06 kojima ar

KOJIMA Company, Ltd. 19

Annual Report 2006Year ended March 31, 2006

KOJIMA

KOJIMA Company, Ltd.http://www.kojima.net/

50 Year Celebrated

KOJIMA

KOJIMA Company, Ltd.16

Consumer recognitionHome electronic appliance mass merchandisers are becoming more and more popular with consumers. In its October

21, 2003, edition, the Nikkei Marketing Journal released the results of a survey on how such mass merchandisers are

perceived among consumers of home electronic appliances. Kojima topped the list in the responses to three key

questions:

✽ "Where have you shopped in the past six months?" 38.1%;

✽ "Which stores have cheap products?" 78.9%;

✽ "Where would you like to shop in the future?" 34.5%.

The survey also revealed that customer needs are oriented toward low prices and abundant product lineup, as well as

product-related knowledge of store employees, after-sales services, and location.

According to the Nikkei Marketing Journal, Kojima ranked 13th in Japan and 101st worldwide for fiscal 2002

among all retailers-including department stores, supermarkets, and home centers-in terms of net sales, and was the

third largest domestic mass merchandiser of home electronic appliances.

ProfileKOJIMA Company, Ltd., commenced operations in 1963 as a mass merchandiser of home electronic appli-ances. Headquartered in Utsunomiya, Tochigi Prefecture, the Company now has 225 stores nationwide,with a solid presence in all of Japan's major metropolitan areas, including Tokyo, Hokkaido, Tohoku,Kanto, Kansai, and Kyushu. Consolidated net sales in the fiscal year ended March 31, 2006, totaled ¥498.0billion ($4,239 million), making Kojima one of the nation's largest home appliance retail chains.

Since its foundation, the Company has been committed to making people's lives more comfortable by"bringing light and warmth" to homes, as symbolized by the Company's "sun" logo. Based on this com-mitment, we have endeavored to sell our products at the lowest prices in the world.To fulfill this commitment, we have put together an extensive lineup of offerings, combining productsdesigned in-house with those provided by prominent manufacturers, which we sell at ultralow prices. Inaddition to selling products at our stores, we employ a broad range of sales channels, including televisionand Internet shopping.

To address changes in the market environment, we are shifting the focus of our business expansionstrategy from one based solely on quantity to one emphasizing "quantity together with quality." Byputting the customer first, we are working to become the No. 1 retailer in each of our regions. To this end,we are making our stores more competitive, our operations more efficient, our products more appealing,and our employees more competent. At the same time, we are building stronger relationships with ourcustomers through better after-sales services, product explanations, and other initiatives.

ContentsMessage from the President 2

KOJIMA GROUP’S BASIC STRATEGY 6

More Competitive Stores 8

More Competent Employees 9

More Appealing Products 10

More Efficient Operations 11

Top Mass Merchandiser of Home Appliances 12

Financial Section 13

Consolidated Financial Review 14

Consolidated Financial Statements 16

Non-Consolidated Financial Statements 36

Corporate Information 48


Thousands ofMillions of yen U.S. dollars

Years ended March 31, 2006 2005 2006

Net sales ¥498,040 ¥490,694 $4,239,725

Operating (loss) income (4,296) (3,839) (36,574)

Net (loss) income (3,829) 2,222 (32,602)

Per share of common stock (yen or U.S. dollars)

Net (loss) income (Basic) ¥ — ¥ 47 $ —

Shareholders' equity 1,590 1,707 13.54

At March 31,

Shareholders’ equity ¥ 61,909 ¥ 66,456 $ 527,019

Total assets 208,615 215,160 1,775,902

Note: U.S. dollar amounts are translated, for convenience only, at ¥117.47=US$1, the rate prerailing on March 31, 2006.

Consolidated Financial Highlights

Net Sales(¥ billions)

495.

9

503.

4

476.

1

490.

6

498.

0

Shareholders' Equity(¥ billions)

65.2

64.7

64.8 66

.4

61.9

Total Assets (¥ billions)

201.

5

208.

8

207.

9

215.

1

208.

6

’02 ’03 ’04 ’05 ’06 ’02 ’03 ’04 ’05 ’06 ’02 ’03 ’04 ’05 ’06


Summary of ResultsFiscal 2005 - the year ended March 31, 2006 - was the first year of the Kojima Group's new

medium-term management plan, which focuses on reforming our growth structure. Our perfor-

mance in fiscal 2005 reflects the success of this plan, as well as the previous plan, which

emphasized reforms of our earnings structure.

