NAMCO BANDAI Holdings Inc.

Annual Report 2006

www.bandainamco.co.jp

NAMCO BANDAI Holdings Inc.
Annual Report 2006

Printed in JapanIn 1950, Bandai Co., Ltd., was established as amarketer of toys. Since that time, Bandai’s mission
has been to provide dreams, inspiration andexcitement to people around the world throughentertainment businesses, and the company has
always risen to the challenge of achieving
continual improvement. Bandai has developed awide range of operations, including not just toys
but also apparel, candy toys, card games, gamesoftware, visual products, and network services,
through the active use of its original businessmodel—character merchandising.

In 1955, NAMCO LIMITED was established asa manufacturer and marketer of amusement
machines. Since that time, NAMCO’s overriding
mission has been contributing to the realization offun, happy, healthy lifestyles, and the company has
led the way in helping people experience the fun
they have always dreamed of. In addition toamusement machine manufacturing andmarketing, NAMCO has expanded its businessfields to a wide array of other areas, including
amusement facility operations and game software
for home game consoles, and has developed
original technical strengths and facility networks.

Forward-Looking Statements

The forward-looking statements in this annual report are based on the information currently available to management and include various risks and uncertainties. Accordingly,
actual results may differ materially from these projections for a variety of reasons. Major factors that could influence actual results include changes in business environments,
market trends, and exchange rate fluctuations relevant to the businesses of the BANDAI NAMCO Group.
Notes:
1. All figures in this report are rounded to the nearest unit.
2. Fiscal 2006, the year under review, refers to the one-year period ended March 31, 2006.
3. Projections and other figures in this annual report are as of May 2006.

Ta b l eo f

C o n t e n t s,

Our Vision

Brand-New Potential ...................................................................... 02

To become the Worlds
Inspiring Entertainme

An introduction to the direction of the BANDAI NAMCO Group,
which has set off on a new journey.

Strategic Business Units (SBUs) .................................................... 06
An introduction to the Group’s operations and major companies.

Consolidated Financial Highlights .............................................. 08
A Message from the President .................................................... 09

The BANDAI NAMCO Group will constantly strive to be a pioneer, aiming to deepen and widen the appeal ofentertainment and winning the hearts of people worldwide who enjoy having fun. Our ultimate goal is tobecome the World’s Most Inspiring Entertainment Group.

A message from Takeo Takasu.

Brand-New Synergies ..................................................................... 14
A special section explaining the Group’s Medium-Term Management Plan.

Directors and Corporate Auditors .............................................. 25
Corporate Governance .................................................................. 26
The BANDAI NAMCO Group’s CSR Initiatives ........................... 28
Overview of Main Group Companies ........................................ 30
Financial Section ............................................................................. 32
Corporate Information .................................................................. 67

Toys and Hobby
VisualLife-Style

CHARACTER

Networks

Amusement

Video Game
SoftwareVideo Game Software

TECHNOLOGYLOCATION

Amusement
Facility
Operations

01

04

Arcade Machines

Brand-New Potential
On September 29, 2005, Bandai Co., Ltd., and NAMCO LIMITED established a joint holding company—NAMCO
BANDAI Holdings Inc.—and implemented a management integration. In Japan and overseas, the BANDAI NAMCO
Group is developing operations in a wide range of fields, including toys, amusement facilities, arcade machines,
video game software, network services, and visual products. In the future, the Group will make full use of thisbroad range of businesses as it strives to open up new possibilities and achieve further growth.

BANDAI NAMCO’s Mission Statement:
Dreams, Fun and Inspiration
BANDAI NAMCO will continue to provide Dreams,
Fun and Inspiration to people around the world throughentertainment based on creativity and boundlessenthusiasm.

BANDAI NAMCO believes that:
Dreams, Fun and Inspiration Are the Key
to Happiness
The meaning of Dreams, Fun and Inspiration will
essentially change over time, but BANDAI NAMCO holds
one unshakable belief: that Dreams, Fun and Inspiration
will always hold the key to happiness.

BANDAI NAMCO’s basic ethos is defined by:
Corporate Philosophy
The Group Corporate Philosophy acts as the foundation for theGroup’s decision-making process and a source of inspiration for every
Group employee. In short, it represents the fundamental policy
underpinning all the Group’s activities. The Group Corporate
Philosophy encompasses all of the separate corporate philosophies
formulated by the individual companies in the BANDAI NAMCO
Group.
Anchored by this corporate philosophy, the BANDAI NAMCO
Group respects the independence and autonomy of every Group
company, aiming to boost the corporate value of the entire Group by
maximizing the creativity of these companies and generating newsynergies.

More Passion, More Innovation,
More Perceptive• Unparalleled curiosity and boundless enthusiasm• Abundant creativity unrestrained by the status quo• Open to people’s needs and satisfaction fromgiving inspiration

NAMCO BANDAI Holdings Inc.
President and Representative Director
Takeo Takasu

02

03

Brand-New Potential
On September 29, 2005, Bandai Co., Ltd., and NAMCO LIMITED established a joint holding company—NAMCO
BANDAI Holdings Inc.—and implemented a management integration. In Japan and overseas, the BANDAI NAMCO
Group is developing operations in a wide range of fields, including toys, amusement facilities, arcade machines,
video game software, network services, and visual products. In the future, the Group will make full use of thisbroad range of businesses as it strives to open up new possibilities and achieve further growth.

BANDAI NAMCO’s Mission Statement:
Dreams, Fun and Inspiration
BANDAI NAMCO will continue to provide Dreams,
Fun and Inspiration to people around the world throughentertainment based on creativity and boundlessenthusiasm.

BANDAI NAMCO believes that:
Dreams, Fun and Inspiration Are the Key
to Happiness
The meaning of Dreams, Fun and Inspiration will
essentially change over time, but BANDAI NAMCO holds
one unshakable belief: that Dreams, Fun and Inspiration
will always hold the key to happiness.

BANDAI NAMCO’s basic ethos is defined by:
Corporate Philosophy
The Group Corporate Philosophy acts as the foundation for theGroup’s decision-making process and a source of inspiration for every
Group employee. In short, it represents the fundamental policy
underpinning all the Group’s activities. The Group Corporate
Philosophy encompasses all of the separate corporate philosophies
formulated by the individual companies in the BANDAI NAMCO
Group.
Anchored by this corporate philosophy, the BANDAI NAMCO
Group respects the independence and autonomy of every Group
company, aiming to boost the corporate value of the entire Group by
maximizing the creativity of these companies and generating newsynergies.

More Passion, More Innovation,
More Perceptive• Unparalleled curiosity and boundless enthusiasm• Abundant creativity unrestrained by the status quo• Open to people’s needs and satisfaction fromgiving inspiration

NAMCO BANDAI Holdings Inc.
President and Representative Director
Takeo Takasu

02

03

Ta b l eo f

C o n t e n t s,

Our Vision

Brand-New Potential ...................................................................... 02

To become the Worlds
Inspiring Entertainme

An introduction to the direction of the BANDAI NAMCO Group,
which has set off on a new journey.

Strategic Business Units (SBUs) .................................................... 06
An introduction to the Group’s operations and major companies.

Consolidated Financial Highlights .............................................. 08
A Message from the President .................................................... 09

The BANDAI NAMCO Group will constantly strive to be a pioneer, aiming to deepen and widen the appeal ofentertainment and winning the hearts of people worldwide who enjoy having fun. Our ultimate goal is tobecome the World’s Most Inspiring Entertainment Group.

A message from Takeo Takasu.

Brand-New Synergies ..................................................................... 14
A special section explaining the Group’s Medium-Term Management Plan.

Directors and Corporate Auditors .............................................. 25
Corporate Governance .................................................................. 26
The BANDAI NAMCO Group’s CSR Initiatives ........................... 28
Overview of Main Group Companies ........................................ 30
Financial Section ............................................................................. 32
Corporate Information .................................................................. 67

Toys and Hobby
VisualLife-Style

CHARACTER

Networks

Amusement

Video Game
SoftwareVideo Game Software

TECHNOLOGYLOCATION

Amusement
Facility
Operations

01

04

Arcade Machines

Most
nt Group

Toys and Hobby

Life-Style
Visual andMusic Content

CHARACTER
Network

TECHNOLOGYLOCATION

Game
Contents
Amusement
Facility

The Business Portfolio of the BANDAI NAMCO Group05

Strategic Business06

Consolidated
Financial Highlights
NAMCO BANDAI Holdings Inc. and Consolidated Subsidiaries

Thousands of
U.S. dollars*1

Millions of yen except per share data and main financial indicators

2004*2For the years ended March 31

For the YearNet sales

2005*2

2006

2006

NAMCO BANDAI

NAMCO BANDAIBANDAI
NAMCO
BANDAI
NAMCO
BANDAI
NAMCO
BANDAI
NAMCO
BANDAI
NAMCO
BANDAI
NAMCO¥263,175¥172,594
27,651
15,43027,222
14,428
14,207
7,546
11,576
14,009
7,149
11,104¥269,946¥178,552
24,39815,08625,724
14,58911,225
9,465
11,53913,155
7,947
11,173¥450,829$3,837,822

35,669303,643

37,122

316,013

14,150120,456

24,020204,478

19,144

162,969

BANDAI
NAMCO
BANDAI
NAMCO¥228,076¥148,117
121,068
101,811¥240,290¥154,474
131,750
107,773¥386,651$3,291,487

243,6072,073,781

Per Share Data (yen and U.S.dollars*1)*4,5
Net income
BANDAI
NAMCO
Cash dividends
BANDAI
NAMCO¥142.28¥133.00
22.50
40.00

¥111.13¥ 83.63
30.00
40.00

¥54.39

$0.46

12.00

0.10

Operating income
Recurring income*3
Net income
Capital expenditures
Depreciation

At Year-End
Total assets
Total shareholders’ equity

Main Financial Indicators (%)
Return on equity*6

12.0%
7.6%
12.0
9.9

BANDAI
NAMCO
BANDAINAMCO

Return on assets*6

5.8%

8.9%
9.0%
11.0
9.6

9.6

*1 U.S. dollar amounts have been translated, for convenience only, at the rate of ¥117.47=U.S.$1, the approximate exchange rate on March 31, 2006.
*2 Figures for 2004 and 2005 are the consolidated figures for Bandai and NAMCO prior to the management integration.
*3 Recurring income is a Japanese accounting term denoting income before extraordinary items.
*4 Bandai implemented a 2:1 stock split on November 20, 2003. Net income per share in the fiscal year ended March 2004 was calculated as if the stock split had been implemented at the beginning of the fiscal year. Calculatedon the assumption that the stock split was implemented at the beginning of the fiscal year ended March 2004, per share dividends for the fiscal year ended March 2004 would be ¥15.00.
*5 Namco implemented a 2:1 stock split on November 19, 2004. Net income per share in the fiscal year ended March 2005 was calculated as if the stock split had been implemented at the beginning of the fiscal year. Calculatedon the assumption that the stock split was implemented at the beginning of the fiscal year ended March 2004, net income per share for the fiscal year ended March 2004 would be ¥66.50, per share dividends for the fiscal
year ended March 2005 would be ¥30.00, and per share dividends for the fiscal year ended March 2004 would be ¥20.00.
*6 Figures for total assets and shareholders’ equity as of March 31, 2006, are used in calculating ROE and ROA for the fiscal year ended March 2006.

Net Sales

Operating Income

Net Income(Millions of yen)

(Millions of yen)

(Millions of yen)

500,000

40,00015,000BANDAI

450,829

NAMCO

Total Shareholders’ Equity(Millions of yen)

12,667

NAMCO BANDAI Holdings

12,00030,000269,946

200,000

172,594
152,136

9,000

15,430178,552

6,000

15,086

100,000

107,305
96,133

121,068

96,647

101,811

107,773

154,777
4,116

100,000

9,470

3,000

6,133

08

131,750

7,546
116,116

10,000

FY02.3150,000

20,76420,000227,930

09,465

24,398244,950

200,000

11,225
10,64427,651
25,869263,175

243,607250,000

35,669400,000

300,000

14,15014,207

FY03.3

FY04.3

FY05.3

FY06.30

FY02.350,0002,035

FY03.3

FY04.3

FY05.3

FY06.30

FY02.3

FY03.3

FY04.3

FY05.3

FY06.30

FY02.3

FY03.3

FY04.3

FY05.3

FY06.3

A Message from the President

In September 2005, Bandai and NAMCO
established a joint holding company, NAMCO
BANDAI Holdings Inc., and made a new startas the BANDAI NAMCO Group.
The vision of the BANDAI NAMCO Group
is to become the “World’s Most Inspiring
Entertainment Group,” and its mission is toprovide entertainment that offers “Dreams, Funand Inspiration” to people around the world. Since
the management integration, we have reorganized
the Group at a pace that exceeded our initial plans,
and a vast array of possibilities is opening up
before us. We’re off to a brand-new future!

NAMCO BANDAI Holdings Inc.
President and Representative Director
Takeo Takasu

09

A Message from the President
Focusing Diverse Strengths
The BANDAI NAMCO Group is developing businesses in a wide range of entertainment
fields. We have established a holding company, which we believe is the ideal organizational structure for making use of the originality of the brands in each of ourfields while fully leveraging Group synergies. In formulating and implementing
operating strategies for Japan and overseas, a central role is played by our five SBUs—
Toys and Hobby, Amusement Facility, Game Contents, Network, and Visual and Music
Content—which encompass the operating companies in each field. In addition, we
have clarified the lines of responsibility and authority. At the same time, the AffiliatedBusiness Group provides support for the operations of each SBU.
NAMCO BANDAI Holdings Inc., in accordance with medium to long term
management strategies, determines the overall strategic direction of the Group andadvances Groupwide initiatives while respecting the independence of each SBU.

Group Organization

NAMCO BANDAI Holdings Inc.

• Management Strategy Committee

Strategic Business Units• CSR Committee
Social Contribution Committee
Environmental Project Committee
Crisis Management Committee
Compliance Committee

Toys and Hobby• Internal Control Committee• Waigaya (weekly meetings)

Core Company

BandaiAmusement Facility
Core Company

NAMCO

Game ContentsGroupwide Meetings

Core Company

NAMCO BANDAI Games

Network
Core Company

Bandai Networks

Visual and Music Content
Core Company

Bandai Visual

Affiliated Business Group
Support for Group Businesses

10Group Business Report Meeting
Character Strategy Meeting
Contents Strategy Meeting
Visual and Music Content& Network SBU Meeting
Shared Service Council

Enhancing Operational Breadth and Depth, andMaximizing Enterprise Value
The key objectives of the management integration were to focus the strengths ofBandai and NAMCO, to further enhance the breadth and depth of our businessactivities in the entertainment industry, which is marked by intense change andcompetition, and to maximize the enterprise value of the Group. The management
integration has allowed us, as an entertainment group, to operate in a wide range offields—such as toys, amusement facilities, arcade game machines, game software forhome video game consoles, network services, and visual software—in the global
market. We will aim to secure stable growth and to leverage Group synergies that makefull use of these operational fields.

Consolidated Performance in the Year under Review
For the fiscal year ended March 2006 (the year under review), strong performanceswere recorded by the Toys and Hobby SBU, which benefited from the worldwide
success of the Tamagotchi Plus series, and the Visual and Music Content SBU, where
the Mobile Suit Gundam series enjoyed Group synergies. However, in the Amusement
Facility and Game Contents SBUs, due to the sluggish market conditions and our slow
response to changes in customer needs, our performances did not meet the plannedlevels. In addition, with conditions in game markets expected to remain difficult, werecorded a valuation loss on inventories, such as game software, and, from a
conservative point of view, we recorded a valuation allowance for the deferred tax
assets that were on our books at the beginning of the fiscal year.
Accordingly, our performance did not meet our initial plans. We recorded net
sales of ¥450.8 billion, operating income of ¥35.7 billion, recurring income of ¥37.1
billion, and net income of ¥14.2 billion for the year under review.
On the other hand, in 2006 we have seen favorable signs, such as improving
market conditions in the amusement facility markets. We also plan to launch multiple
products and services that leverage Group synergies. We are determined to work
together to achieve the objectives of the Medium-Term Management Plan.
Major Initiatives
May 2, 2005 Announcement of management integration of Bandai and NAMCO.
September 29, 2005 Establishment of NAMCO BANDAI Holdings Inc.
NAMCO BANDAI Holdings Inc. listed on the First Section of the Tokyo Stock Exchange.

December 1, 2005 Transfer of a portion of Bandai and NAMCO’s management of subsidiary and affiliatedcompanies to NAMCO BANDAI Holdings Inc. through corporate separation.

January 2, 2006 Under the direction of NAMCO BANDAI Holdings (USA) Inc., a U.S. regional holding company,
affiliated operating companies restructured, including integration of home console game operations.

January 31, 2006 Bandai Logipal Inc. made a wholly owned subsidiary through a share-for-share exchange.
February 23, 2006 BANDAI NAMCO Group’s medium-term management plan announced.
March 31,2006 NAMCO’s amusement facility management operations transferred to the newly established NAMCO LIMITED.
Domestic game operations integrated under the newly established NAMCO BANDAI Games Inc.

June 1, 2006 Banpresto Co., Ltd., made a wholly owned subsidiary through a share exchange.

11

A Message from the President
Key Theme of Medium-Term Management Plan:
Strengthening, Enriching, and Expanding Portfolio Management
Under the Medium-Term Management Plan that commenced in April 2006, which was
our first plan since the management integration, the key theme is to increase enterprisevalue by strengthening, enriching, and expanding the BANDAI NAMCO Group’s
portfolio management. We combine business portfolios, where businesses aredeveloped in a wide range of fields; content portfolios, with extensive lineups ranging
from established content to new offerings; and regional portfolios, where operations
are developed in regions around the world. In our portfolio management, we use threedimensional, multifaceted combinations of these portfolios, thereby striving to achieve
ongoing, stable growth. Under the Medium-Term Management Plan, we will further
strengthen these portfolios, leverage synergies among them, and strengthen, enrich,and enhance our overall portfolio management. In particular, in strengthening ourbusiness portfolios, we will target the creation of a new SBU. We plan to spin off new
operations from one of the five existing SBUs. In addition, we will aggressively launch
new businesses, including alliances with outside partners and M&A activities, by taking
advantage of the strengths of the holding company organization, which facilitates open
business structure initiatives.
Three-Year Plan Figures (Consolidated)(¥ Million)

FY2006.3

FY2007.3(Target)

FY2008.3 (Target)

FY2009.3 (Target)

Net Sales

450,829

470,000

500,000

550,000

Operating Income

35,66940,00050,00058,000

ROA

9.6%

10.0%

12.0%

13.5%

ROE

5.8%

8.0%

9.5%

10.0%

Figures for total assets and shareholders’ equity as of March 31, 2006, are used in calculating ROA and ROE for the fiscal year ended
March 2006.

