Securities code: 3659 March 12, 2012 To Shareholders with Voting Rights 2-3-1 Shinkawa 2-chome, Chuo-ku, Tokyo NEXON Co., Ltd. Representative Director/President Seungwoo Choi
Notice of the 10th Ordinary General Meeting of Shareholders Dear Shareholders: You are cordially invited to attend the 10th Ordinary General Meeting of Shareholders. The meeting details and agenda are as outlined below.
If you are unable to attend the meeting, you may exercise your voting rights in writing. Please review the General Shareholders Meeting agenda described below and return the Voting Rights Exercise Form with your vote by 7pm on Monday, March 26, 2012. Notice 1. Date &Time: 10:00 a.m., Tuesday, March 27, 2012 2. Location: ANA InterContinental Hotel Tokyo At Prominence Room on B1 Floor 1-12-33, Akasaka, Minato-ku, Tokyo (Please refer to the location map on the last page of this document) 3. Agenda: Matters to be reported: 1) Business Report and Consolidated Financial Statements for the 10th fiscal year (from January 1, 2011 to December 31, 2011), and audit results on the Consolidated financial statements for the 10th fiscal year (from January 1, 2011 to December 31, 2011) by the Independent Auditors and the Board of Statutory Auditors. 2) Non-consolidated Financial Statements for the 10th fiscal year (from January 1, 2011 to December 31, 2011). Proposals to be voted on: Proposal No. 1: Election of six (6) directors Proposal No. 2: Reduction of Capital reserve Proposal No. 3: Issuance of subscription rights to shares as stock options to the Company’s directors and employees ··········································································································· If attending the meeting in person, please submit the enclosed Voting Rights Exercise Form to the receptionist.
Shareholders may exercise voting rights by proxy by assigning his or her voting rights to another shareholders with voting rights designated to act as his or her representative, provided that the document certifying his or her power of representation is submitted to the Convener.
－ 1 －
Should there be any amendments or changes to the reference materials for the General Meeting of Shareholders, Business Report, Financial Statements and Consolidated Financial Statements, the Company shall notify its shareholders via the Company’s website (http://company.nexon.co.jp/).
－ 2 － (Reference Materials）
Business Report (From January 1, 2011 to December 31, 2011)
1. Current Status of the Corporate Group (1) Business summary for the current fiscal year Outline and results of business operations The global economic activities for the current consolidated fiscal year remained at a relatively low level primarily due to the European debt crisis, and economic recovery also remained at a slow pace. Asian region, such as China and India, which have been leading the global economy are still expanding mainly due to strong domestic demands, but there appears to be the need to monitor the trends of real estate and commodity prices and the exporting business to the European and American regions. In the United States of America, the economy has started to show a sign of recovery including a decrease in unemployment rates towards the end of the year, but it continues to experience tension caused by the turmoil in the financial and capital markets in the European region. European economy was exposed to the risk of a sharp drop because of the confusion in the capital market, negative impact of fiscal tightening, and concerns over debt problems of certain countries. In Japan, due to the Great East Japan Earthquake and the nuclear power plant disaster, the economic activities, mostly in eastern Japan, have been partially paralyzed. Coupled with the rapid appreciation of yen and concerns about the slowing global economy, the outlook of domestic economy and individual consumption is uncertain.
Under such economic environment described above, the Group is engaged in primarily online game business, as well as mobile game business and other businesses, and has been focusing on providing high quality services to wide range of customers and on acquiring excellent contents to accommodate diversifying needs of users through updating existing game titles and publishing new game titles.
As a result of our efforts, we recorded Net sales of ¥87,612 million (an increase of 25.6% year-on-year); Operating income of ¥38, 249 million (an increase of 26.7% year-on-year); Ordinary income of ¥36,905 million (an increase of 29.6% year-on-year); and, Net income of ¥25, 755 million yen (an increase of 19.0% year-on-year) for the consolidated fiscal year ended December 31, 2011.
Performance results by reportable segments presented as Net sales to third party customers are as follows:
－ 3 － i) Japan In Japan, major updates of leading existing game titles, such as “Maple Story,” “Dungeon and Fighter,” and “Tales Weaver,” contributed to steady performance. In addition, our expansion into the new sector of devices and platforms such as smart phones and tablets, and publishing new game titles such as “Mabinogi: Heroes” contributed to Net sales of ¥13,012 million and Segment income of ¥2,202 million despite IPO-related expenses. ii) Korea In Korea, continuing increases in Royalty revenue from publishing “Dungeon and Fighter” in China and successful updates of existing game titles such as “Maple Story” and “Dungeon and Fighter” Contributed to Net sales of ¥63,173 million and Segment income of ¥33,741 million despite the capital expenditure such as setting up a new customer center. The impact of the substantial appreciation of Japanese yen against Korean won was mostly offset by high rate of growth and did not have a significant negative impact on earnings. iii) China In China, Net sales and Segment income were ¥3,146 million and ¥2,028 million, respectively, due to the increase in Consulting revenue resulting from an increase in number of online game users against the backdrop of the internet adoption. iv) North America North America segment recorded Net sales of ¥6,210 million as a result of steady performance of the existing game titles as well as contributions from our new game title “Dragon Nest” and our first Facebook-platform game title “Maple Story Adventure.” However, aggressive marketing activities such as participation in E3 (Note) and advance investments including recruitment activities for the purpose of strengthening service functions resulted in Segment loss of ¥274 million. v) Other In other segments, primarily due to the favorable performance of the existing game titles in European countries, Net sales and Segment income amounted to ¥2,071 million and ¥478 million, respectively.
－ 4 － (Note) E3 refers to the Electronic Entertainment Exposition which is a computer game-related exhibition held in the United States.
The Company prepared consolidated financial statements pursuant to the provisions of the Article 444 of the Companies Act for the first time for the 10th fiscal year. Accordingly, the comparisons of consolidated results to the previous period in the statements were made against consolidated financial statements for the 9th fiscal year which were not audited by statutory auditors or independent auditors pursuant to the provisions of Paragraph 4 the above Article.
10th Fiscal Year Segment Ended December 31, 2011 (Current Consolidated Fiscal Year) Millions of yen Share Japan 13,012 14.9% Korea 63,173 72.1 China 3,146 3.6 North America 6,210 7.1 Other 2,071 2.3 Total 87,613 100.0
Capital expenditure Total capital expenditure of the Group during the current consolidated fiscal year amounted to ¥14,810 million.
The major components of our capital expenditure include building construction cost of ¥11,617 million (Kangnam district: ¥10,599 million, Pangyo district: ¥1,018 million) and online game equipment of ¥1,502 million for a subsidiary NEXON Korea Corporation, and software for internal use (game related) of ¥1,171 million.
In addition, a subsidiary GameHi Co., Ltd. disposed of its business equipment with a book value of ¥1,969 million during the current consolidated fiscal year.
－ 5 － Financing As of December 14, 2011, the Company listed in the First Section of the Tokyo Stock Exchange and raised ¥86,872 million by issuing 70,000 thousand shares through a public offering.
Business transfers, absorption-type splits, or incorporation-type splits Not applicable.
Businesses transferred from other companies Not applicable.
Rights and obligations related to other companies assumed as a result of absorption-type mergers or splits
NexToric Corporation, Symmetric Space Corporation and NCLIPSE Corporation, consolidated subsidiaries of the Company, executed an absorption-type merger with Nextoric Corporation as a surviving company effective as of December 27, 2011.
Acquisition or disposition of shares, other equity interests or subscription rights to shares of other companies
The Company acquired shares of Gamania Digital Entertainment Co., Ltd., on March 24, 2011 and designated the company as an affiliate accounted for using the equity method.
The company acquired shares of Six Waves Inc. on July 29, 2011 and designated the company as an affiliate accounted for using the equity method.
－ 6 － (2) Assets and Profit/Loss for the most recent three fiscal years
10th Fiscal Year 7th Fiscal Year 8th Fiscal Year 9th Fiscal Year (Current (Ended (Ended (Ended consolidated Accounts December 31, December 31, December 31, fiscal year ) 2008) 2009) 2010) (Ended December 31, 2011) Net sales (Millions of yen) 40,219 51,572 69,781 87,613 Ordinary income (Millions of 12,019 22,351 28,479 36,905 yen) Net income (Millions of yen) 8,290 17,659 21,638 25,755
Net income per share (Yen) 2,349.44 5,004.15 6,131.79 71.65
Total assets (Millions of yen) 75,996 94,530 123,717 235,765
Net assets (Millions of yen) 27,059 45,895 66,904 177,886
Net assets per share (Yen) 7,618.19 12,937.33 17,714.50 408.28
(Notes)1. As of July 21, 2011 during the 10th fiscal year, the Company executed a share split at the ratio of 100-for-1 for common stock. Net income per share is calculated based on the assumption that the stock split had taken place at the beginning of the period. 2. The Company prepared consolidated financial statements pursuant to the provisions of Article 444 of the Companies Act for the first time for the 10th fiscal year. Accordingly, the figures for the 7th, 8th and 9th fiscal years were based on consolidated financial statements that have not been audited by statutory auditors or independent auditors pursuant to the provisions of Paragraph 4 of the above Article.
(3) Current status of the major parent company and subsidiaries Parent company The Company’s parent company is NXC Corporation, which owns 231,631 thousand shares, or voting rights ratio of 54.36%, of the Company. NXC Corporation and its subsidiaries, except for the Group, engage in investment businesses and other businesses that are not related to online game business which is the Company’ primary business. And NXC Corporation has executed a non-compete agreement stipulating that the company shall not engage in any businesses that may compete with the online game business of the Group.
－ 7 － Major subsidiaries Voting rights owned Name Capital by the company Main business Online game development/ NEXON Korea KRW 100％ publishing online games and Corporation 2,000 million publication licensing in Korea Provision of necessary Lexian Software infrastructure to publishing Development US$4,100 100 companies and consulting (Shanghai) Co., Ltd. thousand services for game publishing in China Online game publishing in the NEXON America, Inc. US$210 100 United States
EUR1,500 Online game publishing in NEXON Europe S.à.r.l. thousand 100 Europe
KRW NEOPLE INC 175 million 100 Online game development
－ 8 － (4) Business to Be Addressed The Company has identified the following areas of focus in order to maintain our competitive position in the online game market and continue to grow in the future:
Adaption to mobile devices The Group believes that it is imperative to develop games for mobile devices to expand our business in the mobile game market which is expected to grow due to the dissemination of smart phones as well as the development of more extended and faster communication infrastructures. The Group’s policy is to take aggressive measures in adapting mobile devices through conversion of existing popular game titles to mobile versions as well as M&As and investments to collaborate with reputable mobile game developers.
Strengthening overseas business In light of the growth of the online game market primarily in North America and Europe, we believe expanding into the overseas market is one of the key factors for the Group’s further growth.
The Group has already established a structure to publish online games globally by setting up overseas subsidiaries in major regions including Korea, the United States, and Europe and partnership relationships with major local enterprises. In the future, the Group is determined to pursue opportunities to expand our overseas businesses more aggressively primarily in North America and Europe by taking advantage of our experience in conducting business in overseas markets.
Strengthening information security The Group provides online game service which handles personal information through the information system, and accordingly, the highest level of information system security is required in order to prevent illegal access or illegal use by external parties. In addition, since various user-related data is collected to provide online game services, taking measures to protect personal information is also one of our major tasks.
The Group is determined to make concentrated efforts to strengthen the security of information to provide our users with reliable and secure services.
－ 9 － (5) Principal Business (as of December 31, 2011) Online game business
(6) Major Office and Factories (as of December 31, 2011) Office and Name Location factories The Company Head office Chuo-ku, Tokyo
NEXON Korea Corporation Seoul, Korea Head office Lexian Software Development Shanghai, People’s (Shanghai) Co., Ltd. Head office Republic of China NEXON America, Inc. California, U.S.A. Head office NEXON Europe S.à.r.l. Luxembourg Head office
NEOPLE INC Head office Seoul, Korea
－ 10 － (7) Employees (as of December 31, 2011) Employees of the Group Changes from the previous consolidated fiscal Number of employees year-end 3,420（300） Increase by 550（Increase by 134）
(Note) Figures above represent full-time employees, and figures in parenthesis represent average number of part-time and fixed-term employees during the year.