Consolidated net sales for the year amounted to ¥498,040 million ($4,239.7 million), up

¥7,345 million, or 1.5%, from the previous fiscal period. Gross profit increased ¥3,284 million, to

¥83,932 million ($714.5 million). However, the Group reported a net loss of ¥3,829 million

($32.6 million). This stemmed from an ¥8,780 million impairment loss on fixed assets accompany-

ing the closure of small and medium-sized retail stores.

The main factor behind the revenue increase was growth in sales of digital products, mainly

flat-screen televisions, arising from the expansion of areas in Japan covered by terrestrial digital

broadcasts. The Turin Winter Olympics in February 2006 also helped boost revenue. Other

contributing factors included strong sales of refrigerators, air conditioners, washing machines

and other white goods, which benefited from the twin effects of a record-setting cold winter in

Japan and demand from consumers upgrading to new models.

During the year under review, the Kojima Group celebrated its 50th anniversary while

continuing its distinctive brand of sales promotion activities. In addition to delivering improved

customer services, we continued focusing on further rationalization and efficiencies in order to

fine-tune our medium-term management strategies of reforms to our earnings and growth

structures.

Profit AppropriationThe Kojima Group places top priority on providing its shareholders with steady and sustained

dividends. Based on this fundamental principle, we maintain a healthy level of capital in order to

Message from the President

In May 2005, Kojima commemorated its 50th anniversary. Throughout the past five de-

cades, we have held fast to the spirit of providing our customers with good-quality

home appliances at ultralow prices. Committed to bringing smiles to the faces of our

customers, we will continue working to become the top retailer in each of our regions

by providing an extensive lineup of offerings, prices, and after-sales services that satisfy

our customers' needs. As we look ahead to the next fifty years, guided by our "NEXT 50

- Bring it On!" slogan, we will continue striving to be a company that is the most

trusted by customers. We are committed to "bringing light and warmth" to people's

homes, as symbolized by the Company's "sun" logo.


ensure consistent growth through future business expansion and a sound

financial base. Retained earnings are utilized for capital investment, such as

building new stores, increasing store size, and store refurbishment, as well as

for investment in information systems, expansion of operations, and pursuing

enhanced efficiency. For the year under review, the Company declared annual

dividends of ¥16.50 per share.

Management PoliciesOur fundamental management strategy is to position Kojima as the "No.1

retailer" in each of our regions. To achieve this strategy, we have focused on

reforming our earnings structure under our management plan that ended in

the previous fiscal year, with the aim of ensuring stable growth into the future.

These reforms have steadily borne fruit, highlighted by improvements in

profitability and inventory levels. While the reforms are ongoing, we embarked

on a new medium-term management plan in April 2005, which targets

reforms of our growth structure. The new plan covers the three-year period to

March 2008.

The essence of these two reform programs is to further strengthen the Company's existing

strategy through four initiatives: creating "competitive stores," "efficient operations," "compe-

tent employees," and "appealing products."

The first initiative - creating more competitive stores - entails opening large stores with a floor

space of 3,000 square meters or more, while at the same time pursuing a "scrap-and-build"

approach to small and medium-sized stores. Through a number of measures, we have enhanced

efficiency in various areas of our operations. The completion of a nationwide network of five

distribution centers has resulted in an overall decline in distribution costs. Moreover, the introduc-

tion of an automatic ordering system, based on accurate demand forecasts, has boosted sales

efficiency, which has also benefited from enhanced information systems. Our success in offering

appealing offerings is attributable to the development of original items, improved product

planning capabilities, and reduction of idle inventories. The fourth initiative, aimed at developing

more competent employees, has seen the introduction of a merit-based system and a full range

of training programs. These four strategic components have finally begun to bear fruit, and we

expect them to yield more and more benefits in the years ahead.

Financial HighlightsThe success of Company's program of reforming its earnings structure, as well as the more recent

campaign to reform its growth structure, is now becoming apparent. Improvements to internal

frameworks and efficiency are steadily translating into enhanced revenue, earnings, and profit-

ability.

