Item 4. Information on the Company.
A. History and Development of the Company.
Our business was founded by our current Representative Director, Chairman of the
Board and Chief Executive Officer, Mr. Kagemasa Kozuki, in Osaka on March 21,
1969. Konami was incorporated as a joint stock corporation under the laws of
Japan on March 19, 1973 under the name Konami Industries Co., Ltd.
We originally were established to produce amusement arcade games and since that
time have expanded the range of our products. We began to produce and market
microcomputer-equipped video game machines in 1978, game software for personal
computers in 1983, game software for home video game consoles in 1985 and
software for LCD units for pachinko machines in 1992. We began our Toy & Hobby
business in 1996. We obtained a license to manufacture and sell gaming machines
in Nevada, and entered the gaming business in the United States in 2000. We
entered the sports club and equipment business through our acquisition of PEOPLE
CO., LTD., which was renamed Konami Sports Corporation, in February 2001.
We initiated overseas operations by exporting amusement arcade games in 1979. We
established our U.S. sales and manufacturing subsidiary, Konami Digital
Entertainment, Inc., formerly known as Konami of America, Inc. in 1982. Later,
we established sales and manufacturing subsidiaries in a number of foreign
countries.
We listed our shares on the Osaka Securities Exchange in 1984 (subsequently
delisted in December 2002), on the Tokyo Stock Exchange in 1988, on the
Singapore Exchange in 1997, on the London Stock Exchange in 1999 and on the New
York Stock Exchange in September 2002.
In 1991, we changed our name to Konami Co., Ltd. and subsequently changed our
name to KONAMI CORPORATION in 2000. In August 2002, we moved our principal head
office to 4-1, Marunouchi 2-chome, Chiyoda-ku, Tokyo 100-6330, Japan. Our
telephone number is 81-3-5220-0573.
For a discussion of recent and current capital expenditures, please see "Capital
Expenditures" at the end of Item 5.A. We have had no recent significant
divestitures nor are any significant divestitures currently being made.
B. Business Overview.
Overview
We develop, publish, market and distribute video game software products globally
for use on Sony PlayStation and PlayStation 2, Nintendo GameCube, Microsoft Xbox
console systems, and Nintendo Game Boy, Game Boy Color and Game Boy Advance
handheld devices and, to a lesser extent, personal computers, mobile phones and
online network systems. We have steadily increased the number of titles
published for home and handheld video game platforms from 55 titles in the
fiscal year ended March 31, 1999 to 120 titles in the fiscal year ended March
31, 2004.
We also make card games, character goods, toys, CDs and other merchandize
products, many of which use popular characters seen in movies, television, comic
books, video games, advertising or other media. We also publish, produce and
service software and hardware for amusement arcade games. In addition, we
produce software for LCD units used in pachinko machines, and produce video
games and token-operated games installed in amusement arcades and other
entertainment venues in Japan as well as gaming machines for casinos in the
United States, Australia and other overseas jurisdictions.
In addition, we believe that we are the leading operator of health and sports
clubs in Japan, in terms of revenues, members and the total number of
facilities. As of March 31, 2004, our nationwide network of 208 directly
operated health and sports club facilities and 32 franchised facilities cater to
all age groups, from children through senior citizens. We also manufacture
fitness equipment mainly for our sports clubs and manufacture and sell other
goods and services related to sports and fitness.
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Because our sales are affected by changes in how consumers, particularly
children and young adults, spend their leisure time, we seek to meet consumers'
needs and preferences by developing products that can be used in a number of
environments, including home video games, card games and games for amusement
arcades, casinos and pachinko parlors. We also recognize that in the
entertainment industry, borders that separate product categories such as games,
movies, music, toys, books and television programs are blurring. We seek to
capitalize on this trend by projecting successful concepts across different
types of leisure environments and product categories.
Many of our successful products have resulted from transporting concepts to and
from our Computer & Video Games business. For example:
We first sold Dance Dance Revolution, one of our most popular
products, through our Amusement Division in November 1998 as
an amusement arcade game. We launched Dance Dance Revolution
in the form of home video game software in April 1999 and have
sold over one million units. We also extended this product's
range of targeted customers through the new "diet" version for
home use which is targeted mainly at women.
We launched beatmania as an amusement arcade game in
December 1997. We began selling beatmania in the form of
home video game software in October 1998 and have sold over
one million units.
We sold Yu-Gi-Oh! as video game software for Game Boy in July
1998; we subsequently introduced our hit Yu-Gi-Oh! card game
produced by our Toy &Hobby Division in February 1999.
METAL GEAR SOLID, initially sold in 1998, and Tokimeki
Memorial, a teenage romance game first introduced in 1994,
have been hit video game software products and have also
generated substantial sales of related character goods
produced by our Toy & Hobby Division.
We will publish comic book series based on METAL GEAR SOLID
video game in the United States in September 2004.
We have used our expertise in video game software and hardware
for the development of our gaming machine and fitness
equipment products.
We have built a company with a portfolio of products and services that spans a
range of categories and target markets. We have created, licensed and acquired a
group of recognizable brands that we market to a growing variety of consumer
demographics.
For the fiscal year ended March 31, 2004, we had consolidated net revenues and
net profit of 273,412 million and 20,104 million, respectively, compared with
net revenues and net loss of 253,657 million and 28,519 million, respectively,
for the fiscal year ended March 31, 2003.
Products and Services
We divide our business into five business segments, each of which is reflected
in a separate division. The net revenue figures for each business segment
described below include intersegment revenues:
Computer & Video Games: We develop, publish, distribute and
market video game software primarily for use on home and
handheld game console systems and are also entering into
Internet and mobile phone platforms. During fiscal 2004, this
segment had net revenues of 92,520 million, which accounted for
33.8% of consolidated net revenues.
Toy & Hobby: We are engaged in the production, sale and
copyright of a range of products and brand-related goods,
including card games, toys, portable electronic games, CDs and
DVDs of music from our video game software, game tip books
(containing clues and strategies for playing popular games), game
prizes for amusement arcade games and other accessories. During
fiscal 2004, this segment had net revenues and of 57,468 million,
which accounted for 21.0% of consolidated net revenues.
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Amusement: This segment is involved in developing content and
hardware for a variety of amusement-related products such as video
game machines and token-operated game machines for amusement arcades
mainly in Japan and software for LCD units used in pachinko
machines. We also provide delivery and maintenance services with
respect to these products. During fiscal 2004, this segment had net
revenues of 35,427 million, which accounted for 13.0% of
consolidated net revenues.
Gaming: This segment is involved in developing content and
hardware for gaming machines for casinos in other countries.
During fiscal 2004, this segment had net revenues of 10,947
million, which accounted for 4.0% of consolidated net revenues.
Health & Fitness: We are the leading health and sports club
operator in Japan. We believe that we had approximately 25% of
the market as measured by revenues based on the Leisure White
Paper issued by Institute for Free Time Design and data made
publicly available by Nihon Keizai Shimbun, Inc. for fiscal 2004.
During fiscal 2004, this segment had net revenues of 78,899
million, which accounted for 28.9% of consolidated net revenues.
The following table presents net revenues in each of our business segments,
including intersegment revenues, for each of the three years ended March 31,
2004.
Segment Revenues
Year ended March 31
2002 2003 2004
Net Revenues:
Computer & Video Games 90,129 87,476 92,520
Toy & Hobby 25,601 45,948 57,468
Amusement 37,918 34,305 35,427
Gaming 3,063 8,215 10,947
Health & Fitness 65,650 78,525 78,899
Other, Corporate and Eliminations 219 (812 ) (1,849 )
Consolidated net revenues 225,580 253,657 273,412
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 Konami.
"Eliminations" primarily consists of eliminations of intercompany sales and of
intercompany profits on inventories.
Computer & Video Games
Industry Overview
The video game industry is comprised of video game hardware manufacturers and
video game software publishers. Game hardware systems, frequently referred to as
platforms, include home game consoles, handheld platforms and personal
computers. In Japan, mobile phones are yet another platform for which there is
an emerging demand for game software applications.
A new generation of more technologically advanced game consoles has been
introduced every several years. The first modern platform was introduced by
Nintendo in 1983 using 8-bit technology. 8-bit means that the central processing
unit, or chip, on which the software operates is capable of processing data in
8-bit units. Subsequent advances in technology have resulted in continuous
increases in the processing power of the chips
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that power both the consoles and PCs. The new generation of systems is based
primarily on 128-bit technology although the latest handheld platform, Game Boy
Advance, uses 32-bit technology. As the technology of the hardware has advanced,
the software has similarly advanced, with faster and more complex images, more
lifelike animation and sound effects and more intricate scenarios.
Each new generation, or cycle, of hardware has resulted in larger numbers of
consoles being purchased, referred to in the industry as a larger "installed
base". At the beginning of each cycle, during the period of rapid growth in the
installed base of the new generation of consoles, the video game software
industry has experienced rapid periods of expansion, as buyers purchase video
games for their new consoles. Shortly before and after the release of a new
generation of game consoles, sales of the current generation of platforms and
games generally diminish, as consumers defer purchases in anticipation of the
new platforms and games.
Platform manufacturers license publishers to publish games for their platforms
and retain a degree of control over the quality and manufacturing of these
games. The publishers, subject to the approval of the platform manufacturers,
determine the types of games they will create. Software publishers either create
their games in-house, through their own development teams, or outsource this
function to independent developers.
The following table illustrates the evolution of the principal platforms of both
home game console and handheld devices since 1989.
Year of
Introduction
Manufacturer Product Name Japan U.S. Media Format Technology
Home Game Consoles:
Sega Genesis 1988 1989 Cartridge 16-bit
Nintendo SNES 1990 1991 Cartridge 16-bit
Sega Saturn 1994 1995 CD-ROM Disc 32-bit
Sony PlayStation 1994 1995 CD-ROM Disc 32-bit
Nintendo Nintendo 64 1996 1996 Cartridge 64-bit
Sega Dreamcast 1999 1999 Proprietary Disc 128-bit
Sony PlayStation 2 2000 2000 DVD-ROM Disc 128-bit
Nintendo GameCube 2001 2001 Proprietary Disc 128-bit
Microsoft Xbox 2002 2001 DVD-ROM Disc 128-bit
Handheld Devices:
Nintendo Game Boy 1989 1989 Cartridge 8-bit
Nintendo Game Boy Color 1998 1998 Cartridge 8-bit
Nintendo Game Boy Advance 2001 2001 Cartridge 32-bit
Nintendo Game Boy Advance SP 2003 2003 Cartridge 32-bit
(1) Game Boy Advance SP is an updated version of the Game
Boy Advance platform and the same software may be
used on both devices.
