Square Enix 2005 Annual Report Download

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SQUARE ENIX CO., LTD.
www.square-enix.com/
ANNUAL REPORT
2005
Printed in Japan
This annual re
p
ort is
p
rinted on recycled
p
a
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er.

Table of contents

  • Page 1
    SQUARE ENIX CO., LTD. www.square-enix.com/ 2005 ANNUAL REPORT Printed in Japan This annual report is printed on recycled paper.

  • Page 2
    ... economic conditions in Japan and foreign countries, in particular levels of consumer spending; [2] fluctuations in exchange rates, in particular the exchange rate of the Japanese yen in relation to the U.S. dollar, the euro and others, which SQUARE ENIX uses extensively in its overseas business...

  • Page 3
    Financial Highlights SQUARE ENIX CO., LTD. and Consolidated Subsidiaries Years Ended March 31 Millions of Yen Thousands of U.S. Dollars 2004 2005 2005 For the Year Net sales Operating income Net income ¥ 73,864 26,438 14,932 ¥ 63,202 19,398 10,993 $ 687,819 246,193 139,048 At Year-end Total ...

  • Page 4
    ... present the annual report of SQUARE ENIX for fiscal 2004, ended March 31, 2005. Fiscal 2004 was the Company's second year of business since we were formed through the merger of SQUARE CO., LTD., and ENIX CORPORATION. Consolidated net sales increased 16.9%, to ¥73,864 million; operating income rose...

  • Page 5
    ... generation of games consoles. At Electronic Entertainment Expo (E3), the world's largest video game trade show, held in Los Angeles in May 2005, Sony Computer Entertainment, Nintendo and Microsoft introduced SQUARE ENIX as one of the most important game software companies. Our presence in the video...

  • Page 6
    ...In the near future, I believe communication infrastructures will not be an issue in most countries. Progress of Terminals -Taking CPU Power as an Example- Next Generation Consoles Xbox GC PS2 N64 PS Video Game Console Handheld Game Console PC (Desktop) Mobile Phone Arcade Game Set Top Box Processor...

  • Page 7
    ...the customer. This time, however, it is different. The clichés are finally becoming a reality, and a true power shift is under way. I firmly believe the most important quality that management can possess is insight into the timing and details of structural changes. The next two to three years will...

  • Page 8
    ...our cross-platform strategy, which enables users to access content from game consoles, PCs and mobile phones anywhere. In a networked society, content providers and customers will develop content together Software Content made by game makers Community Content generated by users 6 SQUARE ENIX CO...

  • Page 9
    ... SQUARE and ENIX was a significant milestone in the structural change within the game industry. Going forward, I expect more alliances with companies outside of the game industry will happen. We appreciate your unwavering support. July 2005 Yoichi Wada President and Representative Director Annual...

  • Page 10
    ... pack "FINAL FANTASY XI: Chains of Promathia" was released in Japan and North America, while online game service "PlayOnline" and "FINAL FANTASY XI" ("FFXI") were launched in Europe. Business Segment Information Games (Offline) Fiscal year ended March 31, 2005 Millions of yen Publication Others...

  • Page 11
    ...., LTD. All Rights Reserved. ©2004 SQUARE ENIX CO., LTD. All Rights Reserved. CHARACTER DESIGN: TETSUYA NOMURA Consolidated Sales by Geographic Segment Japan Fiscal year ended March 31, 2005 Millions of yen Asia Total North America Europe Consolidated net sales Percentage of share 59,092 80...

  • Page 12
    ... and licensing of SQUARE ENIX titles' derivative products. The Company sells toys and merchandise for a wide range of ages, such as merchandise related to "DRAGON QUEST", pencils named "BATO-EN" and character goods related to "FINAL FANTASY," "Kingdom Hearts" and "FULLMETAL ALCHEMIST." The Company...

  • Page 13
    ... the last fiscal year The Company has increased the number of Board members from five to six to strengthen its decisionmaking capacity to deal with the complicated and intense management tasks. Furthermore, the Company has appointed two directors to head development, accounting and finance, thereby...

  • Page 14
    ... Yamashita Honorary Chairman Yasuhiro Fukushima Hiroshi Nakamura Auditor Toshio Maekawa Auditor *2 Akitoshi Kawazu Yosuke Matsuda Koichi Ishii Yoshinori Kitase Yosuke Saito Koji Taguchi Tamotsu Iba Auditor *2 Norikazu Yahagi *1: Outside Director *2: Outside Auditor 12 SQUARE ENIX CO., LTD.

  • Page 15
    ... statements submitted to the Director of the Kanto Finance Bureau in Japan (yukashoken hokokusho). The consolidated financial statements prepared in conformity with accounting principles generally accepted in the United States of America were audited by independent auditors. Annual Report 2005...

