Annual Report 2003 Year Ended August 31, 2003
Saizeriya Co., Ltd.
Saizeriya Co., Ltd., a restaurant company, has been serving healthy Italian foods in Japan since 1968 by its chain store method and was incorporated in 1973. The Company’s unique feature is to supply foods via the Vertical Merchandise System, which procures ingredients from various places in the world and supplies the food-stuffs conveniently processed for the restaurant staffs’ operations in order to reduce labor works toward the end of final stages of whole procedures. Our goals are:
Profile
● To provide healthy and tasty meals at affordable prices enabling anyone to enjoy them every day ● To create restaurants which customers can visit casually and regularly ● To contribute to regional communities by operating many restaurants ● To provide products/merchandise for new dining experiences and to establish a comprehensive system covering all phases from the procurement of ingredients to the supply of foods In December 2003, the Company opened its first overseas restaurant in Shanghai, China. Saizeriya will further promote and develop its business, serving healthy authentic Italian cuisine, throughout in the world. Current Status (As of August 31, 2003): Number of restaurants: 699 Net sales: ¥65,383 million (Non-consolidated) Net income: ¥2,267 million (Non-consolidated) Number of employees: 1,558
Contents Financial Highlights
1
To Our Shareholders and Investors
2
Medium-term Strategy
3
Business Strategy Expansion Strategy
4
Procurement & Supply
6
Improvement in Operation Saizeriya is ...
8 10
Financial Section
12
Corporate Data
28
Consolidated Subsidiaries
28
Shareholders Information
29
Forward Looking Statement This annual report contains forward-looking statements related to management’s expectations about future business conditions. Actual business conditions may differ significantly from management’s expectations and accordingly affect the corporation’s sales and profitability. Actual results may differ as a result of factors over which the corporation has no control, including unexpected changes in competitive and economic conditions, government regulations, technology and other factors.
Financial Highlights Saizeriya Co., Ltd. and its Consolidated Subsidiaries
2003 Years ended 31st August, 2003 and 2002
Non-consolidated
2002
Consolidated
2003
Non-consolidated
Consolidated
Non-consolidated
Consolidated
¥61,787,923
¥61,890,869
$556,390
$558,830
Operation Data (Thousands of Yen and Thousands of U.S. Dollars): Net Sales
¥65,097,601 ¥65,383,076
Income before Income Taxes
4,593,798
4,380,132
9,786,105
9,767,383
39,263
37,437
Net Income
2,481,275
2,267,158
5,573,716
5,553,118
21,207
19,377
Total Assets
55,614,877
56,593,894
49,373,449
50,023,305
475,341
483,709
Total Shareholders’ Equity
39,916,462
40,586,412
37,852,984
38,186,331
341,166
346,893
Financial Data:
Per Share Data (Yen and U.S. Dollars): Net Income per Share
¥
Cash Dividends per Share
47.49 ¥
43.39
10.00
10.00
¥
106.65
¥
10.00
$
106.26
0.41
$
0.37
0.09
10.00
0.09
Note : The U.S. dollar amounts represent translations of Japanese yen amounts at the rate of ¥117=$1, the approximate rate of exchange at 31st August, 2003.
Net Sales
65,098 65,383
Millions of Yen
61,788 61,891 Non-consolidated Consolidated
Net Income Millions of Yen Non-consolidated Consolidated
51,887 5,000
50,000
5,574 5,553 4,643
39,738 4,000
40,000
3,527
30,857 30,000
3,000
20,000
2,000
10,000
1,000
0
2,481
2,267
1,709
0
1999 2000 2001
2002
2003
1999 2000 2001
2002
2003
Total Assets
Total Shareholders’ Equity and Equity Ratio
Millions of Yen
Millions of Yen Non-consolidated Consolidated
Non-consolidated Consolidated
55,615 56,594 49,373 50,023
50,000
Non-consolidated Consolidated
% 100
50,000
42,971 38,124
40,000
40,000
76.2
74.4
32,809
76.0 32,640
76.7
76.3
37,853 38,186
28,354
39,916 40,586 80 71.8 71.7 60
30,000
30,000
20,000
20,000
40
10,000
10,000
20
0
25,010
0
1999 2000 2001
2002
2003
0
1999 2000 2001
2002
2003
1
To Our Shareholders and Investors
We will expand the restaurants geared towards customers’ lifestyles through more sophisticated ingredients development and merchandise supply systems.
The fiscal year ended August 2003 was a year in which we understood new challenges for the next phase of our growth, after many years of expansion while bolstering our own vertical merchandising systems (integrated systems for ingredients development and products supply). The dining-out industry continued to face excessive competition, while the quality of take-out foods at convenience stores and food supermarkets had been improved in terms of price, convenience and taste. Thus, the battle for the “share of stomach” had intensified in all food business sectors. Under these circumstances, we posted sales of 65,383 million yen (up 5.6% from the previous year), operating income of 3,885 million yen (down 56.5%) and net income of 2,267 million yen (down 59.2%), on a consolidated basis, in the current fiscal period. One of main factors causing these fluctuations was the sales performance at existing restaurants, which fell short of projections. This was because of a failure to improve our merchandise system as planned, as a result of a delay in the start-up operations of our Australian Plant, which had originally been slated to come on stream at the beginning of the fiscal year. For the second main factor, we reduced the number of new restaurant openings from the initial plan of 150, to 110, after strictly reassessing return on investment, and eventually set up only 107 restaurants. The other factor was a temporary decline in labor productivity at our restaurants in the first half of the fiscal year, resulting in increases in sales costs as well as general and administrative expenses. Since Saizeriya’s founding, our corporate policy has not been changed: we want our customers to enjoy Italian home-style dishes in a casual atmosphere, mining a rich dietary culture at the world’s highest standard. However, the above results suggest that during the course of executing our strategy to realize this management policy, unforeseen happenings of negative events and delays in the improvement of our merchandise have pushed our business performance more downside than expected at the beginning of the fiscal year. We now believe that the most important issue is to develop and improve our core merchandising system in line with the medium-term and long-term plans and to improve operational efficiency by simplifying work processes at the restaurant operations. In fact, we will first enhance our vertical merchandising system and improve our cost performance through the operation of the Australian Plant, and develop new products using foodstuffs produced there. We will also enhance our restaurant support systems in the western district of Japan upon completion of the Hyogo Commissary, further simplifying work processes at restaurants, and maintain and increase sales at existing restaurants. In addition, we plan to open 70 new restaurants under more strict investment criteria. All of us will take concerted efforts to fulfill necessary preconditions and to achieve numerical targets. Apart from these basic management plans in Japan, we will open our first restaurant in Shanghai in mid-December this year. With this start, we intend to steadily expand our restaurant chain to materialize our corporate policy in foreign countries. We very much appreciate the continued support of our shareholders.
Yasuhiko Shogaki President
2
As our medium- and long-term business objectives, we have set targets of operating 1,000 restaurants in Japan (expected to be achieved at the end of the fiscal year ending August 2006) and of operating the fast food and food processing business and the overseas restaurant business. To achieve these objectives, we are carrying out management policies focusing on the following seven criteria:
Medium-term Strategy
1 2 3 4 5 6 7
Proactively operate the restaurant business assuming a target-area population per restaurant of 60,000 Increase the frequency of customer visits by offering attractive merchandise of the world-class standard in terms of both price and quality
Promotion of New Restaurant Openings and Menu Policies
Promote a vertical merchandising system
Construct commissaries targeting 200-300 restaurants in each region, and start full-scale operation of the Hyogo Commissary
Establishment of Merchandise Supply System
Reduce the costs of food ingredients, stabilize their supply and reduce the work processes at restaurants by operating the Australian Plant
Promote portion control of food ingredients, reduce losses and maintain a better quality of merchandise
Improvement of Restaurant Operations
Achieve return on investment (ROI) of at least 20% on capital investments
Objectives
In Domestic Market
1,000
restaurants in operation
Operating Income Margin
15%
over
ROE (return on equity)
15%
or more
(expected to achieve by the end of August, 2006)
3
Business Strategy Expansion Strategy
Saizeriya aims to establish a nationwide chain of 1,000 restaurants by 2006, with a theme of menus that “deliver genuine and authentic ingredients from the world.” In areas where the target-area population per restaurant is 60,000–100,000, it is essential to create restaurants that encourage customers to return soon at their leisure and to develop attractive menus with reasonable prices, high quality and good taste.