The industry has completed a transition from 32- and 64-bit home game consoles
to the next generation 128-bit consoles, with the release of Sony's PlayStation
2 in March 2000 (October 2000 in the United States) and the release of the
Nintendo GameCube in September 2001 (November 2001 in the United States) and the
release of Microsoft Xbox in February 2002 (November 2001 in the United States).
Also, Sony released PlayStation X, a PlayStation 2 with a DVD recorder function,
in Japan in December 2003. Similarly, the 8-bit Game Boy Color handheld
platform, introduced in 1998, is now being replaced by the 32-bit Game Boy
Advance, introduced in March 2001 and Game Boy Advance SP, introduced in
February, 2003. By incorporating 128-bit processing speeds, more memory and
better resolution, these platforms allow the design of games with more realistic
graphics and better game performance than games designed for the
prior-generation systems.
The 128-bit hardware platforms, such as Sony's PlayStation 2 and Microsoft's
Xbox, utilize a DVD software format and serve as a player for DVD movies and
compact discs. Sony's PlayStation X released in
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December 2003 carries a DVD recorder function and can serve as a home
entertainment center. The ability of the next generation game consoles to serve
as multi-purpose entertainment devices with DVD and Internet capabilities should
have crossover appeal to a segment of the market that might not otherwise be
inclined to purchase game consoles.
World Video Game Software Markets
According to data by the Computer Entertainment Software Association, or CESA,
the number of shipment of video game software was 66,373 thousand copies in
Japan, 168,911 thousand copies in North America and 79,152 thousand copies in
Europe in 2002. The North American market, the largest market for video game
software in the world, and European markets have been growing steadily, while
the Japanese market has been shrinking.
Broadband, Mobile Phone and the Growth of Online Games
High-speed broadband Internet technologies provided users with a richer, more
interactive online experience. The increased penetration of broadband services,
together with increasing competition, stimulates growth in online games. With
the rapid penetration of broadband infrastructure, many console manufactures and
software publishers have launched online game businesses. For example, Sony
Computer Entertainment Inc. launched a broadband online service for its
PlayStation 2 console in Japan during the Spring of 2002 whereby PlayStation 2
users are able to play online games and download software, and also enjoy
broadband content such as movie clips and music on their TV sets. Sony Computer
Entertainment America Inc. started marketing an online adapter and software for
PlayStation 2 in the U.S. in August 2002. Nintendo Co. launched online services
with its GameCube in Japan and the U.S. in fall 2002. Microsoft Corp. launched
online services with its Xbox in the U.S. in November 2002 and in Japan in
January 2003. Some of our competitors have begun to operate web sites that allow
players to enjoy games downloaded from the Internet and play games on the
Internet. As broadband lines proliferate and speed up, we expect that investment
and interest in online games will grow significantly.
We also believe that mobile phones will provide another platform for our video
game software. In Japan, mobile phones are not just mobile phones-they are
wireless net terminals equipped with cameras and a multimedia processor. As of
March 31, 2004, there were over 69 million mobile Internet subscribers in Japan
who download stock quotes, read news, send photographs and play games on their
mobile phones. While the United States leads Japan in percentage of PCs and
Internet use, Japan has more mobile Internet users and mobile phone is one of
the popular ways to log on to the Internet.
Companies like NTT DoCoMo have developed cutting-edge technologies that provide
Japanese subscribers with inexpensive, round-the-clock Internet access via
mobile phone. One of the most popular services, i-mode, was created by DoCoMo
and allows its users to view specially formatted web sites and receive email via
their mobile phones. In addition to Internet and email access, i-mode offers
access to financial information (including stocks and online banking), travel,
news, and entertainment. Additional content such as games is offered on a
monthly subscription basis generally ranging from 100 to 300 per month. Similar
features are offered by other online mobile phone services such as vodafone
live! and au's Ezweb. In 2001, third-generation mobile phone technologies
allowed high-speed wireless packet data services over the Internet. These
third-generation services provide the speed and capacity necessary to support
innovative mobile multimedia applications including not only broader and more
efficient access to email systems, high speed web browsing and e-commerce
applications but also more sophisticated online games, music downloads and video
images.
Our Computer & Video Games Software Business
Our Computer & Video Games business develops, publishes, distributes and markets
software for home and handheld video game consoles and, to a lesser extent,
personal computers, mobile phones and online networks.
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Consolidated net revenues generated by our Computer & Video Games business,
including intersegment revenues, increased 5.8% from 87,476 million during
fiscal 2003 to 92,520 million during fiscal 2004. Most of our software consists
of video games designed for use with video game platforms, including Sony
PlayStation and PlayStation 2, Nintendo GameCube, Game Boy and Game Boy Advance
and Microsoft Xbox. During the past five years we have released over 539 titles
which includes 130 Sony PlayStation titles, 173 Sony PlayStation 2 titles, 106
Game Boy Advance titles, 30 Nintendo GameCube titles, 16 Microsoft Xbox titles
and 15 PC titles.
By developing game software for each of the leading home and handheld video game
platforms, we are able to limit our dependence on individual platforms,
capitalize on the popularity of successful platforms from time to time and sell
to a more diverse group of consumers since the target age group for each major
platform differs. For example, the primary target consumers for Nintendo Game
Boy, Game Boy Advance and GameCube are elementary school students. Sony
PlayStation and PlayStation 2, and Microsoft Xbox cover a wider range of user
age groups, including customers in their thirties.
The market for video game software is substantially affected by sales of the
various video game platforms. For example, during fiscal 2002 the launches of
the Nintendo GameCube and Microsoft's Xbox were a significant development in
this market, and we and our competitors devoted resources to developing software
for these platforms. Our sales of video game software are inevitably affected to
a substantial degree by the cyclical nature of the industry generally as
platforms change, but through diversification we seek to limit this effect.
The table below shows, for the periods indicated, Konami's non-consolidated net
sales of video game software, categorized by major platform manufacturers.
Although this table does not include sales made by our consolidated
subsidiaries, it illustrates a trend of increasing overseas sales as well as the
relative significance of the manufacturers of hardware platforms for which we
design our home video games.
Fiscal year ended March 31,
2002 2003 2004 2004
(yen in millions, dollar in thousands)
Sony Domestic 22,218 20,520 19,237 $ 182,013
Overseas 20,000 14,021 15,022 142,133
Nintendo Domestic 8,698 7,861 7,240 68,502
Overseas 6,649 8,247 11,356 107,446
Microsoft Domestic 381 103 1 9
Overseas 997 2,021 1,085 10,266
(1) This data is presented in accordance with Japanese GAAP
because we do not maintain U.S. GAAP data on net sales broken
down by hardware manufacturer. However, we do not believe
that there are material differences between Japanese GAAP and
U.S. GAAP net sales of video game software.
(2) This table does not indicate total revenues of the Computer
& Video Games segment because it does not include sales of
game software made by our consolidated subsidiaries or sales
of other goods and services.
In light of the recent growth in the online and mobile phone game markets, we
have been moving aggressively into the mobile phone and online game software
business, where we believe there are opportunities for realizing additional
revenues from the sale of our software titles.
We established Konami Mobile & Online, Inc. in October 2001 as our primary
mobile phone games development subsidiary. In September 2003, Konami Mobile &
Online, Inc. added an online game business that manages online game
infrastructures to its existing business and changed its name to Konami Online,
Inc. Through Konami Online, we develop and distribute various types of contents
for all three domestic mobile phone Internet services including i-mode, vodafone
live! and EZweb. In 2003, we started distributing various types of game contents
in North America, Europe and Asia. In Japan, we offer download services for our
original mobile phone ringer melody and screen image data. Many of our mobile
games are mobile phone versions of our popular
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home video games. In return for these services, we charge the mobile phone users
a monthly fee of 70 to 300, depending upon the service provided. As of March 31,
2004 our games were posted on approximately 51 gaming sites for Internet mobile
phone services.
We also publish a relatively small volume of game software for personal
computers. The game software market for personal computers is not yet well
established in Japan. Outside Japan, there is a substantial market for games for
personal computers. We believe that our presence in the personal computers game
market abroad assists us in the expansion of our sales of video game software
worldwide.
Software Titles
We publish approximately more than 100 new titles of video game software each
year, almost all of which are designed for use with leading home and handheld
video game consoles. We publish software titles in a variety of categories,
including sports, action, role playing and music simulation.
The following table illustrates the number of software titles that we have
released as well as the number of units that we have sold by platform for the
periods indicated on a consolidated basis. This table indicates where we have
concentrated our development efforts as well as changes in the relative
significance of individual platforms.
Year ended March 31,
2000 2001 2002 2003 2004
Platforms Titles Units Titles Units Titles Units Titles Units Titles Units
(sales units in thousands)
PlayStation 47 12,800 43 6,100 17 2,920 16 4,100 7 1,350
PlayStation 2 1 100 30 4,000 43 11,490 42 8,900 57 10,750
Sega Saturn - - - - - - - - - -
Dreamcast 6 - 2 - - - - - - -
Nintendo 64 9 1,300 3 700 - - - - - -
Game Boy 25 2,600 19 4,850 4 290 - 1,400 - 250
Game Boy Advance - - 8 450 32 4,750 33 4,800 33 6,700
GameCube - - - - 3 150 15 800 12 1,450
Xbox - - - - 3 630 8 800 5 550
PC - - - - 3 10 6 200 6 550
Other 1 700 - 400 - 60 - - - -
Total 89 17,500 105 16,500 105 20,300 120 21,000 120 21,600
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The following two tables indicate the major software titles that we have either
published, or anticipate publishing, during fiscal years 2004 and 2005 in each
geographic market indicating for each title (i) the category of the game, (ii)
the platform on which the game can be played, (iii) the date of release or
anticipated release, and (iv) the market in which the product is sold. We cannot
assure you that each of the titles anticipated for release in fiscal 2005 will
be released when scheduled, if ever. Sales of video game software in Japan
accounted for approximately 57% and 49% of our total video software sales in the
years ended March 31, 2003 and 2004, respectively. We are working to improve our
title lineups covering overseas markets in order to increase our shares in
overseas markets, especially in the U.S. and European markets which have
continuous growth potential.
