SANKYO CO., LTD. · 2015-01-16 · Since its establishment in 1966, SANKYO CO., LTD., has carried out its operations in the pachinko industry—one of Japan’s most popular leisure

S A N K Y O C O . , L T D .

A n n u a l R e p o r t 2 0 0 1

Since its establishment in 1966, SANKYO CO., LTD., has carried out its operations in the

pachinko industry—one of Japan’s most popular leisure industries—based on the key

word “ingenuity,” a spirit of continually creating innovative ideas that are not bound by

past concepts. In doing so, Sankyo has developed, manufactured, and sold pachinko

machines enjoyed by people throughout Japan and has established a solid position as the

industry’s largest manufacturer of pachinko machines.

In the future, as a leading company that manufactures pachinko machines, Sankyo

aims to achieve further growth by offering products that are highly original and that

enable people to realize their dreams while contributing to the ongoing development

of Japan’s leisure industry.

P R O F I L E

C O N S O L I D A T E D F I N A N C I A L H I G H L I G H T S

SANKYO CO., LTD. and Its Consolidated Subsidiaries Years ended March 31, 2001 and 2000

Thousands of Millions of yen U.S. dollars

2001 2000 2001

For the year:Net sales ............................................................................................................. ¥129,548 ¥133,437 $1,045,585Operating income .............................................................................................. 41,539 52,365 335,262Net income......................................................................................................... 23,051 25,968 186,044

At year-end:Total assets......................................................................................................... 243,306 235,512 1,963,730Total shareholders’ equity .................................................................................. 187,675 171,259 1,514,730

Yen U.S. dollars

Per share data:Net income......................................................................................................... ¥236.75 ¥399.12 $1.91Cash dividends................................................................................................... 40.00 40.00 0.32

Note: The U.S. dollar amounts in this report represent translations of Japanese yen, for convenience only, at the rate of ¥123.90=U.S.$1. See Note 2 to the consolidated financial statements.

C o n t e n t s1 A Discussion with the CEO

4 Honing Developmental Acumen

through Inventive Ingenuity

8 Divisional Review

9 New Machines

10 Five-Year Summary

11 Financial Review

14 Consolidated Balance Sheets

16 Consolidated Statements of Income

17 Consolidated Statements of

Shareholders’ Equity

18 Consolidated Statements of Cash Flows

19 Notes to the Consolidated

Financial Statements

30 Report of Independent Certified

Public Accountants

31 Sankyo Network/Corporate Data/Board

of Directors and Corporate Auditors

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Net Sales(Billions of yen)

Net Income (Loss)(Billions of yen)

Net Income (Loss)per Share (Yen)

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A D I S C U S S I O N W I T H T H E C E O

Hideyuki Busujima,

Chief Executive Officer

As at December 2000, Japan’s pachinko market had contracted by 185 pachinko parlors com-pared with the previous year-end, to a total of 16,988 parlors, and the number of pachinkomachines installed had declined by 135,000 units, to 3.42 million machines. Such conditionswere ascribed to weak consumer spending due to Japan’s prolonged economic slump and moreintense competition between parlors, which has resulted in a survival-of-the-fittest situation inthe industry. At the same time, demand for pachinko machines has proven to be strong.Financially robust, large-scale franchises frequently replaced their pachinko machines withnewer models, and, thus, the number of machines shipped increased approximately 340,000units year on year, to 3.36 million units.

Against this backdrop, Sankyo Co., Ltd., strove to meet the diverse needs of pachinkoenthusiasts by introducing new machines under the key word “ingenuity,” which has been theessence of our corporate stance since our foundation. However, owing to such factors as anincrease in the number of new machines introduced by our competitors and mounting marketcompetition, consolidated net sales for the term declined 2.9%, to ¥129.5 billion, and netincome totaled ¥23.1 billion.

Q Please describe the market environment and business results for fiscal2001, ended March 31, 2001.

’00’99’98’97’96’95’940

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Number of pachinko machines installedNumber of pachinko machines shipped

(Source: Nikkoso and The National Police Agency)

3.363.42

Number of PachinkoMachines Installedand Shipped in Japan(Millions of units)

Market Share ofLeisure-RelatedExpenditure in Japan(%)

Pastime67.2

Hobby13.9

Travel13.1

Sports5.8

Pachinko33.7

(Source: Institute for Free Time Design)

Meeting new challenges with

a spirit of ambition

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Our business strategy consists of strengthening our ability to respond swiftly to market fluctu-ations, bolstering our brand promotion strategies, developing the pachislo market, and diversi-fying our earnings base.

What precisely do you mean by “strengthening our ability to respond swiftlyto market fluctuations”?

By this, I mean further enhancing the competitive edge of our development, manufacturing,and revenue operations in response to the rapid changes that the pachinko machine market iscurrently undergoing. When developing new machines, it is vital to be unrestrained by thelimits of past concepts and constantly incorporate new ideas. Sankyo continually introducescutting-edge models. Years ago, our Fever machine caused a huge sensation throughout thepachinko industry, and in recent years we have developed machines incorporating a 32-bitCPU for image data processing. Furthermore, when authorities relaxed restrictions on thegambling aspect of pachinko, Sankyo was quick to introduce new machines in advance of itscompetitors and capitalize on the resulting new market opportunities. Pachinko fans are con-stantly seeking machines with new design concepts and game features, which puts to task thepachinko machine manufacturer’s ability to fulfill this demand in a timely manner. Therefore,Sankyo will steadfastly maintain dominance over its competitors by continuing aggressiveinvestment in research and development as well as augmenting its development teams.

On the production side, our new Sanwa Plant, in Gunma Prefecture, construction of whichcommenced last year, was completed and launched in April 2001. The new plant has a dailyproduction capacity of 6,000 pachinko machines, making Sankyo’s production capacity thehighest in the industry. Furthermore, to strengthen our selling power as well as manufacturingabilities, we will strive to increase sales volumes by fully leveraging our sales network, whichcomprises 9 branches and 16 offices nationwide, and by implementing seamless communica-tions into our sales practices.

Please explain Sankyo’s brand strategy.

Owing to the overwhelming popularity of the Fever model and thesuccession of equally popular machines that have followed, Sankyohas attained outstanding brand recognition among pachinko parlors.This is further augmented by sales of pachinko machines manufactured

Q Please describe Sankyo’s business strategy.

Pachinko hall interior

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by Daido Co., Ltd., our subsidiary. Through this multiple brand strategy, Sankyo is able toincrease both the number and variety of machines it develops, thus giving it a competitive edgeover other manufacturers. We will continue to work toward expanding sales by utilizing theSankyo and Daido brands.

Specifically, how will Sankyo diversify its earnings base?

In recent years, demographics have shown a rise in the number of women and members of theyounger generation playing pachinko. This means it is now more important than ever to pro-vide pachinko parlors with an attractive gaming atmosphere by refurbishing both parlor interi-ors and exteriors in addition to installing appealing pachinko machines. To meet these needs,Sankyo will provide a full range of merchandise contributing to the creation of appealingpachinko parlors that take ease of use and the facilities’ atmosphere into full consideration,including prepaid card operations, ball bearing supply systems, and other parlor managementfundamentals. In addition to pachinko machinesmanufactured by our Daido subsidiary, and since thepachislo market continues to grow, we will make fur-ther efforts to develop and sell pachislo machines andseek to develop this business segment to rival that ofour pachinko machines operations. Through such ini-tiatives, we will diversify our earnings base acrossbusiness segments spanning the entire spectrum ofthe pachinko industry and attempt to enhance ouroperational results.

As competition to attract customers intensifies among pachinko parlors, the selection criteriafor the purchase of new machines—which have an enormous impact on a parlor’s ability toattract customers—are likely to become even more critical. Against this backdrop, those manu-facturers who are able to quickly analyze market needs and respond immediately will be theones capable of expanding market share and gaining superiority over their competitors. To thisend, Sankyo will exploit its past track record, experience, and the expertise it has cultivatedover its long history in the industry in order to strengthen its development, manufacturing,and sales operations. In this way, we will generate the level of business results expected of thepachinko industry’s leading company.

September 2001

Hideyuki Busujima,Chief Executive Officer

Q What future trends do you foresee for the pachinko market?

Ball Bearing Supply System

Honing Developmental Acumen through Inventive Ingenuity

Sankyo sent shock waves through the pachinko industry in 1980 when itintroduced the Fever machine. Ever since, Fever has continued to beregarded as the quintessential pachinko machine, and fans have come toexpect a consistent supply of original and innovative machines from theCompany.

Sankyo has adopted an idea proposal system to support the develop-ment of original products. Under this system, ideas are collected not onlyfrom members of the development department, but from all Companyemployees. These ideas are then considered at regularly held meetingsbased on market needs ascertained by the development department. The

development concepts that evolve out of the exploration of the possibilities for these diverseideas are reflected in the novel and progressive products that we ultimately create.

The majority of current card reader (CR)type-1 pachinko machines incorporate LCDs.Against this technological backdrop, to fulfill itsfans’ expectations and exert its pioneering spirit,Sankyo introduced a unique “drum-type” machineand the “8-Line” LCD model, exemplifying theCompany’s commitment to ingenuity.