New Yoyogi Restaurant
New Openings and Existing Restaurants in the Current Fiscal Year In the current fiscal year, we reduced the number of new restaurant openings from the initial plan of 150 to 110, and then eventually to 107. This downward revision was due to the lack of improvement in sales at existing restaurants, resulting in some restaurants failing to achieve ROI of 20% or more. One of the reasons was a delay in the start-up of the Australian Plant, which in turn prevented us from developing new menus as planned. We opened only such new restaurants that could be expected to achieve ROI of at least 30%, considering the number of potential customers and given operation costs including headquarter costs. Consequently, we were operating a total of 669 restaurants as of the end of the current fiscal year. The quality of merchandise is still to be improved. For existing restaurants, therefore, we proposed menus at reasonable prices to motivate customers to visit, according to our management policies. As a result, since April, existing restaurants have been steadily attracting more and more customers. In the future, we plan to gradually improve the quality of our merchandise in line with the full-scale operation of the Australian Plant, aiming at an increase in sales at existing restaurants.
4
New menus
Changes in Menus Saizeriya’s menus are prepared from a merchandisers’ perspective after establishing a system to ensure stable supply of food ingredients to restaurants, through accurate understanding of global food ingredients’ supply based on seasonal, regional and quantity factors. Hamburgers, which were the first merchandise produced in the Australian Plant, were added to the menu after its renewal in April. At the same time, to attract more customers, we introduced a spaghetti menu at 290 yen. We also reduced the price of our all-you-can-drink service at almost all restaurants from 180 yen to 100 yen in late July. Moreover, with the full-scale operation of the Australian Plant, we have made changes to main menus at all restaurants, effective of October 21. We have endeavored to differentiate ourselves from our competitors by adding items using healthy and quality ingredients of the kind which the Australian Plant specializes in, such as vegetable-rich soup, chowder with high-quality milk, or hamburger and meat sauces with high-quality meat.
Number of Store (Store)
New Store Existing Store
700
107
600
100
500
562
130 468
400 300
95 344
80 249
200 174 100 0
1999
2000
2001
2002
2003
Breakdown of Menus (As of 31st August 2003) Others 0.3%
Appetizers, Salad and Soup 16.1%
Drinks and Dessert 22.3%
2003 Fish and Meat 22.5%
Popular menus
Pizza, Pasta and Snacks 38.7%
New Menu launched in October
Development of Menus for Small Target-Areas Assuming that the target-area population per restaurant is 60,000 in metropolitan regions and 100,000 in suburban areas, we set up restaurants only in target regions with a population of two million or more, in order to establish dominant positions. A target-area population of 60,000 in a metropolitan region means that customers can visit any of our restaurants within ten minutes either on foot or by car. To increase repeat customers, we have prepared our proprietary menus and a variety of dishes that are available in different scenarios, such as breakfast, lunch, dinner and snack. As the frequency of customer visits improves in a small target-area, we are pursuing a management policy that is expected to yield good profits. Some examples are to introduce exclusive merchandise using expensive ingredients, which may prompt customers to “give them a try,” and seasonal and regional items in the main menu common in our restaurants.
The start of operations at the Australian Plant has enabled us to provide higher quality food ingredients. Above all, the soup menu was further improved, adding healthy green bean potage and seafood chowder, rich with ingredients. The new face of the reasonably priced “double size” soup means that we can respond to the diverse expectations of customers. We also strive to enhance the frequency of customer visits by showcasing new items such as roast duck, spaghetti pescatora and pizza with prosciutto. The children’s menu, including kids’ plates, was revived by placing a greater emphasis on the safety than ever before. We target families by setting prices that are more reasonable than those at any other restaurants.
5
Business Strategy Procurement & Supply
The key to the taste of foods lies in the quality of ingredients. To provide healthy, tasty and enjoyable meals at affordable prices, Saizeriya has been focused on establishing integrated systems for ingredient procurement and supply. To this end, we grow the best possible ingredients at optimal sites around the world and import them directly. We also collect fresh vegetables harvested in the morning through our own logistics, which access farms directly.
Australian Plant
Hyogo Commissary
Evolution of Vertical Merchandising System To ensure the systematic provision of low cost high quality ingredients, we have established a vertical merchandising system (retrospective development of raw materials) as our own unique system for supplying merchandise, without depending on trading companies. This system covers all phases from the production of ingredients to its processing and distribution. When a company first sets up and runs such a system, it is often thought to be costly and problematic. Saizeriya believes that outlays on market research can be reduced through avoiding the wholesalers or middleman between those producing and those processing/preparing food. Because the entire system is operated on an integrated basis, any improvement within the system will lead to an improvement in cost performance. Such improvement to the system is the basis that enables us to provide meals at more affordable prices, ahead of our competitors.
6
Full-Scale Operations Start at Australian Plant and Hyogo Commissary At the Australian Plant, a production line for hamburgers was launched in January 2003, supplying part of the hamburger menus since February. In April, hamburgers, produced in the Plant, were added as a core item to the new main menu and distributed to all of the restaurants. The remaining two production lines were completed in May. The supply system has been gradually developing through trial operation. After the introduction of the new menu in October, ingredients for soups and sauces were gradually supplied to as many restaurants as possible. Ingredients produced in Australia meet international safety standards. Thanks to this production base in the Southern Hemisphere, we have developed and supplied merchandise that uses ingredients that are not in season in Japan. In Japan, the construction of the Hyogo Commissary was completed in April. This plant is our third commissary in Japan, following the Yoshikawa and Kanagawa Commissaries in the eastern part of Japan, and will become a logistics base in the western part of Japan.
Net Sales / Cost of Sales to Net Sales Ratio (Non-consolidated) Net Sales
(Millions of Yen)
Cost of Sales to Net Sales Ratio
( %)
40
80,000 36.3
35.8 34.5
60,000
34.1
34.7 65,098
35
61,788 51,887 39,738
40,000
30
30,857 20,000
Shanghai
Tohoku and Hokkaido/
22stores
25
0
0
1999
2000
2001
2002
2003
Distribution of Stores by Region Koshinetsu/35stores Fukushima plant Kinki and Chugoku/107stores
Northern Kanto/55stores Yoshikawa commissary Kanagawa commissary
Hyogo commissary
Tokyo Metropolitan Area/ 355stores Tokai/95stores
Koshinetsu 4.7%
Tohoku and Hokkaido 3.1%
Kinki and Chugoku 13.4%
Tokyo Metropolitan Area 59.1%
Tokai 12.1% Northern Kanto 7.6%
Australia
Saizeriya Australia Pty. Ltd.
Hyogo Commissary
Systems for Supplying and Processing Ingredients Our vertical merchandising system is considered to be a step towards establishing a mechanism for providing tasty and healthy meals at affordable prices. As part of this process, we have selected perfect sites for producing the ingredients and constructed production bases. The Fukushima Commissary is a rice-cooking plant that processes wash-free rice and cooks processed rice such as pilaf to supply to all of our restaurants. The Australian Plant is a supply base to produce sauces and hamburgers from safe and high quality local ingredients for frozen export. It has the capacity to supply such ingredients to 1,000 restaurants. In the future, we will promote the development of merchandise, improve productivity in Australia, and enhance the commercial viability of merchandise through the vertical merchandising system. The Yoshikawa, Kanagawa and Hyogo Commissaries are designed to reduce the operational burdens at restaurants. They are originally cooking plants that implement all processes prior to cooking in the kitchen at restaurants. They function as logistics bases that supply the allocated ingredients to each restaurant.
The Hyogo Commissary, with a production capacity twice that of the Yoshikawa Commissary, was completed in April 2003 (the site area is 13,000 m2). After performing processing operations such as washing and cutting of vegetables for salads, packing and portioning, the Commissary distributes the processed vegetables to all of the restaurants in the western part of Japan. With this new commissary, which boasts the logistics capacity to service some 300 restaurants, we will speed up the openings of selected new restaurants in the Kinki and Chugoku regions.
7
Business Strategy Improvement in Operation
The vertical merchandising system is not the only mechanism to provide low cost high quality merchandise to more customers. As the details of all restaurant cooking operations simplified with the aid of food plants and commissaries are fully explained in the manual, there is a substantial improvement in productivity at each restaurant and in product quality.
Management Structure Area manager 40 persons
Area managers in 40 areas supervise restaurant operations and provide
Restaurant manager 669 persons
instructions, so as to improve operations under the supervision of
Restaurant staff 773 persons
sales department.
