Interim Results
Konami Corporation
13 January 2006
1. Consolidated Financial Statements
(1) Consolidated Balance Sheets
Millions of Yen
September 30, 2004 September 30, 2005 March 31, 2005
% % %
ASSETS
CURRENT ASSETS:
Cash and cash equivalents Y 79,779 Y 75,678 Y 89,583
Trade notes and accounts 25,017 24,992 33,577
receivable, net of allowance for
doubtful accounts of Y754 million, Y463
million and Y604 million at September
30, 2004, September 30, 2005 and March
31, 2005, respectively
Inventories 23,826 22,988 15,488
Deferred income taxes, net 13,798 12,878 18,392
Prepaid expenses and other current 8,045 8,990 4,898
assets
Total current assets 150,465 51.1 145,526 47.9 161,938 53.2
PROPERTY AND EQUIPMENT, net 47,394 16.1 52,277 17.2 46,595 15.3
INVESTMENTS AND OTHER
ASSETS:
Investments in marketable 130 185 165
Securities
Investments in affiliates 9,419 - 5,184
Identifiable intangible assets 46,389 45,944 45,991
Goodwill 464 15,471 849
Lease deposits 23,684 25,182 24,216
Other assets 16,329 19,436 19,383
Total investments and other 96,415 32.8 106,218 34.9 95,788 31.5
assets
TOTAL ASSETS Y 294,274 100.0 Y 304,021 100.0 Y 304,321 100.0
See accompanying notes to consolidated financial statements
Millions of Yen
September 30, September 30, March 31, 2005
2004 2005
% % %
LIABILITIES AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings Y 7,073 Y 9,990 Y 8,582
Current portion of long-term debt 17,591 17,147 16,727
and capital lease obligations
Trade notes and accounts payable 16,477 13,399 16,134
Accrued income taxes 21,960 18,951 28,372
Accrued expenses 18,173 17,358 19,875
Deferred revenue 6,088 5,963 5,396
Other current liabilities 4,139 5,962 4,741
Total current liabilities 91,501 31.1 88,770 29.2 99,827 32.8
LONG-TERM LIABILITIES:
Long-term debt and capital lease 52,572 40,717 52,780
obligations, less current portion
Accrued pension and severance 2,357 2,614 2,344
costs
Deferred income taxes, net 20,731 15,822 16,147
Other long-term liabilities 2,307 6,559 1,879
Total long-term liabilities 77,967 26.5 65,712 21.6 73,150 24.0
TOTAL LIABILITIES 169,468 57.6 154,482 50.8 172,977 56.8
MINORITY INTEREST IN 24,959 8.5 15,598 5.1 25,487 8.4
CONSOLIDATED SUBSIDIARIES
COMMITMENTS AND - - - - - -
CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, no par value-
Authorized 450,000,000 shares; 47,399 16.1 47,399 15.6 47,399 15.6
issued 128,737,566 shares at
September 30, 2004 and March 31,
2005, 139,531,708 shares at
September 30, 2005
Additional paid-in capital 46,736 15.9 70,376 23.1 46,736 15.4
Legal reserve - - 207 0.1 - -
Retained earnings 32,152 10.9 41,308 13.6 37,776 12.4
Accumulated Other 950 0.3 2,820 0.9 2,217 0.7
Comprehensive Income
Total 127,237 43.2 162,110 53.3 134,128 44.1
Treasury stock, at cost-
8,914,272 shares, 9,225,633 shares (27,390) (9.3) (28,169) (9.2) (28,271) (9.3)
and 9,256,155 shares at September
30, 2004, September 30, 2005 and
March 31, 2005, respectively
Total stockholders' equity 99,847 33.9 133,941 44.1 105,857 34.8
TOTAL LIABILITIES AND Y 294,274 100.0 Y 304,021 100.0 Y 304,321 100.0
STOCKHOLDERS' EQUITY
See accompanying notes to consolidated financial statements
(2) Consolidated Statements of Operations
Millions of Yen
Six months ended Six months ended Year ended
September 30, September 30,
2004 2005 March 31, 2005
% % %
NET REVENUES:
Product sales revenue Y 74,933 Y 74,377 Y 183,030
Service revenue 39,076 37,493 77,661
Total net revenues 114,009 100.0 111,870 100.0 260,691 100.0
COSTS AND EXPENSES:
Costs of products sold 45,409 44,038 114,547
Costs of services rendered 33,205 36,572 65,816
Selling, general and administrative 23,544 23,798 52,192
Total costs and expenses 102,158 89.6 104,408 93.3 232,555 89.2
Operating income 11,851 10.4 7,462 6.7 28,136 10.8
OTHER INCOME (EXPENSES):
Interest income 239 365 518
Interest expense (475) (531) (971)
Gain on sale of shares of an - 6,917 563
affiliated company
Other, net (29) 122 (804)
Other income (expenses), net (265) (0.2) 6,873 6.1 (694) (0.3)
INCOME BEFORE INCOME 11,586 10.2 14,335 12.8 27,442 10.5
TAXES, MINORITY INTEREST AND
EQUITY IN NET INCOME (LOSS) OF
AFFILIATED COMPANIES
INCOME TAXES 5,819 5.1 7,167 6.4 7,902 3.0
INCOME BEFORE MINORITY 5,767 5.1 7,168 6.4 19,540 7.5
INTEREST AND EQUITY IN NET
INCOME (LOSS) OF AFFILIATED
COMPANIES
MINORITY INTEREST IN INCOME 1,590 1.4 204 0.2 2,761 1.1
OF CONSOLIDATED
SUBSIDIARIES
EQUITY IN NET INCOME (LOSS) OF (2,551) (2.3) - - (6,293) (2.4)
AFFILIATED COMPANIES
NET INCOME Y 1,626 1.4 Y 6,964 6.2 Y 10,486 4.0
See accompanying notes to consolidated financial statements
PER SHARE DATA: Yen
Six months Six months Year
ended ended ended
September 30, September 30, March 31,
2004 2005 2005
Basic net income per share Y 13.51 Y 53.45 Y 87.41
Diluted net income per share Y 13.51 Y 53.44 Y 87.41
Weighted-average common shares
outstanding 120,388,556 130,300,952 119,970,052
See accompanying notes to consolidated financial statements
(3) Consolidated Statements of Stockholders' Equity
For the six months ended September 30, 2004
Millions of Yen
Common Additional Legal Retained Accumulated Treasury Total
Stock Paid-in Reserve Earnings Other Stock, Stockholders'
Capital Comprehensive at Cost Equity
Income (Loss)
Balance at Y47,399 Y46,736 Y- Y33,779 Y(119) Y(25,666) Y102,129
March 31, 2004
Net income 1,626 1,626
Cash dividends, Y (3,253) (3,253)
27.0 per share
Foreign currency 1,322 1,322
translation
adjustments
Net unrealized (253) (253)
losses on
available-for-sale
securities
Repurchase of (1,724) (1,724)
treasury stock
Balance at Y47,399 Y46,736 Y- Y32,152 Y950 Y(27,390) Y99,847
September 30,
2004
For the six months ended September 30, 2005
Millions of Yen
Common Additional Legal Retained Accumulated Treasury Total
Stock Paid-in Reserve Earnings Other Stock, Stockholders'
Capital Comprehensive at Cost Equity
Income (Loss)
Balance at Y47,399 Y46,736 Y - Y37,776 Y2,217 Y(28,271) Y105,857
March 31, 2005
Net income 6,964 6,964
Cash dividends, Y (3,225) (3,225)
27.0 per share
Foreign currency 759 759
translation
adjustments
Net unrealized (156) (156)
losses on
available-for-sale
securities
Transfer from 207 207
Retained
Earnings
Transfer to Legal (207) (207)
Reserve
Common stock 23,583 23,583
issued by merger
with subsidiaries
Stock compensation 57 57
Repurchase of (29) (29)
treasury stock
Reissuance of 131 131
treasury stock
Balance at Y47,399 Y70,376 Y207 Y41,308 Y2,820 Y(28,169) Y133,941
September 30,
2005
See accompanying notes to consolidated financial statements
For the year ended March 31, 2004
Millions of Yen
Common Additional Legal Retained Accumulated Treasury Total
Stock Paid-in Reserve Earnings Other Stock, Stockholders'
Capital Comprehensive at Cost Equity
Income (Loss)
Balance at Y47,399 Y46,736 Y- Y33,779 Y(119) Y(25,666) Y102,129
March 31, 2005
Net income 10,486 10,486
Cash dividends, (6,489) (6,489)
Y54.0 per
share
Foreign currency 2,285 2,285
translation
adjustments
Net unrealized loss (20) (20)
on available-for-sale
securities
Adjustment for 71 71
minimum pension
liability
Repurchase of (2,605) (2,605)
treasury stock
Balance at Y47,399 Y46,736 Y- Y37,776 Y2,217 Y(28,271) Y105,857
March 31, 2005
Millions of Yen
Comprehensive income Six months Six months
ended ended Year ended
September 30, September 30, March 31,
2004 2005 2005
Net income Y 1,626 Y 6,964 Y 10,486
Accumulated Other Comprehensive 1,069 603 2,336
Income, tax allocation adjusted
Net comprehensive income Y 2,695 Y 7,567 Y 12,822
See accompanying notes to consolidated financial statements
(4) Consolidated Statements of Cash Flows
Millions of Yen
Six months Six months Year ended
ended ended March 31,
September September 2005
30, 2004 30, 2005
Cash flows from operating activities:
Net income Y 1,626 Y 6,964 Y 10,486
Adjustments to reconcile net income to net cash
provided by operating activities -
Depreciation and amortization 4,224 4,484 9,360
Allowance (Reversal) for doubtful receivables (455) 105 (400)
Loss (gain) on sale or disposal of property and 635 (484) 1,553
equipment, net
Loss on sale of marketable securities 46 - 46
Gain on sales of shares of an affiliated company - (6,917) (563)
Equity in net loss of an affiliated company 2,551 - 6,293
Minority interest 1,590 204 2,761
Deferred income taxes 1,616 5,258 (7,615)
Change in assets and liabilities, net of business
acquired:
Decrease (increase) in trade notes and accounts 955 10,559 (5,632)
