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

Don Quijote Co., Ltd. ANNUAL REPORT 2004 Printed in Japan 67-7511 +81-3-5667-7522 : URL http://www.donki.com Head Office Address: 4-14-1, Kitakasai, Edogawa-ku, Head Office Address: 4-14-1, Tokyo 134-0081, Japan Tel:+81-3-56 Fax Don Quijote Co., Ltd. Don Quijote Store Network Building The Mechanism for High- Speed Yet Stable Store Store Opening Network Expansion Share Information (as of June 30, 2004) Reaping benefits of scale brought How to accelerate corporate growth with sensible about by area saturation and and efficient store network expansion? Don Quijote’s nationwide store expansion SHARES OF COMMON STOCK answer is three store formats to tailor stores to the Authorized: 78,000,000 needs of individual locations and a 20-store-per-year Issued: 20,833,929 expansion pace. The deep, accumulated Treasury stock: 2,307 expertise on store openings, based on our area-saturation strategy, NUMBER OF SHAREHOLDERS gives valuable strength to a 4,338 flexible and prompt store-opening program PRINCIPAL SHAREHOLDERS that seeks out and Percentage of Store Formats Mechanisms of Don Quijote’s Number of total shares in issue makes best use of shares held (%) Flexibly responding to trade favorable locations. Takao Yasuda ...... 3,244,000 15.6 area characteristics with three Distinctive CreativityLa Mancha ...... 3,000,000 14.4 store formats: Don Quijote, PAW The Master Trust Bank of Japan, Ltd...... 1,559,700 7.5 and Picasso and Overwhel mingJapan Trustee Power Services Bank, Ltd...... 1,461,900 7.0 UBS AG Hong Kong ...... 854,000 4.1 Lehman Brothers International (Europe) ...... 583,200 2.8 Nomura Securities Co., Ltd...... 575,200 2.8 Don Quijote’s Principle: The Chase Manhattan Bank, N.A. London ...... 452,600 2.2 The Customer Anryu Shoji Ltd...... 430,000 2.1 Comes First Morgan Stanley & Company, Inc...... 360,000 1.7 Contents SHARE OWNERSHIP BY CATEGORY Late-night operation to serve diversifying Percentage of Number of Number of total shares in issue Dear Fellow Shareholders . . . 2 lifestyles, a combined display concept and shareholders shares held (%) merchandise mix that provides amusement Financial Institutions ...... 59 4,685,674 22.5 Employee Empowerment . . . . 6 through excitement and discovery, a string of Securities Companies ...... 20 901,879 4.3 new services that answer customer Store Network Building . . . . 8 Other Japanese Corporations ...... 84 516,300 2.5 requests—creative innovation based on Foreign Corporations and Individuals ...... 189 10,106,168 48.5 Customer Care ...... 12 pursuit of the customer-first principle distinguishes Don Quijote among Japanese Individuals and Others ...... 3,986 4,623,908 22.2 Financial Section ...... 14 full-line discount store operators. Total ...... 4,338 20,833,929 100.0 Perfecting this model will be Corporate Data ...... 33 the key to the Company's overwhelming power. TRANSFER AGENT Share Information ...... 35 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 Customer Care The Mechanism for Acquiring Loyal Customers through Rigorous Pursuit of the Customer-First Principle Along with providing a unique product selection and a display method that offers astonishment and discovery, Don Quijote addresses an emotional element in the shopping experience with heartfelt services. This determination led to “Customer Care Specialists”—staff assigned specifically to customer care, including former employees of luxury-class hotels—and to new services that enhance shopping convenience in our stores. Don Quijote Co., Ltd. Annual Report 2004 35 Employee Empowerment The Mechanism for Sales-floor Constantly Increasing Creation Amusement and Compression display creates Employee Motivation excitement and lengthens time Sweeping delegation of authority increases staff spent in the store motivation and keeps store employees brimming with enthusiasm. Don Quijote offers not only the low prices customers expect, but also a vast product selection presented under the “compression display” high-density shelf-stocking concept that provides amusement akin to a Don Quijote’s Merchandising jungle treasure hunt. Unique expertise Creativity A vast product selection spanning such as this adds up Creativity everything from daily necessities to an unassailable to home appliances and retailing advantage ming Power luxury-brand goods for Don Quijote.

The Business Concept Greater Convenience, Greater Discounts and Greater Amusement

Don Quijote’s distinctive character was born not only of a passion for convenience and discounts, but also from an overriding desire to provide amusement. Our customers have come to regard the time spent in our stores and the fun they have searching for, discovering and selecting their purchases as a new form of shopping pleasure.

Services A successive introduction of new services reflecting the opinions and wishes of customers

Sales Active appointment of “Customer Care Specialists” to increase customer satisfaction

Don Quijote Co., Ltd. Annual Report 2004 1 Dear Fellow Shareholders

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

The year under review, the fiscal year ended June 30, 2004, was the final year of the 2x4 Plan, Don Quijote’s four-year mid-term management plan. We continued efforts to enhance the appeal of our stores by improving the product mix and presentation, achieving higher sales and profits for the four- teenth consecutive year. The business grew dramatically during the four years of the 2x4 Plan as a result of a company-wide effort, and we nearly reached the plan’s highly ambitious numerical targets. We have established the 7532 Plan as our next goal, and have already begun to implement a number of specific measures aimed at future business development.

Takao Yasuda President

Continued Solid Growth Despite a Harsh Business Environment In the fiscal year ended June 30, 2004, signs of business recovery at last began to emerge in some sectors of Japan’s economy owing to increases in exports and capital investment. Although positive signs began to appear in personal consumption as well, the nascent upturn lacked dynamism and did not become a full-fledged recovery in consumption. The retail industry, the sector in which the Company operates, faced an adverse trading environment owing to factors such as unseasonable weather conditions in the form of a cool summer, mild winter and numerous rainy days, the intensification of business competition and temporary confusion attendant on the change to the inclusion of consumption tax in indicated prices. In these circumstances, the Company put into practice our corporate philosophy The Customer Comes First, striving to continue to provide enjoyment and astonishment in shopping by offering popular, fast-selling products and further strengthening our product presentation skills. At the same time, we focused on further enhancing our service capabilities to add emotional warmth to the shopping experience. To enable a greater number of customers to experience the attractions of Don Quijote, we accelerated our nationwide store open- ing program; we opened 24 new stores in the year under review, expanding the total number of stores to 93 from 70 at the previous fiscal year-end (one store was closed). As a result of these initiatives, consolidated net sales surged to ¥192.8 billion, an increase of 21.6% from the previous year, operating income was 15.8% higher at ¥10.6 billion and net income rose 21.4% to ¥6.8 billion. Don

Summary of Business Results Millions of yen

For the Year ended June 30 2000 2001 2002 2003 2004

Net sales ¥73,402 ¥94,706 ¥115,428 ¥158,619 ¥192,839 Operating income 4,639 6,011 6,916 9,165 10,610 Income before income taxes 5,874 6,748 7,150 10,095 12,368 Net income 2,829 3,353 4,027 5,641 6,846 Earnings per share* (yen) 283 334 401 557 348

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

2 Don Quijote Co., Ltd. Annual Report 2004 Quijote has achieved higher sales and profits for the 8 consecutive years since adopting consolidated accounting and for 14 consecutive years, on a non-consolidated basis—ever since the business was established.

Steady Expansion of Don Quijote’s Unique Appeal Brings High Popularity, Name Recognition and Expectations Don Quijote was formed in 1989 as a retailer that operates full-line discount stores where people can shop late into the night and which implements the unique business concept of enticing people to spend time in our stores by delivering the same enjoyment as people receive from browsing at shopping fairs or bazaars. We operate stores that remain fresh and novel no matter how often people visit. Our vast selection of merchandise spans everything from daily necessities and food to sundries, apparel, electrical goods and luxury-brand goods. It also combines nationally known brands with products people have never seen anywhere else, available on a limited time basis. Moreover, the “compression display” method of presenting this intriguing variety of merchandise has become widely known as a trademark of Don Quijote. Compression display involves creating the impression of a jungle by packing every nook and cranny in the store with merchandise displays to deliver the added value of astonishment and discovery. To effectively spread awareness of Don Quijote’s distinctive appeal, which is so unlike any other retailer, the Company has expanded the store network based on an area-saturation strategy that concentrates new store openings in certain geographical areas. Following implementation of a store-opening program focused in the greater Tokyo metropolitan area, in 2001 we began to open stores in selected areas across Japan. At the end of the year under review we operated stores in 18 prefectures. From the time the first store opened until today, Don Quijote has delivered numerous concrete results, including expansion of the store network and improvement in business performance. The high popularity, name recognition and expectations among people all across Japan attained over the years are Don Quijote’s greatest management resources, and we intend to take full advantage of this strength to deliver additional growth in the coming years.

“2x4” Mid-term Management Plan—A Bold Quest for Dramatic Growth The fiscal year ended June 30, 2004 marked the final year of the 2x4 Plan, Don Quijote’s four-year mid-term management plan. Announced in 2000, when sales were ¥73 billion and the number of stores totaled 27, this was an extremely ambitious undertaking aimed at achieving net sales of ¥200 billion, ROE of 20%, establishing a framework for delivering ordinary income of ¥20 billion and opening 20 new stores each year. True to the spirit of the name Don Quijote, our stance is to boldly accept challenges and tackle every difficulty, and the

Results of the 2x4 Plan

19.2 200 192.8 20 18.5 15 25 24

16.6 16.5 16.6 12.5 20 158.6 20 150 15 10.1 17 10 115.4 15 7.6 100 94.7 10 6.9

73.4 5.8 10 5 8

50 5 6 5

0 0 0 0 00 01 02 03 04 00 01 02 03 04 00 01 02 03 04 00 01 02 03 04

Net sales (¥ billions) Return on equity (%) Ordinary income (¥ billions) New store openings

Don Quijote Co., Ltd. Annual Report 2004 3 employees pulled together as one in a vigorous effort to achieve the targets in the plan. While the results for the year under review of ¥192.8 billion in net sales, ¥12.5 billion in ordinary income, ROE of 18.5%, and 24 new stores opened fell slightly short of the plan’s challenging targets, we are confident that the 2x4 Plan contributed to establishment of a framework and foundation for further growth in the years ahead.

Key Results Achieved by the 2x4 Plan One of the many results we achieved by implementing the 2x4 Plan was the establishment of two new store formats that complement the Don Quijote format: Picasso small-scale discount stores and PAW shopping malls, with tenants from other industries. This has greatly increased flexibility in store opening and accelerated expansion to a nationwide store network. Our financial structure has grown stronger and more flexible. The opening of the Shinjuku Higashi-guchi Store in 2000 marked the first time we employed asset securitization using a special purpose company (SPC). By continuing to use this financing approach, we succeeded reducing new store opening costs and curbing excess asset expan- sion. We have also sought to attain stability of funds procurement and lower cost of funds through such means as concluding a commitment line agreement with a group of banks and issuing corporate bonds. We also made great progress with the most important task of all—the enhancement of customer satisfaction. We greatly improved the service capabilities at our stores by staffing them with dedicated customer-service personnel and introducing bank ATMs and other automated services. To increase shopping convenience and institute a service to reward customers through a bonus point program, we began issuing the Club Donpen Card, a credit card with a cash-advance feature. In addition to these results, we aggressively worked to reduce the cost of goods sold: we lowered purchase costs and improved the gross profit margin by consolidating vendors, reviewed trading terms and conditions, and expanded our lines of OEM and develop-and-import products. We are also strengthening systems for lowering the selling price, working to cut costs by putting into operation a joint shipping system based on centralized delivery and efficiently managing merchandise using a new backbone computer system.

Increasingly Important Social Responsibility Initiatives in Line with Corporate Growth Don Quijote has achieved tremendous corporate growth during the past four years. We are keenly aware that this growth entails greater responsibility to society and are making every effort to fulfill our corporate social responsibility. Don Quijote has long engaged in store operation that places deep importance on coexisting harmoniously with society, engaging in day-to-day volunteer activities and working to deepen communication with the com- munities we serve. We also believe that our stores, which are open for business at midnight, should be a dependable place for local residents to turn for assistance when emergencies occur late at night, and have worked to fulfill that role. Late-night sale through videophone consulting of over-the-counter (OTC) drugs is a

Summary of Financial Position Millions of yen

As of June 30 2000 2001 2002 2003 2004

Total assets ¥34,228 ¥47,483 ¥72,485 ¥93,410 ¥126,774 Total shareholders’ equity 18,561 22,053 26,562 32,232 41,738

Return on equity (%) 54.2 46.4 36.6 34.5 32.9 Interest-bearing debt 6,359 11,133 26,250 37,974 55,493

Debt-to-equity ratio (%) 34.2 50.4 98.8 117.8 132.9

4 Don Quijote Co., Ltd. Annual Report 2004 concept born of this stance (a pharmacist must be present under Japanese law). Our strong conviction bore fruit when regulations were relaxed, paving the way for us to provide these medications to customers even late at night. At the same time, we regard strengthening corporate governance to be an important management task and are taking measures to ensure observance of corporate ethics and maximize corporate value. In addition to meetings of the Board of Directors, since June 2003 we have held meetings to consider operational reforms for addressing important management issues laterally across the entire group and putting in place a structure for flexible, rapid decision-making. In 2003, we appointed an outside director to increase management transparency and strengthen corporate supervision.

