SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
¨ | REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR 12(G) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended March 31, 20072010
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
¨ | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Date of event requiring this shell company report . . . . . . . . . . . . . . . . . . .
For the transition period from to
Commission file number: 1-31452
Konami Kabushiki Kaisha
(Exact name of registrant as specified in its charter)
KONAMI CORPORATION
(Translation of registrant’s name into English)
Japan | 7-2, Akasaka 9-chome, Minato-ku, Tokyo 107-8323 | |
Japan | ||
(Jurisdiction of incorporation or organization) | (Address of principal executive offices) |
Noriaki Yamaguchi, +81-3-5770-0573, +81-3-5412-3300,
7-2, Akasaka 9-chome, Minato-ku, Tokyo 107-8323, Japan
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of Each Class | Name of Each Exchange On Which Registered | |
Common Stock1 | New York Stock Exchange |
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
(Title of Class)
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
As of March 31, 2007, 137,254,8162010, 133,460,664 shares of common stock were outstanding, including 1,167,970398,323 shares represented by 920,500398,323 American Depositary Shares.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ¨ No x
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP x International Financial Reporting Standards as issued by the International Accounting Standards Board ¨ Other ¨
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:follow.
Item 17 ¨ Item 18 x¨
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
1 | Not for trading, but only in connection with the listing of American Depositary Shares, each representing one share of common stock. |
As used in this annual report, references to “Konami” are to KONAMI CORPORATION and references to“KONAMI” “we”, “our” and “us” are to KONAMI CORPORATION and its subsidiaries, except asunless the context otherwise requires.
As used in this annual report, “fiscal 2007”2010” refers to our fiscal year ended March 31, 2007,2010, and other fiscal years are referred to in a corresponding manner.
As used in this annual report, “U.S. dollar” or “$” means the lawful currency of the United States of America, and “yen” or “¥” means the lawful currency of Japan.
As used in this annual report, “U.S. GAAP” means accounting principles generally accepted in the United States, and “Japanese GAAP” means accounting principles generally accepted in Japan.
As used in this annual report, “ADS” means an American Depositary Share, and “ADR” means an American Depositary Receipt.
PART I
Item 1. | Identity of Directors, Senior Management and Advisers. |
Not applicable.
Item 2. | Offer Statistics and Expected Timetable. |
Not applicable.
Item 3. | Key Information. |
A. Selected Financial Data.
The following tables include selected historical financial data as of and for the fiscal years ended March 31, 20032006 through 2007,2010, derived from our audited consolidated financial statements prepared in accordance with U.S. GAAP. You should read the selected financial data below in conjunction with Item 5 of this annual report and our audited consolidated financial statements and information prepared in accordance with U.S. GAAP which are included in this annual report.
Selected Financial Data Prepared in Accordance with U.S. GAAP
Fiscal year ended/as of March 31, | Fiscal year ended/as of March 31, | |||||||||||||||||||||||||||||||||||||||||||||||
2003 | 2004 | 2005 | 2006 | 2007 | 2007 | 2006 | 2007 | 2008 | 2009 | 2010 | 2010 | |||||||||||||||||||||||||||||||||||||
(Yen in millions and U.S. dollars in thousands, except per share data) | (Yen in millions and U.S. dollars in thousands, except per share data) | |||||||||||||||||||||||||||||||||||||||||||||||
Income Statement Data: | ||||||||||||||||||||||||||||||||||||||||||||||||
Net revenues | ¥ | 253,657 | ¥ | 273,412 | ¥ | 260,691 | ¥ | 262,137 | ¥ | 280,279 | $ | 2,374,240 | ¥ | 262,137 | ¥ | 280,279 | ¥ | 297,402 | ¥ | 309,771 | ¥ | 262,144 | $ | 2,817,541 | ||||||||||||||||||||||||
Cost of products sold and services rendered | 174,879 | 179,182 | 180,363 | 184,744 | 193,506 | 1,639,187 | 184,744 | 193,506 | 205,188 | 212,636 | 185,734 | 1,996,281 | ||||||||||||||||||||||||||||||||||||
Impairment of goodwill, other identifiable intangible assets and long-lived assets (1)(2) | 47,599 | — | — | 19,713 | — | — | ||||||||||||||||||||||||||||||||||||||||||
Selling, general and administrative expenses | 53,049 | 53,517 | 52,192 | 55,199 | 58,628 | 496,637 | 55,199 | 58,628 | 58,375 | 58,653 | 55,407 | 595,518 | ||||||||||||||||||||||||||||||||||||
Restructuring and impairment charges (1)(2)(3) | 19,713 | — | — | 11,121 | 2,339 | �� | 25,140 | |||||||||||||||||||||||||||||||||||||||||
Operating income (loss) | (21,870 | ) | 40,713 | 28,136 | 2,481 | 28,145 | 238,416 | |||||||||||||||||||||||||||||||||||||||||
Operating income | 2,481 | 28,145 | 33,839 | 27,361 | 18,664 | 200,602 | ||||||||||||||||||||||||||||||||||||||||||
Other income (expenses), net | (226 | ) | (606 | ) | (694 | ) | 5,957 | (578 | ) | (4,896 | ) | 5,957 | (578 | ) | (1,005 | ) | (2,642 | ) | (1,542 | ) | (16,574 | ) | ||||||||||||||||||||||||||
Income (loss) before income taxes, minority interest and equity in net income (loss) of affiliated companies | (22,096 | ) | 40,107 | 27,442 | 8,438 | 27,567 | 233,520 | |||||||||||||||||||||||||||||||||||||||||
Income before income taxes and equity in net income (loss) of affiliated company | 8,438 | 27,567 | 32,834 | 24,719 | 17,122 | 184,028 | ||||||||||||||||||||||||||||||||||||||||||
Income taxes | 6,186 | 18,035 | 7,902 | (10,270 | ) | 10,919 | 92,495 | (10,270 | ) | 10,919 | 13,080 | 10,715 | 3,600 | 38,693 | ||||||||||||||||||||||||||||||||||
Minority interest in income (loss) of consolidated subsidiaries | (1,051 | ) | 2,220 | 2,761 | (4,267 | ) | 575 | 4,871 | ||||||||||||||||||||||||||||||||||||||||
Equity in net income (loss) of affiliated companies | (1,288 | ) | 252 | (6,293 | ) | 33 | 138 | 1,169 | ||||||||||||||||||||||||||||||||||||||||
Equity in net income (loss) of affiliated company | 33 | 138 | 180 | (2,490 | ) | 56 | 602 | |||||||||||||||||||||||||||||||||||||||||
Net income (loss) | ¥ | (28,519 | ) | ¥ | 20,104 | ¥ | 10,486 | ¥ | 23,008 | ¥ | 16,211 | $ | 137,323 | |||||||||||||||||||||||||||||||||||
Net income | 18,741 | 16,786 | 19,934 | 11,514 | 13,578 | 145,937 | ||||||||||||||||||||||||||||||||||||||||||
Net income (loss) attributable to the noncontrolling interest | (4,267 | ) | 575 | 1,589 | 640 | 264 | 2,837 | |||||||||||||||||||||||||||||||||||||||||
Basic net income (loss) per share | ¥ | (234.58 | ) | ¥ | 166.86 | ¥ | 87.41 | ¥ | 175.86 | ¥ | 118.15 | $ | 1.00 | |||||||||||||||||||||||||||||||||||
Diluted net income (loss) per share | ¥ | (234.58 | ) | ¥ | 166.86 | ¥ | 87.41 | ¥ | 175.80 | ¥ | 118.09 | $ | 1.00 | |||||||||||||||||||||||||||||||||||
Cash dividends declared per share (3) | ¥ | 54.00 | ¥ | 54.00 | ¥ | 54.00 | ¥ | 54.00 | ¥ | 54.00 | $ | 0.46 | ||||||||||||||||||||||||||||||||||||
Net income attributable to KONAMI CORPORATION | ¥ | 23,008 | ¥ | 16,211 | ¥ | 18,345 | ¥ | 10,874 | ¥ | 13,314 | $ | 143,100 | ||||||||||||||||||||||||||||||||||||
Basic net income attributable to KONAMI CORPORATION per share | ¥ | 175.86 | ¥ | 118.15 | ¥ | 133.63 | ¥ | 79.30 | ¥ | 99.76 | $ | 1.07 | ||||||||||||||||||||||||||||||||||||
Diluted net income attributable to KONAMI CORPORATION per share | ¥ | 175.80 | ¥ | 118.09 | ¥ | 133.57 | ¥ | 79.30 | ¥ | 99.76 | $ | 1.07 | ||||||||||||||||||||||||||||||||||||
Cash dividends declared per share (4) | ¥ | 54.00 | ¥ | 54.00 | ¥ | 54.00 | ¥ | 54.00 | ¥ | 54.00 | ||||||||||||||||||||||||||||||||||||||
Cash dividends declared per share in USD (5) | $ | 0.46 | $ | 0.46 | $ | 0.54 | $ | 0.54 | $ | 0.58 | ||||||||||||||||||||||||||||||||||||||
Balance Sheet Data: | ||||||||||||||||||||||||||||||||||||||||||||||||
Total current assets | ¥ | 136,705 | ¥ | 152,766 | ¥ | 161,938 | ¥ | 144,327 | ¥ | 138,261 | $ | 1,171,207 | ¥ | 144,327 | ¥ | 138,261 | ¥ | 140,079 | ¥ | 136,675 | ¥ | 134,562 | $ | 1,446,281 | ||||||||||||||||||||||||
Total goodwill, identifiable intangible assets and property and equipment | 92,912 | 93,148 | 93,435 | 103,129 | 114,517 | 970,919 | 103,129 | 114,617 | 126,786 | 118,360 | 119,579 | 1,285,243 | ||||||||||||||||||||||||||||||||||||
Total assets | 278,250 | 294,497 | 304,321 | 302,637 | 304,657 | 2,580,745 | 302,637 | 304,657 | 319,248 | 301,670 | 298,198 | 3,205,052 | ||||||||||||||||||||||||||||||||||||
Total current liabilities | 71,774 | 72,799 | 99,827 | 81,224 | 82,466 | 698,568 | 81,224 | 82,466 | 75,113 | 62,386 | 53,465 | 574,645 | ||||||||||||||||||||||||||||||||||||
Total long-term liabilities | 87,215 | 92,160 | 73,150 | 55,477 | 44,832 | 379,771 | 55,477 | 44,832 | 57,052 | 55,745 | 55,502 | 596,539 | ||||||||||||||||||||||||||||||||||||
Total stockholders’ equity | 90,406 | 102,129 | 105,857 | 163,815 | 174,662 | 1,479,50 | ||||||||||||||||||||||||||||||||||||||||||
Common stock | 47,399 | 47,399 | 47,399 | 47,399 | 47,399 | 509,448 | ||||||||||||||||||||||||||||||||||||||||||
Total KONAMI CORPORATION stockholders’ equity | 163,815 | 174,662 | 182,759 | 178,632 | 184,465 | 1,982,642 | ||||||||||||||||||||||||||||||||||||||||||
Noncontrolling interest | 2,121 | 2,697 | 4,324 | 4,907 | 4,766 | 51,226 | ||||||||||||||||||||||||||||||||||||||||||
Total equity | 165,936 | 177,359 | 187,083 | 183,539 | 189,231 | 2,033,868 |
(1) |
During fiscal 2006, we determined that the fair value of long-lived assets and identifiable intangible assets related to the Health & Fitness reporting unit was lower than their carrying value as a result of a review based on independent valuations. Accordingly, impairment of long-lived assets and identifiable intangible assets of ¥10,533 million and ¥9,180 million were recorded in operating expenses respectively. |
(2) | During fiscal 2009, we recorded ¥11,121 million as restructuring and impairment charges that include impairment losses of long-lived assets for our Health & Fitness segment. |
(3) | During fiscal 2010, we recorded ¥2,339 million as restructuring and impairment charges that include impairment losses of long-lived assets and expenses related to closure of facilities for our Health & Fitness segment. |
(4) | Cash dividends per share consist of interim dividends paid during the fiscal year and year-end dividends paid after the fiscal year-end. |
(5) | Calculated using the yen-dollar exchange rate of the respective fiscal year end date, the noon buying rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York. |
Exchange Rate Data
Fluctuations in exchange rates between the Japanese yen and U.S. dollar and other currencies will affect the U.S. dollar and other currency equivalent of the yen price of our shares and ADSs and the U.S. dollar amounts received on conversion of cash dividends. We have translated some Japanese yen amounts presented in this annual report into U.S. dollars solely for your convenience. Unless otherwise noted, the rate used for the translations was ¥118.05¥93.04 per $1.00 which was the mid price for telegraphic transfer of U.S. dollars for yen quoted by The Bank of Tokyo-Mitsubishi UFJ, Ltd. as of March 30, 2007,31, 2010, the last business day on or prior to the date of our most recent annual consolidated financial statements. The translation should not be construed as a representation that the yen amounts have been, could have been, or could in the future be converted into U.S. dollars at the above or any other rate.
The following table presents the noon buying rates for Japanese yen per $1.00 in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York for and as of the end of each period indicated.
