Final Results - Part 1

Konami Corporation 9 May 2002 Summary of Consolidated Financial Results for the Year Ended March 31, 2002 May 9, 2002 KONAMI CORPORATION Stock Code Number: 9766 Shares Listed: Tokyo Stock Exchange , Osaka Securities Exchange , London Stock Exchange and Singapore Exchange Contact: Toshiro Tateno, Executive Corporate Officer, Corporate Planning Division (Phone:03-3578-0573) URL: http://www.konami.com Date of Board Meeting on financial results for the fiscal year: May 9, 2002 1. Financial Results for the Year Ended March 31, 2002 (1) Consolidated Results of Operations (Figures truncated) Year-on-year Operating Year-on-year Ordinary Year-on-year Net Sales Change Income Change Income Change (Y million) (%) (Y million) (%) (Y million) (%) Year ended 225,580 31.5 26,877 (30.5) 26,878 (26.2) March 31, 2002 Year ended 171,480 16.9 38,645 24.9 36,427 17.1 March 31, 2001 Diluted Ordinary Ordinary Net Income Year-on-year Net Income Net Income Return on Income to Income to Change per Share per Share Equity Assets Ratio Sales Ratio (Y million) (%) (Y) (Y) (%) (%) (%) Year ended 13,573 (37.7) 107.24 - 9.3 10.0 11.9 March 31, 2002 Year ended 21,781 18.7 190.91 - 19.7 18.9 21.2 March 31, 2001 Notes: 1. Equity in net income (losses) of affiliated companies Year ended March 31, 2002: Y524 million Year ended March 31, 2001: Y(583) million 2. Average number of shares issued and outstanding Year ended March 31, 2002: 127,647,120 shares Year ended March 31, 2001: 114,093,518 shares 3. There is no change in accounting policies. 4. Change (%) of net sales, operating income, ordinary income and net income represents the increase or decrease ratio in relation with the same period of the previous year. (2) Consolidated Financial Position Total Shareholders' Equity-Assets Total Shareholders' Total Assets Equity Ratio Equity per Share (Y million) (Y million) (%) (Y) March 31, 2002 290,147 141,297 48.7 1,135.11 March 31, 2001 250,023 149,875 59.9 1,164.19 Note: Number of shares issued and outstanding at year-end March 31, 2002: 124,479,815 shares March 31, 2001: 128,737,538 shares (3) Consolidated Cash Flows Net Cash Provided by (Used in) Cash and Operating Investing Financing Cash Equivalents Activities Activities Activities at Year-end (Y million) (Y million) (Y million) (Y million) Year ended 10,037 (22,114) 15,020 75,187 March 31, 2002 Year ended 21,116 (72,686) 60,440 66,812 March 31, 2001 (4) Consolidation Scope and Application of Equity Method Consolidated subsidiaries: 37 companies Affiliated companies applicable under equity method: 4 companies (5) Changes in Consolidation Scope and Application of Equity Method Increase in the number of consolidated subsidiaries: 6 companies Increase in the number of affiliates applicable under equity method: 2 companies 2. Consolidated Financial Forecast for the Year Ended March 31, 2003 Ordinary Net Net Sales Income Income (Y million) (Y million) (Y million) Six months ended 107,000 5,500 1,000 September 30, 2002 Year ended 235,000 22,500 7,000 March 31, 2003 Note: Estimated net income per share for the year ended March 31, 2003 is Y56.23. Cautionary Statement: These statements are based on information currently available to the management but subject to changes. Actual financial results might differ due to a number of factors, not limited to but, general global economy, foreign exchange rates in which Konami Group trades and Konami Group's capability to come up with innovative and attractive products in highly competitive markets of which we have solid confidence. 1. Organization Structure of Konami Group Konami Group specifies its business domain as the global entertainment industry and is structured by KONAMI CORPORATION (the 'Company'), 37 consolidated subsidiaries and 4 affiliated companies applicable under equity method. The Company, the subsidiaries and the affiliated companies are categorized into each business segment according to their operations as stated below. Business segment categorization stated below is based on the same categorization stated in '1. Operating Segment Information' of '4. Consolidated Financial Statements (Segment Information)' Business Segments Major Companies Consumer Software Domestic The Company, Konami Marketing, Inc. (*11) Konami Computer Entertainment Osaka, Inc. (*4) Konami Computer Entertainment Tokyo, Inc. (*8) Konami Computer Entertainment Japan, Inc. (*16) Konami Computer Entertainment Studios, Inc. (*14) Konami Computer Entertainment School, Inc. (5.) Konami Style.com Japan, Inc. Konami Mobile & Online, Inc. (*12) HUDSON SOFT CO., LTD. (*10,14,18), Genki Co., Ltd. (*15,18) 4 other companies (5.) Overseas Konami of America, Inc., Konami of Europe GmbH Konami Marketing (Asia) Ltd. (*1) Konami Software Shanghai, Inc., 3 other companies Sports Club Domestic Konami Sports Corporation (*2) (Note 4) Konami Olympic Sports Club Corporation (*17) 2 other companies (*5) Character Products Domestic The Company, Konami Marketing, Inc. (*11) Konami Music Entertainment, Inc., Konami Style.com Japan, Inc. (Note 3) Overseas Konami of America, Inc., Konami Marketing (Asia) Ltd. (*1) 2 other companies Pachinko Systems Domestic The Company, Konami Parlor Entertainment, Inc. 1 other company (*7) Amusement Machines Domestic The Company, Konami Marketing, Inc. (*11), 1 other company Overseas Konami of America, Inc. Konami Amusement of Europe Ltd. Konami Marketing (Asia) Ltd. (*1) 2 other companies Gaming Machines Domestic The Company, Konami Marketing, Inc. (*11) Overseas Konami Gaming, Inc. (*9) Konami Australia Pty Ltd. (*13), 1 other company (*13) Health Entertainment Domestic The Company Konami Sports Life Corporation (*3,6) Other Domestic Konami Capital, Inc., Konami Service, Inc. Konami Amusement Operation, Inc. TAKARA CO., LTD. (*18), 1 other company Overseas 3 other companies Notes: 1. The companies that have multiple business segments are included in each segment respectively. 2. Changes in major companies for the year ended March 31, 2002 are as follows: (*1) Konami (Hong Kong) Ltd. changed its company name to Konami Marketing (Asia) Ltd. on June 1, 2001. (*2) PEOPLE CO., LTD. changed its company name to Konami Sports Corporation on June 1, 2001. (*3) NAPS CORPORATION changed its company name to Konami Sports Life Corporation on June 1, 2001. (*4) KCEO Inc. changed its company name to Konami Computer Entertainment Osaka, Inc. on June 28, 2001. (*5) NISSAN SPORTS PLAZA, CO., LTD. became a wholly owned subsidiary of Konami Sports Corporation on June 22, 2001 and changed its company name to Konami Sports Plaza, Inc. on June 29, 2001. (*6) Konami Sports Life Corporation merged with KCE Planning, Inc. on July 12, 2001. (*7) DELUCADERUYO, Inc. became a wholly owned subsidiary of Konami Parlor Entertainment, Inc. on July 31, 2001 and changed its company name to Konami Parlor Research, Inc. on August 1, 2001. (*8) KCE Tokyo, Inc. changed its company name to Konami Computer Entertainment Tokyo, Inc. on August 1, 2001. (*9) Konami Gaming, Inc. acquired and merged with Paradigm Gaming Systems, Inc. on August 3, 2001, and integrated it as a systems division. (*10) HUDSON SOFT CO., LTD. became an affiliated company applicable under equity method on August 22, 2001. (*11) Konami Marketing, Inc. merged with 11 domestic sales dealers (TOKYO KONAMI CO., LTD., OSAKA KONAMI CO., LTD., CHUBU KONAMI CO., LTD., CHUO KONAMI CO., LTD., HOKKAIDO KONAMI CO., LTD., KITAKANTO KONAMI CO., LTD., HIGASHIKANTO KONAMI CO., LTD., MINAMIKANTO KONAMI CO., LTD., CHUGOKU KONAMI CO., LTD., KYUSHU KONAMI CO., LTD., NISHINIHON KONAMI CO., LTD.) for the purpose of the reinforcement and efficiency of domestic sales network on October 1, 2001. (*12) Konami Mobile & Online, Inc. was established on October 1, 2001. (*13) Konami Australia Pty Ltd. and its subsidiary, Konami Gaming Australia Pty Ltd., became consolidated subsidiaries on October 1, 2001. (*14) HUDSON SOFT CO., LTD. succeeded a portion of the business in Sapporo of a consolidated subsidiary, Konami Computer Entertainment Studios, Inc., by the method of absorption following a spin-off on December 1, 2001. (*15) Genki Co.,Ltd. became an affiliated company applicable under equity method on January 30, 2002. (*16) Konami Computer Entertainment Japan, Inc. was listed on JASDAQ (Japanese over-the-counter market) on February 6, 2002. (*17) DAIEI OLYMPIC SPORTS CLUB, INC. became a subsidiary of Konami Sports Corporation and changed its company name to Konami Olympic Sports Club Corporation on February 27, 2002. (*18) These are affiliated companies applicable under equity method. 3. Creative Products segment changed its name to Character Products from the year ended March 31, 2002. 4. Operation of fitness facilities which had been included in Health Entertainment segment is separately stated as newly established Sports Club segment from the year ended March 31, 2002.. 