MOS FOOD SERVICES, INC. Annual Report For the year ended March 31, 2000 M S IS THE NLY NE A Quick Look at MOS

Financial Highlights Thousands of U.S. dollars (Except per Thousands of yen (Except per share figures) share figures) Years ended March 31 2000 1999 1998 1997 1996 2000 Net sales ¥71,554,497 ¥71,071,736 ¥71,325,355 ¥66,815,630 ¥64,154,601 $674,089 Net income 1,987,538 1,832,261 2,857,774 2,771,228 3,607,598 18,724 Net income per share 61.00 54.14 82.83 87.88 125.80 0.57 Cash dividends per share, applicable to the year 28.00 28.00 28.00 25.45 23.14 0.26 Total assets 63,524,677 63,204,916 64,182,396 60,772,655 58,239,115 598,443 Shareholders’ equity 43,992,717 44,520,150 45,101,793 43,924,697 41,971,673 414,439 Notes: All dollar figures in this report refer to U.S. currency and are translated for convenience only at the rate of ¥106.15 to U.S.$1.00, the approximate rate of exchange on March 31, 2000. Per share data has been retroactively adjusted for subsequent stock splits.

REFORMATION eadquarters was reorga- STORE H nized to focus more on ENHANCEMENT issues at franchise stores. y relocating and rebuilding The Company created a four- B existing stores, we aim to division area sales system boost customer traffic with headed by directors to enhance more convenient operating relationships with store owners. hours and locations. REINFORCING

CONTENTS

Interview with the President 2 Review of Operations 6 Financial Review 9 Five-Year Summary 10 Consolidated Statements of Income 11 Consolidated Balance Sheets 12 Consolidated Statements of Shareholders’ Equity 14 Consolidated Statement of Cash Flows 15 Notes to Consolidated Financial Statements 16 Report of Independent Public Accountants 23 Corporate Data 24 Directors and Corporate Auditors 25

MOS FOOD SERVICES, INC. 12 Sales Growth (Millions of yen) 71,325 71,071 71,554 66,815 62,815 64,154 59,000 53,868 48,731 43,023

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

FASTER IMPROVED SERVICE MENU APPEAL e are creating a system OS aims to offer menus e intend to raise cus- W to shorten the time it M tailored to breakfast, W tomer awareness of the takes to prepare food after it is lunch, teatime and dinner, and high value of our products, ordered, so our customers can to provide supplementary which use the best ingredients always enjoy fresh and deli- menus according to store for the health and well-being of cious entrees. sales, floor space and location. our customers. SAME STORES

Growth of MOS Burger (Non-Consolidated) (Shops) 1,561 1,481 1,525 1,426 1,450 1,469 1,330 1,387 1,413 1,277 1,318 1,358 1,193 1,264 1,213 1,103 1,136 1,015 1,049 965

50 54 57 64 66 69 68 68 75 92

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Domestic MOS Burger: Franchised Domestic MOS Burger: Directly Operated Interview with the President

“Subsidiaries made important contributions to consolidated results. However, we must address a number of issues that became clear during the fiscal year for the sake of future development.”

Q A variety of trials were con- onsolidated net sales grew 0.7% to ¥71,554 million (US$674 ducted during fiscal 2000, million) compared with the previous fiscal year. Although cost of ended March 31, 2000. What sales decreased 0.9% to ¥44,368 million (US$418 million), selling, is your analysis of consoli- C general and administrative expenses increased 5.4% to ¥23,106 million dated results? (US$218 million). As a result, operating income fell 6.8% to ¥4,080 mil- lion (US$38 million). Net income rose 8.5% to ¥1,988 million (US$19

SOLIDmillion), and tax-effect accounting was introduced.PRO Subsidiary NAKAU Co., LTD. grew enough to generate profits on increased sales, substantially contributing to consolidated results for the fiscal year under review. I think our consolidated performance for the fiscal year was acceptable. MOS Food Services, Inc. comprises six consolidated subsidiaries. Among these subsidiaries, Nakau, a Japanese-style fast-food chain serving donburi and , continued to grow in terms of restaurants and sales, and was listed on the over-the-counter exchange in December 1999. I believe there are two factors behind Nakau’s success. One is the incorporation of an effective franchise system. Know-how in franchise systems, supplied by MOS Burger and based on past experience, was key to the development of stores that competitors could not follow. The second factor is drawing out the latent potential of Japanese-style food as a business. Considering the sensibilities of Japanese people for Japanese-style food, we once believed there were limits to a simple, mechanical fast-food . Using only the finest ingredients, Nakau makes elaborate efforts in its stores and menu. The fact that a broad range of customers frequent Nakau, from women to the elderly, is the driving force behind growth.