Fiscal year ended March 31, | High | Low | Average (1) | Period-end | ||||
2002 | 134.77 | 115.89 | 125.64 | 132.70 | ||||
2003 | 133.40 | 115.71 | 121.10 | 118.07 | ||||
2004 | 120.55 | 104.18 | 112.75 | 104.18 | ||||
2005 | 114.30 | 102.26 | 107.28 | 107.22 | ||||
2006 | 120.93 | 104.41 | 113.67 | 117.48 | ||||
2007 | 121.81 | 110.07 | 116.55 | 117.56 | ||||
Calendar year 2007 | ||||||||
January | 121.18 | 118.49 | 120.45 | 121.02 | ||||
February | 121.77 | 118.33 | 120.50 | 118.33 | ||||
March | 118.15 | 116.01 | 117.26 | 117.56 | ||||
April | 119.84 | 117.69 | 118.93 | 119.44 | ||||
May | 121.79 | 119.77 | 120.77 | 121.76 | ||||
June | 124.09 | 121.08 | 122.69 | 123.69 |
Fiscal year ended March 31, | High | Low | Average (1) | Period-end | ||||
2006 | 120.93 | 104.41 | 113.67 | 117.48 | ||||
2007 | 121.81 | 110.07 | 116.55 | 117.56 | ||||
2008 | 124.09 | 96.88 | 114.31 | 99.85 | ||||
2009 | 110.48 | 87.80 | 100.62 | 99.15 | ||||
2010 | 100.71 | 86.12 | 92.93 | 93.40 | ||||
Calendar year 2010 | ||||||||
January | 93.31 | 89.41 | 91.10 | 90.38 | ||||
February | 91.94 | 88.84 | 90.14 | 88.84 | ||||
March | 93.40 | 88.43 | 90.72 | 93.40 | ||||
April | 94.51 | 92.03 | 93.45 | 94.24 | ||||
May | 94.68 | 89.89 | 91.97 | 90.81 | ||||
June | 92.33 | 88.39 | 90.81 | 88.49 |
(1) | Calculated from the average of the exchange rates on the last day of each month during the period with respect to fiscal years and from the average of daily noon buying rate with respect to calendar years. |
As of July 26, 2007,23, 2010, the noon buying rate was ¥119.14¥87.31 per $1.00.
B. Capitalization and Indebtedness.
Not applicable.
C. Reasons for the Offer and Use of Proceeds.
Not applicable.
D. Risk Factors.
Special Note Regarding Forward-looking Statements.
This annual report contains forward-looking statements about our industry, our business, our plans and objectives, our financial condition and our results of operations that are based on our current expectations, assumptions, estimates and projections. These forward-looking statements are subject to various risks and uncertainties. Generally, these forward-looking statements can be identified by the use of forward-looking terminology such as “may”, “will”, “expect”, “anticipate”, “estimate”, “plan” or similar words. These statements discuss future expectations, identify strategies, discuss market trends, contain projections of results of operations or of financial condition, or state other forward-looking information. Known and unknown risks, uncertainties and other factors could cause our actual results to differ materially from and worse than those contained in or suggested by any forward-looking statement. We cannot promise that our expectations, projections, anticipated estimates or other information expressed in or underlying these forward-looking statements will turn out to be correct. We do not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Important risksrisk factors that could cause our actual results to be materially different from as described in the forward-looking statements are set forth in this Item 3.D or elsewhere in this annual report and include, without limitation:
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;
changes in economic conditions affecting our operations or the way that individuals choose to spend their leisure time;
our ability to successfully expand internationally with a focus on our Digital Entertainment segment and Gaming & System segment;
our ability to successfully expand the scope of our business and broaden our customer base through our Health & Fitness segment;
our ability to successfully generate cash flows on an individual club operation level sufficient to recover the carrying value of the related individual club operations;
regulatory developments and changes, in particular in the gaming industry, and our ability to respond and adapt to those changes;
our ability to successfully integrate current acquisitions and realize expected synergies and business benefits to recover the acquisition investment, including goodwill and separately identifiable intangible assets; and
our expectations with regard to further acquisitions and the integration of any companies we may acquire.
Risks Relating to Our Overall Business
Our future success is dependent on our ability to release “hit” products.
The market for video game software, toy & hobby products, amusement arcade games, token-operated games, card games and online service products that belong to our Digital Entertainment segment, and gaming machines that belong to our Gaming & System segment, is “hits”and pachinko liquid crystal display and pachinko slot machines that belong to our
Other Operations segment are “hit” driven. “Hit” products account for a substantial portion of our net revenues and of the revenues in each of these markets. For example, the fast growth of our toy & hobbycard game products in recent years resulted from,
and was heavily dependent on, the sales of ourYu-Gi-Oh! Trading Card Game. Similarly, hit video game software titles such as theYu-Gi-Oh! series, theDanceDanceRevolution series, theWORLD SOCCERWinning Elevenseriesand series and theMETAL GEAR SOLIDseries, as well as oure-AMUSEMENT products for our amusement facilities,have contributed significantly to our recent results. If we do not develop, publish and distribute “hit” products in the future, our financial condition, results of operations and profitability in these segments could be negatively affected. The most important factor in developing hit products is to respond quickly to public tastes and preferences that change rapidly and are hard to predict. Therefore, if we fail to accurately anticipate and promptly respond to changing tastes and preferences, our business, revenues and profits in these segments could be harmed.
Our revenues are dependent on timely introduction of popular new products.
Our success depends on generating revenue from the timely introduction and shipment of new products. The majority of sales of a new video game software generally occurs in the first thirty to one hundred and twenty days after release. The sales occurrence for toy & hobby products including mainly card games, amusement arcade games, token-operated games and card game products that belong to Digital Entertainment segment, and gaming machines that belong to Gaming & System segment and pachinko slot machines that belong to Other segment also tends to be limited. We are constantly required to introduce new products in order to generate revenues and/or to replace declining revenues from older products. Also, because revenues earned during the early life of a product generally constitute a relatively high percentage of the total revenues earned from a product, a significant delay in the introduction of one or more new products, or the inability to ship in sufficient quantities to meet demand, could negatively affect sales and have a negative impact on our financial condition and results of operations. Unanticipated delays could also cause us to miss an important selling season such as the year-end holiday buying season or summer vacation. Moreover, our products may not achieve and sustain market acceptance during the short life cycle sufficient to generate revenue to recover our investment in developing the products and to cover our other costs.
The timely shipment of a new product depends on various factors, including the development process, approval by third-party licensors, production capacity and other factors such as debugging and approval by hardware licensors, in the case of video game software. It is possible that some of our products will not be released or shipped in a timely fashion in accordance with our plans.
Competition for market acceptance and pricing competition affect our revenue and profitability.
The markets for video game software, toy & hobby products, arcade games, token-operated games, card game products, gaming machines and most of our other products are intensely competitive and new products and platforms are regularly introduced. Only a small percentage of products introduced in the market achieve any degree of sustained market acceptance. In the case of video game software for handheld systems and home game consoles, amusement arcade games, token-operated games, gaming machines and gamingpachinko slot machines, significant price competition and reduced profit margins may result as the hardware product cycle matures. In addition, competition from new technologies such as video game software for play over the Internet or mobile phones may reduce demand in markets in which we have traditionally competed. As a result of prolonged price competition and reduced demand due to competing technologies, our operations in the past have been, and in the future could continue to be, negatively impacted.
Our competitors vary in size from small companies to very large corporations, some of which have significantly greater financial, marketing and product development resources than we have. Due to these greater resources, certain of our competitors can undertake more extensive marketing campaigns, adopt more aggressive pricing policies, pay higher fees to licensors of desirable motion picture, television, music, sports and character properties and pay more to third party software developers than we can. It is also possible that some of our domestic competitors will form alliances or enter into exclusive business arrangements with key creators, distributors or retailers overseas which could hinder our ability to expand into international markets.
A decline in consumer spending due to unfavorable economic conditions could hinder sales of our products.
Our product sales are affected by customer’s ability and desire to spend disposable income on the purchase of our products. Any significant downturn in general economic conditions which results in a reduction in
consumers’ discretionary spending could reduce demand especially for entertainment and health-oriented products and services like ours and may harm our business. Such industry downturns have been, and may continue to be, characterized by diminished product demand and subsequent erosion of average selling prices.
Our performance may be vulnerable to rapidly changing consumer preferences.
Sales of our products depend substantially on how consumers decide to spend their money. Many of our markets are characterized by rapidly changing trends and fads, and frequent innovations and improvements are necessary to maintain consumer interest. We compete with other forms of entertainment and leisure activities. For example, we believe that the overall growth in the use of the internet and online services by consumers may pose a competitive threat if customers and potential customers spend less of their available time using video game software, toy & hobby products, amusement arcade games, token-operated games, card game products, gaming machines and gamingpachinko and pachinko slot machines, and more time using the Internet or otherwise choose to engage in other forms of entertainment and leisure activities. Our financial performance may be harmed if we are unable to successfully adapt our products and services to these changing trends and fads.
Fluctuations in our quarterly operating results make our quarterly revenues and income difficult to predict.
The timing of release of new products can cause material quarterly revenue and earnings fluctuations. A significant portion of revenues in any quarter is often derived from sales of new products introduced in that quarter or in the immediately preceding quarter. If we are unable to begin volume shipments of a significant new product during the scheduled quarter, our revenues and earnings will be negatively affected in that period. In addition, because a majority of the unit sales for many of our products typically occur in the first thirty to one hundred and twenty days following their introduction, revenues and earnings may increase significantly in a period in which a major product is introduced and may decline in the following period or in periods in which there are no major product introductions.
Our quarterly operating results also may be materially impacted by other factors, including the level of market acceptance or demand for video game software, the timing of hardware platform introductions, the level of development and/or promotion expenses for a video game title. Also, many of our products are in the greatest demand from November to January, particularly in November and December and 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. Thisyear. The reason for this trend is explained asthat these months correspond to the periods of children’s school holidays and it is customary in Japan to give presents to girlfriends, boyfriends, and family members during the Christmas season in December and buy such productstoys as Christmas and New Year presents in December and January. In addition, in the U.S. demand is highest from November, starting with Thanksgiving and through the Christmas season. Moreover, in a platform transition period, sales of video game software products can be significantly affected by the timeliness of introduction of video game systems by the manufacturers of those platforms, such as Sony Corporation (“Sony”), Nintendo Co., Ltd. (“Nintendo”) and Microsoft Corporation (“Microsoft”).
Inability to procure commercially valuable intellectual property licenses may prevent product releases or result in reduced product sales.
We focus our development and publishing activities principally on products that are, or have the potential to become, franchise brand properties. Many of our products are based on intellectual property and other character or story rights acquired or licensed from third parties. For example, our products often embody trademarks, trade names, logos, or copyrights licensed by third parties, such as Major League Baseball Properties, Inc., and Major League Baseball Players Association. We have also acquired content licenses from sports organizations such as FIFPro Commercial Enterprises BV, the Japan Professional Baseball League, the Japan Professional Soccer
League, or J-League, and the Japan Football Association. In addition, we have obtained content licenses from various companies, including NIHON AD SYSTEMS Inc., Kodansha Ltd., and Shogakukan Production Inc.Shogakukan-Shueisha Productions Co., Ltd.
These license and distribution agreements are limited in scope and time, and we may not be able to acquire new licenses, renew licenses when they expire or include new products in existing licenses. License agreements
relating to these rights generally extend for an initial term of two to three years. The agreements are terminable upon the occurrence of a number of factors, including our material breach of the agreement, failure to paydelay in payment of amounts due to the licensor in a timely manner, or a bankruptcy or insolvency. The loss of a significant number of our intellectual property licenses or of our relationships with licensors could have a material adverse effect on our ability to develop new products and therefore on our business and financial results.
Inadequate intellectual property protections could prevent us from enforcing or defending our proprietary technology.
We regard our products as proprietary and rely on a combination of patent, copyright, trademark and trade secret laws, employee and third party nondisclosure agreements and other methods to protect our proprietary rights. We own or license various patents, copyrights and trademarks. We are aware that some unauthorized copying occurs within the video game software, trading card game and arcade machine industries. For example, unauthorized copies of theYu-Gi-Oh! Trading Card Gamehave been found inall over the United States, France, China, Taiwan and the Netherlands.world. If a significant volume of unauthorized copying of our trading card games and other products were to occur, it could cause material harm to our business and financial results.
Policing all the unauthorized use of our products is difficult and can be a persistent problem, especially in some international markets. Further, the laws of some countries where our products are or may be distributed either do not protect our products and intellectual property rights to the same extent as the laws of Japan and the United States, or are poorly enforced. Legal protection of our rights may be ineffective in such countries, and we may be unable to protect our intellectual property rights, particularly as we pursue new and emerging technologies. We cannot assure you that existing intellectual property laws will provide adequate protection for our products in connection with these emerging technologies.
Infringement of intellectual property rights could lead to costly litigation and/or the need to enter into license agreements, which may result in increased operating expenses.
Existing or future infringement claims against us may result in costly litigation or require us to obtain a license for the proprietary rights of third parties, which could have a negative impact on our results of operations. As the number of our products increases there is an increased possibility of the contents and features of these products overlapping with the products of other companies, and we become subject to an increasing possibility of infringement claims. Although we are making efforts to ensure that our products do not violate the intellectual property rights of others, it is possible that third parties still may claim infringement.