5. Konami Computer Entertainment School, Inc. merged with Roppongi Monitoring Center, Inc. for the purpose of the efficiency of operation on May 1, 2002 and changed its name to Konami School, Inc. 2. Management Policy 1. Management Policy In addition to our management policy of putting primary priority to shareholders, we aim to maintain good relationship with all the stakeholders including shareholders and to make wide range of social contribution as a good corporate citizen. Management policy of putting primary priority to shareholders Our management policy of putting primary priority to shareholders is expressed in two ways. One is to continuously increase and improve shareholders value = corporate value = market capitalization and the other is to provide stable dividend as means to return profit to shareholders. We are to realize our practical targets of consolidated Return on Equity of 15% through optimum utilization of management resources. 'Adaptation to Global Standards', 'Maintaining Fair Competition' and 'Pursuit of High Profit' are the keywords of our management policy. Good relationship with stakeholders and social contribution as good corporate citizen Aiming to maintain good relationship with shareholders, investors, end-users, suppliers, employees and community in general we promote disclosure of information and wide range of social contribution. We support promotion of education, sports and culture. Our affiliated educational foundations provide supports for IT and multi-media education. We are serving as official sponsor for Nippon Professional Baseball Commissioners Organization, Japan Professional Football League, Japan Golf Tour Organization and K-1 World Grand Prix and also serving as official partner for New National Theatre Foundation. We aim to be an entertainment enterprise offering pleasure to society, achieving continuous expansion and being well recognized by society. 2. Profit Appropriation Policy We consider providing stable cash dividends and increasing and improving corporate value as important to return income to shareholders, aiming practically more than 30 % of consolidated net income. Accumulated earnings will be used to invest in the prospective and profitable business fields in future to strengthen continuous growth potential and competitiveness of the Company. 3. Medium to Long-term Strategies and Company Priorities Environment surrounding entertainment industry is drastically changing. With rapid advancement of digital technology, industries of game, movie, music, sports, toy, publishing and communication are merging and melting with each other and a new world is on verge of making its appearance. At the same time, entertainment industry finds potentiality of combining with fields of sports, fitness, health and education. Also consumers are getting more and more selective. Responding to this environment and to maintain continuous growing capability we recognize necessity of both refined diversification of business strategies and reinforcement of corporate constitution. We are to increase our 'Brand Value' by strengthening our 'Production', 'Marketing' and 'Financial Resources'. Refined diversification of business strategies We aim to build up corporate structure capable of generating profit in wide range of business areas by branching out into sports and health related fields and pursuing synergistic effects among video game, card game, mobile game and on-line game in entertainment business. We also keenly seek possibility of business alliance necessary for operational evolution. Reinforcement of corporate constitution We are to improve management control, to build up brand value and to enhance disclosure. As for management control, 'Leadership Development Center' was established last November to nurture leadership and enhance management control capability. As for brand value, new section for central management of brand strategy was established and full-scale activities to increase brand value is going to be initiated. As for enhancement of disclosure, we are preparing for listing on New York Stock Exchange and intending to obtain trust from investors and capital market by further enhancing our disclosure. 3. Business Performance and Financial Position 1. Business Review Overview Due to decrease of general demand, global decline of capital expenditure centering IT industry, industrial hollowing out, sluggish stock prices and employment insecurity corporate earnings and individual expenditures remain weak and Japanese economical situation has been tough and severe. In such environment, Nintendo GAMECUBE (September 2001) and Microsoft Xbox (February 2002) were released and stimulated entertainment industry. With Playstation2 and GAME BOY ADVANCE, full line-up of consumer-use game platforms made not only Japanese but also U.S. and European markets very active. On the other hand, commercial-use amusement machine market is rather shrinking due to advancement of consumer-use game machines and diversification of entertainment. Development of innovative amusement machines with originality is required to increase the sales. We have expanded and enhanced business areas by active utilization of M&A and business alliances and promoted building up of structure enable each business to generate profit independently. Strategic capital and business alliance between HUDSON SOFT CO., LTD. and the Company was established in August 2001 and cooperation in production of mobile & on-line game and sharing of management resources has been promoted. Capital and business alliance with Genki Co., Ltd. was established in January 2002 to enhance our publisher function. These alliances added new contents to Konami Group and are expected to generate synergistic effects among group businesses and new potentiality for our contents business. Konami Sports Corporation acquired all the stock (82.17% of total issued stock) of DAIEI OLYMPIC SPORTS CLUB, INC. (trade name changed to Konami Olympic Sports Club Corporation as of February 27, 2002) owned by The Daiei Inc. and its group in February 2002. This acquisition accelerates expansion of fitness club network and enhances competitiveness. Konami Marketing, Inc. in charge of marketing function since October 2001 merged with 11 Konami nationwide dealers to establish marketing system directly connected to retailers. As for overseas marketing system, marketing function in Hong Kong, Singapore and Korea were integrated into Konami Marketing (Asia) Ltd. to reinforce marketing system in Asia and improve efficiency. As a result, consolidated net sales of the term was Y225,580 million (131.5%) owing to the contribution made by sales of action game and sports game of CS Div. (Consumer Software), SP Div. (Sports Club) and card game of CP Div. (Character Products). Consolidated ordinary income was Y26,878 million (73.8%) and consolidated net income was Y13,573 million (62.3 %). The dividend of the term is Y54 per share (consolidated payout ratio 50.4% : interim dividend Y27). Performance by Division CS Div. (Consumer Software) marked strong sales particularly in the U.S. market following the release of new platforms, Nintendo GAMECUBE and Xbox. Game hardware market is very active with drastically increased penetration of PlayStation2 since the latter half of 2001 and increased popularity of handheld GAME BOY ADVANCE centering kid-users. Also game software market which was rather slow due to the transition of hardware has achieved rapid expansion. In such environment, our long-awaited 'METAL GEAR SOLID 2: SONS OF LIBERTY' (PS2) received high acclaim as expected and recorded 5 million copies shipment globally. 