ANNUAL REPORT 2015 SEGA SAMMY HOLDINGS ANNUAL REPORT 2015 SEGA SAMMY HOLDINGS The entertainment industry is currently facing major structural change as the pastimes of the young generation diversify. In response, the SEGA SAMMY Group has restructured decisively to get back on a trajectory of earnings growth and sustained long- term development. Restructuring has clarified core businesses, restructured unprofitable and underperforming businesses drastically, laid foundations for strengthening business portfolio management, and optimized personnel deployment. + Vision + Strategies + Action 2 SEGA SAMMY HOLDINGS In fiscal 2016, we expect to see some of the benefits of restructuring. However, the SEGA SAMMY Group’s reform is still under way. We will set out a clear target profile for the Group, establish strategies to achieve it, and advance measures based on these strategies steadily. For us, change is constant. ANNUAL REPORT 2015 3 [ INDEX ] the NUMBERS the GROUP Grasp the main points in business Discussion on the Group’s Past and Present result trends and in fiscal 2015 Get to know the Group’s past business results and present Business Results Highlights ......................................... 6 We explain business models and management resources from a Groupwide viewpoint as well as our track record for returns to shareholders. What Makes the SEGA SAMMY Group Tick? .............24 the MANAGEMENT TEAM The SEGA SAMMY Group: The Story So Far ..............26 Learn about the management Management Resources Creating Entertainment Value ...................................................28 team’s approach • Intellectual Properties ..............................................28 Messages from senior executives of SEGA SAMMY HOLDINGS, SEGA Holdings, and Sammy • Human Capital .........................................................30 A Message from the Chairman of • Financial Capital .......................................................34 the Board and CEO ..................................................... 12 Shareholder Value .......................................................36 A Message from Senior Managing Director ..............19 Messages from the COOs of Operating Companies Discussion on the Group’s Future (SEGA Holdings, Sammy)............................................20 Understand the Group’s strategies going forward This section gives insights into our position, opportunities, and risks as well as short-, medium-, and long-term strategies. SEGA SAMMY Group in the Big Picture .....................40 Risks and Opportunities .............................................42 The Group’s Short-, Medium-, and Long-Term Growth Strategy ............................... 44 DEFINITION OF TERMS Special Feature: “Be A Game Changer” “Fiscal 2015” refers to the fiscal year ended March 31, 2015, and other fiscal years are referred to in a corresponding manner in this annual report. —The New SEGA Group’s Growth Strategy ...............46 CAUTIONARY STATEMENT WITH RESPECT TO FORWARD-LOOKING STATEMENTS Statements in this annual report regarding the plans, estimates, beliefs, management strategies, perceptions, and other aspects of SEGA SAMMY HOLDINGS INC. (“the Company”) and its SEGA SAMMY Group Companies (“the Group”), including SEGA CORPORATION and Sammy Corporation, are forward-looking statements based on the information currently available to the Company. Forward-looking statements include, but are not limited to, those the OPERATIONAL SEGMENTS statements using words such as “believe,” “expect,” “plans,” “strategy,” “prospects,” “forecast,” “estimate,” “project,” “anticipate,” “aim,” “may,” and “might,” and words of similar meaning in Discussion on the Segments’ Future connection with a discussion of future operations, financial performance, events, or conditions. From time to time, oral or written forward-looking statements may also be included in other materials released to the public. These statements are based on management’s assumptions Find out about business segments’ and beliefs in light of the information currently available to management. The Company cautions you that a number of important risks and uncertainties could cause past, present, and future actual results to differ materially from those discussed in the forward-looking statements, and therefore you should not place undue reliance on them. You also should not assume that the Company has any obligation to update or revise any forward-looking statements, whether as a Here, we explain each business segment’s growth strategy result of new information, future events, or otherwise. The Company disclaims any such obligation. of yesterday, today, and tomorrow. Actual results may vary significantly from the Company’s forecasts due to various factors. Factors that could influence actual results include, but are not limited to, economic conditions, especially trends in consumer spending, as well as currency exchange rate fluctuations, Pachislot and Pachinko Machine Business .................52 changes in laws and government systems, pressure from competitors’ pricing and product strategies, declines in the marketability of the Group’s existing and new products, disruptions Entertainment Contents Business .............................58 to production, violations of the Group’s intellectual property rights, rapid advances in technol- ogy, and unfavorable verdicts in major litigation. Resort Business .........................................................65 [This annual report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act ESG Data ....................................................................66 of 1934, as amended.] 4 SEGA SAMMY HOLDINGS Editorial Policy of Annual Report 2015 Our business management reflects opinions obtained through dialogues with shareholders and investors. We use this valuable feedback when preparing management strategies and making management decisions. GOVERNANCE To provide a basis for further constructive dialogue, Annual Report 2015 reflects the following aims. Check out corporate governance • Organize information into Group strategies from the viewpoint of the holding company and business strategies from the viewpoint This is an overview of governance systems and a report on of each business segment fiscal 2015 initiatives and compensation. We have added • Tell a growth story linking the past, present, and future comments from an outside director. • Analyze long-term trends in management resources essential for Interview with an Outside Director ............................68 strategy implementation: personnel, intellectual properties, and financial capital Corporate Governance System ..................................70 • Illustrate industry structures and business models graphically Main Activities and Compensation in Fiscal 2015 .......74 • Identify financial risk and important society and environmental Directors, Audit and Supervisory Board Members, risk and show connectivity with strategies and Executive Officers ...............................................75 Annual Report 2015 explains the different risks and opportunities stemming from the structural characteristics of each industry and business and shows which types of society and environmental risk are important for each business. For more detailed information on FINANCIALS corporate social responsibility (CSR), please see CSR Report 2015 and the Social Responsibility section of our website. Access our financial information We analyze business results in light of long-term trends discussion points and year-on-year comparisons. To provide basic information to those reading Management’s Discussion and Analysis ....................78 our annual report for the first time as well as a Consolidated Balance Sheets .....................................86 convenient tool for institutional investors and analysts, we have prepared discussion points, Consolidated Statements of Income and discussion points which summarizes the main content of Annual Comprehensive Income ............................................ 88 Report 2015 in a compact format. Consolidated Statements of Changes in Net Assets ...89 Consolidated Statements of Cash Flows ....................91 Notes to Consolidated Financial Statements .............93 Independent Auditor’s Report ..................................133 Go Straight to the Information You Need Time series data P.6 Business model P.25 Changes since management integration P.26 Management resources P.28– Returns to shareholders P.36 Market position P.40 Risks and opportunities P.42 The Group’s strategy P.44 The new SEGA Group’s strategy P.46 Casino related P.19 Business strategies P.52– ESG risks P.57, 64, 65 Outside director P.68 Compensation of directors P.74 ANNUAL REPORT 2015 5 [the NUMBERS] | Business Results Highlights Years ended March 31 Consolidated Business Highlights Thousands of Millions of yen, unless stated otherwise U.S. dollars*1 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2015 Net sales ¥553,240 ¥528,238 ¥458,977 ¥429,194 ¥384,679 ¥396,732 ¥395,502 ¥321,407 ¥378,011 ¥354,921 $2,960,389 Gross profit 229,011 203,079 120,403 119,092 138,867 166,055 161,663 116,938 147,970 134,876 1,125,004 Selling, general and administrative (SG&A) expenses 109,867 126,548 126,232 110,728 102,154 97,304 103,279 97,865 109,437 117,267 978,125 Operating income (loss) 119,144 76,530 (5,829) 8,363 36,712 68,750 58,384 19,073 38,533 17,609 146,878