SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: August 17, 2004
KONAMI CORPORATION
By: /s/ Noriaki Yamaguchi
Name: Noriaki Yamaguchi
Title: Executive Vice President and CFO
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Profile
KONAMI was founded in Osaka in 1969 by Kagemasa Kozuki, who is currently
Chairman and CEO, and began manufacturing and selling amusement games for
arcades in 1973.
In the following years, we have added innovative businesses to our business
portfolio. We currently have five main business segments. In September 2002, we
listed our shares on the New York Stock Exchange and in October 2003 were
designated one of the 225 components of the Nikkei Stock Average. These business
segments each play a part in forming an innovative corporate group that
maintains industry-leading competitiveness and creates synergies.
In March 2004, the Exercise Entertainment Business Segment was renamed the
Health & Fitness Business Segment to clarify our policy of developing businesses
in the health field. The KONAMI Group will continue to grow its businesses in
the two broad domains of Entertainment and Health to achieve further growth.
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Contents
Consolidated Financial Highlights (U.S. GAAP) 1
Letter to Shareholders 2
Feature 8
Review of Operations 12
Computer & Video Games Business Segment 12
Toy & Hobby Business Segment 14
Amusement Business Segment 16
Gaming Business Segment 18
Health & Fitness Business Segment 20
Corporate Governance and Compliance 22
KONAMI Group's Social Contribution 24
Financial Section 26
Six-Year Summary 91
Fact Sheet (Consolidated) 92
KONAMI's History 94
Major Subsidiaries and Affiliates 96
Board of Directors, Corporate Auditors and Corporate Officers 97
Investor Information 98
Corporate Data 99
CAUTIONARY STATEMENTS WITH RESPECT TO FORWARD-LOOKING STATEMENTS
Statements made in this report with respect to our current plans, estimates,
strategies and beliefs, including any forecasts, are forward-looking statements
about our future performance. These statements are based on management's
assumptions and beliefs in light of information that is currently available to
it, and therefore, you should not place undue reliance on such statements. A
number of important factors could cause actual results to be materially
different from, and possibly worse than, those discussed in forward-looking
statements. Such factors include, but are not limited to: (i) changes in
economic conditions affecting our operations; (ii) fluctuations in currency
exchange rates, particularly with respect to the value of the Japanese yen, the
U.S. dollar and the euro; (iii) our ability to continue to win acceptance of our
products, which are offered in highly competitive markets characterized by the
continuous introduction of new products, rapid developments in technology and
subjective and changing consumer preferences; (iv) our ability to expand
internationally, mainly in our video game software business, card game business
and gaming machine business; (v) our ability to successfully expand the scope of
our business and broaden our customer base through our health and fitness
business; (vi) regulatory developments and changes, and our ability to respond
and adapt to those changes; (vii) our expectations with regard to further
acquisitions and the integration of any companies we may acquire; and (viii) the
outcome of contingencies.
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Consolidated Financial Highlights (U.S. GAAP)
KONAMI CORPORATION and Consolidated Subsidiaries
Years ended March 31, 2002, 2003, and 2004
Thousands of
U.S. dollars
Millions of Yen (except per
(except per share data) share data)
2002 2003 2004 2004 (Note 3)
Income Statement Data:
Net revenues 225,580 253,657 273,412 $ 2,586,924
Cost of revenues 154,651 174,879 179,182 1,695,355
Impairment on goodwill and other intangible assets - 47,599 - -
Selling, general and administrative expenses 52,842 53,049 53,517 506,358
Operating income (loss) 18,087 (21,870 ) 40,713 385,211
Other income (expenses)-net 4,591 (226 ) (606 ) (5,733 )
Income (loss) before income taxes (Note 1) 22,678 (22,096 ) 40,107 379,478
Income taxes 11,667 6,186 18,035 170,641
Minority interest in income (loss) of consolidated
subsidiaries 364 (1,051 ) 2,220 21,004
Equity in net income (loss) of affiliated
companies 755 (1,288 ) 252 2,384
Net income (loss) 11,402 (28,519 ) 20,104 $ 190,217
Basic and diluted net income (loss) per share 89.32 (234.58 ) 166.86 $ 1.58
Cash dividends per share (Note 2) 54.00 54.00 54.00 $ 0.51
Balance Sheet Data:
Total current assets 142,055 136,705 152,766 $ 1,445,416
Total assets 328,091 278,250 294,497 2,786,423
Total current liabilities 79,548 71,774 72,799 688,798
Total long-term liabilities 77,637 87,215 92,160 871,984
Total shareholders' equity 134,990 90,406 102,129 966,308
Note: (1) Under U.S. GAAP, income before income taxes does not include equity
in net income (loss) of affiliated companies.
(2) Cash dividends per share consist of interim dividends paid during
the fiscal year and year-end dividends paid after the fiscal year-end.
(3) The translations of Japanese yen amounts into U.S. dollar amounts
are included solely for the convenience of readers outside Japan, and have
been made at the rate of 105.69 to U.S.$1, the approximate exchange rate on
March 31, 2004.
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Letter to Shareholders
Fiscal 2004, ended March 31, 2004, saw us deliver highly satisfactory results.
We posted record net revenues and operating income, while achieving
profitability in all five of our business segments. I'm pleased to report on
behalf of the KONAMI Group that each of our business segments is making steady
progress toward expanding opportunities to reach the next phase of growth.
The KONAMI Group's businesses are shifting over to structures capable of
generating steady earnings through global and asset-based business (a business
based on expertise and global content).
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Fiscal 2004 in Review
One significant accomplishment in fiscal 2004 was that each of our 5 business
segments delivered growth in net revenues and earnings. Operating income in
three business segments, specifically the Computer & Video Games, Toy & Hobby,
and Amusement business segments, all topped 10.0 billion. The Gaming and Health
& Fitness business segments both achieved profitability after posting operating
losses in the previous fiscal year. This healthy performance across all our
businesses demonstrates that we are making steady progress towards the group's
goal of establishing a well-balanced business portfolio.
In fiscal 2003, we transitioned from accounting principles and practices
generally accepted in Japan (Japanese GAAP) to accounting principles generally
accepted in the U.S. (U.S. GAAP), upon listing on the NYSE. In line with U.S.
GAAP, we booked an impairment loss on goodwill and other identifiable intangible
assets related to the Health & Fitness Business Segment. In light of the concern
caused to shareholders by this action, I believe that achieving record operating
income in the fiscal year under review was a highly significant accomplishment.
In fiscal 2004, the KONAMI Group posted net revenues of 273,412 million and
operating income of 40,713 million, both record highs for the group. Net income
reached 20,104 million. As a result, KONAMI was able to pay dividends of 54 per
share for fiscal 2004.
Segment Business Strategies Playing to Unique Strengths
In recent years, the KONAMI Group's ratio of overseas revenues has been steadily
rising. The main reason for this increase is that the Americas and Europe have
much larger markets than Japan in the Computer & Video Games and Toy & Hobby
domains. Naturally, we are looking to overseas markets as a source of further
top-line growth. Underpinned by the full-fledged start of the gaming business in
North America and other factors, our ratio of overseas revenues should continue
to increase.
Expanding steady earnings streams is a hurdle that the KONAMI Group must
surmount to achieve consistent growth. The Amusement Business Segment, which has
shifted to Internet-driven businesses, and the Health & Fitness Business
Segment, which has made a clear commitment to health-related markets, are both
excellent illustrations of businesses with steady earnings streams.
In this manner, the KONAMI Group has gotten off to a new start toward
establishing global and asset-based businesses and achieving a stable earnings
structure by having our four entertainment businesses and one health-related
business autonomously develop their operations, leveraging the strengths of each
business unit.
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Computer & Video Games Business Segment: Aiming to Acquire World-class Content
Demand for home-use video games in the Americas and Europe, the largest markets
for these products, is steadily rising. While we have a vast store of content
that is already highly rated around the world, such as the METAL GEAR SOLID
series, the WORLD SOCCER WINNING ELEVEN series, and the Yu-Gi-Oh! series, we
need to acquire even more outstanding content to enhance our presence in
American and European markets. To address this issue, wholly owned subsidiary
Konami Digital Entertainment, Inc. was established in October 2003, in Los
Angeles, U.S.A. This move was guided by the thinking that to rise above
competition from prominent home-use video game companies overseas, we need to
capture trends in overseas markets first hand, and respond with speed. Looking
ahead, we will view North America as a key base, especially for acquiring
content, using this region as a springboard for expanding operations worldwide.
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Toy & Hobby Business Segment: Extending Popular Content in Japan to Overseas
Markets
The popularity of the Yu-Gi-Oh! official card game series rapidly spread to all
corners of Japanese society after its introduction in February 1999. The Toy &
Hobby Business Segment subsequently launched this card game in North America in
March 2002 and Europe in December 2002, where it also met with phenomenal
success. The North American and European toy markets are each roughly three
times larger than the Japanese market. Taking hit products in Japan into
overseas markets thus promises significant rewards. In the future, we would like
to create many more global strategic products following the Yu-Gi-Oh! series.
Amusement Business Segment: Adapting to the Internet Age
Some view our business sector as one where corporate growth is difficult to
predict because it can be easily swayed by a single hit product. Certainly,
establishing businesses that generate consistent earnings irrespective of hit
products is a key management issue for the KONAMI Group as it aims for higher
corporate growth. Concrete actions are already under way. Our amusement business
has initiated the "e-AMUSEMENT" service, which links amusement arcades
nationwide and KONAMI into a single network to enable online multi-player games,
content distribution over the Internet and much more. The system is designed to
distribute over networks the latest games offering an entirely new, exciting
experience for players, while providing a consistent source of revenues.
Gaming Business Segment: Start of Aggressive Growth in the World's Largest
Market
Although casinos are still not legal in Japan, the KONAMI Group views the Gaming
Business Segment as a key pillar of growth in overseas markets. As you may know,
the gaming business is one of only a few growth industries that have achieved
consistent, long-term growth worldwide. In North America, the world's largest
market, states and provinces are promoting further expansion in the casino
market, from the standpoint of securing steady tax revenues and other
considerations. Although the KONAMI Group's gaming business has so far been in
an investment phase, fiscal 2004 saw us achieve our long-standing goal of
posting operating income in this business for the first time. In North America,
plans include relocating and ramping up output at a production facility for
gaming machines by the end of fiscal 2005. We currently hold licenses to
manufacture and sell gaming machines in most major states and regions in North
America, and also have built up an outstanding product lineup that can compete
with prominent gaming machine manufacturers. We are now standing on the
threshold of an aggressive phase of growth.