'YU-GI-OH! DUELMONSTERS 5 EXPERT 1' (GBA) with continued popularity among kids and 'WORLD SOCCER WINNING ELEVEN 5 FINAL EVOLUTION' (PS2) released in year-end holiday season marked strong sales in the domestic market. As for the overseas market, 'Silent Hill 2' (PS2) and 'Frogger: The Great Quest' (PS2) in the U.S. and 'PRO EVOLUTION SOCCER' (PS2) and 'Silent Hill 2' (PS2) in Europe made big sales. As a result, consolidated sales of the division was Y88 ,761 million (150.0 %). SP Div. (Sports Club, Note 2) posted solid sales through active increase of outlets by acquisition of DAIEI OLYMPIC SPORTS CLUB, INC. (currently Konami Olympic Sports Club Corporation) by Konami Sports Corporation in February 2002 and franchising existing fitness clubs. As a result, consolidated sales of the division was Y60,426 million (1348.6 %, Note 3). As for its brand strategy, we used to operate under 4 brands of 'People', 'eg-zas', 'FREIZEIT' and 'SELE' but 'FREIZEIT' and 'SELE' were integrated into 'eg-zas' brand in March 2002. Now we promote operation under 3 brands of 'eg-zas', 'People' and newly added brand 'GRANCISE', sports club targeting at businessperson. CP Div. (Character Products) enjoyed big contribution from sales of 'YU-GI-OH! OFFICIAL CARD GAME DUELMONSTERS' series. Even though the onetime frenzied boom was subsided and sales decreased compared to that of last year, level of sales is still high owing to popularity of card game as standard game. Shipment of the card game to the U.S. was initiated in March 2002. We are to strongly promote the U.S. introduction of YU-GI-OH! contents as TV animation broadcast started last year is getting high ratings and consumer-use game software is already released in March this year aiming to generate synergistic effects. New toy 'DigiQ', the first product of MICRO IR series was released in October 2001 on TAKARA CO., LTD. distribution network and made good sales. Consolidated sales of the division was Y25,213 million (41.7 %). PS Div. (Pachinko Systems) marked solid sales owing to the joint effort with pachinko machine maker to develop product responding to market needs and introduction of differentiated liquid crystal units. Consolidated sales of the division was Y16,924 million (115.4 %). AM Div. (Amusement Machines) posted stable sales of variation kits of music game 'drummania', 'pop'n music' and 'GUITARFREAKS' series and gun shooting game 'The KEISATSUKAN' and 'SILENT SCOPE' series. We have actively introduced products with originalities to create new game genre such as 'CELEBRITY STUDIO' automatic photo taking machine with technique of professional photographer, 'HIEHIEPENTA' the first prize offering machine in the industry with freezer function and 'dogstation' pet nurturing game. They were favorably accepted because of their unique ideas but sales ended lower than that of previous year due to reaction from music game boom lasted until last year. We have been working on development of new products with keywords of 'live communication' and 'ubiquitous game'. The first product 'MAH-JONG FIGHT CLUB' was released in March and favored by many operators. At the same time 'e-AMUSEMENT Service' was introduced as game with new element of amusement and made a good start. Consolidated sales of the division was Y10,973 million (64.1 %). GM Div. (Gaming Machines) marked big sales of large size token-operated machine 'FORTUNEORB' with its exciting entertainment effects. Large size token-operated machine 'Monster Gate' and 'Monster Gate II' very popular as new genre of token-operated machine and 'GI-WINNINGSIRE' offering excitement to players as live performance made solid sales. As for overseas gaming business, 100% owned subsidiary in Las Vegas, Nevada U.S., Konami Gaming, Inc. acquired casino management system developing company, Paradigm Gaming Systems, Inc. in August 2001 and integrated it into KGI. We aimed at expansion of sales by offering integrated package of gaming machines and management system and promoted improvement of service. However due to decrease of capital expenditure in line with dropped operational rate at casinos because of decline in the U.S. economy and tragic terrorists' attack, targeted sales was not achieved. Also we acquired 100% share of Konami Australia Pty., Ltd., a company holding state gaming licenses in Australia and doing development, manufacture, sales and servicing of gaming machines and made it a subsidiary since October 2001. Consolidated sales of the division was Y11,814 million (138.8 %). HE Div. (Health Entertainment Note 2) made stable sales at sports facilities engineering business and club-use business. As for the new products, in August 2001 'Dance Dance Revolution FAMIMAT' and in September 2001 'FITNESSORCHESTRA SERIES' were released. 'MARTIALBEAT' fitness action game combining martial art type of exercise program very popular at sports clubs of Konami Sports Corporation and elements of Konami music game was released in February 2002. We are working on development of new type of exercise machine with concept of 'EXERTAINMENT', a fusion of 'exercise' and 'entertainment'. 'EZBIKE' and 'EZRUNNER' were already released to create new market. Consolidated sales of the division was Y5,192 million (2,063.9 % Notes 3). Consolidated sales of others was Y6,273 million. Outlook for the Next Term In the year of '2002 FIFA World Cup', soccer is the focal point of public attention. CS Div. (Consumer Software) is going to release popular 'WORLD SOCCER WINNING ELEVEN' series both in domestic and overseas markets aiming significant hit sales. Strategic collaboration was set up with Nippon Television Network Corporation and baseball game with the title of TV live broadcast 'THE BASEBALL 2002 Battle Ballpark Declaration' will be released. In SP Div. (Sports Club), Konami Sports Corporation acquired DAIEI OLYMPIC SPORTS CLUB, INC. (currently Konami Olympic Sports Club Corporation) in February 2002. Based on the further reinforced No. 1 position, all the facilities are integrated under the name of 'Konami Sports Club'. We are planning to introduce 'single card system' to enable members to use nationwide Konami Sports Club facilities and aiming to obtain a million members. In CP Div. (Character Products), 'YU-GI-OH!' card game released in the U.S. in March is making a debut owing to effective media-mix promotion to consumers and introduction into Europe is also in the scope. The second product of new toy, MICRO IR series 'DigiQ TRAIN' will be strongly promoted. As a whole, each business segment will aim to expand, producing high quality products that meet consumers' needs with the keyword of 'Pursuit of High Profit'. The forecast for the next term is Y235,000 million for consolidated net sales, Y23,500 million for consolidated operating income, Y22,500 million for consolidated ordinary income and Y7,000 million for consolidated net income. Consolidated Financial Forecast for the Year Ended March 31, 2003 Operating Ordinary Net Net Sales Income Income Income (Y million) (Y million) (Y million) (Y million) Six months ended 107,000 6,000 5,500 1,000 September 30, 2002 Year ended 235,000 23,500 22,500 7,000 March 31, 2003 Cautionary Statement: These statements are based on information currently available to the management but subject to changes. Actual financial results might differ due to a number of factors, not limited to but, general global economy, foreign exchange rates in which Konami Group trades and Konami Group's capability to come up with innovative and attractive products in highly competitive markets of which we have solid confidence. Notes: 1. Percentage in parentheses represents the proportion to the amount of the year ended March 31, 2001. 2. Operation of fitness facilities which had been included in Health Entertainment division is separately stated as newly established Sports Club segment. 3. In the fiscal year ended March 31,2001, Sports Club division and Health Entertainment division consisted of the companies which were acquired in February 2001. Therefore, the consolidated results of the business divisions included their results of operations for one-month period of March 2001. 2. Financial Position Overview (Billions of yen) Year ended Year ended Increase March 31, March 31, (Decrease) 2001 2002 Net cash provided by operating activities Y21.1 Y10.0 Y(11.0) Net cash used in investing activities (72.6) (22.1) 50.5 Net cash provided by financing activities 60.4 15.0 (45.4) Foreign currency translation adjustments on cash and cash equivalents 0.5 0.6 0.0 Net increase in cash and cash equivalents 9.4 3.6 (5.8) Cash and cash equivalents of newly consolidated companies - 0.0 0.0 Cash and cash equivalents of newly merged - 4.7 4.7 companies Cash and cash equivalents of a transferred - (0.0) (0.0) business Cash and cash equivalents, end of year 66.8 75.1 8.3 Net cash provided by operating activities was Y10,037 million for the year ended March 31, 2002. Income before income taxes and minority interest amounted to Y29,198 million, decreased compared with that of the previous year. However after the adjustment for depreciation and amortization of goodwill as non-cash items, the income remained on stable level compared with the previous fiscal year due to solid increase in sales of the CS and SP business. On the other hand, trade receivables and inventories increased and trade payables significantly decreased. Consequently, net cash provided by operating activities decreased by Y11,079 million compared with the previous year. Net cash used in investing activities amounted to Y22,114 million. This decrease was due to expenditures along with active increase of outlets promoted by Konami Sports Corporation (Y2,150 million), acquisition of Konami Olympic Sports Club Corporation (Y2,758 million) and acquisition of shares in HUDSON SOFT CO., LTD. through a third-party allotment as strategic business alliance including a capital tie-up (Y5,000 million). Net cash provided by financing activities amounted to Y15,002 million. The Company paid cash dividends of Y7,080 million for the previous fiscal year and the six months ended September 30, 2001, redeemed unsecured bonds of Y10,000 million, and acquired treasury stock of Y15,006 million to improve capital efficiency, return more profits to shareholders and realize capital policy to flexibly deal with any changes in business environment. On the other hand, Konami Computer Entertainment Japan, Inc. gained Y 7,035 million by capital increase at fair value along with its initial public offering on over-the- counter market. The Company also gained Y4,468 million as proceeds from the 3rd, 4th, and 5th unsecured bonds issued to raise liquidity and expand the business flexibly. As a result, cash and cash equivalents at the fiscal year-end amounted to Y75,187 million, increased by Y8,375 million compared with that as of the previous year-end. Outlook for the Next Term Cash provided by operating activities is expected to be improved although the surrounding business environment will be severe. In investing activities, cash used in investing activities capital expenditures are estimated to be increase along with the active increase of outlets continued by Konami Sports Corporation. In financing activities, the Company will continue to acquire treasury stock to improve capital efficiency, return more profits to shareholders and realize capital policy to flexibly deal with any changes in business environment. We, on the medium-to-long term basis, aim to maintain higher liquidity and improve financial condition. 