Number of Employees 1,600
1,442 1,233
1,200 800
1,558
1,056
804
400 0 1999
2001
2002
2003
Reducing Inefficiency and Maintaining Stability by Standardizing Work Operations
Fewer Work Processes and More Efficiency at Restaurants
At present, we provide the same quality of meals and services at 669 restaurants across Japan. This has been made possible by efficient restaurant operations thanks to substantial decreases in work processes at each restaurant. This is also due to an enhancement of our ingredients processing systems at our own logistics bases.
The higher the share of work processes at restaurants, the higher the personnel expense. If operations are simplified, even inexperienced staff can be optimally utilized and the efficiency of operations will improve. For example, soups and salads are supplied in small portions packed at commissaries, so there are no leftovers after placing them on a dish at a restaurant.
Because of the integration of ingredients processing operations at commissaries and plants, the number of restaurants has increased. At the same time, however, we have been employing inexperienced staff at a higher percentage. Therefore, we decided to revise our restaurant operations manual to improve productivity at each restaurant. The new manual does not only introduce the standardization of finished products but also teaches specific procedures like the postures while cooking and the usage of cooking utensils, in order to prevent inexperienced staff from fluctuating product quality.
8
2000
Although all work operations at a restaurant are thus compiled in the manual, the restaurant manager is to draw up a “labor scheduling” which lists a monthly working schedule. Under this schedule, the restaurant manager is free to assign staff to scheduled works and can therefore proceed with operations efficiently. To facilitate the serving of dishes to customers, our manual instructs staff to help each other irrespective of their post in the kitchen or the dining hall. This is one of the distinctive characteristics of Saizeriya’s style.
SGA Expenses / SGA Expenses to Net Sales Ratio (Non-consolidated) SGA Expenses SGA Expenses to Net Sales Ratio
(Millions of Yen)
40,000
( %)
57.4
60
37,348 30,000 48.1
49.4
49.7 25,762
50.7
50
31,342
19,638
20,000 14,843
40 10,000
0
0
1999
2000
2001
2002
2003
Net Sales, Number of Customers, Per-Customer Price (Non-consolidated) Net Sales (Millions of Yen) Number of Customers Per-Customer Price (Yen)
1,000
100,000 857
87,370 806
80,000
806
789
78,291 64,372 61,788 60,000
40,000
(Yen)
745
600
49,317 51,887 36,002
800
65,098
39,738
400
30,857
200
20,000
0
0
1999
2000
2001
2002
2003
Saizeriya Establishes Foothold in Shanghai
Securing and Training of Human Resources As a company that is rapidly expanding, we face an urgent need to secure and train human resources. Mainly through on-the-job training, new employees are first assigned to restaurants, and learn and improve their skills through actual work. Our job training system integrates work operations, training, evaluation and reward. With this system, employees can master 200 different kinds of tasks one by one, to reach the stage of having enough skills to be a restaurant manager. Once they are qualified through a designated examination, they can move up to the next stage, and their salary will increase accordingly. Restaurant managers have an important obligation to master all kinds of operations at restaurants and demonstrate leadership in giving instructions to other staff. Area managers call on the experience that restaurant managers have in all areas of field operations for the development of menus and the procurement of ingredients.
In December 2003, the Saizeriya chain will launch its overseas operations. We were the first Japan based restaurant chain to obtain a permission to set up a 100% owned subsidiary in Shanghai, China, and our first restaurant will open concurrently. The menu will include pasta, doria (rice au gratin) and pizza, as in Japan. Targeting local customers rather than tourists, we will create a foothold for expanding our business in China, where demand for dining out is expected to increase as income levels rise. Although Japanese staff will be dispatched, Chinese college graduates will be trained in Japan. The operation of the restaurant will be the responsibility of a bilingual staff (Japanese and Chinese). The policy for new openings will be considered in line with the progress of the first restaurant and through marketing research. We also intend to establish another subsidiary in Beijing and start its business prior to the 2008 Summer Olympics.
9
Saizeriya is ...
Saizeriya aims to be a restaurant chain with high productivity that provides richness
Provide “low-priced Italian cuisine” through direct procurement of high quality ingredients globally
10
Contributing to regional communities by operating many restaurants
in daily life
Providing various delicious menus for new dining experiences
Creating restaurants which customers can visit casually and regularly
Provide healthy “authentic Italian cuisine” through continuous pursuit of quality
11
Financial Section Contents Financial Review
13
Consolidated Balance Sheets
16
Consolidated Statements of Income
18
Consolidated Statements of Shareholders’ Equity
19
Consolidated Statements of Cash Flows
20
Notes to Consolidated Financial Statements
21
Independent Auditors’ Report
27
Saizeriya Co., Ltd. established its first subsidiary during the year ended 31st August, 2000. Initially, consolidation of subsidiaries’ financial statements did not significantly change the total assets, net sales or net income reported in the 2000 and 2001 non-consolidated financial statements. However, due to an increase of their materiality with respect to consolidation, the subsidiaries’ financial statements were consolidated for the first time for the year ended 31st August, 2002. In “Five-Year Summary,” the financial statements for the years ended 31st August, 2002 and 2003 were prepared on a consolidated basis, while the financial statements for the years ended 31st August, 2000 and 2001 were prepared on a nonconsolidated basis. There were no significant effects of such non-consolidation for the comparison of financial information shown in the Summary. The graphs in the Financial Review section were prepared on the same basis as above.
Five-Year Summary Saizeriya Co., Ltd. Millions of U.S. Dollars (1)
In millions of yen and millions of U.S. dollars except for per share information
1999
2000
2001
2002
2003
2003
¥ 30,857
¥ 39,738
¥ 51,887
¥ 61,891
¥ 65,383
$ 559
Operating income
4,972
6,404
8,452
8,942
3,885
33
Net income
1,709
3,527
4,643
5,553
2,267
19
Net income (2)
36.02
67.48
88.83
106.26
43.39
0.37
Cash dividends
10.00
15.00
10.00
10.00
10.00
0.09
32,809
38,124
42,971
50,023
56,594
484
2,972
2,527
1,123
1,716
6,342
54
Total shareholders’ equity
25,010
28,354
32,640
38,186
40,586
347
Total capital expenditures
2,223
3,946
7,232
7,048
6,863
59
Depreciation and amortisation
811
966
1,407
1,970
2,272
19
Number of full-time employees
804
1,056
1,233
1,442
1,558
Number of restaurants
254
344
474
568
669
Years ended 31st August
Net sales
Per share data (Yen and U.S. Dollars):
Total assets Long-term debt
Note : (1) The U.S. dollar amounts represent translations of Japanese yen amounts at the rate of ¥117=$1, the rate of exchange at 31st August, 2003. (2) The computation of net income per share is based on the weighted average number of shares outstanding during each year, retroactively adjusted for stock splits. On 18th October, 2002, the Company made a stock split by way of a free share distribution at the rate of 1.3 shares for each outstanding share.
