Square Enix 2006 Annual Report Download

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Table of contents

  • Page 1

  • 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 2006 2005 2006 For the Year Net sales Operating income Net income At year-end Total assets Total shareholders' equity ¥213,348 120,993 ¥131,695 108,933 Yen...

  • Page 4
    ... environment and the change of the industry structure by preparing a stronger than ever product lineup. FINAL FANTASY XII and KINGDOM HEARTS II became record-setting game titles in the industry during the fiscal year under review, while the release of the computer-generated imagery (CGI)-animated...

  • Page 5
    ... is not only altering the industry's distribution structure but also transforming the business model itself. Furthermore, changes are occurring in the competitiveness of game consoles. In particular, in terms of graphics capabilities, work is the Game. thing plays Games. Annual Report 2006 02 03

  • Page 6
    ...World's Leading Community Management Company: Three Key Approaches Our goal is to become the best community management company providing the best content in the world. When I talk about "community," I do not limit it to just net-based communities, but use it to mean any group of customers that share...

  • Page 7
    ... range of lifestyles. One of the reasons we decided to bring TAITO into the SQUARE ENIX Group was the addition of amusement arcades to our existing lineup of customer entry points, which includes video game consoles, personal computers (PCs), mobile phones and magazines. Annual Report 2006 04 05

  • Page 8
    ... This may involve providing value added to third parties, who have already developed communities with strong drawing power, and helping invigorate these communities. We are confident that we can nurture such businesses to become new revenue sources. Services provided to EZ Game Street! and On Demand...

  • Page 9
    ...Suppliers' Association-Japan's video game industry body-from fiscal 2006 is also part of this contribution. Furthermore, for three years from fiscal 2006 we have secured a research base at the University of Tokyo covering intellectual property issues. We hope to utilize this research grouping as the...

  • Page 10
    ...Games (Offline), Games (Online), Mobile Phone Content, Publication, AM (Amusement) and Others. The Company has been pursuing fundamental R&D activities to obtain advanced information technologies, which are crucial to promote network-related businesses, and to apply such technologies to our products...

  • Page 11
    ...SQUARE ENIX All Rights Reserved. Consolidated Sales by Geographic Segment (Fiscal year ended March 31, 2006) (Millions of yen) Japan North America Europe Asia Total Consolidated net sales Percentage of share 104,433 83.9% 15,635 12.6% 1,378 1.1% 3,025 2.4% 124,473 100.0% Annual Report 2006...

  • Page 12
    ...include the operation of amusement centers and rental of coinoperated game machines business, the products and merchandise business, the content services business and others. Taito Group's operating results are included in the Company's consolidated statements of income from October 2005. During the...

  • Page 13
    ... DESIGN: TETSUYA NOMURA ©2005 SQUARE ENIX CO., LTD. All Rights Reserved. ©2005 SQUARE ENIX CO., LTD. All Rights Reserved. CHARACTER DESIGN: TETSUYA NOMURA FINAL FANTASY is a registered trademark of Square Enix Co., Ltd. ADVENT CHILDREN is a trademark of Square Enix Co., Ltd. Annual Report 2006...

  • Page 14
    ... needed. Accounting issues are reviewed by an independent audit firm, ChuoAoyama PricewaterhouseCoopers, under the Commercial Code of Japan and the Securities and Exchange Law. In this fiscal year, certified public accountants in charge are as follows: • Certified Public Accountants Partner staff...

  • Page 15
    ... Director *1 Yosuke Matsuda Yukinobu Chida Makoto Naruke Corporate Auditors Corporate Executives/ Executive Producers Yoichi Wada Keiji Honda Akitoshi Kawazu Yosuke...Shinji Hashimoto Masashi Hiramatsu *1: Outside Director *2: Outside Auditor Yu Miyake Koji Yamashita Annual Report 2006 12 13

  • Page 16
    ... Financial Statements (U.S. GAAP) Report of Independent Auditors 15 22 24 25 26 28 44 46 47 48 49 64 SQUARE ENIX CO., LTD., assumes full responsibility of the consolidated financial statements prepared in conformity with accounting principles generally accepted in Japan, which are the English...

  • Page 17
    ... for doubtful accounts or record bad debts and losses. Content Production Account 3. Analysis of Business Performance in Fiscal 2005 (For the year ended March 31, 2006) Note: The figures used in this analysis are for reference purposes and are based on TAITO CORPORATION (Taito) being included...

  • Page 18
    ...the current business environment. In the event that a title development project is canceled as a result of such reevaluation, the Company may write-off capitalized development costs for the canceled title in the content production account as an extraordinary loss. In the fiscal year under review, an...

  • Page 19
    ...2006 Change L ia b ilit ie s Tot al Liabilit ies Years ended M arch 31 M illions of yen Reference: Taito Common stock Capital surplus reserve Retained earnings Unrealized gain on revaluation of other investment securities Foreign currency translation adjustment Treasury stock Total shareholders...