In the year under review, the ordinary income margin rose 0.11 percentage point, to 1.27%.

This represents a 3.1-fold increase from fiscal 2001, when the margin was 0.41%. Return on

assets (ROA) for the period was 2.7%, up 0.3 percentage point year-on-year. Meanwhile, the

asset turnover ratio rose from 2.25 to 2.39 times.


While year-end inventories were up 6.3%, the inventory turnover ratio increased to 7.29

times, from 7.22 in the previous year. (This figure excludes the ¥4.0 billion increase in distribution

center inventories arising from the introduction of a next-day delivery system.) The inventory

turnover period (12 months divided by product turnover ratio) also improved, down from 1.66 to

1.64 months. We expect these favorable indicators to continue steadily improving in the future.

Store PolicyAs a mass merchandiser of home electronic appliances, Kojima established many stores with a

floor space of around 500 square meters under the former Large-Scale Retail Store Law, which

restricted the opening of larger stores. However, this restriction was eased when the law was

amended in 2000. As a result, our current policy calls for large stores, with a benchmark floor

space of 3,000 square meters or more.

A strategy centering on large-scale stores has become indispensable for providing customers

with adequate opportunities to compare a full and varied lineup of large digital home appliances,

highly functional white goods, and other products. In response to this new environment, in the

year under review we closed 19 small stores and opened 13 large ones. As a result, there were

225 Kojima stores as of March 31, 2006.

We plan to continue reassessing these small and medium-sized stores in order to ensure a

solid marketing and sales system. In the year to March 2007, we plan to open 20 new stores and

close 16 existing ones, as we focus on expanding our sales network.

In line with our fundamental strategy of becoming the No. 1 retailer in all of our regions, over

the next two years we intend to open large roadside stores, each with a floor space of around

3,000 square meters, in our priority regions at a rate of two stores every month. This will enable

us to fulfill our objective of having a network of large stores in every prefecture in Japan.

Taking Advantage of the InternetThe spread of broadband in Japan in recent years has made online shopping more widely

available to consumers. Our online store, accessed via the Kojima website, is being continually

upgraded to make it easier for customers to use. We are also continually bolstering server

capacity and accessibility, while integrating our online systems with our retail stores. We will

continue expanding online transaction volume by increasing payment options and improving the

user-friendliness of our systems.

We have already launched a new DVD software online store. Handling more than 100,000

movie and game titles, it is the largest of its type in the nation. This new service offers a full

product lineup, an advanced search function, and free delivery to anywhere in Japan within 24

hours.

In response to the increasing sophistication of mobile phone functions, we launched the

Kojima Club Mobile site, which can be accessed via mobile phone. This service, too, has received

much acclaim.

Net sales and recurring profits ratio Net sales (¥ billion) Recurring profit ratio (%)

495.

9

503.

4

476.

1

490.

6

498.

0

528.

6

'06'05'04'03Mar. 2002 '07 (est.)

0.41 0.43

0.66

1.161.27

1.33


Akitoshi KojimaPresident and CEO

Card ServicesIt is now three years since we introduced the Kojima Club Card, with the aim of strengthening

customer relations. Membership has grown steadily, with 13 million cardholders at March 31,

2006. In April 2006, we implemented a new reward system to members under the name "Hassle-

Free Kojima Services." Under the system, cardholders purchasing a Kojima product valued at

¥70,000 or more will receive free long-term warranties. There is the additional benefit of free

warranties for a period of five years for air conditioners, refrigerators, and massage chairs.

Members are also eligible to have items repaired as many times as they need within a five-year

period for faults covered by manufacturer warrantees, such as damage caused by fire or

lightning.

A further service allows members to obtain long-term warranties upon payment of only 5%

of the purchase price of products priced between ¥10,000 and ¥70,000 not covered by free

warranties, as well as for Kojima products priced ¥10,000 or higher not included in those

mentioned above.

Management Policies Going ForwardThe Japanese economy is expected to continue its modest recovery despite a number of

uncertainties. These include sharp rises in oil prices, appreciation of the Japanese yen, and

growing debate on tax increases. The home appliance industry anticipates continued steady

growth in demand for digital products, centering on flat-screen televisions. Nonetheless, compe-

tition between companies in the industry is expected to intensify.