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Fever

Display of CR Fever

Wide Powerful SP

(LCD-type machine)

Display of CR Fever

Seven Flash SP

(Drum-type machine)

Product Development Process

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R&D expenditure (left scale)Ratio of R&D expenditure to net sales

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R&D Expenditure andRatio of R&D Expenditureto Net Sales(Billions of yen, %)

Start of development

Ideas collected

Feasibility ofideas

discussed

Hand-madeprototype

Productplanningmeeting

Mass production

designMold casting

ApprovalFormat

inspection bythe Hotsukyo*

Product planningmeeting

Machine forformat

inspectionassembled

Massproductionprototype

From idea to development:approximately two years

*The Association for Maintenance of ElectronicCommunications Technology

Q What kind of expectations do pachinko fans, and Sankyo fans in particular,have toward the Sankyo brand?

The key ingredient in Sankyo’s development operations is its ability to respond swiftly.Pachinko machine manufacturers are subject to Japan’s Act to Control Businesses That MayAffect Public Morals, Etc. (Fu-Ei-Ho), and all pachinko machines must pass a format inspec-tion administered by a screening organization, the Hotsukyo (The Association for Maintenance ofElectronic Communications Technology) before they are approved for sale. Regulations aretightened and relaxed in step with social change, and manufacturers must constantly producepachinko machines that comply with the latest rules. It is no exaggeration to say that the abili-ty to react promptly to changes in these regulations will determine future market share. Inaddition to organizing a flexible developmental framework, Sankyo maintains its top positionin the industry by strengthening its ties with manufacturing partners and being proactive in itsbusiness practices as well as willing to take risks. Although such a hard-driving developmentalapproach can occasionally run counter to market needs, it is also essential to maintainingindustry dominance into the future.

The accumulation of expertise over long years of experience is a crucial factor in the develop-ment of pachinko machines. Onto this process, Sankyo has always stamped its pioneeringspirit in its efforts to stay ahead of its competition. Consequently, we possess the followingadvantages over our competitors.

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Q What areas does Sankyo emphasize in its development operations?

Q What are the strengths that separate Sankyo from its competitors?

� We are the industry leaderin terms of the number ofpachinko machine-relatedpatents.

� We are also the industryleader in terms of the num-ber of products eligible forformat inspection on anannual basis.

� We consistently incorporateideas for reducing costsstarting directly at the devel-opment stage.

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Ratio of Operating Incometo Net Sales(%)

Pachinko Machine-RelatedPatents, Etc.(Number attained)

Sankyo and DaidoPachinko Machines(Number inspected, %)

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Number of pachinko machines inspected (left scale)Percentage of total number of machines inspected

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Pegging

Brass pegs are insertedinto the veneer boardwith an automaticpegging machine.

NC router

Holes are punchedin the veneer boardwhere componentswill be attached.

� Ball bearing launchguideway rail isattached.

� Pinwheel is attached.

The New Sanwa Plant

Melamine sheets are attached to aveneer board (which forms the gamesurface of the pachinko machine). This is done to prevent warpingand contortion.

Sanwa Plant Production Flow

Melamine boardsattached

� Standardized holesare drilled in theveneer board usinga multispindle drillingmachine.

The greatest asset of the Sanwa Plant is its production capacity. The plant is equipped with theindustry’s finest machinery and devices, yielding a daily production capacity of 6,000 pachinkomachines, approximately twice the capacity of the Company’s Kiryu Plant. It is rare for manu-facturers in the pachinko industry to possess multiple production facilities, and those with lowproduction capacities often outsource production when they obtain purchase orders in excess oftheir capacity, thereby running the risk of incurring delays in delivery. In recent years, manu-facturers have been marketing a large number of new machines, and pachinko parlors are aptto change suppliers if they offer quicker delivery of new machines, causing manufacturers tolose their hard-earned sales opportunities. Furthermore, the Sanwa Plant is situated in thedeveloping Isezaki Sanwa Industrial Park, which is located immediately beside an interchangeproviding access to the national expressway network, and, thus, is well positioned for productdelivery nationwide. We feel assured that we have enhanced our dominance in the industry byorganizing a mass-production framework that is capable of prompt product supply to meet theneeds of pachinko parlors and prevent the loss of any business opportunities.

Q Please describe the unique features of Sankyo’s newly launchedSanwa Plant.

Sanwa Plant

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Until this year, our manufacturing framework consisted of our Kiryu Plant—located in GunmaPrefecture—in eastern Japan as our main manufacturing point for Sankyo brand products, andour Nagoya Plant—located in Aichi Prefecture—in western Japan as the principal productionfacility for Daido brand pachinko and pachislo machines. Now, with the addition of the newSanwa Plant, we have transferred the Kiryu Plant operations to Daido and closed the NagoyaPlant, thus consolidating our production facilities within the same prefecture. Furthermore,two of our subsidiaries, Sankyo Plastic Co., Ltd., and Daiwa Electric Co., Ltd., which manu-facture electronic circuit boards and plastic-molded products for pachinko machines, are alsolocated within Gunma Prefecture. Whereas these subsidiaries formerly supplied productionfacilities in both eastern and western Japan, with the consolidation of production within thesame prefecture they are now capable of a much smoother supply of materials to both plants.Thus, we have gained an enormous advantage by reducing logistics costs and enabling thesmoother coordination of interplant production scheduling.

Q How has the construction of the new plant affected the Sankyo Group’s pro-duction framework?

To implement the automation and mechanization of the manufacturing process, Sankyowas one of the first companies in the industry to unitize and standardize its components.As a result, we now possess an extremely simple, rational, and efficient manufacturingsystem, capable of producing a single pachinko machine in approximately three hours.

� Component unitization: The assembly of each individual component requires numer-ous processes within the assembly line. Therefore, Sankyo conducts assembly on a unitbasis within the manufacturing line by repeatedly standardizing component usage andpurchasing multiple components in unitized form.

� Promoting the automation and mechanization of work processes: Sankyo has automatedall assembly stages for large components (game machine frames, etc.) that present agreat burden for operators and for components that are processed by multiple machines.

Gauge board assembly andinspection line

� LCD and other components(accessories) are attached, and thegauge board is completed.

� Proper functioning of all compo-nents is confirmed.

Pachinko machineassembly andinspection line

Completion

� Completed gauge boards areattached to the pachinko machineframes, thus completing thepachinko machine.

� Proper functioning of all compo-nents is confirmed.

� Glass and metalframes are attached.

� Gauge board mountsare attached.

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In the pachinko machines and related industries, we endeavored to meetthe needs of pachinko enthusiasts in a market leaning increasinglytoward LCD-type machines by marketing a diverse range of highlyentertaining machines based on our own unique design concepts.Examples of these products include the Fever Seven Flash series ofdrum-type machines; the Takoyaki Hatchan, the first new type-2machine in five years; and Fever Densha de Go! (Go by Train!) series—acompanion series to our game machines.

However, the effects of persistently unpredictable economic condi-tions on the pachinko industry—which has traditionally held strongagainst harsh economic conditions—could not be avoided, and competi-tion among manufacturers further intensified. Consequently, total salesin this segment for the term under review declined 7.8% compared withthe previous term, to ¥101.0 billion. Operating income decreased14.7%, to ¥45.2 billion. Total unit sales amounted to 620,000, a declineof 3.6%.

Pachinko Machines and Related Industries

D I V I S I O N A L R E V I E W

In ball bearing supply systems and related industries, the marketing ofsuch new products as Daichi, a computerized system for monitoring thenumber of customers and machines in use, and Sora, a digital securitysurveillance system to monitor inappropriate behavior in pachinko halls,led to an increase in total sales for this segment of ¥3.8 billion, or42.2%, to ¥12.8 billion. However, owing to increased operating costs,operating income dropped 73.3%, to ¥0.8 billion.

Ball Bearing Supply Systems and Related Industries

Sankyo first entered the market for pachislo machines and relatedindustries in the previous fiscal year. As our history in this segment isstill quite short, our highest priority is currently assigned to the task ofraising brand recognition. We went about this by marketing suchmachines as Shimuken G, which makes use of images of popular celebri-ties. As a result, total sales for this segment increased 2.6%, to ¥4.0 bil-lion. Although total sales volumes also increased, up 25.0%, to 15,000units, operating income fell 60.0%, to ¥0.6 billion.

Pachislo Machines and Related Industries

In the pachinko halls and related industries segment, which focuses onpachinko parlor management, we strove to attract customers throughsuch measures as the renovation of parlor interiors. However, owing tosuch factors as a decline in the number of operating days as a result ofthese renovations and encroachment by large-scale franchises, total salesfor this segment slipped 1.1%, to ¥9.1 billion. Operating income, incontrast, surged 183.3%, to ¥0.17 billion.