4. Consolidated Financial Statements (1) Consolidated Balance Sheets (Unaudited) (Millions of yen) March 31, 2001 March 31, 2002 Component Component Ratio Ratio ASSETS: I Current Assets Y125,278 50.1 % Y142,132 49.0 % Cash and cash equivalents 66,812 75,769 Trade notes and accounts receivable 33,870 34,911 Inventories 13,997 15,990 Prepaid expenses 3,257 3,248 Deferred tax assets 6,421 9,644 Other 1,448 3,204 Allowance for bad debts (528 ) (636 ) II Fixed Assets 124,744 49.9 148,015 51.0 1. Tangible fixed assets 31,865 12.7 38,222 13.2 Buildings and structures 19,137 22,697 Machinery and 448 transportation equipment 316 Tools and fixtures 3,975 4,202 Land 8,225 10,699 Construction in progress 211 175 2. Intangible fixed assets 62,736 25.1 63,905 22.0 Leaseholds 2,100 2,075 In-house software 2,267 3,481 Goodwill 57,857 57,588 Other 510 759 3. Investments and other assets 30,143 12.1 45,887 15.8 Investment securities 4,949 13,896 Lease deposits 21,696 28,790 Deferred tax assets 2,881 4,845 Other 615 1,166 Allowance for bad debts - (2,811 ) TOTAL ASSETS Y250,023 100.0 % Y290,147 100.0 % (Millions of yen) March 31, 2001 March 31, 2002 Component Component Ratio Ratio LIABILITIES: I Current Liabilities Y77,570 31.0 % Y75,644 26.1 % Trade notes and accounts payable 24,651 20,292 Short-term loans payable 5,686 10,947 Current portion of long-term loans payable 2,001 2,584 Current portion of straight bonds 10,000 - Other accounts payable 8,646 11,327 Accrued expenses 3,780 7,877 Income taxes payable 14,880 13,224 Deferred tax liabilities 339 - Advances received 2,786 4,915 Allowance for bonuses 1,964 - Other 2,834 4,476 II Long-term Liabilities 8,553 3.5 53,111 18.3 Straight bonds - 45,000 Long-term loans payable 3,262 253 Allowance for retirement benefits 1,818 2,357 Liability for directors' retirement 1,738 1,485 benefits Other 1,733 4,014 TOTAL LIABILITIES 86,124 34.5 128,756 44.4 MINORITY INTEREST 14,023 5.6 20,093 6.9 SHAREHOLDERS' EQUITY: I Common Stock 47,398 19.0 47,398 16.3 II Additional Paid-in Capital 47,106 18.8 47,106 16.2 III Revaluation Losses - (153 ) (0.0 ) IV Retained Earnings 55,253 22.1 61,420 21.2 V Unrealized Holding Gains (Losses) on Other Investment Securities 115 0.0 (157 ) (0.0 ) VI Foreign Currency Translation Adjustments 1 0.0 686 0.2 VII Treasury Stock (0 ) (0.0 ) (15,003 ) (5.2 ) TOTAL SHAREHOLDERS' EQUITY 149,875 59.9 141,297 48.7 TOTAL LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS' EQUITY Y250,023 100.0 % Y290,147 100.0 % (2) Consolidated Statements of Income (Unaudited) (Millions of yen) Year ended Year ended March 31 , 2001 March 31, 2002 Share of Share of net sales net sales I Net Sales Y171,480 100.0 % Y225,580 100.0 % II Cost of Sales 103,209 60.2 154,370 68.4 Gross Profit 68,270 39.8 71,209 31.6 III Selling, General and Administrative Expenses 29,624 17.3 44,331 19.7 Operating Income 38,645 22.5 26,877 11.9 IV Non-operating Income 897 0.5 1,715 0.8 Interest income 468 234 Gain on sale of treasury stock 16 - Foreign exchange gains - 335 Equity in net income of affiliated companies - 524 Rental income 20 14 Other 393 605 V Non-operating Expenses 3,115 1.8 1,714 0.8 Interest expenses 810 548 Foreign exchange losses 220 - Stock issue expenses 639 - Commission for syndicate loan 302 - Equity in net losses of affiliated companies 583 - Bond issue expenses - 318 Other 558 846 Ordinary Income 36,427 21.2 26,878 11.9 VI Extraordinary Income 4,072 2.4 6,426 2.8 Gain on sale of fixed assets 124 28 Gain on sale of investment securities - 416 Gain on sale of investments in 3 1,129 subsidiaries Gain on sale of minority interest in subsidiaries 3,944 3,526 Gain on reversal of allowance for retirement benefits - 621 Gain on transfer of operation - 704 VII Extraordinary Losses 908 0.5 4,105 1.8 Loss on sale and disposal 516 922 of fixed assets Loss on sale of investment securities 7 - Loss on disposal of inventories - 372 Loss on cancellation 384 - of leasing contracts Addition to allowance for bad debts - 2,811 Net Income before Income Taxes and Minority Interest 39,591 23.1 29,198 12.9 Income Taxes 17,306 10.1 13,248 5.9 Income taxes - current 20,902 17,276 Income taxes - deferred (3,595 ) (4,027 ) Minority Interest 503 0.3 2,377 1.0 Net Income Y21,781 12.7 % Y13,573 6.0 % (3) Consolidated Statements of Retained Earnings (Unaudited) (Millions of yen) Year ended Year ended March 31, 2001 March 31, 2002 I Retained Earnings, Beginning of Year Y 39,565 Y 55,253 II Increase in Retained Earnings - 117 Increase by merger - 117 III Decrease in Retained Earnings 6,094 7,522 Cash dividends 5,913 7,080 Directors' bonuses 170 442 Decrease by consolidated subsidiary's merger with unconsolidated subsidiary 10 - IV Net Income 21,781 13,573 V Retained Earnings, End of Year Y 55,253 Y 61,420 (4) Consolidated Statements of Cash Flows (Unaudited) (Millions of yen) Year ended Year ended March 31, 2001 March 31, 2002 I OPERATING ACTIVITIES: Income before income taxes and minority Y39,591 Y29,198 interest Depreciation and amortization 3,123 6,354 Amortization of goodwill 274 2,976 Decrease (increase) in liability for directors' retirement benefits - net 61 (255 ) Decrease (increase) in allowance for bonuses - net 374 (1,964 ) Increase in allowance for bad debts - net 35 2,863 Interest and dividend income (469 ) (243 ) Interest expenses 810 548 Gain on sale of treasury stock (16 ) - Foreign exchange losses - net (650 ) (589 ) Stock issue expenses 639 - Bond issue expenses - 318 Equity in net income (losses) of affiliated companies - net 583 (524 ) Gain on sale of tangible fixed assets (124 ) (28 ) Loss on sale and disposal of tangible fixed 516 922 assets Gain on sale of investments in subsidiaries (3,947 ) (4,655 ) Gain on sale of investment securities - (416 ) Decrease in trade receivables - net (7,551 ) (3,930 ) Increase in inventories - net (1,052 ) (1,593 ) Increase (decrease) in trade payables - net 6,442 (5,933 ) Increase (decrease) in consumption taxes (230 ) 510 payable - net Other - net 1,923 5,705 Sub-total 40,334 29,265 Interests and dividends received 435 301 Interests paid (777 ) (519 ) Income taxes paid (18,875 ) (19,010 ) Net cash provided by operating activities 21,116 10,037 II INVESTING ACTIVITES: Increase in time deposits - net 1,415 89 Acquisition of tangible fixed assets (2,822 ) (6,694 ) Proceeds from sale of tangible fixed assets 1,274 444 Acquisition of intangible fixed assets (1,488 ) (1,652 ) Acquisition of investment securities (3,887 ) (8,115 ) Proceeds from sale of investment securities 28 558 Acquisition of shares in subsidiaries (68,285 ) (4,194 ) Proceeds from sale of investment in - 1,797 subsidiaries Decrease (Increase) in short-term loans (69 ) 92 receivable - net Repayment of deposits received (3,054 ) - Increase in deposits received 3,448 - Increase in lease deposits - net - (1,876 ) Other - net 754 (2,564 ) Net cash used in investing activities (72,686 ) (22,114 ) III FINANCING ACTIVITES: Decrease in short-term loans payable - net (1,220 ) (1,107 ) Proceeds from long-term loans 720 549 Repayment of long-term loans (1,983 ) (3,171 ) Proceeds from issuance of bonds - 44,681 Redemption of straight bonds - (10,000 ) Proceeds from issuance of common stock 62,562 - Proceeds from issuance of common stock to minority shareholders 6,060 7,035 Proceeds from sale of treasury stock 62 10 Acquisition of treasury stock - (15,006 ) Dividends paid (5,913 ) (7,080 ) Dividends paid to minority shareholders (78 ) (571 ) Other - net 229 (317 ) Net cash provided by financing activities Y60,440 Y15,020 (Millions of yen) Year ended Year ended March 31, 2001 March 31, 2002 IV FOREIGN CURRENCY Y575 Y666 TRANSLATION ADJUSTMENTS