[edit] Financial Summary

[edit] Recent Updates

[edit] Summary

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

The company announced the launch of the pachislot machine “Magical Shopping Arcade Abenobashi” on July 5, 2010. It employs anime content which won a prize at the 2002 Japan Media Arts Festival, planned and produced by GAINAX Co., Ltd. The machine is expected to be available at the halls from August 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. (“DF”) shares (planned date for the share transfer is June 30, 2010). Details are as follows:

• Number of shares to be acquired: 60 (12.63% of total shares outstanding)
• Change in the number of the shares held: from 353 shares (shareholding ratio: 74.31%) to 413 shares (shareholding ratio: 86.94%).

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

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

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.

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[edit] Trends & Outlook

Quarterly Trends

Q1 Results FY03/11

The company released 1H revised estimates and Q1 FY03/11 results on August 4, 2010 (see the table above). 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%.

FY03/11 Outlook

Misunderstood?

After several months of following the company (observing but not commenting on share price) SR Inc. wonders if Fields Corporation, or at least the way it produces earnings forecasts - especially long-term forecasts - is somewhat misunderstood. While the market seems to focus on whether or not the forecast is met on an annual basis, some points important to understanding the value of the company might be overlooked.

It is hard for Fields Corporation to produce precise forecasts as its earnings depend on lumpy sales of entertainment machines. Each machine is somewhat similar to a computer game production - whether or not it will be a hit is unknown until actual release (with the possible exception of Eva series). It is therefore important to understand that official estimates are more general goals than precise targets. For the company, the general direction and growth rate are more important than clearing yearly forecasts.

Over the past 10 years the company sustained remarkable profitability amid highly volatile and often adverse market conditions. Throughout this period it generated healthy cash flows and managed its balance sheet generally conservatively. The stability of the financial position and a relatively low-risk profile of the business model are probably often overlooked.

The company has stated its long-term goal of diversifying away from a pure play pachinko/pachislot distribution company to a distributor of the entertainment contents in a broader sense. It has been trying to develop elements of this strategy since listing. The track record up to 2009 had been mixed, with some successes and some failures, but the whole process was managed carefully and conservatively, without detracting too much in terms of managerial resources or shareholder value. The equity market has been taking a “show me the money” attitude towards these ambitions but it is not probably wise to disregard them entirely. The acquisition in April 2010 of Tsuburaya Productions Co., Ltd. (Tsuburaya Productions), the owner of Ultraman rights, and Digital Frontier Inc. (Digital Frontier), one of the largest computer graphics producers in Japan, as well as establishing a publishing subsidiary HERO’S could be an important step in a new direction.

FY03/11 forecast (PS Business)

SR Inc. understands that FY03/11 sales will see a higher weight of pachislot in 2H. Pachislot seems to become a larger driver compared to the previous year, reflecting recent market dynamics, where the pachinko trend at what Fields Corporation sees as normal stable level of approximately 3.0 million machines per year while the pachislot machine sales recover somewhat to 0.75-0.85 million machines.

Based on available information, SR Inc. developed a set of assumptions presented below. (Please note that Fields Corporation does not disclose overall unit estimates or individual machine sales assumptions and these calculations are provided by SR Inc. solely to help readers grasp in broad strokes possible underlying assumptions):

Pachinko

The company released in 1H FY03/11 (June 2010) a new pachinko machine of the Eva series, “CR Neon Genesis Evangelion – Evangelical of the beginnings”, and planned the release of the first installation of the collaboration title with KYORAKU SANGYO in 2H (Q4).

The sales of pachinko machines for Fields Corporation are mainly the commission from the pachinko manufacturers, estimated at 30,000-50,000 yen per machine.

In terms of overall FY03/11 pachinko launches, 4-6 machines are likely to be brought to the market and the total machine sales are estimated at approximately the same level as in FY03/10, about 330,000 machines.