Titles Released In Fiscal 2004
Title Category Platform Release Date Market
Yu-Gi-Oh! WorldWide
Edition Card Battle Game Boy Advance April 2003 Japan
Silent Hill 3 Horror Adventure PlayStation 2 July 2003 Japan
Powerful Professional Sports PlayStation 2/Nintendo
Baseball 10 (Baseball) GameCube July 2003 Japan
WORLD SOCCER WINNING
ELEVEN 7 Sports (Soccer) PlayStation 2 August 2003 Japan
Castlevania Adventure PlayStation 2 November 2003 Japan
Sports
Pawapurokun Pocket 6 (Baseball) Game Boy Advance December 2003 Japan
Powerful Professional Sports PlayStation 2/Nintendo
Baseball 10 (Baseball) GameCube December 2003 Japan
WORLD SOCCER WINNING
ELEVEN 7 World Edition Sports (Soccer) PlayStation 2 February 2004 Japan
METAL GEAR SOLID THE
TWIN SNAKES Action Nintendo GameCube March 2004 Japan
Professional Baseball Sports
Spirits 2004 (Baseball) PlayStation 2 March 2004 Japan
Yu-Gi-Oh! WorldWide
Edition Card Battle Game Boy Advance April 2003 North America
Castlevania: Aria of
Sorrow Action Game Boy Advance May 2003 North America
Silent Hill 3 Horror Adventure PlayStation 2 August 2003 North America
Teenage Mutant Ninja
Turtles Action Multi Platform October 2003 North America
DDR Max 2 Dance Dance
Revolution Music Game PlayStation 2 October 2003 North America
Yu-Gi-Oh! Sacred Card Card Battle Game Boy Advance November 2003 North America
Castlevania Lament of
Innocence Adventure PlayStation 2 November 2003 North America
Yu-Gi-Oh! The Falsebound
Kingdom Card Battle Nintendo GameCube November 2003 North America
METAL GEAR SOLID THE
TWIN SNAKES Action Nintendo GameCube November 2003 North America
Yu-Gi-Oh! World
Championship 2004 Card Battle Game Boy Advance March 2004 North America
Yu-Gi-Oh! WorldWide
Edition Card Battle Game Boy Advance April 2003 Europe
Dancing Stage Megamix Music Game PlayStaion 2 May 2003 Europe
Silent Hill 3 Horror Adventure PlayStation 2 May 2003 Europe
Pro Evolution Soccer 3 Sports PlayStation 2 October 2003 Europe
Yu-Gi-Oh! Sacred Card Card Battle Game Boy Advance December 2003 Europe
Castlevania Adventure PlayStation 2 January 2004 Europe
Yu-Gi-Oh! World
Championship 2004 Card Battle Game Boy Advance March 2004 Europe
METAL GEAR SOLID THE
TWIN SNAKES Action Nintendo GameCube March 2004 Europe
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Titles Released and Anticipated To Be Released In Fiscal 2005 (1)
Title Category Platform Release Date Market
WORLD SOCCER WINNING
ELEVEN 8 Sports (Soccer) PlayStation 2 August 2004 Japan
METAL GEAR SOLID 3
SNAKE EATER Action PlayStation 2 2nd half of Fiscal 2005 Japan
Powerful Professional
Baseball 11 Sports (Baseball) PlayStation 2 July 2004 Japan
Suikoden IV RPG PlayStation 2 July 2004 Japan
WORLD SOCCER WINNING
ELEVEN 8
INTERNATIONAL Sports (Soccer) PlayStation 2 2nd half of Fiscal 2005 Japan
Enthusia Racing PlayStation 2 2nd half of Fiscal 2005 Japan
Pawapurokun Pocket 7 Sports (Baseball) Game Boy Advance 2nd half of Fiscal 2005 Japan
Bokutai Action Adventure Game Boy Advance August 2004 Japan
METAL GEAR SOLID 3
SNAKE EATER Action PlayStation 2 2nd half of Fiscal 2005 North America
Yu-Gi-Oh! Reshef of
Destruction Card Battle Game Boy Advance June 2004 North America
Enthusia Racing PlayStation 2 2nd half of Fiscal 2005 North America
DDR Extreme Music Game PlayStation 2 September 2004 North America
Silent Hill 4 The
Room Horror Adventure PlayStation 2 September 2004 North America
Neo Contra Action PlayStation 2 2nd half of Fiscal 2005 North America
Teenage Mutant Ninja
Turtles 2 Action PlayStation 2 2nd half of Fiscal 2005 North America
Pro Evolution Soccer
4 Sports (Soccer) PlayStation 2 2nd half of Fiscal 2005 Europe
METAL GEAR SOLID 3
SNAKE EATER Action PlayStation 2 2nd half of Fiscal 2005 Europe
Yu-Gi-Oh! Reshef of
Destruction Card Battle Game Boy Advance September 2004 Europe
Silent Hill 4 The
Room Horror Adventure PlayStation 2 September 2004 Europe
(1) Excluding titles that are scheduled but have not yet
been publicly announced to be released.
The primary video game software products on which we have relied to produce
revenues have been our hit titles, which include the following:
METAL GEAR SOLID. We have sold a total of over 14 million
units of our METAL GEAR SOLID series, including over seven
million units of METAL GEAR SOLID, the original action game that
we introduced in 1999 and six million units of the sequel, METAL
GEAR SOLID 2 SONS OF LIBERTY.
Yu-Gi-Oh! Since we introduced the first Yu-Gi-Oh! title in July
1998, we have sold a total of over 19 million units of our
Yu-Gi-Oh!series for the Game Boy, Game Boy Advance, PlayStation and
PlayStation 2 platforms.
Soccer titles. We sold a total of 15.6 million units of WORLD
SOCCER WINNING ELEVEN series and Pro Evolution Soccer series in
Japan, Europe and North America form the year ended March 31,
1996 to the year ended March 31, 2004.
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Baseball titles. We sold a total of 12 million units of
baseball titles in Japan from the year ended March 31, 1994 to
the year ended March 31, 2004.
Silent Hill. We have sold a total of over 4.3 million units
of the Silent Hill series, a horror action game, since we
introduced the first Silent Hill title in 1999.
Software Development
We seek to develop video games that are fun and exciting, and which provide
sufficient challenge at various levels of proficiency to encourage repeated
play. We also develop and release titles with comic, cartoon and movie contents
and achieve synergy with media. We develop most of our own video game software.
Because the popularity of successful titles fades quickly, we are constantly
working to develop new titles and sequels to existing titles. The life span for
software titles depends on the type of title. Sports titles, which are updated
frequently, may last indefinitely. Other titles usually have short life spans,
generally six months to one year.
We believe that the best software products tend to be developed by small
independent development groups, which encourages creativity and productivity.
Accordingly, we operate our internal development groups as autonomous
development studios, each in a separately incorporated but majority-owned
subsidiary, three of which-Konami Computer Entertainment Studios, Inc., Konami
Computer Entertainment Tokyo, Inc., and Konami Computer Entertainment Japan,
Inc.-are publicly listed companies that trade on JASDAQ, Japan's
over-the-counter market.
Most of our software development, including titles designed for overseas
markets, is conducted by our three development subsidiaries in Japan and a
subsidiary in the U.S. We subcontract the development of some of our less
technically-demanding game concepts to a subsidiary in China, Konami Software
Shanghai, Inc. We expect that this subsidiary will be able to create and develop
sophisticated software for both the Japanese market and the international market
as it gradually acquires additional expertise and know-how.
Our software development is a collaborative process between our head office and
our development subsidiaries. Our development subsidiaries are allowed wide
creative freedom including the development of strategies, story lines and other
characteristics. Also, compensation of the employees of each subsidiary is based
in part upon the success of the titles published by that subsidiary. Each
development subsidiary is generally supported by our central administrative and
technology resources. Each subsidiary tends to specialized in the development of
software for a particular game genre in which it excels. We monitor and
coordinate these development activities in order to ensure that sufficient
resources are allocated among the subsidiaries so that the development of games
is appropriately balanced. In addition, earnings performance of each development
subsidiary can more readily be identified. By taking a collaborative approach to
development, we seek to assure that our software product line is of consistently
high quality across the range of our game concepts. Prior to release, each
product undergoes careful quality assurance testing which involves technical
review of each component of the final product and testing on the applicable
platforms.
Hiring and retaining talented creative staff is key to developing successful
content. To do this, we have introduced equity-based incentives for creative
staff at our publicly-traded development subsidiaries with respect to the
subsidiaries' shares and remuneration packages for developers that reflect the
financial results of their work. We believe that this compensation structure
that rewards creators for the success of their games and our policy of providing
creators substantial independence and flexibility, enables us to attract and
retain game creators that are among the best in the industry.
Through our long experience in developing software, we have developed
significant in-house expertise and many proprietary development tools-such as
game engines, three-dimensional models and texture maps that can be used to
control the diffuse color of a surface on a pixel-by-pixel basis-that streamline
the development process, allowing members of our development teams to focus
their efforts on the play and simulation aspects of
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the product under development. We believe our accumulated know-how and
proprietary development tools enable our software designers to develop
compelling, graphically sophisticated games quickly and efficiently, which may
give us an advantage over competitors.
Development of a video game generally takes six to 24 months or longer and
typically costs 100 million to 700 million. Because of the increasingly complex
technology and software involved, both the time and cost to develop games have
increased during the past few years. We believe that we can generate significant
incremental revenue from our games by introducing them on additional platforms
at a significantly lower cost than the development cost for introducing the game
on the first platform. Converting an existing next-generation game from one
platform to another is expected to take three to six months. These relatively
long development cycles require that we assess whether there will be adequate
demand for a game well in advance of its release, which is difficult to predict.
Manufacturing
The manufacturers of the home and handheld game platforms, such as Sony,
Nintendo and Microsoft, generally manufacture our video games for us, either
themselves or through their designees, as required by the applicable platform
license. We believe that this is the most desirable arrangement for both parties
because we avoid the costs associated with the construction and maintenance of
manufacturing facilities while the hardware manufacturers collect per unit
royalties for each game they manufacture. The manufacturing process begins with
our placing a purchase order with a manufacturer and opening a letter of credit
in favor of the manufacturer. Hardware manufacturers or their authorized vendors
typically deliver the first order to us within four to six weeks and additional
orders for the same title within two days to four weeks.
