PARCO CO., LTD. Annual Report 2005 · Operating income Net income Financial Position: Total assets...

2005Annual ReportPARCO CO., LTD.

PARCO CO., LTD.

Management Strategy

Consolidated Financial Highlights

Feature: Changing Market, Evolving PARCO

CEO Message

Corporate Governance

Commitment to CSR

Review of Operations

Review of Group Operations

Development Business

• Marketing Division

• Development Division

• Administration Division and Other Organizations

Space Engineering and Management Business

Retail Business

Other Business

Financial Section

Financial Review

Financial Statements

Notes to the Consolidated Financial Statements

Report of Independent Auditors

Selected Financial Data for Principal Companies of the PARCO Group

Corporate Data

Corporate History

Corporate Organization/Stock Information

List of Stores

A new phase of evolution

Contents

2005Annual Report

Entrance of Sapporo PARCO Annex

3359

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0 50,000 100,000 150,000 200,000 250,000 300,000

2001/2

2002/2

2003/2

2004/2

2005/2

Net Sales

(Millions of yen)

257,625

281,478

307,482

310,624

297,614



Operating Results:

Net sales

Operating income

Net income

Financial Position:

Total assets

Shareholders’ equity

Interest-bearing debt

Debt equity ratio *2 (times)

Per Share Data:

Net income per share


Cash dividends

Major Indicators:

Return on equity (ROE) *3

¥297,614

8,348

2,373

222,541

55,209

80,150

1.45

¥ 30.94

717.59

8.00

4.4%

2003

¥310,624

8,325

2,454

230,561

52,916

79,829

1.51

¥ 34.38

702.97

8.00

5.0%

2002

¥307,482

7,587

683

248,268

44,536

100,480

2.26

¥ 12.18

794.52

8.00

1.5%

2001

¥281,478

8,894

2,791

203,688

54,575

67,341

1.23

¥ 36.97

767.07

8.00

5.1%

2004

¥257,625

8,441

1,742

187,993

61,760

48,732

0.79

¥ 21.87

763.90

10.00

3.0%

$2,477,163

81,163

16,750

1,807,625

593,846

468,577

$0.210

7.345

0.096

2005 2005

Sales Activities Enhanced and Financial Structure Improved by Concentrating Management Resources on Our Core BusinessWe invested aggressively in renovating existing stores and opening new stores to enhance sales.In terms of finance, we improved our financial structure by selling treasury stock and applying impairment accounting to fixed assets ahead of schedule.

*1 U.S. dollar amounts have been translated, for convenience only, at the rate of ¥104 = US$1

*2 Debt Equity Ratio = Interest-bearing Debt Outstanding/Shareholders’ Equity An indicator used to determine the financial stability of a company by examining the ratio of interest-bearing debt to total shareholders’ equity.

*3 Return on Equity (ROE) = Net Income/Shareholders’ Equity × 100 An indicator used to determine management efficiency by examining the amount of income generated in a year against shareholders’ equity.

Cautionary Note on Forward-Looking StatementsPlans and forecasts contained in this report are based on currently available data and are subject to risks and uncertainties beyond our control. Actual business results may therefore materially differ from these forward-looking statements.

PARCO CO., LTD. and Consolidated SubsidiariesFor the years ended 28th/29th February, 2001, 2002, 2003, 2004 and 2005

Millions of yen Thousands of U.S. dollars*1

Percentage

Yen U.S. dollars*1

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0 2,500 5,000 7,500

2001/2

2002/2

2003/2

2004/2

2005/2

(Millions of yen)

8,894

8,441

7,587

8,325

8,348

Net Income

0 500 1,000 1,500 2,000 2,500 (Millions of yen)

2001/2

2002/2

2003/2

2004/2

2005/2

2,791

1,742

2,373

683

2,454

Operating Income

Interest-bearing Debt and Debt Equity RatioDebt Equity Ratio

Interest-bearing Debt

Total Assets and Shareholders’ Equity

Shareholders’ Equity

Total Assets

0 22,000 44,000 66,000 88,000

0 0.5 1.0 1.5 2.0

(Millions of yen)

(Times)

2001/2

2002/2

2003/2

2004/2

2005/2

67,341

48,732

100,48079,829

80,1501.23

0.79

2.261.51

1.45

(Millions of yen)0 100,000 200,000

2001/2

2002/2

2003/2

2004/2

2005/2

203,688

187,993

248,268

230,561

222,541

54,575

44,536

52,916

55,209

61,760

The Next Stage for PARCO as a Developer of Urban Shopping Complexes

PARCO’s history began in 1969, with the transition in business model from the Tokyo Marubutsu department store to Ikebukuro PARCO and has continued as a journey of realizing a shopping complex vision that is consistently in step with the changing times and markets. The total producing expertise cultivated so far has generated significant recognition, not only as a developer and operator of nineteen PARCO stores nationwide, but also of a shopping complex in Singapore, as well as our track record of contracts for numerous consulting projects. This expertise is increasingly in demand today as the need to develop and operate shopping complexes continues to grow.Today, we are already well on the way into our next stage of evolution.

Feature: Changing Market, Evolving PARCO

Entrance of Pedi Shiodome05

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Monitoring Retail Market Trends with an Emphasis on Diversifying Development Schemes

Japan’s annual retail sales have continued to decline after peaking in 1997. Meanwhile, shopping centers have steadily increased their share of sales in the overall retail market, despite the enactment of the Large-Scale Retail Store Location Law in 2002. This has led to a structural change in the retail market centered on competition between the shopping center business model and the department store and supermarket business models, which have been declining. In addition, the increased activity and scale of shopping center development in suburban locations has also resulted in a full-fledged realignment and survival race among shopping centers. PARCO has seized this change in the management environment as a business opportunity to develop and operate competitive stores that differentiate themselves through the application of our total producing ability, and to create new businesses.

Increasing Momentum of Realignment and the Race to Survive in the Retail Business Model

In November 2000, regulations concerning investment trusts and investment corporations came into effect, expanding the scope of the Japanese Real Estate Investment Trust (J-REIT) market. Growth has come particularly from the market targeting shopping complexes for investment, and the need to maximize cash flow has progressively led to a separation between ownership and management of shopping complexes. This, in turn, has given rise to the need for managers who can consistently maintain and enhance the value of shopping complexes. Noting this change in the market environment, PARCO has entered into the property management market.

Ongoing Separation of Shopping Complex Ownership and Management

In The Market0 500,000 1,000,000 1,500,000 2,000,000

0 5 10 15 20

1991

1994

1997

1999

2002

2004

Change in Retail Market and Share of Shopping Centers in Total Sales

(Billions of yen)

(%)

Total Retail Sales

Share of Shopping Centers’ Sales in Total Retail Sales

(Compiled from “Survey on Commerce,” Ministry of Economy, Trade and Industry; “SC White Paper 2005,” Japan Council of Shopping Centers)

(Compiled from data provided by Investment Trusts Association Japan)

0 50 100 150 200

0 500,000 1,000,000 1,500,000 2,000,000

2001

2002

2003

2004

Status of Total Real Estate Incorporated into Real Estate Investment Trusts

(m2)Office Commercial/Shopping HousingTotal Area for Rent

Office HousingCommercial/ShoppingNumber of Incorporated Properties

46448,788

830,236

1,250,233

1,751,718

123

167

212150342,350

51,251

1919

699

2929

53 1,721,308

663,635

227,478

1,281,240

1,351,253

1,438,326

1,477,541

1,433,250

1,422,911

15.49

17.33

18.91

20.59

19.33

11.38

18,36718,367

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Sendai PARCO

A shopping complex that increases the appeal of a symbolic location in Sendai City

Ario Kawaguchi

PARCO’s first full-scale property management project

Floor area: Approximately 37,750 m2

Operating area: Approximately 34,650 m2

Completion of construction: November 2005 (tentative)

Commercial composition: GMS (approx. 14,650 m2), specialty shop

(approx. 14,700m2) and cinema complex (approx. 5,300 m2)

Outline of Ario Kawaguchi

PARCO won a contract from Ito-Yokado Co., Ltd. to provide pre-opening support and property management operations for the specialty shopping mall section of Ario Kawaguchi, a shopping center under development. We are currently preparing for the fall 2005 opening of an attractive shopping center that combines a GMS and specialty shopping mall in Kawaguchi City, Saitama Prefecture, an area with promising growth potential.

Plans are underway to open a new PARCO store inside the redeveloped building of JR Sendai Station West Exit as part of Sendai City’s redevelopment project. PARCO has acquired commercial floors comprising one floor underground and nine floors above ground, and has entered the concrete stage of development toward opening in 2008. This will mark PARCO’s debut in the Tohoku region, and we expect to attract customers from a wide area.

Type: Chuo Icchome Second District Urban Redevelopment Project

Completion of construction: Spring 2008 (tentative)

Commercial composition: 1 floor underground, 9 floors above ground

Floor area: Approximately 26,000m2

Outline of Property under Development

Business

Ito-Yokado Specialty shopping mall (managed by PARCO)

Scheme for Ario Kawaguchi

Ito-Yokado

Planning

Operations

Marketing

Designing

PARCO

new d s

Development of low-rise, suburban shopping malls and other new business models

Entry into the property management market

and

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PARCO has sought to actively develop new PARCO stores and neighboring areas by adopting a multifaceted approach that included alliances, M&A, and acquisition of going concerns. As a result, we made a full-scale entry in fiscal 2004 into a diversified array of business models and domains that extend beyond our existing PARCO store business. PARCO aspires to become a developer that meets high expectations and is sought in every aspect of shopping complex development.

Type: Urawa Station East Exit Area, Type II Urban Area Redevelopment Project

Completion of construction: Fall 2007 (tentative)

Commercial composition: 1 floor underground, 7 floors above ground

Floor area: Approximately 66,000 m2

Outline of Property under Development

Urawa PARCO

A large-scale shopping complex with all the functions required to serve as a gateway to the prefectural capital

Operating area: 4,470 m2

Facility composition: 2 floors underground, 1 floor above ground

Commercial composition: 25 shops including sales of goods, restaurants and services

Outline of Pedi Shiodome Facilities

A case model for a shopping complex inside an office building

Pedi Shiodome

We opened Pedi Shiodome, a shopping space that supports the daily lives of office workers, inside Shiodome Siosite, one of Tokyo’s largest complex developments composed of office, hotel, and shopping floors. Most of the main tenants are new to PARCO, and include restaurants that offer different features for daytime and evening patrons, retailers offering convenience, relaxation facilities, and clinics. We are operating these facilities as a case model for a store within an office building.

Plans are underway for a new PARCO store that forms a part of Saitama City’s redevelopment project for the JR Urawa Station East Exit. In an area undergoing intensifying competition with the accelerated opening of suburban shopping centers, we plan to develop a large-scale shopping complex with all the functions required to serve a prefectural capital that enjoys the support of the local community.

Engaged in All Aspects of Shopping Complex Development

Developing New Business Models and Structures

Further Expansion of the PARCO Business Model

Tokyo Shiodome Building

Shiodome Sumitomo Building

PediShiodome

Into The Next BDevelopment of new PARCO stores and neighboring areas

Alliances, M&A, and acquisition of going concerns

Toward the Next Stage of GrowthIsamu Ito, President & CEO

CEO Message

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2005/2

Renovated area

Year-on-year sales of renovated sections0 90 100 110 120 (%)

0 20,000 30,000 40,000 50,000 (m2)

Status of Renovation at Existing Stores Major Renovations in Fiscal 2004

59,100

45,500

39,600

44,500

42,000116.7

113.0

116.4

118.4

119.3

•Renewal of facility and composition planning at QUATTRO

•Full renovation of PART3•Renovation of upper floors of PART2

•Full renovation of West Building, 6th Floor Children’s Clothing Zone

•Renovation of West Building, 3rd and 4th Floors/ South Building

•Reorganization of Ladies’ Floor, mainly focusing on married women in their 30s

•Full renovation of food floor to enhance penetration as a community-oriented shopping complex

Scale of renovation (number of tenantson renovated area)

Year-on-yearsales for

renovatedsections

Content of Major Renovations

Behind the Five-Year Medium-Term Management Plan

Launching the Medium-Term Management Plan toward Growth in Revenue and Profit

Five-Year Medium-Term Management Plan (1)

Reinforcing the Pillars of Growth— Bolstering Our Ability to Operate and Develop Shopping Complexes

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ShibuyaPARCO

105 tenants on 9,700m3

141.7%

109.4%

105.5%

150.2%




NagoyaPARCO

ChofuPARCO

Shin-TokorozawaPARCO

Reorganization of the PARCO Group continued in fiscal 2004 with efforts to improve its financial structure by concentrating on core businesses. We followed our “complex-by-complex” strategy for existing stores, and implemented a series of major renovations at our mainstay stores, such as Shibuya PARCO, Nagoya PARCO and Chofu PARCO, as well as suburban PARCO stores to respond to market conditions and competition. We also actively introduced new tenants.

Within the PARCO Group, NEUVE A CO., LTD. actively sought to open new stores, while PARCO SPACE SYSTEMS CO., LTD. (PSS) increased the number of building interior contracts through an aggressive sales effort. Meanwhile, we continued to reorganize the Group by following up on the sale of our stake in LIBRO CO., LTD. in fiscal 2003 by selling our stake in WAVE CO., LTD. in fiscal 2004. As a result, consolidated net sales fell 8.5% compared with the previous fiscal year to ¥257.625 billion and operating income fell 5.4% on the year to ¥8.441 billion.

PARCO’s non-consolidated net sales, which had been growing annually over the past few years, decreased year-on-year in fiscal 2004 for the first time in eleven fiscal years. This was due to a variety of factors, including intensifying competition. In fiscal 2005 we formulated the Five-Year Medium-Term Management Plan, which begins in fiscal 2005 and ends in fiscal 2009, as a map for surviving and emerging as successful amid intensifying competition.

Over the past three years, we have invested over ¥5 billion in the renovation of existing stores, our pillars of profit. Yet although the renovated retail floors are actually reporting strong sales growth, the pace of growth is falling short of boosting overall sales of our Development Business. This is a sign of the increasing severe competition in the Japanese retail market.

In terms of the entire retail market, while absolute volume has remained unchanged, consumption at the storefront has been declining due to diversification in sales channels, including the Internet. In addition, large-scale stores are in over-supply in major cities, further exacerbating competition. This changing environment calls for an immediate, fundamental restructuring of our business toward greater revenue and profit.

PARCO must address three issues. First, we must maintain sales at existing stores that serve as the pillar of profit. Second, we must develop new stores as additional profit centers. This development

Major Contracts for Outsourcing and Consulting Businesses

Cocoon Shintoshin

AMU PLAZA KAGOSHIMA

Ario Kawaguchi, PARCO’s first property management project, scheduled to open fall 2005

AMU PLAZA NAGASAKI

200420001995 2005

PARCO Bugis Junction (Singapore)

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Five-Year Medium-Term Management Plan (2)

Moving Into New Domains Based on Our Strengths — Property Management, Asset Management, and Cultivation of Peripheral Businesses

to respond appropriately to diversified market conditions.PARCO determined that addressing these problems required a

fundamental solution, a level of reform beyond operational improvements. In 2005, we formulated the Effective Store Grouping Strategy as a key element of the Five-Year Medium-Term Management Plan.

The Effective Store Grouping Strategy entails separating each store into groups according to common characteristics to undertake operations based on these groupings. We may switch operational control for some stores to the headquarters and optimize on-site staffing to lower operational costs. On the other hand, for a group of high value-added urban stores, we will seek versatile store operations based on a more market-centric “complex-by-complex” approach. We will launch these fundamental operational reforms in fiscal 2005.

In addition to strengthening operational capabilities as a foundation for profit, we also decided to open new stores in Urawa

PARCO’s expertise has never been in greater demand than today for intensifying the appeal and market strength of commercial facilities.

Development of New Stores Primarily in Major Urban Centers

Stores opened

Stores scheduled to be opened

No store yet

Sapporo

ChibaNagoyaOsakaHiroshima

Sendai

Saitama(Urawa)

Yokohama

KawasakiShizuoka

Kyoto

KobeKita-kyushu

Fukuoka

in 2007 and in Sendai in 2008. We will continue to seek opportunities for new store development focusing on major metropolitan areas with large populations. Our methods will include land development as well as the acquisition of going concerns, M&A, and master lease contracts.

In light of the current over-supply of stores, we must pursue broader opportunities for business growth, in addition to fundamentally reforming our conventional store operations and new store openings.

We are aware of the need to experiment with new business domains, free from the constraints of conventional business styles, such as expanding our property management business by focusing on trends in the growing real estate securitization business and developing new businesses that utilize asset management methods.

In today’s retail market, shaped by fast-paced changes in trends and diversified consumer lifestyles and values, every company—department stores and mass merchandisers alike—struggles with severe competition. However, the current situation offers an excellent business opportunity for a specialty store business model such as PARCO’s, since this model allows for quick, flexible response to changing times and market requirements, and is easily differentiated from other business models. In fact, PARCO has implemented renovations encompassing an average of approximately 50,000m2 each year in response to the changing market. By maintaining this level of effort for more than 35 years, we have cultivated an expertise in store operation that is designed to keep consumers satisfied. This has included discovering popular brands and the speed required for new openings, and maintaining the fresh appeal of our stores.

Management Target(Millions of Yen)

Net sales

Ordinary income

Net income

ROE

¥300,000

12,000

6,000

8.2%

Fiscal 2009

Target

¥257,625

8,079

1,742

3.0%

Comparisonwith Fiscal 2004

+42,375

+3,921

+4,258

+5.2%

Fiscal 2004Results

Outline of the Five-Year Management Plan(Fiscal 2005 - 2009)

Strengthening operational and development capabilities of shopping complexes

Effective Store Grouping Strategy1In addition to strengthening and expanding mainstay stores through the “complex-by-complex” approach, PARCO will adopt a method of operation based on the Effective Store Grouping Strategy, enhancing inter-company (PARCO and tenant) efforts.

PARCO will expand its exclusive product line, adopt new business proposals, and exercise innovative zoning in response to market needs by grouping according to store theme and merchandise, promoting differentiation from the competition and growth in customer numbers.

•

•

Fostering new businessesand taking on new challenges

Expansion and development of property management business

1

2

In response to the growing need for real estate investment in shopping complexes, PARCO will approach property from the perspectives of both owner and operator, and create new development schemes.

Taking on the challenge of new development schemesAs part of its new development schemes, PARCO will take on new areas such as asset management operations, primarily for shopping complexes.

Deepening and broadeningperipheral businesses

Expanding content-based businesses1

Theater Division: Expand theatrical productions not only at PARCO Theater, but also in external theaters and regional theaters; extend the commercial use of performances, including the production and sale of DVDs, and publication of plays.

Film Division: Enter the licensing business in addition to the current operation of an exclusive movie theater.

Development of new stores primarily in major urban centers

2

PARCO will promote development and new store openings primarily in major metropolitan areas where there are no stores, including new projects as well as transformation of existing commercial facilities. In development, we will utilize various methods, beginning with land development and including acquisition of going concerns, M&A, and master lease contracts. We also plan to open new stores in Urawa in fall 2007 and in Sendai in spring 2008.

—PARCO CO., LTD., Entertainment Department

Strengthening building management business and developing new businesses

2

Strengthen building the management business and develop new businesses including call-center and agent businesses

—PARCO SPACE SYSTEMS CO., LTD.

Expanding business content through aggressive store openings

3

Raise the PARCO external ratio and aggressively expand business content by opening 48 new stores in the next five years.

—NEUVE A CO., LTD.

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PARCO’s Internal Auditor Office and the Auditor Offices of major Group companies to strengthen the auditing functions for PARCO as well as for the entire Group.

With respect to our CSR efforts, we established the CSR Committee, which I chair, in March 2005. The Committee will make decisions on the guidelines and priority of our CSR activities and oversee the content of each activity.

The most important management resource for a business model like PARCO’s is people. As I have already mentioned, in the course of exploring the creation of new businesses under the current circumstances, we tend to become focused on the immediate operation at hand. However, if we are genuinely concerned about the company’s future growth, we must cultivate our human resources now.

Consequently, in fiscal 2003 PARCO launched the U-29 PARCO Trial, a system for regularly recruiting persons under the age of 29, regardless of their past careers. The system enables recruiting a variety of talent beyond new college graduates. We also provide highly motivated employees with opportunities for training, education, and acquisition of qualifications, thereby raising human “capital” with market value and a sense of management support.

Starting in the latter half of fiscal 2003, we also initiated the PARCO Business College. Mid-career employees in their thirties are selected from each section as future candidates for management. They participate in a monthly study group on management over a three-year period. With respect to people (employees) as a corporate asset, we recognize everything that expands the scope of knowledge, information, external networking, and character of an individual as a type of ability. The content of these study groups is designed to enhance these abilities. First-year participants have now entered their second year, and all have shown solid growth. Starting in fiscal 2004, we began inviting voluntary participants in addition to those who have been selected, and they are now following in the footsteps of the first-year participants.