From time to time, third parties have asserted that some of our products infringed their proprietary rights. These infringement claims have sometimes resulted in litigation against us. For example, in video game software featuring sports such as baseball and soccer, we use individual names and images of professional players, team names, logos and uniforms. Although we have obtained licenses to use them from organizations and agents which manage the rights of the professional players and the teams, in the event agreements change or any disputes arise among the professional players, the teams and organizations or agents which manage their rights, it is possible that such professional players, teams, organizations or agents might bring a lawsuit against us to suspend manufacturing and sales of the relevant video game software. Such a lawsuit may be time consuming and expensive to defend.
Intellectual property litigation or claims could force us to do one or more of the following:
cease selling, incorporating or using products or services that incorporate the challenged intellectual property;
obtain a license from the holder of the infringed intellectual property, which, if available at all, may not be available on commercially favorable terms; or
redesign our products, which could cause us to incur additional costs, delay introduction and possibly reduce commercial appeal of our products.
Any of these actions may cause material harm to our business and financial results.
If our products contain defects, our business could be harmed significantly.
Our video game software products, amusement arcade games, token-operated games, exercise equipments, gaming machines, and pachinko liquid crystal displays (“LCDs”) and pachinko slot machines are complex and may contain undetected errors when first introduced or when new versions are released. We cannot assure you that, despite extensive testing prior to release, errors will not be found in new products or releases after shipment, resulting in loss of or delay in market acceptance. This loss or delay could significantly harm our business and financial results.
We may face limitations on our ability to find suitable acquisition opportunities and integrate acquired businesses.
In order to develop and market our products and services competitively, we are seeking opportunities in and outside Japan to make acquisitions of controlling or significant stakes in other businesses that will grow our current businesses. Some of these transactions could be material in size and scope. Our acquisitions strategy requires that we effectively coordinate and integrate our activities with those of the companies in which we invest or which we acquire. In the event we make such acquisitions or investments, we will face additional financial and operational risks, including:
difficulty in assimilating the operations, technology and personnel of acquired companies;
disruption in our business because of the allocation of financial and human resources to consummate the acquisitions;
difficulty in retaining key technical and managerial personnel from acquired companies;
dilution of our current shareholders if we issue equity to fund one or more of these acquisitions or investments;
difficulty in successful integration of acquisitions and realization of expected synergies and business benefits to recover acquisition investments, including any goodwill and separately identifiable intangible assets; and
assumption of operating losses and increased expenses, charges and liabilities in connection with acquisitions.
While we will continually be searching for additional acquisition opportunities, we may not be successful in identifying suitable acquisitions. As the video game software, amusement arcade machine, fitness club, and gaming machine and pachinko and pachinko slot industries continue to consolidate, we face significant competition in seeking and consummating acquisition opportunities. We may not be able to consummate potential acquisitions or investments on terms acceptable to us or such an acquisition or investment may not enhance our business or may decrease rather than increase our earnings. Our shareholders may not have the opportunity to review, vote on or evaluate future acquisitions.
Our business and financial results could be negatively impacted if we are unable to attract additional qualified employees or retain the services of key employees, the loss of whom could have a material adverse effect on our business.
Our continued growth and success depend to a significant extent on the continued service of our senior management and other key employees and the hiring of new qualified employees. The software industry in
particular is characterized by a high level of employee mobility and aggressive recruiting among competitors for personnel with technical, marketing, sales, product development and management skills. We may not be able to attract and retain skilled personnel or may incur significant costs in order to do so that may not be offset through either improved productivity or higher prices.
Factors specific to international trade may result in reduced revenues and/or increased costs.
Approximately 73.6%75% of our net revenues during fiscal 20072010 were derived from sales in Japan. Although we expect that domestic sales will continue to account for a significant portion of our revenues in future periods, we plan to expand our international operations, particularly with respect to video game software, gaming machines and toy & hobbycard game products, including through alliances or investments. Sales in foreign countries may involve expenses incurred to customize products to comply with local laws, especially in the case of gaming machines. In addition, products that are successful in the domestic Japanese market may not be successful in foreign markets due to different consumer preferences. In addition, our costs will increase as a result of the need to conduct market research to discover local preferences and tastes and to develop foreign language versions or make product modifications in order to tailor our products to various local markets. In the case of video game software, we may have to grant price concessions to or accept returns from major retailers that control market access to consumers. International trade is also subject to general country risks, including suspension of currency exchange by governments, increases in tariffs, and forfeiture of property through expropriation by governments. International trade is also exposed to fluctuating exchange rates. We may become exposed to increased litigation risks or unexpected bankruptcy risks through product liabilities, facility liabilities, product defect or labor issues in the course of further expanding our business, enhancing our international network and increasing our vendors and customers. These and other factors specific to international trade may result in increased costs or reduced revenues.
Demographic trends may have an adverse effect on our target market and our ability to increase revenues.
The Japanese population of people in their teens and twenties, the traditional target market for our products and services including computer & video games products and arcade games, is expected to decline. Accordingly, we may not be able to increase or maintain revenues if we are unable to enter new markets such as fitness clubs and expand our customer base and product offerings to overseas markets. Life expectancy in Japan is among the highest of the developed countries. However, as a result of a decline in fertility rates, Japan’s population is expected to begin declining after 2007 and its demographic makeup is already aging considerably. According to government estimates, released in December 2006, as of calendar year 2005, 20.2%October 2009, 22.7% of Japan’s population was aged 65 or over, and, released in April 2008, as of calendar year 2006, this percentage is expected to reach 25.2% by 2013 and 40.5% by 2055.
Risks Relating to Our Digital Entertainment Segment
Transitions in game consoles and technological change have a material impact on the market for video game software and may adversely affect our revenues and profitability.
The life cycle of existing game consoles and the market acceptance and popularity of new game consoles significantly affect the success of our products. The introduction of new technologies could render our current products or products in development obsolete or unmarketable. In addition, we cannot guarantee that we will be successful in developing and publishing video game software for new game consoles on a timely basis. Further, the release dates of new game platforms or the number of units that will be shipped upon such release are beyond the scope of our control.
Also, when new game consoles are announced or introduced into the market, consumers typically reduce their purchases of video game software products for current consoles in anticipation of new platforms becoming available. During these periods, sales of our video game software products can be expected to slow down or even decline until new platforms have been introduced and have achieved wide consumer acceptance. For example, sales of some of our products for the previous PlayStation 2 and Nintendo 64GameCube platforms were negatively
affected by the platform transition from 32-bit and 64-bit to 128-bit game consoles such as Sony PlayStation 2,3, Nintendo GameCubeWii and Microsoft Xbox.Xbox360. Also, if fewer than expected units of a new game platform are manufactured or shipped, or the introduction of a new platform is significantly delayed, we may experience lower-than-expected sales.
We must make significant expenditures to develop products for new platforms which may not be successful or released when anticipated.
The cyclical nature of the industry requires us to anticipate and assess the emergence and market acceptance of new game consoles and develop new software well in advance of the time the platform is introduced to consumers. The complexity of next-generation platforms has resulted in higher development expenses for us which typically range between ¥100 million and ¥700 million per software title. If the platforms for which we develop new software products do not attain significant market penetration or our new products fail to gain market acceptance, we may not be able to recover in revenues our development expenses, which could be significant, and our business and financial results could be significantly harmed. We anticipate that our profitability will continue to be impacted by the levels of research and development expenses relative to revenues, and by fluctuations relating to the timing of development in anticipation of future platforms.
If we are unable to obtain or renew licenses from hardware manufacturers, we will not be able to release video game software for popular video game systems and our revenue and profitability may be negatively impacted.
Substantially all of our revenues from Computer & Video Games business have historically been derived from sales of video game software for use on proprietary game platforms developed and manufactured by other companies. We may only publish our games for play on their game platforms if we receive a platform license from them, which is generally for an initial term of several years and may be extended for additional one-year terms. If we cannot obtain licenses to develop video game software from manufacturers of popular game consoles or if any of our existing license agreements are terminated, we will not be able to release video game software for those systems, which may have a negative impact on our results of operations and profitability. Although we cannot assure shareholders that we will be able to obtain extensions or that we will be successful in negotiating definitive license agreements with developers of new systems when the term of existing license agreements end, to date we have always obtained extensions or new agreements with the hardware companies. We also depend on hardware manufacturers for the following additional reasons:
platform manufacturers have considerable control over the prices for their publisher licenses;
we must obtain their prior review and approval to publish games on their platforms;
if the popularity of a game platform declines, or the manufacturer stops manufacturing or does not meet the demand for a platform, or delays the introduction of a platform in a region important to us, the games that we have published and that we are developing for that platform would likely produce lower sales than we anticipate;
these manufacturers control the manufacture of, or approval to manufacture, the game discs and cartridges that incorporate our video game software; and
these companies have the exclusive right to protect the intellectual property rights to their respective hardware platforms and technology and to discourage others from producing unauthorized software for their platforms that compete with our games.
In addition, we depend on Sony and Nintendo for the manufacture of products that we develop for their hardware platforms. Games for Microsoft’s hardware platforms must be manufactured by an authorized replicator. Our hardware platform licenses with these hardware manufacturers provide that the manufacturer may change licenses’ costs. These licenses include other provisions such as approval rights of all products and related promotional materials that could have an effect on our costs and the timing of release of new titles.
Since major manufacturers such as Sony and Nintendo are also publishers of games for their own hardware platforms and manufacture products for all of their other licensees, such manufacturers may give priority to their own products or those of our competitors in the event of insufficient manufacturing capacity. Our business and
financial results could be materially harmed by unanticipated delays in the manufacturing and delivery of our products by Sony or Nintendo, which has occurred in the past. In addition, our business and financial results
could be materially harmed if Sony or Nintendo used their rights under these agreements to delay the manufacture or delivery of our products, limit the costs recoverable by us to manufacture video game software for their consoles, or elect to manufacture video game software themselves or use developers other than us.
Our video game software for both game consoles and amusement arcade games may be subject to governmental restrictions, rating systems or to legal claims regarding content.
Legislation is periodically introduced at the local, state and federal levels in the United States and in other countries has established rating systems to establish a system for providinginform consumers with information aboutof software products that contain graphic violence andand/or sexually explicit material contained in software products.material. In 2005, legislation was also introduced in Japan to establish a system for local authorities to restrict the provision of products containing graphic violence. In addition, many countries have laws that permit governmental entities to censor the content and advertising of software. Although there are no mandatory government-run rating systemsgovernment regulations in Japan, North America, Europe and Asian countries except China that are significant markets or potential markets for our products, an exception is China, where governmental approval is required for software sales in China and such rating systemsthat country. Similar requirements for governmental approval may be adopted elsewhere. We may be required to modify our products or alter our marketing strategies to comply with new regulations, which could delay the release of our products in those countries. Due to theMoreover, uncertainties regarding thesethe rating systems may give rise to confusion in the marketplace, may occur, and we are unable to predict what effect, if any, such rating systems would have on our business.
WithinIn the past several years, at least one lawsuit has been filed in the United States against video game companies by the families of persons shot and killed by teenage gunmen. This lawsuit, which did not name us as a defendant, by the families of victims who were shot and killed by teenage gunmen. This lawsuit alleged that the video game companies manufactured and/or supplied these teenagers with violent video games, teaching them how to use a gun and causing them to act out in a violent manner. While the plaintiffs’ claims were dismissed, similar lawsuits may be filed in the future which, if decided against us and our insurance carrier does not cover the amounts we are liable for, could have a material adverse effect on our business and financial results. Also payment of significant claims by insurance carriers may make such insurance coverage materially more expensive or unavailable in the future, thereby exposing our business to additional risk.
Although neither the terrorist attacks in the United States of America in September 2001, the late 2001 bio-terrorist attacks on various organizations nor war against Iraq commenced in March 2003 involving terrorist attacks have had a material adverse effect on our business, operations or financial condition, we cannot assure you that future terrorist attacks or the response of governments to any future terrorist actions, would not negatively affect our business by requiring us to modify the content of our video game software, which could result in expensive product recalls, reprogramming or delays in the release of future games.
Our results of operations may suffer if amusement arcade revenues and sales of arcade games and token-operated game machines continue to decline.
Amusement arcades are the primary venue for video game machines and token-operated game machines in Japan. Over the past several years,Although amusement arcade revenues and the sales of arcade games had bottomed out and recently have recovered. However,continued to grow, the market environment shows a declining trend due to the worldwide economic downturn stemming from the financial recession that started in the U.S. In addition, due to the development of full-scale home video game systems that can rival amusement arcade games in play quality and the introduction of advanced mobile telephones equipped with network and game functions, consumers now have increasing leisure alternatives outside of amusement arcades. As customer preferences diversify, fewer people may visit frequently the amusement arcades on which we depend for sales of our amusement arcade game software, amusement arcade games and token-operated game machines and this could have a negative impact on our results of operations if amusement arcade operators reduce purchases of our products as a result.
If our games are not accepted in the competitive domestic market for video game machines and token-operated game machines for amusement arcades, our results of operations will suffer.
