Interim Results - Part 1

Konami Corporation 16 November 2000 PART 1 Financial Results for the Six Months Ended September 30, 2000 and Financial Forecast for the Year Ended March 31, 2001 Consolidated annual sales and net income for the year are consecutively expected to be the highest in the past. Announcement of the financial results for the six-month period ended September 30, 2000 For this six-month period, the most significant impact on the financial results of KONAMI CORPORATION (the Company) is the successful card game business and recognition of gain on increase in equity holdings of KCE Tokyo, Inc., consumer-use software production subsidiary, which increased capital along with initial public offering. The financial results for the six-month period ended September 30, 2000 are shown as following tables. For the financial forecast of the year ended March 31, 2000, the consolidated annual sales and net income are consecutively from the last term expected to mark the highest in the past. The company expects to harvest the outcome of strategic business alliances it has pursued since previous term. They include the production of 'ESPN' (the world best sports channel) branded sports titles based on the agreement with Disney interactive and publishing and world-wide distribution of interactive movie games based on the alliance with Universal Interactive Studios. Furthermore, effort for the global business expansion by distributing the titles in line with the release of PlayStation 2 in Europe and the US will also contribute to the performance expected for the year. Interim cash dividends per share for this six-month period is Y26 that exceeded the expected value by Y11. Considering the two-for-one stock split on May 19, 2000, the amount of dividends essentially increased by Y7 compared with the dividends for the six-month ended September. 31, 1999. 1. Results of Operation for the Six Months Ended September 30, 2000 (1) Consolidated (Millions of yen) Net Sales Ordinary Income Net Income Six months ended September 30,2000 74,374 15,940 11,634 (2) Non-consolidated (Millions of yen) Net Sales Ordinary Income Net Income Six months ended September 30,2000 66,506 15,369 8,777 (3) Dividends Interim Cash Dividends Per Share Six months ended September 30, 2000 Y26.00 2. Financial Forecast for the Year Ended March 31, 2001 (1) Consolidated (Millions of yen) Net Sales Ordinary Income Net Income Year ended March 31, 2001 153,000 29,000 19,000 (2) Non-consolidated (Millions of yen) Net Sales Ordinary Income Net Income Year ended March 31, 2001 132,000 23,000 13,000 Cash Dividends Per Share Year-end Annual Year ended March 31, 2001 Y26.00 Y52.00 (Further inquiries from press) KONAMI CORPORATION Public Relation Section 4-3-1, Toranomon, Minato-ku, Tokyo, 105-6021 Japan TEL: +81 3-3432-5610 FAX : +81 3-3432-5862 http://www.konami.com/ Summary of Consolidated Financial Results for the Six Months Ended September 30, 2000 KONAMI CORPORATION Address: 3-1, Toranomon 4-chome, Minato-ku, Tokyo, Japan Stock Code Number: 9766 Shares Listed: Tokyo Stock Exchange (First Section), Osaka Securities Exchange (First Section), London Stock Exchange, and Singapore Exchange (Main Board) Contact: Mr. Noriaki Yamaguchi, Director Phone: 03 (3578) 0573 http://www.konami.com Date of Board Meeting on financial results for the six-month period: November 16, 2000 1. Financial Results for the Six Months Ended September 30,2000 (1) Results of Operation (Figures truncated) Net Year- Operating Year-on Ordinary Year-on Sales on-year Income year Change Income year Change Change (Y million) (%) (Y million) (%) (Y million) (%) Six months ended September 30, 2000 74,374 (4.9) 17,136 (14.1) 15,940 (20.1) Six months ended September 30, 1999 78,246 - 19,955 - 19,954 - Year ended - March 31, 2000 146,666 30,938 31,103 Year-on-year Net Income Diluted Net Income Change Per Share Net Income Six months ended (Y million) (%) (Y) Per Share (Y) September 30, 2000 11,634 (16.9) 102.31 102.31 Six months ended September 30, 1999 14,004 - 249.78 246.99 Year ended - March 31, 2000 18,344 325.01 323.20 Notes: 1. Equity losses Six months ended September 30, 2000: Y706 million Six months ended September 30, 1999: - Year ended March 31, 2000: Y44 million 2. Unrealized holding gains on derivatives: Y19 million 2. There is no change in accounting policies. 3. 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. 