We maintain both the proprietary rights and risks associated with each game
title. In addition, at the time our product unit orders are filled by the
manufacturer, we become responsible for the costs of manufacturing and/or the
applicable per unit royalty on such units, even if the units do not ultimately
sell. We provide a standard defective product warranty on all of the products
sold. We are responsible in most cases for resolving, at our expense, any
applicable warranty or repair claim. To date, we have not experienced any
material costs from warranty or repair claims.
Platform Licenses
Our video game software business is dependent on our license agreements with the
manufacturers of hardware platforms. All of these licenses are non-exclusive
with fixed terms although these contracts are usually extended for additional
terms. Each license grants us the right to develop, publish and distribute
titles for use on the manufacturer's platforms. Manufacturers typically retain
the right to approve the titles to be released and embodied in products that are
manufactured solely by the manufacturer or its authorized vendor.
The following table sets forth information with respect to our platform
licenses. In some instances, we have more than one platform license for a
particular platform.
Manufacturer Platform Territory Expiration Date
Nintendo Game Boy Color Japan March 7, 2005
Nintendo Game Boy Advance Japan January 8, 2005
Nintendo United States and July 5, 2007
Game Boy Advance Canada
Nintendo GameCube Japan October 31, 2004
Nintendo United States and January 9, 2005
GameCube Canada
Sony PlayStation Japan April 7, 2005
Sony PlayStation Europe December 31, 2005
Sony PlayStation 2 Japan March 31, 2005
Sony PlayStation 2 Asia March 31, 2005
Sony United States and March 31, 2005
PlayStation 2 Canada
Microsoft Xbox Determined on a November 14, 2004
software
title-by-title
basis
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Nintendo charges us an amount for each Game Boy Advance, Game Boy Color and Game
Boy Pocket cartridge. This amount varies based, in part, on the memory capacity
of the cartridges. Nintendo GameCube, Sony and Microsoft contracts include a
charge for every disc manufactured. The amounts charged by the manufacturers
generally include a manufacturing, printing and packaging fee as well as a
royalty for the use of the manufacturer's name, proprietary information and
technology, and are subject to adjustment by the manufacturers at their
discretion. The manufacturers have the right to review, evaluate and approve a
prototype of each title and the title's packaging.
Marketing, Sales and Distribution
We believe that we benefit from a strong positive perception in Japan of the
Konami brand name. We are focusing on further enhancing the Konami brand name by
aggressively advertising and promoting ourselves and our products and services.
To continue to increase our brand name recognition, we advertise on television,
the radio and through various magazines and newspapers. Konami Marketing Japan,
Inc., our wholly-owned subsidiary, conducts sales and market research for all of
our products in Japan, other than our Pachinko LCD units and products sold at
shops within fitness facilities directly managed by Konami Sports, and oversees
our relationships with retailers.
Our video game software products are sold in Japan primarily through our sales
distribution network, coordinated by Konami Marketing Japan, Inc., which has
offices throughout Japan. Each of these sales offices focuses its efforts on a
specified area within Japan. We bear inventory risk until the product is sold to
the retailer. However, once products are sold to a retailer, they cannot be
returned unless they are defective. We believe that our distribution network is
a major asset of our business.
As for overseas marketing, we sell our products through our subsidiaries,
principally those in the United States, Germany and Hong Kong. In October 2003,
Konami of America, Inc., our sales subsidiary in the United States, added a new
function of overseas business administration to its existing sales business,
changed its name to Konami Digital Entertainment, Inc. It established a new
administrative office in Los Angeles in order to conduct various activities
responding to local market needs for expanding shares of our Computer & Video
Games business overseas.
Toy & Hobby
Toy Industry Overview
Consumption Trends-Declining Child Population and Enlarging the Age Brackets of
Consumers
The Japanese toy industry is being forced to restructure as a result of a
declining child population, the growing number of alternative options for play,
changes in distribution systems and the bankruptcy of major toy wholesalers.
Furthermore, companies must develop toys with original ideas so children will
play with toys to a more advanced age than at present.
Since the population of children (those aged 0-14 years old) has been steadily
declining and since the number of live births has also tended to decline (owing
to women getting married later in life and to the increasing number of unmarried
women), the child population is expected to continue to decline slightly in the
future. According to the National Institute of Population and Social Security
Research, the number of births in Japan has declined from 2.09 million in 1973
to 1.19 million in 2000. Consequently, the population of this age group has
decreased from 27 million in the beginning of the 1980s to 18.5 million in the
population census of 2000. The children's population is expected to fall below
16 million in 2016.
The phenomenon of children abandoning toys at a younger age is due to the
changing pattern of children's lives. A large number of children go to music
classes (piano classes, etc.), sports clubs (swimming schools, etc.) and cram
schools (educational institutions to help enter kindergartens, primary schools
and junior and senior high
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schools) from infancy and thus they spend less of their leisure time playing
with toys than previous generations did. Moreover, electronic toys such as
PlayStation2 and Game Boy Advance now occupy an important position in the toy
market. These toys are also used by younger people. The popularity of electronic
games contributes much to the decreasing demand for general toys.
Trends and Characteristics of Toy Demand
According to the market research conducted by the Japan Toy Association, total
revenues of toys sold domestically, including home video game consoles and
software, have been stable with the level of around 700 billion in the past five
years. In light of the long-term demographic trends, this industry is not
expected to grow. Toy demand fluctuates sharply from season to season. Toys are
in the greatest demand in December and January, particularly at the end and
beginning of the year, and, to a lesser extent, in August and in March (in
decreasing order). This trend is explained as these months correspond to the
periods of children's school holidays and it is customary in Japan to buy toys
as Christmas and New Year presents in December and January.
According to the market research conducted by the Japan Toy Association, sales
of girl's toys, such as dress-up dolls, are decreasing, while sales of hobby
items, such as plastic models, radio controlled toys and miniature trains, have
steadily increased. As to card games, according to the Toy Industry White
Papers, retail sales grew dramatically from 30 billion in fiscal 1996 to 120
billion in fiscal 2001. However, sales of card games during fiscal 2003 and
fiscal 2004 declined to 60 billion. Because our products represent a significant
portion of the Japanese card game market, we believe that much of this decline
is due to the reduced popularity of our Yu-Gi-Oh! card games which have
dominated the market.
Popular goods reflect contemporary social conditions. We believe that the
changing market environment has led to certain goods being introduced and
produced, as mentioned below.
character toys, which were created from the multiplier effects
of mass-media and TV-animation films, movie animation films,
comic books and so on have sold extremely well;
computers have been used in all aspects of social life, as
electronic technology advances and, as a result, toys that
were adapted from office automation equipment for children
have attracted consumers;
more and more parents have attached importance to education and they
tend to buy expensive products for their children in the category of
educational/preschool toys; and
hobby items, such as radio controlled products and games,
have sold well due to an increasing amount of leisure time
caused by the spread of the five-day workweek.
The distribution of toys has greatly changed owing to the entry of the large
U.S. chain toy store Toys"R"Us into the Japanese market and to the increased
sales made by suburban toy chain stores. The sales share of specialty toy shops
has decreased and wholesalers, which act as intermediaries for manufacturers and
retailers, have been affected by the change of distribution routes and the
shortened distribution channels, which has caused them difficulties. The system
of fixed price sales, which is the traditional business practices in the toy
market, has begun to collapse, and even department stores have sold at a
discount prices.
According to the research conducted by the NPD Group, the toy market in North
America has a size of $2 billion annual sales, accounting for approximately 37%
of the world toy market. The toy market in North America is expected to expand
gradually and not to be affected significantly by general economic conditions.
Costs for product development and marketing in European markets are generally
higher than other markets due primarily to costs for translation in several
languages and different distribution system in each country.
The average amount spent on each child has been increasing due to declining
birth rate in North America. Also, the age group of consumers of toy products
has been lowered, reflecting the fact that children tend to abandon toys at a
younger age due to the accelerating pace of children's growth.
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In North America, sales of licensed products accounted for 25 to 30% of total
toy products sales and toys relating to Japanese cartoon contents have been
especially popular.
Our Toy & Hobby Business
We create, develop, design and sell a range of toys and brand-related goods,
including card games, figures, toys with confectionery, CDs and DVDs of music
from our video game software, game tip books (containing clues and strategies
for playing popular games), capsule toys, game prizes for amusement arcade games
and other accessories. These original toys and brand-related goods are based on
well-known characters, brands and images, or content, that we either create on
our own or license from third parties. In some cases, owners of popular content
such as comic book publishers or animation companies approach us and ask us to
use their content in our products. In other cases, we approach the owners of
content that we believe has potential customer appeal in order to obtain the
rights to use and develop that content into products. Because of our strong
reputation in the industry, we are able to acquire licenses to use popular
characters and images such as those contained in Yu-Gi-Oh! Most sports-related
licenses, which give us the right to use team or organization logos and
trademarks, are non-exclusive. In other cases, we typically obtain exclusive
rights. Although each product is different, in most cases, we create, develop
and design the product around popular content and subcontract the manufacturing
to a third party.
Our Toy & Hobby business is divided into four divisions: (i) card games; (ii)
toys; (iii) music CDs and DVDs; and (iv) publications. Consolidated net revenues
generated by our Toy & Hobby business increased 11,520 million, or 25.1%, to
57,468 million in fiscal 2004 from 45,948 million in fiscal 2003 due primarily
to an increase of approximately 11,400 million in sales of the Yu-Gi-Oh! card
games. More than 80% of our revenues from our Toy & Hobby business has been
derived from worldwide sales of card games. We believe we have the largest share
of the worldwide card game market according to data available from the Japan Toy
Association and the Toy Industry Association, Inc. In February 1999, we launched
our Yu-Gi-Oh! Official Card Game in Japan. Yu-Gi-Oh! is the story of a shy young
boy who overcomes rivals with the help of an ancient deck of cards. Yu-Gi-Oh!
card game is based on the comic by Kazuki Takahashi that was originally
serialized in Shonen Jump, one of Japan's most popular comic magazines.
Yu-Gi-Oh! features frightening monsters and dark fantasy storylines, which have
a strong appeal to preteens. Our license agreement with the Japanese publisher
automatically extends on a yearly basis unless terminated with notice.
Yu-Gi-Oh! was launched as a television cartoon series in the United States in
September 2001, and has been keeping high audience ratings on the Kids' WB!