Pachislot

Pachislot machine sales expected in the 1H of FY03/11 are “Neon Genesis Evangelion – Die Spur Der SEELE”, launched in the previous fiscal year and sales carried over to the current fiscal year, “Onimusha: Dawn of Dreams”, which was similarly launched in FY03/10 and carried over to FY03/11, and “Gamera” which was launched as the second campaign for Rodeo’s 10th anniversary. Additional titles will be launched from FY03/11 second quarter and going forward. In addition to the above, several new titles will be launched by other manufacturers. 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, driven by recovering pachislot market and launch of Rodeo’s 10th anniversary products.

Total

Fields Corporations’ official estimates are 68.0 billion yen for sales and 27.5 billion yen for gross profit (40.4% margin).

On the parent basis, the company forecasts 16.5 billion yen in SG&A expenses, slightly higher YoY in absolute terms but lower as a percentage of projected sales (24.3% from 25.9%). The parent operating profit forecast is 11.0 billion yen.

Note: Accounting for sales of pachinko and pachislot is different due to varying commercial conventions. This translates into very different gross profitability figures for two segments. Therefore any comparisons or trend analysis of sales and gross profitability figures are only meaningful when pachinko is compared to pachinko and pachislot to pachislot.

Consolidated projections

Group companies and subsidiaries are expected to break even in aggregate. New subsidiary companies (DF and Tsuburaya added since FY03/11) should have no operating profit contribution due to goodwill charges.

The forecast calls for 80.0 billion yen in sales, 31.5 billion yen in gross profits, and 20.5 billion yen in SG&A expense (consolidated) vs. 18.8 billion yen in FY03/10. As a percentage of sales, SG&A is expected by the company to decline to 25.6% vs. 28.3%. The operating profit is projected at 11.0 billion yen (+35.4% YoY; 13.8% OPM).

Shareholder returns

The company has a stated dividend payout policy of over 20%. In FY03/10, full year dividends amounted to 4,500 yen per share (total 1.5 billion yen). FY03/11 calls for (flat) 4,500 yen dividend. Additionally, the company also completed a stock repurchase (1.2% of shares outstanding at FY03/09, 4,242 shares) during FY03/10.

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.

Number of Titles to be Launched

Source: Compiled by SR Inc., based on information disclosed at the 1H FY03/10 results meeting.

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 FY03/12 and beyond were highlighted at the November 2009 analyst meeting (and reiterated its commitment to the sales and OP targets at its FY03/10 analyst results meeting):

FY03/12 – 17 billion yen OP; two new KYORAKU SANGYO releases expected; SR Inc. believes that there is a possibility of a release of a new type machine developed in a break with established pachinko industry conventions.

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

FY03/14 – at least 25 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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[edit] Business

[edit] Summary

The company’s core business is the planning, development and distribution of machines to pachinko and pachislot halls, referred to in this report as “halls”. Its expertise extends beyond simple distribution to a role of a content creator. Its strategic partners include several premier pachinko/pachislot manufacturers in the market today. Fields Corporations’ “value-add” is derived from its ability to obtain and combine proprietary content to plan and develop pachinko/pachislot machines that offer a unique entertainment experience to consumers, turning them into fans and repeat players. The company’s customers are the halls. Fields Corporation acts as a sole distributor for 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 clients 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 94% of total sales as of FY03/10 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.

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[edit] Business Description

Main Business and Product Segments

Pachinko/Pachislot (PS) Field: Historically accounting for 75~90% of consolidated sales, it is a strong cash flow generating business where margins have historically been steady (low to mid double digits from FY03/06-FY03/10). Partnership with Bisty, a subsidiary of SANKYO, is currently (FY03/10) the most important contributor (producing titles like Evangelion*). Another important alliance is Rodeo, a subsidiary of Sammy (Sega Sammy Holdings, TSE 6460), in which Fields Corporation has an equity stake and acts as the sole distribution agent. A new alliance which warrants attention is with KYORAKU SANGYO (unlisted company) for planning, development and sales of a new machine. Finally, Fields Corporation is looking for cross-media opportunities to monetize its content library (see Strategy).

