Business Report 2005 Report and Reference for the 1St Ordinary General Meeting of Shareholders
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Business Report 2005 Report and Reference for the 1st Ordinary General Meeting of Shareholders Contents 1 To Our Shareholders 4 Business Report ( Report and Reference for the 1st Ordinary General Meeting of Shareholders) 4 Overview of Business 19 Overview of the Company 25 Significant Events following the End of the Fiscal Year 26 Consolidated Balance Sheet 27 Consolidated Statement of Income 28 Notes to Consolidated Financial Statements 32 Independent Auditors’ Report (Copy) 33 Board of Corporate Auditors’ Report (Copy) 34 Non-Consolidated Balance Sheet 35 Non-Consolidated Statement of Income 36 Notes to Financial Statements 37 Proposal for Appropriation of Unappropriated Retained Earnings 38 Independent Auditors' Report (Copy) 39 Board of Corporate Auditors’ Report (Copy) (Unaudited) 40 Consolidated Financial Statements (Sammy Corporation) 42 Consolidated Financial Statements (SEGA CORPORATION) 44 Medium-Term Business Plan 45 IR Information To Our Shareholders Aiming to stake out an unshakeable position as the world-beating, comprehensive entertainment company, Sammy Corporation and SEGA CORPORATION joined forces to create SEGA SAMMY HOLDINGS INC. in October 2004. The following is a report on the business results of the Company in its maiden fiscal year, which ended on March 31, 2005. Hajime Satomi Chairman and CEO The SEGA SAMMY Group Vision Establish a presence in all operational fields and become the World’s No.1 Comprehensive Entertainment Company. 1 Before reviewing the year’s business perfor- We apologize sincerely to our shareholders for mance, I would like to recount and apologize for the concern that the these incidents have caused. incidents that occurred in the SEGA SAMMY SEGA SAMMY HOLDINGS INC. will take Group- Group. wide measures to bolster corporate governance In February 2005, some media agencies reported and compliance, which it regards as its highest on allegations of Income tax law violations by a management priority. For further details on former president of the Company’s subsidiary those issues, please see the Important Issues Sammy Corporation. The SEGA SAMMY Group section on page 11 of this report. regards the inadequacy of the internal controls Turning to business performance during the fiscal that it has developed as a grave matter. Accor- year under review, in the pachislot business—a dingly, the Group is committed to strengthening Group mainstay—the unabated popularity of the corporate governance to prevent the recurrence “Hokuto No Ken” pachislot machine drove up of such an incident. unit sales to a new industry record. As a result of In addition, on April 18, 2005, at the TOKYO brisk sales of that product and other offerings, JOYPOLIS facility (Daiba, Minato-ku, Tokyo), the Group further strengthened its position as which is operated by subsidiary SEGA CORPO- the manufacturer with the largest share of the RATION, a customer’s precious life was lost as a pachislot machine market. Further, as a result of result of an accidental fall at the Viva! Skydiving strengthening the pachinko machine business, attraction. The SEGA SAMMY Group regards the our first machine built in accordance with new occurrence of such an accident in one of its facil- regulations, “CR Hakushon Daimao 2,” was favor- ities as an extremely serious problem and extends ably received and sales of pachinko machines profound and unreserved apologies to the remained steady. bereaved family. In the amusement machine sales business, such To ensure that such an accident never happens mainstays as “UFO Catcher 7” and such new again, the Group will concertedly implement offerings as “Quest of D” were positively received. preventative measures and establish improved safety measures. 2 In amusement center operations, “MUSHIKING: The King of Beetles” contributed substantially to revenues, clearing the 150-million mark for post- launch cumulative card sales. The consumer business sold 11.79 million units of eight home-use game software titles in the fiscal year under review. And, cumulative sales of “Jissen Pachislot Hisshoho! Hokuto No Ken” passed the one-million-unit milestone. As a result of the above, in the fiscal year ended March 31, 2005, the Company reported consoli- dated net sales of ¥515,668 million, ordinary income of ¥104,432 million and net income of ¥50,574 million. For our first fiscal year, we plan to return profits to our shareholders by paying year-end cash dividends per share of ¥40.00 and com- memorative cash dividends per share of ¥20.00 to mark the establishment of SEGA SAMMY HOLDINGS INC. In closing, I would like to ask our shareholders to endorse the SEGA SAMMY Group as it contin- ues to forge ahead. Hajime Satomi Chairman and CEO 3 