Faced with these conditions, we plan to extend the earnings structure reforms previously

implemented by the Group, while proceeding with growth structure reforms currently under way.

To succeed in our fundamental strategy of becoming the No. 1 retailer in each of our regions, we

will continue reinforcing the Company's sales prowess. To this end, we will enhance our lineup of

appealing products and set attractive prices that meet the needs of our customers. We will also

provide improved services and bolster customer responsiveness through enhanced employee

training.

We have set targets of an ordinary income margin of 3.0% and a return on assets of 9.0%. To

reach these targets, we will work hard to increase profitability and raise capital efficiency.

With respect to social responsibility, we will continue expanding compliance-oriented activi-

ties, ensure rigorous protection of personal information, emphasize information system security,

and protect the environment. To meet the needs of an increasingly networked society, we will

swiftly formulate and implement measures as required by the times.

We look forward to the ongoing understanding and support of all of our shareholders.


The Kojima Group has reformed its earnings structure by shifting its business expan-sion focus from quantity alone to "quantity together with quality." To achieve long-term growth, we have now embarked upon reforms to our growth structure in orderto raise corporate value.

Mar. 2002 '03 '04 '05 '06 '07 '08

Reforming growth structure

Enhanced efficiency

Reforming earnings structure

Fruition IntroductionPreparation

Rai

se c

orp

ora

te v

alu

e

Preparation period

Introduction Fruition

Management Direction

From "Reforming earnings structure" to"Reforming growth structure"

Becoming the "No. 1 retailer in each region"

Build a Strong Foundation to Become

the ‘‘No.1 Retailer‘‘ in Each Region


KOJIMA GROUP'S BASIC STRATEGY


To achieve further growth and realize our strategy aimed at becoming No.1 retailerin each of our regions, we are pooling our efforts to enhance the competitiveness ofour stores, the capabilities of our employees, the appeal of our products, and theefficiency of our operations. These initiatives are described in more detail below.


Striving to become the "No.1 retailer" in each of our regions

More competitive

stores

More competent employees

More efficient

operations

More appealing products

Reinforcing our "planned purchasing" system

Strengthening sales of new products

Distinguishing ourselves by reinforcing concept brand" products

Adoption of executive officer system

Introduction of merit-based remuneration

Upgrading education

Energizing our human resources

Opening large-scale stores with floor space of 3,000m2 or more

Store renewal based on market size

Store renewal reflecting changes in product lineup

Promoting consolidation of stores

Integrated distribution centers: Reducing distribution costs and raising product profitability

Automatic ordering system based on demand forecasts:

Minimizing returned product ratio and lost sales opportunities

Kojima Customer Card: Strengthening relationships with customers

Less full-time employees and more part-time workers


Large StoresCustomers require the opportunity to compare a large number of products. Theyalso want attractive pricing and products that are readily available. To meet theserequirements, retailers must build stores with larger and larger floor space. Kojimahas expanded its network of stores throughout the country based on a strategy ofsituating one store per 200,000 of population. At the same time, we have shiftedour emphasis to building large stores while closing and replacing small andmedium-sized ones.

Our fundamental strategy for each large store is to provide 3,000 squaremeters of floor space over two stories. Each store offers products in two maincategories: Audiovisual and Computer (AVC), and Home Appliance, Life Condi-tioning, and Health & Beauty (HLH). In fiscal 2005, we enhanced efficiency byopening a further 13 large stores and closing 19 smaller ones. At the end of March2006, there were 225 Kojima stores throughout Japan. Although this representssix fewer stores compared with the previous fiscal year-end, the shift to largestores resulted in total floor space of 512,536 square meters, up 4.0% year-on-year. Our new Naha store is the first of its type in Okinawa and has sales floorspace of 4,000 square meters. It has proved extremely popular since opening inMarch 2006.

We intend to continue with this fundamental strategy over the current fiscalyear. With plans to open around 20 large stores and to close 16 smaller ones overthe period, we plan to have a total of 229 stores at the end of March 2007. Thiswill represent an 8.6% year-on-year increase in sales floor space, to 556,781square meters.

In the current fiscal year, we plan to open nine new stores in the Kanto region,five in Tohoku, two in Tokai, one in Chubu, and three in the Chugoku-Shikokuregion. The combined floor space of these 20 new stores is projected to be 60,557square meters. We will open additional stores at a later date depending on theavailability of satisfactory sites.

