unconventional growth - 驚安の殿堂ドン・キホーテ€™s customers and has led to the...

UnconventionalGrowthUnconventionalGrowth

Don Quijote Co., Ltd.

Annual Report 2003

54%

46%

¥10 billion

Demonstrated GrowthDemonstrated Growth

Key Figures

Average 5-year growth

Average 5-yeargrowth

OPERATING INCOME

NET SALES

ContentsHow have we managed to grow so successfully? . . . 2

How will we achieve future growth? . . . . . . . . . . . . . . 5

Dear Fellow Shareholders . . . . . . . . . . . . . . . . . . . . . . 8

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

Investor Information . . . . . . . . . . . . . . . . . . . . . . . . . . 33

ORDINARY INCOME

1st among Japanesegeneral discount stores

(non-consolidated basis)

14.8%

16.6%

16.5%

16.6% `03

`02`01`00

`99

5.8%

7053

332719

19.2%

¥557.02¥351.78

`99

`03

`03

`02

`01

`00

`99

21.8%

22.4% 22.3%22.6%

22.9%

`99`00 `01

`02`03

and Profitability

Double the average of

Japan's top-ten general

merchandise stores: 2.7%(non-consolidated basis)

ROE

EPS

OPERATING INCOME MARGIN

GROSSMARGIN

NUMBER OFSTORES

* Earnings per share shown here does not reflect thestock split (2 for 1) effective on August 20, 2003.

Don Quijote Co., Ltd. Annual Report 2003 1

ChallengingCommon Sense for Uncommon

Results

For one thing, it makes us hard to copy

Since opening our first store in Fuchu, Tokyo in 1989, DonQuijote has overturned the conventional wisdom of the retailindustry and pioneered a new model of the full-line discountstore by resolutely adhering to the principle “The CustomerComes First.” Creative initiatives such as late-night opera-tion, stores brimming with amusement and a vast productselection encompassing everything from daily necessities toluxurious branded products have enabled us to realize highgrowth potential and deliver sales and earnings increases for13 consecutive years.

How have we managed to grow so successfully?

Don Quijote Co., Ltd. Annual Report 20032


King of the Night BazaarSince Don Quijote opened its first store more than ten years ago,

round-the-clock living has rapidly taken hold, mainly in urban areas.

Nighttime is when families and friends gather and is the time of day

when people enjoy maximum freedom. Nevertheless, heretofore there

was no retailer in Japan that clearly recognized the expansion of free-

dom and the scope of activities in the late-night hours and provided

entertainment to meet new needs arising from this change. It was Don

Quijote that identified these newly percolating consumer needs and

came on the scene with a discount store operating into the night. This

experiment of ours has been met with the overwhelming support of

today’s customers and has led to the Company’s current growth rate.

Demand for late-night shopping remains high, and the 10 p.m. period

is the peak time for store traffic at our stores.

Customers Expect the UnexpectedAs a full-line discount store operator, Don Quijote provides products

at lower prices as a matter of course. But we also offer another attrac-

tion customers have found appealing: a shopping environment that

offers a high degree of amusement. Every part of the store—shelves,

walls and aisles—is jam-packed with products from floor to ceiling,

imparting a feeling of being surrounded by a jungle of products.

Belying the conventional wisdom that neat and tidy displays, which

make products easy to find, are desirable, this method of “compres-

sion display” makes possible a vast selection of items that far exceeds what is conventional for stores

of similar size and provides customers with a thrilling feeling of exploration. By deliberately bringing a

high degree of amusement to the shopping experience in parallel with

compression display, the Company created a proprietary retail model with

enhanced earnings that entices people to spend more time in our stores

and stimulates their purchase motivation.

!

10 12 14 16 18 20 22 24 2 4

Average sales by time of day

!


A Vast Product Mix Brings Unexpected Benefits

One reason Don Quijote enjoys high popularity among customers is a vast selection of products that

spans everything from non-perishable foods and daily necessities to fashion items and luxury branded

goods. This mix provides customers with fresh discoveries while enabling us to flexibly respond to the

ever-changing consumption environment in Japan. About 60% of our merchandise is regularly

stocked items, with an emphasis on national brands, and 40% consists of products offered on a limit-

ed availability basis that are procured through our own unique channels and replaced from time to

time. Products offered on a limited availability basis contribute the excitement

of discovery to the shopping experience that is now associated with Don

Quijote: astonishingly low prices and uncommon enjoyment. The sensi-

bility to select and the ability to procure these limited availability prod-

ucts are great strengths that other retailers have been slow to devel-

op. Furthermore, these products afford great leeway for increasing

the gross margin and contribute

greatly to increasing the Company’s

profit margin.

!

Bold Delegation of Authority toStore Staff

Don Quijote owes its growth to 70 stores at the end of the year under

review to its highly creative business model. And the driving force

behind this innovative model has been the thoroughgoing delegation

of authority to the people on the front lines of the business. It is the

store employees, who come into contact with customers day in and

day out, who know best what customers require of Don Quijote.

Empowering the staff has made it possible to create truly appealing

stores unconstrained by conventional ways of thinking in the retail

industry. For this reason, ever since the Company began operations

we have given store staff great authority in everything from purchasing

the products sold in the categories they are assigned to manage, to

setting prices and deciding display and presentation methods. At the

same time, in the area of personnel assessment we have adopted a

top-to-bottom merit system by which results and customer evalua-

tions are quickly linked to compensation and advancement in position.

This front line-oriented management policy arouses high employee

motivation and helps to sustain the distinctiveness and competitive

edge of each individual store.

!

21.1%

42.4%

33.2%

3.3%

Home appliances

Household goods, foods, consumables

Watches, fashion merchandise, sporting& leisure items

Others

Expanding

Vertically and

Horizontally

It brings flexibility to store openings

An undercurrent of social change in Japan’s urban landscapehas brought increased diversity to lifestyles, physical scale,and consumer dynamics, all of which spell opportunities forretail innovation. Because no single store format can addressthis diversity, Don Quijote has developed the new Picassosmall-scale discount store format and PAW commercial-com-plex format. Not only do the new formats carry the archetypalDon Quijote format to new markets within the Tokyo metropol-itan area, they provide the basis for a store opening strategythat is adaptable to a range of urban areas throughout Japan.

How will we achieve future growth?



Three Store Formats AddressDifferent Markets

The Company’s mainstay Don Quijote format has demonstrated tremendous

power in establishing and developing our business concept of offering “greater

convenience, greater discounts and greater amusement.” The new discount store

style tested and perfected at Don Quijote enjoys the support of countless cus-

tomers. To more broadly extend that appeal, the Company has developed two

new business formats. One is Picasso, a small-scale store format that makes it

possible to open stores of about the same limited size as convenience stores. The

other is PAW, a shopping complex format that features a variety of shops, restau-

rants and service providers along with a “Big Don Quijote” store with floor space

of about 2,000 square meters as the anchor tenant. As the number of sites avail-

able for store openings increases due to such factors as the withdrawal of large

stores attendant on realignment of the retail industry, the Company will optimally

deploy the three store formats taking into consideration trade area size and store

location characteristics. We also adopt techniques such as joint store openings

with other companies to move forward with a measured store opening program

based on careful determination of the potential for return on investment.

Steady and Organized NationwideExpansion

To establish a rock-solid presence in the nighttime market, the Company has

focused primarily on the greater Tokyo metropolitan area, a region with extreme-

ly high population concentration. Within this area, we have expanded the scope

of our store-opening program to include central-city shopping districts near rail-

way terminals, in addition to suburban roadside locations. Now, capitalizing on

the deployment of the new PAW and Picasso store formats, we are accelerating

new store openings in cities elsewhere in Japan. Demand for nighttime shopping

and the Company’s proprietary retail model are high in second-tier cities, and

each of the 16 stores the Company operated outside the greater Tokyo area

at the fiscal year-end is highly prosperous. These stores have been

doing a flourishing business, attracting a great number of customers

from the time they opened even though they didn’t

engage in advance advertising. Recapturing the night-

time bustle is one step toward urban renewal, and

the Company aims to contribute to the vital-

ization of cities across Japan through the

enjoyment of shopping.

!

!

Don Quijote Core identity 57stores

PAW 24-hr shopping mall 4stores

Picasso Smaller-scale specialist 9stores

A Don Quijote store is a full-line discount store that typically has a sales floor

space of about 1,000 square meters and offers a rich and varied product

selection of about 40,000 items. Since the first Don Quijote store opened in

1989, the Company has steadily increased the number of stores. Don

Quijote stores have contributed to the development of the nighttime market

and the building up of a store image unique to the Company, including the

amusement-filled “compression display.” This is the Company’s mainstay

store format, and we will continue to work to sustain its uniqueness.

Featuring Big Don Quijote stores with a sales floor space of 2,000 square

meters as the anchor tenant, these round-the-clock shopping complexes are

home to a variety of tenants including merchandise retailers such as fresh

food shops and booksellers, restaurants, beauty salons, massage salons

and other service providers. By assembling tenants from different lines of

business, we provide customers with a new style of shopping enjoyment

befitting the name PAW, an acronym for “purchase,” “amusement” and

“wonderland” while at the same time enhancing the customer base.

A format that offers the unique appeal of Don Quijote in scaled-down

stores with a sales floor space of from 300 to 500 square meters, Picasso

brings tremendous adaptability to the Company’s store opening strategy.

Although the product line is more tightly focused on daily necessities, a

rich and varied selection of products at low prices and an amusing shop-

ping experience give Picasso stores competitive advantage over conven-

ience stores. The Company began deploying this format in June 2001 and

is working to establish a unique Picasso identity.



The fiscal year ended June 30, 2003 brought record-high sales, operating income

and net income for Don Quijote Co., Ltd., marking the thirteenth consecutive

year of higher sales and income. The impetus for this tremendous surge for-

ward was concerted business development measures: the introduction of

new store formats and a nationwide expansion program. In the coming

years, we will not lose sight of the importance of continuing to chal-

lenge the limits of the possible in our drive for further growth.