The 7532 Plan Is a Promise to Achieve the Next Set of Objectives In August 2004, we announced the 7532 Plan, Don Quijote’s new mid-term management plan. In the past, the Company implemented the 753 Plan, which aimed for net sales of ¥70 billion, ordinary income of ¥5 billion, and a network of 30 stores. We achieved those objectives and next embarked on the 2x4 Plan. Now, the 7532 Plan calls for achievement of a ratio of ordinary income to sales greater than 7%, EPS greater than ¥500, sales higher than ¥300 billion within three years, and double-digit growth of 20%. At a time when the scale of the business is expanding and corporate responsibility increasing, we believe that in formulating the 7532 Plan, the targets we set should be tantamount to a firm promise. Compared to the aggressive objectives of the 2x4 Plan, the new plan is a quota that will be achieved without fail, and I intend to achieve results that exceed the targets.

Specific Measures Already Under Way to Achieve Further Growth Concurrent with the announcement of the new management plan, various specific measures to achieve the plan objectives have already been set in motion, such as “Donki Kenkokan,” our healthcare business. Through our efforts to date to make possible late-night sales of OTC drugs we have come to understand fully the breadth and depth of people’s healthcare needs. To meet customer expectations, we decided to enter into an alliance with healthcare management company I’rom Co., Ltd. The alliance aims to fuse I’rom’s expertise and personnel specializing in the medical care and healthcare field with Don Quijote’s retail experience to make a full-scale launch into the comprehensive healthcare business. Through cooperation with I’rom, we plan to extend to all stores the late-night sale of OTC medications that is currently limited to a portion of Don Quijote stores, establish dedicated healthcare corners at all Don Quijote stores, and commence Internet sales. As the first initiative in establishing the business, in September 2004 at the Shinjuku Store we opened the Donki Kenkokan, which offers a selection of medications and healthcare products. In another development, in August 2004 we entered into an agreement with Seven-Eleven Japan Co., Ltd. and announced the opening of a Seven-Eleven store in the Don Quijote Niigata-ekinan Store. As these new initiatives indicate, Don Quijote intends to continue to pursue alliances with various companies, generate synergies with our high name recognition and ability to draw customers, and bring happiness and progress to Don Quijote, our business partners and customers. Even as we direct our attention to the effective utilization of the more extensive management resources made available to us by business expansion, we will not lose our enthusiasm for exploring new possibilities and accepting new challenges. We would encourage our shareholders and the investment community to main- tain high expectations for Don Quijote and request your continued support.

PRESIDENT TAKAO YASUDA

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

Infinite Shopping Excitement

6 Don Quijote Co., Ltd. Annual Report 2004 The Mechanism for Constantly Increasing Amusement and Employee Motivation

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

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

Late-night Operation and Compression Display for Amusement-packed Sales Floors

The convenience of expanded operation hours that allow customers to shop until late at night is only one of Don Quijote’s many appeals. Other features include “compression display”—the high-density showcasing of merchandise using unique know-how developed within the Company. This involves offering an overwhelming variety of merchandise—everything from daily necessities and sundries to electrical goods, jewelry and luxury-brand goods—stocked virtually from floor to ceiling. Compression display creates an atmosphere like that of a jungle inside our stores and makes them highly amusing places brimming with the fun of hunting for uncharted bargains and the surprise of new discoveries. Moreover, compression display minimizes the back stock area and makes it possible to display and efficiently turnover more than five times the volume of merchandise found at an ordinary store of the same size, resulting in high sales per square meter.

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

Merchandising with an Emphasis on Low Price and Originality As a full-line discount store operator, Don Quijote offers low prices as a matter of course in combination with a vast selection of merchandise, ranging from daily necessities to brand name goods. To maintain the enjoyment of shopping and a sense of freshness and novelty in our stores, in addition to low price, about 60% of our merchandise is regularly stocked items, and 40% consists of products offered on a limited-availability basis. Regularly stocked merchandise, centered on national brands increases the closeness to people’s daily lives, and the constantly changing selection of limited availability products procured by staff with their unique sensibility provides the discovery and wonder distinctive to the Don Quijote shopping experience.

Don Quijote Co., Ltd. Annual Report 2004 7 Store Network Building

Expanding the Chain Nationwide

8 Don Quijote Co., Ltd. Annual Report 2004 The Mechanism for High-speed Yet Stable Store Network Expansion

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

Shopping entertainment stores with 24-hour shopping malls featuring a Scaled-down stores tailored to small 1,000 square meters of sales floor Don Quijote store as the anchor trade areas, offering 10,000 to space that offer a full-line selection of tenant, and sales floors of 4,000 to 20,000 items in sales floors of 300 to 40,000 items. 5,000 square meters. 500 square meters.

Low-cost Store Opening and Low-cost Operation In recent years, aggressive business restructuring activity on the part of Japanese industries has resulted in an environment in which retail properties in good locations have become available on favorable terms. For Don Quijote, this trend has spurred new store openings even as we carefully control costs. We are further reducing costs by increasing the store- opening method of adopting vacant retail properties and utilizing existing facilities. Furthermore, store network expansion has begun to exert a cost-reduction effect in product purchasing and store operation. Even as we continue to foster the individuality and uniqueness of each store, we are steadily pursuing efficiency by taking advantage of benefits of scale.

Highly Flexible Procurement of Funds for Store Openings Since the opening of its first store in 1988, Don Quijote has pursued an area-saturation strategy in the greater Tokyo met- ropolitan area and has implemented a policy of funding store openings within the scope of cash flow. However, as the Company follows its strategy of extending operations nationwide and opening stores at the pace of 20 stores per year, diversifying of fund procurement methods and improving asset efficiency have become important issues. The Company was quick to recognize and address these issues and engages in asset securitization using special purpose companies (SPCs), a scheme used for three stores since 2000, with the opening of the Shinjuku Higashi-guchi Store. In December 2001, we concluded a commitment line agreement for ¥10 billion with a group of ten banks. The Company issued convertible bonds of ¥8 billion in total in March 2002 and ¥17 billion in January 2004. In this way, we laid a solid foundation for procuring the funds necessary for growth.

Don Quijote Co., Ltd. Annual Report 2004 9 Pursuing Nationwide Benefits of Scale by Establishing a High-density, High-efficiency Store Network Region by Region

Review of Store Openings in Fiscal 2004

During the year under review, we strengthened our presence in the greater Tokyo metropolitan area and steadily engaged in store network expansion on a nationwide scale. We opened a total of 24 new stores during the term: 9 Don Quijote stores, 14 PAW stores, and 1 Picasso store. We put in place the framework for opening 20 new stores each year called for in the 2X4 Plan, the Company’s medium-term management plan. The PAW format, which is attracting attention as a powerful tool to fight the hollowing out of regional cities, has begun to follow a stable trajectory.

Central-Tokyo Saturation Strategy The year under review was another year of great progress for the store-opening program in the greater Tokyo area. The simultaneous opening in the spring of 2004 of two stores in Tokyo’s Ginza district, Japan’s shopping mecca, has been the subject of keen public attention, and we are confident this move has dramatically increased our area saturation in central Tokyo. Looking to the future, we plan to increase store density in central Tokyo and pursue greater efficiencies of store operation.

Accelerating Store Openings in Regional Cities Since the opening of a store in Fukuoka in 2001, we have expanded our nationwide net- work of stores in major cities to 18 prefectures, from Hokkaido in the north to Kyushu in the south. With regard to store openings in regional cities, we plan to take advantage of the expertise in area saturation gained in the highly competitive greater Tokyo area to develop a high-density, high-efficiency store-opening program centered on large cities, such as government-designated cities. Having the Don Quijote, PAW and Picasso store formats will enhance agility and flexibility in implementing this strategy.

The Ginza Brand-kan Store specializes in upscale, international brand-name items.

The Ginza Honkan Store offers daily consumable goods, which are hard to find in this fashion district. Hokkaido area ...... 5 stores

Number of stores totals 93 in 18 prefectures, with 24 new stores. Koshinetsu area ...... 2 stores

Kansai area . . . 17 stores Kanto area . . . . 61 stores

Tokai area . . . . 3 stores

Kyushu area . . . 5 stores

Benefits of Scale Derived from Store Network Expansion Now that the Company has extended the service area to regional cities and the number of stores has grown to nearly 100, we have begun to engage in the low-cost store operation necessary to take maximum advantage of benefits of scale. Regarding merchandise purchasing, we have introduced a centralized negotiation Total scheme by which only the head office negotiates with vendors, and each store makes its 93 stores own specific purchasing decisions on the basis of terms negotiated by the head office. 100 Picasso With this system, we aim to achieve both product selection that can be tailored to local 10 stores characteristics and benefits of scale. The Company is aggressively working to reduce costs that do not bear directly on customer satisfaction, including costs of construction,

80 70stores store interiors, fixtures, security and insurance. We are applying these cost reductions to PAW achieve new store openings at lower expense. 9stores 18 stores 53 stores 60 4 stores stores 7 2004 61 stores Don Quijote 2003 40 1 store 65 stores 54 stores 2004 57 stores 32 stores 2002 45 stores 20 42 stores 2003 16 stores

2002 11 stores 0 2002 2003 2004

Number of Number of stores Number of stores stores by format in the Kanto area in regional cities

Don Quijote Co., Ltd. Annual Report 2004 11 Customer Care

Offering Services to Satisfy the Heart

12 Don Quijote Co., Ltd. Annual Report 2004 The Mechanism for Acquiring Loyal Customers through Rigorous Pursuit of the Customer-first Principle

New Services to Transform Customer Dissatisfaction and Anxiety into Club Donpen Card Satisfaction and Peace of Mind To make shopping even more convenient and enjoyable and to increase the appeal of our stores, we are actively introducing value-added services grounded in the customer’s point of view. To increase shopping convenience and value, we have begun issuing the Club Donpen Card, a credit card with a bonus-point program. Considering the strong necessity of the late-night sale of OTC drugs, which has proved difficult owing to the problem of securing pharmacists, we introduced a videophone system that connects customers remotely with pharmacists. With the aim of offering comprehensive personal services, a dental clinic with office hours until 1:00 A.M. has opened in a Installation of ATMs at stores PAW mall. Other efforts include expanded installation of ATMs and other equipment for customer is expanding. convenience, such as cell phone battery recharging.

“Customer Care Specialists” Touch the Hearts of Customers Over the years, Don Quijote has provided customers with wonder and astonishment through its product mix and display. Now, we are focusing on adding an emotional element to the shopping experience by assigning “Customer Care Specialists” to our stores. An example of this is “Answer Man.” An Answer Man is a highly experienced mature employee who periodically walks through the store solicitously responding to customer requests and providing advice. During the year under review, we also began staffing stores with “Concierges,” employees charged with retention of loyal customers. As experienced service-industry professionals with advanced customer-handling skills, they are hired to serve mainly those customers who frequently purchase luxury-brand goods, jewelry and high-ticket appliances. The As an “Answer Man,” I support the customer’s keen customer-service attitude demonstrated by these specialists serves as a positive role model for shopping experience. other employees and contributes to raising the customer-service level throughout the store.