4. Figures in parentheses represent negative values. (2) Financial position Total Shareholders' Equity-Assets Total Shareholders' Total Assets Equity Ratio Equity Per Share (Y million) (Y million) (%) (Y) September 30, 2000 145,321 78,782 54.2 692.76 September 30, 1999 142,924 68,754 48.1 1,212.34 March 31, 2000 136,080 70,844 52.1 1,246.08 (3) Cash Flows Net cash provided by (used in) Cash and Operating Investing Financing Cash Equivalents Activities Activities Activities at End (Y million) (Y million) (Y million) (Y million) Six months ended September 30, 2000 (3,260) (4,156) 3,076 52,998 Six months ended September 30, 1999 - - - - Year ended March 31, 2000 31,365 12,880 (10,015) 57,365 (4) Scope of Consolidation and Application of Equity Method Consolidated subsidiaries: 31 companies Affiliated companies applicable under equity method: 2 companies (5) Changes in Scope of Consolidation and Application of Equity Method Increase in consolidated subsidiaries: 2 companies Decrease in consolidated subsidiaries: 2 companies Increase in affiliates under equity method: 1 companies 2. Financial forecast for the year ended March 31, 2001 Ordinary Net Net Sales Income Income (Y million) (Y million) (Y million) Year ended March 31, 2001 153,000 29,000 19,000 Note: Estimated net income per share for the year ended March 31, 2001 is Y167.07. 1. Organization Structure of Konami Group Konami group specifies its business domain as the digital entertainment industry by providing a wide range of entertainment via computers, and is structured by KONAMI CORPORATION (the Company), 31 consolidated subsidiaries and 2 affiliated companies applicable under equity method. The Company, the consolidated subsidiaries and the affiliated companies under equity method are categorized into each business segment as follows according to their operations: Divisions Major Companies KONAMI CORPORATION KCE Tokyo, Inc. KCEO, Inc. KCE Japan, Inc Domestic KCE Studios, Inc. (Note 3) Consumer-Use Software Konami Computer Entertainment School, Inc. Mobile21 Co., Ltd., Konami Style.com Japan, Inc. Konami Marketing, Inc. 3 other companies Konami of America,Inc., Konami of Europe GmbH., Overseas Konami (Hong Kong)Ltd., Konami Software Shanghai, inc., 4 other companies Domestic KONAMI CORPORATION, Konami Marketing, Inc., 2 other companies Konami of America,Inc., Amusement Machines Overseas Konami Amusement of Europe Ltd., Konami (Hong Kong ) Ltd., 3 other companies Domestic KONAMI CORPORATION, Konami Marketing, Inc., 1 anothcr company Konami Gaming, Inc., Konami of America,Inc., Gaming Machines Overseas Konami Amusement of Europe Ltd, Konami (Hong Kong) Ltd., 3 other companies Domestic KONAMI CORPORATION, Konami Marketing, Inc., Creative Products Konami Music Entertainment Inc., Konami Style.com Japan, Inc. Domestic Konami Amusement Operation, Inc., Amusement Operations and 1 another company Finance Domestic Konami Capital, Inc. (Note 4) Domestic Konami Capital, Inc., Konami Service, Inc., TAKARA Co. Ltd., and I another company Others Overseas 3 other companies Notes: 1. The major products of each division are stated in the Note 2 of '5. Segment Information, (1) Operations by Business Segment'. 2. The companies that are running multiple businesses are included in each division respectively. 3. KCE Studios, Inc. is the new name of the former Konami Computer Entertainment Yokohama, Inc. that has merged with former Konami Computer Entertainment of Sapporo, Inc. in this six-month period ended September 30, 2000. 4. Konami Capital, Inc. is the new name of the former Konami Kosan, Inc. that has merged with former Konami Capital. 2. Management Policy 1. Basic Policy Konami management aggressively promotes operational innovation to be ahead of current trend based on the primary keywords 'Competition, Global standards and High profits'. With rapid advancement of communication infrastructure, 'Mobile or Handheld' and 'Network' are getting to be important factors to set the course of direction of entertainment industry. In the wide range of our entertainment operations, we are to proceed with these two factors in mind. Not only with our established branded contents, but also reinforced with newly acquired movie and sports related contents, we aim to further evolve our overseas operation, strengthen competitiveness and increase profits based on the solid growth. To be a 'Good Corporate Citizen' is another important part of our management policy. To promote sports activities and provide strong support for expansion of Information Technology and Multi-Media education, we serve as official partner of New National Theatre Foundation and official sponsor for Nippon Professional Baseball Commissioners Organization, Japan Professional Football League, Japan Olympic Committee, Nihon Sumo Association and Japan Golf Tour Organization. 1. Profit Appropriation Policy Konami regards the provision of stable dividends and improvement of corporate value, or shareholders' value, as important means of returning profits to shareholders. In other words, we set the target for total dividends at 30% of consolidated net income and strive to increase dividends per share. Our target for consolidated Return on Equity is 15% or more and considering cash flow, we review the priority of investment for new business or M&A and retirement of treasury stocks with a long-term point of view focusing on the future growth of corporate value. ROE of the previous year was 31.2%, and the expected ROE in this fiscal year ended March 31 is 24.7%. 