ANNUAL REPORT 2000 SEGA CORPORATION Year ended March 31, 2000 CONSOLIDATED FINANCIAL HIGHLIGHTS SEGA Enterprises, Ltd. and Consolidated Subsidiaries Years ended March 31, 1998, 1999 and 2000 Thousands of Millions of yen U.S. dollars 1998 1999 2000 2000 For the year: Net sales: Consumer products ........................................................................................................ ¥114,457 ¥084,694 ¥186,189 $1,754,018 Amusement center operations ...................................................................................... 94,521 93,128 79,212 746,227 Amusement machine sales............................................................................................ 122,627 88,372 73,654 693,867 Total ........................................................................................................................... ¥331,605 ¥266,194 ¥339,055 $3,194,112 Cost of sales ...................................................................................................................... ¥270,710 ¥201,819 ¥290,492 $2,736,618 Gross profit ........................................................................................................................ 60,895 64,375 48,563 457,494 Selling, general and administrative expenses .................................................................. 74,862 62,287 88,917 837,654 Operating (loss) income ..................................................................................................... (13,967) 2,088 (40,354) (380,160) Net loss.............................................................................................................................. (35,635) (42,881) (42,880) (403,957) Depreciation and amortization .......................................................................................... 23,336 26,141 23,945 225,577 At year-end: Total assets.................................................................................................................... 368,963 425,614 375,341 3,535,949 Total shareholders’ equity ............................................................................................. 122,047 80,641 80,725 760,480 Financial ratios: Return on average assets .......................................................................................... —% —% —% —% Return on average equity........................................................................................... —% —% —% —% Payout ratio................................................................................................................ —% —% —% —% Yen U.S. dollars 1998 1999 2000 2000 Net loss per share—basic................................................................................................. ¥(354.1) ¥(425.3) ¥(390.6) $(3.68) Cash dividends per share................................................................................................... 38.0 39.0 —— Notes: 1. U.S. dollar amounts are translated from yen, for convenience only, at the rate of ¥106.15=US$1, the exchange rate prevailing at March 31, 2000. 2. Net loss per share figures have been computed using the weighted average number of shares outstanding during each period. CONTENTS Message from the Chairman and President...................................................................... 2 Note Our Medium-Term Strategy.................................................................................................. 4 The World’s Top Creators ..................................................................................................... 8 Virtua NBA: The NBA is a trademark of NBA Properties, Inc. Review of Operations........................................................................................................... 10 F355 Challenge: F355 Challenge is a trademark of Ferrari Idea S.A. Financial Review................................................................................................................... 14 Daytona USA: Daytona USA is a trademark of International Speedway Corp. Consolidated Balance Sheets............................................................................................ 16 Sakura Wars: © Sega © RED Consolidated Statements of Operations........................................................................... 18 Shenmue: © CRI Consolidated Statements of Shareholders’ Equity ......................................................... 19 Star Wars: © & ™ Lucas Film Ltd. Consolidated Statement of Cash Flows............................................................................ 20 Notes to the Consolidated Financial Statements............................................................ 21 Report of Independent Certified Public Accountants on the Consolidated Financial Statements..................................................................... 32 Non-Consolidated Statements of Operations.................................................................. 33 Non-Consolidated Balance Sheets................................................................................... 34 Board of Directors................................................................................................................ 36 Corporate Data...................................................................................................................... 37 Effective November 1, 2000, the Company’s name was changed to SEGA CORPORATION. H2 SEGA CORPORATION founded in 1951 and incorporated in 1960, is a world leader in interactive digi- tal entertainment, engaged in the comprehensive businesses of consumer products, amusement center operations, and amuse- ment machines. To launch the products, technologies, and inter- active entertainment of tomorrow, we are centering our creative energies on interactive content. 1 MESSAGE FROM THE CHAIRMAN AND PRESIDENT Sega to Become the “World’s Number-One Network Game Service Provider” In the years ahead, we plan to focus on the three main pillars of our business: Isao Okawa •Content business: Provide interactive content focused around Representative Director, Chairman, and President network-based games, •Network service business: Offer ES to a live community, suit- ed to both narrowband and broadband telecommunication modes, and In our consumer product business and amusement business, we •Amusement business: Provide venues where customers can are constantly working to create new and innovative games to relax and enjoy something a little out of the ordinary. play, and we have won a strong position in the world of enter- In addition, we have set a vision and goal for 2003 of being tainment. Moreover, we anticipated the arrival of the Internet the “World’s Number-One Network Game Service Provider.” network era early on and have accumulated a substantial We will continue to secure revenues through our current con- library of content and technology. tent business and amusement business while moving swiftly to The arrival of the Internet is bringing changes to today’s increase revenues from our network service business, with the world in a wide range of areas, including society in general, aim of making steady progress toward recovering our position individual ways of thinking, and the way we live. as a highly profitable company. Amid this transformation, the CSK•SEGA Group has set the We look to our shareholders for their continued support and corporate goal of changing the world through Electronic encouragement. Service, which we call ES for short. We are taking full advan- tage of the know-how, experience, and sensitivities that we November 1, 2000 have accumulated to work toward meeting the desires of each and every customer principally through content and services, furnishing them with moving experiences, and providing via the network interactive services that did not exist before and that create a new dimension in the quality of life, thereby bringing a Isao Okawa new richness to their lives. Representative Director, Chairman, and President 2 Amusement Content Network 3 OUR MEDIUM-TERM STRATEGY SEGA’s major strengths are its capabilities for developing superior content, assets in the form of a vast collection of software titles, and a proven record in developing a large number of network games. We plan to use these strengths fully to attain our goal of becoming the “World’s Number-One Network Game Service Provider.” To attain this goal, we have formulated the following strategies and are implementing them aggressively. Hideki Sato Vice President 1. Platform Strategy At present, Dreamcast is the only network game console that we will proceed with the development of our business opera- has a built-in modem. In addition, its positioning and concept tions by licensing the Dreamcast architecture for multiplatform differ from those of other game consoles. use on PCs, set-top boxes (STBs), audiovisual equipment, In preparation for an era that will come soon, when the net- mobile telephones, personal digital assistants (PDAs), and other work itself will become the platform, we are making the transi- equipment. We will continue to provide software and network tion from “product provider” offering the game console to services for Dreamcast and these Dreamcast families. “format provider” offering the architecture. To accomplish this, 4 Tetsu Kayama Executive Adviser 2. Content Strategy In our content business, to become the world’s leading content In addition, network games can only be played in the present provider we will develop these operations with a content busi- environment for the most