ANNUAL REPORT 1999 Year Ended March 31, 1999 SEGA Enterprises, Ltd

SEGA ENTERPRISES, LTD.

ANNUAL REPORT 1999 Year ended March 31, 1999 SEGA Enterprises, Ltd. c2 rs rft...... Gross profit e noeprsaedltd...... 85— 48.5 Net incomepershare—diluted...... At year-end: ercainadaotzto ...... 2,1 21 22,914 41,172 ...... Depreciation andamortization ...... Net (loss)income 43,555 Operating income...... Selling, generalandadministrativeexpenses ...... Cost ofsales Corporate Data...... Board ofDirectors...... Report ofIndependentCertifiedPublicAccountants Notes totheConsolidatedFinancialStatements...... 34 Consolidated BalanceSheets...... 32 Consolidated StatementsofOperationsand Report ofIndependentCertifiedPublicAccountants Notes totheNon-ConsolidatedFinancialStatements...... 21 Non-Consolidated StatementsofCashFlows...... 20 ...... 19 Non-Consolidated StatementsofShareholders’Equity Non-Consolidated StatementsofOperations...... 18 Non-Consolidated BalanceSheets...... 16 Financial Review...... Review ofOperations...... 6 Message fromthePresident ...... 4 Message fromtheChairman CONTENTS 3,87 Notes: 1.U.S.dollaramountsaretranslatedfromyen,forconvenienceonly,attherateof¥120.55=US$1,exchangepre 38.0 ¥(430.3 Number ofemployees...... Cash dividendspershare...... ¥55.4 Net (loss)incomepershare—basic...... Net sales: For theyear: on theConsolidatedFinancialStatements...... 42 (Accumulated Deficit)RetainedEarnings...... 31 on theNon-ConsolidatedFinancialStatements...... 30 Financial ratios: oa hrhles qiy...... 19231 179,293 ...... Total shareholders’equity Total assets...... oate ngm otae...... 9134,252 9,103 Royalties ongamesoftware...... msmn ahn ae...... 821101,89 90,958 98,241 88,191 Amusement machinesales...... Amusement centeroperations osmrpout ...... ¥164,3 ...... Consumer products euno vrg ses...... %—% 3.1 1.3% Return onaverageequity...... Return onaverageassets aotrto...... 68. Payout ratio...... Total 2. Net(loss)incomepersharefigureshavebeencomputedusingtheweightedaveragenumberofsharesoutstandingduringeachp NON-CONSOLIDATED FINANCIALHIGHLIGHTS Years endedMarch31,1997,1998,and1999 SEGA Enterprises,Ltd...... 44 .....14 ....43 .12 Virtua Striker2Ver.99 SONIC ADVENTURE©SEGAENTERPRISES, LTD.,1998, authorization. Star Wars©&™LucasfilmLtd.Allrightsreserved.Usedunder Teams, Inc. CART Racing©1999OfficialLicensedProductofChampionshipAuto The HouseofDead2©SEGAENTERPRISES,LTD.,1998,1999 SEAMAN ©DigiToysCo.,Ltd.,&VIVARIUMInc.,1996–1999 Shenmue ©SEGAENTERPRISES,LTD.,1999 Airline Pilots©SEGAENTERPRISES,LTD.,1999(supportedbyJAL) Dynamite Baseball Copyright Notice .. 47454,879 74,784 ...... ¥8,4 ¥216,596 ¥285,146 .... 8,7 346,538 387,279 . 3990¥271,475 ¥359,930 . ,7 (43,300) 5,572 . 12913,707 31,229 971998 1997 971998 1997 6 5¥ 95 % % 3,982 2 vailing atMarch31,1999. 0 32,036 74,375 — — ,831 38.0 eriod. % % 0 ) iloso e U.S.dollars Millions ofyen 1054$1,415,130 ¥170,594 2456$1,779,726 ¥214,546 ¥ 0,3 834,808 100,636 1,6 3,465,475 417,763 0 (3.)$(2.75) ¥(331.1) 3,8)(276,922) (33,383) 336193,579 23,336 392364,596 43,952 181347,333 41,871 623466,221 56,203 844$ 68,434 793729,515 87,943 ,8 17,263 2,081 ,6 16,309 1,966 3,974 %—% —% — — 900.32 39.0 991999 1999 991999 1999 e U.S.dollars Yen —— % % Thousands of 0, 567,681 — — % % SEGA Enterprises, Ltd. 1 SEGA Enterprises, Ltd., founded in 1951 SEGA Enterprises, Ltd., founded in and incorporated in 1960, is a world leader in interactive digital entertainment, engaged in the comprehensive businesses of consumer products, and amusement center operations, launch the amusement machines. To products, technologies, and interactive we are cen- entertainment of tomorrow, tering our creative energies on interactive content and amusement theme parks (ATPs). SEGA Enterprises, Ltd. 2 SEGA Enterprises, Ltd. 3 The CSK Group’s research and development The CSK Group’s the business and entertain-encompasses both technologies ment sectors covering a range of The from microchips to satellite communications. CSK more than 90 corporations Group, comprising with a level worldwide, conducts its operations unparalleled in of creativity and originality that is CSK information technology industry. the world’s development, is leading the growth of systems and networks. systems integration, outsourcing, as telemar- Group companies handle such areas prepaid card keting, education and publishing, and are business, and visual data processing leaders in the information and communications In the fields of entertainment and con- industry. sumer electronics, SEGA and ASCII Corp., with its abundant information content and knowledge, as well as CSK Electronics Corporation, our PC and growth are enjoying peripherals sales company, through their individual efforts. Each Group strength contributes to the synergy member’s that enhances the overall creative energy of the entire Group. The CSK Group, utilizing its comprehensive strength, utilizing its comprehensive The CSK Group, business world. an imaginative strives to create MESSAGE FROM THE CHAIRMAN

It is my firm conviction that the 21st century will become the century of the network society and the Internet society. As readers are no doubt aware, the number of Internet users is currently experiencing dramatic worldwide growth, and forecasts predict that the number of users will exceed one billion by 2005. According to projections by the U.S. research company Forrester Research, the number of households connected to the Internet at the end of 1999 will have increased 16.5%, to 38.8 million, compared with one year earlier. The Interactive Digital Software Association (IDSA) predicts that computer game users will increasingly enter the Internet society, attracted by the potential for taking part in multiplayer games, and that by 2002, 26.8 million Internet users will be playing on-line computer games. According to the Internet Association of Japan, the number of Japanese Internet users exceeded 10 million in February 1998 and is forecast to reach 45 million in 2010. The number of radio listeners worldwide took 38 years to reach 50 million, and the number of tele- vision viewers worldwide took 13 years to reach the same figure. In comparison with these technological advances, the Internet has been adopted with a speed and range unheard of in human experi- Isao Okawa ence, and it is my belief that it will continue to contribute to society Representative Director and Chairman in numerous ways. Stock price trends often provide an insight into future develop- ments, and the phenomenal recent growth of Internet and electronic commerce (E-commerce) related stocks tends to support the scenario of a world changing radically as a result of the influence of these two technologies. SEGA Enterprises, Ltd. 4 SEGA Enterprises, Ltd. 5 When playing games on the system, additional voice and 3-D When playing games on Our next aim is the worldwide launch of Dreamcast Network, a Our next aim is the worldwide I am confident that Dreamcast will not simply function as video I am confident that Dreamcast will not simply Dreamcast literally creates a dream-type world, characterized by Dreamcast literally creates a dream-type world, that we have In this context, the pioneering business partnerships Dreamcast-based network system that will allow simultaneous Dreamcast-based network and make it possible for people from every access by 200,000 users communicate in various ways, play games corner of the globe to each other. together, and converse with range of games and moving image functions increase the depth and a whole new genre how they are played. This development creates a radical shift in of inexpensive computer games, precipitating a form of gamers’ perceptions of game playing and engendering telephones. communication beyond even the scope of video player takes the interactive communication in which the leading role. tool serving the game equipment but will become a leading network century. needs of business and the individual in the 21st as well as British concluded with AT&T Corp. in the United States role in the next Telecom plc and ICL plc in Europe will play a crucial high expectations for stage of our business development and give us the future of SEGA. August 1999 Isao Okawa Representative Director and Chairman Specifically, the coming era for computer games will be one Specifically, the coming era for computer games SEGA is committed to bringing the potential of cyberspace to SEGA is committed to bringing the potential In the next stage in E-commerce related development, software In the next stage in E-commerce SEGA Soft Networks, Inc., a U.S. company established by SEGA One of the key points in this new era of electronic services in the One of the key points in this new era of electronic game users by creating an array of network-based multiplayer game users by creating an array of network-based use with Dreamcast. games as well as cameras and microphones for of proprietary net- At the same time, we will work on the creation works principally centering on Dreamcast. and CSK Corp., which has engaged in four years of field-leading investment in network game and electronic services systems, pro- vides Heat Net, a proprietary PC-based on-line game service. and digital content will take center stage as what is likely to be an and digital content will electronic services, commences. I era of Internet-based services, Ltd., and the CSK Group, with their believe that SEGA Enterprises, and digital content fields that brings them command of the software services business, are very favorably to the heart of the electronic offering customers positioned to respond to this development by high-value-added services. and video-chat where such cyberspace applications as voice-chat gamers to com- will create a global gaming community that enables other computer municate and enjoy playing games together with that the expansion game enthusiasts from across the globe. I believe Community” will of the Internet infrastructure based “Global Live begin to intensify in the coming period. to create an computer game industry will be how to use cyberspace efficient gaming environment. MESSAGE FROM THE PRESIDENT