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Health & Fitness Business Segment: Our Foray Into Health-related Businesses
Attracts Much Attention
At the end of fiscal 2004, the Exercise Entertainment Business Segment was
renamed the Health & Fitness Business Segment. In parallel, we have adopted an
aggressive stance toward developing businesses in the health-related sector,
estimated to be a 3 trillion market. Since joining the KONAMI Group in February
2001, Konami Sports Corporation has seen business start to return to a growth
trajectory, benefiting in part from immediate measures to unify brands,
structurally reform management and achieve other goals. In Japan, some 20 years
have passed since the full-scale advent of sports clubs. However, user needs
regarding sports clubs are gradually changing. As the aging of Japan's society
progresses, many people truly wish to lead healthier and more relaxing lives. In
this climate, the Health & Fitness Business Segment is shifting emphasis from
quantity to quality. Guided by this thinking, this segment is developing
nutritional supplements, home-use fitness equipment and offering esthetic
services. The goal is to develop products and services tailored to the needs and
lifestyles of each and every individual user that lead to healthier lives,
leveraging an IT-driven database of personal data. Under the banner of "healthy
and enjoyable lifestyles," the Health & Fitness Business Segment will continue
to run businesses aimed at generating steady revenues in fiscal 2005.
The KONAMI Group Must Retrace its Steps Before Moving to the Next Phase of
Growth
In the past 10 years, the KONAMI Group has accomplished impressive growth,
culminating in record net revenues and operating income in fiscal 2004. To
achieve this level of growth, there were many difficult challenges we had to
meet, alongside the tough task of changing our mindset and culture. Every time
we were faced with a challenging situation, the whole group has come together to
overcome it. However, in addition to considering how to move forward, we must
now take a moment to reassess our current situation. Since listing on the NYSE
in September 2002, we have been subject to the Sarbanes-Oxley Act. This
legislation sets forth strict rules regarding the reliability of financial
statements and procedures for internal control. Naturally, stricter rules on
corporate governance and compliance have been introduced at KONAMI. With no end
to corporate scandals in sight, however, creating corporate governance and
compliance systems solely for form's sake is meaningless. What is important is
to ensure that the various management structures currently in place are
functioning properly. It is essential that each and every one of the KONAMI
Group's workforce of some 4,400 employees not only pursue higher growth but at
times stand back and make sure that all risks have been identified and that
strategies are correct. I'm confident that this process will help us build a
powerful yet flexible organization that can deal with potential risks and
related factors, alongside immediately pressing issues.
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Shareholder-driven Management and Social Contribution
The KONAMI Group's basic management policy is to place emphasis on shareholders,
while maintaining good relationships with all stakeholder groups and
contributing to society as a good corporate citizen. Traditionally, our investor
relations program has focused on institutional investors in Japan and overseas.
However, we have started to take a range of actions targeting individual
investors in the past two years. Presentations for individual investors are
held, and disclosure on our website and by email has been upgraded. We are
currently reviewing our investor relations program from the perspective of
improving fair disclosure. We are also committed to returning profits to
shareholders through dividend payments. Our basic policy is to pay the
equivalent of at least 30% of net income in the form of dividends. The dividend
of 54 per share for fiscal 2004 exceeds this level. Maintaining our stance of
placing emphasis on shareholders is a key issue for the KONAMI Group, and will
guide our actions in the future.
Corporate social responsibility (CSR) is another key priority for us. From an
investor relations perspective, a key requirement for shareholders to hold
KONAMI shares over the long-term is for us to remain a company that contributes
to society. CSR programs will give the KONAMI Group a huge advantage in carrying
out each of its businesses. Our activities currently cover environmental
preservation activities, as well as academic and cultural programs. We look to
expand the range of CSR activities further. 2004 is the year of the Athens
Olympics. Leveraging our business, we have given all Japanese athletes
participating in the Olympics free access to all of the KONAMI Group's sports
facilities to support their training programs. Our basic stance is to actually
apply our businesses to the betterment of society, rather than merely offering
sponsorships or financial assistance. I believe that more companies will be
required to adopt this stance in the future. I have personally established
foundations to support educational and sports activities, to contribute to
society. Looking ahead, CSR programs will be advanced by the entire KONAMI
Group. At the same time, we will clearly explain these programs to investors and
all other stakeholder groups.
It is my hope that these actions will ensure that the KONAMI Group remains
worthy of the support of investors and all other stakeholders.
July 2004
Kagemasa Kozuki
CEO, KONAMI Group
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Feature
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9
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STRENGTH IN A DIVERSE ASSET BASE
Approved by NPB Usage of official NPB
BIS Professional Baseball Records.
Approved by 11 Franchised Baseball
Stadiums and Sapporo Dome. Approved by
ABF.
1996 JFA 2001 KFA adidas, the adidas
logo, FEVERNOVA, the trigon logo, the
3-Stripes mark and the Tricolore logo
are registered trade marks which are
owned by the adidas-Salomon Group,
used with permission. the use of real
player names and likenesses is
authorised by FIFPro and its member
associations. Milan's trademarks, name
and logo appear under license from
Milan A.C.S.p.A. Official product
manufactured and distributed by KONAMI
under licence granted by Roma
International Football Service S.r.l.
Produced under the license from Lazio
Societa Sportiva S.p.A. Parma and
Parma Logo are trademarks of Parma
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[Computer & Video Games Business Segment]
Global Content From the U.S.
In this segment, Konami Digital Entertainment, Inc. was established in Los
Angeles (U.S.) in October 2003, to provide global content from the U.S. to the
rest of the world.
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Global Expansion of Hit-Producing
Content
The Yu-Gi-Oh! card game series, which
caused a sensation in Japan, also met
with phenomenal success in North America
and Europe. By taking hit-producing
content to overseas markets, KONAMI is
able to efficiently drive revenue
growth.
KAZUKI TAKAHASHI STUDIO DICE/SHUEISHA,
planning & production KONAMI
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[Amusement Business Segment]
A Recurring Revenue Business Through
the
"e-AMUSEMENT" Service
By linking KONAMI amusement machines
nationwide over the Internet and
receiving income from usage fees, the
"e-AMUSEMENT" service has enabled us
to shift from a one-time sales-driven
business to a recurring revenue
business.
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[Gaming Business Segment]
Full-fledged Inroads Into the North
American Market
In North America, the world's largest
casino gaming market, KONAMI had
obtained licenses to sell and
manufacture gaming machines in 22 states
and provinces as of March 31, 2004.
Looking ahead, we will work to further
promote the KONAMI brand in global
casino gaming markets, with the view to
entering markets where restrictions on
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[Health & Fitness Business Segment]
Diversifying Into a Broad Range of Health-Related Businesses
In the Health & Fitness Business Segment, we aim to satisfy various needs of our
sports club members. Key priorities are to reinforce our network of sports
facilities, and diversify into various health-related businesses, from the
arrangement of disease prevention programs using health statistics to the
development of nutritional supplements.
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Review of Operations
[[Image Removed: LOGO]] Computer & Video Games Business Segment [[Image Removed: LOGO]]
Kazumi Kitaue The Computer & Video Games Business Segment
Computer & Video Games develops, manufactures and sells video game
Business software for home-use, including PCs.
We have a solid position in Japan and overseas
markets, underpinned by an outstanding product
lineup. This includes sports titles such as the
WORLD SOCCER WINNING ELEVEN series, the PAWAFURU
PURO YAKYU series; original content, including
the METAL GEAR SOLID series; and animation
content such as the Yu-Gi-Oh! series.
In fiscal 2004, consolidated net sales in this
segment increased 5.8% to 92,520 million,
operating income was up 15.0% at 16,084 million,
and the operating margin improved from 16.0% to
17.4%.
Market Environment
In Japan, the market for hardware platforms was characterized by softening
demand, as several years have passed since the launch of the PlayStation 2
(PS2), Nintendo GameCube (GC), and Game Boy Advance (GBA) platforms. On the
other hand, the maturing market for home-use video games is seeing slower unit
sales of entirely new titles, alongside steady sales of sequels to popular game
series and games based on strong content.
In contrast, the market for hardware platforms saw continued growth overseas,
especially in Europe and the U.S., benefiting in part from hardware price
discounts. In Japan and overseas, PS2 held on to the top share in the console
platform category. GBA has steadily posted higher unit sales, establishing a
dominant position in the handheld game category. There is growing interest in
online games alongside existing platforms.
A large number of titles were introduced in every region during the fiscal year,
causing customers to become even more selective. The result was an even greater
gap between popular games and other titles.
In this environment, companies with a large volume of highly appealing content
that have the qualities customers want most have an enormous advantage.
Performance
In fiscal 2004, total shipments, including our distribution business, reached an
all-time high of 24.7 million copies, compared with 23.7 million copies in the
previous fiscal year. Shipments of KONAMI titles increased from 21 million
copies to 21.6 million copies, while shipments in our distribution business of
other companies' games increased from 2.7 million to 3.1 million copies. We held
on to a large share of the domestic market, while achieving growth in overseas
shipments due to a strong showing by popular titles such as the Yu-Gi-Oh! series
and soccer titles. These factors made a significant contribution to results in
fiscal 2004.
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In the soccer category, WORLD SOCCER WINNING ELEVEN 7 (Pro Evolution Soccer 3 in
Europe) for the PS2, the latest edition of the WINNING ELEVEN series, went on
sale in August 2003 (October 2003 in Europe). This game became a hit title
alongside its predecessor with sales topping 1 million copies in both Japan and
Europe. Another success was recorded by WORLD SOCCER WINNING ELEVEN 7
INTERNATIONAL, which sold very well after its launch in February 2004. In fiscal
2004, we sold 4.6 million copies of soccer games in total, including the WINNING
ELEVEN series.
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The popularity of the Yu-Gi-Oh! card game series also drove sales growth in
Yu-Gi-Oh! titles in the U.S. and Europe. In the U.S., the growing popularity of
the Yu-Gi-Oh! card game since the outset of the fiscal year supported strong
sales of new titles, including Yu-Gi-Oh! Worldwide Edition: Stairway to the
Destined Duel for GBA in April 2003 and Yu-Gi-Oh! The Sacred Cards for GBA in
November 2003. We also continued to increase sales of titles rolled out in the
previous fiscal year. In Europe, where the Yu-Gi-Oh! trading card game went on
sale in December 2002, Yu-Gi-Oh! Worldwide Edition: Stairway to the Destined
Duel for GBA and Yu-Gi-Oh! THE DUELISTS OF THE ROSES for PS2, which were
launched in April and September 2003, respectively, recorded strong sales.