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

Don Quijote Co., Ltd. Annual Report 2004 13 Financial Section Five-year Summary (Consolidated data) Years ended June 30

Thousands of Thousands of yen U.S. dollars

2000 2001 2002 2003 2004 2004

For the year Net sales ¥73,402,102 ¥94,706,874 ¥115,428,986 ¥158,619,115 ¥192,839,871 $1,778,145 Cost of goods sold 56,951,004 73,571,274 89,388,264 122,307,605 148,542,703 1,369,688 Selling, general and administrative expenses 11,811,613 15,124,082 19,123,731 27,145,874 33,686,628 310,618 Operating income 4,639,485 6,011,518 6,916,990 9,165,635 10,610,540 97,838 Income before income taxes 5,874,791 6,748,143 7,150,611 10,095,742 12,368,246 114,045 Net income 2,829,465 3,353,197 4,027,264 5,641,698 6,846,475 63,130

At year-end Total assets ¥34,228,974 ¥47,483,788 ¥ 72,485,638 ¥ 93,410,943 ¥126,774,381 $1,168,966 Shareholders’ equity 18,561,177 22,053,899 26,562,284 32,232,664 41,738,148 384,860

Yen U.S. dollars

Per share(*) Basic earnings ¥ 283.51 ¥ 334.82 ¥ 401.20 ¥ 557.02 ¥ 348.83 $ 3.21 Diluted earnings – 334.39 391.04 513.89 308.68 2.84 Cash dividends 5.00 5.00 15.00 15.00 30.00 0.27

%

Key ratios ROA 17.4 14.8 11.3 10.8 9.6 ROE 16.6 16.5 16.6 19.2 18.5

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

Contents

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

14 Don Quijote Co., Ltd. Annual Report 2004 Management Discussion and Analysis

Consolidated Business Results In the year ended June 30, 2004 (July 1, 2003 to June 30, 2004), Don Quijote Co., Ltd. and its consolidated subsidiaries, as in the previous year, achieved double-digit increases in revenue and profits, with consoli- dated net sales at ¥192.8 billion, 21.6% higher than in the previous year, and operating income at ¥10.6 bil- lion, a rise of 15.8%. The Company attained higher sales and profits for the 8th consecutive year since the introduction of consolidated accounting, and for the 14th consecutive year on a non-consolidated basis. The increase in sales was attributed to 24 new stores opened in the year under review and the full-year contribution of 17 stores opened during the previous year. The new stores—9 Don Quijote stores, 14 PAW malls and 1 Picasso store—all got off to a strong start, contributing significantly to operating profits. Eleven of these new stores were opened in the first half of the year and 13 in the second half (of which, 9 were opened in the final quarter). Despite such short operating periods, recurring profit at the stores open less than one year averaged 3.9%. Incidentally, one store was closed when its lease contract expired in August 2003. Comparable-store sales declined 2.4% from the prior-year figures. The nation’s economy was just beginning to emerge from a long slump, led by the export sector, and a few bright signs were seen to be emerging in consumer spending. It seemed that our store sales in the year under review bottomed out, and the comparable-store spending per customer saw a 0.4% increase. However, the stores had 2.8% fewer shoppers than in the previous year because of an unseasonable summer and a mild winter, as well as many rainy days, particularly on weekends. The decline was also attributed in part to a regulatory change that went into effect last April requiring all stores in the country to display in-store price tags that include the consumption tax. This changeover disrupted the smooth operation at stores. By product category, sales of daily sundries and consumables remained almost flat, due to tougher price competition with rival stores, however, food items posted solid sales, helped by a growing number of stores carrying alcoholic beverages. The share, in terms of total net sales, of the low-price, high-turnover merchandise category consisting of the above-mentioned products declined 0.7 percentage point from the previous year to 41.7%. The sales efforts for high-priced and high-margin goods, such as watches, fashion goods, sports gear and leisure-related goods, continued to be strengthened, in order to further differentiate

200,000 192,839 60,000 22.9 23.0 25 22.4 22.3 22.6

158,619 20 150,000 44,297

40,000 36,311 115,428 15

100,000 94,706 26,040 73,402 21,135 10 20,000 16,451 50,000 5

0 0 0 00 01 02 03 04 00 01 02 03 04

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

Don Quijote Co., Ltd. Annual Report 2004 15 Don Quijote from competitors. These items accounted for 33.9% of total net sales, up 0.7 percentage point from the previous year. The Company is now in a position to enjoy economies of scale particularly with apparel items, which have contributed significantly to improvement of profitability. On the other hand, sales of sports and leisure goods, many of them seasonal items, struggled due to unseasonable weather. Regarding household electrical appliances, those for personal use as well as miscellaneous electrical goods logged strong sales. These items accounted for 20.3% of total net sales, down 0.8 percentage point from the previous year. Merchandise sales rose 20.2% year on year to ¥189.3 billion, representing 98.2% of total net sales. In addition to merchandise sales, as the opening of PAW shopping malls was accelerated during the year under review, the Company’s rent revenue from tenants increased by a remarkable 162.0%, to ¥2.8 billion, for a share of total net sales of 1.5%. In February 2004, the Company formed a wholly-owned subsidiary, Donki Johokan Co., Ltd. specializing in sales of cellular phones, which it previously categorized as house- hold electrical appliances. Sales of this business came to ¥0.6 billion. The gross profit margin improved by 0.1 percentage point from the previous year to 23.0%. With regard to selling, general and administrative expenses, there were some areas where the Company enjoyed economies of scale, but the ratio of these expenses to sales increased 0.4 percentage point from the previous year to 17.5%. This was attributable to the fact that many stores opened in new areas, which requires more prior investment than in the case of areas where our stores already exist. Operating income margin declined 0.3 percentage point from the previous year, to 5.5%. As for other income and expenses, there was increased income from rental fees for the computer sys- tem as a result of expanded store operations. Gains were recorded from the sale of investment securities, along with an increase in return on investments in anonymous associations (return on investments in spe- cial purpose companies (SPCs) that own outlets securitized by the Company), all of which contributed to a large increase in revenue. Consequently, income before income taxes rose 22.5% to ¥12.3 billion and net income grew 21.4% to ¥6.8 billion from the previous year. The early adoption of asset impairment account- ing, which was introduced in the fiscal year under review, did not influence the revenue and expenditures of the Company.

12,000 120,000 116,516 160

10,610

10,000 9,165 90,000 120 79,588 8,000 93 6,916 6,846

6,011 70 6,000 5,641 60,000 56,629 80 4,639 53 4,027 4,000 3,353 35,191 2,829 30,000 29,163 40 2,000 33 27

0 0 0 00 01 02 03 04 00 01 02 03 04

Operating income (¥ millions) Number of stores 2 Net income (¥ millions) Total sales floor space (m )

16 Don Quijote Co., Ltd. Annual Report 2004 Looking ahead to the year ending June 30, 2005, the Company projects net sales of ¥230 billion, an increase of 19.3% from the previous year, and operating income of ¥13.2 billion, a rise of 24.4%. Ordinary income for the year is set to grow 19.1% to ¥15 billion and net income to rise 18.3% to ¥8.1 billion, on the assumption that more than 15 new stores will open during the coming fiscal year.

Financial Position

As the scale of operations and the store network expanded, total assets rose by ¥33.3 billion from the previous year to ¥126.7 billion as of June 30, 2004. Current assets increased by ¥11.4 billion to ¥49.0 billion, due largely to an ¥8.2 billion rise in inventories to ¥35.1 billion. As a result of dedicating efforts to efficiently control the level of inventories by disposing of inven- tories accumulated over the years and by procuring popular goods that turn over quickly, inventories increased only 30.7%, while stores’ total sales floor space grew 46.4%. The inventory value per square meter was held to a satisfactory level of ¥300,000, down 11.0% from the previous year. The total value of property and equipment rose by ¥14.9 billion to ¥55.6 billion, due to an increase in the number of newly opened stores and the procurement of land for new stores. Total liabilities at the fiscal year-end increased by ¥23.8 billion to ¥85.0 billion from the year before. Current liabilities rose by ¥11.4 billion to ¥44.7 billion. These increases were chiefly attributable to the fact that the Company issued commercial paper (CP) as a low-cost, short-term source of funds. The outstanding balance of CP at the fiscal year-end was ¥10 billion. In the meantime, the Company continued to pay back short-term loans, which decreased by ¥5.2 billion to ¥0.8 billion as of the end of the fiscal year. Long-term liabilities increased by ¥12.4 billion to ¥40.3 billion. The main reason for the increase was that in January 2004 the Company issued a euro-denominated convertible bond of ¥17.0 billion with a 2011 maturity date. On the other hand, the Company continued to repay long-term debts. Furthermore, of all the convertible bonds issued in the past, ¥2.4 billion in bonds had been converted into the Company’s shares by the end of the year under review, representing a conversion rate of 31.2%.

150,000 60 50,000 60

126,774 41,738 120,000 40,000

32,232 93,410 40 40 80,000 30,000 26,562 72,485 22,053 60,000 20,000 18,561 19.2 18.5 17.4 47,483 20 16.5 16.6 20

11.3 34,228 10.8 9.6 30,000 10,000 16.6 14.8

0 0 0 0 00 01 02 03 04 00 01 02 03 04

Total assets (¥ millions) Total shareholders’ equity (¥ millions) Return on assets (%) Return on equity (%)

Don Quijote Co., Ltd. Annual Report 2004 17 As the convertible bonds issued in 2004 were zero-coupon bonds, the fiscal year-end balance of interest- bearing debt increased by only ¥0.5 billion, to ¥38.4 billion, and the ratio of interest-bearing debt to total assets lessened to 30.4% from 40.7% recorded a year earlier, and the debt-to-equity ratio also improved to 92.2% from 117.8%. Total shareholders’ equity increased by ¥9.5 billion from the previous year’s figure to ¥41.7 billion, due to the accumulation of earnings and the conversion of convertible bonds into shares in the year under review. The shareholders’ equity ratio stood at 32.9%.

Cash Flows

In the fiscal year ended June 30, 2004, net cash of ¥6.7 billion was generated by operating activities, an increase of ¥4.7 billion from the previous year. The Company made efforts to hold inventories in check, while increases were seen in profits, depreciation and amortization and trade accounts payable. Net cash used in investing activities was ¥24.5 billion, as the Company made aggressive capital investments for future growth. This was a ¥11.4 billion increase in outflow from the previous year. Net cash of ¥19.7 billion was provided by financing activities, ¥7.8 billion more than in the previous year. This rise came from ¥17.0 billion in proceeds from a convertible-bond issue to finance capital investments and CP issued to procure short-term working funds. As a result of those developments, the closing balance of cash and cash equivalents rose by ¥1.8 billion from the previous year to ¥8.9 billion.

Capital Investment

In the year to June 30, 2004, the Company’s capital investment grew by ¥10.9 billion to ¥22.4 billion. In the meantime, free cash flows (net income for the year + depreciation and amortization + extraordinary loss - cash dividends) increased by ¥1.9 billion from the previous year to ¥9.9 billion. The Company met capital demands exceeding free cash flows through the issuance of new convertible bonds worth ¥17.0 billion. The Company plans to open more than 15 stores in the year ending June 30, 2005, and has put in place fund procurement plans to finance capital investments worth ¥16.0 billion.

9,969 25,000 10,000 22,437

20,000 7,954 7,500 17,507

15,000 5,817

11,505 5,000 4,531 10,000 9,078 3,495 7,135

2,500 5,000

0 0 00 01 02 03 04 00 01 02 03 04

Free cash flow Capital expenditure (¥ millions) (¥ millions)

18 Don Quijote Co., Ltd. Annual Report 2004 Independent Auditors’ Report

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

We have audited the accompanying consolidated balance sheets of Don Quijote Co.,Ltd. and its subsidiaries as of June 30, 2003 and 2004, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the two years in the period ended June 30, 2004, all expressed in yen. These consolidated finan- cial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in Japan. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above, expressed in yen, present fairly, in all material respects, the consolidated financial position of Don Quijote Co.,Ltd. and subsidiaries at June 30, 2003 and 2004, and the consolidated results of their operations and their cash flows for each of the two years in the period ended June 30, 2004, in conformity with generally accepted accounting principles in Japan.

Also, in our opinion, the accompanying consolidated financial statements expressed in yen have been translated into U.S dollars on the basis set forth in Note 2.

BA Tokyo & Co MEMBER OF MAZARS

Certified Public Accountants

Tokyo, Japan September 28, 2004

STATEMENT ON ACCOUNTING PRINCIPLES AND AUDITING STANDARDS

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

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

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

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

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

Don Quijote Co., Ltd. Annual Report 2004 19 Consolidated Balance Sheets Don Quijote Co., Ltd, and Subsidiaries As of June 30, 2004 and 2003

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

ASSETS 2004 2003 2004

Current assets: Cash and time deposits ...... ¥ 8,903,992 ¥ 7,040,599 $ 82,102 Note and accounts receivables—trade ...... 2,016,925 1,140,465 18,597 Less: Allowance for doubtful accounts (Note 4) ...... (2,386) (1,539) (22) Inventories (Notes 4 and 5) ...... 35,114,163 26,856,229 323,782 Prepaid expenses ...... 825,368 576,317 7,610 Deferred tax assets (Notes 4 and 14) ...... 933,683 935,917 8,609 Other current assets ...... 1,272,734 1,028,691 11,735 Total current assets ...... 49,064,481 37,576,682 452,415

Investments and advances: Investment securities (Notes 4 and 7) ...... 4,731,812 2,095,348 43,631 Advance payment for fixed leasehold deposits ...... 868,864 856,943 8,011 Long-term loans receivable ...... 1,172,740 1,150,000 10,813 Less: Allowance for doubtful accounts (Note 4) ...... (3,301) (1,725) (30) Total investments and advances ...... 6,770,115 4,100,567 62,426

Property and equipment, at cost (Notes 3, 4 and 13): Buildings and structures ...... 30,880,923 19,954,125 284,748 Vehicles and delivery equipment ...... 79,672 73,505 734 Equipment ...... 7,695,308 5,293,147 70,957 Less: Accumulated depreciation ...... (8,426,378) (5,503,154) (77,698) Land ...... 22,574,852 19,900,117 208,159 Construction in progress ...... 2,806,256 957,382 25,876 Net property and equipment ...... 55,610,635 40,675,124 512,776

Intangibles (Note 4) ...... 1,502,896 1,231,508 13,857

Other assets: Fixed leasehold deposits ...... 10,796,920 7,119,430 99,556 Prepaid expenses ...... 922,638 463,478 8,507 Deferred tax assets (Notes 4 and 14) ...... 344,588 644,840 3,177 Other non-current assets ...... 1,762,107 1,599,310 16,248 Total other assets ...... 13,826,253 9,827,060 127,489 Total assets ...... ¥126,774,381 ¥93,410,943 $1,168,966

The accompanying notes are an integral part of the statements.