(*) Evangelion: Mega hit anime franchise spanning entertainment genres. Controlled largely by animation studio GAINAX Co., Ltd., it rose to popularity in 1995-1996 when 26 episodes of an anime version were broadcast on TV Tokyo.

Evangelion is an apocalyptic action story about a paramilitary organization called Nerv, and its fight against monsters (Angels). Nerv's weapons to fight the Angels are giant robots called Evangelion (Eva). The Eva are piloted by a group of teenagers, among them Shinji Ikari, the main protagonist. Work contains philosophical and religious themes and unique vocabulary. A picture of an Evangelion pachinko machine is shown below.

CR Evangelion – The Beginning and the End

©カラー ©Bisty

In December 2004 Fields Corporation started selling its first of the Neon Genesis Evangelion series pachinko machines under Bisty brand, sales of which eventually reached 125,000 machines. The franchise became a big success, with further four annual releases in 2006-2010 for the total of six megahit machines. Neon Genesis Evangelion pachislot machines were commercialized in 2005, 2007, 2008, and 2010; last two titles selling over 80,000 machines each. “The Beginning of the End”, released in April 2009 and sold approximately 237,000, the highest for the franchise until that point. As of June 2010, the latest version, “CR Evangelion – The Beginning and the End”, is on sale. The Evangelion Sales Trend table (below) illustrates that with an exception of one low gambling nature model, the company consistently hit “home-runs” as defined by machine sales exceeding 100,000 per release and succeeded in establishing a strong and widely recognized “Eva brand”.

Released as both pachinko and pachislot machines, Evangelion is an exceptional blockbuster series. Success of Evangelion can probably be attributed to its (1) engaging storyline and characters, (2) fluid video graphics and good sound, (3) design of jackpot probability and (4) fact that the machines are said to be “fun to play”.

Conversely, over-reliance on a particular series represents a business risk for Fields Corporation if future performance were to weaken. SR Inc. estimates that contribution from Evangelion has ranged from about 25% to more than 60% of the company’s revenues over the past five years (see Strategy for additional discussion).

Segment name changes

In Q1 FY03/09, Other Field segment was divided into three segments (Sports Field, Movies Field, 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; finally, Movie Field was integrated into Other Field etc.

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 Kimiko Date Krumm, Kazuhiro Kiyohara and others.

Mobile Field: Operating “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 Corporations’ 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 library and uses it to propose original value-added pachinko/pachislot content. Once a new machine is developed by a partner company, Fields Corporation becomes the sole distributor and continues to participate in the development process. The manufacturer accepts responsibility for production and some development related functions such as programming of logic boards. Inventory risk is with the manufacturer. (The company notes that this marketing activity effectively reduces inventory risk for manufactures as actual machine sales tend to fall close to original forecasts.) Fields Corporation also distributes product for non-partners; this is a small fraction of the overall machines sold.

As with any business, sales is price multiplied by volume. Industry average selling prices (ASPs) have trended higher in recent years (e.g. pachinko machines sell for 350,000 yen in FY03/10 vs. about 250,000 yen in FY03/05). This is the result of higher quality components (LCD screens, motherboards, ICs) being incorporated into the equipment, and other quality-related cost increases. But the main driver of revenues for the company is machine sales with volumes changing considerably depending on the timing of releases.

Accounting of sales is based on machine type. Sales for pachinko are commissions from manufacturers, typically 30,000~50,000 yen per machine. Fields Corporation purchases pachislot machines from manufacturers (taking on inventory) for resale to halls, booking the entire price of 300,000~400,000 yen as revenue. The gross margins on pachislot are higher than pachinko, about 60,000~ 90,000 yen per machine. Pachislot is higher margin because of higher ASPs.