  • Page 16
    ... the stock market and stock in privately held companies for which share prices are difficult to calculate. In the event that the fair market value of these shares as of the end of this fiscal year ended March 31, 2005 (this "fiscal year") have declined no less than 50% of their acquisition cost, the...

  • Page 17
    ... of this increase is as follows. Cash and Time Deposits Years ended March 31 2004 2005 Millions of yen Change As a rule, content development costs for authorized productions are capitalized in the content production account until release. When the content (title) is released, this amount is then...

  • Page 18
    ... reserve is due to stock options being exercised. Sales and Operating Income Years ended March 31 2004 Composition 2005 Composition Change Millions of yen Percent change Net sales Gross profit Reversal of allowance for sales returns Provision for allowance for sales returns Net gross profit Selling...

  • Page 19
    ... FINAL FANTASY XI-Chains of Promathia into the online game market under our own brand at the same time as in the United States and Japan. However, as in the United States, we were unable to release any major titles. Sales in Europe declined ¥823 million, to ¥1,298 million. Annual Report 2005...

  • Page 20
    ... China and Asia, and are working to strengthen our operating capability. Accordingly, we will plan to dissolve our current subsidiary in China, SQUARE ENIX WEBSTAR NETWORK TECHNOLOGY (BEIJING) CO., LTD., as of December 2005. Until the dissolution of this subsidiary, we will transfer our online games...

  • Page 21
    ...The Company has established overseas consolidated subsidiaries in the United States, Europe and China. Local currency that these subsidiaries have earned is mainly used for settlements in that country or turned to local investment, and actual exchange rate risk is reduced. However, sales, costs and...

  • Page 22
    ... Sheets (JPNGAAP) SQUARE ENIX CO., LTD. and Consolidated Subsidiaries As of March 31 Millions of yen 2005 2004 Assets I Current assets 1. Cash and deposits 2. Notes and accounts receivable 3. Inventories 4. Content production account 5. Deferred tax assets 6. Other current assets Allowance for...

  • Page 23
    ... within one year 3. Other accounts payable 4. Accrued expenses 5. Accrued corporate taxes 6. Accrued consumption taxes 7. Advance payments received 8. Deposits received 9. Reserve for bonuses 10. Allowance for sales returns 11. Other Total current liabilities II Non-current liabilities 1. Allowance...

  • Page 24
    Consolidated Statements of Income (JPNGAAP) SQUARE ENIX CO., LTD. and Consolidated Subsidiaries Years ended March 31 Millions of yen 2005 2004 I Net sales II Cost of sales Gross profit Reversal of allowance for sales returns Provision for allowance for sales returns Net gross profit III Selling,...

  • Page 25
    ...) SQUARE ENIX CO., LTD. and Consolidated Subsidiaries Years ended March 31 Millions of yen 2005 2004 (Capital surplus) I Capital surplus at beginning of year II Increase in capital surplus 1. Increase due to merger 2. Gain on disposal of treasury stock 3. Shares issued through stock options III...

  • Page 26
    ... Statements of Cash Flows (JPNGAAP) SQUARE ENIX CO., LTD. and Consolidated Subsidiaries Years ended March 31 Millions of yen 2005 2004 I Cash flows from operating activities Income before income taxes Depreciation and amortization Increase (decrease) in allowance for doubtful accounts...

  • Page 27
    ...Payments for acquisition of shares in affiliates Proceeds from sale of shares in affiliates Proceeds from liquidation of shares in affiliates Proceeds from return of guarantee money paid Payments for provision of guarantee money paid Other Net cash provided by (used in) investing activities III Cash...

  • Page 28
    ...COMMUNITY ENGINE NETWORK SOFTWARE (BEIJING) CO., LTD. UIEVOLUTION, INC. FF FILM PARTNERS (partnership) SQUARE ENIX (China) CO., LTD., was established in January 2005 and has been included in the Company's scope of consolidation from this fiscal year. (2) Non-consolidated subsidiaries BMF CORPORATION...

  • Page 29
    ...-line basis Other investment securities Securities for which fair values are available: Market value, determined by the quoted market price as of the balance sheet date, with unrealized gains and losses reported as a separate component of shareholders' equity at a net-of-tax amount, and the cost...

  • Page 30
    ...pay if all eligible employees were to voluntarily terminate their employment at the balance sheet date. Effective from the current fiscal year, as the number of Company employees exceeded 300 due to the merger with SQUARE, the Company changed its accounting policy for reserve for retirement benefits...

  • Page 31
    ... merger with SQUARE and the increase in the Company's number of employees above 300. Reserve for retirement benefits for the first half were calculated using the previous method. Adjusting first-half accounts to reflect the change in accounting method, recurring profit and income before income taxes...