Aspiration EVOLUTION

Shoichiro Irimajiri Representative Director and President

BUSINESS RESULTS Consolidated net sales fell 19.7%, to ¥266.2 billion. Operating Despite the fact that fiscal 1999, ended March 31, 1999, was an income, however, amounted to ¥2.1 billion, compared with an oper- extremely difficult year for Sega, with the stepping up of its con- ating loss of ¥2.1 billion for the previous fiscal year. sumer businesses as typified by the domestic launch of Dreamcast Looking at consolidated results by business segment, total sales the year also represents what was in many respects a new start for from amusement center operations were down ¥1.4 billion, or 1.5%, the Company. to ¥93.1 billion, amusement machine sales declined ¥34.6 billion, or However, the severe operating environment of the previous fiscal 27.9%, to ¥89.4 billion, and consumer product sales dropped ¥29.8 year continued and, in fact, deteriorated in fiscal 1999 with the billion, or 26.0%, to ¥84.7 billion. result that non-consolidated net sales dropped ¥56.9 billion, or The Company increased cash dividends applicable to the period 21.0%, to ¥214.5 billion, and operating income declined 84.8%, to ¥1, to ¥39, representing the Dreamcast anniversary ¥1 dividend ¥2.1 billion. In addition, special losses of ¥33.9 billion were record- increase included in the interim dividend already paid. ed, resulting in a net loss of ¥33.4 billion. SEGA Enterprises, Ltd. 6 SEGA Enterprises, Ltd. 7 In response to these disappointing results, from April 1999 the In response to these disappointing results, from The Company is also in the process of reducing fixed costs 30% The Company is also in the process of reducing In addition to the aforementioned measures, initiatives aimed at Fixed cost-cutting initiatives are expected to yield annual cost reduc- potential. These measures included the disposal of unprofitable potential. These measures operations; the write-off of amusement overseas amusement center write-off of SegaSaturn components and machine inventories; the development costs for the same prod- the depreciation of software business; and uct; the diminution of investment in the PC software on investment the charging to the accounts of evaluation losses of ¥33.9 billion securities. As a result, SEGA posted special losses and consolidated special losses of ¥26.0 billion. reforms and Company began implementing large-scale structural of its manage- streamlining its operations. To revitalize the quality found it essential to ment and restore profit earning potential, SEGA entailed the rethink- implement drastic streamlining measures that As part of this ing and overhaul of its management structure. have been cut, streamlining, levels of management remuneration and the number of executive officer posts reduced. streamlined opera-as part of its drive to achieve highly efficient, staff reductions of tions. SEGA’s early retirement program facilitated need to achieve the 900 by the end of June 1999, in line with the appropriate staff levels in view of the scale of the Company’s operations. With the inclusion of the natural reduction in the number of our employees through standard retirement, we expect to reach our target of a reduction of 1,000 staff by the end of fiscal 2000. tions of ¥21 billion, helping to make SEGA a leaner, stronger company. specific business segments are detailed as follows. In the amusement industry, although certain products which In the amusement industry, although certain Nevertheless, SEGA implemented aggressive measures during In this difficult operating environment, SEGA, using the basic com- In this difficult operating environment, SEGA, using by the decline in However, amusement center operators, hit hard the soundness and restore profit earning year to ensure financial ANALYSIS the Japanese economy became still The deep recession affecting in the period under review. Employment more protracted and severe incomes deteriorated, causing consumer prospects and personal investment as spending to slump; companies pared back capital financial sector con- demand weakened; and anxiety concerning the economies. tinued as did the economic crisis affecting Asian managed to attain struck a chord with young people’s sensibilities downturn in hit status, generally speaking the recession-induced and consequently consumer spending further depressed the market, demand remained stagnant. of new amuse-ponents from Dreamcast, brought to market a variety high-capability new ment machine products utilizing its low-cost and In the consumer computer graphics (CG) system board, NAOMI. sales of its products business, the Company commenced domestic console. key product, Dreamcast, a 128-bit home video game machines, and the personal consumption, reduced orders for new amusement machine business suffered as a result. The consumer products business also felt the negative effects of an insufficient supply of hardware to meet the initial market fervor that greeted the launch of Dreamcast and the lack of the timely release of software killer titles. Both amusement machine and consumer products sales declined as a consequence. SEGA Enterprises, Ltd. 8 nologies ofvision, sound,andvirtualreality. radically innovativefacilitiesthatwill drivethecutting-edgetech- ment spacesthroughtheoptimalutilization ofSEGA’sknow-how. ment centerdevelopmentandstrive tocreateuniquenewentertain- performance, wewillabandonthehithertouniformstyleofamuse- ment facilitiesthroughallianceswithotherindustries. will considertheadoptionofafranchisesystemoperations. sales. machine exceptionofcertainareas,wewill specializeinamusement the of andinvestmentintheexistingtypecenters.Overseas,with on nonperformingsmall-scalelocations,andcutbacktheopening measures. following tain thenumberonepositioninindustry,wewillcarryout term, adownwardtrendwasshowninincome.However,tomain- environment duetothedepressedeconomicconditionsduring In amusementcenteroperations,withradicalchangesinthemarket AMUSEMENT CENTEROPERATIONS Fourth, inlinewithourconservativeexpectationsforSEGA’sfuture Fifth, wewillaggressivelyinvestin R&Dforthedevelopmentof Third, wewillstriveforthedevelopmentofnewstylesamuse- Second, forthepurposeofenhancingownershipawareness,we First, wewillclose101ofouramusementcenters,concentrating Delight portable gamecardwithabuilt-inLCD screen. using itsVisualMemorySystem—a combinationmemorycardand machines, madepossiblethroughinterworkingwithDreamcast strengthen thesynergybetweenconsumerproductsandamusement principal componentswithDreamcast.Atthesametime,wewill software licenseesfortheNAOMICGsystemboard,whichshares supervision ofFerrariS.p.A.Furthermore,wewillworktoexpand tem board,isthefirstdrivingsimulatortobedevelopedunder such asF355Challenge.Thisgame,whichusestheNAOMICGsys- powerful, thrillinggamesthatcanonlybeexperiencedinarcades, In amusementmachinesales,wearebolsteringthedevelopmentof AMUSEMENT MACHINESALES aquarium restaurant,Fish“on”Tips,inGifuPrefecture. Toyohashi, inAichiPrefecture,andthenew,sensationalvirtual Tokyo’s ShibuyaWard,andinJulyweopenedSEGAArena tions development.AttheendofJune,weopenedShibuyaGIGO,in ourselves tolocationswithhighprofitabilityaswellnewopera- In theopeningofnewamusementcenters,wehaverestricted SEGA Enterprises, Ltd. 9 Overseas, we will commence sales of Dreamcast in the United At present, more than 500 publishers around the world are devel- At present, more than 500 publishers around the Additionally, we will streamline our development division through software whose debut we have been carefully planning. Numerous software whose debut we have been carefully groundbreaking new killer titles, network titles, children’s titles, and release. cornerstone software titles are planned for continuous Dreamcast’s ever- oping software for Dreamcast. We are striving for quality and cost broader sales expansion through superb titles incorpo- performance hardware and a wide variety of software rating the talents of outstanding software creators. States on September 9, 1999, priced at $199.99, and later in Europe, priced at £199.99. As in Japan, we have made modems standard equipment through which we are pursuing the new entertainment potential of on-line games by adding networking to traditional playing environments. the concentration and consolidation of our software development business and work toward the strengthening and optimization of our home entertainment software and software for amusement center machines. In addition, we will reinforce our approach to new market seg-In addition, we will reinforce our approach to Concerning our software lineup, major new products will be fully ments, such as the women’s, children’s, and family markets, through ments, such as the women’s, children’s, and family include the new system sales. Examples of these new systems entertainment Disney Fun Square from SEGA, which comprises Disney characters, machines geared for children that incorporate computer and the Virtual Aquarium that utilizes SEGA’s cutting-edge graphics technology. CONSUMER PRODUCTS In consumer products, we will release new software titles that fully utilize Dreamcast’s communications features, thereby differentiating our products from other TV game brands. We will respond to the demands of the network society by pursuing network entertainment, with Dreamcast as its core, and thereby enrich the world of amusement and communication. assembled from such powerful licensees as Acclaim, Accolade, Capcom, Take2, THQ, Hasbro Interactive, Mindscape, Namco, Midway, GT Interactive, Interplay, Konami, Micropose, ASC Games, Fox Interactive, Ubi Soft, and also Shenmue, our own line of SEGA Enterprises, Ltd. 10 business development. and Europeanmarkets,weare aggressivelypromotingits Christmas 1999.Dreamcasthasreceived ravereviewsintheU.S. software titles,whichwillbefurther expandedto40titlesby nied bythesimultaneousintroductionofanabundantlineup16 through drasticcostreductions.Thesaleslaunchwillbeaccompa- commence inSeptemberathighlycompetitivepricesmadepossible spread ofDreamcast. was huge,andwefirmlybelievethatitwillfurtheracceleratethe price ofDreamcastto¥19,900.Themarketreactionthiscut domestic Dreamcastoperations,onJune24,1999,weloweredthe game consoles.Inaddition,asasecond-phasestrategyofour speed ofitsmarketdiffusionexceedsallpreviousrecordsforTV November 27,1998,weachievedsalesofonemillionunits.The In thesixmonthssinceDreamcast’sintroductioninJapanon THE DREAMCOMESTRUEWITHSEGA As forthemarketingofDreamcastoverseas,salesareslatedto Fruition locations asanewtoolinvarietyof applications. ly beingusedbyToyotaMotorCorp. inallofitsnationwidesales other industriesasanewtypeofinformation terminalandisactual- Dreamcast hasattractedtheattention ofnumerouscorporationsin catalyst forthespreadofnetworksalloverJapan.Moreover, port, butitisourbeliefthatthepopularityofDreamcastwillbe work usersmorethan50%hadneveraccessedtheInternetbefore. are attractingattentionfromallindustries.Furthermore,ofournet- accessed thenetwork.TheseareastoundingfiguresforJapanand its introductioninJapanNovember,morethan30%ofusershave game graphicswiththeworldofInternet-basednetworking.Since machine. Hence,Dreamcastrealizesthefusionofworld3-D the premiseofDreamcasthasbeentodevelopanentirelynewgame and theexplosivespreadofInternetenvironments,fromoutset With thephenomenalevolutionofgraphicexpressioncapabilities DREAMCAST NETWORK Dreamcast (fortheJapanesemarket) At SEGA,wearedevelopingourownnetworkserviceandsup- SEGA Enterprises, Ltd. 11 In closing, on behalf of the Board of Directors I would like to thank alliances with AT&T in the United States, British Telecom in Europe, alliances with AT&T in the United States, British three hubs, we will and prominent corporations in Japan. From these of network and elec- provide real-time, on-line games and a variety tronic services. our shareholders for their support and ask for their continued back- ing as we move into an exciting future. August 1999 Shoichiro Irimajiri Representative Director and President SEGA recognizes the potential of the network business and has Obviously, SEGA’s network business through Dreamcast has the Obviously, SEGA’s network business through Dreamcast potential to expand instantly. SEGA, together with CSK, has estab- potential to expand instantly. SEGA, together with and is promoting lished SEGA Soft Networks in the United States the development of on-line games. Presently, SEGA Soft Networks is providing such service across the United States under the name Heat Net. In the future, SEGA will apply Heat Net’s service to Dreamcast and with the support of such partners as AT&T, British Telecom, and ICL will develop a worldwide Dreamcast Network. established a new division for this business’ aggressive development. With respect to Dreamcast-based Internet services, SEGA and CSK will pool all their resources and proactively invest in the development of network content, communication services, and E-commerce. Through the newly developed Dreamcast Network, we plan to further expand the functions and scope of network services through SEGA Enterprises, Ltd. 12 and souvenirshops. theaters, bowlingalleys,karaokerooms,foodandbeveragestands, and developedmulti-entertainmentcomplexesthatcombinemovie Company furtherimprovedthemanagementefficiencyofthesesites for amusementcenteroperations.Duringthetermunderreview, medium-sized complexescomplementthelarge-scaleATPs. ing ClubSEGAinShibuyaandArenaHamaotsu.These with thelaunchingofeightnew-styleamusementcomplexes,includ- Okayama Prefecture,andtheUmedaJoypolis,inOsaka. two newamusementthemeparks(ATPs),theOkayamaJoypolis,in this backdropandonthebasisofthoroughresearch,SEGAopened reflected theongoingrecessioninJapaneseeconomy.Against In fiscal1999,theflatconditionsinamusementcentermarket AMUSEMENT CENTEROPERATIONS market withsuchdistinctiveproducts asVirtuaStriker2,asoccer In domesticamusementmachinesales, wecontinuedtoleadthe AMUSEMENT MACHINESALES ‘ down ¥3.0billion,or3.3%,to¥87.9billion. bated bythecontinuedpoorperformanceofsmall-scalecenters. in thespendingpatternsofyoungpeople.Thesefactorswereexacer- hit productthatwouldappealtoawiderangeofusers,andchanges due tosluggishoverallconsumerspendinginJapan,theabsenceofa However, revenuesfromouramusementcenteroperationsdeclined With 870domesticsites,SEGArankstopintheJapanesemarket As aresult,netsalesfromamusementcenteroperationsedged Moreover, theCompanymovedtocaptureaprofitablemarket REVIEW OFOPERATIONS 51.8%, to¥33.4billion.However, the differenceinsalesfrom economies ledtoadeclineinexport sales. ment marketstogetherwiththenegativeinfluenceofweakAsian measures, theprotractedsluggishnessofEuropeanandU.S.amuse- ing newproductsincorporatingtheNAOMIboard.Despitethese tion, wefocusedondevelopingnewcustomersegmentsbylaunch- Edition—a racinggame—andHarleyDavidson&LARiders.Inaddi- games asVirtuaStriker2Version99,DaytonaUSAPower SEGA’s domesticsalesofamusementmachinesshrank. year. Againstthebackdropofthisharshoperatingenvironment, to aprecipitousdeclineinconsumerspendingafterthestartof ment centeroperatorscontractedastheirfinancesbecametightdue tions oftheamusementcentermarket.Inparticular,salestoamuse- conditions oftheJapaneseeconomywerereflectedinflatcondi- new genrethatisprovingextremelypopular.Inaddition,theweak simulator. flight Baseball 98;CrazyTaxi,adrivinggame;andAirlinePilots, The HouseofDead2,ahorrorshootinggame;Dynamite low costwithhighperformance. machines thatuseNAOMI,anewCGsystemboardcombines second halfofthefiscalperiodSEGAreleasedseveralnewgame battle gameCyberTroopers,VirtualOn:Oratorio.Moreover,inthe game thatharnessesthepowerofMODEL3CGboard,and Domestic salesofamusementmachines plunged¥35.9billion,or Among exportproducts,theCompanymetmarketneedswithsuch However, SEGAwaslatetoenterthemarketformusicgames,a The titlelistofgamesincorporatingtheNAOMIboardincludes SEGA Enterprises, Ltd. 13 Millions of 9.0 74.8 2.0 16.3 1999 1999 22.8 189.1 33.4 277.1 87.956.2 729.5 466.2 59.4 492.9 68.4 567.7 ¥214.5 $1,779.7 Billions of yen U.S. dollars 1998 32.5 69.4 16.4 58.0 74.4 ¥271.5 ing at March 31, 1999. We intend to expand sales of Dreamcast to the U.S. market As of the end of fiscal 1999, the Company had sold 900,000 As of the end of fiscal 1999, the Company The network functionality of Dreamcast is one of its greatest The network functionality of Dreamcast is one Overseas, we began sales of Dreamcast to Asian markets and Overseas, we began sales of Dreamcast to Asian Thanks to the aforementioned factors, domestic sales edged up Thanks to the aforementioned factors, domestic Dreamcast, together with a delay in developing software for use Dreamcast, together with a delay in developing with the console, had a negative impact on sales. of initial sales tar- Dreamcast game consoles, falling slightly short sold more than one gets. By May 1999, however, the Company had million consoles. advantage of the attractions, and 30% of purchasers have taken Internet capabilities of the console. focused on promotional activities to boost demand. sales dropped 2.6%, or ¥1.5 billion, to ¥59.4 billion. Overseas was only mar- 45.2%, or ¥7.4 billion, to ¥9.0 billion, as Dreamcast keted in Asia. on 9, 1999, and later to European markets. September Dreamcast (for the Japanese market) Exports Domestic sales Exports Domestic sales However, a shortage of semiconductors employed in fabricating Amusement center operationsAmusement machine sales: 91.0 101.9 Consumer products: We also released an impressive array of exciting games to take We also released an impressive array of exciting Royalties on game software 4.2 Note: U.S. dollar amounts are translated from yen, for convenience only, at the rate of ¥120.55=US$1, the exchange rate prevail Note: Sales by division Net sales: previous period is partly due to the spin-off of slot-machine and previous period is partly due to the spin-off business marketing pachinko businesses and the transfer of karaoke sales of ¥20.1 functions to subsidiaries. These businesses recorded to ¥22.8 billion. Net billion. Exports dropped ¥9.7 billion, or 30.0%, to ¥56.2 billion. sales in this segment fell ¥45.7 billion, or 44.8%, CONSUMER PRODUCTS released the much- In the domestic consumer products business, we awaited a 128-bit home video game console, in Japan in Dreamcast, November 1998. Dreamcast, which advantage of the outstanding capabilities of includes the Virtua incorporates a modem. The software lineup 3-D action Fighter 3 team battle; Sonic Adventure, a high-speed, game; The House of The Dead 2; and the nonstop adventure game Blue Stinger. In addition, SEGA Rally 2 is a racing game that uses the console’s modem to enable networked play. FINANCIAL REVIEW

