HEIWA CORPORATION ANNUAL REPORT 2002

Transcription

HEIWA CORPORATION
ANNUAL REPORT 2002
January 1, 2002- December 31, 2002
Profile
Heiwa Corporation was established in 1949, during the tumultuous
period following World War II. Over the years, it has evolved into a
comprehensive business that includes the development, manufacture and
marketing of pachinko machines and automatic ball-replenishing systems,
the development and marketing of pachislo machines, the development
and marketing of computer systems and peripheral equipment for pachinko
parlors, and pachinko parlor management consulting.
The word “Heiwa” means “peace” in Japanese. The wartime
experiences of the Company’s founder, Kenkichi Nakajima,
strengthened his belief that peace is crucial for the well-being of all
humankind and that the pachinko industry should be the symbol of
peace. He named his company “Heiwa” after his deep-rooted belief.
The value of Japan’s leisure market is calculated at over ¥85.0 trillion
(US$708.3 billion), out of which pachinko ball “rental” charges amount
to ¥28.7 trillion (US$239.2 billion). (Before playing the game of
pachinko, players rent the necessary number of balls from the parlor,
with the term “rental charges” signifying money paid during this
transaction; approximately 80% to 90% of this money is returned to the
players in the form of prizes.) With pachinko fans numbering 20.2
million, it is widely accepted as the “king” of recreation for the general
public. Pachinko machines have continued to evolve to meet the
demands of the game’s wide range of fans. Today they are the epitome
of high-technology, equipped with Japan’s cutting-edge electronic
devices such as microprocessors and color liquid crystal displays, not to
mention their state-of-the-art mechanisms, software and components.
Over the years, Heiwa has developed numerous innovative “hit”
models of pachinko machines, and in August 1988 became the first firm
in the industry to go public as an over-the-counter company. In December
1991, Heiwa qualified for registration on the Second Section of the Tokyo
Stock Exchange (TSE), and in June 1997 its shares were moved to the TSE’s
First Section. In August 2000, Heiwa became the first company in the
pachinko and pachislo industry to obtain ISO9001 certification.
With consolidated net sales of ¥98,384 million (US$820 million) for
the fiscal year ended December 2002, and with consolidated
subsidiaries that include manufacturers of electronic circuit boards
which function as the “brain” of pachinko machines, as well as a
company which manages pachinko parlors, the Heiwa Group has
established itself as the leader in the Japanese pachinko industry.
Guided by our theme of “High-Tech Recreation with a Warm Touch,”
we will strive to merge our state-of-the-art electronics technology with
strong human values while pursuing our quest for the ultimate in leisure
and recreation.
PACHINKO
Pachinko is a form of gaming popular in Japan, with pachinko parlors
commonly found in almost every Japanese neighborhood. Together
with pachinko slot games (hereafter called pachislo), in 2002
pachinko/pachislo parlors in Japan numbered 16,504.
Based on the Law on Control and Improvement of Amusement
Business, Chapter 1, Section 7, a pachinko/pachislo parlor is defined
as an amusement business that may stimulate customers’ ambitions.
Since pachinko addiction has recently become a social issue, there
has been a movement among pachinko/pachislo manufacturers to
make the game more sound and healthy, and a self-imposed regulation
for supplying less ambitious games is becoming widely accepted.
CAUTIONARY STATEMENT WITH RESPECT
TO FORWARD-LOOKING STATEMENTS
Statements made in this annual report with respect to
Heiwa’s current plans, estimates, strategies and
beliefs, including any forecasts, are forward-looking
statements about the future performance of Heiwa.
These statements are based on management’s
assumptions and beliefs in light of information
currently available to it, and therefore, you should
not place undue reliance on them. A number of
important factors could cause actual results to be
materially different from and worse than those
discussed in the forward-looking statements.
Such factors include but are not limited to
(i) changes in economic conditions affecting our
operations; (ii) fluctuations in currency exchange
rates, particularly with respect to the value of the
Japanese yen, the U.S. dollar and the euro; (iii) our
ability to continue to win acceptance of our
products, which are offered in highly competitive
markets characterized by the continuous
introduction of new products, rapid developments in
technology and subjective and changing consumer
preferences; (iv) regulatory developments and
changes and our ability to respond and adapt to
those changes; (v) our expectations with regard to
further acquisitions and the integration of any
companies we may acquire; and (vi) the outcome
of contingencies.
Contents
Consolidated Financial Highlights ――1
To Our Shareholders ――2
Special Report:
“Promoting Growth by Meeting Customer Needs” ――4
Review of Operations ――8
Market Trends in the Pachinko Industry ――11
Financial Review ――12
Consolidated Five-Year Financial Summary ――13
Consolidated Balance Sheets ――14
Consolidated Statements of Income ――16
Consolidated Statements of Shareholders’ Equity ――17
Consolidated Statements of Cash Flows ――18
Notes to Consolidated Financial Statements ――19
Independent Auditors’ Report ――28
Network and Subsidiaries ――29
Board of Directors ――29
Corporate Data ――29
00
Consolidated Financial Highlights
Thousands of
U.S. Dollars
Millions of Yen
2002
Fiscal year ended December 31
Net sales
Net income
Total assets
Total shareholders’ equity
Per share data (yen and U.S. dollars):
Net income per share
Cash dividend per share
Book value per share
2001
2002
¥ 98,384
5,952
218,713
188,492
¥ 97,468
5,917
219,778
187,936
$ 819,868
49,596
1,822,608
1,570,763
¥
¥
$
0.43
0.21
13.58
$
19.04
11.67
Financial ratios (percent):
Equity ratio
Return on sales
Return on average assets
Return on average equity
51.36
25.00
1,629
50.52
25.00
1,605
86.2
6.0
2.7
3.2
85.5
6.1
2.7
3.2
Prices quoted on the Tokyo Stock Exchange First Section
(yen and U.S. dollars):
High
Low
¥
Number of shareholders
Number of employees
2,285
1,400
14,668
880
¥
2,600
1,290
16,897
817
Note: U.S. dollar amounts are converted, for convenience only, at the rate of ¥120.00=US$1, the approximate rate of exchange at December 31, 2002.
100.6
12.9
97.5 98.4
213.2 213.8
91.2
226.4
219.8 218.7
68.0
6.4
5.9
6.0
’01
’02
4.2
’98
’99
’00
’01
Net Sales
(Billions of Yen)
’02
’98
’99
’00
Net Income
(Billions of Yen)
’98
’99
’00
’01
’02
Total Assets
(Billions of Yen)
1
To Our Shareholders
Operating Results for Fiscal 2002
Jun Nakajima
President
2
In fiscal 2002, ended December 31, 2002, Japan’s economy showed signs of
improvement in some sectors, with a slight increase in exports and modest gains
in manufacturing. Overall, however, conditions remained harsh and a full-fledged
economic recovery is still not in sight. The nation’s struggle with low employment
and declining income levels continued, and uncertainties about future prospects
were heightened by the growing anxiety about the U.S. economy and the falling
stock prices in Japan.
The outlook for the pachinko industry, on the other hand, showed some signs
of promise when in June 2002 the Japan Game Machine Industry Association
(Nikkoso), whose members include pachinko machine manufacturers, amended
its bylaws to substantially broaden the nature of gaming. Overall, however,
conditions remained unfavorable. One new challenge facing the industry involves
the Regulation Classification List published in August 2002. Based on the SelfRegulation Concerning Limited Gambling Recreational Gaming Machines
established by the Japan Electric Game Manufacturers’ Association (Nichidenkyo),
whose members include pachislo machine manufacturers, the Regulation
Classification List specifies approximately 150 types of pachislo machines that will
become subject to self-regulation.
Against this background, in fiscal 2002 Heiwa’s consolidated net sales edged
upward by 0.9% from the previous year’s level, to ¥98,384 million (US$820
million). Consolidated operating income fell by 38.9%, to ¥11,586 million
(US$97 million), while consolidated net income rose by 0.6%, to ¥5,952 million
(US$50 million).
Looking at operating results by business segment, in the pachinko machines
segment we focused our sales efforts on three new machine series. The
Kaettekita Koumonchama series, which we launched in March 2002, was
outfitted with a new-concept detachable housing that represents a dramatic
upgrade from conventional pachinko machines. The Chiki Chiki Machine series
was brought to market in April 2002. The Lupin The Third series, introduced in
November 2002, became a runaway hit with sales reaching more than 120,000
units. Overall sales in this business were solid in the first half of the fiscal year,
posting an 11.4% gain over the previous year’s level, to ¥63,734 million (US$531
million). Sales in the second half, however, fell short of our target due to such
factors as reduced capital investment at pachinko parlors and self-imposed
restrictions on purchasing new replacement models during the 2002 FIFA World
CupTM soccer tournament, held in May and June. In the supply machines segment,
sales increased by 19.5%, to ¥10,231 million (US$85 million), as the weak
investment at pachinko parlors led to fewer commitments for new machines. In
the amusement parlors segment, Heiwa’s sales were up by 20.9% from the
previous year, reaching ¥11,262 million (US$94 million). In the pachislo
machines segment, on the other hand, sales dropped by 41.6%, to ¥13,016
million (US$108 million). In May 2002 we introduced Fujiko 2, the industry’s first
detachable pachislo machine. Despite our vigorous efforts to promote it, however,
sales of Fujiko 2 fell short of the level we had hoped, due to the self-imposed
restrictions on pachislo machines.
Market Trends and Prospects for Fiscal 2003
Challenges and Outlook
The game machine industry is likely to face challenges in the
fiscal year ending December 31, 2003, in its efforts to
stimulate demand beyond this past year’s level. Conditions in
the pachinko parlor business are expected to remain bleak,
due to both the continuation of Japan’s prolonged economic
slump and the sales-dampening effects of the self-imposed
restrictions on pachislo machines. Accordingly, we do not
anticipate overall growth in demand in the pachinko and
pachislo machine markets.
Despite the cloudy outlook for our industry as a whole in
fiscal 2003, we believe we will be able to boost our sales of
pachinko machines. Our strategy includes improving the
conditions for obtaining approval of new machines and,
drawing on the results of our October 2002 review of the
Company’s product planning and development system,
quickly and aggressively introducing products that satisfy the
demands of Japan’s pachinko enthusiasts.
In addition, we plan to strengthen our business
development and sales system alliance with Olympia Co.,
Ltd. This will allow us to boost our share of the pachislo
machine market by offering attractive products such as our
Pachislo Machine Named Antonio Inoki, which is enjoying
immense popularity in the market.
With regard to ball-replenishing systems, Heiwa has
decided to set a more prudent sales target—one that reflects
the diminishing capital investment at pachinko parlors
resulting from Japan’s lingering recession and problems in
raising funds from financial institutions.
Altogether, these factors lead Heiwa to project that fiscal
2003 will see some improvement in consolidated operating
results compared to fiscal 2002. Specifically, we expect net
sales to increase by around 18.4%, to ¥116,500 million
(US$971 million), operating income to grow by 46.7%, to
¥17,000 million (US$142 million), and net income to climb
by 74.7%, to ¥10,400 million (US$87 million).
Heiwa will address three key strategic issues in fiscal 2003.