Our success as a manufacturer of video game machines and token-operated game machines is dependent upon numerous factors, including our ability to design, manufacture, market and service video game machines
and token-operated game machines that achieve player acceptance while maintaining product quality and acceptable margins. In addition, we must compete against other large and well-established game manufacturers such as SEGA SAMMY HOLDINGS INC. (“Sega Sammy”) and NAMCO BANDAI Holdings Inc. (“Namco Bandai”). If any of these game manufacturers, or another competitor, develops popular video game machines or token-operated game machines for amusement arcades and installed these game machines in the same arcade floor space as our video games and token-operated game machines, our sales from the amusement arcade game and domestic token-operated game machine markets may decrease significantly.
Our business could be harmed if there is any substantial decline in the popularity of interactive Internet-based games or if our Internet-based games are not received favorably in the market.
In recent years, the rapid growth of the Internet has resulted in the development of interactive software games for play over networks and on mobile phones. Although we are marketing mobile phone-based games as well as games forwhich can be downloadable or which allows multiple players to play against each other using Nintendo Wii, DS, PlayStation 3, PlayStation 2, and Xbox, games downloadable using thePlayStation Portable, Xbox 360 or personal computers, and games for play over networks, games have diversified over recent years and consumers now have expanded choices. If there is any substantial decline in the popularity of our network-based games, our business, revenues and profits could be harmed.
In addition, the development and operation of Internet-based games require a long period for development and a substantial amount of initial investment, including for example numerous test operations of facilities such as servers. If our Internet-based games are not received favorably in the market, we may be unable to recoup our initial investment or operating expenses, and may have to recognize an impairment with respect to the servers and software assets associated with such games.
Information processing failures in the operation of our Internet-based games may adversely affect our revenues and income.
As our Internet-based games require servers that process a heavy volume of information, the computers we use as servers must be equipped with high processing capacity. Although we attempt to prevent troubles by performing maintenance for our servers, we may be unable to operate our Internet-based games if the information processing capacity of a server becomes suddenly overloaded or is unexpectedly attacked by external computer viruses. If the recovery of processing capacity requires a long period of time, thus driving customers away, or if such technical errors and interruptions occur repeatedly and cause our customers to lose confidence in our services, our net revenues and operating income may decrease.
Abuses of network-based credit card billing authorization may adversely affect our revenues and profits.
We collect charges for our network-based games based on consumers’ credit card information, through a credit card authorization agent. Although our credit card authorization agent takes all possible measures to ensure the privacy of customer information during billing transactions, if the credit card information of our customers is obtained by unauthorized third parties and used for unauthorized transactions, we may be required to make repayments of the unauthorized amounts out of the sales we made to such customers. In addition, if numerous abuses occur, a credit card authorization agent might cancel billing collection services with us, and our net revenues and operating income may be adversely affected.
Risks Relating to Our Gaming & System Segment
If our gaming products are not accepted in the competitive market for gaming machines, we may be unable to compete in the gaming machine market.
Our success as a gaming machine manufacturer and supplier in overseas markets is dependent upon numerous factors, including our ability to design, manufacture, market and service gaming machines and casino management systems that achieve player and casino acceptance while maintaining product quality and acceptable margins and to obtain approvals for our products from gaming authorities. In addition, we must compete against gaming equipment and system companies such as International Game Technology, Bally Technologies, Inc., Aristocrat Leisure Limited and WMS Industries Inc., which are among the largest and most-established suppliers of gaming machines in the world. Some of our competitors have greater financial resources, name recognition, established service networks and customer relationships than we do, and are licensed in more jurisdictions than we are.
In order to diversify and expand sales, we have obtained licenses in every state in Australia, the main states in the United States, and some provinces in Canada, and are marketing and selling gaming products in those markets. If our games and our system products fail to be accepted by the market, and we are otherwise unable to develop products that offer technological advantages or unique entertainment features, we will be unable to generate the revenues necessary to compete effectively in the competitive gaming product market. Consequently, the results of our operations could suffer.
If our technologies for gaming products are subject to claims they infringe on competitors’ patents, trademark rights and design rights, we may be unable to market our products as planned, thus adversely affecting our profits.
As technological capabilities and an ability to develop effective business plans are constantly becoming more crucial for success in the gaming business, it has become a critical business strategy for companies, especially in the United States, to ensure an advantage over competitors by filing and acquiring their own intellectual property rights such as patents, trademark rights and design rights in advance of their competitors. In this competitive business environment, we strive to commercialize our products only after carefully examining the intellectual property rights status of the products. However, if the contents of our new products and services are deemed to infringe on the intellectual property rights of competitors, we may be unable to bring such products or services to market or be forced to cease selling such products or services.
An adverse change affecting the gaming and systems industries, including a change in the economy, in gaming regulations or in the expansion and popularity of casino gaming, will negatively impact our profitability and our potential for growth.
Our ability to grow our business and operate profitably is substantially dependent upon the expansion of the gaming industry and factors that are beyond our control. These factors include, among others:
changes in the economy;
the pace of market expansion;
changes in gaming regulation;
fluctuations in popularity of casino gaming; and
changes in casino gaming tax rates instituted by national, state or province governments.
An adverse change in any of these political, legal and other factors may negatively impact our results of operations.
Our failure to obtain or retain required licenses for our Gaming & System segment could prevent us from expanding our market and prohibit us from generating revenue in certain jurisdictions.
In North America, the manufacture and distribution of gaming products is subject to numerous federal, state, provincial, tribal, international and local regulations. In particular, we are subject to extensive regulation in Arizona, California, Idaho, Illinois, Indiana, Iowa, Kansas, Louisiana, Michigan, Minnesota, Mississippi, Nevada, New Jersey, New Mexico, New York, Oregon, West Virginia, Wisconsin, North Dakota, South Dakota, Oklahoma, Connecticut, Pennsylvania, Florida, Rhode Island, Puerto Rico and the Provinces of British Columbia, Ontario, Quebec, Alberta, Manitoba and Saskatchewan in Canada due to our gaming product business in those jurisdictions. In addition, we may also be subject to regulation as a gaming operator if we keep on developing lease participation agreements under which we share in the revenues generated by gaming machines. These regulations are constantly changing and evolving, and may curtail gaming in various jurisdictions in the future, which would decrease the number of jurisdictions from which we can generate revenues.
Together with our key personnel, we undergo extensive investigation before each jurisdictional license is issued. Our gaming products are subjected to independent testing and evaluation prior to approval from each jurisdiction in which we do business. Generally, regulatory authorities have broad discretion when granting, renewing or revoking these game approvals and licenses. Our failure to obtain or retain a required license or approval in one jurisdiction could negatively impact our ability to obtain or retain required licenses and approvals in other jurisdictions. The failure to obtain or retain a required license or approval in any jurisdiction would decrease the geographic areas where we may operate and generate revenues, decrease our share in the gaming marketplace and put us at a disadvantage compared with our competitors. Consequently, the market price of our common stock may suffer.
Regulatory authorities may require shareholders to submit to background investigations and respond to questions from regulatory authorities, and may deny a license or revoke our licenses based upon their findings. These licensing procedures and background investigations may inhibit potential investors from becoming significant shareholders.
The future revenue growth of our Gaming & System segment depends on our ability to strengthen our research and development departments and improve the effectiveness of our sales organizations and service departments.
In order to increase market awareness and sales of our gaming products, it is important for us to develop hit products that are received favorably in our markets and for us to maintain technology that allows for future innovation and adaptations to changes in customer preferences. If we fail to assess market needs or be technologically innovative, our net revenues and operating income may be adversely affected.
In addition, it is important for us to improve the effectiveness of our sales operations and service departments internationally. Our gaming business is expanding from sales of slot machines to sales of casino management systems, which connect gaming machines under a single accounting, marketing and customer management system and reinforcement of security. Casino management systems provide for relatively stable revenues, as proceeds from the initial sale are supplemented by subsequent connection fees. However, gaming products require sophisticated sales efforts targeted at selected people within the gaming industry and quality post-sale servicing. Competition for qualified sales personnel is intense, and we might not be able to hire the kind and number of sales personnel we are targeting. In addition, we will need to effectively train and educate our sales force and strengthen our service departments to ensure trust in our products if we are to be successful in selling into the gaming machine market.
If our manufacturing plant in the United States has operational difficulties, and we have problems with manufacturing capacity and quality control, our business growth may be adversely affected.
In June 2005, we started operation of a manufacturing plant in Las Vegas to strengthen production capacity and customer service and expand development and sales in the U.S. market. We depend on our manufacturing
capacity for substantially all of our sales in the U.S. market. If operational troubles occur in this plant, we may be unable to maintain sufficient manufacturing capacity to meet increases in orders, and our financial performance may be adversely affected.
Natural disasters such as the damage caused by the record snowfall of December 2009 in the northeast United States, and flood damage due to the torrential rain in Manila in the Philippines in September 2009, could have material adverse effects on our Gaming & System segment.
The record snowfall in December 2009 raised concerns about a delay in transporting equipment to the casino markets in the northeast part of the United States where we ship our products. In addition, the flood caused by the torrential rain in September 2009 caused serious harm to the casino markets where construction and transporting were planned. Similarly, our business results could be significantly affected due to other natural disasters in the future.
Risks Relating to Our Health & Fitness Segment
Our health & fitness segment may not grow as we expect if we are not able to successfully develop and operate new club locations.
Our growth strategy depends in part on our ability to successfully develop and operate new club locations. The successful development of new clubs will depend on various factors, including our ability to:
locate suitable sites for clubs;
successfully negotiate lease agreements and meet construction schedules and budgets;
resolve zoning, permitting or other regulatory issues relating to the construction of new clubs;
hire, train and retain qualified personnel;
attract new members; and
effectively address issues raised by other factors, some or all of which may be beyond our control.
If we are not able to achieve success with respect to the factors outlined above, the growth of our health & fitness segment may be limited. We cannot assure you that we will be able to implement our growth strategy, open new clubs in a timely and cost-efficient basis or operate our new clubs profitably. Upon opening a new fitness club, we often experience an initial period of operating losses with respect to that club for the first year. However, this period can vary depending on the individual club, and may be substantially longer than a year. If we are unable to enhance the performance of our new fitness clubs, our operating income may be adversely affected. In fiscal 2006,2009, we recognized ¥19,713recorded ¥11,121 million inas restructuring and impairment charges that include impairment losses in our Health & Fitness segment partlyof long-lived assets. In fiscal 2010, we recorded ¥2,339 million as a resultrestructuring and impairment charges that include impairment losses of the segment’s failurelong-lived assets and expenses related to meet previous growth expectations, and weclosure of facilities. We may still incur future impairment charges against goodwill, other identifiable intangible assets, or property and equipment.
A decline in membership levels of our fitness clubs could have a negative effect on our business.
The performance of our fitness clubs is dependent on our ability to attract, acquire and retain members, and wemembers. We cannot assure you that we will be successful in these efforts, or that the membership levels at one or more of our clubs will not decline. Our members can cancel their club membership at the end of any month provided that they give advance notice by the tenth day of that month. Because members periodically cancel their membership, our total number of members will decline unless we are able to attract new members each month. There are numerous factors that could lead to a decline in membership levels at established clubs or that could prevent us from increasing our membership at newer clubs, including our reputation, our ability to deliver quality service at
a competitive cost, the presence of direct and indirect competition in the areas in which the clubs are located, general interest in sports and fitness clubs and general economic conditions. As a result of these factors, we cannot assure you that our membership levels will be adequate to maintain or permit the expansion of our operations. In addition, a decline in membership levels may have a material adverse effect on our performance, financial condition and results of operations.
Failure to compete effectively in the fitness club industry will have an adverse effect on our results of operations.
The fitness club industry is highly competitive. We compete with other fitness clubs, physical fitness and recreational facilities established by local governments, hospitals and businesses for their employees, amenity and condominium clubs and, to a certain extent, with racquet and tennis and other athletic clubs, country clubs, weight reducing salons and the home-use fitness equipment industry. We also compete with other entertainment and retail businesses for the discretionary income of our target markets. We cannot assure you that we will be able to compete effectively in the future in the markets in which we operate. In addition, we may face new competitors in the market that may be larger and have greater resources than us. These competitive conditions may limit our ability to increase dues without a material loss in membership, attract new members and attract and retain qualified personnel. Additionally, consolidation in the fitness club industry could result in increased competition among participants, particularly as large multi-facility operators are better able to compete for attractive acquisition candidates, thereby increasing costs associated with expansion through acquisitions, as well as negotiation of leases and the availability of real estate.
Future claims—we could be subject to claims related to health risks at our clubs.
Use of our fitness clubs and equipment poses some potential health risks to members or guests through exertion from use of our services and facilities including exercise equipment. As a result, we may be subject to claims against us for death or injury suffered by members while exercising at our fitness clubs, and we may not
be able to successfully defend any such claims. In addition, any such claims may harm our reputation. We currently maintain general liability insurance coverage but there can be no assurance that we will be able to maintain such liability insurance on acceptable terms in the future or that such insurance will provide adequate coverage against potential claims. Any liability claim in excess of our insurance coverage may adversely affect our results of operations.operations as well as damage our brand image.