Although the retail industry depends on quick, short-term results, only pursuing short-term results cannot lead to sustainable growth. We intend to achieve steady progress in reforming our management structure by implementing our Five-Year Medium-Term Plan, looking beyond this framework to determine what will be required for PARCO a decade from now, as the basis for cultivating our people (employees) as a corporate asset.

In reforming its management system, PARCO strengthened its corporate governance to enhance transparency and fairness. Reforming the management structure requires that shareholders and investors are fully aware of the current state of PARCO and that employees understand the reforms as well. We have therefore endeavored to disclose and share management information to encourage all our employees to develop a healthy sense of participation.

As part of these efforts, we established a system of advisory committees in fiscal 2002, and adopted a “Company with Committees” system as introduced by the revised Japanese Commercial Code that went into effect in 2003.

In management execution, we adopted a “mission cascade” system for fulfilling the mission of the entire company as set forth by the president. Each fiscal year, Executive Officers make concrete commitments with regard to areas of the mission within their capacity, followed by their reporting managers, who in turn declare their specific commitments for achieving the mission under the leadership of their respective Executive Officer. The Board of Directors conducts quarterly progress reviews in regard to each area of the mission. In addition to this system, we achieved greater transparency in our management by fulfilling the functions of a “Company with Committees System.” The opportunity for receiving external evaluation has also led to a positive sense of urgency with respect to management.

Starting in fiscal 2005, Ms. Yukako Uchinaga, who serves as Senior Managing Director for Asia Pacific Technical Operations, IBM Japan, Ltd. will join PARCO as an External Director. PARCO will further strengthen corporate governance by increasing the number of External Directors so that there are five Internal Directors and five External Directors. We expect Ms. Uchinaga will evaluate and contribute advice on PARCO’s customer satisfaction and CSR activities, not only from her experience and knowledge as a corporate officer, but also from a woman’s perspective.

In terms of our organization, we created the posts of Chief Executive Officer (CEO) and Chief Operational Officer (COO) in fiscal 2005. The CEO, as the chief officer for management, initiates guidelines and strategies for management in general as they pertain to PARCO and the PARCO Group. The COO, as the chief officer for operations, manages specific operations based on management guidelines and strategies. Through this system, we will strive to accelerate the execution of operations and achieve greater transparency.

Furthermore, we established the Group Auditor by integrating

business. We hope to create new businesses by accumulating expertise in the necessary development proposal concepts as a shopping complex developer.

In fiscal 2005, we implemented organizational reforms and assigned personnel to proceed with these various businesses. In concrete terms, we transferred the property management business, traditionally undertaken by PARCO SPACE SYSTEMS CO., LTD., to PARCO CO., LTD. and established the Property Management Department. The new department will promote the sharing of management resources and operational efficiency in the tenant leasing business under the newly established Development Division, along with the New Project Development Department, which had been handling new business creation, including new store development. The Development Division will take the initiative in expanding and strengthening our business as a shopping complex developer, while seeking synergies in bolstering operational expertise with the Effective Store Grouping Strategy of the Marketing Division.

In other efforts, we incorporated the pursuit of peripheral businesses into the Five-Year Medium-Term Management Plan as a new pillar in our profit expansion plans.

PARCO will cultivate its entertainment business beyond its role in attracting visitors to the stores utilizing the content of theater operations to expand business outside PARCO.

PARCO SPACE SYSTEMS CO., LTD. will remain focused on the growing need for outsourcing and reducing costs in efficiently operating shopping complexes, and will strive to boost its management base by expanding its call center business and creating other new businesses.

NEUVE A CO., LTD. has solidified its management base and has begun its transition into a phase of full-scale growth. Accordingly, we plan to increase the number of stores by 1.5 times over the next five years, toward a 140-store structure. We will aggressively pursue new store openings in suburban markets.

Furthermore, we have accumulated expertise in raising customer traffic by managing theaters and other entertainment businesses and holding sales and promotional events to generate synergy with product sales. This is exactly the kind of expertise now required by the retail market. Armed with these competencies, we are convinced PARCO will achieve significant growth by seizing opportunities for new businesses in areas such as property and asset management.

From this perspective, PARCO has already started to provide consulting services for the opening of shopping complexes as a stepping stone for creating new businesses. In fiscal 2004, these efforts bore fruit in the opening of AMU PLAZA KAGOSHIMA under consignment from Kyushu Railway Company and Cocoon Shintoshin in Saitama New Urban Center, under consignment from Katakura Industries Co., Ltd. We also opened Pedi Shiodome, a shopping complex within the Tokyo Shiodome Building, as our first store opening in an office building. These projects attracted positive feedback for our work in this new business domain.

In 2005, we will develop the specialty shopping mall portion of Ario Kawaguchi, a complex that Ito-Yokado Co., Ltd. plans to open this fall in Kawaguchi City, Saitama Prefecture. Once opened, we will handle property management. This will serve as a touchstone for the full-scale development of our future property management business, and an ideal opportunity for utilizing PARCO’s expertise.

Unlike our past high value-added urban stores, suburban locations must offer unique characteristics to gain differentiation from other commercial facilities, while at the same time clearing the hurdle of low-cost operation. Our challenge is to determine the best approach for establishing such a system, and we expect to gain new expertise as a case model for developing operational methodologies not bound by our conventional PARCO store operations.

Apart from property management, we are being asked to provide development schemes in the context of our asset management

AdministrationDivision

Corporate PlanningDepartment

Marketing Division

Development Division

PARCOCO., LTD.

NEUVE A CO., LTD.



Retail Business

Other Business

PARCO SPACE SYSTEMS CO., LTD.

Maximizing Group Value

Acceleration of new store openings

Expansion of outsourcing business/Development of new businesses

Full-scale pursuit of propertymanagement business/

Creation of new business models

PARCO GroupA New Executive System of Operations

Enhanced profits throughrenovation of existing stores

How can we survive current market competition and directly face changes ten years from now? By cultivating and strengthening our other management resource—people—toward sustainable corporate growth.

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Reform of Our Management System

Strengthening Governance and Our Commitment to CSR

Management Resources for the Next Generation — Cultivating People as a Corporate Asset

Continuing PARCO’s Growth beyond the Next Decade

Management Supervision

ManagementSupervision

Execution of Management

Collaboration

InternalAuditor

Board of Directors(ten members, includingfive External Directors)

General Shareholders’ Meeting

Executive President (CEO)Executive Vice President (COO)

Management Committee

Departments

Executive Officer

Compensation Committee (five members, including four External Directors)

Audit Committee (all five members are External Directors)

Nominating Committee (five members, including four External Directors)

External Directors

System of Management Supervision and Execution Reporting, directions, auditing, selection, etc.

Group Auditor Office

Munehiko Ohno,Member of the board

Shuichi Matsuda,Member of the board

Atsushi Toki,Member of the board

Joji Miyazawa,Member of the board

Yukako Uchinaga,Member of the board

Structure of PARCO’s Corporate Mission

Structure of Corporate Mission

Corporate Mission

Ten Action Guidelines

Ensuring our visitorsa delightful experience

Originality

Innovation

Abundant hospitality

Human Resource Value

The strength of our employees makes this a reality through their day-to-day activities.

Customer Value Operational Value Sphere of Operations (Domain)

CSR Committee

Identifies and categorizes the CSR-related issues as they pertain to PARCO, considers the priority and content of CSR activities, and creates a system to promote CSR.

CS Committee

Collaborates with the CS committees at each store to create an environment of convenience and comfort for customers visiting our stores and a pleasant working place for tenants by incorporating the opinions of customers and tenants in improving our services.

Risk Management Committee

Responsible for identifying, assessing, developing countermeasures, and conducting internal educational activities with respect to latent risks in our corporate activities. It also constructs a cross-sectional system of controls, including emergency headquarters and information management, to quickly respond to actual risks as they occur.

ImprovingFinancial Value

as anAchievement

Chairman: Atsushi Toki (Director); Members: Shuichi Matsuda (Director); Munehiko Ohno (Director);

Yukako Uchinaga (Director); Isamu Ito (Director)

Chairman: Isamu Ito (Executive President)Secretary: Hidekazu Hirano (Executive Officer,

Corporate Planning)

Chairman: Sakaguchi Toshiro (Executive Vice President)Secretary: Kouzou Makiyama (Executive Officer, Store

Management)

Chairman: Mototeru Fujishima (Senior Executive Officer)Vice Chairman: Shuji Kainaga (Executive Officer, Human Resources

& General Administration) Jyunichi Yamada (Executive Officer, Facility Management)

Chairman: Joji Miyazawa (Director); Members: Shuichi Matsuda (Director); Atsushi Toki (Director);

Munehiko Ohno (Director); Yukako Uchinaga (Director)

Chairman: Shuichi Matsuda (Director); Members: Atsushi Toki (Director); Munehiko Ohno (Director);

Yukako Uchinaga (Director); Isamu Ito (Director)

Contributing totenant’s success

Creation of shopping space

Corporate Governance

We will pursue even faster execution of operations and greater transparency in management

Commitment to CSR

Building a system to promote CSR through the establishment of three CSR Committees

Board of Directors: Fiscal 2004: Nineteen meetings The Board of Directors is responsible for decision-making on basic management principles and the supervision of Directors and Executive Officers.

In addition to regular monthly meetings, the Board of Directors provides flexibility by holding special meetings as necessary.

CommitteesEach committee acted in their capacity to conduct management supervision and reported to the Board of Directors. A Committees Secretariat has been established to assist as dedicated staff in the activities of the three committees.•Nominating Committee: Fiscal 2004: Nine meetings This committee is entrusted with determining the process for selecting or removing Directors, and to nominate or recommend the removal of the Chief Executive Officer and the Executive Officer.

•Audit Committee: Fiscal 2004: Twelve meetingsThis committee is empowered to conduct audits on the execution of operations by Directors and Executive Officers and to establish the process for selecting or removing the financial auditor.

•Compensation Committee: Fiscal 2004: Eight meetingsThis committee is responsible for determining the compensation for individual Directors and Executive Officers.

Group Auditor Office The Internal Auditor Office of PARCO CO., LTD. was integrated with the auditor offices of major Group subsidiaries to form the Group Auditor, thereby strengthening internal audit functions of the Group. This office also assists in carrying out the duties of the Audit Committee as necessary based on the recommendations or direction of the Audit Committee.

Executive Officers and Management CommitteeThe Executive Officer is responsible for executing specific operations based on the basic principles decided by the Board of Directors. In March 2005, we endeavored to accelerate the execution of operations by appointing the Executive President as the Chief Executive Officer (CEO) to design plans and strategies related to the overall management of PARCO and the PARCO Group. We also appointed the Executive Vice President as Chief Operating Officer (COO) to execute operations related to overall management based on the management plans and strategies determined by the Company. The Management Committee is an advisory organ that enables the COO to decide on the execution of specific operations. The committee meets weekly, attended by all Executive Officers and the Director, who serves as the Chairman of the Audit Committee.

Establishment of Three CSR Committees

Commitment to Compliance

Action Guidelines based on the Corporate Mission

Creating futuristic, innovative spaces that brim with hospitality, providing a beautiful experience for people visiting our stores, and helping our tenants prosper.

PARCO formulated its Corporate Mission in 1999 and subsequently established the Corporate Mission Structure in 2003. We have consistently sought to thoroughly embed the mission throughout the company. At the same time, we have been reviewing the corporate social responsibility (CSR) activities undertaken by the PARCO Group. In March 2005, these efforts culminated in the establishment of the CSR Committee, chaired by the President. The purpose of the CSR

Committee is to raise corporate value through the realization of our Corporate Mission. The Committee oversees the CSR efforts of the PARCO Group and determines the principles and priorities of CSR activities. In practice, the Customer Satisfaction (CS) Committee and the Risk Management Committee cooperate with the CSR Committee to promote CSR activities across the entire company.

The business of the Company is the result of the daily actions of employees.In this context, every action must align with the Corporate Mission.Therefore, we established the Ten Action Guidelines for PARCO employees to reflect the Corporate Mission in our daily activities.

1. Customers come first2. Maintain equal partnership with

tenants3. Innovation4. Originality5. Hospitality

6. Responsibility and sincerity 7. Spirit of challenge and enthusiasm 8. Individuals with a sense of

community 9. Cooperate with others10. Growth and development

Action Guidelines for Good Corporate Citizenship

As part of our efforts to develop a system of compliance, we have formulated the Basic Principles of Compliance and Guidelines of Conduct that must be followed by all employees. We also established an Internal Reporting System as a specialized means for receiving internal alerts and requests for consultation. We are further promoting internal education by distributing the “PARCO Employee Handbook,” which contains guidelines on compliance activities for all officers and employees.

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Bringing All Our Core Competencies Together to Maximize Group ValuePARCO offers unique specialty stores and services centered on its Development Business, which operates PARCO stores throughout Japan. The PARCO Network is the backbone of the enterprise, and PARCO companies maximize its value by tapping into accumulated expertise and the synergies among Network companies. PARCO Network companies not only provide services to the Network, but also develop new businesses and services outside PARCO stores in line with a growth strategy that is based on the core competencies of each business. Information, expertise and knowledge gained through these efforts are shared throughout the PARCO Network and incorporated into future strategies.


Retail Business

OtherBusiness

Space Engineeringand

Management Business

PARCO Group


Retail Business

Other Business


Share of Net Salesby Segment in Fiscal 2004

Operating Incomeby Segment in Fiscal 2004

P19

P27

P28

P29

Review of Operations

9.1%

Retail Business 5.4%Other Business 0.9%

Development Business 84.6%

6.8%

Retail Business 3.4%Other Business1.0%

Development Business 88.8%

PARCO-CITY CO., LTD.HOTEL NEW CRESTON CO., LTD.

NEUVE A CO., LTD.HARLEY-DAVIDSON CITY CO., LTD.PALM GARDEN CO., LTD.


PARCO CO., LTD.PARCO (Singapore) Pte LtdStraits Parco Retail Management Pte Ltd

Based on PARCO’s total producing ability in shopping complexes, we develop and operate PARCO stores in nineteen cities across Japan and one city overseas. We strengthen the competitiveness of each store by actively renovating existing PARCO stores based on our “complex-by-complex” approach. We also create new businesses that leverage the total producing ability gained from developing urban shopping complexes. These new ventures include developing areas surrounding existing

PARCO stores and new properties, developing property and business models through the acquisition of going concerns and M&A, and undertaking property management (PM). We operate the PARCO Bugis Junction shopping complex in Singapore with the intention of expanding into other areas of Southeast Asia.

We develop and manage shopping complexes, with a focus on space production, which includes the planning and design of shopping areas and construction of building interiors, facilities and electrical work. In addition, we engage in building management by providing maintenance, cleaning, and security services under consignment to ensure comfortable facility

environments. We also develop new shopping complexes beyond PARCO brand stores utilizing our expertise and knowledge cultivated over the years through PARCO’s space design and facility management operations, and actively develop new businesses that anticipate market trends.

We develop unique shops that offer fashion items and specialty stores handling such goods as motorbikes and foods under the concept of presenting new lifestyles not reflected in other specialty stores. The appeal of our specialty stores is enhanced by our efforts to improve management efficiency and strengthen our business foundations, as well as renovating existing

stores. We actively open shops outside of PARCO stores and explore opportunities for expansion into suburban areas, beyond our metropolitan presence, to increase revenues of individual shops.

We offer businesses and services that enrich everyday life, from an IT venture that provides Web-based information services to the operation of hotels. By providing services that integrate our marketing and IT expertise from the unique perspective of a retailer, we seek to deepen communication

with PARCO customers and increase contracts outside the PARCO Network. We operate four hotels in our hotel management business.

*Starting in fiscal 2004, the “Culture, IT & Other Business” has been renamed “Other Business.”*Net sales by segment include operating revenue.*Net sales and operating income by segment include transactions between business segments.

Development, management and operation of PARCO stores

Opening specialty stores for general merchandise and foods at shopping complexes

Planning and designing facilities, building interiors, and maintenance of shopping complexes

Developing IT-based customer communication services



Develop new PARCO stores and business models, and extend to property management

Aggressively open stores at shopping complexes outside PARCO stores

Generate new consigned businesses, develop new businesses and services

Increase projects for consigned customer

communication services

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PARCO

Customervisits

Sales

Advertisement andsales promotion activities

In fiscal 2004 we implemented a series of store renovation projects that included Shibuya PARCO PART3 and Nagoya PARCO, based on our “complex-by-complex“ approach and responding to the scale and market requirements of each store. Total renovations in fiscal 2004 involved 606 tenants and approximately 59,100m2. Sales generated by the renovated segments grew by 16.7% compared with the previous fiscal year. We also opened Pedi Shiodome, our first entry into an office building shopping complex.

Nevertheless, the slow recovery of some stores due to competition and the drop in sales during large-scale renovation work resulted in net sales falling 2.4% year-on-year to ¥238.41 billion and operating income declining 6.2% to ¥7.257 billion.

In fiscal 2005 ended February 2006, the first year of our Five-Year Medium-Term Management Plan, we will prepare for the opening of the Urawa PARCO and Sendai PARCO while working to achieve the plan’s goals.

• City surveys, analysis• Location and commercial area

studies• Competitor analysis• Customer surveys• Facility scale, business type, and

business model proposals• Business projections and plans

• Basic facility concept planning• Target-setting, basic MD planning• Business profit-and-loss

calculations• Establishment of basic conditions

for shop launching by tenants• Basic design proposals for

buildings and interior space

• Overall project management• Tenant recruitment• Merchandising (MD) — profit-and-

loss simulations• Establishing MD plan• Naming of buildings and floors• Advertisement and promotion

planning for store openings• Design proposals for buildings and

interior space

• Tenant administration• Customer administration• Accounting systems• Sales, advertising and promotion

planning• Store management planning• Tenant training• Public relations planning

Planning

Operations

Marketing

Designing


(PARCO CO., LTD.)

Planning OperationMarketing Designing

Tenant

Sharing of marketinginformation

Advertisement andsales promotion activities

Business model andmerchandising (MD) research

Producing environmentaldesign

Operation of tenantsessions

Organization of trainingseminars and study meetings

• Development of new PARCO stores

• Development of areas surrounding existing PARCO stores

• Development of projects through M&A business, including the acquisition of going concerns

• Consignment contracts for property management (PM)

MarketingDivision

AdministrationDivision

DevelopmentDivision

Leveraging Our Total Producing Capability to Become a Commercial Developer with a Formidable Market Presence


P20

P26

P25

Promoting Effective Operations by Energizing Sales at Existing StoresThe Marketing Division is composed of the Store Management Department and the Advertising and Promotion Department, which serve as the interface with customers, and the Entertainment Department. This division takes the initiative in reforming the operations of existing stores and leads in operational reengineering and enhancing employee awareness. To maximize its effectiveness, the division seeks to bolster the operational capability of shopping complexes, which lies at the heart of market competitiveness, through closer cooperation with the Development Division and the Administration Division. We will also expand our copyright business in the entertainment sector.

Store Management Department

Offering Quick, Precise Support for the Operations and Policies of Existing Stores


The mission of the Store Management Department is to raise the market presence of PARCO stores. The department fulfills this mission by establishing policies and offering management support for the existing nineteen stores, based on our “complex-by-complex” approach, which benefits from our total producing ability as a shopping complex developer. Equal partnership, that is, seeking to achieve growth alongside tenant companies, is the fundamental concept underlying the department’s activities. For example, the PARCO Session, comprising approximately 800 companies and 2,600 tenants, holds Tenant Training Seminars to provide opportunities for acquiring practical know-how, such as wrapping and display skills. We also organized PARCO Directors’ Club (PDC) for owners with medium-sized tenants. PDC sponsors seminars to discuss various topics in the retail industry, conducts tours, and analyzes overseas shopping centers to provide innovative concepts and perspectives as well as understanding of consumer trends.

In fiscal 2004, the Store Policy Section was established within the Store Management Department to establish closer, more versatile

cooperation between the division and individual PARCO stores. We have been building on this system, starting in fiscal 2005, to promote our Effective Store Grouping Strategy for implementing fundamental reforms in our store operation approach. In contrast with conventional store categories such as city, neighborhood, and suburb, strategic store grouping designs a grouping structure based on comprehensive market analysis and clarification of the current building framework and store operation scheme for each PARCO store. The goal is to heighten inter-company cooperation through the synergies generated by PARCO’s corporate abilities and tenant mobility. This division takes the lead in promoting market differentiation and increasing customer visits by presenting original products and business models according to theme, items, and grouping, as well as innovative zoning. The Store Policy Section was accordingly renamed the Marketing Development Section, with the role of establishing a system for faster, more precise decision-making on mid- to long-term growth strategies for PARCO and its tenants.

This section oversees tenant incubation, including the discovery and support of new tenants and the development of new business models, in addition to its leading role in the planning, leasing and marketing functions for existing stores.

To ensure the effectiveness of these actions, we work to improve the skills of employees assigned to each store in improving their skills. Accordingly, tenant information for each store, including expertise, experience, proposals, goals, and measures, is collected in a database. Accomplishments are captured in real time and knowledge is shared throughout PARCO.

In addition to these efforts, we comprehensively prioritize and then pursue customer satisfaction policies by identifying issues appropriate to the circumstances surrounding each store. This includes customer service strategies using the PEC card in collaboration with the Advertising and Promotion Department, developing amenities for the sales floor environment in collaboration with the Facility Management Department, improving back-office employee lounges, and implementing measures to counter facility aging across the entire shopping complex.