Pachinko Halls and Related Industries

CR Fever Densha de Go! GP

CR Fever Seven Flash SP

Pachinko machines and related industries

Pachislo machines and related industries

Ball bearing supply systems and related industries

Pachinko halls and related industriesOther industries

78.0%

9.9%

7.1%

1.9%

3.1%

Share of Net Sales(%)

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N e w M a c h i n e s

The 8-Line System: The allure of the Powerful seriesThe most appealing aspect of the Powerful series is its incorporation of slot

machine-type features into the traditional Japanese game of pachinko. Players

win a jackpot when three 7’s are lined up in the eight lines—which are com-

posed of nine reels—or if fruit symbols appear in all lines simultaneously.

The nine independent reels that appear on the large LCD screen add a

depth to the game’s entertainment that is sure to satisfy avid pachinko fans.

Pachinko Machines

Fever Queen 1

Exciting entertainment delivered through the use of the double drumThe Fever Queen 1 features a second drum unit installed in the upper half of the

board face in addition to the usual drum unit. This secondary drum unit generates

an assortment of action that adds to the excitement and anticipation of a jackpot,

thus providing a thrilling gaming experience.

CR Fever Wide Powerful SP

Fever Queen 1

CR Fever Wide Powerful SP

Accelerating the progress of history. A powerful introduction

for the 21st century CR Fever Wide Powerful SP is the third installment in the enormously popular

Powerful series. We introduced the first installment, Fever Powerful III, in 1992, fol-

lowed by the CR Fever Big

Powerful FX in 1996, both of

which have sold more than

300,000 units. The CR Fever

Wide Powerful SP was the most

eagerly awaited large-scale

new model in the term under

review.

Fever Powerful III (1992) CR Fever Big Powerful FX

(1996)

Pachislo Machines

Second

Drum

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F I V E - Y E A R S U M M A R Y

SANKYO CO., LTD. and Its Consolidated Subsidiaries Years ended March 31, 2001, 2000, 1999, 1998 and 1997

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2001 2000 1999 1998 1997 2001

For the year:Net sales ................................................. ¥129,548 ¥133,437 ¥ 88,047 ¥ 67,138 ¥126,571 $1,045,585Gross profit ............................................ 65,493 72,405 41,920 29,195 52,783 528,595Selling, general and administrative expenses ........................ 23,954 20,040 16,290 15,543 20,191 193,333

Operating income .................................. 41,539 52,365 25,630 13,652 32,592 335,262Net income (loss) ................................... 23,051 25,968 (26,112) 7,919 15,406 186,044Research and development expenditure ... 5,762 5,029 4,196 3,436 2,827 46,505

At year-end:Total assets............................................. 243,306 235,512 176,698 180,456 201,263 1,963,730Total shareholders’ equity ...................... 187,675 171,259 136,217 165,833 160,792 1,514,730

Yen U.S. dollars

Per share data:Net income (loss) ................................... ¥ 236.75 ¥ 399.12 ¥ (401.33) ¥ 121.71 ¥ 236.78 $ 1.91Cash dividends ....................................... 40.00 40.00 40.00 50.00 40.00 0.32Shareholders’ equity ............................... 1,930.83 2,632.11 2,093.58 2,548.74 2,471.27 15.58

%

Ratio:Return on equity ..................................... 12.8 16.9 (17.3) 4.8 9.9Shareholders’ equity ratio ........................ 77.1 72.7 77.1 91.9 79.9

Note: The U.S. dollar amounts in this report represent translations of Japanese yen, for convenience only, at the rate of ¥123.90=U.S.$1.See Note 2 to the consolidated financial statements.

11

F I N A N C I A L R E V I E W

Results of Operations

N e t S a l e sDuring the fiscal year under review, ended March 31, 2001 the future of theJapanese economy remained uncertain. Overall conditions surroundingpachinko parlor management were severe for the term under review, marked byincreasing disparity between profitable and unprofitable operations. Againstthis backdrop, Sankyo Co., Ltd. (the “Company”), and its consolidated sub-sidiaries (collectively, the “Group”) strove to develop and market a diverse rangeof highly entertaining pachinko machines that fulfill the needs of pachinkoenthusiasts in advance of its competitors. However, competition in both thepachinko and pachislo segments was far more intense than anticipated in thesecond half of the year under review, and consolidated net sales for the fiscalyear declined 2.9%, to ¥129.5 billion. Results for each individual business seg-ment were as follows:

Pachinko Machines and Related IndustriesUnit sales of pachinko machines and pachinko machine gauge boards declined23,354 units, from 643,124 units in the previous term to 619,770 units, and totalsales for the segment fell 7.8%, to ¥101.1 billion. The percentage of total Groupsales accounted for by the segment also declined, down 4.2 percentage points, to78.0%. New products introduced during the term included the Fever Densha deGo! (Go by Train!) series, CR Super Combi SP, and the Fever Seven Flash series.

Ball Bearing Supply Systems and Related IndustriesBenefiting from the introduction of such new products as hall computers, totalsales in ball bearing supply systems and related industries climbed 41.1%, to¥12.8 billion. The percentage of total Group sales accounted for by the segmentgrew 3.1 percentage points, to 9.9%.

Pachislo Machines and Related IndustriesUnit sales of pachislo machines increased 3,606 units, from 12,181 units in theprevious term to 15,787 units. As a relative newcomer to the pachislo industry,elevating brand recognition is the Group’s most crucial task for the immediatefuture, and as such it carried out an aggressive pricing strategy during the termunder review. Total sales for the segment increased 2.1%, to ¥4.0 billion, and thepercentage of total Group sales accounted for by the segment grew marginally,to 3.1%. Principal products sold during the term included the Shimuken series.

Pachinko Halls and Related IndustriesThis segment consists of four pachinko parlors managed as satellite operationsby the Company’s wholly owned subsidiary Sanritsu Kigyo Co., Ltd. Althoughthe Group strove to attract customers through such measures as the renovationof parlor interiors, due to increasing competition from large-scale chain fran-chises, total sales for this segment declined 1.0%, to ¥9.1 billion. The percentageof total Group sales accounted for by the segment edged up slightly, to 7.1%.

Other IndustriesThis segment consists primarily of sales of formed components from theCompany’s wholly owned subsidiary Sankyo Create Co., Ltd. Total sales forthe segment surged 59.9%, to ¥2.5 billion. The percentage of total Group salesaccounted for by the segment advanced marginally, to 1.9%.

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Net Sales(Billions of yen)

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C o s t s , E x p e n s e s a n d E a r n i n g sThe cost of sales increased 5.0% compared with the previous fiscal year, to¥64.0 billion. The cost of sales ratio increased 3.7 percentage points, to 49.4%,reflecting the drop in unit sales prices. Consequently, the gross profit ratio fell 3.7percentage points, to 50.6%, and gross profit declined 9.5%, to ¥65.5 billion.

Selling, general and administrative (SG&A) expenses increased 19.5%, to¥24.0 billion. The main cause for this increase was a rise in advertising expens-es, which primarily comprised television commercial production related costs.SG&A expenses as a percentage of net sales rose 3.4 percentage points, to 18.5%.As a result, operating income declined 20.7%, to ¥41.5 billion, and operatingincome as a percentage of net sales slipped 7.1 percentage points, to 32.1%.

Other income, net, amounted to ¥1.5 billion, compared with ¥0.4 billion inthe previous term. The primary reasons for this increase were the non-recordingof a loss on devaluation and sale of investment securities and a provision foraccrued retirement allowances derived from a change in accounting practices,all of which were recorded in the previous term and equaled ¥1.3 billion.

As a result of these factors, income before income taxes declined 18.5%, to¥43.0 billion.

Income taxes after the application of tax-effect accounting decreased from¥26.7 billion in the previous fiscal year to ¥19.9 billion. The tax burden rate ofincome before income taxes and minority interests declined from 50.7% in theprevious term to 46.4%. The tax burden rate for the term under review moreclosely approached the statutory tax rate of approximately 42%.

As a result, net income for the term declined 11.2%, to ¥23.1 billion, and netincome as a percentage of net sales fell 1.7 percentage points, to 17.8%. Therefore,return on shareholders’ equity decreased 4.1 percentage points, to 12.8%.

F i n a n c i a l P o s i t i o nTotal assets at the end of the fiscal year rose 3.3%, or ¥7.8 billion, to ¥243.3billion. This was due primarily to a ¥5.0 billion increase in notes and accountsreceivable—trade, a ¥12.7 billion increase in inventories, a ¥6.6 billion increasein investment securities, and a ¥3.0 billion increase in long-term advances. Thisincrease in notes and accounts receivable—trade was due primarily to the inclu-sion in the year-end balance of trade notes receivable with a maturity date ofMarch 31, 2001, as a consequence of this date being a holiday for finance insti-tutions in Japan. The increase in inventories reflects the transfer of land fromproperty, plant and equipment to inventories as a result of a change in holdingpurposes from land for use in business operations to land for sale, as well asadvance orders for LCDs and other electronic components that were placed forthe sake of securing stable supplies. The increase in investment securitiesreflects a ¥20.3 billion transfer from marketable securities as of April 1, 2001,as a result of the revision of holding purposes related to the adoption of currentvalue accounting for financial instruments, and a net decline in value of ¥2.6billion due to a lowering of current value assessment. As correspondingaccounts for this decline in assessment value, ¥1.1 billion in deferred tax assetswas recorded and ¥1.5 billion (after tax-effect accounting) in net unrealizedlosses on other securities was recorded in shareholders’ equity. Furthermore,during the term under review, the Group invested a total of ¥6.3 billion in therationalization and streamlining of manufacturing facilities and the develop-ment of new products.