ON CASH AND CASH EQUIVALENTS V NET INCREASE IN CASH AND CASH 9,446 3,609 EQUIVALENTS VI CASH AND CASH EQUIVALENTS, 57,365 66,812 BEGINNING OF YEAR VII CASH AND CASH EQUIVALENTS - 10 OF NEWLY CONSOLIDATED COMPANIES VIII CASH AND CASH EQUIVALENTS - 4,755 OF NEWLY MERGED COMPANIES IX CASH AND CASH EQIVALENTS - (0 ) OF A TRSFERRED BUSINESS X CASH AND CASH EQUIVALENTS, Y66,812 Y75,187 END OF YEAR Summary of Significant Accounting Policies 1. Scope of Consolidation (1) The consolidated financial statements include the accounts of KONAMI CORPORATION (the 'Company') and its 37 consolidated subsidiaries (See '1. Organization Structure of Konami Group', which shows major subsidiaries). Konami Mobile & Online, Inc., and Konami Australia Pty Ltd. and its subsidiary Konami Gaming (Australia) Pty Ltd. have been included as consolidated subsidiaries since the year ended March 31, 2002. NISSAN SPORTS PLAZA, CO., LTD. (currently named Konami Sports Plaza, Inc.) and DAIEI OLYMPIC SPORTS CLUB, INC. (currently named Konami Olympic Sports Club Corporation) which were acquired by Konami Sports Corporation, and DELUCADERUYO, Inc. (currently named Konami Parlor Research, Inc.) which was acquired by Konami Parlor Entertainment, Inc. have been included as consolidated subsidiaries since the year ended March 31, 2002. Konami Sports Plaza, Inc. merged with KCE Planning, Inc. Konami Gaming, Inc. acquired and merged with Paradigm Gaming Systems, Inc. Konami Marketing, Inc. merged with 11 domestic sales dealers (TOKYO KONAMI CO., LTD., OSAKA KONAMI CO., LTD., CHUBU KONAMI CO., LTD., CHUO KONAMI CO., LTD., HOKKAIDO KONAMI CO., LTD., KITAKANTO KONAMI CO., LTD., HIGASHIKANTO KONAMI CO., LTD., MINAMIKANTO KONAMI CO., LTD., CHUGOKU KONAMI CO., LTD., KYUSHU KONAMI CO., LTD., NISHINIHON KONAMI CO., LTD.). (2) KCE Enterprise, Inc. is excluded from the scope of consolidation since each of its net assets, net sales, net income, and retained earnings is immaterial, and has no significant effect as a whole on the consolidated financial statements. 2. Application of Equity Method (1) Four affiliated companies, TAKARA CO., LTD., HUDSON SOFT CO., LTD., Genki Co., Ltd., and Mobile 21 Co., Ltd. are accounted for by the equity method. (2) The equity method is not applied to an unconsolidated subsidiary as it has no significant effect on the consolidated net income and retained earnings, and are immaterial as a whole. 3. Fiscal Year-end of Consolidated Subsidiaries Fiscal year-ends for Konami Sports Corporation and The Club at Yebisu Garden Co., Ltd. were September 30, 2001 and March 31, 2002 for the fiscal year and Konami Olympic Sports Club Corporation used a fiscal year-end at February 28, 2002. Since the fiscal year-ends of those consolidated subsidiaries differ from that of the Company, the pro forma financial statements as of March 31, 2002 are used for the consolidated financial statements. All other consolidated subsidiaries use the same balance sheet date as that of the Company. 4. Accounting Standards a. Valuation of Assets (1) Marketable and Investment Securities 'Other investment securities' for which the market value is readily determinable are stated at fair value as of the balance sheet date. Unrealized holding gain or loss is reported as a separate component of shareholders' equity. The cost of securities sold is determined primarily by the moving average method. 'Other investment securities' for which the market value is not readily determinable are stated at cost based on the moving average method. (2) Derivative Financial Instruments Derivative financial instruments are stated at fair value. (3) Inventories Inventories other than merchandise and work in process are stated at cost determined by the moving average method. Merchandise is stated at the lower of cost or market, cost being determined mainly by the first-in, first-out method. Work in process consisting of hardware products is stated at cost determined by the moving average method while work in process consisting of software products is stated at cost determined by the specific identification method. b. Depreciation Methods Tangible fixed assets are depreciated mainly using the declining balance method while intangible fixed assets are amortized mainly using the straight-line method. For in-house software, amortization is computed using the straight-line method based on the estimated useful life of 5 years. c. Provisions (1) Allowance for bad debts Generally, the allowance for bad debts is calculated based on the actual ratio of bad debt losses incurred. For specific accounts with higher possibility of bad debt loss, the allowance is determined by independent judgment. (2) Allowance for retirement benefits (Prepaid pension expense) Allowance for retirement benefits to be paid to employees is calculated based on the estimated amount of the projected benefit obligation and the plan assets at the fiscal year-end. Generally, unrecognized net transition asset or obligation is amortized over 13 years. Unrecognized actuarial net gain or loss will be amortized from the following fiscal year within the average remaining service period of 12 to 13 years on a straight-line basis. (3) Liability for directors' retirement benefits Required amount for retirement benefits to be paid to directors of the Company, Konami Sports Corporation, Konami Sports Life Corporation and Konami Olympic Sports Club Corporation as of the balance sheet date is reserved as liability. All other consolidated subsidiaries do not reserve for directors' retirement benefits. d. Foreign Currency Translation Monetary assets and liabilities denominated in foreign currencies are translated into Japanese yen at the current exchange rate at each balance sheet date, and the translation gains and losses are credited or charged to income. Assets and liabilities of foreign subsidiaries are translated into Japanese yen at the current exchange rate at each balance sheet date while revenue and expenses are translated at the average exchange rate for the period. Differences arising from such translation are included in minority interest and shareholders' equity as foreign currency translation adjustments. e. Leases Finance leases other than those that deem to transfer ownership of the leased property to the lessee are accounted for as operating lease transactions. f. Deferred Assets Bond issue expenses are charged to income upon payment or as incurred. g. Consumption Tax Consumption tax is excluded from the stated amount of revenue and expenses. 5. Valuation of Subsidiaries' Assets and Liabilities All assets and liabilities of consolidated subsidiaries are valued at their fair value. 6. Amortization of Goodwill The difference between the cost and underlying fair value of the net equity of investments in subsidiaries at the point of acquisition is amortized on a straight-line basis over the estimated period or 5 years. Such difference is charged to income as incurred if the amount is considered immaterial. 7. Appropriation of Retained Earnings The consolidated statements of retained earnings is prepared based on the appropriation planned for each fiscal year. 8. Cash and Cash Equivalents The cash and cash equivalents stated in the Consolidated Statements of Cash Flows consist of cash on hand, deposits which can be withdrawn on demand and short-term investments which have original maturities of three months or less with insignificant risk of changes in value of principal. Changes in Presentation of Consolidated Financial Statements Consolidated Statements of Cash Flows In investing activities, the amount of 'Repayment of deposits received' (Y202 million) and 'Increase in deposits received' (Y107 million) are included in 'Other-net' for the year ended March 31, 2002 although it had been stated separately. 'Increase in lease deposits - net' (Y28 million for the year ended March31, 2001) is separately stated for the year ended March 31, 2002 although it had been included in 'Other - net'. Additional Information Allowance for Bonuses 'Allowances for bonuses' (Y1,683 million) is included in 'Accrued expenses' of current liabilities based on the release on February 14, 2001 regarding presentation of allowance for bonuses by the Japanese Institute of Certified Public Accountant although it had been stated separately as part of estimated bonus payment to employees in the following period. Notes to Consolidated Financial Statements Notes to Consolidated Balance Sheets 1. Investments in unconsolidated subsidiaries and affiliated companies of Y3,271 million and Y12,637 million as of March 31, 2001 and 2002, respectively. 2. Accumulated depreciation of tangible fixed assets of Y31,209 million and Y35,661 million as of March 31, 2001 and 2002, respectively. 