The accounting treatment for pachislot introduces accounting volatility to sales. For instance, during periods of high pachislot sales (e.g. 2005~2007), annual sales grew to more than 100 billion yen (FY03/08) vs. 73.0 billion yen in FY03/09, although machine shipments of machines were about equal. The company notes that it does not intentionally manage its product mix to improve margins. On the balance sheet, the impact of sales fluctuations of pachinko/pachislot machines is felt via large expansion/contraction of accounts receivable and accounts payable. Despite these temporary distortions, both solvency and liquidity ratios appear healthy (see Financial Ratios).

Each of the company’s salespeople covers approx. 40 accounts. Salespeople employ a “consulting sales” approach where they will make specific recommendations on titles. The company also has show rooms in all of its branch offices. Fields Corporation utilizes two distribution channels. The first is a direct channel – selling directly to hall operators (approx. 80% of machines are sold using the direct channel). The second one is sales through resellers. This method is lower margin but sometimes makes economic sense due to small size or geographic location of end customers.

Machine volumes are the main swing-factor to earnings (see chart below). SR Inc. estimates that contribution from pachislot has ranged from a low of about 45% to a peak of 80% of operating profit over the past ten years. This percentage may trend downward over next several years as pachinko becomes a larger portion of product mix. SR Inc. posits that exposure to both segments may actually serve as a natural hedge for the business.

Profitability Snapshot and Financial Ratios

As displayed above, profitability has been consistently high with operating margins generally in the low to mid teens. But ROA and ROE have steadily trended downward from peak levels of 20% and 45% respectively. Although it does not discuss concrete ratio targets, management is aware of deterioration in some metrics. SR Inc. notes that if the company’s stated mid-term profit targets are achieved, forward ROA and ROE would return to FY03/04 levels.

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

SWOT Analysis

Strengths

• Sales Power: Manufacturers use Fields Corporation to take advantage of its large and skilled sales force enabling them to extend geographic reach and accelerate speed to market.
• Neutrality: Halls prefer to trade with Fields Corporation given its perception as 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 its partners more bandwidth to sell product while defraying 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 a 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 been proving difficult.

Main Facilities

Fields Corporations’ 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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[edit] Market & Value Chain

Market Overview

The total domestic leisure market is said to be worth 72.8 trillion yen in 2008 (Source: “White Paper on Leisure 2009”, Japan Productive Center). Within leisure, the largest category is the “game” genre in Amusement category (pachinko, mahjong, game centers and game corners, TV games and game software) was estimated at 23.0 trillion yen. Within that genre, pachinko forms the major piece within the larger leisure market with 21.7 trillion yen in sales (about 30% of the overall leisure market). This figure corresponds to the gross turnover of halls. (Note: pachinko and pachislot are defined as “amusement” or “entertainment” industries by the public authorities). Of that sales amount, 19.4 trillion yen is returned to players in payouts or “winnings”. Of the remaining 2.3 trillion yen, roughly 1.14 trillion yen is reinvested by operators into new machine purchases (the company estimate). New machine purchases were 900.5 billion yen for pachinko and 242.3 billion yen for pachislot in 2008.

Industry data show that the market has been shrinking but this trend seems to be bottoming out. Player population was 15.8 million in 2007 vs. 23.1 million in 1997 (one in about seven Japanese play pachinko/pachislot), the number is higher than last year’s suggesting a recovery. Average customer spend of 122,900 yen per year has been flat since 2002. The number of halls declined from 18,224 in 1995 to 12,652 in 2009 (Source: Metropolitan Police Department). Limited cash flow for renewed investment has forced some smaller operators to sell or shut operations. At the same time, average hall size has increased from 261 installed machines in 1995 to 353 in 2009, a clear trend towards larger establishments. Larger chains also appear to be gaining scale highlighting continued polarization of the market.

