Financial Summary

Recent Updates

Highlights

On February 2, 2012, Fields Corp. released Q3 FY03/12 results: click here to go direct to the Q3 FY03/12 results section.

(For original PDF format English language announcement please click here.)

On January 18, 2012, the company announced the release of a new pachislot machine from Bitsy Co. “Evangelion – the Heartbeat of Life”. It was expected to be available at pachinko halls from February 2012.

(For original Japanese-language only announcement in PDF format,please click here.)

On December 26, 2011, the company announced that its Board of Directors had concluded a basic agreement with Universal Entertainment Corp. (Jasdaq 6425) for a joint venture across a variety of entertainment fields.

(For original Japanese-language only announcement in PDF format, please click here.)

Overview of the Basic Agreement

• The company and Universal Entertainment Corp. (Universal) agreed to start joint venture operations through Mizuho, a wholly-owned subsidiary of Universal.
• The company plans to acquire 198 shares in Mizuho (an ownership ratio of 49.75%) at projected total cost of 1.0 billion yen during a third party offering that is targeted for early January 2012.
• In addition, the company and Universal also agreed to look for further tie-up opportunities across the entertainment industry.

For corporate releases and developments more than three months old please refer to the News & Topics section.

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Trends & Outlook

Quarterly Trends

Q3 FY03/12 Results (Announced on February 2, 2012; please refer to table above)

The full year forecast was left unchanged. Cumulative Q3 sales were down 39.7% YoY at 43.1 billion yen with operating profit tumbling 99.1% to 106 million yen. Net income fell 82.3% YoY to 1.1 billion yen due to the recognition of a deferred tax asset form the dissolution/liquidation of its Japan Sports Marketing Inc. subsidiary and a lower corporate tax burden.

The company posted relatively large YoY declines in sales and profitability, however, this was because Fields was expecting to release a number of blockbuster Pachinko and Pachislot machine titles in Q4.

Performance by segment was as follows:

• PS Field: Sales of 38.0 billion yen (-41.0% YoY); Operating profit of 229 million yen (-97.8% YoY)

Industry Situation:

Pachinko and pachislot machine manufacturers had changed their sales schedules with a focus on 2H FY03/12 activity (October 2011 to March 2012), as component makers, such as semiconductor firms, began recovering from March 2011’s earthquake going into summer 2011. Consequently, 1H sales were sluggish industry-wide on a YoY basis as machine sales were focused on those units where components had been procured pre-quake.

However, the supply chain has recovered faster than initially expected and for Q3 machine makers released numerous new titles, with a number of them becoming hit machines. Pachinko hall operators have also been actively replacing models with new machines. Regarding the impact of the November 2011 floods in Thailand there have been limited issues with component procurement, however, the industry wide effect was not perceived to be particularly severe.

Company Situation:

Given the above situation of most makers choosing to release titles in Q3, as a distributor to halls Fields Corp. decided to go for Q4 releases of its titles to attract players.

Cumulative Q3 unit sales performance was 73,489 Pachislot machine units (down 64,423 units YoY) and 125,465 Pachinko machine units (down 116,228 units YoY)

As for Q4, its latest release in its hit Evangelion Pachinko machine series, “CR Evangelion 7", was released in January 2012. This was the company’s first major release for the quarter and machine utilization rates were strong with the company also receiving additional orders for the model. The ongoing recovery in the Pachislot segment also continued, and the company was slated to launch “Evangelion – the Heartbeat of Life”, its second major title for the quarter, in February as well as a third major title.

• Mobile Field: Sales of 1.6 billion yen (+1.1% YoY); Operating profit of 41 million yen (-85.6% YoY)

• Sports Entertainment Field: Sales of 1.5 billion yen (-10.1% YoY); Operating loss of 35 million yen (vs. an operating loss of 219 million YoY)

• Other Field: Sales of 3.0 billion yen (-29.4% YoY); Operating loss of 183 million yen (vs. an operating profit of 177 million YoY)

1H/Q2 FY03/12 Results (Announced on November 2, 2011; please refer to table above)

The full year forecast was left unchanged. 1H sales were down 22.5% YoY at 33.3 billion yen. Operating profit dropped 82.8% to 1.5 billion yen and recurring profit was off 82.0%. In addition, net income fell 55.3% YoY to 2.4 billion yen due to the recognition of a deferred tax asset form the dissolution/liquidation of its Japan Sports Marketing Inc. subsidiary.

While both sales and profits were sharply down due to the shortage of electronic components in the aftermath of March 2011’s Great East Japan Earthquake the company’s FY03/12 machine sales plan is focused on releasing several big pachinko and pachislot machine titles in 2H FY03/12, whose release remained on track.

Performance by segment was as follows

PS Field: Sales of 29.5 billion yen (-23.2% YoY); Operating profit of 1.7 billion yen

New pachislot machines released in 1H were “SAMURAI 7” and “Kaze no Youjinbou–Memory of Butterflies”, while the “MOBASLO Evangelion–for your own wish” models went on sale in Q4 FY03/11 and contributed to sales for the period as well. As for pachinko machines, "CR The story of ayumi hamasaki－introduction” was the only release for the period, sales of which crossed the 70,000 units sold threshold.

The company noted that the rise in the installed pachislot machine base continued into Q2 from Q1. The total number of domestic pachislot machines in operation increased 7.5% YoY to approximately 1.4 million as of end-September 2011. Including pachinko machines, the total number of units was up 0.4% YoY to approximately 4.5 million (note: these figures are based on Fields’ own industry data). The recovery in pachislot machine utilization rates continued, a situation the company noted was remarkable given pachislot machines could surpass 100,000 units. As for pachinko machine utilization levels, the company remarked last year there were instances when fewer than 20,000 balls per unit were in operation, current utilization ratios were comparatively strong.

As for the pachinko market, the company’s own analysis suggests that machine numbers in the middle-low/middle-light specification zone have been increasing, while the share of machines in the high-stakes max-type/middle-high zone has been decreasing. SR Inc. believes that one cause for the pachinko market’s recovery is that the focus has shifted to low-initial investment, middle-type machines away from the traditional max-type machines as various makers have released middle-light and middle-low type models, and as a result machine utilization rates have improved. Despite this backdrop, the company released a traditional middle-high specification zone model in its “CR Evangelion” series, but it commented the next title it introduces will fall into the middle-low specification.

Note: classification of pachinko specifications (i.e., jackpot-probabilities) is based on explanations from the company. Specifically, the probabilities are as follows: max-type is 1/370-1/399; middle-low is 1/280-1/319; light-middle is 1/150-1/279; “amadeji” class is 1/149+.

As of Q3, the company had begun selling the “Rahxephon” and “Street Fighter IV” pachislot machines. The company was planning to release a big title pachinko machine early in new year 2012, and also had major pachislot titles lined up for sequential releases. Given Q4 will see a concentration of major releases, full year performance will likely be determined by Q4.

Regarding the impact of the November 2011 floods in Thailand on component procurement, the company noted it was difficult to assess the situation and potential risks given component procurement is handled by its manufacturing partners. Nonetheless, it remarked it did not feel there would be any serious effect on the release of its near term big title releases.

Mobile Field: Sales of 1.1 billion yen (+8.5% YoY); Operating profit of 62 million yen (-68.8% YoY)

This business handles mobile/online services that utilize pachinko/pachislot-related content as well as those that utilize non-pachinko/pachislot-related content.

The company offers four large platforms focused on pachinko/pachislot-related content: “NanaPachi”, “Pspace”, “MOBASLO” (which links up with pachislot machines), and is developing the “Fields Mobile” website for smartphones. NanaPachi and Pspace have large memberships numbers, but the company recognizes that it faces a challenge in transitioning these to a paid service.

As far as non-pachinko/pachislot related content, the company is developing “Shameji,” a photo-related application for mobile phones, and other communication services. The company commented going forwards it would bank on new IP and policies to increase memberships in order to drive revenues.

Sports Entertainment Field: Sales of 1.0 billion yen (-4.7% YoY); Operating loss of 34 million yen (vs. an operating loss of 140 million in 1H FY03/11)

The company restructured its Japan Sports Marketing Inc. subsidiary. Of its three businesses, the fitness club business (Total Workout) was folded into Fields Corp to be run by the company and the remaining two were being wound down. The company was completely withdrawing from the sponsor-sales and rights businesses, which includes televising rights. The company plans to wind down the subsidiary with special liquidation proceedings in January 2012.

Other Field: Sales of 2.2 billion yen (-12.1% YoY); Operating loss of 139 million yen (vs. an operating profit of 58 million in 1H FY03/11)

HERO’S Inc., a publishing company that Fields established together with Shogakukan Creative Inc., released its first issue of the “Heroes Monthly” comic magazine on November 1, 2011. In addition, subsidiary Lucent Pictures Entertainment Inc. is readying for the planned February 2012 release of the film “BERSERK I THE HIGH KING’S EGG”. It was also working on tie-up projects with various other media companies.

The first issue of “Heroes Monthly” was released on November 1, 2011. In addition to going on sale at Seven-Eleven Japan Co.’s (subsidiary of Seven & i Holdings Co. (TSE 3328)) approximately 13,000 stores nationwide, its distribution in pachinko halls has led to the publication of 100,000 copies of the magazine. According to the company, its business model for “Heroes Monthly” differs from existing comic magazines in that its primary source of earnings is advertising revenue, and publication of separate volume comics will add value. The company is also planning a second-round roll out of pachinko/pachislot-related IP to drive revenues. The company commented that it expects to be in the red for its initial financial year due to advertising expenses, but that from the second financial year on, it should be profitable as it develops other media areas.

Q1 FY03/12 Results

The company released Q1 FY03/12 results on August 4, 2011 (see the table above).

Sales were down 17.4% YoY at 17.6 billion yen. The company posted an operating loss of 225 million yen (vs. an operating profit of 2.3 billion yen in Q1 FY03/11) and a recurring loss of 266 million yen (vs. a recurring profit of 2.5 billion yen in Q1 FY03/11). A further 87 million yen was recorded in extraordinary losses resulting in a net loss of 284 million yen (vs. net income of 1.4 billion yen in Q1 FY03/11)

The company commented its Q1 FY03/12 results came in according to plan.

Q1 sales at the core PS Fields business for pachinko machines were 7,107 units (a YoY decline of 57,785 units vs. FY03/11), and 36,250 units for pachislot (a YoY decrease of 4,396 units). With regards to pachislot the "SAMURAI 7" and “MOBASLO Evangelion for your own wish” models went on sale in Q4 FY03/11. The decrease in pachinko and pachislot machine sales was the main reason behind the operating loss.