  • Page 20
    ... sales and operating income declined. In contrast, magazine and comic book sales w ere firm, providing a stable source of income. In the Others business segment, during the fiscal year under review the success of the CGI-animated film FINAL FANTASY VII: Advent Children led to a substantial increase...

  • Page 21
    ... of unprofitable game center facilities. Adjustment loss in connection w ith advance received in mobile phone business resulted from the increase in significance of a user point program run as part of the M obile Phone Content business. This loss w as posted in relation to unused points aw arded...

  • Page 22
    ... by SQUARE ENIX, INC. In the fiscal year under review , several titles for the PS2 w ere released, including " Dragon Quest VIII: Journey of the Cursed King" and " Kingdom Hearts II." The Company's online game service PlayOnline-focused on " FINAL FANTASY XI" -performed w ell, recording membership...

  • Page 23
    ... climates, law and legal factors, cultural factors, religious factors, customs and other factors. F lu c t u a t io n o f E x c h a n g e R a t e s The Group includes consolidated subsidiaries located in North America, Europe and Asia. The risks of foreign exchange loss have been reduced as foreign...

  • Page 24
    ... s o lid a t e d B a la n c e S h e e t s (J P N G A A P ) SQUARE ENIX CO., LTD. and Consolidated Subsidiaries As of M arch 31 M illions of yen 2006 2005 A s s et s I Current assets 1. Cash and deposits 2. Notes and accounts receivable 3. Inventories 4. Content production account 5. Deferred tax...

  • Page 25
    ...ie s I Current liabilities 1. Notes and accounts payable 2. Other accounts payable 3. Accrued expenses 4. Accrued corporate taxes 5. Accrued consumption taxes 6. Advance payments received 7. Deposits received 8. Reserve for bonuses 9. Allow ance for sales returns 10. Allow ance for store closings 11...

  • Page 26
    ... f In c o m e (J P N G A A P ) SQUARE ENIX CO., LTD. and Consolidated Subsidiaries Years ended M arch 31 M illions of yen 2006 2005 I II Net sales Cost of sales Gross profit Reversal of allow ance for sales returns Provision for allow ance for sales returns Net gross profit III Selling, general...

  • Page 27
    ...A A P ) SQUARE ENIX CO., LTD. and Consolidated Subsidiaries Years ended M arch 31 M illions of yen 2006 2005 (Capital surplus) I Capital surplus at beginning of year II Increase in capital surplus 1. Gain on disposal of treasury stock 2. Shares issued through stock options III Capital surplus at...

  • Page 28
    ...A P ) SQUARE ENIX CO., LTD. and Consolidated Subsidiaries Years ended M arch 31 M illions of yen 2006 2005 I Cash flow s from operating activities Income before income taxes Depreciation and amortization Impairment loss Increase in allow ance for doubtful accounts Increase (decrease) in reserve...

  • Page 29
    ... from short-term loans Payment of short-term loans Proceeds from issuance of corporate bonds Payments for acquisition of treasury stock Payments for dividends Payments for dividends for minority interests Other Net cash provided by (used in) financing activities IV Effect of exchange rate changes on...

  • Page 30
    .... SQUARE ENIX (China) CO., LTD. SQUARE ENIX WEBSTAR NETWORK TECHNOLOGY (BEIJING) CO., LTD. COM M UNITY ENGINE NETWORK SOFTWARE (BEIJING) CO., LTD. UIEVOLUTION, INC. FF·FILM ·PARTNERS (partnership) HUANG LONG CO., LTD. BEIJING TAIXIN CULTURAL AM USEM ENT CO., LTD. TAITO KOREA CORPORATION TAITO ART...

  • Page 31
    ... date of M arch 31 are reconciled for consolidation. • FY2005 (April 1, 2005 to M arch 31, 2006) Among the Company's consolidated subsidiaries, the fiscal year of SQUARE ENIX (China) CO., LTD., HUANG LONG CO., LTD., COM M UNITY ENGINE NETWORK SOFTWARE (BEIJING) CO., LTD., BEIJING TAIXIN CULTURAL...

  • Page 32
    ... to M arch 31, 2006) A) Property and equipment Property and equipment of the Company and its domestic consolidated subsidiaries are depreciated using the declining-balance method. How ever, the straight-line method is applied to buildings (excluding building fixtures) acquired after April 1, 1998...

  • Page 33
    ...April 1, 2005 to M arch 31, 2006) Stock issuance expenses Same as FY2004 A) Corporate bond issuance expenses Costs associated w ith issuance of corporate bonds are expensed as incurred. (7) Additional accounting policies used to prepare consolidated financial statements: • FY2004 (April 1, 2004 to...