20 Don Quijote Co., Ltd. Annual Report 2004 Thousands of Thousands of yen (Note 2) U.S. dollars (Note 2)

LIABILITIES AND SHAREHOLDERS’ EQUITY 2004 2003 2004

Current liabilities: Accounts payable—trade ...... ¥20,363,635 ¥16,470,330 $187,769 Short-term loans payable (Notes 8 and 13) ...... 848,000 6,100,000 7,819 Current maturities of long-term debt (Notes 8 and 13) ...... 5,702,240 4,702,240 52,579 Commercial paper ...... 10,000,000 — 92,208 Accrued income taxes (Note 14) ...... 3,109,298 3,243,742 28,670 Accrued expense ...... 1,603,775 1,058,195 14,788 Other current liabilities ...... 3,108,109 1,720,786 28,659 Total current liabilities ...... 44,735,059 33,295,294 412,494

Long-term liabilities: Long-term debt (Notes 8 and 13) ...... 38,943,320 27,172,560 359,090 Allowance for retirement benefits for directors (Note 4) ...... 143,058 94,136 1,319 Other non-current liabilities ...... 1,214,795 616,288 11,201 Total long-term liabilities ...... 40,301,173 27,882,984 371,610 Total liabilities ...... 85,036,233 61,178,279 784,105

Shareholders’ equity (Notes 4 and 11): Common stock Authorized: 2003 — 39,000,000 shares 2004 — 78,000,000 shares Issued and outstanding: 2003 — 10,140,122 shares 2004 — 20,833,929 shares ...... 7,134,414 5,949,875 65,785 Additional paid-in capital ...... 8,449,169 7,265,028 77,908 Retained earnings ...... 25,807,914 19,148,534 237,970 Net unrealized gains (losses) on investment securities ...... 359,837 (123,492) 3,317 Total 41,751,336 32,239,945 384,982 Less: Treasury stock, at cost 2003 — 698 shares 2004 — 2,307 shares ...... (13,188) (7,281) (121) Total shareholders’ equity ...... 41,738,148 32,232,664 384,860 Total liabilities and shareholders’ equity ...... ¥126,774,381 ¥93,410,943 $1,168,966

The accompanying notes are an integral part of the statements.

Don Quijote Co., Ltd. Annual Report 2004 21 Consolidated Statements of Income Don Quijote Co., Ltd. and Subsidiaries For the years ended June 30, 2004 and 2003

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

2004 2003 2004 Net sales ...... ¥192,839,871 ¥158,619,115 $1,778,145 Cost of goods sold ...... 148,542,703 122,307,605 1,369,688 Gross profit ...... 44,297,168 36,311,510 408,457 Selling, general and administrative expenses (Note 15) ...... 33,686,628 27,145,874 310,618 Operating income ...... 10,610,540 9,165,635 97,838

Other income (expenses): Interest and dividend income ...... 99,291 47,910 915 Interest expense ...... (352,792) (293,661) (3,253) Stock issuance cost (Note 4) ...... (7,963) (4,363) (73) Bond issuance cost (Note 4) ...... (69,751) (243,905) (643) Other income, net (Note 12) ...... 2,088,921 1,424,126 19,261 Income before income taxes 12,368,246 10,095,742 114,045

Income taxes (Notes 4 and 14): Current ...... 5,554,010 5,003,135 51,212 Deferred ...... (32,238) (549,091) (297) Net income ...... ¥ 6,846,475 ¥ 5,641,698 $ 63,130

Amount per share of common stock(*): Yen U.S. dollars (Note 2) Basic earnings (Notes 4 and 17) ...... ¥348.83 ¥557.02 $3.21 Diluted earnings (Notes 4 and 17) ...... 308.68 513.89 2.84 Cash dividends applicable to the year ...... ¥ 30.00 ¥ 15.00 $0.27

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

The accompanying notes are an integral part of the statements.

22 Don Quijote Co., Ltd. Annual Report 2004 Consolidated Statements of Stockholders’ Equity Don Quijote Co., Ltd. and Subsidiaries For the years ended June 30, 2004 and 2003

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

2004 2003 2004 Common stock: Balance at beginning of the year ...... ¥5,949,875 ¥5,815,528 $54,862 Exercise of stock options (Note 11) ...... 295,840 29,348 2,727 Conversion of convertible bonds ...... 888,699 104,997 8,194 Balance at end of the year ...... 7,134,414 5,949,875 65,785

Additional paid-in capital: Balance at beginning of the year ...... 7,265,028 7,130,677 66,989 Exercise of stock options (Note 11) ...... 295,840 29,348 2,727 Conversion of convertible bonds ...... 888,300 105,002 8,190 Balance at end of the year ...... 8,449,169 7,265,028 77,908

Retained earnings: Balance at beginning of the year ...... 19,148,534 13,658,355 176,565 Net income ...... 6,846,475 5,641,698 63,130 Cash dividends ...... (152,091) (151,519) (1,402) Decrease for exclusion of consolidation ...... (35,003) — (322) Balance at end of the year ...... 25,807,914 19,148,534 237,970

Net realized gains (losses) on investment securities: Balance at beginning of the year ...... (123,492) (38,532) (1,138) Increase ...... 483,330 (84,960) 4,456 Balance at end of the year ...... 359,837 (123,492) 3,317

Treasury stock, at cost: Balance at beginning of the year ...... (7,281) (3,743) (67) Increase ...... (5,906) (3,538) (54) Balance at end of the year ...... ¥ (13,188) ¥ (7,281) $ (121)

The accompanying notes are an integral part of the statements.

Don Quijote Co., Ltd. Annual Report 2004 23 Consolidated Statements of Cash Flows Don Quijote Co., Ltd. and Subsidiaries For the years ended June 30, 2004 and 2003

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

2004 2003 2004 Cash flows from operating activities: Income before income taxes ...... ¥12,368,246 ¥10,095,742 $114,045 Depreciation and amortization, including prepaid expense ...... 3,274,078 2,304,317 30,189 Increase (Reversal) for doubtful accounts ...... 2,423 (2,448) 22 Provision for retirement benefits for directors ...... 48,921 4,508 451 Interest and dividend income ...... (99,291) (47,910) (915) Gain from funds ...... (264,541) (104,496) (2,439) Interest expense ...... 402,082 333,794 3,707 Foreign exchange loss ...... 2,349 — 21 Loss on devaluation of investment securities ...... — 130,710 — Gain on sale of investment securities ...... (244,261) — (2,252) Loss on sale of investment securities ...... 26,237 8,745 241 Gain on sale of affiliated companies ...... — (61,574) — Loss on sale of affiliated companies ...... 7,000 — 64 Gain on sale of property and equipment ...... — (85,193) — Loss on sale of property and equipment ...... 153,440 4,133 1,414 Loss on disposal of property and equipment ...... 7,436 81,018 68 Loss on close of shops ...... 61,765 — 569 Offset rent from deposit ...... 265,762 189,218 2,450 Increase in trade receivable ...... (878,673) (149,407) (8,102) Increase in inventories ...... (8,257,934) (8,868,035) (76,145) Increase in other current assets ...... (474,961) (183,732) (4,379) Increase in trade payable ...... 3,893,305 2,229,606 35,899 Decrease (Increase) in other current liabilities ...... 1,947,678 (403,765) 17,959 Increase in other non-current liabilities ...... 610,336 490,487 5,627 Cash generated from operations ...... 12,851,402 5,965,719 118,500 Received interest and dividend income ...... 47,380 4,281 436 Interest paid ...... (420,438) (314,439) (3,876) Income tax paid ...... (5,680,979) (3,602,955) (52,383) Net cash provided by operating activities ...... 6,797,363 2,052,605 62,677 Cash flows from investing activities: Proceeds from time deposit ...... — 20,180 — Payments for purchase of property ...... (18,537,929) (12,886,607) (170,935) Proceeds from sale of property and equipment ...... 422,825 3,457,621 3,898 Payments for purchase of intangible assets ...... (464,480) (693,792) (4,282) Increase of loan receivable ...... (49,919) (870,000) (460) Collection of loan receivable ...... 10,708 80,000 98 Payments for leasehold deposits ...... (2,913,742) (1,923,129) (26,867) Proceeds from termination of leasehold deposits ...... 1,873,072 1,001,698 17,271 Advance payments for fixed leasehold deposits ...... (3,152,844) (971,239) (29,071) Payments for cash surrender value ...... (394,908) (413,252) (3,641) Proceeds from cash surrender value ...... 227,313 248,563 2,096 Payments for purchase of investment securities ...... (2,142,751) (268,900) (19,757) Proceeds from sales of investment securities ...... 856,141 58,736 7,894 Proceeds from sales of affiliates’ securities ...... — 159,480 — Payments for purchase of affiliates’ securities ...... (3,000) — (27) Other—net ...... (299,825) (79,969) (2,764) Net cash used in investing activities ...... (24,569,338) (13,080,609) (226,549) Cash flows from financing activities: Borrowing of short-term bank loans ...... 34,400,000 20,100,000 317,196 Repayment of short-term bank loans ...... (39,652,000) (20,556,000) (365,624) Proceeds from issuance of commercial paper ...... 37,000,000 — 341,171 Payments for redemption of commercial paper ...... (27,000,000) — (248,962) Borrowing of long-term debt ...... 3,000,000 6,653,320 27,662 Repayment of long-term debt ...... (4,852,240) (3,962,630) (44,741) Proceeds from issuance of bonds ...... — 10,000,000 — Payments for redemption of bonds ...... (600,000) (300,000) (5,532) Proceeds from issuance of convertible bonds ...... 17,000,000 — 156,754 Payments for purchase of treasury stock ...... (5,906) (3,537) (54) Issuance of common stock ...... 591,680 58,697 5,455 Payments of cash dividends ...... (152,091) (151,519) (1,402) Net cash provided by financing activities ...... 19,729,442 11,838,330 181,922 Effect of exchange rate exchanges on cash and cash equivalents ...... (2,349) — (21) Net increase in cash and cash equivalents ...... 1,955,118 810,326 18,027 Cash and cash equivalent at beginning of the year ...... 7,040,599 6,230,273 64,920 Decrease in cash and cash equivalents resulting from elimination of consolidation . . . (91,725) — (845) Cash and cash equivalents at end of the year (Notes 4 and 19) ...... ¥ 8,903,992 ¥ 7,040,599 $ 82,102

The accompanying notes are an integral part of the statements.

24 Don Quijote Co., Ltd. Annual Report 2004 Notes to Consolidated Financial Statements For the years ended June 30, 2004 and 2003

BUSINESS RISKS could have a material adverse effect on the Company’s business, financial Don Quijote Co., Ltd. (the “Company”) has risks in relation to our business condition and results of operation. and others as follows: 5. Regulatory environment We make every effort to avoid these risks and dispose of them if these The Company is subject to Japanese laws and regulations, the Large were realized after recognizing a possibility of these risks in the future. The Scale Retail Store Location Law, in which it can conduct its business after following risks include the future matters, which are described based on June 2000. The purpose of the law is to give local authorities the power our judgment and consideration from management point of view as of the to regulate the development of large stores with a sales floor space of date of filing the financial reports to MOF, September 28, 2004. more than 1,000 square meters in order to maintain the living environ- ment in the areas surrounding such stores. 1. Store expansion and human resources The Company has to take measures with establishing extra walls and The Company’s strategy is to increase revenue by expanding and prof- lawns around car parks to resolve the problem regarding car park noise. itably operating a network of stores in Tokyo and other areas in Japan. If the local communities have special regulations for the stores with a To manage its planned store expansion, the Company must ensure sales floor space of less than 1,000 square meters, in particular, the the continuing adequacy of its existing systems, controls and procedures, Company’s financial performance and expansion plans may be adversely including distribution facilities, store management, financial controls and affected if stores are forced to reduce their operations. information systems. Especially the adequate labor resources must be essential. There can be no assurance that the Company will be able to 6. Management achieve its planned expansion, that new stores will be effectively integrat- The Company’s success may depend on the continued service of a key ed into the Company’s existing operations or that such stores will be management figure, Takao Yasuda. Takao Yasuda, the Company’s profitable. founder, president, and major shareholder, plays a key role in directing the Company’s business operations. The Company gives many opportu- 2. Import and distribution nities to challenge goals to other management and key persons, although The Company is importing an increasing portion of its merchandise from not anticipated, the loss of Mr. Yasuda’s services without a suitable sources outside of Japan. As an importer, the Company’s business is replacement could have a material adverse effect on the Company’s abili- subject to the risks generally associated with doing business abroad, ty to implement its business strategy, and no assurance can be made that such as foreign governmental regulations, economic disruptions, delays any successor(s) would be able to implement the Company’s business in shipments, freight cost increases and changes in political or economic strategy successfully. conditions in countries in which the Company purchases products. Two distribution centers in Saitama and Osaka are operated on behalf of 7. Future capital requirements the Company by a third-party contractor. Any significant interruption in the The Company has to secure enough finance through use of various finan- operation of these facilities, failure by the contractor to properly coordinate cial instruments (including bonds) for the Company’s further expansion the operations of these facilities successfully or any financial difficulties of plans. To the extent that such funding is not available to the Company in the contractor would have a material adverse effect on the Company’s the future or is only available at very high cost, the Company’s business, business, financial condition and results of operations. financial condition and results of operations are likely to be adversely affected. 3. Merchandising The Company’s success depends in part upon the ability of its merchan- 8. Accounting payable outsourcing dising staff to anticipate customer trends, particularly those in the 20–30 The Company entrusts daily procedures in relation to the Company’s age group, and to provide merchandise that appeals to their preferences. accounting payables to a third-party contractor. Any significant interrup- The failure of the Company to anticipate, identify or react appropriately to tion in the procedures, failure by the contractor to properly coordinate the changes in consumer trends could lead to, among other things, either a procedures successfully or any financial difficulties of the contractor shortage of products or excess inventories and higher markdowns and would have a material adverse effect on the Company’s accounting and could have a material adverse effect on the Company’s business, financial payment process. condition and results of operations. 9. Security of client data 4. Consumer demand, weather and seasonality The Company takes every care for the security of client data. Any leaking Sales at the Company’s stores are subject to consumer demand, weather problems regarding these data would have a material adverse effect on and seasonal variations. The peak sales periods for the Company are, for the Company’s business, financial condition and results of operations example, the months of August and December. Consequently, if the which connect to legal matters. Company fails to realize sufficient sales according to its peak points, this

