Operating Results and Financial Position (1) Overview During the first three quarters of the fiscal year ending March 31, 2011, the Japanese economy still remained unpredictable, amid the growing concern for the economic recovery losing its momentum, given the rapidly rising yen and decelerating economies in the U.S. and Europe along with still stagnant personal consumption, although there are signs of turnaround in some areas of the economy, including recovery trends in corporate earnings. In this climate, although the pachislot and pachinko industry has been witnessing the replacement of older pachinko machines at a rather weak pace, the pachislot market is on a recovery trend thanks to the positive factors including the launch of a few newly launched machines that enjoyed high market reputation, the recovery of pachislot’s popularity in pachinko parlors, and an increase in the number of pachislot machines installed in some of the major pachinko parlors. In the amusement machine and amusement center industry, conditions remained difficult. While awaiting the development and launch of new innovative machines that could boost the market, the industry itself is undergoing a changeover to new business models which simultaneously enhance investment efficiency for amusement center operators and secure sources of stable earnings for amusement machine manufacturers. In the home video game software industry, the demand was generally weak in the U.S. and European markets due to the headwind like sluggish personal consumption. The Group needs to adapt to changing business environment in which the market demand for new content geared to social networking service (SNS), smartphone is expanding. In this business environment, net sales for the first three quarters of the fiscal year ending March 31, 2011 amounted to ¥310,103 million, an increase of 8.7% for the same period in the previous fiscal year. The Group posted an operating income of ¥62,970 million, an increase of 118.2% for the same period in the previous fiscal year. Due to the factors including gain on reversal of subscription rights to shares, distribution of patent royalty income for prior periods, loss on valuation of investment securities, loss on adjustment for changes of accounting standard for asset retirement obligations and impairment loss, the Group recorded a net income of ¥36,821 million, an increase of 117.3% for the same period in the previous fiscal year. The Company conducted an exchange of shares effective December 1, 2010, in order to convert Sammy NetWorks Co., Ltd., SEGA TOYS CO., LTD., and TMS ENTERTAINMENT, LTD. into wholly owned subsidiaries of SEGA SAMMY HOLDINGS INC., which will become the wholly owning parent of each such company. Furthermore, the Company passed resolutions on retirement of treasury stock and purchase of treasury stock. Regarding retirement of treasury stock, the Company retired 17,000,000 shares of its treasury stock (6.0% of the total outstanding shares before the retirement) effective December 10, 2010. Regarding purchase of treasury stock, the purchase period is from December 2, 2010 to June 30, 2011, and the Company restricts the number of shares to be purchased within 14,000,000 shares and the amount of shares to be purchased within ¥25,000 million. The number of shares purchased by the Company by the end of December 31, 2010 is 1,352,300 shares, and the amount purchased is ¥2,104 million. 3 Results by business segments were as follows. 《Pachislot and Pachinko Machines》 In the pachinko machine business, apart from the solid sales of “Pachinko CR Juoh” newly launched in the current third quarter under the Sammy brand, “Dejiten CR Nogaremono Orin”, “Dejiten CR Hakushon Daimaou 3” were launched in a new approach as part of the “Dejiten Series” which features innovative game elements to come up to the customer needs in pachinko machines, resulting in the sales of 241 thousand units. In the pachislot machine business, the sales of “Oreno Sora～Spirit of Young Justice～” newly launched in the current third quarter under the RODEO brand maintained strong sales. Meanwhile, sales of “Pachislot Shin Onimusha” launched in the previous fiscal year under the RODEO brand remained solid. Overall pachislot machine sales amounted to 268 thousand units, exceeding the results of the same period in the previous fiscal year. Meanwhile thanks to an initiative to promote reuse of components, especially those related to liquid crystal display, there was an improvement in profit ratio as well. In the current third quarter, as pachinko parlors restrained themselves from replacing old pachinko machines with new ones from the middle of October to the middle of November 2010, in connection with the APEC Economic Leaders’ Meeting, some of major titles will be launched in the fourth quarter. As a result, net sales in this segment were ¥168,105 million (an increase of 33.6% for the same period in the previous fiscal year) and operating income was ¥54,666 million (an increase of 102.8% for the same period in the previous fiscal year). 