MOS FOOD SERVICES, INC. 2 Q Looking at the numbers, s I said earlier, I believe our subsidiaries were unrelenting in their satisfactory results were efforts. During the fiscal year, MOS Burger aggressively engaged in produced during the fiscal A new business development, introduced more than ten new menu year. Including the subsidiar- items, reviewed the average cost ratio of franchise stores, and relocated ies you’ve just mentioned, existing stores. However, growth at existing stores did not develop as antici- what is your evaluation of the pated, leading to negative figures. Results were not produced from the year? introduction of various new products and combination menus. The chal- lenge is how to overcome the major issue of negative growth at existing stores. This is a difficult problem that cannot be solved overnight. I believe existing stores must be radically rebuilt.

Q Does this mean a sweeping hat is right. In the short time frame of one year, we were unable to review of the MOS franchise profoundly change the makeup of existing franchise stores, even on system? T the surface. Our past success had taken on mythic proportions. At times, this resulted in actions that were not necessarily in tune with market trends. We must remedy this situation as soon as possible. With what kind of ideas, how much financing and what aspirations will all owners of MOS Burger restaurants seriously work at developing the business? Furthermore, what problems are faced by each store? These questions are limitless in variety and cannot be resolved in one fell swoop. That is one of the difficul- ties of the franchise business.

GRESSQ How do you propose to im- believe the first prerequisiteBY... is reforming headquarters. I want to create a prove all 1,561 restaurants? headquarters able to clearly indicate problems at franchise stores and I guide efforts to solve those problems. For starters, we reorganized in January 2000, placing the marketing division in a four-division area system. A director was appointed as head of each marketing division in an effort to deepen understanding between headquarters and owners. This has resulted in rapid decision-making and stronger responses to individual stores and areas. During the current term, we have made it obligatory for franchise stores to submit financial statements to headquarters. Following financial analysis, the Franchise Management Advisory Office provides consulting as necessary. These initiatives will lead to strengthening the entire chain of stores.

Q Hard times were not neces- o. There are any number of corporations growing in this operating sarily limited to MOS Burger. environment. Unfortunately, customer complaints tend to escalate Do you correlate these condi- N annually in line with increases in the number of MOS Burger tions with the severe eco- restaurants. This has no direct connection to the economic recession. The nomic situation in ? level of quality at our stores is on the decline. Until now, headquarters had requested franchise stores to improve their attentiveness. Complaints would not arise if customers were truly pleased with the services provided. How- ever, the attentiveness of people is not easily changed. There are few people

MOS FOOD SERVICES, INC. 3 who take immediate action to change their awareness. We created the “MOS Human Academy” at headquarters, which will create manuals for every operation at stores. With the establishment of an operation check system, store management will be recorded and improved. This manual will be mastered by part-time workers while checking their attentiveness and behavior in detail. We will increase individual capabilities and raise aware- ness while growing. In this way, we will make steady progress step by step, not by immediately reaching for the end goal. We will establish a qualifica- tions system for the headquarters supervisor who advises stores and for store managers who are responsible for the store, and nurture a mentality and desire to improve to the next level.

Q Are there any other reasons here is no reason other than the decline in customer traffic for behind performance besides existing store performance. Four factors behind fewer customers are the declining level of quality as follows: at existing stores? T 1) Competition has intensified between convenience stores and other restaurant industries. 2) The level of store management capabilities at other stores has improved. 3) We were late in relocating stores. 4) We have not clearly explained to customers our product value and prices. MOS Burger products boast a strong foundation from the perspective of

...TACKLINGdeliciousness. Prices, however, are high. Stores are not open during conve- nient hours. And restaurants are not located nearby. There are frequent cases where these reasons sap customer motivation to visit stores. I believe headquarters must rein in the decrease in customer traffic and strengthen existing stores.

Q In particular, what will you irst, we need to shorten the time it takes to serve products. MOS start improving? Burger prepares food after it is ordered so customers can always eat it F fresh. As such, shortening the time it takes to serve products is a major issue. To overcome this challenge, we must establish a total system that integrates stores and cooking equipment as well as staff. In December 1999, we opened two experimental MOS Standard restaurants, and are currently running tests. We will introduce new cooking equipment in directly-operated stores, including three completely renovated restaurants, and conduct more experiments. We will then promote the introduction of measures that have shown results. We will also establish criteria and standards for staff to provide speedy service and bolster education and training programs. MOS Burger will increase its team of instructors from headquarters and strengthen store operations, while providing supervisors and management guidance from the Franchise Management Advisory Office.