Order trends for Fields Corporation are inextricably linked to 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 2008, turnover for pachinko was 1.08 times and for pachislot 0.63 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. Therefore, the product development of new pachinko machines, the main market, remains the priority.

In terms of the machine market, machine sales of pachinko rose from 3.7 million in 1995 to a peak of 4 million machines in 2005 (8.9% increase). 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 2008. On the other hand, the machine sales of pachislot machines expanded 5-fold off a low base of 350,000 in 1995 to 1.8 million machines in 2005. Following a cycle of strong demand for 5th generation machines after introduction of stricter regulation in 2007, demand for lower gambling nature pachislot machines has fallen, but recovered from the second half of 2009.

With changes in market size, competition between manufactures has been intensifying. Although well-known franchises have a tendency to generate repeat sales, breaking into the top-ranks has not been easy for smaller players. Today, while top-selling blockbusters may still garner over 200,000 machines of 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. attributes the success of the company partly to its ability to partner with key players at development stage. Manufacturers, in turn, have reason to partner with Fields Corporation as it enables the creation of a second brand and higher penetration per account resulting in a higher market share.

The company believes that with the recent move away from dependency on high gambling nature and towards healthier and more entertainment orientated environment, the pachinko industry should resume growth in the near future. While it is difficult to provide a solid “proof” of this view, as the time an average consumer can allocate to leisure has been increasing, the company sees evolution and growth of the pachinko industry into one of choice entertainment as a very likely scenario. In addition, the pachinko market does appear 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 declining population and emerging forms of passive entertainment. However, the process is gradual and innovation in the industry could reverse or slow this trend. The key cyclical drivers are government regulation and 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; the high gambling nature trends have been easing. A change in pachislot gambling nature in 2004 for instance, led to big wave of replacement sales in 2007. Pachislot machine sales declined afterwards as some players gravitated to pachinko. However, as manufacturers compete to develop machines compliant with the newest regulation and attempt to increase the entertainment factor of the new machines, the whole process could be accelerating innovation in both hardware and software.

According to Fields Corporation, different levels of gambling nature seem to have an impact on players and could be impacting market growth. As of FY03/10, many manufacturers have been focusing on so-called max-type machines. Average amount of money spent by a player on max-type machines will increase, and the expected return is likely to be higher (which can be appealing to serious players) than on other machine types. This means that on average a player loses money faster in these types of machines. Although max-type machines could mean higher cash flow for halls in the short run, Fields Corporation is concerned that this trend may alienate the casual player and is an unhealthy trend for the whole market.

SR Inc. thinks that Fields Corporation could be a long term beneficiary from the rise and fall in popularity of different machines. Indeed, changes upstage current leaders and give manufacturers a short window when they need to scramble for new innovative products. Fields Corporation helps them 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. The company considers roughly 9,000 largest halls as its target customers within the larger market of approx. 12,700 halls (as of 2009).

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

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. The largest supplier in FY03/10 was the SANKYO group (80.7% of machines Fields Corporation sold in the year).

Barriers to Entry

Barriers to entry are high. Overall, the industry has a number of sophisticated and well capitalized players. Products require substantial development cost and carry high failure rates. The company’s business model is unique and would be difficult to replicate successfully. Fields Corporation possesses an extensive expert sales network and has long term relationships both with top manufacturers and with thousands of halls. With roughly 300 salespeople in daily discussions with hall operators, the customer relationship is sticky and information about customers replete. Pachinko is a personality driven industry reliant upon trust. Incumbents with existing relationships therefore have a natural advantage. Another point is that the operator market is fragmented. A newcomer would need significant time to gather a critical mass of customers to become profitable.

Competition

The company estimates that approx. 1,000 distributing companies exist in the pachinko/pachislot market. However, no other company has a business model or a nationwide sales network that rivals Fields Corporation. The company products do in fact compete with those of its partner and non-partner manufacturers. Listed manufacturers include SANKYO (TSE 6417), Sega Sammy Holdings (TSE 6460), Heiwa Corporation (TSE 6412), and Universal Entertainment (JASDAQ 6425).