3. Trade notes matured on the balance sheet date are settled on the exchange date of the notes. Since each balance sheet date was a holiday for financial institutions, the following matured trade notes are included in each ending balance. (Millions of yen) March 31, 2001 March 31, 2002 Trade notes receivable Y98 Y70 Trade notes payable 3,049 1,651 4. Konami Group has contracts with four banks for committed revolving credit agreements for the purpose of efficient financing of working capital as of March 31, 2002. The total amount of the committed revolving credit agreements and the balance of loans payable based on the agreements as of the balance sheet date are as follows: (Millions of yen) March 31, 2001 March 31, 2002 Total amount of Y12,000 Y12,000 committed revolving credit agreements Loans payable based on - - committed revolving credit agreements 5. TAKARA CO., LTD. revaluated its lands which it holds for business-use purpose based on the Land Revaluation Law (issued on March 31,1998). The equity portion of the Company of Y(153) million is stated in the shareholders' equity section of consolidated balance sheet as 'Revaluation Losses'. Revaluation date Book value before revaluation Book value after revaluation (Millions of yen) (Millions of yen) March 31, 2002 Y9,505 Y2,795 Notes to Consolidated Statements of Income 1. Losses from inventory valuation of Y242 million and Y204 million are included in the cost of sales for the years ended March 31, 2001 and 2002, respectively. 2. Major portion of selling, general and administrative expenses consists of the following: (Millions of yen) Year ended March 31, 2001 Advertising expenses Y6,572 Compensation to directors and 8,102 salary expenses Addition to allowance for 569 bonuses Addition to liability for 78 directors' retirement benefits Addition to allowance for bad 16 debts (Millions of yen) Year ended March 31, 2002 Advertising expenses Y6,972 Compensation to directors and 13,098 salary expenses Addition to liability for 10 directors' retirement benefits 3. Research and development expenses of Y567 million and Y553 million are included in the general and administrative expenses for the years ended March 31, 2001 and 2002, respectively. 4. Gain on sale of fixed assets consists of the following: (Millions of yen) Year ended Year ended March 31, 2001 March 31, 2002 Land Y92 Y15 Buildings and structures 31 7 Machinery and - 0 transportation equipment Tools and fixtures - 4 Total Y124 Y28 5. Loss on sale and disposal of fixed assets consists of the following: (Millions of yen) Year ended March 31, 2001 Sale of land Y172 Sale of buildings and structures 93 Sale of tools and fixtures 2 Disposal of buildings and structures 60 Disposal of tools and fixtures 170 Other 16 Total Y516 (Millions of yen) Year ended March 31, 2002 Sale of buildings and structures Y3 Sale of tools and fixtures 26 Disposal of buildings and structures 613 Disposal of tools and fixtures 185 Disposal of software 37 Other 55 Total Y922 6. Gain on transfer of operation of Y704 million is recognized along with the transfer of the business in Sapporo of a consolidated subsidiary, Konami Computer Entertainment Studios, Inc., to an affiliated company, HUDSON SOFT CO., LTD., by the method of absorption following a spin-off based on the strategic business alliance including a capital tie-up. Notes to Consolidated Statements of Cash Flows 1. For the ending balance of cash and cash equivalents, there are differences between consolidated statements of cash flows and consolidated balance sheets as follows: (Millions of yen) March 31, 2001 March 31, 2002 Cash and cash equivalents Y66,812 Y75,769 on consolidated balance sheets Less: Time deposits with original - (582) maturities of more than three months Cash and cash equivalents on consolidated statements of cash flows Y66,812 Y75,187 2. Assets and liabilities of newly acquired consolidated subsidiaries, PEOPLE CO., LTD. (currently Konami Sports Corporation) and two other companies during the fiscal year ended March 31, 2001 and Konami Olympic Sports Club Corporation (KOSC) and six other companies during the year ended March 31, 2002, at the point of acquisitions and the expenditures on acquisitions are as follows: Fiscal year ended March 31, 2001 PEOPLE CO., LTD. and two other companies (Millions of yen) Current assets Y5,521 Fixed assets 31,385 Current liabilities (13,479) Long-term liabilities (3,267) Goodwill 58,087 Minority interest (9,204) Acquisition cost of PEOPLE CO., LTD. 69,044 and two other companies Less: Cash and cash equivalents of (759) PEOPLE CO., LTD. and six other companies Expenditures on acquisitions of Y68,285 PEOPLE CO., LTD. and two other companies Fiscal year ended March 31, 2002 Konami Olympic Sports Club Corporation (KOSC) and six other companies (Millions of yen) Current assets Y3,396 Fixed assets 12,528 Current liabilities (10,165) Long-term liabilities (2,807) Goodwill 3,060 Minority interest (260) Acquisition cost of KOSC 5,752 and six other companies Less: Cash and cash equivalents of (1,723) KOSC and six other companies Expenditures on acquisitions of Y4,029 KOSC and six other companies 3. Material non-cash activities a. Assets and liabilities transferred from 11 domestic sales dealers to Konami Marketing, Inc. are as follows: (Millions of yen) Current assets Y15,090 Fixed assets 659 Total assets 15,750 Current liabilities 14,581 Long-term liabilities 866 Total liabilities Y15,448 b. Assets and liabilities transferred from Konami Computer Entertainment Studios, Inc. to HUDSON SOFT CO., LTD. along with the absorption following a spin-off are as follows: (Millions of yen) Total assets Y401 Total liabilities 131 Leases 1. Finance leases other than those that deem to transfer ownership of leased property to the lessee: a. Acquisition cost, accumulated depreciation, and ending balance of leased assets (Millions of yen) March 31, 2001 March 31, 2002 Acquisition Accumulated Ending Acquisition Accumulated Ending cost depreciation balance cost depreciation balance Machinery and Y58 Y50 Y8 Y147 Y80 Y67 Transportation equipment Tools and 11,541 6,001 5,539 10,393 5,675 4,717 fixtures Software - - - 22 6 16 Total Y11,600 Y6,051 Y5,548 Y10,564 Y5,762 Y4,801 b. Obligations under finance leases (Millions of yen) March 31, 2001 March 31, 2002 Due within one year Y2,678 Y2,154 Due after one year 3,135 2,777 Total Y5,814 Y4,932 c. Lease payments, depreciation expense and interest expense (Millions of yen) Year ended Year ended March 31, 2001 March 31, 2002 Lease payments Y1,673 Y2,947 Depreciation expense 1,610 2,768 Interest expense 133 171 d. Depreciation expense is computed by the straight-line method with lease term as useful life and salvage value of zero. e. Interest expense is defined as the difference between total lease payment and equivalent of acquisition cost, and allocated using the effective interest method to each period. 2. Obligations under operating leases (Millions of yen) March 31, 2001 March 31, 2002 Due within one year Y1,722 Y2,411 Due after one year 25,177 27,523 Total Y26,899 Y29,935 Marketable and Investment Securities 1. 'Other investment securities' valued at market value (Millions of yen) March 31, 2001 March 31, 2002 Net Net Acquisition Balance Unrealized Acquisition Balance Unrealized cost sheet gain cost sheet gain(losses) amount (losses) amount Securities which Equity Y51 Y631 Y579 Y21 Y87 Y65 hold unrealized securities gain Other - - - - - - securities Sub-total Y51 Y631 Y579 Y21 Y87 Y65 Securities which Equity - - - 2 2 - hold unrealized securities loss Other 200 126 (73) 200 114 (85) securities Sub-total Y200 Y126 Y(73) Y202 Y116 Y(85) Total Y251 Y757 Y505 Y224 Y203 Y(20) 2. Y416 million gains resulted from the sale of other investment securities at the total price of Y558 million for the year ended March 31, 2002. 