MOS FOOD SERVICES, INC. 4 Q Was the waiting time short- es, it was. In September 1999 we started serving MOS Lunch ened by introducing combina- Combinations (M.L.C.), and I believe we were able to shorten tion menu items? Y waiting times, make it easier to buy and provide discounts for customers. During the current fiscal year, MOS Burger is examining new combination menu items that meet customer expectations in product volume and pricing. In addition, a few of our stores have begun offering a breakfast menu. I would like to augment the product lineup to match customer lifestyles with a menu tailored to breakfast, lunch, teatime and dinner.

Q Was a review of menu items es. At present, we have too many items available. To increase conducted? operational efficiency, however, I believe we should offer the best Y menu by store in consideration of the store’s scope of sales, floor space and location, and provide optional menus to complement the main menu.

Q Last year, MOS Burger aired his year, we will aggressively disclose information through news commercials featuring a reports and conduct publicity with higher reliability instead of popular female singer. What T advertising. In July 1997, MOS Burger announced its “New Value are the plans for this year? Proclamation” campaign. Based on the keywords Healthiness and Delicious- ness, the proclamation marked a significant switch of foods used at all

THE restaurantsISSUES to mineral vegetables with low agrochemicals and additives, as well as natural beef imported from Tasmania, Australia. We implemented these initiatives as our natural duty in the restaurant industry. Because we thought this was common sense, we did not follow up with an aggressive public relations campaign. I want our customers to understand the merits of MOS Burger products and why they are not priced at the bottom of the fast-food scale.

Q How would you describe would like to fully deploy the strengths of MOS Burger and thoroughly progress in the current fiscal implement the initiatives I mentioned previously in the management of year? I each store and area. The objective is to increase customer traffic and expand sales at existing stores. We will make an all-out effort to show the high appraisal we receive from our customers in results. We thank our shareholders for their contin- ued support.

Atsushi Sakurada President

MOS FOOD SERVICES, INC. 5 Review of Operations New Products

MOS Burger he MOS Tsukune is made of minced T roasted chicken and long onions to bring out the full flavor Fried Shrimp Cutlet Burger of tsukune, lightly seasoned with ur Fried Shrimp Cutlet garlic to whet the appetite. Topped M.L.C. Burger is prepared with with kidney bean stalks for color, he MOS Lunch Combina- O fresh, crispy cabbage and the MOS Rice Burger Tsukune is tion (M.L.C.) is a combina- an original tartar sauce on a sump- bursting with vivid colors and T tion plate comprising one tuous shrimp cutlet. The shrimp flavors. The rice bun features five item from our selection of ham- cutlet is made of egg whites and grains (rice, barley and three types burgers, rice burgers or hot dogs, in whole peeled shrimp, and our of millet) that provide more miner- addition to french fries, onion original tartar sauce is made of als than normal white rice, includ- rings, coleslaw salad and a beverage. delicious seafood mixed with eggs, ing vitamin B, vegetable fiber, iron Served only during lunchtime, the onions and parsley with a dash of and calcium. M.L.C. plate has become popular herbs and spices. Other rice burgers include the among customers since its introduc- Originally offered for a limited MOS Rice Burger Gomoku Kinpira, tion as MOS’s first combination time between the end of 1999 and prepared with burdock, carrots, menu item. The M.L.C. plate is April 2000, a flood of customer bamboo shoots, konnyaku, made of only the healthiest ingredi- requests for the Fried Shrimp Cutlet yamakurage and special sauce; and ents in line with MOS Burger’s Burger prompted its extension to the MOS Rice Burger Yakiniku, basic philosophy about food. July 2000. made with plenty of grilled beef and

WHAT’SThe M.L.C. plate is NEWOur new burger full a new lunchtime of delicious whole menu offering from shrimp is highly MOS Burger. recommended.