Owing to a shortage of electronic components in the aftermath of March 2011’s Great East Japan Earthquake the company’s FY03/12 machine sales plan is focused on releasing several big pachinko and pachislot machine titles in H2 FY03/12. Given this, Q1 FY03/12 new model sales was limited to one new unit: the "SAMURAI 7" pachislot machine.

Q2 releases, on the other hand, were the pachinko machine "CR The story of Ayumi Hamasaki - the prologue” and the pachislot machine “Kaze no Youjinbou - Memories of a Butterfly” and results for these came in above company plans.

At the company results meeting the company commented it did not consider the pachinko and pachislot market environment to be bad given the staggered operating hours of halls since July. It also noted that for pachislot machines it had become clear a recovery in hall utilization rates and sales was underway. With regards to this point SR Inc. is aware that there have been releases of high entertainment value machines centered on ART (Assist Replay Time) type models, which have attracted both new players and maintained existing-player repeat-user rates for pachislot gaming.

On the other hand, pachinko machines had been weak until around March 2011, but had begun recovering since then. One factor behind this was manufacturers had been introducing middle-light and middle type machines which require lower initial investments versus MAX type models and these models also helped lift utilization rates.

FY03/12 Outlook

Current pachinko/pachislot market environment

(Based on comments from May 13, 2011, results briefing)

2011 Golden Week market data was noteworthy given how soon after March’s Great East Japan Earthquake it occurred, and when one factors in the backdrop of rolling blackouts and pachinko hall operators exercising self restraint in terms of promoting their business post-quake:

• The daily count of balls played per machine has declined by approximately 2,000 balls during the past five years or so, during Golden Week. However, in 2011 the level remained pretty much flat on a YoY basis (about 24,000 balls played per machine for the week). While there was a sharp drop in play immediately after the earthquake this later recovered completely. Daily pachislot play volumes continued to be good at roughly 12,000 tokens per machine.
• Customers had started to return to pachinko halls, and the company believes fallout from the Tohoku earthquake has been contained. While the high-stakes max-type pachinko machines, which appeal to hardcore players, were negatively impacted by the mood of general self-restraint post-quake the mid-type machine category experienced good numbers from Golden Week up until the time of the company’s results meeting, which actually boosted overall play and sales figures.

FY03/12 Forecast

The company’s FY03/12 corporate forecasts and assumptions are as follows:

Effects of the Great East Japan Earthquake (Based on comments from May 13, 2011 earnings briefing):

The operational impact on halls was due to power shortages at Tokyo Electric Power Co. (Tepco) and Tohoku Electric Power Co. and operators planning staggered closures of halls to cope with power shortages but this meant primarily that business hour times during late March mid-April were different from normal rather than anything beyond this.

Some manufacturers were experiencing parts shortages and predicted this would impact new machine roll-outs. The company noted it was however comfortable that titles slated for 1H launch would be unaffected. Beyond September the impact on components was less clear and the company was trying to set up the necessary framework for the launch of several new products during FY03/12.

Due to the above reasons the company felt it was necessary to examine the timing of new pachinko and pachislot machine releases and so the company did not disclose any forecasts for 1H.

FY03/12 Title Launches:

The company said it planned to release several major pachinko game titles in FY03/12, such as “CR The story of Ayumi Hamasaki－the prologue”.

The company noted that the recovery in the pachislot segment meant both Rodeo and Bitsy had plans for major title launches as well.

Group business (Based on comments from May 13, 2011 earnings briefing):

The company was targeting operating profit of over 1.0 billion yen (excluding PS Field) vs. 261 million yen in FY03/11.

FY03/11 total pachinko machine sales were 262,614 units, and the company is aiming for larger unit sales in FY03/12. The higher unit sales targets are based on expectations for several major title releases in FY03/12, beginning with the “Evangelion” series. The company also noted the major sales contribution in FY03/11 of “CR Neon Genesis Evangelion – Evangelical of the beginnings”.

FY03/12 Corporate Forecasts:

Considering the above, the company is forecasting a 3.5% YoY decline in sales to 100.0 billion yen while it projects operating profit to increase 6.6% YoY to 14.0 billion yen and sees recurring profit coming in at 140.0 billion yen (+2.3% YoY), and net income at 8.0 billion yen (+106.4% YoY).

The reason why the company was forecasting an increase in profit despite a decline in sales was the company assumed more growth will come from pachinko machines (for which only sales commissions are booked as Fields revenues) compared to pachislot machines (for which the entire unit price of the machine is booked). The company also commented that the forecast took into consideration any impact from electronic component sourcing issues. The company did not issue a 1H forecast but commented that 2H sales would be responsible for a larger share of sales.

It noted that in FY03/11 the “CR Evangelion – Evangelical of the Beginnings” pachinko game unit made a significant contribution to sales and expected similar contributions from a series of big titles it has slated for releases in FY03/12, such as “CR The story of Ayumi Hamasaki”.

The company is targeting a similar level of pachislot unit sales for FY03/12 as FY03/11 when it sold 217,659 units.The pachislot market has been recovering in FY03/11, while the pachinko market also appears to have bottomed out. The company points out that one reason for this is more mid-type units (rather than the high-stakes max-types) were being launched.

SR Inc. believes that post-Tohoku consumers are looking for leisure activities that are quick, easy and value for money. It is noteworthy that monthly sales numbers for Village Vanguard Co. (Jasdaq 2769) and Round One Inc. (TSE 4680), which are both covered by SR Inc. and fit a similar bill for quick, easy and value for money entertainment, have improved significantly.

In their May 13, 2011 results briefing, the company said its initial FY03/12 forecast targets operating profit of 14.0 billion yen, but it remained committed to trying to hit its goal of 17.0 billion yen in operating profit that it had initially hoped to hit in FY03/11 under its mid-term management plan.

Long Term Outlook

The company released its first medium-term plan in May 2008 outlying its growth vision through March 2013 and offered revisions in 2009 and 2010. The three main pillars supporting the plan were: 1) produce highly entertaining machines, 2) produce copyrights (content) and supply them to manufacturers, and 3) develop as the largest independent distributor.

A modified forecast was presented to investors in May 2009. The modification was due to: (1) a change in the timing of “CR Neon Genesis Evangelion – The Beginning and the End” release, (2) a change in the timing of inaugural KYORAKU SANGYO title to FY03/11, and (3) a reduction in profit projection related to the sale of D3 Inc.

In addition, the following initiatives for FY03/13 and beyond were highlighted at the November 2009 analyst meeting (and reiterated its commitment to the sales and OP targets at its FY03/11 analyst results meeting):

FY03/13 – 20.0 billion yen OP; targeting at least 20 pachinko and pachislot machine launches.

FY03/14 – at least 25.0 billion yen OP, but the company indicated that creating specific targets this far into the future is challenging.

Overall, pachinko business is expected to be the main incremental driver, while the pachislot business is anticipated to grow slowly for the foreseeable future.

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Business

Summary

The company’s core business is the planning, development and distribution of machines to pachinko and pachislot halls (hereafter referred to as halls). Its expertise extends beyond simple distribution to the role of a content creator. Its strategic partners include several premier pachinko/pachislot manufacturers. Fields’　“value-add” comes from its ability to obtain and combine proprietary content to plan and develop pachinko/pachislot machines that offer a unique entertainment experience to players. The company’s direct customers, however, are the halls. Fields acts as a sole distributor for the machines of its partners, it also sells other manufacturers’ machines. Because of this dual capability and because the company is the largest independent distributor with a national sales network, its customers enjoy the benefit of purchasing titles from several different manufacturers through a single sales contact. Its sales force has compiled a detailed database about market trends and best practices. The company shares this accumulated knowledge with halls, fostering customer loyalty.

The main segment that handles planning and distribution of pachinko/pachislot machines is Pachinko/Pachislot (PS) Field. This segment accounted for approximately 91.0% of total sales as of FY03/11 end. Within PS Field the main earnings drivers are sales of pachinko and pachislot machines of Bisty, a subsidiary of SANKYO (TSE 6417), and Rodeo, a subsidiary of Sammy (a subsidiary of Sega Sammy Holdings Inc. (TSE 6460)).

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Business Description

Main Business and Product Segments

Pachinko/Pachislot (PS) Field: Historically accounting for 75.0-95.0% of consolidated sales, it is a cash flow generative business where margins have historically been steady (low to mid double digits from FY03/06-FY03/10). Its partnership with Bisty is currently (FY03/11) the most important contributor to the company's sales (producing titles like Evangelion*). Another important alliance is with Rodeo in which Fields has an equity stake and for whom it acts as the sole distribution agent. A new alliance which warrants attention is with KYORAKU SANGYO (unlisted) for planning, development and sales of new machines. Fields is also looking for cross-media opportunities to monetize its content library (see Strategy section).

(*) Evangelion: A hit anime franchise controlled largely by animation studio GAINAX Co. the series rose to popularity in 1995-1996 when 26 episodes of the show were broadcast on TV Tokyo. Evangelion is an apocalyptic action story about a paramilitary organization (called Nerv) and its fight against monsters (known as Angels). (See below for image of an Evangelion pachinko machine.)

CR Evangelion – The Beginning and the End

©カラー ©Bisty

In December 2004 Fields started selling the first of the Neon Genesis Evangelion series pachinko machines under the Bisty brand; sales of the first model eventually reached 125,000 machines and led to the launch of a successful hit franchise with a further five releases between 2006-2010. Neon Genesis Evangelion pachislot machines were released in 2005, 2007, 2008, and 2010 with the last two titles selling over 80,000 machines each. “The Beginning of the End” pachinko model released in April 2009 sold approximately 237,000 units; the highest sales volume for the Evangelion franchise until that point. The latest release in the series “CR Evangelion – Evangelical of the Beginnings” went on sale in June 2010. The table below illustrates that the company has consistently hit home-runs with pachinko unit sales for the series exceeding 100,000 per release (with the exception of one low gambling nature model) and succeeded in establishing a strong and widely recognized Evangelion brand.

The Evangelion line has been an exceptional blockbuster series, most likely because of its engaging storyline and characters; fluid video graphics and good sound; and its well-designed probabilities of hitting jackpots. However, over-reliance on a particular series represents a business risk for Fields if the series' future performance were to weaken. SR Inc. estimates that the Evangelion series has contributed anywhere from about 25.0% to more than 60.0% of the company’s revenues over the past five years (see the Strategy section for additional discussion).