Worldwide sales of the Yu-Gi-Oh! series, a major hit product, totaled 5.01
million copies, including Japan, North America and Europe. Sales were 2.45
million copies in North America and 2.24 million copies in Europe.
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In other product categories, the PAWAFURU PURO YAKYU series saw the debut
of JIKKYO PAWAFURU PURO YAKYU 10 for PS2 and GC in July 2003. In the following
December, JIKKYO PAWAFURU PURO YAKYU 10 CHOKETTEIBAN 2003 MEMORIAL for PS2 and
GC was released. Fiscal 2004 shipments of baseball titles, including the
PAWAFURU PURO YAKYU series, reached 1.44 million copies. SILENT HILL 3 for PS2,
the latest in the SILENT HILL series, was unveiled in July 2003 in Japan (August
2003 in North America and May 2003 in Europe). Worldwide shipments of the SILENT
HILL series reached 990,000 copies centered on shipments of SILENT HILL 3.
Following the start of overseas shipments of TEENAGE MUTANT NINJA TURTLES (TMNT)
for PS2, GC, GBA, Xbox and PCs, sales of the TMNT series reached 1.48 million
copies.
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We also took actions to further strengthen our overseas operations. In October
2003, Konami Digital Entertainment, Inc. was established in Los Angeles (U.S.)
to serve as a new base for this business. Setting global markets in its sights,
the new company produces quality original content, actively acquires licensed
content and conducts marketing activities.
As a result, consolidated segment sales increased 5.8% to 92,520 million, and
operating income rose 15.0% to 16,084 million. The operating margin improved
from 16.0% to 17.4%.
Outlook
Fiscal 2004 saw growing overseas markets become the center of attention, even
more so than the domestic market. This trend is expected to become still more
apparent in fiscal 2005 and thereafter. The understanding of customer needs
worldwide and global marketing will become critical to our success in the
future.
We have a lineup of highly popular content overseas, including the METAL GEAR
SOLID, SILENT HILL and Pro Evolution Soccer series. The METAL GEAR SOLID series,
in particular, has achieved cumulative worldwide shipments of 14.5 million
copies. The latest title in this series, METAL GEAR SOLID 3: SNAKE EATER, will
debut in fiscal 2005. Konami Digital Entertainment, our new operating base, will
play a key role in helping us capture a greater share of overseas markets.
Aiming to maintain our high market share in Japan, we will continue to reinforce
products in strong-selling genres while creating new titles in other ones. The
emergence of new game platforms starting in fiscal 2005 presents an opportunity
for energizing the market while establishing new brand titles. Preparations are
already under way to proactively roll out entirely new and original titles.
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[[Image Removed: LOGO]] Toy & Hobby Business Segment
Akihiko Nagata The Toy & Hobby Business Segment develops,
Toy & Hobby Business manufactures and sells a variety of toys and
hobby products that leverage outstanding content
and take advantage of synergies with other
businesses. Main products include card games,
character goods, educational toys for toddlers,
bath and toiletries products, music CDs and game
strategy guides.
In addition to efforts to further expand into
product categories that have proven popular
across a wide range of customer age brackets,
this segment is leveraging the creative talents
of the KONAMI Group to challenge new categories,
delivering products that fit the needs of the
times.
Consolidated sales of the Toy & Hobby Business
Segment were 57,468 million, 25.1% higher than in
the previous fiscal year. Operating income
increased 17.7% year on year to 19,579 million.
The operating margin was 34.1%, compared with
36.2% in the previous fiscal year.
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Market Environment
In Japan, the toy market is holding firm without any sharp declines in demand,
despite a declining birth rate, children growing out of toys at younger ages due
to earlier maturity, falling disposable incomes due to the sluggish economy, and
increases in spending for other entertainment purposes. The main reasons are
that expenditure per child is increasing and toys targeting adults are
stimulating demand, in step with the aging of society. While the toy market
targeting children faces growing difficulties, non-traditional toys, such as
products for adults, are gaining momentum. In this way, the toy industry is
expanding through growth in peripheral domains, despite the declining birthrate.
Overseas markets saw strong sales in the Christmas shopping season, when the
majority of sales are generated, securing stable market scale. Japan's major toy
manufacturers are taking actions to reinforce overseas sales, fanning heated
competition between various players on the global stage.
Performance
In fiscal 2004, we rolled out a broad lineup of toy products ranging from the
mainstay Yu-Gi-Oh! card game, to character figurines for boys, electronic toys,
educational toys for toddlers, and bath and toiletries products. Sales of the
Yu-Gi-Oh! card game series, the mainstay product in this business, declined in
Japan. However, strong sales of this product in overseas markets made a
significant contribution to results. The Yu-Gi-Oh! official card game series has
broad acceptance in the domestic market. In fiscal 2004, sales of the Yu-Gi-Oh!
official card game series in Japan and Asia were 9.5 billion, compared with 13.5
billion in the previous fiscal year.
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In overseas markets, sales remained strong in the North American market,
particularly in the first quarter, due to rapid market growth on the back of an
increase in the number of players. Sales of the Yu-Gi-Oh! trading card game
series in North America were 26 billion, compared with 24 billion in the
previous fiscal year.
In fiscal 2004, we actively launched the Yu-Gi-Oh! trading card game in European
markets, alongside North America. This card game was translated into the
languages of each country, and steadily increased sales in Europe. Sales of the
Yu-Gi-Oh! trading card game series in Europe increased to 14.0 billion from 0.5
billion in the previous fiscal year.
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As a result of the above, worldwide sales of the Yu-Gi-Oh! card game totaled
49.5 billion, compared with 38.0 billion in the previous fiscal year.
We are also making headway with products in new content genres. In the toy
business, the acquisition of toy merchandising rights to The Gransazers, a new
SFX superhero TV series, heralded our full-scale entry into the boys' character
toy market. Sales of action figures and accessories based on this series have
already begun at retailers across Japan. We will continue to deliver a product
lineup that offers the best in quality and entertainment, with the view to
making the boys' character toy market a new pillar of earnings.
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In addition to these products, we are introducing products in a diverse array of
content genres, such as electronic toys, candy toys, game strategy books and
other books, and music CDs. This high quality product lineup is now underpinning
the entire Toy & Hobby Business Segment.
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As a result, in fiscal 2004, consolidated sales of the Toy & Hobby Business
Segment increased 25.1% to 57,468 million. Operating income rose 17.7% to 19,579
million. The operating margin was 34.1%, compared with 36.2% in the previous
year.
Outlook
We will continue to promote measures to nurture the Yu-Gi-Oh! card game into a
long-running bestseller over the long term. These measures will see us enhance
Yu-Gi-Oh! training seminars to attract new players and hold special events and
tournaments that involve our existing fan base. We plan to hold another
"Yu-Gi-Oh! World Championship" in 2004, building on the success of the previous
championship held in August 2003. The expertise related to game systems and
product logistics gained from the Yu-Gi-Oh! card game, will prove an invaluable
asset to our business by helping us to establish KONAMI as a leading card game
manufacturer, and making this domain a stable pillar of our business.
As for new initiatives, focusing on the potential of the evolving world of
Japanese animation, we have begun a full-scale drive to plan and develop an
original TV animation series called "Get Ride! AMDRIVER." TV broadcasts of this
series started in April 2004 at 25 stations nationwide centered on the TV Tokyo
network. This is a huge "media-mix" project that will promote this content
across a variety of media. We will leverage synergies among the Toy & Hobby
Business and other KONAMI businesses to enliven this content in its many forms.
In parallel with measures to expand our lineup of toys linked to various media,
such as animation and superhero TV series, we will further enhance educational
toys for toddlers and bath and toiletries products to buttress our product
lineup. Our goal is to achieve steady growth fueled by multiple sources of
earnings that combine long-standing bestsellers and new popular products.
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Amusement Business Segment
This business segment develops, manufactures and
sells games for amusement arcades in Japan and
overseas and LCD units for pachinko machines in
Japan.
[[Image Removed: LOGO]] The starting point for us, the Amusement Business
Fumiaki Tanaka Segment has successively produced innovative
Amusement Business games that leverage our distinctive,
industry-leading expertise. Recent hit products
include music simulation games such as the
beatmania series and the Dance Dance Revolution
series, which created headlines. We also rolled
out the "e-AMUSEMENT" service, which established
a wholly new market in fiscal 2003. This new
service links amusement arcades throughout Japan
and KONAMI over a single network.
Consolidated sales of this segment increased 3.3%
to 35,427 million. Operating income rose 62.3% to
11,797 million. The operating income ratio was
33.3%, compared with 21.2% in the previous fiscal
year. [[Image Removed: LOGO]]
Market Environment
The amusement arcade market is showing signs of bottoming out in fiscal 2004,
after domestic equipment sales and operations sales had declined for five
straight years from fiscal 1999 to fiscal 2003. This is mainly attributable to
progress in the closure of unprofitable arcades and the opening of large-scale
facilities, and active measures to attract families and women to arcades.
By product genre, there was significant growth in sales of video games linked to
networks and card systems with frames designed for multiple players. Other
strong selling products included token-operated machines and crane-based prize
machines that gained popularity among women and families in step with the
increase in large multipurpose facilities.
On the other hand, sales of traditional video games fell sharply due to the lack
of a hit product.
The pachinko machine market remained flat due to steady growth in demand for
pachinko slot machines in recent years.
Performance
In the video games category, the "e-AMUSEMENT" service found greater market
acceptance and established itself as the pioneer in network-linked games.
Launched in fiscal 2003, this new service links amusement arcades and KONAMI
over a single network. This online gaming framework allows players to connect
with any other player, anywhere, anytime for as long as they like. It has won
accolades from operators and users throughout Japan. MAH-JONG FIGHT CLUB 2, a
game that lets people play mah-jong online, made a strong contribution to sales
in fiscal 2004. This game is the sequel to our first "e-AMUSEMENT" product,
MAH-JONG FIGHT CLUB, which was a huge hit in fiscal 2003. QUIZ MAGIC ACADEMY, a
head-to-head online quiz game, also performed well. Since the launch of products
based on the "e-AMUSEMENT" service in June 2002, cumulative shipments had
reached 26,500 units as of March 31, 2004. Our best-selling music simulation
games, including the pop'n music, GUITARFREAKS, and drummania series, also
remained popular.
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In token-operated machines, large-scale token-operated game machines, a key
strength, retained strong popularity in step with the increase in large-scale
amusement facilities. Our broad lineup of token-operated game machines combines
a wealth of content with stage effects and entertainment value unmatched by
traditional token-operated games. This makes KONAMI machines indispensable to
the token-operated game section of any amusement arcade. During fiscal 2004,
Fantasic Fever, a new-style of "penny-falls" game machine, which enhances the
ambience of amusement facilities with medals flowing overhead and special
electrical effects like parades, received favorable reviews. MONSTER GATE ONLINE
and GI-TURFWILD, both token-operated machines linked to the "e-AMUSEMENT"
service, also made strong contributions to sales.