1. NATURE OF OPERATIONS sells cellular phone subscriptions and cellular phone handsets from Don Quijote Co., Ltd. (the “Company”) and its subsidiaries, PAW February 2004. Creation, and Donki Johokan (together the “Group”) have three opera- tions: discount store operations; rental business operations for real prop- 2. BASIS OF PRESENTING CONSOLIDATED FINAN- erty and operations as agent for cellular phone business. CIAL STATEMENTS The discount store operations, which mainly comprise 93 discount The consolidated financial statements are prepared in accordance with retail stores, including small discount retail stores, in Japan, principally accounting principles and practices generally accepted in Japan under the sell electronic goods, household goods, food, cosmetics, toiletries, requirements of the Japanese Commercial Code and other applicable sports goods and etc. rules and regulations for domestic purpose and were filed with the local PAW Creation rents part of its floor space to tenants for rental busi- finance bureau of the Ministry of Finance (MOF) as required by the ness operations. Securities and Exchange Law and its related laws. In preparing these Donki Johokan operates as agent for cellular phone subscriptions and financial statements, certain reclassifications and rearrangements have

Don Quijote Co., Ltd. Annual Report 2004 25 been made to the original financial statements issued domestically in 4. SUMMARY OF SIGNIFICANT ACCOUNTING Japan, for the conveniences of readers outside of Japan. The consolidated POLICIES financial statements are not intended to present the financial position, Consolidation results of operations and cash flows in accordance with accounting prin- In the accompanying consolidated financial statements, the Company ciples and practices generally accepted in countries and jurisdictions accounts for its subsidiaries on a consolidated basis. As of June 30, other than Japan. 2004, the Parent has seven subsidiaries, including two consolidated as In addition, the accompanying notes include information, which is not set out in the following table. required under generally accepted accounting principles and practices in Group interest Japan, but is presented herein as additional information. of capital Activity Significant differences between the accounting policies followed by the PAW Creation 100% Operation of multiple tenant shopping Company and International Accounting Standards are described in Note 3. malls including leasing of real property All yen figures are rounded down to the nearest thousand. Accordingly, Donki 100% Operation as agent for cellular individual figures may not total up to the sums attributed to them. The Johokan(*) phone subscriptions and selling of cellular U.S. dollar amounts presented in the accompanying financial statements phone subscriptions and cellular phone are converted solely for convenience at the rate of ¥108.45 to U.S. $1.00, handsets which was the exchange rate prevailing on June 30, 2004. The conven- ( ) * At the September 13, 2004, the Board of Directors meeting approved to issue common stock. ience translations should not be construed as representations that the Number of new stock Common stock 1,800 shares Japanese yen amounts have been, could have been, or could in the future Issued price ¥50,000 ($461) Total amount for issuing new stock ¥90,000 thousand ($829 thousand) be, converted into U.S. dollars at this or any other rate of exchange. Certain reclassifications have been made in the 2003 financial state- Cash flow equivalents ments to conform to the presentation for 2004. In preparing the cash flow statements for the year ended June 30, 2004 and 2003, cash is considered to be “cash and cash equivalents,” which 3. SIGNIFICANT DIFFERENCES BETWEEN include cash on hand, readily available deposits and highly liquid invest- ACCOUNTING POLICIES FOLLOWED BY THE ments with original maturities not exceeding three months. COMPANY AND DOMESTIC SUBSIDIARIES AND Translation of foreign currency accounts INTERNATIONAL ACCOUNTING STANDARDS Accounts and payables denominated in foreign currencies are translated into The accompanying consolidated financial statements are prepared in con- Japanese yen at the foreign currency exchange rates in effect at the respec- formity with accounting principles generally accepted in Japan. tive balance sheet dates. Exchange differences are charged to income. Differences from IAS include the following. Use of estimates Leases (Note 6) The preparation of financial statements requires management to make The Company has treated finance leases of the Company, where owner- estimates and assumptions that affect the reported amounts of assets ship does not transfer to the lessees, as not capitalized in the same way and liabilities and disclosure of contingent assets and liabilities at the as operating leases under accounting principles generally accepted in date of the financial statements and revenues and expenses during the Japan, which differ from IAS No. 17. reporting period. Actual results could differ from those estimates. SPC accounting Marketable securities and investment securities Accounting for Consolidation-Special Purpose Entities is not required for Securities available-for-sale are securities other than trading securities the special case under generally accepted accounting principles and prac- and securities being held to maturity. tices in Japan, which differ from Interpretation SIC-12. Securities available-for-sale are carried at fair value with correspon- Amount of significant effects on the consolidated finan- ding unrealized gains (losses) recorded directly in a separate component cial statements of stockholders’ equity. Realized gains and losses, which are determined Had IAS applied, the significant effects on the accompanying consolidated by the moving-average cost method, are reflected in the statements of financial statements would have been as follows: income when realized. Securities available-for-sale for which fair value is Thousands of not readily determinable are carried at moving average cost or amortized Thousands of yen U.S. dollars (Note 2) (Note 2) cost determined by the moving average method. 2004 2003 2004 The Company adopted its method of valuation of investments to Lease (Note 6): record it at market or fair value. Property and equipment . . . . ¥ 146,869 ¥ 191,814 $ 1,354 Inventories Current liabilities ...... 46,147 46,147 425 The Parent adopts the principle that inventories are valued at cost deter- Long-term liabilities ...... 104,843 150,990 966 mined by the retail method. SPC (Notes 6 and 10): Impairment loss on inventories of ¥879 million ($8,105 thousand) Land ...... ¥8,278,652 ¥8,278,652 $76,336 and ¥605 million as of June 30, 2004 and 2003 were recorded in “Cost of Buildings ...... 2,735,978 2,735,978 25,228 goods sold” respectively. Structures ...... 62,194 62,194 573 The subsidiary, Donki Johokan adopts the principle that inventories are valued at cost determined by the average method. Current liabilities ...... 1,433,735 1,490,268 13,220 Long-term liabilities ...... 5,246,941 6,624,144 48,381 Property and equipment Property and equipment are carried at cost. Significant renewals and As a result of future revisions of IAS/IFRS or the other effects, there is a additions are capitalized: maintenance and repairs, and minor renewals possibility that certain differences may arise for the accounting proce- and improvements, are charged to income as incurred, interest costs dures that are not discussed above (such as financial instruments). relating to construction of property and equipment are not capitalized. Property and equipment are computed principally by the declining balance method according to the rules based on the Japanese Corporation Tax Law. 26 Don Quijote Co., Ltd. Annual Report 2004 The useful lives of property and equipment for computing deprecia- Income taxes tion, which are identical with the useful lives stipulated under the Income taxes are determined by using the liability method, where Japanese Corporate Tax regulations, are as shown below: deferred tax assets and liabilities are recognized for temporary differ- Years ences between tax basis of assets and liabilities and their reported Buildings and structures ...... 3 to 45 amounts in the financial statements. Equipment and vehicles ...... 2 to 20 Treasury stock and reversal of statutory reserve In general, when assets are sold or otherwise disposed of, the profits Effective April 1, 2002, the Company adopted the new accounting stan- or losses thereon, computed on the basis of the difference between dard for treasury stock and reversal of statutory reserves (Accounting depreciated costs and proceeds, are credited or charged to income in the Standards Board Statement No. 1, “Accounting Standard for Treasury year of sale or disposal, and costs and accumulated depreciation are Stock and Reversal of Statutory Reserves”, issued by the Accounting removed from the accounts. Standards Board of Japan on February 21, 2002). Long-lived assets are reviewed for impairment and written down to The effect on net income of the adoption of the new accounting stan- fair value whenever events or changes in circumstances indicate that the dard was not material. carrying amount of an asset may not be recoverable and an impairment Leased transactions loss must be recognized. If the sum of the expected future cash flows is Finance leases of the Company where ownership does not transfer to the the less than the carrying amount of the assets, an impairment loss is lessees are not capitalized and are accounted for in the same manner as recognized based on the fair value. operating leases (“non-capitalized finance leases”).

Intangible assets Derivatives financial instruments In accordance with the provisional rule of the JICPA’s Accounting Hedge accounting Committee Report No. 12 “Practical Guidance for Accounting for The Company has adopted hedge accounting for its derivative transactions. Research and Development Costs, etc.” (the “Report”), the Company Gains or losses on changes in the fair values of the hedging instruments, accounts for software which was included in intangible assets in the which consist of swap contracts, are recognized in income when the same manner in 2004 as in 2003 and depreciated it using the straight-line relating hedged items are reflected in income. method over the estimated useful lives (five years). Purpose of derivative trading Identifiable intangibles are reviewed for impairment and written down The Company enters into derivative transactions related to interest swap to fair value whenever events or changes in circumstances indicate that transactions in order to reduce their risk exposure arising from fluctua- the carrying amount of an asset may not be recoverable and an impair- tions in these rates, based on internal policies. ment loss must be recognized. If the sum of the expected future cash Assessment for the efficiency of their hedging flows is the less than the carrying amount of the assets, an impairment The Company omits to control the risk of the transaction by assessing the loss is recognized based on the fair value. efficiency of their hedging.

Impairment of fixed assets Costs of start-up activities The Group adopt early the new standard for impairment of fixed assets All costs of start-up activities are expensed as incurred. (“Opinion Concerning Establishment of Accounting Standard for Impairment of Fixed Assets” issued by the Business Accounting Dividends Deliberation Council on August 9, 2002) and the implementation guid- Dividends are declared by the Board of Directors and approved by the ance for the accounting standard for impairment of fixed assets (the shareholders at meetings held subsequent to the fiscal year to which the Financial Accounting Standards Implementation Guidance No. 6 issued dividends are applicable, and shareholders of record as at the end of such by the Accounting Standards Board of Japan on October 31, 2003). This fiscal year are entitled to the subsequently declared dividends. Dividends standard also applies to a non-capitalized finance leases. And this change charged to retained earnings represent dividends approved by the share- has no impact on the Income before income tax. holders and paid during the respective years. Semi-annual interim dividends may also be paid upon resolution of the Board of Directors, Common stock issuance costs subject to certain limitations imposed by the Japanese Commercial Code. Common stock issuance costs are directly charged to income as incurred. The Japanese Commercial Code prohibits charging such stock Bonuses to directors and statutory auditors issuance costs to capital accounts. Bonuses to directors and statutory auditors, which are subject to share- holders’ approval at the annual shareholders’ meeting under the Japanese Bond issuance costs Commercial Code, are charged to income as incurred. Bond issuance costs are directly charged to income as incurred. The Company changed its method of accounting for bonuses to direc- Allowance for doubtful accounts tors and statutory auditors to charge them to income as incurred (Practical The allowance for doubtful receivables is provided in amounts sufficient Issues Task Force No. 13, “Accounting Treatment for Bonuses to Directors to cover possible losses on collection. It is determined by adding the and Corporate Auditors,” issued by the Accounting Standards Board of uncollectible amounts individually estimated for doubtful receivables to a Japan on March 9, 2004). The change had no effect on net income for the maximum amount permitted for tax purpose, which is calculated collec- current year. tively, and by adding the uncollectible amounts individually. Accounting for consumption taxes Allowance for retirement benefits for directors The Japanese consumption taxes withheld and consumption taxes paid The Company adopted a retirement benefit plan for directors and statutory are not included in the accompanying consolidated statements of income. auditors. Directors and statutory auditors are entitled to be paid a lump- Shareholders’ equity sum retirement benefit determined on the basis of rules of the Company. The Japanese Commercial Code requires at least 50% of the issue price Revenues recognition of new shares to be designated as stated capital as determined by resolu- The Company recognizes revenue as “Net sales” at the time sales are tion of the Board of Directors. Proceeds in excess of amounts designated made to customers. as stated capital are credited to additional paid-in capital.