Dear Fellow Shareholders

Takao Yasuda President

Seventeen newly opened

stores and twenty

opened last year con-

tributed to our amazing

sales growth. This

increase and our con-

centration on improving

gross margins brought a

significant rise in profits.

Thirteen Consecutive Years ofHigher Sales and Income Sincethe First Don Quijote StoreThe year under review brought no signs of a

turnaround in the bleak business conditions

confronting Japan’s retail industry, an envi-

ronment characterized by the grim realities of

progressing deflation, slumping stock prices

and the dampening of consumer confidence

stemming from concern about future liveli-

hood. On top of these factors, unseasonable

weather was a powerful force that resulted in

a further drop in consumption.

In these harsh circumstances, the

Company strove to strengthen its product

procurement and proposal capabilities to

answer diversified consumption and individu-

alized needs and reawaken the true enjoy-

ment of shopping.

Taking advantage of the adaptability in

new store opening activities enabled by the

addition of the PAW and Picasso new store

formats, we accelerated the nationwide store

opening program: during the year under

review we opened 17 new stores—12 in

greater Tokyo, one in Hokkaido and four in

the Kansai region. We expanded the number

of stores in operation to 70 at the fiscal year-

end, up from 53 stores the previous year.

The success of our intensive business

development raised both sales and income.

Consolidated net sales surged to ¥158.6 bil-

lion (US$1,324 million), an increase of 37.4%

compared to the last fiscal year. Operating

income jumped 32.5% to ¥9.1 billion (US$76

million), and net income expanded by 40.1%

to ¥5.6 billion (US$47 million). Don Quijote

has recorded increases in each of these cat-

egories for 13 consecutive years since the

Company began store operations in 1989.

Implementing Measures toEnhance Profitability andCustomer SatisfactionThe Company is aggressively implementing

measures to improve the gross profit margin

with the aim of evolving into a company with

a high earnings structure. Although products

that our stores independently purchase and

offer on a limited availability basis contribute

greatly to gross margin improvement, hereto-

fore stores have been unable to afford suffi-

cient display space for these items. For this

reason, during the year under review, to facil-

itate the introduction of these products, we

modified store layouts and expanded free

space. At the same time, we carefully

reviewed our line of regularly stocked prod-

ucts and narrowed down the selection to

best-selling items. We also introduced a new


Refining the PAW and

Picasso formats to further

increase the potential for growth

Focus

1

PAW

Picasso

Deployment of the Picasso format began

in June 2001, followed by the introduction

of PAW in April 2002. These two new store

formats launched by Don Quijote to meet

the challenge of further growth have given

us confidence in the tremendous future

potential of the Company.

PAW created Japan’s first round-the-

clock shopping mall. PAW complexes

leverage the high customer drawing power

of anchor tenant Don Quijote and enjoy an

excellent reputation among mall tenants

from other industries. By combining the

strengths of Don Quijote and those of

other companies in a more strategic way,

we seek to make still greater advances as

we move forward with development of the

PAW format.

We are still in the trial and error stage

in developing the Picasso format.

Currently we are configuring Picasso as a

highly competitive format appropriate for

small discount stores operated in the Don

Quijote style. Once the prototype has been

established we intend to take advantage

of the adaptabil ity in opening stores

afforded by a small-store format and move

forward with rapid expansion.


Our efforts to meet chal-

lenges with creative

solutions are the force

driving our robust

growth. We will focus on

the three latest chal-

lenges set for ourselves

applying the unarguably

distinctive Don Quijote

approach.

backbone computer system that provides

greater behind-the-lines support for store

operations. The system accurately tracks

product trends at the item level and signifi-

cantly curtails losses from missed opportuni-

ties and from disposal and discounting of

remainders. As a result of these initiatives,

we improved the gross margin on sales to

over 24% for the fourth quarter.

Another major marketing action carried

out during the year under review involved ini-

tiatives to retain existing customers and

acquire new customers. These included

introducing at all stores its new “Ratchpon”

scratch coupons, with entertaining interac-

tive features such as passwords that give

access to Internet games, issuing PAW Card

credit cards, in a tie-up with Acom Co., Ltd.,

and offering Don Quijote Original Gift Cards,

in a tie-up with the Sumitomo Mitsui Card

Co., Ltd. We also worked to enhance our

ability to draw customers by moving for-

ward with full-scale introduction of store

sections where all products are uniformly

priced at ¥50.

Toward Achievement of the2x4 PlanThe Company is conducting business with a

medium-term objective under the 2x4 Plan, a

mid-term management plan announced in

August 2000. With this plan we aim to

achieve net sales of ¥200 billion and ROE of

20%, and establish a framework for generat-

ing ordinary income of ¥20 billion and open-

ing 20 new stores per year by the year ending

June 2004. For the year under review, we

increased net sales by ¥43 billion to ¥158.6

billion, and ROE stood at 19.2%, indicating

our steady progress toward the goal. As for

new stores, we opened 20 stores during the

previous period, 17 stores in the term under

review and plan to open 20 stores in the

coming year, so we recognize our achieve-

ment of the target to build a structure capa-

ble of opening 20 new stores per year. As for

establishing a structure that delivers ¥20 bil-

lion in ordinary income, I am convinced that

by pressing ahead with the gross margin

improvement and low-cost operation initia-

tives we began during the year under review,

we will be able to establish firm footing for

the march on our goal by the target date.

Three New ChallengesAs symbolized by the company name Don

Quijote, we have grown to our present size

by ceaselessly challenging the limits of the

possible. Now we have set our sights on

three new challenges.

The first challenge is the success of the

new PAW and Picasso store formats. Each

of the four PAW stores opened by the close

of the year under review enjoys tremendous

customer support, and we intend to work to

develop PAW complexes into socially signifi-

cant shopping malls that contribute to

reversing the progressive hollowing out of

urban areas and promoting the rebirth cities.

During the year under review we engaged in

trial and error that provided initial insights

into the direction to pursue with Picasso, and

the time to expand deployment of this format

has drawn near.


Ratio of Unanticipated Construction to Total New-store

Construction Expense

YoY YoY

7.98%

1.78%35%

decrease30%

decrease

Selected Insurance Costs Photocopy and FacsimileFees for Leasing and Usage

Focus

2

Cost-cutting Results

To date, Don Quijote has achieved dra-

matic growth by leveraging a unique busi-

ness model. At the same time, we have

engaged in an idiosyncratic retail ing

approach based on what can be termed a

high-cost, high-return business structure.

The fact is, we have placed cost reduction

initiatives on the back burner out of con-

cern that we might compromise our cus-

tomer-first focus or sacrifice customer

satisfaction. However, in this period of

business expansion the Company will

boldly accept the challenge of achieving

low-cost operations.

To promote this objective, we have

established the Management Support

Headquarters. To reduce costs without

losing sight of the principle The Customer

Comes First and while retaining our prac-

tice of delegating authority to each store,

the Management Support Headquarters

will conduct a thorough review of costs in

various sectors, including security costs,

fire and casualty insurance premiums and

fixtures and fittings costs, beginning with a

check of construction costs incurred in

new store openings.

Low-cost operation ordinarily leads

to the pursuit of eff ic iency attained

through undifferentiated store develop-

ment. However, just as we have always

challenged existing concepts, we will

take a unique approach in pursuit of ben-

efits of scale to achieve low-cost opera-

t ion whi le sustaining the dist inct ive

appeal of Don Quijote.

Network-wideCost Management while Retaining

Our Special Appeal


The second challenge is low-cost

operations. Although previously the Company

has not squarely confronted the issue of

operating costs, we are determined to pursue

low-cost operations through benefits of

scale, while at the same time maintaining

our uniqueness.

As our third challenge, we have begun

work to improve our customer service skills.

This involves pushing ahead with our The

Customer Comes First principle and working

to capture customers not only through our

products, but also through our hearts. One

measure to achieve this involves assigning to

each store an Answer Man whose sole

responsibility is to deal with customers, thus

launching concrete initiatives to provide

thrilling shopping environments.

Using a Variety of Means toSteadily Expand the StoreNetworkThe Company has reached the stage in its

development where we pursue higher tar-

gets, and management’s view is that

engaging in appropriate capital investment

to expand operations while increasing inter-

nal reserves will lead to returns for our

shareholders.

As means of procuring funds for capital

investment during the year under review, in

addition to once again raising funds through

total issues of ¥10 billion in bonds and low-

interest indirect financing, we also stepped

up funds procurement by means of asset

securitization. We’ve already engaged in

structured financing involving the Shinjuku

Higashi-guchi store in the fiscal year ended

June 30, 2001 and the Roppongi store in the

year ended June 30, 2002. During the year

under review we securit ized the PAW

Kawasaki store.

The structured financing method of

opening stores—a method by which the

Company does not directly acquire store

real estate, but rather a Special Purpose

Company (SPC) owns real estate and leas-

es it to the Company—makes it possible to

limit store-opening costs to one-tenth the

ordinary level while at the same time pre-

venting excess asset expansion. By select-

ing the optimal financing method for store

opening, whether ownership, leasing, or

structured financing, the Company plans to

support a framework for opening 20 new

stores per year.

No matter how much our business

scale expands, we will by no means lose

sight of The Customer Comes First principle

or our unique retail model that are at the core

of what makes Don Quijote Don Quijote.

Over and above that, we will continue to

boldly meet the challenge of implementing

whatever reforms the times require and open

the way to a future full of hope.

Takao Yasuda

President

We will never stray from

the customer-first princi-

ple, while dynamically

growing our business.

Customer satisfaction is

our ultimate pursuit, and

we will do everything to

achieve it.


Building

``Overwhelming''Customer Satisfaction

Focus

3

Our stores are always chock-full of wonder.

Although we have always worked to create

stores that provide customers with aston-

ishment and enjoyment, our focus has

been on the tangible areas of product

selection and display. At a time when our

store network is expanding beyond the

Tokyo metropolitan area to regional cities

and is enjoying the support of a greater

number of customers, the Company will

embrace the challenge of raising the quality

of customer service to levels that will

inspire customers and take the develop-

ment of Don Quijote to the next stage.