Sales of LCD units for pachinko machines fell below the previous year's level.
As a result, consolidated sales in this segment increased 3.3% to 35,427
million. Operating income rose 62.3% to 11,797 million. The operating margin was
33.3%, compared with 21.2% in the previous fiscal year.
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Outlook
The "e-AMUSEMENT" online game service we created for amusement arcades has
revitalized the entire amusement arcade market. As a result, the industry as a
whole is starting to see a turnaround in domestic equipment sales and operations
sales. The "e-AMUSEMENT" service demonstrates that the amusement arcade market
promises further growth, driven by the creation of entirely new types of games
that can only be enjoyed at amusement arcades.
The "e-AMUSEMENT" service is benefiting from advancements in Japan's digital
communications network. We are actively working to promote greater adoption of
this system nationwide, and further reinforce the lineup of "e-AMUSEMENT"
products.
In token-operated games, lineups of large-scale token-operated game machines and
single-token machines will be upgraded to meet growing demand for token-operated
game sections at large-scale amusement arcades.
In the LCD unit business, our focus is on developing products that meet market
needs, leveraging our competitive edge in creating products with superior game
and entertainment value.
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[[Image Removed: LOGO]] Gaming Business Segment
Satoshi Sakamoto
Gaming Business The Gaming Business Segment is involved in the
development, manufacture and sale of gaming
machines and gaming management systems mainly for
the Australian and North American markets.
Our video slot machines have been extremely well
received in Australia, the world's second largest
market, ever since we began operations there in
1998. This success has helped us to establish a
solid position in the country. We are also taking
steps to build a stronger presence in North
America, the world's largest market. Actions
include enhancing the product lineup and
obtaining licenses in more states and provinces.
Consolidated sales in this segment climbed 33.3%
to 10,947 million. We achieved profitability in
fiscal 2004, posting operating income of 692
million, compared with a 169 million operating
loss in the previous fiscal year. [[Image Removed: LOGO]]
Market Environment
The number of countries and regions where casinos are legal is increasing every
year, with casinos currently operating in more than 130 countries and regions
around the world. Growth in Australia, the world's second largest market, is
slowing, partly due to an upper limit on the number of gaming machines that can
be installed in casinos and steps toward tax code reforms. North America, the
world's largest market, offers solid prospects for steady growth on shorter
replacement cycles due to technological advancement in gaming machines, facility
expansion at existing casinos, the opening of new casinos, and the legalization
of casino gambling in more states and provinces.
The uptake of gaming machines that offer superior entertainment and game value
is proceeding apace, alongside growing demand for gaming machines that can
withstand the long operating hours at casinos without breakdowns.
Looking ahead, we will have plenty of opportunity to give full play to our
competitive advantages in product durability and product creation skills.
Performance
We hold licenses to manufacture and sell gaming machines in every state in
Australia. Our video slot machines are highly rated in this market. During
fiscal 2004, subsidiary Konami Australia Pty Ltd posted steady unit sales,
remaining mostly the same as the previous fiscal year.
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In North America, after receiving a license to manufacture and sell gaming
machines in Nevada in January 2000, we acquired similar licenses in Mississippi,
California, New Mexico, Illinois, Michigan and other states. As of March 31,
2004, we held licenses in a total of 22 states and provinces in North America.
In September 2003, we displayed numerous gaming machine titles at the Global
Gaming Expo in Las Vegas, the world's largest trade show for gaming machines.
Along with our highly rated video slot machines, we displayed mechanical slot
machines for the first time. Sales of mechanical slot machines commenced in
December 2003. In this way, our product lineup has improved in terms of both
quality and quantity. During fiscal 2004, subsidiary Konami Gaming, Inc. saw
unit sales of gaming machines double from the previous fiscal year's level,
achieving significant growth.
As a result, consolidated sales in this segment increased 33.3% to 10,947
million. We moved into the black for the first time, posting operating income of
692 million, compared with an operating loss of 169 million in the previous
fiscal year.
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Outlook
Our goal is to consistently increase market share by delivering distinctive
products that maximize the expertise we have gained in the entertainment
industry.
We are strengthening operations in North America, the world's largest market, by
ramping up production capacity, reinforcing our product lineup and taking other
actions. Our highly rated video slot machines are estimated to have captured a
market share of 10% or more in this category. We aim to raise this share
further. In parallel, we will drive sales growth in the entire North American
market by increasing shipments and our market share in the mechanical slot
machine category, which we entered in fiscal 2004. We will continue to implement
cost cutting initiatives and efficient management practices with the goal of
further improving profitability.
Our drive to maintain and increase market share will also be a key priority in
the Australian market.
In regions other than North America and Australia, there is growing demand from
Russia, which has achieved rapid growth in recent years, and Macao, where the
construction of new casinos is planned. The scheduled lifting of U.K. casino
gaming restrictions, and actions toward the possible legalization of casinos in
Singapore and Japan may open up exciting new avenues for growth. We will keep a
close eye on developments in these regions as we develop our business further.
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[[Image Removed: LOGO]] Health & Fitness Business Segment
Fumiaki Tanaka
Health & Fitness Business The Health & Fitness Business Segment operates
sports clubs and develops, produces and sells
health products.
We are currently diversifying into a broad array
of businesses themed on health that encompass
mental health, diet & nutrition and many more
fields. We are making steady progress toward
transforming ourselves from a mere operator of
sports clubs to a health creation business.
Developing businesses that effectively tap our
diverse expertise in entertainment and Konami
Sports' health management, we are offering
innovative ideas to the market by fundamentally
reexamining the nature of fitness businesses.
In fiscal 2004, consolidated net sales increased
0.5% to 78,899 million. We moved into the black,
posting operating income of 2,772 million,
compared with an operating loss of 49,412 million
in the previous fiscal year.
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Market Environment
The Japanese sports club market has consistently generated annual revenues of
about 300 billion over the past few years. One notable trend is the number of
mergers and alliances. Another is the increasing disappearance of relatively
small-scale companies, operating only a few clubs, as they are absorbed by large
companies. The persistent weakness of Japan's economy is no doubt partly
responsible for these events. At the same time, there is rising interest in
fitness as Japan's population ages. Especially significant is the surge in
interest in sports clubs among middle-aged and older individuals. Overall, there
is much room for growth in the sports club market in Japan, as a much lower
share of Japan's population currently uses these clubs than in the United States
and Europe.
One critical shortcoming of the sports club industry is the tendency to offer a
generally identical selection of services. This lack of originality prevents
clubs from offering services tailored to the needs of different age groups.
There is an obvious need for fresh ideas for the operation of these clubs. And
ongoing shifts in market dynamics indicate that companies able to cater to these
needs will be rewarded.
In the market for fitness machines used in sports clubs, there has traditionally
been a high reliance on products imported from Europe and North America.
However, there is now a growing volume of equipment developed in Japan to
precisely address domestic market demands. Some models even have
entertainment-based features. Overall, these events are taking the fitness
equipment market in new directions.
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Performance
During fiscal 2004, Konami Sports Corporation, which is responsible for sports
club operations, took a fresh look at customer needs, redoubling its commitment
to a customer-centric approach.
We also promoted measures to ensure that chain operations deliver the highest
standard of safety, cleanliness, and comfort at every one of our 208 sports
clubs (as of March 31, 2004) nationwide.
Actions were taken to create a more powerful brand. To cement our position as
the No. 1 brand in the sports club industry, we unified our collection of
brands, including Eg-zas and People, into a single brand: Konami Sports Club.
In September 2003, we introduced a new membership system and standardized
prices. At the same time, we took steps to enhance convenience for members. The
new system allows members to use sports clubs other than the one where they
joined during vacations or when travelling.
We also implemented measures to develop businesses other than sports clubs. Some
examples include the start of the Hawaii Project and collaboration related to
the development of outdoor sports programs in conjunction with Hakuba Village in
Nagano Prefecture in Japan. The Hawaii Project provides opportunities for people
to participate in sports and events in Hawaii. We helped roughly 1,000 people
participate in the Honolulu Marathon Tour held in December 2003.
On the cost front, actions were taken to reduce the cost of sales and selling,
general and administrative (SG&A) expenses. Cost-of-sales reductions involved
measures to adopt more efficient sales promotion techniques and a review of
renovation methods for facilities. To lower SG&A expenses, we worked to utilize
advertising and promotion budgets more efficiently.
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As a result of the above initiatives, income from membership fees at existing
sports clubs exceeded the previous year's level, while our cost structure
improved. New facilities opened in fiscal 2003, such as new sports clubs and
clubs acquired from other companies, achieved higher sales and earnings. The
result was that Konami Sports posted top- and bottom-line growth in fiscal 2004.
In the fitness machine and health products sector, we continued to develop and
deploy the EZ series of fitness machines, which combine exercise with
entertainment, at Konami sports clubs.
As a result, consolidated net sales rose 0.5% to 78,899 million. We moved into
the black, posting operating income of 2,772 million in fiscal 2004, compared
with an operating loss of 49,412 million in the previous fiscal year.
Outlook
The number of people who attend sports clubs in Japan is still well below the
levels in Europe and the U.S. as a share of the total population. Japan is
seeing a steady increase in sports club membership, with growth occurring
chiefly among middle-aged and older individuals who are becoming more conscious
of the importance of staying fit. In an environment crowded with many sports
clubs, success will depend greatly on the ability to offer high-value-added
services that are highly distinctive.
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In the sports club sector, we will continue to open new locations. The resulting
growth in market share and geographic coverage will yield a variety of
competitive advantages. Along with this expansion, Konami Sports will adopt the
customers' viewpoint to offer fitness clubs that are safe, clean and pleasant.
Another goal is improving services in terms of diversity and quality to address
the broadest possible spectrum of customer demands. This thinking will guide us
in our shift from price-based competition to value-based competition.
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In the fitness machine and health products business, we will continue to deploy
fitness machines to Konami sports clubs, while expanding sales to outside clubs
and public facilities. Leveraging expertise amassed through the production of
commercial fitness machines, we will enter the market for home-use fitness
machines, while developing and selling original nutritional supplements on a
full scale.