First, in line with one of our corporate principles, we will
make our pachinko business more “customer-centered” while
also stepping up efforts to develop new recreational game
machines that deliver true customer satisfaction to both
pachinko parlors and pachinko enthusiasts. Following the wideranging organizational review conducted last October, we
consolidated our marketing research and planning functions into
the Product Strategy Division and clarified the roles and
responsibilities of this division relative to those of the Product
Development Division. In fiscal 2003, the smooth operation of
these two divisions will drive our efforts to plan and develop
products that fully and accurately meet the diverse needs of our
pachinko parlor and pachinko enthusiast customers.
Second, we will increase our share of the pachislo machine
market by forging even closer development and sales ties with
Olympia Co., Ltd., our alliance partner. In addition, we will
pursue our own in-house system for developing pachislo
machines, and aiming to conform to the model-testing standards
set by the Security Electronics and Communications Technology
Association, we will work toward the establishment of a
complete pachislo machine production system.
In this regard, the detachable pachislo machine case we
introduced in April 2002 has received high praise from
pachinko parlors, because it not only helps lower costs and
saves labor but also provides easier recycling.
Third, we will address the question of how Heiwa, as a
leading manufacturer of recreational game machines, can help
promote higher recycling rates. We will make environmental
protection a high priority in product development. Recreational
game machines are subject to recycling regulations established
under the Effective Use of Natural Resources Law amended in
April 2001. Nikkoso has stated to the Ministry of Economy,
Trade and Industry that it has established a self-imposed target of
reusing or recycling 55% (by weight) of recreational game
machines by fiscal 2005. Further, Nikkoso has declared its intent
to establish a recycling management system that fulfills the
responsibility of game machine manufacturers to increase the
service lives of parts and materials in their products. In line with
this program, in fiscal 2003 Heiwa will begin constructing a
trade-in recovery system aimed at increasing the reuse of parts
and materials in our machines, and will make “reduce, reuse
and recycle” a key guideline in our product development
system. These measures will not only benefit the environment
today, they will also lead to lower product costs tomorrow.
While we expect business conditions to remain quite difficult
in fiscal 2003, we will continue formulating and implementing
aggressive measures to strengthen Heiwa, meet shareholders’
expectations, and boost corporate value. We look forward to
your kind understanding and support as we face the challenges
ahead.
MAIN COMPANIES
IN THE HEIWA GROUP
Heiwa Corp.
Business and
capital tie-up
Wholly owned
subsidiaries
Amtex Co., Ltd.
Olympia Co., Ltd.
Shinko Co., Ltd.
Joyco Systems Co., Ltd.
Heiwa Insurance Inc.
Jun Nakajima, President
3
Special Report
Promoting Growth by Meeting Customer Needs
In October 2002, Heiwa undertook a major restructuring effort aimed at the “creation of customer-centered machines” that in turn will
spur our business into new growth. Since the restructuring, the Company has stepped up its activities in every department to provide
value-added products and services that meet customer needs. Here, representatives of four divisions discuss the Company’s product
planning and development processes, and the basic approach to the environment under the new system.
Product Strategy Division
Strengthening our checking system to create products that meet customer needs and
’
enjoy long-term success in the marketplace
Yoshihisa Takada, Executive Manager (As of April 1, 2003)
Yoshihisa Takada
Executive Manager
4
The pachinko machine market today requires that we plan and develop products that meet customer
needs as quickly as possible, and launch them in timely fashion into the market. Toward that end, we
split the department that traditionally handled these activities into two divisions. The new Product
Strategy Division is in charge of marketing research and planning. This includes such tasks as
collecting information, analyzing market trends, negotiating with testing organizations, managing
copyrights, and all other activities related to planning and creating new product proposals. The new
Product Development Division oversees the actual development of products. We believe that
dividing up the tasks and clarifying the roles in this way allows us to improve the quality of products
and shorten development time.
Today, after many years of developing recreational game machines, we are putting our focus back
to where it began—on the “creation of customer-centered machines.” Our goal, and our most
important challenge, is to develop the kinds of machines that pachinko parlors and pachinko
enthusiasts can truly enjoy. For this purpose, the Product Strategy Division is trying to improve the
“check system” up to the product launch, to grasp customer needs directly and quickly, and verify if
the products under development actually satisfy these needs.
Our first step in grasping customer needs was relocation. We moved our department to Tokyo,
Japan’s largest pachinko market, to be in closer proximity to our customers. Then we focused on
nurturing an environment for gathering information that would help us in our efforts. We distributed
questionnaires to pachinko enthusiasts, interviewed pachinko parlor managers, consulted with
marketing and salespeople, held meetings with customer companies, and attended a number of
events and exhibitions. These and other activities are helping us stay aware of the latest social trends
and gain a better understanding of what it takes to satisfy our customers.
As part of setting up our check system, we strengthened our in-house Planning Approval
Committee, the group that decides which products to develop and bring to market. Each manager of
our department attends the committee’s meetings, and the decisions are made while the actual trial
screens or samples are observed at the meetings, showing what a machine image or “face” looks
like. At the same time, we spread information throughout the Company and urge employees to
provide us feedback, suggestion and ideas. Prior to the approval of a new pachinko machine, we
hold play-and-evaluate sessions at which employees are asked to look at a final prototype machine
through the eyes of a pachinko enthusiast, try it out, and offer a frank assessment of its performance
and appeal. At the end of these play-and-evaluate sessions if we are not convinced that a product is
fully satisfactory, we reconsider its design. I firmly believe that this kind of double or triple checking
is a key reason why Heiwa creates some of the best products on the market.
In April 2003, we introduced Shenron Monogatari, the first product developed under this new
system. This is the world’s first camera-equipped pachinko machine, which actually projects the
player’s face onto the machine’s screen. We’re looking forward to developing more innovative
products that will provide the best in leisure-time entertainment for pachinko enthusiasts.
Product Development Division
Accelerating the development process to get the product to market in a more timely manner
Satoshi Taniguchi, General Manager (As of April 1, 2003)
Our role in the Product Development Division is to design and develop a pachinko machine for
commercialization by taking over plans from the Product Strategy Division. These processes involve
a great number of different skills and activities. For example, the pachinko machine’s “face” or board
surface—the part that customers see—needs a creative design. There’s also design and development
of the machine’s internal hardware and software, and design and control of the pictures that will
appear on the liquid crystal display (LCD) panel. And there are such secondary works as creating the
documentation, including the machine’s specifications, that must be presented along with a
prototype machine to the testing organizations.
Our goal is to reduce the time it takes from planning to development. Before, when a single
division of the Company handled the whole process, large blocks of time were allotted to planning.
As a result, post-planning activities often fell behind schedule during the development phase. Our
new structure, such as responsibilities between two divisions, makes it much easier to focus on the
development process. There’s no more worrying about schedule delays.
The biggest issue the Product Development Division must address today is further improvements
in development speed. Even if we quickly formulate plans for an attractive product, but we do not
execute them as soon as possible and launch products into the market in a timely manner, we will be
unable to seize business opportunities.
We have made three changes in our approach to improve our performance.
First, we introduced the team system. Before, we were using a project system that means an
engineer from each department such as drawing and designing was assigned to a project for
developing the model. But since the skills and creative abilities of any one individual are limited, we
have decided to shift to a team approach. For example, we’ve created teams, such as a design team
and an artwork team, and adopted a style of undertaking development while team members
exchange opinions among themselves. Second, we will utilize more outsourcing. We have a plan to
broaden the scope of outsourcing from previous artwork and CG to the one including some designing
division works. And third, we are strengthening our verification function during the prototype
production stage to avoid problems in the final development phase. Our new arrangement demands
early verification timing and swift decision-making.
However, shorter development time is not sufficient for creating products that provide true
customer satisfaction. It’s vital that we link the planning and development aspects of product creation
Satoshi Taniguchi
General Manager
5
so that they work smoothly together. That’s why we regularly hold joint sessions with the Product
Strategy Division, exchange ideas and share information using a videoconference system. This
structure, with two separate divisions working close together, will help Heiwa introduce innovative
pachinko machines to the market ahead of its competitors.
Pachislo Machine Development Division
Creating our own development system to promote substantial growth in the pachislo
machine business
Kenji Hiramatsu, General Manager (As of April 1, 2003)
Kenji Hiramatsu
General Manager
6
Heiwa entered the pachislo machine business through a business tie-up with Olympia Co., Ltd. in
1998. This cooperative arrangement, in which Olympia handles product development and
manufacturing while Heiwa handles sales, has helped us achieve steady growth and earn a solid
reputation and position within the industry. Now, with the pachislo machine market expected to see
continuous growth, we feel the time is right for us to initiate full-scale in-house development and
manufacturing of pachislo machines. Our goals are to boost our share of the market and develop the
pachislo machine business into our second cornerstone operation. To spearhead this exciting new
project, the Pachislo Machine Development Division was created in October 2002.
The division was given responsibility for activities ranging from product planning and
development to submitting applications to testing organizations and providing manufacturing
support. It works to produce attractive and unique pachislo machines in close cooperation with the
Company’s Product Strategy Division, which handles marketing and pachislo machine planning, and
the Sales and Marketing Headquarters. Aiming to register as a pachislo machine manufacturer in
2003 and introduce products to the market in 2004, we have nearly completed developing the
prototype of a product. We are making steady progress in our preparations for a full-scale market
entry, including the construction of a new mass-production manufacturing line.
Heiwa has three distinct advantages to the pachislo machine market.
First, we have the outstanding marketing capabilities that we’ve cultivated in our many years of
pachinko machine sales and in our sales of pachislo machines through our alliance with Olympia.
All our sales representatives sell both pachinko machines and pachislo machines. We are miles
ahead of competitors, with our marketing style that directly supports parlors’ management needs
while analyzing total balance of pachinko and pachislo machines there.
Second, in our years of production pachinko machines we’ve acquired the expertise to create
attractive, customer-pleasing products within the limits of regulations.
And third, we expect that our pachinko machine operations will provide synergistic benefits in
terms of parts procurement. That is, utilizing the routes the Company has already established will
provide us with more favorable purchasing terms than our competitors.
We believe that in-house development has several big advantages, especially in light of the cost
advantages offered by pachislo machines compared with pachinko machines. A pachislo machine
has a simpler basic structure, for example, and so we can keep manufacturing capital investment
low. Also, there’s a great deal of similarity between different types of pachislo machines, so we can
design parts that can be used in more than one type of machine and thus reduce the risk of having
excess inventory.
To consistently develop new models, we need the abilities to plan innovative products and get
those products to market quickly, to take advantage of every sales opportunity. We believe that
working closely with other Company divisions and recruiting efficient staff will give us those
abilities. And by adding up sales of current Olympia-made pachinko machines and our future inhouse-developed ones, we are convinced that our division can enjoy significant success and make a
valuable contribution to corporate earnings.
Environmental Coordination Division
Aiming to both realize the recycling-oriented society and reduce costs by reusing
parts from recovered products
Tsutomu Ochiai
General Manager
Tsutomu Ochiai, General Manager (As of April 1, 2003)
At Heiwa, our basic approach to the environment is to strive to find the ideal position for
manufacturers in the coming recycling-oriented society and to make environment-friendliness a key
consideration in the product development process. The Environmental Coordination Division
promotes 3R, “reduce, reuse and recycle,” in this direction.