Medium / Long-Term Goals
FY2006.3

Sales: ¥450.8 billion
Operating Income: ¥35.7 billion
Overseas Sales: 19% of total

Present

12

Implementationof Three-Year Plan

FY2009.3 (Target)

Sales: ¥550 billion
Operating Income: ¥58 billion
Overseas Sales: 25% of total

Targeted Position in
Three Years, from a
Medium / Long-Term
Outlook

Progress toward Big Dreams

Sales: ¥1 trillion
Operating Income: ¥100 billion
Overseas Sales: 50% of total

Medium / Long-Term
Goals

Focused on a Bright Future
The BANDAI NAMCO Group has set long-term goals of ¥1 trillion in net sales and ¥100
billion in operating income. To achieve these goals, we will strive to be an organization
with number one positions in a wide range of entertainment categories. Our MediumTerm Management Plan is the first step toward realizing this objective, and accordingly
our consolidated performance objectives for the fiscal year ending March 2009, thefinal year of the plan, are net sales of ¥550 billion and operating income of ¥58 billion.
The plan’s objectives also include ROA of 13.5% and ROE of 10.0%.
To achieve these targets, we must expand our operations not only in Japan but
also overseas. Over the past 10 years, overseas sales have accounted for about 20%of Bandai and NAMCO’s combined sales, with minimal changes from year to year.
However, we have already implemented multiple initiatives in all overseas regions,targeting the leveraging of synergies that have resulted from the management
integration. By raising the percentage of overseas sales to 25% by the fiscal year ending
March 2009 and to 50% in the long term, we will make progress toward achieving ourgoal of ¥1 trillion in net sales.

Unlimited New Potential
NAMCO BANDAI Holdings Inc. had about 40,000 shareholders as of the end of March
2006, an increase of about 10,000 shareholders, principally made up of individual
shareholders, in just six months after the implemention of the management integration.
We believe that this growth is an indication of the high expectations the investors havefor the new BANDAI NAMCO Group, and we are very grateful for the support. At thesame time, we are committed to achieving strong results from the management
integration in order to meet the expectations of the shareholders who are supporting
the BANDAI NAMCO Group.
The management integration has opened up unlimited possibilities for the
BANDAI NAMCO Group in the creation of new inspirations in entertainment. In the
future, we will maintain a position of leadership by accelerating the integration andleveraging the synergies of the Group and strive to become the “World’s Most Inspiring
Entertainment Group,” providing “Dreams, Fun and Inspiration” to people of all ages
around the world. Everyone at the BANDAI NAMCO Group is working together with asense of confidence and excitement to open the doors to a new future.

August 2006

Takeo Takasu
President and Representative Director
NAMCO BANDAI Holdings Inc.

13

Brand-New
The Medium-Term Management Planof the BANDAI NAMCO Group

The BANDAI NAMCO Group is implementing a three-year medium-term management plan that covers the period
from April 2006 to March 2009. Under this plan, we will leverage the strengths of the Group and maximize thesynergies, thereby further enhancing our capabilities.

14

Synergies
Key Theme of the Medium-Term Management Plan
The key theme of the Medium-Term Management Plan is “strengthening, enriching, and expanding the BANDAI NAMCO
Group’s portfolio management.” Portfolio management is supported by management strategies, which are implemented
mainly by NAMCO BANDAI Holdings Inc., and by business strategies, which are implemented mainly by the SBUs.
Through these strategies, we will further enhance portfolio management, the Group’s greatest strength, andcreate a portfolio spiral effect among our wide range of business portfolios, globally oriented regional portfolios,
and abundant content portfolios, thereby increasing the Group’s enterprise value.

• Strengthening corporate governance• Effectively utilizing human resources• Building the optimal management system
Organizational reform
Consolidation of indirect operations
Implemented mainly by the holding company

NAMCO BANDAI Holdings Inc.

• Promoting the “Entertainment Hub Concept”
Content strategy
Domain strategy
Channel strategy• Strengthening overseas businesses
Implemented mainly by

Strategic Business Units

15

Brand-New Synergies
Under the Medium-Term Management Plan, we have three key management
strategies—strengthening corporate governance, effectively utilizing humanresources, and building the optimal management system. The holding company
is primarily responsible for implementing these strategies.
NAMCO BANDAI Holdings Inc., as the key promoter of the Group’s
management strategies, will formulate and implement medium-term
management plans, provide support for implementing business strategies,
oversee business activities, effectively allocate management resources, andpromote strategic tie-ups with other companies.

Strengthening corporate governanceIn order to strengthen our corporate governance, we will implement a range ofinitiatives in becoming a trusted company that can continually contribute to society.
Specifically, we will improve our corporate brand by introducing corporate brand use
and management standards, strengthening and monitoring our strategy and results
through the introduction of management tools, such as balanced score cards, andenhance our CSR and compliance systems. In this way, we will increase managementsoundness, transparency, and efficiency and, at the same time, build a corporate
governance system that facilitates timely information disclosure.

Effectively utilizing human resources
We believe that our employees are our most important asset and the engine ofour growth. In line with the management integration of Bandai and NAMCO, theknowledge and competence of Group employees will pave the way for our future.
Accordingly, we will take the necessary steps to enhance the know-how of ouremployees through Group exchange programs, such as implementing intra-Group
recruitment systems and transfer programs for our management-level personnel. We
will also strengthen our Group human resources training programs to enhance project
development skills and cultivate leaders. Through the introduction of new employment
rules, which consist of high-level professional contracts and specialist job categories, wewill create a work environment to promote opportunities to enable employees todemonstrate their strengths.

Building the optimal management system
Expanding operations and increasing efficiency are two key aspects of the management
integration. Our fundamental policy is to restructure operations to achieve the mostefficient and effective Group management system, and accordingly we have createdthree principal points of emphasis.
The first is “cooperation,” which will drive our organizational restructuring.
In mature markets, or in markets where we can increase our share through theapplication of the Group’s comprehensive strengths, we will focus on increasing
efficiency and leveraging economies of scale, by, for instance, integrating overlapping
departments within SBUs.

16

The second is “competition.” In growth markets, we will compete aggressively
under the current organization, including competition among members of the Group,
aiming to raise Groupwide enterprise value.
The third is “collaboration.” We will integrate the operations of indirect
departments, such as accounting, general affairs, human resources, and IT systems,
thereby reducing indirect costs and strengthening our profit base.
Since the management integration, the Group has implemented a range oforganizational restructuring measures in accordance with these basic policies. In
the Americas, we have established a regional holding company and taken otherrestructuring initiatives. In addition, from the viewpoint of “cooperation,” we haveintegrated our domestic game operations and made Bandai Logipal and Banprestowholly owned subsidiaries. We will continue to implement reorganization measures
to establish a system that will create synergies in the Group. In addition, throughmanagement utilizing Groupwide committees, such as the Management Strategy
Committee and the Group Business Report Meeting, we will bolster Group functions tofacilitate close cooperation among management and the execution and utilization ofsynergies among SBUs.
Furthermore, from the viewpoint of “collaboration,” we will increase theefficiencies in the indirect departments through the introduction of the Shared Service
Center. As the first step, we have consolidated the indirect departments of NAMCO
and NAMCO BANDAI Games. In the future, we plan to integrate these consolidated
departments with the indirect departments of Bandai and establish the Shared Service
Center. By the fiscal year ending March 2009, the final year of the Medium-Term
Management Plan, we are targeting a 15% reduction in the indirect costs of thesethree core companies, from the current level of ¥10 billion a year, with the introductionof shared services.
Building the Optimal Management System—Consolidation of Indirect Operations
Revising operations and raising personnel expertise

NAMCO BANDAI Holdings Inc.

April 2009
Shared Service Center

Group SSC
(Shared Service Center) to be launched

April 2008

Affiliated Business GroupPart of Group functions to be merged

April 2007
Back offices of 3 Strategic Business Units
to be integrated, Shared Service Center tobe establishedGame Contents

Amusement Facility

Toys and Hobby

3 Strategic Business Units

Cost reduction target for 3 main
companies—15% by FY09.3

April 2006
NAMCO and NAMCO BANDAI Gamesback offices consolidated

17

Brand-New Synergies
Under the Medium-Term Management Plan, we have two key businessstrategies—promoting the “Entertainment Hub Concept” and strengthening
overseas businesses. These strategies are principally the responsibility of theStrategic Business Units, each of which is focused on expanding its operations.

Promoting the “Entertainment Hub Concept”
Following the management integration of Bandai, with its strengths in character
merchandising, and NAMCO, with its technologies and extensive network of locations,
the BANDAI NAMCO Group has the ability to implement a comprehensive range ofactivities, from the creation and acquisition of content to product development andsales, and to provide products and services in a wide range of business domains. We
call this system, which is similar to a hub airport, the “entertainment hub” system.
Under the Entertainment Hub Concept, we have implemented the domain
strategy and the channel strategy, with the content strategy playing a central role. We
will target expansion and growth in Group operations by further strengthening andenhancing hub functionality. Specifically, under the content strategy, in addition tofurther strengthening Group content, we will take steps to create, acquire, and cultivate
superior content, such as strengthening cooperation with outside partners and creators
and utilizing M&A activities and alliances. Under our domain strategy, we will
horizontally broaden the scope of our content in wide-ranging business fields andcreate new domains through cooperation with outside partners, thereby expanding
our business. Under our channel strategy, in addition to development with our existing
distribution partners, through cooperation with new partners and the use of network
infrastructure, we will expand our distribution channels, thereby expanding ourchannels on a global scale.
The Entertainment Hub Concept

Character Merchandising
Broad Domain

Locations

Develop VerticallyDevelop Horizontally

Expand Territory

Content Strategy

Domain Strategy

Channel Strategy

Create, Obtain, and Cultivate
High-Quality Content

Expand Existing Domains throughDevelopment of New Categories

Bolster Space Creation Capabilities

Venture into New Domains

Expand Client Contacts

Technology

Strengthen Efforts with Partner Companies

18Strengthening overseas businesses
In our overseas business, each SBU will develop its own core operations around theworld. At the same time, the SBUs will establish close cooperative relationships with thecompanies that have regional oversight functions to make full use of the uniquecharacteristics of the region, thereby bolstering portfolio management by region.
In regard to regional oversight functions in the Americas, we reorganized theGroup in January 2006 and have created an organizational system that can perform
portfolio management functions that are similar to those in Japan. In Europe,
centralized in BANDAI S.A. and NAMCO EUROPE LTD., and in Asia, centralized in
BANDAI (H.K.) CO., LTD., we will enhance infrastructure and effectively allocate
management resources. To strengthen our operations in each region, we haveestablished a game company in Europe and two marketing companies in Asia.
Under this system, in the Americas we will enhance the appealing content of our
SBUs, including the Toys and Hobby, Game Contents, and Visual and Music Content
SBUs, from two directions—developing local content in the Americas and localizing

Net Sales by Geographic Segment(FY2006.3)

content from Japan. In Europe, in addition to expanding our geographical coverage, wewill enhance our business portfolio by expanding operations, such as amusement facility
and game contents operations, and strengthen product strategies by target. In Asia,

Europe

6.9%

Asia

2.4%

Americas

9.5%

meanwhile, we will bolster the roles of our production and sales bases. In particular, we
will strive to establish the character merchandising business model in China and India.
Japan

In line with these strategies, in the fiscal year ending March 2009, the final year

81.2%

of the Medium-Term Management Plan, we plan to increase the overseas sales
percentage to 25% and to strive for 50% over the long term.

Management System in the Americas—An Example of Our Direction in Overseas Markets

Transition to an organizational system that can perform portfolio
management functions that are nearly on a par with those in Japan
NAMCO BANDAI Holdings Inc.

NAMCO BANDAI Holdings (USA) Inc.

Regional responsibility for allocationof management resources and oversightBandai America Incorporated

Toys and Hobby SBU

NAMCO CYBERTAINMENT INC.

Amusement Facility SBU

NAMCO BANDAI Games America Inc.
NAMCO AMERICA INC.

Execution of strategies by SBUs
Game Contents SBU

NAMCO NETWORKS AMERICA INC.
BANDAI ENTERTAINMENT INC.

Visual and Music Content SBU

19

Brand-New Synergies
Business Strategy by SBU

VisionConstantly strive to create unique value forcustomers through advances in character
merchandising

Strategy
In the toys and hobby business, in the midst of industry reorganization, we are facing ashrinking domestic market due to the falling birthrate, diversifying consumer needs, andstructural change in the industry.
In Japan, in accordance with the “Entertainment Hub Concept,” we will expand
our operations around a core of popular content and reinforce tie-ups with external
partners, aiming to establish the number one position in all of our business categories.
In addition, we will expand our target customer range to include women and seniorcitizens and work to create new businesses through the integration of products andservices. Our objective for new businesses is to contribute ¥5 billion of sales in the fiscal
Since it was launched in March 2004,
the Tamagotchi Plus series has soldmore than 20 million units aroundthe world.

year ending March 2009.
In strengthening our overseas operations, we will strive to further expand
our business in the Americas, where we are working to improve our results byimplementing the principles of selection and concentration in products and content.
In Europe, we will work to expand our product lineup and strengthen our distribution
network. In Asia, meanwhile, we will utilize our character merchandising businessmodel in growth markets, such as China and India.

The DATA CARDDASS machine,which combines digital data and acard game, established a new category for the Toys and Hobby Strategic Business Unit.

Net Sales

Operating Income / Operating Income Margin(Billions of yen)
250
Japan

(Billions of yen)20
19.1

Overseas

200

181.0

(%)
15

19.0

Overseas

210.0

15.7

190.0

180.0

Operating Income
Margin (Right Scale)
Japan

15

16.5

10.6
10

9.0

150

146.0
137.0
134.6

8.7

8.7
10

132.5

100

11.2
10.0

13.5
10.0

5
5
50
The popular Power Rangers series
has boasted hit products for morethan 30 years in Japan and morethan 10 years overseas.

46.3

53.0

0

5.7

6.5

7.8

0
2006.3

20

47.5

5.5

64.0

2007.3(Target)2008.3(Target)2009.3(Target)02006.32007.3(Target)2008.3(Target)2009.3(Target)VisionDiversify entertainment facility operations
to strengthen revenue baseStrategy
In the amusement facility business, with increases in the consumption tax anticipatedin the future, key challenges include changes in the industry’s profit structure and thediversification of consumer preferences.
In response, we will aggressively open large-scale locations, in addition to
scrapping unprofitable facilities. At the same time, we will work to attract morecustomers through synergies based on the full use of the Group’s content. We will also
work to improve profitability by reevaluating our workforce allocation and will takesteps to accommodate new payment systems, such as electronic money. Furthermore,
we will diversify our operations with new business formats for specific customer groups
and expand our customer base by including younger customers, families, and seniorcitizens. Our objective for new formats is to contribute ¥30 billion of sales in the fiscal
year ending March 2009.
In our overseas operations, we will scrap unprofitable stores and expand thenumber of stores operated on a revenue-sharing basis in the Americas. In Europe, we

NAMJATOWN is an indoor theme
park with a range of features, including attractions, a food theme park,and a healing park.

will expand operations, centered on hybrid facilities, and we will extend the businessmodel used in the domestic market to Asia. These strategies will enable us to bolster
our profit foundation in each overseas region.

Net Sales

Operating Income / Operating Income Margin(Billions of yen)
120
Japan

114.0
104.0

Overseas

Operating Income
Margin (Right Scale)Japan
Overseas90.0

90(Billions of yen)
8

8.0

(%)
15
The Spa Resort Liberty, which was
opened in 2005 as the Group’s firstspa resort, is a project of our diverse
amusement facility operations.

7.0

6

79.4

10

4.8
98.8
60

76.5

4

89.0

2.5

30

7.5

6.6

5.3

66.3

7.0

6.7

4.6

5

2
3.1 2.4
13.0

13.5

15.0

15.2
0

0
2006.32007.3(Target)2008.3(Target)2009.3(Target)

0.5
0.4
0.2
0.1
2006.32007.32008.32009.3(Target)(Target)(Target)0

NAMCO Aso-Base draws on Groupsynergies to enhance the enjoyment
of Bandai toys and character apparel.

21Brand-New Synergies

VisionBecome the world’s premier quality game maker,
continually providing games that are fun,enjoyable, and satisfying

Strategy
In the game contents business, our markets are anticipating the launch of the next generationof game platforms. In this setting, key challenges include dealing with changing customer needs
and rising content development costs.
Accordingly, we will work to share know-how and technologies among the fields ofarcade game machines, home game software, and mobile content. We will also strive to build
a stable profit base through effective content utilization.
In home game software, we will respond promptly to customer needs with a balanced
mix of titles for each platform. Moreover, we will endeavor to increase efficiency by optimally
The Mobile Suit Gundam: Senjo no
Kizuna dome-type game machine
features team competition and wasdeveloped jointly by Banpresto and
NAMCO BANDAI Games.

allocating creators and reevaluating the development process. We will also work aggressively inthe development of software for next-generation platforms and accumulate technical knowhow. In arcade game machines, we will bolster the content links with home game software andenhance the development of games that draw on Group synergies, such as Mobile Suit
Gundam: Senjo no Kizuna. Through these initiatives, we will provide machines that better meet
our customer needs. In the distribution of content for mobile phones, we will continue to utilize
the content developed in-house and will expand it through the content links with home gamesoftware and arcade game machines. In addition, we will strive to create content that can beused around the world and expand overseas revenues.

In addition to existing gamemachines, we provide multiplatform
software for next-generation gamemachines that takes advantage ofour planning, development, andtechnical capabilities.

Net Sales

Operating Income (Loss) / Operating Income Margin(Billions of yen)
200
Japan

(Billions of yen)
25

Overseas

153.0

24.0

(%)
20

14.1

15

Overseas

170.0
153.0

Operating Income
Margin (Right Scale)
Japan

20.0

20

150

13.1

130.4
15

115.0
106.5

100
105.7

116.0

10

19.6

13.0
10.5
8.1

10

16.7
8.5
11.0

The first version of the Tamagotchi
Connection: Corner Shop series ofNintendo DS software, which utilizes
the characters’ worldview, sold morethan a million units.