We are subject to various governmental regulations, any con-compliancenon-compliance with which could result in temporary closings and negative publicity.publicity, causing damage to our corporate image.
Our operations are subject to national, local and municipal government regulation in the various jurisdictions in which our clubs are located. These regulations include, but are not limited to, health, sanitation and safety regulations with respect to the sale of food and beverages and the operation of swimming pools and baths. Any failure to comply with these regulations could result in the temporary suspension or loss of licenses necessary for food service and other operations at of our clubs. In addition, any resulting negative publicity that could have an adverse effect on our reputation, resulting in deterioration of our brand image and ability to attract, acquire, and retain club members.
We may be unable to get refunds of deposits and guarantee money relating to leases of land and buildings for the use of our fitness club facilities.
In many cases, we rent land and buildings when we open new fitness clubs. Under the lease agreements that we enter into with landowners, we are often required to make deposits and to provide guarantee money in case we default in payment of rent or neglect to restore the property to its original state upon termination of the lease agreement. Under such lease agreements, if we pay our rent and restore the property as stipulated, we are entitled to obtain refund of such deposits and guarantee money. However, if the owner of the property faces financial
difficulty or is otherwise unable or unwilling to return these funds, we may not be able to obtain full refunds of such deposits and guarantee money. As of March 31, 2007,2010, such deposits and guarantee money accounted for over 8%9% of our total assets.
Risks RelatingInability to Our Gaming & System Segment
If our gaming products are not acceptedprocure licenses for fitness programs from third parties or changes in the competitive market for gaming machines, weconditions of such licenses may be unable to compete in the gaming machine market.adversely affect our revenues.
Our successcompany acts as a gaming machine manufacturer and supplierlicensing agency in overseas markets is dependent upon numerous factors, including our ability to design, manufacture, market and service gaming machines and casino management systems that achieve player and casino acceptance while maintaining product quality and acceptable margins and to obtain approvals for our products from gaming authorities. In addition, we must compete against gaming equipment and system companies such as International Game Technology, Bally Technologies, Inc., Aristocrat Leisure Limited and WMS Industries Inc., which are among the largest and most-established suppliers of gaming machines in the world. Some of our competitors have greater financial resources, name recognition, established service networks and customer relationships than we do, and are licensed in more jurisdictions than we are.
In order to diversify and expand sales, we have obtained licenses in every state in Australia, the main states in the United States, and some provinces in Canada, and are marketing and selling gaming products in those markets. If our games and our system products fail to be accepted by the market, and we are otherwise unable to develop products that offer technological advantages or unique entertainment features, we will be unable to generate the revenues necessary to compete effectively in the competitive gaming product market. Consequently, the results of our operations could suffer.
If our technologies for gaming products are subject to claims they infringe on competitors’ patents, trademark rights and design rights, we may be unable to market our products as planned, thus adversely affecting our profits.
As technological capabilities and an ability to develop effective business plans are constantly becoming more crucial for success in the gaming business, it has become a critical business strategy for companies, especially in the United States, to ensure an advantage over competitors by filing andJapan, acquiring their own intellectual property rights such as patents, trademark rights and design rights in advance of their competitors. In this competitive business environment, we strive to commercialize our products only after carefully examining the intellectual property rights status of the products. However, if the contents of our new products and services are deemed to infringe on the intellectual property rights of competitors, we may be unable to bring such products or services to market or be forced to cease selling such products or services.
An adverse change affecting the gaming and systems industries, including a change in gaming regulations or in the expansion and popularity of casino gaming, will negatively impact our profitability and our potential for growth.
Our ability to grow our business and operate profitably is substantially dependent upon the expansion of the gaming industry and factors that are beyond our control. These factors include, among others:
the pace of market expansion;
changes in gaming regulation;
fluctuations in popularity of casino gaming; and
changes in casino gaming tax rates for instituted by national, state or province governments.
An adverse change in any of these political, legal and other factors may negatively impact our results of operations.
Our failure to obtain or retain required licenses for programs that have worldwide popularity, and supplies the programs to not only our Gaming & System segment could prevent us from expanding our market and prohibit us from generating revenue in certain jurisdictions.
own facilities but also to other fitness clubs. In North America, the manufacture and distributionevent that it becomes difficult to renew licenses or if any changes are made to the conditions of gaming products is subject to numerous federal, state, provincial, tribal, international and local regulations. In particular, we are subject to extensive regulation in Arizona, California, Idaho, Illinois, Indiana, Iowa, Kansas, Louisiana, Michigan, Minnesota, Mississippi, Nevada, New Jersey, New Mexico, New York, Oregon, West Virginia, Wisconsin, North Dakota, South Dakota, Oklahoma, Connecticut, Pennsylvania, Florida, Rhode Island, Puerto Rico and the Provinces of British Columbia, Ontario, Quebec, Alberta, Manitoba and Saskatchewan in Canada due to our gaming product business in those jurisdictions. In addition, we may also be subject to regulation as a gaming operator if we keep on developing lease participation agreements under which we share in the revenues generated by gaming machines. These regulations are constantly changing and evolving, and may curtail gaming in various jurisdictions in the future, which would decrease the number of jurisdictions from which we can generate revenues.
Together with our key personnel, we undergo extensive investigation before each jurisdictional license is issued. Our gaming products are subjected to independent testing and evaluation prior to approval from each jurisdiction in which we do business. Generally, regulatory authorities have broad discretion when granting, renewing or revoking these game approvals and licenses. Our failure to obtain or retain a required license or approval in one jurisdiction could negatively impact our ability to obtain or retain requiredsuch licenses, and approvals in other jurisdictions. The failure to obtain or retain a required license or approval in any jurisdiction would decrease the geographic areas where we may operate and generate revenues, decrease our share in the gaming marketplace and put us at a disadvantage compared with our competitors. Consequently, the market price of our common stock may suffer.
Regulatory authorities may require shareholders to submit to background investigations and respond to questions from regulatory authorities, and may deny a license or revoke our licenses based upon their findings. These licensing procedures and background investigations may inhibit potential investors from becoming significant shareholders.
The future revenue growth of our Gaming & System segment depends on our ability to strengthen our research and development departments and improve the effectiveness of our sales organizations and service departments.
In order to increase market awareness and sales of our gaming products, it is important for us to develop hit products that are received favorably in our markets and for us to maintain technology that allows for future innovation and adaptations to changes in customer preferences. If we fail to assess market needs or be technologically innovative, our net revenues and operating incomethere may be adversely affected.
In addition, it is important for us to improve the effectiveness of our sales operations and service departments internationally. Our gaming business is expanding from sales of slot machines to sales of casino management systems, which connect gaming machines under a single accounting, marketing and customer management system and reinforcement of security. Casino management systems provide for relatively stable revenues, as proceeds from the initial sale are supplemented by subsequent connection fees. However, gaming products require sophisticated sales efforts targeted at selected people within the gaming industry and quality post-sale servicing. Competition for qualified sales personnel is intense, and we might not be able to hire the kind and number of sales personnel we are targeting. In addition, we will need to effectively train and educate our sales force and strengthen our service departments to ensure trust in our products if we are to be successful in selling into the gaming machine market.
If our manufacturing plant in the United States has operational difficulties, and we have problems with manufacturing capacity and quality control, our business growth may be adversely affected.
In June 2005, we started operation of a manufacturing plant in Nevada to strengthen production capacity and customer service and expand development and sales in the U.S. market. We depend on our manufacturing capacity for substantially all of our sales in the U.S. market. If operational troubles occur in this plant, we may be unable to maintain sufficient manufacturing capacity to meet increases in orders, and our financial performance may be adversely affected.
Natural disasters such as hurricanes Katrina in August 2005 and Rita in September 2005, which caused a tremendous amount of damage to the southern part of the United States, could have a material adverse effect on our Gaming & System segment.ability to supply programs to each facility and our business results could be affected.
The need to suspend our business operations due to unexpected epidemic diseases may adversely affect our revenues.
In summer 2005, hurricanes caused a tremendous amount of damageDue to the gamingH1N1 influenza pandemic during fiscal 2010, the business operations of fitness clubs in some areas of Japan were suspended at the discretion of the government. If an unexpected epidemic of an unknown or known disease in the southern partfuture results in the suspension of business operations of our fitness clubs at the instruction of the United States, where we ship somegovernment or at our own discretion, our business results could be affected.
Abrupt changes in consumer tastes may adversely affect our business results.
Revenues due to usage of our products. The hurricanes resultedfacilities are highly dependent upon how consumers chose to spend their money, which makes it imperative that we unremittingly provide high quality services in loss of gaming equipment and a decrease in and cancellation of purchase orders. We also faced losses of gaming devices inventory, although to a lesser degree. Ourline with customer needs. For example, our business results of operations maycould be adverselynegatively affected if similar natural disasters occur infitness trends which don’t require the future.spending of money catch on, such as home fitness, running or walking.
Risks Relating to Our Other Operations—LCDs for Pachinko machines and Pachinko slot machines
As we do not manufactureUpon manufacturing LCDs for Pachinko machines, any delay or disruption in shipments from outside sources or incorporation of our software into the LCDs by subcontractors may adversely affect our profits.
Our revenues and profits from sales of our pachinko LCDs business come from sales of software that is integrated into LCDs. The manufacturing of LCDs is a complicated process which we entrust to third parties through agreements with certain suppliers who specialize in LCD commercial production. While we believe that
we currently enjoy good relations with these suppliers, we cannot ensure that they will be able to provide us with the quality and quantity of LCDs which we may require in the future. We also rely on subcontractors to incorporate our software into the LCDs, which makes it possible that we will suffer profitability losses in the event of complications or delay. In addition, if any of the manufacturers or subcontractors discontinuediscontinues their operations and we cannot find suitable replacements in a timely manner, we may face delays in introducing new products into the market and a decreased capacity for supplying software that is integrated into LCDs, adversely affecting our results of operations.
If the makers of LCDs for pachinko machines experience production delays, there may be unforeseen rises in inventory and delays in the posting of sales.
If the product release dates of makers of LCDs for pachinko machines are delayed for reasons such as revisions of the product release dates (due to changes in the market environment, efforts to differentiate themselves from competitors, or efforts to create balance between other products in their product line), or failure to pass the testing of the Security Electronics and Communications Technology Association (the “Security Association”), etc., there may be unforeseen rises in inventory and delays in the posting sales.
Our company’s pachinko slot machines may not pass the testing of the Security Association due to circumstances beyond our control, and as a result, there may be delays in the date of release. Further, due to the tightening of regulations on the pachinko business by the National Police Agency or the bankruptcy of our suppliers, pachinko slot machines which had passed the Security Association testing, and released or were scheduled for release, may not be able to be sold.
Upon receipt of commission by a prefectural public safety commission, the Security Association conducts a regulatory check as to whether pachinko and pachinko slot machines fulfill prescribed conditions on the basis of documents submitted by the pachinko and pachinko slot makers, as well as the practical exam, as described below:
1. | Pachinko and pachinko slot machine makers apply for the Security Association examination (application lots are determined by lottery). |
2. | In case the machines fail to pass 1., applicants must correct the parts which failed the examination, reapply, and upon passing, move on to 3. |
3. | The machines are inspected by a prefectural public safety commission. |
4. | The machines are set up in a pachinko hall, and the police ward with jurisdiction over the pachinko hall conducts an inspection. |
5. | Operation of the machines begins in the hall upon passing the test in 4. above. |
The date of release for a product may be delayed if reapplication becomes necessary in the process of the above procedures due to failure to gain an application lot, changes to the test standards or are tightening of regulations on the industry by the National Police Agency or other similar considerations.
Our company’s pachinko slot machines may be adversely affected because of groups attempting to make money through illicit methods (commonly referred to as goto-shi) in the pachinko and pachinko slot industry.
Our company’s pachinko slot machines may be adversely affected because of groups attempting to make money through illicit methods (commonly referred to asgoto-shi) in the pachinko and pachinko slot industries. In the event of such manipulation bygoto-shi, there may be a decline in sales volume due to the tarnishing of our brand image, and delays in the dates of release due to measures to preventgoto-shi manipulation of our other products.
Risks Relating to the Shares and the ADSs
Our shareholders of record on a record date may not receive the dividend they anticipate
The customary dividend payout practice of publicly listed companies in Japan may significantly differ from the practice widely followed in foreign markets. Our dividend payout practice is no exception. Pursuant to our Articles of Incorporation, our board of directors can determine the matters regarding dividends. While we may announce a dividend forecast prior to the record date of March 31, September 30, or such other date as we may set pursuant to our Articles of Incorporation, our board of directors is not legally bound by such forecast. Instead, our board of directors ultimately determines the actual dividend payment amount to our shareholders of record on a record date, including whether we will make any dividend payment to such shareholders at all, after the expiry of such record date. Therefore, our shareholders of record on the March 31 record date may not receive the dividend they anticipate.
Our share price is volatile and shareholders may not be able to recoup their investment.
Disclosures of our operating results (particularly if below the estimates of securities industry analysts), announcements of various events by us or by our competitors or other industry participants or the development and marketing of new products, as well as other factors, may cause the market price of our common stock to
change significantly over short periods of time. The price of our common stock has been and is likely to continue to be highly volatile, and shareholders may not be able to recoup their investment. For example, the closing highs and lows of price per share of our common stock ranged from ¥2,330¥1,416 to ¥3,670¥2,080 during fiscal 2007.2010.