The first step in achieving this aim is to

assign an Answer Man to each store. The

Answer Man mainly will be an employee

age 50 or older who has led a life rich in

experiences. Drawing on his or her experi-

ences and knowledge, the Answer Man will

respond to various customer requests.

Management plans to provide additional

support to stores by strengthening a cor-

porate-level department to provide a

centralized response to complaints that

cannot be resolved at the store level. We

anticipate that the straightforward, sincere

attitude toward customers demonstrated

by the smiling Answer Man will serve as an

example to young store employees and

contribute to raising the level of customer

service storewide. With these initiatives,

Don Quijote will enhance its appeal not

only by astonishing customers, but also by

inspiring them.


Five-year Summary (Consolidated data)Years ended June 30

For the year

Net sales

Cost of goods sold

Selling, general and administrative expenses

Operating income

Income before income taxes

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

¥46,522,042 ¥73,402,102 ¥94,706,874 ¥115,428,986 ¥158,619,115 $1,324,033

36,376,000 56,951,004 73,571,274 89,388,264 122,307,605 1,020,932

7,003,270 11,811,613 15,124,082 19,123,731 27,145,874 226,593

3,142,771 4,639,485 6,011,518 6,916,990 9,165,635 76,508

3,628,759 5,874,791 6,748,143 7,150,611 10,095,742 84,272

1,675,347 2,829,465 3,353,197 4,027,264 5,641,698 47,093

¥22,938,805 ¥34,228,974 ¥47,483,788 ¥ 72,485,638 ¥ 93,410,943 $ 779,724

15,578,907 18,561,177 22,053,899 26,562,284 32,232,664 269,054

¥ 351.78 ¥ 283.51 ¥ 334.82 ¥ 401.20 ¥ 557.02 $ 4.65

– – 334.39 391.04 513.89 4.29

5.00 5.00 5.00 15.00 15.00 0.13

18.1 17.4 14.8 11.3 10.8

14.8 16.6 16.5 16.6 19.2

Thousands of yen Thousands of U.S. dollars

1999 2000 2001 2002 2003 2003

Yen U.S. dollars

%

Financial Section

Contents


In the consolidated business results for the fis-

cal year ended June 2003 (July 1, 2002 to June

30, 2003), Don Quijote Co., Ltd. and its consoli-

dated subsidiaries achieved record performance

for the seventh consecutive year since the intro-

duction of consolidated accounting (as well as

13 consecutive years of higher sales and

income on a parent company basis). On a con-

solidated basis, the Company recorded sharp

increases in sales and income: net sales

jumped 37.4% to ¥158.6 billion (US$1,324 mil-

lion) and operating income rose 32.5% to ¥9.1

billion (US$76 million).

The increase in net sales is attributable to

the opening of 17 new stores during the year

under review and the full-year contribution from

20 stores opened during the previous term.

Each of the 12 Don Quijote stores, 2 Picasso

stores and 3 PAW [páu] malls opened during

the term got off to a favorable start. At existing

stores the Company strove to strengthen its

unique product proposal capabilities, offer a

product selection that accurately reflects current

consumption trends and create stores that

enable customers to experience the genuine

enjoyment of shopping. These efforts resulted in

a 0.5% year-on-year increase in the number of

customers despite harsh business conditions

characterized by a prolonged slump in con-

sumption exacerbated by unseasonable weath-

er. Spending per customer decreased 2.3%

from the previous term owing to the effect of

deflation, and net sales at existing stores

decreased 1.8%. The increase in the number of

PAW shopping malls resulted in an increase of

¥0.6 billion in rental income from tenants to ¥1.1

billion (US$9 million).

The gross profit margin improved by 0.3

percentage points from the previous term to

22.9%, and the gross margin at existing stores

improved as well. The improvement is attributa-

ble to the effect of the joint delivery center that

went into full-scale operation the previous term

and to measures implemented during the year

under review to increase profitability. These

measures include efficient product manage-

ment, owing to the newly introduced backbone

system, a review of vendors and terms and con-

ditions of purchase, and restructuring of the

merchandise mix. The impact of these meas-

ures gradually began to appear during the sec-

ond half of the term, and the gross profit margin

for the third and fourth quarters was 23.1% and

24.3% respectively.

By product category, sales of low-priced

commodity items that turn over rapidly, including

Management Discussion and Analysis

158,619

115,428

94,706

73,402

46,522

’99 ’00 ’01 ’02 ’03

9,165

6,916

6,011

4,639

3,142

’99’00

’01’02 ’03

5,641

4,027

3,353

2,829

1,675

Net sales(¥ millions)

Operating income (¥ millions)■

Net income (¥ millions)■

� Consolidated Business Results


miscellaneous household sundries, food products

and consumables, accounted for 42.4% of net

sales, a year-on-year increase of 0.6 percentage

point, as the Company’s price competitiveness

brought strong customer support in a deflationary

economy. This product category accounted for

42.7% of gross profit, decreasing 0.9 percentage

point from the previous term. Measures currently

being implemented to boost sales of watches,

fashion merchandise, sporting goods and leisure

items have resulted in an increased contribution

to sales for this category that includes many high-

price, high-margin items. This category account-

ed for 33.2% of net sales, an increase of 1.0

percentage point, and 39.0% of gross profit, an

increase of 2.7 percentage points. Home appli-

ances accounted for 21.1% of net sales, a

decrease of 1.3 percentage points, and 16.7% of

gross profit, a decrease of 0.3 percentage point.

The Company is now shifting emphasis in this

category from appliances for home use to appli-

ances for personal use in order to boost invento-

ry utilization efficiency.

With regard to selling, general and adminis-

trative expenses, the ratio of this cost to net

sales worsened by 0.5 percentage point to

17.1%. The change is attributable to increased

expenses stemming from business expansion,

rent expenses arising from securitization of the

Roppongi store carried out last year and securiti-

zation of the PAW Kawasaki store carried out

this year, and higher depreciation charges

caused by an increase in store size and the fact

that 7 of the 17 stores opened during the year

under review were company-owned properties.

However, the ratio of operating income to sales

fell by only 0.2 percentage point to 5.8% owing

to higher revenue and improvement in the gross

profit margin.

As for other income and expenses, although

the Company charged to income ¥243 million

(US$2 million) in costs incurred during the year

under review for the issuance of a total of ¥10.0

billion in bank-guaranteed privately placed bonds

(corporate bonds), improvement in the devalua-

tion losses on investment securities and other fac-

tors led to a sharp increase in other income. As a

result, income before income taxes surged 41.2%

to ¥10.0 billion (US$84 million) and net income

rose 40.1% to ¥5.6 billion (US$47 million).

In the year ending June 2004, on the basis

of plans to open 20 new stores (including 10

PAW stores) the Company forecasts net sales of

¥194.0 billion, an increase of 22.3% year on

year, operating income of ¥11.3 billion, an

increase of 23.3%, and net income of ¥6.9 bil-

lion, an increase of 22.3%.

Sales per employee (¥ thousands) ■

Sales per square meter (¥ thousands) ■

Number of stores ●Total sales floor space (m2) ■

43,90944,46245,077

42,233

48,662

’99’00

’01’02 ’03

2,3132,8273,0503,760

4,682

79,588

56,629

35,191

29,163

15,356

70

53

3327

19

’99’00

’01 ’02 ’03


Attendant on expansion of the scale of opera-

tions and the store network, the Company’s total

assets were ¥93.4 billion (US$779 million) as of

June 30, 2003, ¥20.9 billion higher than at the

end of the previous term. The 28.9% rate of

increase in assets was lower than the rate of

growth in profits; this means that the Company

succeeded in increasing profits while giving due

consideration to asset efficiency.

Current assets increased by ¥10.4 billion to

¥37.5 billion (US$313 million), primarily on

account of a 49.3% increase of ¥8.8 billion in

inventories to ¥26.8 billion (US$224 million). The

increase in inventories stemmed from an increase

of 22,959 square meters (40.5%) in sales floor

space with 17 new stores and increased empha-

sis on watches and fashion merchandise, prod-

ucts with high per-unit inventory value.

Property and equipment rose for an increase

in buildings and structures in tandem with new

store openings and the acquisition of sites for

stores opened during the year under review and

to be opened in the future. However, the amount

of increase over the previous term was held to

¥7.4 billion because the company assigned the

land and building of the PAW Kawasaki store to a

special purpose company (SPC) and securitized

the assets (¥1.7 billion in buildings and struc-

tures, ¥1.6 billion in land).

Total l iabil i t ies at the f iscal year-end

increased by ¥15.2 billion from a year earlier to

¥61.1 billion (US$510 million). Current liabilities

increased by ¥4.9 billion to ¥33.2 billion (US$277

million). The increase in accounts payable, the

main factor contributing to the increase in current

liabilities, was held to ¥2.2 billion, compared to a

¥4.0 billion increase the previous year, because,

unlike the previous term, no new stores opened

just before the fiscal year-end. Long-term liabili-

ties at the fiscal year-end increased by ¥10.2 bil-

lion from a year earlier to ¥27.8 billion (US$232

million) on account of funds procurement to pro-

vide for an increase in property and equipment in

connection with expansion of the store network.

Corporate bonds accounted for ¥9.1 billion of the

increase. The balance of interest-bearing debt

increased by ¥11.7 billion compared to the pre-

vious fiscal year-end to ¥37.9 billion (US$316

million), the ratio of interest-bearing debt to

total assets was 40.7%, and the debt to equity

ratio was 1.2.

Total shareholders’ equity at the fiscal year-

end increased by ¥5.6 billion over the previous

year to ¥32.2 billion (US$269 million) owing to

the accumulation of earnings. The equity ratio

was 34.5%.

� Financial Position

Total assets (¥ millions) ■

Return on assets (%) ●

Total shareholders’ equity (¥ millions) ■

Return on equity (%) ●

93,410

72,485

47,483

34,228

22,983

10.811.314.8

17.418.1

’99’00

’01 ’02 ’03

32,232

26,562

22,053

18,561

15,578

19.2

16.6

16.516.6

14.8

’99’00

’01 ’02 ’03


For the fiscal year ended June 30, 2003, net cash

of ¥2.0 billion (US$17 million) was provided by

operating activities, a decrease of ¥2.9 billion from

the previous year. Although profits, depreciation

and payables steadily increased in line with busi-

ness expansion, inventories, income taxes and

other cash outlays also increased substantially.