receivable
Decrease (increase) in inventories (5,246) (4,793) 2,949
Increase (decrease) in trade notes and accounts payable (23) (2,902) 352
Increase (decrease) in accrued income taxes (1,418) (9,384) 4,954
Increase (decrease) in accrued expenses (718) (1,560) 617
Increase (decrease) in deferred revenue 52 567 (640)
Other, net 1,112 211 3,239
Net cash provided by operating activities 6,547 2,312 27,760
Cash flows from investing activities:
Proceeds from sales of shares of affiliated companies - 11,016 1,407
Capital expenditures (7,764) (5,784) (15,818)
Proceeds from sales of property and equipment 333 2,484 696
Proceeds from sales of investments in marketable 22 - 22
securities
Acquisition of a new subsidiary, net of cash - 1,433 -
acquired
Decrease (increase) in lease deposits, net 165 (833) (542)
Expenditure from acquisition of minority - (695) -
interests
Other, net (647) (451) (108)
Net cash provided by (used in) investing activities (7,891) 7,170 (14,343)
Cash flows from financing activities:
Net increase (decrease) in short-term borrowings 4,485 (3,632) 6,001
Repayments of long-term debt (588) (619) (1,177)
Redemption of bonds - (15,000) -
Principal payments under capital lease obligations (1,176) (1,210) (2,255)
Dividends paid (4,217) (3,369) (7,963)
Purchases of treasury stock by parent company (2,605)
(1,724) (29)
Purchases of treasury stock by subsidiaries (3,555) - (3,593)
Other, net (39) (40) (78)
Net cash used in financing activities (6,814) (23,899) (11,670)
Effect of exchange rate changes on cash and cash 1,052 512 951
equivalents
Net increase (decrease) in cash and cash equivalents (7,106) (13,905) 2,698
Cash and cash equivalents, beginning of the period 86,885 89,583 86,885
Cash and cash equivalents, end of the period Y 79,779 Y 75,678 Y 89,583
See accompanying notes to consolidated financial statements
Notes to Consolidated Financial Statements
1. Basis of Presentation
Pursuant to section 81 of 'Regulation Concerning the Terminology, Forms and
Preparation Methods of Consolidated Semi-annual Financial Statements'' (Ministry
of Finance Ordinance No. 24, 1999), the accompanying semi-annual consolidated
financial statements for the six months ended September 30, 2004 and 2005 of
Konami Corporation (the 'Company ') and its subsidiaries (collectively 'Konami')
have been prepared in accordance with United States generally accepted
accounting principles ('U.S.GAAP'). Konami became publicly traded on the New
York Stock Exchange in September 2002, and prepares its consolidated financial
statements pursuant to the terminology, forms and preparation methods required
in order to issue American Depositary Shares, which are registered with the
Securities and Exchange Commission of the United States of America.
2. Business and Organization
The Company was founded in 1969 and was incorporated under the laws of Japan in
March 1973. Konami engages in production and sale of game software for home
video game systems, game machines for installation in amusement arcades and
other entertainment venues and other amusement-related products, and operation
of health and fitness club facilities. The principal markets for Konami's
products are Japan, North America, Europe, Asia and Australia while all of its
health and fitness club facility operation is in Japan.
Substantially all of Konami's revenues from video game software have
historically been derived from sales of software for use on proprietary game
platforms developed and manufactured by other manufacturers. Konami may only
publish its games for use on the manufacturers' game platforms if it receives a
platform license from them, which is generally for an initial term of several
years and may be extended for additional one-year terms. If Konami cannot obtain
licenses to develop video game software from manufacturers of popular game
platforms or if any of its existing license agreements are terminated, it will
not be able to release software for those platforms, which may have a negative
impact on its results of operations and profitability. To date, Konami has
always obtained extensions or new agreements with the platform manufacturers.
These licenses include other provisions such as approval rights by the
manufacturers of all products and related promotional materials which could have
an effect on Konami's costs and the timing of release of new game titles.
In the United States, Canada and Australia, the manufacture and distribution of
Konami's gaming machines are subject to numerous federal, state and local
regulations. In addition, Konami may be subject to regulation as a gaming
operator if it enters into lease participation agreements under which it shares
in the revenues generated by gaming machines. These regulations are constantly
changing and evolving, and may curtail gaming in various jurisdictions in the
future, which would decrease the number of jurisdictions from which Konami can
generate revenues. Konami and its key personnel are subject to an extensive
investigation before each jurisdictional gaming license is issued. Also, Konami
's gaming machines are subjected to independent testing and evaluation prior to
approval from each jurisdiction. Generally, regulatory authorities have broad
discretion when granting, renewing or revoking these game approvals and
licenses.
3. Reclassifications
Certain reclassifications have been made to the prior years' consolidated
financial statements to conform to the presentation used for the six months
ended September 30, 2005.
4. Summary of Significant Accounting Policies
(a) Consolidation Policy
The accompanying consolidated financial statements include the accounts of the
Company and all of its majority-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
In January 2003, the Financial Accounting Standards Board ('FASB') issued FASB
Interpretation No. ('FIN') 46, 'Consolidation of Variable Interest Entities, an
interpretation of ARB No. 51. ' In December 2003, the FASB issued FIN 46
(revised December 2003), 'Consolidation of Variable Interest Entities' ('FIN
46R'), which addresses how a business enterprise should evaluate whether it has
a controlling financial interest in an entity through means other than voting
rights and accordingly should consolidate the entity. FIN 46R replaces FIN 46.
Konami applied FIN 46R as of January 1, 2004. The Company evaluates potential
nonvoting controlling interests in variable interest entities and consolidates
entities for which the Company is determined to be the primary beneficiary. The
implementation of FIN 46R did not have a significant effect on Konami's
consolidated financial statements.
(b) Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid investments with an initial
maturity of three months or less.
(c) Marketable Securities
Konami classifies its debt and equity securities into one of the three
categories: trading, available-for-sale, or held-to-maturity securities. Trading
securities are bought and held primarily for the purpose of selling them in the
near term. Held-to-maturity securities are those securities in which Konami has
the ability and intent to hold them until maturity. All securities not included
in trading or held-to-maturity categories are classified as available-for-sale.
Trading and available-for-sale securities whose fair values are readily
determinable are recorded at fair value. Held-to-maturity securities are
recorded at amortized cost, adjusted for the amortization or accretion of
premiums or discounts. Unrealized gains and losses on trading securities are
included in earnings. Unrealized gains and losses, net of the related tax
effect, on available-for-sale securities are excluded from earnings and are
reported as a separate component of accumulated other comprehensive income until
realized. Realized gains and losses from sale of available-for-sale securities
are determined based on the average cost method. A decline in the market value
of any available-for-sale security below cost that is deemed to be other than
temporary results in a reduction in carrying amount to fair value. The
impairment is charged to earnings and a new cost basis for the security is
established. Dividend income is recognized when earned. As of September 30, 2004
and 2005 and March 31, 2005, all equity securities held by Konami are classified
as available-for-sale.