  • Page 34
    ... of impairment loss w as deducted directly from the book value of each asset in accordance w ith the amended consolidated accounting policy. R e c la s s if ic a t io n s • FY2004 (April 1, 2004 to M arch 31, 2005) The consolidated statement of capital surplus and retained earnings is prepared...

  • Page 35
    ... are classified individually. In addition, assets related to the Group's headquarters and w elfare facilities are classified as common-use assets. Since the market values for the idle assets listed above has declined severely in relation to their book values, and because it remains uncertain as to...

  • Page 36
    ...-line method over the useful life w ith no residual value. • FY2005 (April 1, 2005 to M arch 31, 2006) Information related to finance leases other than those that transfer ow nership to the lessee 1. Acquisition cost, accumulated depreciation, accumulated impairment loss and net book value of...

  • Page 37
    ... 31, 2006, the impairment loss associated w ith the fair market value determination of other investment securities w ith market value w as ¥91 million. Impairment loss on securities is charged to income w hen the market price at the end of the fiscal year falls less than 50% of the acquisition cost...

  • Page 38
    ... executive director in charge, and the Accounting and Financing Division administer the risk management. 2. M arket value of transaction Not applicable • FY2005 (April 1, 2005 to M arch 31, 2006) 1. Condition of transaction (1) Type of transaction and purpose Same as FY2004 (2) Transaction policy...

  • Page 39
    ... securities Offset to deferred tax assets (non-current assets) Total deferred tax liabilities Balance: Net deferred tax assets (liabilities) Service cost Interest cost Expected return on plan assets Amortization of prior service cost Amortization of net actuarial gains and losses Retirement benefit...

  • Page 40
    ... by each business segment: Segment M ajor Products Games (Offline) Games (Online) M obile Phone Content Publication Others Games Online games Content for mobile phones M agazine comics, serial comics, game-related books Derivative products such as character merchandise, school for game designers...

  • Page 41
    ... Others Games Online games Content for mobile phones M agazine comics, serial comics, game-related books All operations of TAITO CORPORATION, including rental operations, product and merchandise sales, and content services Derivative products such as character merchandise, school for game designers...

  • Page 42
    ... 1, 2005 to M arch 31, 2006) M illions 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 (2) Intersegment sales Total Operating expenses Operating income II Assets ¥107,354 4,316...

  • Page 43
    ... (1) North America...the United States of America, Canada (2) Europe ...United Kingdom, France, Germany, others (3) Asia...China, Republic of Korea, Taiw an, others 3. Overseas sales represent sales of the Company and its consolidated subsidiaries to countries and areas outside of Japan. [Relat ed...

  • Page 44
    ... Name of the partner company to transfer XING INC. 3. Detail of the business to transfer Selling party TAITO CORPORATION M ain operations - Operation and rental business - Product and merchandise sales - Content services - Other businesses Paid-in capital ¥16 million Shareholding ratio SQUARE ENIX...

  • Page 45
    ... Issue date Security M aturity SQUARE ENIX CO., LTD. Total Five-year yen-denominated bonds w ith w arrants November 25, 2005 (UK time) - - 50,000 50,000 - None November 25, 2010 (UK time) [Bonds w ith Warrants Issued] (As of M arch 31, 2006) Issue price 100% of face value Aggregate issue...

  • Page 46
    ...U.S. dollars 2006 2005 2006 A s s et s Current assets Cash and cash equivalents Accounts and notes receivable, less allow ance for doubtful accounts of 869 and 262, respectively Inventories Softw are development costs Prepaid expenses and others current assets Deferred income taxes Total current...

  • Page 47
    ... contingencies Stockholders' equity Common stock: No par value. Authorized 440,000,000 shares, issued and outstanding 110,547,484 and 110,234,893 shares, respectively. Additional paid-in capital Retained earnings Accumulated other comprehensive income (loss) Treasury stock, at cost, 182,139 and 150...

  • Page 48
    ...P ) SQUARE ENIX CO., LTD. and Consolidated Subsidiaries Years ended M arch 31 M illions of yen Thousands of U.S. dollars 2006 2005 2004 2006 Net sales Cost of sales Gross profit Impairment charge for goodw ill and other intangible assets Impairment losses on long-lived assets Selling, general...

  • Page 49
    ... q u it y (U . S . G A A P ) SQUARE ENIX CO., LTD. and Consolidated Subsidiaries Years ended M arch 31 M illions of yen (except number of shares) Common stock Shares Amount Additional paid-in capital Retained earnings Accumulated other comprehensive income Treasury stock, at cost Total stockholders...

  • Page 50
    ... investment securities Impairment charge for goodw ill and other intangible assets Impairment losses on long-lived assets M inority interest in earnings of consolidated subsidiaries Equity in income of an affiliated company Changes in assets and liabilities, net of effects of acquisitions: Accounts...