Principal declines in assets included a ¥3.5 billion decline in cash anddeposits—as explained in the analysis of cash flows—and a ¥15.8 billion declinein marketable securities, reflecting the aforementioned transfer to investmentsecurities.

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Gross Profit and Gross Profit Ratio(Billions of yen, %)

’01’00’99’98’97

Return on equity (ROE)Return on assets (ROA)

-20

-10

0

10

20

30

Return on Equity (ROE)and Return on Assets(ROA)(%)

’01’00’99’98’97Total shareholders’ equity (left scale)Equity ratio

0

20

40

60

80

100

0

50

100

150

200

Total Shareholders’Equity and Equity Ratio(Billions of yen, %)

ROA=(Operating income +Interest and dividend income +Interest on marketable securities +Interest expenses)/Total assets(yearly average)

13

On the liabilities side, total liabilities decreased 13.4%, or ¥8.6 billion, to¥55.6 billion. The primary factors for the decline in total liabilities included adecline of ¥3.2 billion in notes and accounts payable, trade, and a ¥4.0 billiondecrease in accrued income taxes, reflecting the drop in net income for the term.

Shareholders’ equity rose 9.6%, or ¥16.4 billion, to ¥187.7 billion. Thisincrease was due to an increase in consolidated retained earnings, reflecting netincome for the term. The increase was partially offset by the recording of trea-sury stock, which was acquired in line with the Company’s stock option pro-gram, and the aforementioned net unrealized losses on other securities. As aresult, the shareholders’ equity ratio increased 4.4 percentage points, to 77.1%.

C a s h F l o w sAlthough net cash provided by operating activities during the term was suffi-cient to fund business operations, it was not able to generate the financialresources to invest in facilities or help to pay cash dividends. Plenty of surplusfunds were allocated to the fulfillment of these requirements. Cash and cashequivalents at end of year declined ¥8.5 billion, from ¥79.3 billion at the previ-ous year-end to ¥70.8 billion. This decrease was due primarily to cash fluctua-tions resulting from the following activities.

Net cash provided by operating activities declined ¥55.0 billion comparedwith the previous term, to ¥0.2 billion. This was due primarily to ¥43.0 billionin income before income taxes, compared with ¥52.7 billion for the previousterm, and ¥2.4 billion in depreciation and amortization, as opposed to ¥2.3 bil-lion in the previous term. Meanwhile, principal cash outflows for the termincluded ¥18.9 billion in expenditures of working capital related to notes andaccounts receivable—trade, inventories, and notes and accounts payable—trade,compared with a cash inflow of ¥1.5 billion from these items in the previousfiscal year, as well as ¥24.6 billion in income taxes paid, compared with ¥2.1billion in the previous year under review. This increase in working capitalexpenditures was due primarily to an increase in inventories as a result ofadvance procurement of electronic components. The increase in income taxespaid is due to the amount of net income for the term and a delay in the paymentof the corresponding taxes.

Net cash used in investing activities improved ¥26.9 billion over the previousterm, to ¥3.3 billion. Cash expenditures consisted primarily of ¥4.9 billion usedin the net purchase of property, plant and equipment and intangible fixedassets—compared with expenditures of ¥6.9 billion in the previous term.Principal cash generated was ¥4.3 billion from the net sale of securities andother financial products, compared with net expenditures of ¥21.5 billion in theprevious fiscal term.

Net cash used in financing activities increased ¥2.6 billion compared withthe previous term under review, to ¥5.4 billion. This consisted primarily of ¥1.6billion used in the payment for purchase of treasury stock as a result of theadoption of a stock option system—for which there was no correspondingitem in the previous fiscal period—and ¥3.2 billion in cash dividends paid.

’01’00’99’98’970

50

100

150

200

250

Total Assets(Billions of yen)

’01’00

Net cash provided by operating activitiesNet cash used in investing activitiesNet cash used in financing activitiesNet (decrease) increase in cash and cash equivalents

0

10

20

30

40

50

60

Cash Flows(Billions of yen)

’01’00’99’98’970

10

20

30

40

50

Payout Ratio(%)

The payout ratio for 1999 cannotbe calculated because a net losswas recorded.

14

C O N S O L I D A T E D B A L A N C E S H E E T S

SANKYO CO., LTD. and Its Consolidated Subsidiaries As of March 31, 2001 and 2000

Thousands ofU.S. dollars

Millions of yen (Note 2)ASSETS 2001 2000 2001

Current assets:Cash and deposits (Note 3)................................................................................ ¥ 29,600 ¥ 33,116 $ 238,902Marketable securities (Notes 3 and 4)................................................................ 55,681 71,451 449,403Beneficiary certificate on trust of specified receivable (Note 3).......................... 23,600 24,830 190,476Notes and accounts receivable—trade ................................................................ 38,664 33,621 312,058Inventories (Note 5)........................................................................................... 21,603 8,861 174,358Deferred income taxes (Note 12) ....................................................................... 1,783 1,513 14,391Other current assets ........................................................................................... 3,969 4,255 32,035Allowance for doubtful accounts ........................................................................ (153) (175) (1,235)

Total current assets ........................................................................................ 174,747 177,472 1,410,388

Fixed assets:Property, plant and equipment (Note 6):Buildings and structures ..................................................................................... 13,258 12,949 107,006Machinery and equipment ................................................................................. 9,969 9,048 80,460Land................................................................................................................... 15,344 17,201 123,842Construction in progress .................................................................................... 4,374 111 35,303

............................................................................................................................... 42,945 39,309 346,611Accumulated depreciation.................................................................................. (9,423) (7,672) (76,053)

............................................................................................................................... 33,522 31,637 270,558

Intangible fixed assets........................................................................................... 376 526 3,035

Investments and other assets:Investment securities (Note 4) ........................................................................... 26,263 19,669 211,969Long-term advance ............................................................................................ 3,983 1,004 32,147Deferred income taxes (Note 12) ....................................................................... 2,511 894 20,266Other assets........................................................................................................ 2,016 4,413 16,271Allowance for doubtful accounts ........................................................................ (112) (103) (904)

............................................................................................................................... 34,661 25,877 279,749

............................................................................................................................... 68,559 58,040 553,342

............................................................................................................................... ¥243,306 ¥235,512 $1,963,730The accompanying notes are an integral part of these statements.

Sankyo AR 2001-0913 01.11.7 1:39 PM ページ 14

15


Millions of yen (Note 2)LIABILITIES AND SHAREHOLDERS’ EQUITY 2001 2000 2001

Current liabilities:Short-term bank loans and current portion of long-term debt (Note 6)............ ¥ 656 ¥ 645 $ 5,295Notes and accounts payable—trade.................................................................... 24,450 27,670 197,337Accrued income taxes......................................................................................... 12,455 16,469 100,525Other current liabilities ...................................................................................... 6,874 7,922 55,480

Total current liabilities ................................................................................... 44,435 52,706 358,637

Long-term liabilities:Long-term debt (Note 6) ................................................................................... 8,987 9,556 72,534Accrued retirement allowances (Note 7) ............................................................ 2,002 1,783 16,158Other long-term liabilities ................................................................................. 207 208 1,671

............................................................................................................................... 11,196 11,547 90,363

Shareholders’ equity (Note 10):Common stock, non-par value—

Authorized: 144,000,000 sharesIssued: 97,597,500 shares............................................................................... 14,840 14,840 119,774

Additional paid-in capital .................................................................................. 23,750 23,750 191,687Retained earnings............................................................................................... 152,187 132,670 1,228,305Net unrealized losses on other securities (Note 4) ............................................. (1,499) — (12,098)Less: treasury stock, at cost ................................................................................ (1,603) (1) (12,938)

............................................................................................................................... 187,675 171,259 1,514,730Contingent liabilities (Note 8)............................................................................................................................... ¥243,306 ¥235,512 $1,963,730

Sankyo AR 2001-0913 01.11.7 1:39 PM ページ 15

16

C O N S O L I D A T E D S T A T E M E N T S O F I N C O M E

SANKYO CO., LTD. and Its Consolidated Subsidiaries For the years ended March 31, 2001 and 2000


Millions of yen (Note 2)2001 2000 2001

Net sales ................................................................................................................ ¥129,548 ¥133,437 $1,045,585Cost of sales (Note 14) .......................................................................................... 64,055 61,032 516,990

Gross profit ........................................................................................................ 65,493 72,405 528,595Selling, general and administrative expenses (Notes 11 and 14) ......................... 23,954 20,040 193,333

Operating income .......................................................................................... 41,539 52,365 335,262

Other income (expenses):Interest and dividend income............................................................................. 1,875 1,654 15,133Prior year’s royalty income ................................................................................. 435 — 3,511Interest expense.................................................................................................. (219) (231) (1,768)Loss on devaluation of investment securities...................................................... — (156) —Loss on sale or disposal of property,plant and equipment, net ................................................................................. (173) (156) (1,396)

Provision for accrued retirement allowances ...................................................... — (729) —Loss on sale of investment securities .................................................................. — (423) —Loss on devaluation of golf memberships .......................................................... (444) — (3,584)Other, net........................................................................................................... (39) 391 (315)

Income before income taxes ........................................................................... 42,974 52,715 346,843

Income taxes (Note 12):Current............................................................................................................... 20,723 17,251 167,256Deferred ............................................................................................................. (800) 9,496 (6,457)

............................................................................................................................... 19,923 26,747 160,799Net income ............................................................................................................ ¥ 23,051 ¥ 25,968 $ 186,044

U.S. dollarsYen (Note 2)

Net income per share ............................................................................................ ¥236.75 ¥399.12 $1.91Cash dividends per share ...................................................................................... 40.00 40.00 0.32The accompanying notes are an integral part of these statements.