(d) Investments in Affiliates
For those investments in affiliates in which the Company's voting interest is
between 20% and 50% and it has the ability to exercise significant influence
over the affiliate's operations, the equity method of accounting is used. Under
this method, the investment originally recorded at cost is adjusted to recognize
the Company's share of the net earnings or losses of the affiliates. All
significant intercompany profits from these affiliates have been eliminated.
Investments in non-marketable equity securities in which the Company's ownership
is less than 20% are carried at cost. A decline in the value of a non-marketable
equity security below cost that is deemed to be other than temporary results in
a reduction in carrying amount to fair value. The impairment is charged to
earnings and a new cost basis for the security is established.
(e) Inventories
Inventories, consisting of merchandise for resale, finished products,
work-in-process, raw materials and supplies, are stated at the lower of cost or
market. Cost is determined by the first-in, first-out method for merchandise, by
the specific identification method for software products, and by the average
method for others.
(f) Property and Equipment
Property and equipment are carried at cost. Depreciation is computed on the
declining-balance method using estimated useful lives ranging from 10 to 50
years for buildings and structures and from 2 to 20 years for tools, furniture
and fixtures. Equipment under capital leases is stated at the lower of the
present value of minimum lease payments or the fair value of the leased
equipment at the inception of the lease and is amortized on a straight-line
basis over either the lease term or estimated useful life of the asset, which
ranged from 3 to 8 years.
Ordinary maintenance and repairs are expensed as incurred. Major replacements
and improvements are capitalized. When properties are retired or otherwise
disposed of, the property and related accumulated depreciation accounts are
relieved of the applicable amounts and any differences are included in operating
income or expenses.
(g) Software for Internal Use
Under the provisions of the American Institute of Certified Public Accountants
Statement of Position ('SOP') 98-1, 'Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use,' Konami has capitalized costs
associated with software systems for internal use, that have reached the
application stage and meet recoverability tests as capitalized computer software
in the accompanying consolidated balance sheets. Such capitalized costs
primarily include external direct costs utilized in developing or obtaining the
applications. Capitalization of such costs ceases at the point in which the
project is substantially complete and ready for its intended use, and the costs
capitalized are amortized on a straight-line basis over the estimated useful
life of each application, ranging from 2 to 5 years. Konami expenses costs
incurred during the preliminary project stage which include costs for making
strategic decisions about the project, and determining performance and system
requirements. Konami also expenses costs incurred for internal-use software in
the post-implementation stage such as training and maintenance costs.
(h) Business Combination
Konami has used the purchase method of accounting for its acquisitions and,
accordingly, has allocated the purchase price based on the estimated fair value
of net assets of the acquired companies in accordance with SFAS No. 141
'Business combinations'. The excess purchase price over the fair value of net
assets acquired is recorded as goodwill.
(i) Goodwill and Other Intangible Assets
Goodwill represents the difference between the cost of acquired companies and
amounts allocated to the estimated fair value of their net assets. Identifiable
intangible assets represent intangible assets related to trademarks, membership
lists, gaming licenses, existing technology, customer relationships and
franchise contracts acquired in connection with acquisitions of subsidiaries.
Konami performs an assessment of goodwill for impairment at least annually, and
more frequently if an indicator of impairment has occurred, using a two-step
process under SFAS No. 142, 'Goodwill and Other Intangible Assets'. The first
step requires identification of reporting units and determination of the fair
value for each individual reporting unit. The fair value of each reporting unit
is then compared to the reporting unit's carrying amount including assigned
goodwill. To the extent a reporting unit's carrying amount exceeds its fair
value, the second step of the impairment test is performed by comparing the
implied fair value of the reporting unit's goodwill to its carrying amount. If
the implied fair value of a reporting unit's goodwill is less than its carrying
amount, an impairment loss is recorded. Konami performs its annual impairment
test on March 31 each year. Konami has determined its reporting units to be the
same as its reportable segments.
Intangible assets related to trademarks, franchise contracts and gaming licenses
are determined to have an indefinite useful life and have been tested for
impairment based on fair value under SFAS No. 142.
Intangible assets related to existing technology have been amortized over their
estimated useful lives of 5 years. Konami assesses the recoverability of these
intangible assets according to SFAS No. 144, 'Accounting for the Impairment or
Disposal of Long-Lived Assets'.
(j) Impairment or Disposal of Long-Lived Assets
Konami's long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Factors Konami considers important which could trigger an
impairment review include: significant underperformance relative to expected
historical or projected future operating results; significant changes in the
manner of the use of the acquired assets or the strategy for overall business;
significant negative industry or economic trends; significant decline in the
stock price of the acquired entity for a sustained period; and market
capitalization of the acquired entity relative to its net book value.
When it is determined that the carrying amount of assets to be held and used may
not be recoverable based upon the existence of one or more of these indicators
of impairment, recoverability is measured by a comparison of the carrying amount
of an asset to future net cash flows (undiscounted and without interest charges)
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the estimated fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying amount or
fair value less costs to sell.
(k) Derivative Financial Instruments
From time to time, Konami uses certain derivative financial instruments to
manage its foreign currency risks. Konami may enter into forward contracts to
reduce its exposure to short-term (generally no more than one year) movements in
exchange rates applicable to firm funding commitments that are denominated in
currencies other than the Japanese yen.
Konami accounts for derivative financial instruments and other hedging
activities according to SFAS No. 133, 'Accounting for Derivative Instruments and
Hedging Activities' and SFAS No. 138, 'Accounting for Certain Derivative
Instrument and Certain Hedging Activities, an amendment of SFAS No. 133. ' SFAS
No. 133, as amended, requires that all derivative instruments be reported on the
balance sheet as either assets or liabilities measured at fair value. For
derivative instruments designated and effective as fair value hedges, changes in
the fair value of the derivative instrument and of the hedged item attributable
to the hedged risk are recognized in earnings. For derivative instruments
designated as cash flow hedges, the effective portion of any hedge is reported
in other comprehensive income until it is recognized in earnings in the same
period in which the hedged item affects earnings. Any amounts excluded from the
assessment of hedge effectiveness as well as the ineffective portion of all
hedges are reported in current earnings each period. Changes in fair value of
derivative instruments that are not designated as a hedge are recorded each
period in current earnings. If a derivative instrument is not designated as a
hedge, the gain or loss is recognized in earnings in the period of change. To
date, there has been no derivative instrument designated as a hedge by Konami.
(l) Income Taxes
Konami accounts for income taxes in accordance with SFAS No. 109, 'Accounting
for Income Taxes. ' Under SFAS No. 109, deferred income taxes are recognized by
the asset and liability method for the estimated future tax consequences
attributable to temporary differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards, using enacted tax rates in effect
for the years in which those temporary differences are expected to reverse. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in earnings in the period that includes the enactment date.
(m) Revenue Recognition
Konami derives revenue from primarily three sources: (i) product revenue, which
includes packaged game software and other products, game machines and related
equipment and components, (ii) membership fee revenue from health and fitness
club members and (iii) sales and subscription fee revenue from mobile game
contents.
Konami's revenue recognition criteria are as follows:
Persuasive Evidence of an Arrangement.
For product sales, it is Konami's customary practice to have a written contract,
which is signed by both the customer and Konami, or a purchase order or
amendment to the written contract from those customers that have previously
negotiated a standard purchase agreement.
For Konami's health and fitness clubs, members are required to sign a standard
monthly membership agreement upon admission, which is automatically renewed
unless the member provides advance notice of his or her intention to cancel
prior to the tenth day of the month at the end of which the membership will
terminate.
For mobile game contents, Konami enters into distribution agreements with mobile
phone carriers for the sale or subscription of mobile game contents by the
carriers to their subscribers. Konami recognizes as revenues the net amount the
mobile phone carrier pays to Konami upon the sale of Konami's game contents, net
of any service or other fees earned and deducted by the carrier.
Delivery Has Occurred.
Packaged game software and other products are physically delivered to customers.