3. Mid to Long-term Strategies In the entertainment industry boarders among games, movies, music, toys, hobbies, publishing and communications are disappearing and the market is expanding worldwide. Business method is getting more and more sophisticated with complicated alliances between companies and higher utilization of outsourcing. Konami recognize the importance of 'Brand image', 'Production capability', 'Marketing strength' and 'Financial resources' to maintain our continuous growth. To further strengthen those elements, we intend to make the most of our management resources and means of M&A and business alliances are also within the scope. To enhance the management of Komai Group, group companies are planned to go public following suit of KCEO, Inc. (Sept. 1999) and KCE Tokyo, Inc. (Aug. 2000). With active disclosure of information to improve corporate transparency, the group will strongly solidify its management system and financial structure. For the further enhancement of business foundation and operational globalization, we plan to list our shares on New York Stock Exchange in the beginning of the 21st century. Then, we will not only be able to raise fund from worldwide capital market but by adapting ourselves to the strictest accounting standard, also wish to obtain trust and confidence from investors as a truly global company. 4. Company Priorities In recent years there are various risks surrounding the companies. Externally there are possible risks to be involved in lawsuits of 'Product Liability' and 'Infringement of Intellectual Property Right' and internally risks of personnel and labor issues, just name a few. More advanced the globalization, more critical the risk hedge becomes. Konami established 'Risk Management Committee' to avert risk and minimize damage if anything went wrong. The whole group will strive to further reinforce risk management system. 3. Interim Business Performance 1. Overview Performance In the first half of this fiscal year, economy starts expansion led by capital expenditures of private sector, centering IT industry. There are concerns for still sluggish individual consumption and uncertainties of foreign exchange rates and oil prices but the improved corporate performance clearly indicates the beginning of recovery. In the digital entertainment industry to which Konami belongs, even though a bit of excitement was stirred by the release of high functional new game machine PlayStation2 in March, except the branded titles, sales of consumer-use software was generally slow. It was due to the sensational hit of mobile phones such as 'i-mode' and emergence of new communication method like CATV Internet. In such environment, continued popularity and boom of card games of the CP Div. (Creative Products Division) and Dance Dance Revolution series, POWERFUL PRO BASEBALL series and titles on Olympic Games of the CS Div. (Consumer-Use Software Division) made considerable contribution for sales. As a result, consolidated sales of the first half was Y74,374 million *(95.1%). Performance by Division CS Div. released variety of new titles in the first half, both in domestic and overseas markets. 'YU-GI-OH! DUEL MONSTERS III' (GameBoy Color), supported by the boom among kids, made great contribution for sales owing to its media-mix strategy with card games and animation. Sports titles with their established reputation, marked strong sales regardless of the platforms. They are 'JIKKYO POWERFUL PRO BASEBALL' (Nintendo 64), 'JIKKY0 POWERFUL PRO BASEBALL 7' (PlayStation 2) and 'JIKKYO POWERFUL PRO BASEBALL KAIMAKU' (PlayStation). Other major titles are 'Dance Dance Revolution 3rd MIX' (PlayStation) with newly added diet mode function, 'WORLD SOCCER WINNING ELEVEN 2000' (PlayStation) and 'JIKKYO WORLD SOCCER 2000' (PlayStation 2). 'Nightmare Creatures 2', the first tie-up title with Universal Interactive Studios was released overseas. As a result, consolidated sales of the division was Y24,535 million *(70.0 %). AM Div. (Amusement Machines Division) enjoyed solid sales of long-life hit products not only in Japan but also in Asian countries. 'DRUM MANIA' and 'GUITAR FREAKS' series are of music simulation games and 'Dance Dance Revolution' series of dance simulation games with its new variation kit sold well. New type of dance simulation game 'PARAPARA PRADISE' was released to appeal to youngsters who are crazy about the dance and in the arcade machine market 'Konami of music games' position was firmly established. In other genre, 'PUNCH MANIA' which is a lively fighting game, 'SILENT SCOPE' series which is a worldwide hit and 'GUN MANIA' which is a realistic shooting game using BB shots are received very well by the market. As collaboration with the CS Div. peripheral equipment such as exclusive controller for 'Dance Dance Revolution' was produced and made quite a contribution for sales. Liquid crystal unit for pachinko machines obtained high reputation as our product pursued excitement of the game and marked solid sales. As a result, consolidated sales of the division was Y15,122 million *(94.9 %). GM Div. (Gaming Machines Division) made continuous big hit of large size coin-operated machine 'G1-LEADING SIRE' with simulation function of training racing horse. 