Segment name changes

In Q1 FY03/09, the Other Field segment was split into three segments: Sports Field, Movies Field, and Other Field. At the end of Q4 FY03/09, Other Field was further divided into Web Service Field and Other Field. In Q1 of FY03/10, Game Field segment was abolished; Sports Field and Web Service Field were renamed Sports Entertainment Field and Mobile Field, respectively, while Movie Field was folded into Other Field.

Sports Entertainment Field: The company owns and operates three Total Workout sports gyms (EXPRESS). It also provides media-related management to professional athletes such as tennis player Kimiko Date Krumm, former pro baseball player Kazuhiro Kiyohara and others.

Mobile Field: Operates “Fields Mobile”, a website offering paid mobile contents with approximately 400,000 customers as of FY03/10.

Other Field: Businesses related to planning and production of animation, and other audio visual entertainment content.

Business Model

Fields’ business is the planning, development and distribution of pachinko/pachislot machines. The company generates earnings by using its extensive expertise in product development and sales. It acquires content licenses/commercial rights for its own library and then leverages this to create original, value-added pachinko/pachislot content. Once a new machine is developed by a partner company, Fields becomes the sole distributor and continues to participate in the development process. However, the manufacturer accepts responsibility for production and also some development-related functions, such as programming of logic boards; inventory risk is shouldered by the manufacturer. (The company notes that pre-marketing of new products helps reduce inventory risk for manufactures as actual machine sales tend to fall close to original forecasts.) Fields also distributes products for non-partners, however, this is a small fraction of the overall machines it sells.

Industry average selling prices (ASPs) have trended higher in recent years: pachinko machines in FY03/10 sold for 350,000 yen vs. about 250,000 yen in FY03/05. This has been driven by the use of higher quality components (LCD screens, motherboards, ICs) being incorporated into the equipment, and other quality-related cost increases. The main driver of sales for the company is the volume of machines sold with volumes changing considerably depending on timings of releases.

Accounting of sales varies according to machine type. Pachinko machine sales are essentially commissions from manufacturers, typically 30,000~50,000 yen per machine. However, with pachislot machines Fields purchases the machines outright from manufacturers (taking on inventory and associated risk) for resale onto halls and books the entire price of the pachislot machine (typically, 300,000~400,000 yen) as sales. Gross margins on pachislot are higher than pachinko, about 60,000~ 90,000 yen per machine due to higher ASPs for pachislot machines.

The accounting treatment for pachislot, however, introduces volatility to sales. For instance, during periods of high pachislot sales as in 2005~2007, annual sales grew to more than 100.0 billion yen (FY03/08) vs. 73.0 billion yen in FY03/09, although actual machine shipment volumes were about equal. The company has said it does not intentionally manage its product mix to improve margins. On the balance sheet, fluctuations in pachinko and pachislot machine shipments manifest itself in large expansion and contractions in accounts receivable and accounts payable. Despite these temporary distortions, both solvency and liquidity ratios appear healthy (see Financial Ratios).

The company’s salespeople cover approximately 40 accounts each. Salespeople employ a “consulting sales” approach where they make specific recommendations on titles. The company has show rooms in all of its branch offices. Fields utilizes two distribution channels. The first is a direct channel (selling directly to hall operators); around 80.0% of machines are sold using the direct channel. The second is sales through resellers; this channel is lower margin than the direct channel, but sometimes makes economic sense due to the small size or geographic location of end customers.

Machine volumes are the main swing-factor for earnings (see chart below). SR Inc. estimates that pachislot’s contribution has ranged from a low of about 45.0% to a peak of 80.0% of operating profit over the past ten years. This percentage may trend downward over the next several years as pachinko becomes a larger portion of its product mix. SR Inc. posits exposure to both segments may serve as a natural hedge for the overall business.

Profitability Snapshot and Financial Ratios

As shown above, profitability has been consistently high with operating profit margins generally in the low to mid teens. But ROA and ROE have steadily trended downward from peak levels of 20.0% and 45.0%, respectively. Although management does not discuss concrete ratio targets, it is aware of deterioration in some metrics. SR Inc. notes if the company’s stated mid-term profit targets are achieved, forward ROA and ROE would return to FY03/04 levels.

While true peer analysis is not possible due to the company’s unique business model, a comparison with listed manufacturing companies in the pachinko/pachislot industry shows Fields rates slightly above average in terms of sales growth, operating profit margins and ROE. Although peak returns were generally lower for Fields compared to manufacturers, downside volatility (i.e. operating losses) was considerably lower.

Strengths, Weaknesses

Strengths:

• Sales Power: Manufacturers use Fields to take advantage of the company's large and skilled sales force, enabling them to extend their geographic reach and accelerate their speed to market.
• Neutrality: Halls prefer to trade with the company given its perception as an unaffiliated distributor. The company in practice can sell any machine, while manufacturers only promote their own lines.
• Co-branding skills: the ability to create new, distinct brands gives the company's partners more bandwidth to sell product while defraying their marketing costs. (Operators tend to allocate hall-space per brand; distinct labels enable manufacturers to “backdoor” additional machines into one venue.)
• Alliances with top manufacturers possessing high level of technology and development skills.

Weaknesses:

• High dependency on hit titles (Evangelion).
• High reliance on a select group of core partners for a majority of earnings.
• Lack of manufacturing capability limits profit sources to distribution margins.
• Historically uneven execution at the group level. Inconsistent results for non-pachinko group companies led in the past to missed financial goals, and replicating core-business success in new areas has proven difficult.

Main Facilities

Fields Corporation’s operational backbone is based on its national sales network. This includes 26 branch offices (as of FY03/10) located in Hokkaido-Tohoku (3), North Kanto (3), Tokyo (6), Nagoya (3), Osaka (4), Chugoku-Shikoku (3) and Kyushu (4). A high-spec showroom for visitors was opened in the Nagoya Regional Office in April 2008.

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Market & Value Chain

Market Overview

The total domestic leisure market was estimated at 69.5 trillion yen in 2009 (Source: “White Paper on Leisure 2010”, Japan Productive Center). Pachinko/pachislot was estimated at 21.0 trillion yen making it the largest category within the leisure market, of that amount 18.5 trillion yen was returned to players in payouts or “winnings”. Of the remaining 2.5 trillion yen, roughly 1.2 trillion yen was reinvested by operators into new machine purchases, according to Fields' own estimates. New machine purchases were 978.9 billion yen for pachinko and 225.8 billion yen for pachislot in 2009.

Industry data shows that the market has been shrinking but this trend seems to have bottomed out. The player population was 17.2 million in 2009 vs. 23.1 million in 1997 – player numbers bottomed out at 15.8 million in 2007. The average customer spend of approximately 122,000 yen per year has been essentially flat since 2002. The number of halls declined to 12,479 in 2009 from 18,224 in 1995 (Source: Metropolitan Police Department). Limited cash flow for renewed investment has forced some smaller operators to sell or shut operations. At the same time, hall sizes have become larger increasing to an average of 356 installed machines per hall in 2009 from 261 machines in 1995. Larger chains also appear to be gaining scale highlighting continued polarization of the market.

Order trends for Fields are inextricably linked to the financial health of its hall customers. Logically, the higher the cash flows of halls, the more funds they can spend on new equipment. Industry new machine investment is broadly defined by the average number of times halls “turn” their machine line-up per year. In 2009, turnover for pachinko was 1.06 times and for pachislot 0.57 times. (Source: Yano Research, Metropolitan Police Department). In 2009 the pachinko turnover was estimated to be 1.1~1.2 times and pachislot 0.6~0.7 times.

In terms of the machine market, pachinko machine sales rose from 3.7 million machines in 1995 to a peak of 4 million machines in 2005. Pachinko machine sales temporarily declined to 3.2 million machines in 2007 given high replacement demand in pachislot market but subsequently recovered to 3.3 million machines in 2009. On the other hand, the machine sales of pachislot machines expanded five-fold to 1.8 million in 2005 off a low base of 350,000 machines in 1995. Following the introduction of stricter regulation in 2007, demand for lower gambling nature pachislot machines has fallen, but recovered from the second half of 2009.

As the size of the market has changed so competition between manufactures has intensified. Well-known franchises have a tendency to generate repeat sales, however, breaking into the top-ranks has not been easy for smaller players. Today, while top-selling blockbusters may still garner over 200,000 machines in sales, less popular titles may not even sell 10,000 machines. The graph below illustrates market share per manufacturer on a machine basis (Source: Yano Research Institute, Trends of Pachinko Related Manufacturers and Market Share 2009). Pachinko appears less concentrated compared to pachislot. Across both segments, SR Inc. believes the success of the company is partly due to its ability to partner with key players at the development stage. Manufacturers, in turn, have reason to partner with Fields as it enables the creation of secondary brands and higher penetration per account resulting in a higher market share.

The company believes a recent move away from dependency on high gambling nature machines towards healthier and more entertainment-orientated machines should resume growth for the pachinko industry in the near future. While it is difficult to provide solid proof of this view, consumers’ average leisure time has been increasing and the company believes the evolution and growth of the pachinko industry into one of the choices of entertainment to fill this increased leisure time is a likely scenario. In addition, the pachinko market appears to be relatively impervious to the vagaries of the economic cycle. The company thinks that the decline of the playing population is related more to the peculiarities of the pachinko and pachislot markets themselves.

Market Growth Potential & Cyclicality

The market is mature and arguably in secular decline due to Japan's declining population and emerging forms of passive entertainment. However, industry innovation could reverse or slow what has been a gradual decline. The key cyclical drivers are government regulation and the industry's growth as a distinct type of popular entertainment.

The industry is regulated by the National Public Safety Commission. Rules on the approval and certification of machines are set in accordance with the Entertainment Business Control Law per each prefecture.

Historically, regulators have tended to change the technical specifications regarding gambling nature limits every several years. The goal has been to prevent excessive gambling and trends in high-gambling nature machines have been easing. For instance, a change regulations in 2004 led to a de-emphasis in the gambling aspect of pachislot machines, and to a big wave of replacement sales in 2007. Pachislot machine sales then declined afterwards as some players gravitated to pachinko. However, as manufacturers compete to develop machines compliant with the newest regulations and increase the entertainment aspect of new machines there has been an acceleration in both hardware and software innovation.

According to Fields, the gambling aspect has an influence on players and thus potentially on market growth. Since FY03/11, many manufacturers have focused on so-called "max-type" machines where average spend per player tends to be higher when compared with other types of machines, but the expected return is also likely to be higher (which can be appealing to serious players). This means on average a player loses money faster on these types of machines. Although max-type machines could mean higher cash flow for halls in the short run, Fields is concerned this trend may alienate casual players and could be an unhealthy trend for the overall market.