Employees of the Company Number of Changes from the Average service employees previous year-end Average age years 227 Increase by 41 31.7 years old 2.5 years
（ ） (8) Major Lenders as of December 31, 2011 Lenders Amount of loan payable Sumitomo Mitsui Banking Corporation ¥18,567 million Korea Development Bank 2,831 million
(9) Other material facts concerning the current status of the Group Not applicable.
－ 11 － 2. Current Status of the Company (1) Shares (as of December 31, 2011) Total number of authorized shares: 1,400,000,000 shares (Notes)1. Pursuant to amendments to provisions of the article of incorporation as of July 20, 2011, the total number of authorized shares decreased by 6,000 thousand shares. 2. As a result of 100-for-1stock split executed of July 21, 2011, the total number of authorized shares increased by 1,386,000 thousand shares. Number of shares issued and outstanding: 426,132,900 shares (Notes) 1.As a result of 100-for-1stock split executed of July 21, 2011, the total number of shares issued and outstanding increased by 349,360 thousand shares 2. As a result of the allocation of new shares to third parties with the Payment Date of no later than July 29, 2011, the number of shares issued and outstanding increased by 2,500 thousand shares. 3. As a result of the public stock offerings with the Payment Date of no later than December 13, 2011, the number of shares issued and outstanding increased by 70,000 thousand shares. 4. As a result of exercise of stock options, the number of shares issued and outstanding increased by 744 thousand shares. Number of shareholders 26,807 Major shareholders (Top 10) Number of shares Name of shareholders owned Ratio (Thousand shares) NXC Corporation 231,631 54.36％
NXMH B.V.B.A. 38,020 8.92
CBHK-KOREA SECURITIES 26,278 6.17 DEPOSITORY- SAMSUNG Min Seo 11,857 2.78
Sangbeom Kim 8,900 2.09
NXMH B.V. 8,349 1.96
Seungchan Lee 6,184 1.45 STATE STREET BANK AND 5,585 1.31 TRUST COMPANY GOLDMAN, SACHS & CO. 4,832 1.13 REG The Foundation of Children’s 4,000 0.94 Library Culture Development
(Note) No treasury stock is held.
－ 12 － (2) Subscription Rights to Shares Subscription rights to shares granted to officers of the Company as considerations for services provided (as of December 31, 2011) Subscription Rights (1) Subscription Rights (2-1) Date of resolution to issue August 23, 2007 September 28, 2009 Number of subscription rights to shares 1,060 units 300 units
Common stock 1,060,000 shares Common stock 300,000 shares Class and number of underlying shares (1,000 shares per unit) (1,000 shares per unit)
Cash paid for No payment is required in No payment is required in subscription rights exchange for subscription rights exchange for subscription rights
¥153,000 per unit ¥300,000 per unit Exercise price (¥153 per share) (¥300 per share)
From: December 14, 2011 From: December 14, 2011 Exercise period To: September 30, 2015 To: September 30, 2015 Conditions on exercise Notes 1 and 2 Notes 1 and 2 Number of Number of Directors subscription rights 1,060 units subscription rights 300 units (excluding Number of 1,060,000 Number of 300,000 outside underlying shares shares underlying shares shares directors) Number of holders 2 persons Number of holders 1 person Number of －unit Number of －unit Status of subscription rights subscription rights holding Outside Number of － Number of － by directors underlying shares share underlying shares share officers Number of holders －person Number of holders －person Number of － Number of － subscription rights unit subscription rights unit Statutory Number of － Number of － auditors underlying shares share underlying shares share Number of holders －person Number of holders －person
(Notes)1. In principle, holders of subscription rights to shares must continue to be director or employee of the Company or its subsidiary from the date of allocation up to the date of exercise to be eligible to exercise the right. 2. Partial exercise of subscription rights to shares is not allowed.
－ 13 － Subscription Rights (3-1) Subscription Rights (3-3) Date of resolution to October 20, 2010 June 17, 2011 issue Number of subscription 400 units 100 units rights to shares
Class and number of Common stock 400,000 shares Common stock 100,000 shares underlying shares (1,000 shares per unit) (1,000 shares per unit)
Cash paid for No payment is required in No payment is required in subscription rights exchange for subscription rights exchange for subscription rights
¥640,000 per unit ¥640,000 per unit Exercise price (¥640 Yen per share) (¥640 per share)
From: December 14, 2011 From: December 14, 2011 Exercise period To: September 30, 2015 To: September 30, 2015 Conditions on exercise Notes 1 and 2 Notes 1 and 2 Number of Number of 400 units 100 units Directors subscription rights subscription rights (excluding Number of 400,000 Number of 100,000 outside underlying shares shares underlying shares shares directors) Number of holders 2 persons Number of holders 1 person Number of Number of －unit －unit Status of subscription rights subscription rights holding Outside Number of Number of －share －share by directors underlying shares underlying shares officers Number of holders －person Number of holders －person Number of Number of －unit －unit subscription rights subscription rights Statutory Number of Number of －share －share auditors underlying shares underlying shares Number of holders －person Number of holders －person (Notes)1. In principle, holders of subscription rights to shares must continue to be director or employee of the Company or its subsidiary from the date of allocation up to the date of exercise to be eligible to exercise the right. 2. Partial exercise of subscription rights to shares is not allowed.
－ 14 － Subscription rights to shares granted to employees as considerations for services provided during the current fiscal year Subscription Rights (3-2) Subscription Rights (3-3)
Date of resolution to December 17, 2010 June 17, 2011 issue Number of subscription rights to 100 units 90 units shares
Class and number of Common stock 100,000 shares Common stock 90,000 shares underlying shares (1,000 shares per unit) (1,000 shares per unit)
Cash paid for No payment is required in exchange No payment is required in exchange subscription rights for subscription rights for subscription rights
¥640,000 per unit ¥640,000 per unit Exercise price (¥640 per share) (¥640 per share)
From: December 14, 2011 From: December 14, 2011 Exercise period To: September 30, 2015 To: September 30, 2015 Conditions on Notes 1 and 2 Notes 1 and 2 exercise Number of Number of Employees subscription rights －unit subscription rights 90 unit of the Number of Number of Company underlying shares －share underlying shares 90,000shares Status of Number of holders －person Number of holders 4 persons holding by Number of employees Officers Number of and subscription rights 100 units subscription rights －unit employees Number of Number of of underlying shares 100,000 shares underlying shares －share subsidiaries Number of holders 1 person Number of holders －person
(Notes)1. In principle, holders of subscription rights to shares must continue to be director or employee of the Company or its subsidiary from the date of allocation up to the date of exercise to be eligible to exercise the right. 2. Partial exercise of subscription rights to shares is not allowed.
－ 15 － Subscription Rights (3-4) Subscription Rights (4) Date of resolution to issue July 20, 2011 November 2, 2011 Number of subscription rights to 80 units 35 units shares Class and number of Common stock 80,000 shares Common stock 35,000 shares underlying shares (1,000 shares per unit) (1,000 shares per unit) Cash paid for No payment is required in exchange No payment is required in exchange subscription rights for subscription rights for subscription rights ¥640,000 per unit ¥880,000 per unit Exercise price (¥640 per share) (¥880 per share) From: December 14, 2011 From: December 14, 2011 Exercise period To: September 30, 2015 To: September 30, 2015 Conditions on Notes 1 and 2 Notes 1 and 2 exercise Number of subscription Number of subscription －unit －unit Employees rights rights of the Number of underlying Number of underlying Company shares －share shares －share Status of Number of holders －person Number of holders －person grant to employees Number of subscription Number of subscription Officers and rights 80 units rights 35 units employees of Number of Number of subsidiaries underlying shares 80,000 shares underlying shares 35,000 shares Number of holders 1 person Number of holders 1 person (Notes)1. In principle, holders of subscription rights to shares must continue to be director or employee of the Company or its subsidiary from the date of allocation up to the date of exercise to be eligible to exercise the right. 2. Partial exercise of subscription rights to shares is not allowed.
－ 16 － (3) Corporate officers Directors and statutory auditors (as of December 31, 2011) Post and Name Material Posts Concurrently Held Responsibility Representative Director of NEXON Europe Limited Representative Director of NEXON Europe S.à.r.l. President and CEO Seungwoo Choi Director of NEXON Korea Corporation Director of Lexian Software Development (Shanghai) Co., Ltd. Director of NEXON America, Inc.
Director and Director of NEXON Europe Limited Management Jiwon Park Director of NEXON Europe S.à.r.l. General Manager Director, CFO and Chief Owen Mahoney Administrative Officer Representative Director of NEXON Korea Corporation Director Min Seo Director of NEOPLE Inc. Director of NEXON Network Corporation
Director of Lexian Software Development Director Kyungtaek Han (Shanghai) Co., Ltd.
Representative director of NXC Director Jungju Kim Corporation: Full-time statutory Toshishige Tanaka auditor Statutory auditor Iwao Ohtomo Representative of Ohtomo Accounting Firm
Statutory auditor Ryoji Mori Partner of Eichi Law Offices, LLC.
(Notes)1. Toshishige Tanaka, Iwao Ohtomo and Ryoji Mori, statutory auditors, were outside statutory auditors. 2. Statutory auditor Iwao Ohtomo is a certified public accountant and has substantial knowledge about finance and accounting. 3. The Company has appointed statutory auditor Ryoji Mori as the independent officer pursuant to the regulations of the Tokyo Stock Exchange and reported such appointment to the Exchange.
Director or statutory auditor resigned during the year
Not applicable.
－ 17 － Remuneration for directors and statutory auditors (i) Total amount of remuneration for the current fiscal year Amount of Post Number remuneration Directors (in which outside 4 108 million yen directors) (-) (-) Statutory auditors (in which outside 3 10 million Yen auditors) (3) (10 million yen) Total 7 118 milling yen (for outside officers) (3) (10 million yen)
(Notes)1. The number of directors is six, which is different from the number in the above table as two of them are unpaid. 2. Amount of remuneration to directors does not include employee remuneration paid to those directors who serve the company as directors and employees simultaneously. 3. Maximum amount of annual remuneration to directors was resolved at the 9th ordinary general meeting of shareholders held on March 30, 2011 to be less than 500 million yen, excluding the amount paid as employee compensation. 4. Value of subscription rights to shares granted to directors as remuneration was resolved separately from the amount described in note 3 above at the ordinary general meeting of shareholders. 5. Maximum amount of annual remuneration to statutory auditors was resolved at the 9th ordinary general meeting of shareholders held on March 30, 2011 to be less than 50 million yen. 6. Amount of remuneration to directors includes the following: 9 million yen worth of remuneration in the form of stock options (9 million yen to 2 directors)
(ii) Retirement allowance for officers paid during the current fiscal year Not applicable.
(iii) Total amount of officers’ remuneration paid to outside officers by the parent company or subsidiaries Not applicable.
Matters concerning outside officers i) Material concurrent positions of other corporations and the relationship between such companies and the Company Statutory auditor Mr. Iwao Ohtomo is Representative of Ohtomo Accounting Firm. There exists no special relationship between the Company and the subject accounting firm.
－ 18 － Statutory auditor Mr. Ryoji Mori is a partner of Eichi Law Offices, LLC. There exists no special relationship between the company and the subject law firm.
ii) Major activities during the current fiscal year Attendance and Participation Mr. Tanaka attended every meeting of the boards of directors and statutory auditors that were held 21 times and 13 times, respectively, during the current fiscal year. Statutory Toshishige Mr. Tanaka participated in discussions, as necessary, Auditor Tanaka concerning items on agenda as well as general deliberations from the viewpoint of a full-time statutory auditor. Mr. Ohtomo attended every meeting of the boards of directors and statutory auditors that were held 21 times Statutory and 13 times, respectively, during the current fiscal year. Iwao Auditor Mr. Ohtomo participated in discussions, as necessary, Ohtomo concerning the Company’s monthly performance and corporate acquisitions from the professional viewpoint of certified public accountant. Mr. Mori attended 20 of the total 21 meetings of the boards of directors and 12 of the total 13 meetings of Statutory statutory auditors, respectively, during the current fiscal Auditor Ryoji Mori year. Mr. Tanaka participated, as necessary, in discussions concerning establishment and maintenance of the Company’s compliance system and legal aspect of items on agenda from the viewpoint of legal counsel.