More Competitive Stores


Salesperson Training SystemThe skills of our "people" constitute the driving force behind our effort to become theNo. 1 retailer in each of our regions. For this reason, we are currently focusing onupskilling our employees. The home appliance sales sector, which deals with suchdigital devices as PCs, DVD recorders, broadcast and communications satellite sys-tems, and terrestrial digital broadcasting systems, is constantly changing as newproducts and technologies appear in the market on an almost daily basis. It is veryimportant, therefore, that our salespeople have the requisite knowledge and skills toexplain the latest innovations to customers.

Our focus on employee training is directed at enhancing customer service skillsand product knowledge. Here, we use a broadband video-conferencing system andalso use existing training methods based on role-playing. Our video-conferencingsystem uses a world-class network to simultaneously link our 225 stores across thecountry. We are convinced that effective utilization of this system will bring hugebenefits in implementing the Company's strategies. In today's climate of increasinglyintense competition, "knowledge" and "information sharing" will prove indispens-able in distinguishing Kojima from its competitors and maximizing its strengths.

Product Manager SystemWe recently introduced a Product Manager system as a means of providing customerswith the exact items they require. The primary objective of this system is to identifyhot-selling products and bring in more stock accordingly. This is achieved by directlylinking the sales side and the purchasing side of our operations and clarifying roles andresponsibilities for purchasing new merchandise. It is already evident that this systemhas reinforced our product development capabilities. Responsibility and performancewith respect to purchasing has become clearer as a result of extending the existingrole of purchasing managers to include even more precise identification of popularproducts. We expect that the synergistic effects from combining this system with ourplanned purchasing system will lead to increased product turnover and higher sales.

Merit-Based Remuneration System andExecutive Officer SystemTo enhance the skills of employees and help them realize their full potential, wepresent annual "Kojima Awards," which recognize outstanding sales performances of

individual employees and stores. This recognition of skills andcompetencies increases the motivation of all employees, whichin turn generates synergistic effects derived from higher skilllevels and sales growth.

At the managerial level, we have adopted an executiveofficer system to better clarify lines of authority and responsi-bility in each task, and to enable management to expeditedecision-making. This system fosters accurate and timely de-cisions and the execution of duties in a rapidly changingbusiness environment.

More Competent Employees


Timely Provision of Attractive New ProductsThrough our contact with customers as a mass merchandiser of home appliances,we are able to pinpoint the latest trends in consumer demand and use thisknowledge to provide a lineup of appealing products. The combination of thisstrength and our distribution system, as well as our automatic ordering system,which is based on demand forecasts, has created a highly efficient frameworkenabling our stores to offer the newest products available. The ability to stockappropriate volumes of best-selling products using this planned purchasing systemalso serves to expand profits. Furthermore, the development of special productsand items based on original concepts is proving highly successful in distinguishingKojima from the competition.

Fresh Gray SeriesThe Fresh Gray Series is an original Kojima brand developed and made in collabo-ration with 16 leading Japanese manufacturers. Integrating simple designs and

colors, these products are easy to use and offer excellentfunctionality and cost-performance. The series is popularamong young people setting up home for the first time. In1999, the Fresh Gray Series won the Good Design Awardfrom the Japan Industrial Design Promotion Organization.This year marks the 10th year since the series was launched.The 2006 models, consisting of 50 products, went on sale inJanuary this year. We are continually augmenting our lineupto meet the latest trends. Our current product range in-cludes everything from PCs, digital cameras, and LCD televi-sions to air purifiers and health-related products.

Expanding Sales of General Electric RefrigeratorsLeading the U.S. market in large refrigerators, General Electric is also a popularbrand in Japan. Kojima is the sole Japanese distributor of GE refrigerators, which itsells in all of its stores. Thanks to our nationwide sales channels, we now offer theNew Heritage series, developed jointly with General Electric with specificationsand colors specially designed for Kojima. Japanese consumers have respondedfavorably to this series. To avoid the common "white goods" image, theseproducts have extremely simple designs and are targeted specifically at youngurbanites who are very selective. The series, which has received the Good DesignAward, covers four categories: CFC-free refrigerators, drum-type washer/dryers,microwave ovens, and air purifiers.