SR Inc. thinks Fields could be a long term beneficiary from the rise and fall in popularity of different machines. Indeed, regulatory revisions can upstage market leaders and give manufacturers a short window when they need to scramble for new innovative products. The company helps manufacturers plan and develop new product lines to sell to halls that could be otherwise reluctant to increase dependence on a particular maker.

Customers

Halls are the company’s clients. Of the approximately 12,500 halls in existence(as of 2009), the company considers the 9,000 largest halls as its general target customer base.

Halls could buy directly from manufacturers, but the benefits of using Fields include a single supplier relationship and market knowledge that the company can share (such as which machines are popular nationwide etc.).

Suppliers

Field’s main suppliers are pachinko/pachislot machine manufacturers. This is the core relationship defining the company’s business model. The relationship is mutually beneficial - manufacturers provide the company with products to sell, and in return receive content rights, design ideas and benefit from the sales channel.

Barriers to Entry

Barriers to entry are high; the industry has a number of sophisticated and well capitalized players, while products require substantial development costs, and carry high failure rates. The company’s business model is unique and would be difficult to replicate successfully. It possesses an extensive expert sales network and has long term relationships both with top manufacturers and thousands of halls. With roughly 300 salespeople in daily discussions with hall operators, the customer relationship base is sticky and it has extensive information about customers. Moreover, pachinko tends to be a personality-driven industry reliant upon trust, incumbents with existing relationships therefore have a natural advantage. Finally, the operator market is fragmented and a newcomer would need significant time to gather a critical mass of customers to become profitable.

Competition

The company estimates there are approximately 1,000 distribution companies in the pachinko/pachislot market. However, no other company has a business model or a nationwide sales network that rivals Fields. The company's products though do in fact compete with those of its partner and non-partner manufacturers. Listed manufacturers include SANKYO Co. (TSE 6417), Sega Sammy Holdings Inc. (TSE 6460), Heiwa Corp. (TSE 6412), and Universal Entertainment Corp. (Jasdaq 6425).

Substitutes

Pachinko vs. Pachislot: Both types of machines are located in halls and consumers can play the two different formats. Discrete regulatory changes affecting gambling nature levels may make one format relatively more appealing. For instance, Regulation 5 for pachislot substantially reduced the gambling element of machines, a change which may have made pachinko more attractive to players with higher risk appetites. Nonetheless, for an average recreational player substitution between pachinko and pachislot is limited due to different skills and experience needed for each type of machine, in SR Inc.’s view.

Casinos: As of end-FY03/11, casinos were officially banned in Japan, however, there was an ongoing debate regarding potential legalization. SR Inc. thinks even if casinos were legalized, only a limited number would be licensed to operate. As such, the substitution effect would negligible on the larger network of nearly 12,500 pachinko/pachislot halls in local neighborhoods across Japan.

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Strategy

Fields’ has split its organizational structure into two divisions to reflect its growth strategy: the entertainment business, and the pachinko and pachislot business. The long-term strategy for the entertainment business is to develop additional uses for its content in addition to its primary use in the pachinko and pachislot space. As of FY03/11, SR. Inc. thinks new group companies, such as Tsuburaya Productions, Digital Frontier, and HERO’S, were likely to become drivers of future growth.

To stay competitive, the company needs to improve its competitiveness in the broader entertainment business by further leveraging content and improving execution. In its mainstay pachinko/pachislot business the company must maintain the power of its core Evangelion series, as well as expand its lineup of titles, and develop machines that sell 50,000-100,000 units per title. This would produce a more stable earnings stream and could lead to the market’s re-evaluation of the company.

Fields has also been persistent in its attempts to gradually evolve into a company that develops and distributes content across the entertainment industry. It sees its core strength as its ability to find and leverage content for its pachinko and pachislot clients. However, the company’s longer term ambition is to extend its capabilities beyond the pachinko/pachislot business. Fields has not been able to develop a large enough or profitable enough business outside of pachinko/pachislot for the past several years but the profitability of its other businesses has been recovering and the company may be back on a growth track.

While pachinko and pachislot will remain the main earnings drivers until at least 2013-2015, SR Inc. wonders if the acquisition of Tsuburaya Productions (and the Ultraman rights) could mark the beginning of a new era for the company’s rights business. Digital Frontier, with its high technology, should contribute to development of higher quality products in the pachinko/pachislot space. Additionally, through alliances with other group companies, Digital Frontier has the potential to expand its business into other areas in the video entertainment space. Within the group, HERO’S Inc. is responsible for creating content and on top of contributing towards the pachinko and pachislot business it is also expected to be involved in other entertainment ventures, such as digital comics, etc.

What could Ultraman mean for the company? Ultraman is a well-known character in Japan and is also relatively well-known worldwide. Reviving the franchise through a new animated series or a movie is probably a question of time. How successful such an attempt would be and how much further Fields could take Ultraman as a business is an intriguing unanswered question. Meanwhile, it appears likely to SR Inc. that at the minimum, a new exclusive pachinko/pachislot title based on Ultraman, together with other developments such as movies and TV programs should help Fields’ bottom line from 2011-2012 and beyond.

Group and Partner Companies

As of end-FY03/11, Fields Corporation group is composed of 14 subsidiaries and 6 affiliated companies. Group companies in each business segment are listed below (% of stakes held by Fields Corporation shown in brackets).

PS Field: Fields Jr. Corp. (100.0%), Rodeo (35.0%), Shin-Nichi Technology Co. (100.0%), F Corp. (60.0%), Microcabin Corp. (85.0%)

Sports Entertainment Field: Japan Sport Marketing Inc. (61.8%), Express Inc. (80.0%)

Mobile Field: Future Scope Corp. (83.3%), IP Bros Co. (85.0%)

Other Field: Lucent Pictures Entertainment, Inc. (90.0%), Digital Frontier Inc. (86.9%), Tsuburaya Productions Co. (51.0%), HERO’S Inc. (49.0%), SPO Inc. (31.8%), Bbmf Magazine Inc. (33.8%), Kadokawa Haruki Corp. (30.0%), G&E Corp. (33.3%).

Major equity method companies: Rodeo (35.0%), Kadokawa Haruki Corp. (30.0%), and 2 other companies. Rodeo is a strategically important partnership with Sammy (Sega Sammy Holdings).

Strategic Partnerships

The ability of the company to partner with key equipment manufacturers has been a centerpiece of corporate strategy to date. Four main relationships and respective sales performance are summarized below.

Rodeo : Affiliate of Fields Corporation, tie-up with Sammy. Fields has a 35.0% stake, and Sammy 65.0%. Pachislot focus; Fields is the sole distribution agent.

Bisty : A 100.0% subsidiary of SANKYO, business alliance from 2003

• Successful alliance, Bisty accounted for 63.8% of machines sold by Fields in FY03/11
• Strategy – continue Evangelion franchise, develop other titles

Olympia : collaborative products developed and manufactured under Gold Olympia brand. Fields is responsible for product planning and sales.

• Two titles released in FY03/10
• Olympia and Heiwa merged operations in 2008

KYORAKU SANGYO : Business tie-up, February 2008.

• A leading pachinko manufacturer in terms of machine sales
• First co-developed pachinko machine is planned for FY03/12
• Strategy – expand size of market via differentiated machines

Enterrise Co:

• Enterrise is affiliated with Capcom Co. (TSE 9697), a leading video game company.
• It released the “Sengoku BASARA2” pachislot unit in FY03/11.

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Historical Financial Statements

Earnings Results Discussion for the Year Preceding Current Fiscal Year

FY03/11 Results

The company released FY03/11 results on May 12, 2011.

Sales increased 56.2% YoY in FY03/11 to 103.5 billion yen with operating income up 61.7% at 13.1 million yen. The company attributed the dramatic improvement in sales and operating profitability to the following:

• Pachislot machine sales were particularly strong hitting record highs due to additional orders for the “Onimusha: Dawn of Dreams” model launched in March 2010, and solid orders for other models such as “Ore no Sora – Spirit of Young Justice” and “MOBASLO Evangelion for your own wish.”
• New subsidiaries Tsuburaya Productions Co. and Digital Frontier Inc. were included in consolidated results beginning April 2010, improving group profitability.

The company sold 262,614 pachinko machines (down 68,120 units YoY), and had a 9.1% market share of the pachinko machine market in FY03/11, the same level as the previous FY. The “CR Evangelion – Evangelical of the Beginnings” pachinko game unit made a significant contribution to this sales figure at 250,000 units. In the pachislot machine segment the company sold 217,659 units (a YoY increase of 98,513 units), expanding its market share by 5.6% to 24.5% and maintaining the company's top position in the space. Pachislot unit sales hit a record high driven by a solid product lineup, including “MOBASLO Evangelion — for your own wish” (55,000 units), “Onimusha: Dawn of Dreams”” (63,000 units), “Ore no sora – Spirit of Young Justice” (38,000 units) and “Sengoku BASARA 2” (16,000 units).

Combined operating profit for the group (excluding PS Field and inclusive of intersegment sales) was 261 million yen vs. 1 million yen operating loss in FY03/10.

Q3 FY03/11 Results

The company released Q3 FY03/11 results on February 3, 2011.

Cumulative sales through Q3 grew 191.3% YoY to 71.4 billion yen and operating profit increased by 682.1% YoY to 10.7 billion yen. The company identified the following factors behind the strong results.

• Pachislot machine - “Onimusha: Dawn of Dreams” and “Neon Genesis Evangelion – Die Spur Der SEELE” received a high number of repeat orders over the period to date.
• Sales for new pachislot machine “Ore no Sora – Spirit of Young Justice” were strong.
• New subsidiaries Tsuburaya Productions and Digital Frontier were included in consolidated results beginning April 2010.

The company sold 241,693 pachinko machines through Q3 FY03/11 (down by 40,288 machines YoY), and 137,912 pachislot machines through Q3 (an increase of 125,235 machines YoY). Sales of pachislot machines were also strong during Q3. Additional orders for “Onimusha: Dawn of Dreams” totaled 260,000 machines and sales of “Ore no Sora – Spirit of Young Justice” totaled 380,000 machines.

Machine releases expected for Q4 include “CR Kung Fu Panda” (pachinko machine expected in halls in February), and pachislot machines “Gravion” (in halls in January), “Sengoku BASARA 2” (in halls in February), and “MOBASLO Evangelion — for your own wish” (expected to be available in pachinko halls from March).