MOS FOOD SERVICES, INC. 6 fresh sunny lettuce. Rice burgers are enjoyed by a broad age group of customers, and are among the menu items that represent MOS Burger Hokkaido regions, and volume is originality. restricted as well. The Curry Chicken Focaccia is White Sesame Mousse is a new Northern Croquette Focaccia/ prepared by placing finely sliced combination of Japanese white Curry Chicken Focaccia cabbage on a chicken cutlet, heap- sesame and Western cocoa. Mango ocaccia is Italian bread ing it with special vegetable curry Pudding is a sophisticated balance shaped like the original sauce and enveloping it in focaccia. of coconut sauce and mango pud- F pizza. This new menu item is also offered ding. Rare Cheese with Amanatsu The Northern Croquette for a limited time. Sauce draws out the refreshing taste Focaccia is a brand-new menu item. of amanatsu (a variety of orange) Savor the simple flavor of potatoes Desserts sauce and rare cheese made from with the unique taste of focaccia OS Burger is briskly soy milk. Strawberry Sauce Yogurt wrapped around a fresh croquette introducing dessert menu Mousse is made from delicate and cabbage. We use hokkaikogane, M items that boldly use yogurt mousse accentuated by sweet a variety of potato raised with traditional Japanese ingredients said and tart strawberry sauce. These minimal agrochemicals and chemi- to be good for the body, and sea- new menu items have become great cal additives. MOS Burger has sonal fruits. New deserts launched hits among customers for their concentrated on every fine detail of this spring and summer comprise seasonal tastes. this menu item, from the produc- White Sesame Mousse, Mango Responding to the diversified tion of ingredients to product Pudding, Rare Cheese with needs of customers, we aim to development. Consequently, sales Amanatsu Sauce and Strawberry expand demand during teatime are limited to the Kanto and Sauce Yogurt Mousse. with these products.

WITHTry this rice burger You cannot get this MOS?Enjoy a moment to with its unique garlic original MOS Burger yourself after eating flavor. menu item anywhere with these new else! seasonal desserts.

MOS FOOD SERVICES, INC. 7 Restaurants New Concept

MOS Standard o establish a new MOS MOTHER LEAF Burger store concept as a part of MOS’s efforts in new T standard for the 21st century business development, that satisfies diverse customer AEN A MOTHER LEAF is a tea needs, MOS Burger opened two EN is a seasonal foods store opened under the guidance of experimental restaurants in Decem- restaurant that was opened Mr. Takeshi Isobuchi, a tea re- ber 1999; one in Kita Ward, Tokyo, A in Jiyugaoka, Tokyo, through searcher. Following the March 1999 and the other in Urawa, Saitama our subsidiary Shikina, Inc. in June launch of the first store in Ginza, Prefecture. 1999. The restaurant name AEN Chuo Ward, we opened the second The key concept behind the suggests the mineral zinc (aen in store in Shimokitazawa, Setagaya experimental restaurants is “Happy Japanese) for its role in skin me- Ward, and the third store in House.” Experiments tabolism, bone growth and normal Hikarigaoka, Nerima Ward, all in are underway to study every facet of sense of taste. Tokyo. existing stores. Centering on seasonal veg- MOTHER LEAF is a com- The restaurants feature a new etable dishes, AEN serves food pletely new store concept that offers sign design, an open interior layout, created from select ingredients in a aromatic teas prepared with care- an expressive kitchen and register bright Japanese-style setting based fully selected tea leaves from Sri counter area and a natural feeling. on the theme of earth. Vegetables Lanka, as well as a selection of Quality checks of store operations used at AEN are grown in open snacks that go well with tea, includ- are conducted through experiments fields for a well-balanced source of ing American waffles. The store with cooking equipment. minerals. interior reflects an ethnic atmo- In addition, we are promoting AEN creates a dining atmo- sphere with Thai silk for a relaxing the introduction of time-based and sphere reflecting the MOS Burger teatime experience. seasonal menus, provision of menu principles of food and health and The tea leaves are fresh from items according to store, more side natural farm-grown foods. the field and processed within menus, sales of merchandise and the Fresh seasonal ingredients are twenty-four hours of harvesting. use of ceramic plates and glasses. delivered from all over Japan and Five varieties of tea leaves, only MOS Burger is also advancing prepared at the chef’s professional from Sri Lanka, are used including a review of staff service and com- discretion. uba and denbura. The menu will munication tailored by region. Maximizing the quality of the satisfy demanding tea lovers with With a detailed analysis of experi- ingredients in every dish, AEN such items as milk tea made from ment results, the Company will satisfies customer appetites for no-brand black tea and milk made conduct further tests to establish a healthy gourmet food. especially for tea. new standard.

MOS FOOD SERVICES, INC. 8