Hybrid BicyclesTo commemorate Kojima's 50th anniversary, in late May 2005 we launched anoriginal electric hybrid bicycle, called the Ukyo Katayama Model, which wasdesigned with the help of former Formula 1 racing driver Ukyo Katayama. Thefront wheel is equipped with a compact motor that recharges when the brakes areapplied. Also featuring an "eco-recharge" mode, the bicycle combines fashion-able design with functionality, providing comfort over long distances. Althoughhybrid bicycles tend to target women, we are predicting strong sales to malecustomers who commute to work or enjoy recreational cycling.

More Appealing Productsシンプ

ルで安い。コジマフレッシュグ

レー


Efficient National Distribution SystemTo build an efficient product distribution system for servicing our stores around thenation, we have centralized our distribution centers in five locations: North Kanto,South Kanto, Hokkaido, Kansai, and Kyushu. This national network is highlyeffective in streamlining and raising the efficiency of distribution and inventorymanagement. The adoption of centralized distribution via these centers meansthat the system for receiving products by stores has been greatly improved,allowing us to redeploy employees to sales activities.

Information Systems to Support Sales andFront-Line OrderingThe use of PDAs by our salespeople increases the efficiency of store operations andplays a vital part in store automation. By linking this to our fourth-generation CPFR(collaborative planning, forecasting and replenishment) automatic ordering sys-tem, which is based on demand forecasts, we are working hard to expand salesopportunities. This has minimized the return of popular products, eliminated lostsales chances, and enabled optimal inventory management. It has also maximizedproduct ordering efficiency.

Integrating Internet and TV Shopping withStore SalesNext to our 225 stores nationwide, our most popular sales channel is the KojimaNet website. The site displays our latest product lineup and is the industry leader interms of the number of hits and sales. As part of our quest for diversified access toproducts, we also launched the Kojima Club Mobile site. The site can be accessedvia mobile phones, which are fast becoming an essential accessory in today'stechnological world. Another shopping option that has been very popular withcustomers for many years is our television shopping channel, which is availablethrough satellite digital broadcasts.

Using Card Services to Promote SalesWe introduced the Kojima Customer Card in order to strengthen relationshipswith customers. Membership is steadily growing, and at the end of March 2006-three years after its introduction-we had more than 13 million members. Member-ship entitles cardholders to free 10-year warranties for air conditioners, refrigerators,and televisions and free five-year warranties for personal computers. Not only doesthe card offer benefits to our customers, but it is also helping strengthen ourrelationships with customers. We also provide the Kojima Card in cooperation witha finance company.

More Efficient Operations


☛ We will expand our nationwide chain of home appliance stores☛ All stores will be directly managed by Kojima☛ All stores will be located alongside major roads☛ Each of our large stores will service a population of around 200,000 people☛ Following our initial policy of selling products at the lowest prices in the world,

we will continue providing products to an increasing number of customers☛ We will utilize customer cards to ensure more effective customer management

Top Mass Merchandiser of Home Appliances

Kojima aims to continue growing as a mass merchandiser of home appliances,

distinguish itself from its competitors, and establish itself as a leading companies.

To achieve these goals, we are committed to the fundamental strategies outlined

below aimed at reinforcing our services and maximizing efficiency.

Total 225 stores(as of March 31, 2006)


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

Years ended March 31, 2006 2005 2004 2003 2002 2006

Net sales ¥498,040 ¥490,694 ¥476,156 ¥503,458 ¥495,980 $4,239,725

Net (loss) income (3,829) 2,222 492 255 280 (32,602)

Per share of common stock (yen or U.S.dollars)

Net (loss) income (Basic) ¥ — ¥ 47 ¥ 11 ¥ 6 ¥ 7 $ —

Shareholders' equity 1,590 1,707 1,665 1,664 1,676 13.54

At March 31,

Shareholders' equity ¥ 61,909 ¥ 66,456 ¥ 64,804 ¥ 64,739 ¥ 65,221 $ 527,019

Total assets 208,615 215,160 207,904 208,897 201,562 1,775,902

Note: U.S. dollar amounts are translated, for convenience only, at ¥117.47=US$1, the rate prevailing on March 31, 2006.

Consolidated Five-Year Summary

Financial Section

Sales Composition (Consolidated) (¥ billions)

Video Equipment¥120.9 (24.3%)(Televisions, VCRs, etc.)

