Corporate Information

Risk Factors

Of matters pertaining to the Happinet Group's business and accounting, the following matters may have a significant impact on the judgments of shareholders and investors. Note that matters related to the future involve assumptions made by the Group based on information available at the end of the previous consolidated fiscal year.

1. Relying heavily on one supplier

Bandai Co., Ltd. is the Happinet Group's largest supplier. For the fiscal year ended March 2014, purchases from Bandai amounted to 50.548 billion yen. The amount purchased from Bandai accounts for a large percentage of the total amount of purchases by the Happinet Group: 27.7% for the fiscal year ended March 2014, 30.9% for the fiscal year ended March 2013, 30.0% for the fiscal year ended March 2012, 25.9% for the fiscal year ended March 2011, and 22.8% for the fiscal year ended March 2010. The Happinet Group and Bandai first renewed their product trade agreement on April 1, 1992, and the contract has since been automatically renewed each year up to the present. Under these circumstances, any disruptions to future business dealings with Bandai may have an adverse effect on the Happinet Group's financial performance.

2. Inventory

The Happinet Group primarily functions as an intermediate distributor, and, in this capacity, it tends to maintain a large stock of inventory. The Group is working to optimize channel inventory in each business segment and to improve sales proposals. If these efforts do not progress smoothly, the Happinet Group's financial performance may be adversely affected.

3. Content development business

The Happinet Group is aiming to firmly establish its content business. To this end, it is actively making investments in order to acquire high-quality works in the video and music fields. It is also strengthening its planning, production, and marketing capabilities to create high-quality video and music content. Depending on the return on investment from works that the Happinet Group invests in, the Group's financial performance may be adversely affected.

4. Product liability and quality control

Because the Happinet Group is chiefly a wholesaler, most of the products it handles feature other companies' brands. A portion of the products the Group handles are Happinet-branded products or products that Happinet has imported from overseas. The Group makes every effort to ensure quality control, but should a product defect occur that leads to a large-scale recall or compensation for product liability issues, the management performance, financial status, and future business developments of the Happinet Group may be adversely affected.

5. System problems

The Happinet Group's business activities rely heavily on communications networks involving connected computer systems. In the event that a communications network is disconnected due to a natural disaster, an unforeseen accident, a sudden blackout, or another factor, it may become difficult for the Happinet Group to continue its business operations. There are also other risks, such as Happinet Group-owned information being overwritten or important data being erased or unlawfully obtained through criminal acts such as hacking by a third party or through errors made by Happinet management or employees. Happinet has from an early stage in its history implemented measures against such risks. In the event of such a problem, however, the management performance and future business developments of the Happinet Group may be adversely affected.

6. Personal information management

A portion of sales of the Happinet Group comes from selling toys, video and music software, and video games via the Internet. Through these transactions, the Group obtains the personal information of its customers. As the number of online customers is expected to increase, the Happinet Group has in place an in-house management system for handling personal information. The Group is working to raise awareness among management and employees about protecting personal information; it is also placing strict controls on the handling of personal information, so that it is not leaked. However, should there be a leak of personal information due to an unforeseen event, such as hacking by a third party, it could cause a decrease in sales due to a loss of customers' confidence in the Happinet Group or it could generate expenses in the form of compensation for damages; in either case, this could have an adverse affect on the Happinet Group's financial performance.

7. Effect from large-scale disasters

The Happinet Group has formulated a risk management manual in preparation for emergencies such as large-scale disasters. In the fiscal year ended March 2011, the Group formulated a BCP (business continuity plan) that would target a swift recovery of business following a disaster. However, in the case of a massive disaster far beyond the scope of assumption, the business activities and logistics of the Happinet Group may be hindered, thus having an adverse effect on the Group's financial performance.

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