17

C O N S O L I D A T E D S T A T E M E N T S O F S H A R E H O L D E R S ’ E Q U I T Y


Millions of yenAdditional

Number of Common paid-in Retained Treasuryshares issued stock capital earnings stock

Balance at April 1, 1999 .................................................... 65,065,000 ¥14,840 ¥23,750 ¥ 97,629 ¥ (2)Cumulative effect of changes in accounting for income taxes ........................................................... 11,903

Net income .................................................................... 25,968Cash dividends............................................................... (2,602)Bonuses to directors and statutory auditors.................... (228)Net decrease in treasury stock ........................................ 1

Balance at March 31, 2000................................................ 65,065,000 14,840 23,750 132,670 (1)Stock splits ..................................................................... 32,532,500Net income .................................................................... 23,051Cash dividends............................................................... (3,245)Bonuses to directors and statutory auditors.................... (289)Net increase in treasury stock ........................................ (1,602)

Balance at March 31, 2001................................................ 97,597,500 ¥14,840 ¥23,750 ¥152,187 ¥(1,603)

Thousands of U.S. dollars (Note 2)Additional

Number of Common paid-in Retained Treasuryshares issued stock capital earnings stock

Balance at March 31, 2000................................................ 65,065,000 $119,774 $191,687 $1,070,783 $ (8)Stock splits ..................................................................... 32,532,500Net income .................................................................... 186,044Cash dividends............................................................... (26,190)Bonuses to directors and statutory auditors.................... (2,333)Net increase in treasury stock......................................... (12,930)

Balance at March 31, 2001................................................ 97,597,500 $119,774 $191,687 $1,228,305 $(12,938)The accompanying notes are an integral part of these statements.

18

C O N S O L I D A T E D S T A T E M E N T S O F C A S H F L O W S



Millions of yen (Note 2)2001 2000 2001

Cash f lows from operating activities:Income before income taxes ................................................................................... ¥42,974 ¥52,715 $346,843Depreciation and amortization............................................................................... 2,443 2,273 19,718Gain (loss) on sale of investment securities ............................................................ (3) 423 (24)Loss on devaluation of investment securities.......................................................... — 156 —Loss on sale or disposal of property, plant and equipment, net.............................. 173 156 1,396Increase in accrued retirement allowances.............................................................. 219 838 1,768Interest and dividend income ................................................................................. (1,875) (1,654) (15,133)Interest expense...................................................................................................... 219 231 1,768Increase in notes and accounts receivable—trade ................................................... (5,042) (5,787) (40,694)Increase in inventories ............................................................................................ (10,664) (2,215) (86,069)Increase (decrease) in notes and accounts payable—trade ...................................... (3,220) 6,479 (25,989)Decrease in other current assets ............................................................................. 288 858 2,324Increase (decrease) in other current liabilities......................................................... (2,367) 1,262 (19,104)Other...................................................................................................................... 59 (23) 475

Subtotal .............................................................................................................. 23,204 55,712 187,280Interest and dividend income received ................................................................... 1,811 1,756 14,617Interest expense paid .............................................................................................. (216) (231) (1,743)Income taxes paid................................................................................................... (24,638) (2,055) (198,854)

Net cash provided by operating activities ........................................................... 161 55,182 1,300

Cash f lows from investing activities:Payment for purchase of marketable securities....................................................... (8,035) (13,455) (64,851)Proceeds from sale of marketable securities............................................................ 7,820 6,806 63,115Payment for purchase of beneficiary certificate on trust of specified receivable...... (38,970) (34,595) (314,528)Proceeds from sale of beneficiary certificate on trust of specified receivable .......... 38,930 24,265 314,205Payment for purchase of property, plant and equipment and intangible fixed assets .. (4,946) (7,339) (39,919)Proceeds from sale of property, plant and equipment and intangible fixed assets .. 59 440 476Payment for purchase of investment securities ....................................................... (1,202) (10,268) (9,701)Proceeds from sale of investment securities............................................................ 5,778 5,709 46,634Payment for long-term advances............................................................................ (3,180) (795) (25,666)Proceeds from collection of long-term advances .................................................... 251 256 2,026Other...................................................................................................................... 210 (1,172) 1,694

Net cash used in investing activities ................................................................... (3,285) (30,148) (26,515)

Cash f lows from financing activities:Increase (decrease) in short-term bank loans, net .................................................. (7) 589 (56)Proceeds from long-term debt................................................................................ 50 250 404Payment for long-term debt................................................................................... (602) (1,054) (4,859)Payment for purchase of treasury stock .................................................................. (1,601) — (12,922)Cash dividends paid ............................................................................................... (3,245) (2,602) (26,190)

Net cash used in financing activities................................................................... (5,405) (2,817) (43,623)

Net increase (decrease) in cash and cash equivalents............................................... (8,529) 22,217 (68,838)Cash and cash equivalents at beginning of year ....................................................... 79,347 57,130 640,412Cash and cash equivalents at end of year (Note 3) ................................................... ¥70,818 ¥79,347 $571,574The accompanying notes are an integral part of this statement.

19

N O T E S T O T H E C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S

SANKYO CO., LTD. and Its Consolidated Subsidiaries

(a) Basis of Presentation of Consolidated Financial StatementsThe accompanying consolidated financial statements have been prepared based on theaccounts maintained by SANKYO CO., LTD. (the “Company”) and its consolidated sub-sidiaries (the “Companies”) in accordance with the provisions set forth in the CommercialCode of Japan and the Securities and Exchange Law, and in conformity with accountingprinciples and practices generally accepted in Japan, which are different in certain respectsfrom the application and disclosure requirements of International Accounting Standards.

Certain items presented in the consolidated financial statements submitted to the Directorof the Kanto Finance Bureau in Japan have been reclassified in these accounts for the conve-nience of readers outside Japan.

The consolidated financial statements are not intended to present the consolidated financialposition and the consolidated results of operations and of cash flows in accordance withaccounting principles and practices generally accepted in countries and jurisdictions otherthan Japan.

(b) Consolidation PrinciplesThe consolidated financial statements include the accounts of the Company and its five sig-nificant wholly-owned subsidiaries. The remaining unconsolidated subsidiaries have assets,net sales and net income which are not significant in relation to those of the Companies, and,accordingly, the accounts of such subsidiaries have been excluded from consolidation and theinvestments therein are carried at cost.

All significant intercompany transactions, account balances and unrealized profits amongthe Companies have been entirely eliminated.

On the elimination of investments in the common stock of consolidated subsidiaries withthe underlying equity in net assets of such subsidiaries, any difference between the cost of aninvestment in a subsidiary and the amount of underlying equity in the net assets of the sub-sidiary is charged to income for the year.

In accounting for investments in the unconsolidated subsidiaries and affiliates, the equitymethod was not applied since the investments in unconsolidated subsidiaries and affiliates arenot significant and would have had no material effect on consolidated financial net income.

(c) Foreign Currency Translation Until the year ended March 31, 2000, current monetary assets and liabilities denominated inforeign currencies were translated into Japanese yen at the rate of exchange in effect at thebalance sheet date. Long-term monetary assets and liabilities denominated in foreign curren-cies were translated at the historical exchange rate. Revenues and expenses were translated atthe rates of exchange prevailing when transactions were recorded.

Effective from the year ended March 31, 2001, the Company and its subsidiaries adoptedthe new Japanese Accounting Standard for Foreign Currency Translation, which is effectivefor periods beginning on or after April 1, 2000. Under the new standard, all monetary assetsand liabilities denominated in foreign currencies, whether long-term or short-term, are trans-lated into Japanese yen at the exchange rates prevailing at the balance sheet date. The result-ing gains and losses are included in net profit or loss for the period. The adoption of the newmethod had no material impact on the accompanying consolidated financial statements.

(d) Cash and Cash EquivalentsCash and cash equivalents in the consolidated statements of cash flows are composed of cashon hand, bank deposits available for withdrawal on demand and short-term investments withan original maturity of three months or less and which represent a minor risk of fluctuationin value.

1 Summary of

Significant

Accounting Policies

20

(e) Allowance for Doubtful AccountsThe allowance for doubtful accounts is estimated on the basis of the actual bad debt rate forgeneral accounts receivable and the assessed recoverability of individual doubtful accountsreceivable.