3. Major securities for which the fair value is not readily determinable as of each balance sheet date. (Millions of yen) March 31, 2001 March 31, 2002 Unlisted stock other than Y826 Y945 over-the-counter stock Derivative Financial Instruments The Company enters into foreign exchange forward contracts to manage foreign exchange exposure associated with certain assets and liabilities denominated in foreign currencies. The Company does not hold or issue derivatives for speculation purposes. Because the counter-parties to those contracts are limited to major international financial institutions, the Company does not anticipate any losses arising from credit risk. The Finance Department of the Company executes and controls those contracts. Each contract and its results are to be periodically reported to an executive director in charge of the department. Basically the subsidiaries do not enter into any derivative transactions, and no derivative contracts were held by the subsidiaries as of March 31, 2002. Derivative financial instruments as of each balance sheet date are as follows: (Millions of yen) March 31, 2001 March 31, 2002 Unrealized Unrealized holding holding gains Contract Fair gains Contract Fair value (losses) amount value (losses) amount Foreign exchange forward contracts: (Short position) USD Y1,550 Y1,636 Y(85) Y660 Y664 Y(3) GBP 212 220 (7) 211 212 (0) EUR 1,051 1,073 (21) 5,873 5,916 (42) AUD 158 155 2 47 49 (2) HKD 44 45 (0) - - - Total Y3,017 Y3,130 Y(112) Y6,792 Y6,842 Y(49) Notes: 1. Fair values of the contracts stated above are calculated using the forward exchange rates at each balance sheet date 2. All the above contracts were or will be settled within one year from the balance sheet date. Severance and Retirement Plan I. Severance and retirement plan of the Company and domestic consolidated subsidiaries (except for Konami Sports Corporation, The Club at Yebisu Garden Co., Ltd., Konami Sports Plaza, Inc. and Konami Olympic Sports Club Corporation) 1. The Company and domestic consolidated subsidiaries (except for Konami Sports Corporation, The Club at Yebisu Garden Co., Ltd., Konami Sports Plaza, Inc. and Konami Olympic Sports Club Corporation) have the non-contributory defined benefit plan established in March 1986. Full amount of retirement benefits and lump-sum severance payments based on the regulations are provided by the plan. Also, the contributory plan has been applied. A system of voluntary advance retirement payments has been applied to certain employees who earn annually fixed salaries since August 1998 while the non-contributory plan is primarily for other employees. In addition, when the members of the non-contributory plan are qualified for voluntary advance retirement payments, they must withdraw from the plan. The Company and domestic consolidated subsidiaries have joined the welfare pension fund for the computer industry association, a jointly established contributory plan, since its establishment in October 1989. Total amount of the contributory plan assets for the Company and domestic consolidated subsidiaries (except for Konami Sports Corporation, The Club at Yebisu Garden Co., Ltd., Konami Sports Plaza, Inc. and Konami Olympic Sports Club Corporation) is Y3,026 million, which is calculated based on the ratio of members of the plan. 2. Retirement benefit obligation (Millions of yen) March 31, 2001 March 31, 2002 a. Benefit obligations Y(1,209) Y(1,433) b. Plan assets 1,343 1,503 c. Funded status (a + b) 133 69 d. Unrecognized net transition asset (191) (175) e. Unrecognized actuarial loss 198 266 f. Unrecognized prior service cost - - g. Benefit obligations on balance sheet - net 141 160 (c + d + e + f) h. Prepaid pension expense 141 160 i. Allowance for retirement benefits (g - h) - - Note: The contributory plan is not included. 3. Net periodic pension cost (Millions of yen) Year ended Year ended March 31, 2001 March 31, 2002 a. Service cost Y164 Y179 b. Interest cost 19 23 c. Expected return on plan assets (66) (70) d. Amortization of net transition asset (15) (15) e. Amortization of actuarial loss - 15 f. Net periodic pension cost (a + b + c + d + e) Y101 Y131 4. Assumptions March 31, 2001 March 31, 2002 a. Allocation method of projected benefit obligation Straight-line basis Straight-line basis b. Discount rate 3.0% 3.0% c. Expected rate of return on plan assets 5.0% 5.0% d. Amortization period for prior service cost - - e. Amortization period for actuarial loss 13 years 13 years f. Amortization period for net transition asset 13 years 13 years Note: Unrecognized actuarial net gain or loss will be amortized from the following fiscal year within the average remaining service period on a straight-line basis. II. Severance and retirement plan of except for Konami Sports Corporation, The Club at Yebisu Garden Co., Ltd., Konami Sports Plaza, Inc. and Konami Olympic Sports Club Corporation. 1. Konami Sports Corporation and The Club at Yebisu Garden Co., Ltd. which were acquired through a tender offer in February 2001 have the defined benefit plans which include the severance plan and non-contributory plan (started in February 1985). Konami Sports Plaza, Inc., which has been included as consolidated subsidiary since June 2001 has the severance plan and Konami Olympic Sports Club Corporation which has been included as consolidated subsidiary since February 2002 has the severance plan and the contributory plan (started in the fiscal year ended March 31, 1998). Konami Sports Corporation and The Club at Yebisu Garden Co., Ltd. withdrew from the contributory plan during the fiscal year ended March 31, 2001. Retirement benefit obligations for Konami Olympic Sports Club Corporation were computed as at the end of year-end of February. Therefore the following liability for retirement benefits of the defined benefit plan was accounted for based on their pro forma information as of March 31, 2001. 2. Retirement benefit obligation (Millions of yen) March 31, 2001 March 31, 2002 a. Benefit obligations Y(5,122) Y(3,365) b. Plan assets 2,405 729 c. Funded status (a + b) (2,716) (2,636) d. Unrecognized net transition obligation 898 - e. Unrecognized actuarial loss - 278 f. Unrecognized prior service cost - - g. Benefit obligations on balance sheet - net (1,818) (2,357) (c + d + e + f) h. Prepaid pension expense - - i. Allowance for retirement benefits(g - h) (1,818) (2,357) Notes: 1. A portion of the contributory plan carried on behalf of the government is included. 2. A subsidiary company, Konami Sports Plaza, Inc., applies the simplified method for calculating retirement benefit obligation. 3. Net periodic pension cost (Millions of yen) Year ended Year ended March 31, 2001 March 31, 2002 a. Service cost Y39 Y351 b. Interest cost 14 121 c. Expected return on plan assets (8) (61) d. Amortization of net transition asset 81 898 e. Amortization of actuarial loss - - f. Net periodic pension cost (a + b + c + d + e) Y127 Y1,309 Notes: 1. Retirement benefit obligation of consolidated subsidiaries which apply the simplified method is regarded as service cost. 2. Employees' contribution to the contributory plan is excluded. 3. Assumptions March 31, 2001 March 31, 2002 a. Allocation method of projected benefit obligation Straight-line basis Straight-line basis b. Discount rate 3.5% 1.5 to 3.0% c. Expected rate of return on plan assets Contributory plan 4.2% 4.5% Non-contributory plan 4.0% 4.0% d. Amortization period for prior service cost - 12years e. Amortization period for net transition obligation 1 year 1 year Note: Unrecognized actuarial net gain or loss will be amortized from the following fiscal year within the average remaining service period on a straight-line basis. Income Taxes 1.Major portion of deferred tax assets and deferred tax liabilities consists of the following: (Millions of yen) March 31, 2001 Deferred tax assets: Fixed assets - intercompany profits Y1,237 Enterprise taxes payable 1,297 Liability for directors' retirement benefits 740 Allowance for retirement benefits 737 Allowance for bonuses 432 Inventories - intercompany profits etc. 3,907 Excess of depreciation 426 Accrued expenses 327 Net operating loss carryforwards 6,310 Other 710 Sub total 16,127 Less: Valuation allowance (6,615) Total deferred tax assets Y9,512 Deferred tax liabilities: Reserve for deferred gains of fixed assets Y(154) Other (394) Total deferred tax liabilities Y(549) Deferred tax assets - net Y8,963 (Millions of yen) March 31, 2002 Deferred tax assets: Fixed assets - intercompany profits Y1,183 Enterprise taxes payable 1,099 Liability for directors' retirement benefits 624 Allowance for retirement benefits 833 Inventories - intercompany profits etc. 7,327 Excess of depreciation 348 Accrued expenses 752 Net operating loss carryforwards 7,389 Allowance for bad debts 1,218 Other 1,319 Sub total 22,097 Less: Valuation allowance (7,324) Total deferred tax assets Y14,773 Deferred tax liabilities: Reserve for deferred gains of fixed assets Y(150) Other (133) Total deferred tax liabilities Y(284) Deferred tax assets - net Y14,489 Note: Net deferred tax assets is included in consolidated balance sheet as stated below: (Millions of yen) March 31, 2001 March 31, 2002 Current assets - deferred tax assets Y6,421 Y9,644 Fixed assets - deferred tax assets 2,881 4,845 Current liabilities - deferred tax liabilities (339) - 2. Reconciliation between the normal effective statutory tax rate and the actual effective tax rates reflected in the accompanying consolidated statements of income is as follows: March 31, 2001 Normal effective statutory tax rate 42.1% Permanently non-deductible expenses 1.5 Permanently non-taxable income (0.2) Per capita portion of inhabitants taxes 0.1 Gain on sale of minority interest in subsidiaries (4.2) Equity in net income of affiliated companies 0.6 Valuation allowance 0.7 Utilized net operating loss carryforwards of subsidiaries (1.6) Operating losses of subsidiaries 4.6 Other - net 0.1 Actual effective tax rate 43.7% March 31, 2002 Normal effective statutory tax rate 42.1% Permanently non-deductible expenses 1.3 Permanently non-taxable income (0.1) Per capita portion of inhabitants taxes 0.8 Gain on sale of minority interest in subsidiaries (5.1) Equity in net income