5

50

24.6

46.5

55.0
0

0

2.0

3.3

4.4
0

– 0.9

–2.5

2006.3

22

37.0

5

11.3

2007.3(Target)2008.3(Target)2009.3(Target)2006.32007.3(Target)2008.3(Target)2009.3(Target)Vision
Effectively utilize Group content, technicaldevelopment capabilities, and system construction
capabilities and make a leap forward to become
a comprehensive network company

Strategy
In the network business, major challenges include responding to continued progress inmobile phones—such as larger capacities and more-advanced functionality and the start ofone-segment broadcasts—and responding to the expansion and growth of the network
environment stemming from enhanced infrastructure, such as the broadband environment.
In response, we will make full use of Group assets, including superior content, andaggressively plan and develop appealing network content. At the same time, we will
strengthen our ability to develop and propose new, industry-leading technologies.
Specifically, we will develop and launch services based on new technologies and aggressively
expand our solutions business for corporations by utilizing system construction and content
utilization capabilities. Also, we have begun to establish new businesses, such as anentertainment portal site that will incorporate games, music, characters, commerce, andcommunication and will be accessible through a range of networks, such as mobile phones

Bandai Networks and NAMCO
BANDAI Games developed SD
Gundam RPG for mobile phones.

and PCs. Other new businesses include Internet advertising operations that leverage web
sites and content with customer-drawing power. Through these initiatives, we will make aleap in becoming a comprehensive network company.

Net Sales

Operating Income / Operating Income Margin(Billions of yen)
20
Japan

(Billions of yen)
2.5

16.0
14.5

15

12.5

Operating Income
Margin (Right Scale)
Japan

2.3

(%)
25

2.1
2.0

13.5
1.5

1.8

1.9

20

14.5

14.4

In addition to standby screen images
and games, our content for mobile
phones offers abundant variations,such as Internet-based sales.

14.4

15

14.1

10
1.0

10

0.5

5

5

0

0
2006.32007.3(Target)2008.3(Target)2009.3(Target)02006.32007.3(Target)2008.3(Target)2009.3(Target)We are developing a broad range of
products sold only over the Internet,
such as bike helmets with character
themes.

23

Brand-New Synergies

VisionBecome a content production business group thatcan create quality content and achieve efficientmanagement

Strategy
In the visual and music content business, our challenges include developing content
businesses for new media and responding to new, advanced hardware.
Accordingly, we will build a business model for new media, such as visual andmusic content distribution and electronic publishing. At the same time, we will movequickly to make full use of the Group’s content for new hardware.
In the Medium-Term Management Plan, the Visual and Music Content SBU has
the important role of original content creation in accordance with the “Entertainment
Hub Concept,” and the unit will also strive to enhance its ability to create or acquirecontent and will develop content for new media. Further, we will take strategic steps tobolster our presence as a content holder in such areas as broadband distribution and
The Mobile Suit Gundam series
has maintained its popularity witha broad range of consumers, fromchildren to adults, for more than
20 years.

the operation of animation portal sites by establishing a new company, thereby
maximizing the value of our content and, in turn, our profits.

Net Sales

Three Group companies worked
together to develop THE WINGS OF
REAN, our first original animation forbroadband.

Operating Income (Loss) / Operating Income Margin(Billions of yen)
50

(Billions of yen)
8
7.6

Japan
Overseas

43.3
37.5

40

40.0

42.0

Operating Income
Margin (Right Scale)Japan
Overseas

6.2

6

7.0

6.7

6.4

20

17.1
16.7

16.8
4

30

20

35.5

37.5

24

6.6

6.9

2

5

0.1

0

0.1

0.1

–1.4
0

2.5
2.0
1.1
2006.32007.32008.3(Target)(Target)

10

39.2

10
The .hack series is utilizing a media
mix that extends to TV animation,
game software, and comics.

15

14.3
6.3

42.2

(%)
25

2.8
2009.3(Target)–22006.32007.3(Target)2008.3(Target)2009.3(Target)0Directors andCorporate Auditors(As of June 26, 2006)

President andRepresentative Director
Takeo Takasu

Director
Masahiro Tachibana

Director
Masaatsu Hayakawa

Director
Keiji Tanaka

Director
Junji Senda

Director (Part-time)
Kazunori Ueno

Director (Part-time)

Director (Part-time)

Director (Outside)

Shukuo Ishikawa

Jun Higashi

Masatake Yone

Director (Outside)

Statutory Auditor(Full-time)

Kazuo Ichijo

Koichiro Honma

Statutory Auditor(Full-time)
Katsutoshi Hirasawa

Statutory Auditor(Outside)

Statutory Auditor(Outside)

Osamu Sudo

Kouji Yanase25

Corporate
GovernanceFundamental Approach to Corporate GovernanceAs the “World’s Most Inspiring Entertainment Group,” the BANDAI NAMCO Group will continue to provide“Dreams, Fun and Inspiration” to people around the world through entertainment. Our highest priority is theprovision of benefits to all of the stakeholders who support our business activities. We believe that in striving tomaximize enterprise value over the long term, bolstering corporate governance is an important management issue.

Corporate Governance System
The Company is working to enhance the supervision of management. The board of directors comprises 10 members, ofwhom 2 are outside directors. Moreover, in order to ensure that the Company responds to changes in the management
environment as promptly as possible and to further clarify the responsibilities of directors, the term of directors has been set at
one year or less.
The Company uses the statutory auditor system. The board of statutory auditors comprises four auditors, of whom two
are outside auditors. Two of the statutory auditors are full-time. In accordance with the allocation of responsibilities as
determined by the board of statutory auditors, each statutory auditor conducts audits, working with the independent
auditors as needed.
The Internal Auditing Division rigorously audits business execution, and the independent auditors provide accountauditing. With close interaction centered on the statutory auditors, the Company’s internal control systems are continuallymonitored, and any issues are identified and recommendations for resolving those issues are provided.
General Meeting of Shareholders
Appointment / Dismissal Appointment / Dismissal

Auditing

Board of Directors

Appointment / Dismissal

Board of Statutory Auditors

10 directors(of whom 2 are outside directors)

Account Auditing
Reports on Results
Independent Auditors

4 statutory auditors(of whom 2 are outside statutory auditors)

Appointment / Dismissal
Supervision
Auditing
Personnel Committee

Representative Director
Reports

Directions
Reports
Directions

Committees
Internal Auditing Division
Cooperation

CSR Committee

Management Strategy Committee
Projects
Auditing

Auditing

Group Business Report Meeting
Policy Directions
Reports

BANDAI NAMCO Group Companies

26

Crisis Management Committee,
Compliance Committee

Top management meetings attended by directors and statutory auditors are shown below.
Meeting Name

Schedule

Agenda / Purpose

Participants

Board of Directors

Monthly

Resolutions and reports on matters prescribed by the Company Law. Resolutions,

Directors, statutory auditors

deliberations, and reports on matters related to the BANDAI NAMCO Group.
Management Strategy Committee

Monthly

Deliberations on BANDAI NAMCO Group management strategies,

Inside directors, full-time statutory

business creation, and business expansion.

auditors, others depending on
meeting topics

Group Business Report Meeting

Waigaya Meeting

Monthly

WeeklyReports on BANDAI NAMCO Group business affairs and deliberations on

Full-time directors, full-time statutory

business issues and problems.

auditors, SBU representatives, others

Weekly reports on divisions supervised by NAMCO BANDAI Holdings’ directors.

Full-time directors, general managers

As shown in the table above, the Company holds a variety of top management meetings. With the representative
director, the director with chief responsibility for information-related issues, and other directors attending these meetings,
the BANDAI NAMCO Group has established a system that facilitates timely tracking and responding to Group management
information. Moreover, the Company has established the Personnel Committee. Outside directors represent half of themembers of this committee, which objectively and neutrally considers personnel and compensation issues regarding directorsof the Company as well as other matters that are referred to it.
In addition, we hold regular meetings of the Compliance Committee, which is led by the president. This committee
is in charge of monitoring and supervising important issues related to compliance and has established a system to prevent
violations of laws and regulations and to ensure prompt action in the event of any incidents that could be a legal or
regulatory violation.
In crisis management, the Crisis Management Committee, which is led by a director, meets on an as needed basis andworks on behalf of the BANDAI NAMCO Group to prevent crisis situations and to ensure a prompt response if such situations
do occur.
The Group comprises five Strategic Business Units (SBUs) and an Affiliated Business Group that handle Groupwide
functions. In each SBU, operating strategies are formulated and implemented, centered on that SBU’s core company.
Under the Medium-Term Management Plan that began in April 2006, management strategies are mainly implemented
by the holding company and business strategies are mainly implemented by the SBUs. The key theme of the plan is“strengthening, enriching, and expanding the BANDAI NAMCO Group’s portfolio management.”
Overall Group strategies are formulated by such committees as the Management Strategy Committee, the Group
Business Report Meeting, and the CSR Committee.

Internal Control Systems
From the fiscal year ending March 2007, to further enhance its internal control systems and to provide a sound foundation
for internal control on a Groupwide basis, the Group has established basic policies in each of the following areas and is
working to bolster its internal control systems.
1. A system for ensuring that the directors conform to laws, regulations, and the articles of incorporation in the executionof their duties.
2. A system for storing and controlling information concerning the execution of the duties of directors.
3. Regulations concerning the management of the risk of losses and other systems.
4. A system for ensuring that directors execute their duties efficiently.
5. A system for ensuring that employees’ duties conform to laws, regulations, and the articles of incorporation.
6. A system for ensuring that work is carried out appropriately by the Group, comprising the company, its parent
company, and its subsidiaries.
7. Items concerning employees requested by auditors to assist the auditors in the performance of their duties.
8. Items concerning the independence of such employees described in the previous section from the directors.
9. A system for reports by directors and employees to the statutory auditors and a system for other reports to the statutory
auditors.
10. Other systems for ensuring that the audits performed by the statutory auditors are effective.

27

The BANDAI
NAMCO
Group,s CSR
Initiatives
The BANDAI NAMCO Group’s corporate philosophy is to provide “Dreams, Fun and Inspiration” to people aroundthe world through entertainment based on creativity and boundless enthusiasm. To ensure that we can continue
to provide “Dreams, Fun and Inspiration,” we have formulated Groupwide CSR initiatives that include three typesof responsibilities.
In accordance with these basic responsibilities, a range of initiatives are implemented by the CSR Committee
and its sub-committees, the Social Contribution Committee, the Environmental Project Committee, the Crisis
Management Committee, and the Compliance Committee.

Legal and ethical responsibilities (compliance)

Legal and ethical responsibilities

We have formulated basic compliance standards for Group companies, officers, and employees in Japan and overseas, and wecontinually monitor the activities to ensure appropriate observance of legal and ethical standards.

(compliance)

Environmental and social responsibilities(safety / quality, environmental conservation, cultural / social support activities)
Safety / quality initiatives
We follow industry and in-house standards, and we have built a system that facilitates the achievement of higher levels of safety
and quality, so that customers can use our products with confidence.
Environmental conservation initiatives
We are aggressively implementing forward-looking environmental conservation measures to ensure that we can continue to provide“Dreams, Fun and Inspiration” to people around the world.
Cultural / social support activities
We are also active in areas outside the provision of products and services, such as museum operations and volunteer activities.

Environmental and social
responsibilities(safety / quality, environmental
conservation,
cultural / social support activities)

Economic responsibilities
Economic
responsibilities

We are continually working to enhance management transparency and monitoring the management plans and conditions of Group
companies. Moreover, we are working to provide maximum returns to society and stakeholders by selecting the optimal operational
fields for Group development and focusing our management resources in these fields.

TopicsManufacturing Safe, Reliable Products
In the Group’s broad range of product fields, we follow all legal and industry quality and safety
standards, and we have also established our own more-rigorous in-house standards, which are
updated as needed, such as due to changes in the operating environment.
For example, to verify such characteristics as safety, strength, and durability, Bandai has morethan 300 inspection items. In accordance with product characteristics, appropriate items are selected
Dropping products to test for
qualityfor inspections. In addition, for NAMCO BANDAI Games arcade game machines, we design parts andsystems with concern not only for customer safety but also for maintenance in the arcades.

Packaging Reduction
In addition to implementing measures to reduce packaging, such as decreasing packaging space ratiosand developing packaging-free products, we are also working to shift toward the use of lowerenvironmental-impact packaging. Furthermore, we are working to reduce waste by taking measureswith the packaging used for the distribution of amusement machines and other products.
Packaging-free product from
Bandai28

Social Welfare
In 1985, we developed TalkingAid, a portable assistance device for people that have difficultyin speaking, and since that time we have continued to improve this product and enhance its
functionality. We also develop and market rehabilitation-entertainment machines, which areenhanced versions of arcade game machines that are designed to provide both fun and physicalrehabilitation. In 2005, we used the experience that we have cultivated in these operations to open
Kaikaya, a day-care service center for senior citizens. Through these initiatives, we are
NAMCO’s TalkingAid

implementing a range of activities that combine entertainment and social welfare.

Wide-Ranging Environmental Impact Reduction
Bandai Logipal has acquired Green Management Certification, which is given to transportationcompanies that implement low-environmental-impact operations. Furthermore, NAMCO
ECOLOTECH is conducting product planning, development, and sales of low-environmental-impact
products, such as waste processing equipment and deodorization equipment.
Bandai Hobby Center(plastic model plant)

In addition, we are conducting green procurement in arcade game machine operations andimplementing a range of energy-saving and resource conservation measures at Group work sites.
At the Bandai Hobby Center, a plastic model plant that opened in 2006, we are taking a
range of steps—such as the use of solar power generation and raw material recycling—with thegoal of making it the first plant in the domestic toy industry to receive green certification.

Bandai Logipal low-emission truck

Human Resources
The BANDAI NAMCO Group believes that its employees are its most important asset. Accordingly, we are working to create
systems and environments that help employees to maximize their abilities.
In order to provide a challenging environment to bring out the best in our employees, we recruit for open positions on
a Groupwide basis. In addition, we solicit proposals for new businesses and internal reforms, provide monetary support forpromising plans, and work to implement them. We also have a range of training programs, such as a training program fornext-generation leaders that is attended by Group employees. Moreover, with a range of systems to support a balance
between home and work life, such as maternity and child-care leave, we are working to support our employees.

Social Contribution
We are conducting a variety of activities to help children enjoy culture and science, such as
operating the World Toy Museum, which has a collection of antique toys from the 18th to 20th
centuries, and holding events that draw on a collection that includes many items created by the
famous inventor Thomas Edison. In addition, the Group supports the activities of Japan’s Toy
Libraries through such means as donations to the Japan Toy Library Foundation, which provides
children who have physical and mental challenges the chance to play with toys and have fun. We
Bandai’s World Toy Museum

also provide assistance to the New Technology Foundation, which is active in R&D, promotion, andsupport activities in science and technology.

Local Community Contribution Activities
We have made space available in Bandai’s head office for a child-care center that is certified by
Tokyo prefecture. In addition, we are implementing a range of communication activities in local
areas, such as inviting community residents to events at Bandai head office and holding events atamusement facilities.
Child-care center in Bandai’s head
office29

Overview of Main
Group Companies(As of July 31, 2006)

NAMCO BANDAI Holdings Inc.

Planning and execution of medium- and long-term management strategies; support for business strategy
implementation by Group companies (Tokyo Stock Exchange, First Section)

NAMCO BANDAI Holdings (USA) Inc.

Execution of North American regional strategy; management guidance and support for North
American operating companies

Toys and Hobby Strategic Business Unit
Bandai Co., Ltd.

Planning, production, and sales of toys, apparel, and vending machine products, etc.

Megahouse Corporation

Planning, manufacturing, and sales of toys, etc.

Popy Co., Ltd.

Manufacturing and sales of toys, etc.

Seika Co., Ltd.

Planning, development, and sales of stationery and sundries, etc.

Seeds Co., Ltd.

Manufacturing of toys, etc.

Plex Co., Ltd.

Planning and design of character-based products

Sunlink Co., Ltd.

Operation and sales of vending machine products, etc.

People Co., Ltd.*

Planning, manufacturing, and sales of toys for infants (JASDAQ)

Bandai America Incorporated

Sales of toy-related products

BANDAI S.A.

Regional management functions; sales of toy-related products

BANDAI U.K. LTD.

Sales of toy-related products

BANDAI ESPAÑA S.A.

Sales of toy-related products

BANDAI (H.K.) CO., LTD.

Regional management functions; import, export, manufacturing, and sales of toy-related products

BANDAI ASIA CO., LTD.

Sales of toy-related products

BANDAI INDUSTRIAL CO., LTD.

Manufacturing of toy-related products

BANDAI KOREA CO., LTD.

Manufacturing, import, and sales of toys, etc., and licensing operations

CREATIVE B WORKS CO., LTD.

Sales of toy-related products

Amusement Facility Strategic Business Unit
NAMCO LIMITEDManagement of amusement facilities

Pleasure Cast Co., Ltd.

Operation of amusement facilities

Hanayashiki Co., Ltd.

Operation of Asakusa Hanayashiki amusement park

St. Tropez Ltd.

Management of amusement facilities; real estate leasing operations

NAMCO SPA RESORT LTD.

Management of spa facilities

Yunokawa Kanko Hotel Co., Ltd.

Management of tourist hotels

NAMCO CYBERTAINMENT INC.

Management of amusement facilities

NAMCO OPERATIONS EUROPE LTD.

Management of amusement facilities

NAMCO OPERATIONS SPAIN S.L.

Management of amusement facilities

NAMCO ENTERPRISES ASIA LTD.

Management of amusement facilities

SHANGHAI NAMCO LTD.*Management of amusement facilities; manufacturing and sales of amusement machines, etc.

* Companies accounted for by the equity method30

Game Contents Strategic Business Unit
NAMCO BANDAI Games Inc.

Planning, development, and sales of game software and arcade machines, etc.

Banpresto Co., Ltd.

Planning, development, and sales of arcade machines, amusement prizes, and game software

Bec Co., Ltd.

Planning and development of game software

Banpresto Sales Co., Ltd.

Sales of amusement prizes, etc.

Banpresoft Co., Ltd.

Planning and development of game software

Monolith Software Inc.

Planning, development, and sales of game software

NAMCO TALES STUDIO LTD.

Planning, development, and sales of game software

BANPRESTO (H.K.) LTD.