A substantial number of our shares of common stock are eligible for future sale, and the sale of these shares may cause the price of our common stock to decline even if our business is performing well.
As of MayMarch 31, 2007,2010, there were 137,254,816133,460,664 shares of our common stock outstanding including 35,011,82335,400,786 shares, representing 25.51%26.53% of our outstanding shares, beneficially owned by Kagemasa Kozuki, our founder, Representative Director, Chairman of the Board, President and Chief Executive Officer, and his affiliate holders Yoko Kozuki, Kozuki Holding B.V., Kozuki Foundation for Sports and Higher Education, Kozuki Holding and Kozuki Capital Corporation. These shares and, generally, the shares owned by other shareholders, can be disposed of on the Tokyo Stock Exchange or otherwise in Japan without any legal restriction. Additionally, under our Articles of Incorporation, our board of directors is authorized to issue 306,444,214306,500,000 additional shares of common stock generally without any shareholder approval. In addition, as of MayMarch 31, 2007,2010, we held 6,295,12410,039,336 shares of treasury stock which our board of directors may sell without any shareholder approval.
Additional sales of a substantial amount of our common stock in the public market, or the perception that such sales may occur, could cause the market price of our common stock to decline. This could also impair our ability to raise additional capital through the sale of our securities. Also, in the future, we may issue common stock to raise cash for additional capital expenditures, working capital, research and development or acquisitions, and we may also pay for additional interests in subsidiaries or affiliated companies by using cash, common stock or both. We may also issue securities convertible into our common stock. Any of these events may dilute your ownership interest in us and have an adverse impact on the price of our common stock.
Investors holding less than a unit of shares will have limited rights as shareholders.
Pursuant to the Corporate Law of Japan relating to joint stock corporations and other related legislation, our Articles of Incorporation provide that 100 shares of common stock constitute one “unit”. The Corporate Law imposes significant restrictions and limitations on holdings of shares that do not constitute whole units. In general, holders of shares constituting less than one unit do not have the right to vote or to examine our books and records. The transferabilityrecords (other than our articles of our shares of common stock constituting less than one unit is significantly limited.incorporation and shareholders register). For a more complete description of the unit share system and its effect on the rights of holders of our shares, see Item 10.B “Unit Share System” below.
There are restrictions on your ability to withdraw shares from the depositary receipt facility.
Each ADS represents the right to receive one share of common stock. Each ADR will bear a legend to that effect. Holders of ADSs will be unable to withdraw fractions of shares from the depositary or receive any cash
settlement in lieu of withdrawal of fractions of shares. Therefore, pursuant to the terms of the deposit agreement with our depositary, JPMorgan Chase Bank in order to withdraw any shares, a holder of ADSs must surrender for cancellation and withdrawal of shares, ADRs evidencing 100 ADSs or any integral multiple thereof. In addition, although the ADSs themselves may be transferred in any lots pursuant to the deposit agreement, the ability to trade the underlying shares may be limited.
Holders of ADRs have fewer rights than shareholders and must act through the depositary to exercise those rights.
Holders of ADRs do not have the same rights as shareholders and accordingly cannot exercise rights of shareholders against us. JPMorgan Chase Bank, as depositary, through its custodian agent, is the registered shareholder of the deposited shares underlying the ADSs, and therefore only it can exercise the rights of shareholders in connection with the deposited shares. In certain cases, we may not ask JPMorgan Chase Bank to
ask holders of ADSs for instructions as to how they wish their shares voted. Even if we ask JPMorgan Chase Bank to ask holders of ADSs for such instructions, it may not be possible for JPMorgan Chase Bank to obtain these instructions from ADS holders in time for JPMorgan Chase Bank to vote in accordance with such instructions. JPMorgan Chase Bank is only obliged to try, as far as practical, and subject to Japanese law and our Articles of Incorporation, to vote or have its agents vote the deposited shares as holders of ADSs instruct. In your capacity as an ADS holder, you will not be able to bring a derivative action, examine the accounting books and records of the company, or exercise appraisal rights.
Rights of shareholders under Japanese law may be more limited than under the laws of other jurisdictions.
Our Articles of Incorporation, our board of directors’ Regulations and the Corporate Law of Japan govern our corporate affairs. Legal principles relating to such matters as the validity of corporate procedures, directors’ fiduciary duties and liabilities, and shareholders’ rights may be different from those that would apply to a non-Japanese company. Shareholders’ rights under Japanese law may not be as extensive as shareholders’ rights under the laws of other countries or jurisdictions within the United States. You may have more difficulty in asserting your rights as a shareholder than you would as a shareholder of a corporation organized in another jurisdiction.
Because of daily price range limitations under Japanese stock exchange rules, you may not be able to sell your shares of our common stock at a particular price on any particular trading day, or at all.
Stock prices on Japanese stock exchanges are determined on a real-time basis by the equilibrium between bids and offers. These exchanges are order-driven markets without specialists or market makers to guide price formation. To prevent excessive volatility, these exchanges set daily upward and downward price fluctuation limits for each stock, based on the previous day’s closing price. Although transactions may continue at the upward or downward limit price if the limit price is reached on a particular trading day, no transactions may take place outside these limits. Consequently, an investor wishing to sell at a price above or below the relevant daily limit may not be able to sell his or her shares at such price on a particular trading day, or at all.
U.S. investors may have difficulty in serving process or enforcing a judgment against us or our directors, executive officers or corporate auditors.
We are a limited liability, joint-stock corporation incorporated under the laws of Japan. Most of our directors, executive officers and corporate auditors reside in Japan. All or substantially all of our assets and the assets of these persons are located in Japan and elsewhere outside the United States. It may not be possible, therefore, for U.S. investors to effect service of process within the United States upon us or these persons or to enforce against us or these persons judgments obtained in U.S. courts predicated upon the civil liability provisions of the federal securities laws of the United States. There is doubt as to the enforceability in Japan, in original actions or in actions for enforcement of judgment of U.S. courts, of liabilities predicated solely upon the federal securities laws of the United States.
The dollar amount of the dividends to be paid to ADS and ADS holders might be affected by fluctuations in the foreign currency market.
The market price of our company’s ADS might drop in the event of a decline in the yen-U.S. dollar exchange rate. Further, the U.S. dollar amount of the cash dividend and other cash payments to be paid to holders of our company’s ADS will decrease in the event that the yen-U.S. dollar exchange rate declines.
Foreign exchange fluctuations may affect the dollar value of our ADSs and dividends payable to holders of our ADSs.
Market prices for our ADSs may fall if the value of the yen declines against the U.S. dollar. In addition, the U.S. dollar amount of cash dividends and other cash payments made to holders of our ADSs would be reduced if the value of the yen declines against the U.S. dollar.
Item 4. | Information on the Company. |
A. History and Development of the Company.
Our business was founded by our current Representative Director, Chairman of the Board and Chief Executive Officer,President, Kagemasa Kozuki, in Osaka on March 21, 1969. KonamiKONAMI was incorporated as a joint stock corporation under the laws of Japan on March 19, 1973 under the name Konami Industries Co., Ltd.
We originally were established to produce amusement arcade games and since that time have expanded the range of our products. We began to produce and market microcomputer-equipped video game machines in 1978, video game software for personal computers in 1982, game software for a home video game system in 1985 and software for LCDs for pachinko machines in 1992. We began our Toy & Hobby business in 1996. We obtained a license to manufacture and sell gaming machines in Nevada, and entered the gaming business in the United States in 2000. We entered the fitness club and equipment business through our acquisition of PEOPLE CO., LTD., which was renamed Konami Sports Corporation, in February 2001.
We initiated overseas operations by exporting amusement arcade games in 1979. We established our U.S. sales and manufacturing subsidiary, Konami of America, Inc. (the predecessor of Konami Digital Entertainment, Inc.) in 1982. Later, we established sales and manufacturing subsidiaries in a number of foreign countries.
We listed our shares on the Osaka Securities Exchange in 1984 (subsequently delisted in December 2002), on the Tokyo Stock Exchange in 1988, on the Singapore Exchange in 1997 (subsequently delisted in October 2009), on the London Stock Exchange in 1999 and on the New York Stock Exchange in September 2002.
In 1991, we changed our name to Konami Co., Ltd. and subsequently changed our name to KONAMI CORPORATION in 2000.
In 2006, we made Konami Sports Corporation (the predecessor of Konami Sports & Life Co., Ltd.) a wholly-owned subsidiary by issuing Konami shares to the minority shareholders of Konami Sports after Konami Sports Corporation merged with Konami Sports Life Corporation. In addition, we newly established Konami Digital Entertainment Co., Ltd. through a company separation to succeed to our digital entertainment business and we changed our group structure so that we act as a holding company.
In April 2007, we moved our principal head office to 7-2, Akasaka 9-chome, Minato-ku, Tokyo 107-8323, Japan. Our telephone number is 81-3-5770-0573.
For a discussion of recent and current capital expenditures, please see “Capital Expenditures” at the end of Item 5.A. We have had no recent significant divestitures nor are any significant divestitures currently being made.
B. Business Overview.
Overview
We develop, publish, market and distribute video game software products globally for stationary consoles such as Sony PlayStation PlayStation 2, PLAYSTATIONPlayStation 3, Nintendo Wii, Nintendo GameCube, Microsoft Xbox,and Microsoft Xbox 360, console systems,and for portable consoles such as Sony PlayStation Portable Nintendo Game Boy Advance and Nintendo DS, handheld systems as well as for use on personal computers. In addition, we plan, produce, operate and distribute entertainment content for mobile phone online games.
We produce gaming machines for casinos in the United States, Australia and other overseas jurisdictions, in addition to video games and token-operated games installed in amusement arcades and other entertainment venues in Japan. We also produce card games, character goods, toys & hobbies, publications, CDs and DVDs and other merchandize products, many of which use popular characters seen in movies, television, comic books, video games, advertising or other media. We also publish, produce and provide post-sale service for software and hardware for amusement arcade games. In addition, we produce software and hardware for pachinko slot machines and LCDs used in pachinko machines, and produce video games and token-operated games installed in amusement arcades and other entertainment venues in Japan as well as gaming machines for casinos in the United States, Australia and other overseas jurisdictions.machines.
In addition, we believe that we are the leading operator of health and fitness clubs in Japan, in terms of revenues members and the total number of facilities.members. As of March 31, 2007, our2010, we have a nationwide network of 208211 directly operated health and fitness club facilities and 104116 sports facilities whose operations are outsourced to us and which cater to all age groups, from children through senior citizens. Moreover, Konami Sports Corporation merged with Konami Sports Life Corporation to establish Konami Sports & Life Co., Ltd. as of February 28, 2006, and COMBI WELLNESS Corporation became its wholly-owned subsidiary as of May 31, 2006 following our acquisition of all of its outstanding shares. We also have enhanced the value of each facility of former Sportsplex Japan Co., Ltd., which was merged into Konami Sports & Life Co., Ltd. as of June 30, 2008, by promoting the expansion of high quality and wide-ranging services. We aim to create new markets and provide various health-related services through the operation of fitness club facilities and the development and manufacturing of heath-relatedhealth-related equipment and supplements.
Because our sales are affected by changes in how consumers, particularly children and young adults, spend their leisure time, we seek to meet consumers’ needs and preferences by developing products that can be used in a number of environments, including home video games, card games and games for amusement arcades and card games, casinos and pachinko parlors. We also recognize that borders that separate product categories such as games, movies, music, toys, books and television programs are blurring. We seek to capitalize on this trend by projecting successful concepts across different types of leisure environments and product categories.
Many of our successful products have resulted from diversified use of strong contents. For example:
• | We first sold |
• | We launchedbeatmania as an amusement arcade game in December 1997. We began sellingbeatmania in the form of home video game software in October 1998 and have sold over one million units. We soldbeatmania as a pachinko slot machine in April 2008. |
• | We soldYu-Gi-Oh! as video game software for Game Boy in July 1998; we subsequently introduced our hitYu-Gi-Oh! Trading Card Gamein February 1999. From April 2006, we createdYu-Gi-Oh! ONLINE, an online version of theYu-Gi-Oh! Trading Card Game. Since March 2008, we have also developed Yu-Gi-Oh! DUEL TERMINAL, an amusement arcade game, for amusement arcades and supermarkets and introduced a new type of entertainment using trading cards. |
• | METAL GEAR SOLID, |
• | Tokimeki Memorial, a teenage romance game first introduced in 1994, have been hit video game software products and have also generated substantial sales of related character goods. |
• | We began selling theWinning Eleven series, a soccer game, in the form of home video game software in Japan in July 1995, and later expanded its compatibility to several home video game platforms. We have also introduced the series in overseas markets, particularly Europe and North America. In addition, we sell books, a music CD with a theme song, amusement game software and mobile contents related to theWinning Eleven series. |
We have used our expertise in video game software and hardware for the development of our gaming machine and fitness equipment products.
We have built a company with a portfolio of products and services that spans a range of categories and target markets. We have created, licensed and acquired a group of recognizable brands that we market to a growing variety of consumer demographics.