(f ) Marketable Securities and Investment SecuritiesUntil the year ended March 31, 2000, quoted securities were stated at the lower of cost ormarket value. Other securities were stated at cost. Cost was determined by the moving aver-age method.

Effective from the year ended March 31, 2001, the Company and its subsidiaries adoptedthe new Japanese Accounting Standard for Financial Instruments, which is effective for peri-ods beginning on or after April 1, 2000.

Under the new standard, held-to-maturity debt securities that the Company and its sub-sidiaries intend to hold to maturity, are stated at cost after accounting for any premium or dis-count on acquisition, which is amortized over the period to maturity. Other securities, forwhich market quotations are available, are stated at fair value. Net unrealized gains or losseson these securities are reported as a separate item in shareholders’ equity, net of tax. Othersecurities, for which market quotations are unavailable, are stated at cost, except as stated inthe paragraph below.

In cases where the fair value of held-to-maturity debt securities, equity securities issued byunconsolidated subsidiaries and affiliates, or other securities has declined significantly andsuch impairment of value is not deemed temporary, those securities are written down to fairvalue and the resulting losses are included in net profit or loss for the period.

As a result of adoption of the new standard, income before income taxes for the year endedMarch 31, 2001 increased by ¥2,590 million ($20,904 thousand), net unrealized losses onother securities increased by ¥1,499 million ($12,098 thousand), deferred income tax assets(current) increased by ¥98 million ($791 thousand) and deferred income tax assets (non-cur-rent) increased by ¥1,184 million ($9,556 thousand), as compared with the amount whichwould have been reported if the previous standard had been applied consistently.

Under the new standard, trading securities and debt securities due within one year are pre-sented as “current” and all other securities are presented as “non-current.” The securities heldby the Company and its subsidiaries have been reclassified as of April 1, 2000 (the beginningof the year). As a result of such reclassification, the securities in the current portfoliodecreased by ¥20,252 million ($163,454 thousand) and the securities in the non-current port-folio increased by the same amount.

(g) InventoriesInventories are stated at cost, which is determined as follows:

Finished goods, merchandise and raw materials .................................Primarily, annual average method

Work in process .....................................Individual methodSupplies..................................................Last purchase price method

(h) Property, Plant and Equipment and DepreciationProperty, plant and equipment are stated at cost. Depreciation is computed principally by thedeclining-balance method at rates based on the estimated useful lives of respective assets,except for buildings, for which the straight-line method is applied.

Fixed assets whose acquisition costs are more than ¥100,000 and less than ¥200,000 aredepreciated on the straight-line method over three years.

21

( i ) Accrued Retirement AllowancesThe Company provides accrued retirement allowances for its employees and directors andstatutory auditors. Until the year ended March 31, 2000, the accrued retirement allowance foremployees was calculated based on the present value of retirement benefit obligations. Inaddition, the consolidated subsidiaries provide accrued retirement allowances at an amountequal to 100 percent of the liabilities which they would have been required to pay if all eligibleemployees had retired voluntarily at the balance sheet dates.

Effective from the year ended March 31, 2001, the Company and its subsidiaries adoptedthe new Japanese Accounting Standard for Retirement Benefits, which is effective for periodsbeginning on or after April 1, 2000. In accordance with the new standard, the accrued retire-ment allowance for employees as of March 31, 2001 represents the estimated present value ofprojected benefit obligations in excess of the fair value of the plan assets and unrecognizedactuarial differences which are amortized on a straight-line basis over a period of five yearsfrom the year in which they arise. The effect of adopting the new accounting standard on theaccompanying consolidated financial statements was immaterial.

The accrued retirement allowance for directors and statutory auditors was made at 100 per-cent of the liability which would be required to be paid if all eligible directors and statutoryauditors were to leave the Company voluntarily at the balance sheet date.

( j ) LeasesUnder Japanese accounting practices, financing leases are capitalized, in principle. However,financing leases without options to transfer ownership of the leased assets to lessees may beaccounted for as operating leases subject to appropriate footnote disclosure.

Therefore, the Companies charge or credit periodic lease payments and receipts to incomeas incurred.

(k) Research and Development and Computer SoftwareResearch and development expenses are charged to income as incurred.

Expenditure relating to computer software developed for internal use is charged to incomeas incurred, except if it contributes to the generation of income or to future cost savings, inwhich case it is capitalized and amortized using the straight-line method over the estimateduseful life of the software (five years).

( l ) Income TaxesIncome taxes of the Company and its consolidated subsidiaries consist of corporate incometaxes, local inhabitants’ taxes and enterprise taxes.

The Company and its consolidated subsidiaries have adopted the deferred tax accountingmethod. Income taxes were determined using the asset and liability approach, wherebydeferred tax assets and liabilities were recognized in respect of temporary differences betweenthe tax basis of assets and liabilities and those as reported in the financial statements.

(m) Appropriation of Retained EarningsThe Commercial Code of Japan stipulates that appropriations of retained earnings requireapproval by the shareholders at an ordinary general meeting. The appropriations of retainedearnings are, therefore, not reflected in the consolidated financial statements for the period towhich they relate, but are recorded in the consolidated financial statements in the subsequentaccounting period after shareholders’ approval has been obtained.

22

(n) Net Income and Dividends Per ShareNet income per share of common stock shown in the accompanying consolidated statements ofincome is computed based on the weighted average number of shares outstanding during each year.

Cash dividends per share shown in the accompanying consolidated statements of incomerepresent dividends declared and paid as applicable to the respective fiscal year.

(o) ReclassificationCertain reclassifications of previously reported amounts have been made to conform with cur-rent classifications.

2 U.S. Dollar Amounts Amounts in U.S. dollars are included solely for the convenience of readers outside Japan. Therate of ¥123.90=U.S.$1, the rate of exchange on March 31, 2001 has been used in translation.The inclusion of such amounts is not intended to imply that Japanese yen have been or couldbe readily converted, realized or settled in U.S. dollars at this or any other rate.

3 Cash and Cash

Equivalents

Reconciliation of cash and cash equivalents to the accounts disclosed on the balance sheet atMarch 31, 2001 and 2000 is as follows:

Thousands ofMillions of yen U.S. dollars

2001 2000 2001

Cash and deposits............................................ ¥ 29,600 ¥ 33,116 $238,902Marketable securities ....................................... 55,681 71,451 449,403Beneficiary certificate on trust of specified receivable .................................... 23,600 24,830 190,476Total ............................................................ 108,881 129,397 878,781

Time deposits with maturity in excess of three months............................... (3,968) (4,270) (32,026)

Bonds and debentures, investment funds and others ...................................................... (11,995) (25,550) (96,812)

Beneficiary certificate on trust of specified receivable with maturityin excess of three months............................... (22,100) (20,230) (178,369)

Cash and cash equivalents ............................... ¥ 70,818 ¥ 79,347 $571,574

4Marketable

Securities and

Investment

Securities

Marketable securities and investment securities at March 31, 2001 and 2000 were as follows:

(a) Held-to-maturityMillions of yen Thousands of U.S. dollars

2001 2001Gross Gross Gross Gross

Carrying unrealized unrealized Market Carrying unrealized unrealized Marketamounts gains losses value amounts gains losses value

Market value available: Bonds and debentures.............. ¥22,897 ¥119 ¥96 ¥22,920 $184,802 $961 $775 $184,988

Market value not available:Bonds and debentures.............. 100 807

..................................... ¥22,997 $185,609

23

(b) Other securitiesMillions of yen Thousands of U.S. dollars

2001 2001Gross Gross Gross Gross

unrealized unrealized Carrying unrealized unrealized Carrying Cost gains losses amounts Cost gains losses amounts

Market value available:Equity securities ...... ¥ 6,919 ¥ — ¥(2,592) ¥ 4,327 $ 55,843 $ — $(20,920) $ 34,923Bonds and debentures.............. 9,200 44 (172) 9,072 74,254 355 (1,389) 73,220

Investment funds and others .............. 33,709 247 (112) 33,844 272,066 1,993 (903) 273,156

..................................... ¥49,828 ¥291 ¥(2,876) 47,243 $402,163 $2,348 $(23,212) 381,299Market value not available:Bonds and debentures ............. 10,771 86,933

.................................... ¥58,014 $468,232

Millions of yen2000

Carrying Market Unrealizedamounts value gain

Marketable securities:Market value available:

Bonds and debentures ...................................... ¥ 8,533 ¥ 8,801 ¥268Investment funds and others ............................ 33,506 33,639 133

................................................................................. 42,039 ¥42,440 ¥401Market value not available ................................... 29,412

Total ................................................................ ¥71,451

Investment securities:Market value available:

Equity securities ............................................... ¥ 5,955 ¥ 6,463 ¥508................................................................................. 5,955 ¥ 6,463 ¥508

Market value not available ................................... 13,714Total ................................................................ ¥19,669

Inventories at March 31, 2001 and 2000 comprised the following:Thousands of

Millions of yen U.S. dollars2001 2000 2001

Merchandise ............................................................ ¥ 59 ¥ 130 $ 476Finished goods ......................................................... 335 1,602 2,704Work in process ....................................................... 298 423 2,405Raw materials........................................................... 19,071 6,683 153,923Supplies.................................................................... 188 23 1,517Real estate held for sale............................................ 1,652 — 13,333

Total .................................................................... ¥21,603 ¥8,861 $174,358

5 Inventories

24

The annual average interest rates applicable to short-term bank loans at March 31, 2001 and2000 was 1.875 percent.