Manufacturing and production management of arcade machines and prizes

NAMCO BANDAI Games America Inc.

Planning, development, and sales of game software

NAMCO AMERICA INC.

Sales of arcade machines

NAMCO NETWORKS AMERICA INC.

Development and distribution of content for mobile phones

NAMCO EUROPE LTD.

Regional management functions; manufacturing and sales of arcade machines and development
and distribution of content for mobile phones

NAMCO BANDAI Games Europe SAS

Sales of game software, etc.

Network Strategic Business Unit
Bandai Networks Co., Ltd.

Development and provision of network content and network solutions (JASDAQ)

VIBE Inc.

Development and provision of network content and network advertising

Visual and Music Content Strategic Business Unit
Bandai Visual Co., Ltd.

Planning, production, and sales of visual software, etc. (Tokyo Stock Exchange, First Section)

Sunrise Inc.

Planning and production of animation

Bandai Channel Co., Ltd.

On-demand delivery of content, such as animations

Lantis Co., Ltd.

Planning, production, sales, and management of music content

BANDAI ENTERTAINMENT INC.

Planning, production, sales, and copyright management of visual content

Affiliated Business Group
Bandai Logipal Inc.

Logistics management, warehousing, and transportation operations

Banalex Corporation

Staffing services, leasing and financial services, and building management

Artpresto Co., Ltd.

Planning and design of various printed materials

NAMCO ECOLOTECH LTD.

Development and sales of environmental equipment

NAMCO SUPPORTERS LTD.

Building management, real estate, and insurance agency

NAMCO TRADING LTD.

Vending machine installation and management; distribution of content for mobile phones

Happinet Corporation*

Wholesale of toys and video game consoles (Tokyo Stock Exchange, First Section)

Sotsu Agency Co., Ltd.*

Planning and development of advertising and copyright business (JASDAQ)

Italian Tomato Ltd.*Management of directly operated restaurants; franchise operations* Companies accounted for by the equity method
31

Financial Section

Contents

32

Consolidated Six-Year Financial Summary

33

Financial Review

34

Consolidated Balance Sheet

40

Consolidated Statement of Income

42

Consolidated Statement of Shareholders’ Equity

43

Consolidated Statement of Cash Flows

44

Notes to Consolidated Financial Statements

45

Independent Auditors’ Report66Consolidated Six-Year Financial Summary
NAMCO BANDAI Holdings Inc. and Consolidated Subsidiaries

Millions of yen except per share data and main financial indicators

2001*1For the years ended March 31

2002*1

2003*1

2004*1

2005*1For the Year:Net sales
Gross profit
Selling, general andadministrative expenses
Operating income (loss)
Recurring income (loss)*2
Net income (loss)
Capital expenditures
Depreciation
Cash flows from operating
activities
At Year-End:Total assets
Current assets
Current liabilities
Total shareholders’ equity
Per Share Data (yen):
Net income (loss) per share
Cash dividends

BANDAI
NAMCO
BANDAI
NAMCO
BANDAI
NAMCO
BANDAI
NAMCO
BANDAI
NAMCO
BANDAI
NAMCO
BANDAI
NAMCO
BANDAI
NAMCO
BANDAI
NAMCO
BANDAI
NAMCO
BANDAI
NAMCO
BANDAI
NAMCO
BANDAI
NAMCO
BANDAI
NAMCO
BANDAI
NAMCO

Main Financial Indicators (%):
Return on equity (ROE)*3, 5
Return on assets (ROA)*4, 5Selling, general and administrative expenses to net sales
Operating income (loss)
to net sales
Net income (loss) to net sales
Shareholders’ equity ratio
Debt/equity ratio

2006
NAMCO BANDAI
Holdings Inc.
(Consolidated)

BANDAI
NAMCO
BANDAI
NAMCO
BANDAI
NAMCO
BANDAI
NAMCO
BANDAI
NAMCO
BANDAI
NAMCO
BANDAI
NAMCO¥217,010¥146,554¥227,930¥152,136¥244,950¥154,777¥263,175¥172,594¥269,946¥178,552¥450,829

79,91825,816
64,102
28,682
15,816(2,866)
16,34690,86634,85370,102
28,72020,764
6,133
21,993

106,801
37,52980,932
28,05925,8699,470
26,435116,258
49,08888,60733,65827,651
15,43027,222

116,801
47,55592,40332,46924,39815,08625,724

156,565(3,477)
12,897(6,000)
7,107

4,664
10,644
2,035
7,212

8,777
12,667
4,116
8,593

14,428
14,207
7,546
11,576

14,58911,225
9,465
11,53916,197
6,362
14,623
14,83812,332

11,943
6,505
14,08526,56815,368

10,376
6,885
11,22728,00915,89014,009
7,149
11,104
20,033
12,931

13,155
7,947
11,173
14,8393,172¥205,558¥197,424¥225,683¥228,076¥240,290¥138,962
121,017
51,261
67,40930,275
107,217¥144,140
126,966
61,346
62,20829,659107,305¥143,214
158,782
68,08967,21535,920116,116¥148,117
163,13173,61461,31933,860121,068¥154,474
173,40282,666
68,862
33,219131,750

91,646

96,13396,647

101,811

107,773¥ 265.47¥(109.09)
30.00
15.00

¥217.62¥ 36.95
30.00
17.00

¥254.09¥ 72.35
40.00
30.00

¥142.28¥133.00
22.50
40.00

¥111.13¥ 83.63
30.00
40.00

12.9%
(6.3)%
7.7
(2.3)
29.5
19.6
7.3

9.9%
2.2%
10.9
3.3
30.8
18.9
9.1

11.3%
4.3%
12.5
6.1
33.0
18.1
10.6

12.0%
7.6%
12.0
9.9
33.7
19.5
10.5

8.9%
9.0%
11.0
9.6
34.2
18.2
9.0

(2.0)
5.9
(4.1)
52.2

4.0
4.7
1.3
54.4

6.1
5.2
2.7
51.5

8.9
5.4
4.4
53.1

8.4
4.2
5.3
54.8

66.0
33.8
19.3

66.7
18.1
18.6

67.5
31.6
16.3

68.7
21.1
6.7

69.8
21.4
6.7

120,896
35,66937,122
14,15024,02019,14431,809¥386,651
240,635
107,528
243,607¥54.3912.00*6

5.8%
9.6
26.8
7.9
3.1
63.0
13.3

*1 Figures for 2001 to 2005 are the consolidated figures for Bandai and NAMCO prior to the management integration.
*2 Recurring income (loss) is a Japanese accounting term denoting income before extraordinary items.
*3 ROE = Net income (loss) / Average total shareholders’ equity*4 ROA = Recurring income (loss) / Average total assets*5 Figures for total assets and shareholders’ equity as of March 31, 2006, are used in calculating ROA and ROE for the fiscal year ended March 2006.
*6 In lieu of interim dividends, share transfer payments of ¥18 per share were paid to shareholders of Bandai and ¥12 were paid to shareholders of NAMCO.

33

Financial Review■ Overview of Performance

SG&A Expenses:

Selling, general and administrative (SG&A) expenses were ¥120.9
In the fiscal year ended March 31, 2006, corporate earnings werebillion, and the ratio of SG&A expenses to net sales was 26.8%.

strong in Japan and corporate sentiment improved moderately.

Major items included advertising and promotion of ¥31.1 billion,

In addition, capital investment continued to increase. Although

directors’ remuneration and employees’ wages of ¥28.2 billion,rising crude oil prices and other factors adversely affected consumer

retirement and severance benefits of ¥1.1 billion, and R&D expense

spending, employees’ wages followed a moderate upward trend,of ¥20.2 billion.

and consumer spending was firm overall.
In the entertainment industry, global competition intensified

Operating Income:further due to the spread and expansion of network environments

Operating income was ¥35.7 billion, and the operating income

stemming from technological innovation. In Japan, the markets are

margin was 7.9%.

characterized by ongoing trends of fewer children per family
household and greater diversity in leisure activities. As a result, toOther Income (Loss):secure stable revenues, companies must attract customers throughGain on sales of investment securities was ¥3.1 billion, while loss on

aggressive research and development activities and the creation andimpairment of fixed assets was ¥3.0 billion. As a result, net otheravailability of appealing products and services.

loss was ¥0.1 billion.

In the current environment, on September 29, 2005, Bandai Co.,
Ltd., and NAMCO LIMITED implemented a management integration

Net Income:to establish NAMCO BANDAI Holdings Inc., thereby broadening

With conditions in the game market expected to remain

and strengthening their business operations and enhancing

challenging, the Company strictly assessed inventories, such as

shareholder value.

inventories of home video game software, and recorded a valuation

During the year under review, the Tamagotchi Plus series was

loss. In addition, from a conservative accounting perspective, we

popular around the world, and strong performances were reported

established a valuation allowance against deferred income tax

by Tamagotchi Connection: Corner Shop for the Nintendo DS andassets at the beginning of the fiscal year. As a result, net income

Mario Kart Arcade GP, an arcade game machine. The Mobile Suitwas ¥14.2 billion and net income per share was ¥54.39.

Gundam series benefited from Group synergies and made a solid
contribution to the Company’s performance. However, in the home

■ Business Segment Overview

video game software market, in addition to sluggish market conditions, the Company was unable to respond swiftly to changing

Toys and Hobby SBU

customer preferences, and sales of major titles were weak.

In Japan, the Tamagotchi Plus series, including related products,
reported extremely strong results. In addition, DATA CARDDASS,Net Sales:

which combines digital data and card games, also performed well,

The Company reported consolidated net sales of ¥450.8 billion. In

principally with such characters as Dragon Ball Z. Other popular

the domestic market, sales were ¥374.3 billion. Overseas, sales

products included girls’ toys and children’s apparel based on thewere ¥44.1 billion in the Americas, ¥31.2 billion in Europe, andPretty Cure: Max Heart line, Power Rangers toys for boys, and¥32.1 billion in Asia.

children’s apparel and goods based on MUSHIKING: The King ofBeetles.

Cost of Sales:

Overseas, the Company worked to build a stable revenue

Cost of sales was ¥294.3 billion, and the ratio of cost of sales to net

platform in the Americas by implementing the principles ofsales was 65.3%. Gross profit was ¥156.6 billion.

selection and concentration in characters and product categories.
Sales in Europe and Asia remained strong, centered on the Power
Rangers and Tamagotchi series.
As a result, the Toys and Hobby SBU recorded sales of ¥181.0
billion and operating income of ¥19.1 billion.

34

Amusement Facility SBU

subscribers increasing 2.9%, to 980 thousand subscribers at the

In Japan, the Company took steps to activate the amusement

end of the year under review. In the Americas, more mobile carriers

facility market, such as launching Mario Kart Arcade GP in theare offering games and the number of subscribers is increasing. In

second half of the fiscal year. We also focused on attracting new

Europe, however, delays in introducing new services and othercustomers with a newly developed food theme park and a full-scale

factors resulted in weak results.

entry into the spa resort facility business. However, these initiatives
were not sufficient to offset the sluggish market conditions in the

As a result, the Game Contents SBU recorded net sales of ¥130.4
billion and operating income of ¥10.5 billion.

first half of the fiscal year and the declining popularity of prize
game machines. Net sales at existing directly managed locations

Network SBU

and amusement facilities were down 1.5% from the previous year.

In its content distribution services for mobile phones, Bandai

Overseas, we continued taking steps to counter challenging

Networks Co., Ltd., recorded a decrease in the number of sub-market conditions in the Americas, such as expanding revenue-

scribers for stand-by screens and wallpaper, and as a result the total

sharing locations (where revenues derived from coin-operated game

number of fee-paying subscribers declined. At the end of the fiscal

machines are shared), closing unprofitable sites, and implementing

year under review, Bandai Networks had 3,960,000 paid

other cost-cutting measures. Nonetheless, successive hurricanes,

subscribers, a decline of 3.3% from the previous fiscal year-end. In

rising gasoline prices, and other factors had a negative effect on

this setting, the company took steps to reinforce its revenue basemarket conditions, which were sluggish overall. Net sales at existingby actively introducing high-value-added content, such as Gundam

directly managed locations were down 3.0% from the previous

Network Online Mobile, a Mobile Suit Gundam simulation game.

year. In Europe, sales were strong, particularly at amusement

As a result, the average revenue per subscriber increased. Strong

complexes in the United Kingdom, and in Asia the Company

contributions to Bandai Network’s performance were also made byintensified its product development, based on prize games andthe provision of new technologies—such as 2D Vector Engine,other original products.

which enables the display of animation on a mobile phone, and 3D

As a result, the Amusement Facility SBU recorded net sales ofEngine, which delivers three-dimensional renderings of characters—¥79.4 billion and operating income of ¥2.5 billion. At the end of theas well as by solutions services for corporations and web content.

fiscal year, we had a total of 1,683 facilities — 464 directly managed
facilities, 1,215 revenue-sharing facilities, and 4 theme parks.

Moreover, in the fiscal year under review, Bandai Networks
entered a tie-up with VIBE Inc., a provider of music-related content
to a variety of mobile communications companies. VIBE has become

Game Contents SBU
In the home video game software market, sales of Tamagotchi
Connection: Corner Shop for the Nintendo DS surpassed one

a consolidated subsidiary of NAMCO BANDAI Holdings.
As a result, the Network SBU recorded net sales of ¥12.5 billion
and operating income of ¥1.8 billion.

million units in Japan. Super Robot Wars α 3, Tales of the Abyss,
and Dragon Ball Z Sparking!—all for the PlayStation 2—were also

Visual and Music Content SBU

popular in the domestic market. In general, however, the market

In Japan, the Mobile Suit Gundam series fostered powerful Groupwas sluggish, and the Company was unable to respond swiftly tosynergies and made a substantial contribution to the SBU’s per-changing customer preferences, both in Japan and overseas. In

formance. The Mobile Suit Gundam SEED DESTINY, an animatedaddition, sales of other major game titles were slack, and thetelevision series, Mobile Suit Gundam series of theatrical films, andCompany recorded valuation losses on inventory. Overall, ourpackages all garnered strong popularity. Sales of DVD videos for rental

performance was weak in this business.

use also performed well, with support from an expanding market.

In the arcade game machines market, sales of Mario Kart Arcade GP,
a game for arcade game machines, were extremely strong worldwide.

Overseas, the market in the Americas was sluggish, and returnsof unsold items increased, resulting in a weak performance.

In addition, Idol M@ster registered a solid performance in Japan,

In September 2005, NAMCO LIMITED transferred a portion ofand Wangan Midnight MAXIMUM TUNE 2 performed strongly inthe shares it held in Nikkatsu Corporation to Index Corporation. As

the Americas.

a result of this transaction, Nikkatsu ceased to be a consolidated

NAMCO’s content for mobile phones and other mobile platforms
includes TAIKO: Drum Master and the Tales of . . . series, whichwere popular in the domestic market, with the number ofsubsidiary of the Company.
As a result, the Visual and Music Content SBU recorded net salesof ¥43.3 billion and operating income of ¥6.2 billion.

35

Other Businesses

The Americas

In logistics and other support services, we have taken steps toIn the Americas, we worked to establish a stable foundation for theincrease efficiency. In social welfare, in consideration of Japan’s

Toys and Hobby SBU through a strategy of selection andaging population, the Group opened a second Kaikaya day service

concentration for characters and product categories. The Game

center and began sales of TalkingAid Light, a portable commu-

Contents SBU recorded favorable sales of arcade game machines,

nication support device for people with disabilities and seniorsuch as Mario Kart Arcade GP.

citizens that is lighter in weight compared to the conventional
devices.
As a result, Other Businesses recorded net sales of ¥23.1 billion
and an operating loss of ¥0.2 billion.

However, in home video game software, sales of main titles
declined substantially in comparison with previous versions, and as
a result overall performance was poor. To counter challenging
market conditions, the Amusement Facility SBU continued to takesuch steps as expanding facilities operated under revenue-sharing■ Geographic Segment Overview

arrangements, closing unprofitable establishments, and trimming
costs. Despite these efforts, overall performance was sluggish, asJapansuccessive hurricanes, rising gasoline prices, and other factors had

In the Toys and Hobby SBU, favorable performances were recorded

an adverse effect on market conditions. Furthermore, performanceby the Tamagotchi Plus series, DATA CARDDASS, which integrates

in the Visual and Music Content SBU was poor as slack market

digital data and card games, and girls’ toys and children’s apparel,

conditions prompted increased product returns.

centered on Pretty Cure: Max Heart.
In the Amusement Facility SBU, we took steps to activate our

As a result of these factors, in the Americas we recorded sales of¥44.1 billion and an operating loss of ¥3.3 billion.

operations with the launch of original products in the second halfof the fiscal year and we worked to acquire new customers.

EuropeNonetheless, these initiatives could not offset weak market

In Europe, the Toys and Hobby SBU recorded a strong performance,

conditions in the first half of the fiscal year and the declining

centered on the Power Rangers and Tamagotchi series. In the

popularity of coin-operated prize game machines.

Amusement Facility SBU, amusement complexes proved popular in

In the Game Contents SBU, popular home video game software

the United Kingdom, and the Game Contents SBU registeredtitles included Tamagotchi Connection: Corner Shop for thefavorable results with software for home video games, such as

Nintendo DS and Super Robot Wars α 3 for the PlayStation 2.

Tekken 5: Dark Resurrection and Dragon Ball Z Budokai 4 (Japanese

However, in addition to sluggish market conditions, we failed to

product name: Dragon Ball Z Sparking!), both products for the

respond quickly to changes in consumer needs. Sales of other main

PlayStation 2. In coin-operated game machines, Mario Kart Arcade

titles declined steeply compared with previous versions, resulting in

GP turned in a solid performance.

a weak performance. On the other hand, sales of arcade gamemachines, such as Mario Kart Arcade GP, were strong.

As a result, net sales in Europe were ¥31.2 billion and operating
income was ¥4.3 billion.

In the Network SBU, specifically in content distribution services
for mobile phones and other mobile platforms, we reinforced ourAsia (excluding Japan)

profit foundation by actively launching high-value-added content,

In Asia, the Toys and Hobby SBU registered solid results, centeredleading to an increase in average revenue per subscriber.

on the Power Rangers and Tamagotchi series. In the Amusement

In the Visual and Music Content SBU, the Mobile Suit Gundam
series generated strong synergies and made a substantial
contribution to results.
As a result, net sales in Japan totaled ¥374.3 billion andoperating income was ¥37. 6 billion.