Also, Konami's game machines and related equipment are physically delivered to
customers as a fully-assembled, ready to be installed unit. Accordingly, Konami
recognizes revenue from product sales upon delivery and acceptance since title
and risk of loss transfer to the customer based on free on board ('FOB')
destination. Generally, Konami does not permit exchanges or accept returns of
unsold merchandise except in the case of obvious defects. In certain limited
circumstances Konami may allow returns, for which Konami estimates the related
allowances based upon management's evaluation of historical experience, the
nature of the software titles and other factors. These estimates are deducted
from gross sales.
Revenue from health and fitness club membership is derived primarily from
monthly membership fees from club members. Revenue for those fees is recognized
as monthly charges are generally made to the members' accounts in advance, at
the end of each month, with respect to the following month's membership. This
policy requires Konami to defer the applicable membership fee revenue for one
month.
Revenue from mobile game contents is derived from monthly subscription fees.
Under the distribution agreements, the mobile phone carriers are responsible for
billing, collection and remittance of those subscription fees to Konami. The
carriers generally report the final sales data to Konami within 60 days
following the end of each month. When final sales data is not available in a
timely manner for reporting purposes, Konami estimates its revenues based on
available sales data, which is then adjusted to actual revenues in the following
reporting period once the actual amounts are determined.
The Price is Fixed or Determinable.
The price customers pay for Konami's products is negotiated at the outset of an
arrangement, and is generally determined by the specific volume of product to be
delivered. Therefore, the prices are considered to be fixed or determinable at
the start of the arrangement. Konami's membership fee for health and fitness
clubs is fixed at the time of admission of the member. Also, monthly
subscription fees for mobile game contents are based on a fixed rate per end
customer subscriber.
Collection is Probable.
Probability of collection is assessed on a customer-by-customer basis. Konami
typically sells to customers with whom Konami has a history of successful
collection. New customers are subjected to a credit review process that
evaluates the customers' financial position and ultimately their ability to pay.
For Konami's health and fitness clubs, the collectibility of membership fees is
assured as it generally charges members' accounts one-month in advance.
Also, for mobile game contents, the collectibility of subscription fees is
assured by the distribution agreements with the mobile phone carriers.
(n) Software Development Costs
Research and development expenses are charged to income as incurred. Research
and development expenses included in selling, general and administrative
expenses amounted to Y919 million, Y1,335 million and Y1,813 million for the six
months ended September 30, 2004 and 2005 and the year ended March 31, 2005,
respectively, in the accompanying consolidated statements of operations.
SFAS No. 86, 'Accounting for the Cost of Computer Software to be Sold, Leased,
or Otherwise Marketed', provides for the capitalization of certain software
development costs incurred after technological feasibility is established or for
development costs that have alternative future uses. Under Konami's current
practice of developing new game software products, technological feasibility is
not established until substantially all development activities are complete,
which generally include the development of a working template and the related
tools. For game products where a proven game engine technology exists and other
criteria supporting the technological feasibility of the game title in
development have been met, which include coding and testing of unique or
unproven functions and features, Konami capitalizes these costs and begins to
expense them upon release of the product through cost of revenues or when they
are deemed unrecoverable.
(o) Royalties and License Fees
Konami pays royalties and license fees to professional sports organizations and
certain other third parties for use of their trade names. Minimum portions of
such royalties and license fees paid up-front are recorded as prepaid royalties
and are expensed to cost of products sold over the contractual terms ranging
primarily from 4 to 12 months. Variable portions of such royalties and license
fees, which are generally determined based on the number of copies shipped at
the predetermined royalty rates, are expensed to cost of products sold based on
actual shipment. Management periodically evaluates the future realizability of
prepaid royalties and charges to income any amounts deemed unlikely to be
realized. Prepaid royalties amounted to Y381 million, Y117 million and Y301
million at September 30, 2004 and 2005 and March 31, 2005, respectively, and
were included in Prepaid expenses and other current assets in the accompanying
consolidated balance sheets.
(p) Advertising Expenses
Advertising expenses are charged to earnings as incurred and are included in
Selling, general and administrative expenses in the accompanying consolidated
statements of operations. Advertising expenses amounted to Y5,878 million,
Y4,907 million and Y12,667 million for the six months ended September 30, 2004
and 2005 and the year ended March 31, 2005, respectively.
(q) Stock-based Compensation
Konami accounts for its stock-based compensation plan to directors and employees
using the intrinsic value based method prescribed by APB No. 25, 'Accounting for
Stock Issued to Employees' and FIN No. 44, 'Accounting for Certain Transactions
Involving Stock Compensation an Interpretation of APB No. 25'. As such,
compensation expense is recorded on the date of grant only if the current fair
value of the underlying stock exceeds the exercise price.
SFAS No. 123, 'Accounting for Stock-Based Compensation, ' allows companies to
continue to apply the provisions of APB No. 25, where applicable, and provide
pro forma disclosure for employee stock option grants as if the fair value based
method defined in SFAS No. 123 had been applied. Konami has elected to continue
to apply the provisions of APB No. 25 for their stock-based compensation plans
to directors and employees.
Had Konami determined compensation expense based on the fair value at the grant
date for rights of stock-based compensation plans under SFAS No. 123, Konami's
net income and net income per share would have been adjusted to the pro forma
amounts indicated below;
Six months Six months Year ended
ended ended March 31,
September 30, September 2005
2004 30, 2005
Millions of Yen
Reported net Y 1,626 Y 6,964 Y 10,486
income.........................................................
Add back: stock-based compensation expense under
intrinsic-value-based method, net of tax ....................... - 59 -
Deduct: stock-based compensation expense under
fair-value-based method, net of tax................................. (302) (308) (589)
Pro forma net
income........................................................ Y 1,324 Y 6,715 Y 9,897
Yen
Per share data:
Reported net income per
share......................................... Y 13.51 Y 53.45 Y 87.41
Add back: stock-based compensation expense under
intrinsic-value-based method, net of tax ....................... - 0.45 -
Deduct: stock-based compensation expense under
fair-value-based method, net of
tax................................. (2.51) (2.36) (4.92)
Pro forma net income per share Y 11.00 Y 51.54 Y 82.49
(r) Issuance of Stock by Subsidiaries
The change in the Company's proportionate share of subsidiary equity resulting
from issuance of stock by the subsidiary is accounted for as gain or loss,
including the related income tax effect, in the period such shares are issued
provided the sale of such shares by the subsidiary is not a part of a broader
corporate reorganization contemplated or planned by the registrant, the value of
the proceeds or other value received is objectively determinable and any
resulting gains reasonably assured. If such criteria are not met, the issuance
of stock is accounted for as a capital transaction in the consolidated financial
statements.
(s) Comprehensive Income
SFAS No. 130, 'Reporting Comprehensive Income, ' requires classification of
other comprehensive income in a financial statement and display of other
comprehensive income separately from retained earnings and additional paid-in
capital. Other comprehensive income includes primarily foreign currency
translation adjustments, unrealized gains (losses) from marketable securities
considered available-for-sale and adjustment for minimum pension liability.
(t) Translation of Foreign Currencies
Transactions denominated in foreign currencies are recorded using the exchange
rates in effect as of the transaction dates. The related foreign currency asset
and liability balances are translated based on exchange rates prevailing at each
balance sheet date with the resulting gain/loss charged to income.
Assets and liabilities of a foreign subsidiary where the functional currency is
other than Japanese yen are translated into Japanese yen at the exchange rates
in effect at the balance sheet date. Revenue and expense accounts are translated
at average exchange rates during the current year. The resulting translation
adjustments are included in accumulated other comprehensive income.
(u) Earnings Per Share
Earnings per share ('EPS') are presented in accordance with the provisions of
SFAS No. 128, 'Earnings Per Share. ' Under SFAS No. 128, basic EPS excludes
dilution for potential common stock and is computed by dividing consolidated net
income (loss) by the weighted-average number of common shares outstanding.
Diluted EPS reflects the effect of potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. Diluted net income per share is calculated by dividing net
income by the sum of the weighted-average number of shares plus additional
shares that would be outstanding if potential dilutive shares had been issued.
(v) Use of Estimates
Preparation of these consolidated financial statements requires management of
Konami to make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of financial statements, and the reported amounts of revenue and expenses
during the reporting periods. There can be no assurance that actual results will
not differ from those estimates.
Konami has identified four areas where it believes assumptions and estimates are
particularly critical to the consolidated financial statements. These are
revenue recognition, accounting for software development costs, impairment on
long-lived and intangible assets, and realizability of deferred tax assets.