Net cash of ¥13.0 billion (US$109 million)

was used in investing activities, reflecting contin-

ued aggressive capital investment in preparation

for future growth. Outlays decreased by ¥4.5 bil-

lion compared to the previous year.

Net cash of ¥11.8 billion (US$98 million) was

provided by financing activities, a decrease of ¥3.7

billion from the previous year. In addition to using

indirect financing to procure funds earmarked for

capital investment, the Company issued a total of

¥10.0 billion in new corporate bonds.

As a result of these developments, the clos-

ing balance of cash and cash equivalents

amounted to ¥7.0 billion (US$58 million), an

increase of ¥0.8 billion from the previous year.

Net capital expenditures (capital outlays – funds

procured by means of asset securitization) for

the fiscal year ended June 30, 2003 decreased

by ¥6.0 billion from the previous year to ¥11.5

billion (US$96 million). During the year under

review the Company raised ¥3.3 billion from

securitization of the PAW Kawasaki store. Free

cash flow (net income + depreciation and amorti-

zation + extraordinary loss – cash dividends)

increased by ¥2.1 billion from the previous year

to ¥7.9 billion (US$66 million). The Company

procures funds for capital requirements exceed-

ing free cash flow through low-interest indirect

financing and the issuance of corporate bonds.

The Company plans to open 20 stores and

expects capital investment in the amount of

¥13.8 billion during the fiscal year ending June

30, 2004.

� Cash Flows � Capital Investment

Free cash flow (¥ millions)

7,954

5,817

4,531

3,495

2,187

’99 ’00 ’01 ’02 ’03

Capital expenditure (¥ millions)

11,505

17,507

9,078

7,135

5,991

’99’00

’01 ’02 ’03


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

We have audited the accompanying balance sheets (expressed in yen) of Don Quijote Co.,

Ltd. and subsidiaries as of June 30, 2003 and 2002, and the related consolidated statements

of income, stockholders’ equity and cash flows for each of the years in the two-year period

ended June 30. Our audits were made in accordance with generally accepted audit standards

in Japan and accordingly, included such tests of the accounting records and such other

auditing procedures as we considered necessary in the circumstances.

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

material respects, the consolidated financial position of Don Quijote Co., Ltd and subsidiaries

as of June 30, 2003 and 2002, and the consolidated result of their operations and their cash

flows for each of the years in the two-year period ended June 30, in conformity with generally

accepted accounting principles in Japan consistently applied during the period.

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 & CoMEMBER OF MAZARS

Certified Public Accountants

Tokyo, Japan

September 25, 2003

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 financial 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.

Independent Auditors’ Report


Consolidated Balance SheetsDon Quijote Co., Ltd. and SubsidiariesAs of June 30, 2003 and 2002

ASSETS 2003 2002 2003

Current assets:

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

Note and accounts receivable—trade . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

Inventories (Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Prepaid expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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 and deferred charge (Note 4) . . . . . . . . . . . . . . . . . . . . . . . . .

Other assets:

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

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)

¥ 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

1,694,986

7,119,430

644,840

1,599,311

9,363,582

¥93,410,943

¥ 6,250,453

991,058

(4,632)

17,988,194

478,280

539,089

900,709

27,143,153

2,169,731

1,200,115

360,000

(1,080)

3,728,766

11,971,889

69,267

4,097,265

(3,672,068)

18,851,606

1,885,724

33,203,684

1,517,799

5,267,761

430,801

1,193,670

6,892,233

¥72,485,638

$ 58,770

9,520

(13)

224,176

4,810

7,812

8,587

313,662

17,490

7,153

9,599

(14)

34,228

166,562

614

44,183

(45,936)

166,111

7,991

339,525

14,149

59,428

5,383

13,349

78,160

$779,724


LIABILITIES AND SHAREHOLDERS’ EQUITY 2003 2002 2003

Current liabilities:

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

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

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

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:

2002 — 39,000,000 shares

2003 — 39,000,000 shares

Issued and outstanding:

2002 — 10,101,647 shares

2003 — 10,140,122 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

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

Net unrealized losses on investment securities . . . . . . . . . . . . . . . . . . .

Total

Less: Treasury stock, at cost

2002 — 374 shares

2003 — 698 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

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




¥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

¥14,240,723

6,556,000

2,534,310

1,843,563

961,560

2,204,169

28,340,327

17,159,800

89,628

333,598

17,583,026

45,923,353

5,815,528

7,130,677

13,658,355

(38,532)

26,566,028

(3,743)

26,562,284

¥72,485,638

$137,482

50,918

39,251

27,076

8,833

14,364

277,924

226,816

786

5,144

232,746

510,670

49,665

60,643

159,838

(1,031)

269,115

(61)

269,054

$779,724


Consolidated Statements of Income Don Quijote Co., Ltd. and SubsidiariesFor the years ended June 30, 2003 and 2002

2003 2002 2003

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 before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Income taxes (Notes 4 and 14):

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

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

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

Amount per share of common stock

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

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

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




¥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

Yen

¥557.02

513.89

¥ 15.00

¥115,428,986

89,388,264

26,040,721

19,123,731

6,916,990

50,089

(202,377)

(1,349)

(275,958)

663,215

7,150,611

3,608,424

(485,077)

¥ 4,027,264

Yen

¥401.20

391.04

¥ 15.00

$1,324,033

1,020,932

303,101

226,593

76,508

399

(2,451)

(36)

(2,036)

11,888

84,272

41,762

(4,583)

$ 47,093

U.S. dollars (Note2)

$4.65

4.29

$0.13


Consolidated Statements of Shareholders’ Equity Don Quijote Co., Ltd. and SubsidiariesFor the years ended June 30, 2003 and 2002

2003 2002 2003

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

Deficit resulting from merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .


Net realized losses on investment securities:


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


Treasury stock, at cost:


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





¥ 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)

¥ 5,539,684

19,853

255,990

5,815,528

6,854,814

19,853

256,009

7,130,677

9,693,545

4,027,264

(50,158)

(12,296)

13,658,355

(33,755)

(4,777)

(38,532)

(388)

(3,355)

¥ (3,743)

$ 48,544

245

876

49,665

59,522

245

876

60,643

114,010

47,093

(1,265)

—

$159,838

(322)

(709)

(1,031)

(31)

(30)

$ (61)


Consolidated Statements of Cash Flows Don Quijote Co., Ltd. and SubsidiariesFor the years ended June 30, 2003 and 2002

2003 2002 2003Cash flows from operating activities:

Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Adjustments to reconcile income before income taxes to net cash provided by operating activities:Depreciation and amortization, including amortizationof consolidation difference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Reversal for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Provision for retirement benefits for directors . . . . . . . . . . . . . . . . . . .Interest and dividend income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Loss on disposal of property and equipment . . . . . . . . . . . . . . . . . . . .Gain on sale of property and equipment . . . . . . . . . . . . . . . . . . . . . . .Gain on sale of investment securities . . . . . . . . . . . . . . . . . . . . . . . . .Loss on devaluation of investment securities . . . . . . . . . . . . . . . . . . .Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Increase in trade receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Increase in inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Decrease (Increase) in other current assets . . . . . . . . . . . . . . . . . . . . . .Increase in trade payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Increase (Decrease) 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:Payments for purchase of investment securities . . . . . . . . . . . . . . . . . . .Proceeds from sale of investment securities . . . . . . . . . . . . . . . . . . . . . .Payments for purchase of tangible fixed assets and intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Proceeds from sale of tangible fixed assets . . . . . . . . . . . . . . . . . . . . . .Increase in loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Increase in fixed leasehold deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . .Advance payment for leasehold deposits . . . . . . . . . . . . . . . . . . . . . . . .Increase in insurance policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cash flows from financing activities:Decrease in short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Borrowing in long-term debts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Repayment in long-term debts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Payments for purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . .Payments of cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . .

Net increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . .Cash and cash equivalents at beginning of the year . . . . . . . . . . . . . . . .Increase in cash and cash equivalents resulting from merger . . . . . . . . .Cash and cash equivalents at end of the year (Notes 4 and 18) . . . . . . .

The accompanying notes are integral part of the statements.



¥ 10,095,742

2,304,317 (2,448)4,508

(47,910)333,794 81,018

(81,060)(52,829)130,710 84,722

(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

(268,900)218,216

(13,580,399)3,457,621 (790,000)(921,431)(971,239)(164,689)(59,789)

(13,080,609)

(456,000) 16,653,320(4,262,630)

58,697 (3,537)

(151,519)11,838,330

810,326 6,230,273

—¥ 7,040,599

¥ 7,150,611

1,361,090(2,720)10,122

(50,089)202,37730,289

(25,407)—

503,600127,054

(283,476)(5,798,144)

134,2504,082,3831,487,533

200,6909,130,166

8,819(177,626)

(3,988,985)4,972,374

(273,841)124,773

(17,893,049)3,614,906

—(1,035,370)(1,448,678)

(376,129)(380,162)

(17,667,551)

(886,000) 18,069,900 (1,555,740)

39,707(3,355)

(50,158)15,614,353

2,919,1763,249,409

61,687¥ 6,230,273

$ 84,272

19,235(20)38

(400)2,786

676(677)(441)

1,091707

(1,247)(74,024)(1,534)18,611(3,370)4,094

49,79737

(2,625)(30,075)17,134

(2,245)1,821

(113,359)28,862(6,594)(7,691)(8,107)(1,375)

(499)(109,187)

(3,806)139,009(35,581)

490(30)

(1,265)98,817

6,76452,006

—$ 58,770


Notes to Consolidated Financial StatementsFor the years ended June 30, 2003 and 2002

1. NATURE OF OPERATIONS

The Don Quijote Co., Ltd. (“Parent”) and its subsidiaries, PAW

Creation and Leader Co., Ltd., (together the “Company”) have

three operations; discount store operations, wholesale opera-

tions and rental business operations for real property.