Network. Reflecting the popularity of the Yu-Gi-Oh! television cartoon, we
recorded 26 billion sales of the Yu-Gi-Oh! Trading Card Game in the U.S in
fiscal 2004. We have sold several new versions of Yu-Gi-Oh! Trading Card Game
and plan to release additional new versions to the extent that it produces
sufficient profit. We believe our card games are popular both for play and for
card collecting.
The Yu-Gi-Oh! card game was launched in the United Kingdom in December 2002, in
France in March 2003 and in other European countries in April 2003. The
Yu-Gi-Oh! card game gained popularity in these European markets and recorded
sales of 14 billion in fiscal 2004.
We are working to diversify the range of our toy products in order to reduce our
dependency on card games. Our toy business mainly develops (i) boy's toys that
are licensed from television and comic cartoons or figures based on characters
of our home game software and amusement games, etc.; (ii) educational toys with
sounds for infants; (iii) toys with confectionery; (iv) capsule toys; and (v)
bath and toiletry items.
In our main boy's toy business, we have obtained an exclusive license to develop
a major series of boy's toy products based on The Gransazers, a science fiction
action hero in a TV show produced by Toho and broadcast by 26 TV stations around
the country, including six stations affiliated with TV Tokyo. We have received
favorable responses for our lineup of toys and merchandize carrying heroes and
robots appearing on the show. Also, a new robot hero animation television
program, Get Ride! AMDRIVER, started in April 2004 and we intend to introduce a
lineup of toy products using the characters from this television program.
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Toy & Hobby Business-Production
Our Toy & Hobby products are produced both overseas and in Japan by various
third-party manufacturers. We are not dependent on any single manufacturer for
the production of our Toy & Hobby products.
Toy & Hobby Business-Marketing, Sales and Distribution
Marketing and sales in Japan are conducted through our sales network in the
company group through which we sell directly to retailers such as Toys"R"Us. In
July 2001, we opened the Konami Card Game Center in Tokyo as a customer service
base for our card game business. Our retail partner, The Upper Deck Company,
LLC., acts as our distributor in the U.S. and retains the inventory and return
risks for the Yu-Gi-Oh! Trading Card Game there. In Europe, we conducted sales
of Yu-Gi-Oh! Trading Card Game either directly or through our retail partners,
including The Upper Deck Company, LLC until March 2004, however, we currently
distribute our products through The Upper Deck Company, LLC's European entity
employing the scheme used in the U.S.
Amusement
Our Amusement segment produces and sells products in the two industries:
video game machines and token-operated game machines for
amusement arcades; and
software for LCD units used in pachinko machines.
The discussion below presents a separate overview of these two
industries-amusement arcade games and software for LCD units used in pachinko
machines-each of which is followed by a description of our Amusement segment
operations corresponding to that industry.
Amusement Arcade Games-Industry Overview
According to the most recent industry statistics, the domestic amusement arcade
industry had total revenues of 760.0 billion during 2003. The breakdown by
category is shown in the following table.
Amusement Arcades-Japanese Industry Revenues
Industry Segment 2000 2001 2002 2003
(in billions of yen)
Amusement arcade operations 619.5 596.4 590.3 605.5
Amusement arcade games (domestic)
Video Game Machines 43.1 28.3 24.5 22.7
Token-operated game machines 13.1 24.3 22.3 27.1
Prize Machines 14.1 11.2 10.7 12.3
Vending Machines 10.4 13.1 18.0 18.8
Music Simulation Game Machines 16.2 6.6 4.9 3.4
Other 48.4 36.6 39.7 50.2
Sub-total 145.2 120.2 120.2 134.5
Amusement arcade games (exports) 41.9 22.4 20.6 20.0
Total 806.6 739.0 731.1 760.0
Source: "Amusement Industry Survey, Fiscal 2003"
(September 11, 2003), Japan Amusement Machinery
Manufacturers Association, All Nippon Amusement
Machine Operators' Union and Nippon SC Amusement
Park Association.
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The number of amusement arcades in Japan has been declining over the past
several years. According to industry statistics, revenues from the operation of
amusement arcades in Japan decreased for five years in a row from 1997. It is
believed that the weak market condition for amusement arcades is primarily due
to reduced player interest because of the increase in entertainment alternatives
available to potential amusement arcade game players. Due to the development of
powerful home game consoles that can rival amusement arcade games in play
quality and the introduction of advanced mobile telephones equipped with
Internet and game functions, consumers now have competitive leisure
alternatives. However, revenues from the operation of amusement arcades
increased in 2003 to 605.5 billion due primarily to the restructuring of the
amusement industry, including the closing of unprofitable small-sized amusement
arcades and the efficient development of large-scale amusement arcades that
attract customers, and marketing efforts targeting families and women.
Our Amusement Business-Video Game Machines
Our Amusement business develops, produces and sells video game machines for
amusement arcades, many of which use sophisticated computer graphics technology.
Consolidated net revenues generated from the sale of amusement arcade games,
including intersegment revenues, amounted to approximately 17,900 million in
fiscal 2003 and approximately 18,100 million in fiscal 2004, an increase of
approximately 200 million, or 1.1%.
Last year, we introduced approximately 14 new titles for video game machines for
amusement arcades, half of which tend to be sequel titles. Such titles typically
have life spans of six to 18 months, although popular titles may have a longer
life and are sometimes developed into a series of titles, which together
constitute a recognized brand such as Dance Dance Revolution.
The main purchasers of our video game machines are amusement arcades. We have
sought to respond to market trends by introducing low price products and
products that involve the type of play that can not be replicated easily by home
video game consoles. In this regard, our music simulation games have been
successful. These games evolved from beatmania, a disc jockey simulation game
developed in our Amusement business. Hit music simulation games have included
Dance Dance Revolution, beatmania, pop'nmusic, drummania and GUITARFREAKS. These
music-simulation game machines are relatively expensive, but can accommodate
relatively inexpensive software updates for sequel games. Because the price of
new software generally is substantially less expensive as compared to the price
of a new amusement arcade machine, software upgrades tend to be more attractive
to our customers.
In March 2003, our Amusement business introduced the "e-AMUSEMENT" service that
connects amusement arcades all over Japan through a computer network run by
Konami, creating a new amusement arcade market. This service allows multiple
players to participate in the same game from different locations simultaneously.
Our MAH-JONG FIGHT CLUB, which is our first e-AMUSEMENT title, is increasing in
popularity in part due to events such as national conventions where players can
try their skills in a tournament.
MAH-JONG FIGHT CLUB, a Mah-jong game that allows multiple players
to participate simultaneously from different locations;
Quiz MAGIC ACADEMY, an online quiz game participated by many
players from all over the country; and
drummania, a drum simulation game that corresponds to e-AMUSEMENT.
Amusement Business-Video Game Machines-Production
Our video game machines for amusement arcades designed for both the Japanese and
the overseas markets are developed in Kobe and Tokyo. We also produce our
amusement arcade games designed for the Japanese market at our production
facilities in Kobe. We export our developed software content to the United
Kingdom and the United States, where we produce the amusement arcade video games
for those markets. Local production and assembly allows us to reduce costs and
to limit our exposure to exchange rate fluctuations.
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Amusement Business-Video Game Machines-Marketing, Sales and Distribution
Our video game machines for amusement arcades are marketed, sold and distributed
in Japan through our sales distribution network, coordinated by Konami Marketing
Japan, Inc. In overseas markets, our foreign sales subsidiaries are responsible
for marketing, sales and distribution of our video game machines for amusement
arcades.
Amusement Business-Overview of Token-Operated Game Machines Business
Token-operated game machines in Japan
As indicated in the following table, total industry revenues from the sale of
token-operated game machines had been generally decreasing through fiscal 1999.
However, sales rebounded to a record 24.3 billion in fiscal 2001, which was an
increase of 186.0% as compared to the previous fiscal year. This growth was due
primarily to the popularity of large-sized mass medal game machines,
particularly horse racing games. As of fiscal 2003, sales of token-operated game
machines amounted to 27.1 billion, comprising approximately 20.1% of the 134.5
billion Japanese amusement arcade game market. As indicated in the following
table, revenues from amusement arcade operations have been declining, whereas
revenues from the operation of token-operated game machines increased largely in
fiscal 1999, 2001, 2002, 2003 and 2004. We believe that the sale of medium- and
large-sized token-operated game machines, which provide the type of
entertainment that cannot be replicated on home video game consoles, is largely
responsible for this trend.
Token-Operated Game Machines-Japanese Industry Revenues
Year ended March 31,
1997 1998 1999 2000 2001 2002 2003
(billions of yen except for percentages)
Revenues from the sale of
token-operated game machines 11.1 11.3 9.8 13.1 24.3 22.3 27.1
Revenues from amusement arcade
operations 642.3 643.4 628.9 619.5 596.4 590.3 605.5
Revenues from token-operated game
machines 114.6 114.8 123.5 117.6 129.5 137.4 152.6
Token-operated game machine
revenues as a percentage of
amusement arcade revenues 17.8 % 17.8 % 19.6 % 19.0 % 21.7 % 23.3 % 25.2 %
Source: "Amusement Industry Survey, Fiscal 2003"
(September 11, 2003), Japan Amusement Machinery
Manufacturers Association, All Nippon Amusement
Machine Operators' Union and Nippon SC Amusement
Park Association.
Amusement Business-Overview of Our Token-Operated Game Machines Business
We develop, produce and sell token-operated game machines that we sell primarily
to amusement arcade operators in Japan. Consolidated net revenues generated by
our token-operated game machines amounted to approximately 7,400 million in
fiscal 2003 and approximately 11,000 million in fiscal 2004, an increase of
approximately 3,600 million, or 48.6%. We believe that we have over 40.2% of the
domestic market for token-operated game machines based on Amusement Industry
Survey.
All token-operated game machines that we sell in Japan are played by purchasing
tokens that are inserted into the machine, the object being for the player to
win more tokens to extend the playing time. Our two most popular token-operated
game machines, FORTUNE ORB and GI-WINNING SIRE, accounted for a substantial
majority of our net revenues of token-operated game machines in fiscal 2004.
Fantasic Fever is a golden spiral
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decorated with numerous lamps, above which tokens shiningly flow and fall in
front of the player. FORTUNE ORB is a classic token-operated game with
additional attractive slot characters such as direct chance and fortune bonus,
and significantly increased reach patterns as compared to the previous version
in order to retain players' attention and increase the excitement of the game.