36

Facility SBU, we reinforced business development through the useof prize games and original products.
As a result, net sales in Asia were ¥32.1 billion and operating
income was ¥2.3 billion.

■ Financial Position

factors as capital investments. The net change in cash and cash
equivalents is expected to remain the same as in the fiscal year

At the end of the fiscal year, on a consolidated basis, current assets

ended March 31, 2006, and as a result, cash and cash equivalents

were ¥240.6 billion, investments and other assets were ¥54.9

at the end of March 2007 will remain consistent with the prior year.

billion, property, plant and equipment totaled ¥74.1 billion,
intangible assets were ¥17.0 billion, and total assets were ¥386.7
billion.

■ Basic Policy on the Distribution of Profits
and the Payment of Dividends

Current liabilities were ¥107.5 billion, long-term liabilities were
¥26.9 billion, and total liabilities at year-end were ¥134.4 billion.

The Company places a high priority on the distribution of profits to

Total shareholders’ equity at year-end was ¥243.6 billion, andshareholders, and its basic policy for the payment of dividends is tothe shareholders’ equity ratio was 63.0%. In addition, the current

continue to pay dividends and raise enterprise value while further

ratio* was 2.2 times, and the quick ratio* was 1.7 times. The

strengthening the Group’s competitiveness and maintaining ainterest coverage ratio* was 125.4 times.

sound financial position. Specifically, our objectives are to maintain* Current ratio: Current assets / Current liabilities
Quick ratio: (Cash and time deposits + Short-term investmentsa base level of annual per share dividend payments of ¥24 and aconsolidated dividend payout ratio of 30%.

+ Trade receivables ) / Current liabilities

Internal reserves will be used for aggressive investment for theInterest coverage ratio: (Operating income + Interest income +purpose of enhancing enterprise value, such as investment to

Dividend income ) / Interest expensedevelop new operational fields and M&A and alliance initiatives.
In lieu of interim dividends, share transfer payments of ¥18 per■ Cash Flow

share were paid to shareholders of Bandai and ¥12 were paid toshareholders of NAMCO. In accordance with the Company’s basic

Cash and cash equivalents at the end of the fiscal year totaled

policy, year-end dividend payments were ¥12 per share.

¥113.2 billion.

■ Targets and Management Indicators
Cash flows from operating activities

Net cash provided by operating activities was ¥31.8 billion, due

The Group uses ROA and ROE for the medium-term management

primarily to ¥35.6 billion in income before income taxes andindicators. The Group believes that it can reinforce and stabilize its

minority interests.

management foundation over the medium to long term by striving toconsistently utilize all of its assets and shareholders’ equity effectively.

Cash flows from investing activities

In fiscal year ending March 2009, the final year of the Medium-Net cash used in investing activities was ¥24.4 billion. Major items

Term Management Plan that the Group rolled out in April 2006,

included ¥18.0 billion for the acquisition of shares in consolidated

our targets, on a consolidated basis, are ROA of 13.5% and ROE of

subsidiaries, net of cash acquired, following the acquisition of

10.0%. We will strive to further increase management efficiency

shares in Banpresto Co., Ltd., and ¥9.9 billion in purchases ofand expand operations.

property, plant and equipment.

■ Outlook for the Fiscal Year Ending March 2007
Cash flows from financing activities

Net cash used in financing activities was ¥20.0 billion. Major items

Although there are positive signs in employment and consumer

included ¥11.0 billion in redemption of bonds, including bonds ofspending, stemming from improved corporate performances andBandai, and ¥10.6 billion for purchase of treasury stock.

increased capital investment, there is cause for concern, such as
rising crude oil prices, and the economic outlook remains uncertain.

In the fiscal year ending March 31, 2007, the Company expects

In this environment, the Group will work to strengthen, enrich,

net cash provided by operating activities to increase, reflecting

and expand its portfolio management, based on the three-year

improved results, while the levels of net cash used in investing

Medium-Term Management Plan launched in April 2006.

activities and financing activities should remain high due to such37

In the Toys and Hobby SBU, in addition to popular characters■ Business Risks

from Power Rangers (Boukenjer), Mobile Suit Gundam, andTamagotchi, we will work to create and develop new characters

Risk factors related to the BANDAI NAMCO Group’s businesses thatand to further strengthen content offerings targeting a wide range

might significantly affect decisions made by the investmentof customers. Moreover, in the Americas, we will strive to establish

community, include, but are not limited to, those listed below.

a stable foundation by implementing the principles of selection and

These statements on risk are based on information available to theconcentration for characters and product categories.

Group as of May 11, 2006.

In the Amusement Facility SBU, we will work to increase sales byactively opening large facilities and introducing new business

1. Risks associated with the core business model

formats. At the same time, we will strive to expand profits by

The Group’s businesses are centered on products and services

sharing our experience for low-cost operations. Moreover, in thebased on content, such as characters. Accordingly, the Group’s

Americas, we will continue to increase the number of revenue-

operating results might be affected by changes in the popularity ofsharing locations and reduce costs.

specific content or related trends. Therefore, the Group is working

In the Game Contents SBU, in order to facilitate prompt

to achieve stable earnings by strengthening, enriching, andresponses to rapidly changing operating environments in Japan andexpanding its portfolio management through three-dimensionaloverseas, we will work to meet customer needs and implement a

and multi-lateral business administration. This portfolio manage-balanced multiplatform strategy. At the same time, we will strive toment comprises business portfolios, in which the Group conducts

increase the efficiency of sales and development activities.

operations in a diverse array of business domains; content

Furthermore, we will leverage the Group’s strengths to generate

portfolios, where many different content lines are developed; andsales of coin-operated game machines, such as Mobile Suit

regional portfolios, where businesses are conducted in regions

Gundam: Senjo no Kizuna.

around the world. In each business, the Group works to develop

In the Network SBU, we will provide high-value-added content
for mobile platforms, such as SD Gundam RPG, and move ahead

new content and conducts marketing activities designed to cultivateand develop that content over the long term.

with planning and development targeting our entry into the field ofvideo distribution. We will also reinforce our solutions operations
and enlarge our mail-order site.

2. Risks associated with overseas businessexpansion

In the Visual and Music Content SBU, we will reinforce our

The Group is aggressively expanding its business overseas. This

existing DVD video business, such as through the sale of DVD box

initiative exposes the Group to a variety of risks, including businesssets of the extremely popular Mobile Suit Gundam TV 23 series. We

risks associated with regional characteristics, such as local media

will also work to respond to changes in the operating environment,

and distribution systems; risks associated with intellectual property

such as new markets and media, while striving to expand ourrights, such as those related to counterfeit products; and risks

operations.

associated with fluctuations in exchange rates. Operationally, theAs a result, our consolidated financial forecasts for the fiscal year

Group conducts sufficient research to minimize these risks andending March 2007 are for net sales of ¥470.0 billion, an increase

formulates countermeasures before proceeding with overseas

of 4.3%; recurring income of ¥40.5 billion, an increase of 9.1%;

business expansion. With respect to intellectual property rights, theand net income of ¥22.0 billion, an increase of 55.5%.

Group cooperates with local government agencies and otherauthorities to identify counterfeit products, promote enhanced■ Forward-Looking Statements

recognition of genuine products, etc. In addition, for foreignexchange risks, the Group uses forward contracts to lower the risks

Forecasts for the next fiscal year and other future projections in thisfrom short-term fluctuations in the exchange rates for majorannual report are based on information available to the Group at thecurrencies.

time they were made and are therefore subject to various risks anduncertainties. Actual results therefore may differ materially fromprojections for a variety of factors. Major factors that could influence
results include changes in the Company and the Group’s operating
environment, market trends, and exchange rate fluctuations.

38

3. Retaining and developing employees

7. Concentration of production in China

In the fast-changing entertainment industry, it is essential for the

In the Group’s Toys and Hobby SBU, approximately 90% of the toys

Group to retain and develop employees who can respondare manufactured in China. The Group faces the risk of higher

effectively to rapid changes. In addition to developing a

production costs from the revaluation of the yuan and country risk

compensation system that will facilitate the retention of thesestemming from the regional concentration of production. In

employees, the Group actively delegates authority. To develop the

response, the Group is working to reduce production costs and to

next generation of employees, the Group is devoting resources todiversify its production bases into Southeast Asia and other regions.

training seminars and other development programs.

8. Risks from higher crude oil prices
4. Risk associated with game contents business

The Group faces the risk that higher crude oil prices could lead to

In the game contents business, titles are a significant cause ofhigher production costs from increased product raw material prices

fluctuations in profits, and there is a risk that changes in the timing

and to higher transportation costs. Accordingly, the Group isof product launches will affect earnings in a given period. The

working to standardize the metal casts and molds used forGroup tightly controls software development schedules for every

character toys marketed worldwide and to reduce costs bygame while striving to diversify risks by flexibly developing multiple

enhancing the efficiency of processes, ranging from production to

products with different software characteristics and development

distribution.

periods. Moreover, with a slowdown in sales associated with thelaunch of new game platforms and with customer needs

Additional risks include disasters, such as natural disasters ordiversifying, market conditions remain marked by uncertainty. The

accidents, changes in laws and regulations, defective or deficientGroup is therefore working to implement a title composition that is

products or services, leaks of customer information, and litigation

balanced across individual game platforms and to respond promptly

associated with business activities. The Group maintains risk

to customer needs.

management systems and works to strengthen its managementfoundation in order to minimize the effects on its results in the

5. Risks associated with advances in and newgenerations of platforms

unlikely event that any of these risks should materialize.

In developing game content, visual content, and network content,
the Group faces the risk of delays in responding to advances in andnew generations of content-provision platforms and the risk ofdelays in changing its business models in response to thesedevelopments. The Group conducts research into new technologies
and works to develop competitive content that is in step with thelatest advances. At the same time, the Group actively works toacquire expertise on new business models. Additionally, the Grouptakes steps to further develop the content that it has created and toacquire rights to new content.

6. Decline in domestic birthrate
In the future, an ongoing decline in the domestic birthrate might
affect the financial results of the Group. Accordingly, the Group has
been expanding the scope and target of its business activities inJapan and is aggressively taking steps to expand its operations inoverseas markets.

39Consolidated Balance Sheet
NAMCO BANDAI Holdings Inc. and Consolidated Subsidiaries
As of March 31, 2006

Millions of yen

Thousands of
U.S. dollars(note 3)

2006

2006

AssetsCurrent assets:
Cash and time deposits (note 4)¥ 109,514$

932,272

Short-term investments (notes 4 and 5)

5,547

47,221

Trade receivables (note 6)

70,911

603,652

Allowance for doubtful receivables(1,506)(12,820)

Inventories (note 7)

27,530234,358

Deferred tax assets (note 12)

7,038

59,913

Other current assets

21,601

183,884

Total current assets

240,635

2,048,480

Investment securities (note 5)

22,522

191,726

Guarantee money deposited

24,916

212,105

Deferred tax assets (note 12)

3,901

33,208Investments and other assets:

Other investments and assets

4,822

41,049Allowance for doubtful receivables(1,212)(10,318)

54,949467,770

Buildings and structures

32,150273,687

Amusement facilities and machines

87,048741,024Land

22,094

188,082

Total investments and other assets

Property, plant and equipment:

Other property, plant and equipment
Total
Less accumulated depreciation
Net property, plant and equipment

55,141

469,405

196,433

1,672,198(122,360)(1,041,628)

74,073

630,570

7,668

65,276

Intangible assets:
Consolidation goodwill
Other intangible assets

9,326

79,391

Total intangible assets

16,994

144,667¥ 386,651$ 3,291,487

Total assets
See accompanying Notes to Consolidated Financial Statements.

40

Millions of yen

Thousands of
U.S. dollars(note 3)

2006

2006

Liabilities, minority interests and shareholders’ equity
Current liabilities:
Short-term borrowings (note 9)¥ 19,888$ 169,303

Trade payables (note 10)

40,561

345,288

Accrued expenses

32,362

275,492

Accrued income taxes (note 12)

6,827

58,117

Other current liabilities (note 12)
Total current liabilities

7,890

67,166

107,528

915,366

Long-term liabilities:
Long-term debt (note 9)

12,542

106,768

Accrued retirement and severance benefits (note 11)2,970

25,283

Deferred tax liabilities (note 12)

7,283

61,999Other long-term liabilities

4,084

34,765

Total long-term liabilities

26,879228,815

Total liabilities

134,407

1,144,181

Minority interests

8,637

73,525

10,00085,128

Shareholders’ equity:
Common stock (note 17)
Authorized 1,000,000,000 shares;
issued 260,580,191 shares
Additional paid-in capital (note 17)

95,772815,289

Retained earnings (note 15)

164,504

1,400,392

Land revaluation difference (notes 12 and 16)(21,460)(182,685)

4,145

35,286

Other securities valuation difference (notes 5 and 12)
Translation adjustment
Total
Treasury stock, at cost; 7,616,892 shares
Total shareholders’ equity

1,802

15,340254,763

2,168,750(11,156)(94,969)

243,6072,073,781¥386,651$3,291,487

Contingencies (note 20)
Total liabilities, minority interests and shareholders’ equity

41

Consolidated Statement of Income
NAMCO BANDAI Holdings Inc. and Consolidated Subsidiaries
Year Ended March 31, 2006

Millions of yen

Thousands of
U.S. dollars(note 3)

2006

2006

Net sales¥450,829$3,837,822

Cost of sales

294,264

2,505,014

156,565

1,332,808

120,896

1,029,165

35,669303,643

960

8,172

Gross profit
Selling, general and administrative expenses (note 13)
Operating income
Other income (loss):
Interest and dividend income
Interest expense(292)(2,486)

Gain on sales of investment securities

3,073

26,160Loss on valuation of investment securities(260)(2,213)Gain (loss) on sales and disposal of property, plant and equipment

(68)

(579)

(3,001)(25,547)(511)(4,349)

(99)

(842)

Income before income taxes and minority interests

35,570302,801

Income taxes (note 12)

19,282

164,145

Minority interests

2,138

18,200¥ 14,150$ 120,456

Yen

U.S. dollars(note 3)

Loss on impairment of fixed assets (note 8)
Other

Net income

Data per common share (note 14):
Net assets at March 31¥961.36

$8.18

Basic

54.39

0.46

Diluted

54.37

0.46

12.00

0.10

Net income:

Dividend applicable to period (note 15)
See accompanying Notes to Consolidated Financial Statements.

42

Consolidated Statement of Shareholders’ Equity
NAMCO BANDAI Holdings Inc. and Consolidated Subsidiaries
Year Ended March 31, 2006

Millions of yen

Thousands of
U.S. dollars(note 3)

2006

2006

Common stock (note 17):
Balance at beginning of year
Balance at end of year

¥ 10,000$

85,12810,00085,12892,034

783,468

397

3,380

Additional paid-in capital:
Balance at beginning of year
Exercise of stock option
Issuance of stock

3,341

28,441

Balance at end of year

95,772815,289

Balance at beginning of year

158,182

1,346,574

Net income

14,150120,45629

247

Retained earnings (note 15):

Increase in retained earnings due to exclusion of consolidated subsidiaries
Increase in retained earnings due to increase in the number of companies
in equity method

15

128

Reversal of land revaluation difference

303

2,579

Cash dividends(4,416)(37,593)

Cash payment for share transfer(3,013)(25,649)

Bonuses to directors and corporate auditors(559)(4,758)Decrease in retained earnings due to exclusion of consolidated subsidiaries(187)(1,592)

164,504

1,400,392(21,163)(180,157)(297)(2,528)(21,460)(182,685)

Balance at beginning of year

2,932

24,960Net change during year, net of tax

1,213

10,326

Balance at end of year

4,145

35,286

Balance at beginning of year

(1,870)(15,919)

Net change during year

3,672

31,259Balance at end of year

1,802

15,340(591)(5,031)

Net change during year

(10,565)(89,938)

Balance at end of year

(11,156)(94,969)¥243,607$2,073,781

Balance at end of year
Land revaluation difference (notes 12 and 16):
Balance at beginning of year
Net change during year, net of tax
Balance at end of year
Other securities valuation difference (notes 5 and 12):

Translation adjustment:

Treasury stock:
Balance at beginning of year

Total shareholders’ equity at end of year
See accompanying Notes to Consolidated Financial Statements.

43

Consolidated Statement of Cash Flows
NAMCO BANDAI Holdings Inc. and Consolidated Subsidiaries
Year Ended March 31, 2006

Cash flows from operating activities:
Income before income taxes and minority interests
Depreciation
Loss on impairment of fixed assets
Loss (gain) on sales and disposal of property, plant and equipment
Loss on disposal of amusement facilities and machines
Gain on sales of investment securities
Loss on valuation of investment securities
Decrease (increase) in trade receivables
Decrease (increase) in inventories
Acquisition of amusement facilities and machines
Increase (decrease) in trade payables
Other
SubtotalInterest and dividends received
Interest paid
Income taxes paid
Net cash provided by operating activities
Cash flows from investing activities:
Decrease (increase) in time deposits
Purchases of property, plant and equipment
Sales of property, plant and equipment
Purchases of intangible assets
Purchases of investment securities
Sales of investment securities
Acquisition of shares in consolidated subsidiaries, net of cash acquired
Sales of shares in consolidated subsidiaries
Purchase of subsidiary shares affecting the scope of consolidation
Sales of subsidiary shares affecting the scope of consolidation
Payment of guarantee money deposited
Collection of guarantee money depositedOther
Net cash used in investing activities
Cash flows from financing activities:
Increase (decrease) in short-term borrowings
Proceeds from long-term debt
Repayment of long-term debt
Proceeds from issuance of stock
Proceeds from capital paid by minority interests
Purchase of treasury stock
Dividends paid
Dividends paid to minority interests
Cash payments for share transfer
Net cash used in financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Increase in cash and cash equivalents due to additional consolidation of subsidiaries
Decrease in cash and cash equivalents due to exclusion of consolidated subsidiaries
Cash and cash equivalents at end of year (note 4)
See accompanying Notes to Consolidated Financial Statements.