(w) Recent Accounting Pronouncements
In November 2004, the FASB issued SFAS No.151, 'Inventory Costs, an amendment of
ARB No. 43, Chapter 4' to clarify the accounting for abnormal amounts of idle
facility expense, freight, handling costs, and wasted material. Among other
provisions, the new rule requires items such as excessive spoilage, double
freight, and re-transportation charge be recognized as current period charges,
regardless of whether they meet the criterion of so called abnormal as stated in
Accounting Research Bulletins ('ARB') No. 43. In addition, SFAS No.151 requires
the allocation of fixed production overheads to the costs of conversion be based
on the normal capacity of the production facilities. The Company is required to
adopt SFAS No.151 for fiscal years beginning after June 15, 2005. The Company
and its subsidiaries do not expect the adoption of this statement will have a
material effect on its consolidated financial statements.
In December 2004, the FASB issued a revision to SFAS No.123, 'Accounting for
Stock-Based Compensation' ('SFAS No.123R'). SFAS No.123R focuses on the
accounting for share-based payment transactions in which an enterprise receives
employee services in exchange for equity instruments of the enterprise or
liabilities that are based on the fair value of the enterprise's equity
instruments that may be settled by the issuance of such equity instruments. The
statement would eliminate the ability to account for share-based compensation
transactions using APB Opinion No.25, 'Accounting for Stock Issued to
Employees', and generally would require such transactions be accounted for using
a fair-value-based method. The Company will be required to adopt SFAS No.123R at
the beginning of the first annual period beginning after June 15, 2005. The
Company and its subsidiaries is currently evaluating the potential impact of
adoption of SFAS No.123R on its financial position and results of operations and
has not yet determined the impact of adopting this statement.
In December 2004, the FASB issued SFAS No.153, 'Exchanges of Nonmonetary Assets,
an amendment of APB Opinion No.29'. SFAS No.153 focuses on the measurement of
exchanges nonmonetary assets and redefines the scope of transaction that should
be measured based on the fair value of the assets exchanged. The Company will be
required to adopt SFAS No.153 for the fiscal years beginning after June 15,
2005. The Company and its subsidiaries do not expect the adoption of this
statement will have a material effect on its consolidated financial statements.
5. Merger and Acquisition
On December 16, 2004, the Company entered into a plan of merger agreement with
three of its consolidated subsidiaries, Konami Computer Entertainment Studios,
Inc, (hereafter referred as 'Konami STUDIO') Konami Computer Entertainment
Tokyo, Inc. (hereafter referred as 'Konami TYO') and Konami Computer
Entertainment Japan, Inc., (hereafter referred as 'Konami JPN') which was
approved in the extraordinary shareholders' meeting of each company held on
February 22, 2005. Under the terms of the agreement, 0.42, 1.00, and 0.81 of one
share of the Company's common stock was exchanged for each common share of
Konami STUDIO, Konami TYO and Konami JPN. The Company consummated the mergers on
April 1, 2005, by issuing 10,794,142 new common shares to minority shareholders
of those merged companies. The merger ratios were determined based on the
valuation by the third-party valuation experts hired separately by each subject
company.
Konami accounted for the acquisition of additional equity interest in the merged
companies as a step-acquisition, and, accordingly the purchase price has been
allocated to the tangible and intangible assets of Konami STUDIO, Konami TYO and
Konami JPN using an independent, third-party appraisal. The fair value of new
common shares issued to minority shareholders of those merged companies and the
direct cost of the acquisition amounted to Y24,373 million in excess of the
estimated fair value of the net assets acquired of Y13,348 million has been
recorded as goodwill in the accompanying consolidated balance sheets. Goodwill
arising from the acquisition of additional equity interest in Konami STUDIO,
Konami TYO and Konami JPN has all been allocated to the Digital Entertainment
segment of Konami. In-Process research and development ('IPRD') included the
value of products in the development stage that were not considered to have
reached technological feasibility or to have alternative future use.
Accordingly, IPRD of Y225 million was charged to R&D expense in the consolidated
statement of income upon consummation of the acquisition. The allocation of the
purchase price is based on preliminary valuations. Konami, however, does not
expect that the final allocation will produce materially different results than
those reflected above.
On December 16, 2004, the Company merged with Konami Online, Inc., ('KOL') a
wholly-owned subsidiary effective April 1, 2005. The Company is the surviving
entity and KOL has subsequently been dissolved. As the Company owns 100% of KOL
shares, there has been no share exchanged. The Company has taken over all of KOL
business functions from planning and developing the contents for mobile phones
and online games and building systems to operation of computer servers.
On February 22, 2005, the Company merged with Konami Media Entertainment, Inc.,
('KME') a wholly-owned subsidiary, effective April 1, 2005. The Company is the
surviving entity and KME has subsequently been dissolved. As the Company owns
100% of KME shares, there has been no share exchanged. The Company will directly
conduct all aspects of its business, from planning and developing products to
production and sales of soundtrack CDs and game tip books.
On April 11, 2005, the Company merged with Konami Traumer, Inc., ('KT') a
consolidated subsidiary, effective June 1, 2005. The Company exchanged 212
shares of its common stock for each 1 share of KT. The Company is the surviving
entity and KT has subsequently been dissolved. The Company will take over KT's
business, including designing, manufacturing and selling toys, fancy goods and
convenience goods.
On April 27, 2005, the Company acquired an additional 3,000,000 shares of HUDSON
SOFT CO., LTD. ('Hudson') an equity method affiliate by accepting a third party
allotment for total consideration of 1,434 million yen. Accordingly, the Company
's equity ownership interest in Hudson increased from 45.47% to 53.99% and, as a
result, Hudson became a consolidated subsidiary. Financial results of Hudson
have been included in the consolidated financial statements from the acquisition
date.
The following table reflects the April 27, 2005, condensed balance sheet of
Hudson, as adjusted to give effect to the preliminary purchase method accounting
adjustments:
Millions of Yen
Cash, receivable and other assets Y8,309
Property and equipment 1,130
Goodwill 1,240
Other assets 477
In-process research & development 42
Total assets 11,198
Current liabilities 7,455
Long-term liabilities 450
Total liabilities assumed 7,905
Minority interest 948
Net assets acquired Y2,345
Goodwill related to acquisition of Hudson shares are allocated to Digital
Entertainment segment of Konami. In-process research and development ('IPRD')
included the value of products in the development stage that were not considered
to have reached technological feasibility or to have alternative future use.
Accordingly, IPRD of Y42 million was charged to R&D expense in the consolidated
statement of income upon consummation of the acquisition.
6. Investments in Affiliates
On April 27, 2005, the Company accepted a third party allotment of new shares of
Hudson, an equity method affiliate, and owns 53.99% of Hudson shares. As a
result, Hudson became a consolidated subsidiary of the Company.
On April 25, 2005, the Company sold its entire equity interests in Takara Co.,
Ltd, an equity method affiliate and terminated its capital relationship. As a
result, 6,917 million yen of gain on sale of shares of an affiliated company was
recognized in the consolidated statement of operations for six months ended
September 30, 2005.
At September 30, 2004 and March 31, 2005, Konami held investments in the equity
method affiliates as follows. There were no investments in the equity method
affiliates at September 30, 2005.
Description of business Acquisition Date
Takara Co., Ltd.
('Takara')................... Toy manufacturer July 2000
Hudson Soft Co., Ltd.
('Hudson')....... Game software producer August 2001
Condensed combined financial information of the Company's unconsolidated
affiliates at September 30, 2004 and 2005 and March 31, 2005 and for the six
months ended September 30, 2004 and 2005 and the year ended March 31, 2005 are
as follows:
Millions of Yen
September September March 31,
30, 2004 30, 2005 2005
Combined Financial Position:
Property and equipment, net.............................................. Y13,258 Y - Y13,046
Other assets, net................................................................. 87,976 - 78,712
Total assets.................................................................... 101,234 - 91,758
Debt................................................................................. 40,144 - 42,363
Other liabilities................................................................... 26,743 - 29,664
Minority interest................................................................ 9,831 - 9,716
Stockholders' equity........................................................... 24,516 - 10,015
Total liabilities and equity.............................................. Y101,234 Y - Y91,758
Millions of Yen
Six Six Year
months months ended
ended ended March 31,
September September 2005
30, 2004 30, 2005
Combined Operations:
Sales.............................................................................. Y55,076 Y - Y 108,979
Cost of revenues................................................................. 43,957 - 83,936
Selling, general and administrative expenses....................... 16,595 - 41,820
Operating income (loss)................................................. (5,476) - (16,777)
Interest expense, net........................................................... (280) - (476)
Other, net............................................................................ 2,123 - 2,355
Income taxes....................................................................... (3,269) - (5,640)
Net income (loss)........................................................... Y(6,902) Y- Y(20,538)
The Company's share of undistributed earnings of affiliated companies included
in consolidated retained earnings was earnings of Y1,066 million as of September
30, 2004. There are no undistributed earnings of affiliated companies as of
September 30, 2005 and March 31, 2005. Affiliated companies accounted for under
the equity method with an aggregate carrying amount of Y8,570 million and Y5,184
million as of September 30, 2004 and March 31, 2005, respectively, were traded
on established markets and were quoted at an aggregate value of Y15,930 million
and Y14,757 million as of September 30, 2004 and March 31, 2005, respectively.