Medium- and large-sized game machines, which sell for as much as approximately
20 million and attract older children and adults, are supplied mainly to
amusement arcades. In addition to Fantasic Fever and FORTUNE ORB, our principal
machines include GI-TURFWILD, a "penny falls" type of horse racing game. Such
large-sized token operated game machines have a typical commercial life span of
four to five years and we typically introduce two new types of large-sized
token-operated game machines each year. We also sell small-sized token-operated
game machines.
Amusement Business-Token Operated Game Machines-Production
Our domestic token-operated game machines are developed and produced in our
production facilities in Zama, Japan.
Amusement Business-Token Operated Game Machines-Marketing, Sales and
Distribution
Our token-operated game machines for amusement arcades are marketed, sold and
distributed through our sales distribution network, coordinated by Konami
Marketing Japan, Inc., in the same manner as video game machines for amusement
arcades.
Pachinko-Overview
The pinball-like game of pachinko is a national pastime in Japan. Players
purchase a supply of tiny metal pinballs that they then propel with a motorized
trigger at a maximum permitted rate of 100 times a minute through a vertically
mounted pinball-like maze in a pachinko machine. As the balls bounce through a
maze of pins, they either hit jackpots to produce more balls or fall into the
gutter at the bottom of the machine. The board face, which has moving images on
a LCD panels and flashing lights is designed to attract players and is the most
important component. Our LCD unit is installed in the board face.
Our Pachinko LCD Unit Operations
We develop software that is incorporated into and sold together with LCD units
for pachinko machines. The life cycle of such software for LCD units is
approximately several months to one year. Consolidated net revenues generated by
our pachinko LCD unit operations decreased in fiscal 2004 due to our inability
to introduce new products meeting rapidly changing market needs in a timely
manner.
We typically introduce between five and ten new pachinko software installed in
LCD units each year. Pachinko machines must be inspected by The Security
Electronics and Communications Technology Association, an extra-governmental
organization associated with the Metropolitan Police Department, before being
marketed in Japan. This process exposes us to possible delays in our
introduction of new software installed in LCD units because we maybe required to
change software content.
To attract a wider customer base, we have expanded the type of pachinko game
machine titles we develop to focus software development to a great extent on
entertainment and game value. We believe that the pachinko game machine
manufacturing market in Japan is mature and is unlikely to grow significantly,
if at all. However, we plan to expand our market share by increasing the volume
of software we sell.
LCD Units for Pachinko Machines-Development, Production and Components Supply
We develop the software for LCD units used in pachinko machines and, in a few
limited cases, we have begun to sub-contract a portion of the software
production to various third parties who produce our software to
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our circuit design specifications. We also work with third-party subcontractors
who integrate the software with LCDs, semi-conductors and printed circuit boards
that we order from major electrical manufacturers in Japan. Because of the
increasing demand for LCDs, we have encountered difficulties in the past in
procuring LCDs in sufficient quantities, although currently there are no such
difficulties because of the increasing production capabilities of LCD makers.
There is also increasing demand for semiconductors and, in order to avoid future
procurement problems, we regularly place orders in advance of our requirements.
We have not encountered, and do not expect to encounter, any difficulty in
procuring printed circuit boards for our use. After our subcontractors have
integrated the software and hardware, we then supply the bundled unit to the
pachinko hardware manufacturer for the relevant pachinko machines.
LCD Units for Pachinko Machines-Marketing and Sales
We sell our LCD units directly to pachinko machine manufacturers. Certain of the
larger manufacturers publish their own software for pachinko machines, but most
manufacturers purchase software from third parties, including us. We commenced
sales in 1992 and currently have basic product and sales agreements with over
seven companies but are seeking to sell to other pachinko machine manufacturers.
Gaming
Our Gaming segment develops, produces and sells gaming machines such as
video/mechanical slot machines to casino operators in the United States,
Australia and other overseas jurisdictions.
Gaming Industry Overview
Global Gaming Industry
We believe that the North American market constitutes approximately 60% of the
global gaming market, followed by the Oceania market with approximately 20%, the
South American market with approximately 7% and the African and Asian market
with approximately 1% each. The North American gaming market has been growing at
an annual rate of approximately 10% and major players in this market have been
growing significantly.
Gaming in the United States
The casino industry in the United States, and the gaming industry in general,
have experienced substantial growth in the last decade. Prior to 1979, casino
gaming was limited to Nevada. In 1979, casino gaming was legalized in New
Jersey. Between 1979 and 1988, gaming activities by various Native American
tribes developed, leading to the federal enactment of the Indian Gaming
Regulatory Act. The growth of Native American gaming served as a catalyst for
certain jurisdictions to consider non-Native American casino gaming because of
its potential as a source of government revenue. Since 1989, various forms of
casino gaming have been legalized in numerous states including but not limited
to Colorado, Illinois, Indiana, Iowa, Louisiana, Michigan, Mississippi and
Missouri. In addition, gaming facilities operate on cruise ships sailing out of
numerous ports in and around the United States. Several other states have
approved or are considering approval of some form of casino gaming.
Gaming in Australia
In Australia, the gaming industry is characterized by limited market growth and
intense competition between manufacturers due partly to upper limits for numbers
of gaming machines installed in major states. Australia is the largest and most
established market for gaming products outside of North America and is primarily
a video slot machine market.
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Our Gaming Business
Net revenues generated by our Gaming business, including intersegment revenues,
amounted to approximately 8,215 million in fiscal 2003 and approximately 10,947
million in fiscal 2004, an increase of approximately 2,732 million, or 33.3%. We
develop, produce and sell gaming machines for international markets, primarily
in North America and Australia. We sold 4,500 gaming machines and 5,600 gaming
machines in North America and Australia, respectively, in fiscal 2004.
We have expanded our gaming machines business in international markets. This
expansion, initiated in March 1998 by exporting components of video slot
machines to Australia, was followed by the launch of video slot machine sales in
the United States in late 2000. In August 2001, we acquired Paradigm Gaming
Systems, Inc., through our American subsidiary, Konami Gaming, Inc., and
integrated it into the Systems Division of Konami Gaming, Inc. Paradigm Gaming
Systems, Inc. is a developer of casino management systems. We obtained two new
customers in fiscal 2003 due to this acquisition and expect that this
acquisition will further increase our market opportunities for gaming machines
in North America. We are actively seeking additional licenses and sales
opportunities in North America as we have received licenses to manufacture
and/or sell gaming machines in Arizona, California, Illinois, Indiana, Iowa,
Kansas, Louisiana, Michigan, Minnesota, Mississippi, Nevada, New Mexico, New
York, Oregon, West Virginia, Wisconsin North Dakota, Idaho and Puerto Rico, and
the Canadian provinces of British Columbia, Ontario, Quebec and Saskatchewan. In
addition, our application for license in New Jersey has been in process. In
September 2003 we introduced 22 new video slot games during the Global Gaming
Expo held in Las Vegas. Our product lineup has been improving in its quality and
number.
We believe that the annual demand of casino gaming machines in North America is
approximately 100,000 units, out of which approximately 50% are mechanical slot
machines. We launched mechanical slot machines in North America in December 2003
and hope to grow our share. Also, we sell video slot machines, the market for
which is expected to grow in the United States as we believe that video slot
machines provide more powerful performance gains and better cost advantages over
mechanical slot machines, and our sales of video slot machines have been growing
steadily.
Gaming Business-Production
Our gaming machines sold in North America are assembled at our production
facility in Las Vegas, Nevada, and gaming machines sold in Australia are
assembled at our production facility in Sydney, Australia. Our products are
assembled utilizing various parts and components from a large base of local
vendors. We supply certain software and electronic components to our overseas
production facilities. We have identified alternate sources of supply for
significant parts and components in the event any of our current vendors fail to
meet order requirements.
We are currently building a new gaming machine factory in Las Vegas. The new
factory will have a production capacity of approximately 1,000 gaming machines
per month, which is almost double of the production capacity of the current
factory, and is scheduled to commence its operation in November 2004.
Gaming Business-Marketing, Sales and Distribution
Our gaming machines are marketed, sold and distributed overseas through our
local subsidiaries directly to casino operators.
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Health & Fitness
Our Health & Fitness business is comprised of the operation of sports clubs and
the design, manufacture and sales of fitness machines and fitness-related
products.
Sports Club Operations
Industry Overview
According to Fitness Online, a website operated by the publisher of a
professional fitness industry magazine called "Club Management", as of December
2002 only 2.6% of the Japanese population had a private sports club membership.
This compares to 6.3% in the United States and 5.3% in England. Judging from
Japan's low membership figures relative to the United States and England, the
industry believes that there is room for future growth over the long-term,
although weak economic conditions in Japan may dampen growth in the short-term.
According to "Club Business Trends in Japan, 2002" available at Fitness Online,
private sports club revenues in Japan have leveled off at a compound annual rate
of increase of approximately 0.2% over a five year period, from 294.5 billion in
1998 to 297.3 billion in 2002. On the other hand, over the same period, the
number of private sports clubs has grown at a compound annual rate of
approximately 1.8% from 1,708 in 1998 to 1,873 in 2002. However, sports club
membership has increased over the same period only at a compound annual rate of
0.7%, from 2.9 million in 1998 to 3.0 million in 2002, which implies that the
number of sports clubs increased at a higher level than the number of sports
club membership and average revenue per member has declined at a compound annual
rate of 0.45% since 1998. We believe that sports clubs, on average, are
experiencing excess capacity together with discounted membership fees. Surviving
in the current sports club market is relatively difficult, and only those who do
experience the level of membership and revenue to realize the benefits of the
inherent operating leverage in the industry will survive.
We believe that the growth in sports club memberships is attributable to several
factors. Japanese are becoming increasingly focused on achieving healthier, more
active and less stressful lives. Of the factors that members consider very
important in their decision to join a sports club, the most commonly mentioned
are shaping up, appearance related factors including muscle tone and looking
better, relief of stress, weight control and general health maintenance. Other
factors that are taken into account when selecting sports clubs include the
distance from home, quality of facilities and price. We believe that interest in
sports clubs has heightened due to the efforts of club owners to renew
facilities, reduce membership fees, offer more diverse membership options,
extend club hours, increase group exercise programs such as aerobics and
jazzercise, and enhance marketing and sales activities. We also believe that
sports clubs provide a more convenient venue for exercise than outdoor
activities, particularly in densely populated metropolitan areas.