Our activities include promotion product design that reflects the “reduce, reuse and recycle”
concept and setting up systems to recover pachinko machines and other products and recycle or
reuse them. Over many years of concern for the environment, we’ve sought to use parts and
materials with low environmental impact, and we’ve had some experience with recycling parts of
used pachinko machines to create solid fuel (thermal recycling).
To expand this process, one area that we’re focusing on ahead of others in the industry involves
the reuse of internal parts from retired pachinko machines into newly developed machines. We have
already conducted two studies aimed at determining the durability and quality of recovered parts
and finding ways to reuse them. One result is that we’ve learned we can reuse electrical
components, including expensive LCD units, and certain plastic components.
However, to increase our reuse percentage, we must consider reusing the parts from the stage of
developing and designing the products. That’s a topic we plan to focus on.
Reusing components is not only good for the environment, it’s also recognized as an excellent
way to reduce manufacturing costs. Lower overhead means that Heiwa can offer products at
attractive prices and give more satisfaction to pachinko parlors. So our company policy will be to
aggressively develop systems in the future that allow maximum recycling and reuse of parts and
materials from the standpoint of “creation of customer-centered machines.”
7
Review of Operations
Pachinko Machines
Sales Results
During fiscal 2002, the general market environment in the pachinko
machines segment reflected the weak demand for capital investment at
pachinko parlors. At the same time, the industry set a self-imposed restriction
on new model replacements during the 2002 FIFA World CupTM soccer
tournament, held in May and June. Finally, problems with the main unit
housing on some of the Company’s pachinko machines introduced during
fiscal 2001 resulted in lower sales.
Under these circumstances, the Company focused its sales efforts on its
Kaettekita Koumonchama series, which was launched in March 2002 with a
new main unit housing based on a fresh concept that revamped the
conventional pachinko machine image, the Chiki Chiki Machine series brought
to market in April 2002, and the Lupin The Third series, which became a
runaway-hit model following its introduction in November 2002 and achieved
sales that broke the 120,000-unit mark.
As a result of these factors, the Company sold 318,808 machines in 2002
(138,167 in the first half and 180,641 in the second half), 24,684 fewer
machines than in the previous year. Net sales of pachinko machines
increased by 11.4% compared to the previous fiscal year, to ¥63,734 million
(US$531 million); ¥28,354 million (US$236 million) in the first half, and
¥35,380 million (US$295 million) in the second half. Consolidated operating
income fell by 22.0%, to ¥13,891 million (US$116 million).
Prospects for the Next Term
Pachinko machine
Lupin The Third
In fiscal 2003, Japan’s lengthy economic recession will cast a shadow over
the nation’s recreational game machine market. Given these circumstances,
we do not anticipate further market growth. As pachinko parlor operators
strive to attract customers in the wake of increasing competition, pachinko
parlors are expected to become more discriminating in their product
selection.
Following the wide-ranging organizational review conducted last
October, the Company improved its “product power” and shortened its
product development period through product planning enhancements. By
rapidly introducing attractive products that cater accurately to pachinko
enthusiasts’ needs, management believes that the Company will be able to
achieve pachinko machine sales exceeding the level achieved in 2002.
Based on these circumstances, for fiscal 2003 the Company has set a
combined sales objective for pachinko machines and gauge boards of
360,000 units and net sales of ¥66,000 million (US$550 million), up by 3.6%
from the fiscal year under review.
Pachinko machine
PX2002 (future model)
8
Supply Machines
Sales Results
The pachinko parlor business continued to operate under difficult industry
conditions during 2002. The desire to undertake capital investment in ballreplenishing systems, including computer-related devices, remained particularly
weak. Although this presented fewer sales opportunities, the Company achieved
strong positive results, and net sales in the supply machines segment rose by
19.5% compared to the previous fiscal year, to ¥10,231 million (US$85 million);
¥4,540 million (US$38 million) in the first half and ¥5,690 million (US$47
million) in the second half. Operating income was ¥198 million (US$2 million).
Joyco Systems Co., Ltd., a joint venture firm funded by eight manufacturers
including Heiwa, began sales of its prepaid-coin system in January 2002. The
number of pachinko parlors that have introduced this system continues to grow
steadily, which is contributing to increased sales in the Company’s supply
machines division. With expected capital investment at pachinko parlors
weakening in the face of various difficulties, including the lingering recession and
problems in raising funds from financial institutions, however, conditions are
likely to be similar to the previous year in terms of large-scale, high-volume sales.
In consideration of these conditions, the Company has established a prudent
sales objective for its supply machines division, projecting net sales of ¥8,000
million (US$67 million), a decrease of 21.8% compared to the previous year.
Joyco System (Joyco)
Pachislo Machines
Sales Results
In the pachislo machines segment, the Company concentrated its sales efforts on
Fujiko 2, the industry’s first detachable pachislo machine, which was introduced
in May 2002. The number of machines sold, however, did not increase due to the
effect of the industry’s self-imposed restrictions on pachislo machines. During the
year, the Company sold 41,831 machines (20,851 in the first half and 20,980 in
the second half), a decline of 27,715 machines compared to the previous fiscal
year. Net sales were 41.6% lower than the previous fiscal year, at ¥13,016
million (US$108 million); ¥6,619 million (US$55 million) in the first half and
¥6,397 million (US$53 million) in the second half. Operating income dropped by
70.3% from the previous fiscal-year level, to ¥1,419 million (US$12 million).
Given the likelihood that the effects of the self-imposed restrictions on pachislo
machines since last August will linger in the pachislo machine market during fiscal
2003, the trend in replacement demand will probably be slightly negative.
In the pachislo machine segment, our Pachislo Machine Named Antonio
Inoki, which we put on the market in January 2003, has become a smash hit. By
strengthening our development and sales system tie-up with alliance partner
Olympia Co., Ltd. in the future, we believe we can expand our market share.
During fiscal 2003, we aim to sell 120,000 pachislo machines, and increase net
sales by 138.2% over the previous fiscal year, to ¥31,000 million (US$258 million).
Pachislo machine
Pachislo Machine Named Antonio Inoki
9
Amusement Parlors
Sales Results
This business segment consists of pachinko parlor management operations at
the Company’s wholly owned consolidated subsidiary, Shinko Co., Ltd.
Given the influence of the prolonged economic downturn, we did not
expect an increase in the amount of recreational game spending per
pachinko player. Furthermore, competition among pachinko parlors was
gradually intensifying, creating a situation in which pachinko parlors battled
to attract and retain customers by means such as improving the rate of
returns to pachinko players and staging newly remodeled parlor opening
events based on rapid replacement with new models.
In these conditions, the segment recorded net sales of ¥11,262 million
(US$94 million); ¥5,707 million (US$48 million) in the first half and ¥5,555
million (US$46 million) in the second half. This was an increase of 20.9%
compared to the previous fiscal year. Operating income rose by 892.3%, to
¥129 million (US$1 million).
The three pachinko parlors managed by Shinko fulfill the role of “antenna
shops” for Heiwa’s products. During the past year, however, competition to
attract customers has grown severe as competitors have opened large-scale
parlors in suburban neighborhoods. Pachinko parlors enjoy the patronage of
pachinko enthusiasts who live or work within approximately 30 minutes’
travel time of the pachinko parlor. Thus, to differentiate Heiwa’s parlors from
those of nearby rivals, management is working to improve its ability to attract
customers by reviewing the composition of installed machines, staging
renewal reopening events, attracting new pachinko enthusiasts, building an
efficient management system and improving the rate of return to the
Company’s customers.
Based on the above efforts, the Company plans to increase net sales of
recreational gaming facilities by 1.8%, to ¥11,400 million (US$95 million)
compared to the previous year.
Others
Sales Results
The Company’s business operations in this segment include leasing,
reinsurance and investment activities. Combined net sales for these
operations increased by 60.2%, to ¥141 million (US$1,176 thousand);
¥77 million (US$642 thousand) in the first half and ¥64 million (US$533
thousand) in the second half. The combined operating loss was
¥50 million (US$414 thousand).
10
Showroom (Tokyo Branch Office)
Market Trends in the Pachinko Industry
5,000
20,000
1,000
200
4,000
16,000
800
160
3,000
12,000
600
120
2,000
8,000
400
80
1,000
4,000
200
40
0
’98
’99
’00
’01
Number of Pachinko and
Pachislo Machines Installed
(Thousands)
Pachinko machines
Pachislo machines
Source: The National Police Agency.
’02
0
’98
’99
’00
’01
Number of Parlors
Pachinko parlors
Parlors specializing in pachislo
Note: “Pachinko parlors” includes
Note: parlors featuring both pachinko
Note: and pachislo machines.
Source: The National Police Agency.
’02
0
’99
’00
’01
Estimated Market Value of the
Pachinko and Pachislo Markets
(Billions of Yen)
Pachinko
Pachislo
Source: Yano Research Institute.
0
’99
’00
’01
Market Size of BallReplenishing Systems and
Peripheral Products
(Billions of Yen)
Pachinko machines
Source: Yano Research Institute.
11
Financial Review
Please note that Heiwa’s business segment information included in
this report is derived from the management reports of the Company
and its subsidiaries, which are based on accounting principles and
practices generally accepted in Japan (“Japanese GAAP”).
Analysis of Operating Results
Heiwa’s consolidated net sales for fiscal 2002 rose by 0.9%, or
¥916 million (US$8 million) in comparison with the previous
year, to ¥98,384 million (US$820 million). By segment, sales of
pachinko machines advanced by 11.4%, or ¥6,516 million
(US$54 million), to ¥63,734 million (US$531 million). Supply
machines increased by 19.5%, or ¥1,670 million (US$14 million),
to ¥10,231 million (US$85 million). Revenues from amusement
parlors surged by 20.9%, or ¥1,950 million (US$16 million), to
¥11,262 million (US$94 million). Sales of pachislo machines,
however, dropped by 41.6%, or ¥9,273 million (US$77 million),
to ¥13,016 million (US$108 million), and fell to 13.2% of
consolidated net sales, compared with 22.9% a year earlier.
The cost of sales rose by ¥6,577 million (US$55 million), or
10.7%, to ¥67,848 million (US$565 million). Gross profit
declined by ¥5,661 million (US$47 million), or 15.6%, to
¥30,536 million (US$254 million), and the gross margin fell to
31.0% from 37.1%.
Selling, general and administrative (SG&A) expenses were up
by 9.9%, or ¥1,700 million (US$14 million), to ¥18,950 million
(US$158 million). SG&A expenses as a percentage of net sales
rose to 19.3% from 17.7% a year earlier. Research and
development costs (which are included in SG&A expenses) were
up by 18.5%, or ¥709 million (US$6 million), to ¥4,535 million
(US$38 million). Operating income dropped by ¥7,361 million
(US$61 million), or 38.9%, to ¥11,586 million (US$97 million),
and the operating margin decreased to 11.8% from 19.4%.
Nonoperating expenses exceeded nonoperating income by
¥953 million (US$8 million), an improvement compared with
the previous year’s net nonoperating expenses of ¥8,158
million, which had included a sizeable loss on devaluation of
inventories. Nonoperating expenses for the fiscal year under
review consisted primarily of a loss on devaluation of
inventories of ¥1,576 million (US$13 million), a foreign
exchange loss of ¥927 million (US$8 million), retirement
benefits for directors and corporate auditors of ¥292 million
(US$2 million), and a loss on sales or disposals of property, plant
and equipment—net of ¥283 million (US$2 million).