Substitutes

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

Casinos: As of FY03/10 end, casinos were officially banned in Japan, however there was an ongoing debate regarding potential legalization. SR Inc. thinks that 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 13,000 pachinko/pachislot halls in local neighborhoods across Japan.

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[edit] Strategy

Fields Corporations’ growth strategy is twofold: in order to better address the reality of the business and its evolution to date, the company shifted to a new organizational structure with two business divisions: entertainment business (group business) and pachinko and pachislot business. Field’s longer-term strategy in the entertainment business is to develop additional uses for its content in addition to the primary use. SR Inc. notes that new group companies such as Tsuburaya Productions, Digital Frontier, and HERO’S will be the new drivers of the company’s future growth.

To stay competitive, the company needs to improve its competitiveness in the wide range of entertainment business by further leveraging content and improving execution. In the mainstay pachinko/pachislot business, the challenge for the company is twofold. It has to continue maintaining the power of the core Eva series. It also needs to develop a lineup of titles, and to develop machines that could sell 50,000-100,000 machines per title. This would produce a more stable earnings stream and could lead to a further evaluation of the company by the market.

Fields Corporation has also been persistent in its attempts to gradually evolve the business into a company that develops and distributes contents in the entertainment business. It already sees its core strength in 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 Corporation 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 in other business is recovering and it can be possible that the company is on the 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 rights business. Digital Frontier, with its high technology, will contribute to the developing a higher quality product in the pachinko/pachislot development. Additionally, through alliance with the group companies, it has the potential of expanding business into all kinds in the area of visual entertainment. Within the group companies, HERO’S Inc. takes the responsibility of creating contents and contribution can be expected not only in the pachinko and pachislot business but also in the various entertainment business in the digital comics, etc.

What could Ultraman mean for Fields Corporation? Ultraman is a well-known character with good recognition in Japan and is also relatively well-known worldwide. According to search results from Google, although Ultraman trails the power of Godzilla (about 6 million results) and Captain America (4.2 million results), it still generated a respectable 2.7 million search results in English when searched on May 26, 2010. 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 Corporation could take Ultraman as 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 Corporations’ bottom line from 2011-2012 and beyond.

Group and Partner Companies

As of the end of FY03/10, Fields Corporation group is composed of 11 subsidiaries and 5 affiliated companies. Group companies in each business segment are listed below (% of stakes held by Fields Corporation shown in brackets).

PS Field: Fields Jr. Corporation (100.0%), Rodeo (35.0%), Shin-Nichi Technology Co., Ltd. (100.0%), Ildel Corporation (60.0%)

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

Mobile Field: Future Scope Corporation (83.3%)

Other Field: Lucent Pictures Entertainment, Inc. (90.0%), Haruki Fields Cinema Fund (90.0%), SPO Inc. (31.8%), Bbmf Magazine, Inc. (33.8%), Kadokawa Haruki Corporation (30.0%), G&E Corporation (33.3%)

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

Additions in Q1 FY03/11:

• Acquisitions: Tsuburaya Productions (51.0%), Digital Frontier (86.9%)
• Newly established: HERO’S (49.0%)

Fields Corporation sold D3, a game software company, in early 2009. D3 did not achieve goals set by the company (“developing businesses as a game publisher in Japan, North America, and Europe; revitalizing activities to acquire copyrights”) and was unable to leverage its content in pachinko/pachislot. SR Inc. believes that the sale marked an important change in the company; Fields Corporation has since recommitted itself to its core competence of pachinko/pachislot.

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 Corporation 35% stake, Sammy 65%. Pachislot focus; Fields Corporation is sole distribution agent.