44

Millions of yen

Thousands of
U.S. dollars(note 3)

2006

2006

¥ 35,570
19,144
3,001
68
1,348
(3,073)
260
4,455
5,842
(10,892)(2,679)(5,091)
47,953
1,349(352)(17,141)
31,809$ 302,801
162,969
25,547579
11,475(26,160)
2,213
37,92549,732(92,722)(22,806)(43,338)
408,215
11,484(2,997)(145,918)
270,784(351)(9,924)
4,388(3,204)(2,064)783(18,033)
349(1,781)
5,439
(883)
1,964
(1,090)(24,407)(2,988)(84,481)
37,354(27,275)(17,570)
6,666(153,512)
2,971(15,161)
46,301(7,517)
16,719(9,279)(207,772)

10,848575(13,399)397
20(10,551)(4,416)(426)(3,013)(19,965)
1,676(10,887)
124,92410(861)¥113,186

92,347
4,895(114,063)
3,380
170(89,819)(37,593)(3,626)(25,649)(169,958)
14,267(92,679)
1,063,455
85(7,330)$ 963,531

Notes to Consolidated Financial Statements
NAMCO BANDAI Holdings Inc. and Consolidated Subsidiaries

1 Basis of Presentation

Investments in unconsolidated subsidiaries and certain

NAMCO BANDAI Holdings Inc. (“the Company”) and its

affiliates other than those discussed in the previous paragraphconsolidated subsidiaries (collectively, “the Company”) haveare stated at cost, and if the equity method had been applied

prepared their financial statements in accordance with theto the investments in these companies, there would have been

provisions set forth in the Japanese Securities and Exchange

no material effect on the accompanying consolidated financial

Law and its related accounting regulations, and in conformity

statements.

with accounting principles generally accepted in Japan, which

All significant intercompany accounts and transactions haveare different in certain respects as to application and disclo-

been eliminated in consolidation. The excess of cost over thesure requirements of International Financial Reporting Standards.

underlying fair value of the net assets of consolidated

The accounts of overseas subsidiaries are based on theirsubsidiaries from acquisition is being amortized over a five-accounting records maintained in conformity with generallyyear period.

accepted accounting principles prevailing in the respective
countries of domicile. The accompanying consolidated
financial statements have been prepared and translated into(b) Matters Relating to Capital Consolidation Procedures
Accompanying a Share Transfer

English from the consolidated financial statements of the

NAMCO BANDAI Holdings Inc. was established in a stock

Company prepared in accordance with Japanese GAAP andexchange program as a holding company for Bandai Co., Ltd.,

filed with the appropriate Local Finance Bureau of the Ministry

and NAMCO Limited (currently NAMCO BANDAI Games Inc.).

of Finance as required by the Securities and Exchange Law.

The consolidation procedures for the business combination

Some supplementary information included in the statutory

were accounted in accordance with “capital consolidation

Japanese language consolidated financial statements that isprocedure for the establishment of the entire parent andnot required for fair presentation is not presented in thesubsidiary relationship use a stock-to-stock exchange and theaccompanying consolidated financial statements.

stock-transfer method” (Japanese Institute of Certified Public

In preparing the accompanying consolidated financial state-

Accountants (JICPA) Accounting Committee Research Reportments, certain reclassifications have been made to theNo. 6). The consolidation was accounted for under the pooling-

consolidated financial statements issued in Japan in order toof-interests method.

present them in a form that is more useful to readers outside
Japan.

The Company considered the operations, financial positionand sharing of the risks and rewards of the consolidating
entities and believed that pooling the interest of both entities

2 Summary of Significant Accounting Policies

was appropriate for the combination.

(a) Principles of Consolidation
The accompanying consolidated financial statements include(c) Cash and Cash Equivalents

the accounts of the Company and its significant subsidiaries.

In reporting cash flows, the Company considers cash on hand,

Consolidation of the remaining subsidiaries would have had

demand deposits and all highly liquid investments withno material effect on the accompanying consolidated financial

original maturities of three months or less to be cash and cash

statements. Investments in significant affiliates are stated at

equivalents (note 4).

the Company’s equity in their underlying net assets.

45

(d) Foreign Currency Translation(f) Short-Term Investments and Investment Securities

Foreign currency transactions are translated into yen at rates

The Company classifies its securities into one of the following

in effect at the dates they are transacted, and the gains or

three categories: held-to-maturity securities, investments inlosses arising from the settlement of the related receivables or

unconsolidated subsidiaries and affiliated companies, or otherpayables are reflected in “Other income (loss)”.

securities.

Receivables and payables denominated in foreign currencies

Held-to-maturity securities are amortized to face value overat the balance sheet date are translated at the rates in effectthe period remaining to the maturity date. Investments inas of the balance sheet dates, and the unrealized gains or

unconsolidated subsidiaries and affiliated companies are

losses are reflected in “Other income (loss)”.

carried at cost. Other securities with a market value are

The assets and liabilities of foreign consolidated subsidiaries

principally carried at market value. The difference, net of tax,

and affiliates are translated into yen at the rates of exchange

between the acquisition cost and the carrying amount ofin effect at the balance sheet dates. Revenue and expenses ofother securities, including unrealized gains and losses, isforeign consolidated subsidiaries and affiliates are translated

recognized in “Other securities valuation difference” ininto yen at the average rates of exchange during the year.

“Shareholders’ equity” until realized. Other securities without

Gains and losses resulting from foreign currency transactions

a market value are principally carried at cost. The cost of otherare included in “Other income (loss)”, and those resulting

securities sold is principally computed based on the movingfrom the translation of financial statements are generally

average method.

excluded from the consolidated statements of income and areincluded in “Minority interests” and “Translation adjustment”(g) Allowance for Doubtful Receivables

in “Shareholders’ equity”.

The allowance for doubtful receivables is provided for possible
losses on unrecoverable receivables. For ordinary receivables,(e) Accounting Standards for Income and Expenses

the amount of the allowance is based on the historical rate of

Accounting procedures for video game software production

loss. For receivables from debtors at risk of bankruptcy andexpenses:receivables from debtors in bankruptcy or under reorganiza-

A distinctive characteristic of video game software is thetion, the amount of the allowance is based on individually

production through which the software is combined with theestimated unrecoverable amounts.

content that cannot be separated into identifiable components.
The content is considered an important component of each(h) Inventories

video game title which combines the game content andDomestic consolidated subsidiaries:

visual / music data. Once management makes a decision to go

Inventories are stated at cost determined on an average costforward in distributing the title, the Company records thebasis.

software and content development costs to inventory andForeign consolidated subsidiaries:

advanced payments.

Inventories are stated at the lower of cost, determined

The capitalized production costs (which include inventory
and advanced payments) are amortized to cost of sales basedon projected sales volumes.

principally by the first-in, first-out method, or market.
However, both domestic and foreign consolidated subsidiaries
state work-in-process of game software by the specific-cost
method.

46

(i) Income Taxes

Goodwill incurred by foreign subsidiaries is amortized in

Current income taxes are accounted for based on income andconformity with accounting principles and practices generally

deferred income taxes are accounted for under the asset andaccepted in the country of incorporation.

liability method. Deferred tax assets and liabilities arerecognized for future tax consequences attributable to dif-(l) Impairment of Fixed Assets

ferences between the financial statement carrying amounts of

The Company has applied the Accounting Standard forexisting assets and liabilities and their respective tax bases andImpairment of Fixed Assets (the “Opinion Concerning

operating loss and tax credit carryforwards. Deferred tax

Establishment of Accounting Standard for Impairment of Fixed

assets and liabilities are measured using enacted tax rates

Assets” (Business Accounting Deliberation Council, August 9,

expected to apply to taxable income in the years in which

2002) and the “Implementation Guidance for the Accounting

those temporary differences are expected to be recovered orStandard for Impairment of Fixed Assets” (Guidance on

settled. The effect on deferred tax assets and liabilities of a

Corporate Accounting Standard No. 6, October 31, 2003).

change in the tax rate is recognized in income in the period

The amount of accumulated losses on impairment of fixedthat includes the enactment date.

assets is deducted directly from the amount of each asset
pursuant to the Regulations Concerning Financial Statements.

(j) Property, Plant and Equipment
The Company and its domestic consolidated subsidiaries:(m) Derivatives and Hedging Activities

Depreciation of property, plant and equipment is principally

The Company and its consolidated subsidiaries use derivative

computed by the declining-balance method based on

instruments, such as forward exchange contracts and interest

estimated useful life. The straight-line method is used for

rate swap contracts, to reduce market risks stemming frombuildings (except for building fixtures) acquired since April 1,

fluctuations in foreign exchange rates and interest rates. The

1998. The estimated useful lives for Buildings and structures

Company and its consolidated subsidiaries use these derivativeand Amusement facilities and machines are 2-50 years andinstruments solely for the purpose of reducing the risk of

3-15 years, respectively.

fluctuations, such as fluctuations in foreign exchange rates

Foreign consolidated subsidiaries:

and interest rates, to which it is exposed in the course of its

Depreciation of property, plant and equipment is principallybusiness activities. Accordingly, the Company does not use

computed by the straight-line method based on estimatedderivative instruments or other financial instruments for

useful life. The estimated useful lives for Buildings andspeculative purposes.

structures and Amusement facilities and machines are 5-50
years and 2-7 years, respectively.

Because the Company’s counterparties for derivative
instruments are all highly creditworthy financial institutions,the Company believes that it is exposed to almost no(k) Intangible Assets

counterparty risk. Also, derivative transactions are conducted

Depreciation of intangible assets is computed by the straight-

in accordance with internal rules that specify transaction

line method based on estimated useful life. Software forauthority and transaction amount limits, within the scope ofcompany use is depreciated over 2-5 years.

the above policies, and for the intended purposes.

Goodwill incurred by domestic subsidiaries is amortized over
5 years using the straight-line method.

As a general rule, companies are required to state derivative
instruments at fair value. For derivative instruments that meetthe standards for hedge accounting, recognition of gains orlosses is deferred. In cases where forward foreign exchange
contracts meet certain hedging criteria, they are accounted for47

under the allocation method. Interest rate swaps that meetamortize prior service costs over a fixed period (10 years) thatspecific matching criteria are accounted for using special

does not exceed the average remaining years of service of

methods.

employees at the point when the costs are incurred, and, toAs a general rule, the Company assesses the effectiveness ofprovide for payment of retirement benefits to directors andhedging transactions from the start of the transaction to theauditors, they record the amount needed at the end of thepoint at which effectiveness is assessed, comparing the

fiscal year in accordance with internal regulations.

cumulative changes in the fair value or the cumulativechanges in the cash flows of the hedged item with the(o) Leases

cumulative changes in the fair value or the cumulative

Financial leases, except for those where the legal title to thechanges in the cash flows of the hedging instrument. The

underlying property is transferred from the lessor to the lessee

assessment is based on the amounts of those changes. In theat the end of the lease term, are accounted for similar

event that important conditions are the same for the hedging

to operating leases. The Company and its consolidated

instrument and the hedged assets, liabilities, or scheduledsubsidiaries do not have any leases where the title is trans-

transaction, it is obvious that the hedge is 100% effective, so

ferred. However, overseas consolidated subsidiaries accountthe assessment of effectiveness is not abbreviated. Also, forfor finance leases as ordinary purchase or sale transactions ininterest rate swaps for which the special methods are applied,accordance with local accounting principles.

the assessment of effectiveness is abbreviated.
In the event that a hedge loses its effectiveness, hedge(p) Issuance of Shares by Consolidated Subsidiaries

accounting is no longer applied and the recognition of the

The change in the Company’s proportionate share ofgains or losses on the hedge transaction is no longer deferred.

consolidated subsidiary equity resulting from issuance ofcapital stock by the consolidated subsidiaries is accounted for(n) Retirement and Severance Benefits

in the consolidated statement of income.

The Company has established a retirement lump-sum grantsystem and a defined contribution pension plan. With the(q) Appropriation of Retained Earnings

exception of certain companies, domestic consolidated

In Japan, retained earnings with respect to a given financial

subsidiaries have established qualified retirement benefit

period are appropriated by resolution of the shareholders at aplans, retirement lump-sum grants, or comprehensive

general meeting to be held subsequent to the close of such

employee pension funds. At the Company’s discretion,

financial period. The accounts for that period do not,additional benefits may be paid at retirement. Certain

therefore, reflect such appropriations.

overseas consolidated subsidiaries have established defined
contribution retirement pension plans.

(r) Data per Common Share

The allowance for retirement benefits for employees is

In computing basic net income per common share, theprovided for based on the estimated values of retirement

average number of shares outstanding during each year has

benefit obligations and pension plan assets at the end of the

been used.

fiscal year. Unrecognized actuarial gain or loss is amortized,

Diluted net income per share assumes the dilution thatbeginning from the fiscal year following the year in which it iscould occur if securities or other contracts to issue common

incurred, using the straight-line method over a period thatstock were exercised or converted into common stock, ordoes not exceed the average remaining years (10 to 17 years)

resulted into issuance of common stock.

of service of employees as of the end of the fiscal year inwhich it is incurred. Certain domestic consolidated subsidiaries

48

Cash dividends per common share are computed based on
dividends declared with respect to the income for the year.

3 Financial Statement Translation

rate of ¥117.47=US$1, the approximate exchange rate on the

The consolidated financial statements are expressed in yen.

Tokyo Foreign Exchange Market on March 31, 2006.

However, solely for the convenience of the reader, theThis translation should not be construed as an indication

consolidated financial statements as of and for the year ended

that the amounts shown could be converted into U.S. dollars

March 31, 2006 have been translated into U.S. dollars at theat such rate.

4 Cash and Cash Equivalents
A reconciliation of cash and cash equivalents at March 31, 2006 between the balance sheet and the statement of cash flows is asfollows:
Millions of yen

Thousands of
U.S. dollars

2006

2006

Cash and time deposits¥109,514$932,272

Short-term investments

5,547

47,221Time deposits with maturities in excess of three months
Cash and cash equivalents per consolidated statement of cash flows(1,875)(15,962)¥113,186$963,531

Cash and time deposits of ¥54 million ($460 thousand) at March 31, 2006 are pledged as collateral for short-term borrowingsof ¥29 million ($247 thousand).

5 Short-Term Investments and Investment Securities
Short-term investments and investment securities at March 31, 2006 are summarized as follows:
Held-to-maturity securities at March 31, 2006 include marketable governmental bond securities with a carrying amount of¥10 million ($85 thousand), which approximates market value.

Held-to-maturity securities

Millions of yen

Thousands of
U.S. dollars

2006

2006

¥

47

$

400

Other securities–marketable

11,54898,307

Other securities–non-marketable

7,190

61,207

Investments in unconsolidated subsidiaries and affiliated companies

9,284

79,033

Total of short-term investments and investment securities¥28,069$238,947

The original cost, carrying amount (market value) and gross unrealized holding gain (loss) for marketable other securities at
March 31, 2006 are summarized as follows:
Millions of yen

2006
Original Cost

Gross Unrealized
Holding Gain

Gross Unrealized
Holding Loss

Carrying Amount(Market Value)

Equity securities¥2,971¥8,316¥(128)¥11,159

Debt securities

100

—

(2)

98

Other securities–marketable:

Other

233

62

(4)

291

Total

¥3,304¥8,378¥(134)¥11,548

49

Thousands of U.S. dollars

2006
Original Cost

Gross Unrealized
Holding Gain

Gross Unrealized
Holding Loss

Carrying Amount(Market Value)

Equity securities$25,293$70,793$(1,090)$94,996

Debt securities

851

—

(17)

834

Other securities–marketable:

Other

1,983

528

(34)

2,477

Total

$28,127$71,321$(1,141)$98,307

Proceeds and gross realized gains and losses from the sale of other securities in the year ended March 31, 2006 are as follows:
Millions of yen

Thousands of
U.S. dollars

2006

2006

Proceeds from the sales of other securities¥783$6,666Gross realized gains from the sales of other securities

489

4,163

Gross realized losses from the sales of other securities——

Millions of yen

Thousands of
U.S. dollars

The following is a summary of non-marketable securities at March 31, 2006:

2006

2006

Carrying Amount

Carrying AmountUnlisted stock securities¥1,579$13,442

Non-listed equity securities money market fund, etc.

Other securities–non-marketable:
5,047

42,964

Other

564

4,801

Total

¥7,190$61,207

Other securities with specified maturity dates and held-to-maturity securities at March 31, 2006 mature as follows:
Millions of yen

2006
Due:

WithinOne Year

After 1through 5 Years

After 5through 10 Years

¥—

¥10

¥ —

Debt securities:
Governmental bond securities
Corporate bond securities
Total

—

—

135

¥—

¥10

¥135

Thousands of U.S. dollars

2006
Due:

WithinOne Year

After 1through 5 Years

After 5through 10 Years

Governmental bond securities

$—

$85

Corporate bond securities

—

—

1,149

$—

$85

$1,149Debt securities:

Total

50

$

—

6 Trade Receivables
Trade receivables at March 31, 2006 are summarized as follows:
Millions of yen

Thousands of
U.S. dollars

2006

2006

Notes receivable¥ 8,218$ 69,958

Accounts receivable–trade

62,693533,694¥70,911$603,652

Millions of yen

Thousands of
U.S. dollars

Total

7 Inventories
Inventories at March 31, 2006 are summarized as follows:

2006

2006

Finished goods¥ 9,743$ 82,940

Work in process

14,618124,441

Raw materials and supplies
Total

3,169

26,977¥27,530$234,358

8 Loss on Impairment of Fixed Assets
In order to test for impairment, the Company and its consolidated subsidiaries formed group assets by strategic business unit for
management accounting purposes, excluding important idle assets, assets scheduled for disposal and leased assets.
In order to fairly state the Company’s financial position, the Company reduced the book values of the following assets
scheduled for disposal and intangible assets to recoverable amounts during fiscal 2006 and reported the reduction as an
impairment loss in “Other income (loss)”.
The recoverable amounts for land in the following table have been calculated based on net sales prices, assessed in accordancewith real estate appraisals. In calculating the recoverable values of other assets, the value in use is considered to be zero.
Millions of yen

Location

Minato-ku, Tokyo

Use

—

Item

Consolidation goodwill

Thousands of U.S. dollars

Impairment Loss

¥1,619$13,783

Matsudo-shi, Chiba

Cultural facility

Buildings and structures, etc.