Owing to the decrease in net nonoperating expenses
compared with the previous year, income before income taxes
was down by just 1.4%, or ¥156 million (US$1 million), to
¥10,633 million (US$89 million). Total income taxes also
declined, to ¥4,681 million (US$39 million), a drop of ¥191
million (US$2 million), or 3.9%. Total income taxes comprised
current income taxes of ¥3,248 million (US$27 million) and
deferred income taxes of ¥1,433 million (US$12 million).
As a result of the above, the Company recorded net income
of ¥5,952 million (US$50 million), up by 0.6%, or ¥35 million
(US$292 thousand).
Net income per share improved to ¥51.36 (US$0.43),
compared with ¥50.52 a year earlier. Cash dividends applicable
to the year were maintained at ¥25.00 (US$0.21). The payout
ratio was 48.7%, compared with 49.5% a year earlier.
Analysis of Financial Position
Total assets fell by 0.5%, or ¥1,065 million (US$9 million), to
¥218,713 million (US$1,823 million). Total current assets declined
by ¥14,104 million (US$118 million), or 11.4%, to ¥110,083
million (US$917 million). Total current assets comprised 50.3%
of total assets, compared with 56.5% the prior year.
12
Cash and cash equivalents declined by 26.6%, or ¥14,612
million (US$122 million) from a year earlier, to ¥40,304 million
(US$336 million). Time deposits dropped by 46.4%, or ¥3,272
million (US$27 million), to ¥3,783 million (US$32 million).
Marketable securities rose by 20.3%, or ¥3,460 million (US$29
million), to ¥20,523 million (US$171 million).
Notes and accounts receivable, net of an allowance for doubtful
accounts, rose by 14.9%, or ¥4,139 million (US$34 million), to
¥32,006 million (US$267 million). Inventories declined by 15.6%, or
¥1,866 million (US$16 million), to ¥10,104 million (US$84 million).
Net property, plant and equipment totaled ¥22,570 million
(US$188 million), virtually unchanged from the prior year, and
comprised 10.3% of total assets, versus 10.4% the year before.
Total investments and other assets expanded by 18.5%, or
¥13,411 million (US$112 million), to ¥86,060 million (US$717
million). Investment securities rose by 18.7%, or ¥11,037 million
(US$92 million), to ¥70,035 million (US$584 million). Total
investments and other assets comprised 39.3% of total assets,
compared with 33.1% the prior year.
Total current liabilities declined by 5.5%, or ¥1,685 million
(US$14 million), to ¥28,891 million (US$241 million), primarily
because of a drop in trade notes payable of ¥2,843 million (US$24
million), or 28.2%, to ¥7,237 million (US$60 million). Trade
accounts payable increased by ¥611 million (US$5 million), or
4.1%, to ¥15,377 million (US$128 million). Total current liabilities
comprised 95.6% of total liabilities, compared with 96.0% a year
earlier. The current ratio declined to 381% from 406%.
Total long-term liabilities rose by ¥64 million (US$533 thousand),
to ¥1,330 million (US$11 million), and consisted mainly of liability
for employees’ retirement benefits of ¥724 million (US$6 million)
and warranty reserves of ¥415 million (US$3 million).
Total shareholders’ equity rose by ¥556 million (US$5 million),
or 0.3%, to ¥188,492 million (US$1,571 million). During the fiscal
year under review, the Company retired a total of 1,321 thousand
shares of its common stock, representing approximately 1.1% of the
shares outstanding at the start of the fiscal year, with an aggregated
purchase amount of ¥2,467 million (US$21 million), canceling the
shares by charging the amount to retained earnings. The equity
ratio improved to 86.2% from 85.5%.
Analysis of Cash Flow
Net cash provided by operating activities advanced by 54.9%, to
¥7,169 million (US$60 million). Income before income taxes
provided ¥10,633 million (US$89 million), and depreciation and
amortization comprised ¥2,406 million (US$20 million). Major
changes in assets and liabilities included an increase in trade notes
and accounts receivable of ¥3,783 million (US$32 million), income
taxes paid of ¥2,379 million (US$20 million), a decrease in trade
notes and accounts payable of ¥2,215 million (US$18 million) and
a decrease in inventories of ¥1,866 million (US$16 million).
Net cash used in investing activities totaled ¥16,110 million
(US$134 million), down by 3.7% from the prior year. Major
components of investing activities during the fiscal year under
review included purchases of investment securities of ¥39,879
million (US$332 million) and proceeds from sales of investment
securities of ¥23,419 million (US$195 million).
Net cash used in financing activities rose by 15.0%, to ¥5,018
million (US$42 million), of which cash dividends paid comprised
¥2,906 million (US$24 million) and purchases of treasury stocks
comprised ¥2,112 million (US$18 million).
For the year, the Company recorded a net decrease in cash and
cash equivalents of ¥14,612 million (US$122 million). At the fiscal
year-end, cash and cash equivalents amounted to ¥40,304 million
(US$336 million).
Consolidated Five-Year Financial Summary
Fiscal year ended December 31
Balance-sheet data:
Total assets
Total current assets
Net property, plant and equipment
Total investments and other assets
Total current liabilities
Total long-term liabilities
2002
Millions of Yen (except where noted)
2001
2000
1999
1998
¥ 218,713
110,083
22,570
86,060
28,891
1,330
188,492
¥ 219,778
124,187
22,942
72,649
30,576
1,266
187,936
¥ 226,388
188,715
22,676
14,997
39,351
278
186,759
¥ 213,775
182,792
22,872
8,111
27,332
391
186,052
¥ 213,226
170,205
34,951
8,070
30,149
131
182,946
¥ 98,384
63,734
10,231
13,016
11,262
141
67,848
30,536
18,950
11,586
4,681
5,952
¥ 97,468
57,218
8,561
22,289
9,312
88
61,271
36,197
17,250
18,947
4,872
5,917
¥ 100,589
65,891
9,085
15,347
10,143
123
59,709
40,880
15,849
25,031
11,091
12,914
¥ 91,246
62,153
8,677
9,232
10,570
614
55,111
36,135
14,032
22,103
5,210
6,427
¥ 67,966
47,966
6,737
Per share data:
Net income per share (yen)
Cash dividend per share (yen)
Book value per share (yen)
Payout ratio (percent)
¥ 51.36
25.00
1,629
48.7
¥ 50.52
25.00
1,605
49.5
¥ 107.77
25.00
1,591
23.2
¥ 52.53
27.50
1,521
47.6
¥ 34.22
25.00
1,495
80.4
Stock-related data:
Stock price quoted on the TSE First Section:
High (yen)
Low (yen)
Price-earnings ratio (high) (times)
Price-earnings ratio (low) (times)
Weighted average number of shares (thousands)
Number of shareholders (persons)
¥ 2,285
1,400
44.5
27.3
115,870
14,668
¥ 2,600
1,290
51.5
25.5
117,114
16,897
¥ 2,470
1,400
22.9
13.0
119,832
20,970
¥ 3,870
1,150
73.7
21.9
122,360
19,507
¥ 1,500
1,001
43.8
29.3
122,360
7,430
Efficiency:
Gross margin (percent)
Operating margin (percent)
Return on sales (percent)
Return on average assets (percent)
Return on average equity (percent)
SG&A expenditures as a % of net sales (percent)
Net sales per employee
31.0
11.8
6.0
2.7
3.2
19.3
112
37.1
19.4
6.1
2.7
3.2
17.7
119
40.6
24.9
12.8
5.9
6.9
15.8
116
39.6
24.2
7.0
3.0
3.5
15.4
108
32.6
16.0
6.2
2.1
2.3
16.7
72
¥ 81,192
8,358
86.2
381
¥ 93,611
7,742
85.5
406
¥ 149,364
14,666
82.5
480
¥ 155,460
8,396
87.0
669
¥ 140,056
6,252
85.8
565
¥ 2,225
2.3
4,535
4.6
880
¥ 3,188
3.3
3,826
3.9
817
¥ 2,284
2.3
3,276
3.3
870
¥ 4,583
5.0
2,406
2.6
848
¥ 2,909
4.3
2,147
3.2
946
Income statement data:
Net sales
Pachinko machines
Supply machines
Pachislo machines
Amusement parlors
Other
Cost of sales
Gross profit
Selling, general and administrative expenses
Operating income
Income taxes
Net income
Liquidity:
Working capital
Cash flow*
Equity ratio (percent)
Current ratio (percent)
Other:
Capital expenditure
Capital expenditure as a % of net sales (percent)
R&D costs
R&D costs as a % of net sales (percent)
Number of employees (persons)
12,080
1,183
45,783
22,183
11,324
10,859
6,527
4,187
* Cash flow = Net income plus depreciation and amortization.
13
Consolidated Balance Sheets
December 31, 2002 and 2001
Thousands of
U.S. Dollars
(Note 1)
2002
Millions of Yen
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
Time deposits
Marketable securities (Note 3)
Notes and accounts receivable:
Notes receivable—trade
Accounts receivable—trade
Accounts receivable—other
Allowance for doubtful accounts
Inventories (Note 4)
Deferred tax assets—current (Note 7)
Prepaid expenses and other
Total current assets
PROPERTY, PLANT AND EQUIPMENT:
Land
Buildings and structures
Machinery and equipment
Furniture and fixtures
Construction in progress
Total
Accumulated depreciation
Net property, plant and equipment
INVESTMENTS AND OTHER ASSETS:
Investment securities (Note 3)
Investments in unconsolidated subsidiaries
and associated companies
Deferred tax assets—non-current (Note 7)
Other assets (Note 5)
Allowance for doubtful accounts
Total investments and other assets
TOTAL
See notes to consolidated financial statements.