7. Inventories
Inventories at September 30, 2004 and 2005 and March 31, 2005 consisted of the
following:
Millions of Yen
September September March 31,
30, 2004 30, 2005 2005
Finished products............................... Y7,805 Y9,505 Y6,117
Work in process................................ 13,806 10,887 7,504
Raw materials and supplies..................... 2,215 2,596 1,867
Total ......................................... Y23,826 Y22,988 Y15,488
8. Marketable and Investment Securities
Marketable and investment securities at September 30, 2004 and 2005 and March
31, 2005 consisted of the following:
Millions of Yen
September 30, 2004
Cost Gross Gross Fair value
unrealized unrealized
gains losses
Available-for-sale:
Marketable equity securities..................... Y76 Y54 Y- Y130
Total............................ Y76 Y54 Y- Y130
Millions of Yen
September 30, 2005
Cost Gross Gross Fair value
unrealized unrealized
gains losses
Available-for-sale:
Marketable equity securities............... Y76 Y109 Y- Y185
Total.......................... Y76 Y109 Y- Y185
Millions of Yen
March 31, 2005
Cost Gross Gross Fair value
unrealized unrealized
gains losses
Available-for-sale:
Marketable equity securities........................ Y76 Y89 Y- Y165
Total............................ Y76 Y89 Y- Y165
9. Property and Equipment
Property and equipment at September 30, 2004 and 2005 and March 31, 2005
consisted of the following:
Millions of Yen
September 30, September 30, March 31,
2004 2005 2005
Property and equipment, at cost:
Land................................................ Y11,587 Y10,409 Y 11,515
Buildings and structures................. 56,817 64,962 56,708
Tools, furniture and fixtures........... 25,088 28,512 25,584
Construction in progress................ 1,103 27 738
Total........................................... 94,595 103,910 94,545
Less-Accumulated depreciation..... (47,201) (51,633) (47,950)
Net property and equipment..... Y47,394 Y52,277 Y 46,595
Depreciation expense for the six months ended September 30, 2004 and 2005 and
the year ended March 31, 2005 amounted to Y3,630 million, Y3,269 million and
Y7,592 million, respectively.
10. Goodwill and Identifiable Intangible Assets
The changes in the carrying amount of goodwill by operating segment for the six
months ended September 30, 2004 are as follows:
Millions of Yen
Digital Health &
Entertainment Gaming Fitness Total
Balance at March 31, 2004............... Y339 Y125 Y- Y464
Additional acquisitions during the period.......... - - - -
Balance at September 30, 2004...................... Y339 Y125 Y- Y464
The changes in the carrying amount of goodwill by operating segment for the six
months ended September 30, 2005 are as follows:
Millions of Yen
Digital Health &
Entertainment Gaming Fitness Total
Balance at March 31, 2005.................. Y339 Y125 Y385 Y849
Additional acquisitions during the period.......... 14,622 - - 14,622
Balance at September 30, 2005............ Y14,961 Y125 Y385 Y15,471
The Company merged with Konami STUDIO, Konami TYO and Konami JPN during the six
months ended September 30, 2005. Also the Company accepted a third party
allotment of new shares of Hudson, an equity method affiliate, and owned 53.99%
of its shares, which made Hudson a consolidated subsidiary of the Company.
The changes in the carrying amount of goodwill by operating segment for the year
ended March 31, 2005 are as follows:
Millions of Yen
Digital Health &
Entertainment Gaming Fitness Total
Balance at March 31, 2004.............. Y339 Y125 Y- Y464
Additional acquisitions during the period.......... - - 385 385
Balance at March 31, 2005......................... Y339 Y125 Y385 Y849
In the year ended March 31, 2005, Konami Sports Corporation a consolidated
subsidiary which belongs to the health & fitness business, additionally acquired
treasury stock and increased Konami's share from 60.5% to 64.1%.
Identifiable intangible assets at September 30, 2004 and 2005 and March 31, 2005
primarily representing intangible assets acquired in connection with
acquisitions of subsidiaries consisted of the following:
Millions of Yen
Identifiable intangible assets subject to amortization: September September March 31,
30, 2004 30, 2005 2005
Existing technology....................................................... 666 Y679 Y644
Total.............................................................................. 666 679 644
Less-Accumulated amortization.................................. (422) (566) (472)
Net amortized identifiable intangible assets.................. 244 113 172
Identifiable intangible assets with an indefinite life:
Trademarks................................................................ 39,190 38,818 38,818
Franchise contracts..................................................... 6,668 6,703 6,703
Gaming licenses............................................................ 287 310 298
Total unamortized identifiable intangible assets.............. 46,145 45,831 45,819
Total identifiable intangible assets Y46,389 Y45,944 Y45,991
The aggregate amortization expense for identifiable intangible assets for the
six months ended September 30, 2004 and 2005 and the year ended March 31, 2005
was Y66 million, Y66 million and Y129 million, respectively.
The estimated amortization expense for the following years is as follows:
Millions of
Yen
Year ending March 31,
2006 (second half year)....... 68
2007..................................... 45
11. Severance and Retirement Plans
The Company and its domestic subsidiaries have defined benefit severance and
retirement plans covering their employees. The plans provide, under most
circumstances, retirement benefits and lump-sum severance payments to the
employees determined by reference to their rate of pay at the time of
termination, years of service and certain other factors. All employees can make
an election either to remain in the defined benefit plans or to withdraw from
the plans and enroll under such system as receiving all compensation currently
during their employment. For those who under the fixed annual compensation
system, separate severance and retirement benefits are to be eliminated upon
their termination or retirement.
In December 2003, the FASB issued SFAS No. 132 (revised), 'Employers'
Disclosures about Pensions and Other Postretirement Benefits. ' SFAS No. 132
(revised) prescribes employers' disclosures about pension plans and other
postretirement benefit plans; it does not change the measurement or recognition
of those plans. The Statement retains and revises the disclosure requirements
contained in the original SFAS No. 132. It also requires additional disclosures
about the assets, obligations, cash flows, and net periodic benefit cost of
defined benefit pension plans and other postretirement benefit plans. The
Statement generally is effective for fiscal years ending after December 15,
2003. The disclosure requirements of SFAS No. 132 (revised) have been included
below. Adoption of this statement did not have a material effect on its
consolidated financial statements.