“MOBASLO” is a free membership service that links pachislot machines and cell phone mobile sites. Registered users can save data from the pachislot machine to a mobile site and view unique information on their cell phones. In addition, registered users can view images available only to them, and can customize their character details on pachislot machines.

At the results briefing held on February 4, 2011, the company announced satisfactory orders for the “Sengoku BASARA 2” machine and that it had sold out. Because the “MOBASLO Evangelion—for your own wish” machine was expected to be available in pachinko halls from March 2011, sales figures will be posted in both FY03/11 and FY03/12. The company and KYORAKU SANGYO jointly decided to change the release date for their first collaborative title until 1H FY03/12 to allow time to increase security features of the machine. The release date for another type of pachinko machine was also changed to 1H FY03/12. The company commented that even considering the current pachinko market environment, they will continue manufacturing this type of machine.

The company said that in view of the strengthening pachislot market and the slowing pachinko market, it plans to continue planning and developing pachislot machines and increase the number of lines and units it sells. Additionally, the company said that it will continue to revitalize their pachinko machine lines (such as the two machines discussed above with an expected release in FY03/12) and continue planning and developing pachinko products.

Q2 FY03/11 Results

The company released Q2 (1H) FY03/11 results on November 4, 2010. At the same time, the company announced an upward revision to its FY03/11 forecasts and expected dividend payment. As a percentage of the full year revised company estimates, FY03/11 Q2 (1H) results were as follows:

• Sales: 43.0% (vs. FY estimate of 100.0 billion yen )
• Operating profit: 70.6% (vs. FY estimate of 13.0 billion yen)
• Recurring profit: 73.1% (vs. FY estimate of 13.0 billion yen)
• Net income: 77.5% (vs. FY estimate of 7.0 billion yen)

1H sales grew 100.6% YoY due to higher pachislot machines sales. New subsidiaries Tsuburaya Productions Co. and Digital Frontier Inc. were included in consolidated results, which also helped push up sales. Operating profit in 1H increased 70.5% YoY due to the combination of higher pachislot machines sales and the success of pachinko machine “CR Neon Genesis Evangelion – Evangelical of the beginnings” (exceeding the 200,000 unit sales mark).

The revised FY03/11 forecast was as follows:

• Sales: 100.0 billion yen (previous forecast: 80.0 billion yen)
• Operating profit: 13.0 billion yen (previous forecast: 11.0 billion yen)
• Recurring profit: 13.0 billion yen (previous forecast: 11.0 billion yen)
• Net income: 7.0 billion yen (previous forecast: 5.5 billion yen)

The company identified the following factors behind the revision:

• “CR Neon Genesis Evangelion – Evangelical of the beginnings” was a big hit in 1H FY03/11, with total sales surpassing 200,000 units.
• As of Q3 FY03/11, orders for “Onimusha: Dawn of Dreams”, and “Neon Genesis Evangelion – Die Spur Der SEELE” had exceeded the company’s expectations.
• The company expected to release several big titles in 2H, like “Ore no Sora – Spirit of Young Justice” (expected release date: December 2010) and the pachislot market had been recovering.
• Results of Group companies, especially entertainment businesses, were improving.

In light of the full year revision, the company increased its expected FY03/11 interim dividend to 2,500 yen per share (vs. an earlier estimate of 2,000 yen per share) resulting in an increase of the annual dividend to 5,000 yen per share (vs. an earlier estimate of 4,500 yen per share).

Selected comments made by the company during the November 5, 2010 results meeting are summarized below:

• In the pachinko market, there has been strong demand for pachinko machines that are rich in gaming and entertainment value to increase players’ interest in playing.
• The company will continue to release pachinko machines that will revitalize the market, focusing on middle-type machines rather than the strong gambling nature max-type machines. (The company expects to release one machine in Q3 and two machines in Q4).
• The pachislot market is strong. Overall operations and gross profit at pachinko halls nationwide are recovering. The company expects this trend to continue.
• Sales of the "Onimusha: Dawn of Dreams" pachislot machine will continue through Q3 from strong back-orders. 64,000 machines have been sold since the machine was released, and the 2H sales target is at least 20,000 machines.
• The level of orders received for the "Ore no Sora - Spirit of Young Justice" pachislot machine is developing well, exceeding the range of expectations. One more big title will be launched in Q4.
• The company focus in the Mobile Field segment is on measures to expand the number of paid members.
• Overall, group businesses are in the black and will contribute to consolidated earnings.
• The full year operating profit forecast of 13.0 billion yen is an important goal for the company. Pachinko titles currently being manufactured are not factored in.
• Dividends are the preferred means of shareholder return.

SR Inc. thinks that the revised full year operating profit forecast of 13.0 billion yen might be conservative. The company should introduce several pachislot titles in 2H FY03/11, helped by the favorable pachislot market.

The pachislot market has been recovering since 2H FY03/10. It is SR Inc.’s understanding that one of the main factors behind the recovery is the introduction of a number of highly entertaining machines that proved popular with users and drove people into the halls. Sammy Corporation introduced “Psalms of Planets Eureka Seven” in September 2009 (it became a popular machine, selling over 50,000 units) which seems to have started the trend. Other pachislot machines followed which were also popular. These include “Onimusha: Dawn of Dreams,” released by Rodeo March 2010 (total sales of 64,000 units as of September 2010) and Bisty’s “Neon Genesis Evangelion - Die Spur Der SEELE” (total sales of 84,600 units as of September 2010). Fields commented that the pachislot market seems stronger than they had originally thought at the start of FY03/11.

SR Inc. estimates that supported by a favorable environment, Fields will likely introduce several new titles, including its “Ore no Sora – Spirit of Young Justice,” scheduled for release in December 2010. The company commented that pre-orders for “Ore no Sora – Spirit of Young Justice” are better than had been anticipated. Sales of titles released after “Ore no Sora – Spirit of Young Justice” will probably remain firm if the pachislot market continues to recover.

Additionally, Fields commented that pachinko machines being made as of the beginning of Q3 were not included in the FY03/11 budget. SR Inc. estimates that the company will likely be able to achieve the full year financial targets with the abovementioned pachislot launches alone.

Q1 FY03/11 Results

The company released 1H revised estimates and Q1 FY03/11 results on August 4, 2010. As a percentage of the 1H company estimate, Q1 numbers were as follows:

• Sales: 47.4% (vs. 1H estimate of 45.0 billion yen )

• Operating profit: 26.1% (vs. 1H estimate of 9.0 billion yen)

• Recurring profit: 28.0% (vs. 1H estimate of 9.0 billion yen)

• Net income: 32.8% (vs. 1H estimate of 4.5 billion yen)

Sales grew 33.1% YoY, as new subsidiaries Tsuburaya Productions Co., Ltd. (Tsuburaya Productions) and Digital Frontier Inc. (Digital Frontier) were included in consolidated results. Sales were also pushed up by higher pachislot machines sales. Operating profit decreased 72.4% YoY, mainly due to timing differences in pachinko sales recognition of Eva series machines. In FY03/10, pachinko sales of CR Neon Genesis Evangelion were recorded during Q1, but in FY03/11 most of sales are expected in Q2.

Details of the revision

• Sales: 45.0 billion yen (15.0 billion yen over previous forecast of 30.0 billion yen)

• Operating profit: 9.0 billion yen (5.0 billion yen over previous forecast of 4.0 billion yen)

• Recurring profit: 9.0 billion yen (5.0 billion yen over previous forecast of 4.0 billion yen)

• Net income: 4.5 billion yen (2.5 billion yen over previous forecast of 2.0 billion yen)

The company indicated that the 1H revision was due to strong pachinko/pachislot machine sales. “CR Neon Genesis Evangelion – Evangelical of the beginnings” released in June 2010 became a big hit, selling more than 200,000 units which exceeded the company’s initial expectations. Orders for “Onimusha: Dawn of Dreams”, and “Neon Genesis Evangelion – Die Spur Der SEELE” released in Q4 FY03/10 have also exceeded the company’s expectations.

The full year forecast was unchanged. The company indicated that it will make revisions as necessary when the 2H progress becomes clear.

The “CR Neon Genesis Evangelion – Evangelical of the beginnings” pachinko machine, which began selling in June 2010, exceeded the company’s initial expectations and became a major hit with 205,000 units sold. The company sold 56,000 units in Q1 with the remainder to be booked in Q2. In pachislot, additional orders for “Onimusha: Dawn of Dreams” and “Neon Genesis Evangelion – Die Spur Der SEELE” machines introduced in March 2010 were better than expected. The company indicated that this strength was the main reason for the upward revision.

The company’s operating profit forecast for FY03/11 is 11.0 billion yen. Given that the newly revised 1H (cumulative Q2) forecast calls for 9.0 billion yen in operating profit, the company only needs to generate 2.0 billion yen in 2H to meet its forecast. Based on expectations for the pachislot market (discussed below), SR Inc. concludes that there is a strong possibility that operating profit for year will exceed the company’s forecast and earning momentum is positive.

Pachinko

Fields expects to introduce the first collaborative title with KYORAKU SANGYO in Q4. SR Inc. believes that Fields can expect robust sales because it is a first title (possibly selling 50,000 units, a hit product). Assuming Fields releases another two machines in 2H, total units sold in FY03/11 should be over 300,000 units, including sales of “Neon Genesis Evangelion – Die Spur Der SEELE”.

Pachislot

In the second half of the fiscal year, Fields expects that Rodeo Co., Ltd. will introduce another “Onimusha: Dawn of Dreams” and “Gamera” series machine marking the Rodeo Co.’s 10th anniversary. SR Inc. also expects that several other titles will be released. Latest Eva series title was a big hit, and Eva series has in the past launched a new title with a period of 1 to 1.5 years, and a new title might as well be launched as early as in FY03/11. In SR Inc’s view, the number of pachislot machines sold in FY03/11 will increase compared to 120,000 machines in the previous year.

Full Year FY03/10 Results

The company announced FY03/10 full year results on May 10, 2010.

FY03/10 Results Report Card

Sales were 66.3 billion yen (-9.2% YoY), operating profit 8.1 billion yen (+314.3% YoY), recurring profit 7.7 billion yen (+682.9% YoY), net income 3.2 billion yen (vs. a net loss of -1.4 billion yen in FY03/09).