14
2002
2001
¥ 40,304
3,783
20,523
¥ 54,916
7,055
17,063
$
335,865
31,525
171,024
23,587
7,630
807
(18)
10,104
2,825
538
110,083
16,070
11,314
493
(10)
11,970
4,431
885
124,187
196,561
63,579
6,727
(147)
84,199
23,542
4,482
917,357
10,872
13,351
3,098
6,321
10
33,652
(11,082)
22,570
10,872
13,198
2,921
5,775
14
32,780
(9,838)
22,942
90,600
111,255
25,821
52,672
85
280,433
(92,352)
188,081
70,035
58,998
583,625
535
2,002
13,560
(72)
86,060
10
1,738
12,016
(113)
72,649
4,458
16,682
113,001
(596)
717,170
¥ 218,713
¥ 219,778
$ 1,822,608
Thousands of
U.S. Dollars
(Note 1)
2002
Millions of Yen
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes and accounts payable:
Notes payable—trade
Accounts payable—trade
Accounts payable—other
Income taxes payable
Accrued expenses
Deferred tax liabilities—current (Note 7)
Other current liabilities
Total current liabilities
LONG-TERM LIABILITIES:
Liability for employees’ retirement benefits (Note 6)
Warranty reserves
Deferred tax liabilities—non-current (Note 7)
Other long-term liabilities
Total long-term liabilities
SHAREHOLDERS’ EQUITY (Note 9):
Common stock, no par value—
authorized, 228,903 thousand shares in 2002
and 230,224 thousand shares in 2001;
issued, 115,743 thousand shares in 2002
and 117,064 thousand shares in 2001
Additional paid-in capital
Retained earnings
Unrealized (loss) gain on available-for-sale securities
Foreign currency translation adjustments
Total
Treasury stock—at cost, 323 thousand shares in 2002
and 500 thousand shares in 2001
TOTAL
2002
¥
2001
7,237
15,377
2,192
2,996
340
13
736
28,891
¥ 10,080
14,766
2,337
2,127
659
14
593
30,576
$
60,310
128,141
18,269
24,965
2,832
112
6,134
240,763
724
415
25
166
1,330
563
600
35
68
1,266
6,036
3,455
209
1,382
11,082
16,755
16,675
155,720
(78)
(68)
189,004
16,755
16,675
155,356
65
(48)
188,803
139,625
138,958
1,297,664
(648)
(571)
1,575,028
(512)
188,492
(867)
187,936
(4,265)
1,570,763
¥ 218,713
¥ 219,778
$ 1,822,608
15
Consolidated Statements of Income
Years Ended December 31, 2002 and 2001
2002
2001
Thousands of
U.S. Dollars
(Note 1)
2002
¥ 98,384
¥ 97,468
$ 819,868
COST OF SALES
Gross profit
67,848
30,536
61,271
36,197
565,401
254,467
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (Note 10)
Operating income
18,950
11,586
17,250
18,947
157,914
96,553
1,631
(927)
(1,576)
1,257
653
(8,601)
13,593
(7,724)
(13,131)
(283)
58
(961)
(600)
(2,363)
487
Millions of Yen
NET SALES
OTHER INCOME (EXPENSES):
Interest and dividend income
Foreign exchange (loss) gain
Loss on devaluation of inventories
Loss on sales or disposals of property, plant
and equipment—net
Reversal of (provision for) warranty reserves
Charge for full amount of transitional
obligation for retirement benefits
Retirement benefits for directors and
corporate auditors
Other—net
Other expenses—net
INCOME BEFORE INCOME TAXES
INCOME TAXES (Note 7):
Current
Deferred
Total income taxes
NET INCOME
(307)
(292)
436
(953)
401
(8,158)
(2,435)
3,631
(7,942)
10,633
10,789
88,611
3,248
1,433
4,681
8,187
(3,315)
4,872
27,071
11,944
39,015
¥ 5,952
¥ 5,917
$ 49,596
Yen
PER SHARE OF COMMON STOCK (Note 2.q):
Net income
Cash dividends applicable to the year
16
¥ 51.36
25.00
U.S. Dollars
¥ 50.52
25.00
$ 0.43
0.21
Consolidated Statements of Shareholders’ Equity
Thousands
BALANCE, JANUARY 1, 2001
Outstanding
Number of
Shares of
Common Stock
117,360
Millions of Yen
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
¥ 16,755
¥ 16,675
¥ 153,329
Net income
5,917
Cash dividends, ¥25 per share
Bonuses to directors and corporate auditors
(2,930)
(407)
Net changes in unrealized gain on available-for-sale securities
Unrealized
Foreign
(Loss) Gain on Currency
Available-for-sale Translation
Securities
Adjustments
¥ 65
Net changes in foreign currency translation adjustments
Purchase of treasury stock
¥ (48)
¥ (1,420)
(796)
Retirement of treasury stock (296 thousand shares)
BALANCE, DECEMBER 31, 2001
(553)
116,564
16,755
16,675
155,356
Net income
5,952
Cash dividends, ¥25 per share
(2,904)
(217)
Net increase in unrealized loss on available-for-sale securities
Retirement of treasury stock (1,321 thousand shares)
Treasury
Stock
553
65
(48)
(867)
(143)
(20)
(1,144)
(2,112)
2,467
(2,467)
115,420
¥ 16,755
¥ 16,675
¥ 155,720
¥ (78)
¥ (68)
¥ (512)
Thousands of U.S. Dollars (Note 1)
Common
Stock
$ 139,625
Additional
Paid-in
Capital
$ 138,958
Net income
Cash dividends, $0.21 per share
Retained
Earnings
$ 1,294,630
Unrealized
Foreign
(Loss) Gain on Currency
Available-for-sale Translation
Securities
Adjustments
$ 543
$ (7,222)
49,596
(24,198)
Net increase in unrealized loss on available-for-sale securities
(1,804)
(1,191)
(171)
Retirement of treasury stock
$ (400)
Treasury
Stock
(17,603)
20,560
(20,560)
$ 139,625
$ 138,958
$ 1,297,664
$ (648)
$ (571)
$ (4,265)
17
Consolidated Statements of Cash Flows
Millions of Yen
2002
OPERATING ACTIVITIES:
Income before income taxes
Adjustments for:
Income taxes paid
Depreciation and amortization
Loss on sales or disposals of property, plant and
equipment—net
Reversal of allowance for doubtful accounts
Provision for retirement allowances
(Reversal of) provision for warranty reserves
Foreign exchange loss
Changes in assets and liabilities:
(Increase) decrease in notes and accounts
receivable—trade
Decrease (increase) in inventories
Decrease in notes and accounts payable—trade
Other—net
Total adjustments
Net cash provided by operating activities
INVESTING ACTIVITIES:
Purchases of property, plant and equipment
Purchases of investment securities
Proceeds from sales of investment securities
Proceeds from time deposits
Investments in venture capital funds
Investments in life insurance funds
Proceeds from cancellation of life insurance funds
Decrease in other assets
Net cash used in investing activities
FINANCING ACTIVITIES:
Purchases of treasury stocks
Cash dividends paid
Net cash used in financing activities
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS
ON CASH AND CASH EQUIVALENTS
NET DECREASE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
(Note 2.b)
CASH AND CASH EQUIVALENTS, END OF YEAR
18
2001
Thousands of
U.S. Dollars
(Note 1)
2002
¥ 10,633
¥ 10,789
$ 88,611
(2,379)
2,406
(15,807)
1,825
(19,828)
20,053
360
(33)
161
(185)
(216)
633
1,098
(389)
563
600
(408)
2,998
(279)
1,346
(1,544)
(1,804)
5,272
(3,783)
1,866
(2,215)
(79)
(3,464)
7,169
9,481
(521)
(1,669)
(933)
(6,160)
4,629
(31,525)
15,553
(18,460)
(656)
(28,874)
59,737
(2,478)
(39,879)
23,419
3,015
(11)
(3,434)
1,200
2,058
(16,110)
(2,695)
(46,620)
29,829
5,219
(1,150)
(1,671)
357
(16,731)
(20,647)
(332,328)
195,155
25,127
(92)
(28,612)
10,004
17,148
(134,245)
(2,112)
(2,906)
(5,018)
(1,419)
(2,943)
(4,362)
(17,603)
(24,217)
(41,820)
(653)
(14,612)
38
(16,426)
(5,442)
(121,770)
54,916
71,342
457,635
¥ 40,304
¥ 54,916
$ 335,865
Notes to Consolidated Financial Statements
1. BASIS OF PRESENTING CONSOLIDATED FINANCIAL STATEMENTS
The accompanying consolidated financial statements of Heiwa Corporation (the “Company”) and consolidated subsidiaries have been prepared
in accordance with the provisions set forth in the Japanese Securities and Exchange Law and its related accounting regulations, and in
conformity with accounting principles and practices generally accepted in Japan (“Japan GAAP”), which are different in certain respects as to
application and disclosure requirements of International Financial Reporting Standards. The consolidated financial statements are not intended
to present the financial position, results of operations and cash flows in accordance with accounting principles and practices generally accepted
in countries and jurisdictions other than Japan.
In preparing these consolidated financial statements, certain reclassifications and rearrangements have been made to the consolidated
financial statements of the Company and its consolidated subsidiaries issued domestically in order to present them in a form which is more
familiar to readers outside Japan. In addition, certain reclassifications and rearrangements have been made in the 2001 consolidated financial
statements to conform to the classifications used in 2002.
The consolidated financial statements are stated in Japanese yen, the currency of the country in which the Company is incorporated and
operates. The translations of Japanese yen amounts into U.S. dollar amounts are included solely for the convenience of readers outside Japan
and have been made at the rate of ¥120.00 to $1, the approximate rate of exchange at December 31, 2002. Such translations should not be
construed as representations that the Japanese yen amounts could be converted into U.S. dollars at that or any other rate.
2. SIGNIFICANT ACCOUNTING POLICIES
a. Consolidation—The accompanying consolidated financial statements as of December 31, 2002 include the accounts of the Company and its
four significant (three in 2001) subsidiaries (together, the “Group”). Under the control or influence concept, those companies in which the
Company, directly or indirectly, is able to exercise control over operations are fully consolidated, and those companies over which the
Company has the ability to exercise significant influence are accounted for by the equity method.
a.
Investments in the remaining one (nil in 2001) unconsolidated subsidiary and one (one in 2001) associated company are stated at cost. If
the equity method of accounting had been applied to the investments in these companies, the effect on the accompanying consolidated
financial statements would not be material.
a.
All significant intercompany balances and transactions have been eliminated in consolidation. All material unrealized profit included in
assets resulting from transactions within the Group is eliminated.
a.
On August 9, 2002, the Company established Meteor LLC (“Meteor”), a wholly owned subsidiary of the Company. Meteor’s main business is to
perform investment activities through life insurance funds for the Company’s directors.
a.
On March 27, 2001, the Company established HEIWA INSURANCE INC. (“HII”). The Company holds 100% of the shares of HII. HII’s
main business is to provide captive insurance as one of the risk management techniques for the Group.
b. Cash Equivalents—Cash equivalents are short-term investments that are readily convertible into cash and that are exposed to insignificant
risk of changes in value. Cash equivalents include time deposits, certificate of deposits, money market mutual funds, midterm government
bond funds and call loans that represent short-term investments, all of which mature or become due within three months of the date of
acquisition.
c. Marketable and Investment Securities—Marketable and investment securities are classified and accounted for, depending on management’s
intent, as follows: (1) held-to-maturity debt securities, which are expected to be held to maturity with the positive intent and ability to hold to
maturity are reported at amortized cost, and (2) available-for-sale securities, which are not classified as the aforementioned securities, are
reported at fair value, with unrealized gains and losses, net of applicable taxes, reported in a separate component of shareholders’ equity.
a.
Non-marketable available-for-sale securities are stated at cost determined by the moving-average method. For other than temporary
declines in fair value, investment securities are reduced to net realizable value by a charge to income.
d. Inventories—Merchandise and manufacturing inventories are principally stated at cost determined by the average method. Supplies are
principally stated at the most recent purchase price which approximates cost determined by the first-in, first-out method.
e. Property, Plant and Equipment—Property, plant and equipment are stated at cost. Depreciation is computed on the declining-balance
method over the estimated useful lives of assets.
Estimated useful lives are as follows:
Buildings and structures 8 to 50 years
Machinery and equipment 3 to 11 years
Furniture and fixtures 2 to 15 years
f. Other Assets—Intangible assets, goodwill and prepaid expenses—non-current are carried at cost less accumulated amortization, which is
calculated by the straight-line method principally over 5 to 20 years for intangible assets, 5 years for goodwill and 1 to 15 years for prepaid
expenses—non-current. Computer software used for internal purpose is recorded at cost less accumulated amortization and is amortized by
the straight-line method over 5 years, the estimated useful life of the software.