OVERVIEW In amusement center operations, the Company strove to attract During fiscal 1999, ended March 31, 1999, although the Japanese customers by opening ATPs in two locations and opening eight opera- video game industry was buoyed by the success of a number of new tionally efficient medium-sized complexes. We also improved our sup- products among young consumers, it again had to deal with lackluster port services and enhanced operations and management systems, consumer spending amid the protracted economic recession. As including the establishment of multi-entertainment complexes that before, the problems of a market lacking economic vitality persisted. combine amusement facilities with restaurants and retail stores. Under difficult conditions, SEGA undertook two major product However, due to the general weakness of personal consumption and launches: NAOMI, a low-cost, high-performance CG system board, such market changes as the diversification of spending among young and Dreamcast, a 128-bit home video game console. Despite the consumers, sales for the division inched down ¥3.0 billion, or 3.3%, to introduction of NAOMI, Amusement Machine Division revenues ¥87.9 billion (US$729.5 million). declined due to slack consumer spending and operators’ diminished Royalties on game software plummeted ¥2.3 billion, or 53.8%, to appetite for purchasing. Revenues in the Consumer Products Division ¥2.0 billion (US$16.3 million). also fell, reflecting the insufficient supply of hardware and software Exports represented 15.1% of net sales, down 3.8 percentage to meet the initial demand for Dreamcast. points from the previous year. This was mainly due to declines in rev- While promoting its new flagship products, the Company advanced enue from products and royalties. Export sales declined ¥18.9 billion, with wide-ranging measures to streamline its operations and effect or 36.8%, to ¥32.4 billion (US$268.9 million). revenue recovery through a healthy corporate structure. These included liquidating unprofitable overseas amusement operations, reducing COSTS, EXPENSES, AND EARNINGS inventory levels, amortizing SegaSaturn software development Cost of sales for the term decreased ¥46.0 billion, or 21.2%, to ¥170.6 expenses, disposing of investments in PC software businesses, and billion, slightly more than the 21.0% drop in net sales. As a result, the writing off investment securities valuation losses. cost of sales ratio declined 0.3 percentage point, to 79.5%. However, As a result of these factors, non-consolidated net sales for the term due to the large drop in revenue, fixed costs were not completely declined 21.0%, to ¥214.5 billion (US$1,779.7 million). Furthermore, recovered, resulting in a drop in gross profit of ¥10.9 billion, or 19.9%, due to the special losses accompanying corporate restructuring, SEGA to ¥44.0 billion (US$364.6 million). recorded a net loss of ¥33.4 billion (US$276.9 million)—an improve- Although the Company endeavored to keep selling, general and ment on the ¥43.3 billion net loss posted in the previous fiscal year. administrative (SG&A) expenses down, advertising costs incurred in In commemoration of the debut of Dreamcast, SEGA paid annual the development of Dreamcast and other new products resulted in cash dividends per share of ¥39.0 (US$0.32), up ¥1.00 from the previ- SG&A expenses expanding ¥0.7 billion, or 1.7%, to ¥41.9 billion ous fiscal year. (US$347.3 million). Due to this factor and the decline in revenue, SG&A expenses as a percentage of sales rose 4.3 percentage points, NET SALES to 19.5%. R&D expenses included in SG&A expenses decreased ¥1.4 SEGA’s non-consolidated net sales dropped ¥56.9 billion, or 21.0%, to billion, or 23.5%, to ¥4.7 billion (US$38.9 million). Total R&D expens- ¥214.5 billion (US$1,779.7 million). In amusement machine sales, we es decreased ¥2.5 billion, or 9.2%, to ¥24.6 billion (US$204.5 million). concentrated our efforts on invigorating the Japanese market by This reflects the expenditure incurred during the previous term in the introducing a variety of unique products for CG system boards and development of NAOMI and Dreamcast. However, as a percentage of releasing NAOMI. However, divisional sales plummeted ¥45.7 billion, net sales, R&D expenses climbed 1.5 percentage points, to 11.5%. or 44.8%, to ¥56.2 billion, and this was the primary cause of the This level of expenditure reflects our ongoing drive to create a strong decline in net sales. This was due to the slowdown in the amusement R&D structure and a commitment to become a high-tech application market, associated with the adverse effects from the introduction of corporation underpinned by proprietary R&D capabilities. As a result music games and the overall economic downturn, and a decline in of these factors, operating income declined ¥11.6 billion, to ¥2.1 bil- demand brought on by a sudden and acute drop in personal consump- lion (US$17.3 million), and fell 4.0 percentage points as a percentage tion at the start of the calendar year. of net sales, to 1.0%. In consumer products, the Company introduced Dreamcast to the Total other expenses, while declining ¥13.6 billion, to ¥35.2 billion Japanese market. Along with the hardware, featuring communica- (US$292.1 million), still remained high. This was due to the aforemen- tions functions in the form of internal modems, we strove for sales of tioned efforts to bolster corporate structure and streamline operations a large assortment of software as well. In exports, we launched sales as well as several special losses. Principal losses for the term includ- of Dreamcast in Asia and worked to promote sales through software ed an ¥11.5 billion (US$95.4 million) loss on the write-down or dis- support. However, the insufficient supply of hardware and software posal of inventories (see Note 14), a ¥5.0 billion (US$41.6 million) loss incurred during the start-up adversely affected sales, regrettably on the dissolution of a subsidiary, a ¥7.1 billion (US$59.2 million) pro- resulting in a decline in sales for the division of ¥5.9 billion, or 8.0%, vision for doubtful accounts, and a ¥5.5 billion (US$45.5 million) loss to ¥68.4 billion (US$567.7 million). on reserve for guaranteed obligation. SEGA Enterprises, Ltd. 14 As a result of these factors, the Company recorded a loss before Due to these factors, working capital increased ¥44.3 billion during income taxes of ¥33.1 billion (US$274.9 million) and a net loss of the term, to ¥133.8 billion (US$1,110.1 million). As a result, the cur- ¥33.4 billion (US$276.9 million). rent ratio rose from 2.0 to 2.3. SEGA considers this level of liquidity to Net loss per share—basic, compared with ¥430.3 in the previous be sufficient to maintain smooth operations. term, amounted to ¥331.1 (US$2.75). Total shareholders’ equity declined ¥31.4 billion, to ¥100.6 billion (US$834.8 million). This primarily reflects a ¥45.0 billion reversal of FINANCIAL POSITION voluntary reserves. Mainly as a result of this factor and the increase In consideration of its plans for business development in the 21st cen- in interest-bearing debt during the year, the equity ratio decreased tury, during the term under review SEGA procured net capital 14.0 percentage points, to 24.1%. SEGA will make every effort to of ¥104.1 billion through various methods, including fund-raising. restore shareholder value through the implementation of business Emphasizing asset quality, we continued to record suitable provi- development measures that emphasize corporate financial results. sions for doubtful accounts related to investments in and advances to Also, the Company plans to improve its equity ratio through the con- subsidiaries and affiliates, and also promoted the reduction of inven- version of ¥191.9 billion in convertible bonds. Furthermore, the ¥32.1 tory levels. As a result, total assets at March 31, 1999, stood at billion (US$266.1 million) accumulated deficit was eliminated by a ¥417.8 billion (US$3,465.5 million), up ¥71.2 billion from the previous ¥38.0 billion reversal in voluntary reserves, which was approved at fiscal year-end. the Annual General Meeting of Shareholders on June 29, 1999. Total current assets rose ¥55.8 billion, to ¥234.0 billion, and was the principal cause for the increase in total assets. Among current CASH FLOWS assets, cash and cash equivalents leapt ¥69.5 billion, to ¥127.0 bil- In fiscal 1999, cash and cash equivalents increased ¥69.5 billion, to lion, reflecting the growth of marketable securities under temporary ¥127.0 billion (US$1,053.3 million). This jump was mainly due to an management and the procurement of funds for anticipated capital increase in the procurement of funds to finance future business requirements in the next term. In addition, inventories climbed ¥9.6 development. billion due to the advanced production of certain products undertaken Net cash provided by operating activities decreased ¥27.8 billion, to meet strong future demand. Trade receivables fell ¥6.5 billion as a to ¥18.4 billion (US$152.7 million). Net cash after adjustments for result of a sharp decline in amusement machine sales at the begin- depreciation, amortization, and other non-cash items totaled ¥22.1 ning of 1999. billion, down ¥4.2 billion from the previous fiscal year. Changes in In property and equipment, the Company invested a total of ¥19.0 operating assets and liabilities, resulted in a cash outflow of ¥3.7 bil- billion (US$157.6 million) in amusement machines and facilities. As lion, compared with a cash inflow of ¥19.9 billion in the previous fis- the amount of capital expenditure was less than the amount of depre- cal year. This difference was primarily due to an increase in ciation, total property and equipment fell ¥1.9 billion, to ¥74.9 billion inventories and a decrease in notes and accounts receivable. (US$621.1 million). Net cash used in investing activities declined ¥28.1 billion, to ¥49.1 Despite such factors as the increases in provisions for doubtful billion (US$407.7 million), mainly due to a ¥27.0 billion decrease in accounts related to investments in and advances to subsidiaries and investments in subsidiaries and affiliates, to ¥20.1 billion. In addition, affiliates, total investments and advances increased ¥13.5 billion, to acquisition of property and equipment, at ¥20.6 billion, was down ¥73.3 billion (US$608.2 million), mainly due to increased investments slightly from the previous fiscal year. and advances for new business development. Net cash provided by financing activities totaled ¥100.2 billion Although contributions of ¥4.4 billion were made due to the con- (US$831.3 million), in contrast with outflows of ¥3.8 billion in the pre- struction of new amusement facilities, cancellation of contracts and vious term. This mainly reflects the procurement of ¥104.1 billion returns resulted in only a ¥1.8 billion increase in fixed leasehold through convertible bonds and long-term bank loans. This fund-raising deposits, to ¥24.2 billion (US$200.5 million). activity countered expenditure incurred for bond redemption and the Total current and long-term liabilities increased ¥102.6 billion, to repayment of long-term borrowings. ¥317.1 billion (US$2,630.7 million). Short- and long-term interest- bearing debt climbed ¥100.8 billion, to ¥245.6 billion (US$2,037.6 mil- YEAR 2000 (Y2K) PROBLEM lion), underpinning the rise in total liabilities. This was the result of a SEGA has placed highest priority on this matter and is proceeding new drive to raise funds for business expansion, primarily through the with Y2K compliance of internal information systems, products, and issue of straight and convertible bonds. Although income tax payable ATP and head office facilities. decreased ¥4.0 billion due to the net loss, a ¥5.5 billion (US$45.5 mil- Hardware and software compliance is expected to be completed by lion) loss on reserve for guaranteed obligation and other factors September 1999. resulted in operating and other liabilities expanding ¥1.8 billion, to We estimate the cost of Y2K compliance at ¥40 million and had ¥71.5 billion (US$593.0 million). appropriated ¥7 million by March 1999. We do not expect these expenses to have any significant effect on our future business operations or performance. SEGA Enterprises, Ltd.