As a percentage of the company forecast, the results were as follows:

Sales: 94.8% (vs. full year forecast of 70.0 billion yen)

Operating profit: 81.2% (vs. full year forecast of 10.0 billion yen)

Recurring profit: 77.6% (vs. full year forecast of 10.0 billion yen)

Net income: 73.1% (vs. full year forecast of 4.5 billion yen)

Revenues

Target: 70.0 billion yen (-4.2% YoY)

Result: 66.3 billion yen (-9.2% YoY)

Gross Profit

Target: 28.5 billion yen gross profit (+18.6% YoY)

Result: 26.8 billion yen (+11.9% YoY)

SG&A, Operating Profit

Target: 18.5 billion yen SG&A (-16.1% YoY)

Result: 18.7 billion yen (-15.0% YoY)

Target: 10.0 billion yen OP (+410.2% YoY)

Result: 8.1 billion yen (+314.5% YoY)

Recurring Profit

Target: 10.0 billion yen (+909.1% YoY)

Result: 7.7 billion yen (+683.1% YoY)

Net Income

Target: 4.5 billion yen (vs. -1.4 billion yen in FY03/09)

Result: 3.2 billion yen

Additional Discussion

Consolidated sales were somewhat below the initial company estimate (66.3 billion yen vs. 70.0 billion yen; -5.2%).Parent sales were closer to the company forecast but also marginally below (61.3 billion yen vs. 63.0 billion yen; -2.6%).

While the fact that the full year estimates were not achieved is disappointing, the pachinko/pachislot business appears to have resumed growth. A total of 449,880 machines were sold in the year (330,734 pachinko, 119,146 pachislot) vs. 331,205 in FY03/09 (+35.8% YoY). SR Inc. originally estimated total sales of 450,000-500,000 machines so actual results were at the low end of estimates. At the same time, SR Inc. notes that looking at aggregate numbers is not entirely meaningful due to differences in profitability – lower pachinko machine sales are easily offset by a smaller unit increase of pachislot machines. All in all, the pachislot business performed in-line with expectations while the pachinko business underperformed.

In pachinko, the Eva series continued to dominate earnings while new non-Eva titles sold approximately 100,000 machines. In terms of the recent dynamics of the overall pachinko market, there has been a trend towards halls focusing on famous franchise titles and max type machines with high gambling potential. The pachislot market seems to have started coming back to life and this could be positive for earnings.

The SG&A expenses in FY03/10 were slightly higher than the initial forecast but down substantially YoY, in a big part due to the absence of D3 Inc. (D3) subsidiary in FY03/10 results. In terms of consolidated operating profit, the overall performance of subsidiaries has improved and the company commented that the operating profit of most subsidiaries was “more or less in line with the plan”.

The dividend of 4,500 yen per share (2,000 yen at the interim and 2,500 yen at the year-end) was identical to one paid in FY03/09. The payout ratio in FY03/10 amounted to 45.9%.

Q3 Results Announcement

Q3 results were reported on February 4, 2010. Cumulative figures were as follows: sales declined 62.0% YoY to 24.5 billion yen, operating income declined 78.0% YoY to 1.4 billion yen, and recurring profit decreased 81.0% YoY to 1.1 billion yen. The company recorded a net loss of 0.3 billion yen during the quarter, due in part to extraordinary losses related to fixed assets disposal loss at Osaka branch.

In the main PS Field segment the company recorded cumulative sales of 281,981 pachinko machines, along with 12,677 pachislot machines. New pachislot titles released during Q3 included: "I am KONISHIKI" and "Hono-no-Nekketsu Kyoshi"; one pachinko machine was released, “CR Ryori-no-Tetsujin”. As a result, sales in the PS Field segment were 21.5 billion yen and operating profit was 1.5 billion yen.

Sports Entertainment Field sales were 1.8 billion yen and operating loss was 0.3 billion yen. At Mobile Field, the number of paying users at Field Mobile achieved 380,000 accounts resulting in sales of 1.4 billion yen and operating profit of 0.3 billion yen.

Sales in the Other Field segment were 0.3 billion yen with an operating loss of approximately 0.06 billion yen.

Update on "CR Shimizu no Jirocho - The Bonds of Life”

The machine was originally planned for Q2-Q3 FY03/10 release but scheduling delays led to a later launch. As a result, the company had little choice but to bring the pachinko machine to market at the same time as the pachislot machine “Neon Genesis Evangelion ~ Die Spur Der SEELE”, a widely anticipated pachislot machine launched Q4 FY03/10. In many cases hall buyers only ordered the widely anticipated pachislot title, leaving “Shimizu no Jirocho” lacking initial momentum. The company commented that despite relatively lackluster results (the number sold was not disclosed as of beginning of February 2010 but SR Inc. estimates a range of 20,000-40,000 machines), the machine is a symbolically important evolutionary step in entertainment machine development. Fields Corporation hopes that halls and pachinko fans will embrace the new concept: high quality advanced animation and video sequences, combined with seamless parallel planning and development of the machine alongside a TV drama. The feedback from the halls has been encouraging despite conservative stance of buyers.

Overall results

Q3 was supposed to be ‘all costs and little sales’ in the first place, and as the company expects to release two major titles in Q4, it left the full year forecast unchanged.

SR Inc. had an impression after the results meeting that the company became more pessimistic about Q4 and FY03/11 prospects. However, during the subsequent company visit, the company insisted that any such impression was erroneous and they continued to be confident about the ability to achieve both the full year forecast and targets in FY03/11 and beyond. Furthermore, the company also said that the perception of the pachinko market deteriorating rapidly, being driven down at least in part by the weak economy, is not entirely correct.

The SR Inc. interpretation of the results meeting and SR Inc. visit discussion is summarized as follows (please note that this is Fields Corporations’ official view):

• The company believes that the full year forecast is attainable.
• The market is not deteriorating beyond anything they already expected and accounted for.

The company is confident about two new pachislot titles, Bisty’s “Neon Genesis Evangelion ~ Die Spur Der SEELE” and Rodeo’s “Onimusha: Dawn of Dreams”. The profitability of pachislot machines is much higher than that of pachinko machines (as much as 1.5x-2x the gross profit amount per machine), which means that the profit contribution from the pachislot machine should be sufficient to offset any shortfall caused by weaker than expected non-Eva pachinko profits. Furthermore, the company has sufficient visibility to feel that both pachislot titles have a high probability of commercial success (in particular, the previous Evangelion pachislot title sold approximately 90,000 machines taking roughly 10.0% market share and Fields Corporation is hoping for a similar share gain for the new one).

In terms of Q4 numbers, SR Inc. suspects that the pachinko machine sales will be approximately in 320,000-340,000 machines range (probably below the company targets) and the pachislot machine sales will be near or just over 120,000 machines (probably above the company targets). In addition, given the SG&A spending through Q3 it appears that the company has a degree of cost buffer when it comes to its full year forecast and it therefore achieving the full year numbers looks possible.

Market discussion

Pachinko - The company mentioned that so called “max type” machines are more popular with the halls. Combined with continued increases in 1-yen pachinko penetration and stable popularity of “amadeji” machines, this means that the middle-type machines are getting squeezed at the overall market level. Although it is technically very easy for Fields Corporation to release max type machines (there were no max type releases in FY03/10 however), the company is unhappy about this trend saying that it hollows up the market by both alienating new, more entertainment driven, customers and hurting existing patrons (max type machines mean more and faster rate losses in the long run for the players).

Pachislot - The company indicated that there are indications of a recovery (or at least a bottoming) in the pachislot market. This is driven by a number of more interesting machines being released and possibly a new generation of players emerging who have not experienced higher gambling nature machines and as a result are more likely to enjoy the currently offered machines.

Q2 (1H) Results Announcement

Q2 results were reported on November 5, 2009. Cumulative figures were as follows: sales for the half declined 48.0% YoY to 21.4 billion yen, operating income rose 65.6% to 5.4 billion yen while net income increased 158.1% YoY to 2.2 billion yen. The operating losses during the quarter were better than originally forecasted (a -3.1 billion yen loss versus an initial estimate of -4.0 billion), mostly due to the adequate control of SG&A expenses. The sales were slightly below the estimate but SR Inc. believes this is immaterial due to the absence of any major revenue generators in Q2. Full-year forecasts remained unchanged.

Additionally, the company mentioned that pachinko halls across the country have continued to introduce ‘middle-type’ machines (with enhanced entertainment features) aimed at building a healthier market and expanding the fan base. The pachislot market began to show signs of a bottoming during the Q2.

Q1 Results Announcement

The company reported Q1 FY03/10 results on August 4, 2009. Revenue rose 119.0% YoY to 16.0 billion yen while profits turned positive at the operating level: 8.52 billion yen in Q1 FY03/10 vs. a loss of 3.3 billion a year earlier. The OP of 8.52 billion is 85.0% of the company’s full year forecast for FY03/10 of 10.0 billion yen.

Earnings were driven by strong sales of pachinko title “CR Neon Genesis Evangelion – The Beginning and the End” which sold 237,000 machines in Q1 (sales of 235,969 were booked in Q1; the remainder will be accounted for in Q2). This figure represented 97.0% of Q1 pachinko machine sales and 95.0% of total machine sales. In pachislot, two titles were released: “Aim for the Ace!” and “Saturday Night Fever”. In total, the company shipped 244,091 pachinko machines and 6,055 pachislot machines during Q1. The sales for PS Field segment reached 15.0 billion yen and the operating profit 8.5 billion yen.

The success of the new Eva machine can be attributed to a large degree to successful timing. The company postponed the launch by two months as the beginning of the year saw the market crowded with competitors’ launches, partially driven by releases of so called Max Type (high gambling nature) machines ahead of the industry self-regulated shift to low-middle gambling nature pachinko. “CR Hana-no-Keiji-2” by Nyugin Co., Ltd. was one of the Max Type machines. Some lower gambling nature machines such as “CR Pachinko Kinnikuman” by KYORAKU SANGYO also hit the market at the same time. The later arrival in April of “CR Neon Genesis Evangelion – The Beginning and the End” meant that Fields Corporation enjoyed no immediate strong competition. The company also believes that in addition to impeccably good timing, the success of the launch is a testament to the improving quality of the machine and the gaming experience it provides.

The company modified its segment data, eliminating Game Field segment, renaming Sports Field segment to Sports Entertainment Field and Web Service Field to Mobile Field. Finally, Movie Field segment has been incorporated within Other Field.

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Income Statement

Historical Trends

Analysis of sales can be affected by the mix between pachinko/pachislot sales due to their respective accounting treatments (pachinko revenues are booked as commissions; pachislot revenues are booked for the full machine price). Field’s operating profit trends track the underlying market cycle relatively closely.