12
Financial Review Saizeriya Co., Ltd. and its Consolidated Subsidiaries
Operations and Results During the fiscal year ended August 2003, the Japanese economy showed signs of an upward movement in both corporate earnings and private capital expenditure, despite the impact of an unstable world economy owing to the war in Iraq and the SARS (severe acute respiratory syndrome) outbreak. The stock market turned back on track for recovery, due to a rise in prices of US stocks and an injection of public funds into major Japanese banks. On the other hand, the outlook for consumer spending remained uncertain, as the employment and earnings situation seemed bleak reflecting a high unemployment rate and it was still difficult to envision any scenario to overcome deflation. With the growing emphasis on food safety, the diningout industry is facing uncertain times. Corporate Japan continued to reduce personnel expenses by increasingly hiring part-timers — which now make up a substantial part of the workforce — and to introduce self-service systems. Furthermore, as deflation was prevailing across the country, it was inevitable to see declines in both consumer spending as a whole and per customer spending. Despite an increase in the number of restaurants in the dining-out sector, it seems that companies cannot survive in the virtually saturated market unless they can differentiate their corporate brand identity. Under these circumstances, we posted net sales of 65,383 million yen (up 5.6% year on year), operating income of 3,885 million yen (down 56.5% year on year) and net income of 2,267 million yen (down 59.2% year on year) on a consolidated basis for the fiscal year ended in August 2003. Net sales Net sales increased 5.6% from the previous fiscal year to ¥65,383 million ($559 million). An increase in the number of restaurants contributed to the increase of net sales. Cost of sales and Selling, general and administrative (“SGA”) expenses Cost of sales increased to ¥23,723 million ($203 million)
from previous fiscal year’s ¥21,532 million. As a percentage, cost of sales to net sales increased 1.5 percentage points to 36.3%. The decrease in the gross profit margin is mainly due to a decrease in average sales per restaurant and a decrease in the number of newly opened stores compared with the forecast. SGA expenses increased by 20.2% or ¥6,359 million ($54 million) over the previous fiscal year to ¥37,775 million ($323 million). The ratio of SGA expenses to net sales increased 7.0 percentage points to 57.8%. The increase was mainly due to an increase in personnel-related expenses and rent expenses due to an increase in the number of restaurants. Operating income Operating income was ¥3,885 million ($33 million), a 56.6% decrease from ¥8,942 million recorded in the previous fiscal year. The decrease resulted from a decrease in gross profit margin and an increase in SGA expenses, notwithstanding the increase in net sales. Other expenses Other income, on a net basis, was ¥495 million ($4 million), representing a ¥330 million ($3 million) decrease from the ¥825 million recorded in the previous fiscal year. The decrease was primarily due to a ¥414 million gain recorded in the previous fiscal year in connection with the collection of investment securities (Princeton Bond) previously written off in 1999. Income before income taxes Income before income taxes was down ¥4,380 million ($37 million), a 55.2% decrease compared with ¥9,767 million for the previous fiscal year. Income taxes Income tax as a percentage of pre-tax income (the effective tax rate) rose from 43.0% in previous fiscal year to 48.2% in this fiscal year. The increase in the effective rate was mainly due to increase in percentage of per capita tax resulting from the decrease in income before income taxes.
13
65,383
Net Sales
Net income Net income was ¥2,267 million ($19 million), a 59.2% decrease from the previous fiscal year’s ¥5,553 million. Net income per share of common stock was ¥43.39, compared with previous fiscal year’s ¥106.26. Return on assets was 4.3% in this fiscal year. Return on equity was 5.8%, versus 15.6% in the previous fiscal year.
61,891
Millions of Yen 51,887 50,000 39,738 40,000 30,857 30,000
20,000
Financial Position
10,000
0
1999 2000 2001 2002 2003
SG&A and SG&A to Net Sales
37,775
Millions of Yen SG&A SG&A to Net Sales
31,416
%
30,000
100 25,762 80
24,000 19,638 18,000 12,000
57.8 50.8
14,843 49.4
48.1
49.7
60
40
6,000
20
0
0
1999 2000 2001 2002 2003
Net Income and Net Income to Net Sales Millions of Yen 5,553 Net Income Net Income to Net Sales 4,643 9.0 8.9
5,000
% 10
9.0 4,000
8
3,527
3,000
5.5
2,000
1,709
2,267
6
4 3.4
1,000
2
0
0
1999 2000 2001 2002 2003
ROE and ROA % ROE ROA 25
20 15.2
9.9 11.5
10 9.9 5
15.6
13.2
15
11.9 5.8
6.9 4.3
0
1999 2000 2001 2002 2003 ROE = Net Income/Shareholders’ Equity (Yearly average) ✕ 100 ROA = Net Income/Total Assets (Yearly average) ✕ 100
14
At 31st August 2003, the Company’s total assets were ¥56,594 million ($484 million), an increase of ¥6,571 ($56 million) over the previous fiscal year. The increase in assets was mainly due to the increase of property, lease guarantee payments and deposits and inventories. The increase in property was mainly due to the acquisition of Hyogo Commissary and newly opened restaurants during this fiscal year. Also, the opening of restaurants during this fiscal year caused the increase of lease guarantee payments and deposits. The increase in inventories was mainly due to the increase in the number of restaurants. Liabilities increased ¥4,220 million ($36 million) to ¥16,007 million ($137 million). Income taxes payable decreased by ¥2,098 million ($18 million) to ¥90 million ($1 million). This decrease was mainly due to the decrease in taxable income and an interim payment. Long-term debt, including the current portion, increased by ¥5,006 million ($43 million) to ¥7,146 million ($61 million). Shareholders’ equity increased ¥2,400 million ($21 million) to ¥40,586 million ($347 million). This increase was mainly due to net income for this fiscal year and a net increase in foreign currency translation adjustments. The ratio of shareholders’ equity to total assets decreased 4.6 percentage points to 71.7%.
Cash Flows Net cash provided by operating activities was ¥2,385 million ($20 million), a ¥3,636 million ($31 million) decrease over the previous fiscal year. Income before income taxes decreased by ¥5,387 million ($46 million) compared with the previous fiscal year, even though other reconciliation items such as changes in accounts payable and other current assets had favorable effects upon cash flow. Net cash used in investing activities was ¥8,228 million ($70 million), a decrease of ¥781 million ($7 million) over the pervious fiscal year. The purchase of property decreased ¥185 million ($2 million) to ¥6,863 million ($59
million). Also, payments for guarantee money and deposits decreased ¥458 million ($4 million) to ¥1,879 million ($16 million). Those cash payments were primarily used for the construction of the Hyogo Commissary and newly opened restaurants. Net cash provided by financing activities was ¥4,591 million ($39 million), a ¥4,028 million ($34 million) increase over the previous fiscal year. The net proceeds from short-term loans and long-term debt increased ¥3,902 million ($30 million) to ¥5,110 million ($44 million). As a result, cash and cash equivalents decreased by ¥1,169 million ($10 million) to ¥7,526 million ($64 million) at the end of this fiscal year, from ¥8,695 million at the end of the previous fiscal year.
Cash Flows Millions of Yen 7,523 7,500 6,050 6,000 4,539
4,492 4,500
3,000
2,520
1,500
0
1999 2000 2001 2002 2003 Cash Flows = Net Income + Depreciation and Amortisation
Capital Expenditures (Expenditures to Property, Deposits, etc.) Millions of Yen
Financial Management
12,500 10,948*
At present, funds required for operating capital and capital expenditures are financed through internally generated cash and debt financing. Short-term debt financing, with maturities of one year or less, is utilized primarily to obtain required operating capital. Long-term borrowing is utilized to obtain required long-term funding such as investments in plants and newly opened restaurants. As of 31st August, 2003, all of the long-term borrowings of ¥7,146 million ($61 million), including the portion due within one year, were denominated in fixed rate yen and were comprised of ¥7,133 million ($61 million) of loans from banks and ¥12 million ($0.1 million) of long-term payable to leasing companies. The Company believes that their sound financial position and ability to generate positive operating cash flows provide sufficient resources to fund future requirements for operating capital and for capital expenditures related to the expansion of production capacity and the increase in the number of restaurants.
9,776
10,000 7,915
7,315
7,500 5,029 5,000 2,500
0
1999 2000 2001 2002 2003 * The amount of capital expenditure for the fiscal year 2001 would be 12,915 million yen, if the amounts incorporated the capital expenditures spent by subsidiaries.
Depreciation and Amortisation Millions of Yen 2,272 1,970
2,000
1,600
1,407
1,200 966 811 800
400
0
1999 2000 2001 2002 2003
Number of Restaurants 699
568
600 474
480 344
360 254 240 120
0
1999 2000 2001 2002 2003
15
Consolidated Balance Sheets Saizeriya Co., Ltd. and Consolidated Subsidiaries
Thousands of U.S. Dollars (Note 1)
Thousands of Yen
2003
2002
2003
¥ 7,526,268
¥ 8,695,456
$ 64,327
Accounts receivables
477,437
518,215
4,081
Inventories (Note 4)
3,102,232
2,291,476
26,515
178,484
288,232
1,525
2,624,268
2,004,064
22,430
13,908,689
13,797,443
118,878
5,470,879
5,242,828
46,760
23,441,044
16,396,430
200,351
Machinery and equipment
3,815,939
1,525,684
32,615
Furniture and fixtures
2,728,383
2,472,342
23,319
59,859
3,021,966
512
35,516,104
28,659,250
303,557
(8,105,241)
(6,196,722)
(69,276)
27,410,863
22,462,528
234,281
209,383
209,383
1,790
13,152,794
12,000,733
112,417
364,089
262,831
3,112
1,548,076
1,290,387
13,231
15,274,342
13,763,334
130,550
¥56,593,894
¥50,023,305
$483,709
31st August, 2003 and 2002
ASSETS CURRENT ASSETS: Cash and cash equivalents
Deferred tax assets (Note 9) Prepaid expenses and other current assets Total current assets
PROPERTY, PLANT AND EQUIPMENT (Note 6): Land Buildings and structures
Construction in progress Total Accumulated depreciation Net property, plant and equipment
INVESTMENTS AND OTHER ASSETS: Investments in an unconsolidated subsidiary Lease guarantee payments and deposits (Note 5) Deferred tax assets (Note 9) Other assets Total investments and other assets TOTAL See notes to consolidated financial statements.