15 SEGA Enterprises, Ltd. 16 Property andEquipment: The accompanyingnotesareanintegralpartof thesestatements. Deferred ChargesandIntangibleAssets Current Assets: ASSETS Fixed LeaseholdDeposits Investments andAdvances: ...... Prepaid expenses...... netre Nt )...... Inventories (Note4) Buildings andstructures...... Amusement machinesandfacilities Notes andaccountsreceivable: Construction inprogress...... Land Less accumulateddepreciation...... Machinery andequipment...... Less allowancefordoubtfulaccounts...... Other investments ...... Other currentassets Less allowancefordoubtfulaccounts...... Cash andcashequivalents(Note2(3)): netet nadavne osbiire n fiits(oe8...... 73,372 Investments inandadvancestosubsidiariesaffiliates(Note8)...... Investments insecurities(Note5)...... te ...... Other Subsidiaries andaffiliates...... Trade...... Short-term investments(Note5)...... iedpst ...... Time deposits ...... Cash oa rpryadeupet...... 76 ...... Total propertyandequipment 59,7 Total investmentsandadvances...... Total currentassets...... oa ses...... Total assets Nt )...... 22,373 ...... (Note 6) ...... 9,364 ...... NON-CONSOLIDATED BALANCESHEETS March 31,1998and1999 SEGA Enterprises,Ltd...... 22,574 ...... 9,916 ...... 18,157 ...... ¥ ...... 36,952 ...... 11,201 ...... 1,054 ...... 9,979 ...... 8,520 ...... 47,872 ...... 126 ...... 43,946 ...... 20,947 ...... 178,232 ...... ¥346,538 ...... 18,827 ...... (83,813) ...... (42,387) .. (485) .. 69,072 . 14,503 . 137,891 102,178 0 72,019 71,534 57,491 54,078 34,468 ,778 1998 91 iloso e dollars(Note3) Millions ofyen 4773$3,465,475 ¥417,763 ¥ 4,1 1,177,263 141,919 3,0 1,941,169 234,008 2,7 1,053,297 126,975 2,4 1,013,256 122,148 0 4,3)(405,085) (48,833) 8,4)(744,479) (89,747) 388363,485 43,818 462121,211 14,612 652386,080 46,542 372363,269 43,792 036417,802 587,317 50,366 70,801 335608,171 73,315 896239,785 97,064 28,906 11,701 549211,356 25,479 254187,258 22,574 172,144 20,752 212432,784 52,172 446$ 94,476 14294,583 11,402 065752,260 90,685 203182,688 22,023 488621,054 74,868 410200,498 24,170 ,1 26,636 3,211 ,8 17,312 2,087 ,4 78,308 9,440 ,2 58,233 7,020 991999 1999 2 1,012 122 2)(216) (26) Thousands ofU.S. 0, 783,708 SEGA Enterprises, Ltd. 17 243,642 0, Thousands of U.S. Thousands of U.S. 85 705 556 4,612 291 2,414 880 7,300 125 1,036 1999 1999 3,626 30,079 5,485 45,500 2,770 22,978 1,944 16,125 42,109 349,307 41,653 345,525 45,892 380,689 46,171 383,003 50,677 420,382 12,619 104,679 29,371 $ (32,079) (266,105) 100,181 831,033 216,265 1,793,986 100,636 834,808 216,946 1,799,634 0 ¥417,763 $3,465,475 ¥ Millions of yen dollars (Note 3) 302 1998 51,393 19,897 0 ¥ .. 132,036 .... — .... 125,793 ...... 88,709 ...... 4,088 ...... 522 ...... (39,389) ...... 90,892 ...... 124,923 ...... 38,700 ...... 2,377 ...... 11,605 ...... 1,726 ...... 50,308 ...... 563 ...... (Note 18) Total liabilities and shareholders’ equity...... ¥346,538 Total shareholders’ equity...... Total long-term liabilities ...... Total current liabilities ...... 103,219,703 shares at March 31, 1998 and 1999, respectively ...... 39,154 Authorized—200,000,000 shares at March 31, 1998 and 1999 Issued, par value ¥50 per share—100,633,718 shares and Subsidiaries and affiliates...... Trade...... Other ...... Long-term debt (Note 9) ...... Accrued employees’ retirement benefits (Note 10) ...... 595 Additional paid-in capital ...... Common stock: Legal reserve (Note 11) ...... Voluntary reserves (Note 11)...... Special tax-purpose reserves (Note 2 (13)) ...... Notes and accounts payable: Current portion of long-term debt (Note 9)Current portion of long-term ...... Accumulated deficit (Note 19)...... Accrued retirement benefits for directors and corporate auditors (Note 10)Accrued retirement benefits for directors and corporate ...... 275 Other current liabilities...... Accrued expenses...... Income taxes payable (Note 7)...... Income taxes payable (Note Reserve for guaranteed obligation...... Long-Term Liabilities: Commitments and Contingent Liabilities Shareholders’ Equity: Current Liabilities: LIABILITIES AND SHAREHOLDERS’ EQUITY LIABILITIES AND SHAREHOLDERS’ SEGA Enterprises, Ltd. 18 * DilutednetlosspersharewasnotdisclosedfortheyearsendedMarch31,1998and1999, asnetlosspersharewascalculate The accompanyingnotesareanintegralpartofthesestatements. Per Share Income Taxes Selling, GeneralandAdministrativeExpenses Cost ofSales Net Sales Other Income(Expenses) ahdvdns...... 8038.0 100,633 100,633 38.0 Weighted averagenumberofshares(thousands)...... Cash dividends 1,26 Other, net...... e noedltd ...... 4. — ¥(430.3) 48.5 ¥55.4 ...... Net income—diluted* Net (loss)income—basic...... mriaino odadnt su xess...... (7)(263) — (687) (977) (40,343) — — (1,154) 1,155 Amortization ofbondandnoteissueexpenses...... — Amortization ofdiscountsonbonds...... (2,780) ...... Loss onreserveforguaranteedobligation(Note17) 4,305 510 — Provision fordoubtfulaccounts(Notes8and16)...... — — ...... Net (loss)gainonforeignexchange (3,992) (739) ...... Loss ondissolutionofasubsidiary(Notes8and15) 1,780 Loss onsaleordisposalofoperationsinsubsidiariesandaffiliates...... 4,416 — (4,295) Gain onsalesofinvestmentsecurities...... — — Gain onsalesofinvestmentsinsubsidiariesandaffiliates...... (380) ...... Loss onvaluationofcashtrustforinvestments (722) — Loss onvaluationofinvestmentsinsubsidiariesandaffiliates...... (22,944) Loss onvaluationofinvestmentsecurities...... (419) ...... Loss onwrite-downofinvestmentsinsubsidiaries(Note8) (3,243) ...... Loss onsaleordisposalofpropertyandequipment Loss onwrite-downordisposalofinventories(Note14)...... neetepne...... (7)(651 1,313 (675) 1,396 Interest expense...... Interest anddividendincome...... Ls)icm eoeicm ae...... 1,5 (35,136) ¥ Net (loss)income...... (48,843) 14,257 (Loss) incomebeforetaxes...... (16,972) ...... Total otherincome(expenses) rs rft...... 7,8 54, 74,784 Gross profit...... prtn noe...... 12913,707 31,229 ...... Operating income Nts1 n 3 ...... 3990¥271,475 ¥359,930 ...... (Notes 12and13) (Note 2(15)): Nt 2 ...... 8,4 216,596 285,146 ...... (Note 12) Nt )...... 8658,164 8,685 ...... (Note 7) (Note 13): NON-CONSOLIDATED STATEMENTSOFOPERATIONS For theyearsendedMarch31,1997,1998and1999 ...... 35541,172 43,555 ...... SEGA Enterprises,Ltd. 00 ,7 (43,300) ¥ 5,572 971998 1997 971998 1997 2,309 5 d fortheyearafteradjustmentdilution. 879 ) iloso e dollars(Note3) Millions ofyen 3,8)$ (33,383) ¥ 2456$1,779,726 ¥214,546 100,833 7,9 1,415,130 170,594 (3.)$(2.75) ¥(331.1) 3,3)(274,881) (292,144) (33,137) (35,218) 1,9)(95,355) (11,495) 181347,333 41,871 392364,596 43,952 545 (45,500) (59,220) (41,593) (5,485) (7,139) (5,014) (11,033) (10,709) (9,000) (1,330) (1,291) (1,085) ,8 17,263 2,081 ,0 13,306 1,604 46 (3,450) (416) 73 (5,998) (5,691) (4,388) (723) (686) (529) (6,221) (750) 89 (7,292) (879) 900.32 39.0 991999 1999 991999 1999 4 2,041 246 e (Note3) Yen —— —— —— —— —— Thousands ofU.S. , U.S. dollars (276,922) SEGA Enterprises, Ltd. 19 8,985 (0 (Accumulat- (Accumulat- Millions of yen Thousands of U.S. dollars (Note 3) Additional Special ed deficit) ——— — —— —— — — — 393 — — — — — — — (45,000) — — (33,383) — (3,925) — (11) (393) 45,000 11 ——— —— —— — — — — 3,260 — — — — — — (373,289) — — — — (276,922) — (32,559) (91) (3,260) 373,289 91 stock capital reserve reserves reserves earnings 24,513 24,496 — — — — Common paid-in Legal Voluntary tax-purpose Retained $349,307 $345,525 $22,978 $380,689 $2,414 $(266,105) SEGA Enterprises, Ltd. SEGA Enterprises, shares of Common paid-in Legal Voluntary tax-purpose Retained Number of Additional Special ed deficit) 2,585,985 2,955 2,953 — — — — common stock stock capital reserve reserves reserves earnings 103,219,703 ¥42,109 ¥41,653 ¥2,770 ¥45,892 ¥291 ¥(32,079) For the years ended March 31, 1997, 1998 and 1999 1998 and March 31, 1997, years ended For the NON-CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY OF SHAREHOLDERS’ STATEMENTS NON-CONSOLIDATED ...... $324,794 $321,029 $19,718 $753,978 $2,505...... $(326,744) ...... 100,633,718 ¥39,154 ¥38,700 ¥1,589 ¥88,892 ¥324 ¥ ...... 100,633,718 39,154 38,700 1,981 89,892...... 100,633,718 313 39,154 9,253 38,700 2,377 90,892 302 (39,389) (Note 2 (13)) ...... — — — — — (11) 11 (Note 2 (13)) ...... — — — — — (11) 11 (Note 2 (13)) ...... Net loss for the year ended March 31, 1999 ...... Cash dividends...... Transfer to legal reserve ...... Reversal of special tax-purpose reserves (Note 2 (13)) ...... Reversal of voluntary reserves ...... Net income for the year ended March 31, 1997Net income for the year ...... Cash dividends...... Transfer to legal reserve ...... corporate auditors...... Bonuses to directors and — reserves Reversal of special tax-purpose — — — — — — — — — — — — — 392 — — — — — — — — 5,572 (3,824) — (392) (99) Proceeds from conversion of convertible bonds ...... Proceeds from conversion of convertible bonds ...... Transfer to voluntary reserves...... — — — — 1,000 — (1,000) Transfer to voluntary reserves...... Net loss for the year ended March 31, 1998 ...... —Cash dividends...... Transfer to legal reserve ...... Bonuses to directors and corporate auditors...... — —Reversal of special tax-purpose reserves — — — — — — —Net loss for the year ended March 31, 1999 ...... — — — — 1,000 — — — — 396 — — — — — (1,000) — — — (43,300) — (3,824) — (396) (133) Cash dividends...... Transfer to legal reserve ...... Reversal of special tax-purpose reserves Reversal of voluntary reserves ...... Balance at March 31, 1999 The accompanying notes are an integral part of these statements. Balance at March 31, 1998 Balance at March 31, 1999 Balance at March 31, 1996 Balance at March 31, Balance at March 31, 1998 Balance at March 31, 1997 SEGA Enterprises, Ltd. 20 The accompanyingnotesareanintegralpartof thesestatements. Cash andEquivalentsatEnd ofYear Cash andEquivalentsatBeginning ofYear Cash FlowsfromOperatingActivities: Changes inCashandEquivalents Cash FlowsfromFinancingActivities: Cash FlowsfromInvestingActivities: Adjustments toreconcilenet(loss)incomecash ahdvdns...... 384 (3 (3,824) ...... Cash dividends (3,445) (1,600) Increase indeferredchargesandintangibleassets...... e ls)icm...... ¥ Net (loss)income...... eamn fln-embroig ...... —— — — — — (30,620) ...... Repayment oflong-termborrowings ...... Repayment ofcurrentportionlong-termdebt (350) ...... Proceeds fromissuanceoflong-termdebt (2,963) (96) (47,114) (761) (1,925) 1,638 Increase infixedleaseholddeposits...... 3,294 Increase inotherinvestments...... (7,547) (Increase) decreaseininvestmentssubsidiariesandaffiliates...... (23,054) 1,746 Increase ininvestmentssecurities...... (31,075) Proceeds fromsaleofpropertyandequipment...... Acquisition ofpropertyandequipment...... provided byoperatingactivities: Changes inassetsandliabilities: tes...... 5 (281 — — 40,343 651 — 2,780 — ...... Others — (510) ...... Loss onreserveforguaranteedobligation — 739 — Provision fordoubtfulaccounts...... Loss ondissolutionofasubsidiary 4,295 (1,780) Loss onsaleordisposalofoperationsinsubsidiariesandaffiliates...... — (4,416) — 380 Gain onsalesofinvestmentsecurities...... 722 Gain onsalesofinvestmentsinsubsidiariesandaffiliates...... — Loss onvaluationofinvestmentsinsubsidiariesandaffiliates...... 22,944 2,552 419 Loss onvaluationofinvestmentsecurities...... Loss onwrite-downofinvestmentsinsubsidiaries 3,243 19,27 ...... Loss onsaleordisposalofpropertyandequipment 3,920 Loss onwrite-downordisposalofinventories...... 18,994 ...... Amortization ...... Depreciation Dces)ices nicm ae aal...... 615(2,045) (479) 11,892 6,135 2,849 (33,527) (Decrease) increaseinincometaxespayable...... 1,759 10,873 (Decrease) increaseinnotesandaccountspayable...... 4,836 ...... (Increase) decreaseinprepaidexpensesandothercurrentassets 14,042 ...... (Increase) decreaseininventories ...... Decrease innotesandaccountsreceivable nrae(erae nacudepne n te urn iblte .....185(3,175) 1,845 ...... Increase (decrease)inaccruedexpensesandothercurrentliabilities e ahpoie y(sdi)fnnigatvte ...... (444 (3,824) (34,444) ...... Net cashprovidedby(usedin)financingactivities (77,213) (36,039) ...... Net cashusedininvestingactivities 46,192 45,359 ...... Net cashprovidedbyoperatingactivities NON-CONSOLIDATED STATEMENTSOFCASHFLOWS ...... 2,2)(34,845) (25,124) ...... ¥ ...... For theyearsendedMarch31,1997,1998and1999 ...... 174092,336 117,460 ...... SEGA Enterprises,Ltd. 00 0 236¥ 92,336 ,7 ¥(43,300) 5,572 971998 1997 0 57,491 ,824) 9 ) iloso e dollars(Note3) Millions ofyen 3,8)$ (33,383) ¥ 1695$1,053,297 ¥126,975 0,1 831,323 100,216 2,3 1,076,981 129,830 1,8)(148,362) (17,885) 1,9)(165,052) (407,657) (19,897) (49,143) (166,545) (170,900) (20,077) (20,602) 771230,120 27,741 95,355 11,495 981164,919 19,881 741476,906 57,491 944576,391 69,484 152,725 18,411 396 (33,065) (31,514) (61,742) (3,986) (3,799) (7,443) 395 (32,559) (3,925) (27,566) (3,323) 572 (48,046) (5,792) (14,907) (37,379) (1,797) (4,506) ,8 45,500 59,220 41,593 5,485 7,139 5,014 10,709 9,000 28,660 1,291 1,085 3,455 ,1 10,917 1,316 ,2 14,286 1,722 11 (1,253) (151) 14 (1,277) (154) 991999 1999 5 6,221 750 —— —— —— —— Thousands ofU.S. , (276,922) SEGA Enterprises, Ltd. 21 There have been no material transactions and account balances There have been no material shortened in The estimated useful lives of buildings have been The consumption tax imposed on the Company’s sales to customers cash flows in accordance with accounting principles and practices cash flows in accordance and jurisdictions other than Japan. generally accepted in countries (2) Significant Shareholders of CSKThe Company is an affiliate Corporation, Japan, which owned of common stock of the Company at March 31, 20,148 thousand shares 20.02% and 19.52% of shares outstand- 1998 and 1999, representing the chairman of the Company, Mr. Isao ing at such dates. In addition, 2.11% of the issued shares of the Company Okawa, personally owned as of March 31, 1999. the Company outstanding, other than the shareholdings, between and CSK Corporation. amendments of the straight-line method in accordance with the 1998 immaterial. The Japanese tax laws. The effects of this change were for buildings and range of useful lives is principally from 3 to 50 years furniture and structures; from 2 to 20 years for machinery, equipment, and facilities. tools; and from 2 to 5 years for amusement machines tax laws. The accordance with the 1998 amendments of Japanese expense by ¥101 effects of this change were to increase depreciation and operating million ($838 thousand) and to decrease gross profit ($788 thousand), profit by ¥27 million ($224 thousand) and ¥95 million taxes by ¥95 million respectively, and to increase loss before income ($788 thousand). (6) Consumption Tax Until March 31, 1997, the consumption tax had been imposed at the flat rate of 3% on all domestic consumption of goods and services (with certain exemptions). On April 1, 1997, the rate was increased to 5%. is withheld by the Company at the time of sale and is paid to the national government subsequently. The consumption tax withheld upon sale is not included in the amount of “Net sales” in the accompanying non-consolidated statements of operations but is recorded as a liability, “consumption tax withheld.” The balances of “consumption tax withheld” and “consumption tax paid” (an asset item), which is borne by the Company on the purchases of products, merchandise and services from vendors, are not included in the amounts of costs and expenses but are offset, and the net balance is included in “Other current assets” or “Other current liabilities” of the non-consolidated balance sheets at March 31, 1998 and 1999. SEGA Enterprises, Ltd. SEGA Enterprises, For the years ended March 31, 1997, 1998 and 1999 1998 and March 31, 1997, years ended For the NOTES TO THE NON-CONSOLIDATED FINANCIAL STATEMENTS FINANCIAL NON-CONSOLIDATED TO THE NOTES Certain items presented in the non-consolidated financial state- Certain items presented intended to pre- The non-consolidated financial statements are not 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 2. SUMMARY OF SIGNIFICANT ACCOUNTING (1) Inventories moving-average Inventories are stated at cost, determined by the classes of invento- method. When the net realizable value of certain (cost) and such ries is substantially lower than the carrying value appropriate write- decline of value is considered to be permanent, downs are recorded on such items. (2) Valuation of Securities at the lower of cost Securities with quoted market values are valued or market on an individual basis, cost being determined by the moving- which is deter- average method. Other securities are valued at cost, mined by the moving-average method. (3) Cash and Cash Equivalents Cash equivalents include time deposits and short-term investments in conformity with generally accepted Japanese accounting practices. (4) Investments in Subsidiaries and Affiliates Investments in subsidiaries (majority-owned companies) and affiliates to 50% owned companies) are valued at cost. The equity (20% method of accounting for investments in the common stock of subsidiaries and affiliates has not been followed by the Company in the non-consolidated financial statements under Japanese accounting practices. (5) Property and Equipment Depreciation is computed, except for buildings acquired on and after 1, 1998, by the declining-balance method at rates based April on useful lives of assets, as prescribed by the Japanese the estimated income tax laws. The depreciation method of buildings, except for buildings’ improvements and structures, acquired on and after April 1, changed from the declining-balance method to the 1998, was 1. BASIS OF PRESENTING THE NON-CONSOLIDATED FINANCIAL STATEMENTS PRESENTING THE NON-CONSOLIDATED 1. BASIS OF (1) Accounting Principles financial statements have been The accompanying non-consolidated maintained by SEGA Enterprises, Ltd. (the prepared from accounts with the provisions set forth in the “Company”) in accordance and in conformity with accounting princi- Japanese Commercial Code accepted in Japan, which are different in ples and practices generally and disclosure requirements of certain respects as to application Standards. International Accounting of Finance (the “MOF”) in Japan have ments filed with the Ministry convenience of readers outside Japan. In been reclassified for the flows are not addition, the non-consolidated statements of cash prepared and required to be filed with the MOF, but have been included in the non-consolidated financial statements. of operations and sent the non-consolidated financial position, results SEGA Enterprises, Ltd. 22 based onthefinancialpositionof recipientsoftheseguarantees. Estimated futureobligationsrelatedtocertainguaranteesareprovided (12) ReserveforGuaranteedObligation the JapaneseTaxLaw. accounts at0.8%oftotalreceivablesoutstandinginaccordancewith 31, 1998,andprior,theCompanymaintainedallowancefordoubtful date, inaccordancewiththeJapaneseTaxLawasamended.AtMarch quency andwrite-offbasedonitsanalysesthehistoricalcollection accounts thataredeemedadequatetocoverfuturelossesfromdelin- At March31,1999,theCompanyprovidedforallowancedoubtful (11) AllowanceforDoubtfulAccounts cial reporting. ferences intherecognitionofcertainexpensesbetweentaxandfinan- returns forthefiscalyear.Notaxeffectisrecordedtemporarydif- Income taxesareprovidedforbasedontheamountrequiredbytax (10) IncomeTaxes rates ofexchange. forward exchangecontractsaretranslatedintoyenatthecontracted historical ratesprevailingatthetransactiondates. investments inoverseassubsidiaries,aregenerallytranslatedatthe fiscal year. gains orlossesareincludedinthedeterminationofnetincomefor vailing attherespectivebalancesheetdates.Resultingtranslation currencies aretranslatedintoyenatthecurrentexchangeratespre- Cash andshort-termreceivablespayablesdenominatedinforeign (9) ForeignCurrencyTranslation straight-line basisoverathree-yearperiod. made inproportiontothebalanceofconvertedbonds. ed intocommonstockoftheCompany,appropriateamortizationis up tothematurityofbonds.Whendiscountbondsareconvert- and isamortizedtoexpensesonastraight-linebasisovertheperiod vertible discountbonds(seeNote9),isrecordedasadeferredcharge thestraight-linemethod,principally oversevenyears. by Amortization ofdeferredchargesandintangibleassetsiscomputed (8) Amortization method thatisapplicabletoordinaryoperatingleases. ownership oftheleasedassetstolesseesareaccountedforby Finance leasesotherthanthosewhicharedeemedtotransferthe (7) Leases Accounts denominatedinforeigncurrencieswhicharehedgedby Long-term receivablesdenominatedinforeigncurrencies,including Bond andnoteissueexpensesaredeferredamortizedona “Bond discount”arisingfromtheissueofzero-couponcon- capital” account. account andtheremaining50%iscreditedto“Additionalpaid-in lic offeringsatmarketpriceistransferredtothe“Commonstock” requirements, 50%oftheproceedsfromnewshareissuessoldinpub- greater thantheparvalueofcommonstock.Inaccordancewithsuch the “Commonstock”account,provided50%ofissuepriceis that atleast50%oftheissuepricenewsharesbetransferredto Under theprovisionsofJapaneseCommercialCode,itisrequired (16) CommonStockandAdditionalPaid-inCapital applicabletotherespectiveperiod. as consolidated statementsofoperationsrepresentdividendsdeclared interest expenses. and exerciseofwarrantsoutstandingwiththerelatedreduction shares ofcommonstockuponconversionconvertibledebtsecurities the dilutiveeffectonnetincomeassumingpotentialissuesofnew incomepershareiscomputedtoreflect ing eachfiscalyear.Net(loss) weighted averagenumberofsharescommonstockoutstandingdur- Net (loss)incomepershareofcommonstockisbaseduponthe (15) Net(Loss)IncomeandDividendsperShare shareholders‘ registerattheendofeachfiscalyear. of duringthatyear.Year-enddividendsarepaidtoshareholdersonthe cal yearbutwereapprovedbytheshareholders’meetinganddisposed appropriations whichareapplicabletotheimmediatelyprecedingfis- non-consolidated financialstatementsrepresentstheresultsofsuch The appropriationofretainedearningsreflectedintheaccompanying which mustbeheldwithinthreemonthsoftheendeachfiscalyear. Board ofDirectorsshouldbeapprovedbytheshareholders’meeting earnings (includingyear-endcashdividendpayments)proposedbythe Incorporation oftheCompany,planforappropriationretained Under theJapaneseCommercialCodeandArticlesof (14) AppropriationofRetainedEarnings gains arisingfromqualifiedassetreplacements. incometaxpaymentsbyreasonofexportsalesanddeferredcapital of the appropriationrelates. from oraddedbacktothetaxableincomeoffiscalyearwhich are madethroughappropriationofretainedearningsanddeducted The provisionsforandreversalsofthespecialtax-purposereserves with theprovisionsofSpecialTaxationMeasuresLawJapan. have resultedinthedeferralofincometaxpaymentsaccordance The Companyhasprovidedforspecialtax-purposereserveswhich (13) SpecialTax-PurposeReserves Cash dividendspershareshownforeachyearinthenon- The reservesoftheCompanyareinrespectpostponement SEGA Enterprises, Ltd. 23 26,727 38,805 75,687 0 0 0 Thousands of Thousands of Thousands of 31, 1998 and 98 and 1999, con- 301 2,497 1999 1999 1999 1999 1999 1999 2,704 22,431 5,3382,129 44,280 17,661 4,678 $ 3,222 $ 6,361 52,766 9,1245,432 $ 45,060 19,894 165,027 0 0 20,500 170,054 20,498 170,037 13,757 114,119 0 ¥ ¥ ¥25,479 $211,356 ¥22,023 $182,688 ¥12,095 $100,332 ¥46,542 $386,080 ¥ Millions of yen U.S. dollars Millions of yen U.S. dollars Millions of yen U.S. dollars 1998 1998 1998 6,007 3,141 2,129 8,209 0 0 16,698 0 ¥14,503 ¥18,827 ¥36,952 ...... ¥ ...... 