(iv) Summary of the limited liability agreement Pursuant to provisions of Article 427, Paragraph 1 of the Companies Act and Article 36 of the Company’s articles of incorporation, the Company and each of the outside statutory auditors entered into an agreement to limit the liability for damages of statutory auditors provided for in Article 423, Paragraph 1 of the Companies Act.
The limit of liability for damages under the agreement described above is ¥2.4 million, or the amount provided for in Article 425, Paragraph 1 of the Companies Act, whichever is higher.
－ 19 － (4) Accounting Auditors Name: PricewaterhouseCoopers Aarata
Amount of remuneration Amount of remuneration Amount of remuneration paid to the auditors for the current fiscal year ¥ 80 million Total amount of cash and other financial benefits to be paid by the Company and its subsidiaries to the ¥ 249 million auditors (Notes) 1. The above amount represents the sum of the professional audit fees for the services under the Companies Act and those under the Financial Instruments and Exchange Act as the audit service agreement between the Company and the independent auditors does not clearly divide them and it is impracticable to do so. 2. NEXON Korea Corporation and other nine companies, all of which are consolidated subsidiaries of the Company, are audited by PricewaterhouseCoopers LLP, member firms of the same global network of the Company’s auditor.
Non-audit services The Company pays professional fees to the auditors for services to prepare letters to domestic and overseas lead underwriters and to review offering circular documents. In addition, each of NEXON Korea Corporation, NDoors Corporation and NEXON America, Inc., all of which are the Company’s consolidated subsidiaries, pays professional fees to the auditors for tax- related services.
Policies to determine dismissal or non-reappointment of the auditor If and when it is deemed necessary to do so owing to the auditor having difficulty in performing its duties, the board of directors shall place the matter to dismiss or not to reappoint the current auditor on the agenda of a ordinary general meeting of shareholders, upon obtaining consent from the board of statutory auditors or at the request of the board of statutory auditors.
When it is acknowledged that the auditors fall under any of the items in Article 340, Paragraph 1 of the Companies Act, the board of statutory auditors shall dismiss the auditors with unanimous consent of all statutory auditors. In this case, the statutory auditor appointed by the board of statutory auditors shall report the dismissal of the auditor and the reason of dismissal at the first ordinary general meeting of shareholders called after the dismissal.
－ 20 － (5) Systems to Ensure Proper Operation The summary of decisions made to establish a system to ensure the execution of duties by directors is in compliance with laws and regulations and the articles of incorporation and other systems to ensure the appropriateness of operations of the Company is as follows:
System to ensure that the execution of duties by directors and employees comply with laws and regulations and the articles of incorporation (i) Board of directors The meeting of the board of directors shall be held at least once a month in order to ensure the effective monitoring functions for directors’ performance. (ii) Statutory auditors Statutory auditors shall attend the meeting of the board of directors to ensure the effective supervising functions for directors’ performance. In addition, statutory auditors shall enhance their expertise in their supervising functions by appointing external professionals as outside statutory auditors. (iii)Internal audit office The internal audit office shall be responsible for carrying out continuous internal audits of the business operations. The internal audit office shall report directly to President/CEO and maintain the independence of internal audit. (iv) Legal department The legal department shall serve as the contact point for matters concerning the compliance of business operations (“compliance”) to ensure compliance within the Company.
System to store and control information on the directors’ execution of their duties Information on the directors’ execution of their duties including minutes of the meetings of the board of directors and requests for approval shall be recorded and stored in a document format or electromagnetic devices in accordance with the documentation control regulations. Directors and statutory auditors shall be allowed to access any of these records at any time.
System to ensure the reliability of financial reporting The Company shall establish systems to prepare proper financial reporting and to review the effectiveness of the system on a regular or as needed basis.
Regulations and other systems to manage potential risks of losses The Company shall develop risk management regulations to minimize the potential exposure to risk of incurring losses. In addition, the Company shall prepare for serious incidents by developing a risk management manual and establishing a system enabling timely response.
－ 21 － System to ensure efficient execution of duties by directors (i) Directors shall report the status of executing their respective duties on a monthly basis at a meeting of the board of directors. Obstructive factors in the execution of duties, if any, shall be addressed to improve the situation in a timely manner. (ii) Directors shall facilitate the process of decision making and information sharing by taking advantage of the IT infrastructure.
System to ensure the proper execution of duties within the corporate group composed of the Company, its parent company and subsidiaries While recognizing the independence of each entity due to unique local circumstances, the Company shall require periodical reporting from each entity of the Group on necessary matters in accordance with the related companies management regulations.
Matters concerning employees assigned to assist the duties of the statutory auditor at the request of statutory auditors and their independence from directors No full-time assistants shall be assigned, but the statutory auditors, if deemed necessary, may assign employees in the Internal Audit Office to assist statutory auditors in the execution of audit-related duties. In this context, the assigned employees shall not be subjected to instructions of directors or the head of the Internal Audit Office.
System for directors and/or employees to report to statutory auditors and other systems concerning reports to statutory auditors Directors or employees shall immediately report to statutory auditors any facts that may cause substantial damages to the Company or the Group and any facts that execution of duties by directors is in violation of laws and regulations and the articles of incorporation.
Other systems to ensure effective performance of audit by statutory auditors Statutory auditors shall hold periodic meetings to exchange opinions with President/CEO and the independent auditors, respectively. In addition, the head of the Internal Audit Office shall report to statutory auditors on a regular basis.
Basic policy and relevant system to eliminate anti-social forces (i) Basic policy to eliminate the threats posed by anti-social forces The Company shall maintain a firm attitude toward anti-social forces that may pose threats to the order and security of the society and block any relationships including ordinary commercial transactions. (ii) System to eliminate anti-social forces The Company shall exercise its best efforts to block any relationships with anti-social forces by assigning the Legal Office to be in charge of dealing
－ 22 － with anti-social forces and conducting customer reviews. In case the Company is approached by anti-social forces, a systematic response shall be taken jointly with external special agencies.
(6) Basic Policy on Control of the Company Not applicable.
(7) Policy to Determine Distributions of Surplus The Company provides in its articles of incorporation that distributions of surplus shall be decided by resolutions of the board of directors pursuant to Article 459, Paragraph 1 of the Companies Act.
The Company recognizes that one of its important management tasks is to return profits to the shareholders and intends to return profits in a stable manner in line with the performance after prudently considering the actual results and forecast of the Company’s performances. Under the current conditions, the Company intends to make effective investments to aggressively expand the businesses by expanding existing businesses or starting up new businesses to strengthen the management basis and enhance future business areas, pursuing opportunities in M&A, or acquiring game copyrights.
－ 23 － Consolidated Balance Sheet (As of December 31, 2011) (Millions of Yen) Account Amount Account Amount (Assets) (Liabilities)
Current assets Current liabilities 24,562 150,722 Cash and deposits Notes and accounts 981 132,479 payable-trade Notes and accounts 13,845 Current portion of long- 2,994 receivable-trade term loans-payable Short-term investment 12 Current portion of securities 40 convertible bond-type bonds with subscription 9 Merchandise 233 rights to shares Deferred tax assets 4,133 Accounts payable-other 2,017 Other (22) Accrued expenses 831 Allowance for doubtful 85,043 Income taxes payable 6,671 accounts 16,016 Noncurrent assets Deferred tax liabilities 110 1,146 Property, plant and Unearned revenue 8,111 equipment 36 Provision for bonuses 1,082 Buildings and structures 5,657 Asset retirement 47 Vehicles 12,374 obligations Other 1,702 Tools, furniture and 1,596 fixtures (4,794) Noncurrent liabilities 33,316 Land 44,074 Long-term loans-payable 18,567 Construction in progress 31,163 Deferred tax liabilities 4,536 Accumulated 11,595 Long-term unearned depreciation revenue 5,707 Intangible fixed assets 1,315 Provision for retirement benefits 203 Game copyrights 24,952 Negative goodwill 3,553 17,002 Goodwill Asset retirement 117 Other 71 obligations Investments and other 4,680 Other 630 assets 653 Total liabilities 57,878 Investment securities 2,166 (Net assets) Long-term loans 3,194 receivable Shareholders’ equity 191,219 (2,815) Deferred tax assets Capital stock 50,300
Long-term prepaid Capital surplus 50,162
expenses Retained earnings 90,757 Lease and guarantee Accumulated other comprehensive (17,239) deposits income Other Valuation difference on available-for-sale securities 471 Allowance for doubtful Foreign currency accounts translation adjustments (17,711)
－ 24 － Subscription rights to shares 455
Minority interests 3,451
Total nets assets 177,886 Total liabilities and net Total assets 235,765 235,765 assets
－ 25 － Consolidated Statement of Income
( For the year ended December 31, 2011 )
(Millions of Yen) Account Amount Net sales 87,613 Cost of sales 14,948 Gross profit 72,665 Selling, general and administrative expenses 34,415 Operating income 38,249 Non-operating income Interest income 981 Dividends income 18 Gain on sales of investment securities 135 Amortization of negative goodwill 951 Reversal of deferred revenue 303 Miscellaneous income 261 2,652 Non-operating expenses Interest expenses 552 Foreign exchange losses 317 Equity in losses of affiliates 1,316 Commission fee 128 Provision of allowance for doubtful accounts 1,314 Miscellaneous expenses 367 3,997 Ordinary income 36,905 Extraordinary income Gain on sales of noncurrent assets 399 Gain on sales of subsidiaries and affiliates’ stocks 80 Gain on prior period adjustment 5 Gain on change in equity 20 Other 33 540 Extraordinary loss Loss on sales and retirement of noncurrent assets 18 Impairment loss 1,384 Loss on change in equity 36 Loss on adjustment for changes of accounting 3 standard for asset retirement obligations Compensation for damage 398 Other 103 1,944 Income before income taxes and minority interests 35,500 Income taxes-current 14,641 Income taxes-deferred (4,688) 9,953 Income before minority interests 25,547 Minority interests in loss (208) Net income 25,755
－ 26 － Consolidated Statement of Changes in Net Assets
( For the year ended December 31, 2011 )
(Millions of Yen) Shareholders’ equity Total shareholders’ Capital stock Capital surplus Retained earnings equity Balance as of December 31, 2010 4,245 4,107 66,120 74,473 Changes of items during the period Issuance of new shares 46,054 46,054 92,109 Dividends from surplus (1,058) (1,058) Net income 25,755 25,755 Other (60) (60) Net changes of items other than shareholders’ equity Total changes of items during the period 46,054 46,054 24,636 116,746 Balance as of December 31, 50,300 50,162 90,757 191,219 2011
Accumulated other comprehensive income Subscription Valuation Foreign Total Minority accumulated rights to interests Total net assets difference on currency other shares available-for-sale translation comprehensive securities adjustments income Balance as of December 31, 2010 463 (12,424) (11,960) 368 4,022 66,904 Changes of items during the period Issuance of new shares 92,109 Dividends from surplus (1,058) Net income 25,755 Other (60) Net changes of items other than shareholders’ equity 8 (5,287) (5,278) 86 (571) (5,763) Total changes of items during the period 8 (5,287) (5,278) 86 (571) 110,982 Balance as of December 31, 471 (17,711) (17,239) 455 3,451 177,886 2011
－ 27 － Notes to Consolidated Financial Statements
1. Significant basis for preparation of the consolidated financial statements (1) Scope of consolidation 1) Status of consolidated subsidiaries Number of consolidated subsidiaries: 22 Name of major consolidated subsidiaries NEXON Korea Corporation (Korea) Lexian Software Development Co., Ltd. (China) NEXON America Inc. (United States) NEOPLE Inc. (Korea) Ndoors Corporation (Korea) GameHi Co., Ltd. (Korea)
Centum Interactive Co., Ltd. (Korea) changed its company name to Qbious Co., Ltd. (Korea).
2) Status of non-consolidated subsidiaries Name of major non-consolidated subsidiaries Moria Japan Company Ltd. (Japan) GameHi SB Company Ltd. (Republic of Korea) 7on information tech Company Ltd. (China)
(Reason for excluding from the scope of consolidation) These companies are excluded from the scope of consolidation as their business size is small and their Total assets, Revenues, Net income (for the Company’s proportional share) and Retained earnings (for the Company’s proportional share) do not have material impact on the consolidated financial statements.