16
Thousands of U.S. Dollars (Note 1)
Thousands of Yen
2003
31st August, 2003 and 2002
2002
2003
LIABILITIES AND SHAREHOLDERS’ EQUITY CURRENT LIABILITIES: Current portion of long-term debt (Note 6) Accounts payables Income taxes payable Accrued expenses Other current liabilities Total current liabilities
¥
803,471
¥
423,370
$
6,867
3,441,448
3,202,036
29,414
90,250
2,187,761
772
3,852,334
3,319,085
32,926
546,191
240,452
4,668
8,733,694
9,372,704
74,647
6,342,099
1,716,402
54,206
LONG-TERM LIABILITIES: Long-term debt (Note 6)
304
Deferred tax liabilities (Note 9) Liability for retirement benefits (Note 7)
809,100
621,628
6,915
Other liabilities
122,589
125,936
1,048
7,273,788
2,464,270
62,169
8,612,500
8,612,500
73,611
9,007,200
9,007,200
76,985
22,135,880
20,270,707
189,196
898,465
347,745
7,679
40,654,045
38,238,152
347,471
Total long-term liabilities
CONTINGENT LIABILITIES (Note 12)
SHAREHOLDERS’ EQUITY (Notes 8 and 13): Common stock — authorised, 73,208 thousand shares; issued, 52,272 thousand shares in 2003 and 40,209 thousand shares in 2002 Additional paid-in capital Retained earnings Foreign currency translation adjustments Total Treasury stock — at cost, 26 thousand shares in 2003 and 11 thousand shares in 2002 Total shareholders’ equity TOTAL
(67,633)
(51,821)
(578)
40,586,412
38,186,331
346,893
¥56,593,894
¥50,023,305
$483,709
17
Consolidated Statements of Income Saizeriya Co., Ltd. and Consolidated Subsidiaries
Thousands of U.S. Dollars (Note 1)
Thousands of Yen
2003
Years Ended 31st August, 2003 and 2002
NET SALES
2002
2003
¥ 65,383,076
¥ 61,890,869
$ 558,830
COST OF SALES
23,722,992
21,532,389
202,761
Gross profit
41,660,084
40,358,480
356,069
37,774,598
31,416,261
322,860
3,885,486
8,942,219
33,209
Interest income
76,357
94,493
653
Interest expense
(57,791)
(17,925)
(494)
Foreign exchange gain
564,041
417,317
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Operating income
OTHER INCOME (EXPENSES):
Recovery on securities previously written off
4,821
413,695
Other — net
(87,961)
(82,416)
494,646
825,164
4,228
4,380,132
9,767,383
37,437
2,104,787
4,076,798
17,990
8,187
137,467
70
2,112,974
4,214,265
18,060
¥ 2,267,158
¥ 5,553,118
$ 19,377
Other income — net INCOME BEFORE INCOME TAXES
(752)
INCOME TAXES (Note 9): Current Deferred Total income taxes NET INCOME
Yen
U.S. Dollars
PER SHARE OF COMMON STOCK (Note 2.l): Basic net income Cash dividends applicable to the year See notes to consolidated financial statements.
18
¥
43.39 10.00
¥
106.26 10.00
$
0.37 0.09
Consolidated Statements of Shareholders’ Equity Saizeriya Co., Ltd. and Consolidated Subsidiaries
Thousands
Years Ended 31st August, 2003 and 2002
BALANCE, 1ST SEPTEMBER, 2001
Number of Shares Issued
Thousands of Yen
Common Stock
Additional Paid-in Capital
Foreign Currency Translation Adjustments
Retained Earnings
30,930 ¥ 8,612,500 ¥ 9,007,200 ¥ 15,026,891 ¥
Net income
Treasury Stock
477,872 ¥
(774)
5,553,118
Cash dividends, ¥10 per share
(309,302)
Increase in treasury stock (11 thousand shares) Stock splits (Note 8)
(51,047) 9,279
Net decrease in foreign currency translation adjustments BALANCE, 31ST AUGUST, 2002
(130,127) 40,209
8,612,500
9,007,200
Net income
20,270,707
347,745
(51,821)
2,267,158
Cash dividends, ¥10 per share
(401,985)
Increase in treasury stock (15 thousand shares) Stock splits (Note 8)
(15,812) 12,063
Net increase in foreign currency translation adjustments BALANCE, 31ST AUGUST, 2003
550,720 52,272 ¥ 8,612,500 ¥ 9,007,200 ¥ 22,135,880 ¥
898,465 ¥
(67,633)
Thousands of U.S. Dollars (Note 1)
BALANCE, 31ST AUGUST, 2002
Common Stock
Additional Paid-in Capital
Retained Earnings
$ 73,611
$ 76,985
$ 173,254
Net income
19,377
Cash dividends, $0.09 per share
(3,435)
Foreign Currency Translation Adjustments
$
2,972
Treasury Stock
$
Increase in treasury stock (15 thousand shares)
(135)
Net increase in foreign currency translation adjustments BALANCE, 31ST AUGUST, 2003
(443)
4,707 $ 73,611
$ 76,985
$ 189,196
$
7,679
$
(578)
See notes to consolidated financial statements.
19
Consolidated Statements of Cash Flows Saizeriya Co., Ltd. and Consolidated Subsidiaries
Thousands of U.S. Dollars (Note 1)
Thousands of Yen Years Ended 31st August, 2003 and 2002
OPERATING ACTIVITIES: Income before income taxes Adjustments for: Income taxes — paid Depreciation and amortisation Loss on disposal of property, plant and equipment Foreign exchange gain Changes in assets and liabilities: (Increase) decrease in accounts receivable Increase in inventories (Increase) decrease in other current assets Increase in long-term prepaid expenses Increase (decrease) in accounts payable Increase in accrued expenses and other liabilities Increase in liability for retirement benefits Other — net Total adjustments Net cash provided by operating activities INVESTING ACTIVITIES: Purchases of property, plant and equipment Purchase of marketable securities and investment securities Proceeds from sales of investment securities Proceeds from redemption of guarantee money and deposits Payments for guarantee money and deposits Payments for investment in subsidiary Other Net cash used in investing activities FINANCING ACTIVITIES: Proceeds from short-term loans Proceeds from long-term loans Payment of short-term loans Payment of long-term loans Dividends paid Financing — other Net cash provided by financing activities FOREIGN CURRENCY TRANSLATION ADJUSTMENTS ON CASH AND CASH EQUIVALENTS NET DECREASE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR CASH AND CASH EQUIVALENTS, END OF YEAR See notes to consolidated financial statements.
20
2003
¥ 4,380,132
2002
¥ 9,767,383
2003
$ 37,437
(4,202,390) 2,271,933 100,731
(4,331,123) 1,969,775 76,548 (417,317)
(35,918) 19,418 861
41,018 (803,750) 84,431 (190,474) 233,507 295,428 187,472 (13,164) (1,995,258) 2,384,874
(85,016) (696,274) (554,491) (231,708) (21,391) 441,337 111,619 (8,731) (3,746,772) 6,020,611
351 (6,870) 722 (1,628) 1,996 2,525 1,602 (112) (17,053) 20,384
(6,862,857)
(58,657)
(201,276) (8,227,971)
(7,047,791) (1,000,000) 1,018,572 636,087 (2,336,981) (209,383) (69,278) (9,008,774)
2,850,000 5,670,000 (2,850,000) (559,587) (401,985) (117,727) 4,590,701
3,000,000 1,500,000 (3,100,000) (292,465) (309,302) (235,222) 563,011
24,359 48,462 (24,359) (4,783) (3,436) (1,006) 39,237
83,208 (1,169,188)
444,117 (1,981,035)
711 (9,993)
714,976 (1,878,814)
8,695,456 ¥ 7,526,268
10,676,491 ¥ 8,695,456
6,111 (16,058) (1,721) (70,325)
74,320 $ 64,327
Notes to Consolidated Financial Statements Saizeriya Co., Ltd. and Consolidated Subsidiaries
Years Ended 31st August, 2003 and 2002
1. Basis of Presenting Consolidated Financial Statements The accompanying consolidated financial statements have been prepared in accordance with the provisions set forth in the Japanese Securities and Exchange Law and its related accounting regulations, 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. The consolidated financial statements are not intended to present the financial position, results of operations and cash flows in accordance with accounting principles and practices generally accepted in countries and jurisdictions other than Japan. In preparing these consolidated financial statements, certain reclassifications and rearrangements have been made to the consolidated financial statements issued domestically in order to present them in a form which is more familiar to readers outside Japan. The consolidated financial statements are stated in Japanese yen, the currency of the country in which SAIZERIYA CO., LTD. (the “Company”) is incorporated and operates. The translations of Japanese yen amounts into U.S. dollar amounts are included solely for the convenience of readers outside Japan and have been made at the rate of ¥117 to $1, the approximate rate of exchange at 31st August, 2003. Such translations should not be construed as representations that the Japanese yen amounts could be converted into U.S. dollars at that or any other rate.