5,818 ...... ¥ ...... 4,000 ...... ¥8,654 ...... 4,496 ...... 2,671 ...... 4,901 ...... ¥ ...... 14,427 ...... 2,331 ...... 12,152 ...... amounts is solely for convenience and is not intended to imply that yen amounts is solely for convenience be converted, realized or settled in dollars amounts have been or could other rate. at ¥120.55=US$1 or at any Cash trust for investments...... Non-current portfolio...... Other securities...... Shares and convertible bonds issued by CSK Corporation...... Other securities...... Listed corporate shares...... Market value of listed corporate shares (except for CSK Corporation’s shares) included in the non-current portfolio as of March Lease-backed notes...... Unlisted corporate shares...... Market value of listed corporate shares in: Short-term investments: Supplies...... IN SECURITIES 5. SHORT-TERM INVESTMENTS AND INVESTMENTS in securities (non-current portfolio) of the Company at March 31, 19 Short-term investments (current portfolio) and investments Merchandise...... 4. INVENTORIES 31, 1998 and 1999, consisted of: Inventories as of March sisted of the following: 3. UNITED STATES DOLLAR AMOUNTS 3. UNITED STATES Investments in securities: 1999, is summarized as follows: The Company maintains its accounting records in yen. The dollar The Company maintains non-consolidated financial statements and amounts included in the the arithmetical results of translating yen to notes thereto represent The inclusion of such dollar dollars on the basis of ¥120.55=US$1. Products...... Materials ...... Work in process...... SEGA Enterprises, Ltd. 24 netimn xess hc r o a eutbe naddition, entertainment expenses,whicharenottaxdeductible.In incomebeforetaxes.Suchdifferencesarisepartlyfrom (loss) byapplyingtheaforementionedstatutorytaxratesto computed consolidated statementsofoperationsdifferfromtheamounts purposes whenitispaid. Statutory taxrateineffecttoreflectthedeductibilityofenterprisewhenpaid...... Standard rates: March 31,1997,1998and1999,consistedofcorporateincometax Income taxesinJapanapplicabletotheCompanyforyearsended 7. INCOMETAXES tive totheamountofannualleaserentalpayments.Suchleasehold leased fromlessorsonalong-termcancellablebasis. The Companyconductsamusementcenteroperationsonproperty 6. FIXEDLEASEHOLDDEPOSITS volatility oftheforeigncurrencymarkets.TheCompanysometimes committee whichdeterminestheCompany’shedgingstrategy. not holdorissuederivativefinancialinstrumentsfortradingpurposes. fluctuations initsexportandimporttransactions.TheCompanydoes eign currencyoptionstohedgeagainstexposureforeign The Companyentersintoforeigncurrencyforwardcontractsandfor- Derivative FinancialInstruments ...... Resident incometaxes...... Income taxexpensesasshownintheaccompanyingnon- Unlike otherincometaxes,enterprisetaxisdeductiblefor Enterprise tax...... Corporate incometax...... Japanese lessorsrequirelargeamountsofleaseholddepositsrela- The derivativetransactionshavemarketriskassociatedwiththe All thederivativetransactionsarecontrolledbyforeigncurrency of deductionestablishedbythetaxlawsandotherfactors. posed of,reservefordoubtfulaccountsprovidedinexcessofthelimit until paid,write-downofinventoriesnotdeductibleactuallydis- reporting primarilyinrelationtoaccruedenterprisetaxnotdeductible tax certain temporarydifferencesbetweenfinancialaccountingand differencesarisebecausenotaxeffectshavebeenrecognizedon the approximate ratesindicatedbelow: (national), enterprisetax(local)andresidentincometaxesatthe consolidated balancesheetsas“Fixedleaseholddeposits.” the leaseisterminated.Suchleaseholddepositsareshowninnon- deposits donotbearinterestandaregenerallyreturnableonlywhen were nocurrencyoptioncontractsoutstanding. contracts wereallocatedtorelatedaccountsreceivableandthere currencies. options contractsislimitedsoasnottoexceeditsdemandforforeign by marketfluctuations.Therefore,theCompany’sinvolvementin Under suchcontracts,theCompanymaysufferadverseeffectscaused issues putoptionsinordertoenterintozerocostoptioncontracts...... As ofMarch31,1998and1999,alltheforeigncurrencyforward ...... 1. 12.6 12.6 ...... 3.%37.5% 37.5% ...... 7.8 7.8 ...... 5.%51.4% 51.4% ...... 79 57.9% 57.9% 971998 1997 Rates ontaxableincome 47.7% 11.6 34.5% 53.2% 1999 7.1 SEGA Enterprises, Ltd. 25 Thousands of 541 11 91 64 531 3830 315 249 2660 216 498 11 91 —— —— —— —— —— 100721103 829 5,981 854 101 838 709 5,881 255 2,115 100173 830 1,435 169240490 1,402 1,991 4,065 476 3,949 257365 2,132 3,028 126255250 1,045 2,115 2,074 1999 1999 5,031 41,734 1,4374,930 11,920 40,896 1,470 12,194 1,870 15,512 40,000 331,813 15,798 131,049 ¥90,685 $752,260 ¥15,014 $124,546 Millions of yen U.S. dollars 38 60 — ,246 ¥73,372 . Ltd. in the amount of ¥2,014 million. The loss recognized 0 100 0 709 9 255 on-consolidated statements of operations. .4 1,470 .0 ¥15,014 .0 257 00.0 100 100.0 101 Percentage of ownership 1998 . 63.0 65 ..... — 25 ..... — 120 ...... 100.0 8,605 ...... 50.0 — ...... 86.0 2,014 (*2) (*3) (*1) ...... — 40,000 ...... — — (*4) (*4) Advances...... — 8 Investment in capital stock...... 29.0 30 Advances Advances...... — — Advances...... — 1 Investment in capital stock...... 50.0Investment in capital stock 200 Investment in capital stock Advances SEGA Enterprises, Inc. (U.S.A.) SEGA Amusements Taiwan Ltd. SEGA Amusements Taiwan ...... SEGA Singapore Pte. Ltd...... B.V.SEGA International Finance ...... 75.0Nextech Co., Ltd...... 100.0 100.0 1 475 103 11 SI Co., Ltd...... Electronics 100. SIMS Co., Ltd...... SEGA Europe Ltd...... 100 Other ...... Amusement World of Vietnam Corporation...... SEGA Lease Co., Ltd. 30.0 38 Lotte SEGA Co., Ltd...... 50. SEGA Logistics Service Co., Ltd...... Super Merge Corporation Sdn. Bhd...... Hyundai Sega Entertainment Co., Ltd...... 50.0SEGA Muse Ltd...... 20.0 25.0 46. 100 437 173 SEGA Digital Communication Co., Ltd...... SEGA Music Networks Co., Ltd. 35.0SG MEDIA Co., Ltd...... SEGA Soft Networks, Inc. 140 20.0 Light Printing Co., Ltd...... 33 Linguaphone Japan Ltd...... 24.6 — Other ...... SEGA Huahan Culture Entertainment Co., Ltd...... SEGA TOYS, Ltd. (formerly SEGA Yonezawa Co., Ltd.) ...... SEGA Enterprises (Australia) Pty. Ltd. 80.0 100.0 240 — Cross Products Ltd...... 100 Atlus Dream Entertainment Co., Ltd...... — 76 SEGA Distribution Australia Pty. Ltd...... SEGA Food Works Co., Ltd...... S.G.S. Co., Ltd...... 100.0 51.0 365 5 OASIS Park Co., Ltd...... Eighty-one Entertainment Co., Ltd...... SEGA of America, Inc. 63.8 61.4 — During the year ended March 31, 1999, the Company increased investments in SEGA Enterprises, Inc. (U.S.A.). During the year ended March 31, 1999, the Company purchased shares of SEGA Soft Networks, Inc. Advances to SEGA of America, Inc. and SEGA Enterprises (Australia) Pty. Ltd. are fully reserved. During the year ended March 31, 1999, the Company wrote off the investment in capital stock of SEGA Enterprises (Australia) Pty During the year ended March 31, 1999, the Company wrote off the investment in capital stock of SEGA Enterprises (Australia) ...... (*2) (*3) (*4) (*1) Subsidiaries: 8. INVESTMENTS IN AND ADVANCES TO SUBSIDIARIES AND AFFILIATES TO SUBSIDIARIES IN AND ADVANCES 8. INVESTMENTS 1998 and 1999, were as follows: to subsidiaries and affiliates as of March 31, Investments in and advances as a result of the write-off is ¥2,014 million, which is included in “Loss on dissolution of a subsidiary” in the accompanying n Affiliates: SEGA Enterprises, Ltd. 26 tthecurrentconversionpriceof¥4,156.60pershare. at bonds areconvertibleintosharesofcommonstocktheCompany September 7,1995,intheprincipalamountof¥30,000million.The conversion priceof¥7,726.10pershare. vertible intosharesofcommonstocktheCompanyatcurrent 1994, intheprincipalamountof¥100,000million.Thebondsarecon- shareholders’meeting, butisnotavailablefordividend payments. a Board ofDirectorsorusedtoreduceadeficit byaresolutionof of the stock. Thisreservemaybetransferred tocommonstockbyaresolution legal reserveuntilsuchequals 25%oftheamountcommon cers, etc.)paidoutofretainedearnings shouldbeappropriatedtothe least 10%ofcashdistributions(cash dividendsandbonusestooffi- The JapaneseCommercialCodestates thatanamountequaltoat 11. LEGALRESERVEANDAPPROPRIATIONOFRETAINEDEARNINGS benefits,” whichbecamenolongernecessaryduetothechange,is government pensionprogram. whereby thepensionfundhasbeensubstitutedforaportionof trust fund,pursuanttothewelfarepensioninsurancelawsinJapan, contributory pensionprogramwhichwasestablishedasa Company transferred100%oftheretirementbenefitstoaseparate of serviceandwhethertheretirementisvoluntaryorinvoluntary. benefits aredeterminedbyreferencetothelatestrateofpay,length Company’s retirementbenefitplan.Theamountsofsuch lump-sum paymentsorpensionuponretirementunderthe The employeesoftheCompanyaregenerallyentitledtoreceive 10. RETIREMENTPLANANDSEVERANCEINDEMNITIES Other long-termdebt...... 2.15% unsecurednotesdue2001 ...... 2.00% unsecurednotesdue2001 Long-term debtatMarch31,1998and1999,consistedofthefollowing: 9. LONG-TERMDEBT Zero-coupon convertiblediscountbondsdue1999...... 2.27% unsecurednotesdue2002 Unsecured loans,frombanks: ...... 0.40% convertiblebondsdue2006 Zero-coupon convertiblebondsdue2003...... Zero-coupon convertiblebondsdue1999...... 0.55% convertiblebondsdue2000 ...... Less portionduewithinoneyear...... The zero-couponconvertiblebondsdue1999wereissuedon The 0.55%convertiblebondsdue2000wereissuedonJune24, As aresult,thebalanceof“Accruedemployees’retirement GroupCompanies,the In November1993,togetherwiththeSEGA u 01t 02wt neetrnigfo .0 o19%pranm...... — Due 2001to2002withinterestrangingfrom1.80%1.92%perannum...... conversion priceof¥2,285pershare. vertible intosharesofcommonstocktheCompanyatcurrent 1999, intheprincipalamountof¥30,000million.Thebondsarecon- thecurrentconversionpriceof¥2,285pershare. at bonds areconvertibleintosharesofcommonstocktheCompany February 17,1999,intheprincipalamountof¥50,000million.The Board ofDirectorsandtheshareholders. disposition ofsuchappropriationsshall beatthediscretionof “Voluntary reserves”intheaccompanying financialstatements.Any various purposes,theaccumulatedbalance ofwhichispresentedas shareholders, hasmadeannualappropriations ofretainedearningsfor such paymentstodirectorsandcorporateauditorsonanaccrualbasis. for employees’payments.TheCompanyhasprovidedareserve holders. Theamountsaredeterminedonabasissimilartothatused upon retirementwiththeapprovalofageneralmeetingshare- pany makeslump-sumpaymentstoadirectororcorporateauditor has nolegalobligation,asiscustomarypracticeinJapan,theCom- million ($13,654thousand),whicharebeingamortizedover20years. costs ofthepensionplanarebeingamortized. being amortizedtoincomeoveraperiodforwhichthepastservice ...... The 0.40%convertiblebondsdue2006wereissuedonFebruary17, The zero-couponconvertiblebondsdue2003wereissuedon The Company’sBoardofDirectors,with subsequentapprovalbythe With respecttodirectorsandcorporateauditors,whiletheCompany As ofMarch31,1999,thepastservicecostsamountedto¥1,646 ...... 1,213 ...... 19,897 ...... — ...... ¥ ...... — ...... — ...... 94,339 ...... — 29,371 ...... 19,897 ... ¥124,923 0000 144,820 1998 — iloso e U.S.dollars Millions ofyen 2625$1,793,986 ¥216,265 ¥ 4,3 2,037,628 245,636 0 931243,642 29,371 00082,953 $ 10,000 10,000 996248,826 733,737 29,996 88,452 405365,782 243,642 44,095 29,371 700223,973 27,000 ,2 14,285 1,722 ,0 41,477 5,000 991999 1999 —— Thousands of 0,0 82,953 SEGA Enterprises, Ltd. 27 877,453 859,527 0, 0, Thousands of Thousands of s follows: tee to SEGA of 44 365 —— 914749 7,582 6,213 1999 1999 1999 1999 1,966 16,309 18,86087,943 156,449 729,515 66,978 555,603 16,571 137,462 ¥58,743 $487,291 124,637 1,033,902 ¥105,777 $ ¥103,616 $ ¥214,546 $1,779,726 ¥170,594 $1,415,130 Millions of yen U.S. dollars Millions of yen U.S. dollars 085 6 36,710 1997 1998 1997 1998 262,636 176,265 ¥250,010 ¥139,555 ¥359,930 ¥271,475 ¥285,146 ¥216,596 ...... 900 51 1,068 83 Provision for doubtful accounts for the year ended March 31, 1999, ...... and software for consumer products and amusement machine products and a loss of write-off of prepaid development costs for certain software. SEGA Enterprises (Australia) Pty. Ltd. and losses on the discontinua- tion of operations in Australia. included the write-down of loans from affiliated companies (SEGA Enterprises (Australia) Pty. Ltd. and SEGA Music Networks Co., Ltd.) amounting to ¥6,400 million ($53,090 thousand). Product sales...... Revenues from amusement center operations...... Revenues from amusement 88,191 90,958 Cost of amusement center operations ...... 58,113 65,224 Merchandise sales...... 12,62 Royalties on game software...... 9,103 4,252 Cost of products and merchandise sold ...... ¥227,033 ¥151,372 ...... 17. LOSS ON RESERVE FOR GUARANTEED OBLIGATION 16. PROVISION FOR DOUBTFUL ACCOUNTS Loss on write-down or disposal of inventories of ¥11,495 million for the year ended March 31, 1999, represents a valuation loss on hardware 15. LOSS ON DISSOLUTION OF A SUBSIDIARY Sales to subsidiaries and affiliates (merchandise) ...... Revenues from amusement center operations...... Royalty income...... 101Interest income ...... 54 affiliatesGain on sales of investments in subsidiaries and ...... 120 4,416 INVENTORIES 14. LOSS ON WRITE-DOWN OR DISPOSAL OF 46 — Loss on dissolution of a subsidiary of ¥5,014 million for the year ended March 31, 1999, represents a valuation loss on the investment in Provision for doubtful accounts for the year ended March 31, 1998, represented the write-down of loans from an affiliated company (SEGA Inc.). of America, Sales to subsidiaries and affiliates (products) ...... ¥147,608 ¥82, 13. RELATED PARTY TRANSACTIONS parties for the years ended March 31, 1997, 1998 and 1999, are summarized a The Company’s significant transactions with related Net sales: 12. ANALYSIS OF NET SALES AND COST OF SALES 12. ANALYSIS OF NET follows: ended March 31, 1997, 1998 and 1999, is as net sales and cost of sales for the years The breakdown of the Company’s Loss on the reserve for guaranteed obligation for the year ended March 31, 1999, represented the estimated loss from the guaran Loss on the reserve for guaranteed obligation for the year ended March 31, 1999, represented the America, Inc.’s bank loan. Cost of sales: SEGA Enterprises, Ltd. 28 ed theportionofinterestthereon,issummarizedasfollows: Buildings: More thanoneyear...... Within oneyear...... Interest expense...... Depreciation ...... Lease payment Future leasepayments: Amusement machines: Finance leasecontractswithoutownershiptransferasofandfortheyearsendedMarch31,19981999,aresummarizedfol 18. COMMITMENTSANDCONTINGENTLIABILITIES 31, 1998and1999,aresummarizedasfollows: Others: 1999, aresummarizedasfollows: ...... Lease paymentandthecalculatedamountsrelevanttodepreciationinterestexpenseforleasedpropertiesyears More thanoneyear...... The amountofoutstandingfutureleasepaymentsforfinanceleaseswithoutownershiptransferdueatMarch31,1998and1999,w ...... Book value ...... Accumulated depreciation ...... Book value ...... Accumulated depreciation Acquisition cost...... Book value ...... Accumulated depreciation Within oneyear...... Acquisition cost...... Calculated amountsrelevanttotheacquisitioncost,accumulateddepreciationandbookvalueofleasedpropertiesasMarch3 The amountofoutstandingfutureleasepaymentsfornon-cancellableoperating leasesatMarch31,1999,issummarizedasfollow Acquisition cost...... 2,185 ...... ¥4 $1,161 ¥140 ...... 324 ...... ¥2,478 ...... ¥1,933 ...... ¥2,237 ...... ¥1,133 ...... 6 1,377 166 ...... ¥3,517 ...... ¥3,164 ...... ¥3,691 ...... ¥2,057 ...... 3,538 ...... (1,758) ...... (1,280) ...... (2,031) ...... ¥5,595 1998 1998 1998 iloso e U.S.dollars Millions ofyen iloso e U.S.dollars Millions ofyen U.S.dollars Millions ofyen U.S.dollars Millions ofyen 205$17,296 ¥2,085 283$23,998 ¥2,893 544$45,409 ¥5,474 252$21,087 ¥2,542 320$27,291 ¥3,290 $12,518 ¥1,509 ¥ 198$16,325 ¥1,968 575$47,988 ¥5,785 245 (20,697) (2,495) (8,569) (1,033) (12,692) (1,530) ,8 28,113 3,389 0, ,4 21,136 2,548 36$2,538 ¥306 991999 1999 991999 1999 1999 1999 3 $ 438 0 2,505 302 lows. ended March 1, 1998and s: hich includ- Thousands of Thousands of Thousands of Thousands of 0 3,633 SEGA Enterprises, Ltd. 29 27,540 50,021 0 (0 Thousands of Thousands of roved by the 5,931 49,200 3,320 $ 6,030 $ 0 (0 ¥23,124 $191,821 Millions of yen U.S. dollars Millions of yen U.S. dollars ...... ¥(32,079) $(266,105) ...... 271...... 2,340 2,248 19,411 ...... 9 75 ...... 205 1,701 ...... 10...... 83 ¥ ...... 2,374 19,693 ...... 262 2,173 ...... 707 5,865 ...... ¥ ...... 4,580 37,993 ...... 2,611 21,660 ...... 468 3,882 ...... 45 373 ...... 60 498 ...... 38,000 315,222 ...... 237 1,967 ...... 5,473 45,400 ...... 197 1,634 ...... 2,354 19,527 ...... 123 1,020 ...... employees. As a result, 706 employees accepted this program from May 7, 1999, to June 18, 1999. The Company will recognize ¥2,038 million ($16,906 thousand) of special termination costs in the next fiscal year. option plan for certain directors and employees. Under the plan, options for 127,000 shares and 317,000 shares of common stock of the Company would be granted to 9 directors and 318 employees, respectively. These new options to be granted will be exercisable at an price of 105% of the average market price for the month exercise immediately preceding the date of grant over a period from July 30, 1999, through June 30, 2002. The exercise price will be subject to adjustments if there are stock splits or additional shares issued for less than the ongoing market price. Total appropriations...... Cash dividends (¥39 per share)...... SEGA Enterprises, Inc. (U.S.A.) ...... The Company was contingently liable for obligations of others as of March 31, 1999, as follows: as of March 31, 1999, for obligations of others was contingently liable The Company Transfer to legal reserve...... SEGA Lease Co., Ltd...... SEGA Gameworks, L.L.C...... Cross Products Ltd...... SEGA of America, Inc...... Co., Ltd. Eighty-one Entertainment ...... SEGA Enterprises, Inc. (U.S.A.) ...... SEGA Europe Ltd...... Ltd. SEGA Amusements Europe ...... Premier Loisir France S.A...... TRILOGY Corporation ...... TOWA JAPAN CO., LTD...... Atlus Dream Entertainment Co., Ltd.Atlus Dream Entertainment ...... Premier Loisir France S.A...... SEGA Amusements Europe Ltd...... Appropriations: 20. STOCK OPTION PLAN (1) At the General Meeting of Shareholders held on June 26, 1998, the shareholders of the Company approved a stock option plan for certain directors and employees. Under the plan, options for 130,000 shares and 305,000 shares of common stock of the Company were granted to at March 31, 1999. 9 directors and 161 employees, respectively, All are exercisable at an exercise price of ¥2,835 from July options 1, June 30, 2002. The exercise price will be subject 1999, through to or additional shares issued adjustments if there are stock splits for less than the ongoing market price. (2) In addition, at the General Meeting of Shareholders held on June 29, 1999, the shareholders of the Company approved another stock Retained earnings to be carried forward...... General Meeting of Shareholders held on June 29, 1999, are as follows: General Meeting of Shareholders held on June 29, Accumulated deficit as of March 31, 1999...... Reversal of special tax-purpose reserves...... Reversal of voluntary reserves...... 19. SUBSEQUENT EVENTS Appropriations of Retained Earnings of the year ended March 31, 1999, proposed by the Board of Directors and app The appropriations of retained earnings in respect Early Retirement Program In order to reduce costs and improve productivity and asset utilization, the Company offered a voluntary early retirement program to its Guarantee of lease rental obligations for: Guarantee of lease rental Guarantee of obligations to banks for: Guarantee of obligations Other guarantee or commitment for: REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON THE NON-CONSOLIDATED FINANCIAL STATEMENTS