Net periodic cost of the Company and its domestic subsidiaries' plans accounted
for in accordance with SFAS No. 87 for the six months ended September 30, 2004
and 2005 and the year ended March 31, 2005 included the following components:
Millions of Yen
Six months Six months Year ended
ended ended March 31,
September 30, September 30, 2005
2004 2005
Service cost - benefits earned during the
period........................... Y 157 Y 117 Y 313
Interest cost on projected benefit obligation................................. 20 18 40
Expected return on plan assets................................ (21) (20) (41)
Recognized actuarial (gain) loss.................................................... 8 (31) (51)
Amortization of prior service cost................................................ (6) (7) (14)
Net periodic cost................................................................. Y 158 Y 77 Y 247
13. Comprehensive Income (Loss)
Accumulated other comprehensive income at September 30, 2004 and 2005 and March
31, 2005 is as follows:
Millions of Yen
Six months Six months Year ended
ended ended March 31,
September September 2005
30, 2004 30, 2005
Foreign currency translation adjustments:
Balance, beginning of period................................. Y(266) Y2,019 Y(266)
Aggregate adjustment for the year
resulting from translation of
foreign currency financial statements............... 1,322 759 2,285
Balance, end of period.......................................... Y1,056 Y2,778 Y2,019
Net unrealized gains (losses) on securities
available-for-sale:
Balance, beginning of period................................. Y218 Y198 Y218
Net change....................................................... (253) (156) (20)
Balance, end of period.......................................... Y(35) Y42 Y198
Minimum pension liability adjustment:
Balance, beginning of period................................. Y(71) - Y(71)
Adjustments for the period.................................. - - 71
Balance, end of period.......................................... Y(71) - Y -
Total accumulated other comprehensive income
(loss):
Balance, beginning of period................................. Y(119) Y2,217 Y(119)
Adjustments for the period.................................. 1,069 603 2,336
Balance, end of period.......................................... Y950 Y2,820 Y2,217
Tax effects allocated to each component of other comprehensive income and
adjustments are as follows:
Millions of Yen
Pretax Tax (expense) Net of tax
amount or benefit amount
Six months ended September 30, 2004
Foreign currency translation
adjustments................................. Y1,322 Y - Y1,322
Net unrealized gains (losses) on available-for-sale
securities:
Unrealized gains (losses) arising during the
period............... (233) 95 (138)
Less: reclassification adjustment for (gains) or losses
included in net income (loss) .............................. (195) 80 (115)
Net unrealized gains (losses) ............................ (428) 175 (253)
Other comprehensive income.... ..................... Y894 Y175 Y1,069
Six months ended September 30, 2005
Foreign currency translation adjustments................................. Y759 Y - Y759
Net unrealized gains (losses) on available-for-sale
securities:
Unrealized gains (losses) arising during the
period............... 24 (10) 14
Less: reclassification adjustment for (gains) or losses
included in net income (loss) ........................................ (287) 117 (170)
Net unrealized gains (losses).......................... (263) 107 (156)
Other comprehensive income......................... Y496 Y107 Y603
Year ended March 31, 2005
Foreign currency translation adjustments...................... Y2,258 Y 27 Y2,285
Net unrealized gains (losses) on available-for-sale securities:
Unrealized gains (losses) arising during the year.................. 216 (88) 128
Less: reclassification adjustment for (gains) or losses
included in net income (loss) .................................. (250) 102 (148)
Net unrealized gains (losses)....................... (34) 14 (20)
Minimum pension liability adjustment.......... 120 (49) 71
Other comprehensive income....................... Y2,344 Y (8) Y 2,336
14. Derivative Financial Instruments
Konami uses foreign exchange forward contracts with terms ranging from 3 to 6
months to reduce its exposure to short-term movements in the exchange rates
applicable to firm funding commitments denominated in currencies other than
Japanese yen. The aggregate notional amounts of derivative financial instruments
outstanding at September 30, 2004 and 2005 and March 31, 2005 were as follows:
Millions of Yen
September September March 31,
30, 2004 30, 2005 2005
Forward exchange contracts:
To sell foreign currencies...................... Y10,778 Y3,806 Y9,493
Konami does not designate the forward exchange contracts as hedges. Accordingly
the foreign currency gains (losses) of Y(3) million, Y(52) million and Y33
million arising from these forward exchange contracts at September 30, 2004 and
2005 and March 31, 2005 were included in earnings under the caption Other, net
in the accompanying consolidated statements of operations, respectively. Foreign
exchange net gains (losses), including those on these forward exchange
contracts, for the six months ended September 30, 2004 and 2005 and the year
ended March 31, 2005 were Y1 million, Y80 million and Y(826) million,
respectively.
Effects of exchange rate changes subsequent to September 30, 2005 on fair value
of those forward exchange contracts have not been significant as of the
reporting date.
15. Fair Value of Financial Instruments
(a) Cash and cash equivalents, Trade notes and accounts receivable, Trade notes
and accounts payable, Accrued expenses, and Short term borrowings
The carrying amount approximates fair value because of the short maturity of
these instruments.
(b) Investments in marketable securities
The fair values of Konami's investments in marketable securities are based on
quoted market prices.
(c) Investments in non-marketable securities
For investments in non-marketable securities for which there are no quoted
market prices, a reasonable estimate of fair value could not be made without
incurring excessive costs. It was not practicable to estimate the fair value of
common stock representing certain untraded companies. These investments are
carried at cost.
(d) Long-term debt
The fair values of Konami's long-term debt instruments are based on the quoted
price in the most active market or the present value of future cash flows
associated with each instrument discounted using the Company's current borrowing
rate for similar debt instruments of comparable maturity.
(e) Derivative financial instruments
The fair values of derivative financial instruments, consisting principally of
foreign exchange contracts, all of which are used for purposes other than
trading, are estimated by obtaining quotes from brokers.
The estimated fair values of Konami's financial instruments at September 30,
2004 and 2005 and March 31, 2005 are as follows:
Millions of Yen
September 30, 2004 September 30, 2005 March 31, 2005
Carrying Estimated Carrying Estimated Carrying Estimated
amount fair value amount fair value amount fair value
Nonderivatives:
Investment in
marketable securities........ Y130 Y130 Y185 Y185 Y165 Y165
Long-term debt,
including current installments..... (65,500) (63,664) (49,451) (48,892) (64,912) (63,794)
Derivatives:
Foreign exchange
forward contracts:
Assets................. 7 7 - - 36 36
Liabilities............. (10) (10) (52) (52) (3) (3)
Limitations
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instruments. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
16. Supplemental Disclosures to Consolidated Statements of Cash Flows
Millions of Yen
Six Six Year ended
months months March 31,
ended ended 2005
September September
30, 2004 30, 2005
Cash paid during the period for:
Interest............................................................................. Y476 Y531 Y974
Income taxes..................................................................... 6,142 11,550 9,983
Cash acquisitions of new subsidiaries:
Fair value of assets acquired............................................ - 6,180 -
Liabilities assumed........................................................... - (7,905) -
Goodwill.......................................................................... - 1,240 -
Minority interest............................................................. - (948) -
Cash paid, net of cash acquired................................... - (1,433) -
Property acquired under capital leases during the period.... 620 4,409 1,844
Property and equipment asset retirement obligation........... - 4,387 -
17. Segment Information
Under SFAS No. 131, 'Disclosures about Segments of an Enterprise and Related
Information, ' operating segments are defined as components of an enterprise
about which separate financial information is available that is regularly
evaluated by the chief operating decision maker in deciding how to allocate
resources and in assessing performance. The operating segments are managed
separately as each segment represents a strategic business unit that offers
different products and serves different markets.
Konami operates on a worldwide basis principally with the following three
business segments:
1. Digital Entertainment business segment
Digital Entertainment business segment contains former three business segments,
Computer & Video Games, Toy & Hobby and Amusement, and two new business domains,
Online and Multimedia to respond to the change on the digital entertainment
market.
Computer & Video Games: Production, manufacture and sale of video game software for consoles.
Production of contents for mobile phones.
Distribution of video game software produced by third parties.
Production of online game software.
Toy & Hobby: Planning, production, manufacture and sale of card games, electronic toys,
toys for boys, candy toys, figures, character goods and others.
Amusement: Planning, manufacture and sale of the content for amusement facilities such
as video games and token-operated games.
Online: Creation of systems for online games.
Management and operation of online servers.
Distribution of the content for mobile phones.
Multimedia: Planning, production and sale of the products related to music and video.
Planning, production and sale of books and magazines.
2. Gaming business segment
Production manufacture and sale of gaming machines for casinos and casino
management systems.
3. Health & Fitness business segment
Management of fitness centers and production, manufacture and sale of gaming
machines and health-related products.
Notes:
'Other' consists of segments which do not meet the quantitative criteria for
separate presentation under SFAS No. 131 'Disclosures about Segments of an
Enterprise and Related Information. '
'Corporate' primarily consists of administrative expenses of the Company.
'Eliminations' primarily consist of eliminations of intercompany sales and of
intercompany profits on inventories.
Computer & Video game Segment, Toy & Hobby Segment and Amusement Segment were
reorganized to Digital Entertainment Segment effective on April 1, 2005. Thus,
records in previous fiscal year are reclassified into new business segment.