The discount store operations, which mainly comprise 70 dis-

count retail stores, including small discount retail stores, in

Japan, principally sell electrical appliances, household goods,

food, cosmetics, toiletries, sports goods and etc.

Leader Co., Ltd. sold goods to the Parent and the others as

wholesale business. Leader Co., Ltd. ceased wholesale activities

in August 2002.

The PAW Creation rents part of its floor space to tenants for

rental business operations.

2. BASIS OF PRESENTING CONSOLIDATED FINANCIALSTATEMENTS

The consolidated financial statements are prepared in accor-

dance with accounting principles and practices generally

accepted in Japan under the requirements of the Japanese

Commercial Code and other applicable rules and regulations for

domestic purposes and were filed with the local finance bureau

of the Ministry of Finance (MOF) as required by the Securities and

Exchange Law and its related laws. In preparing these financial

statements, certain reclassifications and rearrangements have

been made to the original financial statements issued domesti-

cally in Japan, for the convenience of readers outside of Japan.

In addition, the accompanying notes include information,

which is not required under generally accepted accounting prin-

ciples and practices in Japan, but is presented herein as addi-

tional information.

Significant differences between the accounting policies fol-

lowed by the Company and International Accounting Standards

are described in Note 3.

All yen figures are rounded down to the nearest thousand.

Accordingly, breakdown figures may not add up to sums. The

U.S. dollar amounts presented in the accompanying financial

statements are converted solely for convenience at the rate of

¥119.8 to US$1.00, which was the exchange rate prevailing on

June 30, 2003. The translations for convenience should not be

construed as representations that the Japanese yen amounts

have been, could have been, or could in the future be, converted

into U.S. dollars at this or any other rate of exchange.

Certain reclassifications have been made in the 2002 financial

statements to conform to the presentation for 2003.

3. SIGNIFICANT DIFFERENCES BETWEEN ACCOUNTINGPOLICIES FOLLOWED BY THE COMPANY AND DOMES-TIC SUBSIDIARIES AND INTERNATIONAL ACCOUNTINGSTANDARDS

The accompanying consolidated financial statements are pre-

pared in conformity with accounting principles generally accepted

in Japan. Differences from IAS include the following.

Leases (Note 6)

The Company in Japan treated finance leases of the Company,

where ownership does not transfer to the lessees, as not capital-

ized in the same way as operating leases under accounting prin-

ciples generally accepted in Japan, which differ from IAS No. 17.

Impairment of assets accounting

Accounting for impairment of assets (real property, long-lived

assets) is not required under generally accepted accounting

principles and practices in Japan, which differ from IAS No. 36.

SPC accounting

Accounting for consolidation of special purpose entities is not

required for the special case under generally accepted account-

ing principles and practices in Japan, which differ from

Interpretation SIC-12.

Amount of significant effects on the consolidated financialstatements

Had IAS applied, the significant effects on the accompanying

consolidated financial statements would have been as follows:Thousands of

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

2003 2002 2003

Lease (Note 6):Property and equipment . . . . . ¥ 197,137 ¥ 15,734 $ 1,646Current liabilities . . . . . . . . . . 46,147 13,827 385Long-term liabilities . . . . . . . ¥ 150,990 ¥ 1,907 $ 1,261SPC (Notes 6 and 10):Land . . . . . . . . . . . . . . . . . . . ¥8,278,652 ¥6,807,226 $69,104Buildings . . . . . . . . . . . . . . . . 2,735,978 1,074,196 22,838Structures . . . . . . . . . . . . . . . 62,194 — 519Current liabilities . . . . . . . . . . 1,490,268 1,100,458 12,440Long-term liabilities . . . . . . . ¥6,624,144 ¥5,031,602 $55,293

4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESConsolidation

The accompanying consolidated financial statements of the

Company account for its subsidiaries on a consolidated basis.

As of June 30, 2003, the Parent has six subsidiaries including

two consolidated as set out in the following table.

Leader Co., Ltd. Wholesale business supplying household

goods to the Parent and others

PAW Creation Operation of multiple tenant shopping malls

including leasing of real property

Investments in 2003 and 2002 unconsolidated subsidiaries are

stated at cost.

Cash equivalents

In preparing the cash flow statements for the years ended June

30, 2003 and 2002, cash is considered to be “cash and cash

equivalents,” which includes cash on hand, readily available

deposits and highly liquid investments with original maturities

not exceeding three months.


Translation of foreign currency accounts

Accounts and payables denominated in foreign currencies are

translated into Japanese yen at the foreign currency exchange

rates in effect at the respective balance sheet dates.

Use of estimates

The preparation of financial statements requires management to

make estimates and assumptions that affect the reported

amounts of assets and liabilities and disclosure of contingent

assets and liabilities at the date of the financial statements and

revenues and expenses during the reporting period. Actual

results could differ from those estimates.

Marketable securities and Investment securities

Securities available-for-sale are securities other than trading

securities and securities being held to maturity.

Securities available-for-sale are carried at fair value with corre-

sponding unrealized gains (losses) recorded directly in a sepa-

rate component of stockholders’ equity. Securities available-for-

sale for which fair value is not readily determinable are carried at

moving average cost or amortized cost determined by the mov-

ing average method.

The Company records investments at market or fair value as

its method of valuation.

Inventories

For the Parent, inventories are valued at cost determined by the

retail method.

Impairment loss on inventories of ¥605 million ($5,050 thou-

sand) and ¥654 million as of June 30, 2003 and 2002, respec-

tively, was recorded in “Cost of goods sold.”

For the subsidiary, Leader Co., Ltd., inventories are valued at

cost determined by the most recent purchase price method.

Property and equipment

Property and equipment are carried at cost. Significant renewals

and additions are capitalized: maintenance and repairs, and

minor renewals and improvements are charged to income as

incurred. Interest costs relating to construction of property and

equipment are not capitalized.

Property and equipment are computed on the declining bal-

ance method according to the rules based on the Japanese

Corporation Tax Law.

The useful lives of property and equipment for computing

depreciation, which are identical with the useful lives stipulat-

ed under the Japanese Corporate Tax regulations, are as

shown below:Years

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

Software

In accordance with the provisional rule of the JICPA’s

Accounting Committee Report No. 12 “Practical Guidance for

Accounting for Research and Development Costs, etc.” (The

“Report”), the Company accounts for software which was includ-

ed in intangible assets in the same manner in 2003 as in 2002

and depreciates it using the straight-line method over the esti-

mated useful lives (five years).

Common stock issuance costs

Common stock issuance costs are directly charged to income as

incurred. The Japanese Commercial Code prohibits charging

such stock issuance costs to capital accounts.

Bond issuance costs

Bond issuance costs are directly charged to income as incurred.

Allowance for doubtful accounts

The allowance for doubtful receivables is provided in amounts

sufficient to cover possible losses on collection. It is determined

by adding the uncollectible amounts individually estimated for

doubtful receivables to a maximum amount permitted for tax

purposes, which is calculated collectively, and by adding the

uncollectible amounts individually.

Allowance for retirement benefits for directors

The Company adopted a retirement benefit plan for directors

and statutory auditors. Directors and statutory auditors are enti-

tled to be paid a lump-sum retirement benefit determined on the

basis of rules of the Company.

Revenue recognition

The Company recognizes revenue as “Net sales” at the time

sales are made to customers.

Income taxes

Income taxes are determined by using the liability method,

where deferred tax assets and liabilities are recognized for tem-

porary differences between the tax basis of assets and liabilities

and their reported amounts in the financial statements.

Treasury stock and reversal of statutory reserve

Effective April 1, 2002, the Company adopted a new accounting

standard for treasury stock and reversal of statutory reserves

(Accounting Standards Board Statement No.1, “Accounting

Standard for Treasury Stock and Reversal of Statutory

Reserves,” issued by the Accounting Standards Board of Japan

on February 21, 2002).

The effect on net income of the adoption of the new account-

ing standard was not material.

Leased transactions

Finance leases of the Company where ownership does not transfer

to the lessees are not capitalized and are accounted for in the

same manner as operating leases “non-capitalized finance leases.”

Derivative financial instruments

Hedge accounting

The 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 the relating hedged items are reflected in income.


Purpose of derivative trading

The Company enters into derivative transactions related to inter-

est swap transactions in order to reduce their risk exposure aris-

ing from fluctuations in these rates, based on the internal policies.

Assessment for the efficiency of hedging

The Company omits to control the risk of the transaction by

assessing the efficiency of its hedging.

Costs of start-up activities

All costs of start-up activities are expensed as incurred.

Dividends

Dividends are declared by the Board of Directors and approved

by the shareholders at meetings held subsequent to the fiscal

year to which the dividends are applicable, and shareholders of

record as at the end of such fiscal year are entitled to the subse-

quently declared dividends. Dividends charged to retained earn-

ings represent dividends approved by the shareholders and paid

during the respective years.

Semi-annual interim dividends may also be paid upon resolu-

tion of the Board of Directors, subject to certain limitations

imposed by the Japanese Commercial Code.

Bonuses to directors and statutory auditors

Bonuses to directors and statutory auditors, which are subject to

shareholders’ approval at the annual shareholders’ meeting

under the Japanese Commercial Code, are accounted for as an

appropriation of retained earnings.

Accounting for consumption taxes

The Japanese consumption taxes withheld and consumption

taxes paid are not included in the accompanying consolidated

statements of income.

Shareholders’ equity

The Japanese Commercial Code requires at least 50% of the

issue price of new shares to be designated as stated capital as

determined by resolution of the Board of Directors. Proceeds in

excess of amounts designated as stated capital are credited to

additional paid-in capital.

Effective 1 October 2001, the amended Japanese Commercial

Code provides that an amount of at least 10% of the aggregate

amounts of cash dividends and directors’ and auditors’ bonuses

which are made as an appropriation of retained earnings alloca-

ble to each fiscal period shall be appropriated and set aside as a

legal reserve until such reserve plus additional paid-in capital

equals 25% of stated capital.

The Japanese Commercial Code permits the transfer of the

portions of additional paid-in capital by the resolution of the

Board of Directors. The Japanese Commercial Code also per-

mits the transfer of portions of unappropriate retained earnings

to stated capital by resolution of shareholders.