For the fiscal year ended March 31, 2007,2010, we had consolidated net revenues and net income attributable to KONAMI CORPORATION of ¥280,279¥262,144 million and ¥16,211¥13,314 million, respectively, compared with net revenues and net income attributable to KONAMI CORPORATION of ¥262,137¥309,771 million and ¥23,008¥10,874 million, respectively, for the fiscal year ended March 31, 2006.2009.
Products and Services
We reclassifiedclassify our businesses into three segments: Digital Entertainment, Health & Fitness and Gaming & System during the fiscal year ended March 31, 2006,and Health & Fitness, each of which is operated on a separate basis. The net revenue figures for each business segment described below are before elimination of intersegment revenues.
Digital Entertainment Segment
Operating in a business environment with lowering barriers to entry in the digital entertainment industry, we decided to reposition our existing major business segments—video game software, toy & hobby, amusement, onlinecard game and multimedia—online—into one Digital Entertainment Segment from April 2005 to create a business structure where we can achieve maximum synergies. During fiscal 2007,2010, this segment had net revenues of ¥164,860¥142,650 million, which accounted for 58.8%54.4% of our consolidated net revenues, before elimination of intersegment revenues. Our Digital Entertainment Segment consists of the five businesses as follows:
• | Computer & Video Games business:We produce, manufacture and sell video game software, purchase and distribute video game software for home use. |
• |
|
Amusement business:We produce, manufacture and sell video games for amusement facilities and content for token-operated games. |
• | Card Games business: We plan, produce, manufacture and sell card games. |
• | Online business:We build computer systems related to online games, maintain and operate online servers, produce and distribute content for mobile phones, and produce online games. |
• |
|
Health & Fitness Segment
We are the leading health and fitness club operator and health-related business enterprise in Japan. We believe that we had approximately 21% of the market as measured by revenues based on the Leisure White Paper issued by Japan productivity center for socio-economic development for fiscal 2007. During fiscal 2007, this segment had net revenues of ¥88,459 million, which accounted for 31.6% of our consolidated net revenues, before elimination of intersegment revenues.
Gaming & System Segment
This segment is involved in developingdevelopment and sales of content, hardware and hardwarecasino management systems for gaming machines for casinos outside of Japan. During fiscal 2007,2010, our net revenues from this segment were ¥16,744¥ 19,996 million, which accounted for 6.0%7.6% of our consolidated net revenues, before elimination of intersegment revenues.
In addition, as part of our shift to a holding company structure, we transferred our research and development center for gaming machines to Konami Gaming, Inc., our U.S. subsidiary in March 2006, to become Konami Gaming’s Japanese branch and research and development hub.
Health & Fitness Segment
We also changedare the leading health and fitness club operator and health-related business enterprise in Japan. We believe that we had approximately 22% of the market in fiscal 2009 (according to the latest available data) as measured by revenues based on “Fitness Club Industry Trends in Japan, 2009” published by Club Business Japan in June 2010. During fiscal 2010, this segment name from Gaming to Gaming & System during fiscal 2006.had net revenues of ¥85,765 million, which accounted for 32.7% of our consolidated net revenues, before elimination of intersegment revenues.
The following table presents net revenues in each of our historical business segments, before elimination of intersegment revenues, for each of the three years ended March 31, 2007.2010.
Segment Revenues
Year ended March 31, | ||||||||||||
2005 | 2006 | 2007 | 2007 | |||||||||
(yen in millions, dollar in thousands) | ||||||||||||
Net Revenues: | ||||||||||||
Digital Entertainment | ¥ | 163,671 | ¥ | 165,276 | ¥ | 164,860 | $ | 1,396,526 | ||||
Health & Fitness | 79,106 | 81,209 | 88,459 | 749,336 | ||||||||
Gaming & System | 11,643 | 10,623 | 16,744 | 141,838 | ||||||||
Other and Eliminations | 6,271 | 5,029 | 10,216 | 86,540 | ||||||||
Consolidated net revenues | ¥ | 260,691 | ¥ | 262,137 | ¥ | 280,279 | $ | 2,374,240 | ||||
Year ended March 31, | ||||||||||||
2008 | 2009 | 2010 | 2010 | |||||||||
(yen in millions, dollar in thousands) | ||||||||||||
Net Revenues: | ||||||||||||
Digital Entertainment | ¥ | 178,939 | ¥ | 187,628 | ¥ | 142,650 | $ | 1,533,211 | ||||
Gaming & System | 18,471 | 18,336 | 19,996 | 214,918 | ||||||||
Health & Fitness | 86,544 | 89,965 | 85,765 | 921,808 | ||||||||
Other and Eliminations | 13,448 | 13,842 | 13,733 | 147,604 | ||||||||
Consolidated net revenues | ¥ | 297,402 | ¥ | 309,771 | ¥ | 262,144 | $ | 2,817,541 | ||||
Notes:
“Other” consists of businesses which do not meet the quantitative criteria for separate presentation under SFAS No. 131 “Disclosures about Segments of an Enterprise and Related Information.”
“Eliminations”segment reporting. “Eliminations” primarily consists of eliminations of intercompany sales and of intercompany profits on inventories.
Digital Entertainment Segment
Consolidated net revenues generated by our Digital Entertainment Segment, before elimination of intersegment revenues, amounted to ¥165,276¥187,628 million in fiscal 20062009 and to ¥164,860¥142,650 million in fiscal 2007,2010, a decrease of ¥416¥44,978 million.
Computer & Video Games business
Industry Overview
The video game industry is comprised of video game hardware manufacturers and video game software publishers. Game hardware systems, frequently referred to as platforms, include home game consoles, handheld platforms and personal computers. In Japan, mobile phones are yet another platform for which there is an emerging demand for video game software applications.
A new generation of more technologically advanced game consoles has been introduced every several years. The first platform was Nintendo Entertainment System introduced by Nintendo in 1983 with its central processing unit, or CPU, using 8-bit 1.78 MHz technology. The CPU is a chip on which the software operates, with a “bite” indicating capacity to process data and clock frequency (MHz) indicating the processing speed. Subsequent advances in technology have resulted in continuous increases in the processing power of the chips that power both the consoles and PCs. With the advancement of hardware technology, software has also advanced, with faster and more complex images, more lifelike animation and sound effects and more intricate scenarios.
Each new generation, or cycle, of hardware has resulted in larger numbers of consoles being purchased. At the beginning of each cycle, during the period of rapid growth in the installed base of the new generation of consoles, the video game software industry has experienced rapid periods of expansion, as buyers purchase video games for their new consoles. Shortly before and after the release of a new generation of game consoles, sales of the current generation of platforms and games generally diminish, as consumers defer purchases in anticipation of the new platforms and games.
Platform manufacturers license publishers to publish games for their platforms and retain a degree of control over the quality and manufacturing of these games. The publishers, subject to the approval of the platform
manufacturers, determine the types of games they will create. Software publishers either create their games in-house, through their own development teams, or outsource this function to independent developers.
The following table illustrates the evolution of the principal platforms of both video game system and handheld system.
Manufacturer | Platform Name | Year of Introduction | Media Format | |||||
Japan | U.S. | |||||||
Home Game Consoles: | ||||||||
Nintendo | NES | 1983 | 1985 | Cartridge | ||||
Sega | Genesis | 1988 | 1989 | Cartridge | ||||
Nintendo | SNES | 1990 | 1991 | Cartridge | ||||
Sega | Saturn | 1994 | 1995 | CD-ROM Disc | ||||
Sony | PlayStation | 1994 | 1995 | CD-ROM Disc | ||||
Nintendo | Nintendo 64 | 1996 | 1996 | Cartridge | ||||
Sega | Dreamcast | 1999 | 1999 | Proprietary Disc | ||||
Sony | PlayStation 2 | 2000 | 2000 | DVD-ROM Disc/CD-ROM Disc | ||||
Nintendo | GameCube | 2001 | 2001 | Proprietary Disc | ||||
Microsoft | Xbox | 2002 | 2001 | DVD-ROM Disc/CD-ROM Disc | ||||
Microsoft | Xbox 360 | 2005 | 2005 | DVD-ROM Disc/CD-ROM Disc | ||||
Nintendo | Wii | 2006 | 2006 | Proprietary Disc | ||||
Sony | PLAYSTATION 3 | 2006 | 2006 | BD-ROM/DVD-ROM | ||||
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Nintendo | Game Boy | 1989 | 1989 | Cartridge | ||||
Nintendo | Game Boy Color | 1998 | 1998 | Cartridge | ||||
Nintendo | Game Boy Advance | 2001 | 2001 | Cartridge | ||||
Nintendo | Game Boy Advance SP | 2003 | 2003 | Cartridge | ||||
Nintendo | Nintendo DS | 2004 | 2004 | Cartridge | ||||
Sony | PlayStation Portable | 2004 | 2005 | UMD |
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Nintendo | NES | 1983 | 1985 | Cartridge | ||||
Sega | Genesis | 1988 | 1989 | Cartridge | ||||
Nintendo | SNES | 1990 | 1991 | Cartridge | ||||
Sega | Saturn | 1994 | 1995 | CD-ROM Disc | ||||
Sony | PlayStation | 1994 | 1995 | CD-ROM Disc | ||||
Nintendo | Nintendo 64 | 1996 | 1996 | Cartridge | ||||
Sega | Dreamcast | 1999 | 1999 | Proprietary Disc | ||||
Sony | PlayStation 2 | 2000 | 2000 | DVD-ROM Disc/CD-ROM Disc | ||||
Nintendo | GameCube | 2001 | 2001 | Proprietary Disc | ||||
Microsoft | Xbox | 2002 | 2001 | DVD-ROM Disc/CD-ROM Disc | ||||
Microsoft | Xbox 360 | 2005 | 2005 | DVD-ROM Disc/CD-ROM Disc | ||||
Nintendo | Wii | 2006 | 2006 | Proprietary Disc | ||||
Sony | PlayStation 3 | 2006 | 2006 | BD-ROM/DVD-ROM | ||||
Handheld systems: | ||||||||
Nintendo | Game Boy | 1989 | 1989 | Cartridge | ||||
Nintendo | Game Boy Color | 1998 | 1998 | Cartridge | ||||
Nintendo | Game Boy Advance | 2001 | 2001 | Cartridge | ||||
Nintendo | Game Boy Advance SP* | 2003 | 2003 | Cartridge | ||||
Nintendo | Nintendo DS | 2004 | 2004 | Cartridge | ||||
Sony | PlayStation Portable | 2004 | 2005 | UMD |
Game Boy Advance SP is an updated version of the Game Boy Advance platform and the same software may be used on both devices. |
Handheld systems such as Nintendo DS and Sony PlayStation Portable have widely been accepted in markets, and in Japan in particular, strong sales of Nintendo DS tapped a market of new users who were not yet familiar with such games, further expanding new markets for these devices.
As for stationary systems, starting with Microsoft Xbox 360 released in December 2005 in Japan and November 2005 in North America, Sony PLAYSTATIONPlayStation 3 was launched in November 2006 in Japan and March 2007 in Europe, as well as Nintendo Wii in December 2006 in Japan and November 2006 in North America. These next-generation game consoles have become more highly sophisticated in their ability to show expressiveness when playing games. As a result, demand for home game consoles compatible with online usage are on the rise, exhibiting developments in service and products using online networks. This further led to the diversification of consumers’ preferences, attracting a wide range of users across different age and gender groups and stimulating markets for home game machines.
World Video Game Software Markets
According to data by the Computer Entertainment Supplier’s Association, or CESA, in 2006, the number of shipment of video game software was 90,394 thousand units in Japan, 213,511 thousand units in North America,
and 177,385 thousand units in Europe. The North American market, the largest market for video game software in the world, and the European and Japanese markets have been growing steadily.
Our Computer & Video Games Software Business
Our Computer & Video Games business develops, publishes, distributes and markets software for video game systems and, to a lesser extent, personal computers. Most of our software consists of video games designed for use with video game platforms, including PlayStation 2, PLAYSTATIONPlayStation 3, PlayStation Portable, Nintendo Nintendo DS, Game Boy Advance, Nintendo Wii and Microsoft Xbox and Xbox 360, and PCs.
By developing video game software for each of the leading home and handheld video game platforms, we are able to limit our dependence on individual platforms, capitalize on the popularity of successful platforms from time to time, and sell to a more diverse group of consumers since the target age group for each major platform differs. Along with the diversification of consumers’ preferences, Nintendo DS attractsand Wii attract a wide range of users across different age and gender groups.
The market for video game software is substantially affected by sales of the various video game platforms. Our sales of video game software are inevitably affected to a substantial degree by the cyclical nature of the industry generally as platforms change, but through diversification we seek to limit this effect.
Software Titles
We publish approximatelyAlthough we have published more than 100 new titles of video game software each year, almostin fiscal 2009 we streamlined the number of new titles to 88 titles under the theme of “Selection and Concentration” and in fiscal 2010, to 61 titles. Almost all of whichthese titles are designed for use with leading home and portable game platforms. We publish software titles in a variety of genres, including sports, action, role playing and music simulation.