'G1-LEADING SIRE ver.2' with more sophisticated function also received high acclaim. Middle size coin-operated machine 'CYCLONEFEVER' with multiple stage effects posted remarkable sales. Variation kit for 'DRAGON PALECE' series and large and middle size coin-operated machine 'BINGO BOOMER' and 'TWINKLEDOME' made solid sales. As a result, consolidated sales of the division was Y4,246 million *(68.9%). CP Div. caused social phenomenal boom with 'YU-GI-OH! OFFICIAL CARD GAME DUELMONSTERS'. The product was a tremendous hit last year and owing to the repeating of TV animation since April, popularity soared higher than ever to surpass last year sales. As a result, consolidated sales of the division was Y26,993 million *(223.0%). AO Div. (Amusement Operations Division) marked very good performance with its newly opened outlets such as Kohoku store (Yokohama City). Other stores tried to increase per capita expenditure with events to appeal new machines and various competitions. Rental business started this year succeeded in installing machines at 350 stores. As a result, consolidated sales of the division was Y2,483 million *(112.2%). Consolidated sales of Finance and other divisions amounted to Y992 million. Consolidated ordinary income was: Y15,940 million which was a considerable increase from the original forecast because of the larger sales proportion of high-income card games. In addition, extraordinary income of Y3,944 million was recognized as increase in equity holdings of KCE Tokyo Inc., consumer-use software production subsidiary, which increased capital along with initial public offering. Consolidated net income of the first half was Y11,634 million. In recognition of good performance and as a means to return income to shareholders, the interim dividend will be Y26 per share. 2. Outlook for Fiscal Year 2001 in the second half, we expect to harvest the outcome of strategic business alliances we have pursued since previous term. They include the production of 'ESPN' branded sports titles based on the agreement with Disney Interactive and publishing of interactive movie games based on the alliance with Universal Interactive Studios. In line with the release of PlayStation 2 in the U.S. and Europe, we intend to aggressively evolve our overseas business. Following the gaming license granted from the state of Nevada in January 2000, we plan to obtain similar licenses from other states in the U.S. and build the gaming machine business to the new pillar of Konami Group. As for the domestic marketing system, to implement more effective and efficient marketing activities Konami Marketing. Inc. was established and commenced operation as of Oct. 1st, 2000. With centralized grasping and analysis of market trend and implementation of sales promotional operations, we further strive to respond to diversified customer needs. Consolidated annual sales is expected to be Y153 billion **(104.3%), consolidated ordinary income and net income will be Y29 billion **(93.2%) and Y19 billion **(103.6%) respectively. * Portion in the total amount of the six-month period ended September 30, 1999. **Portion in the total amount of the previous year. 4. Consolidated Financial Statements (1) Consolidated Balance Sheets (Millions of yen) September 30, September 30, March 31, 2000 1999 2000 Share of Share of Share of total assets total assets total assets ASSETS: I Current Assets Y111,415 76.7% Y109,140 76.3% Y102,952 75.7% Cash and cash equivalents 54,383 55,615 58,780 Trade notes and accounts receivable 36,807 34,621 27,203 Marketable securities - 678 0 Inventories 13,545 11,548 11,393 Prepaid expenses 2,702 1,255 1,635 Loans receivable - 1,591 - Deferred tax assets 2,080 1,780 2,206 Others 2,099 2,410 2,223 Allowance for bad debts (204) (361) (491) II Fixed Assets 33,906 23.3 33,407 23.4 32,666 24.0 1. Tangible fixed assets 22,399 15.4 24,631 17.2 22,865 16.8 Buildings and structures 10,772 12,413 11,305 Machinery and transportation equipment 279 270 252 Tools and fixtures 2,907 2,630 2,818 Land 8,345 9,314 8,488 Construction in progress 94 2 0 2. Intangible fixed assets1,667 1.1 1,251 0.9 1,572 1.2 In-house software 1,576 1,161 1,485 Others 91 89 86 3. Investments and other assets 9,838 6.8 7,524 5.3 8,228 6.0 Investment securities 3,754 129 986 Lease deposits 3,976 5,440 4,703 Deferred tax assets 1,887 1,519 2,064 Others 220 434 474 III Translation Adjustments - - 377 0.3 461 0.3 TOTAL ASSETS Y145,321 100.0% Y142,924 100.0% Y136,080 100.0% (Millions of yen) September 30. 