Marketing Division

2005 annual meeting of the PARCO Session View of the tenant information database

Tenant training at stores

Policy of equal partnershipPolicy of equal partnership

Consumers

Net Sales and Operating Income

2003/2

2004/2

2005/2

(Millions of yen)

(Millions of yen)

0

0

100,000 200,000

6,000 7,000

Net Sales

Operating Income

238,410

246,810

244,348

7,257

7,369

7,739

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Entertainment Department

Expanding Business by Producing Diverse Content

Advertisement & Promotion Department

Creating Advertisements and Promotions that Effectively Generate Excitement in the Market

2004 gift campaign: PARCO GIFT DAYS

2004 summer: PARCO Grand BazarFeaturing Arashi, singing group

2004 Christmas campaign: VERY CHRISTMAS PARCOFeaturing Eriko Sato, actress

2005 winter: PARCO Grand BazarFeaturing Kumagai, tap dancer

September 2004: Shibuya PARCO PART3 completed renovations; SHIBUYA TO PARCO

In fiscal 2004, PARCO Theater staged 297 exciting performances, including new plays by Kankuro Kudo (“Don-Ju”), Hirohito Goto (“Midsummer Carol”) and Koki Mitani (“Naniwa Butterfly”), as well as annual performances and concerts produced and performed by Akihiro Miwa. At sites outside PARCO, including local venues, we presented 518 performances, ranging from the musical “Candide” to a translated comedy “It runs in the family,” starring Takaya Kamikawa, for the entertainment of 340 thousand customers.

We funded the production of the film version of Koki Mitani’s play “warai no daigaku,” while seeking to produce DVD versions of performances, and published five new DVD titles, including the legendary stage performance of Shuji Terayama’s “Bluebeard’s Castle.” We will continue producing DVD titles and use PARCO Theater’s unique Internet membership system to enhance sales of performance-related novelty goods.

We plan to develop and expand our theater business as a form of entertainment that includes the discovery of new talent for future generations.

PARCO’s affiliated artist MO’SOME TONEBENDER

PARCO’s affiliated artist Analogfish

Developing and Expanding the Theater Business through New Plays and the Promotion of DVDs

Presenting Popular Films at the Uniquely Positioned CINE QUINTO

Offering a Multifaceted Coverage of the Music Scene, Centering on CLUB QUATTRO

Offering a Distinctive Publishing Business Based on PARCO’s Unique Perspective and Network

*Ticket stub allows admission at ¥1,000 on the next visit.

PEC Card

(Left) JAPAN AVANT-GARDE(Right) Cheese recipes from Atelier de Fromage

The mission for the Advertisement & Promotion Department is to ensure that each PARCO store is popular in its market, resonates with people, increases the number of visitors, and makes PARCO the subject of customer conversation. Therefore, we make use of the most effective media and methods, utilizing the results of marketing based on our “complex-by-complex” approach, to motivate customers in each market through consistency and innovation. The PARCO brand has been steadily strengthened through a series of sophisticated advertisement and promotion activities.

In fiscal 2004, we sought to achieve maximum impact from our large-scale promotional campaigns by promoting advertisements corresponding to the specific

characteristics of each area. Campaigns included the renovation of our PARCO stores in Shibuya, Chofu, Shin-Tokorozawa and Tsudanuma; the 15th anniversary of Nagoya PARCO; and the 10th anniversary of Ikebukuro P’PARCO. We also cultivated new customers through eye-catching advertisements with fresh, trend-setting talent. Our goal was to raise brand recognition and spark conversation. For on-site events, we sought to increase visitors by holding exhibitions in joint promotions with television broadcasting companies and movies.

As values become increasingly diversified, we will continue to develop effective promotions in fiscal 2005 by presenting the market with optimal advertising expressions, media strategies, and visitor attendance plans.

In addition, we will improve the effectiveness of advertising and promotion using IT to deliver real-time information and through the development of PEC Card International, PARCO’s shopping card, as a personal, interactive communication tool.

The dynamic integration of these methods reflects PARCO’s innovative advertising approach for successfully gaining the appreciation of the market.

CINE QUINTO, an exclusive theater, has stood out from the current proliferation of cinema complexes by presenting exclusive screenings of attractive films. Its unique position in the market has been established by offering services that clearly differentiate CINE QUINTO from other theaters, such as a ticket return system*.

In fiscal 2004, our offerings included “KAMIKAZE GIRLS,” which was ranked Number 3 in the Top Ten Japanese Movies in Kinema Junpo’s film magazine and for which we own distribution rights, and “SWING GIRLS,” another hit film which made news with a live performance on Koen Dori. We will secure a firm foothold in the film business by aggressively acquiring distribution rights as well as video/DVD licenses, television broadcast rights, and capital participation in domestic and overseas films.

PARCO undertakes a broad range of publishing, from art books and novels to practical guides and original calendars. The overwhelming popularity of books by Akihiro Miwa continues with the brisk sales for his latest work, “REI-Naante-kowakunaiyo.” He has become an established “face” of PARCO Publishing. We have also captured the attention of the publishing world and readers

through the successive publication of stimulating works by fresh writers including “Donju,” a collection of plays by Kankuro Kudo, and “Chie-Netsu (Teething Fever),” a first collection of works by Emi Ikematsu (also known as Shinsan Nameko), and a daring theater poster collection “JAPAN AVANT-GARDE.” In the practical guide

genre, we have pursued planning and publishing projects that appeal strongly to young women, and were quick to publish recipe books by popular shops such as

“Cheese recipes from Atelier de Fromage.”We are also enhancing our planning proposal ability across a broad range of

activities that include exhibitions and events, utilizing the Network cultivated by PARCO’s individual departments and entertainment business.

CLUB QUATTRO is the only live performance venue in the industry that operates a chain at four locations. The first store was opened in Shibuya, Tokyo in 1988, followed by Nagoya in 1989, Shinsaibashi, Osaka, in 1991, and Hiroshima in 2001. CLUB QUATTRO has established a dominating position in the Japanese music scene as a live venue that creates trends by selecting and gathering the latest bands and quality artists at the cutting edge of style and culture, from Japan and overseas, based on its unique perspective.

Focused on CLUB QUATTRO, we also undertake management of young artists, planning and production of concerts, and license business. We are involved in producing PARCO’s affiliated bands MO’SOME TONEBENDER and Analogfish, for whom we handle everything, from CD production to planning and management of concert tours.

We implemented a major redesign of “FLYER,” our free monthly paper, starting with the March 2005 issue. Under the theme of “LIVE & DIRECT,” we provide multifaceted coverage of the music entertainment scene by offering information on cultural events linked with live performances at our four CLUB QUATTRO locations, along with our “net-flyer” Web site.

(Left) “Tsubaki-Hime / La Dame Aux Camélias,“ starring and directed by Akihiro Miwa (Center) “warai no daigaku,“ a film written by Koki Mitani (Right) “Naniwa Butterfly,“ written and directed by Koki Mitani

(Left) “SWING GIRLS”(Right) “KAMIKAZE GIRLS,” starring Kyoko Fukada

TheaterOperations

FilmBusiness

MusicBusiness

PublishingBusiness

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会社概要

財務セクション

事業概況

経営戦略

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Store Management/Operation

SapporoPARCO

Opening Annex for a Broader Customer Base and Pursuing the Next Stage of Sapporo PARCO

General Manager of Sapporo PARCO: Hiroshi Shinozuka

“Franc franc DESIGN FOR LIFE” “Purple & Yellow” “LOWRYS FARM” Entrance of the Annex

“Q ” “LIMI feu” “Kitchen Kitchen” “adidas kids shop”

KichijojiPARCO

Casting a Spotlight on PARCO’s Presence and Enhancing Its Appeal as a Key Element of the Town

General Manager of Kichijoji PARCO: Kazuko Hamada

ShibuyaPARCO

Proposing Sophisticated Urban Lifestyles through a Series of Major Renovation Projects

“BABYLONE” “SEE BY CHLOÉ”

“Language” “ABC Cooking Studio”

Composed of the West, East and South Buildings, Nagoya PARCO is the largest of the PARCO stores. We accommodate over 350 shops offering fashion, accessories, sports, interior goods and music, a movie theater, a fitness club, and a hotel. We celebrated our 15th anniversary in 2004. The main customer base has expanded from the younger generation, our main customers when we first opened, to women in their late twenties and second-generation baby boomer families. We have responded with a full-scale renovation of the Kid’s Zone in summer 2004, giving the sales floor a highly fashionable taste comparable to floors for adult clothing. We also implemented a large-scale renewal of the ladies’ floor from autumn 2004 to spring 2005 to enhance the fashion aspect for adults and couples with discerning tastes.

Nagoya PARCO will continue to improve its sophisticated image to further improve our position in the market.

NagoyaPARCO

Implementing Renovations to Boost the Overall Impact of the Building in the Face of Intensifying Competition

“PROFILE stylish select gallery”

“Edition”

“Shimamura Music”

Kids’ Zone

Sapporo PARCO, which celebrates its 30th anniversary in 2005, has long led Sapporo’s young fashion market as a trend-setter at the cutting edge of fashion. However, competition has intensified in recent years with the growth of a major commercial zone in the nearby area.

Against this background, the Sapporo PARCO Annex opened in March 2005. The goal was to spark renewed recognition of Sapporo PARCO by creating a commercial zone where couples and families could enjoy shopping right next to the Main Building, with its steadfast focus on young fashion, and to enhance the appeal of the area surrounding Sapporo PARCO. The Annex is offering new tenants with strong impact for shoppers, including six new shops. ZARA, a popular Spanish brand that operates over 600 shops worldwide, is making its debut in Sapporo. We also implemented renovations to bring out the synergy between the two buildings, including significant enhancements to the seventh floor accessory zone and the eighth floor for restaurants.

Aside from opening the Annex and implementing renovations, we also intend to boost the overall skills and capabilities of existing tenants and sales staff. Our 30-year history challenges us to do even better, and therefore we will return to the roots of PARCO’s business success to create the next platform for the development of Sapporo PARCO.

Having started with large-scale renovations during our 30th anniversary in 2003, our ongoing innovation efforts at Shibuya PARCO reached their final stage with the completion of the full-scale renewal of PART3 and renovation of the upper floors of PART2 in autumn 2004.

In PART3, we offer a varied assortment of 80 shops, including many that were making their Tokyo debut, with each floor organized around a different concept. We also installed a new escalator in the center of the building and created an open environment through the generous application of glass in the exterior walls on the first and second floors. In PART2, we increased the space for interior goods and sundries to offer high-class lifestyles targeting adult couples.

Virtually reborn as the result of renovation work, Shibuya PARCO will continue setting the trend for urban lifestyles.

Kichijoji is a town characterized by commercial complexes and roadside shops, each with its own unique presence amid the town’s unified commercial zone. Since 2000, Kichijoji PARCO has undergone significant renovation to reinforce its position as a leading fashion destination. As a result, we have maintained solid performance for four consecutive years in terms of year-on-year sales growth.

In renovations undertaken during spring 2005, seventeen new shops were introduced and eight shops were updated to project a fresh, new appeal. The second floor in particular was upgraded to satisfy our target market of adult women with sophisticated tastes, by offering urban select shop Q and LIMI feu, a brand that participates in the Tokyo Collection. We also significantly bolstered the seventh floor children’s brands with a selection of distinctive labels such as adidas kids shop KICHIJOJI, the first Kids Shop launched by the world famous multi-sports brand “adidas.” In addition, we created an infant care room with an area for nursing and installed benches beside escalators to offer customers greater comfort and convenience.

Autumn 2005 marks the 25th anniversary of Kichijoji PARCO. We hope to continue highlighting our presence as we contribute to the overall appeal of the entire town.

The Finance & Accounting Department engages in a wide range of support activities pertaining to the consolidated financial affairs of PARCO CO., LTD. and the PARCO Network companies. We aggressively invest in both new and existing businesses, clarify the strategic positioning of companies in the Network, improve our financial standing by reducing interest-bearing debt and strengthening profitability, and make optimal use of our assets.

In addition, we are building a system to properly distribute budgets and costs by store, while at the same time sharing knowledge and responding to the need for disclosure of quarterly financial results. By improving and supporting the utilization of PARCO’s enterprise resource planning and information systems, we will maintain a systematic foundation for accomplishing our medium-term management goals.

Finance & Accounting Department

Creating Strategic Policies and Building an Information Infrastructure

Property Management Department

As the trend toward property-related financial businesses gains momentum, the separation between property ownership and management has accelerated in Japan, requiring property management in commercial development projects. At present, companies from a broad spectrum of industries are involved in property management, which is invigorating and expanding the market. Distinct from the management of office and housing property, shopping complex property management requires long-term strategies for maintaining and increasing customer visits. In this respect, PARCO’s total producing ability, based on extensive data and objective measures, gives us a competitive edge in the property management market.

PARCO enjoys three major competencies in property management. The first major competency is the tenant Network we have organized over the years as a developer of shopping complexes. The second major competency is our real-time information gathering ability cultivated through the operation and management of nineteen stores in Japan and one store overseas. Our third major competency is represented by PARCO’s corporate policies and human resources, which consistently enhance the value of shopping complexes as well as our corporate value. These competencies provide significant strengths in the face of increasingly active development of shopping centers, since we stand out in contrast to growing uniformity and standardization. These competencies

have led to our success in winning PARCO’s first full-scale property management contract from Ito-Yokado Co., Ltd.

In fiscal 2005 the Property Management Department, which was established by transferring operations from PARCO Space Systems Co., Ltd., will expand the consigned property management business by applying the comprehensive expertise of the PARCO Network gained from more than 30 years of experience at the forefront of the industry, including expertise in space planning and delivering customer enjoyment. Our overall objective is to increase the orders of consigned projects from clients by offering maximum profit for commercial complexes at optimal cost.

Utilizing Network Momentum and the Advantages of Actual Data Compiled Over Years of Experience

Human Resources & General Administration Department

Cultivating Employee Motivation

Facility Management Department

Enhancing the Asset Value of Shopping Complexes

The Facility Management Department is responsible for maintenance and financial management of buildings. We also manage property assets, from facility management to contracts with landlords, to put into practice our Corporate Mission of “creating futuristic, innovating spaces that brim with hospitality, providing a beautiful experience for people visiting our stores.” In response to emerging public concern for the environment, barrier-free services, safety, risk management, and lifecycle cost as they relate to shopping complexes, we manage our facilities with complete commitment to fulfilling our social responsibilities. At the same time, we concentrate on the planning and implementation of actions to improve asset value and facility functionality.

The Human Resources & General Administration Department is responsible for planning and implementing policies related to personnel and general administration. We are reforming our personnel system to encourage all employees to carry out their tasks with enthusiasm by introducing an ability and performance-based approach and incorporating it into the annual salary system. We provide a system of education and training to nurture next-generation managers, encourage personnel interchanges among Network companies and implement the U-29 PARCO Trial hiring plan that emphasizes individual excellence. We also undertake centralized processing of salary operations for the entire Network. In our administrative operations, we established a compliance system for risk management and the Personal Information Protection Law, while setting shareholder policy in collaboration with the Corporate Planning Department.

Accumulating Varied Expertise in the Development and Management of Shopping ComplexesThe Development Division was newly established to oversee the New Project Development Department and the Property Management Department that was transferred from PARCO Space Systems Co., Ltd. The division will seek to create profitable new businesses, from new store development and property management to contracts for asset management, while concurrently acquiring knowledge, expertise, and information beyond the scope of the existing PARCO by conducting pilot models of new businesses and new business domains.

New Project Development Department

Implementing Comprehensive and Meticulous Store Planning that Only PARCO Can Accomplish

Development Business Development Division

Supporting Income Generation Based on Diverse Functions and ExpertiseThe mission of the Administration Division is to efficiently and effectively apply our producing ability, which represents our unique strength as a developer of commercial complexes. To fulfill this mission, the division has developed a system for consolidating the various functions and expertise that has been cultivated by individual stores and divisions in the operation and management of shopping complexes and forging an organic link with income-producing departments. As each department advances in its field of specialization, the ability to quickly exchange the latest information and expertise provides vital support to the planning and implementation of measures in response to change.

Development Business Administration Division

Corporate Planning

Corporate Planning seeks to strengthen our governance system under consolidated management while developing and nurturing income-producing businesses to enhance corporate value for the entire Network. Starting in fiscal 2005, we are responsible for promoting and managing the progress of our Five-Year Medium-Term Management Plan. We also serve as the secretariat of the newly established CSR Committee, and will establish a CSR system in collaboration with other departments. In addition, Corporate Planning is responsible for the promotion of PR activities based on the management plan, investor relations, and knowledge management designed to improve employee awareness through sharing and utilization of information.

Committees Secretariat

The Committees Secretariat operates independently of the executive departments to handle the administrative work required to ensure the smooth, effective operation of the Nominating, Audit, and Compensation Committees. It establishes and promotes each committee’s annual plan, convenes the committees, and performs other administrative tasks as assigned by the committees.

In addition, the Committees Secretariat helps committee members understand the agendas prior to meetings by conducting briefings and distributing meeting documents to each committee member (mainly external directors), thereby improving the effectiveness and efficiency of each committee.

Group Auditor Office

Other Organizations

The Group Auditor Office endeavors to identify management risks inherent in PARCO CO., LTD. and the PARCO Group companies as quickly as possible and to minimize them before seeking new business opportunities. To this end, we have also established a system of internal controls and an environment for risk management across the entire Network. The Group Auditor Office plays an integral part in developing a sound management environment for PARCO CO., LTD. and the PARCO Network companies by minimizing risk through cross-organizational activities throughout the entire Group.

The mission of the New Project Development Department is to utilize PARCO’s total producing ability to create profitable new businesses, ranging from new store development, M&A projects, and new businesses derived from the process of developing shopping complexes. In exploring development projects, we conduct detailed feasibility studies to analyze business opportunities, drawing upon extensive data on competitive conditions, the formulation of target strategies, and plans for attracting tenants. We develop new stores with a focus on major metropolitan areas with large populations.

Once we have determined our commercial strategy, we begin planning for merchandise composition and promptly negotiate locations using our tenant database. Cross-functional collaboration with the Facility Management Department and Advertising & Promotion Department, as well as across our

organization, allows us to formulate a comprehensive, meticulous business plan and to propose shopping complexes that are perfectly tailored to specific locations and fully prepared to maintain a competitive edge. As a result of these efforts, in fiscal 2004 we opened Pedi Shiodome, our first entry into an office building shopping complex, and opened Sapporo PARCO Annex by acquiring a going concern. We will seek to further expand our business by applying an innovative approach to store development as well as planning and leasing methods. Looking beyond fiscal 2005, we will pursue development operations related to the Urawa PARCO, scheduled to open in autumn 2007, and the Sendai PARCO, scheduled to open in spring 2008.

Apart from these businesses, we are also involved in other new business development projects, such as the production of Web Across, a pioneer in street marketing based on

fixed-point operation and a popular Web-based magazine that has passed the 1.5 million page-view mark by approximately 200,000 unique hosts. Other new projects include individual projects commissioned by clients, marketing for existing stores, and providing support for store planning projects.

Rendering of Urawa PARCO

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会社概要


経営戦略

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Net Sales and Operating Income(Millions of yen)0 10,000 20,000

(Millions of yen)0 200 400

Net Sales

Operating Income

25,729

26,949

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230

23,577139

2003/2

2004/2

2005/2

Net Sales and Operating Income(Millions of yen)

(Millions of yen)

0

0

20,000 40,000 60,000

200 400 600

Net Sales

Operating Income

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277

279

37,703580

15,320

Managem

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ores

Needs for commercialproperties investment

Needs for increasingthe value of shopping

complexes

Optimizing operating costs

Needs to improvingoperating efficiency

ComprehensiveEquipment

Division

DevelopmentBusinessDivision

SpaceProduction

DivisionPSS

BuildingManagement

Division

Developing a Variety of New Shopping Complex Businesses by Grasping Changes in the Market, Technology, and Society

In fiscal 2004, we observed a considerable increase in contracts from tenants for building interior works related to renovations at large-scale stores, such as Shibuya PARCO PART3, with additional contracts from shopping complexes and external developers to which we provide consulting services. We also actively pursued new businesses, including an agency business for handling new products and a call center business, while continuing

to cut costs and improve our operation, which led to an improvement in our profit margin. As a result, we reported net sales of ¥25.729 billion, up 9.1% compared with the previous fiscal year, and a significant leap in operating income to ¥559 million, up 301.8% year on year.

In fiscal 2005, we will aggressively develop new businesses and cultivate and strengthen businesses with growth potential.


Operating Unique Specialty Stores that Capture Current Trends, with an Eye on Market Potential

In fiscal 2004, NEUVE A CO., LTD. followed a scrap and build approach to open 10 new stores while withdrawing from 3 existing ones, expanding the total number of stores to 92. At the same time, the company bolstered the appeal and customer approach of 16 existing stores through renovations. As a result, net sales for NEUVE A CO., LTD. grew 4.1% from the previous fiscal year, marking the fourth consecutive year of annual sales growth since the company was established. However, consolidated net sales for the Retail Business fell 59.4% year-on-year to ¥15.32 billion, and operating income

fell 53.3% to ¥277 million, as the number of consolidated subsidiaries decreased due to the sale of stocks in LIBRO CO., LTD. in fiscal 2003 and of WAVE CO., LTD. in fiscal 2004.