－ 28 － (2) Application of the equity method 1) Status of non-consolidated subsidiaries and affiliates accounted for using the equity method Number of companies accounted for using the equity method: 11 Name of the major equity method companies INTIVSOFT Co., Ltd. (Korea) Human Works Co., Ltd. (Korea) Gamania Digital Entertainment Co., Ltd. (Taiwan) Eyasoft Co., Ltd. (Korea) Six Waves Inc. (Hong Kong)
GH Hope Island Co., Ltd. (Korea) changed its company name to CJ Game Lab Corporation (Korea).
2) Status of non-consolidated subsidiaries and affiliates which are not accounted for using the equity method Name of non-consolidated subsidiaries and affiliate which are not accounted for using the equity method Moria Japan Company Ltd. (Japan) GameHi SB Company Ltd. (Korea) 7on information tech Company Ltd. (China) Menian.com Company Ltd. (Korea)
(Reason for not accounting for using the equity method) These entities have not been accounted for using the equity method because exclusion of the Company’s share in their Net income and Retained earnings do not have material impact on the consolidated financial statements and these entities as a whole are not significant.
－ 29 － (3) Changes in the scope of consolidation and application of the equity method 1) Changes in the scope of consolidation Nexon Communications Co., Ltd (Korea) was newly established and included in the scope of consolidation. NexToric Corporation (Korea) absorbed Symmetric Corporation (Korea) and NCLIPSE Corporation (Korea) in a merger by absorption, with NexToric Corporation as a surviving company. Ndoors Entertainment Inc. (Japan) was excluded from the scope of consolidation as its liquidation process was completed. 2) Changes in the scope of application of the equity method Gamania Digital Entertainment Co., Ltd. (Taiwan) became an equity method company as a result of the purchase of additional shares. A Bit Lucky, Inc. (USA), Eyasoft Co., Ltd. (Republic of Korea) and Six Waves Inc. (Hong Kong) became equity method companies as a result of purchase of new shares. NGL Co., Ltd. (Republic of Korea) became an equity method company as a result of establishment of a joint venture. Innotive Inc. (USA), Qplay Motion Graphics Corporation (Republic of Korea), Gamonster Inc (Republic of Korea) are no longer accounted for using the equity method as a result of sale of their shares.
(4) Matters related to fiscal year of consolidated subsidiaries All consolidated subsidiaries have the same fiscal year-end as the consolidated fiscal year-end.
－ 30 － (5) Accounting policies 1) Valuation basis and method for major assets (i) Securities ・Trading securities Valued at fair value, with cost of securities sold calculated using the moving- average method. ・Available-for-sale securities With fair value Securities with fair values are stated at fair value with fair market value at year end. Unrealized gains and losses, net of applicable taxes, are directly recorded in Net assets and Cost of securities sold is calculated using the moving-average method. Without fair value Securities without fair values are stated at cost based on the moving-average method. (ii) Derivatives Derivatives are stated at fair value. (iii) Inventory Inventory is stated principally at the periodic-average cost. (Book value is written down due to decline in profitability) (2) Depreciation method for major depreciable assets (i) Tangible fixed assets, excluding lease assets The Company and its consolidated subsidiaries apply the declining balance method. Useful lives of major assets are as follows: Buildings and structures: 3 to 40 years Vehicles: 3 years Furniture and fixture: 3 to 5 years
(ii) Intangible fixed assets, excluding lease assets Software for internal use is amortized using the straight-line method over the useful life (three to five years). Game copyrights are amortized using the straight-line method over the period between four and eight years. (iii) Lease assets Finance lease transactions that do not transfer ownership Finance lease assets without ownership transfer are depreciated using the straight-line method over the lease period, assuming no residual value. Finance lease assets without ownership transfer with the lease start date prior to December 31, 2008 are accounted for using the similar method as the operating lease.
－ 31 － 3) Accounting for major allowances (i) Allowance for doubtful accounts Allowance for performing receivable is provided based on the actual credit loss ratio. Allowance for specific receivable such as those with doubtful collectibility is provided for the expected uncollectible amount based on the individual assessment for collectability. (ii) Provision for bonuses Provision for bonuses is provided for the estimated bonus amount to be paid to the employees attributable to the current consolidated fiscal year. (iii) Provision for retirement benefits In some Korean subsidiaries, provision for employees’ retirement benefits is provided for the amount of obligation expected to have incurred at year-end based on the estimated retirement benefit obligation and pension assets as of year-end. Actuarial difference is fully expensed in the year it incurred. 4) Revenue recognition In the online game business, “Service period method” is applied whereby revenue is recognized ratably over the estimated period during which a game user can use an in-game item purchased in exchange for game points. 5) Basis of translation of major foreign currency denominated assets and liabilities to Japanese yen Foreign currency denominated monetary receivables and payables are translated into Japanese yen using the year-end spot foreign exchange rates, with resulting gains and losses included in earnings. Assets and liabilities of overseas subsidiaries are translated into Japanese yen using the year-end spot foreign exchange rates and revenues and expenses are translated using the average foreign exchange rates during the year, with resulting gains and losses recorded in Foreign currency translation adjustments in Net assets. 6) Interest expense As for interest expense related to business assets under construction for a long period of time, Korean subsidiaries capitalize those incurred during the construction and include as part of the cost of the assets in accordance with the local accounting standards. 7) Amortization of goodwill and negative goodwill Goodwill and negative goodwill incurred before March 31, 2010 are amortized over the period of four to ten years during which they are expected to have effects. 8) Other important matters for preparation of the consolidated financial statements Accounting for consumptions taxes
－ 32 － Transactions subject to consumption taxes are stated at the amount, net of the consumption taxes (“Zei Nuki method”).
－ 33 － (6) Changes in accounting principles 1) Adoption of Accounting Standard for Asset Retirement Obligations Effective January 1, 2011, the Company adopted Accounting Standards Board of Japan (“ASBJ”) Statement No.18, “Accounting Standard for Asset Retirement Obligations” issued on March 31, 2008 and ASBJ Guidance No.21, “Guidance on Accounting Standard for Asset Retirement Obligations” issued on March 31, 2008. The impact of the adoption on earnings was insignificant. 2) Adoption of “Accounting Standard for Equity Method of Accounting for Investments” and “Practical Solution on Unification of Accounting Policies Applied to Associates Accounted for Using the Equity Method” Effective January 1, 2011, the Company adopted ASBJ Statement No.16, “Accounting Standard for Equity Method of Accounting for Investments” issued on March 10, 2008 and Practical Issues Task Force No.24, “Practical Solution on Unification of Accounting Policies Applied to Associates Accounted for Using the Equity Method” issued on March 10, 2008. The adoption had no impact on earnings.
(7) Changes in presentation 1) Consolidated balance sheet and consolidated statement of changes in net assets Effective January 1, 2011, pursuant to ASBJ Statement No. 25, “Accounting Standard for Presentation of Comprehensive Income” issued on June 30, 2010, the Company adopted Ordinance of the Ministry of Justice No. 33 of 2010, “Ordinance for Partial Revision of Company Accounting Regulations” issued on September 30, 2010, and accordingly, presented “Valuation and translation adjustments” in the consolidated balance sheet and “Total valuation and translation adjustments” in the consolidated statement of changes in net assets as “Accumulated other comprehensive income” and “Total accumulated other comprehensive income”, respectively.
2) Consolidated statement of income Effective January 1, 2011, pursuant to ASBJ Statement No.22, “Accounting Standard for Consolidated Financial Statements,” issued on December 26, 2008, the Company adopted Ordinance of the Ministry of Justice No.7 of 2009, “Ordinance for Partial Revision of Ordinance for Enforcement of the Company Act and Company Calculation Rules” issued on March 27, 2009, and accordingly, presented a line item of “Income before income taxes and minority interests”.
－ 34 － 2. Notes to Consolidated Balance Sheet (1) Assets pledged as collateral and liabilities corresponding to pledged assets 1) Assets pledged as collateral Cash and deposits ¥6,027 million Land ¥11,933 million Construction in progress ¥1,430 million Buildings and structures ¥133 million Total ¥19,525 million
2) Liabilities corresponding to pledged assets The above assets are pledged as collateral for current portion of long-term loans payable of ¥2,994 million yen and long-term loans payable of ¥18,567 million. The above cash and deposits as well as land are pledged as collateral for long-term loans payable of ¥18,230 million borrowed from the Sumitomo Mitsui Banking Corporation (“Bank”) mainly for the purpose of purchasing stocks of subsidiaries and land for offices of subsidiaries. Under the long-term loan agreement with the Bank regarding this finance, the Company is required to deposit ¥2,770 million to the collateral account set up in the Bank on the last day of March, June, September, December of each year, unless an early repayment of ¥2,770 million or more is made, in which case such deposit is not required for the quarter. These accounts cannot be used for purposes other than repayment of principal and interest of the loan.
－ 35 － (2) Financial covenants The long-term loan agreements of the Company entered into with the Sumitomo Mitsui Banking Corporation totaling ¥18.5 billion include the following financial covenants calculated based on the Group’s consolidated year-end results. In the event that the Group fails to comply with such financial covenants and the notice from the lender is received, all obligations under the agreements would lose the benefit of time and immediate repayment would be required. 1) Leverage ratio must be maintained equal to or less than 3.0. 2) Interest coverage ratio must be maintained equal to or more than 2.5 3) Debt service coverage ratio must be maintained equal to or more than the ratio specified for each fiscal year in the table below. (*1) Fiscal year Ratio FY2011 1.5 FY2012 1.5 FY2013 1.5 FY2014 1.5 FY2015 1.5 FY2016 1.5 FY2017 1.5 FY2018 1.5 4) Total off-balance sheet liabilities must be maintained equal to or less than ¥12 billion. 5) Net assets of Nexon Korea Corporation must be maintained equal to or more than net assets in the fiscal year immediately preceding the fiscal year in which each agreement was entered (*2).
－ 36 － 6) Consolidated revenue and operating income of the Group must be maintained equal to or more than the higher of (i) 70% of the respective amounts for the year ended December 31, 2007, or (ii) 70% of the respective amounts for the previous year. (*1) Long-term loans payable was extended based on two agreements of “Loan Agreement” and “Second Loan Agreement”, which had outstanding balances of long-term loans payable of ¥8.6 billion yen and ¥9.6 billion yen, respectively, as of December 31, 2011. The final year of the payment is FY2018 for “Loan Agreement” and FY2015 for “Second Loan Agreement.” (*2) The applicable fiscal year is FY2010 for “Loan Agreement” and FY2009 for “Second Loan Agreement.” [Definition and formula] 1) Leverage ratio = Interest-bearing debts / EBITDA 2) Interest coverage ratio = Free cash flow / (Interest expense + Discounting charges) 3) Debt service coverage ratio = Free cash flow / (Principal payment + Interest expense + Discounting charges) 4) Off-balance sheet liabilities = Liabilities associated with transactions that are not recorded on the balance sheet, such as liability guarantees, lease, derivative transactions including swaps and forward exchange contracts, etc. 5) EBITDA = Operating income + Depreciation and amortization + Goodwill amortization
(3) Liabilities for guarantees Balance of liabilities for guarantee 7,570 million yen Mainly, the Company provides guarantees to borrowings made by other companies from financial institutions.
－ 37 － 3. Notes to Consolidated Statement of Changes in Net Assets (1) Class and number of shares issued and outstanding Total number of Total number as shares as of of December 31, Increase Decrease Share class December 31, 2010 2011 3,528 thousand 422,604 thousand 426,132 thousand Common stock －thousand shares shares shares shares
(Note) Explanation of changes Breakdown of increase is as follows: 1. Due to exercise of subscription rights to shares: 744 thousand shares 2. Due to stock split: 349,360 thousand shares 3. Due to capital increase by public offering: 70,000 thousand shares 4. Due to capital increase by third party allocation for purchasing stocks of Six Waves Inc.: 2,500 thousand shares
(2) Class and number of treasury stocks Not applicable
(3) Dividends from surplus 1) Amount of dividend paid Total amount Amount of Share of dividend dividend per Effective Source of Resolution Record date class (Millions of share date Dividend yen) (yen) Ordinary general meeting of Common December March 31, Retained 1,058 300 shareholders stock 31, 2010 2011 earnings held on March 30, 2011 2) Dividends with the record date in the current fiscal year but the effective date in the following fiscal year Not applicable
－ 38 － (4) Subscription rights to shares as of December 31, 2011
Subscription rights to shares as Subscription rights to shares as 2007 Stock Option (1) 2009 Stock Option (2-1)
Class of underlying share Common stock Common stock Number of underlying 14,376,000 shares 2,899,000 shares share Outstanding balance of subscription rights to 14,376 units 2,899 units shares
Subscription rights to shares as Subscription rights to shares as 2010 Stock Option (2-2) 2010 Stock Option (2-3)
Class of underlying share Common stock Common stock Number of underlying 66,000 shares 63,000 shares share Outstanding balance of subscription rights to 66 units 63 units shares
Subscription rights to shares as 2010 Stock Option (3-1)
Class of underlying share Common stock Number of underlying 621,000 shares share Outstanding balance of subscription rights to 621 units shares (Note) Unvested subscription rights to shares are excluded.