In January 2004, Konami Sports concluded an agreement with the Japanese Olympic
Committee (JOC) to form an Official JOC Partnership. To fulfill our social
responsibilities in a manner befitting a company that runs sports clubs, we are
giving JOC-designated athletes and Japanese athletes competing in the upcoming
Athens Olympics free access to all Konami sports clubs nationwide with the aim
of helping to improve Japan's international competitiveness in sports. Hand in
hand with these steps, we are also working to improve recognition of Konami
sports clubs by conducting promotional campaigns featuring athletes affiliated
with KONAMI.
Amid growing general interest in health, we will provide various health-related
services to a broad customer base that goes beyond sports club facilities.
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Corporate Governance and Compliance
Our fundamental management philosophy is to maintain a shareholder-driven
approach to management and sound relationships with all stakeholders, while
fulfilling our obligations as a responsible corporate citizen. Open and
transparent management practices are essential to operating in line with this
philosophy. For this purpose, we began making revisions to our board of
directors at an early stage. In May 1992, the first external director joined the
board, making this body more active and effective. To speed up decision-making
regarding management and business operations, the executive officer system was
adopted in June 1999. In June 2001, the number of directors was reduced from 15
to 9. Currently, we have a structure in which three of the company's eight
directors are external directors, realizing a much stronger management
supervisory system.
To support compliance, we have formulated and set forth basic principles in the
KONAMI Group Conduct Charter and KONAMI Group Code of Business and Ethics.
Compliance principles are made known to each and every employee to establish a
shared understanding of this subject. To prevent problems from occurring, we
have also established a system for employees to report ethical issues and other
matters without fear of recrimination.
Our compliance structure consists of three internal committees: the Risk
Management Committee, Compliance Committee and Disclosure Committee. These units
take the lead in preventing problems from occurring and educating employees
throughout the company.
Corporate Governance and Compliance at KONAMI
[[Image Removed: LOGO]]
Noriaki Yamaguchi
CFO, Konami Group
We began reporting consolidated financial results based on U.S. GAAP upon
listing on the New York Stock Exchange in September 2002. The listing made us
subject to the U.S. Sarbanes-Oxley Act. In the process of implementing the
provisions of this law, our disclosure system has become much stronger. By
exposing ourselves to challenging circumstances, we have reinforced our system
for internal control. As our businesses become increasingly global in scale, we
would like to build an even more powerful group management structure.
In January 2000, we became the first Japanese company to obtain a license from
the State of Nevada for the manufacture and sale of casino gaming machines. As
of April 2004, we had obtained licenses in 22 states and provinces in North
America. We must remain in strict compliance with laws and regulations at all
times to maintain these licenses.
To maintain our listing on the New York Stock Exchange and licenses to
manufacture casino gaming machines, it is essential that we work to educate all
group employees on the importance of compliance issues. This process will help
to earn the trust of all stakeholder groups. Our organization will continue to
be managed to the highest global standard.
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Risk Management Committee
Formed in April 2000, this committee's primary role is enacting preventive
measures with regard to the different kinds of risks to which the company is
exposed.
Compliance Committee
Formed in September 2001, this committee is responsible for ensuring that each
and every individual at KONAMI strictly complies with all applicable laws and
regulations.
Disclosure Committee
Formed in April 2003, this committee is charged with determining if the company
is releasing information in conformity with the disclosure provisions of the
U.S. Sarbanes-Oxley Act. We are subject to this law, as our shares have been
traded on the New York Stock Exchange since September 2002. The listing has
prompted us to tighten internal controls throughout the group and ensure the
highest standard of fair disclosure.
THE NEW YORK STOCK EXCHANGE CORPORATE GOVERNANCE LISTING STANDARDS
The amendment to the New York Stock Exchange Listed Company Manual 303A,
effective November 2003, requires foreign private issuers to disclose material
differences between the regulations followed by those foreign private issuers in
their own countries. KONAMI discloses such differences on our website at
www.konami.com.
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Toshiro Tateno
Group Corporate Planning
As part of corporate governance measures, a Group Corporate Officers Framework
was formulated and announced in May 2004, to clarify responsibility for business
execution. This move was guided by the thinking that as our businesses become
diversified and global, it is important to demonstrate, both internally and
externally, that the KONAMI Group is managed under a set of common principles.
The members of this framework are responsible for business execution.
On the other hand, management supervision is the responsibility of the Board of
Directors, which has eight members, including three external directors, and four
corporate auditors. External directors and corporate auditors, all of whom are
prominent in their respective fields, contribute many opinions and advice to
every meeting of the Board of Directors. Therefore, I believe that we have a
board of directors that can fulfill its obligations to oversee our management.
During the past few years, there have been many revisions to Japan's Commercial
Code that give companies more options regarding management systems. We have
ourselves conducted a series of reforms to establish our own style of corporate
governance. We will continue to work on preserving sound relationships with our
stakeholders while building a distinctive, KONAMI model for management.
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KONAMI Group's Social Contribution
KONAMI has made contributing to society as a good corporate citizen a central
tenet of its corporate philosophy.
Our activities cover the areas described below.
Environmental Conservation
Implementation of the Clean Campaign
Aiming to preserve beautiful beaches for future generations, Konami Sports
regularly implements beach cleanup campaigns through its Diving Division.
Members of Eg-zas Diving College and scuba diving members of the Argonaut Marine
Club take part in these activities.
Academic & Cultural Activities
Support for Digital Media Education & Research
(Osaka Electro-Communication University)
We are supporting the development and enhancement of educational and research
programs in the IT field at the Osaka Electro-Communication University. Our goal
is to contribute to the advancement of the digital media culture of the 21st
century.
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In September 2001, we completed the Konami Hall on the university's Shijounawate
Campus. This 950-seat multipurpose lecture hall is equipped with the very latest
IT and audio-visual equipment. Through such industry-academia partnerships, we
will continue to help nurture personnel that will shoulder the next-generation
IT society.
Industry-academia Alliance With Waseda University
In February 2004, KONAMI CORPORATION and Waseda University reached agreement to
start an open curriculum and conduct joint research into state-of-the-art
technologies to support advancement in entertainment fields. Many students
applied to take part in a seminar that started in April 2004, demonstrating
strong interest in the entertainment industry.
The entertainment industry, typified by digital video games, has grown into a
key, globally competitive industry for Japan, in step with advancements in 3D
computer graphics and networking technologies. This alliance will combine Waseda
University's advanced basic research strengths in science and technology with
KONAMI's expertise in developing applications. The overriding goal is to
contribute to society by further enhancing the entertainment industry.
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Sponsorships
JOC Official Partnership
[[Image Removed: LOGO]]
In January 2004, Konami Sports concluded an agreement with the Japanese Olympic
Committee (JOC) to form an Official JOC Partnership (contract category: sports
clubs and their management).
The agreement will give JOC-designated athletes and Japanese athletes competing
in the Athens Olympics and other international sports events free access to all
Konami sports clubs nationwide with the aim of helping them improve their
competitiveness.
Social Contribution of Related Foundations
The Kozuki Foundation for Sports and Athletes, Kozuki Foundation for Advanced
Information Technology, and Kozuki Foundation for Higher Education were
established by Kagemasa Kozuki, a founder and current CEO of KONAMI CORPORATION.
These foundations provide support, subsidies and scholarships for the promotion
and advancement of sports, education, including IT, and culture.
* The Kozuki Foundation for Sports and Athletes, Kozuki Foundation for
Advanced Information Technology and Kozuki Foundation for Higher
Education are major shareholders of KONAMI CORPORATION. Their operations
are supported by dividends from KONAMI shares.
Kozuki Foundation for Sports and Athletes
The Kozuki Foundation for Sports and Athletes was established in March 2003
under the jurisdiction of the Ministry of Education, Culture, Sports, Science
and Technology. It carries out the following five programs aimed at the
advancement of sports and enhancement of health: "Support for Sports Players and
Coaches Program," "Recognition of Sports Players and Coaches Program," "Subsidy
for Sports Research Program," "Sports Training Research Program," and "Subsidy
for Sports Organizations and Games Program."
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Kozuki Foundation for Advanced Information Technology
The Kozuki Foundation for Advanced Information Technology is under the
jurisdiction of the Ministry of Education, Culture, Sports, Science and
Technology. It carries out the following programs aimed at the promotion of IT
education: "Subsidy for IT Educational Research Program," "Kozuki IT Education
Award," "Subsidy for Edutainment Research Program," "Provision of IT Equipment
Program," and "Seminar Room Operation Program." The Foundation also holds
lectures and publishes materials for the promotion of IT education.
Kozuki Foundation for Higher Education
The Kozuki Foundation for Higher Education is under the jurisdiction of Hyogo
Prefecture. It offers support to educators and scholarships to children and
students and is carrying out the following programs aimed at the promotion of
education and culture in Hyogo Prefecture: "Scholarship for Surviving Children
Program," "Support for Students' Venture Business Program," "Digital Game
Creator Nurturing Program," "Comic Artist Nurturing Program," and "Kozuki
Seminar Room Operation Program."
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Financial Section
Contents
Operating and Financial Review and Prospects 27
Consolidated Balance Sheets 52
Consolidated Statements of Operations 54
Consolidated Statements of Stockholders' Equity 55
Consolidated Statements of Cash Flows 56
Notes to Consolidated Financial Statements 57
Report of Independent Registered Public Accounting Firm 90
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Operating and Financial Review and Prospects
Fiscal 2004 and 2003 indicate the years ended March 31, 2004 and 2003
respectively
A. Operating Results.
You should read the following discussion of our financial condition and results
of operations together with our consolidated financial statements and
information included in this annual report. Fiscal 2004 herein refers to the
fiscal year ended March 31, 2004, and other fiscal years are referred to in a
corresponding manner.
This discussion and analysis contains forward-looking statements that involve
risks, uncertainties and assumptions. Our actual results may differ materially
from those anticipated in these forward-looking statements as a result of
certain factors.
Overview
We are a global entertainment products and health products and services
provider. We develop, publish and distribute video game software for home-use
and handheld video game consoles, principally those manufactured by Sony and
Nintendo. Since February 2001, we have also run the largest chain of sports
clubs in Japan. We also produce toys, such as card games, including some that
use characters from or are inspired by characters in our home video game
software and other products. Finally, we produce and market a variety of
entertainment and exercise machines and components, including amusement arcade
games, token-operated games, LCD units for pachinko machines, gaming machines
and fitness machines. We earn revenues and income and generate cash from sales
of these products and services.
We divide our worldwide operations principally into five business segments for
financial reporting purposes: Computer & Video Games, Toy & Hobby, Amusement,
Gaming and Health & Fitness. The net revenue of these segments accounted for
33.8%, 21.0%, 13.0%, 4.0% and 28.9%, respectively, of our total net revenues,
including intersegment revenues, in fiscal 2004. We have achieved constant
growth in net revenues over the last nine years, with revenue growth of 7.8% in
fiscal 2004. Our consolidated net revenue for fiscal 2004 was 273,412 million,
which is the highest since our founding.