In fiscal 2005, we will aggressively pursue new store openings by NEUVE A as part of our plan for deepening and broadening our peripheral businesses under the Five-Year Medium-Term Management Plan. We plan to open 48 new stores in the next five years to develop a 140-store organization to contribute to Network income by accelerating the pace of new store openings outside PARCO stores.

Retail Business

Maintaining the Concept of a Specialty Store for Fashion Accessories

http://www.neuve-a.com/

Keeping an Eye on the Future as a Community-Based, Trendsetting Specialty Food Company

“annabeille” “POKER FACE”

http://www.palmgarden.co.jp/

Formerly a specialty liquor store, Palm Garden was transformed and re-launched in March 2003 as a comprehensive food company. We operate three business models: Palm Garden, a high quality supermarket; Food Market, a total food store for department store settings; and Vino Mercato, a specialty liquor shop that mainly handles wine. The stores are located at PARCO stores in Chofu, Hibarigaoka and Oizumi Nos Vos.

PARCO SPACE SYSTEMS CO., LTD. (PSS) NEUVE A CO., LTD.

PALM GARDEN CO., LTD.

Winning the Satisfaction, Excitement and Loyalty of Customers by Proposing New Motorcycle Lifestyles

HARLEY-DAVIDSON CITY CO., LTD.

As the official sales representative for Harley-Davidson Japan, we sell motorcycles, parts, and goods, and provide related services at the Shibuya and Tanashi stores. Having celebrated our 10th anniversary, we are proposing new bike-oriented lifestyles toward further growth by appealing to various motivations, including two-rider touring on highways permitted by recent deregulation. We will strive to raise the quality of our employees and establish a sales system that generates customer satisfaction, excitement, and loyalty.

NEUVE A focuses on the concept of a specialty shop for fashion accessories and operates a variety of specialty stores including TiC TAC for

watches as fashion accessories, POKER FACE for glasses, COLLECTORS for men’s items, ROSEMARY for cosmetics and cosmetic accessories, and “annabeille,” a specialty store for women’s fashion accessories that was newly established last year. We develop innovative business models for unique shops that serve consumers seeking new lifestyles not provided for by other shops. Since our establishment in 2001, we have been honing the management of our portfolio, comprising

five specialty stores with different target customers and product composition, to steadily strengthen our financial standing and solidify our business base. We will further accelerate the pace of new store openings by each specialty store starting in fiscal 2005 under our new Five-Year Medium-Term Management Plan, which ends in fiscal 2009. In particular, we intend to expand “annabeille” from 2 stores in fiscal 2004 to 21. We will nurture and strengthen the brand as a fifth business by aggressively seeking store locations outside PARCO stores, including the launching of stores within suburban shopping centers that are currently undergoing a rush of new store openings, in addition to existing locations in urban areas.

We will actively implement a unique approach for bolstering merchandising targeting women by planning joint stores by “annabeille” and ROSEMARY. We will also focus attention on existing stores and aim for further growth as a company with a unique presence that operates many trend-setting specialty store business models.

Evolving into a Unique Company Offering Extensive Expertise and Services in the Development and Operation of Shopping Complexes

PARCO SPACE SYSTEMS CO., LTD. (PSS) steadfastly monitors market trends, such as commercial properties investment and the realignment

of shopping complexes caused by intensifying competition. Its mission as a strategic company of the PARCO Network is to create new income-producing businesses in collaboration with PARCO and to contribute to Network income by independently developing businesses.

The Space Production Division has been handling environmental design, building interior supervision and interiors for PARCO stores nationwide and for large-scale shopping complex development projects such as Amu Plaza Kagoshima, Cocoon Shintoshin (Saitama New Urban Center) and Pedi Shiodome in fiscal 2004. We are developing new clients by applying PARCO’s expertise and Network, built upon 30 years of experience.

The Comprehensive Equipment Division is strategically involved in construction work related to information and communications facilities in anticipation of a ubiquitous information society. It also provides a call center service, mainly targeting restaurant operations, where the need for outsourcing is growing. Thanks to the helpful advice and nationwide mobility we offer based on our ample experience and expertise in the area of facility works, we have been rewarded with a steady flow of contracts.

The Building Management Division is responsible for the maintenance of PARCO

stores and is also engaged in the construction supervision business for building owners and developers. We provide a broad range of expertise, especially with respect to building interior supervision, and we are involved in design direction, promotion and construction management. We also aggressively expand sales outside the Network, as in our agency business, in which we seek to meet such needs as greater operating efficiency, cost reduction and environmental responsibility by handling new products, including ultra-hard, semi-permanent coating materials and non-polluting construction methods that do not generate cloth waste, to prevent “sick building” syndrome.

In fiscal 2005, we established the Development Business Division to provide services and products that represent the ideal solution for client needs through measures already implemented as well as by accurately grasping the underlying changes in society, markets, and technology. We will develop new business models and new clients by

honing the design and proposal capabilities we have cultivated through our work with PARCO stores. Safety, health and environmental responsibility are becoming increasingly important factors in determining the quality of a shopping complex. Therefore we set up the Quality Audit Office to address these issues and to enhance customer satisfaction. We plan to raise the overall capabilities of PSS by utilizing the cross-organizational functions of each division to grasp the changes underway, while developing businesses, services and products that boast the highest levels of expertise. We are committed to taking the next leap toward becoming a company with strong market competencies.

President: Katsuhiko TakedaPresident: Daizaburo Suzuki

“Palm Garden”

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51

Financial Review


Consolidated Balance Sheets

Consolidated Statements of Income

Consolidated Statements of Shareholders’ Equity

Consolidated Statements of Cash Flows



Selected Financial Data for Principal Companies of the PARCO Group

Contents

Financial Section

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gy Providing High Value-Added Services, Utilizing Specialized Expertise

PARCO-CITY is responsible for the IT operations of the PARCO Network and the customer communication business, such as planning for PEC cards, while also expanding into Web-based customer communication services outside the Network. We obtained TRUSTe certification for protecting personal information for the safe handling of customer information and enhanced information-related security. HOTEL NEW CRESTON CO., LTD. continues

to operate four hotels, including the Nagoya Creston Hotel and Chofu Creston Hotel, which serve as magnets that attract customers to PARCO stores. As a result, in fiscal 2004 we reported net sales of ¥2.51 billion, down 17.0% from the previous fiscal year, and operating income of ¥79 million, compared with an operating loss of ¥400 million in the previous year.

Other Business

PARCO-CITY was established in 2000 as a specialized group pursuing Internet businesses. Since then, we have forged closer ties between PARCO and its customers through Web sites and E-mail distribution, and accumulated a wealth of IT expertise in the areas of online shopping, customer data management and various surveys and analyses. We have expanded our business domains to personnel and IR, which constitute a communication business with stakeholders other than our customers. The expertise and services cultivated through our actual businesses with PARCO have won the acclaim of companies outside the PARCO Network for the abundance of experience and practicality, allowing us to grow to the point of providing such services to numerous shopping centers and retail franchises.

Since 2003, we have added planning and operation of PARCO’s shopping card, PEC Card International, to our business. While upgrading our business execution abilities by analyzing purchasing data and survey results, planning direct mailings and editing “PEC-

NEWS,” a magazine for PEC cardholders, we have systematically organized our CRM expertise for optimizing customer relations and improving customer satisfaction.

We are actively involved in supporting corporate customer relations as a communication consulting company, drawing upon our expertise in three areas we have cultivated over the years: marketing support for shopping complexes, IT utilization geared to practical application, and CRM solutions. In addition, we are developing and providing a wide range of services for the mutual benefit and sustained prosperity of customers, clients, and for ourselves by offering solutions for a variety of issues, such as building a loyal customer base, business process reengineering, and improving the value of brands.

Offering Communication Consulting by Integrating Our IT and CRM Expertise

http://www.crestonhotel.co.jp/

http://www.parco-city.co.jp/

PARCO-CITY CO., LTD.

HOTEL NEW CRESTON operates hotels in four locations — in the upper floors of Nagoya PARCO and Chofu PARCO, in Shibuya, and in Izu. We endeavor to provide conscientious service brimming with hospitality under the motto of “service that touches the heartstrings of customers.” We focus on providing such creative services as the planning of unique wedding ceremonies tailored to the needs of individual customers, and providing healthy menus with a rich seasonal variety, featuring

ingredients that our chefs have inspected and selected at food markets to ensure quality and safety. Our goal is to be a unique hotel operator through such actions as eliminating service charges commonly practiced in the hotel industry.

Developing a Unique Business that Touches the Hearts of Customers

HOTEL NEW CRESTON CO., LTD.

Home page of parco-city.co.jp

“PEC NEWS,” a magazine for cardholders

Shibuya CRESTON HOTEL

Net Sales and Operating Income Net Sales

Operating Income

-262003/2

2004/2

2005/2

(Millions of yen)0 1,000-1,000 2,000 3,000

(Millions of yen)0 100-100 200 300

-43,025

2,510

3,484

79


(Millions of yen)Net Sales and Operating Income (Loss) by Segment

Net Sales and

Operating Income (Loss)

Net Sales*

(1) External Sales to Customers

(2) Internal Sales between Segments or Transferred Amount

Total

Operating Expenses

Operating Income

2,216

294

2,510

2,431

79

14,534

11,195

25,729

25,170

559

4,675

10,645

15,320

15,043

277

237,849

561

238,410

231,152

7,257

259,275

22,696

281,971

273,797

8,173

–

(22,696)

(22,696)

(22,963)

267

259,275

–

259,275

250,833

8,441

*Net sales by segment include operating revenue.

Others Business

Space Engineeringand

Management BusinessRetail

BusinessDevelopment

Business TotalEliminations

orcorporate

Consolidated

Financial Review

Operating Results:

Net sales

Operating income

Net income

Financial Position:

Total assets


Interest-bearing debt

Debt equity ratio (times)

Per Share Data:

Net income per share*2


Cash dividends*3

Major Indicators:

Return on equity (ROE)

¥297,614

8,348

2,373

222,541

55,209

80,150

1.45

¥ 30.94

717.59

8.00

4.4%

2003

¥310,624

8,325

2,454

230,561

52,916

79,829

1.51

¥ 34.38

702.97

8.00

5.0%

2002

¥307,482

7,587

683

248,268

44,536

100,480

2.26

¥ 12.18

794.52

8.00

1.5%

2001

¥264,849

6,360

484

239,439

49,469

97,594

1.97

¥ 8.63

882.52

8.00

1.0%

2000

¥275,689

6,227

(2,935)

241,836

49,476

92,827

1.88

¥(52.36)

882.64

8.00

－

1999

¥257,625

8,441

1,742

187,993

61,760

48,732

0.79

¥ 21.87

763.90

10.00

3.0%

2005

¥281,478

8,894

2,791

203,688

54,575

67,341

1.23

¥ 36.97

767.07

8.00

5.1%

2004

$2,477,163

81,163

16,750

1,807,625

593,846

468,577

$0.210

7.345

0.096

2005

Overview

Operating Results

Performance by Segment

Net Sales

Net Sales* and Ratio to Total Sales for Each Segment


¥238,410 million (84.6%)

Space Engineering and

Management Business

¥25,729 million (9.1%)

Retail Business

¥15,320 million (5.4%)

Other Business

¥2,510 million (0.9%)

In fiscal 2004, the Japanese economy generally followed a path of gradual recovery. Corporate profitability improved on the back of export growth and increased capital investment. The business environment for the retail sector, however, remained harsh due to unpredictable weather conditions, including record summer heat and a series of typhoons, as well as intensifying corporate competition that led to the construction of a flood of new large-scale shopping complexes.

Under these circumstances, the PARCO Group companies focused on

their core businesses. In line with these efforts, the Group implemented aggressive sales activities by refurbishing existing PARCO stores and opening new stores, and improved its financial structure by selling treasury stock and applying impairment accounting to fixed assets.

The PARCO Group consolidated all of its 10 subsidiaries and applied the equity method to 4 affiliates. Of the 15 subsidiaries that were consolidated in the previous year’s financial statements, 5 companies have been excluded from consolidation due to stock sales or company liquidation.

The PARCO Group’s consolidated net sales for fiscal 2004 decreased by ¥23.853 billion, or 8.5%, from the previous fiscal year, to ¥257.625 billion (US$2,477 million). Reduced sales resulting from the sale of a subsidiary in Retail Business and the effects of intensified competition in the Development Business dampened the increased sales in the Space Engineering and Management Business.

*In addition to the above, Mori Trust Holdings Inc. and Mori Trust Co., Ltd. also constitutes an affiliate.*Starting in fiscal 2004, Culture, IT & Other Business has been classified under Other Business.*On April 14, 2005, shares of Seiyo Investment (S) Pte Ltd owned by PARCO (Singapore) Pte Ltd were transferred to CapitaLand Retail (BJ) Investments Pte Ltd.

The Development Business continued to refurbish existing stores, create new stores, and plan sales. With respect to existing stores, a series of refurbishment projects was implemented appropriate to the size, market condition, and status of competition for each store. Efforts were made to acquire new tenants based on the “complex-by-complex” policy. In the area of facilities and environment, the objective was to create shopping facilities that offer safe, comfortable, clean and pleasant space and services.<Shibuya PARCO>Following the April 2004 renewal of the Quattro Building, PART3 Building was fully renovated in September followed by the renovation of the upper floors of PART2 Building in October. In addition to enhancing customer convenience by installing a new down escalator, a liberating, expansive space was created for PART3 by allowing natural light to stream in through the glassed sections of the first and second floors. This completes the full renovation of buildings in the Shibuya area, thereby strengthening the image of each building and enhancing their synergy. (Scale of renovation: 105 tenants, 9,700 m2)<Nagoya PARCO>For the first time since their opening, renovations were completed for the shared environment for the children’s wear zone on the 6th Floor of the West Building, as well as the fashion zone on the 3rd and 4th Floors of the West Building, and the South Building. These efforts were implemented in anticipation of competition with the new annex Mitsukoshi LACHIC, which is scheduled to open in March 2005. Efforts were also made to broaden the customer base and attract new customers by creating a fashion zone for adult women, enhancing responsiveness to younger family member needs, and actively turning over tenants in the young fashion zone. (Scale of renovation: 71 tenants, 5,100 m2)<Chofu PARCO>The fashion floors from the first to the fourth floors were completely restructured in 2004 to coincide with the 15th anniversary of the store’s opening. In response to the maturing of the market over that time, the largest-scale renovation for the store was implemented, including

overhauling the main entrance. (Scale of renovation: 62 tenants, 4,800 m2)<Tsudanuma PARCO>In the face of growing competition from the opening of a new shopping center, renovations were made to re-establish the store’s status as a specialized, fashion-centered building in an excellent location in front of the station. The entrance was expanded and improvements were made to the shared environment of the floors. (Scale of renovation: 62 tenants, 5,700 m2)<Shin-Tokorozawa PARCO>PARCO B1 Foods Floor was completely renovated, and tenants that support quality lifestyles were introduced or reorganized to enhance movement, encouraging customers to enjoy shopping throughout the entire building. (Scale of renovation: 36 tenants, 6,000 m2)

The scale of renovation in fiscal 2004 was unprecedented, totaling 606 tenants and covering approximately 59,100 m2. Sales generated by the renovated segments grew 116.7% compared to the previous fiscal year.

Aggressive renovation efforts were well-received by customers, and as a result, average spending per customer rose for the third consecutive year to ¥3,632, although the number of customers declined to 97.7% of the level in the previous year.

Meanwhile, some stores recovered slowly from the negative impact of competition, and sales declined during large-scale renovation work. As a result net sales fell by ¥5.938 billion, or 2.4% year-on-year, to ¥238.410 billion (US$2,292 million).

With respect to new store openings, Pedi Shiodome was opened in February 2005 inside the Tokyo Shiodome Building as the our first store launched in an office building shopping complex. In addition, a new building with a floor area of 3,200 m2 was opened to revitalize Sapporo PARCO in preparation for its 30th anniversary. Other openings included the Urawa Station East Exit Store (floor area: 67,000 m2) in Saitama City, Saitama Prefecture, in autumn 2007, and the Sendai Station West Exit Store (floor area: 26,000 m2) in spring 2008.

Millions of yen Thousands of U.S. dollars*1

Yen

Percentage

PARCO CO., LTD. and Consolidated SubsidiariesFor the years ended 28th/29th February, 1999, 2000, 2001, 2002, 2003, 2004 and 2005

*1 U.S. dollar amounts have been translated, for convenience only, at the rate of ¥104 = US$1*2 Adjusted by the weighted average number of shares*3 Historical

U.S. dollars

•Development Business

0 50,000 100,000 150,000 200,000 250,000 300,000

2001/2

2002/2

2003/2

2004/2

2005/2

Net Sales

(Millions of yen)

281,478

257,625

307,482

310,624

297,614

Outline of the PARCO Group

Development Business Development, management, maintenance and operation of shopping centers PARCO (Singapore) Pte Ltd

Seiyo Investment (S) Pte LtdStraits Parco Retail Management Pte Ltd and 2 other affiliates

Other Business IT-based customer communication services, hotel operation

PARCO-CITY CO., LTD.HOTEL NEW CRESTON CO., LTD. and 2 other affiliates

Main business Company name

PARCO Co., Ltd.

Subsidiaries:

Retail Business Sales of clothing and sundries

NEUVE A CO., LTD.HARLEY-DAVIDSON CITY CO., LTD.PALM GARDEN CO., LTD.

Subsidiaries:

Space Engineering and Management Business Designing and construction of building interiors, cleaning, security surveillance and maintenance of buildings

PARCO SPACE SYSTEMS CO., LTD. and 1 other subsidiarySubsidiaries:

Subsidiaries:

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*Figures for the number of customers and average spending per customer are based on combined sales for each store. Combined sales for each store indicates overall sales strength of the stores and includes sales from PARCO Theater and fixed rent tenants as well as specialty store tenants.

The Development business is operated primarily by PARCO CO., LTD. PARCO seeks and selects tenants and signs tenant agreements under which the tenants open their shops (specialty shops) within PARCO stores. PARCO undertakes marketing and sales promotional activities such as promotional events to encourage customer turnout while the tenant conducts sales activities to encourage customer purchases. The amount of customer purchases is received by PARCO on a daily basis as sales, and after a set period of time, PARCO in turn pays the tenant after deducting rent based on the tenant agreement as the amount of retail goods purchased on a semi-monthly basis. In a typical tenant agreement, the amount of rent is calculated by multiplying monthly sales by a basic rent rate, and a minimum amount—calculated by multiplying the standard amount of sales by the basic rent rate—is guaranteed, while a diminishing rent rate is applied for sales that exceed a given level. Therefore, as tenant sales from customer purchases increase, PARCO’s rent income increases in terms of absolute amount, and the tenant’s rent rate decreases. Thus gross margin for the Development business may fall below those of other retailers, but operating income is somewhat higher than department stores, because sales and general administrative expenses such as marketing and personnel costs can be kept low. On the other hand, the Development business has the advantage of not having the risk of carrying inventory or the risk of credit losses on trade receivables.

TenantCustomers

Promotional events and other activities

Sales activitiesSales fromcustomerpurchase

Profit Structure for the Development Business

PARCO

Receipt of salesafter deduction

of rent

Receipts fromsales by tenants

Payment of amountafter deduction of

rent (cost of sales by tenants)

•Space Engineering and Management BusinessNet sales of PARCO SPACE SYSTEMS CO., LTD. grew 11.1% year-on-year, due to a substantial increase in orders for interior finishing work from tenants along with the large-scale renovations of Shibuya PARCO Part 3 and the other PARCO stores. In addition, an increase in external orders for work, including contracts from a shopping complex—a client of the company’s consulting services—and external developers contributed to sales growth.

The company also won a contract for pre-opening support services for Ito-Yokado Co., Ltd.’s Ario Kawaguchi, scheduled to open in autumn 2005, on condition that the property management contract will also be awarded to the company.

As a result, net sales increased by ¥2.152 billion compared with the previous fiscal year, or 9.1%, to ¥25.729 billion (US$247 million).

•Retail BusinessNEUVE A CO., LTD. maintained its aggressive scrap-and-build approach, opening 10 new stores and closing 3 to expand the number of stores to 92. The company also broadened the appeal of existing stores by refurbishing 16 existing stores. These efforts resulted in a 4.1% year-on-year growth in net sales, representing the fourth consecutive year of sales growth since its establishment.

However, due to the decrease in the number of consolidated companies, including the transfer of shares of LIBRO CO., LTD. during fiscal 2003 and of WAVE CO., LTD. during the fiscal year under review, net sales fell by ¥22.382 billion, or 59.4%, from the previous fiscal year to ¥15.320 billion (US$147 million).