  • Page 32
    ... to cost of sales at the time of sale of related game products. For the fiscal year ended March 31, 2004, "Content production account" included such capitalized costs in the amount of ¥3,763 million. (Accounting for business combination) • FY2003 (April 1, 2003 to March 31, 2004) Cash and cash...

  • Page 33
    ... of consolidated subsidiary SQUARE ENIX INC., in favor of SONY COMPUTER ENTERTAINMENT AMERICA INC. As of March 31, 2005, there is no liability outstanding under the guarantee. Notes to Consolidated Statements of Income Assets Current assets Cash and deposits Accounts receivable-trade Finished goods...

  • Page 34
    ... is calculated using the straight-line method over the useful life with no residual value. • FY2003 (April 1, 2003 to March 31, 2004) Information related to finance leases other than those that transfer ownership to the lessee 1. Acquisition cost, accumulated depreciation and net book value of...

  • Page 35
    ... (1) Stocks acquisition cost exceeding book value Subtotal Total Securities with (1) Stocks acquisition cost exceeding book value Subtotal Total Note: Impairment loss on securities is charged to income when the market price at the end of the fiscal year falls less than 50% of the acquisition cost...

  • Page 36
    ... used in accounting for retirement benefit obligation Periodic allocation method for projected benefits Discount rate Years over which net actuarial gains and losses are amortized Straight-line basis 1.611 1 year • FY2004 (April 1, 2004 to March 31, 2005) 1. Overview of retirement benefit...

  • Page 37
    ... used in accounting for retirement benefit obligation Periodic allocation method for projected benefits Discount rate Years over which prior service costs are amortized Years over which net actuarial gains and losses are amortized Tax Effect Accounting Straight-line basis 1.652 1 year 1 year...

  • Page 38
    ... Segment Major Products Games (Offline) Games (Online) Mobile Phone Content Publication Others Games Online games Content for mobile phones Magazine comics, serial comics, game-related books Derivative products such as character merchandise, school for game designers 36 SQUARE ENIX CO., LTD...

  • Page 39
    ... related to administrative departments of the Company. The Company used to include cash, deposits and marketable securities in the "Eliminations or unallocated" column. However, following the merger with SQUARE, these have been allocated to each business segment in order to properly reflect business...

  • Page 40
    ... departments of the Company. [Consolidated Geographic Segment Information] • FY2003 (April 1, 2003 to March 31, 2004) Millions of yen North America Eliminations or unallocated Consolidated total Japan Europe Asia Total I Sales and operating income Net sales (1) Sales to outside customers...

  • Page 41
    ... are as follows: (1) North America ...the United States of America, Canada (2) Europe...United Kingdom, France, Germany, others (3) Asia...China, others 3. Overseas sales represent sales of the Company and its consolidated subsidiaries to countries and areas outside of Japan. Annual Report 2005 39

  • Page 42
    ... as follows: (1) North America ...the United States of America, Canada (2) Europe...United Kingdom, France, Germany, others (3) Asia...China, others 3. Overseas sales represent sales of the Company and its consolidated subsidiaries to countries and areas outside of Japan. [Related Party Transactions...

  • Page 43
    ... in the number of common shares (thousands of shares) 962 (of which new shares with acquisition rights) (962) Number of latent shares with no dilution excluded from the calculation of diluted net income per share: The issue of stock options was approved at the Company's annual general meeting...

  • Page 44
    ...Thousands of U.S. dollars 2005 2004 2005 Assets Current assets Cash and cash equivalents Accounts and notes receivable, less allowance for doubtful accounts of 262 and 227, respectively Inventories Software development costs Prepaid expenses and others current assets Deferred income taxes Total...

  • Page 45
    ...of yen Thousands of U.S. dollars 2005 2004 2005 Liabilities and Stockholders' Equity Current liabilities Accounts and notes payable: Trade Other Current portion of long-term debt Advances received Income taxes payable Accrued bonus Reserve for sales returns and price protection Accrued expenses...

  • Page 46
    Consolidated Statements of Income (U.S. GAAP) SQUARE ENIX CO., LTD. and Consolidated Subsidiaries Years ended March 31 Millions of yen Thousands of U.S. dollars 2005 2004 2003 (Unaudited) 2005 Net sales Cost of sales Gross profit Selling, general and administrative expenses Income from ...

  • Page 47
    ... U.S. dollars (except number of shares) Balance at March 31, 2004 Dividends declared Purchase of treasury stock Reissuance of treasury stock Exercise of stock option Unrealized gains on available-for-sale securities Foreign currency translation adjustments Net income Balance at March 31, 2005 110...