Due to the nature of the entertainment industry, our results of operations have
largely been, and will be to a considerable extent remain, affected by
individual products or a series of products that are hits with consumers, such
as our Yu-Gi-Oh! card game and our Yu-Gi-Oh! game software. We have been working
to reduce volatility in our results by building a solid and well-balanced
business portfolio with multiple segments, each featuring a growing number and
variety of products and services. In the year ended March 31, 2004, for the
first time, we had three segments with over 10,000 million in operating income
and our other two segments turned profitable. This success was due to our
concerted efforts to strengthen and diversify each of our segments. We are also
diversifying our revenue sources by expanding our businesses overseas. Our
Computer & Video Games and Toy & Hobby segments have been active in North
American and European markets and our Gaming segment has actively developed its
operations in North American market, the biggest gaming market in the world.
The overall Japanese entertainment industry has been expanding, reflecting an
increasing social recognition of the importance of developing intellectual
property and the rapid advance of technology. Among all, the video game software
industry in which our Computer & Video Games segment operates has become
increasingly competitive and more hit products-oriented, with the size of the
market fluctuating by hit products. The toy industry in Japan where our Toy &
Hobby segment operates is holding firm without any sharp decline in demand,
despite a declining birth rate, children growing out of toys at younger ages due
to earlier maturity, falling disposable incomes due to the sluggish economy, and
increases in spending for other entertainment purposes. The main reasons are
that expenditure per child is increasing and toys targeting adults are
stimulating demand, in step with the aging of society. The amusement arcade
industry where our Amusement segment operates has also been sluggish, reflecting
intensifying competition with other entertainment options but it has recovered
recently due primarily to the development of large-size amusement arcades that
attract new consumers. The Japanese health industry in which our Health &
Fitness segment operates has been developing gradually with an increasing demand
for health-related services among middle-aged and senior consumers.
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As a result of sluggish domestic markets in some of our business segments, we
have been aggressively expanding overseas and increasingly dependent on our
overseas business, taking advantage of opportunities for growth in foreign
markets, such as North America and Europe. Our revenue growth in the past two
fiscal years has been driven primarily by international growth. For example,
sales of our Yu-Gi-Oh! card game and game software with Yu-Gi-Oh! contents
increased substantially in North America in fiscal 2003 and in Europe in fiscal
2004. In the sports video game category, soccer titles such as the WINNING
ELEVEN series, including WORLD SOCCER WINNING ELEVEN 7 and Pro Evolution Soccer
3 for PlayStation 2, gained popularity mainly in Japan and Europe and recorded
sales of 4.6 million copies worldwide in fiscal 2004. We seek to continue
expanding our business in these markets by introducing products which became
hits in the Japanese market, however, new hit products may not be as successful
abroad as in Japan due to different customers' tastes and competition
environment in each market. Accordingly, we aim to diversify our overseas
operations by deploying our products in other markets including China, where we
recently released our first video game software, WORLD SOCCER WINNING ELEVEN 7
INTERNATIONAL for PlayStation 2.
Our main business strategies for each segment are as follows:
In the Computer & Video Games segment, we strive to strengthen our
international operations through acquiring and creating contents that
are globally competitive and enhancing our PC game software business
with an alliance with Vivendi Universal.
In the Toy & Hobby segment, we are working to diversify our products
lineups, including boy's toy and educational toy products, toy
products for infants and publishing, as well as standardizing the
Yu-Gi-Oh! card game internationally for its further promotion.
In the Amusement segment, we plan to further enhance our e-AMUSEMENT
service which links amusement arcades throughout Japan by
strengthening existing contents.
In the Gaming segment, we aim to grow our market share in North
America with the increased production capacity of our new factory
and a full-scale operation for mechanical slot machines.
In the Health & Fitness segment, we are focusing on improving the
quality of our services, rather than giving discounts, by offering a
wide range of health-related value-added services in order to develop
our operations effectively.
Factors Affecting Our Results of Operations
Factors Affecting Combined Results of Operations
A number of factors affect revenues and expenses across several of our segments,
and therefore have a substantial impact on our combined results of operations.
These factors include the importance of "hit products" that respond to trends in
popular culture, intellectual property licensing, seasonal fluctuations,
investments and acquisitions.
Hit Products
Most of our non-fitness related revenues come from sales of interactive
entertainment software and devices and are dependent on our ability to
anticipate or influence the kinds of games and products that are popular with
consumers. Revenues for our Computer & Video Games, Toy & Hobby, Amusement and
Gaming segments are strongly affected by whether individual products or a series
of products become "hits" with consumers. A single hit product can generate very
substantial revenues, which can continue over an extended period through the
release of sequel products and through extension of the concept or characters
from a popular game from one business segment to another business segment.
For example, our Toy & Hobby net revenues, including intersegment revenues,
increased 25.1% from 45,948 million in fiscal 2003 to 57,468 million in fiscal
2004 due mainly to robust sales of our Yu-Gi-Oh! card game in North America, as
well as increased sales of the card game in Europe. Our Computer & Video Games
net revenues, including intersegment revenues, increased 5.8% from 87,476
million in fiscal 2003 to 92,520 million in fiscal 2004 due primarily to
favorable sales of the Yu-Gi-Oh! game software in North America and Europe and
an increase in sales of the WINNING ELEVEN series, soccer title, in Japan and
Europe.
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It is difficult to predict whether any particular product will become a hit. We
seek to reduce the volatility of our net revenues by developing a large number
of new titles each year in various categories and for various platforms. We have
steadily increased the number of titles published by our home and handheld video
game software business from 55 titles in fiscal 1999 to 120 titles in fiscal
2004. We have also decreased the volatility of our net revenues by entering the
sports club business, which we believe will provide a more stable base of
revenue.
Intellectual Property Licensing
One means we use to increase the likelihood that our products will succeed is
licensing the right to utilize ideas and images from popular culture, such as
comic book characters, sports and entertainment personalities and high
visibility events. Thus, to some extent our revenues are dependent on successful
identification and acquisition of rights to popular ideas and images. We have
steadily increased the number of intellectual property licenses we hold from 13
licenses for 26 products in fiscal 1999 to 94 licenses for 154 products in
fiscal 2004.
These licenses typically require a guarantee of minimum future royalties. We may
experience losses if sales based on licensed intellectual property do not
produce sufficient revenues to cover our royalties expenses. In addition, games
that are based on licensed ideas have lower margins than games that we develop
independently.
In recent years, the entertainment industry has seen an acceleration in
crossovers with other industries such as toys, films, music, comics, publishing
and communications. When we are able to use intellectual property licenses in
multiple segments, we are able to produce higher revenues. For example, our
Yu-Gi-Oh! card game originated from the popular Yu-Gi-Oh! comic in a prominent
Japanese weekly magazine. Following our "media-mix strategy", we made good use
of the license for the game, making substantial sales of our Yu-Gi-Oh! card game
for our Toy & Hobby segment and as a video game for our Computer & Video Games
segment.
Seasonal Fluctuations
Many of our products 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 (summer vacation) and in March (spring vacation), in decreasing order.
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. However, our earnings may not necessarily reflect the seasonal
patterns of the industry as a whole as a result of increased sales due to the
occurrence of special events such as the Olympic Games, World Cup Soccer
Tournament or the release of "hit" titles.
Investments and Acquisitions
In the last four years we have sought growth and diversification through
investments and acquisitions in sectors that promise increased revenue stability
and increased revenue growth. In particular, we have made investments in video
game software development companies for our Computer & Video Games segment and
we have acquired new consolidated subsidiaries for our Health & Fitness and
Gaming segments. These investments and acquisitions have made substantial
changes in the composition of our assets, in particular increasing the amount of
goodwill and intangibles in our consolidated balance sheet for fiscal 2001 and
fiscal 2002.
We made the following investments in equity method affiliates in fiscal 2001 and
fiscal 2002:
acquisition of 23.0% of the common stock of TAKARA Co., Ltd.;
acquisition of 45.5% of the common stock of HUDSON SOFT CO., LTD.; and
acquisition of 37.2% of the common stock of Genki Co., Ltd.
Our investments allow us to develop closer ties with companies doing business in
areas that we consider growth areas for our business, including sales of Toy &
Hobby products and mobile and on-line video game software. Because these
companies are equity method affiliates, our financial results are affected by
our pro rata share of their net income or losses. As a result of our fiscal 2003
year-end annual examination of these investments, we recognized a net-of-tax
impairment charge of 2,438 million with respect to the investment in HUDSON SOFT
CO., LTD., due to a significant decline in its share value in the market. For
fiscal 2004, our income statement included 252 million in equity in net income
of affiliated companies.
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We spent an aggregate of 76,664 million on the following acquisitions of
consolidated subsidiaries in the last four fiscal years:
Toy & Hobby:
Acquisition of 77.8% of the common stock of Konami Trumer, Inc.,
formerly known as Trmer, Inc., in April 2003.
Gaming:
acquisition of 100% of the common stock of Paradigm Gaming Systems,
Inc. in August 2001; and
acquisition of 100% of the common stock of Konami Australia Pty Ltd
in October 2001.
Health & Fitness:
acquisition of 54.6% of the common stock of Konami Sports
Corporation, formerly known as People Co., Ltd. in February 2001;
acquisition of 100% of the common stock of Konami Sports Plaza,
Inc., formerly known as Nissan Sports Plaza, Inc., in June 2001;
acquisition of 82.2% of the common stock of Konami Olympic Sports
Club, Inc., formerly known as Daiei Olympic Sports Club, Inc., in
February 2002; and
acquisition of 100% of the common stock of Konami Athletics Inc.,
formerly known as Nissay Athletics Company, in March 2003.
In connection with our acquisition of majority ownership of new consolidated
subsidiaries in fiscal 2001 through 2004, we recognized an aggregate amount of
goodwill of 39,359 million and acquired an aggregate amount of intangibles of
64,809 million, mostly related to the trademarks and other intangible property
associated with our sports club business. Our acquisition related goodwill and
other intangible assets were originally amortized over various periods. However,
a recent change in U.S. GAAP means that such amortization for goodwill and
indefinite lived intangibles ceased beginning on April 1, 2002 and that the
remaining balances will be tested for impairment at least on an annual basis.
Following the impairment review for fiscal 2003, we recognized impairment losses
of 47,599 million with respect to our investment in Konami Sports Corporation.