  • Page 51
    ... Company develops interactive games designed for video game console platforms and PCs, and publishes and distributes such games in Japan, North America, Europe and Asia. (ii) Online Games: The Company provides online game services including massively multi-players online RPGs such as " FINAL FANTASY...

  • Page 52
    ... video game products. Softw are development costs are amortized as a component of " Cost of sales" over the expected life of each video game product, starting from its initial delivery to the market. The Company continually evaluates the recoverability of capitalized softw are costs and w ill charge...

  • Page 53
    ... 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 softw are games business segment and the overall economy, changes in customer demand...

  • Page 54
    ...as employee stock options) at fair value on the grant date. That cost w ill be recognized over the period during w hich an employee is required to provide services in exchange for the aw ard (the requisite service period). This statement is effective as of the beginning of the first annual reporting...

  • Page 55
    ...effects on net income and the net income per share in future years. 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 w eighted...

  • Page 56
    ..., the Company acquired all outstanding shares of SQUARE CO., LTD., a video game developer in Japan, in the form of a statutory merger. The aggregate purchase price, Acquisit ion of UIEvolut ion On M arch 24, 2004, the Company acquired all of the outstanding preferred and common stock of UIEvolution...

  • Page 57
    ... Co., Ltd., a domestic video game w hole-seller devoted to the convenience store market, listed on the Hercules market of Osaka Securities Exchange, and accounted for using the equity method. DigiCube w ent bankrupt in November 2003, and the Company recognized an impairment loss on its investment in...

  • Page 58
    ... losses attributable to " Corporate and elimination" w ere incurred on the lands and buildings not currently in use, because their fair market values quoted by the independent appraiser w ere below their carrying amounts. The Company employed discounted cash flow s method to determine the fair value...

  • Page 59
    ... as other valuation approaches including comparison of multiples indicated by the stock price and market capitalization of comparable companies, and asset and liability structure of the acquired subsidiaries. Significant assumptions used in this analysis included 1) expected future revenue grow th...

  • Page 60
    ... U.S. dollars 2006 2005 2006 Change in benefit obligation: Benefit obligation at beginning of year Service cost Interest cost Benefit obligation transferred from acquired company Prior service costs Actuarial gain Benefits paid Benefit obligation at end of year Change in plan assets: Fair value...

  • Page 61
    ... is equal to the closing price of underlying stock of the Company at the TSE as of November 8, 2005, the date one-day before the date w hen the Company decided the issue. The Company has an option, (" Option" ), to move the floor price per share to the market price of underlying stock at the time of...

  • Page 62
    ... motion picture film in the amount of ¥1,661 million and ¥2,211 million, respectively. Transferred pre-merger NOLs w ere fully utilized in the year ended M arch 31, 2004. Follow ing the acquisition of 93.7% of outstanding shares of Taito (" Old Taito" ) in September 2005, the Company engaged...

  • Page 63
    ...u it y M erger On April, 2003, the Company issued 51,167,293 shares of common stock in exchange for shares of former Square as a result of the statutory merger. The merger w as accounted for using " pooling of interest method of accounting" for JCC purposes, and accordingly, the stockholders' equity...

  • Page 64
    ... games, (ii) online games, (iii) mobilephone content, (iv) publication, (v) amusement, and (vi) others. Revenue from disc sales for Final Fantasy XI is included in the online games segment. They are defined for w hich separate financial information is available and regularly review ed by the Company...

  • Page 65
    ...Int er segment sales Japan North America Europe Asia excluding Japan Corporate and elimination Total U.S.GAAP adjustments Consolidated 2006 2005 2004 2006 2 0 . R e la t e d P a r t y T r a n s a c t io n No related party transaction w as identified for the years ended M arch 31,2006, 2005 and...

  • Page 66
    R e p o r t o f In d e p e n d e n t A u d it o r s S Q U A R E E N IX C O . , L T D .

  • Page 67
    ... centers Europe SQUARE ENIX LTD. Asia SQUARE ENIX (China) CO., LTD. Huang Long Co., Ltd. SQUARE ENIX WEBSTAR NETWORK TECHNOLOGY (BEIJING) CO., LTD. COM M UNITY ENGINE NETWORK SOFTWARE (BEIJING) CO., LTD. BEIJING TAIXIN CULTURAL ENTERTAINM ENT CO., LTD. TAITO KOREA CORPORATION Partnership FF Film...

  • Page 68
    ...of the Tokyo Stock Exchange 7 8 9 » Securit ies code: 9684 The M aster Trust Bank of Japan, Ltd. (Trust Account) 2,196 Japan Trustee Services Bank, Ltd. (Trust Account) 2,142 » Shareholder regist rat ion agent : Securities Agency Department M itsubishi UFJ Trust and Banking Corporation 7-10-11...