Don Quijote Co., Ltd. Annual Report 2004 27 Effective October 1, 2001, the amended Japanese Commercial Code (a) A summary of assumed amounts of acquisition cost, accumulated provides that an amount of at least 10% of the aggregate amounts of depreciation and net book value on June 30, 2004 and 2003 was as cash dividends and directors’ and statutory auditors’ bonuses which are follows: Thousands of made as an appropriation of retained earnings allocable to each fiscal Thousands of yen U.S. dollars period shall be appropriated and set aside as a legal reserve until such (Note 2) (Note 2) reserve plus additional paid-in capital equals 25% of stated capital. Equipment 2004 2003 2004 The Japanese Commercial Code permits the transfer of the portions of Acquisition cost ...... ¥228,582 ¥353,954 $2,107 additional paid-in capital by the resolution of the Board of Directors. The Accumulated depreciation . . . (81,712) (162,139) (753) Japanese Commercial Code also permits the transfer of portions of inap- Net book value ...... ¥146,869 ¥191,814 $1,354 propriate retained earnings to stated capital by resolution of shareholders. Changes in the number of shares issued and outstanding during the (b) Future minimum lease payments, inclusive of interest, as of June 30, 2004 and 2003 were as follows: years ended 30 June, 2004 and 2003 are as follows: Thousands of Thousands of yen U.S. dollars Common stock outstanding: 2004 2003 (Note 2) (Note 2) Balance at beginning of year ...... 10,140,122 10,101,647 2004 2003 2004 Conversion of convertible bonds ...... 420,985 24,875 Due within one year ...... ¥ 46,147 ¥ 46,147 $ 425 Exercise of stock options ...... 132,700 13,600 Due after one year ...... 104,843 150,990 966 Increase of stock splits ...... 10,140,122 – Total ...... ¥150,990 ¥197,137 $1,392 Balance at end of year ...... 20,833,929 10,140,122 (c) Future minimum lease payments under the non-capitalized finance The Company purchased its treasury stocks in response to shareholders’ and operating leases on June 30, 2004 and 2003 were as follows: Thousands of requests for purchase of their shares representing less than one unit. Thousands of yen U.S. dollars Changes in the number of treasury stocks during the years ended 30 (Note 2) (Note 2) June 2004 and 2003 are as follows: 2004 2003 2004 Lease payments ...... ¥46,147 ¥47,020 $425 Treasury stock outstanding: 2004 2003 Assumed depreciation Balance at beginning of year ...... 698 374 charges ...... 44,944 45,699 414 Increase by the purchase Assumed interest expenses . . 1,768 1,710 16 of treasury stock ...... 1,609 324 Balance at end of year ...... 2,307 698 (d) Assumed depreciation charges are computed using the straight-line method over lease terms assuming no residual value. Per share data (e) Assumed interest expenses, which is the difference between total Basic net income per common share is calculated by dividing net income lease payments and assumed acquisition costs of leased property, is by the weighted-average number of shares outstanding during the reported allocated each accounting period based on the interest method. period. The calculation of diluted net income per common share is similar (2) Lease transactions derived from Special Purpose to the calculation of basic net income per share, except that the weighted- Company (SPC) average number of shares outstanding includes the additional dilution (a) Assumed acquisition cost: from potential common stock equivalents such as convertible bonds and Thousands of Thousands of yen U.S. dollars dilutive equity securities. (Note 2) (Note 2) Effective April 1, 2002, the Company adopted the new accounting 2004 2003 2004 standard for earnings per share and related guidance “Accounting Land ...... ¥8,278,652 ¥8,278,652 $76,336 Standard for Earnings Per Share” and “Implementation Guidance for Buildings ...... 2,735,978 2,735,978 25,228 Accounting Standard for Earnings Per Share.” Structures ...... 62,194 62,194 573

5. INVENTORIES (b) Lease payments: Inventories at June 30, 2004, and 2003 were as follows: Thousands of Thousands of Thousands of yen U.S. dollars Thousands of yen U.S. dollars (Note 2) (Note 2) (Note 2) (Note 2) 2004 2003 2004 2004 2003 2004 Lease payments ...... ¥1,433,735 ¥1,378,189 $13,220 Electronic goods ...... ¥ 8,596,156 ¥ 6,522,856 $ 79,263 Merchandises ...... 5,591,899 4,267,257 51,562 (c) Minimum guarantees for SPC: 75% of the assumed acquisition cost Foods ...... 1,719,543 1,165,793 15,855 to ¥4,572,066 thousand ($42,158 thousand) Watches, fashion ...... 16,326,059 12,178,206 150,539 (3) Operating lease Sports, leisure goods . . . . . 2,333,469 1,834,435 21,516 Future minimum lease payments subsequent to on June 30, 2004 and Others ...... 547,035 887,679 5,044 2003 for operating leases were summarized as follows: Total ...... ¥35,114,163 ¥26,856,229 $323,782 Thousands of Thousands of yen U.S. dollars (Note 2) (Note 2) 6. LEASE TRANSACTION 2004 2003 2004 (1) The Company leases certain equipment under non- Due within one year ...... ¥1,433,735 ¥1,490,268 $13,220 capitalized finance and operating leases. Finance leases Due after one year ...... 5,246,941 6,624,144 48,381 that do not transfer ownership to lessees are not capi- Total ...... ¥6,680,677 ¥8,114,412 $61,601 talized and accounted for the same manner as operating lease. Certain information for such non-capitalized finance and operating lease is as follows:

28 Don Quijote Co., Ltd. Annual Report 2004 7. MARKETABLE SECURITIES AND INVESTMENT (2) Unlisted equity securities as of June 30, 2004 and SECURITIES 2003 were as follows: The Group invests in equity securities and classified its investments in Thousands of Thousands of yen U.S. dollars equity securities as available-for-sale. (Note 2) (Note 2) Investment securities consist of equity securities and others carried at 2004 2003 2004 fair market value. Subsidiaries and affiliates . . . ¥ 70,300 ¥4,700 $ 648 (1) Information regarding available-for-sale securities and Unlisted equity securities investment securities as of June 30, 2004 and 2003 (except the equity securities which traded on over-the- counter markets) ...... ¥160,420 ¥167,620 $1,479 was as follows: The following table sets forth acquisition cost, fair market value and unre- The proceeds from sale of investment securities were ¥856,141 thousand alized gains (losses) as of June 30, 2004. Thousands of yen (Note 2) ($7,894 thousand) and ¥58,736 thousand for the years ended June 30, 2004 2004 and 2003 respectively. Gain on sales of available-for-sale securities Net unrealized computed on the moving-average cost basis were ¥244,261 thousand Acquisition cost Fair market value gains (losses) ($2,252 thousand) for the year ended June 30, 2004. Loss on sale of Fair market value exceeds acquisition cost: available-for-sale securities computed on the moving-average cost basis Equity securities ...... ¥ 22,928 ¥ 50,236 ¥ 27,308 were ¥26,237 thousand ($241 thousand) and ¥8,745 thousand for the Debt securities ...... –––years ended June 30, 2004 and 2003 respectively. Others ...... 2,209,508 2,850,800 641,291 Subtotal ...... 2,232,437 2,901,037 668,599 8. SHORT-TERM LOANS AND LONG-TERM DEBT Fair market value does not exceed acquisition cost: Short-term loans are principally comprised of bank loans. The annual Equity securities ...... 4,030 3,050 (980) average of interest rates applicable to such loans was 0.6% as of June Debt securities ...... –––30, 2004. And the annual average of interest rates applicable to commer- cial paper was 0.1%. Others ...... 583,750 520,900 (62,850) As is customary in Japan, substantially all loans from banks (including Subtotal ...... 587,780 523,950 (63,830) short-term loans) are made under general agreements which provide Total ...... ¥2,820,217 ¥3,424,987 ¥604,769 that, at the request of the banks, the borrower is required to provide collateral or guarantors (or additional collateral or guarantors, as appropriate) The following table sets forth acquisition cost, fair market value and unre- with respect to such loans, and that all assets pledged as collateral under alized gains (losses) as of June 30, 2003. such agreements will be applicable to all present and future indebtedness Thousands of yen (Note 2) 2003 to the banks concerned. Net unrealized Long-term debt at June 30, 2004 consisted of the following: Acquisition cost Fair market value gains (losses) Thousands of Fair market value exceeds acquisition cost: Thousands of yen U.S. dollars (Note 2) (Note 2) Equity securities ...... ¥ 12,600 ¥ 133,087 ¥ 120,487 Borrowings from banks and insurance companies at Debt securities ...... – – – interest ranging from 0.860% to 1.950% . . . ¥ 7,942,320 $ 73,234 Others ...... – – – 0.25% unsecured convertible bonds due 2007 Subtotal ...... 12,600 133,087 120,487 (convertible at ¥4,221 ($38) for one common share, Fair market value does not exceed acquisition cost: redeemable before due date) ...... 5,501,000 50,723 Equity securities(*1) ...... 26,958 23,051 (3,907) 0.00% unsecured convertible bonds due 2011 Debt securities ...... – – – (convertible at ¥6,750 ($62) for one common share, redeemable before due date)(*) ...... 17,000,000 156,754 Others ...... 1,311,058 981,192 (329,866) 0.70% unsecured straight bonds due 2007 . . . 3,000,000 27,662 Subtotal ...... 1,338,017 1,004,243 (333,773) 0.70% unsecured straight bonds due 2007 . . . 3,000,000 27,662 Total ...... ¥1,350,617 ¥1,137,331 ¥(213,286) 0.77% unsecured straight bonds due 2006 . . . 1,000,000 9,220 (*1) Including impairment losses of ¥130,710 thousand ($1,205 thousand) on some equity securities. 0.64% unsecured straight bonds due 2007 . . . 500,000 4,610 Thousands of U.S. dollars (Note 2) 0.35% unsecured straight bonds due 2007 . . . 1,000,000 9,220 2004 Net unrealized Total ...... ¥38,943,320 $359,090 Acquisition cost Fair market value gains (losses) (*) A summary of the exercise rights of the stock acquisition rights (SARs) as of June 30, 2004 is Fair market value exceeds acquisition cost: as follows: Exercise price Total number of Outstanding Number of shares Equity securities ...... $ 211 $ 463 $ 251 Issued on Exercisable during Yen Dollars SARs to be issued balance of outstanding balance Debt securities ...... ––– January February 9, 2004 2,518,518 26, 2004 through ¥6,750 $62 3,400 unit 3,400 unit Others ...... 20,373 26,286 5,913 shares January 11, 2011 Subtotal ...... 20,584 26,749 6,165 Fair market value does not exceed acquisition cost: Convertible bonds are treated solely as bonds and no value inherent in Equity securities ...... 37 28 (9) their conversion feature is recognized in accordance with accounting Debt securities ...... –––principles generally accepted in Japan. The total amount of the convert- Others ...... 5,382 4,803 (579) ible bonds has been included in long-term debt. Long-term loans are principally comprised of bank loans. The annual Subtotal ...... 5,419 4,831 (588) average of interest rates applicable to such loan was 1.8% as of June 30, Total ...... $26,004 $31,581 $5,576 2004.