19
g. Allowance for Doubtful Accounts—The allowance for doubtful accounts is stated in amounts considered to be appropriate based on the
Group’s past credit loss experience and an evaluation of potential losses in the receivables outstanding.
h. Employees’ Retirement Benefit—The Group has a non-contributory funded pension plan covering substantially all of its employees. The
liability for employees’ retirement benefits is accounted for based on projected benefit obligations and plan assets at the balance sheet date.
a.
In addition to the above pension plan, the Company has a special retirement payment plan under which additional retirement payments
will be made and expensed to employees who contribute distinguished services to the Company for a long period of time.
i. Warranty Reserves—The warranty reserves are stated in amounts considered to be appropriate based on an evaluation of potential warranty
expenses in the products sold.
j. Leases—All leases are accounted for as operating leases. Under Japan GAAP for leases, finance leases that deem to transfer ownership of the
leased property to the lessee are to be capitalized, while other finance leases are permitted to be accounted for as operating lease
transactions if certain “as if capitalized” information is disclosed in the notes to the lessee’s financial statements.
k. Income Taxes—The provision for income taxes is computed based on the pretax income included in the consolidated statements of income.
The asset and liability approach is used to recognize deferred tax assets and liabilities for the expected future tax consequences of temporary
differences between the carrying amounts and the tax bases of assets and liabilities. Deferred taxes are measured by applying currently
enacted tax laws to the temporary differences.
l. Accounting for Consumption Tax—The consumption tax imposed on revenue from customers for the Group’s services is withheld by the
Group at the time of receipt and subsequently paid to the national government. The consumption tax withheld upon recognition of revenue
and the consumption tax paid by the Group on the purchase of products, merchandise and services from vendors, are not included in the
related accounts in the accompanying consolidated statements of income. The consumption tax paid is generally offset against the balance
of consumption tax withheld, and net overpayment is included in current assets and net over withholding is included in current liabilities.
m. Appropriations of Retained Earnings—Appropriations of retained earnings are reflected in the accompanying consolidated statements of
shareholders’ equity for the following year upon shareholders’ approval. Semiannual interim dividends paid upon resolution of the Board of
Directors are reflected in the respective years.
n. Foreign Currency Transaction—All short-term and long-term monetary receivables and payables denominated in foreign currencies are
translated into Japanese yen at the exchange rates at the balance sheet date. The foreign exchange gains and losses from translation are
recognized in the consolidated statements of income to the extent that they are not hedged by forward exchange contracts.
o. Foreign Currency Financial Statements—The balance sheet accounts of the consolidated foreign subsidiaries are translated into Japanese yen
at the current exchange rate as of the balance sheet date except for shareholders’ equity, which is translated at the historical rate. Differences
arising from such translation were shown as “Foreign currency translation adjustments” in a separate component of shareholders’ equity.
Revenue and expense accounts of consolidated foreign subsidiaries are translated into yen at the average exchange rate.
p. Derivative Financial Instruments—The Group uses derivative financial instruments (“derivatives”) to manage their exposure to fluctuation in
foreign exchange rate. Foreign exchange forward contracts are utilized by the Group to reduce foreign currency exchange risk. The Group
does not enter into derivatives for trading or speculative purposes.
a.
Japan GAAP require that: (a) all derivatives be recognized as either assets or liabilities and measured at fair value, and gains or losses on
derivative transactions are recognized in the statement of income and (b) for derivatives used for hedging purposes, if derivatives qualify for
hedge accounting because of high correlation and effectiveness between the hedging instruments and the hedged items, gains or losses on
derivatives are deferred until maturity of the hedged transactions. The foreign exchange forward contracts employed to hedge foreign
exchange exposures are measured at the fair value and the unrealized gains/losses are recognized in income.
q. Per Share Information—The computation of net income per share is based on the weighted average number of shares of common stock
outstanding during each year. The weighted average number of common shares used in the computation was 115,870 thousand shares for
2002 and 117,114 thousand shares for 2001. Diluted net income per common share is not disclosed because no convertible bonds or
warrants are issued. Cash dividends per common share presented in the accompanying consolidated statements of income are dividends
applicable to the respective years including dividends to be paid after the end of the year.
3. MARKETABLE AND INVESTMENT SECURITIES
Marketable and investment securities at December 31, 2002 and 2001 consisted of the following:
2002
2001
Thousands of
U.S. Dollars
2002
Current:
Debt securities
Trust fund investments and other
Total
¥ 5,015
15,508
¥ 20,523
¥ 2,001
15,062
¥ 17,063
$ 41,795
129,229
$ 171,024
Non-current:
Equity securities
Debt securities
Trust fund investments and other
Total
¥ 5,209
64,726
100
¥ 70,035
¥ 5,227
45,487
8,284
¥ 58,998
$ 43,407
539,386
832
$ 583,625
Millions of Yen
20
The carrying amounts and aggregate fair values of marketable and investment securities at December 31, 2002 and 2001 were as follows:
Millions of Yen
Cost
December 31, 2002
Securities classified as:
Available-for-sale:
Equity securities
Debt securities
Other
Held-to-maturity
¥
Unrealized
Gains
231
68,275
13,342
1,758
¥
36
518
272
91
Unrealized
Losses
¥
54
809
127
Fair
Value
¥
213
67,984
13,487
1,849
December 31, 2001
Available-for-sale:
Equity securities
Debt securities
Other
Held-to-maturity
212
5,089
13,727
50,416
39
73
41
210
5,162
13,256
50,434
471
270
288
Thousands of U.S. Dollars
December 31, 2002
Available-for-sale:
Equity securities
Debt securities
Other
Held-to-maturity
$
Cost
Unrealized
Gains
Unrealized
Losses
1,928
568,957
111,186
14,649
$ 303
4,318
2,268
762
$ 456
6,742
1,064
Fair
Value
$
1,775
566,533
112,390
15,411
Available-for-sale securities and held-to-maturity securities whose fair value is not readily determinable as of December 31, 2002 and 2001
were as follows:
Carrying Amount
Millions of Yen
2002
¥ 4,996
2,000
120
¥ 7,116
Available-for-sale:
Equity securities
Certificate of deposits
Held-to-maturity—Certificate of deposits
Total
2001
¥ 5,017
2,000
¥ 7,017
Thousands of
U.S. Dollars
2002
$ 41,631
16,666
1,005
$ 59,302
Proceeds from sales of available-for-sale securities for the years ended December 31, 2002 and 2001 were ¥68,375 million ($569,791
thousand) and ¥58,774 million, respectively. Gross realized gains and losses on these sales, computed on the moving average cost basis, were
¥22 million ($185 thousand) and zero, respectively, for the year ended December 31, 2002 and ¥198 million and ¥17 million, respectively, for
the year ended December 31, 2001.
The carrying values of debt securities by contractual maturities for securities classified as available-for-sale and held-to-maturity at
December 31, 2002 are as follows:
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Total
Millions of Yen
AvailableHeld-tofor-Sale
Maturity
AvailableHeld-tofor-Sale
Maturity
¥ 5,000
48,575
10,843
4,000
¥ 68,418
$ 41,667
404,788
90,358
33,333
$ 570,146
¥
434
1,409
¥ 1,843
$ 3,615
11,747
$ 15,362
As a result of consideration of the holding purpose concerning investment securities held as of January 1, 2002, the Group decided to reclassify
a portion of held-to-maturity debt securities into available-for-sale securities. The effect of the change in the classification and accounting for
investments was to increase marketable securities, investment securities and deferred tax assets—non-current as of December 31, 2002 and
income before income taxes for the year ended December 31, 2002, by ¥6 million ($47 thousand), ¥545 million ($4,538 thousand), ¥96
million ($801 thousand) and ¥775 million ($6,457 thousand), respectively, and to decrease deferred tax assets—current and unrealized gain on
available-for-sale securities by ¥2 million ($19 thousand) and ¥131 million ($1,091 thousand), respectively, as compared with the amounts that
would have been recognized had the prior method been used.
21
4. INVENTORIES
Inventories at December 31, 2002 and 2001 consisted of the following:
Thousands of
U.S. Dollars
Millions of Yen
2002
¥ 3,007
43
6,718
336
¥ 10,104
Finished products and merchandise
Work in process
Raw materials
Supplies
Total
2001
771
400
10,488
311
¥ 11,970
2002
$ 25,062
361
55,978
2,798
$ 84,199
¥
5. OTHER ASSETS
Other assets at December 31, 2002 and 2001 consisted of the following:
Thousands of
U.S. Dollars
Millions of Yen
2002
¥ 2,402
101
11,057
¥ 13,560
Intangible assets
Long-term loans receivable
Others
Total
2001
¥ 2,558
153
9,305
¥ 12,016
2002
$ 20,013
842
92,146
$ 113,001
6. EMPLOYEES’ RETIREMENT BENEFITS
Under the Group’s pension plan, employees terminating their employment are entitled to lump-sum payments or an annuity from the pension
fund based on their rates of pay at the time of termination and years of service. If the termination is involuntary or caused by retirement at the
mandatory retirement age, the employee is usually entitled to greater payments than in the case of voluntary termination.