825

7,023

Ota-ku, Tokyo

Parking

Land

531

4,520

Taito-ku, Tokyo

Software for internet content business

Other intangible assets

Total

26

221

¥3,001$25,547

51

9 Short-Term Borrowings and Long-Term Debt
Short-term borrowings at March 31, 2006 are summarized as follows:

Bank borrowings
Long-term debt due within one year
Total

Millions of yen

Thousands of
U.S. dollars

2006

2006

¥12,661$107,781

7,227

61,522¥19,888$169,303

The weighted average interest rate on bank borrowings outstanding at March 31, 2006 was 0.61%.
Millions of yen

Thousands of
U.S. dollars

2006

2006

¥ 4,769$ 40,598

Loans, principally from banks, maturing in installments through March 31, 2012;
the weighted average interest rates of current installments at March 31, 2006
was 0.96% and non-current installments at March 31, 2006 was 1.14%
0.60% debentures, due Mar. 28, 2007

5,000

42,564

0.69% debentures, due Mar. 28, 2008

10,00085,128

Total long-term debt

19,769168,290

Less current installments(7,227)(61,522)¥12,542$106,768

Total

The aggregate annual maturities of long-term debt outstanding at March 31, 2006 are as follows:
Millions of yen

Thousands of
U.S. dollars

2007¥ 7,227$ 61,522

2008

11,408

97,115

2009

596

5,074

2010

346

2,945

2011

96

817

Years ending March 31

2012

96

817

¥19,769$168,290

Millions of yen

Thousands of
U.S. dollars

2006

2006

Notes payable¥ 7,998$ 68,085

Accounts payable–trade32,563

277,203¥40,561$345,288

Total

10 Trade Payables
Trade payables at March 31, 2006 are summarized as follows:

Total

52

11 Retirement and Severance Benefits
The plan’s funded status and amount recognized in the accompanying consolidated balance sheet at March 31, 2006 are as
follows:
Millions of yen

Thousands of
U.S. dollars

2006

2006

Projected benefit obligations¥ 14,275$121,520

Plan assets at fair value

Employee retirement and severance benefits:(11,232)(95,616)

Projected benefit obligation in excess of plan assets

3,043

25,904

Unrecognized gain

(1,180)(10,044)

Unrecognized prior service cost
Net retirement and severance benefits recognized on the balance sheet
Prepaid pension costAccrued retirement and severance benefits

10

85

1,873

15,945

192

1,634

2,065

17,579905

7,704¥ 2,970$ 25,283

Officers’ retirement severance benefits:
Accrued retirement and severance benefits
Total accrued retirement and severance benefits

Notes:
1. In addition to the above plan assets, plan assets of ¥1,099 million ($9,356 thousand) at March 31, 2006 are managed by a governmental welfare pension benefit plan, which was jointly
established by the Company and various third-party companies. The aforementioned plan assets are computed on a pro-rata allocation of contributions paid.
2. Certain consolidated subsidiaries use a simplified method for calculating projected benefit obligations.

Net periodic cost of employee retirement and severance benefits for the year ended March 31, 2006 consist of the following:

Service cost for benefits earned–net of employee contributions

Millions of yen

Thousands of
U.S. dollars

2006

2006

¥1,415$12,046

Interest cost on projected benefit obligation

252

2,145

Estimated return on plan assets(188)(1,600)

Amortization of unrecognized actuarial gain or loss

291

2,477

Amortization of prior service cost

18

153

¥1,788$15,221

Net periodic cost

Notes:
1. In addition to the net periodic cost of employee retirement and severance benefits, additional retirement payment of ¥175 million ($1,490 thousand) is charged to expense in the year
ended March 31, 2006, and is included in “Selling, general and administrative expenses” and “Other income (loss)”.
2. In addition to the net periodic cost of employee retirement and severance benefits, contributions to the governmental welfare pension benefit plan of ¥80 million ($681 thousand)are charged to “Cost of sales” and “Selling, general and administrative expenses” in the year ended March 31, 2006.
3. The defined contribution amount for certain overseas consolidated subsidiaries that have established defined contribution retirement pension systems is recorded as a service cost.

Actuarial assumptions and the basis for the calculation of retirement and severance benefits in 2006 are as follows:

2006
Method of the benefit attribution“Benefit/year-of-service” approach

Discount rate

1.3%~2.0%

Estimated rate of return on plan assets

2.0%~3.0%

Period of amortization of unrecognized prior service cost
Period of amortization of unrecognized actuarial gain or loss

10 years
10~17 years(from the year following the year incurred)53

12 Income Taxes
The Company and its domestic consolidated subsidiaries are subject to Japanese corporate, inhabitant and enterprise taxes basedon income which, in the aggregate, resulted in a normal tax rate of approximately 40.6% in 2006.
Income tax expenses reflected in the accompanying consolidated statement of income for the year ended March 31, 2006
consist of the following:

Current

Millions of yen

Thousands of
U.S. dollars

2006

2006

¥14,468$123,164

Deferred

4,814

40,981

Total¥19,282$164,145

Reconciliation of the normal tax rate and the effective tax rate as a percentage of income before income taxes and minority
interests for the year ended March 31, 2006 is as follows:

2006
Normal tax rate

40.6%

Increase in valuation allowance related to deferred tax assets

11.3

Entertainment expenses not deductible for tax purposes

1.2

Amortization of consolidation goodwill

0.9

Corporate inhabitant tax on per capita basis

0.7

Other

(0.5)

Effective tax rate

54

54.2%

Significant components of deferred tax assets and liabilities at March 31, 2006 are as follows:
Millions of yen

Thousands of
U.S. dollars

2006

2006

Deferred tax assets:
Land revaluation difference¥ 9,323$ 79,365

Excess depreciation of fixed assets

3,387

28,833Losses carried forward

3,261

27,760Loss on valuation of advance payments

1,892

16,106Inventory valuation losses

1,785

15,195

Accrued employee bonuses

1,526

12,991

Allowance for doubtful receivables

1,357

11,552

Loss on impairment of fixed assets

1,313

11,177845

7,193

Accrued enterprise taxes, etc.
Retirement and severance benefit accruals

776

6,606

Excess amortization of deferred assets

764

6,504

Research and development costs

497

4,231

4,452

37,89931,178265,412Valuation allowance(18,631)(158,602)

Total deferred tax assets

12,547

106,810(4,511)(38,401)

Other
Total gross deferred tax assets

Deferred tax liabilities:
Retained earnings of foreign consolidated subsidiaries
Other securities valuation difference(3,388)(28,841)

Inventory revaluation(1,199)(10,207)

Land revaluation difference(891)(7,585)Reserve for deferred income tax(164)(1,396)

Other
Total gross deferred tax liabilities
Net deferred tax assets

(39)

(332)

(10,192)(86,762)¥ 2,355$ 20,048

Net deferred tax assets are included in the following line items in the consolidated balance sheet:

Current assets–Deferred tax assets
Investments and other assets–Deferred tax assets

Millions of yen

Thousands of
U.S. dollars

2006

2006

¥ 7,038$ 59,913

3,901

33,208Current liabilities–Other (deferred tax liabilities)(1,301)(11,074)

Long-term liabilities–Deferred tax liabilities(7,283)(61,999)¥ 2,355$ 20,048

Total

55

13 Selling, General and Administrative Expenses
Significant components of selling, general and administrative expenses for the year ended March 31, 2006 are as follows:

MarketingMillions of yen

Thousands of
U.S. dollars

2006

2006

¥ 31,056$ 264,374

Directors’ remuneration and employees’ wages

28,220240,232

Retirement and severance benefits

1,125

9,577

Director retirement benefits

187

1,592

Research and development

20,240172,299

798

6,793

39,270334,298¥120,896$1,029,165

Allowance for doubtful receivables, investments and other assets
Other
Total selling, general and administrative expenses

14 Reconciliation of Differences between Basic and Diluted Net Income per Common Share
The reconciliation of the differences between basic and diluted net income per common share for the year ended March 31,
2006 is as follows:

Net income
Unappropriated bonuses to directors and corporate auditors
Net income available to common stock

Millions of yen

Thousands of
U.S. dollars

2006

2006

¥14,150$120,456(418)(3,558)13,732

116,898(5)(43)¥13,727$116,855

Effect of dilutive securities:
Stock options in certain consolidated subsidiary
Net income for diluted EPS calculation

Thousands of shares

Average number of common shares outstanding

252,488

252,488

Effect of dilutive securities:
Stock options
Average number of common shares for diluted EPS calculation

8

8

252,496

252,496

Yen

U.S. dollars

Basic¥54.39$0.46

Diluted

54.37

0.46

Net income per common share:56

15 Retained Earnings and Dividends

16 Land Revaluation Difference

In Japan, earnings in an amount equal to at least 10% of

In accordance with the “Law Concerning Land Revaluation

appropriations of retained earnings that are paid in cash, such as(Law No. 34, promulgated on March 31, 1998)”, thecash dividends, shall be appropriated as a legal reserve until

Company revalued its land used for business purposes on

the aggregate amount of capital surplus and the legal reserve

March 31, 2002. The write-down in the value of the land

equals 25% of stated capital.

(¥20,769 million), net of related deferred tax assets andCertain foreign consolidated subsidiaries are also required toappropriate their earnings to legal reserves under the laws ofliabilities, was reported as “Land revaluation difference” in“Shareholders’ equity”.

the respective countries.
The Company’s retained earnings includes legal reserves ofRevaluation method:¥1,645 million ($14,004 thousand) at March 31, 2006.

The fair value of land is determined based on official notice

Proposed appropriations of retained earnings have not been

prices that are calculated by the method assessed and publishedreflected in the consolidated financial statements at the end ofby the Commissioner of the National Tax Administration. The

the fiscal year. The Company’s approved appropriations ofCommissioner assesses and publishes the method to calculate

retained earnings at March 31, 2006 were cash dividends ofland value that forms the foundation for calculating taxable¥3,127 million ($26,620 thousand). In addition, a mid-year

value of land value tax prescribed in “Article 16 of Land Value

dividend may be paid based on approval by the Board of

Tax Law (Law No. 69, promulgated on May 2, 1991)”, as

Directors, which is subject to limitations.

stipulated in “Article 2-4 of the Ordinance Implementing the
Law Concerning Land Revaluation (Cabinet Order No. 119,
promulgated on March 31, 1998)”. Reasonable adjustments
are made to the official notice prices.
In fiscal 2006, unrealized losses for land of ¥883 million($7,517 thousand) were calculated based on the difference
between the land carrying amount, which was revalued infiscal 2002, and the fair market value of the land as of March
31, 2006.

57

17 Common Stock and Stock Option Plan
The ordinary general meeting of shareholders of NAMCO BANDAI Holdings Inc. held on June 26, 2006, approved the adoption of
the following stock option system.
Those receiving stock subscription rights

Directors of NAMCO BANDAI
Holdings Inc.

Directors of the subsidiaries
of NAMCO BANDAI Holdings Inc.

Employees of NAMCO BANDAI
Holdings Inc. and its subsidiaries

Number of stock subscription rights (items)

Upper limit of 1,700 per year

Upper limit of 2,100

Upper limit of 24,300

Type of share to be acquired upon exercise

Common stock of NAMCO

Common stock of NAMCO

Common stock of NAMCO

BANDAI Holdings Inc.

BANDAI Holdings Inc.

BANDAI Holdings Inc.

Upper limit of 170,000 per year

Upper limit of 210,000

Upper limit of 2,430,000

1

1

note 1

Period for exercise of stock subscription rights

July 10, 2009–June 30, 2014

July 10, 2009–June 30, 2014

July 10, 2008–June 30, 2010

Conditions for exercise of stock subscription rights

note 2

note 3

note 4

Items relating to the transfer of stock

Approval of the directors ofApproval of the directors ofApproval of the directors ofsubscription rights

NAMCO BANDAI Holdings Inc.

NAMCO BANDAI Holdings Inc. NAMCO BANDAI Holdings Inc.

required for the transfer ofrequired for the transfer ofrequired for the transfer ofstock subscription rights

stock subscription rights

stock subscription rightsof stock subscription rights
Number of shares to be acquired upon
exercise of stock subscription rights (shares)
Amount to be paid upon exercise of stock
subscription rights (yen)Notes:
1. The average closing price of NAMCO BANDAI Holdings Inc.’s common stock on the Tokyo Stock Exchange in the month (excluding non-trading days) prior to the month in which stock
subscription rights are exercised multiplied by 1.05 (amounts less than ¥1 rounded up). However, if the amount is less than the closing price on the most recent trading day prior to theexercise of stock subscription rights, the closing price is used.
2. Stock subscription rights cannot be exercised if the growth rate of the share price of NAMCO BANDAI Holdings Inc. is lower than the TOPIX growth rate during the period after
allocation of stock subscription rights to the first day of the period for exercise of stock subscription rights. Further, the growth rate of the share price of NAMCO BANDAI Holdings Inc.
is calculated by dividing the average closing price of the common stock of NAMCO BANDAI Holdings Inc. on the Tokyo Stock Exchange in the three months (excluding non-tradingdays) prior to the month of the first day of the period for exercise of stock subscription rights by the average closing price of the common stock of NAMCO BANDAI Holdings Inc. on theTokyo Stock Exchange in the three months (excluding non-trading days) prior to the month of the day of allocation of stock subscription rights. Further, the TOPIX growth rate is
calculated using the same method as for the growth rate of the share price of NAMCO BANDAI Holdings Inc.
3. (1) When rights are granted, as an evaluation indicator of net sales and operating income of the strategic business units to which those allocated stock subscription rights (stock
subscription rights holders) belong, annual business targets and an evaluation period (the three-year period from the granting of stock subscription rights to the time when stock
subscription rights can be exercised) are fixed. During the evaluation period, target achievement rates are measured for each year. If, upon completion of the evaluation period,
respective average achievement rates are 50% or higher over the evaluation period, stock subscription rights can be exercised. However, even in such cases, the number of shares ofcommon stock that can be acquired through the exercise of subscription rights is based on the same rate as the average achievement rate (with an upper limit of 100%).
(2) In the event of the death of a stock subscription rights holder, the rights shall be transferred to their heirs (limited to one person). However, the rights cannot be owned or exercised
beyond the exercise period of the stock subscription rights.
(3) The Company will not recognize the transfer, pledging, or any other dispositions of stock subscription rights.
(4) Other conditions are stipulated in stock subscription rights contracts concluded between NAMCO BANDAI Holdings Inc. and those receiving rights, which are based on the
resolutions of the ordinary general meeting of shareholders and the Board of Directors.
4. (1) At the time of exercising rights, stock subscription rights holders are required to be employees of NAMCO BANDAI Holdings Inc. or the BANDAI NAMCO Group.
(2) If, despite the regulation in (1), stock subscription rights holders retire due to personal circumstances, they can own and exercise stock subscription rights for a maximum of six
months following the occurrence of grounds for retirement. However, the said rights cannot be owned or exercised beyond the period for exercise of stock subscription rights.
Further, if stock subscription rights holders due to circumstances of the Company or in other cases that the Company recognizes as valid, there will be no change in the rights or the
exercise period of the stock subscription rights.
(3) In the event of the death of a stock subscription rights holder, the rights shall be transferred to their heirs (limited to one person). In such an event, the heirs can own and exercise
the stock subscription rights that have been granted for a maximum of six months following the death (in the event of the death of a stock subscription rights holder prior to theexercise period of the stock subscription rights, six months from the beginning of the period for exercise of stock subscription rights). However, the rights cannot be owned or
exercised beyond the exercise period of the stock subscription rights.
(4) The Company will not recognize the transfer, pledging, or any other dispositions of stock subscription rights.
(5) Other conditions are stipulated in stock subscription rights contracts concluded between NAMCO BANDAI Holdings Inc. and those receiving rights, which are based on the
resolutions of the ordinary general meeting of shareholders and the Board of Directors.

58

18 Leases
1. Lessee
The Company and its subsidiaries occupy offices and other facilities under various finance and operating lease arrangements.
(1) Finance leases
Finance leases, except for those where the legal title to the underlying property is transferred to the lessee, are accounted forsimilar to operating leases. The title does not transfer in any of the Company’s leases.
The original cost and accumulated depreciation of assets under such finance leases at March 31, 2006 are as follows:

Original cost at inception of leases

Millions of yen

Thousands of
U.S. dollars

2006

2006

¥1,239$10,548

Less accumulated depreciation(522)(4,444)

Assets under finance lease, net¥ 717$ 6,104

Millions of yen

Thousands of
U.S. dollars

2006

2006

Future minimum payments due under finance leases as of March 31, 2006 are as follows:

Due within one year
Due after one year
Total

¥237

$2,018

480

4,086

¥717

$6,104The lease and depreciation expense for such finance leases for the year ended March 31, 2006 are as follows:
Millions of yen

Thousands of
U.S. dollars

2006

2006

Lease expense¥239$2,035

Depreciation expense

239

2,035

Millions of yen

Thousands of
U.S. dollars

2006

2006

Due within one year

¥1,798$15,306

Due after one year

6,380

54,312¥8,178$69,618(2) Operating leases
Future minimum payments required under operating leases at March 31, 2006 are as follows:

Total

59

2. Lessor
Finance leases
Finance leases, except for those where the legal title to the underlying property is transferred from the lessor to the lessee, areaccounted for similar to operating leases.
The acquisition cost, accumulated depreciation and net value of assets under such finance leases included in fixed assets at
March 31, 2006 are as follows:
Millions of yen

Thousands of
U.S. dollars

2006

2006

Acquisition cost

¥1,497$12,744

Less accumulated depreciation(879)(7,483)

Assets under finance leases, net¥ 618$ 5,261

Millions of yen

Thousands of
U.S. dollars

2006

2006

Future minimum payments due under finance leases at March 31, 2006 are as follows:

Due within one year¥294

Due after one year
Total

$2,503

409

3,482

¥703

$5,985

Lease income and depreciation expense for finance leases for the year ended March 31, 2006 are as follows:
Millions of yen

Thousands of
U.S. dollars

2006

2006

Lease income¥357$3,039Depreciation expense

320

2,724

19 Foreign Exchange Risk Management and Interest Rate Risk Management
Derivative financial instruments are comprised principally of foreign exchange contracts and interest rate swaps. These
instruments are used to reduce the risks of changes in foreign exchange rates and interest rates; they are not used for
speculation.
The Company is exposed to credit risk related to nonperformance by the counterparties to foreign exchange contracts andinterest rate swaps, but the Company does not expect any problems with nonperformance due to the high credit ratings of thecounterparties.
Contract amounts, market values, and gains or losses from valuation of foreign exchange contracts outstanding at March 31,
2006 are set forth as follows. These contract amounts in themselves should not be considered indicative of the market risk
associated with the derivative financial instruments.

