SEGA Enterprises, Ltd. Annual Report 1998 Year Ended March 31, 1998
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SEGA Enterprises, Ltd. Annual Report 1998 Year ended March 31, 1998 SEGA proudly unveils the ulti- mate digital entertainment machine—Dreamcast. The prod- uct of an unprecedented techno- logical partnership with major computer and media corpora- tions, Dreamcast offers total sys- tem performance that tops not only all existing video game con- soles, but all consumer enter- tainment devices, period. Dreamcast delivers what video game enthusiasts really want— an experience that looks and sounds totally real. NET SALES TOTAL ASSETS 480 (Billions of yen) 480 (Billions of yen) 360 360 347 240 272 240 120 120 0 0 '94 '95 '96 '97 '98 '94 '95 '96 '97 '98 CONTENTS Message from the President .................................................................................................1 Review of Operations..............................................................................................................6 Copyright Notice Six-Year Financial Summary..................................................................................................8 Financial Review......................................................................................................................9 SONIC ADVENTURE © SEGA ENTERPRISES, LTD., 1998 Non-Consolidated Balance Sheets....................................................................................10 Daytona USA 2 © SEGA 1994, 1998 Non-Consolidated Statements of Income.........................................................................12 Daytona USA and design are trademarks of Non-Consolidated Statements of Shareholders’ Equity .................................................13 International Speedway Corporation, used under license from Daytona Properties. Non-Consolidated Statements of Cash Flows..................................................................14 THE LOST WORLD THE LOST WORLD: JURASSIC PARK TM & © 1997 Notes to the Non-Consolidated Financial Statements....................................................15 Universal City Studios, Inc. and Amblin Report of Independent Certified Public Accountants Entertainment, inc. on the Non-Consolidated Financial Statements.............................................................23 All rights reserved. Licensed by MCA/Universal Board of Directors.................................................................................................................24 Merchandising, Inc. Corporate Data.......................................................................................................................25 © SEGA 1997 MESSAGE FROM THE PRESIDENT Realization! Shoichiro Irimajiri Representative Director and President BUSINESS RESULTS system in Japan grew increasingly unstable and the first signs of a In fiscal 1998, non-consolidated net sales fell ¥88.5 billion, or deflationary spiral appeared. 24.6%, to ¥271.5 billion (US$2,055.1 million), and recurring income In the amusement industry, certain products—notably Print Club amounted to ¥11.0 billion (US$83.5 million). However, due to sub- photo-sticker booths—enjoyed hit status, but on the whole the mar- stantial special losses, the Company posted a net loss for the year of ket continued to be stagnant amid the aforementioned slump in per- ¥43.3 billion (US$327.8 million), compared with net income of ¥5.6 sonal consumption. billion in fiscal 1997. Amid this operating environment, SEGA Enterprises, Ltd., put high By business segment, net sales from amusement center opera- priority on profitability in its consumer product operations. Focusing tions climbed ¥2.8 billion, or 3.1%, to ¥91.0 billion (US$688.6 mil- on the Japanese market, we offered new software titles with strong lion), amusement machine sales edged up ¥3.6 billion, or 3.7%, to consumer appeal. However, sales in overseas markets deteriorated, ¥101.9 billion (US$771.3 million), and consumer product sales sank and, as a result, net consumer product sales dropped substantially. ¥90.0 billion, or 54.8%, to ¥74.4 billion (US$563.0 million). Royalties Meanwhile, the Company developed and launched new amusement on game software decreased ¥4.9 billion, or 53.3%, to ¥4.2 billion machines featuring the latest high-end technology and opened (US$32.2 million). large-scale, innovative amusement facilities. Consequently, net The Company maintained cash dividends applicable to the year of sales from amusement machines and amusement center operations ¥38.0 (US$0.29) per share, comprising an interim dividend of ¥15.0 gained somewhat compared with those in the previous fiscal year. (US$0.11), a regular dividend of ¥15.0 (US$0.11), and a special divi- However, SEGA also took aggressive steps during the year to dis- dend of ¥8.0 (US$0.06). pose of