2. Summary of Significant Accounting Policies a. Consolidation — The accompanying consolidated financial statements as of 31st August, 2003 include the accounts of the Company and its three significant (two in 2002) subsidiaries (collectively the “Group”). Consolidation of the remaining subsidiaries would not have a material effect on the accompanying consolidated financial statements. Investment in unconsolidated subsidiary is accounted for on the cost basis. The effect on the consolidated financial statements of not applying the equity method is immaterial. b. Cash Equivalents — Cash equivalents are short-term investments that are readily convertible into cash and that are exposed to insignificant risk of changes in value. Cash equivalents include time deposits, certificate of deposits, commercial paper and bond funds, all of which mature or become due within three months of the date of acquisition. c. Inventories — Semi-finished dishes and supplies are stated at
the most recent purchase price which approximates cost determined by the first-in, first-out method. Raw materials are stated at cost determined by the moving-average method. d. Marketable and Investment Securities — Marketable and investment securities are classified and accounted for, depending on management's intent, as follows: (1) trading securities that are held for the purpose of earning capital gains in the near term are reported at fair value, and the related unrealised gains and losses are included in earnings, (2) held-to-maturity debt securities that are expected to be held to maturity with the positive intent and ability to hold to maturity are reported at amortised cost, and (3) available-for-sale securities not classified as either of the aforementioned securities are classified as available-for-sale securities and reported at fair value, net of applicable taxes. Unrealised losses were charged to income and unrealised gains were reported as a separate component of shareholders’ equity. The cost of securities sold is determined based on the movingaverage method. Non-marketable available-for-sale securities are stated at cost determined by the average method. For other than temporary declines in fair value, securities are reduced to net realisable value by a charge to income. Other investments are valued at average cost. e. Property, Plant and Equipment — Property, plant and equipment are stated at cost. Depreciation of property, plant and equipment of the Company and its consolidated domestic subsidiaries is computed substantially by the declining-balance method at rates based on the estimated useful lives of the assets, while the straight-line method is applied to buildings of the Company and its domestic subsidiaries, and all property, plant and equipment of consolidated foreign subsidiaries. The range of useful lives is principally from 15 to 38 years for buildings and structures, 9 years for machinery and equipment and from 6 to 9 years for furniture and fixtures. f. Retirement and Pension Plans — The Company and certain consolidated subsidiaries have an unfunded retirement benefit plan for employees. In addition, the Company sponsors a contributory welfare pension plan, the Japan Food Service Association welfare pension plan which was established together with other companies in the same business. The welfare pension plan is funded in conformity with the funding requirements of applicable governmental regulations. Annual contributions are charged to income when paid. g. Leases — All leases are accounted for as operating leases. Under Japanese accounting standards for leases, finance leases
21
that deem to transfer ownership of the leased property to the lessee are to be capitalised, while other finance leases are permitted to be accounted for as operating lease transactions if certain “as if capitalised” information is disclosed in the notes to the lessee’s financial statements. h. Income Taxes — The Group accounts for income taxes based on the asset and liability method. Deferred income taxes are recorded to reflect the impact of temporary differences between assets and liabilities recognised for financial reporting purposes and such amounts recognised for tax purposes. These deferred taxes are measured by applying currently enacted tax laws to the temporary differences. i. Appropriations of Retained Earnings — Appropriations of retained earnings at each year end are reflected in the consolidated financial statements in the following year after shareholders’ approval has been obtained. j. Foreign Currency Transactions — All short-term and longterm monetary receivables and payables denominated in foreign currencies are translated into Japanese yen at the exchange rates at the balance sheet date. The foreign exchange gains and losses from translation are recognised in the income statement to the extent that they are not hedged by forward exchange contracts. k. Foreign Currency Financial Statements — The balance sheet accounts of the consolidated foreign subsidiaries are translated into Japanese yen at the current exchange rate as of the balance sheet date except for shareholders’ equity, which is translated at the historical rate. Differences arising from such translation were shown as “Foreign currency translation adjustments” in a separate component of shareholders’ equity. Revenue and expense accounts of consolidated foreign subsidiaries are translated into yen at the average exchange rate. l. Per Share Information — Effective 1st September, 2002, the Company adopted a new accounting standard for earnings per share of common stock issued by the Accounting Standards Board of Japan. Under the new standard, basic net income per share is computed by dividing net income available to common shareholders, which is more precisely computed than under previous practices, by the weighted-average number of common shares outstanding for the period, retroactively adjusted for stock splits. The average number of shares of common stock used in the computation of net income per share was 52,250,749 shares and 52,262,140 shares for 2003 and 2002, respectively. Diluted net income per share is not disclosed because it is anti-dilutive. Cash dividends per share presented in the accompanying
22
consolidated statements of income are dividends applicable to the respective years including dividends to be paid after the end of the year. Retroactive adjustment for stock splits for the calculation of cash dividends per share is not made. m. Derivatives and Hedging Activities — The Group uses derivative financial instruments to manage their exposure to fluctuations in foreign exchange and interest rates. Foreign exchange forward contracts, currency swap contracts and interest rate swap contracts are utilised by the Group to reduce foreign currency exchange and interest rate risks. The Group does not enter into derivatives for trading or speculative purposes. Derivative financial instruments and foreign currency transactions are classified and accounted for as follows: (a) all derivatives are recognised as either assets or liabilities and measured at fair value, and gains or losses on derivative transactions are recognised in the income statement and (b) for derivatives used for hedging purposes, if derivatives qualify for hedge accounting because of high correlation and effectiveness between the hedging instruments and the hedged items, gains or losses on derivatives are deferred until maturity of the hedged transactions. The foreign exchange forward contracts employed to hedge foreign exchange exposures for import transactions are measured at fair value and the unrealised gains/losses are recognised in income. Forward exchange contracts applied for forecasted (or committed) transactions are also measured at fair value but the unrealised gains/losses are deferred until the underlying transactions are completed. Long-term debt denominated in foreign currencies for which foreign exchange forward contracts are used to hedge the foreign currency fluctuations are translated at the contracted rate if the forward contracts qualify for hedge accounting. The currency swap and interest rate swaps which qualify for hedge accounting and meet specific matching criteria are not remeasured at market value but the differential paid or received under the swap agreements are recognised and included in interest expenses or income.
3. Marketable and Investment Securities Proceeds from sales of non-marketable available-for-sale securities for the years ended 31st August, 2003 and 2002 were ¥1,000,625 thousand ($8,552 thousand) and ¥1,018,572 thousand, respectively. Gross realised losses on these sales, computed on the moving average cost basis, were ¥14,305 thousand for the year ended 31st August, 2002.