Changes in the number of shares issued and outstanding during

the years ended June 30, 2003 and 2002 are as follows:

Common stock outstanding: 2003 2002

Balance at beginning of year . . . . . . . . . 10,101,647 10,031,800Conversion of convertible bonds . . . . . . 24,875 60,647Exercise of stock options . . . . . . . . . . . . 13,600 9,200Balance at end of year . . . . . . . . . . . . . . 10,140,122 10,101,647

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 June 30, 2003 and 2002 are as follows:

Common stock outstanding: 2003 2002

Balance at beginning of year . . . . . . . . . 374 40Conversion of convertible bonds . . . . . . 324 334Balance at end of year . . . . . . . . . . . . . . 698 374

Per share data

Per share data in the accompanying statements of income are

computed using the weighted average number of shares out-

standing, retroactively adjusted for stock splits.

Effective April 1, 2002, the Company adopted a new rule for

“Earnings per share.”

5. INVENTORIES

Inventories at June 30, 2003 and 2002 were as follows:Thousands of


2003 2002 2003

Electric goods . . . . . . . . . . . ¥ 6,522,856 ¥ 4,711,188 $ 54,448Merchandise . . . . . . . . . . . . 4,267,257 2,835,596 35,620Foods . . . . . . . . . . . . . . . . . 1,165,793 730,317 9,731Watches, fashion goods . . . 12,178,206 8,016,520 101,655Sports, leisure goods . . . . . 1,834,435 1,245,304 15,312Others . . . . . . . . . . . . . . . . . 887,679 449,266 7,410Total . . . . . . . . . . . . . . . . . . ¥26,856,229 ¥17,988,194 $224,176

6. LEASES TRANSACTIONS

(1) The Company leases certain equipment under non-capital-

ized finance and operating leases. Finance leases that do not

transfer ownership to lessees are not capitalized and

accounted for under the same manner as operating leases.

Certain information for such non-capitalized finance and

operating leases is as follows:


(a) A summary of assumed amounts of acquisition cost, accumu-

lated depreciation and net book value on June 30, 2003 and

2002 are as follows:Thousands of


Equipment 2003 2002 2003

Acquisition cost . . . . . . . . . ¥353,954 ¥450,138 $2,954Accumulated depreciation . . . (162,139) (434,991) (1,353)Net book value . . . . . . . . . . ¥191,814 ¥ 15,146 $1,601

(b) Future minimum lease payments, inclusive of interest, as of

June 30, 2003 and 2002 are as follows:Thousands of


2003 2002 2003

Due within one year . . . . . . ¥ 46,147 ¥13,827 $ 385 Due after one year . . . . . . . 150,990 1,907 1,261Total . . . . . . . . . . . . . . . . . . ¥197,137 ¥15,734 $1,646

(c) Future minimum lease payments under the non-capitalized

finance and operating leases on June 30, 2003 and 2002 are

as follows:Thousands of


2003 2002 2003

Lease payments . . . . . . . . . ¥47,020 ¥115,052 $392Assumed depreciation

charges . . . . . . . . . . . . . . 45,699 111,687 381Assumed interest

expenses . . . . . . . . . . . . . ¥ 1,710 ¥ 1,263 $ 14

(d) Assumed depreciation charges are computed using the

straight-line method over lease terms assuming no residual

value.

(e) Assumed interest expenses, which is the difference between

total lease payments and assumed acquisition costs of leased

property, is allocated in each accounting period based on the

interest method.

(2) Lease transactions derived from Special Purpose Companies(SPC)

(a) Assumed acquisition cost:Thousands of


2003 2002 2003

Land . . . . . . . . . . . . . . . . . . ¥8,278,652 ¥6,807,226 $69,104Buildings . . . . . . . . . . . . . . 2,735,978 ¥1,074,196 22,838Structures . . . . . . . . . . . . . . ¥ 62,194 — $ 519

(b) Lease payments:Thousands of


2003 2002 2003

Lease payments . . . . . . . . . ¥1,378,189 ¥962,524 $11,504

(c) Minimum guarantees for SPC: 75% of the assumed acquisi-

tion cost amounted to ¥4,572,066 thousand.

(3) Operating lease

Future minimum lease payments subsequent to June 30, 2003

and 2002 for operating leases are summarized as follows:Thousands of


2003 2002 2003

Due within one year . . . . . . ¥1,490,268 ¥1,100,458 $12,440Due after one year . . . . . . . 6,624,144 5,031,602 55,293Total . . . . . . . . . . . . . . . . . . ¥8,114,412 ¥6,132,061 $67,733

7. INVESTMENT SECURITIES

The Company invests in equity securities and classified its

investments in equity securities as available-for-sale. Investment

securities consist of equity securities and others carried at fair

market value.

(1) Information regarding available-for-sale securities as of June

30, 2003 and 2002 were as follows: Thousands of yen (Note 2)

2003Net realized gain

Acquisition cost Fair market value (losses)

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 on some equity securities.

Thousands of yen (Note 2)



Fair market value exceeds acquisition cost:

Equity securities . . . . . . . . . ¥ 12,600 ¥ 148,837 ¥136,237Debt securities . . . . . . . . . . — — —Others . . . . . . . . . . . . . . . . . — — —Subtotal . . . . . . . . . . . . . . . 12,600 148,837 136,237Fair market value does not

exceed acquisition cost:Equity securities (*1) . . . . . . 104,131 86,112 (18,019)Debt securities . . . . . . . . . . — — —Others (*2) . . . . . . . . . . . . . . 1,209,058 1,024,290 (184,768)Subtotal . . . . . . . . . . . . . . . 1,313,190 1,110,402 (202,787)Total . . . . . . . . . . . . . . . . . . ¥1,325,790 ¥1,259,239 ¥ (66,550)(*1) Including impairment losses of ¥135,114 thousand on some equity securities.(*2) Including impairment losses of ¥328,686 thousand on investment securities

in monetary trust.


Thousands of U.S. dollars (Note 2)



Fair market valueexceed acquisition cost:

Equity securities . . . . . . . . . $ 105 $1,111 $ 1,006Debt securities . . . . . . . . . . — — —Others . . . . . . . . . . . . . . . . . — — —Subtotal . . . . . . . . . . . . . . . 105 1,111 1,006 Fair market value does not

exceed acquisition cost:Equity securities (*1) . . . . . . 225 192 (33)Debt securities . . . . . . . . . . — — —Others . . . . . . . . . . . . . . . . . 10,944 8,190 (2,753) Subtotal . . . . . . . . . . . . . . . 11,168 8,383 (2,786) Total . . . . . . . . . . . . . . . . . . $11,274 $9,494 $(1,780)(*1) Including impairment losses of $1,091 thousand on some equity securities.

(2) Unlisted equity securities as of June 30, 2003 and 2002 were

as follows:Thousands of


2003 2002 2003

Unlisted equity securities (except the equity securities which traded on over-the-counter markets) . . . . . . . . . . . . . . . ¥167,620 ¥283,940 $1,399

Unlisted equity securities as of June 30, 2002 includes impair-

ment losses of ¥39,800 thousand on some equity securities.

The proceeds from sale of available-for-sale securities were

¥58,736 thousand ($490 thousand) and ¥124,473 thousand for the

years ended June 30, 2003 and 2002 respectively. Loss on sale of

available-for-sale securities computed on the moving-average

cost basis were ¥8,745 thousand ($73 thousand) and ¥8,589 thou-

sand for the years ended June 30, 2003 and 2002 respectively.

8. SHORT-TERM LOANS AND LONG-TERM DEBT

Short-term loans are principally comprised of bank loans. The

annual average of interest rates applicable to such loans was

0.5% as of June 30, 2003.

As is customary in Japan, substantially all loans from banks

(including short-term loans) are made under general agreements

which provide that, at the request of the banks, the borrower is

required to provide collateral or guarantors (or additional collat-

eral or guarantors, as appropriate) with respect to such loans,

and that all assets pledged as collateral under such agreements

will be applicable to all present and future indebtedness to the

banks concerned.

Long-term debt at June 30, 2003, consisted of the following:

Thousands of Thousands of yen U.S. dollars

(Note 2) (Note 2)

Borrowings from banks and insurance companies at interest ranging from 0.860% to 1.950% . . . . . . . . . . . ¥10,794,560 $ 90,105

0.25% unsecured convertible bonds due 2007 . . . . . . . . . . . . . . . . . . 7,278,000 60,751

0.70% unsecured straight bonds due 2007 . . . . . . . . . . . . . . . . . . 3,000,000 25,042



0.64% unsecured straight bonds due 2007 . . . . . . . . . . . . . . . . . . 700,000 5,843


Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥27,172,560 $226,816

The current conversion prices of the 0.25% convertible bonds

issued by the Company are ¥8,442. Conversion price is subject

to adjustment in certain circumstances, including stock splits or

free share distributions of common stock. All outstanding con-

vertible bonds can be repurchased at any time and may be

redeemed at the option of the Company and bondholder, in

whole or in part, at prices ranging from 104% to 100% of their

principal amounts.

Convertible bonds are treated solely as bonds and no value

inherent in their conversion feature is recognized in accordance

with accounting principles generally accepted in Japan. The

total amount of the convertible bonds has been included in

long-term debt.

Long-term loans are principally comprised of bank loans. The

annual average of interest rates applicable to such loans was

1.4% as of June 30, 2003.

The aggregate annual maturities of the long-term debts subse-

quent to June 30, 2003 are as follows:

Thousands of Thousands of yen U.S. dollars

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

2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 4,702,240 $ 39,2512005 . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,702,240 39,2512006 . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,242,320 35,4122007 . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,003,000 91,8452008 and thereafter . . . . . . . . . . . . . . . . 7,225,000 60,308Total . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥31,874,800 $266,067

9. FINANCIAL INSTRUMENTS

The Company has entered into interest rate swap contracts to

manage its interest rate exposures to possible interest rate fluc-

tuation on loans payable to banks. Derivative transactions

entered into by the Company have been made in accordance

with internal policies, which regulate the authorization and credit

limit amount.