FY03/09 Results

FY03/09 sales declined 28.3% YoY to 73.0 billion yen; OP declined 85.1% YoY to 2.0 billion yen due to a delay in the release schedule of the large-scale pachinko title “CR Neon Genesis Evangelion – The Beginning and the End” combined with an operating loss of 1.3 billion yen in the Game Field business (sales of 12.6 billion yen) due to underperformance of D3. D3 was subsequently sold to NAMCO BANDAI Games.

FY03/08 Results

Sales growth YoY was mainly driven by replacement demand for pachislot machines related to regulatory changes.

FY03/07 Results

Sales declined YoY as halls faced funding challenges for purchasing new pachislot machines (regulatory changes required machines to be replaced). Pachislot machine sales have relatively higher profit margins than pachinko, resulting in declines in profit margins (see table above).

FY03/06 Results

Sales rose YoY due to strong demand for both pachinko and pachislot machines. “CR Neon Genesis Evangelion: Second Impact” was released during the year (selling 161,000 machines, 29.0% of total Fields Corporation machine sales).

FY03/05 Results

Sales rose YoY due to the popularity of “CR Neon Genesis Evangelion” pachinko machine (selling approximately 125,000 machines, 26.0% of total Fields machine sales for the year) and +7.3% YoY growth in pachislot machines (191,944 machines vs. 178,906 in FY03/04).

FY03/04 Results

Sales rose YoY, but were affected by a change in revenue recognition for certain pachislot machine sales. Under the revised policy, sales began to be recognized when machines shipped from manufacturers vs. delivery and installation in halls. The accounting change resulted in an additional 6.0 billion yen of sales during the year.

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Balance Sheet

Periodic expansion and contraction of assets and liabilities has been driven by sales. Specifically, current assets have ranged between about 12.0 and 70.0 billion yen during FY03/03 to FY03/11. Increases in sales have tended to lead to higher accounts receivable, reflecting the company’s role as a distributor and its function as a trading partner. The company does not put pachinko machines (the majority of machine sales from FY03/03-FY03/11) on its balance sheet and therefore inventories are not significant. The balance sheet has long remained net cash, and debt levels appear unlikely to increase radically. Shareholders equity has generally been flat although the equity ratio has ranged between 39.1% and 77.6% from FY03/03-FY03/11.

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Cash Flow Statement

Fields Corporation's operating cash flows (OCF) have been lumpy due to volatility in sales (a function of the product mix between pachinko and pachislot machines) and associated working capital changes related to sales activity. OCF in FY03/08 was mainly due to record earnings (approximately 102.0 billion yen) combined with YoY increases in payables and declines in receivables.

Large investment cash outflow in FY03/08 was due to purchases of fixed tangible assets (3.5 billion yen), investment securities (approximately 7.6 billion yen), and investments related to affiliates (1.2 billion yen). Major capex items in FY03/07-FY03/09 were largely land and buildings (sales offices, etc.).

Financing cash flow in FY03/05 was due to additional share issuance (generating approximately 13.1 billion yen). Fields’ financing cash flow appears minor relative to operating and investment cash flows, reflecting the fact the company is self-funded through operations.

Negative simple free cash flow in FY03/04 and FY03/10 was largely the result of cash used in working capital, driven by higher machine sales (+24.7% YoY in FY03/04 and +35.8% YoY in FY03/10).

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Other Information

History

The company was established in Nagoya in 1988 by its founder and current Chairman/CEO, Hidetoshi Yamamoto. Yamamoto was exposed to the pachinko industry initially through his father whose Nagoya company was involved in management of halls. The younger Yamamoto proved a skilled advisor, adept at helping improve halls’ operating performance.

During Fields’ first decade the business grew rapidly as the company augmented its sales pitch with hall space design and machine installation advice. After establishing itself in Kyushu and Tokyo in 1992, Fields Corporation rolled-out operations on a national scale by establishing branch offices in Tohoku, Chugoku, Shikoku and Kansai in 1995.

The company realized halls wanted access to the best machines to attract fans, but industry practice at the time wedded a hall to one, specific manufacturer. What was needed was a flexible system whereby halls could freely pick and choose popular titles. Positioning itself as an unaligned distributor, the company uncovered a profitable niche that it has since fortified.

Important developments since 2000 include partnerships with several major pachinko/pachislot manufacturers. One important example of this was when the company started selling machines of Rodeo, a subsidiary of Sammy Corp. Fields took a 35.0% equity stake in Rodeo in 2002 and used its Rodeo relationship to demonstrate its ability to source publishing rights from third parties. In this case, it licensed rights from Toei Corp. for Gamera (a giant sea-turtle and rival to the Godzilla franchise) and the Gamera model sold a respectable 60,000 machines at the time of its release. The event also raised the company's ability to price its services; specifically, revenue per machine effectively doubled when this approach was employed. (See Business Model)

Starting in the early 2000s, Fields set up several ventures outside of pachinko/pachislot planning, development and sales in order to create new content and realize multiple use of content. These included a sports gym operation, a sports management office for professional athletes, a game software company, a magazine publishing firm, and a mobile content company. In 2003, the company listed on the Jasdaq exchange, receiving the ticker code 2767. It then formed a business tie-up with Bisty of SANKYO Group. SANKYO Co. (TSE 6417) took a 15.0% stake in Fields in 2008. The company has also teamed up (in 2006) with Olympia Co.(unlisted) and formed an alliance in 2008 with KYORAKU SANGYO (unlisted).

In 2007, Takashi Oya, a prominent games and IT securities analyst, joined the company as its new president and COO. With his arrival, the company focused on improving execution, and systemizing many of its planning and sales functions. At the same time, his appointment allowed Chairman Yamamoto the time and freedom to execute his future vision.

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News and Topics

November 2011

On November 15, 2011, the company announced the release of a new pachinko machine from Bitsy Co., Ltd. “CR Evangelion 7". It was expected to be available at pachinko halls from January 2012.

(For original Japanese-language only announcement in PDF format, please click here.)

On November 2, 2011, the company released 1H/Q2 FY03/12 results: click here to go direct to the 1H/Q2 FY03/12 results section.

(For original PDF format English language announcement please click here.)

October 2011

On October 4, 2011, the company and Enterrise Co., Ltd., an affiliate of the major video game manufacturer Capcom Co. (TSE 9697), announced the release of a “Street Fighter IV” pachislot machine. It was expected to be available at pachinko halls from November 2011.

(For original Japanese language only announcement in PDF format please click here.)

September 2011

On September 6, 2011, the company announced the release of a new pachislot machine from Rodeo called “Rahxephon”. It was expected to be available at pachinko halls from October 2011.

(For original Japanese language only announcement in PDF format please click here)

August 2011,

On August 23, 2011, the company announced that its Board of Directors had come to a decision to restructure its Japan Sports Marketing Inc. subsidiary (JSM)

(For original Japanese language only announcement in PDF format please click here.)

The basic outline of the restructuring is as follows:

1.JSM’s fitness club business will be carved out of the original business, absorbed into Fields and run by the company.

2.After this divestiture, JSM will be dissolved and put into special liquidation proceedings.

The company made the following comments about the restructuring:

• Regarding JSM’s fitness club business the company decided that carving out the business and absorbing it would result in high levels of synergies given expected growth opportunities and the resources that the business could leverage

• As for JSM’s other businesses (sports player and rights management), gauging revenue opportunities was judged to be difficult and it was decided to dissolve the business

The impact from the restructuring on the company's results was yet to be determined, but if a significant impact on performance going forwards was determined this would be promptly disclosed, the company noted.

On August 4, 2011, the company released Q1 FY03/12 results: click here to go direct to the Q1 FY03/12 results section.

(For original PDF format English language announcement please click here)

June 2011,

On June 22, 2011, the company announced the release of a new pachislot machine from Rodeo called “Kaze no Youjinbou - Memories of a Butterfly”. It was expected to be available at pachinko halls from August 2011.

(For original Japanese language only announcement in PDF format please click here)

May 2011

On May 13, 2011, the company announced the nationwide release of a new pachinko machine from Bisty Co., “CR The story of Ayumi Hamasaki－the prologue”. It was expected to be available at pachinko halls from July 2011.

On May 12, 2011, the company released FY03/11 results.

(For original PDF format English language announcement please click here)

April 2011

On April 19, 2011, the company announced the nationwide release of a new pachislot machine from Bisty, “SAMURAI 7”. It was expected to be available at pachinko halls from May 2011.

February 2011

On February 3, 2011, the company released Q3 FY03/11 results.

On February 2, 2011, the company announced the nationwide release of a new pachislot machine from Bisty, “MOBASLO Evangelion－for your own wish.” It was expected to be available at pachinko halls from March 2011.

January 2011

On January 14, 2011, the company announced the nationwide release of a new pachislot machine from Enterrise Co., “Sengoku BASARA 2”. It was expected to be available at pachinko halls from February 2011. Enterrise is a subsidiary of Capcom Co. (TSE 9697), a major game software developer.

On January 14, 2011, the company also announced that it entered into an agreement with AQ Interactive Inc. (TSE 3838) to acquire shares of Microcabin Corp., an AQ Interactive subsidiary. The company provided the following details:

• The company would acquire an 85.0% stake in Microcabin on January 14, 2011, making it a subsidiary

• The acquisition would be made with funds on hand, at a total cost of 756 million yen

• The acquisition was intended to strengthen the relationship with AQ Interactive and create synergies between Fields and Microcabin

• AQ Interactive would maintain a 15.0% share of Microcabin

On January 6, 2011, the company announced the nationwide release of a new pachinko machine from Bisty, “CR Kung Fu Panda”. It was expected to be available at pachinko halls from February 2011.

December 2010

On December 7, 2010, the company announced the nationwide release of “Gravion”, a pachislot machine by Rodeo Co. The animated work Gravion was created and directed by Masami Obari, and broadcast by Fuji Television Network in 2002 and 2004. Gravion was an innovative new robot animation that combined classic designs and stories. The machine is expected to be available at pachinko halls from January 2011.

November 2010

On November 4, 2010, the company released Q2 FY03/11 results. At the same time, the company announced an upward revision to its FY03/11 forecasts and revised up the expected interim dividend payment.

October 2010

On October 20, 2010, the company announced the nationwide release of “Ore no Sora – Spirit of Young Justice”, a pachislot machine by Rodeo. The machine is the third commemorative title celebrating Rodeo’s 10th anniversary . It is expected to be available at pachinko halls from December 2010.