4. Inventories
Annual maturities of long-term debt at 31st August, 2003 were as follows:
Inventories at 31st August, 2003 and 2002 consisted of the following: Thousands of Yen
2003 Semi-finished dishes Supplies Raw materials Total
2002
¥ 2,113,510 ¥ 1,852,536 206,392 152,808 782,330 286,132 ¥ 3,102,232 ¥ 2,291,476
Thousands of U.S. Dollars
2003 $ 18,064 1,764 6,687 $ 26,515
Years Ending 31st August
Thousands of Yen
Thousands of U.S. Dollars
¥ 803,471 3,263,318 2,990,730 88,051 ¥ 7,145,570
$ 6,867 27,892 25,562 752 $ 61,073
2004 2005 2006 2007 Total
The carrying amounts of assets pledged as collateral for the above long-term debt at 31st August, 2003 were as follows:
5. Lease Guarantee Payments and Deposits In most cases, restaurant buildings are constructed to the Company’s specifications on land owned by the lessor, and are leased to the Company. The construction costs of restaurant buildings are financed by the Company in the form of lease guarantee payments paid to the lessor, which are non-interest bearing and will be refundable in monthly instalments during the initial period of the lease (usually 15–20 years), which the Company nets against monthly rental payments. Under the lease agreements for the restaurants, the Company is required to place a deposit with the lessors. Lease deposits are non-interest bearing and will be refundable upon expiration of the lease.
Thousands of Yen
Thousands of U.S. Dollars
¥ 1,804,302
$ 15,421
Land and building — net of accumulated depreciation
7. Retirement and Pension Plans Under most circumstances, employees terminating their employment are entitled to retirement benefits and pension payments based on the rate of pay at the time of termination or on their average pay during their employment, period of service and certain other factors. The liability for employees’ retirement benefits at 31st August, 2003 and 2002 consisted of the following: Thousands of Yen
6. Long-term Debt Long-term debt at 31st August, 2003 and 2002 consisted of the following: Thousands of Yen
2003
2002
Loans from banks and other financial institutions, collateralized, due serially to 2007 ¥ 7,133,377 ¥ 2,022,963 Long-term payable due serially 12,193 116,809 to 2005 7,145,570 2,139,772 Total (803,471) (423,370) Less current portion Long-term debt, ¥ 6,342,099 ¥ 1,716,402 less current portion Range of interest rates for loans from banks and other financial institutions
0.66%-1.875%
0.8%-2.25%
Thousands of U.S. Dollars
Projected benefit obligation Recorded liability for retirement benefit
Thousands of U.S. Dollars
2003
2002
2003
¥ 809,100
¥ 621,628
$ 6,915
¥ 809,100
¥ 621,628
$ 6,915
2003 The components of net periodic benefit costs for the years ended 31st August, 2003 and 2002 were as follows: $ 60,969 104 61,073 (6,867) $ 54,206
Thousands of Yen
Service cost Interest cost Amortisation of actuarial loss Contribution to contributory welfare pension plan Net periodic benefit costs
Thousands of U.S. Dollars
2003
2002
2003
¥ 114,328 18,649 66,851
¥ 96,725 15,301 9,396
$ 977 160 571
206,720 ¥ 406,548
276,689 ¥ 398,111
1,767 $ 3,475
Assumptions used for the years ended 31st August, 2003 and 2002 are set forth as follows: 2003 2002 Discount rate Recognition period of actuarial gain/loss Amortisation period of transitional obligation
2.75% 1 year 1 year
3.0% 1 year 1 year
23
The net assets in the fund of the welfare plan were ¥64,457,368 thousand ($550,918 thousand) at 31st March, 2003, which is the most recent date available. The number of employees of the Company in such contributory pension plan approximated 3.84 per cent. of the total participating employees of the welfare plan at 31st March, 2003.
8. Shareholders’ Equity Japanese companies are subject to the Japanese Commercial Code (the “Code”) to which certain amendments became effective from 1st October, 2001. The Code was revised whereby common stock par value was eliminated resulting in all shares being recorded with no par value and at least 50 per cent. of the issue price of new shares is required to be recorded as common stock and the remaining net proceeds as additional paid-in capital, which is included in capital surplus. The Code permits Japanese companies, upon approval of the Board of Directors, to issue shares to existing shareholders without consideration as a stock split. Such issuance of shares generally does not give rise to changes within the shareholders’ accounts. The revised Code also provides that an amount at least equal to 10 per cent. of the aggregate amount of cash dividends and certain other appropriations of retained earnings associated with cash outlays applicable to each period shall be appropriated as a legal reserve (a component of retained earnings) until such reserve and additional paid-in capital equals 25 per cent. of common stock. The amount of total additional paid-in capital and legal reserve that exceeds 25 per cent. of the common stock may be available for dividends by resolution of the shareholders. In addition, the Code permits the transfer of a portion of additional paid-in capital and legal reserve to the common stock by resolution of the Board of Directors. The revised Code eliminated restrictions on the repurchase and use of treasury stock allowing Japanese companies to repurchase treasury stock by a resolution of the shareholders at the general shareholders meeting and dispose of such treasury stock by resolution of the Board of Directors beginning 1st April, 2002. The repurchased amount of treasury stock cannot exceed the amount available for future dividend plus amount of common stock, additional paid-in capital or legal reserve to be reduced in the case where such reduction was resolved at the general shareholders meeting. The amount of retained earnings available for dividends under the Code was ¥22,364,395 thousand ($191,149 thousand) as of
24
31st August, 2003, based on the amount recorded in the parent company’s general books of account. In addition to the provision that requires an appropriation for a legal reserve in connection with the cash payment, the Code imposes certain limitations on the amount of retained earnings available for dividends. Dividends are approved by the shareholders at a meeting held subsequent to the fiscal year to which the dividends are applicable. Semi-annual interim dividends may also be paid upon resolution of the Board of Directors, subject to certain limitations imposed by the Code. On 19th October, 2001 and 18th October, 2002, the Company made a stock split by way of a free share distribution at the rate of 1.3 shares for each outstanding share and, as a result, 9,279 thousand shares and 12,063 thousand shares were issued to shareholders of record on 31st August, 2001 and 2002, respectively.
9. Income Taxes The Company and its domestic subsidiary are subject to Japanese national and local taxes based on income which, in the aggregate, resulted in a normal statutory tax rate of approximately 42.1 per cent. for the years ended 31st August, 2003 and 2002. The tax effects of significant temporary differences which result in deferred tax assets and liabilities at 31st August, 2003 and 2002 were as follows: Thousands of Yen
Deferred tax assets: Accrued enterprise taxes Accrued bonuses to employees Liability for retirement benefits Loss on write-off of investment securities Tax loss carryforwards Other Less valuation allowance Total Deferred tax liabilities: Prepaid expenses Property, plant and equipment Other Total Net deferred tax assets
Thousands of U.S. Dollars
2003
2002
2003
¥ 184,325 319,060
¥ 189,730 127,517 226,407
$ 1,575 2,727
34,953 12,439 79,462 (13,282) 616,957 51,131 19,239 4,014 74,384 ¥ 542,573
36,334 44,364 624,352 47,229 25,643 721 73,593 ¥ 550,759
299 106 679 (113) 5,273 437 165 34 636 $ 4,637
A reconciliation between the normal effective statutory tax rates and the actual effective tax rates reflected in the accompanying consolidated statements of income for the years ended 31st August, 2003 and 2002 is as follows:
Normal effective statutory tax rate Expenses not deductible for income tax purposes Per capita tax Tax credit Valuation allowance Other — net Actual effective tax rate
2003
2002
42.1%
42.1%
0.3 4.6 (0.3) 1.5
0.1 1.8
48.2%
Pro forma information of leased property such as acquisition cost, accumulated depreciation, obligation under finance lease, depreciation expense, interest expense of finance leases that do not transfer ownership of the leased property to the lessee on an “as if capitalised” basis for the years ended 31st August, 2003 and 2002 was as follows: (The imputed interest expense portion which is computed using the interest method is excluded from the above obligations under finance leases.) Thousands of Yen
2003 (1.0) 43.0%
On 31st March, 2003, a tax reform law was enacted in Japan which changed the normal effective statutory tax rate from approximately 42.1 per cent. to 40.5 per cent., effective for years beginning 1st April, 2003. The effect of this change on deferred taxes in the consolidated statement of income for the year ended 31st August, 2003 is approximately ¥14,383 thousand ($123 thousand).