10. USE OF SPECIAL PURPOSE COMPANIES (SPC) FORPROPERTY OWNERSHIP

The Company has used a sale and lease back structure to secu-

ritize real estate assets pursuant to which an SPC acquires real

estate from the Company and leases it back to the Company.

The scheme was used to refinance the Shinjuku Higashi-guchi

store. This particular SPC structure is required to be reviewed

after five years and, if it is determined at that time not to contin-

ue with the structure, the real estate will either be repurchased

by 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 the initial purchase price, the Company is required

to pay the shortfall up to 75% of the initial purchase price.

In order to obtain financing, on February 2002 the Company

used the SPC structure in respect of real estate which it owned

in Roppongi. Under this scheme, the Company entrusted the

real estate to a trustee and received beneficial rights/interests.

The trustee leases the real estate to the Company, will receive

rent from the Company and will pay dividends under the trust to

the SPC. The term of the trust agreement is 6 years and the

term of the lease agreement is 15 years. At the end of the trust

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, on September 2002, the

Company used the SPC structure in respect of real estate for

PAW Kawasaki. The Company entrusted the real estate to a

trustee and sold beneficial rights/interests to improve the finan-

cial structure of the Company by reducing interest-bearing debt.

11. STOCK INCENTIVE PLAN

The shareholders of the Company approved a stock incentive

plan on September 28,1999. The plan provides for the issuance

of up to 20,000 shares in the form of options to 40 key persons.

The options may be exercised during the period from October 2,

2001 until October 1, 2004, and the exercise price was ¥26,580

($222). The terms of options are subject to adjustment if there

are stock splits, consolidation of shares or additional shares

issued at price less than the market price per share.


plan on September 26, 2000. The plan provides for the issuance

of up to 20,000 shares in the form of options to 4 directors and

provides for the issuance of up to 80,000 shares in the form of

options to 179 key persons. The options may be exercised dur-

ing the period from October 2, 2002 to October 1, 2006, and

the exercise price was ¥11,947 ($100). The terms of options are

subject to adjustment if there are stock splits, consolidation of

shares or additional shares issued at price less than the market

price per share.



of up to 25,000 shares in the form of options to 5 directors and

provides for the issuance of up to 100,000 shares in the form of

options to 222 selected employees. The options may be exer-

cised during the period from October 2, 2003 to October 1,

2007, and the exercise price was ¥8,580 ($72). The terms of

options are subject to adjustment if there are stock splits, con-

solidation of shares or additional shares issued at price less than

the market price per share.



of up to 200,000 shares in the form of options to management

and employees. The options may be exercised during the period

from October 2, 2004 to October 1, 2008, and the exercise price

was ¥10,170 ($85). The terms of options are subject to adjust-

ment if there are stock splits, consolidation of shares or addition-

al shares issued at price less than the market price per share.

12. OTHER INCOME, NET

Other income, net for the years ended 2003 and 2002 consisted

of other income and other expense. Other income and other

expense were as follows:Thousands of


2003 2002 2003

Other income:Rental fee for

computer system . . . . . . ¥1,041,583 ¥725,871 $ 8,694Gain on sale of

fixed assets . . . . . . . . . . . 85,193 25,905 711Gain on sale of

affiliated company . . . . . . 61,574 — 514Reversal of allowance for

doubtful accounts . . . . . . 2,448 2,488 20Other . . . . . . . . . . . . . . . . . 535,446 460,942 4,470Other income total . . . . . . . 1,726,246 1,215,207 14,409Other expense:Loss on disposal of

fixed assets . . . . . . . . . . . 81,018 30,289 676Loss on devaluation of

investment securities . . . . 130,710 503,600 1,091Loss on sale of

fixed assets . . . . . . . . . . . 4,133 497 34Loss on sale of

investment securities . . . . 8,745 8,589 73Other . . . . . . . . . . . . . . . . . 77,510 9,014 681Other expense total . . . . . . . 302,118 551,494 2,521Other income, net . . . . . . . . ¥1,424,126 ¥663,215 $11,888


13. PLEDGED ASSETS

The assets pledged as collateral for the Company’s liabilities as

of June 30, 2003 and 2002 were as follows;Thousands of


2003 2002 2003

Land . . . . . . . . . . . . . . . . . . ¥3,114,479 ¥3,114,479 $25,997Buildings . . . . . . . . . . . . . . 410,673 440,827 3,428Total . . . . . . . . . . . . . . . . . . ¥3,525,152 ¥3,555,307 $29,425

Liabilities related with the assets pledged as of June 30, 2003

and 2002 were as follows;Thousands of


2003 2002 2003

Short-term loans . . . . . . . . ¥1,900,000 ¥1,736,000 $15,860Current maturities of

long-term debt . . . . . . . . . 618,200 852,076 5,160Long-term debt . . . . . . . . . . 1,262,050 880,250 10,534Total . . . . . . . . . . . . . . . . . . ¥3,780,250 ¥3,468,326 $31,554

14. INCOME TAX

The normal effective statutory income tax rate in Japan for the

years ended June 30, 2003 and 2002 arising out of the aggrega-

tion of corporate, enterprise and inhabitants taxes was approxi-

mately 42.1%.

The significant components of deferred tax assets and liabilities

as of June 30, 2003 and 2002 were as follows:Thousands of


2003 2002 2003

Deferred tax assets (current):Provision for

enterprise tax . . . . . . . . . . ¥ 289,721 ¥184,537 $ 2,418Allowance for bonus . . . . . . 18,946 17,448 158Inventories . . . . . . . . . . . . . 570,382 315,677 4,761Others . . . . . . . . . . . . . . . . . 56,867 21,426 475Subtotal . . . . . . . . . . . . . . . 935,917 539,089 7,812Deferred tax assets (non- current):Accrued retirement

benefits . . . . . . . . . . . . . . 38,125 37,733 318Depreciation . . . . . . . . . . . . 124,632 47,699 1,040Valuation loss of investment

securities . . . . . . . . . . . . . 310,294 267,524 2,590Net unrealized losses on

investment securities . . . . 89,793 28,017 750Others . . . . . . . . . . . . . . . . . 81,994 49,826 685Subtotal . . . . . . . . . . . . . . . 644,840 430,801 5,383Total . . . . . . . . . . . . . . . . . . ¥1,580,758 ¥969,891 $13,195

A reconciliation of the differences between the statutory tax rate

and the effective income tax rate reflected in the accompanying

statements of operation for the fiscal years ended June 30, 2003

and 2002 was as follows:

2003 2002

Statutory tax rate . . . . . . . . . . . . . . . . . . 42.1% 42.1%Permanent difference . . . . . . . . . . . . . . . 0.2% 0.2%Flat tax of inhabitant tax . . . . . . . . . . . . . 1.6% 1.4%Effect of change in effective

statutory tax rates . . . . . . . . . . . . . . . . 0.2% —Effective income tax rate . . . . . . . . . . . . 44.1% 43.7%

Effective for years commencing on April 1, 2004, or later,

according to the revised local tax law, income tax rates for enter-

prise taxes will be reduced as a result of introducing the assess-

ment by estimation on the basis of the size of business. Based

on the change of income tax rates, for calculation of deferred

income tax assets and liabilities, the current items and non-cur-

rent items, respectively, at March 31, 2003.

As a result of the change in the statutory tax rates, deferred

income tax assets and net income decreased by ¥21,923 thou-

sand ($182 thousand).

15. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Major elements of selling, general and administrative expenses

for the years ended June 30, 2003 and 2002 are summarized as

follows:Thousands of


2003 2002 2003

Employees’ compensation and benefit . . . . . . . . . . . . ¥ 9,860,083 ¥ 7,099,325 $ 82,305

Occupancy and rental . . . . . 4,202,881 2,569,261 35,082Commission . . . . . . . . . . . . 3,148,861 2,467,986 26,284Depreciation . . . . . . . . . . . . 2,247,977 1,305,705 18,764Provision for retirement

benefits for directors . . . . 4,508 10,122 38Other . . . . . . . . . . . . . . . . . 7,681,562 5,671,331 64,120Total . . . . . . . . . . . . . . . . . . ¥27,145,874 ¥19,123,731 $226,593

16. RELATED PARTY TRANSACTIONS

Related party transactions for the years ended June 30, 2003

and 2002 were as follows:Thousands of


Description of theRelated party Category Transaction 2003 2002 2003

¥3,600 ¥3,600 $30

— ¥1,479 —

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

Anryu Shoji LTD. (*2)

Company inwhich thedirector ownsthe majorityvotes

Rental realestate (*1)

Brokerage fee


17. EARNINGS PER SHARE

The following table sets forth the computation of basic and dilut-

ed earnings per share showing the reconciliation of the numera-

tors and denominators used for the computation.Thousands of


2003 2002 2003

Net income . . . . . . . . . . . . . ¥5,641,698 ¥4,027,264 $47,093Effective of dilutive securities:0.25% convertible

bonds due 2007 . . . . . . . . 10,493 3,004 87Diluted net income . . . . . . . ¥5,652,192 ¥4,030,266 $47,180

Thousands

2003 2002

Weighted average number of shares . . . . . . . 10,128 10,038

Effective of dilutive securities:Stock options . . . . . . . . . . . 4 60.25% convertible

bonds due 2007 . . . . . . . . 866 262Diluted weighted average

number of shares . . . . . . . 10,998 10,306

Effective April 1, 2002, the Company adopted the a accounting

standard for earnings per share and related guidance

(Accounting Standards Board Statement No. 2, “Accounting

Standard for Earnings Per Share” and Financial Standards

Implementation Guidance No. 4, “Implementation Guidance for

Accounting Standard for Earnings Per Share,” issued by the

Accounting Standards Board of Japan on September 25, 2002).

Earnings per share for the year ended March 31, 2002 would

have been reported as follows, if this new accounting standard

were applied retroactively.