《Amusement Machine Sales》 In the amusement machine sales business, distribution revenue remained solid thanks to the operation of the revenue sharing models such as “BORDER BREAK” launched in the previous fiscal year, and “HATSUNE MIKU Project DIVA Arcade” launched in the first quarter of the current fiscal year, for the purpose of improving investment efficiency of the operators of amusement centers and of securing long-term stable earnings for the Group. Meanwhile, the Company committed to selling the major title “SENGOKU TAISEN”, CVT KITs including “WORLD CLUB Champion Football Intercontinental Clubs 2009-2010” and consumables including prize products and cards. As a result, net sales in this segment were ¥40,918 million (an increase of 16.4% for the same period in the previous fiscal year) and operating income was ¥8,458 million (an increase of 79.7% for the same period in the previous fiscal year). 《Amusement Center Operations》 In the amusement center operations business, sales at existing SEGA amusement centers in Japan remained solid in the first three quarters, resulting in 100.5 % for the same period in the previous fiscal year. The Group closed 12 amusement centers and opened 4 new amusement centers in the domestic market. Consequently, the Group operated a total of 252 amusement centers at the end of the period. As a result, net sales in this segment were ¥34,594 million (a decrease of 16.6% for the same period in the previous fiscal year) and operating income was ¥817 million (compared with an operating loss of ¥644 million for the same period in the previous fiscal year). 《Consumer Business》 In the consumer business, in the area of home video game software, some major titles for the overseas markets including “Sonic Colors”, “VANQUISH” and “Football Manager 2011”, along with the major titles for the Japanese market including “Shining Hearts” were newly launched in the current third quarter. In the overseas markets, sales of the new titles remained slow as affected by the adverse market condition, although sales remained solid in the Japanese market. As a result, the Group sold 5,770 thousand video game copies in the U.S., 5,950 thousand copies in Europe and 1,900 thousand copies in Japan and other regions, for a total of 13,630 thousand copies. 4 In the toy sales division, along with the solid sales of “Bakugan” by Bakugan Limited Liability Partnership (Bakugan LLP) which was formed mainly by the five Group companies, full-scale sales of “Zoobles” was started as a new development for the overseas markets. Meanwhile, the mobile phone and PC content business also remained robust, thanks primarily to the pay-per-use service of “Sammy 777 Town” (for mobile phone). In the animated films business, distribution revenue remained favorable thanks to the sound box office sales of the 14th theater film “Detective Conan” while domestic and overseas royalty revenue from “Bakugan” stayed robust. As a result, net sales in this segment were ¥67,413 million (a decrease of 18.9% for the same period in the previous fiscal year), and an operating income was ¥2,811 million (an increase of 98.4% for the same period in the previous fiscal year). (2) Consolidated Financial Position Current assets increased ¥44,340 million due primarily to an increase in cash and deposits along with the contribution of trust assets with the purpose to purchase treasury stock, which more than offset the redemption of bonds. Meanwhile, noncurrent assets increased by ¥14,771 million due primarily to an increase in goodwill, resulting from the exchange of shares to convert Sammy NetWorks Co., Ltd., SEGA TOYS CO., LTD., and TMS ENTERTAINMENT, LTD. into wholly owned subsidiaries of the Company, and an increase of investment securities due primarily to the increase of the value of the investment securities. As a result, total assets as of the end of the current third quarter increased ¥59,111 million from the end of the previous fiscal year, to ¥482,273 million. Net assets at the end of the current third quarter increased ¥41,118 million from the end of the previous fiscal year, to ¥297,889 million, as a result of the combined effect of dividends payment thanks to the net income reported for the nine months ended December 31, 2010, and the decrease in capital surplus, treasury stock and minority interests due to the exchange of shares as well as retirement of treasury stock. The current ratio at the end of the current third quarter still remained at high level of 305.7%, despite 16.1 points decrease from the end of the previous fiscal year due to an increase in current assets as well as in current liabilities.