According to published industry sources, the major trends that are driving
changes in the health and fitness industry include:
the aging of the Japanese population is creating an awareness
of and a need for healthy living and physical fitness;
capital investment by large operators who are renewing or
expanding facilities is generating greater consumer demand;
greater availability of membership program options, such as
weekend or after-hours memberships, are attracting greater
numbers of members;
an increase in non-dues revenue from the sale of beverages and
other products is providing revenue diversification for club
operators; and
large operators are acquiring small- and medium-sized sports
clubs in an effort to build national platforms.
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We believe that we had approximately 27% of the Japanese sports club market, as
measured by revenues, for the year ended March 31, 2004 based on the Leisure
White Paper issued by Institute for Free Time Design and data made publicly
available by Nihon Keizai Shimbun, Inc. We have several other competitors in an
otherwise fragmented market but, as noted above, the industry is undergoing
consolidation which may result in the creation of additional significant
competitors.
Our Sports Club Business
Through our acquisition of a majority of the outstanding common stock of PEOPLE
CO., LTD. in February 2001, which we renamed Konami Sports Corporation, we have
become the leading operator of health and sports clubs in Japan in terms of
revenues, members and total number of facilities. Consolidated net revenues
generated by our Health & Fitness business, including intersegment revenues,
amounted to 78,525 million in fiscal 2003 and 78,899 million in fiscal 2004, an
increase of 374 million. Since our acquisition of PEOPLE CO., LTD., we have
grown our sports club business through acquisitions of other sports clubs. We
increased our presence in this market even further through the acquisition in
February 2002 of a majority of the shares of the DAIEI OLYMPIC SPORTS CLUB,
INC.., one of the major sports club operators in Japan in terms of revenues,
which was subsequently taken over by Konami Sports Corporation in October 2002.
These acquisitions were part of our strategy to diversify our revenues and
decrease our reliance on the video game industry. Sports club revenues tend to
be more stable than video game software revenues, which can fluctuate widely
depending on the release of hit products. Sports clubs also tend to have a more
diverse consumer base across both gender and age. Finally, we expect that our
sports clubs will provide demand for our fitness machine business.
As of March 31, 2004, we owned and operated a nationwide network of 208 sports
clubs and an additional 32 franchised facilities. These 240 clubs collectively
served approximately 844,000 members as of March 31, 2004. We offer a wide
variety of health and fitness related services, including traditional
membership-based clubs with swimming, gymnastics and tennis school programs,
aerobics programs, combat-type exercise programs and health and advisory
services to people of all ages. In addition to our facility-based operations, we
also provide health and fitness advisory services to corporations and to public
sector entities. Our non-facility-based operations include franchising of sports
clubs and the licensing of specific products and programs, such as diet
programs. We are also engaged in other activities incidental to our core Health
& Fitness business, including travel agency operations, issuing proprietary IC
cards (which record training and other information) and publishing a magazine
for club members.
We principally sell month-to-month membership payment plans that are generally
cancelable by members at the end of any month provided that they give advance
notice by the tenth day of that month. We believe that members generally prefer
this non-commit membership plan over long term commitments. The non-commit
membership plan also provides us with an incentive to deliver high quality
programs and services in order to retain members.
We have experienced significant growth through a combination of (i) acquiring
existing single and multi-club businesses, and (ii) developing and opening new
club locations. We believe that there are further opportunities to expand our
business. While Japan's population is growing very slowly, and is projected to
begin contracting in the future, the percentage of the population that are
members of sports clubs is significantly lower in Japan than it is in the United
States. First, we plan to continue opening new sports club facilities to
increase our revenues. Second, we believe that we can increase our market
penetration by adding services and facilities that will attract new members from
all age groups. We plan to expand our business into value-added services that
can meet the evolving needs of consumers by establishing fitness and sports
equipment shops, cafes, acupressure and other body-work clinics, and by adding
other entertainment-oriented facilities, such as bicycle or running equipment
with video game features, in our clubs that will help to differentiate us from
our competitors. In addition, we have widened our business focus from a
membership-focused strategy to include facilities that allowing non-members
access on a pay-per-use basis in order to expand our customer base.
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Sports Club Business-Club Formats and Location
Our clubs generally have relatively high "retail" visibility, and close
proximity to subway, train and bus stations in urban areas and commuter suburbs
in accordance with our operating strategy of offering our target members the
convenience of multiple locations close to where they live and work, reciprocal
use privileges and standardized facilities and services.
We operate the following three types of sports clubs, each under its own brand
name at various locations in Japan.
Eg-zas clubs. Our Eg-zas clubs target adult consumers and
offer fitness programs based on combinations of aerobics, machine
training, stretch exercises and pool exercises. In a move to
strengthen brand recognition of our Eg-zas clubs, we decided to
integrate and operate our Sele clubs, which are sports clubs with
basic health club facilities including studios and fitness
machines, and Freizeit clubs, which are large-scale health
complexes open to members and non-members that include spa and
health club facilities, massage services, sportswear sales
outlets and dining facilities, under the Eg-zas brand from April
1, 2002. Our Eg-zas clubs also include our tennis clubs. Our
Eg-zas clubs (together with GRANCISE clubs) accounted for 68.0%
of our Health & Fitness segment revenues for the fiscal year
ended March 31, 2004.
Undo-Jyuku. Our Undo-Jyuku operates swimming and gymnastics
schools with a focus on kindergarten and elementary school students.
The swimming schools include programs for children-infants through
elementary school-as well as adults, and include therapeutic
programs such as aqua-walking, swimming for people with back
problems and maternity swimming courses, and seek to accommodate
various levels of ability and stamina and different fitness
objectives. The gymnastics schools provide instruction in various
gymnastics disciplines for children from pre-schoolers through
junior high school students. Our Undo-Jyuku accounted for 18.1% of
our Health & Fitness segment revenues for the fiscal year ended
March 31, 2004.
GRANCISE clubs. Our GRANCISE clubs target corporate executives
and businesspeople who desire premium services and facilities. As
of May 31, 2004, we operated three GRANCISE clubs. The first club
is located in Otemachi, the heart of Tokyo's financial district.
This luxurious facility with stunning views of downtown Tokyo
offers comprehensive services such as personal nutrition and
fitness coaching, exercise machines and aerobics, men's and women's
steam room, jacuzzi, sauna, pool, spacious locker and shower
facilities, massage therapy, complete workout wear and towel
service. In April 2003, we opened our second GRANCISE club in
Aoyama, Tokyo and later we opened GRANCISE clubs in
Umedachayamachi, Osaka.
Sports Club Business-Ancillary Revenue
Since 2002, we have expanded the level of ancillary services provided to our
members. We charge additional fees for service programs such as personal
trainers, fitness counseling, jazzercise, acupuncture and massage, muscle toning
training, diet programs, scuba diving classes and golf training. We also collect
additional revenue from sales of goods at our pro shops, from the use of our
facilities by non-members and from organizing sports and leisure-related tours
for adults and after-school activities for children. Ancillary revenue as a
percentage of total revenues from our Health & Fitness segment was 6.7% during
fiscal 2004 and contributed 5,217 million to our total Health & Fitness segment
revenues.
Sports Club Business-Marketing
Our marketing campaigns are directed by our in-house Facilities Management
Department. This team consigns marketing business to Brand Communication
Department, or BC, within our headquarter and the group of marketing
professionals in BC conveys each of our nationally branded sports clubs as the
premier network of sports clubs in that region. Advertisements are designed to
highlight the consistent quality and high value-to-price ratio
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that we believe we provide through a combination of our membership programs,
club facilities and personnel. Our goal is to achieve broad awareness of our
brand names primarily through television, newspaper, and magazine and our web
site.
During the second half of fiscal 2004, we introduced a system which offers
reduced initiation fees of individual customers to encourage enrollment.
We also engage in public relations and special events to promote our image in
surrounding local communities. We believe that these public relations efforts
enhance our image and the image of our brand names in the communities in which
we operate.
Sports Club Business-Sales
Sales of new memberships are generally handled at the club level. In making a
sales presentation, we emphasize: (i) the proximity of our clubs to concentrated
commercial and residential areas convenient to where target members live and
work; (ii) the advantages of a membership with a club that has an extensive
nationwide network; (iii) the lack of a long-term obligation on the part of the
enrollee; (iv) the price value relationship of a membership; and (v) access to
value-added services.
We generally offer five principal types of memberships: (i) GRANCISE Regular
Membership, which entitles members to use facilities of all GRANCISE and Eg-zas
branches for no charge; (ii) GRANICISE Branch Membership, which enables members
to use facilities of one GRANCISE branch and all Eg-zas branches for no charge;
(iii) Eg-zas Special Membership, which allows members to use facilities of all
Eg-zas branches nationwide; (iv) Eg-zas Regular Membership, which entitles
members to use facilities of one Eg-zas branch for no charge and all other
Eg-zas branches nationwide on a per-use charge; and (v) Eg-zas Branch
Membership, which enables members to use facilities of one Eg-zas Branch during
certain hours on weekdays or any time during the operation hours of Saturdays,
Sundays and holidays. We introduced this new membership system on September 1,
2003, and we allowed existing members to choose whether to continue with the
previous membership system or to switch to the new membership system. We also
offer corporate membership plans with various price ranges in order to respond
to each company's needs. In addition, we provide corporate fitness programs,
which allow companies to use our sports clubs as part of their employee benefit
plans, and offer fitness assessment services and health clinics. Further, we
offer our Konami Sports Club members various fitness tours. These corporate
activities accounted for 7.2% of our Health & Fitness segment revenues for
fiscal 2004.
In joining a club, a new member signs a membership agreement which obligates the
member to pay monthly dues on an ongoing basis. We collect most of all monthly
membership dues through automatic payments based on credit card or bank account
debit authorization contained in the membership agreement. Most membership dues
(often corporate group members) are paid one month in advance. Members can
generally cancel their membership at the end of any month provided that they
give advance notice by the tenth day of that month. We believe that our program
of monthly dues collection provides a predictable and stable cash flow for us,
eliminates the traditional accounts receivable function, and minimizes bad-debt
write-offs while providing a significant competitive advantage in terms of the
sales process, dues collection, working capital management and membership
retention. During the first week of each month, we receive the dues for that
month initiated by third party processors such as JACCS or Pocket Card, two
Japanese credit card companies. Discrepancies and insufficient funds incidents
are researched and resolved by in-house staff.