•Other BusinessPARCO-CITY CO., LTD. pursued its core business of IT management for the PARCO Group and customer communication services, such as planning services for PEC cards. At the same time, the company obtained accreditation for TRUSTe, a certification for protecting personal information, in an effort to strengthen its consulting capabilities and enhance information-related security.

Net sales decreased by ¥514 million, or 17%, compared with the previous fiscal year, to ¥2.510 billion (US$24 million).

Gross profit on sales, arrived at by deducting cost of sales from net sales, decreased by ¥6.406 billion, or 14.9% compared with the previous fiscal year, to ¥36.511 billion (US$351 million). The ratio of gross profit margin on sales to net sales (hereafter referred to as gross profit margin on sales) declined by 1.0% from 15.2% in the previous fiscal year to 14.2%.

Operating revenue increased by ¥116 million, or 7.6%, to ¥1.649 billion (US$16 million). Gross profit decreased by ¥6.284 billion, or 14.1%, to ¥38.163 billion (US$366 million). As a result, the ratio of gross profit margin to net sales dropped from 15.8% in the previous fiscal year to 14.8%.

SGA expenses were significantly reduced, decreasing by ¥5.831 billion, or 16.4% year-on-year, to ¥29.722 billion (US$285 million). Consequently, the ratio of SGA expenses to net sales fell by 1.1%, from 12.6% in the previous fiscal year to 11.5%. This decline was mainly due to the personnel reduction and decreased rent expenses related to the sale of subsidiaries in the Retail Business.

As a result, operating income fell by ¥453 million, or 5.1% compared with the previous fiscal year, to ¥8.441 billion (US$81 million). Gross profit margin on sales improved from 3.2% in the previous fiscal year to 3.3%.

Overview by Segment

•Development BusinessThe Development Business reported a year-on-year decrease in operating income of ¥481 million, or 6.2%, to ¥7.257 billion (US$70 million). As a result, the operating income margin fell from 3.2% in the previous fiscal year to 3.0%. The decrease was primarily due to the decline in operating income caused by a slow recovery from the negative impact of competition at some stores and decreased sales during large-scale renovation work.

•Space Engineering and Management BusinessOperating income for the Space Engineering and Management Business increased substantially by ¥419 million, or 301.8%, to ¥559 million (US$5 million), primarily due to increases in net sales and operating income accompanying a rise in interior design business orders. As a result, the operating income margin rose from 0.6% to 2.2%.

•Retail BusinessOperating income from the Retail Business fell significantly by ¥303 million, or 52.3%, to ¥277 million (US$3 million), mainly due to the sale of a subsidiary that had reported approximately ¥400 million in operating income for the previous fiscal year. As a result, the operating income margin rose from 1.5% to 1.8%.

•Other BusinessOperating income from the Other Business improved by ¥83 million to ¥79 million (US$0.7 million).

Other expenses improved by ¥526 million year-on-year, to ¥4.239 billion (US$41 million). Major factors included a ¥2.413 billion loss due to the early adoption of impairment accounting for fixed assets, with additional losses of ¥516 million on the sale of fixed assets and ¥695 million from the disposal of fixed assets; other income totaling ¥730 million, including proceeds from the sale of investment securities and fixed assets in non-core businesses; and an improved financial balance sheet due to reduced interest-bearing debt.

As a result of the above, net income decreased by ¥1.048 billion, or 37.6% compared with the previous fiscal year, to ¥1.742 billion (US$17 million). Net income per share fell from ¥36.97 in the previous fiscal year to ¥21.87. ROE (Return on Equity) declined from 5.1% to 3.0%.

PARCO considers returning profit to shareholders to be a top priority. The company is committed to profit distribution in the form of stable payment of dividends, taking into consideration business performance and payout ratio. The company will also strive to improve its financial condition and strengthen its management base by increasing internal reserves to support future business expansion. Based on this medium-term policy, we intend to strengthen our future management base and to express our gratitude for the support of our shareholders by raising annual dividends by ¥2 to ¥10 per share.

Total assets decreased by ¥15.695 billion, or 7.7%, to ¥187.993 billion (US$1,808 million). Consequently, the total asset turnover ratio remained unchanged from the previous fiscal year at 1.32. Current assets decreased by ¥8.642 billion, or 24.8%, to ¥26.242 billion (US$252 million), mainly due to a ¥4.056 billion decrease in cash and cash equivalents and a ¥2.345 billion decrease in notes receivable and accounts receivable.

Fixed assets decreased by ¥7.053 billion, or 4.2%, to ¥161.75 billion (US$1,555 million). While there was an increase from new investments, the overall decrease proved larger, as tangible fixed assets fell by ¥481 million from the previous fiscal year due to the early application of impairment accounting to fixed assets. Investments and other assets fell by ¥6.378 billion due to payments for fixed leasehold deposits and other factors. ROA (Return on Assets) improved from 3.7% in the previous fiscal year to 4.1%, due to a consistent effort to reduce total assets and an increase in ordinary income.

Total liabilities fell by ¥22.566 billion, or 15.5%, to ¥123.485 billion (US$1,187 million). Interest-bearing debt decreased significantly by ¥18.609 billion, or 27.6%, to ¥48.732 billion (US$469 million), due to reductions in short-term bank loans and long-term bank loans.

Current liabilities decreased by ¥8.617 billion, or 15.8%, to ¥45.834 billion (US$441 million), due to a ¥5.308 billion reduction in short-term bank loans.

Long-term liabilities decreased by ¥13.948 billion, or 15.2%, to ¥77.651 billion (US$747 million), due to a ¥12.064 billion reduction in long-term bank loans.

While this led to a decline in the interest coverage ratio from 11.7 times to 11.4 times, the debt equity ratio improved significantly, from 1.23 times to 0.79 times.

*Total Asset Turnover = Net Sales/Total Assets (average of total assets at beginning and end of fiscal term)An indicator used to determine the efficiency with which a company is utilizing total assets during a single fiscal year.

*Return on Equity = Net Income/Shareholders’ Equity×100An indicator used to determine management efficiency by examining the amount of income generated in a year against shareholder’s equity.

Net Income

Gross Profit on Sales, SGA Expenses and Operating Income

Other Income and Expenses

Dividends

Financial PositionAssets

Liabilities

0 2,500 5,000 7,500

0 1.0 2.0 3.0Operating Income Margin

Operating Income

(%)

2001/2

2002/2

2003/2

2004/2

2005/2

Operating Income and Operating Income Margin

(Millions of yen)

8,894

8,441

7,587

8,325

8,3483.2

2.5

2.7

2.8

3.3

0 1.0 2.0 3.0 4.0 5.0 (%)

2001/2

2002/2

2003/2

2004/2

2005/2

ROE

3.0

5.0

4.4

5.1

1.5

ROE

0 500 1,000 1,500 2,000 2,500

0 10 20 30 40 50

(Millions of yen)

(Yen)

Net Income Per Share

Net Income

2001/2

2002/2

2003/2

2004/2

2005/2

Net Income and Net Income Per Share

2,791

2,373

683

2,454

37.0

21.91,742

12.2

34.4

30.9

(Millions of yen)

(Times)

0 50,000 100,000 150,000 200,000 250,000

0 0.3 0.6 0.9 1.2 1.5Total Asset Turnover

Total Assets

2001/2

2002/2

2003/2

2004/2

2005/2

Total Assets and Total Asset Turnover

203,688

187,993

248,268

230,561

222,541

1.32

1.32

1.31

1.26

1.30

0 800 1,600 2,400 3,200

90 92 94 96 98

Number of Customers as Percentage of Previous Year

Average Spending per Customer

(%)

2003/2

2004/2

2005/2

Number of Customers as Percentage of Previous Year and Average Spending per Customer

(Yen)

3,632

3,597

3,626

99.2

98.0

97.7

(Millions of yen)0 2,000 4,000 6,000Capital Investment

2001/2

2002/2

2003/2

2004/2

2005/2

Capital Investment and Depreciation and Amortization

7,085

5,008

5,100

7,300

4,102

4,435

4,659

4,140

4,3424,213

Depreciation and Amortization

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Cash Flows

Shareholders’ equity increased by ¥7.184 billion, or 13.2%, to ¥61.76 billion (US$594 million), due to the sale of treasury stock, third party allocation and conversion of convertible bonds into stock. The equity ratio rose from 26.8% to 32.9%.

The PARCO Group, in principle, manages capital investments and dividend payments with cash provided by operating activities. Free cash flows for fiscal 2004 decreased by ¥1.599 billion, or 15.6% year-on-year, to ¥8.67 billion (US$83 million).

Net cash provided by operating activities decreased by ¥2.606 billion to ¥10.635 billion (US$102 million), primarily due to a decrease in other assets and liabilities compared with the previous fiscal year.

Net cash used in investing activities increased by ¥1.007 billion to ¥1.965 billion (US$19 million). The increase in cash flows was primarily due to increases in income from the sale of tangible fixed assets and from the sale of a subsidiary in the Retail Business. Major expenditures in investing activities included ¥6.737 billion for the acquisition of tangible fixed assets related to store renovation.

Net cash used in financing activities decreased by ¥1.682 billion to ¥12.731 billion (US$122 million). While the sale of treasury stock and third-party allocation of shares generated ¥4.724 billion in income, the reduction in interest-bearing debt resulted in a decrease in income from long-term bank loans. The outstanding amount of interest-bearing debt fell by ¥18.609 billion to ¥48.732 billion.

As a result of the conditions presented above, cash and cash equivalents decreased by ¥4.056 billion to ¥11.984 billion (US$115 million).

Some hope of recovery lies ahead for Japan’s economic outlook, driven by improvements in corporate profitability and increased capital investment. Nevertheless, a challenging business environment is expected to prevail in the retail industry, as the outlook for private

consumption remains largely uncertain and competition continues to intensify. In the first year of the Five-Year Medium-Term Management Plan, the PARCO Group will strive to realize and develop businesses based on the Plan.

Other initiatives include renovation plans for the existing PARCO stores and realizing a store grouping strategy at some stores, while also strengthening operational capabilities.

<Sapporo PARCO>In March 2005, Sapporo PARCO Annex opened on land adjacent to the existing store. The Annex brings together brand shops making their debut in Sapporo in an effort to provide fresh energy to the Sapporo market, which continues to evolve toward maturity. The Main Building will also undergo renovation, including merchandising development on the theme of elegance that is currently favored by young female office workers.<Ikebukuro PARCO>Renovation will be centered on the first floor of the Main Building, which serves as the “face” of Ikebukuro PARCO, by constructing a direct passage to the Ikebukuro Station concourse, and shops on the B1 Floor of the Main Building.

These projects will be followed by renovations at Nagoya PARCO

followed by Chiba PARCO.In new store development, we will continue to prepare for the opening

of stores at the Urawa Station East Exit and Sendai Station West Exit, while concurrently seeking to acquire going concerns and property development through M&A.

We will also endeavor to cultivate new businesses by transferring the property management operations of PARCO SPACE SYSTEMS CO., LTD. to PARCO CO., LTD., and paying due consideration to future progress in property development for new stores. Our intent is to share management resources in the tenant leasing operations to achieve greater operational efficiency and generate a synergistic effect between our existing businesses.

To plant seeds for future expansion, NEUVE A CO., LTD. will aggressively open new stores, while also opening stores in the suburban market at the edge of the city to keep up with the accelerating pace of new openings of suburban shopping centers, toward our goal of developing a 100-store system.

The management base of PARCO SPACE SYSTEMS CO., LTD. will be reinforced by integrating the functions of building management operations within the PARCO Group.

Based on the above plans, for fiscal 2005, the PARCO Group is forecasting consolidated net sales of ¥255 billion, down 1% year-on-year, operating income of ¥8.5 billion, up 0.7%, ordinary income of ¥8.2 billion, up 1.5%, and net income of ¥3.2 billion, up 83.6%.

Shareholders’ Equity

Fund Procurement and Liquidity Management

Cash Flows from Operating Activities

Cash Flows from Investing Activities

Cash Flows from Financing Activities

Cash and Cash Equivalents

Major Renovation Plans

Outlook

Risks Related to Our Business

*Debt Equity Ratio = Interest-bearing Debt Outstanding/Shareholders’ EquityAn indicator used to determine the financial stability of a company by examining the ratio of interest-bearing debt to total shareholders’ equity.

*Equity Ratio = Equity/Total Assets (Equity + Liabilities) ×100An indicator used to determine the soundness of management by examining the ratio of total shareholders’ equity in total assets.

*Free Cash Flows = Operating Income × (1 × Effective Tax Rate) + Depreciation and Amortization – Capital Investment ± Change in Working CapitalIndicates cash flows (net cash balance) generated by a company’s basic business operations.

*Interest Coverage Ratio = Operating Income + Interest Income + Dividend Income/ Interest ExpensesAn indicator used to determine the company’s ability to pay interest, arrived at by calculating the multiple of profit gained on business against financial expenses such as interest payments on loans.

With respect to information contained in this report, the following factors may significantly affect investment decisions. Recognizing these risks, the PARCO Group will strive to prevent their occurrence and to respond appropriately in the event they occur.Information pertaining to the future is based on the PARCO Group’s knowledge as of the publication date of this report.

(1) Risk of Fluctuations in DemandThe PARCO Group engages in the Development Business, including the operation of shopping centers; the Retail Business; and the Space Engineering and Management Business. The Group’s business performance and financial position may be significantly affected by decreased sales and orders caused by declining consumer confidence and a slowdown in corporate profitability due to deterioration in the economy and tax reforms such as higher consumption tax rates. Sluggish sales of seasonal products caused by unusual weather, such as cool summers and warm winters, could also dampen sales.

(2) Risk of Natural Disasters and AccidentsThe PARCO Group operates shopping complexes in major cities in Japan and abroad (Singapore), and has business bases throughout Japan as tenant shops within shopping complexes in various locations nationwide. These locations may experience difficulties in their sales activities in the event of disasters such as earthquakes, fire, acts of terrorism, or unrest. In particular, the PARCO Group has stores and locations in the Tokai and Kanto regions, where major earthquakes are predicted, and may therefore incur damages in these regions. A risk response system is being set up and enhanced to minimize damage from such incidents by implementing countermeasures such as ensuring antiseismic measures, formulating and disseminating the Manual on Major Earthquakes, and conducting disaster drills at the stores. However, depending on the specific circumstances, the PARCO Group’s business performance and financial position may be significantly affected.

(3) Risk of Regulatory RestraintsThe PARCO Group operates its business under a regulated environment, shaped by legislation including the Large-Scale Retail Stores Location Law, the Building Law, and the Building Standard Law. In planning new store openings and expanding floor space in the future, we may be subject to regulatory controls that may affect our new store plans and operational plans, and restrict our business activities. Under such circumstances, the PARCO Group’s business performance and financial position may be significantly affected.

(4) Risk of Fluctuations in the Industry and Markets

The PARCO Group conducts detailed marketing to develop shopping complexes and launch new outlets for specialty stores. However, an unpredictable intensification of competition and changes in market conditions may affect store sales and new store opening plans. To quickly respond to such changes in the business environment, the Group is rationalizing its store operating system and adopting a scrap-and-build approach. However, under certain circumstances, the Group’s business performance and financial position may be significantly affected.

(5) Risk of Corporate ReorganizationThe PARCO Group undertakes its business as an integrated whole, comprising PARCO CO., LTD. and its affiliates in Japan and abroad, through an organic collaboration among the Group members. In the future, the scope or business domain of this corporate group may change due to mergers, transfers or acquisition of operations, and the sale or disposal of affiliated companies, in which case the Group’s business performance and financial position may be significantly affected.

(6) Risk Related to Business AssociatesThe PARCO Group provides fixed leasehold deposits to land and property owners in its Development and Retail Businesses. It also has claims to sales receivables against its business associates in the Space Engineering and Management Business. While we conduct due diligence in credit management with respect to these business associates, land and property

owners may experience financial difficulties, causing problems in the collection of fixed leasehold deposits. The business associates may also suffer deterioration in credit standing, giving rise to irrecoverable loans. Under these circumstances, the Group’s business performance and financial position may be significantly affected.

(7) Risk Related to the Supply of Products and Services

The PARCO Group handles clothing, sundries and foods, and provides services including the management of hotels and restaurants, interior design and construction work, and building management and operation. While the utmost care is exercised to control quality and ensure the hygienic aspects of products and services, should flaws or defects in products or services cause damage to customers, the Group may lose customers and the public’s trust, with a resulting impact on business performance and financial position.

(8) Risk Related to Fixed Assets in PossessionThe PARCO Group possesses fixed assets for business purposes, including land intended for stores and buildings, as part of its business activities. In the event that profits from business and cash flows deteriorate, or should the application of impairment accounting result in a decline in land prices, the PARCO Group’s business performance and financial position may be significantly affected.

(9) Risk Related to the Protection of Personal Information

The PARCO Group possesses personal information of its customers for marketing activities. Recognizing the consequences of any leakage of personal information on corporate management and trust, the Group has established a system for managing personal information, including a manual of rules, employee education, and certification regarding the handling of personal information. However, in the event a leak of personal information results in claims for damages and loss of the public‘s trust, the Group’s business performance and financial position may be significantly affected.

Cash Flows from Financing Activities

2001/2

2002/2

2003/2

2004/2

2005/2

(Millions of yen)△500 0 500

450

△14,464

△11,048

△20,903

△12,731

Cash Flows from Investing Activities

2001/2

2002/2

2003/2

2004/2

2005/2

(Millions of yen)△5,000 0 5,000

△705

△2,972

△1,965

△7,162

△6,134

Cash Flows from Operating Activities

10,635

2001/2

2002/2

2003/2

2004/2

2005/2

(Millions of yen)0 3,000 6,000 9,000 12,000

11,344

13,242

10,788

10,147

(Times)0 2.0 4.0 6.0

2001/2

2002/2

2003/2

2004/2

2005/2

Interest Coverage Ratio

8.0 10.0

11.7

11.4

4.8

6.7

7.7

0 22,000 44,000 66,000 88,000

0 0.5 1.0 1.5 2.0

(Millions of yen)

(Times)Debt Equity Ratio

Interest-Bearing Debt

2001/2

2002/2

2003/2

2004/2

2005/2

Interest-Bearing Debt and Debt Equity Ratio

67,341

48,732

100,48079,829

80,1501.23

0.79

2.261.51

1.45

0 20,000 40,000 60,000

0 10 20 30 (%)

(Millions of yen)

Equity Ratio

Total Shareholders’ Equity

2001/2

2002/2

2003/2

2004/2

2005/2

Total Shareholders’ Equity and Equity Ratio

54,575

44,536

52,916

55,20924.8

26.8

32.9

23.0

17.9

61,760

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Millions of yenThousands of

U.S. dollars (Note 3)Thousands of

U.S. dollars (Note 3)

28th/29th February, 2003, 2004 and 2005

The accompanying notes are an integral part of these statements.