To: The Board of Directors of SEGA Enterprises, Ltd.

We have audited the accompanying non-consolidated balance sheets of SEGA Enterprises, Ltd. as of March 31, 1998 and 1999, and the related non-consolidated statements of operations, shareholders’ equity and cash flows for each of the three years in the period ended March 31, 1999, all expressed in Japanese yen. Our audits were made in accordance with auditing standards, procedures and practices generally accepted and applied in Japan and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances. In our opinion, the non-consolidated financial statements referred to above present fairly the non-consolidated financial position of SEGA Enterprises, Ltd. at March 31, 1998 and 1999, and the non-consolidated results of its operations and its cash flows for each of the three years in the period ended March 31, 1999, in conformity with accounting principles and practices generally accepted in Japan (see Note 1) consistently applied during the periods. The amounts expressed in U.S. dollars, provided solely for the convenience of the reader, have been translated on the basis set forth in Note 3 to the accompanying non-consolidated financial statements.

Tokyo, Japan June 29, 1999

Chuo Audit Corporation Independent Certified Public Accountants SEGA Enterprises, Ltd. 30 SEGA Enterprises, Ltd. 31 (25,691) U.S. dollars 0, Thousands of U.S. Thousands of U.S. 47 390 —— —— —— —— —— —— —— —— —— Yen (Note 5) 342 2,837 230 1,908 1999 1999 1999 1999 39.0 0.32 (436) (3,617) (974) (8,080) (401) (3,326) (550) (4,562) (686)(723) (5,691) (5,998) 1,313 10,892 2,088 17,321 2,378 19,726 (2,175) (18,042) (8,499)(1,436)(1,330) (70,502) (11,912) (11,033) (6,379) (52,916) (3,097) $ (1,366) (11,331) (3,925) (32,559) 62,287 516,690 10,573 87,707 10,343 85,799 41,685 345,790 64,375 534,011 (11,497) (95,371) ¥(425.3) $(3.53) (43,223) (358,549) (34,738)(32,650) (288,163) (270,842) (42,881) (355,712) 0 201,819 1,674,152 ¥ ¥266,194 $2,208,163 Millions of yen dollars (Note 5) 993) 1998 1998 (638) 3,165 4,982 (6,340) 41,685 (19,660) 0 d for the year after the adjustment for dilution. .. (14,347) .. 510 ... (686) ..... (16,495) ..... — ...... 270,710 ...... 1,088 ...... (2,148) ...... 1,913 ...... (346) ...... (395) ...... 76,669 ...... — ...... (3,824) ...... ¥331,605 ...... ¥(354.1) ...... (2,553) ...... (3,719) ...... 60,895 ...... 38.0 ...... ¥ ...... (35,635) ...... 1,705 ...... 5,718 ...... (Note 2 (2))...... (4,495) ...... 339 For the years ended March 31, 1998 and 1999 March 31, 1998 years ended For the ...... 63,043 SEGA Enterprises, Ltd. and Consolidated Subsidiaries and Consolidated Ltd. SEGA Enterprises, (Note 2 (1))...... (11,819) ...... CONSOLIDATED STATEMENTS OF OPERATIONS AND (ACCUMULATED DEFICIT) RETAINED EARNINGS RETAINED DEFICIT) (ACCUMULATED AND OPERATIONS OF STATEMENTS CONSOLIDATED Operating income (loss)...... Bonuses to directors and corporate auditors ...... (133) Transfer from legal reserve ...... Net loss...... Total other income (expenses) ...... Gross profit ...... Loss before income taxes...... (Decrease) increase due to additional consolidation of subsidiaries ...... Increase due to equity method of affiliates (net)...... Increase due to tax effects (Note 2 (4))...... 21 Cash dividends paid...... — Transfer to legal reserve ...... Interest expense ...... Net loss—basic...... Loss on write-down or disposal of inventories (Note 3)Loss on write-down or disposal ...... of property and equipmentLoss on sale or disposal ...... Loss on dissolution of a subsidiary (Note 4) ...... — (477) Interest and dividend income ...... Net income—diluted*...... Cash dividends...... Other, net...... Deferred (Note 2 (4))...... Current ...... Balance at beginning of year...... Loss on valuation of investment securities...... and affiliates...... Loss on valuation of investments in subsidiaries Loss on valuation of cash trust for investments ...... and affiliates...... Loss on sale or disposal of operations in subsidiaries (321) (3, Gain on sales of investment securities ...... (2,780) Net gain on foreign exchange ...... Amortization of discounts on bonds...... Amortization of bond and note issue expenses ...... and affiliates (Note 2 (2))...... Equity in losses of non-consolidated subsidiaries Provision for doubtful accounts...... (263) — of Consolidated Subsidiaries Acquired ...... Per Share: The accompanying notes are an integral part of these statements. * Diluted net loss per share was not disclosed for the years ended March 31, 1998 and 1999, as net loss per share was calculate Balance at end of year...... Equity in Losses of Non-Consolidated Subsidiaries and Affiliates Equity in Losses of Non-Consolidated Subsidiaries Net Sales Cost of Sales Expenses Selling, General and Administrative Other Income (Expenses): Minority Interests in Earnings of Consolidated Subsidiaries Minority Interests in Earnings of Consolidated Net Assets Amortization of Excess Investment Costs over Income Taxes: (Accumulated Deficit) Retained Earnings: SEGA Enterprises, Ltd. 32 Property andEquipment: The accompanyingnotesareanintegralpartof thesestatements. Translation Adjustment Current Assets: ASSETS Excess InvestmentCostsoverNetAssetsofConsolidatedSubsidiaries Acquired Deferred Tax—Non-Current Deferred ChargesandIntangibleAssets Fixed LeaseholdDeposits Investments andAdvances: ...... ad...... Land 8,67 ...... Deferred incometaxes—current(Note2(4)) Prepaid expenses...... Inventories Buildings andstructures...... Amusement machinesandfacilities Construction inprogress...... Less accumulateddepreciation...... Machinery andequipment...... Other investments ...... Other currentassets Less allowancefordoubtfulaccounts...... ah...... Cash netet nadavne onncnoiae usdaisadaflae Nt 2)..... 11,350 Investments inandadvancestonon-consolidatedsubsidiariesaffiliates(Note2(2))...... Investments insecurities...... Notes andaccountsreceivable: Short-term investments...... Time deposits te ...... Other o-osldtdsbiire n fiits...... 26,043 ...... Non-consolidated subsidiariesandaffiliates Trade...... oa rpryadeupet...... 89 ...... Total propertyandequipment 37,5 Total investmentsandadvances...... Total currentassets...... oa ses...... Total assets Nt 3)...... 7,533 (Note 2(3))...... 22,618 ...... Nt 4)...... 2,942 ...... (Note 2(4)) ...... 9,561 ...... SEGA Enterprises,Ltd.andConsolidatedSubsidiaries CONSOLIDATED BALANCESHEETS March 31,1998and1999 ...... 22,632 ...... ¥ ...... 44,683 ...... 13,603 ...... 27,807 ...... 8,540 ...... 12,182 ...... 1,067 ...... 3,261 ...... 54,401 ...... 126 ...... 22,920 ...... 1,427 ...... 14,503 ...... 29,035 ...... 197,588 ...... ¥368,963 ...... (92,783) ...... (1,918) .. 76,352 . 159,788 0 67,453 67,005 65,535 42,403 ,763 1998 31 5 iloso e dollars(Note5) Millions ofyen 1078$ ¥100,708 4564$3,530,601 ¥425,614 1101 (838,415) (101,071) 5,0 1,312,376 158,207 5,7 2,122,555 255,874 432368,163 44,382 269187,715 22,629 128,743 510,825 15,520 61,580 716473,961 57,136 354,144 42,692 311441,153 614,641 53,181 74,095 652303,542 36,592 091256,582 30,931 227184,380 22,227 990663,128 79,940 731143,517 204,247 17,301 24,622 410117,545 211,630 14,170 25,512 549211,356 25,479 160 (14,019) (1,690) ,0 38,988 4,700 ,7 23,850 2,875 ,6 71,016 8,561 ,8 59,610 7,186 ,8 14,815 1,786 ,7 59,552 7,179 ,2 58,233 7,020 991999 1999 7 1,452 175 3 7,781 938 —— Thousands ofU.S. 0, 835,404 SEGA Enterprises, Ltd. 33 142,298 0, Thousands of U.S. Thousands of U.S. 650 (1) (8) (23) (191) 598125 4,961 1,037 148 1,228 734 6,089 1999 1999 4,816 39,950 6,682 55,429 3,397 28,178 (3,097) (25,691) 29,371 243,642 52,957 439,295 80,641 668,942 42,109 349,307 41,653 345,525 17,154 $ 59,639 494,724 14,317 118,764 214,668 1,780,738 124,618 1,033,745 0 220,207 1,826,686 ¥ ¥425,614 $3,530,601 Millions of yen dollars (Note 5) 97 1998 12,655 57,167 0 . 44,063 .. 122,047 .... 19,897 .... 128,450 ..... 746 ...... 118,183 ...... 38,700 ...... ¥ ...... 4,783 ...... 14,792 ...... 8,143 ...... 124,511 ...... (3) ...... 54,566 ...... 2,601 ...... 3,066 ...... 283 (Note 7) Total liabilities and shareholders’ equity...... ¥368,963 Total shareholders’ equity...... Total long-term liabilities ...... Total current liabilities ...... 103,219,703 shares at March 31, 1998 and 1999, respectively ...... 39,154 Trade...... Authorized—200,000,000 shares at March 31, 1998 and 1999 Issued, par value ¥50 per share—100,633,718 shares and Other ...... Accrued employees’ retirement benefits ...... auditorsAccrued retirement benefits for directors and corporate ...... 5 276 Long-term debt ...... Current portion of convertible bonds...... Current portion of convertible Current portion of long-term debtCurrent portion of long-term ...... Notes and accounts payable: Additional paid-in capital ...... Common stock: (Accumulated deficit) retained earnings ...... Short-term bank loans ...... Treasury stock...... Other ...... Other current liabilities...... Accrued expenses...... Income taxes payable...... Unrealized (loss) gain on available-for-sale securities ...... 133 ...... Long-Term Liabilities: Minority Interests in Consolidated Subsidiaries Commitments and Contingent Liabilities Shareholders’ Equity: Current Liabilities: LIABILITIES AND SHAREHOLDERS’ EQUITY LIABILITIES AND SHAREHOLDERS’ SEGA Enterprises, Ltd. 34 ettheconsolidatedfinancialpositionandresultsofoperations sent reclassified fortheconvenienceofreadersoutsideJapan. filed withtheMinistryofFinance(the“MOF”)inJapanhavebeen InternationalAccountingStandards. of certainrespectsastoapplication anddisclosurerequirements in ples andpracticesgenerallyacceptedinJapan,whicharedifferent Japanese CommercialCodeandinconformitywithaccountingprinci- “Companies”) inaccordancewiththeprovisionssetforth “Company”) anditsconsolidatedsubsidiaries(collectively,the pared fromtheaccountsmaintainedbySEGAEnterprises,Ltd.(the The accompanyingconsolidatedfinancialstatementshavebeenpre- (1) AccountingPrinciples 1. BASISOFPRESENTINGTHECONSOLIDATEDFINANCIALSTATEMENTS The consolidatedfinancialstatementsarenotintendedtopre- Certain itemspresentedintheconsolidatedfinancialstatements NOTES TOTHECONSOLIDATEDFINANCIALSTATEMENTS SEGA Enterprises,Ltd.andConsolidatedSubsidiaries For theyearsendedMarch31,1998and1999 n CSKCorporation. and outstanding, otherthantheshareholdings,betweenCompany ing atsuchdates. 1998 and1999,representing20.02%19.52%ofsharesoutstand- 20,148 thousandsharesofcommonstocktheCompanyatMarch31, Corporation,Japan,whichowned The CompanyisanaffiliateofCSK (2) SignificantShareholder accepted incountriesandjurisdictionsotherthanJapan. accordancewithaccounting principlesandpracticesgenerally in There havebeennomaterialtransactionsandaccountbalances SEGA Enterprises, Ltd. 35 8 ruary 28 .4 March 31 Equity ownership n 51.0 March 31 iaia 86.0 100.0 December 31 December 31 A. 100.0 March 31 Country of at percentage ngapore 100.0 March 31 incorporation 31, 1999 March Fiscal year-end .. U.K. 100.0 February 28 ... U.K.... Japan 100.0 31 March 100.0 March 31 ...... Japan 63.0 March 31 Directly Owned 99% by SEGA France S.A. Directly Owned 100% by SEGA Consumer Products S.A. Directly Owned 100% by SGE Holding Ltd. Directly Owned 100% by SEGA Amusements France S.A. Directly Owned 100% by Premier Loisir France S.A. Directly Owned 100% by SEGA Europe Overseas Ltd. subsidiaries and 21 affiliates at March 31, 1998). The consolidated subsidiaries and 21 affiliates the accounts of the Company and 38 of financial statements include its which are listed below. subsidiaries (39 at March 31, 1998), (*9) (*10) (*11) (*6) (*7) (*8) ...... U.K. 100.0 February 28 (*2) ...... Germany 100.0 28 February ...... Hungary 100.0 February 28 ...... Spain 100.0 February 28 (*8) (*4) ...... Germany 100.0 February 28 (*10) (*7) ...... France 100.0 28 February ...... Poland France 100.0 February 28 100.0 28 February ...... Spain 100.0 February 28 (*6) (*5) (*4) ...... France 100.0 February 28 (*10) ...... Spain 100.0 February 28 ...... Czech Republic 100.0 February 28 ...... U.K. 100.0 February 28 (*6) (*8) (*4) (*2) ...... Bulgaria 100.0 February 28 ...... U.K. 100.0 February 28 ...... U.K. 100.0 February 28 (*4) (*2) ...... U.K. 100.0 February 28 ...... U.K. 100.0 February 28 (*11) ...... U.K. 100.0 February 28 ...... France 100.0 February 28 ...... U.K. 100.0 February 28 (*2) (*11) (*3) ...... U.K. 100.0 February 28 ...... U.S.A. 100.0 March 31 (*7) (*11) ...... France 100.0 February 28 (*1) ...... France 99.0 February 28 ...... France 100.0 February 28 (*11) (*8) ...... U.S.A. 100.0 February 2 (*9) (*7) (*1) ...... U.K. 100.0 Feb (*4) Premier Loisir Germany GmbH WDK Eurl SCI D’AUGNY Premier Loisir France S.A. SEGA Operations France Eurl. No cleche S.A. New Software Center Company S.L. SEGA Amusements Spain S.L. SEGA Amusements France S.A. Crystal Leisure Ltd. SEGA France S.A. SEGA Consumer Products S.A. Deith Leisure Warszawa Sp.z.o.o. Deith Leisure Bulgaria Ltd. SEGA Gesellschaft fur Videospiele GmbH Deith Leisure Hungary Kereskedelal KFT Deith Ltd. JPM Interactive Ltd. ACE Coin Equipment Ltd. SEGA ATP Europe Ltd. Deith Leisure Praha spol s.r.o. JPM International Ltd. SEGA Amusements Europe Ltd. SEGA of America, Inc. SEGA Europe Overseas Ltd. SEGA Operations UK Ltd. SGE Holding Ltd. (formerly SEGA Gaming Europe Ltd.) SGE Holding Ltd. (formerly SEGA Gaming Europe SEGA Pinball, Inc. Directly Owned 100% by SEGA Enterprises, Inc. (U.S.A.) Directly Owned 100% by SEGA Europe Ltd. Directly Owned 100% by SEGA Operations UK Ltd. Directly Owned 100% by SEGA Amusements Europe Ltd. Directly Owned 100% by Deith Ltd. Eighty-one Entertainment Co., Ltd...... (*1) (*2) (*3) (*4) Japan(*5) 61 SEGA Enterprises, Inc. (U.S.A.) ...... U.S. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES POLICIES OF SIGNIFICANT ACCOUNTING 2. SUMMARY of Consolidation (1) Scope and Principles (majority-owned companies) and The Company had 55 subsidiaries 21 at March 31, 1999 (55 affiliates (20% to 50% owned companies) SEGA Europe Ltd...... SEGA Singapore Pte. Ltd...... Si Cross Products Ltd...... SEGA Enterprises (Australia) Pty. Ltd...... SEGA Distribution Australia Pty. Ltd...... SEGA Food Works Co., Ltd...... Austral S.G.S. Co., Ltd...... Austral SEGA TOYS, Ltd...... Japa SEGA Enterprises, Ltd. 36 made onlyforthe portion relatedtoconsolidationadjustments, such taxes. Inprioryears,intraperiodallocation ofincometaxeshadbeen dated subsidiarieschangedthemethod ofaccountingforincome During theyearendedMarch31,1998, theCompanyanditsconsoli- (4) AccountingforIncomeTaxes the statementsofoperations. period forthebalancesheetsandonanaveragerate Japanese yenbasedonthecurrentexchangerateatendof were preparedintheirrespectivelocalcurrenciesandtranslatedinto The financialstatementsofnon-consolidatedforeignsubsidiaries Financial Statements (3) TranslationofForeignCurrencyDenominated closed asadeductionforlossbeforeincometaxes. subsidiaries wasincludedinotherexpenses,whichformerlydis- Statement Regulation,equityinlossesofaffiliatesandnon-consolidated the equitymethodisnotmaterial. suchinvesteesforeachfiscalyearbecausetheeffectofapplying of affiliates arecarriedatcostandnotadjustedforequityinlosses Music NetworksCo.,Ltd.forthefiscalyearendedMarch31,1999. Village EntertainmentEquipmentSalesandServicePty.Ltd.Sega Entertainment Co.,Ltd.,LotteSEGACo.SGWHolding,Inc., GmbH, SEGAMuseLtd.,SegaSoftNetworks,Inc.,Hyundai consolidated affiliates,SEGAGameworksL.L.C.,SeruDistribution The equitymethodhasbeenappliedtotheinvestmentsin9non- (2) InvestmentsinNon-ConsolidatedSubsidiariesandAffiliates theeffectsofthischangetosegmentinformation. for presented asadeductionoflossbeforeincometaxes.SeeNote6 selling,generalandadministrativeexpenses,whichwasformerly in over netassetsofconsolidatedsubsidiariesacquiredwasincluded Statement Regulation,theamortizationofexcessinvestmentcosts tized over5years. underlying equityinnetassetsarerecognizedasanassetandamor- amortized over15years. underlyingequityinnetassets arerecognizedasanassetand the alized profitsamongtheCompanieshavebeeneliminated. all significantintercompanytransactions,accountbalancesandunre- of theCompanies,havenotbeenconsolidatedwithCompanies. significant inrelationtothoseoftheconsolidatedfinancialstatements whose totalassets,netsalesandincomeintheaggregatearenot actions thattookplacebetweenthethreedifferentyear-ends. adjustments havebeenmadetotakeaccountofanysignificanttrans- with fiscalyearsendingondaysotherthanMarch31,necessary In accordancewiththeamendmentofConsolidatedFinancial The otherinvestmentsinthenon-consolidatedsubsidiariesand In accordancewiththeamendmentofConsolidatedFinancial Investments inotherconsolidatedsubsidiariesexcessofthe Investments inconsolidatedsubsidiariesEuropeexcessof For thepurposeofpreparingconsolidatedfinancialstatements, The remaining17non-consolidatedsubsidiaries(16for1998), In consolidatingtheaccountsofoverseasconsolidatedsubsidiaries (3) Valuationlossesofinventoriesarechargedtocostsales. or market,costbeingdeterminedbythefirst-in,first-outmethod. (2) Inventoriesheldbythesubsidiariesarevaluedatlowerofcost computed bythestraight-linemethod. (1) Depreciationofpropertyandequipmentheldbythesubsidiariesis dated overseassubsidiaries: from thoseappliedbytheCompany,havebeenconsoli- with suchnotes. ing consolidatedfinancialstatementsshouldbereadinconjunction the non-consolidatedfinancialstatements.Therefore,accompany- have significanteffectsthereonareexplainedinNote2ofthenotesto preparing theaccompanyingconsolidatedfinancialstatementswhich Accounting principlesandpracticesemployedbytheCompanyin Employed bytheCompany (6) OtherAccountingPrinciplesandPractices these changestosegmentinformation. taxes by¥95million($788thousand).SeeNote6fortheeffectsof ($788 thousand),respectively,andtoincreaselossbeforeincome operatingprofitby¥27million($224thousand)and¥95 and expense by¥101million($838thousand),todecreasegrossprofit tax laws.Theeffectsofthischangeweretoincreasedepreciation been shortenedinaccordancewiththe1998amendmentsofJapanese immaterial. Inaddition,theestimatedusefullivesofbuildingshave amendments ofJapanesetaxlaws.Theeffectsthischangewere method tothestraight-lineinaccordancewith1998 tures, acquiredonandafterApril1,1998,fromthedeclining-balance method ofbuildings,exceptforbuildings’improvementsandstruc- The Companyanditsdomesticsubsidiarieschangedthedepreciation (5) ChangesinAccountingPrinciples theprioryears’accounting principles. on higherby¥9,175million, comparedwiththeamountsbased were netlosswaslowerby¥4,192 million;andretainedearnings lion; endedMarch31,1998: operating losswaslowerby¥911mil- year impact ontheconsolidatedfinancialstatementsasofandfor its consolidatedsubsidiarieshasincreased. because thematerialityoftemporarydifferencesCompanyand order toachievethebettermatchingofperiodiccostagainstrevenue, cial reportingpurposesandtaxpurposes.Thechangewasmadein made foralltheitemsrelatedtotemporarydifferencesbetweenfinan- ended March31,1998,intraperiodallocationofincometaxeswas dental toconsolidationandelimination.However,duringtheyear as eliminationsofintercompanyprofitsandcertainotheritemsinci- In addition,thefollowingaccountingpolicies,whicharedifferent This changeinaccountingprinciplesresultedthefollowing SEGA Enterprises, Ltd. 37 084 3,336 (2,148) 0 Millions of yen Business segments 11 ¥ — ¥331,605 n of operations of 000 00,0 Year ended March 31, 1998 949 (1,322) 331,605 11,986 ¥ 91,979 ¥93,708 ¥368,963 0 0 operations, compared with the amounts based on the unting Policies,” the Company changed its accounting 94,521 ¥122,627 ¥ 10,250 ¥ 0 0 Sales of the Companies for the years ended March 31, 1998 and Sales of the Companies for the years ended March 65,753 ¥117,523 ¥ Consumer Amusement Amusement Eliminations hardware and software for consumer products and amusement machine prod- hardware and software for for certain software. and loss of write-off of prepaid development costs ucts, to imply that yen amounts have convenience and is not intended been or could be converted, realized or settled in dollars at ¥120.55=US$1 or at any other rate. 1999, classified byfollows: business segment, are summarized as 0 product sales center operations machine sales /corporate Total Due to this change, the recorded amount of assets was higher by ¥903 million regarding amusement machine sales. center Recorded assets were higher by ¥3,123 million regarding consumer product sales and by ¥1,850 million regarding amusement The total of recorded assets in all business segments was higher by ¥3,297 million. Capital expenditures ...... Acco * Change in accounting principles of intraperiod income tax allocation—As mentioned in Note 2 (4), “Summary of Significant 2,731 25,005 2,248 2,100 32, Intersegment sales/transfers...... Total sales...... Cost of sales and operating expenses...... 114,457 —Operating (loss) income...... 138,852 ¥ (24,395) 94,521 84,271 ¥ — 123, 111,963method regarding income taxes to fully recognize temporary differences of its subsidiaries upon consolidation. 1,322 (1,333) (1,322) 333,753 — Sales to outside customers...... ¥114,457 ¥ 6. SEGMENT INFORMATION (1) Business Segment Information in the following The Company and its subsidiaries operate principally center opera- business segments: consumer product sales, amusement tions and amusement machine sales. 5. UNITED STATES DOLLAR AMOUNTS 5. UNITED STATES DOLLAR its accounting records in yen. The dollar The Company maintains represent amounts included in the consolidated financial statements on the basis of the arithmetical results of translating yen to dollars is solely for ¥120.55=US$1. The inclusion of such dollar amounts 4. LOSS ON DISSOLUTION OF A SUBSIDIARY 4. LOSS ON DISSOLUTION 31, 1999, represented the loss on discontinuatio subsidiary of ¥8,499 million for the year ended March Loss on dissolution of a Pty. Ltd. SEGA Enterprises (Australia) 3. LOSS ON WRITE-DOWN OR DISPOSAL OF INVENTORIES WRITE-DOWN OR DISPOSAL 3. LOSS ON of inventories of ¥11,497 million Loss on write-down or disposal for on ended March 31, 1999, represents a valuation loss the year accounting principles used by the Company in prior years. Assets*...... Depreciation...... ¥ 2,486 19,239 1,564 47 2 SEGA Enterprises, Ltd. 38 ($315 thousand). ($382 thousand). oto ae n prtn xess...... 7,3 0714,9 ,8 6,1 2,6)333,753 (28,361) 362,114 2,988 years. prior 40,399 ¥ method regardingincometaxestofullyrecognize temporarydifferencesofitssubsidiariesuponconsolidation. * Changeinaccountingprinciplesofintraperiod incometaxallocation—AsmentionedinNote2(4),“SummaryofSignificantAcco ¥270,111 40,791 Assets*...... ¥ Operating (loss)income...... 277,936 ...... Cost ofsalesandoperatingexpenses Net salesto: Sales oftheCompaniesforyearsendedMarch31,1998and1999,classified bygeographicalsegment,aresummarizedasfollo (2) GeographicalSegmentInformation ($133 thousand). Significant AccountingPolicies,”thefollowingeffectswereincurredineachbusinesssegment: Due tochangesindepreciationanddisclosurefortheamortizationofexcessinvestmentcostsovernetassetsconsolidateds Capital expenditures...... Operating income(loss)...... Cost ofsalesandoperatingexpenses ...... Total sales Intersegment sales/transfers...... Sales tooutsidecustomers...... Capital expenditures ...... Depreciation Assets...... Operating income(loss)...... Cost ofsalesandoperatingexpenses ...... Total sales Intersegment sales/transfers...... Sales tooutsidecustomers...... ercain...... Depreciation Assets...... Amusement centeroperations:Operatingincomedecreasedby¥194million($1,609thousand),assets¥37($30 No othersegmentswere affectedbythechangeinaccountingprinciples ofintraperiodincometaxallocation. Due tothischange,therecordedamountofassets withinJapanincreasedby¥9,175million,comparedwiththeamountbasedont Consumer productsales:Operatinglossdecreasedby¥46million($382thousand),assets¥44($365thousand Amusement machinesales:Operatingincomedecreasedby¥306million($2,538thousand),assets¥14($116th nesgetslstases...... 2,1 ,1 ,8 996(996 — (29,906) 29,906 — 1,083 3,213 25,610 Intersegment sales/transfers...... usd utmr...... ¥6,2 ¥ ¥265,728 Outside customers...... 9,3 8363,6 ,3 6,1 2,0)331,605 (29,906) 361,511 2,132 39,665 0 28,376 291,338 342¥1,1)¥ ¥(12,415) 13,402 aa mrc uoeOhrTtlEiiain total Eliminations Total Other Europe America Japan rdc ae etroeain ahn ae croaeTotal /corporate machinesales centeroperations product sales 8,3)$ (86,935) $ 7253$7,2 7304$ $733,074 $772,526 $702,563 7754$8,5 6013$,6,2 $3,530,601 $1,367,623 $660,133 $785,251 $717,594 ( ( 306¥361¥,4 3354¥549¥368,963 ¥55,439 ¥313,524 ¥6,746 ¥23,651 13,016 513¥852¥,3 3165¥ ¥331,605 ¥2,132 ¥38,582 25,163 8,9 2,4 7,0 711 2,190,842 2,208,163 (7,101) (8,445) 679,104 741,519 729,341 772,526 789,498 702,563 osmrAueetAueetEliminations Amusement Consumer rdc ae etroeain ahn ae croaeTotal /corporate machinesales centeroperations product sales 9661434864285235,529 2,895 8,644 174,334 49,656 26511711,1 7)216,848 (75) 12,617 181,701 22,605 ot Consolidated North (040 ¥ ¥ ¥(10,480) ¥ osmrAueetAueetEliminations Amusement Consumer ( ( 656¥462¥959¥6,6 ¥425,614 264,106 ¥164,867 ¥79,579 (856) 266,194 (1,018) ¥94,662 81,866 89,390 86,506 87,922 ¥ 93,128 ¥88,372 95,174 ¥93,128 84,694 84,694 ,4 845 — (8,445) 8,445 — — ,8 1061023928,393 26,141 349 (9) 1,042 1,521 21,016 21,904 5,986 2,725 ,1 108 — (1,018) 1,018 — — 0, 74 ¥ (734) 0 315$ 43,185 0 ,0 ¥ 5,206 , ubsidiaries asmentionedinNote2(1)and(5),“Summaryof 86 ¥ (856) unting Policies,”theCompanychangeditsaccounting ) anddepreciationincreasedby¥46million he accountingprinciplesusedbytheCompany in 7 thousand)anddepreciationincreasedby¥38million ousand) anddepreciationincreasedby¥16million 0 245$ 62,415 0,0 0 ,2 ¥ 7,524 63 155 ¥ (1,545) ¥ (603) 0,0 0,0000 Year endedMarch31,1999 Year endedMarch31,1999 00, 0000 134 $ (1,344) Year endedMarch31,1998 000 Thousands ofU.S.dollars $2,208,163 — 12 ¥ (162) ¥331,605 — ¥266,194 — Business segments Business segments ws: Millions ofyen Millions ofyen 0,0 00 0 17,321 (2,148) 2,088 SEGA Enterprises, Ltd. 39 2,088 71,445 91,585 17,321 592,659 0 266,194 00 0 0, 2,208,163 0,0 Millions of yen Millions of yen Millions of yen — ¥266,194 — $2,208,163 Thousands of U.S. dollars Thousands of U.S. dollars 1,716 ¥ Year ended March 31, 1998 14,234 $ 00 0000 Year ended March 31, 1999 Year ended March 31, 1999 Year ended March 31, 1999 Year ended March Year ended March 31, 1999 0 0000 372 ¥ 11.8% 6.4% 27.6% 3,087 $ 000, 0,00 9.0% 12.7% 5.1% 26.8% 696 ¥305,401 ¥120,213 ¥425,614 sidiaries as mentioned in Note 2 (1) and (5), “Summary of ¥24,034 ¥33,828 ¥13,583 ¥ 1,499 ¥266,194 ¥ 9.0% 12.7% 5.1% 26.8% ( 00 North America Europe Other Total North America Europe Other Total 5,774 $2,533,397 $997,204 $3,530,601 0 $199,370 $280,614 $112,675 $ North America Europe Other Total ...... 331,605 ...... ¥31,055 ¥39,108 ¥21,422 ¥ ...... North Consolidated 3,137 ¥ (3,485) ¥(1,193) ¥ 0 North Consolidated 26,023 $ (28,909) $ (9,896) $ 0 Japan America Europe Other Total Eliminations total 1,913 ¥ 19,212 3,616 1,245 — 24,073 (24,073) — 228,740 25,220 34,808 1,499 290,267 (24,073) 266,194 00 226,827 22,083 38,293 2,692 289,895 (25,789) 264,106 ¥ ¥265,707 ¥16,854 ¥22,144 ¥ ¥209,528 ¥21,604 ¥33,563 ¥ Japan America Europe Other Total Eliminations total 15,869 $ 159,370 29,996 10,328 — 199,694 (199,694) — 1,897,470 209,208 288,744 12,435 2,407,857 (199,694) 2,208,163 1,881,6010,0 183,185 317,653 22,331 2,404,770 (213,928) 2,190,842 $1,738,100 $179,212 $278,416 $12,435$ $2,208,163$2,204,123 $ $139,809 $183,691 $ Outside customers ...... Outside customers ...... Intersegment sales/transfers...... Intersegment sales/transfers...... Japan: Operating income decreased by ¥102 million ($846 thousand) and assets decreased by ¥95 million ($788 thousand). Japan: Operating income decreased by ¥102 million ($846 thousand) Europe: Operating loss increased by ¥287 million ($2,381 thousand). Other: Operating loss increased by ¥156 million ($1,294 thousand)...... Overseas sales...... Consolidated net sales ...... Ratio of overseas sales to consolidated sales ...... Overseas sales ...... Consolidated net sales...... Ratio of overseas sales to consolidated sales ...... Consolidated net sales...... Ratio of overseas sales to consolidated sales ...... 9.4% Significant Accounting Policies,” the following effects were incurred in each business segment: Significant Accounting Policies,” the following effects were incurred (3) Overseas Sales Information March 31, 1998Overseas sales of the Company for the years ended as follows: and 1999, are summarized Overseas sales ...... Operating income (loss) ...... Assets*...... of excess investment costs over net assets of consolidated sub * Due to changes in depreciation and disclosure for amortization Net sales to: Cost of sales and operating expenses...... Operating income (loss) ...... Assets*...... Net sales to: expenses...... Cost of sales and operating SEGA Enterprises, Ltd. 40 ed theportionofinterest,aresummarizedasfollows: Buildings: rized asfollows: Other: * DisclosureofthisinformationwasnotrequiredbytheConsolidatedFinancialStatementRegulation asofandfortheyearend Future leasepayments: Interest expense...... Depreciation Lease payments...... Future leasepayments: Amusement machines: Lease rentalexpenseonfinanceleasecontractswithoutownershiptransferduringtheyearsendedMarch31,1998and1999,iss 7. COMMITMENTSANDCONTINGENTLIABILITIES 31, 1998and1999,aresummarizedasfollows: ...... The amountofoutstandingfutureleasepaymentsforfinanceleaseswithoutownershiptransferdueatMarch31,1998and1999,w Acquisition cost...... Calculated amountsrelevanttoacquisitioncost,accumulateddepreciationandbookvalueofleasedpropertiesasMarch31,1 Lease paymentsandthecalculatedamountsrelevanttodepreciationinterestexpenseforleasedpropertiesyears More thanoneyear...... More thanoneyear...... Book value...... Accumulated depreciation Acquisition cost...... Book value...... Accumulated depreciation Book value...... Accumulated depreciation Within oneyear...... Within oneyear...... Acquisition cost...... The amountofoutstandingfutureleasepaymentsfornon-cancellableoperating leasesatMarch31,1999,issummarizedasfollow ...... —* ...... —* ...... ¥—* ...... ¥—* ...... ¥—* ...... ¥2,484 ...... ¥—* ...... ¥—* ...... ¥—* ...... ¥ ...... ¥2,068 ...... ,1 35,819 4,318 ...... 3,570 ...... —* ...... —* ...... —* ...... ed March31,1998. ¥5,638 1998 1998 1998 iloso e U.S.dollars Millions ofyen iloso e U.S.dollars Millions ofyen U.S.dollars Millions ofyen U.S.dollars Millions ofyen 495$41,269 ¥4,975 252$21,087 ¥2,542 347$28,511 ¥3,437 $12,518 ¥1,509 ¥ 217$17,893 ¥2,157 290$24,554 ¥2,960 563$46,645 ¥5,623 601$49,946 ¥6,021 198$16,325 ¥1,968 254 (21,435) (2,584) (8,569) (1,033) (12,692) (1,530) ,6 28,752 3,466 0, 0, ,1 21,676 2,613 991999 1999 991999 1999 1999 1999 3 $ 438 5 $ 657 0 2,538 306 ummarized asfollows. endedMarch 999 aresumma- s: hich includ- Thousands of Thousands of Thousands of Thousands of 0 0 3,633 5,450 The Company was contingently liable for obligations of others as of March 31, 1999, as follows: Thousands of Millions of yen U.S. dollars Note endorsed...... ¥147 $1,219 Guarantee of obligations to banks for: Atlus Dream Entertainment Co., Ltd...... 271 2,248 TRILOGY Corporation ...... 60 498 TOWA JAPAN CO., LTD...... 262 2,173 Other guarantee or commitment for: SEGA Lease Co., Ltd...... 197 1,634 ...... ¥937 $7,772