－ 39 － 4. Notes to financial instruments (1) Policies on handling of financial instruments The Group raises necessary working capitals based on the business plan. The Group mainly raises funds through loans from financial institutions. Excess funds are invested in short-term deposits and marketable securities. The Group uses derivative contracts solely for the purpose of hedging foreign exchange fluctuation risk and do not use them for speculative purposes. (2) Descriptions and risks of financial instruments as well as the Group’s risk management system Trading receivables including notes and accounts receivable-trade are exposed to credit risk of the Group’s business partners. With regard to the credit risk, the Company and its consolidated subsidiaries, based on the respective credit management regulations, regularly conduct credit reviews of their customers to obtain their credit information and manage due dates and outstanding credit balances by customer, in order to detect signs of deteriorating financial conditions of customers’ at an early stage and mitigate potential risks regarding collectibility. Marketable securities and investment securities primarily consist of shares of companies and investments in investment partnership held for business promotion purpose. These securities are exposed to credit risk of issuers, market price fluctuation risk and foreign exchange fluctuation risk. The Group manages these risks by obtaining information about market values and financial conditions of these issuers regularly. A large part of long-term loans receivable is loans receivable from employees and the risk is minimal. All notes and accounts payable-trade become due within one year. Long-term loans payable (the maximum loan period of seven years) are mainly borrowings from financial institutions to finance investment fund. As loans payable bear variable interest rate, they are exposed to interest rate fluctuation risk which is managed by monitoring movement of borrowing rates. Accounts payable-other, accrued expenses and income taxes payable are exposed to liquidity risk. The Company and its consolidated subsidiaries manage the risk by developing and updating their respective financial plan. (3) Supplemental information on market values of financial instruments The market values of financial instruments include values based on the market value and reasonably calculated values when there are no market values. As such values are calculated using variable factors, using different assumptions may result in different values.
－ 40 － (4) Market values of financial instruments Amounts on the consolidated balance sheet, market values and difference between these values as of December 31, 2011 are as follows. Financial instruments for which market values are not readily available are not included. Consolidated balance sheet Market value Difference amount (Millions of yen) (Millions of yen) (Millions of yen) (1）Cash and deposits 132,479 132,479 － (2) Notes and accounts 13,845 － － receivable-trade Allowance for (22) － － doubtful accounts(*) 13,822 13,822 － (3) Short-term investment 12 12 － securities (4) Investment securities 10,168 9,243 (924) (5) Long-term loans 71 71 － receivable Total assets 156,554 155,629 (924) (1) Notes and accounts 981 981 － payable-trade (2) Current portion of long- term loans payable and 21,562 21,717 155 long-term loans payable
(3) Accounts payable-other 2,017 2,017 －
(4) Accrued expenses 831 831 －
(5) Income taxes payable 6,671 6,671 －
Total liabilities 32,064 32,220 155 (*)Allowance for doubtful accounts related to accounts receivable-trade is deducted.
－ 41 － (Note) 1. Calculation method of market values of financial instruments and marketable securities Assets (1）Cash and deposits and (2）Notes and accounts receivable-trade They are stated at carrying value as their carrying value approximates fair value due to the short maturities. (3)Short-term investment securities and (4) Investment securities Market values of these securities are based on quotation in the stock exchange. (5) Long-term loans receivable Long-term loans receivable, mostly loans to employees, consist of a large number of small amount of loans and their terms and conditions vary, therefore, they are stated at carrying value.
Liabilities (1) Notes and accounts payable-trade, (3) Accounts payable-other, (4) Accrued expenses and (5) Income taxes payable They are stated at carrying value as their carrying value approximates fair value due to the short maturities. (2) Current portion of long-term loans payable and long-term loans payable Market values of these items are calculated by discounting the total amount of principal and interests by the rate that would be applied to a new similar borrowing.
－ 42 － 2. Financial instruments for which market values are not readily available Consolidated balance sheet amount Classification (Millions of yen) Investment securities
Affiliated companies’ shares 5,029
Unlisted shares 503
Investments in investment partnership 1,287
Unlisted bonds 13 As these instruments have no quoted price and their market value is not readily available, they are not included in (4) Investment securities.
5. Notes to rental properties Not applicable
6. Notes to per share information (1) Net assets per share 408.28 yen (2) Net income per share 71.65 yen
7. Notes to subsequent events Not applicable
－ 43 － 8. Other Notes to stock options (1) The amount of expense charged related to stock options and account recorded for the year ended December 31, 2011 is as follows: Cost of sales: ¥1 million Selling, general and administrative expenses: ¥101 million
(2) Description, number and changes of stock options 1) Description of stock options
2007 Stock option (1)
1 director of the Company Category and 24 employees of the number of eligible Company person 224 directors and employees of subsidiaries Number of stock Common stock: 24,905,000 options by share shares class (Note 1) Date of grant October 1, 2007 The person must be a director or an employee of the Company at the time of Vesting conditions the exercise to be eligible, except when employment is terminated for due reasons such as retirement. (Note 2) Vesting period Not prescribed From December 14, 2011 to Exercise period September 30, 2015
－ 44 － 2009 Stock option (2-1) 2010 Stock option (2-2) 2010 Stock option (2-3) 5 employees of the Category and Company 8 directors and 1 employee of a number of eligible 37 directors and employees of subsidiary person employees of subsidiaries subsidiaries Number of stock Common stock: Common stock: Common stock: options by share 5,280,000 shares 200,000 shares 200,000 shares class (Note 1)． Date of grant October 1, 2009 January 1, 2010 April 2, 2010 The person must be a director or an employee of the Company at the time of the exercise to Vesting conditions be eligible, except when Same as left Same as left employment is terminated for due reasons such as retirement. (Note 3) Vesting period Not prescribed Same as left Same as left From December 14, Exercise period 2011 to September 30, Same as left Same as left 2015
－ 45 － 2010 Stock option (3-1) 2011 Stock option (3-2) 2011 Stock option (3-3) 2 director of the 1 employee of a 1 director of the Company subsidiary Company Category and 11 employees of the 4 employees of the number of eligible Company Company persons 23 directors and employees of subsidiaries Number of stock Common stock: Common stock: Common stock: options by share 1,970,000 shares 100,000 shares 190,000 shares class (Note 1) Date of grant November 1, 2010 January 3, 2011 July 1, 2011 The person must be a director or an employee of the Company at the time of the exercise to Vesting conditions be eligible, except when Same as left Same as left employment is terminated for due reasons such as retirement. (Note 3) Vesting period Not prescribed Same as left Same as left From December 14, Exercise period 2011 to September 30, Same as left Same as left 2015
－ 46 － 2011 Stock option (3-4)
Category and 1 employee of a number of eligible subsidiary persons
Number of stock Common stock: 800,000 options by share shares class (Note 1) Date of grant August 1, 2011 The person must be a director or an employee of the Company at the time of the exercise to Vesting conditions be eligible, except when employment is terminated for due reasons such as retirement. (Note 3) Vesting period Not prescribed From December 14, Exercise period 2011 to September 30, 2015
－ 47 － 2011 Stock option (4)
Category and 1 employee of a number of subsidiary eligible persons Number of stock Common stock: options by share 35,000 shares class (Note 1) Date of grant November 3, 2011 The person must be a director or an employee of the Company at the time of the exercise to be Vesting conditions eligible, except when employment is terminated for due reasons such as retirement. (Note 3) Vesting period Not prescribed From December 14, Exercise period 2011 to September 30, 2015 (Notes) 1．The number of options granted represents the number of shares to be received upon exercise. The number of shares reflects the effect of a 100-for-1 stock split of common stock executed on July 21, 2011. 2．When employment is terminated for due reasons such as retirement, the options vested at the time of termination are exercisable within 90 days of employment termination. If the following day of employment termination is prior to the IPO date, the vested options can be exercised after the IPO date.
－ 48 － 3. When employment is terminated for due reasons such as retirement, the options vested at the time of termination are exercisable within 90 days of employment termination. If the following day of employment termination is prior to the IPO date, the vested options can be exercised at the earlier of the IPO date or after three years from the grant date.
2) The number and changes of stock options The number of stock option outstanding during the year ended December 31, 2011 represents the number of shares to be received upon exercise. As the Company executed a 100-for-1 stock split of common stock on July 21, 2011, the number of stock options and price information reflects the effect of such stock split. (i) Number of stock options 2007 Stock option
(1)
Unvested stock options (Shares)
As of December 31, 2010 －
Granted －
Forfeited －
Vested － Unvested options as of － December 31, 2011 Vested stock options (Shares)
As of December 31, 2010 14,991,000
Vested － Exercised 615,000 Forfeited － Unexercised options as of 14,376,000 December 31, 2011
－ 49 － 2009 Stock option 2010 Stock option 2010 Stock option
(2-1) (2-2) (2-3) Unvested stock
options (Shares) As of December 31, 2,955,000 200,000 197,000 2010 Granted － － －
Forfeited 108,000 － 3,000
Vested 1,440,000 66,000 63,000 Unvested options as of December 31, 1,407,000 134,000 131,000 2011 Vested stock options
(Shares) As of December 31, 1,588,000 － － 2010 Vested 1,440,000 66,000 63,000
Exercised 129,000 － －
Forfeited － － － Unexercised options as of December 31, 2,899,000 66,000 63,000 2011
－ 50 － 2010 Stock option 2011 Stock option 2011 Stock option
(3-1) (3-2) (3-3) Unvested stock options
(Shares) As of December 31, 1,970,000 － － 2010 Granted － 100,000 190,000
Forfeited 50,000 100,000 －
Vested 621,000 － － Unvested options as 1,299,000 － 190,000 of December 31, 2011 Vested stock options
(Shares) As of December 31, － － － 2010 Vested 621,000 － －
Exercised － － －
Forfeited － － － Unexercised options as of December 31, 621,000 － － 2011
－ 51 － 2011 Stock option
(3-4) Unvested stock
options (Shares) As of December 31, － 2010 Granted 80,000
Forfeited －
Vested － Unvested options as of December 31, 80,000 2011 Vested stock options
(Shares) As of December 31, － 2010 Vested －
Exercised －
Forfeited － Unexercised options as of December 31, － 2011
－ 52 － 2011 Stock option
(4) Unvested stock
options (Shares) As of December 31, － 2010 Granted 35,000
Forfeited －
Vested － Unvested options as of December 31, 35,000 2011 Vested stock options
(Shares) As of December 31, － 2010 Vested －
Exercised －
Forfeited － Unexercised options as of December 31, － 2011
－ 53 － (ii) Price information 2007 Stock option
(1)
Exercise price (Yen) 153 Average share price at (Yen) 1,131 the time of exercise Fair value per share at (Yen) 17 grant date
2009 Stock option 2010 Stock option 2010 Stock option
(2-1) (2-2) (2-3)
Exercise price (Yen) 300 300 300 Average share price at (Yen) 1,131 － － the time of exercise Fair value per share at (Yen) 44 196 196 grant date
2010 Stock option 2011 Stock option 2011 Stock option
(3-1) (3-2) (3-3)
Exercise price (Yen) 640 640 640 Average share price at (Yen) － － － the time of exercise Fair value per share at (Yen) 6 157 240 grant date
－ 54 － 2011 Stock option
(3-4)
Exercise price (Yen) 640 Average share price at (Yen) － the time of exercise Fair value per share at (Yen) 240 grant date
2011 Stock option
(4)
Exercise price (Yen) 880 Average share price at (Yen) － the time of exercise Fair value per share at (Yen) － grant date
－ 55 － (3) Estimate of fair value of stock options As a privately held company, the Group estimated fair value of stock options granted in the year ended December 31, 2007, 2009, 2010 and 2011 using the intrinsic value instead of the fair value. The value of the Company’s stock which was used as a basis to calculate the intrinsic value was derived using the discounted cash flow method.