Machinery and Equipment
Acquisition cost Accumulated depreciation Net leased property
Total
¥ 1,260,223 ¥ 8,866,145 ¥ 10,126,368 267,124 4,360,352 4,627,476 ¥ 993,099 ¥ 4,505,793 ¥ 5,498,892 Thousands of Yen
2002 Machinery and Equipment
Acquisition cost Accumulated depreciation Net leased property
¥ ¥
Furniture and Fixtures
Total
628,464 ¥ 8,133,656 ¥ 8,762,120 285,053 3,265,471 3,550,524 343,411 ¥ 4,868,185 ¥ 5,211,596
10. Leases
Thousands of U.S. Dollars
The Company leases restaurant premises and certain machinery and equipment. Total rental expenses for the years ended 31st August, 2003 and 2002 were as follows: Thousands of Yen
2003 Operating lease Finance lease Total
Furniture and Fixtures
2002
¥ 9,424,313 ¥ 7,791,455 2,001,670 1,752,548 ¥ 11,425,983 ¥ 9,544,003
Thousands of U.S. Dollars
2003 $ 80,550 17,108 $ 97,658
2003
Acquisition cost Accumulated depreciation Net leased property
Machinery and Equipment
Furniture and Fixtures
Total
$ 10,771 2,283 $ 8,488
$ 75,779 37,268 $ 38,511
$ 86,550 39,551 $ 46,999
Obligations under finance lease: Thousands of Yen
2003 Due within one year Due after one year Total
2002
¥ 1,843,330 ¥ 1,673,643 3,752,615 3,622,379 ¥ 5,595,945 ¥ 5,296,022
Thousands of U.S. Dollars
2003 $ 15,755 32,074 $ 47,829
Depreciation expense and interest expense under finance leases: Thousands of Yen
2003 Depreciation expense Interest expense Total
2002
¥ 1,895,690 ¥ 1,662,532 119,563 117,016 ¥ 2,015,253 ¥ 1,779,548
Thousands of U.S. Dollars
2003 $ 16,202 1,022 $ 17,224
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Depreciation expense and interest expense, which are not reflected in the accompanying statements of income, are computed by the straight-line method and the interest method, respectively.
12. Contingent Liabilities At 31st August, 2003 and 2002, the Company was contingently liable for guarantees for employees’ bank loans as follows: Thousands of Yen
11. Derivatives Derivative Financial Instruments — The Group enters into derivative financial instruments (“derivatives”), including foreign currency forward contracts, currency swaps and interest rate swaps, to hedge foreign exchange risk associated with certain liabilities denominated in foreign currencies. The Group does not hold or issue derivatives for trading purposes. Derivatives are subject to market risk and credit risk. Market risk is the exposure created by potential fluctuations in market conditions, including interest or foreign exchange rates. Credit risk is the possibility that a loss may result from a counterparty’s failure to perform according to the terms and conditions of the contract. Because the counterparties to those derivatives are limited to major international financial institutions, the Group does not anticipate any losses arising from credit risk. Derivative transactions entered into by the Group have been made in accordance with internal policies which regulate the authorisation and credit limit amounts. Fair Value of Derivative Financial Instruments — The fair value of the Group’s derivative financial instruments at 31st August, 2002 is as follows:
Guarantees for employees’ bank loan
Thousands of U.S. Dollars
2003
2002
2003
¥ 1,938
¥ 2,507
$ 17
13. Subsequent Event On 27th November, 2003, the shareholders authorised the payment of a cash dividend of ¥10 ($0.09) per share, or total of ¥522,465 thousand ($4,466 thousand) to shareholders of record on 31st August, 2003.
14. Segment Information Information about industry segments, geographic segments and sales to foreign customers of the Group for the years ended 31st August, 2003 and 2002 is as follows: (1) Operations in Different Industries The Group is mainly engaged in one industry segment which is the manufacture and sales of Italian foods, sales of which accounted for more than 90 per cent. of the total consolidated sales. Other sales, operating income and assets are not significant compared to the above segment. Therefore, the information about operations in different industries has been omitted.
Thousands of Yen
2002 Foreign currency forward contracts — Payables — Australia dollars
Contract Amount
Fair Value
Unrealised Gain
¥ 220,000
¥ 260,400
¥ 40,400
Foreign currency forward contracts which qualify for hedge accounting for the years ended 31st August, 2003 and 2002 and such amounts which are assigned to the associated liabilities and are recorded on the balance sheets at 31st August, 2003 and 2002, are excluded from disclosure of market value information.
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(2) Geographic Segment Information Because the foreign operations of the Group for the years ended 31st August, 2003 and 2002 are less than 10 per cent. of the total consolidated operation, the information about geographic segment has been omitted. (3) Sales to Foreign Customers There are no sales to foreign customers for the years ended 31st August, 2003 and 2002.
Independent Auditors’ Report Saizeriya Co., Ltd. and Consolidated Subsidiaries
INDEPENDENT AUDITORS’ REPORT To the Board of Directors of SAIZERIYA CO., LTD.: We have audited the accompanying consolidated balance sheets of SAIZERIYA CO., LTD. and consolidated subsidiaries as of 31st August, 2003 and 2002, and the related consolidated statements of income, shareholders’ equity, and cash flows for the years then 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, procedures and practices generally accepted and applied in Japan. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of SAIZERIYA CO., LTD. and consolidated subsidiaries as of 31st August, 2003 and 2002, and the consolidated results of their operations and their cash flows for the years then ended in conformity with accounting principles and practices generally accepted in Japan. Our audits also comprehended the translation of Japanese yen amounts into U.S. dollar amounts and, in our opinion, such translation has been made in conformity with the basis stated in Note 1. Such U.S. dollar amounts are presented solely for the convenience of readers outside Japan.
27th November, 2003
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Corporate Data As of 31st August, 2003
Company Name Saizeriya Co., Ltd. President and Representative Director Yasuhiko Shogaki Head Office 2-5, Asahi, Yoshikawa-City, Saitama 342-0008, Japan Established May 1st, 1973 Paid-in Capital ¥8,612,500 Thousand Number of Employees 1,558
Board of Directors and Statutory Auditors Yasuhiko Shogaki
Noboru Nagaoka
President
Director
Kunio Shogaki
Kou Shiozaki
Executive Vice President
Director
Jiro Yamamoto
Issei Horino
Executive Managing Director
Director
Yasunori Hotta
Ryohei Shibata
Executive Managing Director
Director
Nobuyuki Masuoka Managing Director
Sakae Abe Standing Statutory Auditor
Kazuhiko Shogaki
Hiroyuki Matsumoto
Director
Statutory Auditor
Hideharu Matsutani
Hiromu Otaka
Director
Statutory Auditor
Consolidated Subsidiaries Name of company Saizeriya Australia Pty. Ltd. Capital 49 million Australian dollars Percentage of voting shares held by the Company 100.0% Major business activities Production of food ingredients, including meat products and sauces
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Saizeriya Australia Pty. Ltd.
Name of company Shanghai Saizeriya Co., Ltd.
Name of company Adda Tours Japan Co., Ltd.
Capital 23,176 thousand yuan
Capital 20 million yen
Percentage of voting shares held by the Company 100.0%
Percentage of voting shares held by the Company 100.0%
Major business activities Italian food restaurants
Major business activities Travel agency business under the Travel Agency Law (domestic and overseas travel businesses)
Shareholders Information As of 31st August, 2003
Total Number of Shares Authorised 73,208,000 Number of Shares Issued 52,272,342 Shares Listed On The First Section of Tokyo Stock Exchange Number of Shareholders 14,364
Number of Shares Held (Thousands)
Voting Rights as % of Total
15,953 5,973 4,455 3,088 2,650 1,736 1,090 1,069 889 832 37,735
30.69 11.49 8.57 5.94 5.10 3.34 2.10 2.06 1.73 1.60 72.62
Number of Shareholders
Number of Shares Held (Unit: 100 shares)
Percentage of Total Shares (%)
53 23 84 134 14,070 14,364
137,496 1,453 46,370 69,408 265,371 520,098
26.3 0.3 8.9 13.3 51.2 100.0
Principal Shareholders Yasuhiko Shogaki Japan Trustee Services Bank, Ltd. Babette Co., Ltd. The Master Trust Bank of Japan, Ltd. Goldman Sachs International Saizeriya Employees’ Stock Holding Association Trust & Custody Services Bank, Ltd. The Bank of Bermuda Sparx Asset Management Co., Ltd. Kunio Shogaki The Mitsubishi Trust and Banking Corporation Total
The Ownership of the Shares by Category Japanese Financial Institutions Japanese Securities Companies Other Japanese Corporations Foreign Corporations and Individuals Japanese Individuals and Others Total
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Saizeriya Co., Ltd. 2-5, Asahi, Yoshikawa-city, Saitama 342-0008, Japan Phone: +81-48-991-9610 Fax: +81-48-991-9637 URL http://www.saizeriya.co.jp
Printed in Japan