  • Page 48
    ...) 2005 Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Deferred income taxes Depreciation and amortization Amortization and write-off of capitalized software developments costs Write-down of investment securities...

  • Page 49
    ... in Japan, four in the United States, one in the United Kingdom, and three in the People's Republic of China. SQUARE ENIX, INC., the wholly-owned U.S. subsidiary, publishes video games, provides localization services to the Company translating Japanese content into English, provides online game and...

  • Page 50
    ...investments purchased with original maturities of three months or less to be cash equivalents. Fair Value of Financial Instruments The Company applies Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Cost of Computer Software to be Sold, Leased, or Otherwise Marketed...

  • Page 51
    ... and sales incentives related to the current period product revenue. The U.S. subsidiary analyzes historical returns, current sell-through of distributor and retailer inventory of its products, current trends in the software games business segment and the overall economy, changes in customer demand...

  • Page 52
    ... fair value based method of accounting for stock-based employee compensation. On April 1, 2003, the Company took over SQUARE's stock option plan as a result of the merger, pursuant to which, the directors, officers and employees of former SQUARE may purchase up to an aggregate of 3,330,895 shares of...

  • Page 53
    ....57 ¥3,065.08 The fair value of the Company's stock options used to compute pro forma net income and the net income per share disclosures is the estimated present value at the grant date using the Black-Scholes option-pricing model. The weighted average fair values of options granted were ¥666.56...

  • Page 54
    ... value of the Company's common stock issued in connection with this acquisition was based on the market price of the Company's common stock shortly before and after the date such proposed transaction was agreed and announced. The acquisition has been accounted for as a purchase business combination...

  • Page 55
    5. Equity Investment in the Affiliated Company The Company had an equity interest of 26.54% in DigiCube Co., Ltd., a domestic video game whole-seller devoted to the convenience store market, listed on the Hercules market of Osaka Securities Exchange, and accounted for using the equity method. ...

  • Page 56
    ... the basis of benefit. Effective April 1, 2005, the Company changed its plan policy, in which the benefit is defined as the accumulation of the product of base-pay and certain point earned in each year of service until termination. The Company adopted SFAS No. 87 "Employers' Accounting for Pensions...

  • Page 57
    ...U.S. dollars 2005 2004 2005 Change in benefit obligation: Benefit obligation at beginning of year ¥(0,983 Service cost 214 Interest cost 16 Benefit obligation transferred from acquired company - Prior service costs (101) Actuarial gains (104) Benefits paid (40) Benefit obligation at end of year...

  • Page 58
    ... of U.S. dollars 2005 2004 2005 Deferred tax assets: Software development costs ¥00,951 Accrued paid absence 134 Accrued pension costs 500 Enterprise tax payable 810 Prepaid expenses 310 Accrued bonus 416 Reserve for sales return and price protection 442 Accrued expense and other 366 Investment...

  • Page 59
    ... earnings per share computation is as follows. Millions of yen Thousands of U.S. dollars 2005 Foreign currency translation adjustments Net unrealized gain on available-for-sale securities: Unrealized gain arising during the year Less: reclassification for gain included in net income Net unrealized...

  • Page 60
    ... segment information Years ended March 31 Millions of yen Thousands of U.S. dollars The Company has five operating segments; (i) games, (ii) online games, (iii) Mobilephone Content, (iv) Publication, and (v) Others. Revenue from disc sales for Final Fantasy XI is included in the online games...

  • Page 61
    ... of yen Thousands of U.S. dollars Years ended March 31 Millions of yen Thousands of U.S. dollars Operating income 2005 2004 2003 (Unaudited) 2005 Sales from external customers Japan ¥23,961 North America 2,270 Europe 31 Asia excluding Japan 177 Corporate and elimination - Total U.S.GAAP...

  • Page 62
    Report of Independent Auditors 60 SQUARE ENIX CO., LTD.

  • Page 63
    ... temporary staff. SQUARE ENIX Group Company Name Consolidated Subsidiaries Japan The Gamedesigners Studio, Inc. Community Engine Inc. DIGITAL ENTERTAINMENT ACADEMY CO., LTD. North America SQUARE ENIX, INC. UIEVOLUTION, INC. SQUARE PICTURES, INC. Europe SQUARE ENIX LTD. Asia SQUARE ENIX (China) CO...

  • Page 64
    ... UFJ Trust and Banking Corporation. 1 2 3 4 5 6 7 8 9 10 Yasuhiro Fukushima Masashi Miyamoto Fukushima Planning Co., Ltd. Sony Computer Entertainment Inc. Japan Trustee Services Bank, Ltd. (Trust Account) The Master Trust Bank of Japan, Ltd. (Trust Account) SNFE MAC Japan Active Shareholder Fund...