Don Quijote Co., Ltd. Annual Report 2004 29 The aggregate annual maturities of the long-term debts subsequent to The shareholders of the Company approved a stock incentive plan on June 30, 2004 are as follows: September 26, 2001. The options may be exercised during the period Thousands of Thousands of yen U.S. dollars from October 2, 2003 until October 1, 2007, and the exercise price was Fiscal year ending June 30, (Note 2) (Note 2) ¥4,290 ($39). The terms of options are subject to adjustment if there are 2005 ...... ¥ 5,702,240 $ 52,579 stock splits, consolidation of shares or additional shares issued at price 2006 ...... 5,242,320 48,338 less than the market price per share. The unexercised and outstanding 2007 ...... 9,476,000 87,376 balance of SAR, as of June 30, 2004, was 101,200 shares. 2008 ...... 7,225,000 66,620 The shareholders of the Company approved a stock incentive plan on 2009 and thereafter ...... 17,000,000 156,754 September 25, 2002. The options may be exercised during the period Total ...... ¥44,645,560 $411,669 from October 2, 2004 until October 1, 2008, and the exercise price was ¥5,085 ($46). The terms of options are subject to adjustment if there are 9. FINANCIAL INSTRUMENTS stock splits, consolidation of shares or additional shares issued at price The Company has entered into interest rate swap contracts to manage its less than the market price per share. The unexercised and outstanding interest rate exposures to possible interest rate fluctuation on loan balance of SAR, as of June 30, 2004, was 335,600 shares. payable to banks. Derivative transactions entered into by the Company The shareholders of the Company approved a stock incentive plan on have been made in accordance with internal policies, which regulate the September 25, 2003. The options may be exercised during the period authorization and credit limit amount. from October 2, 2005 until October 1, 2009, and the exercise price was ¥5,940 ($54). The terms of options are subject to adjustment if there are 10. USE OF A SPECIAL PURPOSE COMPANY (THE stock splits, consolidation of shares or additional shares issued at price “SPC”) FOR PROPERTY OWNERSHIP less than the market price per share. The unexercised and outstanding The Company has used a sale and lease back structure to securitize real balance of SAR, as of June 30, 2004, was 287,100 shares. estate assets pursuant to which an SPC acquires real estate from the The shareholders of the Company approved a stock incentive plan on Company and leases it back to the Company. The scheme was used to refi- September 28, 2004. The plan provides for the issuance of up to 500,000 nance the Shinjuku Higashi-guchi store. This particular SPC structure is shares in the form of options to management and employees. The required to be reviewed after five years and, if it is determined at that time options may be exercised during the period from October 2, 2006 until not to continue with the structure, the real estate will either be repurchased October 1, 2016, and the exercise price is almost equal to the fair market by the Company or sold by the SPC to a third party. In the latter case, value on the date of grant. The terms of options are subject to adjustment where the market value of the real estate has fallen to less than 75% of the if there are stock splits, consolidation of shares or additional shares initial purchase price, the Company is required to pay the shortfall up to issued at price less than the market price per share. 75% of the initial purchase price. In order to obtain financing, in February 2002 the Company used the 12. OTHER INCOME, NET SPC structure in respect of real estate which it owned in Roppongi district Other income, net for the years ended 2004 and 2003 were consisted of of Tokyo. Under this scheme, the Company entrusted the real estate to a other income and other expense. Other income and other expense were as follows. trustee and received beneficial rights/interests. The trustee leases the real Thousands of estate to the Company, will receive rent from the Company and will pay div- Thousands of yen U.S. dollars (Note 2) (Note 2) idends under the trust to the SPC. The term of the trust agreement is 6 2004 2003 2004 years and the term of the lease agreement is 15 years. At the end of the Other income: 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. Rental fee for computer system ...... ¥1,117,543 ¥1,041,583 $10,304 In order to obtain financing, in September 2002 the Company used the SPC structure in respect of real estate for PAW Kawasaki. The Gain on sale of investment securities ...... 244,261 – 2,252 Company entrusted the real estate to a trustee and sold beneficial rights/interests to improve the financial structure of the Company by Gain on sale of fixed asset . . . – 85,193 – reducing interest-bearing debt. Gain on sale of affiliated companies ...... – 61,574 – 11. STOCK INCENTIVE PLAN Reversal of allowance for The shareholders of the Company approved a stock incentive plan on doubtful accounts ...... – 2,448 – September 28, 1999. The options may be exercised during the period Other ...... 1,062,179 535,446 9,794 from October 2, 2001 until October 1, 2004, and the exercise price was Other income total ...... 2,423,984 1,726,246 22,351 ¥13,290 ($122). The terms of options are subject to adjustment if there Other expense: are stock splits, consolidation of shares or additional shares issued at Loss on sale of fixed price less than the market price per share. The unexercised and outstand- assets ...... 153,440 4,133 1,414 ing balance of SAR (Stock of Acquisition Rights), as of June 30, 2004, Loss on close of shops . . . . . 61,765 – 569 was 23,600 shares. Loss on sale of investment The shareholders of the Company approved a stock incentive plan on securities ...... 26,237 8,745 241 September 26, 2000. The options may be exercised during the period Loss on disposal of fixed from October 2, 2002 until October 1, 2006, and the exercise price was assets ...... 7,436 81,018 68 ¥5,974 ($55). The terms of options are subject to adjustment if there are Loss on devaluation of investment stock splits, consolidation of shares or additional shares issued at price securities ...... – 130,710 – less than the market price per share. The unexercised and outstanding Other ...... 86,182 77,510 794 balance of SAR, as of June 30, 2004, was 158,300 shares. Other expense total ...... 335,062 302,118 3,089 Other income, net ...... ¥2,088,921 ¥1,424,126 $19,261

30 Don Quijote Co., Ltd. Annual Report 2004 13. PLEDGED ASSETS 15. SELLING, GENERAL AND ADMINISTRATIVE The assets pledged as collateral for the Company’s liabilities at June 30, EXPENSES 2004 and 2003 were as follows: Major elements of selling, general and administrative expense for 2004 Thousands of Thousands of yen U.S. dollars and 2003 were summarized as follows: (Note 2) (Note 2) Thousands of 2004 2003 2004 Thousands of yen U.S. dollars (Note 2) (Note 2) Land ...... ¥2,618,902 ¥3,114,479 $24,148 2004 2003 2004 Buildings and structures . . . . . 382,789 410,673 3,529 Employees’ compensation Total ...... ¥3,001,692 ¥3,525,152 $27,678 and benefit ...... ¥12,471,347 ¥ 9,860,083 $114,996 Occupancy and rental ...... 5,155,591 4,202,881 47,538 Liabilities related with the assets pledged at June 30, 2004 and 2003 Commission ...... 3,536,723 3,148,861 32,611 were as follows: Thousands of Depreciation ...... 3,045,240 2,247,977 28,079 Thousands of yen U.S. dollars Provision for retirement (Note 2) (Note 2) benefits for directors ...... 48,921 4,508 451 2004 2003 2004 Other ...... 9,428,803 7,681,562 86,941 Short-term loans ...... ¥ 848,000 ¥1,900,000 $ 7,819 Total ...... ¥33,686,628 ¥27,145,874 $310,618 Current maturities of long-term debt ...... 1,418,200 618,200 13,076 16. RELATED PARTY TRANSACTIONS Long-term debt ...... 1,293,850 1,262,050 11,930 Related party transactions for the years ended June 30, 2004 and 2003 Total ...... ¥3,560,050 ¥3,780,250 $32,826 were as follows: Thousands of 14. INCOME TAX Thousands of yen U.S. dollars The normal effective statutory tax rate in Japan arising out of the aggre- (Note 2) (Note 2) gation of corporate, enterprise and inhabitants taxes was approximately Description of the Related party Category Transaction 2004 2003 2004 42.1% for 2004 and 2003. Anryu Shoji Company in Rental real (1) The significant components of deferred tax assets and LTD. (*2) which the estate (*1) liabilities for the years ended June 30, 2004 and 2003 director owns Brokerage fee ¥3,600 ¥3,600 $33 the majority were as follows: Thousands of votes Thousands of yen U.S. dollars (*1) The contract for rental real estate was signed on November 1, 2000. (Note 2) (Note 2) (*2) CEO of the Company, Mr. Takao Yasuda, essentially holds the 100% of voting stocks. 2004 2003 2004 Deferred tax assets (current): 17. EARNINGS PER SHARE Provision for enterprise tax . . . ¥ 272,406 ¥289,721 $ 2,511 Effective April 1, 2002, the Company adopted the new rule of “Earnings Allowance for bonus ...... 23,639 18,946 217 per share.” Inventories ...... 482,689 570,382 4,450 The following table sets forth the computation of basic and diluted Others ...... 154,948 56,867 1,428 earnings per share showing the reconciliation of the numerators and Subtotal ...... 933,683 935,917 8,609 denominators used for the computation. Deferred tax assets (non-current) Thousands of Thousands of yen U.S. dollars Accrued retirement benefits (Note 2) (Note 2) for directors ...... 57,938 38,125 534 2004 2003 2004 Depreciation ...... 141,694 124,632 1,306 Net income ...... ¥6,846,475 ¥5,641,698 $63,130 Valuation loss of investment Effective of dilutive securities: securities ...... 310,294 310,294 2,861 0.25% convertible bonds Net unrealized losses (gains) due 2007 ...... 8,939 10,493 82 on investment securities . . . (244,931) 89,793 (2,258) Diluted net income ...... ¥6,855,414 ¥5,652,192 $63,212 Others ...... 79,591 81,994 733 Subtotal ...... 344,588 644,840 3,177 2004 2003 Total ...... ¥1,278,271 ¥1,580,758 $11,786 Weighted average number of shares ...... 19,627,102 10,128,300 (2) A reconciliation of the difference between the statutory Effective of dilutive securities: tax rate and the effective income tax rate reflected in Stock options ...... 60,739 4,273 the accompanying statements of operation for the 0.25% convertible bonds due years ended June 30, 2004 and 2003 was as follows: 2007 ...... 1,537,221 866,275 2004 2003 0.00% convertible bonds due 2011 ...... 984,011 – Statutory tax rate ...... 42.1% 42.1% Diluted weighted average Permanent difference ...... 0.1% 0.2% number of shares ...... 22,209,073 10,998,848 Flat tax of inhabitant tax ...... 1.8% 1.6% Effect of change in effective statutory tax rates ...... 0.4% 0.2% Others ...... 0.2% – Effective income tax rate ...... 44.6% 44.1%

Don Quijote Co., Ltd. Annual Report 2004 31 Effective April 1, 2002, the Company adopted the new accounting standard Major items included in “Loss on close of shops” are as follows: for earnings per share and related guidance (Accounting Standards Board Thousands of Thousands of yen U.S. dollars Statement No. 2, “Accounting Standard for Earnings Per Share” and (Note 2) (Note 2) Financial Standards Implementation Guidance No. 4, “Implementation 2004 2003 2004 Guidance for Accounting Standard for Earnings Per Share,” issued by the Buildings ...... ¥24,755 – $228 Accounting Standards Board of Japan on September 25, 2002). As of Structures ...... 4,092 – 37 June 30, 2004 and 2003, options issued in connection with the introduc- Equipment ...... 1,838 – 16 tion of stock option plans that could potentially diluted earnings per share Others ...... 31,080 – 286 were not included in the composition of dilute earnings per share Total ...... ¥61,765 – $569 because of its antidilutive effect for the period. U.S. dollars Yen (Note 2) 19. CASH FLOW INFORMATION 2004 2003* 2004 Cash flow information as of June 30, 2004 and 2003 was summarized as Shareholders’ equity follows: per share ...... ¥2,003.60 ¥1,589.47 $18.47 Thousands of Thousands of yen U.S. dollars Basic earnings per share . . . . 348.83 278.51 3.21 (Note 2) (Note 2) Diluted earnings per share . . . ¥308.68 ¥256.94 $ 2.84 2004 2003 2004 *The Company made a 2-for-1 stock split of common stock on August 20, 2003. Earnings per Cash and time deposits . . . . . ¥8,903,992 ¥7,040,599 $82,102 share information has been restated to reflect the retroactive effect of the stock split at the beginning of the year ended June 30, 2003. Time deposits excess three months ...... – – – 18. SUPPLEMENTARY PROFIT AND LOSS Cash and cash equivalents . . . ¥8,903,992 ¥7,040,599 $82,102 INFORMATION Rental fee for computer system 20. SUBSEQUENT EVENTS Rental fees for computer system are charged to suppliers for marketing (1) Appropriation of retained earnings information about inventories. Appropriation of retained earnings under the Commercial Code of Japan, a plan for appropriation of retained earnings proposed by the Board of Items included in “Gain on sales of fixed assets” are as follows: Directors, must be approved at a shareholders’ meeting to be held within Thousands of three months after the end of the fiscal year. The appropriation of Thousands of yen U.S. dollars retained earnings for the year ended June 30, 2004 was approved by the (Note 2) (Note 2) 2004 2003 2004 shareholders’ meeting held on September 28, 2004 as follows: Thousands of Buildings ...... – ¥69,689 – Thousands of yen U.S. dollars Structures ...... – 6,048 – (Note 2) (Note 2) Equipment ...... – 9,455 – Cash dividends (¥30.0 ($0.27) per share) . . . ¥624,948 $5,762 Total ...... – ¥85,193 – The stock incentive plan provides for the issuance of up to 500,000 shares in the form of options to management and employees. The Items included in “Loss on sales of fixed assets” are as follows: Thousands of options may be exercised during the period from October 2, 2006 until Thousands of yen U.S. dollars October 1, 2016, and the exercise price was almost equal to the fair mar- (Note 2) (Note 2) ket value on the date of grant. 2004 2003 2004 Structures ...... ¥ 2,174 – $ 20 (2) Issuing new stocks of the Donki Johokan Vehicles ...... 31 – 0 Group interest of capital Activity Equipment ...... – 629 – Land ...... 151,234 3,504 1,394 Donki 100% Operation as agent for cellular Johokan(*) phone subscriptions and sell cellular Total ...... ¥153,440 ¥4,133 $1,414 phone subscriptions and sell cellular phone handsets. Items included in “Loss on disposal of fixed assets” are (*) As of September 13, 2004, the Board of Directors meeting approved to issue common stock. as follows: Number of new stock Common stock 1,800 shares Thousands of Issued price ¥50,000 ($461) Thousands of yen U.S. dollars Total amount for issuing new stock ¥90,000 thousand ($829 thousand) (Note 2) (Note 2) Investor Hikari Tsushin, Inc. 2004 2003 2004 Buildings ...... ¥7,436 – $68 21. SEGMENT INFORMATION Equipment ...... – 81,018 – Operating segment information Total ...... ¥7,436 ¥81,018 $68 The Group is engaged in discount store operations, rental business opera- tions for real property and operation as agent for cellular phone business. Such segment information, however, has not been presented, as the percentages of other activities are not material to the discount store business.