• Machine sales have declined due to downturn in overall pachislot market
• Effective risk hedge for Fields Corporation should pachislot sales recover

Bisty : A 100% subsidiary of SANKYO, business alliance from 2003

• Successful alliance, Bisty accounted for 80.7% of machines sold by Fields Corporation in FY03/10
• Strategy – continue Evangelion franchise, develop other titles

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

• Two titles released in FY03/10; several titles planned in FY03/11
• 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 FY03/11
• Strategy – expand size of market via differentiated machines

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[edit] Historical Financial Statements

Earnings Results Discussion for the Year Preceding Current Fiscal Year

Q3 Results Announcement

Q3 results were reported on February 4, 2010. Cumulative figures were as follows: sales declined 62% YoY to 24.5 billion yen, operating income declined 78% YoY to 1.4 billion yen, and recurring profit decreased 81% 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% 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% 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% 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% 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% of Q1 pachinko machine sales and 95% 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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[edit] Income Statement

Historical Trends

Analysis of sales can be affected by the mix between pachinko/pachislot sales due to accounting treatment (pachinko revenues are a commission, pachislot revenues are for the full machine price). Field’s operating profit trends track the underlying market cycle relatively closely (pachinko machine sales peaked in 2005, and have been on a declining trend into 2010).

FY03/09 Results

FY03/09 sales declined 28.3% YoY to 73 billion yen; OP declined 85.1% YoY to 1.96 billion yen. Reasons were a delay in release schedule of large scale pachinko title “CR Neon Genesis Evangelion – The Beginning and the End” combined with an operating loss of 1.28 billion yen in the Game Field business (sales 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% 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% of total Fields Corporation 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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[edit] Balance Sheet

Periodic expansion and contraction of assets and liabilities have been driven by sales. Specifically, current assets have ranged between about 12-70 billion yen during FY03/03-FY03/10. Increases in sales tended to lead higher accounts receivable, reflecting the company’s role as a distributor and function as a trading partner. The company does not put pachinko machines (the majority of machine sales from FY03/03-FY03/10) 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 flattish although the equity ratio has ranged between 39.1%-77.6% from FY03/03-FY03/10.

Assets

Current Assets

During FY03/10, current assets rose from 25.1 billion yen to 56.7 billion yen due to significant increase in accounts receivable, driven by an increase in machine sales (449,880 machines vs. 331,205 machines in FY03/09).

Fixed Assets

Tangible fixed assets have typically been minimal on the company’s balance sheet – fixed assets have been mostly intangible assets and investment securities from FY03/03-FY03/10. The company stresses it is committed to an asset-light model; large asset acquisitions are not a part of its strategy (increase in FY03/09 was for a new sales office).

Liabilities

Current Liabilities

Current liabilities increased YoY in FY03/10 mainly due to higher payables (driven by higher sales during the year and taxes payable). As of FY03/10 there were no obvious refinancing needs and current liabilities appear risk-matched with current assets.

Fixed Liabilities

Declined by 726 million yen during FY03/10 due to redemptions of bonds.

Shareholders’ Capital

Total shareholders’ equity increased by approximately 1.6 billion yen in FY03/10 mainly due to retained earnings .

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[edit] Cash Flow Statement

Fields Corporation operating cash flows have been lumpy, driven by 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 billion yen) as well and increases in payables and YoY 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 Corporations’ financing cash flow appears minor relative to operating and investment cash flows, reflecting the fact that the company is self-funded through operations.

Negative simple free cash flows in FY03/04 and FY03/10 were 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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[edit] Other Information

[edit] 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 by chance, 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 Corporations’ 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.

Focused on customer needs, the company realized that halls wanted access to the best machines to attract fans. Industry practices at this time wedded a hall to one, specific manufacturer. Needed was a flexible system whereby halls could freely pick and choose the popular titles. Positioning itself as an unaligned distributor, Fields Corporation uncovered a profitable niche that it has since fortified.