English translation of financial statements originally issued in the Japanese language I Overview of Business 1 Corporate Group and Operating Results During the past fiscal year, the outlook for Japan’s economy improved due to expectations for a continua- tion in a recovery led by private-sector demand. In particular, there was an upturn in employment statistics as corporate performance continued to improve because of a big increase in earnings and other factors. In this environment, the pachislot and pachinko industry saw a rebound in investments by pachinko Business Report parlors as the number of large parlors continued to From October 1, 2004 climb and several new pachinko machines became major To March 31, 2005 hits. In July 2004, revisions were enacted to regulations Note that the first fiscal year for pertaining to the law in Japan governing gaming consolidation reporting purposes covers machines that, among other things, tightened limita- the period from April 1, 2004 to March 31, 2005, whereas the first business year on tions on the gambling elements of pachinko and an operating basis was the six-month period that ended on March 31, 2005. pachislot machines and strengthened measures to prevent improper use of machines. Although pachislot machine manufacturers have had difficulty producing models that conform to these new regulations, there are high expectations among customers that suppliers will quickly introduce innovative models that are even more entertaining. In the pachinko machine category, all manufacturers have been introducing new models that conform to the amended regulations and expanding pachinko machine lineups, a move that is putting an end to the prior trend of all companies supplying look-alike models. The collective result of all these trends is that Japan’s pachislot and pachinko industry is entering a period of transition. In the amusement machine sales industry, one notable trend in recent years has been the industry- 4 English translation of financial statements originally issued in the Japanese language leading sales of popular game machines that allow HOLDINGS INC. was established with the aim of players to compete over networks and that tie in with maximizing corporate value, giving the two companies card trading. Another notable trend is the strong a new beginning as the SEGA SAMMY Group. performance in the market for family-oriented To make even more effective use of its resources, the machines, such as prize crane machines and token- new Group plans to reorganize the operations of based machines for children. Furthermore, there is Sammy Corporation, SEGA CORPORATION and other now widespread market acceptance of pachinko and subsidiaries into the following categories: pachislot and pachislot machines that are redesigned for use in pachinko machines; amusement machine sales; amusement centers. The result is an increasingly amusement center operations; consumer business; and pronounced recovery fueled by rising demand for other businesses. In conjunction with this realignment, amusement products due to the large number of new, Sammy Corporation in the past fiscal year began to large-scale amusement center operations being specialize in pachislot and pachinko machines and SEGA opened in Japan. CORPORATION began assembling a business structure to In the amusement center operations industry, recent specialize in the amusement machine sales, amusement years have witnessed the closing of smaller facilities center operations and consumer businesses. To along with the opening of many large-scale facilities. At accomplish this, the following actions were taken. the same time, facilities for children in shopping centers and other locations continue to perform well. The Business Reorganization Actions During primary source of growth is games for children that use the Past Fiscal Year cards and allow for head-to-head play. (1) To capture synergies quickly from this integration, all In the home videogame software industry, the Tokyo shares of Sammy Amusement Service Co., Ltd. and Game Show 2004, held in September 2004, attracted a APANDA Inc. held by Sammy Corporation were trans- record number of participating companies. As markets ferred to SEGA CORPORATION on December 1, 2004. mature for established home videogame consoles, (2) To strengthen the pachinko parlor design business, manufacturers have been making headlines by Sammy Corporation on January 28, 2005 purchased introducing a number of new portable game consoles all shares of Sammy Design Co., Ltd. that were since late in 2004. As a result, there are rising hopes that previously held by Shuko Electronics Co., Ltd. In addi- this industry, which some feared had begun to stagnate, tion, Sammy Corporation purchased all outstanding will be reenergized. shares of AGORA DESIGN Co., Ltd., a company In this environment,