Audio Equipment¥24.8(5.0%)(Stereo Components & Radio Cassette Tape Decks)

New Household Electrical Appliances¥137.1(27.5%)(Computers, Telephones & Fax Machines)

Seasonal Items¥56.8 (11.4%)(Air Conditioners & Fan Heaters)

Housekeeping Products¥40.8 (8.2%)(Washing Machines & Vacuum Cleaners)

Others¥29.0 (5.8%)

Convenience Goods¥9.6 (2.0%)Grooming, Fitness & Health Appliances¥23.4(4.7%)(Dryers & Massage Devices)

Cooking Appliances¥55.1 (11.1%)(Refrigerators & Microwave Ovens)

Total: ¥498.0 billion (100.0%)


Consolidated Financial Review

RevenuesIn the fiscal year ended March 31, 2006, Kojima reported consolidated net sales of ¥498,040million, up 1.5% from the previous year. Cost of sales rose 1.0%, to ¥414,107 million. Asa result, gross profit grew 4.1%, to ¥83,932 million. Selling, general, and administrativeexpenses climbed 4.4%, to ¥88,228 million, due largely to increased costs associated withthe opening of new stores and the Company's scrap-and-build program for existing out-lets. This was despite efforts to hold down personnel expenses and other fixed costs.Consequently, the Company reported an operating loss of ¥4,296 million.

During the period, Kojima applied impairment accounting for fixed assets, resulting inan ¥8,780 million impairment loss on fixed assets. This led to a net loss of ¥3,829 millionfor the year.

Segment InformationSales of home electronic appliances totaled ¥496,180 million, or 99.6% of net sales. Theremaining ¥1,859 million, or 0.4%, was generated from activities of other activities. Theseincluded travel agency services, real estate management, and insurance agency services. Inthe year under review, sales of home electronic appliances increased 1.5%, and sales fromother activities grew 14.7%.

On a non-consolidated basis, sales of video equipment rose 3.9%, to ¥120,912 mil-lion. Sales of audio equipment, such as hi-fi and mini-component stereo systems, declined7.3%, to ¥24,850 million. Sales of air-conditioners and other seasonal items edged up1.0%, to ¥56,829 million. Sales of new household electrical appliances rose 4.1%, to¥137,123 million, and sales of housekeeping products increased 1.9%, to ¥40,876 mil-lion. Sales of cooking appliances fell 4.4%, to ¥55,198 million. In the "Grooming, fitness,and health appliances" segment, sales were down 3.1%, to ¥23,487 million. Sales ofconvenience goods slipped 2.4%, to ¥9,697 million, while sales of other products grew4.8%, to ¥27,205 million.

Financial positionAt fiscal year-end, total assets stood at ¥208,615 million, down ¥6,545 million, or 3.0%,from a year earlier. Total current assets increased ¥3,968 million, or 3.5%, to ¥115,925million, due mainly to a ¥4,317 million rise in inventories related to the opening of newstores. Total fixed assets declined ¥10,513 million, or 10.1%, to ¥92,689 million. Thisresulted primarily from a ¥13,906 million fall in property and equipment due to sales ofreal estate, reflecting the Company's real estate securitization policy, as well as a loss onimpairment of fixed assets. These factors outweighed a rise in property and equipmentassociated with new store openings.

Total liabilities as fiscal year-end were down ¥1,997 million, to ¥146,706 million. Cur-rent liabilities rose ¥1,067 million, to ¥87,447 million, due mainly to a ¥1,211 million risein notes and accounts payable. Long-term liabilities fell ¥3,064 million, to ¥59,2458 mil-lion, stemming primarily from a ¥3,247 million drop in long-term debt as the Companydiversified its fund-raising sources through real estate securitization.

Shareholders' equity at fiscal year-end totaled ¥61,909 million, down ¥4,547 million

Net Sales(¥ billions)

495.

9

503.

4

476.

1

490.

6

498.

0

’02 ’03 ’04 ’05 ’06


from a year earlier. This was mainly due to a ¥4,510 million decline in retained earnings,stemming from ¥680 million in cash dividends paid and the net loss of ¥3,829 million. Asa result, the equity ratio declined 1.2 points, to 29.7%, and equity per share fell ¥116.86,to ¥1,590.90.