Current assets:

Cash and time deposits (Note 6 (1))

Marketable securities (Note 8)

Notes and accounts receivables:

Trade (Note 2 (14))

Other

Less: Allowance for doubtful accounts

Inventories

Prepaid expenses and other current assets

Deferred tax assets (Note 13)

Total current assets

Investments and advances:

Investment securities (Note 8)

Investments in and advances to affiliates

Other investments

Property and equipment (Note 10):

Store facilities, at cost

Less: Accumulated depreciation

Less: Accumulated impairment losses (Note 7)

Leasehold deposits and loans to lessors (Note 9)

Deferred tax assets (Note 13)

Other assets

Total assets

¥ 11,984

10

9,216

874

(14)

10,076

2,668

752

750

26,242

9,577

4,938

2,199

16,715

154,410

(60,865)

(1,323)

92,220

48,284

2,699

1,830

¥187,993

¥ 16,041

—

11,561

1,077

(22)

12,615

3,914

787

1,525

34,884

9,548

4,848

2,635

17,033

152,125

(59,423)

—

92,702

54,624

2,327

2,116

¥203,688

$ 115,231

96

88,615

8,404

(135)

96,885

25,654

7,231

7,212

252,327

92,087

47,481

21,144

160,721

1,484,712

(585,240)

(12,721)

886,731

464,269

25,952

17,596

$1,807,625

Millions of yen

LIABILITIES


Current liabilities:

Short-term bank loans (Note 10)

Current portion of long-term debt (Note 10)

Notes and accounts payable:

Trade

Other

Accrued income taxes (Note 13)

Accrued expenses

Other current liabilities

Total current liabilities

Long-term debt (Note 10)

Guarantee deposits received from tenants (Note 14)

Reserve for retirement benefits (Note 12)

Accrued retirement benefits for directors

and statutory auditors (Note 2(10)›)

Other long-term liabilities

Total liabilities

MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES

SHAREHOLDERS’ EQUITY;

Common stock:

Authorized: 131,000,000 shares at 28th/29th February,

2003, 2004 and 2005 (Note 19)

Issued: 78,306,282 shares at 28th February, 2003 and

78,531,506 shares at 29th February, 2004 and

82,210,781 shares at 28th February, 2005

Capital surplus

Retained earnings

Net unrealized gains (losses) on securities

Foreign currency translation adjustments

Treasury stock

Total shareholders’ equity

Total liabilities, minority interests in consolidated

subsidiaries and shareholders’ equity

¥ 1,900

12,804

21,972

2,221

24,193

1,994

2,285

2,656

45,834

34,028

42,476

801

63

281

123,485

2,746

26,867

27,107

8,385

465

(316)

(750)

61,760

¥187,993

¥ 8,697

12,551

23,860

2,931

26,791

804

2,473

3,133

54,452

46,092

44,043

1,070

384

8

146,052

3,061

25,942

25,368

7,332

314

(337)

(4,043)

54,575

¥203,688

$ 18,269

123,115

211,269

21,356

232,625

19,173

21,971

25,538

440,712

327,192

408,423

7,702

606

2,702

1,187,356

26,404

258,337

260,644

80,625

4,471

(3,038)

(7,212)

593,846

$1,807,625

ASSETS 2004

¥ 16,830

43

12,289

1,847

(25)

14,111

8,920

1,089

693

41,688

9,397

5,255

2,592

17,245

155,402

(58,890)

—

96,511

60,325

4,288

2,481

¥222,541

2003 2005 2005 2004

¥ 18,670

13,484

25,725

2,505

28,231

446

2,576

3,204

66,613

47,995

47,372

933

626

114

163,656

3,674

25,892

25,318

5,189

(506)

27

(712)

55,209

¥222,541

2003 2005 2005

Consolidated Balance Sheets

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Millions of yen

2004 2005

Thousands of U.S. dollars (Note 3)

yenU.S. dollars

(Note 3)

2005

For the years ended 28th/29th February, 2003, 2004 and 2005


Net sales

Cost of sales

Other operating revenue

Gross profit

Selling, general and administrative expenses

Operating income

Other income (expenses):

Interest income

Interest expenses

Equity in earnings of affiliates accounted for

by the equity method

Bonds issue expenses

Loss on disposal/sales of property and equipment

Loss on revaluation of fixed assets

Loss on impairment of fixed assets (Note 7)

Loss on write-down of investment securities

Loss on sales of investment securities

Gain on termination of substitutional portion

of employees’ pension fund

Gain on sales of subsidiaries’ stocks

Provision for allowance for doubtful accounts

Special allowance for retirement

Other, net

Income before income taxes and minority interests

Provision for income taxes:

Current (Note 13)

Deferred (Note 13)

Total

Minority interests

Net income

Per share (Note 2 (12)):

Net income, basic

Net income, diluted

Cash dividends, historical

Weighted average number of shares (thousands)

¥257,625

221,111

36,513

1,649

38,163

29,722

8,441

131

(907)

204

—

(1,212)

—

(2,413)

—

—

—

55

(868)

(105)

875

(4,239)

4,201

2,233

194

2,427

31

¥ 1,742

¥ 21.9

21.8

¥ 10.0

79,675

¥281,478

238,562

42,915

1,532

44,448

35,553

8,894

104

(1,136)

171

(18)

(1,617)

(1,030)

—

(195)

(8)

—

435

(930)

(245)

(297)

(4,766)

4,128

934

432

1,367

(30)

¥ 2,791

¥ 37.0

35.6

¥ 8.0

75,499

2003

¥297,614

251,597

46,016

1,605

47,622

39,273

8,348

90

(1,371)

201

(198)

(2,094)

—

—

(1,524)

(7)

383

—

—

(185)

477

(4,229)

4,119

590

1,086

1,677

68

¥ 2,373

¥ 30.9

29.5

¥ 8.0

76,718

$2,477,163

2,126,067

351,087

15,856

366,952

285,788

81,163

1,260

(8,721)

1,962

—

(11,654)

—

(23,202)

—

—

—

529

(8,346)

(1,010)

8,413

(40,760)

40,394

21,471

1,865

23,337

298

$ 16,750

$ 0.210

0.210

$ 0.096

79,675

Millions of yenNumber of shares

issued and outstanding(thousands)

Common stock

Capital surplus

Retained earnings



Balance at 28th February, 2002

Net income for the year ended 28th February, 2003

Conversion of convertible bonds

Cash dividends

Bonuses to directors and statutory auditors



Decrease of consolidated subsidiaries


Cash dividends

Bonuses to directors and statutory auditors

Loss on sales of treasury stock



New share issued

Gain on sales of treasury stock


Cash dividends


75,295

—

3,011

—

—

78,306

—

—

225

—

—

—

78,531

—

900

—

2,779

—

82,210

¥25,224

—

668

—

—

25,892

—

—

50

—

—

—

25,942

—

307

—

617

—

¥26,867

¥24,649

—

668

—

—

25,318

—

—

50

—

—

—

25,368

—

306

815

617

—

¥27,107

¥3,467

2,373

—

(610)

(40)

5,189

2,791

23

—

(615)

(56)

(0)

7,332

1,742

—

—

—

(688)

¥8,385

Thousands of U.S. dollars (Note 3)Number of shares

issued and outstanding(thousands)

Common stock

Capital surplus

Retained earnings



New share issued

Gain on sales of treasury stock


Cash dividends


78,531

—

900

—

2,779

—

82,210

$249,442

—

2,952

—

5,933

—

$258,337

$243,923

—

2,942

7,837

5,933

—

$260,644

$70,500

16,750

—

—

—

(6,615)

$80,625

Consolidated Statements of Income Consolidated Statements of Shareholders’ Equity

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Millions of yen

2003 2004

Thousands of U.S. dollars (Note 3)

2005



Cash flows from operating activities:Income before income taxes and minority interests Adjustments for:

Depreciation and amortization Loss on impairment of fixed assetsAmortization of consolidated accounts reconciliation Bonds issue expenses Increase/(Decrease) in allowance for doubtful accounts Increase/(Decrease) in accrued bonuses to employees Increase/(Decrease) in allowance for sales returns Increase/(Decrease) in allowance for books unsold Increase in reserve for sales promotionIncrease/(Decrease) in reserve for retirement benefits Increase/(Decrease) in accrued retirement benefits for directors and statutory auditors Interest income and dividend income Interest expenses Investment profit on equity method Loss on sales/disposal of property and equipment Loss on revaluation of fixed assetsGain on sales of marketable securities and investment securities Loss on write-down of marketable securities and investment securities (Increase)/Decrease in receivables (Increase)/Decrease in inventories Increase/(Decrease) in payables Increase/(Decrease) in other assets and liabilities, net Other

Subtotal Interest income and dividends income received Interest expenses paid Income taxes paid

Net cash provided by operating activities

Cash flows from investing activities:Acquisition of tangible fixed assets Proceeds from sales of tangible fixed assets Acquisition of investment securities Proceeds from sales of investment securities Proceeds from sales of investments in a subsidiary accompanying changes of scope of consolidationPayments for fixed leasehold deposits Collection of fixed leasehold deposits Decrease in guarantee deposits received from tenants Other

Net cash used in investing activities

Cash flows from financing activities:Decrease in short-term bank loans, netBorrowing of long-term debt Repayment of long-term debt Proceeds from issue of bonds Redemption of bonds Redemption of convertible bondsProceeds from issue of common stockSales/(Acquisition) of treasury stockCash dividends paid Cash dividends paid to minority shareholders Other

Net cash provided by (used in) financing activities

Effect of exchange rate changes on cash and cash equivalents Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year (Note 6(1))

¥ 4,128

4,135 —

189 18

899 (89)

2 (4) 69

296

(204) (149)

1,136 (171)

1,144 1,030 (137)

195

(1,260) 212

1,726 1,585

4 14,755

150 (1,131)

(532) 13,242

(3,818) 640

(265) 1,387

—

(180) 4,237

(3,515) (1,457)

¥ (2,972)

¥ (5,260) 10,094

(11,854) 1,982

(2,000)— —

(3,332) (615) (62)

— (11,048)

(5)

(784) 16,825

¥16,041

2005

¥ 4,201

4,214 2,413

202 —

786 39 (2) 4

38 (125)

49

(189) 907

(204) 455

— (286)

—

1,505 (260)

(1,194) (282) (37)

12,236 345

(934) (1,012) 10,635

(6,737) 1,416 (964)

1,537

741 (416)

4,907 (2,193)

(255)¥ (1,965)

¥ (6,097) 900

(11,474)— — (3)

614 4,109 (688) (91)

— (12,731)

4

(4,056) 16,041

¥11,984

¥ 4,119

4,342 —

188 198

(152) (62)

0 (11)

— 35

(80)

(139) 1,371 (201)

1,520 —

(334)

1,524 2,771

683 (3,747)

381 305

12,712 139

(1,406) (657)

10,788

(4,512) 203

(623) 2,122

—

(416) 1,293

(4,586) (642)

¥ (7,162)

¥ (1,833) 19,900

(18,049) 11,801

(10,000)— —

(700) (610)

(28) (29) 450

(0)

4,075 12,750 ¥16,825

$ 40,394

40,519 23,202

1,942 —

7,558 375 (19) 38

365 (1,202)

471

(1,817) 8,721

(1,962) 4,375

— (2,750)

—

14,471 (2,500)

(11,481) (2,712)

(356) 117,654

3,317 (8,981) (9,731)

102,260

(64,779) 13,615 (9,269) 14,779

7,125

(4,000) 47,183

(21,087) (2,452)

$ (18,894)

$ (58,625) 8,654

(110,327)— —

(29) 5,904

39,510 (6,615)

(875)—

(122,413)

38 (39,000) 154,240 $115,231

The accompanying consolidated financial statements have been prepared from accounts and records maintained by PARCO CO., LTD. (the “Company”) and its subsidiaries (together, the “Companies”) in accordance with the provisions set forth in the Commercial Code and the Securities and Exchange Law of Japan, and in conformity with accounting principles and practices generally accepted in Japan, which are different in certain respects as to application and disclosure requirements of International Financial Reporting Standards.

Certain items presented in the consolidated financial statements submitted to the Director of Kanto Finance Bureau in Japan have been reclassified in these accounts for the convenience of readers outside Japan.

The consolidated financial statements are not intended to present the consolidated financial position, results of operations and cash flows in accordance with accounting principles and practices generally accepted in countries and jurisdictions other than Japan.

Relevant notes have been added, and certain reclassifications of account balances as disclosed in the consolidated financial statements in Japan have been made so as to present them in a form which is more familiar to readers outside Japan.

31st December*31st December*31st December*31st December*

The closing dates for the fiscal year of the following consolidated subsidiaries are indicated below:

(2) Elimination of Inter-Company Accounts

For the purposes of preparing the accompanying consolidated financial statements, all significant inter-company transactions, account balances and unrealized profits among the Companies have been entirely eliminated, and the portion attributable to minority interests is charged/credited to minority interests.

(3) Difference between Cost of Investments and Equity in Net Assets

The excess of the cost over the underlying net equity of investments in subsidiaries and affiliated companies accounted for using the equity method of accounting is allocated to identifiable assets and liabilities based on fair values at the date of acquisition.

The unassigned residual value of the excess of the cost over the underlying net equity is recognized as “Difference between cost of investment and equity in net assets”. The Company amortized “Difference between cost of investment and equity in net assets” on a straight-line method over the estimated period of benefits a period of five years, with the exception of minor amounts, which are charged to income in the year of acquisition.

(4) Accounting for Investments in Affiliates

The Company had 4 affiliated companies at 28th February, 2005. All of these affiliates have been accounted for by the equity method.

For the purposes of accounting by the equity method, for investments in affiliates whose closing dates are not in agreement with that of the Company, the accounts of these affiliates at the closing dates of their respective fiscal year-ends are used.

(5) Cash and Cash Equivalents

Cash and cash equivalents in the accompanying Consolidated Statements of Cash Flows are composed of cash on hand, bank deposits which can be withdrawn and short-term investments with an original maturity of three months or less and which represent a minor risk of fluctuations in value.

(6) Valuation of Securities

Marketable securities (current portfolio) and investment securities (non-current portfolio) listed on stock exchanges are stated at fair value (unrealized gains or losses are reflected in the “Shareholders’ Equity”).

Securities without market quotations on stock exchanges are stated at cost, cost being determined by the moving-average method.

S$ 47,778

S$ 1,000S$114,358

100.0%

67.0%66.7%

Parco (Singapore) Pte LtdStraits Parco Retail Management Pte Ltd Seiyo Investment (S) Pte Ltd

Thousands of Singapore

dollars

Equity ownershippercentage

4903,109

5010

100.0%95.2%

100.0%100.0%

NEUVE A CO.,LTD.PARCO SPACE SYSTEMS CO.,LTD.HOTEL NEW CRESTON CO.,LTD.PARCO-CITY CO.,LTD.

Millions of yen

Equity ownershippercentage

Parco (Singapore) Pte LtdStraits Parco Retail Management Pte LtdSeiyo Investment (S) Pte LtdPARCO-CITY CO., LTD.

2. Summary of Significant Accounting Policies

*For the purposes of preparing the consolidated financial statements of the Companies, the accompanying consolidated financial statements include the accounts of the consolidated subsidiaries at the closing dates for their respective fiscal year-ends, and necessary adjustments are made for significant transactions which took place during the periods between the closing dates for the fiscal year of the respective consolidated subsidiaries and that of the Company.

1. Basis of Presenting the Consolidated Financial Statements

Capital Stock

Capital Stock

(1) Scope of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its 10 subsidiaries (15 at 29th February, 2004 and 16 at 28th February, 2003) at 28th February, 2005.

WAVE CO., LTD. was divested and CRESTON HOTEL CO., LTD., Fukido Co., Ltd., J Foods Co., Ltd., and MAINICHI NEWSPAPERS CULTURE CITY CO., LTD were liquidated in the year ended 28th February, 2005, and the above consolidated subsidiaries have been excluded from consolidation effective this fiscal year.

The major consolidated subsidiaries as at and for the year ended 28th February, 2005 are listed below:


Consolidated Statements of Cash Flows

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(7) Inventories

Inventories are stated at cost, cost being determined mainly by the retail method.

(8) Property and Equipment

Depreciation is mainly computed by the straight-line method for buildings (excluding leasehold improvements and auxiliary facilities attached to buildings) and mainly computed by the declining-balance method for other assets.

(9) Amortization

Amortization of intangible assets and long-term prepaid expenses included in “Other assets” is computed by the straight-line method.

Computer software costs for internal use are amortized over their expected useful lives (five years) using the straight-line method.

(10) Recognition of Certain Accrued Expenses

In general, the Companies use the accrual basis of accounting for all income and expense items.

⁄) Allowance for doubtful accounts

An allowance for doubtful accounts is provided for in an amount determined by the bad debt ratio for general receivables, and for particular doubtful receivables, at an amount estimated uncollectable on an individual account basis.

¤) Accrued bonuses to employees

Accrued bonuses to employees is mainly provided for at an amount determined based on the estimated payable by the Companies in the future.

‹) Reserve for retirement benefits

The Companies have funded contributory pension plans which provide for a lump-sum payment or pension payments for life after the age of 60, at the option of retiring employees with at least 20 years of participation in the plan. Those employees retiring with 5 years but less than 20 years of participation are entitled to a lump-sum payment.

The Companies provided for accrued pension and severance costs benefits calculated to state the actuarially calculated present value of projected benefit obligations less the fair value of the pension assets.

The unrecognized transition obligation is amortized on a straight-line basis over 15 years.

Unfunded past service cost and actuarial differences of the plans are amortized over a period of mainly 12 years within the average remaining service period at the time of occurrence. Amortization of actual differences start from the next year in which they arise.

›) Accrued retirement benefits for directors and statutory auditors

Accrued retirement benefits for directors and statutory auditors is reserved at 100 percent of the liabilities the Companies would have been required to pay if all eligible directors and statutory auditors had retired at the respective balance sheet dates.

At the Compensation Committee of 23rd February, 2005, the Company resolved to abolish the accrued retirement benefits for directors and statutory auditors effective on 28th February, 2005. As a result of this change, the full amount of 281 million yen for accrued retirement benefits for directors and statutory auditors was included in long-term debt for the current year.

fi) Reserve for sales promotion

With respect to unused vouchers issued on the promotional reward card system, the reserve for sales promotion is provided in projected amount of such unused vouchers to be used in the future, which has been estimated based on the past actual rate of collection.

The amount of the vouchers issued on the promotional reward card system is charged to income as issued in the past, however the reserve for sales promotion was recorded from the year ended 29th February, 2004, because it has become more important due to increased membership and it became possible to estimate the amount of vouchers to be collected.

The effect of this change was to decrease operating income and income before income taxes each by 69 million yen compared with 2003.

fl) Japanese income tax laws provide for limits deductible for tax purposes with respect to certain accrued expenses which are essentially estimates of amounts to be determined in future years. The allowance for returned goods and the allowance for write-off of books unsold are provided based on the income tax laws.

(11) Accounting for Leases

Leases that transfer substantially all the risks and rewards of ownership of the assets are accounted for as capital leases, while those leases which do not transfer ownership of the assets at the end of the lease term are accounted for as operating leases, in accordance with accounting principles and practices generally accepted in Japan.

(12) Net Income and Dividends per Share

Basic net income per share is based upon the weighted average number of shares outstanding during each year.

Diluted net income per share is computed to reflect the dilutive effect on net income assuming potential issues of new shares of common stock upon conversion of convertible debt securities and exercise of warrants outstanding with the related reduction of interest expenses.

Cash dividends per share represent dividends declared as applicable to each year.

Effective from the year ended 29th February, 2004, the Companies adopted the Financial Accounting Standard No. 2 “Financial Accounting Standards for Earnings per Share” and the Financial Accounting Standards Implementation Guidance No. 4 “Implementation Guidance for Accounting Standards for Earnings per Share” issued by the Accounting Standards Board of Japan on 25th September, 2002.

By applying the new accounting standard, the amounts of net income per share for fiscal year 2003 would be calculated as follows:

Net income per Share, basic 30.4 yenNet income per Share, diluted 29.0 yen

(13) Accounting for Consumption Tax

Consumption tax is imposed at the flat rate of five percent on all domestic consumption of goods and services. Consumption tax on the Companies’ sales to customers is withheld by the Companies at the time of sale and is paid to the national government subsequently. Consumption tax withheld upon sale is not included in the amount of “Net sales” in the accompanying Consolidated Statements of Income but is recorded as a liability, “Consumption tax withheld”. Consumption tax paid by the Companies on their purchases of goods and services and expenses incurred is recorded as an asset. In the accompanying Consolidated Statements of Income, each account item does not include the amount of consumption tax received or paid. Under the consumption tax law, such asset and liability balances are normally offset against each other.

(14) Matured Notes

The Companies accounts for the matured notes as redeemed on their due date.

In the event that the balance sheet date is a bank holiday, notes maturing on the balance sheet date are settled on the following business day and accounted for accordingly.

Feb 29th, 2004 was a bank holiday, therefore 38 million yen of matured notes was included in the balance sheet.

(15) Appropriation of Retained Earnings

In accordance with customary practice in Japan, appropriation of retained earnings is not accrued in the financial statements for the period to which it related, but is recorded in the subsequent accounting period after the approval of board of directors has been obtained.

The financial statements presented herein are expressed in Japanese yen, which are stated in millions of yen by discarding fractional amounts less than ¥ 1 million. Therefore, total or subtotal amounts do not necessarily agree with the aggregation of such account balances. In addition, solely for the convenience of readers, the financial statements have been translated into U.S. dollars at the rate of ¥ 104 =US$1, the approximate rate of exchange prevailing at 28th February, 2005. The translations should not be construed as representations that Japanese yen amounts have been or could be converted into United States dollars at ¥ 104 =US$1 or at any other rate.

On 9th August, 2002, the Business Accounting Council in Japan issued the Statement of Opinion “Accounting Standard for Impairment of Fixed Assets”, and on 31st October, 2003, the Accounting Standard Board of Japan issued the Financial Accounting Standards Implementation Guidance No. 6 “Implementation Guidance for Accounting Standard for Impairment of Fixed Assets”. These standards require that fixed assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

These standards shall be effective from the fiscal years beginning 1st March, 2006. However, earlier adoption is permitted for the fiscal year ending between 28th February, 2005 and 28th February, 2006.

The Company adopted these standards in the fiscal year ended 28th February, 2005. As a result of the adoption of these standards, income before income taxes and minority interests decreased by 2,413 million yen.

(1) Shareholder’s Equity

The Company and its subsidiaries adopted a new provision on additional clause No. 2 of the “Cabinet Ordinance to amend part of the Regulation on Terminology, Forms, and Preparation Method for Consolidated Financial Statements” effective the year ended 28th February, 2003, and shareholders’ equity includes common stock, capital surplus, retained earnings, and others.

(2) Accounting Standard of Treasury Stock and Reduction of

Legal Reserves

The Company and its consolidated subsidiaries adopted “Accounting Standard for Treasury Stock and Reduction of Legal Reserves”(Accounting standard No.1) effective from the year ended 28th February, 2003. The adoption of the standard did not have a significant impact on the Company’s result of operations.