The Fitness Equipment Industry-Consumer Trends
We believe that the domestic market for fitness equipment has potential for
growth due to a number of demographic and market trends that we expect will
continue, including:
growing consumer awareness of positive benefits of good
nutrition and fitness;
expanding media attention on health and fitness;
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an aging population that is maintaining a more active lifestyle;
continued attention to appearance and weight by consumers; and
expansion of the market for sophisticated high-quality fitness
equipment due to consumers' continued demand for higher levels of
efficiency in their workout regimes.
Our Fitness Equipment Business
Our fitness equipment business is primarily comprised of procurement and sales,
manufacturing and marketing of fitness equipment and related products. We
believe that we can leverage our know-how gained from years of creating
entertainment software and hardware to create exciting new fitness products that
offer users entertainment as well as a healthy workout. In addition, we believe
that such equipment will stimulate additional demand for sports club
memberships, thereby benefiting our sports club business.
We also plan to expand into the home fitness equipment market. In particular, we
plan to grow our operations by developing high quality, branded
entertainment-oriented fitness equipment that better meets the needs of our
customers and retailers.
Fitness Equipment Business-Production, Marketing, Sales and Distribution
We have developed and introduced the "EZ" Series as "Exertainment" equipment
which adds entertainment aspects to traditional fitness machines and combines
exercising and entertainment. For example, the EZRUNNER and EZBIKE products are
treadmills and exercise bicycles with a built-in video monitor on which the user
can move characters in a video game by running or pedaling. These products have
been introduced to some of Konami Sports facilities as the next-generation
machines to meet the demand of the users who wish to become healthy while having
fun. We have also introduced home fitness products that allow users to enjoy
exercising at home, such as MARTIAL BEAT II, a martial art fitness game,
Aerobics Revolution, an aerobics game, and Diet Channel, a virtual broadcasting
which reproduces contents regarding diet within game, for Sony PlayStation.
Our fitness equipment and entertainment health related products are designed,
produced, developed, manufactured, marketed, sold and distributed by Konami
Sports Life Corporation, our wholly owned subsidiary. However, Konami Sports
Life commissions Konami Corporation to do some of the manufacturing on its
behalf. Currently, the largest customer for our fitness equipment is Konami
Sports Corporation, which operates our sports clubs.
Other Operations
In addition to the five business segments described above, we run Konami
Computer Entertainment School, which aims to support our entertainment
development capabilities and to foster and maintain creative talent. Many
graduates of school are employed by us and there are approximately 580 students
enrolled at Konami Computer Entertainment School as of June 1, 2004. Also, in
order to bring talent to each of our business areas, we established Konami
School, Inc. in August 2003 and opened Konami School in April 2004. We are
fostering talents for our various business areas, including game creators and
sports club staffs.
Brand Sourcing
A significant portion of our products include content (brands) such as
characters, images, trademarks and logos, to which we have been granted licenses
from a broad range of licensors. The success of our business depends to a
significant extent on our ability to create or license content with strong
consumer appeal and a high level of recognition or acceptance. To do so, we must
identify and respond rapidly to new and emerging consumer trends.
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Content is one of our most valuable assets. Accordingly, we actively seek to
obtain licenses of prominent brands for our video game software, amusement
arcade games, gaming machines, card games, toys, music CDs and other consumer
merchandise. Our most important source for licensed brands has been sports
organizations. Use of the names of actual players in our games is a relatively
new phenomenon in response to the demand for greater reality in game software
content and as such, securing necessary licenses is critical to success of our
sports titles. Increasingly, we also seek to license brands from film makers,
comics publishers, and animation and TV program producers.
Our significant brand licensing activities include the following:
We have obtained licenses from Japanese sports organizations such
as the Professional Baseball Organization of Japan, the Japan
Professional Soccer League, or J-League and the Japan Football
Association.
We have obtained licenses from film makers, comics publishers and
animation companies, including Disney Interactive, Inc., Vivendi
Universal Games, Inc., 4KIDS Entertainment Inc., Mirage
Licensing, Inc., Nihon Ad Systems Inc., Kodansha and Shogakukan
Production Co., Ltd.
Overseas Activities
The following tables show net revenues, operating expenses and operating income
(loss) by geographic area for the periods indicated:
Eliminations
Year Ended Asia/ and
March 31, 2002 Japan Americas Europe Oceania Total Corporate (2) Consolidated
(Millions of Yen)
Net revenues:
Customers 177,618 26,002 19,320 2,640 225,580 - 225,580
Intersegment (1) 31,446 2,860 6 199 34,511 (34,511 ) -
Total 209,064 28,862 19,326 2,839 260,091 (34,511 ) 225,580
Operating expenses 185,089 30,438 14,944 2,695 233,166 (25,673 ) 207,493
Operating income
(loss) 23,975 (1,576 ) 4,382 144 26,925 (8,838 ) 18,087
Eliminations
Year Ended Asia/ and
March 31, 2003 Japan Americas Europe Oceania Total Corporate (2) Consolidated
(Millions of Yen)
Net revenues:
Customers 182,345 47,729 16,297 7,286 253,657 - 253,657
Intersegment (1) 50,670 805 27 506 52,008 (52,008 ) -
Total 233,015 48,534 16,324 7,792 305,665 (52,008 ) 253,657
Operating expenses 258,551 47,112 14,917 6,236 326,816 (51,289 ) 275,527
Operating income
(loss) (25,536 ) 1,422 1,407 1,556 (21,151 ) (719 ) (21,870 )
Assets 277,637 18,787 13,715 4,281 314,420 (36,170 ) 278,250
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Eliminations
Year Ended Asia/ and
March 31, 2004 Japan Americas Europe Oceania Total Corporate (2) Consolidated
(Millions of Yen)
Net revenues:
Customers 176,401 53,670 35,551 7,790 273,412 - 273,412
Intersegment (1) 68,757 1,516 305 260 70,838 (70,838 ) -
Total 245,158 55,186 35,856 8,050 344,250 (70,838 ) 273,412
Operating expenses 213,419 51,806 30,915 6,904 303,044 (70,345 ) 232,699
Operating income (loss) 31,739 3,380 4,941 1,146 41,206 (493 ) 40,713
Assets 294,486 19,647 13,442 4,652 332,227 (37,730 ) 294,497
(1) Intersegment means transactions between geographic areas.
(2) Eliminations and Corporate means elimination of intersegment
transactions and operating expenses not allocated to a
specific geographic region.
One of our principal strategies is to significantly increase our overseas
revenues in absolute terms and as a percentage of our overall revenues.
Our present overseas activities consist principally of sales of video game
software, Toy & Hobby products, amusement arcade games and gaming machines.
During fiscal 2002, our net revenues increased by 17,503 million in the Americas
and by 11,148 million in Europe due primarily to the success of video game
software titles such as METAL GEAR SOLID 2 SONS OF LIBERTY and Silent Hill 2.
During fiscal 2003, our net revenues increased by 21,727 million in the United
States due primarily to the success of the Yu-Gi-Oh! game software and the
Yu-Gi-Oh! Trading Card Game. During fiscal 2004, our net revenues increased by
6,652 million in the United States due primarily to the continuous popularity of
the Yu-Gi-Oh! game software and the Yu-Gi-Oh! Trading Card Game, and by 19,532
million in Europe due primarily to an increase in sales of the Yu-Gi-Oh! game
software, the Yu-Gi-Oh! card games and soccer titles. We also engage in limited
overseas manufacturing activities.
We initiated overseas operations by exporting amusement arcade games in 1979,
and in 1982 we established a sales subsidiary in the United States. In
subsequent years, we established additional sales subsidiaries in Germany, the
United Kingdom, Korea, Singapore and Hong Kong, and a software game development
subsidiary in Shanghai. In February 1997 we established Konami Gaming, Inc. to
manufacture and distribute gaming machines in Nevada. Having received all
licenses required by the state and county officials in Nevada, we began
distributing gaming machines in Nevada beginning in fiscal 2001. Since then, we
have received similar licenses and/or permission to operate in the states of
Arizona, California, Illinois, Indiana, Iowa, Kansas, Louisiana, Michigan,
Minnesota, Mississippi, Oregon, West Virginia, Wisconsin, North Dakota and
Idaho, and Puerto Rico and the Canadian provinces of British Columbia, Ontario,
Quebec and Saskatchewan. In addition, we have been licensed by 39 Native
American tribes in California, 13 tribes in Arizona, 11 tribes in New Mexico,
nine tribes each in Minnesota and Michigan, five tribes in Wisconsin, four
tribes each in Oregon and Kansas, three tribes in North Dakota, two tribes each
in Iowa, New York and Louisiana and one tribe each in Idaho and Mississippi. We
intend to file applications in a number of other gaming jurisdictions in North
America. Konami Australia Pty Ltd., which became our consolidated subsidiary in
October 2001, have obtained licenses to manufacture and sell gaming machines in
all states in Australia, and exports gaming machines to overseas.
During the fiscal year ended March 31, 2001, the gaming machines we sold in the
United States and two video slot machine components we exported to Australia
were produced in Japan. Later, our production facility in Las Vegas, Nevada,
which houses the headquarters and principal manufacturing facility of our U.S.
gaming machine business, began operations in September 2001.
In October 2003, Konami of America, Inc., our sales subsidiary in the United
States, added a new function of overseas business administration to its existing
sales business and changed its name to Konami Digital
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Entertainment, Inc. It established a new administrative office in Los Angeles in
order to conduct various activities responding to local market needs for
expanding shares of our Computer & Video Games business overseas.
Recently we launched sales of our video game software in China with the release
of WORLD SOCCER WINNING ELEVEN 7 INTERNATIONAL for PlayStation 2. We are
committed to build our market share in China by localizing our popular products
for the Chinese market.
In line with our strategy to expand our international business, we are
investigating acquisition and investment opportunities outside Japan for
businesses that will grow or complement our current businesses. However, we may
not be able to make any such acquisition or investment on terms acceptable to
us.
Research and Development
An important requirement for success in the highly competitive markets in which
we operate is the ability to create quality products that attract public
attention. We are also working to expand into new markets such as fitness
equipment. The following three tables show our primary research and development
activities, during each of the last three fiscal years.
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