of affiliated companies (0.7) Utilized net operating loss carryforwards of subsidiaries (1.8) Operating losses of subsidiaries 4.2 Amortization of goodwill 4.5 Other - net 0.2 Actual effective tax rate 45.4% Segment Information 1. Operating Segment Information Year ended March 31, 2001 (Millions of yen) Eliminations Consumer Sports Character Pachinko Amusement Gaming Health and Software Club Products Systems Machines Machines Entertainment Other Total Corporate Consolidated Net sales: To customers Y59,175 Y4,480 Y60,525 Y14,665 Y17,128 Y8,510 Y251 Y6,741 Y171,480 - Y171,480 Inter-segment 1,711 - 64 - 249 371 451 2,135 4,982 Y(4,982) - Total 60,886 4,480 60,589 14,665 17,378 8,881 703 8,876 176,463 (4,982) 171,480 Operating 53,431 4,925 29,975 10,433 13,477 9,307 658 8,671 130,880 1,954 132,834 expenses Operating 7,454 (445) 30,614 4,232 3,901 (425) 44 205 45,582 (6,936) 38,645 income (losses) Assets 46,192 93,465 9,719 8,019 10,149 11,931 2,270 36,828 218,578 31,444 250,023 Depreciation 1,106 242 98 24 368 379 2 301 2,523 600 3,123 expenses Capital 1,888 71,026 465 111 165 607 147 486 74,898 795 75,694 expenditures Year ended March 31, 2002 (Millions of yen) Eliminations Consumer Sports Character Pachinko Amusement Gaming Health and Software Club Products Systems Machines Machines Entertainment Other Total Corporate Consolidated Net sales: To customers Y88,761 Y60,426 Y25,213 Y16,924 Y10,973 Y11,814 Y5,192 Y6,273 Y225,580 - Y225,580 Inter-segment 1,367 120 387 - 883 382 6,208 2,622 11,971 Y(11,971) - Total 90,128 60,546 25,600 16,924 11,856 12,196 11,401 8,896 237,551 (11,971) 225,580 Operating 71,897 56,465 18,401 12,739 10,425 12,040 11,494 9,021 202,486 (3,784) 198,702 expenses Operating 18,231 4,081 7,199 4,185 1,430 155 (93) (125) 35,065 (8,187) 26,877 income (losses) Assets 72,336 107,111 8,014 11,712 10,991 15,282 6,415 33,131 264,994 25,037 290,031 Depreciation 2,237 1,950 137 118 409 641 41 387 5,923 431 6,354 expenses Capital 2,369 10,282 103 301 219 3,188 86 2,017 18,569 512 19,081 expenditures Six months ended September 30, 2001 (Millions of yen) Eliminations Consumer Sports Character Pachinko Amusement Gaming Health and Software Club Products Systems Machines Machines Entertainment Other Total Corporate Consolidated Net sales: To customers Y25,991 Y30,097 Y12,559 Y6,622 Y5,426 Y2,557 Y2,523 Y3,366 Y89,146 - Y89,146 Inter-segment 431 - 15 - 112 169 3,354 957 5,040 Y(5,040) - Total 26,422 30,097 12,575 6,622 5,539 2,726 5,877 4,323 94,186 (5,040) 89,146 Operating 22,407 27,832 7,515 4,784 4,562 3,214 5,722 4,153 80,193 (573) 79,619 expenses Operating 4,015 2,264 5,059 1,838 976 (487) 155 169 13,993 (4,466) 9,526 income (losses) Notes: 1. Business segments are determined by the internal management on a basis of the similarities in the type, nature and production methods of their products. Primary products and services of each segment are defined as follows: Consumer Software: Software for home-use game machines Procurement and distribution of home-use game software Sports Club: Operation of fitness facilities Character Products: Card games Character goods Portable game machines Pachinko Systems: LCD units for pachinko game machines Pachinko slot machines Amusement Machines: Coin-operated game machines for amusement operations Dance-simulation game machines Music-simulation game machines Disc jockey-simulation game machines Gaming Machines: Parts for video slot machines for casinos Token-operated game machines for amusement operations Health Entertainment: Entertainment-oriented health-related products Entertainment-oriented fitness machines Home-use fitness games Health network services Other: Operations of amusement centers Financial services Management of the group companies' real estates 2. Creative Products segment changed its name to Character Products from the year ended March 31, 2002. 3. Operation of fitness facilities which had been included in Health Entertainment segment is separately stated as newly established Sports Club segment since the year ended March 31, 2002. 4. As from the year ended March 31, 2002, Amusement Operations (management of the group companies' real estate) and Finance (Financial services for the group companies) are included in Other. Net sales, operating expenses and operating income or losses of Amusement Operations and Finance for each period are as follows. (Millions of yen) Year ended Year ended March 31, 2001 March 31, 2002 Amusement Amusement Operations Finance Operations Finance Net sales: To customers Y4,810 Y47 Y4,552 Y10 Inter-segment - 166 - 154 Total 4,810 214 4,552 164 Operating expenses 4,986 202 4,660 140 Operating income (176) 12 (108) 24 (losses) Assets 3,036 10,996 3,689 9,711 Depreciation 78 0 128 0 expenses Capital 151 - 6 - expenditures 5. Unallocated operating expenses in the Eliminations and Corporate column mainly consists of the administrative expenses of the Company, amounted to Y6,245 million and Y8,564 million for the years ended March 31, 2001 and 2002 respectively and Y4,135 million for the six months ended September 30, 2001. 6. Assets in the Eliminations and Corporate column mainly consists of cash and cash equivalents, investment securities and assets held by the administrative divisions of the Company, amounted to Y 57,357 million and Y53,584 million for the years ended March 31, 2001 and 2002 respectively. 7. Numbers in parentheses represent negative values. 2. Geographic Information Year ended March 31, 2001 (Millions of yen) Eliminations and Japan Americas Europe Asia Total Corporate Consolidated Net sales: To customers Y153,267 Y8,499 Y8,172 Y1,541 Y171,480 - Y171,480 Inter-segment 11,910 397 2 41 12,352 Y(12,352 ) - Total 165,178 8,897 8,174 1,583 183,833 (12,352 ) 171,480 Operating expenses 118,307 12,156 7,514 1,633 139,611 (6,776 ) 132,834 Operating income 46,871 (3,258) 659 (50) 44,222 (5,576 ) 38,645 (losses) Assets 201,205 8,767 6,663 1,015 217,651 32,371 250,023 Year ended March 31, 2002 (Millions of yen) Eliminations Asia / and Japan Americas Europe Oceania Total Corporate Consolidated Net sales: To customers Y177,618 Y26,002 Y19,319 Y2,639 Y225,580 - Y225,580 Inter-segment 31,446 2,860 5 199 34,510 Y(34,510 ) - Total 209,064 28,862 19,325 2,838 260,090 (34,510 ) 225,580 Operating expenses 178,329 30,437 14,943 2,693 226,404 (27,701 ) 198,702 Operating income 30,734 (1,575) 4,381 145 33,686 (6,808 ) 26,877 (losses) Assets 243,914 7,783 16,896 3,211 271,805 18,225 290,031 Notes: 1. Geographic areas are categorized by geographical proximity. 2. Each overseas segment consists of the following countries: Americas: United States of America etc. Europe: United Kingdom, Germany, France, etc. Asia/Oceania: Hong Kong, Singapore, Korea and Australia 3. Unallocated operating expenses in the Eliminations and Corporate column mainly consists of the administrative expenses of the parent company amounted to Y6,245 million and Y8,564 million for the years ended March 31, 2001 and 2002, respectively. 4. Assets in the Elimination and Corporate column mainly consists of cash and cash equivalents, investment securities and assets held by the administrative divisions of the Company amounted to Y57,357 million and Y53,584 million for the years ended March 31, 2001 and 2002, respectively. 5. Numbers in parentheses represent negative values. 3. Overseas Sales Year ended March 31, 2001 (Millions of yen) Americas Europe Other Total Overseas sales Y8,687 Y8,154 Y3,485 Y20,327 Consolidated sales - - - 171,480 Overseas portion in consolidated sales 5.1% 4.8% 2.0% 11.9% Year ended March 31, 2002 (Millions of yen) Americas Europe Other Total Overseas sales Y26,200 Y19,306 Y2,976 Y48,483 Consolidated sales - - - 225,580 Overseas portion in consolidated sales 11.6% 8.6% 1.3% 21.5% Notes: 1. Geographic areas are categorized by geographical proximity. 2. Each overseas segment consists of the following countries: Americas: United States of America, Canada, etc. Europe: United Kingdom, Germany, France, etc. Other: Hong Kong, Singapore, Australia, etc. 3. Overseas sales consists of the sales outside Japan of the Company and its consolidated subsidiaries. 4. Related Party Transactions Year ended March 31, 2002 Classification Name Occupation Voting Transaction Amount (millions of yen) Interest Occurred Director Kagemasa Kozuki Representative 0.06% Transfer of shares Y1,661 Director and CEO of (directly) the Company Earnings Per Share (Yen) March 31, 2001 March 31, 2002 Net assets per share Y1,164.19 Y1,134.11 Net income per share 190.91 107.24 Diluted net income per share - - Note: The Company and its subsidiaries have no dilutive securities such as bonds with warrants and convertible bonds. Accordingly, diluted net income per share is not stated. Subsequent Events There are no subsequent events to be reported. This information is provided by RNS The company news service from the London Stock Exchange

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