¥16,830

(48)43

¥16,825

Cash and time depositsTime deposits with original

maturities over three monthsMarketable securitiesCash and cash equivalents

at end of year

2003

¥16,041

——

¥16,041

$115,231

—

—

$115,231

2004 2005 2005

Millions of yenThousands ofU.S. dollars

¥11,984

—

—

¥11,984

(1) Cash and Cash Equivalents

The balance of “Cash and time deposits” reflected in the accompanying Consolidated Balance Sheets as at 28th/29th February, 2003, 2004 and 2005 is reconciled to the balance of “Cash and cash equivalents at end of year”, which is presented in the accompanying Consolidated Statements of Cash Flows for the year ended 28th/29th February, 2003, 2004 and 2005, as follows:

(2) Non-Cash Financing Activities

Significant non-cash transactions of the Company in the year ended 28th/29th February, 2003, 2004 and 2005 were as follows:

(3) Assets and Liabilities of the Company that is no longer

a Consolidated Subsidiary

The assets and liabilities of the Company‘s former subsidiary excluded from the scope of consolidation as a result of divestment were as follows:

LIBRO CO., LTD. was divested in the year ended 29th February, 2004.

¥ 668

668¥1,337

Increase in “Common stock” from conversion of convertible bonds payableIncrease in “Additional paid-in capital” from conversion of convertible bonds payable

2003

¥ 50

50¥100

$ 5,933

5,933

$11,865

2004 2005 2005


¥ 617

617

¥1,234

As of 31st August, 2003

¥ 8,128

2,103

¥10,232

8,702

1,127

¥ 9,830

Current assetsFixed assets

Total assetsCurrent liabilitiesFixed liabilities

Total liabilities

Millions of yen

LIBRO CO., LTD.

3. Japanese Yen Amounts and United States Dollar Amounts

4. Accounting Standard for Impairment of Fixed Assets

5. Changes in Presentation of Accounts

6. Notes to Consolidated Statement of Cash Flows

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Man

agem

ent

Stra

tegy

9. Leasehold Deposits and Loans to Lessors

Leasehold deposits are those deposits furnished by the Companies in accordance with customary business practices in Japan. In connection with the leasing of store buildings, Japanese lessors require the lessees to furnish deposits in an amount deemed sufficient to secure the lease contracts and the annual lease rental payments. The leasehold deposits are normally non-interest-bearing and are returnable only when the lease contracts are terminated.

¥3,01720—

3,037

603——

603¥3,640

Balance sheet amount exceeding acquisition cost:

Equity sharesBondsOther

SubtotalBalance sheet amount not exceeding acquisition cost:


SubtotalTotal

Millions of yen

Acquisition cost Difference

Balance sheet

amountFor the year ended 29th February, 2004

Millions of yen


Balance sheet

amount

¥3,59720—

3,617

555——

555¥4,173

¥ 5790

—580

(47)——

(47)¥(532)

¥1,996

10

—

2,006

927

—

—

927

¥2,933





SubtotalTotal

Millions of yen


Balance sheet


¥1,021

0

—

1,021

(232)

—

—

(232)

¥ 788

¥3,017

10

—

3,027

694

—

—

694

¥3,721

¥ 1120—31

4,834—23

4,857¥4,889





SubtotalTotal

For the year ended 28th February, 2003

¥ 1520—36

3,964—15

3,980¥4,016

¥ 30

—4

(869)—(7)

(877)¥(873)

¥46,143

2,000

3,500

3,500

2,000

1,000

2,000

—

1,337 61,480

(13,484)¥47,995

Loans from banks with weighted average interest rates of 1.80%, 1.70% and 1.73% at 28th/29th February, 2003, 2004 and 2005, respectively.

1.57% straight bonds due 2003 in Japanese yen







Convertible bonds due 2004 in Japanese yen

Less: Portion due within one year

2003

¥43,407

—

3,500

3,500

2,000

1,000

2,000

2,000

1,237 58,644

(12,551)¥46,092

2004

¥32,832

—

3,500

3,500

2,000

1,000

2,000

2,000

—

46,832

(12,804)

¥34,028

$315,692

—

33,654

33,654

19,231

9,615

19,231

19,231

—

450,308

(123,115)

$327,192

2005 2005


The Companies’ assets pledged as collateral for short-term and long-term loans from banks at 28th February, 2005 are as follows:

¥4,220

4,445

¥8,665

$40,577

42,740

$83,317

Net book value of property and equipment:BuildingsLand


Other securities

As of 28th/29th February, 2003, 2004 and 2005, the acquisition cost and amounts on the consolidated balance sheets of other securities that have market prices are summarized below:

The Companies recorded impairment losses on the following asset groups during this fiscal year.

NOS VOS by PARCO (Nerima-ku, Tokyo) is included in Hibarigaoka PARCO.

The Companies grouped their fixed assets based on the segment of management accounting.

The book values of stores which incurred operating losses continuously were reduced to the recoverable amount. The amount written down for the period [2,186 million yen] was recorded as an impairment loss. The components of the impairment loss were “Land” of 861 million yen and “Building, etc.” of 1,324 million yen.

The book value of the idle property was reduced to the recoverable amount because of the unforeseeable decline of land values. The amount written down for the period [227 million yen] was recorded as an impairment loss. The components of the impairment loss were “Land” of 221 million yen and “Utility rights” of 5 million yen.

The recoverable amount from these asset groups was calculated based on the selling price and value in use. The selling price was based on mainly appraisal evaluation, and the value in use was calculated from estimated future cash flows discounted at 5.00%.

The aggregate annual maturities of long-term loans from banks at 28th February, 2005 were as follows:

The convertible bonds due in 2004 in Japanese yen were issued on 28th September, 1999 in the principal amount of ¥5,000 million.

As the result of the resolution by the Management Committee on 31th March, 2004, the Company redeemed the above convertible bonds on 1st June, 2004.

Year ending 28th/29th February

¥12,804

11,980

4,318

2,658

1,072

¥32,832

$123,115

115,192

41,519

25,558

10,308

$315,692

20062007200820092010 and thereafter


The weighted average interest rates applicable to short-term bank loans were 1.44%, 1.07% and 1.12% at 28th/29th February, 2003, 2004 and 2005, respectively.

Long-term debt at 28th/29th February, 2003, 2004 and 2005 consisted of the following:

$19,192

96

—

19,288

8,913

—

—

8,913

$28,202





SubtotalTotal

Thousands of U.S. dollars


Balance sheet


$9,817

0

—

9,817

(2,231)

—

—

(2,231)

$7,577

$29,010

96

—

29,106

6,673

—

—

6,673

$35,779

PARCO CO., LTDGifu PARCO[Gifu City, Gifu]

PARCO CO., LTDSinsaibashi PARCO[Osaka City, Osaka]

PARCO CO., LTDAtsugi PARCO[Atsugi City, Kanagawa]

PARCO CO., LTDHibarigaoka PARCO[Nishi-Tokyo City, Tokyo]


Idle property[Nasu County, Tochigi]

Other

Store

Store

Store

Store

Idle land, etc.

Store

Building, etc.Land

Building, etc.

Building, etc.

Building, etc.

Land, etc.

Building, etc.

Location ClassificationUse

¥1,127

209

332

498

227

18

$10,837

2,010

3,192

4,788

2,183

173

2005 2005

Millionsof yen

Thousands ofU.S. dollars

Secured liabilities at 28th February, 2005 are as follows:

¥ 372

2,148

¥2,520

$ 3,577

20,654

$24,231

Short-term loansLong-term loans


Other securities sold during the fiscal years ended 28th/29th February, 2003, 2004 and 2005, were as follows:

¥1,387145

8

Sales-totalRelated gains-totalRelated losses-total

2004

¥1,539

286

—

$14,798

2,750

—

2005 2005


Repayment schedules of other securities with bonds held to maturity during the fiscal years ended 28th/29th February, 2003, 2004 and 2005 are as follows:

¥1010

Within 1 year1 to 5 years

2004

¥10

68

$ 96

654

2005 2005


Major components and book values of securities whose market values are unavailable:

¥8,724

—

Other securities:Non-listed securitiesInvestment funds constituted of bonds

2004

¥2,122342

7

2003

¥1020

2003

¥8,988

43

2003

¥9,220

68

$88,654

654

2005 2005


7. Impairment of Fixed Assets 8. Securities

10. Short-Term Bank Loans and Long-Term Debt

45

Ann

ual R

epor

t 20

05

A n

ew p

hase

of e

volu

tion

46

Cor

pora

te D

ata

Fina

ncia

l Sec

tion

Rev

iew

of O

pera

tions

Man

agem

ent

Stra

tegy

Cor

pora

te D

ata

Fina

ncia

l Sec

tion

Rev

iew

of O

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tions

Man

agem

ent

Stra

tegy

13. Income Taxes

Income taxes in Japan applicable to the Companies consist of corporation tax, inhabitants tax and enterprise tax, which in the aggregate resulted in statutory tax rates of approximately 42.1% for 2003, 2004 and 2005, respectively.

Significant components of deferred tax assets and liabilities at 28th/29th February, 2003, 2004 and 2005 are as follows:

14. Guarantee Deposits Received from Tenants

15. Derivative Information

Reconciliations between the statutory tax rate and the effective tax rate for the years ended 28th/29th February, 2004 and 2005 are as follows:

The reconciliation for 2003 is not disclosed as the difference is less than 5%.

The discount rate and the rates of expected return on plan assets used by the Companies are mainly 2.0% for 2003, 2004 and 2.0% for 2005. Past service costs and actuarial gains / losses are amortized on a straight-line basis mainly over 12 years. Unrecognized transition obligation is amortized on a straight-line basis over 15 years.

2004 2005 2005


¥ 358

102

(54)

(139)

259

107

105

80

(68)

¥ 750

—

¥ 750

¥ 528 131 (54)

(37)276 120 245

— —

¥1,209

— ¥1,209

$3,442

981

(519)

(1,337)

2,490

1,029

1,010

769

(654)

$7,212

—

$7,212

Service costsInterest costs Expected return on plan assets Amortization of unrecognized prior service costsAmortization of actuarial differencesAmortization of net transition obligationPremium severance payAdvanced retirement allowance plansOther

Retirement benefit expensesGain on termination of substitutional portion of employees’ pension fund

Total

2003

¥1,039 169 (91)

(40)167 144 188

— —

¥1,578

(383)¥1,195

¥1,468 1,389

133

297

—

48

434

25

227 —

— 258

4,279 (210)

4,069

215 ¥ 215 ¥3,853

Deferred tax assets:Accumulated loss carried forward Adjustments for unrealized profits Non-deductible retirement benefits

to directors and statutory auditors Non-deductible accrued bonuses to

employees Non-deductible accrued special

allowance for retirementNon-deductible accrued

enterprise tax Non-deductible allowance for

doubtful accounts Non-deductible loss on write-down

of golf club memberships Non-deductible reserve for

retirement benefits Unrealized losses on securities Non-deductible loss on impairment

of fixed assetsOthers

Gross deferred tax assets Less: Valuation allowance

Total deferred tax assets

Deferred tax liabilities:Unrealized gain on securities

Total deferred tax liabilities Net deferred tax assets

2004

¥2,885 1,563

224

290

—

31

—

81

178 359

— 310

5,925 (943)

4,981

— ¥ — ¥4,981

2003

¥ 251

1,114

150

364

114

154

773

—

236

—

995

236

4,391

(620)

3,770

320

¥ 320

¥3,449

$ 2,413

10,712

1,442

3,500

1,096

1,481

7,433

—

2,269

—

9,567

2,269

42,221

(5,962)

36,250

3,077

$ 3,077

$33,163

2005 2005


Statutory tax rate Adjustments:

Permanent non-deductible differences, including entertainment expenses

Permanent non-taxable differences, including dividend income

Amortization of difference between cost of investments and equity in net assets

Equity in earnings of affiliates accounted for by the equity method

Deferred tax for accumulated losses of subsidiaries, etc.

Difference between effective tax rate for domestic companies and those for overseas companies

Resident income taxes - per capita levyEffect of tax reductionValuation allowanceOther

Effective income tax rate

42.1%

4.0

(0.8)

1.9

(1.8)

(14.7)

(1.5)2.2 0.7 —

1.0 33.1%

42.1%

2.7

(0.7)

2.0

(2.0)

—

(2.8)

1.9

1.5

10.9

2.2

57.8%

2004 2005

Percentage

The Companies enter into interest rate swap agreements in order to minimize the risk of fluctuation in interest rates on borrowings.

The Companies have established a control environment which includes policies and procedures for risk assessment and for the approval, reporting and monitoring of transactions involving derivative financial instruments. The Companies do not hold or issue derivative financial instruments for trading purposes.

The Companies are exposed to the risk of credit loss in the event of non-performance by the counterparties to the interest; however, the Companies do not anticipate non-performance by any of these counterparties, all of whom are financial institutions with high credit ratings.

Derivatives that are designated as “hedging instruments” at 28th/29th February, 2003, 2004 and 2005 are not disclosed.

12. Retirement Benefit Plan

The liability for severance and retirement benefits included in the liability section of the Consolidated Balance Sheet as of 28th/29th February, 2003, 2004 and 2005 consists of the following:

(2) Remaining Payments on Operating Leases

2003 2005 2005


¥(5,105)

2,487

(1,559)

2,217

1,158

—

¥ (801)

¥(8,317)3,611 (322)

2,652 1,626 (184)

¥ (933)

$(49,087)

23,913

(14,990)

21,317

11,135

—

$ (7,702)

Retirement benefit obligation Fair value of pension assets Unrecognized prior service costUnrecognized actuarial differences Unrecognized net transition obligation Prepaid pension cost

Reserve for retirement benefits

2004

¥(7,175)3,116 (284)

2,140 1,360 (228)

¥(1,070)

Severance and retirement benefit expenses included in the Consolidated Statement of Income for the year ended 28th/29th February, 2003, 2004 and 2005 are comprised of the following:

On 31st March, 2003, the Japanese National Diet approved various changes to the calculation of the statutory local enterprise tax for companies with capital in excess of ¥100 million, effective April 1, 2004. Under the amended legislation, the enterprise tax will be the sum of three tax components a) an income based component, b) a value added component and c) a capital based component, although there was only “an income tax based component” before the amendment. Concurrently, the basic tax rate for the “income based component” has resulted in a reduction from 9.6% to 7.2%.

This new legislation will change the aggregate statutory tax rate from 42.1% to 40.7% effective for fiscal years beginning after 1st March, 2005.

The impact of these changes was minor to the deferred tax assets and liabilities.

Future lease payments :Due within one yearDue over one year

Lease rental expenses

2003 2005 2005


2004

¥24

¥7

¥ 45

¥10

$29

10

$48

¥3

1

¥5

Depreciation expense for leased assets is computed using the straight-line method over the estimated useful lives of the leased assets.

Interest expense for leased assets is computed using the interest method based on the differences between the lease fees and the respective acquisition cost of the assets which are considered to be interest-bearing.

The Company receives guarantee deposits in an amount determined by reference to annual lease rentals, as a lessor of floor space for retail business under Tenant Agreements with specialty stores and shops. These deposits do not bear interest and are returnable only when the Tenant Agreements are terminated.

16. Related Party Transaction

Not applicable to the years ended 28th/29th February, 2003, 2004 and 2005.

11. Accounting for Lease Transactions

(1) Finance Leases

Pro forma information regarding leased property, such as acquisition costs, accumulated depreciation, net book value and future minimum lease payments under finance leases that do not transfer the ownership of the leased assets to lessees, for the years ended 28th/29th February, 2003, 2004 and 2005 is as follows (Note 2(11)) :

Machinery and equipmentOtherTotal


$20,337

2,365

$22,702


Acquisition costs

Net book value

Accumulated depreciation

$ 9,981

1,269

$11,260

$10,356

1,087

$11,442

Millions of yen

Acquisition costs

Net book value


Buildings and structuresMachinery and equipmentOtherTotal


¥ 171,897

459¥2,374

¥ 15835313

¥1,164

¥ 21,061

145¥1,210

Millions of yen

Acquisition costs

Net book value


Machinery and equipmentOtherTotal


¥2,115

246

¥2,361

¥1,038

132

¥1,171

¥1,077

113

¥1,190

Buildings and structuresMachinery and equipmentOtherTotal


¥ 1282,880

361¥3,369

¥ 1171,583

168¥1,869

¥ 101,296

192¥1,499

Millions of yen

Acquisition costs

Net book value


Lease expenses, depreciation and interest expense for the years ended 28th/29th February, 2003, 2004 and 2005 are as follows:

¥ 5271,018

¥1,546

Future lease payments :Due within one yearDue over one year

Total

2003

¥ 465

737

¥1,203

$ 4,471

7,087

$11,567

2005 2005


¥ 443784

¥1,228

2004

¥768722 38

Lease expensesDepreciationInterest expense

2003

¥508

498

15

$4,885

4,788

144

2005 2005


¥584550 25

2004

47

Ann

ual R

epor

t 20

05

A n

ew p

hase

of e

volu

tion

48

Cor

pora

te D

ata

Fina

ncia

l Sec

tion

Rev

iew

of O

pera

tions

Man

agem

ent

Stra

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Cor

pora

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ata

Fina

ncia

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Rev

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Man

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(2) Geographic Segment Information

For the years ended 28th/29th February, 2003, 2004 and 2005:Geographic segment information has not been prepared and

disclosed since sales and total assets classified in the domestic segment account for more than 90 percent of those of the Companies pursuant to the accounting standards with respect to consolidated financial statements in Japan.

(3) Export Sales Information

For the years ended 28th/29th February, 2003, 2004 and 2005:Export sales information has not been prepared and disclosed since

sales to overseas customers are not significant in relation to those of the Companies (less than 10 percent) pursuant to the accounting standards with respect to consolidated financial statements in Japan.

Notes : 1. Business divisions are determined according to business development considerations within the Companies.

2. Description of the principal businesses in each industry segment:(1) Development business: Development, management and operation of

shopping centers(2) Retail business: Sales of apparel, accessories and other goods(3) Space engineering and management business: Design and construction of

building interiors Providing cleaning, security and maintenance services for buildings(4) Other business: Providing information through the Internet, Management of

Hotels

3. Other operating revenue is included in “Sales”. 4. Long-term prepaid expenses and their amortization are included in “Depreciation and

amortization” and “Capital expenditures”.5. “Culture, IT and others” is described as “Other” for the year ended 28th February, 2005.6. As the result of adopting “Reserve for sales promotion” from the year ended 29th

February, 2004, operating expenses for the year ended 29th February, 2004 increased by ¥69 million in “Development” and “Consolidated”, and operating income decreased by the same amount respectively, as compared with the previous method.

7. Effective from the year ended 28th February, 2005, the Company and its consolidated subsidiaries adopted “Accounting Standard for Impairment of Fixed Assets”.

Millions of yen

Development

Space engineering and

management OtherRetail Total Consolidated

Eliminationsor

corporate

¥237,849 561

238,410 231,152

¥ 7,257 ¥185,621

4,337 2,206 6,387

Sales:Outside customersIntersegment

TotalOperating expensesOperating income (loss)AssetsDepreciation and amortizationLoss on impairment of fixed assetsCapital expenditures

For the year ended 28th February, 2005:

¥259,275 22,696

281,971 273,797

¥ 8,173 ¥207,364

4,681 2,453 6,946

¥259,275 —

259,275 250,833

¥ 8,441 ¥187,993

4,214 2,413 6,953

¥ 4,675 10,645 15,320 15,043

¥ 277 ¥ 4,358

229 19

413

¥14,534 11,195 25,729 25,170

¥ 559 ¥16,929

87 227 124

¥ — (22,696)(22,696)(22,963)

¥ 267 ¥(19,371)

(466)(39)

7

¥2,216 294

2,510 2,431

¥ 79 ¥ 455

25 — 19

Development


management OtherRetail Total Consolidated

Eliminationsor

corporate

$2,287,010 5,394

2,292,404 2,222,615

$ 69,779 $1,784,817

41,702 21,212 61,413


TotalOperating expensesOperating income (loss)AssetsDepreciation and amortizationLoss on impairment of fixed assetsCapital expenditures



$2,493,029 218,231

2,711,260 2,632,663

$ 78,587 $1,993,885

45,010 23,587 66,788

$2,493,029 —

2,493,029 2,411,856

$ 81,163 $1,807,625

40,519 23,202 66,856

$ 44,952 102,356 147,308 144,644

$ 2,663 $ 41,904

2,202 183

3,971

$139,750 107,644 247,394 242,019

$ 5,375 $162,779

837 2,183 1,192

$ — (218,231)(218,231)(220,798)

$ 2,567 $(186,260)

(4,481)(375)

67

$21,308 2,827

24,135 23,375

$ 760 $ 4,375

240 —

183

To the Board of Directors of

PARCO CO., LTD.

We have audited the accompanying consolidated balance sheets of PARCO CO., LTD. and its

subsidiaries as at 28th/29th February 2003, 2004 and 2005, and the related consolidated

statements of income, shareholders’ equity, and cash flows for the years ended, all expressed in

Japanese yen. These consolidated financial statements are the responsibility of the Company’s

management. Our responsibility is to express an opinion on these 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 consolidated financial statements are free of material misstatement. An audit includes

examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated

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

significant estimates made by management, as well as evaluating the overall consolidated 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 present fairly, in all

material respects, the consolidated financial position of PARCO CO., LTD. and its subsidiaries

as at 28th/29th February 2003, 2004 and 2005, and the consolidated results of their operations and

their cash flows for the years then ended in conformity with accounting principles generally

accepted in Japan (see Note 1).