On October 5, 2010, the company announced the nationwide release of a new pachinko machine from Bisty Co., “CR Evangelon – Evangelical of the beginnings Light ver.” The company said this light version of the “CR Evangelion - Evangelical of the beginnings” machine included attractive game functions and will be launched as a “high chance” model that has been preset to make it easier to hit the jackpot.

August 2010

The company announced Q1 FY03/11 results on August 4, 2010 and revised 1H FY03/11 earnings estimates upward.

July 2010

The company announced the launch of the pachislot machine “Magical Shopping Arcade Abenobashi” on July 5, 2010. It employs anime content that was planned and produced by GAINAX Co. and won a prize at the 2002 Japan Media Arts Festival. The machine is expected to be available at the halls from August 2010.

June 2010

On June 24, 2010, Fields Corporation announced that the board of directors made on that day the decision to additionally acquire Digital Frontier Inc. shares (planned date for the share transfer is June 30, 2010). Details are as follows:

• Number of shares to be acquired: 60 (12.6% of total shares outstanding)
• Change in the number of the shares held: from 353 shares (shareholding ratio: 74.3%) to 413 shares (shareholding ratio: 86.9%).

The impact on the FY03/11 performance (both consolidated and parent basis) is minor.

May 2010

On May 10, 2010, Fields Corporation announced FY03/10 full year results.

April 2010

On April 30, 2010, Fields Corporation announced the release of “CR Neon Genesis Evangelion – Evangelical of the beginnings”, a new pachinko machine by Bisty Co., Ltd (Bisty). The machine employs high-quality images from the movie “Evangelion:1.0 You are (not) alone” and “Evangelion:2.0 You can (not) advance”. It also uses a new special “double impact” frame for the machine body modeled on the Evangelion EVA-01 Test Type.　According to the news release, the machine is available in pachinko halls in June 2010.

On April 20, 2010, Fields Corporation has announced the release of “Gamera”, a pachislot machine by Rodeo Co., Ltd (Rodeo). “Gamera” is the second commemorative title to celebrate the 10th anniversary of the Rodeo brand. It retained the original “anyone can play it” concept from the 1st “Gamera” title released in 2000. Fields Corporation commented that alongside features reproduced from the earlier title, such as continuous scenes and reel control, new “Gamera” incorporates modern game system and is a completely new machine. The release said that the machine is to hit the halls in June 2010.

On April 15, 2010, Fields Corporation issued an additional press release regarding the acquisition of Digital Frontier ("DF") shares. The information below has been updated to reflect the new data. The numbers and facts updated on April 15, 2010 are highlighted in bold.

On March 26, 2010, Fields Corporation announced that it made a decision to acquire shares of Digital Frontier, a subsidiary of TYO Inc. (TYO) and reached a basic agreement in this regard with TYO. According to this agreement, it is assumed that Fields Corporation would acquire 74.3% of Digital Frontier shares out of 84.2% that are owned by TYO. According to the release, Digital Frontier is one of the leading Japanese domestic companies in the field of CG (Computer Graphics) production, its track record including CG in movies “DEATH NOTE” and “SUMMER WARS”.

Further on April 15, 2010, Fields Corporation said that the board of directors made on that day the final decision to acquire the abovementioned shares in a share transfer.

DF Company Outline

• Name: Digital Frontier Inc.
• Main businesses: Production of computer graphics
• Date of establishment: May 16, 2000
• Location of head office: 1-1-71 Naka Meguro Meguro Ward Tokyo Japan
• Representative: President/Representative Director Hidenori Ueki
• Paid-in capital: 31 million yen
• Financial year-end: July 31
• Shares outstanding: 475 shares
• Major shareholders and shareholdings: TYO Inc. 84.2%, Hidenori Ueki 4.8%

Details of the number of shares to be acquired, the number of shares to be held after the changes and the anticipated schedule for the changes are listed below

• Number of shares to be acquired: 353 ordinary shares (acquisition price 650 million yen)
• Shares to be held after change: 353 ordinary shares (74.3% stake)

Dates

• March 25, 2010, resolution by board of directors, signing of the basic agreement.
• April 15, 2010, Board meeting of Fields Corporation regarding the issue and signing of the share transfer.
• April 16, 2010, date of share transfer.

DF will become a consolidated subsidiary of Fields Corporation. There was no impact on Field’s FY03/10 financial results. Any such impact on FY03/11 financial results and beyond has not been yet determined as of April 15, 2010.

On April 6, 2010, Fields Corporation announced that it established a new publishing company, “HERO’S”, with Shogakukan Creative INC. Shogakukan Creative INC. and Fields Corporation will have 51.0% and 49.0% stakes respectively. The new company is planning to launch a monthly comic magazine for young readers at the end of 2010.

On April 1, 2010, Fields Corporation announced an update regarding a share buyback conducted in March 2010.

• The buyback period: March 1, 2010 until March 31, 2010.
• Shares repurchased: 46
• Amount: 5,058,000 yen

As of March 31, 2010 there were 332,115 shares outstanding (excluding 14,885 treasury shares).

The company also announced the completion of the repurchase program announced in November 2009. The cost and number of shares repurchased during the total buyback period (from November 24, 2009 until March 31, 2010) is as follows:

• Total number of shares repurchased: 4,242
• Total cost: 454,641,100 yen

March 2010

On March 26, 2010, Fields Corporation issued an additional press release regarding the signing of the agreement to acquire the shares of Tsuburaya Pro. The information below has been updated to reflect the new data. The numbers and facts updated on March 26, 2010 are highlighted in bold.

On March 17, 2010 Fields Corporation announced a decision to acquire shares of Tsuburaya Productions Co. Ltd. (“Tsuburaya Pro”), a consolidated subsidiary of TYO Inc. (“TYO”). The company has reached a basic agreement as a precursor to the transfer of the 51.0% of Tsuburaya Pro ordinary shares held by TYO, and both companies have entered into the main negotiations regarding this transfer. Tsuburaya Pro produces and owns various content, notably the “Ultraman Series,” and became a company under the umbrella of TYO in October 2007.

Further on March 26, 2010, Fields Corporation said that the board of directors made a day earlier the final decision to acquire the abovementioned shares in a share transfer.

Reasons for the acquisition:

1.The multi-use development by the Fields Corporation group companies can be expected thanks to cooperation with Bandai Co., Ltd, which has a 49.0% stake in Tsuburaya Pro. Examples of such cooperation include new character merchandising initiatives and active use of entertainment machine tie-ins with Fields Corporation partner companies.

2.The “Ultraman Series” is intellectual property recognized by markets around the world, so the company expects to find opportunities to develop overseas businesses in areas such as films and character merchandising.

Tsuburaya Pro Company Outline

• Trading name: Tsuburaya Productions Co., Ltd.
• Main businesses: Planning and production of films and television programs; planning, production and marketing of licensed goods featuring character images.
• Date of establishment: April 12, 1963
• Location of head office: 1-10-1 Hachimanyama Setagaya Ward Tokyo Japan
• Representative: President/Representative Director Shinichi Ohka
• Paid-in capital: 310 million yen
• Financial year-end: July 31
• Shares outstanding: 100,000 shares
• Major shareholders and shareholdings: TYO Inc. 51.0%, Bandai Co., Ltd. 49.0%
• Results for the fiscal year to July 2009: Sales 3,577 million yen; Recurring profit 328 million yen; Net profit 238 million yen

Details of the number of shares to be acquired, the number of shares to be held after the changes and the anticipated schedule for the changes are listed below.

• Number of shares to be acquired: 51,000 ordinary shares (acquisition price of 1.1 billion yen)
• Shares to be held after change: 51,000 ordinary shares (51.0% stake)

Dates

• March 17, 2010, resolution by board of directors, formulation of basic agreement.
• March 25, 2010, final decision by board of directors to acquire shares, determination of the date and price of acquisition.
• April 2, 2010, signing of share transfer agreement, date of transfer of shares.

Tsuburaya Pro will become a consolidated subsidiary of Fields Corporation. There is no impact on Field’s FY03/10 financial results. Any such impact on FY03/11 financial results and beyond has not been yet determined as of March 26, 2010.

Additionally, the release of March 26, 2010 indicated that Fields Corporation acquired TYO treasury stock from TYO in a 3rd party offering (payment to be effected on April 2, 2010). As a result of this transaction Fields Corporation becomes a holder of 14.9% of TYO shares.

On March 5, 2010, Fields Corporation announced an update regarding a share buyback conducted in February 2010.

• Buyback period: February 1, 2010 until February 28, 2010.
• Shares repurchased: 3,496
• Amount of cash: 0.4 billion yen

As of February 28, 2010 there were 332,161 shares outstanding (excluding 14,839 shares held in treasury).

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Top Management

Hidetoshi Yamamoto (山本 英俊), born in 1955, founded Fields in 1988. Today he is Chairman and CEO and has responsibility for executing the company’s long-term vision.
Takashi Oya (大屋 高志), born in 1965, joined the company from Deutsche Securities Japan in 2007 as President & COO. Oya has responsibility for managing the company’s day-to-day activities.
Tetsuya Shigematsu (繁松 徹也), born in 1968, is a Senior Managing Director in charge of Group Business and Business Division Manager.
Kiyoharu Akiyama (秋山 清晴), born in 1952, is a Senior Managing Director in charge of Pachinko/Pachislot Business.
Masakazu Kurihara (栗原 正和) born in 1960, is a Managing Director, Development Division Manager.
Shigesato Itoi(糸井 重里) born in 1948, Outside Director.
Hiroyuki Yamanaka (山中 裕之) born in 1967, Director, Planning and Administration Division Manager.
Hideo Ito (伊藤 英雄) born in 1969, Director, Corporate Division Manager.
Akira Fujii (藤井 晶) born in 1960, Director, Sales Division Manager.
Toru Suenaga (末永 徹) born in 1964, Director, General Manager of Chairman’s Office.

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Employees

Fields Corporation employs 639 staff at the parent company level (1,149 consolidated). Average age is 34.4 (parent company), average salary is 6.56 million yen (parent company) – data as of March 31, 2011.

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Major Shareholders

As of end-March 2011, the shareholder breakdown was as follows: individuals/other 54.4%, foreign institutions 10.6%, financial institutions 8.8%. Top 10 Shareholders were:

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Investor Relations

The company hosts quarterly analyst meetings following earnings announcements.

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By the Way

• Chosen by Daiwa Investor Relations Co., Ltd. for 2011’s Outstanding Internet IR Site.
• Chosen by Nikko Investor Relations, Co., Ltd. for the “Best Corporate Website” award.

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Latest Q&A

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