Approximately 36,717 million of this impairment related to the write-off of
goodwill and the remaining 10,882 million related to the impairment of
identifiable intangible assets such as trademarks and franchise contracts. This
impairment was recognized as a component of our operating loss during fiscal
2003. For further information regarding this impairment, see "Critical
Accounting Policies-Valuation of Intangible Assets and Goodwill" on page 45.
Intangibles with finite lives will continue to be amortized.
Foreign Currency Fluctuations
An increasing portion of our business is conducted in currencies other than yen
- most significantly, U.S. dollars, as we increase our sales overseas. Our
business is thus becoming sensitive to fluctuations in foreign currency exchange
rates, especially the yen-U.S. dollar exchange rate. Our consolidated financial
statements are increasingly becoming subject to both translation risk and
transaction risk. Translation risk arises from the fact that our foreign
subsidiaries have different functional currencies than we do. Changes in the
value of the Japanese yen relative to the functional currencies of these
subsidiaries create translation gains and losses on our equity investments in
foreign subsidiaries which are recorded as foreign currency translation
adjustments on our consolidated statements of shareholders' equity and
accumulated other comprehensive income until we dispose of, liquidate or take an
impairment charge with respect to, the relevant subsidiaries.
Transaction risk arises when the currency structure of our costs and liabilities
deviates from the currency structure of our sales proceeds and assets. A
substantial portion of our overseas sales are made in U.S. dollars and Euros.
Our sales denominated in U.S. dollars are, to a significant extent, offset by
U.S. dollar denominated costs. Transaction risk remains for products sold in
U.S. dollars to the extent that we must purchase parts for our products from
Japan, the costs for which are denominated in yen.
We use foreign exchange forward contracts to manage foreign exchange exposure
associated with short-term movements in exchange rates applicable to our
payables commitments and receivables that we expect to pay or receive in foreign
currencies. Changes in the fair values of our foreign exchange forward contracts
are recognized as gains or losses on derivative instruments in our income
statement. For a more detailed discussion of these instruments, you should read
Note 17 to our consolidated financial statements included in this annual report.
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Factors Affecting Results of Business Segments
In addition to the factors affecting our combined results of operations through
several segments, there are other factors that affect the results of each of our
segments independently. The factors affecting results in each of our business
segments are as follows:
Computer & Video Games
Net Revenues. We develop, publish and distribute video game software for
home-use, handheld video game consoles, game content for mobile phones and,
software or content for personal computers and on-line games. We refer to this
segment as our "Computer & Video Games" segment. Our video game software is sold
mainly in the form of DVD-ROMs or proprietary discs for home video game
platforms such as Sony PlayStation 2, Nintendo GameCube and Microsoft Xbox and
ROM-cartridges for handheld video game platforms such as the Game Boy Advance.
In fiscal 2004, net revenues from the Computer & Video Games segment, including
intersegment revenues, were 92,520 million, accounting for 33.8% of consolidated
net revenues excluding intersegment revenues. This was derived primarily from
strong sales of soccer titles such as WORLD SOCCER WINNING ELEVEN 7 and WORLD
SOCCER WINNING ELEVEN 7 INTERNATIONAL for PlayStation 2 in Japan and Pro
Evolution Soccer 3 for PlayStation 2 in Europe. In North America and Europe, we
achieved strong sales of Yu-Gi-Oh! titles, reflecting a synergy effect of the
popularity of the Yu-Gi-Oh! Trading Card Game and the Yu-Gi-Oh! cartoon on
television. In North America, the Yu-Gi-Oh! series, including Yu-Gi-Oh!
Worldwide Edition: Stairway to the Destined Duel and Yu-Gi-Oh! The Sacred Cards
for Game Boy Advance, recorded sales of 2.45 million copies, and in Europe, the
Yu-Gi-Oh! series, including Yu-Gi-Oh! Worldwide Edition: Stairway to the
Destined Duel for Game Boy Advance and Yu-Gi-Oh! THE DUELISTS OF THE ROSES for
PlayStation 2, recorded sales of 2.24 million copies. As a result, the operating
margin for the Computer & Video Games segment, including intersegment revenues,
for fiscal 2004 was 17.4%.
Our sales of video game software are strongly influenced by our ability to
develop or acquire popular game content. See "-Factors Affecting Combined
Results of Operations - Factors Affecting Combined Results of Operations - Hit
Products, Intellectual Property Licensing." Sales of video game software are
significantly affected by sales volumes of video game consoles. The potential
market for a software product designed for a particular video game system is
determined by the total number of such video game consoles purchased by
consumers, a number which is sometimes referred to as the "installed base" of
such video game consoles. When new hardware systems are introduced, we may
experience a temporary decline in net sales attributable to video game software
until we are able to produce one or more hit products that utilize the increased
capabilities of the new hardware.
The home video game industry is characterized by rapid technological changes,
which have resulted in successive introductions of increasingly advanced game
consoles. As a result of the rapid technological shifts, no single game console
has achieved long-term dominance in the home video game and computer games
market. To correspond to these rapid shift in video game hardware technology, it
is necessary for us to continually anticipate game console cycles, time our
product pipeline so that we do not publish games for hardware that is no longer
popular, and develop software programming tools necessary for emerging hardware
systems.
Expenses. A majority of our software titles are developed by our development
subsidiaries. Costs and expenses that we incur in the development of new video
game software titles are expensed as research and development fees until such
games reach technological feasibility, at which point we begin to capitalize the
expenses. We expense capitalized costs to cost of revenues upon commercial
release of the resulting game, as the commercial life of our consumer software
is of short duration.
The rapid technological advances in game consoles have significantly changed the
software development process. The process of developing software for the new
128-bit consoles is extremely complex and we expect the process to possibly
become even more complex and expensive with the advent of more powerful future
game consoles. According to our estimates, it currently takes between 6 and 24
months to develop a new title and the average development cost per title is
generally between 100 million and 700 million, though the cost of our most
technically complex titles may exceed 1,000 million.
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Our cost of revenues for video game software also includes the costs of licenses
from contents licensors. While some of our contents licenses include prepaid or
guaranteed royalties, most of the royalties we pay are on a sales basis. We
amortize the cost of prepaid royalties based on the number the associated
products sold. We evaluate the future recoverability of any prepaid royalties
and capitalized software costs on a regular basis based on actual title
performance. We expense as part of product development costs those capitalized
costs that we deem unrecoverable.
Toy & Hobby
Net Revenues. In fiscal 2004, net revenues from the Toy & Hobby segment,
including intersegment revenues, were 57,468 million, accounting for 21.0% of
consolidated net revenues. This was derived primarily from robust sales of our
popular Yu-Gi-Oh! trading card game series in North America and Europe. The
operating margin for the Toy & Hobby segment, including intersegment revenues,
for fiscal 2004 was 34.1%.
Net revenues for the Toy & Hobby segment are affected principally by our ability
to identify and acquire the rights to popular comic book and television
characters and apply them to creative games, as well as the population of
children, timing of product introductions, competition within the market,
product life cycles and general economic trends.
Our Toy & Hobby segment generates revenues principally from the sales of card
games. As the extraordinary popularity of the Yu-Gi-Oh! official card game in
the Japanese market has subsided, approximately 70% of our Toy & Hobby revenues
were derived from sales of the Yu-Gi-Oh! trading card games in North America and
Europe in fiscal 2004. We believe that sales of card games in these markets are
principally affected by the popularity of the contents from comic or television
cartoon, the timing of product introduction reflecting, for example, the
television broadcasting schedule and other competitive products. In the European
markets, sales are also affected by the recognition of card games in the toy
market as card games are relatively new in Europe on the contrary to the United
States where card game market existed already. We have been globally
standardizing the cards through events such as Yu-Gi-Oh! World Championship in
order to raise international recognition of and promote the Yu-Gi-Oh! card game.
The toy industry in Japan where our Toy & Hobby segment operates is holding firm
without any sharp decline in demand, despite a declining birth rate, children
growing out of toys at younger ages due to earlier maturity, falling disposable
incomes due to the sluggish economy, and increases in spending for other
entertainment purposes. The main reasons are that expenditure per child is
increasing and toys targeting adults are stimulating demand, in step with the
aging of society. Accordingly, we are diversifying the range of our products for
the Japanese market, especially boy's toy products, in order to balance our
business portfolio and improve attractiveness of our product lineups. For
example, we introduced a variety of action figures and other toys for boys using
characters appeared in a popular SFX superhero TV program, The Gransazers, which
were well received by the market. Also, for the first time, we are participating
in the production of animated contents, a new robot hero animation television
program, Get Ride! AMDRIVER, and developing boy's toys products based on the
contents at the same time.
Expenses. Our Toy & Hobby segment has been a comparatively high margin segment
because the costs of producing some of the goods marketed by the segment are
comparatively low. In particular, card games have historically shown a higher
margin than other toy products due to their relatively low manufacturing
expenses. Costs include raw material costs, manufacturing outsourcing,
licensing, research and development and administrative costs. Furthermore,
because the Toy & Hobby products are typically based on previously developed
intellectual property, research and development costs for the segment are
comparatively low.
Amusement
Net Revenues. In fiscal 2004, net revenues from the Amusement segment, including
intersegment revenues, were 35,427 million, accounting for 13.0% of consolidated
net revenues excluding intersegment revenues. Segment revenues were derived
primarily from sales of popular video arcade games such as MAH-JONG FIGHT CLUB
and QUIZ MAGIC ACADEMY and token-operated game machines such as Fantasic Fever
and GI-TURFWILD as well as sales of LCD screen software for pachinko machines.
The operating margin for the Amusement segment, including intersegment revenues,
for fiscal 2004 was 33.3%.
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Although arcade game sales had been declining since the appearance of advanced
interactive entertainment products, such as sophisticated video game consoles
and mobile phones which offered competing entertainment options that one could
only play in an amusement arcade about twenty years ago, sales of the Japanese
amusement arcade industry increased in fiscal 2004 due primarily to an increase
in the number of large-scale amusement arcades within multi-purpose commercial
facilities involving cinema complexes, shopping centers and other commercial
facilities that attract customers, especially families and women.
The majority of revenues for the Amusement segment are derived from the sales of
amusement arcade games and token-operated game machines. In particular, we
continued to benefit from the favorable market acceptance of e-AMUSEMENT
products for amusement arcades, such as the MAH-JONG FIGHT CLUB series, which
are video games that allow players to compete directly with players in other
arcade game locations via an on-line amusement connection. Revenues for the
Amusement segment are affected by market acceptance, introduction of hit titles
and general economic trends. We have found that we are able to elongate the
life-cycle of our arcade games and increase our Amusement segment margins by
creating new software packages for our existing arcade games in addition to
creating new games.