8. STOCK OPTION PLAN

(1) At the General Meeting of Shareholders held on June 26, 1998, the option plan for certain directors and employees. Under the plan, shareholders of the Company approved a stock option plan for certain options for 127,000 shares and 317,000 shares of common stock directors and employees. Under the plan, options for 130,000 shares of the Company would be granted to 9 directors and 318 employees, and 305,000 shares of common stock of the Company were granted to respectively. These new options to be granted will be exercisable at 9 directors and 161 employees, respectively, at March 31, 1999. All an exercise price of 105% of the average market price for the month options are exercisable at an exercise price of ¥2,835 from July 1, immediately preceding the date of grant over a period from July 30, 1999, through June 30, 2002. The exercise price will be subject to 1999, through June 30, 2002. The exercise price will be subject to adjustments if there are stock splits or additional shares issued for adjustments if there are stock splits or additional shares issued for less than the ongoing market price. less than the ongoing market price. (2) In addition, at the General Meeting of Shareholders held on June 29, 1999, the shareholders of the Company approved another stock

9. SUBSEQUENT EVENT

In order to reduce costs and improve productivity and asset utilization, May 7, 1999, to June 18, 1999. The Company will recognize ¥2,038 the Company offered a voluntary early retirement program to its million ($16,906 thousand) of special termination costs in the next employees. As a result, 706 employees accepted this program from fiscal year. SEGA Enterprises, Ltd.

41 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON THE CONSOLIDATED FINANCIAL STATEMENTS

To: The Board of Directors of SEGA Enterprises, Ltd.

We have audited the accompanying consolidated balance sheets of SEGA Enterprises, Ltd. and its consolidated subsidiaries as of March 31, 1998 and 1999, and the related consolidated statements of operations and (accumulated deficit) retained earnings for the years then ended, all expressed in Japanese yen. Our audits were made in accordance with auditing standards, procedures and practices generally accepted and applied in Japan and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances. In our opinion, except for the change in accounting method for income taxes described in the following paragraph, the consolidated financial statements referred to above present fairly the consolidated financial position of SEGA Enterprises, Ltd. and its consolidated subsidiaries at March 31, 1998 and 1999, and the consolidated results of their operations for the years then ended in conformity with accounting principles and practices generally accepted in Japan (see Note 1) consistently applied during the periods. As described in Note 2 (4) of the Notes to the Consolidated Financial Statements, SEGA Enterprises, Ltd. and its consolidated subsidiaries, during the year ended March 31, 1998, changed the method of accounting for income taxes. In prior years, intraperiod allocation of income taxes had been made only for the portion related to consolidation adjustments, such as eliminations of intercompany profits and certain other items incidental to consolidation and elimination. However, during the year ended March 31, 1998, intraperiod allocation of income taxes was made for all the items related to temporary differences between financial reporting purposes and tax purposes. The change was made in order to achieve the better matching of periodic cost against revenue, because the materiality of temporary differences of SEGA Enterprises, Ltd. and its consolidated subsidiaries has increased, and, therefore, we concur with the change as appropriate. As a result of the change, operating loss and net loss for the year ended March 31, 1998, were decreased by ¥911 million and ¥4,192 million, respectively, as compared with the previous method. Also, the effect of the change to the segment information has been described in Note 6 of the Notes to the Consolidated Financial Statements. The amounts expressed in U.S. dollars, provided solely for the convenience of the reader, have been translated on the basis set forth in Note 5 to the accompanying consolidated financial statements.

June 29, 1999 Tokyo, Japan

Chuo Audit Corporation Independent Certified Public Accountants SEGA Enterprises, Ltd. 42 SEGA Enterprises, Ltd. 43 Executive Vice President Sadahiko Hirose (As of June 29, 1999) (As of June Director Yukio Sonoyama Executive Vice President Hisashi Suzuki Director Yoshiji Fukushima Representative Director and President Shoichiro Irimajiri BOARD OF DIRECTORS BOARD Director Yasushi Akimoto Managing Director Tetsuo Takakura Executive Vice President Masahiro Aozono Representative Director and Chairman Isao Okawa SEGA Enterprises, Ltd. 44 60 WallStreet,NewYork,NY10260, U.S.A. Morgan GuarantyTrustCompanyof New York Depositary AMERICAN DEPOSITARY RECEIPTS Tel: 44-208-336-3342 Surrey KT33NL,UnitedKingdom Leigh Close,NewMalden, Unit 2,IndustrialEstate, SEGA AmusementsEuropeLtd. Tel: 44-208-336-2256 Surrey KT33NL,UnitedKingdom Leigh Close,NewMalden, Unit 2,IndustrialEstate, SEGA OperationsUKLtd. Tel: 44-208-995-3399 London W45QB,UnitedKingdom 266-270 GunnersburyAvenue, SEGA EuropeLtd. Tel: 1-415-701-6500 Suite 575,SanFrancisco,CA94103-4908,U.S.A. 650TownsendStreet, Townsend Center, SEGA Enterprises,Inc.(U.S.A.) Tel: 1-415-701-6000 Suite 650,SanFrancisco,CA94103-4908,U.S.A. 650TownsendStreet, Townsend Center, SEGA ofAmerica,Inc. PRINCIPAL SUBSIDIARIES 3,974 Number ofEmployees ¥42,109 million Paid-in Capital June 3,1960 Date ofIncorporation Sapporo, Kansai,Kyushu Branch Offices Tel: (03)5736-7111 2-12, Haneda1-chome,Ohta-ku,Tokyo144-8531 Head Office SEGA ENTERPRISES,LTD. CORPORATE DATA SEGA Enterprises, Ltd. 2-12, Haneda 1-chome, Ohta-ku, Tokyo 144-8531, Japan Tel: (03) 5736-7111 http://www.sega.co.jp/

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