60

Millions of yen

Thousands of U.S. dollars

2006

2006

Contract
AmountEstimated
Fair Value

Unrealized
Gain (Loss)

Contract
AmountEstimated
Fair Value

Unrealized
Gain (Loss)¥$

Foreign Exchange Contracts
Sold:
British Pounds

¥ 964

¥ 958

6

$ 8,206$ 8,155

Yen

590

547

43

5,023

4,657

366

51

Won

178

185

(7)

1,515

1,575

(60)

2,396

2,497

101

20,397

21,257

860

—

—

¥143

—

—

$1,217Purchased:
U.S. dollars
Total

Notes:
1. The above table does not include any derivative financial instruments which are treated as effective hedges of the assets and/or liabilities.
2. The above foreign exchange contracts were originally utilized to manage risks arising from foreign currency receivables and payables between consolidated companies, which were
eliminated in the consolidated financial statements.

20 Commitments and Contingent Liabilities
Contingent liabilities as of March 31, 2006 are summarized as follows:
Millions of yen

Thousands of
U.S. dollars

2006

2006

Guarantee for lease agreement made by a business partner of a foreign
consolidated subsidiary

¥86

$732

21 Segment Information(1) Business segments
Millions of yen

2006
Toys and
Hobby

Amusement
Facility

Game
Contents

Network

Visual andMusic Content

Other

Subtotal¥176,474¥78,793

4,534

592

181,008

79,385

Eliminations
and Corporate Consolidated¥128,105¥12,196¥42,280¥12,981¥450,829—¥450,829

2,326

325

1,048

10,09018,915(18,915)—

130,431

12,521

43,32823,071

469,744(18,915)450,829
415,160

Net sales and Operating
incomeSales to externalcustomers
Intersegment transactions
Subtotal¥

Cost of sales andoperating expenses

161,923

76,878

119,980

10,68537,141

23,243429,850(14,690)

Operating income (loss)¥ 19,085¥ 2,507¥ 10,451¥ 1,836¥ 6,187¥ (172)¥ 39,894¥ (4,225) ¥ 35,669¥136,692¥57,910¥113,800¥10,578¥36,928¥23,212¥379,120¥7,531¥386,651

5,055

9,164

2,107

151

527

1,446

18,450694

19,144

825

—

557

1,619

—

—

3,001

—

3,001

8,457

10,979

1,404

253

1,595

753

23,441579

24,020Assets, Depreciation,
Impairment losses andCapital expenditures
AssetsDepreciation
Loss on impairment of
fixed assets
Capital expenditures61

Thousands of U.S. dollars

2006
Toys and
Hobby

Amusement
Facility

Game
Contents

Network

Visual andMusic Content

Other

Eliminations
and Corporate Consolidated

Subtotal

Net sales and Operating
incomeSales to externalcustomers$1,502,290 $670,750 $1,090,534 $103,822

Intersegment transactions
Subtotal

38,5975,040$359,922$110,504 $3,837,822 $— $3,837,822

19,801

2,767

8,921

85,894

161,020(161,020)—

1,540,887

675,790 1,110,335

106,589

368,843

196,3983,998,842(161,020) 3,837,822

1,378,421

654,448 1,021,367

90,959316,174

197,8633,659,232(125,053) 3,534,179

88,968 $ 15,630$ 52,669$ (1,465) $ 339,610 $ (35,967)$ 303,643$197,599 $3,227,377

Cost of sales andoperating expenses

Operating income (loss) $ 162,466 $ 21,342 $Assets, Depreciation,
Impairment losses andCapital expenditures
Assets$1,163,633 $492,977$968,758$90,049$314,361

43,03378,011

17,936

1,285

4,486

12,310157,061

5,908

162,969

fixed assets

7,023

—

4,742

13,782——25,547—25,547

Capital expenditures

71,993

93,462

11,952

2,154

13,5786,410

199,549

4,929

204,478

Depreciation$64,110 $3,291,487

Loss on impairment ofNotes:
1. The industry segments used above are those used for internal management purposes.
2. Main products in each business segment:(1) Toys and Hobby: toys, candy toys, products for vending machines, cards, plastic models, apparel, sundries, stationery.
(2) Amusement Facility: amusement facilities operation.
(3) Game Contents: home-use video game software, commercial-use video game machines, prizes for amusement arcade machines.
(4) Network: mobile contents.
(5) Visual and Music Content: video products, video software, on-demand video distribution.
(6) Other: transportation and storage of products, leases, real estate management, printing, welfare facilities and facilities for senior citizens, development and sales of environmental
devices.
3. Unallocatable operating expense included in the “Eliminations and Corporate” column under “Operating expenses” was ¥5,812 million ($49,476 thousand) for the year ended March
31, 2006. The majority of these costs represent administrative costs incurred by the general administration department of the Company, Bandai Co., Ltd. and NAMCO Limited(presently NAMCO BANDAI Games Inc.).
4. Assets included in the “Eliminations and Corporate” column under “Assets” approximated ¥24,800 million ($211,118 thousand) as of March 31, 2006. The significant assets includedin the amount were surplus operating funds (cash and time deposits) of the Company, long-term Investment funds (investment securities) and assets held by the administrative sections.

(2) Geographic segments
Millions of yen

2006
Japan

Americas

EuropeAsia,
ExcludingJapan¥365,823¥42,769¥31,231¥11,006

Subtotal¥450,829

Eliminations
and Corporate

Consolidated¥¥450,829

Net sales and Operating income
Sales to external customers
Intersegment transactions
Subtotal

—

8,497

1,335

13

21,10630,951(30,951)—

374,320

44,104

31,244

32,112

481,780(30,951)

450,829

Cost of sales and operating expenses

336,706

47,38826,91429,841

440,849(25,689)

415,160

Operating income (loss)¥ 37,614¥ (3,284)¥ 4,330¥ 2,271¥ 40,931¥ (5,262)¥ 35,669¥291,500¥32,543¥34,087¥15,898¥374,028¥12,623¥386,651

Assets62

Thousands of U.S. dollars

2006
Japan

Americas

EuropeAsia,
ExcludingJapan

Eliminations
and Corporate

Subtotal

Consolidated

Net sales and Operating income
Sales to external customers$3,114,182$364,084$265,864Intersegment transactions

72,333

11,365

111

179,671

263,480

Subtotal

3,186,515

375,449

265,975

273,363

4,101,302(263,480) 3,837,822

Cost of sales and operating expenses

2,866,315

403,405

229,114254,0313,752,865(218,686) 3,534,179$ 320,200$ (27,956)$ 36,861$ 19,332 $ 348,437$ (44,794) $ 303,643$2,481,485$277,032$290,176$135,337 $3,184,030$107,457 $3,291,487

Operating income (loss)
Assets$ 93,692 $ 3,837,822 $— $3,837,822(263,480)—

Notes:
1. Definition of geographic segments and main countries and regions in geographic segments:(1) Foreign geographic segments are defined by geographic region, similarity of economic activities and interrelation of business activities, etc.
(2) The main countries and regions in each geographic segment are as follows:
1) Americas: United States and Canada
2) Europe: France, United Kingdom and Spain
3) Asia, Excluding Japan: Hong Kong, Thailand and Korea
2. Unallocatable operating expense included in the “Eliminations and Corporate” column under “Operating expenses” was ¥5,812 million ($49,476 thousand) for the year ended March
31, 2006. The majority of these costs represent administrative costs incurred by the general administration department of the Company, Bandai Co., Ltd. and NAMCO Limited(presently NAMCO BANDAI Games Inc.).
3. Assets included in the “Eliminations and Corporate” column under “Assets” approximated ¥24,800 million ($211,118 thousand) as of March 31, 2006. The significant assets includedin the amount were surplus operating funds (cash and time deposits) of the Company, long-term Investment funds (investment securities) and assets held by the administrative sections.

(3) Foreign sales
Millions of yen

2006
Foreign sales

Americas

Europe

Asia

Total

¥43,406¥31,537¥10,844¥ 85,787

Consolidated sales
Share of sales to customers outside Japan

450,829
9.6%

7.0%

2.4%

19.0%

Thousands of U.S. dollars

2006
Foreign sales

Americas

Europe

Asia

Total

$369,507$268,469$92,313$ 730,289

9.6%

7.0%

2.4%

Consolidated sales
Share of sales to customers outside Japan

3,837,822
19.0%

Notes:
1. Foreign sales are defined as total sales by the Company and its consolidated subsidiaries in countries and regions other than Japan.
2. Segmentation by country or by regions and the main countries and regions in each geographic segment are as follows:(1) Foreign geographic segments are defined by geographic region, similarity of economic activities and interrelation of business activities, etc.
(2) The main countries and regions in each geographic segment are as follows:
1) Americas: United States, Canada and Latin America
2) Europe: France, United Kingdom, Spain, Middle East and Africa
3) Asia, Excluding Japan: Hong Kong, Singapore, Thailand, Korea, Australia, China and Taiwan

63

22 Significant Subsequent Events
1. Simplified share exchange with grant

2. Announcement of Zapf Creation AG take-over bid

The Company implemented a share exchange which

On June 13, 2006, the Company decided to make a take-over

BANPRESTO Co., Ltd. (BANPRESTO), became a wholly owned

bid to acquire the shares of Zapf Creation AG (“Zapf”) of

subsidiary on June 1, 2006, based on a decision of theGermany through Bandai GmbH of Germany. Bandai GmbH is

Company’s Board of Directors held on March 29, 2006, and aa subsidiary of BANDAI S.A., a wholly owned subsidiary of theshare exchange agreement concluded with BANPRESTO on

Company. Zapf’s Supervisory Board and Management Board

that date. In accordance with Article 358, Paragraph 1 of thehave expressed their support for this take-over bid.

former Commercial Code for the Company and in accordancewith Article 12, Paragraph 4, Clause 2 of the Industrial Revitaliza-(1) Purpose of take-over bid

tion Law for BANPRESTO, a simplified share exchange wasUnder the three-year medium-term management plan (April

conducted without obtaining the approval of the general

2006 to March 2009) being implemented by the BANDAI

meetings of shareholders as stipulated in Article 353, Paragraph

NAMCO Group, the key theme is “Strengthening, Enriching,

1 of the former Commercial Code. The share exchange allows

and Expanding the BANDAI NAMCO Group’s portfolio

the Company to acquire the remaining shares for cash in accor-

management”, and one of the key business strategies is todance with Article 12-9 of the Industrial Revitalization Law.

strengthen overseas operations. The take-over bid for Zapf will
enable the Company to achieve one of the strategies in the(1) Objective of making BANPRESTO a wholly owned
subsidiary through a share exchange

medium-term management plan.
Zapf is headquartered in Germany and has an extremely highFrom February 24, 2006, to March 16, 2006, the Company

name recognition in the European markets for large dolls formade a take-over bid for the shares of BANPRESTO with theinfants and girls, with a share of more than 60% in Germany

objective of making BANPRESTO a wholly owned subsidiary.

and more than 40% in the United Kingdom. In Europe, the

The Company acquired 97.01% of the 10.8 million shares of

BANDAI NAMCO Group’s toys and hobby product portfolio is

BANPRESTO. Subsequently, on June 1, 2006, through thecentered on products for boys. Zapf’s product portfolio andshare exchange, the Company achieved its final objective of

the Group’s product portfolio complement each other well.

making BANPRESTO a wholly owned subsidiary. BANPRESTO

Zapf has operations not just in Central Europe but also in

becoming a wholly owned subsidiary was undertaken for the

Eastern Europe, where the Company does not have a sales

purpose of creating an organization that responds flexibly to

network. Zapf and the Company will also complement eachthe Group’s management strategy.

other well in markets. Accordingly, the Company decided thata capital tie-up with Zapf will enable the two companies to(2) Terms of share exchange agreement
In accordance with the share exchange agreement concluded
on March 29, 2006, the Company will pay ¥3,450 for eachBANPRESTO stock owned by the remaining shareholders of
BANPRESTO, who have entered or otherwise recorded theirshares in the shareholders’ register as of May 31, 2006, whichis the day prior to the effective date of the share exchange.
The share exchange will not apply to those shares held by theCompany.

64

synergize their products and markets.

(2) Summary of take-over bid
1. Summary of target company

7. Public announcement of take-over bid
The take-over bid will be made pursuant to Germany’s

Company name: Zapf Creation AG

regulations, and accordingly, a local take-over bid

Main business: Production and sales of toys

public announcement will be made based on

Establishment: 1932

Germany’s securities exchange laws. There will be no

Head office: Rödental, Germany

public announcement in Japan.

Representative: Georg Kellinghusen, CFO
Stock exchange listings: Frankfurt, Stuttgart, Munich
Number of shares issued and outstanding:

8. Take-over bid agent
BNP PARIBAS Securities Services
9. The target company acceptance of the take-over bid

8,000,000 shares of common stock

The target company’s Supervisory Board andRelationship with the Company: There are no capital,

Management Board have accepted in principal the

personal, or trading relationships.

take-over bid.

Number of employees, consolidated:

10. Other408 (as of December 31, 2005)

In Germany, BANDAI GmbH has not yet submitted the

Net sales: 140.7 million euro

notification of the take-over bid to Deutsche(year ended December 31, 2005)*

Gesellschaft für Ad-hoc-Publizität mbH, which is

Net loss: 27.0 million euro

responsible for handling these procedures. There is a(year ended December 31, 2005)*

possibility that the application may not be accepted.

Total assets: 135.6 million euro

If the application is not accepted, the take-over bid will

(as of December 31, 2005)*

not commence.

Net assets: 11.0 million euro (as of December 31, 2005)** Figures for the year ended December 31, 2005, are unaudited.

2. Type of shares to be acquired
Shares of common stock
3. Take-over bid period
Approximately a 6-week period from the end of June
2006 is scheduled.
4. Purchase price (per share)
One share of common stock: 10.50 euro
5. Planned total number of shares to be acquiredMore than 75% of shares issued and outstanding
Planned total number of shares to be acquired:
6,000,001 or more
6. Movement of shares owned as a result of tender offer bid
Before take-over bid: 0 shares
After take-over bid: 6,000,001 or more(ownership rate of 75% or more)

65

Independent Auditors’ Report

To the Board of Directors of
NAMCO BANDAI Holdings Inc.:

We have audited the accompanying consolidated balance sheet of NAMCO BANDAI Holdings Inc. and consolidated
subsidiaries as of March 31, 2006, and the related consolidated statement of income, shareholders’ equity and cash flows forthe year in the period ended March 31, 2006, expressed in Japanese yen. These consolidated financial statements are theresponsibility of the Company’s management. Our responsibility is to independently express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in Japan. Those standards require that weplan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis forour opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated
financial position of NAMCO BANDAI Holdings Inc. and subsidiaries as of March 31, 2006, and the consolidated results of
their operations and their cash flows for the year in the period ended March 31, 2006, in conformity with accounting
principles generally accepted in Japan.
Without qualifying our opinion, we draw attention to Note 22 to the consolidated financial statements. On June 13, 2006,
the Company decided to make a take-over bid to acquire the shares of Zapf Creation AG (“Zapf”) of Germany throughBandai GmbH of Germany. Bandai GmbH is a wholly owned subsidiary of BANDAI S.A., of France, which is a subsidiary of theCompany.
The U.S. dollar amounts in the accompanying consolidated financial statements with respect to the year ended March 31,
2006 are presented solely for convenience. Our audit also included the translation of yen amounts into U.S. dollar amounts
and, in our opinion, such translation has been made on the basis described in Note 3 to the consolidated financial statements.

Tokyo, Japan
June 26, 2006

66

Corporate
Information(As of March 31, 2006)

In 1950, Bandai Co., Ltd., was established as amarketer of toys. Since that time, Bandai’s mission
has been to provide dreams, inspiration andexcitement to people around the world throughentertainment businesses, and the company has
always risen to the challenge of achieving
continual improvement. Bandai has developed awide range of operations, including not just toys
but also apparel, candy toys, card games, gamesoftware, visual products, and network services,
through the active use of its original businessmodel—character merchandising.

Corporate Name: NAMCO BANDAI Holdings Inc.
Head Office: 9th Floor, Taiyo Seimei Shinagawa Building, 2-16-2, Konan,
Minato-ku, Tokyo 108-0075, Japan
URL: www.bandainamco.co.jp
Capital: ¥10 billion
Stock Exchange Listing: Tokyo Stock Exchange, First Section (Code number: 7832)
Main Business: Planning and execution of medium- and long-term management strategies for the
BANDAI NAMCO Group; provision of support for business strategy implementation
by Group companies and management of business activities.
1,000,000,000 shares
Stock Information: Number of Shares Authorized:
Number of Shares Issued:
260,580,191 shares
Number of Shareholders:
39,579Number of Shares per Trading Unit:
100 shares
Major Shareholders:

NameJapan Trustee Services Bank, Ltd. (Trust Account)

7.29

Northern Trust Company (AVFC) Sub Account American Client

5.55

Masaya Nakamura

5.51

The Master Trust Bank of Japan, Ltd. (Trust Account)

5.17

MAL Ltd.

4.03

Goldman Sachs International

2.79

Bandai Co., Ltd.

2.72

Sanka Ltd.

1.91

The Nomura Trust and Banking Co., Ltd.
(Holder in Retirement Benefit Trust for The Bank of Tokyo-Mitsubishi UFJ, Ltd. Account)

1.76

Om04 SSB Client Omnibus

1.62

Ownership Breakdown:
In 1955, NAMCO LIMITED was established asa manufacturer and marketer of amusement
machines. Since that time, NAMCO’s overriding
mission has been contributing to the realization offun, happy, healthy lifestyles, and the company has
led the way in helping people experience the fun
they have always dreamed of. In addition toamusement machine manufacturing andmarketing, NAMCO has expanded its businessfields to a wide array of other areas, including
amusement facility operations and game software
for home game consoles, and has developed
original technical strengths and facility networks.

% of Total

Individuals, etc.

20.62%

Financial institutions

27.09%

Brokerages

0.62%
Foreign corporate
entities and others

Other corporate entities

14.51%

37.16%

Forward-Looking Statements

The forward-looking statements in this annual report are based on the information currently available to management and include various risks and uncertainties. Accordingly,
actual results may differ materially from these projections for a variety of reasons. Major factors that could influence actual results include changes in business environments,
market trends, and exchange rate fluctuations relevant to the businesses of the BANDAI NAMCO Group.
Notes:
1. All figures in this report are rounded to the nearest unit.
2. Fiscal 2006, the year under review, refers to the one-year period ended March 31, 2006.
3. Projections and other figures in this annual report are as of May 2006.

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NAMCO BANDAI Holdings Inc.

Annual Report 2006

www.bandainamco.co.jp

NAMCO BANDAI Holdings Inc.
Annual Report 2006

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