We derive sustained revenues from our token-operated machines in Japan. We
recorded 11 billion in sales of token-operated machines in fiscal 2004 due
primarily to robust sales of Fantasic Fever and FORTUNE ORB, and believe that we
are one of the leading companies in the Japanese token-operated game machine
industry. As the arcade operations industry in Japan has been consolidating,
with the number of amusement arcades declining and the average size of each
arcade increasing, large-size token-operated game machines such as Fantasic
Fever that attract customers and are well suited to large-scale amusement
arcades are gaining popularity.
The Amusement segment also generates revenues from the sale of software for LCD
units in pachinko games machines. Revenues from pachinko LCDs are affected by
the maturation of the market, consumer preference, regulatory standards,
supply-demand balance of liquid crystal display units, competition within the
market, product life cycles and general economic trends. In recognition that all
software have a finite life-cycle, pachinko parlors regularly replace legacy
machines experiencing declining pay levels with new machines incorporating
enhanced entertainment value and improved player appeal generally every two
months to one year. We recorded a decline in sales of LCD units in fiscal 2004,
due primarily to our inability to introduce new products matching changing
customers' needs in a timely manner.
Also, the pachinko machine market has shown a slight decline due to the overall
effects of recession in the past several years. The pachinko industry still
remains highly regulated which restricts rapid development of our operations.
All pachinko manufacturers in Japan are required to get approval from The
Security Electronics and Communications Technology Association, supervised by
National Police Agency, in order to engage in sales activities. The
manufacturers of pachinko machines must also register with The Japan Crime
Prevention Association. Licensing requirements can delay the development and
release of new pachinko machine products. Changes in rules or regulations
governing pachinko machines may adversely affect our sales of software for LCD
units.
Expenses. Expenses for our Amusement segment are largely related to cost of
parts and raw materials, particularly with respect to pachinko LCDs, which are
sometimes scarce and priced accordingly, manufacturing costs and research and
development expenses. As for amusement arcade games and token operated games, we
incur more limited cost of parts and raw materials and therefore have higher
margins when we provide new game software contents for existing machines rather
than selling new machines. We are currently working on further improving margins
in our Amusement segment through the introduction of less expensive
Internet-linked amusement arcade games "e-AMUSEMENT" and other measures to
decrease production costs.
Gaming
Net Revenues. In fiscal 2004, net revenues from the Gaming segment, including
intersegment revenues, were 10,947 million, accounting for 4.0% of consolidated
net revenues excluding intersegment revenues. The main revenue source for the
Gaming segment is the sale of video slot machines and software contents in
Australia and North America. Revenues for the Gaming segment are affected by the
timing of product introductions, timing of regulatory approvals in various
markets, ability to penetrate into foreign casino markets, number of casino
players, casino gaming regulations in each market, our production capacity,
competition within the market, normal product life cycles and general economic
trends.
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Our sales of casino gaming machines are conducted overseas, primarily in North
America and in Australia. Casinos are authorized to operate in more than 130
countries and the number of countries authorizing casinos has been increasing
each year according to the Tokyo Metropolitan Government, Bureau of Industrial
and Labor Affairs. We believe that the world-wide sales (including leasing and
others) of casino gaming machines for the year 2005 will be over 300 billion and
the market will grow continuously.
Konami Australia Pty Ltd, which has licenses for sales and manufacturing of
gaming machines in all Australian states, marketed casino gaming machines,
including our main product Egyptagon. Although the dominance of the largest
player in the Australian gaming markets has made it difficult for us to become a
market leader quickly, we have made substantial in-roads and believe we are one
of the largest sellers of gaming machines in the Australian market. However, we
believe the Australian gaming market is mature and has been leveling off, due in
part to regulations limiting the maximum number of gaming machines allowed in
each state, so we do not expect our sales of gaming machines in Australia to
expand substantially in the future unless there is a major change in the nature
or regulation of the market.
In North America, the largest casino gaming machines market in the world, we
held licenses to manufacture and sell casino gaming machines in 22 states as of
March 31, 2004. We participated in the world's largest gaming show held in Las
Vegas in September 2003 with 17 product titles, thereby showing that we improved
our line-up of gaming machines both in quantity and quality.
In contrast with Australia, we believe demand for casino gaming machines in
North America has been increasing. Also, our application for license in New
Jersey, one of the largest casino markets in North America, is currently being
processed and, if we succeed in obtaining a New Jersey license, we expect to
further expand our share in the market. In order to meet increasing demand, we
are building a new gaming machine factory in Las Vegas, which is expected to
double our current production capacity and is scheduled to commence its
operation by the end of fiscal 2005.
Expenses. Expenses in our Gaming segment are largely related to cost of parts
and raw materials, manufacturing costs and research and development expenses. In
recent years, we have attempted to decrease our cost of revenues for our Gaming
segment by acquiring parts and producing our machines sold abroad in the markets
in which they are sold, thereby reducing shipping costs and foreign exchange
risks.
Health & Fitness
Net Revenues. We are the largest sports club operator in Japan based on the
Leisure Paper issued by JAPAN PRODUCTIVITY CENTER FOR SOCIO-ECONOMIC
DEVELOPMENT. We also design, manufacture and sell fitness-related games and
exercise machines. As of March 31, 2004, we operated 208 sports clubs that
collectively served approximately 844,000 members. Our Health & Fitness segment
had 78,899 million in net revenues, including intersegment revenues, in fiscal
2004.
The majority of our Health & Fitness revenues come from membership fees. Our
membership fee structure generally includes virtually no initial membership fee.
We do not have financing plans for new members. A lack of financing plans and
the fact that almost all of our members pay their monthly dues by credit card
mean that we have a comparatively low risk of losses from uncollectible
receivables.
Our sports clubs also collect additional revenues from ancillary sales and
services, sales of consumables including meals in our in-club restaurants and
nutritional products in our in-club stores, and fees for services such as
jazzercise and other fitness classes, massage, fitness counseling, diet programs
and personal trainers.
Although we have not achieved expected growth due to unfavorable market
conditions, we expect to continue to increase revenues through club and
membership growth. We currently serve many, but not all, of the major cities in
Japan. We plan to extend our reach into new geographic markets until we cover
all of Japan. We believe that we are well positioned, being twice as large as
the second largest operator according to the Leisure Paper, to identify
opportunities to selectively acquire existing operators and facilities at
attractive prices due to our dominant position in a fragmented market. During
fiscal 2004, we increased the aggregate number of sports clubs we directly
operate by four clubs.
Actions were taken to create a more powerful brand. To cement our position as
No. 1 brand in the sports club industry, we unified our collection of brands,
including eg-zas and People, into a single brand: Konami Sports Club, thereby
strengthening brand recognition and providing more sophisticated facility
services, as part of our continuous efforts to improve the retention rate of
current customers. Improving the retention rate of customers of existing clubs
is one of our major objectives as revenue growth of existing clubs is lower than
newly opened clubs. In a move to improve customer convenience, we introduced new
services and products such as a personal trainer system where an instructor with
specialized knowledge provides individualized lessons for each customer.
Finally, we launched the first official i-mode (internet enabled cellular phone)
site in the fitness industry, which provides various club facility information
and health related information.
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Also, we focus more on improving the quality of our services than on reducing
our prices in order to compete efficiently. For example, we offer value-added
services such as spa and massage in our sports clubs for extra charges. Also, we
offer events and tours such as Honolulu Marathon tours and ski tours in which
our members can participate. As a result of such efforts, the average amount
spent per customer increased in fiscal 2004.
Our Health & Fitness segment develops fitness-oriented games to consumers and
fitness machines with entertainment quality mainly for our Konami Sports fitness
clubs. As of March 31, 2004, we have developed four Health & Fitness machines
under EZ series brand and these machines are now introduced in our Konami Sports
fitness clubs. We also have several new machines in various stages of the
development pipeline.
In fiscal 2004, our fitness-related game and fitness equipment business launched
Diet Channel, a fitness game software that enables dieting while enjoying
exercising at home.
In fiscal 2003, our fitness-related games and exercise machines business
released new home fitness products such as MARTIAL BEAT II, which is a popular
martial arts fitness action game that uses video game software and can measure
physical strength, and Aerobics Revolution, which allows players to enjoy
realistic aerobics activity at home.
Expenses. Operating expenses for our Health & Fitness segment include, for our
sports club business, leases for facilities, salaries for trainers and other
club employees, costs of fitness machines and other equipment, utilities
charges, marketing expenses, costs for maintaining the facilities and
depreciation. Upon opening a new sports club, we often experience an initial
period of club operating losses for the first 12 months, but this period can
vary substantially depending on the individual club. Initial membership levels
tend not to generate sufficient revenue for the club to generate positive
earnings in its first full year of operation and substantially lower margins in
its second full year of operations than a mature club. However, because most of
our expenses are fixed, operating margins tend to improve with respect to each
club as membership increases. Expenses for our fitness-related games and
exercise machines business are largely related to cost of parts and raw
materials, manufacturing costs and research and development expenses.
In fiscal 2003, we had substantial additional operating expenses in our Health &
Fitness segment because we recognized impairment losses of 47,599 million with
respect to our investment in Konami Sports Corporation. Under U.S. GAAP,
impairment loss is treated as an operating expense. Approximately 36,717 million
of this impairment related to the write-off of goodwill and the remaining 10,882
million related to identifiable intangible assets such as trademarks and
franchise contracts. These impairment losses were attributed to the fact that
the growth of this segment did not meet our expectations as a result of negative
trends in general economic conditions in Japan. In fiscal 2004, we did not
recognize any impairment losses.
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Table of Contents
Results of Operations
The table below shows selected items from our consolidated statements of income
for the periods indicated:
Thousands of
Millions of Yen U.S. Dollars
Year ended March 31, 2002 2003 2004 2004
NET REVENUES:
Product sales revenue 165,154 178,766 196,136 $ 1,855,767
Service revenue 60,426 74,891 77,276 731,157
Total net revenues 225,580 253,657 273,412 2,586,924
COSTS AND EXPENSES:
Costs of products sold 104,192 112,364 115,229 1,090,255
Costs of services rendered 50,459 62,515 63,953 605,100
Impairment charge for goodwill and other
intangible assets - 47,599 - -
Selling, general and administrative 52,842 53,049 53,517 506,358
Total costs and expenses 207,493 275,527 232,699 2,201,713
Operating income (loss) 18,087 (21,870 ) 40,713 385,211
OTHER INCOME (EXPENSES):
Interest income 244 373 488 4,617
Interest expense (767