Yen U.S. dollars(Note 2)

2003 2002 2003

Shareholders’ equity per share . . . . . . . . . . . . . ¥3,178.94 ¥2,629.60 $26.53

Basic earnings per share . . . 557.02 401.20 4.65Diluted earnings

per share . . . . . . . . . . . . . ¥ 513.89 ¥ 391.04 $ 4.29

18. CASH FLOW INFORMATION

Cash flow information as of June 30, 2003 and 2002 is summa-

rized as follows:Thousands of


2003 2002 2003

Cash and time deposits . . . ¥7,040,599 ¥6,250,453 $58,770Time deposits excess

three months . . . . . . . . . . — (20,180) —Cash and cash

equivalents . . . . . . . . . . . . ¥7,040,599 ¥6,230,273 $58,770

19. SUBSEQUENT EVENTS

Appropriation of retained earnings under the Commercial Code

of Japan, a plan for appropriation of retained earnings proposed

by the Board of Directors, must be approved at a shareholders’

meeting to be held within three months after the end of the fiscal

year. The appropriation of retained earnings for the year ended

June 30, 2003 was approved by the shareholders’ meeting held

on September 25, 2003 as follows:Thousands of


Cash dividends (¥15.0 ($0.13) per share) . . . . . . . . . . . . ¥152,091 $1,270

The stock incentive plan provides for the issuance of up to

300,000 shares in the form of options to management and

employees. The options may be exercised during the period

from October 2, 2005 to October 1, 2009, and the exercise price

was equal to the fair market value on the date of grant.

The Board of Directors resolved at a meeting held on June 3,

2003 the 2.0 for the one share stock split effective on August 20,

2003, with certain conditions, to which shareholders on the reg-

ister on June 30, 2003 are to be entitled. This stock split will

result in an increase in the number of shares outstanding by

10,140 thousand.

If the stock split had been used for the calculation the per

share information for the years ended June 30, 2003 and 2002

are as follows:Yen U.S. dollars

(Note 2)

2003 2002 2003

Shareholders’ equity per share . . . . . . . . . . . . . ¥1,589.47 ¥1,1314.80 $13.27

Basic earnings per share . . . . . . . . . . . . . 278.51 200.60 2.32

Diluted earnings per share . . . . . . . . . . . . . ¥ 256.94 ¥ 195.49 $ 2.14

20. SEGMENT INFORMATIONOperating segment information

The Company and its subsidiaries are engaged in discount store

operations, wholesale operations and rental business operations

for real property. Such segment information, however, has not

been presented, as the percentages of other activities are not

material to the discount store business.

Geographic segment information

Since most of the Company and its subsidiaries’ business activi-

ties are conducted in Japan, geographic segment information is

not presented.

Sales outside Japan

The Company and its subsidiaries have no sales outside Japan.


Investor Information

Corporate Data (as of June 30, 2003)

COMPANY NAME

Don Quijote Co., Ltd.

SCOPE OF BUSINESS

Operation of discount stores, which sell home appliances, daily

sundries, foods, watches, fashion merchandise, sporting goods,

leisure equipment and other products

HEAD OFFICE

4-14-1, Kitakasai, Edogawa-ku, Tokyo 134-0081, Japan

Tel: +81-3-5667-7511

Fax: +81-3-5667-7522

DATE OF ESTABLISHMENT

September 5, 1980

PAID-IN CAPITAL

¥5,949,875 thousand

NUMBER OF EMPLOYEES

1,113

NUMBER OF STORES

70

Board of Directors (as of September 25, 2003)

President and representative director

Takao Yasuda

Directors

Mitsuo Takahashi

Junji Narusawa

Kouji Ohara

Satoshi Ueda

Kiyoshi Kubota

Koji Fusa

Standing statutory auditor

Isao Matsuura

Statutory auditors

Mutsuo Takahashi

Hitoshi Ehara

Masaru Ueno


Store Network (as of June 30, 2003)

HOKKAIDOSapporo store 3-6, Minami nijo nishi, Chuo-ku, SapporoTeine store 11-7-10, Maeda gojo, Teine-ku, SapporoHiraoka store 1-1-35, Hiraoka yojo, Kiyota-ku,

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

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

Utsunomiya

TOKYO METROPOLITAN AREAFuchu store 2-6-3, Midori-cho, FuchuSuginami store 4-22-13, Miyamae, Suginami-kuShinjuku store 1-12-6, Okubo, Shinjuku-kuKasai store 4-14-1, Kitakasai, Edogawa-kuKanpachi Setagaya

store 3-39, Hachimanyama, Setagaya-kuKannana Umejima

store 5-5-14, Chuohoncho, Adachi-kuKeihin Kamata store 3-29, Nakarokugo, Ota-kuKeio Horinouchi store 34-11, Matsugi, HachiojiTohachi Mitaka store 1-24, Nozaki, MitakaKoganei Koen store 5-3-12, Shin-machi, NishitokyoShibuya store 2-25-8, Dogenzaka, Shibuya-kuMejirodai store 586-22, Kunugida-machi, HachiojiKannana Honancho

store 1-28-3, Honan, Suginami-kuShinjuku Higashi-guchi

store 1-16-5, Kabuki-cho, Shinjuku-kuKodaira store 1-5-23, Ogawahigashi-cho, KodairaRoppongi store 3-14-10, Roppongi, Minato-kuAoto store 3-1-1, Aoto, Katsushika-kuBIG FUN Heiwajima

store 1-1-1, Heiwajima, Ota-kuNakano-ekimae store 5-68-5, Nakano, Nakano-kuMachida-ekimae store 4-2-3, Haramachida, MachidaKameido sotre 1-40-2, Kameido, Koto-kuPAW Kitaikebukuro

store 2-7-5, Ikebukuro-honcho, Toshima-kuPicasso Shinkoiwa

store 1-30-2, Shinkoiwa, Katsushika-kuPicasso Kokubunji

store 2-2-8, Hon-cho, KokubunjiPicasso 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, KawasakiShin-Yokohama store 7-9-25, Kikuna, Kohoku-ku, YokohamaMinato Yamashita

store 1-2-8, Shinyamashita, Naka-ku, YokohamaTomei Sagamihara

store 985-1, Kamitsuruma, SagamiharaYokosuka 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, AtsugiPAW Kawasaki store 1-44-1, Shinmei-cho, Saiwai-ku, KawasakiPAW Hiratsuka store 5535-1, Tamura, HiratsukaPicasso Isezakicho

store 1-5, Akebono-cho, Naka-ku, YokohamaPicasso Tsurumi- 7-12, Toyooka-cho, Tsurumi-ku,

ekimae store Yokohama

SAITAMA PREFECTUREOmiya store 2-685, Higashionari-cho, Kita-ku, SaitamaWako store 3-11-85, Shirako, WakoUrawa Kagetsu store 260-1, Aza-Fudoya, Oaza-Nakao,

Midori-ku, SaitamaOmiya Owada store 1-219-6, Owada-cho, Minuma-ku, SaitamaKawaguchi Araijuku 81-1, Minamihara, Nishiaraijuku,

store KawaguchiWarabi store 1-11-11, Nishiki-cho, WarabiNiiza Nobidome store 4-1-77, Nobidome, NiizaPicasso Ageo store 1-7-23, Naka-cho, Ageo

CHIBA PREFECTUREKisarazu store 2-2-1, Jozai, Kisarazu Makuhari store 5-391-6, Makuhari-cho,

Hanamigawa-ku, ChibaIchihara store 893, Murata-cho, Chuo-ku, ChibaBaraki Nishifunabashi

store 474-1, Hongo-cho, FunabashiChiba Chuo store 3-10-6, Yuko, Chuo-ku, ChibaPAW Kashiwa store 3-3-2, Tomisato, KashiwaPicasso Motoyawata

store 4-7-2, Minamiyawata, Ichikawa

KYOTO PREFECTUREKyoto-minami Inter 1-2, Kamitobakitahanana-cho,

store Minami-ku, Kyoto

OSAKA PREFECTUREMinoh store 4-1-30, Makiochi, MinohHirakata store 2-30-10, Ikenomiya, HirakataSayama store 2-950-2, Higashikuminoki, OsakasayamaUchikan Fukae store 1-13, Fukaekita Higashinari-ku, OsakaPicasso Namba store 3-8-22, Namba, Chuo-ku, Osaka

HYOGO PREFECTUREItami store 7-62-1, Ojika, ItamiHimeji-minami store 2-51, Kamae, Shikama-ku, HimejiSannomiya store 2-12-3, Shimoyamatedori,

Chuo-ku, Kobe

FUKUOKA PREFECTURERakuichigaido

Hakozaki store 5-1-8, Hakozaki, Higashi-ku, FukuokaNishijin store 3-4-2, Nishijin, Sawara-ku, FukuokaRakuichirakuza

Kurume store 2-2-1, Higashiaikawa, Kurume

*The Suginami store was closed on August 24, 2003. The Ichihara store was relocated to the address shown above.


SHARES OF COMMON STOCK

Authorized: 39,000,000

Issued: 10,140,122

Treasury stock: 698

NUMBER OF SHAREHOLDERS

4,282

PRINCIPAL SHAREHOLDERS Percentage of Number of total shares in issue

shares held (%)

Takao Yasuda 1,872,000 18.5

La Mancha 1,500,000 14.8

The Master Trust Bank of Japan, Ltd. 743,200 7.3

Japan Trustee Services Bank, Ltd. 719,400 7.1

Anryu Shoji Ltd. 690,000 6.8

UFJ Trust Bank Ltd. 426,200 4.2

UBS AG Hong Kong 415,000 4.1

Nomura Securities Co., Ltd. 173,500 1.7

The Chase Manhattan Bank, N.A. London 130,000 1.3

Goldman Sachs International Ltd. 113,780 1.1

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

shareholders shares held (%)

Financial Institutions 54 3,098,126 30.5

Securities Companies 13 243,000 2.4

Other Japanese Corporations 88 731,900 7.2

Foreign Corporations and Individuals 126 3,382,198 33.4

Japanese Individuals and Others 4,001 2,684,898 26.5

Total 4,282 10,140,122 100.0

TRANSFER AGENT

The Mitsubishi Trust & Banking Corporation

1-4-5, 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 LISTINGS

Tokyo Stock Exchange, First Section

Share Information (as of June 30, 2003)

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

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