The liability for employees'
retirement benefits at December 31, 2002 and 2001 consisted of the following:
Thousands of
U.S. Dollars
2002
$ 21,799
(14,023)
(1,740)
$ 6,036
Millions of Yen
2002
¥ 2,616
(1,683)
(209)
¥ 724
Projected benefit obligation
Fair value of plan assets
Unrecognized actuarial gain
Net liability
2001
¥ 2,405
(1,628)
(214)
¥ 563
The components of net periodic benefit costs are as follows:
Thousands of
U.S. Dollars
Millions of Yen
2002
¥ 178
60
(41)
214
Service cost
Interest cost
Expected return on plan assets
Recognized actuarial loss
Amortization of transitional obligation
Premium severance pay
Net periodic benefit costs
1
¥ 412
2001
¥ 164
67
(37)
2002
$ 1,486
497
(339)
1,787
307
11
$ 3,442
¥ 501
Assumptions used for the years ended December 31, 2002 and 2001 are set forth as follows:
2002
Discount rate
Expected rate of return on plan assets
Attribution of projected benefit obligation to periods of service
Recognition period of actuarial gain/loss
Amortization period of transitional obligation
22
2.0% (2.5% at the beginning of the fiscal year)
The projected unit credit method
1 year (amortized in the following fiscal year)
2001
2.5%
The projected unit credit method
1 year (amortized in the following fiscal year)
1 year
7. INCOME TAXES
The Company and its domestic subsidiaries are subject to Japanese national and local income taxes which, in the aggregate, resulted in a
normal effective statutory tax rate of 41.7% in 2002 and 2001. The tax effects of significant temporary differences which resulted in deferred tax
assets and liabilities at December 31, 2002 and 2001 are as follows:
Millions of Yen
Current:
Deferred tax assets:
Loss on devaluation of inventories
Accrued enterprise tax
Accrued expenses
Inventories
Marketable and investment securities
denominated in foreign currencies
Unrealized profit
Others
Subtotal
Deferred tax liabilities:
denominated in foreign currencies
Unrealized gain on available-for-sale securities
Unrealized loss
Subtotal
Net deferred tax assets
2002
2001
¥ 2,072
255
89
218
¥ 3,938
200
104
90
$ 17,266
2,124
746
1,821
227
14
13
2,888
5
147
4,484
1,889
116
106
24,068
63
13
76
¥ 2,812
41
12
14
67
¥ 4,417
527
111
638
$ 23,430
Millions of Yen
Non-current:
Deferred tax assets:
Nondeductible amortization expense of
deferred assets for income tax purpose
Nondeductible depreciation expense of
tangible fixed assets for income tax purpose
Liability for employees’ retirement benefits
Intangible asset
Nondeductible depreciation expense of small
depreciable assets for income tax purpose
Loss on disposals of fixed assets
Warranty reserves
Loss on devaluation of investment securities
Loss on devaluation of investments in
venture capital funds
Unrealized loss on available-for-sale securities
Unrealized profit
Others
Subtotal
Deferred tax liabilities:
denominated foreign currencies
Unrealized gain on available-for-sale
securities
Appropriations
Unrealized loss
Subtotal
Thousands of
U.S. Dollars
2002
2002
2001
Thousands of
U.S. Dollars
2002
¥ 146
¥ 169
$ 1,216
136
301
944
133
234
529
1,132
2,510
7,869
129
44
173
66
97
344
250
61
1,079
368
1,442
547
73
121
129
6
2,268
45
134
28
2,024
605
1,010
1,072
50
18,900
236
232
1,970
2
43
10
291
¥ 1,977
34
46
9
321
¥ 1,703
19
355
83
2,427
$ 16,473
The amounts of current and non-current deferred tax assets and liabilities on the balance sheets at December 31, 2002 and 2001 are as follows:
Millions of Yen
Current:
Deferred tax assets
Deferred tax liabilities
Non-current:
Deferred tax assets
Deferred tax liabilities
Thousands of
U.S. Dollars
2002
2001
2002
¥ 2,825
13
¥ 2,812
¥ 4,431
14
¥ 4,417
$ 23,542
112
$ 23,430
¥ 2,002
25
¥ 1,977
¥ 1,738
35
¥ 1,703
$ 16,682
209
$ 16,473
23
A reconciliation between the normal effective statutory tax rate and the actual effective tax rate reflected in the accompanying
statements of income for the years ended December 31, 2002 and 2001 is as follows:
2002
Normal effective statutory tax rate
41.7 %
Expenses not deductible for income tax purposes
1.7 %
Inhabitant taxes—per capita
0.4 %
Other—net
0.2 %
Actual effective tax rate
44.0 %
consolidated
2001
41.7 %
1.4 %
0.3 %
1.6 %
45.0 %
8. LEASES
The Group leases certain machinery, equipment, furniture and fixtures.
Total lease payments under finance leases that do not transfer ownership of the leased property to the lessee were ¥180 million ($1,500
thousand) and ¥201 million for the years ended December 31, 2002 and 2001, respectively.
Pro forma information of leased property under finance leases such as acquisition cost including the imputed interest expense portion,
accumulated depreciation, obligation under finance lease and depreciation expense of finance leases that do not transfer ownership of leased
property to the lessee on an “as if capitalized” basis for the years ended December 31, 2002 and 2001, was as follows:
Millions of Yen
2002
Furniture
and
Fixtures
¥ 383
204
¥ 179
Acquisition cost
Net leased property
Machinery
and
Equipment
¥ 280
137
¥ 143
Acquisition cost
Net leased property
2002
Machinery
Furniture
and
and
Equipment
Fixtures
Total
$ 2,332
$ 3,195
$ 5,527
1,143
1,698
2,841
$ 1,189
$ 1,497
$ 2,686
Total
¥ 663
341
¥ 322
2001
Furniture
and
Fixtures
¥ 547
331
¥ 216
Machinery
and
Equipment
¥ 347
152
¥ 195
Total
¥ 894
483
¥ 411
Obligations under finance leases including the imputed interest expense portion:
Millions of Yen
Due within one year
Due after one year
Total
2002
¥ 129
193
¥ 322
2001
¥ 146
265
¥ 411
Thousands of
U.S. Dollars
2002
$ 1,073
1,613
$ 2,686
Depreciation expense under finance leases:
Millions of Yen
Depreciation expense
2002
¥ 180
2001
¥ 201
Thousands of
U.S. Dollars
2002
$ 1,500
Depreciation expense, which are not reflected in the accompanying consolidated statements of income, is computed by the straight-line method.
The minimum rental commitments under noncancelable operating leases at December 31, 2002 were as follows:
Millions of Yen
Due within one year
Due after one year
Total
9. SHAREHOLDERS’ EQUITY
¥ 317
173
¥ 490
Thousands of
U.S. Dollars
$ 2,642
1,440
$ 4,082
Japanese companies are subject to the Japanese Commercial Code (the “Code”) to which certain amendments became effective from October 1, 2001.
Prior to October 1, 2001, the Code required at least 50% of the issue price of new shares, with a minimum of the par value thereof, to be designated as
stated capital as determined by resolution of the Board of Directors. Proceeds in excess of amounts designated as stated capital were credited to additional
paid-in capital. Effective October 1, 2001, the Code was revised and common stock par values were eliminated resulting in all shares being recorded with
no par value.
24
Prior to October 1, 2001, the Code also provided that an amount at least equal to 10% of the aggregate amount of cash dividends and certain other
cash payments which are made as an appropriation of retained earnings applicable to each fiscal period shall be appropriated and set aside as a legal
reserve until such reserve equals 25% of stated capital. Effective October 1, 2001, the revised Code allows for such appropriations to be set aside as a legal
reserve until the total additional paid-in capital and legal reserve equals 25% of stated capital. The amount of total additional paid-in capital and legal
reserve which exceeds 25% of stated capital can be transferred to retained earnings by resolution of the shareholders, which may be available for
dividends. The Company’s legal reserve amount, which is included in retained earnings, totals ¥3,486 million ($29,048 thousand) and ¥3,486 million as of
December 31, 2002 and 2001, respectively. Under the Code, companies may issue new common shares to existing shareholders without consideration as
a stock split pursuant to a resolution of the Board of Directors. Prior to October 1, 2001, the amount calculated by dividing the total amount of
shareholders’ equity by the number of outstanding shares after the stock split could not be less than ¥50. The revised Code eliminated this restriction.
Prior to October 1, 2001, the Code imposed certain restrictions on the repurchase and use of treasury stock. Effective October 1, 2001, the Code
eliminated these restrictions allowing companies to repurchase treasury stock by a resolution of the shareholders at the general shareholders meeting and
dispose of such treasury stock by resolution of the Board of Directors after March 31, 2002. The repurchased amount of treasury stock cannot exceed the
amount available for future dividend plus amount of stated capital, additional paid-in capital or legal reserve to be reduced in the case where such
reduction was resolved at the general shareholders meeting.
The Code permits companies to transfer a portion of additional paid-in capital and legal reserve to stated capital by resolution of the Board of
Directors. The Code also permits companies to transfer a portion of unappropriated retained earnings, available for dividends, to stated capital by
resolution of the shareholders.
Dividends are approved by the shareholders at a meeting held subsequent to the fiscal year to which the dividends are applicable. Semiannual
interim dividends may also be paid upon resolution of the Board of Directors, subject to certain limitations imposed by the Code.
The Company repurchased a total of 323 thousand shares of the Company’s common stock at the aggregate amount of ¥511 million ($4,257
thousand) during the period from December 3, 2002 to December 20, 2002, through the Tokyo Stock Exchange.
Upon resolution and approval of the Board of Directors on November 29, 2002, the Company was authorized to repurchase the Company’s
common stock with no par value at an upper limit of 400 thousand shares or ¥700 million ($5,833 thousand).
On March 29, 2002, the Company retired a total of 1,321 thousand shares of the treasury stock with the aggregated repurchase amount of ¥2,467
million ($20,560 thousand) by charging to retained earnings.
At the general shareholders meeting held on March 27, 2002, the Company’s shareholders approved the Company to repurchase the Company’s
common stock with no par value at an upper limit of 5 million shares or ¥12.5 billion ($104 million), for the purpose of retiring the shares by charging such
amounts to retained earnings.
The Company repurchased a total of 361 thousand shares of the Company’s common stock at the aggregate amount of ¥708 million ($5,889
thousand) during the period from February 14, 2002 to March 8, 2002 and a total of 460 thousand shares at the aggregate amount of ¥893 million ($7,441
thousand) during the period from January 8, 2002 to February 8, 2002, through the Tokyo Stock Exchange for the purpose of retiring the shares by charging
such amounts to retained earnings. As of March 8, 2002, the accumulated number and the aggregate amount of the Company’s treasury stock were 1,321
thousand shares and ¥2,467 million ($20,560 thousand), respectively.
Upon resolution and approval of the Board of Directors on December 14, 2001, the Company repurchased a total of 500 thousand shares of the
common stock with no par value at the aggregate purchase amount of ¥866 million through the Tokyo Stock Exchange on December 17, 2001, for the
purpose of retiring the shares by charging such amounts to retained earnings. The Company was also authorized to repurchase, upon resolution and approval
of the Board of Directors, the Company’s common stock with no par value at an upper limit of 1.5 million shares or the aggregate amount of ¥3 billion.
Upon resolution and approval of the Board of Directors held on February 27, 2001, the Company was authorized to repurchase the Company’s
common stock with no par value at an upper limit of 1 million shares or the aggregate repurchase amount of ¥2 billion for the period from February 28,
2001 to March 19, 2001 through the Tokyo Stock Exchange, for the purpose of retiring the shares by charging such amounts to retained earnings. The
Company eventually repurchased a total of 296 thousand shares of the stock at the aggregate repurchase amount of ¥553 million, and then all the stock
was retired on March 27, 2001.
10. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the years ended December 31, 2002 and 2001, consisted of the following:
Millions of Yen
Sales commissions
Advertisement
Payroll
Research and development costs
Depreciation and amortization
Others
Total
2002
¥ 1,359
1,392
2,768
4,535
839
8,057
¥ 18,950
2001
¥ 1,430
1,129
2,824
3,826
899
7,142
¥ 17,250
Thousands of
U.S. Dollars
2002
$ 11,320
11,603
23,067
37,787
6,993
67,144
$ 157,914
All research and development costs were included in selling, general and administrative expenses for the fiscal year 2002 and 2001.
11. DERIVATIVE FINANCIAL INSTRUMENTS
The Group enters into foreign currency forward contracts to hedge foreign exchange risk associated with certain assets and liabilities
denominated in foreign currencies. It is the Group’s policy to use derivatives only for the purpose of reducing market risks associated with assets
and liabilities. The Group does not hold or issue derivatives for trading purposes. Derivatives are subject to market risk and credit risk. Market risk
is the exposure created by potential fluctuations in market conditions, including interest or foreign exchange rates. Credit risk is the possibility
that a loss may result from a counterparty’s failure to perform according to the terms and conditions of the contract. Because the counterparties to
those derivatives are limited to financial institutions with high rating, the Group does not anticipate any losses arising from credit risk. Derivative
transactions entered into by the Group have been made in accordance with internal policies which regulate the authorization and credit limit
amount. Each derivative transaction is reported to the chief financial officer and, if necessary, to the Board of Directors.