The following table summarizes revenue, operating income (loss) by operating
segment which are the primary measures used by Konami's chief operating decision
maker to measure Konami's operating results and to measure segment profitability
and performance. This information is derived from Konami's management reports
which have been prepared based on accounting principles generally accepted in
the United States of America.
a. Operations in Different Industries
Six months ended Digital Gaming Health & Other, Consolidated
September 30, Entertainment Fitness Corporate and
2004 Eliminations
(Millions of Yen)
Net revenue:
Customers Y 64,489 Y 5,898 Y 39,719 Y 3,903 Y 114,009
Intersegment 411 - 59 (470) -
Total 64,900 5,898 39,778 3,433 114,009
Operating 52,510 5,141 38,038 6,469 102,158
expenses
Operating income Y 12,390 Y 757 Y 1,740 Y (3,036) Y 11,851
(loss)
Six months ended Digital Gaming Health & Other, Consolidated
September 30, Entertainment Fitness Corporate and
2005 Eliminations
(Millions of Yen)
Net revenue:
Customers Y 65,864 Y 4,727 Y 40,553 Y 726 Y 111,870
Intersegment 807 - 56 (863) -
Total 66,671 4,727 40,609 (137) 111,870
Operating 53,623 4,724 39,928 6,133 104,408
expenses
Operating income Y 13,048 Y 3 Y 681 Y (6,270) Y 7,462
(loss)
Year ended Digital Gaming Health & Other, Consolidated
March 31, 2005 Entertainment Fitness Corporate and
Eliminations
(Millions of Yen)
Net revenue:
Customers Y 162,797 Y 11,641 Y 78,843 Y 7,410 Y 260,691
Intersegment 874 2 263 (1,139) -
Total 163,671 11,643 79,106 6,271 260,691
Operating 131,018 10,201 77,059 14,277 232,555
expenses
Operating income Y 32,653 Y 1,442 Y 2,047 Y (8,006) Y 28,136
(loss)
Intersegment revenues primarily consist of Digital Entertainment segment to Health & Fitness segment sales of hardware
and components from Amusement Health & Fitness.
b. Operations in Geographic Areas
Six months ended Japan Americas Europe Asia Total Eliminations Consolidated
September 30, 2004 /Oceania
(Millions of Yen)
Net revenue:
Customers Y 85,676 Y 14,422 Y 10,099 Y 3,812 Y 114,009 - Y 114,009
Intersegment 21,709 852 51 43 22,655 Y (22,655) -
Total 107,385 15,274 10,150 3,855 136,664 (22,655) 114,009
Operating expenses 94,885 15,097 9,915 3,188 123,085 (20,927) 102,158
Operating income Y 12,500 Y 177 Y 235 Y 667 Y 13,579 Y (1,728) Y 11,851
Six months ended Japan Americas Europe Asia Total Eliminations Consolidated
September 30, 2005 /Oceania
(Millions of Yen)
Net revenue:
Customers Y 90,332 Y 12,358 Y 5,120 Y 4,060 Y 111,870 - Y 111,870
Intersegment 11,396 881 22 64 12,363 Y (12,363) -
Total 101,728 13,239 5,142 4,124 124,233 (12,363) 111,870
Operating expenses 93,063 13,557 6,923 3,268 116,811 (12,403) 104,408
Operating income Y 8,665 Y (318) Y (1,781) Y 856 Y 7,422 Y 40 Y 7,462
Year ended Japan Americas Europe Asia Total Eliminations Consolidated
March 31, 2005 /Oceania
(Millions of Yen)
Net revenue:
Customers Y 176,566 Y 41,480 Y 34,878 Y 7,767 Y 260,691 - Y 260,691
Intersegment 57,123 1,593 450 419 59,585 Y (59,585) -
Total 233,689 43,073 35,328 8,186 320,276 (59,585) 260,691
Operating expenses 211,500 41,682 32,207 6,684 292,073 (59,518) 232,555
Operating income Y 22,189 Y 1,391 Y 3,121 Y 1,502 Y 28,203 Y (67) Y 28,136
For the purpose of presenting its operations in geographic areas above, Konami attributes revenues from external
customers to individual countries in each area based on where products are sold and services are provided.
18. Commitments and Contingencies
Konami is subject to pending claims and litigation. Management, after review and
consultation with counsel, considers that any liability from the disposition of
such lawsuits would not have a material adverse effect on the consolidated
financial condition and results of operations of Konami.
Konami has placed firm orders for purchases of property, plant and equipment and
other assets amounting to approximately Y9,823 million as of September 30, 2005.
19. Subsequent Events
For Six months ended September 30, 2004
The Board of Directors of the Company resolved a plan to set a limit to
acquisition of treasury stock on October 21, 2004 pursuant to the Article of
Incorporation of the Company to facilitate a timely and flexible capital
strategy.
Details of the limit to acquisition of treasury stocks are as follows:
a. Type of shares to be acquired: Common Stock of the Company
b. Number of shares to be acquired: 1.5 million shares (maximum)
c. Total cost of shares to be acquired: 4.5 billion yen (maximum)
d. Schedule of acquiring treasury stock: From November 11, 2004 to May 10,
2005
For Six months ended September 2005
The Company, Konami Sports Life Corporation (hereafter referred as 'Konami
Sports Life') and Konami Sports Corporation (hereafter referred as 'Konami
Sports') resolved at their respective Boards of Directors' meeting held on
November 7, 2005, to merger Konami Sports Life into Konami Sports, to effect a
share exchange between the new Konami Sports and the Company and to shift to a
holding company structure by separating its digital entertainment business, and
have executed a basic agreement among the three companies as parties thereto.
The above transactions are subject to the approval of the respective proposals
in extraordinary shareholders' meetings which will be held on January 26, 2006.
Konami Sports Life and Konami Sports will merge on February 28, 2006, with
Konami Sports as the surviving company (hereafter referred as 'this merger').
With this merger, Konami Sports will allot 3.99 shares per each share of Konami
Sports Life, to the Company which is a shareholder of Konami Sports Life. Thus,
Konami Sports will allot 15,760,500 shares of its common stock held as treasury
stock to the Company.
The Company and Konami Sports will execute a share exchange on March 1, 2006,
which will make the Company the sole parent company and Konami Sports the wholly
owned subsidiary with completion of the merger between Konami Sports Life and
Konami Sports (hereafter referred as 'this share exchange') as a condition. With
this share exchange, The Company will allot 0.79 shares per each share of Konami
Sports. The Company will allot a total of 9,898,911 shares of its common stock
to the minority share holders, including 4,024,078 shares newly issued and
5,874,833 shares held as treasury stocks.
The Company will execute a company separation on March 31, 2006, with the
Company as the separating company and a newly established Konami Digital
Entertainment as the succeeding company, for the purpose of improving management
transparency, creating a speedy and flexible management structure and creating a
complete profit responsibility structure.
For the fiscal year ended March 31, 2005
On December 16, 2004, the Company entered into a plan of merger agreement with
three of its consolidated subsidiaries, Konami STUDIO, Konami TYO and Konami
JPN, which was approved in the extraordinary shareholders' meeting of each
company held on February 22, 2005. Under the terms of the agreement, 0.42, 1.00
and 0.81 of one share of the Company' common stocks were exchanged for each
common share of Konami STUDIO, Konami TYO and Konami JPN. The Company
consummated the mergers on April 1, 2005, by issuing 10,794,142 new common
shares to minority shareholders of those merged companies. The Company will
account for the acquisition of additional equity interest in the merged
companies as a step-acquisition.
On April 25, 2005, the Company sold its entire equity interest in Takara, an
equity-method investee, for total cash consideration of Y11,016 million. The
sale resulted in a gain of Y6,360 million.
On April 27, 2005, the Company acquired an additional 3,000,000 shares of
Hudson's newly issued common stock for total consideration of Y1,434 million in
cash. Accordingly, the Company's equity ownership interest in Hudson increased
from 45.47 % to 53.99 % and, as a result, Hudson became a consolidated
subsidiary. The transaction will be accounted for as a step-acquisition.
On June 23, 2005, the shareholders of the Company approved the Company's Board
of Directors resolutions on May 10 and 19, 2005 for approval of the nine plans
of stock subscription rights to directors and employees of the Company and its
subsidiaries. Those stock subscription rights plans are intended to enable the
grant of stock options and the total maximum number of shares issuable under the
plans is 412,900 shares of common stock of the Company. The exercise periods
will range from 4 months to 24 months through June 30, 2009, and exercise prices
will range from Y1,670 to Y2,857, except for one plan for which the exercise
price has not been set but will be equal to 1.20 times the daily average closing
price on the Tokyo Stock Exchange for the month prior to the grant date.
2. Other
Not applicable.
This information is provided by RNS
The company news service from the London Stock Exchange
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