Long-term debt at March 31, 2001 and 2000 consisted of the following:Thousands of


Loans from banks due from 2002 to 2009 with average interest rates of 2.278%Secured ................................................................ ¥9,374 ¥ 9,930 $75,658Unsecured............................................................ 235 230 1,896

................................................................................. 9,609 10,160 77,554Less: current portion................................................ (622) (604) (5,020)

Total .................................................................... ¥8,987 ¥ 9,556 $72,534

The aggregate annual maturities of long-term debt after March 31, 2001 are as follows:Thousands of

Year ending March 31 Millions of yen U.S. dollars

2002.......................................................................................... ¥ 622 $ 5,0202003.......................................................................................... 827 6,6752004.......................................................................................... 582 4,6972005.......................................................................................... 566 4,5682006.......................................................................................... 520 4,197Thereafter................................................................................. 6,492 52,397

Total ..................................................................................... ¥9,609 $77,554

A summary of assets pledged as collateral for long-term debt, including the current portionof long-term debt, at March 31, 2001 is as follows:


2001 2001

Buildings and structures ........................................................ ¥5,643 $45,545Land ...................................................................................... 5,520 44,552

6 Short-Term Bank

Loans and Long-

Term Debt

Employees, whose service with the Company and consolidated subsidiaries is terminated, areusually entitled to receive lump-sum severance indemnities and/or pension payments based ona defined benefit formula, which takes into account current rates of pay and length of service.

The accrued retirement allowance for employees as of March 31, 2001 is analyzed as follows:Thousands of

Millions of yen U.S. dollars2001 2001

Projected benefit obligations .................................................... ¥1,317 $10,629Plan assets................................................................................. 89 718Unrecognized actuarial differences ........................................... 75 605

Total ..................................................................................... ¥1,153 $ 9,306

The net pension expense relating to retirement benefits for the year ended March 31, 2001was as follows:


2001 2001

Service cost ............................................................................... ¥145 $1,170Interest cost .............................................................................. 29 234Amortization of unrecognized actuarial differences.................. (18) (145)

Total ..................................................................................... ¥156 $1,259

7 Retirement

Benefit Plan

25

Assumptions used in calculation of the above information are as follows:2001

Discount rate ........................................................................................ 2.50%Method of attributing the projected benefits to periods of service ....... Straight-line basisAmortization of unrecognized actuarial differences.............................. Over five years

At March 31, 2001, the Companies were contingently liable as follows:Thousands of

Millions of yen U.S. dollars2001 2001

As an endorser of notes endorsed ........................................... ¥188 $1,517

8 Contingent

Liabilities

(a) The Companies as lessee:Pro forma information relating to acquisition costs, accumulated depreciation and the net bal-ance of property held under finance leases which do not transfer ownership of the leasedproperty to the lessee on an “as if capitalized” basis for the years ended March 31, 2001 and2000 is as follows:

Millions of yen2001

Acquisition Accumulatedcost depreciation Net balance

Machinery and equipment.......................................... ¥2,292 ¥877 ¥1,415

Millions of yen2000


Machinery and equipment.......................................... ¥2,005 ¥1,035 ¥970

Thousands of U.S. dollars2001


Machinery and equipment......................................... $18,499 $7,078 $11,421

Future minimum lease payments under finance leases as of March 31, 2001 and 2000 wereas follows:


2001 2000 2001

Due within one year .................................................. ¥1,494 ¥1,530 $12,058Due after one year ..................................................... 2,639 3,176 21,300

Total ...................................................................... ¥4,133 ¥4,706 $33,358

Future minimum lease payments for sub-leased properties are included in the above sched-ule. Payments of ¥1,093 million ($8,822 thousand) are included in the ‘Due within one year’figures and payments of ¥1,601 million ($12,922 thousand) are included in the ‘Due after oneyear’ figures for the year ended March 31, 2001.

9 Leases

26

The lease expense, depreciation and interest expense in respect of leased assets for the yearsended March 31, 2001 and 2000 were as follows:

Thousands ofMillions of yen U.S. dollars2001 2000 2001

Lease expense .................................................................. ¥438 ¥419 $3,535Depreciation.................................................................... 410 389 3,309Interest expense ............................................................... 29 25 234

Depreciation is calculated by the straight-line method. The useful lives are equal to thelease terms and the residual value is zero.

(b) The Company as lessor:Pro forma information relating to future minimum lease receipts for property held underfinance leases which do not transfer ownership of the leased property to the lessee as of March31, 2001 and 2000 is as follows:


2001 2000 2001

Due within one year .................................................. ¥1,098 ¥1,201 $ 8,862Due after one year ..................................................... 1,609 2,532 12,986

Total ...................................................................... ¥2,707 ¥3,733 $21,848

All future minimum lease receipts relate to sub-leased property.

The following appropriations were approved at the ordinary general meeting of shareholdersof the Company held on June 28, 2001.


2001 2001

Appropriations for:Cash dividends .................................................................. ¥1,943 $15,682Bonuses to directors and statutory auditors....................... 244 1,969Legal reserve...................................................................... 218 1,760

.............................................................................................. ¥2,405 $19,411

The Commercial Code of Japan requires that an amount equal to at least 10 percent ofappropriations paid in cash be transferred to the legal reserve until such reserve equals 25 per-cent of stated capital. This reserve amounted to ¥2,336 million ($18,854 thousand) and¥1,987 million at March 31, 2001 and 2000, respectively. This reserve, included in retainedearnings, is not available for distribution as dividends but may be used to reduce a deficit or betransferred to stated capital.

In May 2000, the Board of Directors decided to implement the Company’s first stockoption plan for Board Members and selected Senior Executives and to purchase some of theCompany’s common shares for transfer to them under the plan, pursuant to Article 210-2 ofthe Commercial Code of Japan. Following approval at the general shareholders’ meeting heldin June 2000 and subsequent Board of Directors’ resolutions, the stock options (rights to pur-chase common shares) were provided to the 7 Directors on the Board at amounts rangingfrom 20,000 to 50,000 common shares each, and to 57 selected Senior Executives at amountsranging from 1,500 to 10,000 common shares each. The stock options are exercisable fromJune 30, 2002 to June 29, 2005 at the market price on the last month date of grant per com-mon share, the exercise price being calculated by a formula approved by shareholders at thesaid annual shareholders’ meeting.

0 Shareholders’ Equity

27

Under the Company’s articles of incorporation, it is possible for the Company to purchaseand retire common shares (up to a maximum of 6,500,000 shares) by using the Company’sretained earnings subject to a resolution of the Board of Directors.

Research and development expenditure charged to income was ¥5,762 million ($46,505 thou-sand) and ¥5,029 million for the years ended March 31, 2001 and 2000, respectively.

A Research and

Development

The Company and its consolidated subsidiaries are subject to a number of different taxesbased on income which, in the aggregate, indicate a statutory effective tax rate of approxi-mately 42 percent for the year ended March 31, 2001 and 2000.

Tax losses can be carried forward for a five-year period and be offset against future taxable income.Significant components of deferred tax assets and liabilities at March 31, 2001 and 2000 are

as follows:Thousands of


Deferred tax assets:Accrued enterprise taxes ........................................ ¥1,155 ¥1,002 $ 9,322Loss on write-down of inventories ........................ 512 265 4,132Unrealized profits .................................................. 7 122 56Accrued retirement allowances .............................. 739 621 5,964Tax loss carry forwards .......................................... 79 191 638Net unrealized gains on securities.......................... 1,184 — 9,556Accumulated depreciation ..................................... 398 — 3,212Unrealized profit on fixed assets ............................ 37 — 299Other ..................................................................... 330 243 2,664Deferred tax assets ................................................. 4,441 2,444 35,843

Deferred tax liabilities:Net unrealized gains on securities.......................... (98) — (791)Allowance for doubtful accounts ........................... (10) (27) (81)Reserve for special depreciation ............................. (39) (8) (314)Other ..................................................................... — (1) —Deferred tax liabilities............................................ (147) (36) (1,186)Deferred tax assets ................................................. ¥4,294 ¥2,408 $34,657

A breakdown of the difference between the statutory tax rate and the effective income taxrate at March 31, 2001 and 2000 is as follows:

2001 2000

Statutory tax rate ...................................................................................... 42.0% 42.0%Tax on undistributed profits..................................................................... 4.3 9.4Other ........................................................................................................ 0.1 (0.7)

Effective income tax rate ...................................................................... 46.4% 50.7%

B Income Taxes

28

The Companies operate within five industry segments in Japan: pachinko machines and relatedindustries, ball bearing supply systems and related industries, pachislo machines and relatedindustries, pachinko halls and related industries and other industries.