Cash flowsCash and cash equivalents at the end of the year totaled ¥22,764 million, down ¥3,679million from a year earlier. The decline stemmed mainly from a net loss before incometaxes, an increase in inventories, and purchases of property and equipment for the pur-pose of opening new stores. This was despite proceeds from sales of property and equip-ment, reflecting the Company' real estate securitization policy, as well as an impairmentloss.

Net cash provided by operating activities amounted to ¥2,094 million, down ¥15,123million from the previous year. Factors boosting cash flows included ¥4,672 million indepreciation and amortization and an ¥8,780 million loss on impairment of fixed assets.Factors holding down cash flows included a ¥2,134 million net loss before income taxes, a¥1,898 million increase in notes and accounts receivable, a ¥4,317 million increase ininventories, and ¥3,750 million in income taxes paid.

Net cash used in investing activities totaled ¥1,942 million, down significantly from theprevious fiscal year. The net outflow stemmed mainly from ¥9,916 million in purchases ofproperty and equipment associated with new-store openings, as well as ¥1,519 million inother investing activities. By contrast, the Company reported ¥10,525 million in proceedsfrom sales of property and equipment, reflecting its real estate securitization policy.

Despite a¥28,000 million increase long-term loans, net cash used in financing activitieswas ¥3,830 million. This was due primarily to ¥30,950 million in repayments of long-termloans and ¥680 million in cash dividends paid.

Future targetsIn the year to March 2007, we expect the Japanese economy to continue recovering mod-erately, despite various uncertain factors, such as surging crude oil prices, the yen's appre-ciation, and increasing debate about tax hikes. In the home electronic appliance sector, weanticipate continued steady growth in demand for digital-related products, centering onflat-screen televisions. However, we expect competition within the industry to further in-tensify.

Facing these challenges, Kojima will strive to become the No. 1 retailer in each of itsregions. To this end, we will adopt the customer's viewpoint as we create a more appeal-ing product lineup, reinforce pricing, and upgrade the quality of our services. In addition,we will strive to strengthen our sales power by concentrating on employee training aimedat enhancing customer interaction. At the same time, we will continue fortifying our prod-uct and inventory management capabilities in order to improve efficiency, while also reas-sessing our expenses. Meanwhile, we will pursue a policy of large-store openings andconsolidation in an effort to attract more customers.

For the year, we project a 6.2% increase in consolidated net sales, to ¥528,690 million,and net income of ¥3,363 million.

Total Assets (¥ billions)

201.

5

208.

8

207.

9

215.

1

208.

6

’02 ’03 ’04 ’05 ’06


Consolidated Balance Sheets


Consolidated Statements of Operations


Consolidated Statements of Shareholders’ Equity


Consolidated Statements of Cash Flows


Notes to Consolidated Financial Statements


Report of Independent Certified Public Accountants


Non-Consolidated Balance Sheets


Non-Consolidated Statements of Income


Non-Consolidated Statements of Shareholders’ Equity


Notes to Non-Consolidated Financial Statements


Report of Independent Certified Public Accountants


Board of Directors and Corporate Auditors

President and CEO Akitoshi Kojima

Vice President Etsuo Ogaki

Senior Managing Director and Senior Executive Managing Officers

Takayuki Kato

Maki Mori

Motohiko Sato

Managing Director and Executive Managing Officers

Etsuo Terasaki

Eizo Yamamoto

Director

Hideo Ishikawa

Senior Corporate Auditor

Takanori Akimoto

Corporate Auditors Koichi Hirayama

Mitsue Aizawa

Directory

Head Office

2-1-8, Hoshigaoka, Utsunomiya,

Tochigi 320-4855, Japan

Phone: (028) 621-0001

Facsimile: (028) 621-0002

URL: http://www.kojima.net/

Founded: April 1955

Capital (Common Stock):

¥18,916 million ($161,033 thousand)

Stores: 225 (as of Mar. 31, 2006)

Employees: 4,769 (Non-Consolidated)

Corporate Information (as of July 1, 2006)


KOJIMA Company, Ltd.Head Office: 2-1-8, Hoshigaoka, Utsunomiya, Tochigi 320-0038, Japan Phone: 028-621-0001 Fax: 028-621-0002

http://www.kojima.net/

Printed in Japan

06 kojima ar

Documents