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

Sales outside Japan The Group has no sales outside Japan. 32 Don Quijote Co., Ltd. Annual Report 2004 Investor Information

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

COMPANY NAME TOKYO METROPOLITAN AREA Don Quijote Co., Ltd. Fuchu store 2-6-3, Midori-cho, Fuchu Shinjuku store 1-12-6, Okubo, Shinjuku-ku SCOPE OF BUSINESS Kasai store 4-14-1, Kitakasai, Edogawa-ku Operation of discount stores, which sell home appliances, daily Kanpachi Setagaya store 3-39, Hachimanyama, Setagaya-ku sundries, foods, watches, fashion merchandise, sporting goods, Kannana Umejima store 5-5-14, Chuohoncho, Adachi-ku leisure equipment and other products Keihin Kamata store 3-29, Nakarokugo, Ota-ku Keio Horinouchi store 34-11, Matsugi, Hachioji HEAD OFFICE Tohachi Mitaka store 1-24, Nozaki, Mitaka 4-14-1, Kitakasai, Edogawa-ku, Tokyo 134-0081, Japan Koganei Koen store 5-3-12, Shin-machi, Nishitokyo Tel: +81-3-5667-7511 Shibuya store 2-25-8, Dogenzaka, Shibuya-ku Fax: +81-3-5667-7522 Mejirodai store 586-22, Kunugida-machi, Hachioji Kannana Honancho store 1-28-3, Honan, Suginami-ku DATE OF ESTABLISHMENT Shinjuku Higashi-guchi store 1-16-5, Kabuki-cho, Shinjuku-ku September 5, 1980 Kodaira store 1-5-23, Ogawahigashi-cho, Kodaira Roppongi store 3-14-10, Roppongi, Minato-ku PAID-IN CAPITAL Aoto store 3-1-1, Aoto, Katsushika-ku ¥7,134,414 thousand Machida-ekimae store 4-2-3, Haramachida, Machida BIG FUN Heiwajima store 1-1-1, Heiwajima, Ota-ku NUMBER OF EMPLOYEES Nakano-ekimae store 5-68-5, Nakano, Nakano-ku 1,449 Kameido store 1-40-2, Kameido, Koto-ku Nerima store 2-19-1, Nishiki, Nerima-ku NUMBER OF STORES Ginza Honkan store Ginza Nine No. 3, 8-10, Ginza, Chuo-ku 93 Ginza Brand-kan store 1-4-5, Shinbashi, Minato-ku Takenotsuka store 6-11-10, Takenotsuka, Adachi-ku PAW Kitaikebukuro store 2-7-5, Ikebukuro-honcho, Toshima-ku Picasso Shinkoiwa store 1-30-2, Shinkoiwa, Katsushika-ku Board of Directors (as of September 28, 2004) Picasso Kokubunji store 2-2-8, Hon-cho, Kokubunji President and representative director Picasso Ikebukuro Higashi-guchi store 1-2-9, Higashiikebukuro, Toshima-ku Takao Yasuda Picasso Sangenjaya store 2-12-12, Sangenjaya, Setagaya-ku Directors Mitsuo Takahashi KANAGAWA PREFECTURE Junji Narusawa Tomei Kawasaki store 1645, Maginu, Miyamae-ku, Kawasaki Kouji Ohara Shin-Yokohama store 7-9-25, Kikuna, Kohoku-ku, Yokohama Satoshi Ueda Minato Yamashita store 1-2-8, Shinyamashita, Naka-ku, Yokohama Kiyoshi Kubota Tomei Sagamihara store 9-47-30, Kamitsurumahonmachi Sagamihara Sumio Inamura Yokosuka store 1-22-7, Otsu-cho, Yokosuka Koji Fusa Tomei Yokohama Inter store 5-1-8, Kirigaoka, Midori-ku, Yokohama Standing statutory auditor Totsuka Harajuku store 4-5-11, Harajuku, Totsuka-ku, Yokohama Isao Matsuura Atsugi store 2-8-12, Tsumadaminami, Atsugi PAW Kawasaki store 1-44-1, Shinmei-cho, Saiwai-ku, Kawasaki Statutory auditors PAW Hiratsuka store 2-7-31, Tamura, Hiratsuka Mutsuo Takahashi Picasso Isezakicho store 1-5, Akebono-cho, Naka-ku, Yokohama Hitoshi Ehara Picasso Tsurumi-ekimae 7-12, Toyooka-cho, Tsurumi-ku, Masaru Ueno store Yokohama

Don Quijote Co., Ltd. Annual Report 2004 33 Store Network (as of June 30, 2004)

SAITAMA PREFECTURE SHIZUOKA PREFECTURE Omiya store 2-685, Higashionari-cho, Kita-ku, Saitama PAW SBS-dori store 2-1-11, Fujimidai, Shizuoka Wako store 3-11-85, Shirako, Wako Urawa Kagetsu store 260-1, Aza-Fudoya, Oaza-Nakao, Midori-ku, AICHI PREFECTURE Saitama PAW Nakagawasanno store 4-5-5, Sanno, Nakagawa-ku, Nagoya Omiya Owada store 1-219-6, Owada-cho, Minuma-ku, Saitama Rakuichigaido Nagoya store 45-1, Aza-Shinmei, Oaza-Nakanogo Kawaguchi Araijuku store 81-1, Minamihara, Nishiaraijuku, Kawaguchi Nishiharu-machi, Nishikasugai-gun Warabi store 1-11-11, Nishiki-cho, Warabi Niiza Nobidome store 4-1-77, Nobidome, Niiza OSAKA PREFECTURE Picasso Ageo store 1-7-23, Naka-cho, Ageo Minoh store 4-1-30, Makiochi, Minoh Hirakata store 2-30-10, Ikenomiya, Hirakata CHIBA PREFECTURE Sayama store 2-950-2, Higashikuminoki, Osakasayama Kisarazu store 2-2-1, Jozai, Kisarazu Uchikan Fukae store 1-13, Fukaekita Higashinari-ku, Osaka Makuhari store 1-7782-1, Makuhari-cho, Hanamigawa-ku, Habikino store 68-2, Kashiyama, Habikino Chiba Juso store 1-6-1, Jusohommachi, Yodogawa-ku, Osaka Ichihara store 893, Murata-cho, Chuo-ku, Chiba Izumi store 65, Tomiaki-cho, Izumi Baraki Nishifunabashi store 474-1, Hongo-cho, Funabashi Yao store 2-11, Minami Uematsu-cho, Yao Chiba Chuo store 3-10-6, Yuko, Chuo-ku, Chiba PAW Suminoe Koen store 1-1-2, Shinkitajima, Suminoe-ku, Osaka PAW Kashiwa store 3-3-2, Tomisato, Kashiwa PAW Uehonmachi store 1-24, Uenomiya-cho, Tennoji-ku, Osaka Picasso Motoyawata store 4-7-2, Minamiyawata, Ichikawa PAW Ishikiri store 7-3-46, Nishiishikiri-cho, Higashiosaka Picasso Funabashikeibajo Picasso Namba store 3-8-22, Namba, Chuo-ku, Osaka store 9-1-1, Miyamoto, Funabashi KYOTO PREFECTURE HOKKAIDO Kyoto-minami Inter store 1-2, Kamitobakitahanana-cho, Minami-ku, Teine store 11-7-10, Maeda gojo, Teine-ku, Sapporo Kyoto Hiraoka store 1-1-35, Hiraoka yojo, Kiyota-ku, Sapporo Sapporo store 3-6, Minami nijo nishi, Chuo-ku, Sapporo HYOGO PREFECTURE Asahikawa store 4-1-3, Nagayama sanjo, Asahikawa Itami store 7-62-1, Ojika, Itami Atsubetsu store 2-9-1, Atsubetsu-nishiyonjo, Atsubetsu-ku, Himeji-minami store 2-51, Kamae, Shikama-ku, Himeji Sapporo Sannomiya store 2-12-3, Shimoyamatedori, Chuo-ku, Kobe Paw Nishinomiya store 1-13, Rokutanji-cho, Nishinomiya IBARAKI PREFECTURE PAW Tsuchiurakita store 3993, Higashiwakamatsu-cho, Tsuchiura FUKUOKA PREFECTURE Rakuichigaido Hakozaki TOCHIGI PREFECTURE store 5-1-8, Hakozaki, Higashi-ku, Fukuoka Utsunomiya store 1590-6, Azaicchoda, Yanaze-cho, Nishijin store 3-4-2, Nishijin, Sawara-ku, Fukuoka Utsunomiya Rakuichirakuza Kurume store 2-2-1, Higashiaikawa, Kurume GUNMA PREFECTURE PAW Takasaki store 2-4-17, Tonyamachi-nishi, Takagasaki KUMAMOTO PREFECTURE PAW Isesaki store 73-3, Kamiizumi-cho, Isesaki PAW Kamikumamoto store 3-3-20, Kamikumamoto, Kumamoto

NIIGATA PREFECTURE OITA PREFECTURE Niigata-ekinan store 1-1-1, Minamisasaguchi, Niigata D•Plaza Oita store 1137, Oaza-Seike, Oita

YAMANASHI PREFECTURE PAW Isawa store 1745, Yokkaichiba, Isawa-cho, Higashiyatsushiro-gun

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

34 Don Quijote Co., Ltd. Annual Report 2004 Store Network Building The Mechanism for High- Speed Yet Stable Store Store Opening Network Expansion Share Information (as of June 30, 2004) Reaping benefits of scale brought How to accelerate corporate growth with sensible about by area saturation and and efficient store network expansion? Don Quijote’s nationwide store expansion SHARES OF COMMON STOCK answer is three store formats to tailor stores to the Authorized: 78,000,000 needs of individual locations and a 20-store-per-year Issued: 20,833,929 expansion pace. The deep, accumulated Treasury stock: 2,307 expertise on store openings, based on our area-saturation strategy, NUMBER OF SHAREHOLDERS gives valuable strength to a 4,338 flexible and prompt store-opening program PRINCIPAL SHAREHOLDERS that seeks out and Percentage of Store Formats Mechanisms of Don Quijote’s Number of total shares in issue makes best use of shares held (%) Flexibly responding to trade favorable locations. Takao Yasuda ...... 3,244,000 15.6 area characteristics with three Distinctive CreativityLa Mancha ...... 3,000,000 14.4 store formats: Don Quijote, PAW The Master Trust Bank of Japan, Ltd...... 1,559,700 7.5 and Picasso and Overwhel mingJapan Trustee Power Services Bank, Ltd...... 1,461,900 7.0 UBS AG Hong Kong ...... 854,000 4.1 Lehman Brothers International (Europe) ...... 583,200 2.8 Nomura Securities Co., Ltd...... 575,200 2.8 Don Quijote’s Principle: The Chase Manhattan Bank, N.A. London ...... 452,600 2.2 The Customer Anryu Shoji Ltd...... 430,000 2.1 Comes First Morgan Stanley & Company, Inc...... 360,000 1.7 Contents SHARE OWNERSHIP BY CATEGORY Late-night operation to serve diversifying Percentage of Number of Number of total shares in issue Dear Fellow Shareholders . . . 2 lifestyles, a combined display concept and shareholders shares held (%) merchandise mix that provides amusement Financial Institutions ...... 59 4,685,674 22.5 Employee Empowerment . . . . 6 through excitement and discovery, a string of Securities Companies ...... 20 901,879 4.3 new services that answer customer Store Network Building . . . . 8 Other Japanese Corporations ...... 84 516,300 2.5 requests—creative innovation based on Foreign Corporations and Individuals ...... 189 10,106,168 48.5 Customer Care ...... 12 pursuit of the customer-first principle distinguishes Don Quijote among Japanese Individuals and Others ...... 3,986 4,623,908 22.2 Financial Section ...... 14 full-line discount store operators. Total ...... 4,338 20,833,929 100.0 Perfecting this model will be Corporate Data ...... 33 the key to the Company's overwhelming power. TRANSFER AGENT Share Information ...... 35 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 Customer Care The Mechanism for Acquiring Loyal Customers through Rigorous Pursuit of the Customer-First Principle Along with providing a unique product selection and a display method that offers astonishment and discovery, Don Quijote addresses an emotional element in the shopping experience with heartfelt services. This determination led to “Customer Care Specialists”—staff assigned specifically to customer care, including former employees of luxury-class hotels—and to new services that enhance shopping convenience in our stores. Don Quijote Co., Ltd. Annual Report 2004 35 2004 Annual Report Annual Don Quijote Co., Ltd. Co., Quijote Don

Don Quijote Co., Ltd. ANNUAL REPORT 2004 Printed in Japan 67-7511 +81-3-5667-7522 : URL http://www.donki.com Head Office Address: 4-14-1, Kitakasai, Edogawa-ku, Head Office Address: 4-14-1, Tokyo 134-0081, Japan Tel:+81-3-56 Fax Don Quijote Co., Ltd. Don Quijote