Pachinko machines and related industries .......................................Pachinko machines, machine gauges, relat-

ed parts and royalty income relating topachinko machines

Ball bearing supply systems and related industries .......................................Pachinko ball feeders, parlor equipment

and peripherals and royalty income relatingto ball feeders

Pachislo machines and related industries .............Pachislo machines and related partsPachinko halls and related industries ...................Ball rental income at amusement placesOther industries.................................................General partsCorporate items include general and administrative expenses and other expenses not identi-

fied with business segments.The Company had no overseas consolidated subsidiaries for the years ended March 31,

2001 and 2000.Sales of the Company and its consolidated subsidiaries from sources outside Japan for the

years ended March 31, 2001 and 2000 were not significant (less than 10 percent of consoli-dated sales for the respective years).

Information by industry segment for the years ended March 31, 2001 and 2000, is as follows:Millions of yen

2001Pachinko Ball bearing Pachislo Pachinko Other Elimination Consolidatedmachines supply systems machines halls and industries or corporate

and related and related and related related itemsindustries industries industries industries

Sales:Customers ................ ¥101,094 ¥12,804 ¥4,000 ¥9,160 ¥2,490 ¥ — ¥129,548Intersegment ............ 54 103 2 — — (159) —

Total..................... 101,148 12,907 4,002 9,160 2,490 (159) 129,548Operating expenses .. 55,865 12,822 3,373 8,985 1,991 4,973 88,009Operating income .... ¥ 45,283 ¥ 85 ¥ 629 ¥ 175 ¥ 499 ¥ (5,132) ¥ 41,539Identifiable assets ..... ¥ 47,188 ¥ 5,391 ¥2,688 ¥3,612 ¥1,397 ¥183,030 ¥243,306Depreciation and amortization ........... ¥ 1,638 ¥ 183 ¥ 175 ¥ 104 ¥ 29 ¥ 314 ¥ 2,443

Capital expenditure ... ¥ 5,357 ¥ 106 ¥ 252 ¥ 336 ¥ 27 ¥ 244 ¥ 6,322*1. Netting corporate items................¥5,598 million*2. Netting corporate items................¥194,474 million

C Segment

Information

*2

*1

29

Millions of yen2000

Pachinko Ball bearing Pachislo Pachinko Other Elimination Consolidatedmachines supply systems machines halls and industries or corporate


Sales:Customers ................ ¥109,630 ¥9,077 ¥3,919 ¥9,255 ¥1,556 ¥ — ¥133,437Intersegment ............ 59 151 6 — — (216) —

Total..................... 109,689 9,228 3,925 9,255 1,556 (216) 133,437Operating expenses .. 56,639 8,893 2,374 9,195 1,389 2,582 81,072Operating income .... ¥ 53,050 ¥ 335 ¥1,551 ¥ 60 ¥ 167 ¥ (2,798) ¥ 52,365Identifiable assets ..... ¥ 61,335 ¥4,915 ¥2,517 ¥3,268 ¥5,202 ¥158,275 ¥235,512Depreciation and amortization ........... ¥ 1,623 ¥ 150 ¥ 86 ¥ 77 ¥ 28 ¥ 309 ¥ 2,273

Capital expenditure ... ¥ 5,844 ¥ 27 ¥ 70 ¥ 307 ¥1,255 ¥ 192 ¥ 7,695*1. Netting corporate items................¥3,318 million*2. Netting corporate items................¥164,012 million

Thousands of U.S. dollars2001

Pachinko Ball bearing Pachislo Pachinko Other Elimination Consolidatedmachines supply systems machines halls and industries or corporate


Sales:Customers ................ $815,932 $103,341 $32,284 $73,931 $20,097 $ — $1,045,585Intersegment............. 436 831 16 — — (1,283) —

Total ..................... 816,368 104,172 32,300 73,931 20,097 (1,283) 1,045,585Operating expenses... 450,888 103,486 27,223 72,519 16,070 40,137 710,323Operating income..... $365,480 $ 686 $ 5,077 $ 1,412 $ 4,027 $ (41,420) $ 335,262Identifiable assets...... $380,856 $ 43,511 $21,695 $29,153 $11,275 $1,477,240 $1,963,730Depreciation and amortization ........... $ 13,220 $ 1,477 $ 1,412 $ 839 $ 236 $ 2,534 $ 19,718

Capital expenditure.... $ 43,236 $ 856 $ 2,034 $ 2,712 $ 218 $ 1,969 $ 51,025*1. Netting corporate items................$45,182 million*2. Netting corporate items................$1,569,605 million

*2

*1

*2

*1

The Company’s significant subsidiaries are as follows:Ownership Country of

Name interest incorporation

SANRITSU KIGYO CO., LTD. ................................................ 100% JapanSANKYO PLASTIC CO., LTD. ................................................ 100% JapanDAIWA ELECTRIC CO., LTD. .............................................. 100% JapanDAIDO CO., LTD. ..................................................................... 100% JapanSANKYO CREATE CO., LTD. ................................................ 100% Japan

E Significant

Subsidiaries

Principal transactions between the Company and INTERNATIONAL CARD SYSTEMCO., LTD., which is an unconsolidated subsidiary of the Company for the years endedMarch 31, 2001 and 2000, are summarized as follows:


2001 2000 2001

Purchases .................................................................... ¥1,539 ¥1,505 $12,421Payments for research and development charges ........ 165 159 1,332

D Related Party

Transactions

30

To the Board of Directors ofSANKYO CO., LTD.

We have audited the accompanying consolidated balance sheets of SANKYO CO., LTD. and its consolidated subsidiaries as ofMarch 31, 2001 and 2000, and the related consolidated statements of income, and shareholders’ equity, and cash flows for theyears then ended, all expressed in Japanese yen. Our audits were made in accordance with auditing standards, procedures andpractices generally accepted and applied in Japan and, accordingly, included such tests of the accounting records and such otherauditing procedures as we considered necessary in the circumstances.

In our opinion, the consolidated financial statements referred to above present fairly the consolidated financial position ofSANKYO CO., LTD. and its consolidated subsidiaries as of March 31, 2001 and 2000, and the consolidated results of theiroperations and their cash flows for the years then ended in conformity with accounting principles and practices generally accept-ed in Japan (see Note 1 (a)) applied on a consistent basis.

As described in Note 1 to the accompanying consolidated financial statements, effective for the year ended March 31, 2001,SANKYO CO., LTD. and its consolidated subsidiaries have adopted new Japanese accounting standards for financial instru-ments and retirement benefits.

The amounts expressed in U.S. dollars, which are provided solely for the convenience of the reader, have been translated on thebasis set forth in Note 2 to the accompanying consolidated financial statements.

ChuoAoyama Audit CorporationTokyo, JapanJune 28, 2001

R E P O R T O F I N D E P E N D E N T C E R T I F I E D P U B L I C A C C O U N T A N T S

31

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S A N K Y O N E T W O R K C O R P O R A T E D A T A

SANKYO CO., LTD.

Head Office

Tokyo Head OfficeURL: http://www.sankyo-fever.co.jp/

Fiscal Year-end DateMarch 31

Date of EstablishmentApril 12, 1966

Capital¥14,840 million

Number of Employees725

Number of SharesIssued and outstanding: 97,597,500

Stock Exchange ListingThe Tokyo Stock Exchange, First Section, Code Number 6417

Transfer AgentThe Chuo-Mitsui Trust & Banking Co., Ltd.

AuditorChuoAoyama Audit Corporation

(As of March 31, 2001)� Head office� Branch� Sales office� Subsidiary

Head Office6-460 Sakaino-cho, Kiryu-shi, Gunma 376-0002, JapanTelephone: 81 (277) 44-3161Facsimile: 81 (277) 47-4523

Tokyo Head Office3-29-14 Shibuya, Shibuya-ku, Tokyo 150-8327, JapanTelephone: 81 (3) 5778-7777Facsimile: 81 (3) 5778-6731

Consolidated Subsidiaries� SANRITSU KIGYO CO., LTD.� SANKYO PLASTIC CO., LTD.� DAIWA ELECTRIC CO., LTD.� DAIDO CO., LTD.� SANKYO CREATE CO., LTD.

(As of March 31, 2001)

B O A R D O F D I R E C T O R S A N D C O R P O R A T E A U D I T O R S

Chairman* Kunio Busujima

Chief Executive Officer*Hideyuki Busujima

Exective Vice President*Shohachi Ugawa

Senior DirectorKazumasa Imai

Managing DirectorsYuichi TakagiAkihiko SawaiAkira Akaishi

DirectorsKimihisa TsutsuiJunzo Hamaguchi

Corporate AuditorsYasuo NakanoKoichiro MakishimaToshiaki Ishiyama

*Representative Directors

(As of June 28, 2001)

Head Office

Tokyo Head Office

Printed in Japan

Printed on paper treated with chlorine-free bleach

Documents

SANKYO CO., LTD. · 2015-01-16 · Since its establishment in 1966, SANKYO CO., LTD., has carried out its operations in the pachinko industry—one of Japan’s most popular leisure