2000 September 30, 1999 March 31, 2000 Share of Share of Share of total liabilities total liabilities total liabilities and and and sh/holders' equity sh/holders' equity sh/holders'equity LIABILITIES: I Current Liabillities Y56,893 39.2 % Y48,934 34.3% Y46,646 34.3% Trade notes payable and accounts payable 21,985 22,176 19,364 Short-tem loans payable 3,869 3,746 2,774 Current portion of long-term debt 2,015 1,403 1,751 Current portion of straight bonds 10,000 400 - Current portion of convertible bonds - 10 - Income taxes payable 7,795 10,839 11,435 Accrued expenses 3,934 3,158 3,750 Allowance for bonuses 1,175 1,207 1,158 Deferred tax liabilities 1 24 - Others 6,116 5,968 6,410 II Long-term Liabilities 4,984 3.4 23,188 16.2 16,347 12.0 Straight bonds - 15,000 10,000 Long-term loans payable 3,366 6,881 4,788 Liability for directors' retirement benefits 1,542 1,258 1,486 Others 75 48 72 TOTAL LIABILITIES 61,877 42.6 72,122 50.5 62,994 46.3 MINORITY INTEREST 4,662 3.2 2,047 1.4 2,242 1.6 SHAREHOLDERS'EQUITY: I Common Stock 15,793 10.9 15,787 11.1 15,793 11.6 II Additional Paid-in Capital 15,516 10.7 15,509 10.9 15,516 11.4 III Retained Earnings 48,062 33.0 37,701 26.4 39,565 29.1 IV Unrealiarised Holding Gains or Losses on Other Investment Securities (47) (0.0) - - - - V Translation Adjustments (527) (0.4) - - - - 78,798 68,997 70,876 Treasury Stock (15) (0.0) (243) (0.2) (31) (0.0) TOTAL SHAREHOLDERS, EQUITY 78,782 54.2 68,754 48.1 70,844 52.1 TOTAL LIABILITY, MINORITY INTEREST AND SHAREHOLDERS'EQUITY Y145,321 100.0% Y142,924 100.0% Y136,080 100.0 % (2) Consolidated Statements of Income (Millions of yen) Six months ended Six months ended Year ended September 30 September 30 March 31 2000 1999 2000 Share of Share of Share of net sales net sales net sales I Net Sales Y 74,374 100.0% Y 78,246 100.0% Y146,666 100.0 % II Cost of Sales 44,007 59.2 47,001 60.1 90,755 61.9 Gross Profit 30,366 40.8 31,245 39.9 55,911 38.1 III Selling, General and Administrative Expenses 13,230 17.8 11,290 14.4 24,972 17.0 Operating Income 17,136 23.0 19,955 25.5 30,938 21.1 IV Non-operating Income 517 0.7 812 1.0 1,759 1.2 Interest income 218 56 139 Gain on sale of marketable securities 0 387 711 Gain on sale of treasury stock - - 213 Foreign exchange gains - - 194 Rental income 2 112 160 Others 296 256 339 V Non-operating Expenses 1,714 2.3 813 1.0 1,594 1.1 Interest expenses 396 334 724 Foreign exchange losses 69 53 - Equity losses 706 - 44 Loss on redemption of bonds - - 100 Others 541 424 724 Ordinary Income 15,940 21.4 19,954 25.5 31,103 21.2 VI Extraordinary Income 4,177 5.6 8,894 11.4 8,943 6.1 Gain on reversal of allowance for bad debts 194 208 192 Gain on sale of fixed assets 35 - 63 Gain on sale of investment in subsidiaries 3 7,021 7,021 Gain on sale of stock by a subsidiary 3,944 1,665 1,665 VI Extraordinary Losses 50 0.1 3,283 4.2 5,636 3.8 Loss on sale and disposal of fixed assets 50 3,259 5,612 Loss on sale of investment in subsidiaries - 23 24 Net Income before Income Taxes and Minority Interest 20,067 26.9 25,565 32.7 34,409 23.5 Provision for income taxes 7,706 10.4 10,949 14.0 16,433 11.2 Income tax adjustments 334 0.4 394 0.5 (782) (0.5) Minority interest 391 0.5 216 0.3 414 0.3 Net Income Y11,634 15.6 Y 14,004 17.9 Y 18,344 12.5 (3) Consolidated Statements of Retained Earnings (Millions of yen) Six months ended Six months ended Year ended September 30, September 30, March 31 2000 1999 2000 I Retained earnings at beginning of period Y 39,565 Y 21,511 Y 21,511 prior year adjustment for deferred tax - 3,363 3,447 II Increase in Retained Earnings - - 25 Increase by consolidating previously unconsolidated subsidiaries - - 25 III Decrease in Retained Earnings 3,137 1,177 3,762 Cash dividends 2,956 1,003 3,560 Directors' bonuses 170 170 170 Decrease by merger of a consolidated subsidiary with an unconsolidated subsidiary 10 - - Decrease by consolidating previously unconsolidated subsidiaries - 4 4 Decrease by revaluation of real estate owned by a U.K. subsidiary - - 28 IV Net income 11,634 14,004 18,344 V Retained earnings at end of period Y 48,062 Y 37,701 Y 39,565 (4) Consolidated Statements of Cash Flows (Millions of yen) Six months ended Year ended September 30, 2000 March 31, 2000 I OPERATING ACTIVITIES: Income before income taxes and minority interest Y 20,067 Y34,409 Depreciation and amortization 1,363 2,788 Increase in allowance for directors' retirement benefits 56 465 Decrease in allowance for bad debts (286) (163) Interest and dividend income (219) (152) Interest expenses 396 724 Gain on sale of marketable securities 0 (711) Loss on sale of fixed assets - 5,612 Equity losses 706 44 Gain on sale of investment in subsidiaries (3,944) (8,687) Gain on sale of treasury stock - (213) Decrease (increase) in trade receivables (9,679) 3,133 Decrease (increase) in inventories (2,190) 2,470 Increase in trade payables 2,620 3,991 Decrease in consumption taxes payable 377 162 Other (999) 1,610 Sub-total 8,269 45,487 Interests and dividends received 173 145 Interests paid (352) (723) Income taxes paid (11,351) (13,544) Net cash provided by operating activities (3,260) 31,365 II INVESTING ACTIVITES: Decrease (increase) in time deposits 30 (1,415) Proceeds from sale of marketable securities 1 2,274 Acquisition of fixed assets (1,015) (2,188) Proceeds from sale of fixed assets 343 368 Acquisition of intangible fixed assets (314) (768) Acquisition of investment securities (3,738) (940) Proceeds from sale of investment securities 260 70 Proceeds from sale of investment in subsidiaries - 7,525 Decrease in loans receivable 38 7,228 Increase in lease deposits paid (456) (1,097) Increase in deposits received 771 - Others (75) 1,822 Net cash provided by investing activities (4,156) 12,880 III FINANCING ACTIVITES: Increase (decrease) in short-term loans payable 998 (1,709) Proceeds from long-term loans 3 412 Repayment of long-term loans (1,066) (2,640) Redemption of straight bonds - (5,500) Proceeds from issuance of common stock to minority shareholders 6,060 2,275 Proceeds from sale of treasury stock - 526 Dividends paid (2,956) (3,560) Others 36 182 Net cash used in financing activities 3,076 (10,015) IV TRANSLATION ADJUSTMENTS ON CASH AND CASH EQUIVALENTS (26) (390) V NET INCREASE IN CASH AND CASH EQUIVALENTS (4,367) 33,839 VI CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 57,365 23,526 VII INCREASE IN CASH AND CASH EQUIVALENTS BY NEWLY CONSOLIDATED COMPANY - 0 VII CASH AND CASH EQUIVALENTS, END OF PERIOD Y 52,998 Y 57,365 Summary of Significant Accounting Policies 1. Scope of Consolidation (1) The consolidated financial statements include accounts of KONAMI CORPORATION and its 31 consolidated subsidiaries listed in '1. Organization Structure of Konami Group'. The number of consolidated subsidiaries increased by two newly established companies, Konami Marketing, Inc. and Konami Software Shanghai, Inc. There also be two excluded consolidated subsidiaries merged by other consolidated subsidiaries: former Konami Computer Entertainment Sapporo, Inc. merged by former Konami Computer Entertainment Yokohama, Inc. (currently named KCE Studios Inc.); and former Konami Capital, Inc. merged by former Konami Kosan, Inc (currently named Konami Capital, Inc.). (2) Four subsidiaries are excluded from the scope of consolidation since each of their net assets, net sales, net income, and retained earnings are immaterial, and had no significant effect as a whole on the consolidated financial statements. 2. Application of Equity Method (1) Two affiliated companies, Mobile 21 Co., Ltd. and TAKARA Co., Ltd., are accounted for by the equity method. (2) The equity method is not applied to the unconsolidated subsidiaries since they have no significant effect on the consolidated net income and retained earnings, and are immaterial as a whole. 3. Fiscal Year-end of Consolidated Subsidiaries All consolidated subsidiaries use the same fiscal year-end as that of the parent company. 4. Accounting Standards a. Valuation of Assets (1) Inventories (a) Finished products and raw materials and supplies are stated at cost based on the moving average method. (b) Work in process is stated at cost based on the moving average method while that of consumer-use game software is stated at cost based on the specific identification method. (2) Marketable and investment securities (a) Investments in affiliates are stated at cost based on the moving average method. (b) Other securities without market value are stated at cost based on the moving average method. (3) Derivatives Foreign exchange forward contracts are stated at market value. b. Depreciation Methods (1) Tangible fixed assets are depreciated on the declining balance method according to Corporation Tax Law. (2) Intangible fixed assets are amortized on the straight-line method according to Corporation Tax Law. (In-house software is amortized on the straight-line method based on estimated useful life of 5 years.) c. Provisions (1) Allowance for bad debts Generally, allowance for bad debts is calculated according to the actual ratio of bad debt losses incurred. For specific accounts with higher possibility of bad debt loss, the allowance is determined by independent judgement. (2) Allowance for bonuses As part of estimated bonus payment to employees in the following six-month period, appropriate amount is provided. (3) Allowance for retirement benefits Accrued amount in the six-month period is provided for retirement benefits paid to employees based on estimated amount of the projected benefit obligation and plan assets as of the end of the period. Unrecognized net transition asset of Y206 million is credited to expense over 13 years on a straight-line basis. (4) Liability for directors' retirement benefits Required amount for the six-month period is provided as liability for retirement benefits paid to directors. d. Foreign Currency Translation Monetary assets and liabilities denominated in foreign currencies are translated at the current exchange rates as of the balance sheet date, and the translation gains and losses are credited or charged to income. Assets and liabilities of foreign subsidiaries are translated into yen at the current exchange rate as of the balance sheet date while revenue and expense are translated at the period average exchange rate. Differences arising from such translation are included as translation adjustments in stockholders' equity. e. Leases Finance leases other than those that deem to transfer ownership of the leased property to the lessee are accounted for as operating leases. d. Other Consumption tax is excluded from the stated amount of revenue and expense. 