Milestones over the past ten years include partnerships with several major pachinko/pachislot manufacturers. One inflection point in its history occurred when the company started selling machines of Rodeo, a subsidiary of Sammy Corporation. Fields Corporation took a 35% equity stake in Rodeo in 2002. With the Rodeo relationship the company demonstrated its ability to source publishing rights from third parties. In this case, it licensed rights from Toei Corporation for Gamera (giant sea-turtle, Godzilla rival) and Gamera did well to sell 60,000 machines at the time. The event also led to an increase in the ability of Fields Corporation to price its service. Specifically, revenue per machine effectively doubled when this approach was employed. (See Business Model)

Starting in the early 2000s, Fields Corporation independently set up several ventures outside of pachinko/pachislot planning, development and sales in order to both create new original contents and realize multiple use of the contents. These include a sports gym operation, sports management office for professional athletes, game software company, magazine publishing firm, and mobile contents 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 the SANKYO Group. SANKYO CO., LTD. (TSE 6417) took a 15% stake in Fields Corporation in 2008. The company has also teamed up (in 2006) with Olympia Co., Ltd., (unlisted company) and formed an alliance (in 2008) with KYORAKU SANGYO (unlisted company).

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, systemizing many of the 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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[edit] News and Topics

April 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 74.31% of Digital Frontier shares out of 84.21% 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. 84.21%, Hidenori Ueki 4.84%

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 (74.31% 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% and 49% 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% 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% 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%, Bandai Co., Ltd. 49%
• 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 1,091 million yen)
• Shares to be held after change: 51,000 ordinary shares (51% 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 14.98% 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: 0.373 billion yen

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

February 2010

Fields Corporation announced Q3 results on February 4, 2010. The company held a results meeting for analysts on February 5,　2010.

January 2010

The company announced the launch of “Neon Genesis Evangelion ~ Die Spur Der SEELE” on January 25, 2010. The Bisty pachislot machine employs high definition images from the animated movie “Evangelion New Theatrical Version”. Material from an episode of the animated series, “Evangelion:2.0 You can (not) advance” (released in June 2009 to a high acclaim) is also included in the machine.

On January 13, 2010 the company officially announced the release of a new important pachinko machine by Bisty, "CR Shimizu No Jirocho - The Bonds of Life". Fields Corporation commenced airing TV commercials for a new pachinko title at the end of December 2009. A new TV drama called "The Restoration Legend of Shimizu no Jirocho" went on air on January 13, 2010 on a Tokyo TV channel.

On January 8, 2010, Fields Corporation announced an update regarding a share buyback conducted in December 2009.

• The buyback period was from December 1, 2009 until December 31, 2009.
• Shares repurchased: 700
• Amount of cash: 76.3 million yen

As of December 31, 2009 there were 335,657 shares in circulation (excluding 11,343 shares held in treasury).

November 2009

Fields Corporation announced the release of new pachinko machine co-developed with Bisty (CR Neon Genesis Evangelion – “The Angels are Back Again YF”) on November 24, 2009.

On November 20, 2009 Fields Corporation announced a share buyback.

• The buyback period will be from November 24, 2009 until March 31, 2010.
• Shares intended to be repurchased: 10,000
• Amount of cash: 1.5 billion yen

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[edit] 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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[edit] Employees

Fields Corporation employs 619 staff at the parent company level (909 consolidated). Average age is 33.5 (parent company), average salary is 6.31 million yen (parent company) – data as of March 31, 2010.

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[edit] Shareholders

Top 10 Shareholders as of March 31, 2010:

As of end of FY03/10, individual investors owned 60.53% of the shares, foreigners 7.58%, financial firms 10.86%, and other firms 21.03%.

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[edit] Investor Relations

The company hosts analyst meetings quarterly following the earnings.

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[edit] By the Way

• Chosen by Daiwa Investor Relations Co., Ltd. for 2009’s Outstanding Internet IR Site.
• Chosen by Nikko Investor Relations, Co., Ltd. for the “Best Corporate Website” award.

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[edit] Latest Q&A

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