The contract or notional amounts of derivatives which are shown in the following table do not represent the amounts exchanged by the
parties and do not measure the Group’s exposure to credit or market risk.
25
Fair Value of Derivative Financial Instruments
The fair value of the derivative financial instruments at December 31, 2002 is as follows:
Contract
Amount
¥ 54,417
35,437
¥ 89,854
Foreign currency forward contracts:
Receivables—U.S. dollars
Payables—U.S. dollars
Total
Millions of Yen
2002
Fair
Value
¥ 53,743
34,792
¥ 88,535
Unrealized
Gain/(Loss)
¥ 674
(645)
¥ 29
2002
Contract
Fair
Amount
Value
Foreign currency forward contracts:
Receivables—U.S. dollars
Payables—U.S. dollars
Total
$ 453,476
295,311
$ 748,787
Unrealized
Gain/(Loss)
$ 447,856
289,938
$ 737,794
$ 5,620
(5,373)
$ 247
The fair value in the above table is based on forward quotation.
12. RELATED PARTY TRANSACTIONS
Transactions with related parties which consisted primarily of associated subcontractors for the years ended December 31, 2002 and 2001 were as follows:
Millions of Yen
2002
¥ 20
94
Sales—trade
Purchases
2001
¥ 21
88
Thousands of
U.S. Dollars
2002
$ 163
780
The balances due to and from these associated companies at December 31, 2002 and 2001 consisted of the following:
Millions of Yen
2002
¥ 12
3
Notes and accounts receivable—trade
Accounts payable—other
2001
¥ 11
1
Thousands of
U.S. Dollars
2002
$ 97
24
13. SEGMENT INFORMATION
The Group operates in the following business segments:
(1) Pachinko machines—Pachinko machines and gauge boards of pachinko machines
(2) Supply machines—Pachinko ball replenishing systems and computers for pachinko parlors
(3) Pachislo machines—Pachislo machines
(4) Amusement parlors— Operation of amusement parlors
(5) Other———————Leasing, reinsurance, investments and other
Information about business segments, geographical segments and sales to foreign customers of the Group for the years ended December 31, 2002 and
2001, is as follows:
(1) Business Segment Information
a. Sales and Operating Income
Sales to customers
Intersegment sales
Total sales
Operating expenses
Operating income (loss)
Pachinko
Machines
¥ 63,734
13,779
77,513
63,622
¥ 13,891
Supply
Machines
¥ 10,231
42
10,273
10,075
¥ 198
Millions of Yen
2002
Pachislo
Amusement
Other
Machines
Parlors
¥ 13,016
¥ 11,262
¥ 141
10
237
11,262
378
13,026
11,133
428
11,607
¥ 129
¥ (50)
¥ 1,419
b. Total Assets, Depreciation and
Capital Expenditures
Total assets
Depreciation
Capital expenditures
¥ 73,821
1,844
1,787
¥ 5,334
95
49
¥ 7,417
26
34
26
¥ 6,698
169
224
¥ 1,662
2
Eliminations/
Corporate Consolidated
¥ 98,384
¥ (14,068)
98,384
(14,068)
86,798
(10,067)
¥ (4,001) ¥ 11,586
¥ 123,781
215
131
¥ 218,713
2,351
2,225
Sales to customers
Intersegment sales
Total sales
Operating expenses
Pachinko
Machines
$ 531,118
114,823
645,941
530,179
$ 115,762
Supply
Machines
$ 85,255
347
85,602
83,955
$ 1,647
2002
Pachislo
Amusement
Eliminations/
Other
Machines
Parlors
$ 108,469
$ 93,850 $ 1,176
$ 819,868
82
1,977 $ (117,229)
108,551
93,850
3,153
(117,229)
819,868
96,729
92,776
3,567
(83,891)
723,315
$ 11,822
$ 1,074 $ (414) $ (33,338) $ 96,553
Total assets
Depreciation
$ 615,174
15,369
14,894
$ 44,447
789
404
$ 61,810
217
285
Millions of Yen
2001
Pachislo
Amusement
Other
Machines
Parlors
¥ 22,289
¥ 9,312
¥ 88
23
263
22,312
9,312
351
17,538
9,299
246
¥ 4,774
¥ 13
¥ 105
Eliminations/
¥ 97,468
¥ (12,773)
(12,773)
97,468
(9,041)
78,521
¥ (3,732) ¥ 18,947
¥ 7,341
10
74
¥ 143,642
288
29
Sales to customers
Intersegment sales
Total sales
Operating expenses
Pachinko
Machines
¥ 57,218
12,432
69,650
51,848
¥ 17,802
Supply
Machines
¥ 8,561
55
8,616
8,631
¥ (15)
Total assets
Depreciation
¥ 54,793
1,269
2,269
¥ 5,730
128
47
$ 55,821
1,403
1,862
¥ 6,738
133
769
$ 13,847 $ 1,031,509 $ 1,822,608
17
1,794
19,589
1,095
18,540
¥ 1,534
1
¥ 219,778
1,829
3,188
Notes: 1. Operating expenses mainly incurred in the Company’s administrative headquarters were unallocable and included in
“Eliminations/corporate” of operating expenses with the aggregate amount of ¥3,883 million ($32,355 thousand) and ¥3,689
million for the years ended December 31, 2002 and 2001, respectively.
Notes: 2. Total corporate assets of ¥133 billion ($1,106 million) and ¥152 billion included in “Eliminations/corporate” of total assets as of
December 31, 2002 and 2001, respectively, mainly consisted of surplus operating funds, such as cash, cash equivalents, shortterm investments and marketable securities, held by the Company and assets used in the Company’s administrative headquarters.
(2) Geographical Segment Information
Net sales and identifiable assets of consolidated foreign subsidiaries are not significant, therefore, geographical segment information is not
presented herein.
(3) Sales to Foreign Customers
Sales to foreign customers are not significant, therefore, information regarding sales to foreign customers is not presented herein.
14. SUBSEQUENT EVENTS
(1) At the general shareholders meeting held on March 27, 2003, the Company’s shareholders approved the following:
a. Purchase of Treasury Stock
The Company was authorized to repurchase, at management discretion, up to 2 million shares of the Company’s common stock (an aggregate
repurchase amount of ¥5 billion ($42 million)) up until the next general shareholders meeting.
b. Appropriations of Retained Earnings
Millions of Yen
Year-end cash dividends, ¥12.5 ($0.10) per share
¥ 1,443
172
$ 12,023
1,431
(2) The Company repurchased a total of 339 thousand shares of the Company’s common stock at the aggregate repurchase amount of ¥581
million ($4,839 thousand) during the period from February 14, 2003 to March 10, 2003 and a total of 600 thousand shares at the aggregate
repurchase amount of ¥1,052 million ($8,769 thousand) during the period from January 7, 2003 to February 14, 2003, respectively, through the
Tokyo Stock Exchange. As of March 10, 2003, the accumulated number and the aggregate repurchase amount of the Company’s treasury stock
were 1,262 thousand shares and ¥2,144 million ($17,866 thousand), respectively. In addition, upon resolution and approval of the Board of
Directors on January 6, 2003, the Company was authorized to repurchase the Company’s common stock with no par value at an upper limit of
2 million shares or ¥4,000 million ($33,333 thousand).
27
Independent Auditors’ Report
To the Board of Directors and Shareholders of Heiwa Corporation:
We have examined the consolidated balance sheets of Heiwa Corporation and consolidated subsidiaries as of December 31, 2002 and 2001,
and the related consolidated statements of income, shareholders’ equity, and cash flows for the years then ended, all expressed in Japanese yen.
Our examinations were made in accordance with auditing standards, procedures and practices generally accepted and applied in Japan and,
accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.
In our opinion, the consolidated financial statements referred to above present fairly the financial position of Heiwa Corporation and
consolidated subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for the years then ended in
conformity with accounting principles and practices generally accepted in Japan applied on a consistent basis.
Our examinations also comprehended the translation of Japanese yen amounts into U.S. dollar amounts and, in our opinion, such translation
has been made in conformity with the basis stated in Note 1 to the consolidated financial statements. Such U.S. dollar amounts are presented
solely for the convenience of readers outside Japan.
March 27, 2003
13. SEGMENT INFORMATION
The Group operates in the following business segments:
(1) Pachinko machines—Pachinko machines and gauge boards of pachinko machines
(2) Supply machines—Pachinko ball replenishing systems and computers for pachinko parlors
(3) Pachislo machines—Pachislo machines
(4) Amusement parlors— Operation of amusement parlors
(5) Other———————Leasing, reinsurance, investments and other
Information about business segments, geographical segments and sales to foreign customers of the Group for the years ended December 31, 2002 and
2001, is as follows:
(1) Business Segment Information
28
Network and Subsidiaries
Head Office: 2-3014-8 Hirosawa-cho, Kiryu, Gunma 376-8588, Japan
Sales Headquarters: 2-22-9 Higashi Ueno, Taito-ku, Tokyo 110-0015, Japan
Subsidiaries: Shinko Co., Ltd., Amtex Co., Ltd. and Heiwa Insurance, Inc.
Nagoya
Hakodate
Sapporo
Sales Office
Branch Office
Kyoto
Niigata
Kushiro
Sales Office
Sales Office
Sales Office
Osaka
Takasaki
Aomori
Branch Office
Branch Office
Sales Office
Kobe
Kanazawa
Sendai
Sales Office
Branch Office
Branch Office
Sales Office
Koriyama
Okayama
Sales Office
Sales Office
Utsunomiya
Takamatsu
Sales Office
Sales Office
Tsukuba
Hiroshima
Sales Office
Branch Office
Kiryu
Yamaguchi
Sales Office
Head Office
Fukuoka
Saitama
Sales Office
Branch Office
Chiba
Oita
Sales Office
Sales Office
Tokyo
Kumamoto
Sales Office
Sales Headquarters・
Branch Office
Kagoshima
Yokohama
Sales Office
Sales Office
Miyazaki
Shizuoka
Sales Office
Sales Office
Board of Directors (As of March 27, 2003)
President
Vice President
Senior Managing Director
Managing Directors
Directors
Senior Corporate Auditor
Corporate Auditors
Jun Nakajima
Yasuhiko Ishibashi
Kazuyoshi Horie
Toru Machida
Takeo Jozen
Toshikatsu Imoto
Isao Ueki
Isao Hoshiyama
Toshio Kamiyama
Masahiro Hirano
Hiroji Arai
Masaaki Kishimoto
Corporate Data (As of April 30, 2003)
Heiwa Corporation
Head Office:
Transfer Agent and Registrar:
Common Stock:
Number of Shareholders:
Listing:
2-3014-8 Hirosawa-cho, Kiryu, Gunma 376-8588, Japan Tel: 81-277-52-0121
The Chuo Mitsui Trust and Banking Co., Ltd.
3-33-1, Shiba, Minato-ku, Tokyo 105-8574, Japan
Authorized: 228,903 thousand shares Issued: 115,743 thousand shares
14,668 (As of December 31, 2002)
Tokyo Stock Exchange First Section
Head Office
29
HEIWA Corporation
2-3014-8 Hirosawa-cho, Kiryu, Gunma 376-8588, Japan
Tel: 81-277-52-0121 URL http://www.heiwanet.co.jp/
Printed in Japan on recycled paper

HEIWA CORPORATION ANNUAL REPORT 2002

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