4. Consolidated Statements of Cash Flows All cash and cash equivalents stated in the consolidated statements of cash flows consist of cash on hand, all time deposits, and short-term investments, which have original maturities of three months or less and can be withdrawn on demand with no diminution of principal. Additional Information 1. Accounting for Retirement Benefits Since the beginning of the six-month period ended September 30, 2000, the accounting standards for retirement benefits, which were released on June 16, 1998, have been adopted. The financial impact of this change is considered immaterial. 2. Accounting for Financial Products Since the beginning of the six-month period ended September 30, 2000, the accounting standards for financial products, which were released on January 22, 1999, have been adopted. As a result of this change, ordinary income and net income before income taxes for the six-month period decreased by Y204 million each. In addition, considering the purpose of holding marketable securities at the beginning of the period, the securities classified as 'other securities' are stated as investment securities. 3. Accounting for Foreign Currency Transactions Since the beginning of the six-month period ended September 30, 2000, the amended accounting standards for foreign currency transactions, which were released on October 22, 1999, have been adopted. The financial impact of this change is considered immaterial. Translation adjustments previously stated in assets are included both in shareholders' equity and minority interest due to a change in preparation standards for interim consolidated financial statements. Notes to Consolidated Financial Statements Notes to Balance Sheets 1. Accumulated Depreciation of Tangible Fixed Assets (Millions of yen) September 30,2000 September 30,1999 12,302 11,699 2. Trade Notes Trade notes matured on the balance sheet date are settled on the exchange date of the notes. Since September 30,2000 was a holiday for financial institutions, the following matured trade notes are included in the balance sheet for the six-month period. (Millions of yen) September 30,2000 Trade notes receivable 27 Trade notes payable 2,218 Notes to Statements of Income Major items of selling, general and administrative expenses (Millions of yen) Six months ended Six months ended September 30,2000 September 30,1999 Personnel expenses 3,523 5,514 Advertising expenses 3,287 6,012 Addition to allowance for bonuses 396 305 Addition to allowance for directors' retirement benefits 75 472 Addition to allowance for bad debts 70 - Notes to Statements of Cash Flows 1. Difference between ending balance of cash and cash equivalents and the balance stated on the consolidated balance sheets: (Millions of yen) September 30,2000 March 31,2000 Cash and cash equivalents on balance sheets 54,383 58,780 Time deposits with original maturties of more than three months (1,385) (1,415) Cash and cash equivalents on statements of cash flows 52,998 57,365 2. Significant non-cash transactions (Millions of yen) Six months ended Year ended September 30,2000 March 31,2000 Increase in common stock by conversion of convertible bonds - 2,684 Increase in additional paid-in capital by conversion of convertible bonds - 2,682 Decrease in convertible bonds by conversion - 5,367 Leases Finance leases other than those that deem to transfer ownership of leased property to the lessee: 1. Equivalents of acquisition cost, accumulated depreciation, and ending balance of leased assets (Millions of yen) September 30,2000 March 31,2000 Acquisition Accumulated Ending Acquisition Accumulated Ending Cost depreciation balance Cost depreciation balance Tools & fixtures 5,325 2,903 2,422 5,248 2,783 2,464 Total 5,325 2,903 2,422 5,248 2,783 2,464 2. Obligations under finance leases, lease payments, and depreciation equivalents (Millions of yen) September 30,200O March 31,2000 Obligations under finance leases Due within one year 1,390 1,329 Due after one year 1,031 1,134 Total 2,422 2,464 Six months ended Year ended September 30,2000 March 31,2000 Lease payments 694 1,426 Depreciation equivalents 694 1,426 Notes: (1) Since the total obligation for unexpired leases at balance sheet date occupies only a small part of the ending balance of tangible fixed assets, acquisition cost equivalent and obligation for unexpired leases at the end of period are calculated including interest expenses. (2) Depreciation equivalents are computed