unprofitable assets, including writing off inventories in preparation for the launch of the Company’s new home video game ANALYSIS console, Dreamcast. Moreover, the Company made substantial In fiscal 1998, the year ended March 31, 1998, the Japanese econo- write-downs of investments in and advances to its subsidiaries my neared a state of full-scale recession. The slump in personal con- SEGA of America, Inc., and SEGA Ozisoft Pty. Ltd., in consideration sumption took root as a long-term phenomenon due to the April of their financial conditions. As a result, SEGA posted special losses 1997 rise in the national consumption tax rate and the abolition of for the term of ¥42.8 billion (US$323.8 million). special income tax breaks that were implemented at the beginning On a consolidated basis, net sales for fiscal 1998 amounted to of the term. In the second half of the term, the economies of several ¥331.6 billion (US$2,510.3 million). The Company recorded a net loss Southeast Asian nations fell into disorder, while the financial of ¥35.6 billion (US$269.8 million). 1 Ĩ What’s Important to SEGA? Vision! The explosive growth of the information technology (IT) industry in We have always sought to secure and maintain the No. 1 position recent years has changed society as well as the business world. in the industry, and these strengths are the tools that will help us SEGA believes its rightful place in the 21st century is as a leader in achieve this goal. interactive digital entertainment. In our opinion, video games—a synergetic fusion of entertainment, interactivity, and cutting-edge THE LESSONS technology—hold extraordinary potential to enable us to become In fiscal 1998, SEGA posted special losses of ¥42.8 billion, which the leading influence of the whole IT industry. contributed to the Company’s first net loss since becoming a publicly traded company. SEGA’S CORE COMPETENCE In the U.S. home video game market, SEGA’s perfor- SEGA’s core competence—the capability it can apply mance has slumped, squeezed by intense price competi- throughout all its operations—is its creativity in using tion among 32-bit machines. The 16-bit SegaGenesis, digital technology. However, creativity is useless if it is predecessor to the 32-bit SegaSaturn, contributed not pointed in a clear direction and can even be detri- greatly to our spectacular business results from fiscal mental if pointed in the wrong direction. We attribute our 1992 to fiscal 1994 and helped boost name recognition of success thus far to the skillful and correct use of creativity. the SEGA brand throughout the world. In hindsight, however, In concrete terms, this core competence is manifested in the fol- it was the very success of SegaGenesis in the U.S. market that ulti- lowing ways: mately resulted in the Company’s net loss in fiscal 1998. We placed • The highest level of R&D in the video game industry, in terms of too much emphasis on the then existing market and formulated what both quality and quantity turned out to be an ineffective strategy for making the transition • Synergetic development of low-cost printed circuit boards for from the 16-bit SegaGenesis to the 32-bit SegaSaturn. In a sense, arcade and home-use machines we became trapped by our own success. • Business operations encompassing both hardware and software Ī 2 ducts Over Pro sea er s C m o u ns ns u o m C� e c r ti P s r e o d m u o c D t s CORE No. 1 COMPETENCE No. 1 O s v e e n r i s h e c a a s A M t m n u e s e m m e s e u n m t M A c a i t c s h e i n m e o s D Moreover, in recent years the operating environment has changed Ten years have passed since SEGA was first listed on the Second radically. With the maturation of the video game industry, the mar- Section of the Tokyo Stock Exchange. During this time, SEGA has ket, our competitors, and our customers’ desires have all changed. been at the forefront of the digital technology revolution and has Given the current business climate, securing and maintaining the thus achieved impressive growth. No. 1 position in the consumer video game market will be a formida- In recent years, however, our overseas consumer product sales ble challenge. However, now that we have a renewed awareness have stagnated, and our once rapidly advancing amusement opera- of market desires and the proper technology mix, if we fully har- tions have slowed down. ness our core competence—creativity in using digital tech- As we have outlined in this report, we have thoroughly nology—the No. 1 position will be well within our grasp. reviewed our past successes and shortfalls and have As a leading company in amusement operations— taken some painful but necessary measures, including comprising our amusement center and amusement recognizing ¥42.8 billion in special losses. In response, machine businesses—SEGA has been one of the indus- we have