As described in Note 4, effective for the year ended 28th February 2005, PARCO CO., LTD. and its

subsidiaries have adopted the new Japanese accounting standards for impairment of fixed assets.

The amounts expressed in U.S. dollars, which are provided solely for the convenience of the

reader, have been translated on the basis set forth in Note 3 to the accompanying consolidated

financial statements.

18. Contingent Liabilities

19. Shareholders’ Equity

Effective 28th May, 2005, the total authorized common stock of the Company increased from 131,000,000 shares to 320,000,000 shares as authorized at the ordinary general meeting of shareholders on the same date.

There are no contingent liabilities which will materially affect the Companies’ operations and financial position.


17. Segment Information

(1) Industry Segment Information

¥246,235 575

246,810 239,440

¥ 7,369 ¥203,843

4,141 4,018


TotalOperating expensesOperating income (loss)AssetsDepreciation and amortizationCapital expenditures

Millions of yen

Development


managementCulture, ITand othersRetailFor the year ended 28th February, 2003:

¥299,220 29,793

329,014 321,162

¥ 7,852 ¥241,577

4,822 4,779

Total

¥299,220 —

299,220 290,872

¥ 8,348 ¥222,541

4,342 4,681

Consolidated

¥33,921 17,849 51,770 51,491

¥ 279 ¥16,594

405 539

¥16,241 10,707 26,949 26,719

¥ 230 ¥18,037

117 162

Eliminationsor

corporate

¥ —(29,793)(29,793)(30,290)

¥ 496 ¥(19,036)

(480)(98)

¥2,822 661

3,484 3,510

¥ (26)¥3,102

158 59

Millions of yen

Development


managementCulture, ITand othersRetail Total Consolidated

Eliminationsor

corporate

¥243,726 622

244,348 236,609

¥ 7,739 ¥195,207

4,174 5,838


TotalOperating expensesOperating income (loss)AssetsDepreciation and amortizationCapital expenditures


¥283,010 25,644

308,655 300,200

¥ 8,454 ¥220,123

4,601 6,449

¥283,010 —

283,010 274,116

¥ 8,894 ¥203,688

4,135 4,032

¥23,970 13,732 37,703 37,122

¥ 580 ¥ 6,982

310 456

¥12,912 10,664 23,577 23,438

¥ 139 ¥17,140

58 82

¥ — (25,644)(25,644)(26,083)

¥ 439 ¥(16,434)

(466)(2,416)

¥2,401 624

3,025 3,029

¥ (4)¥ 793

58 71

ChuoAoyama PricewaterhouseCoopers

Tokyo, Japan

May 28, 2005

49

Ann

ual R

epor

t 20

05

A n

ew p

hase

of e

volu

tion

50

Cor

pora

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ata

Fina

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l Sec

tion

Rev

iew

of O

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tions

Man

agem

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Stra

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Cor

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ata

Fina

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Rev

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Man

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Selected Financial Data for Principal Companies of PARCO Group


9,576

98

13

3,515

555

164

5

3

44

17

934

26

24

247

(80)

—

—

—

—

—

388

32

20

149

59

* The closing date for the fiscal year is 31st December*1 U.S. dollar amounts have been translated for convenience only, at the rate of ¥104 = US$1*2 Starting in fiscal 2004, the “Culture, IT & Other Business” has been renamed “Other Business.”

Fiscal 2002 Fiscal 2004Fiscal 2003 Fiscal 2002 Fiscal 2003

Sales

Operating income

Net income (loss)

Total assets


Sales

Operating income

Net income (loss)

Total assets


Sales

Operating income

Net income (loss)

Total assets


Sales

Operating income

Net income (loss)

Total assets


Fiscal 2004

242,421

7,701

1,914

193,523

57,508

0

88

(114)

5,997

3,201

89

84

66

151

130

23,167

170

(414)

16,870

7,643

Fiscal 2004 Fiscal 2004

236,359

7,212

1,262

183,890

64,171

0

211

150

6,066

3,306

97

91

74

160

138

25,729

614

(97)

16,472

7,461

244,936

7,371

1,401

201,572

58,737

0

52

(39)

6,702

3,643

94

88

70

163

70

26,228

216

100

17,706

8,008

2,272,683

69,346

12,135

1,768,173

617,029

0

2,029

1,442

58,327

31,788

933

875

712

1,538

1,327

247,394

5,904

(933)

158,385

71,740

PARCO CO., LTD.

PARCO (Singapore) Pte Ltd *

Straits Parco Retail Management Pte Ltd *


NEUVE A CO., LTD.

PALM GARDEN CO., LTD.

HARLEY-DAVIDSON CITY CO., LTD.

HOTEL NEW CRESTON CO., LTD.

PARCO-CITY CO., LTD.*

Head Office Address:

Established:

Paid-in Capital:

230 Victoria Street, #04-01 Bugis Junction Towers, Singapore 188024November 25, 1991S$ 47,778 thousand


Established:

Paid-in Capital:

230 Victoria Street, #04-01 Bugis Junction Towers, Singapore 188024May 21, 1992S$ 1,000 thousand

(Changed company name on December, 2002)

(Started operation on June, 2003)

Retail Business

Other Business*2Space Engineering and Management Business

Millions of yenThousands of U.S. dollars*1 Millions of yen

Thousands of U.S. dollars*1

10,636

255

127

3,826

773

3,548

(18)

(28)

457

(47)

1,031

34

14

241

(30)

1,895

46

42

418

105

539

57

37

259

124


Established:

Paid-in Capital:

Representative:

Number of Employees:

Number of offices:

Business Composition:

8-16 Shinsen-cho, Shibuya-ku, TokyoTel: +81-3-5459-6811April 1, 1969¥3,109 million (as of June 1, 2005)Katsuhiko Takeda, President1,245 (including 344 permanent employees, as of June 1, 2005)24 (as of June 1, 2005)Space creation 59.0%, Building management 38.7%, Others 2.3%


Established:

Paid-in Capital:

Representative:


Number of Stores:


8-16 Shinsen-cho, Shibuya-ku, TokyoTel: +81-3-5428-2600June 1, 2001¥490 million (as of June 1, 2005)Daizaburo Suzuki, President345 (as of June 1, 2005)98 (as of June 1, 2005)Watches 25.6%, Glasses 16.9%, General merchandise 17.0%, Cosmetics and cosmetic accessories 40.5%


Tanashi:

Shibuya:

Established:

Paid-in Capital:

Representative:


Number of Stores:


1-8-26 Tanashi-cho, Nishi Tokyo City, TokyoTel: +81-424-65-0080Tel: +81-3-5458-0080September 19, 1995¥30 million (as of June 1, 2005)Tomihiko Uemura, President21 (as of June 1, 2005)2 (as of June 1, 2005)Motorcycles 66.8%, Parts 17.8%, Wear, accessory and others 15.4%


Established:

Paid-in Capital:

Representative:


Number of Stores:


8-16 Shinsen-cho, Shibuya-ku, TokyoTel: +81-3-3476-8740September 13, 1973¥10 million (as of June 1, 2005)Shozo Kusajima, President30 (as of June 1, 2005)4 (as of June 1, 2005)Food 100%


Established:

Paid-in Capital:

Representative:



8-16 Shinsen-cho, Shibuya-ku, TokyoTel: +81-3-3477-8910March 1, 2000¥10 million (as of June 1, 2005)Masayoshi Okura, President19 (as of June 1, 2005)Internet-related business 86%, Customer Relationship Management (CRM) business 14%


Established:

Paid-in Capital:

Representative:


Number of Facilities:


8-16 Shinsen-cho, Shibuya-ku, TokyoTel: +81-3-5456-4821April 30, 2003¥50 million (as of June 1, 2005)Shuji Shinozaki, President77 (as of June 1, 2005)4 (as of June 1, 2005)Management of hotels 100%

10,218

216

91

3,497

646

3,775

9

(36)

598

(19)

1,039

37

34

235

(45)

1,501

24

13

470

63

565

50

28

250

87

102,269

2,452

1,221

36,788

7,433

34,115

(173)

(269)

4,394

(452)

9,913

327

135

2,317

(288)

18,221

442

404

4,019

1,010

5,183

548

356

2,490

1,192

Sales

Operating income

Net income (loss)

Total assets


Sales

Operating income

Net income (loss)

Total assets


Sales

Operating income

Net income (loss)

Total assets


Sales

Operating income

Net income (loss)

Total assets


Sales

Operating income

Net income (loss)

Total assets


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事業概況

経営戦略

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Corporate Data Corporate History Corporate Organization

Stock Information (As of February 28, 2005)

Stock Performance

(Note) The above excludes 1,362 thousand nonvoting treasury stocks held by Parco.

131,000,00082,210,781

1,0004,553

Number of shares authorizedNumber of shares issued and outstanding Number of shares per lot Number of shareholders

Principal Shareholders

Breakdown of Shares by Type of Shareholder

19,179

8,614

7,080

6,740

2,094

1,899

1,499

1,450

1,388

1,305

23.88

10.72

8.81

8.39

2.61

2.36

1.87

1.81

1.73

1.62

Mori Trust Co., Ltd.

Japan Trustee Services Bank, Ltd.(Trust account)

The Master Trust Bank of Japan, Ltd.(Trust account)

Credit Saison Co., Ltd.

Trust & Custody Service Bank, Ltd. (Annuity)

Mizuho Corporate Bank, Ltd.

NikkoCiti Trust and Banking Corporation (Investment trust account)

The Chase Manhattan Bank, N.A. London SL Omnibus Account

Japan Trustee Service Bank, Ltd. (Trust account 4)

Morgan Stanley & Co. International Limited

Name

Number ofshareholders

Foreign investors902.0%

Japaneseindividualsand others5,6886.9%

OtherJapanesecompanies27,76033.8%

Japanese financialinstitutions and Japanese securities companies902.0%

Treasury stock1,3621.7%

Foreigninvestors12,09814.7%

Japanese financialinstitutions and Japanesesecurities companies35,30042.9%

Other Japanesecompanies2996.6%

Japaneseindividualsand others4,07389.4%

Number of shares held(Thousands)

03/2002 01/2003 01/2004 01/2005

800

700

600

500

400

300

200

100

0

12,000

8,000

4,000

0

Volume (Thousands)

(Yen)

Member of the Board, President and Chief Executive OfficerMember of the Board, Executive Vice-President and Chief Operating Officer Member of the Board, Senior Executive Officer,Marketing Division Member of the Board, Deputy Senior Executive Officer,Development Division, New Project Development

Member of the Board, Deputy Senior Executive Officer,Administration Division, Corporate Planning

Member of the BoardMember of the BoardMember of the BoardMember of the BoardMember of the Board Executive Officer, Facility Management

Executive Officer, Human Resources & General AdministrationExecutive Officer, Finance & Accounting

Executive Officer, Corporate Planning

Executive Officer, Group Auditor

Executive Officer, Store Management

Executive Officer, Advertising & Promotion

Executive Officer, Entertainment

Executive Officer, General Manager of Nagoya PARCO

Executive Officer, Property Management

PARCO CO., LTD.

1-28-2 Minami-Ikebukuro, Toshima-ku, Tokyo

8-16 Shinsen-cho, Shibuya-ku, Tokyo

Tel: +81-3-3477-5710 (Public & Investor Relations)

February 13, 1953

¥26.867 billion (as of May 31, 2005)

(as of May 31, 2005)

541 (male 330; female 211) Consolidated employees:

1,627 (as of February 28, 2005)

¥236.4 billion (fiscal 2004)

372,530m2 (fiscal 2004)

2,615 (fiscal 2004)

19531954

1957

1963

1969

19701973

1974

1975

1976

1977

1980198119831984198619871988

1989

19901991

199219931994

19951996

1997

19982000

2001

20022003

2005

Feb.Oct.

MayDec.Jul.

Jun.

Nov.Apr.Jun.

Mar.

Aug.Dec.Sept.Dec.Apr.Jul.Sept.Sept.Jun.Aug.MayJan.Jun.Aug.Sept.Apr.MayJun.Sept.MaySept.Nov.Sept.Oct.Mar.

Apr.Sept.Apr.Nov.Mar.

Nov.Mar.Sept.

Jun.Sept.Apr.Apr.May

Feb.Mar.

Established Ikebukuro Station Building Co., Ltd.With the capital participation of Marubutsu Co., Ltd., the Company shifted operations from the management of the Ikebukuro Station Building to the operation of department storesChanged company name to Tokyo Marubutsu Co., Ltd.Started operation of department store under the name Tokyo MarubutsuTokyo Marubutsu Co., Ltd. becomes registered stock with the Osaka Securities Dealers AssociationTokyo Marubutsu closed; commenced preparations for the establishment of the PARCO storeOpened Ikebukuro PARCOChanged company name to PARCO CO., LTD.Shibuya PARCO opened by Tokyo PARCO Co., Ltd. (established in Sept. 1972), Seibu Theater (later renamed PARCO Theater) openedAbsorbed Tokyo PARCO Co., Ltd., which then took over Shibuya PARCOOpened Sapporo PARCOOpened Shibuya PARCO PART2Opened Gifu PARCOOpened Chiba PARCOOpened Oita PARCOOpened Tsudanuma PARCOOpened Kichijoji PARCOOpened Shibuya PARCO PART3Opened Shin-Tokorozawa PARCOOpened Matsumoto PARCOOpened Kumamoto PARCOStock listed on the Second Section of the Tokyo Stock ExchangeOpened Shibuya Quattro by PARCO (later renamed PARCO Quattro)Stock listed on the First Section of the Tokyo Stock ExchangeEstablished PARCO PROMOTION CO., LTD.Launched PEC CardOpened Chofu PARCOOpened Nagoya PARCOOpened NOS VOS by PARCO in Oizumi Gakuen, TokyoOpened Shinsaibashi PARCOAcquired stake in SEIDENKO CO., LTD.Established PARCO (Singapore) Pte Ltd. Opened Shinsaibashi PARCO-2 (DUE)Opened Hibarigaoka PARCOOpened Ikebukuro P'PARCOOpened Atsugi PARCOOpened Hiroshima PARCOGrand Opening of PARCO Bugis Junction in SingaporeExpanded floor space of Matsumoto PARCOOpened Otsu PARCOOpened Utsunomiya PARCO, bringing the total number of complexes in Japan and abroad to 20Opened Nagoya PARCO South BuildingEstablished PARCO-CITY CO., LTD.Merged SEIDENKO CO., LTD. and PARCO PROMOTIONS CO., LTD.; adopts new corporate name of PARCO SPACE SYSTEMS CO., LTD.Established NEUVE A CO., LTD.Opened Hiroshima PARCO AnnexOpened Shibuya ZERO GATEEstablished HOTEL NEW CRESTON CO., LTD.Adopted “Company with Committees System” under the revised Japanese Commercial CodeOpened Pedi ShiodomeOpened Sapporo PARCO Annex

Company Name

Headquarters

Head Office

Founded

Paid-in Capital

Board of Directors

Employees

Sales

Sales Floor Area

Tenants

Isamu Ito

Toshiro Sakaguchi

Mototeru Fujishima

Takeshi Yoshioka

Kazumi KojimaMunehiko OhnoSyuichi MatsudaAtushi TokiJoji MiyazawaYukako Uchinaga

Jyunichi Yamada

Shuji Kainaga

Kourou Hiraide

Hidekazu Hirano

Takashi Nagashima

Kouzou Makiyama

Hajime Inoue

Koichi Yamazaki

Masaaki Abe

Masato Murata

Shareholders’ Meeting

Board of Directors

President & CEO

Executive Vice President & COO

Corporate Planning

Nominating Committee

Audit Committee

Compensation Committee

Committees Secretariat

Management Committee

MarketingDiv.

AdministrationDiv.

AdministrativeServicesCenter

FacilityManagement

Dept.

Human Resources & General

Administration Dept.

Finance & Accounting

Dept.

EntertainmentDept.

StoreManagement

Dept.

Advertising &Promotion

Dept.

New ProjectDevelopment

Dept.

PropertyManagement

Dept.

Sapporo

Utsunom

iya

Shin-Tokorozawa

Ikebukuro

Shibuya

Hibarigaoka

Kichijoji

Chofu

Tsudanuma

Chiba

Atsugi

Matsum

oto

Gifu

Nagoya

Otsu

Shinsaibashi

Hiroshim

a

Oita

Kum

amoto

Number of sharesheld (Thousands)

Voting shareratio (%)

CSR CommitteeCS Committee

Risk Management CommitteeGroup Auditor

DevelopmentDiv.

Oita PARCO

Kumamoto PARCO

Hiroshima PARCO

Nagoya PARCO

Gifu PARCO

Otsu PARCO

Shinsaibashi PARCO

MatsumotoPARCO Utsunomiya PARCO

Sapporo PARCO

NOS VOS by PARCO

Shibuya PARCO

Ikebukuro PARCOP′PARCO

Pedi Shiodome

ShintokorozawaPARCO

Hibarigaoka PARCOKichijoji PARCO

Chofu PARCOTsudanuma PARCO

Chiba PARCO

Atsugi PARCO

Only the shopping areas of the buildings are shown.

List of Stores

Chiba PARCO2-2-2 Chuo, Chuo-ku, Chiba City, Chiba

B1F–8FOpened on December 1, 1976

Gifu PARCO9-12 Kanda-machi, Gifu city, Gifu

B1F–8FOpened on September 23, 1976

AnnexB1F–5F

Opened on March 31, 2005

Sapporo PARCO3-3 Minami-Ichijo Nishi, Chuo-ku,

Sapporo, HokkaidoB2F–8F

Opened on August 24, 1975

Tsudanuma PARCO2-18-1 Maebara-Nishi, Funabashi City, Chiba

Annex A: B1F–6FAnnex B: B1F–6F

Opened on July 1, 1977

Oita PARCO1-1-1 Funai-machi, Oita City, Oita

B2F–7FOpened on April 29, 1977

P’PARCO (P-Dash PARCO) B2F–8F

Opened on March 10, 1994

Ikebukuro PARCO1-28-2 Minami-Ikebukuro, Toshima-ku, Tokyo

B2F–8FOpened on November 23, 1969

QuattroB1F–5F

Opened on June 28, 1988

ZERO GATEB1F–4F

Opened on April 27, 2002

PART3B1F–8F

Opened on September 10, 1981

PART2B1F–6F

Opened on December 5, 1975

Shibuya PARCO15-1 Udagawa-cho, Shibuya-ku, Tokyo

PART1 B1F–9F


Atsugi PARCO2-12-15 Naka-cho, Atsugi City, Kanagawa

B1F–9FOpened March 25, 1994

Hibarigaoka PARCO1-1-1 Hibarigaoka, Nishi-Tokyo City, Tokyo

B1F–5FOpened on October 8, 1993

NOS VOS by PARCO 4-4-21 Higashi-Oizumi, Nerima-ku, Tokyo

1F–4FOpened on September 29, 1990

Shin-Tokorozawa PARCO1-2-1 Midori-cho, Tokorozawa City, Saitama

Annex P: B1F–5F Annex L: B1F–4F


Kichijoji PARCO1-5-1 Kichijoji-Honcho, Musashino City, Tokyo

B2F–8FOpened on September 21, 1980

South

B1F–10FOpened on November 6, 1998

Nagoya PARCO3-29-1 Sakae, Naka-ku, Nagoya City, Aichi

West/East West: B1F–11F (Hotel: 9–11F)

East: B1F–8FOpened on June 29, 1989

Matsumoto PARCO1-10-30 Chuo, Matsumoto City, Nagano

B1F–6FOpened on August 23, 1984

Hiroshima PARCO10-1 Hondori, Naka-ku, Hiroshima City, Hiroshima


AnnexB1F–9F

Opened on September 21, 2001

Otsu PARCO14-30 Uchidehama, Otsu City, Shiga

1F–8FOpened on November 2, 1996

Shinsaibashi PARCO1-9-1 Shinsaibashi-Suji, Chuo-ku, Osaka City, Osaka

B1F–9FOpened on May 31, 1991

PARCO-2 (DUE)B1F–4F

Opened September 3, 1992

Chofu PARCO1-38-1 Kojima-cho, Chofu City, Tokyo

B1F–10F (Hotel: 8–10F)Opened on May 25, 1989

Kumamoto PARCO5-1 Tedori-Honcho, Kumamoto City,

KumamotoB1F–9F

Opened on May 2, 1986

1-9-1 Higashi-shinbashi, Minato-ku, Tokyo

TOKYO-SHIODOME BUILDINGB2F/B1F/2F

Opened on February 16, 2005

Pedi Shiodome

Utsunomiya PARCO3-1-1 Baba-dori, Utsunomiya City, Tochigi

B1F–10FOpened on March 20, 1997

PARCO Bugis Junction(Singapore)

230 Victoria Street, #04-01Bugis Junction Towers, Singapore 1880241


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PARCO CO., LTD. Annual Report 2005 · Operating income Net income Financial Position: Total assets...

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Transcript of PARCO CO., LTD. Annual Report 2005 · Operating income Net income Financial Position: Total assets...