according to the straight-line method with lease term as useful life and salvage value of zero. 3. Obligations under operating leases (Millions of yen) September 30,2000 March 31,2000 Obligations under operating leases Due within one year 142 142 Due after one year 205 277 Total 348 419 5. Segment Information (1) Operations by Business Segment Six months ended September 30, 2000 Millions of yen Consumer-Use Amusement Gaming Pachinko Creative Amusement Software Machines Machines Systems Products Operations Net sales: To customers Y 24,535 Y 15,122 Y 4,246 - Y 26,993 Y 2,483 Inter-segment 807 53 200 - 34 - Total 25,343 15,175 4,446 - 27,028 2,483 Operating expenses 22,267 11,684 4,389 - 13,512 2,369 Operating income 3,075 3,490 57 - 13,516 114 Millions of yen Eliminations and Finance Other Total Corporate Consolidated Net sales: To customers Y 24 Y 968 Y 74,374 - Y 74,374 Inter-segment 81 1,006 2,184 (2,184) - Total 106 1,974 76,558 (2,184) 74,374 Operating expenses 101 1,786 56,111 1,125 57,237 Operating income 5 187 20,446 (3,310) 17,136 Six months ended September 30,1999 Millions of yen Consumer-Use Amusement Gaming Pachinko Creative Amusement Software Machines Machines Systems Products Operations Net sales: To customers Y 35,044 Y 15,927 Y 6,160 Y 5,867 Y 12,105 Y 2,213 Inter-segment 51 69 148 - 38 - Total 35,095 15,996 6,308 5,867 12,143 2,213 Operating expenses 23,367 11,830 5,080 4,786 7,694 2,175 Operating income 11,727 4,166 1,227 1,080 4,449 38 Millions of yen Eliminations and Finance Other Total Corporate Consolidated Net sales: To customers Y 41 Y 887 Y 78,246 - Y 78,246 Inter-segment 74 1,150 1,532 (1,532) - Total 116 2,038 79,779 (1,532) 78,246 Operating expenses 110 1,849 56,894 1,397 58,291 Operating income 5 189 22,885 (2,930) 19,955 Year ended March 31,2000 Millions of yen Consumer-Use Amusement Gaming Pachinko Creative Amusement Software Machines Machines Systems Products Operations Net sales: To customers Y 61,264 Y 25,334 Y12,988 Y13,178 Y 27,820 Y 4,503 Inter-segment 1,012 197 320 - 164 - Total 62,277 25,532 13,309 13,178 27,985 4,503 Operating expenses 46,812 20,309 12,218 10,055 16,921 4,486 Operating income 15,464 5,222 1,091 3,123 11,064 17 Millions of yen Eliminations and Finance Other Total Corporate Consolidated Net sales: To customers Y 69 Y1,505 Y 146,666 - Y 146,666 Inter-segment 171 2,730 4,596 (4,596) - Total 240 4,235 151,263 (4,596) 146,666 Operating expenses 223 3,856 114,884 843 115,727 Operating income 16 378 36,379 (5,440) 30,938 Notes: 1. Business divisions are determined by the internal management on a basis of the similarities in the type, nature and production methods of their products. 2. The major products and services of each division are defined as follows: Consumer-Use Software: Software for PlayStation, Nintendo 64, Game Boy, and Dreamcast Software for cellular phone On-line game software for internet Amusement Machines: Coin-operated game machines for amusement operations Dance-simulation game machines Music-simulation game machines (previous Gaming Machines Division, Note 3) Disc jockey-simulation game machines (previous Gaming Machines Division, Note 3) Software with LCD units for pachinko game machine makers (previous Pachinko Systems Division, Note 4) Gaming Machines: Token-operated game machines for amusement operations Gaming machines for Casino Pachinko slot machines (previous Pachinko Systems Division, Note 4) Creative Products: Card games, character goods, portable games, procurement and distribution of home use game software created by other companies Amusement Operations: Operations of amusement centers 3. As from March 31, 2000, the operation of manufacturing the disc jockey-simulation and music-simulation game machines of Gaming Machines Division were transferred to Amusement Machines Division. As a result of this change, Y1,232 million for net sales, Y938 million for operating expenses, and Y293 million for operating income are additionally recognized at Amusement Machines Division. 4. AS from March 31,2000, the operations of manufacturing the software with LCD units of Pachinko Systems Divisions were transferred to Amusement Machines Division, and the operations of manufacturing pachinko slot machines of this division were transferred to Gaming Machines Division. As a result, Y6,273 million for net sales, Y4,687 million for operating expenses, and Y1,586 million for operating income of Amusement Machines Division are additionally recognized while the financial impact on Gaming Machines Division is immaterial. 5. Unallocated operating expenses in the Eliminations or Corporate column, mainly consisting of the administrative expenses of the parent company, amounted to Y3,495 million for this six-month period ended September 30, 2000, and Y2,841 million for the previous six-month period ended on September 30, 1999, and Y5,602 million for the previous year ended March 31, 2000. MORE TO FOLLOW

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