(4) Estimate of number of vested stock options Because it is difficult to estimate future forfeitures, the Group only considered actual forfeitures.
(5) The aggregate intrinsic value of stock options outstanding at December 31, 2011 and the aggregated intrinsic value of stock options exercised on the exercise date, based on intrinsic value per unit 1) The aggregate intrinsic value of stock options outstanding: ¥18,538 million 2) The aggregate intrinsic value of stock options exercised: ¥708 million
－ 56 － Non-consolidated Balance Sheet (As of December 31, 2011) (Millions of yen) Account Amount Account Amount (Assets) (Liabilities) Current assets Current liabilities 3,102 Cash and deposits Accounts payable- trade 857 93,487 Accounts receivable- Accounts payable- trade 486 90,800 other Prepaid expenses Accrued expenses 113 1,883 Short-term loans Income taxes payable 305 receivable from 159 Consumption taxes subsidiaries and 62 41 affiliates payable 511 Provision for bonuses 196 Deferred tax assets 70 Unearned income 729 Other 34,517 Other 372 Noncurrent assets 289 Property, plant and Noncurrent liabilities 18,443 equipment 80 Long-term loans payable 18,230 Leasehold 3 improvements Lease obligations 94 422 Long-term unearned Vehicles income 108 （216） Tools, furniture and Asset retirement 10 fixtures 709 obligations Total liabilities 21,545 Accumulated 675 depreciation (Net Assets) 33 Intangible assets 33,518 Shareholders’ equity 106,012 Software 85 Capital stock 50,300 Other 14,485 Capital surplus 50,160 Investment and other Legal capital surplus 50,160 assets 18,230 Investment securities 314 Retained earnings 5,551 Other retained Stocks of subsidiaries 95 earnings 5,551 and affiliates 308 Retained earnings brought forward 5,551 Long-term loans receivable from Valuation and translation (7) subsidiaries and adjustments Valuation difference on affiliates (7) available-for-sale securities Subscription rights to Long-term prepaid 455 expenses shares
Deferred tax assets Total net assets 106,459 Other
－ 57 －
Total assets 128,005 Total liabilities and net 128,005 assets
－ 58 － Non-consolidated Statement of Income
( For the year ended December 31, 2011 )
(Millions of yen) Account Amount Net sales Sales of games 12,903 Other sales 129 13,033 Cost of sales 4,745 Gross profit 8,287 Selling, general and administrative 5,896 expenses Operating income 2,391 Non-operating income Interest income 380 Dividends income 394 Other 74 849 Non-operating expenses Interest expense 365 Foreign exchange loss 48 Stock issuance cost 305 Other 0 720 Ordinary income 2,521 Extraordinary loss Loss on sales and retirement of noncurrent asses 10 Loss on adjustment for changes of accounting standard 3 13 for asset retirement obligations Income before income taxes 2,507 Income taxes-current 982 Income taxes-deferred 3 986 Net income 1,521
－ 59 － Non-Consolidated Statement of Changes in Net Assets
( For the year ended December 31, 2011 )
(Millions of yen) Shareholders’ equity
Capital surplus Retained earnings
Other retained Total earnings Capital stock Total shareholders’ Legal capital Total capital Retained retained equity surplus surplus earnings earnings brought forward Balance as of December 31, 2010 4,245 4,105 4,105 5,088 5,088 13,439
Changes of items during the period
Issuance of new shares 46,054 46,054 46,054 92,109
Dividends from surplus (1,058) (1,058) (1,058)
Net income 1,521 1,521 1,521 Net changes of items other than shareholders’ equity Total changes of items during the period 46,054 46,054 46,054 462 462 92,572 Balance as of December 31, 2011 50,300 50,160 50,160 5,551 5,551 106,012
Valuation and translation adjustments Subscription Valuation difference Total valuation and rights to shares Total net assets on available-for-sale translation securities adjustments Balance as of December 31, 2010 391 391 368 14,200
Changes of items during the period
Issuance of new shares 92,109
Dividends from surplus (1,058)
Net income 1,521 Net changes of items other than shareholders’ equity (399) (399) 86 (313) Total changes of items during the period (399) (399) 86 92,259 Balance as of December 31, 2011 (7) (7) 455 106,459
－ 60 － Notes to non-consolidated financial statements
1. Significant accounting policies (1) Valuation basis and method for securities Stocks of subsidiaries and affiliates Stated at cost based on the moving-average method. Available-for-sale securities With fair value Securities with fair values are stated at fair value with fair market value at year end. Unrealized gains and losses, net of applicable taxes, are directly recorded in Net assets and Cost of securities sold is calculated using the moving-average method. Without fair value Securities without fair values are stated at cost based on the moving-average method.
(2) Depreciation method for depreciable assets 1) Tangible fixed assets, excluding lease assets The Company applies the declining balance method. Useful lives of major assets are as follows: Leasehold improvements: 10 to 15 years Tools, furniture and fixture: 4 to 5 years 2) Intangible fixed assets, excluding lease assets Software for internal use Software for internal use is amortized using the straight-line method over the expected useful life (five years). 3) Lease assets Finance lease transactions that do not transfer ownership Finance lease assets without ownership transfer are depreciated using the straight-line method over the lease period, assuming no residual value. Finance lease assets without ownership transfer with the lease start date prior to December 31, 2008 are accounted for using the similar method as the operating lease.
(3) Accounting for allowances 1) Allowance for doubtful accounts Allowance for performing receivable is provided based on the actual credit loss ratio. Allowance for specific receivable such as those with doubtful
－ 61 － collectibility is provided for the expected uncollectible amount based on the individual assessment for collectibility. 2) Provision for bonuses Provision for bonuses is provided for the estimated bonus amount to be paid to the employees attributable to the current fiscal year.
(4) Revenue recognition In the online game business, “Service period method” is applied whereby revenue is recognized ratably over the estimated period during which a game user can use an in-game item purchased in exchange for game points.
(5) Basis of translation of foreign currency denominated assets and liabilities to Japanese yen Foreign currency denominated monetary receivables and payables are translated into Japanese yen using the year-end spot foreign exchange rates, with resulting gains and losses included in earnings.
(6) Accounting for consumptions taxes Transactions subject to consumption taxes are stated at the amount, net of the consumption taxes (“Zei Nuki method”).
(7) Changes in accounting policies Adoption of accounting standard for asset retirement obligations Effective January 1, 2011, the Company has adopted Accounting Standards Board of Japan (“ASBJ”) Statement No.18, “Accounting Standard for Asset Retirement Obligations” issued on March 31, 2008 and ASBJ Guidance No.21, “Guidance on Accounting Standard for Asset Retirement Obligations” issued on March 31, 2008. The impact of the adoption on earnings was insignificant.
－ 62 － 2. Notes to non-consolidated balance sheet (1) Assets pledged as collateral and liabilities corresponding to pledged assets Provision of security regarding long-term loans payable of the Company and Korean subsidiary (Millions of yen) Assets pledged as collateral Liabilities corresponding to pledged assets Book value as Type of Balance as Type of December security Description of December 31, 2011 interest 31, 2011 Cash and deposits 2,771 Pledge Long-term loans 18,230 payable (Note) Stocks of subsidiaries 450 Pledge and affiliates Long-term loans 18,230 Pledge receivable from subsidiaries and affiliates (Note) The Company borrowed funds from the Sumitomo Mitsui Banking Corporation (“Bank”) for the purpose of sub-lending to NEXON Korea Corporation, its Korean subsidiary, and established the right of pledge on its ordinary deposits, NEXON Korea’s stocks and long-term loans receivable from NEXON Korea as collaterals for such long-term loans payable. Under the long-term loan agreement with the Bank regarding this finance, the Company is required to deposit ¥2,770 million to the collateral account set up in the Bank on the last day of March, June, September, December of each year, unless an early repayment of ¥2,770 million or more is made, in which case such deposit is not required. These accounts cannot be used for purposes other than repayment of principal and interest of the loan. Furthermore, with regard to NEXON Korea’s borrowings of 5,000 million won (equivalent to ¥337 million) from the local bank, the Company established the right of pledge on certain portion of the aforementioned deposits, NEXON Korea’s stocks and long-term loans receivable from NEXON Korea at the same order of priority of pledge.
－ 63 － (2) Liabilities for guarantees The Company provides guarantees for bank borrowings of the following subsidiary,. NEXON Korea Corporation: 5,000 million won (Equivalent to ¥337 million)
(3) Monetary claims and monetary debts to/from affiliated companies (excluding those that are presented separately) Short-term monetary claims: ¥19 million Short-term monetary debts: ¥799 million
(4) Financial covenants The long-term loan agreements of the Company entered into with the Sumitomo Mitsui Banking Corporation totaling ¥18.2 billion include the following financial covenants calculated based on the Group’s consolidated year-end results. In the event that the Group fails to comply with such financial covenants and the notice from the lender is received, all obligations under the agreements would lose the benefit of time and immediate repayment would be required. 1) Leverage ratio must be maintained equal to or less than 3.0. 2) Interest coverage ratio must be maintained equal to or more than 2.5 3) Debt service coverage ratio must be maintained equal to or more than the ratio specified for each fiscal year in the table below. (*1)
Fiscal Year Ratio FY2011 1.5 FY2012 1.5 FY2013 1.5 FY2014 1.5 FY2015 1.5 FY2016 1.5 FY2017 1.5 FY2018 1.5 4) Total off-balance sheet liabilities must be maintained equal to or less than ¥12 billion.
－ 64 － 5) Net assets of Nexon Korea Corporation must be maintained equal to or more than net assets in the fiscal year immediately preceding the fiscal year in which each agreement was entered (*2). 6) Consolidated revenue and operating income of the Group must be maintained equal to or more than the higher of (i) 70% of the respective amounts for the year ended December 31, 2007, or (ii) 70% of the respective amounts for the previous year. (*1) Long-term loans payable was extended based on two agreements of “Loan Agreement” and “Second Loan Agreement”, which had outstanding balances of long-term loans payable of ¥8.6 billion and ¥9.6 billion, respectively, as of December 31, 2011. The final year of the payment is FY2018 for “Loan Agreement” and FY2015 for “Second Loan Agreement”. (*2) The applicable fiscal year is FY2010 for “Loan Agreement” and FY2009 for “Second Loan Agreement”.
－ 65 － [Definition and formula] 1) Leverage ratio = Interest-bearing debts / EBITDA 2) Interest coverage ratio = Free cash flow / (Interest expense + Discounting charges) 3) Debt service coverage ratio = Free cash flow / (Principal payment + Interest expense + Discounting charges) 4) Off-balance sheet liabilities = Liabilities associated with transactions that are not recorded on the balance sheet, such as liability guarantees, lease, derivative transactions including swaps and forward exchange contracts, etc. 5) EBITDA = Operating income + Depreciation and amortization + Goodwill amortization
3. Notes to non-consolidated statement of income Transactions with affiliated companies 1) Operating transactions Net sales: ¥21 million Purchase of goods: ¥3,197 million Selling, general and administrating expenses: ¥14 million 2) Non-operating transactions: ¥393 million
4. Notes to non-consolidated statement of changes in net assets Matters related to number of treasury stock Not applicable
－ 66 － 5. Notes to deferred tax accounting (1) Major components of deferred tax assets and liabilities
Deferred tax assets (Millions of yen) Unearned revenue 296 Enterprise taxes payable 89 Provision for bonuses 79 Accrued expenses 45 Long-term unearned revenue 41 Subscription rights to shares 27 Advertising expenses 19 Valuation difference on available-for-sale securities 5 Asset retirement obligations 1 Total deferred tax assets 607
(2) Major components of significant differences between the statutory effective tax rate and the corporate tax rate after adoption of deferred tax accounting The disclosure is omitted because the difference between the statutory effective tax rate and the corporate tax rate after the adoption of deferred tax accounting is less than 5% of the statutory effective tax rate.
(3) Adjustments to deferred tax assets and liabilities due to change in the statutory effective tax rate On December 2, 2011, the “Act for Partial Revision of the Income Tax Act, etc. for the Purpose of Creating Taxation System Responding to Changes in Economic and Social Structures” (Act No. 114 of 2011) and the “Act on Special Measures for Securing Financial Resources Necessary to Implement Measures for Reconstruction Following the Great East Japan Earthquake” (Act No. 117 of 2011) were promulgated and accordingly, corporate tax rate will be changed from the fiscal year beginning on or after April 1, 2012. In line with this, the effective tax rate used for the calculation of deferred tax assets and liabilities will be reduced to 38.01% from the current rate of 40.69% for temporary difference items which are expected to be reversed between the fiscal year beginning on or after January 1, 2013 and the year beginning on or after January 1, 2015, and reduced to 35.64% from the current 40.69% for temporary difference items which are expected to be reversed from the fiscal year beginning on or after January 1, 2016.
－ 67 － As a result of these changes in the tax rate, the amount of deferred tax assets decreased by ¥6 million and income taxes-current charged in the current fiscal year increased by ¥6 million.
－ 68 － 6. Notes to fixed assets used under lease agreements In addition to fixed assets recorded in non-consolidated balance sheet, parts of “Tools, furniture and fixtures” and “Software” are used under finance lease agreements without ownership transfer. (1) Acquisition cost, accumulated depreciation and book value of leased properties
(Millions of yen) Accumulated Acquisition cost Book value depreciation Tools, furniture 16 12 3 and fixtures Software 9 8 1 Total 26 20 5
(2) Future minimum lease payments Due within one year ¥5 million Due over one year ¥0 million Total ¥5 million
(3) Lease payments, depreciation expense and interest expense Lease payments ¥35 million Depreciation expense ¥33 million Interest expense ¥0 million
(4) Calculation method of depreciation expense Depreciation expense is calculated using the straight-line method over the lease period without residual value.
(5) Calculation method of interest expense The effective interest method is used to allocate the amount equivalent to interest expenses which are difference between total lease payments and the amount equivalent to acquisition cost of leased properties.
－ 69 － 7. Notes to related party transactions (1) Parent company and major corporate shareholders Not applicable
(2) Subsidiaries and affiliated companies Name of Ownership ratio of voting Attribute Relationship company rights License for publishing developed game titles Provision of liability Holding NEXON Korea guarantees Subsidiary Direct Corporation Acceptance of liability 100.00％ guarantees Concurrent position of directors
Transaction Balance at amount end of year Transactions Account (Millions of (Millions of yen) yen) Purchase (Note 1) 2,687 Accounts 654 payable-trade Loans made (Note 2) 10,000 Long-term 18,230 Collection of loans (Note 2) 12,970 loans receivable Interest income (Note 2) 377 from subsidiaries and affiliates Accounts 11 payable-other Accrued 3 expenses Acceptance of liability guarantees 18,230 - - and collaterals for the Company’s bank borrowings (Note 3) Provision of liability guarantees and 337 - - collaterals for bank borrowings of the subsidiary (Note 4)
－ 70 －
Terms and conditions and its determination policies (Note 1) Purchase relates to royalty and transaction terms are decided in consideration of general transaction terms prevailing in the online game market. (Note 2) For long-term loans receivable, transaction terms are determined based on funding costs in Japan. (Note 3) With regard to the Company’s borrowings from banks, the Company obtained liability guarantees and collaterals from NEXON Korea Corporation, its Korean subsidiary. Collaterals include ordinary deposits, time deposits and land. (Note 4) The Company provides liability guarantees to bank borrowings of NEXON Korea Corporation, its Korean subsidiary, and provides ordinary deposits, long- term loans receivable and stocks of subsidiaries and affiliates as collateral.
(3) Companies, etc. with the same parent company and other related companies’ subsidiaries, etc. Not applicable
(4) Officers and major individual shareholders, etc. Not applicable
8. Notes to per share information Net assets per share ¥248.76 Net income per share ¥4.23
9. Notes to subsequent events Not applicable
10．Other Not applicable
－ 71 － (Translation) Audit Report on Consolidated Financial Statements Independent Auditors’ Report February 22, 2012 To the Board of Directors of NEXON Co., Ltd. PricewaterhouseCoopers Aarata Designated Partner, Engagement Partner, Certified Public Accountant Shinya Deguchi Designated Partner, Engagement Partner, Certified Public Accountant Hideaki Zenba
Pursuant to the fourth paragraph of Article 444 of the Companies Act, we have audited the consolidated financial statements, namely, the consolidated balance sheet as of December 31, 2011 of NEXON Co., Ltd. (the “Company”), and the related consolidated statements of income and changes in net assets, and the related notes for the fiscal year from January 1, 2011 to December 31, 2011. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company and consolidated subsidiaries as of December 31, 2011, and the results of their operations for the year then ended in conformity with accounting principles generally accepted in Japan.
－ 72 －
Our firm and the engagement partners do not have any financial interest in the Company for which disclosure is required under the provisions of the Certified Public Accountants Act.
The above represents a translation, for convenience only, of the original report issued in the Japanese language.
－ 73 － (Translation) Audit Report on Non-Consolidated Financial Statements Independent Auditors’ Report February 22, 2012 To the Board of Directors of NEXON Co., Ltd. PricewaterhouseCoopers Aarata Designated Partner, Engagement Partner, Certified Public Accountant Shinya Deguchi Designated Partner, Engagement Partner, Certified Public Accountant Hideaki Zenba
Pursuant to the first item, second paragraph of Article 436 of the Companies Act, we have audited the non-consolidated financial statements, namely, the non- consolidated balance sheet as of December 31, 2011 of NEXON Co., Ltd. (the “Company”), and the related non-consolidated statements of income and changes in net assets, and the related notes for the fiscal year from January 1, 2011 to December 31, 2011, and the accompanying supplemental schedules. These non- consolidated financial statements and the accompanying supplemental schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these non-consolidated financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the non-consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2011, and the results of their operations for the year then ended in
－ 74 － conformity with accounting principles generally accepted in Japan.
Our firm and the engagement partners do not have any financial interest in the Company for which disclosure is required under the provisions of the Certified Public Accountants Act.
The above represents a translation, for convenience only, of the original report issued in the Japanese language.
－ 75 － (Translation) Audit Report of Board of Statutory Auditors Audit Report We, as the Company’s Board of Statutory Auditors, have prepared this audit report regarding the performance of duties of the Company’s Directors during the Company’s fiscal year from January 1, 2011 to December 31, 2011 based on the audit reports prepared by each Statutory Auditor and, upon deliberation, hereby report as follows: 1. Auditing Method Applied by the Board of Statutory Auditors and Each Statutory Auditor and Details Thereof We established the auditing policy and job assignment, received from each Statutory Auditor reports on the status and results of audits, and received from the Directors and other appropriate persons, as well as the Independent Auditors, reports on the performance of their duties, and, when necessary, requested explanations regarding such reports. In accordance with the auditing standards for Statutory Auditors established by the Board of Statutory Auditors, the auditing policy and job assignment, each Statutory Auditor endeavored to gather necessary information and create an improved environment for auditing by taking steps to facilitate communication with the Directors, the internal auditors and employees from various sections. Each Corporate Auditor also attended meetings of the Board of Directors and other important meetings, received from the Directors, employees and other related persons reports on the performance of their duties, requested explanations regarding such reports when necessary, inspected the documents related to important decisions, and examined the status of the Company’s business and properties at the head office and major business facilities. Statutory Auditors expressed an opinion on the content of resolutions by the Board of Directors regarding the establishment of systems, which is described in the Business Report, to ensure that the Directors’ performance of their duties will be in compliance with relevant laws and regulations and with the Company’s Articles of Incorporation and other systems to ensure that the Company’s operations will be conducted appropriately as provided in Paragraph 1 and 3, Article 100 of the Enforcement Regulations of the Companies Act, and on the status of such systems being established by such resolutions (internal control systems), by receiving reports from the Directors and employees on the establishment and operating status on a regular basis and requesting explanations when necessary. Each Statutory Auditor took steps to facilitate communication with the Directors, Statutory Auditors and other related persons of the Company’s subsidiaries, and to
－ 76 － share information among them. When necessary, each Statutory Auditor received reports from subsidiaries on their respective businesses. Based on the foregoing method, we examined the Business Report and the supplemental schedules for this fiscal year. In addition, the Statutory Auditors also monitored and examined whether the Independent Auditors maintained their independence and conducted their audit in an appropriate manner. The Statutory Auditors received from the Independent Auditors reports on the performance of their duties and requested explanations regarding those reports when necessary. The Statutory Auditors also received notification from the Independent Auditors that they have taken appropriate steps to improve the “System for ensuring appropriate execution of its duties” (as enumerated in Article 131 of the Company Accounting Regulation Ordinance) in compliance with the “Quality Control Standards Relating to Auditing” (adopted by the Business Accounting Council on October 28, 2005) and other applicable standards. When necessary, the Statutory Auditors requested explanations on such notifications. Based on the foregoing method, the Statutory Auditors reviewed the non-consolidated financial statements, namely, the balance sheet as of December 31, 2011 of the Company, and the related statements of income and changes in net assets and the related notes for the fiscal year from January 1, 2011 to December 31, 2011, and the accompanying supplemental schedules, and the consolidated financial statements, namely, the consolidated balance sheet as of December 31, 2011 of the Company, and the related consolidated statements of income and changes in net assets and the related notes for the fiscal year from January 1, 2011 to December 31, 2011.
2. Results of Audit (1) Results of Audit of the Business Report and others A. In our opinion, the Business Report and the supplemental schedules present fairly the conditions of the Company in conformity with the applicable laws and regulations of Japan as well as the Articles of Incorporation of the Company. B. In our opinion, there are no fraudulent acts or material facts in the course of the Directors’ performance of their duties that violated the applicable laws and regulations or the Articles of Incorporation of the Company. C. In our opinion, the details of the resolutions of the Board of Directors regarding the internal control systems are appropriate. Furthermore, we believe that no material issues have been raised concerning items described in the Business Report as well as the performance of the Directors’ duties both regarding the internal control systems. (2) Results of Audit of the Financial Statements and the accompanying
－ 77 － Supplemental Schedules In our opinion, the method and the results of the audit conducted by PricewaterhouseCoopers Aarata, the Independent Auditors, are appropriate. (3) Results of Audit of the Consolidated Financial Statements In our opinion, the method and the results of the audit conducted by PricewaterhouseCoopers Aarata, the Independent Auditors, are appropriate.
February 23, 2012
Board of Statutory Auditors of NEXON Co., Ltd. Full-Time Statutory Auditor/Outside statutory auditor Toshishige Tanaka Full-Time Statutory Auditor/Outside statutory auditor Iwao Ohtomo Full-Time Statutory Auditor/Outside statutory auditor Ryoji Mori
－ 78 － Reference Materials for General Meeting of Shareholders
Proposal 1: Election of Six (6) Directors The terms of office for all six (6) current Directors will expire at the conclusion of this General Meeting of Shareholders. Accordingly, the Company requests approval for the election of six (6) Directors.
Candidates for Directors are as follows: Career summary, positions and areas of Name Number of the Candidate responsibility Company’s # (Date of birth) (Significant concurrent positions outside the Company) shares owned Sept. 1999 Joined NEXON Corporation (now NXC Corporation) July 2000 Director of NEXON Corporation Dec. 2002 Director of NEXON Co., Ltd. Jan. 2004 Director of Lexian Software Development (Shanghai) Co., Ltd. (to present) Sept. 2005 Director of NX Games Inc. (now NEXON America Inc.) (to present) Mar. 2007 Representative Director of NEXON Europe Limited (to present) Dec. 2008 President and CEO of NEXON Co., 1 Seung Woo Choi 3,307,500 (May 2, 1968) Ltd. (to present) shares Mar. 2009 Director of NEXON Corporation (now NEXON Korea Corporation) (to present) Nov. 2010 Representative Director of NEXON Europe S.à.r.l. (to present) (Significant concurrent positions) Representative Director of NEXON Europe Limited Representative Director of NEXON Europe S.à.r.l. Director of NEXON Korea Corporation Director of Lexian Software Development (Shanghai) Co., Ltd. Director of NEXON America Inc.
－ 79 －
Career summary, positions and areas of Name Number of the Candidate responsibility Company’s # (Date of birth) (Significant concurrent positions outside shares owned the Company) June 2003 Joined NEXON Corporation (now NXC Corporation) May 2006 Secondment to NEXON Co., Ltd. Mar. 2009 Director of NEXON Europe Limited (to present) Sept. 2010 Director of NEXON Co., Ltd. (to 2 J i w o n P a r k present) － (June 30, 1977) Nov. 2010 Chief Operating Officer of NEXON Co., Ltd. (to present) Nov. 2010 Director of NEXON Europe S.à.r.l. (to present) (Significant concurrent positions) Director of NEXON Europe Limited Director of NEXON Europe S.à.r.l. Nov. 2000 Chief vice-president of Electronic Arts Inc. Sept. 2009 Representative Director of Outspark Inc. Owen Mahoney Aug. 2010 Chief Financial Officer of NEXON Co., 3 (December 28, 1966) Ltd. (to present) － Sept. 2010 Director of NEXON Co., Ltd. (to present) Nov. 2010 Chief Administrative Officer of NEXON Co., Ltd. (to present) Dec. 1994 Director of NEXON Corporation (now NXC Corporation) June 2005 Representative Director of NXC Corporation (to present) Oct. 2005 Representative Director of NEXON Corporation 4 J u n g j u K i m (now NEXON Korea Corporation) － (February 22, 1968) Mar. 2009 Director of NEXON Co., Ltd. Mar. 2010 Resigned Director of NEXON Co., Ltd. Sept. 2010 Director of NEXON Co., Ltd. (to present) (Significant concurrent positions) Representative Director of NXC Corporation
－ 80 －
Career summary, positions and areas of Name Number of the Candidate responsibility Company’s # (Date of birth) (Significant concurrent positions outside shares owned the Company) July 1971 Joined Victor Company of Japan, Limited June 1992 Director of Victor Entertainment Inc. Dec. 1992 Representative Director of Electronic Arts Victor Co., Ltd. (now Electronic Arts Co., Ltd.) Aug. 1998 Representative Director of Eidos * Satoshi Honda Interactive KK － 5 (September 29, 1947) Dec. 2009 Director of Spline Network Inc. (to present) Nov. 2010 Director of Software Imaging Technology Limited (to present) (Significant concurrent positions) Director of Spline Network Inc. Director of Software Imaging Technology Limited Apr. 1982 Registered as a lawyer Entered Oh-Ebashi Law Offices July 1987 Registered as a lawyer in the State of New York June 1997 Statutory auditor of Sunstar Inc. June 1999 Auditor of Kitano Hospital, The Tazuke Kofukai Medical Research Institute (to present) Apr. 2002 Managing partner of Oh-Ebashi LPC &
Partners (to present) * Shiro Kuniya － 6 (February 22, 1957) June 2006 Statutory auditor of Nidec Corporation June 2009 Member of the Board, The Japan Commercial Arbitration Association (to present) Apr. 2011 Board member of Japan Century Symphony Orchestra (to present) Apr. 2011 President of Inter-Pacific Bar Association (IPBA) (Significant concurrent positions) Managing partner of Oh-Ebashi LPC & Partners
－ 81 － (Notes) 1. Those with * are new candidates. 2. There are no special conflicts of interest between each candidate and the Company. 3. Mr. Satoshi Honda and Mr. Shiro Kuniya are both candidates for Outside Director. 4. (1) The Company appointed Mr. Satoshi Honda as a candidate for Outside Director as we expect that he would provide useful advices on the Company’s business based on his knowledge and insight as an experienced corporate manager in the game industry. (2) The Company appointed Mr. Shiro Kuniya as a candidate for Outside Director as we expect that the Company would benefit from his knowledge about corporate governance and compliance matters based on his expertise as a lawyer. Although he had never been involved in corporate management except as an outside statutory auditor, due to the reason noted above, the Company believes that he is capable of executing his duty as an Outside Director. 5. Pursuant to Article 427, Paragraph 1 of the Companies Act and provisions of Article 28 of Articles of Incorporation of the Company, if Mr. Satoshi Honda and Mr. Shiro Kuniya are elected as statutory auditors at the General Meeting, the Company plans to enter into agreements to limit liabilities for damages provided for in Article 423, Paragraph 1 of the Companies Act. The maximum amount of liabilities under such agreement is ¥2.4 million, or the minimum liability amount as provided in Article 425, Paragraph 1 of the Companies Act, whichever is higher.
－ 82 － Proposal 2: Reduction of the Legal Capital Surplus Pursuant to Article 448, Paragraph 1 of the Companies Act, the Company requests to reduce legal capital surplus and to transfer such amount of reduction to other capital surplus in order to prepare for the flexible capital policies in the future and ensuring resilience of the financing strategies. (1) The amount of legal capital surplus to be reduced 50,000,000,000 yen (2) Effective date of the reduction of legal capital surplus March 30, 2012
－ 83 － Proposal 3: Issuance of Subscription Rights to Shares for the Purpose of Granting Stock Options to the Company’s Directors and Employees The Company proposes to be authorized to issue the following subscription rights to shares as stock options to Directors and employees of the Company and its subsidiaries, pursuant to Articles 236, 238 and 239 of the Companies Act, and to delegate the determination of the terms and conditions of the offer thereof to the Board of Directors of the Company. It is also proposed that subscription rights to shares are issued to Directors of the Company as remuneration to Directors, as provided in Article 361 of the Companies Act. The number of Directors shall be six (6), of which two (2) are Outside Directors, if Proposal 1: Election of Six (6) Directors is approved as proposed. 1. The reason why the Company needs to offer the subscription rights to shares under preferential terms The purposes of issuance of subscription rights to shares are to provide incentive to Directors and employees of the Company and its subsidiaries for improving financial results and corporate value as well as promoting management awareness with the emphasis on shareholders. 2. Persons to whom subscription rights to shares will be granted Directors and employees of the Company as well as Directors and employees of the subsidiaries of the Company 3. Terms and conditions as well as the maximum limit of the aggregate number of subscription rights to shares, which can be determined pursuant to a resolution to be passed at this general meeting of shareholders (1) Class and number of shares to be issued upon exercise of subscription rights to shares Not exceeding 12,700,000 shares of common stock of the Company in total. In the event that the Company splits its common stock (including allotment of its common stock without compensation) or consolidates its common stock, the number of shares to be issued upon exercise of each unit of subscription rights to shares shall be adjusted according to the formula outlined below. Provided, however, that such adjustment shall be made only to those remain unexercised at the time of such adjustment, and any fraction less than one share resulting from such adjustment shall be rounded down. Number of shares after adjustment＝number of shares before adjustment ×ratio of split or consolidation
－ 84 － (2) Number of subscription rights to shares to be issued Not exceeding 12,700 units. The maximum limit of the aggregate number of shares to be issued upon exercise of each subscription rights to shares (“Number of Granted Shares”) shall be 1,000 shares of common stock of the Company. In the case the number of shares is adjusted as provided in (1) above, the Number of Granted Shares shall also be adjusted. (3) Cash payment for subscription rights to shares No cash payment is required for subscription rights to shares. (4) Value of the assets to be contributed upon exercise of subscription rights to shares The amount of the assets to be contributed upon exercise of subscription rights to shares shall be the amount obtained by multiplying the amount to be paid in for each share to be issued upon exercise of such subscription rights to shares (“Exercise Price”) by the number of shares to be issued upon exercise of such subscription rights to shares. The Exercise Price shall be the average of the closing prices of the common stock of the Company in the regular trading thereof on the Tokyo Stock Exchange (“Closing Price”) of each day (excluding days on which no trading is concluded) of the month preceding the month to which the date of allotment of subscription rights to shares (“Allotment Date”) belongs, multiplied by 1.05, and any fraction less than one yen shall be rounded up. In case such value is below the Closing Price on the Allotment Date (if there is no Closing Price on such date, the Closing Price on the trading day immediately preceding the Allotment Date shall apply), the Closing Price of the Allotment Date shall apply. In the event that the Company carries out a stock split (including allotment of its common stock without compensation) or a consolidation of its common stock after the Allotment Date, the Exercise Price shall be adjusted according to the following formula. Any fraction of less than one yen shall be rounded up. 1 Exercise Price after Exercise Price adjustment＝ before adjustment× ratio of split or consolidation
In addition to the above, when the Company merges with another company, carries out corporate separation, or reduces its capital, or any other event similar
－ 85 － thereto, and an adjustment of the Exercise Price is required after the Allotment Date, the Exercise Price shall be adjusted to an extent reasonable with a resolution of the Board of Directors. (5) Exercise period of subscription rights to shares The exercise period shall commence on the Allotment Date and terminate after ten years from the date of a resolution of the Board of Directors with regard to the determination of the terms and conditions of the grant of subscription rights to shares. In the event that the last date of the exercise period is a non-business day of the Company, it shall be the business day immediately preceding such date. (6) Conditions for exercise of subscription rights to shares The person must be a director or an employee of the Company or its subsidiaries at the time of the exercise to be eligible, except when a director or an employee of the Company or its subsidiaries loses its position as a director or an employee due to resignation or retirement, dismissal or discharge (excluding punitive dismissal or any other event similar thereto), or death or disability, or when there is any other due reason specifically provided by the Board of Directors. (7) Treatment of subscription rights to shares at the Company’s restructuring and other activities When approval is granted for proposals i), ii), iii), iv), or v) below by a resolution of the General Meeting of Shareholders (or if a resolution of the General Meeting of Shareholders is not required, then when approval is granted by a resolution of the Board of Directors of the Company), the Company may acquire subscription rights to shares without charge on the date specifically stipulated by the Board of Directors: i) Proposal for the approval of a merger agreement in which the Company will become the extinct company; ii) Proposal for the approval of a split agreement or a split plan in which the Company will become a split company; iii) Proposal for the approval of a share exchange agreement or a share transfer plan in which the Company will become a wholly owned subsidiary; iv) Proposal for the approval of an amendment to the Articles of Incorporation to make provisions concerning all shares issued by the Company requiring the Company’s approval for the acquisition of such shares through transfer ; or v) Proposal for the approval of an amendment to the Articles of Incorporation to make provisions concerning underlying shares of subscription rights to shares (i) requiring the Company’s approval for the acquisition of such shares
－ 86 － through transfer, or (ii) allowing the Company to acquire all shares of the relevant class upon resolution of the General Meeting of Shareholders (8) Restriction on the acquisition of subscription rights to shares by transfer Any acquisition of subscription rights to shares by transfer shall require an approval of the Board of Directors of the Company by its resolution. (9) Matters concerning the amount of capital and capital reserve increased by the issuance of shares upon exercise of subscription rights to shares i) The amount of capital increased by the issuance of shares upon exercise of subscription rights to shares shall be one-half of the amount of the maximum limit on the increase in capital as calculated pursuant to Article 17, Paragraph 1, of the Company Accounting Ordinance. Any fraction of less than one yen shall be rounded up. ii) The amount of capital reserve increased by the issuance of shares upon exercise of subscription rights to shares shall be the amount of the maximum limit on the increase in capital provided in i) above, reduced by the amount of increased capital stipulated in i) above. (10) Other terms and conditions of the grant of subscription rights to shares shall be determined by a resolution of the Board of Directors to be held separately.
－ 87 － 4. Matters concerning the issue of subscription rights to shares to Directors of the Company as remuneration to Directors Based on Directors’ performance of their duties and other various factors, subscription rights to shares shall be granted to six Directors of the Company (of which, two are Outside Directors) as remuneration. Up to 1,000 units (of which, 200 units for Outside Directors) of the subscription rights to shares stipulated in 3.(2) above will be granted, and the annual remuneration amount related to the subscription rights to shares thereto shall be set up to a ceiling of ¥1 billion (of which, ¥200 million for Outside Director). The remuneration amount related to the subscription rights to shares shall be calculated by multiplying the fair value of a subscription right to shares by the number of units of subscription rights to shares to be granted to Directors.
The remuneration amount related to the subscription rights to shares shall be established in addition to the Directors’ annual remuneration of ¥500 million which was approved by the 9th Ordinary General Meeting of Shareholders held on March 30, 2011. Decisions related to allocation of the remuneration to Directors and other details shall be based on discussions by the Board of Directors of the Company.
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