The following two tables indicate the major software titles that we have either published, or anticipate publishing, during fiscal years 20072010 and 20082011 in each geographic market indicating for each title (i) the category of the game, (ii) the platform on which the game can be played, (iii) the date of release or anticipated release, and (iv) the market in which the product is sold. We cannot assure you that each of the titles anticipated for release in fiscal 20082011 will be released when scheduled, if ever.
Titles Released Inin Fiscal 2007 (1)2010
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PUROYAKYU SPIRITS 6 | Sports (Baseball) | Multi-Platform | July 2009 | Japan | ||||
WORLD SOCCER Winning Eleven | Sports (Soccer) |
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PUROYAKYU SPIRITS | Sports (Baseball) |
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JIKKYOU PAWAFURU PUROYAKYU | Sports (Baseball) |
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Excluding titles that are scheduled but have not yet been publicly announced to be released. |
The primary home video game software products on which we rely as revenue sources have been our hit titles, which include the following:
• | METAL GEAR SOLID. With respect to ourMETAL GEAR SOLID series, we have sold over |
five million units of the sequel, |
• | Soccer titles. We have sold a total of over |
Baseball titles. We have sold a total of more than 1520.4 million units of baseball titles in Japan as of March 31, 2007,2010, since we began releasing titles during the year ended March 31, 1994.
The following table illustrates the number of units that we have sold by platform for the periods indicated on a consolidated basis. This table indicates where we have concentrated our development efforts as well as changes in the relative significance of individual platforms.
Year ended March 31, | Year ended March 31, | |||||||||||||||||||
2003 | 2004 | 2005 | 2006 | 2007 | 2006 | 2007 | 2008 | 2009 | 2010 | |||||||||||
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PlayStation | 4,100 | 1,350 | 300 | 90 | 20 | 10 | 2 | 1 | 1 | 0 | ||||||||||
PlayStation 2 | 8,900 | 10,750 | 15,250 | 11,620 | 9,760 | 1,290 | 1,063 | 796 | 469 | 241 | ||||||||||
PLAYSTATION 3 | — | — | — | — | 60 | |||||||||||||||
PlayStation 3 | — | 6 | 194 | 761 | 472 | |||||||||||||||
PlayStation Portable | — | — | 330 | 3,090 | 3,110 | 332 | 326 | 383 | 331 | 340 | ||||||||||
Game Boy | 1,400 | 250 | 20 | 0 | 0 | 0 | 0 | 0 | 0 | — | ||||||||||
Game Boy Advance | 4,800 | 6,700 | 3,160 | 1,880 | 570 | 201 | 58 | 6 | 0 | — | ||||||||||
Nintendo GameCube | 800 | 1,450 | 630 | 360 | 100 | 38 | 10 | 9 | 0 | — | ||||||||||
Nintendo DS | — | — | 60 | 1,480 | 3,960 | 164 | 493 | 557 | 433 | 335 | ||||||||||
Wii | — | — | — | — | 410 | — | 41 | 206 | 454 | 438 | ||||||||||
Xbox | 800 | 550 | 1,500 | 1,220 | 350 | 122 | 35 | 3 | 0 | 0 | ||||||||||
Xbox 360 | — | — | — | 110 | 1,360 | 11 | 141 | 124 | 179 | 152 | ||||||||||
PC | 200 | 550 | 850 | 500 | 680 | 50 | 68 | 56 | 50 | 42 | ||||||||||
Other | — | — | — | 120 | 70 | 13 | 7 | 0 | 3 | 0 | ||||||||||
Total | 21,000 | 21,600 | 22,100 | 20,470 | 20,450 | 2,231 | 2,250 | 2,335 | 2,681 | 2,020 | ||||||||||
Software Development
We seek to developproduce video game software that is fun and exciting, and which provide sufficient challenges at various levels of proficiency to encourage repeated play. We also developproduce and release titles with comic, cartoon and movie contents and achieve synergy with media. We developproduce most of our own video game software.
Because the popularity of successful titles fades quickly, we are constantly working to develop new titles and sequels to existing titles. The life span for video game software titles depends on the type of title. Sports titles, which are updated frequently, may last indefinitely. Other titles usually have short life spans, generally six months to one year.
Most of our video game software development,production, including titles designed for overseas markets, is conducted by our group companies in Japan and the U.S.Japan. We subcontract part of the developmentproduction to a subsidiary in China, Konami Software Shanghai, Inc. We expect that this subsidiary will be able to create and develop sophisticated video game software for both the Japanese market and the international market as it gradually acquires additional expertise and know-how.
On March 31, 2006, we founded Konami Digital Entertainment Co., Ltd. through a transfer of our digital entertainment operations including our video game software business, in the form of corporate separation and, as
a result, we shifted to a holding company structure. We presently provide substantial discretion to our subsidiaries to achieve timely decision-making processes while the parent company develops group strategies and distributes management resources among group companies.
Hiring and retaining talented creative staff is key to developing successful content. To do this, we have introduced equity-based incentives and remuneration packages for creative staffs and developers that reflect the financial results of their work. We believe that thisour compensation structure that rewards creators for the success of their games and our policy of providing creators substantial independence and flexibility, enables us to attract and retain game creators that are among the best in the industry.
Through our long experience in developing software, we have developed significant in-house expertise and many proprietary development tools that streamline the development process, allowing members of our
development teams to focus their efforts on the play and simulation aspects of the product under development. We believe our accumulated know-how and proprietary development tools enable our software designers to develop compelling, graphically sophisticated games quickly and efficiently, which may give us an advantage over competitors.
Manufacturing
Our video game software is manufactured upon acceptance by Sony, Nintendo and Microsoft as required by the applicable platform license. We believe that this is the most desirable arrangement for both parties because we avoid the costs associated with the construction and maintenance of manufacturing facilities while the hardware manufacturers collect per unit royalties for each game they manufacture. The manufacturing process begins with our placing a purchase order with a manufacturer. Hardware manufacturers or their authorized vendors typically ship the first order to us within two to six weeks and additional orders for the same title within three days to four weeks.
We maintain both the proprietary rights and risks associated with each game title. In addition, at the time our product unit orders are filled by the manufacturer, we become responsible for the costs of manufacturing and/or the applicable per unit royalty on such units, even if the units do not ultimately sell. We provide a standard defective product warranty on all of the products sold. We are responsible in most cases for resolving, at our expense, any applicable warranty or repair claim. To date, we have not experienced any material costs from warranty or repair claims.
Platform Licenses
Our video game software business is dependent on our license agreements with the manufacturers of hardware platforms. All of these licenses are non-exclusive with fixed terms although these contracts are usually extended for additional terms. Each license grants us the right to develop, publish and distribute titles for use on the manufacturer’s platforms. Manufacturers typically have the right to approve the titles to be released and embodied in products that are manufactured solely by the manufacturer or its authorized vendor.
The following table sets forth information with respect to our platform licenses. In some instances, we have more than one platform license for a particular platform. All of the platform licenses shown below are automatically renewed on an annual basis.
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Nintendo | DS | Japan | October 1, 2004 | |||||
Nintendo | DS | United States and Canada | June 23, 2005 | |||||
Nintendo | DS | Europe | July 24, 2005 | |||||
Nintendo | Wii | Japan | October 2, 2006 | |||||
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Sony | PlayStation 2 | Japan | April 1, 2003 | |||||
Sony | PlayStation 2 | Asia | April 1, 2003 | |||||
Sony | PlayStation 2 | United States and Canada | October 25, 2001 | |||||
Sony | PlayStation Portable | Japan | November 19, 2004 | |||||
Sony | PlayStation Portable | Asia | May 1, 2005 | |||||
Sony | PlayStation Portable | United States and Canada | February 11, 2005 | |||||
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Sony | PlayStation 3 | Europe | October 20, 2006 | |||||
Sony | PlayStation 3 | Asia | October 20, 2006 | |||||
Microsoft | Xbox360 | Worldwide | November 22, 2005 |
Nintendo charges us an amount for each Game Boy Advance, Game Boy Color and Nintendo DS.DS cartridge manufactured. This amount varies based, in part, on the memory capacity of the cartridges. Nintendo GameCube,Wii, Sony and Microsoft contracts include a charge for
every disc manufactured. The amounts charged by the manufacturers include a royalty for the use of the manufacturer’s name, proprietary information and technology, and are subject to adjustment by the manufacturers at their discretion. The manufacturers have the right to review, evaluate and approve a demo-disc of each title and the title’s packaging.
Marketing, Sales and Distribution
We believe that we benefit from a strong positive perception in Japan of the KonamiKONAMI brand name. We are focusing on further enhancing the KonamiKONAMI brand name by aggressively advertising and promoting ourselves and our products and services. To continue to increase our brand name recognition, we advertise on television, the radio and through various magazines and newspapers.
In October 2005, we merged with Konami Marketing Japan, Inc., a wholly-owned subsidiary for our marketing, sales and distribution businesses. As a result, we believe we are able to operate our digital entertainment business in a more consistent manner, from planning and production to advertisement and sales, and operate more efficiently. In addition, we newly established Konami Digital Entertainment Co., Ltd. through a company separation to succeed to our digital entertainment business in March 2006.
Our video game software products are sold in Japan primarily through our sales distribution network, which we coordinate, and offices throughout Japan. Each of these sales offices focuses its efforts on a specific area within Japan. We bear inventory risk until the product is sold to the retailer. However, once products are sold to a retailer, they cannot be returned unless they are defective. We believe that our distribution network is a major asset of our business. In addition, we also conduct online sales through a directly operated website, and online sales have accounted for a greater percentage of our sales each year since 2007 due to the strengthening of our website through sales of limited editions of our video game software products on our website.
As for overseas marketing, we sell our products through sales representatives at our subsidiaries, principally those in the United States, Germany and Hong Kong. Due to different commercial environments, there are some risks for price protection or returned goods. In the European markets, soccer game software havehas made solid sales, whereas in the North American market, music game software areis popular.
Amusement Business
Our Amusement business produces and sells video game machines and token-operated game machines for amusement arcades.
ToyAmusement Arcade Games—Industry Overview
According to an industry statistical report, the amusement industry in Japan recorded total revenues of ¥796.3 billion during fiscal year 2009. The breakdown by category is shown in the following table.
Amusement Industry—Revenues in Japan
December 31, | |||||||||||||||||||||
Industry | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | ||||||||||||||
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Amusement arcade operations | ¥ | 605.5 | ¥ | 637.7 | ¥ | 649.2 | ¥ | 682.5 | ¥ | 702.9 | ¥ | 678.1 | ¥ | 573.1 | |||||||
Amusement arcade games (Japan) | |||||||||||||||||||||
Video game machines | 22.7 | 35.0 | 39.6 | 48.5 | 50.2 | 49.7 | 48.4 | ||||||||||||||
Token-operated game machines | 27.1 | 37.4 | 37.0 | 46.0 | 48.5 | 44.0 | 37.1 | ||||||||||||||
Prize machines | 12.3 | 16.8 | 14.6 | 12.7 | 14.0 | 12.7 | 10.3 | ||||||||||||||
Vending machines | 18.8 | 18.5 | 19.5 | 19.3 | 18.4 | 16.9 | 12.1 | ||||||||||||||
Music simulation game machines | 3.4 | 3.4 | 3.3 | 3.4 | 3.4 | 4.7 | 4.2 | ||||||||||||||
Card games, etc. (excluding kids’) | — | — | 5.5 | 11.5 | 8.7 | 8.0 | 9.4 | ||||||||||||||
*Kids’ Card games, etc. | — | — | — | — | 23.7 | 19.6 | 15.0 | ||||||||||||||
Other | 50.2 | 52.9 | 48.2 | 47.2 | 43.3 | 50.0 | 46.4 | ||||||||||||||
Sub-total | 134.5 | 164.0 | 167.7 | 188.6 | 210.2 | 205.6 | 182.9 | ||||||||||||||
Amusement arcade games (exports) | 20.0 | 13.9 | 12.9 | 10.6 | 13.2 | 13.5 | 13.3 | ||||||||||||||
Total | ¥ | 760.0 | ¥ | 815.6 | ¥ | 829.8 | ¥ | 881.7 | ¥ | 926.3 | ¥ | 897.2 | ¥ | 769.3 | |||||||
* | Sales amounts related to the Kids’ card games Industry was added from 2006. |
Source: | “Amusement Industry Survey, Fiscal 2009” (September, 2009), Japan Amusement Machinery Manufacturers Association. |
Due to the development of powerful home game consoles that can rival amusement arcade games in play quality and the introduction of advanced mobile telephones equipped with online and game functions, consumers now have diverse leisure alternatives. In Japan’s amusement industry as a whole, the revenues produced by the amusement arcade operations decreased to ¥573.1 billion in the year ended December 31, 2008 from ¥678.1 billion in the year ended December 31, 2007 (according to the latest available data). This decrease in the industry-wide revenue was primarily due to shutdown of relatively small scale amusement arcades, which in turn had resulted from a decline in the number of customers and the level consumer spending amidst the deteriorating economy. The restructuring of the amusement industry such as development of large-scale amusement arcades attractive to customers continues, and only sales at shopping centers that target families have decreased for the first time in nine years, from the increase for the eight consecutive years.
KONAMI’s Amusement Business—Video Game Machines
Our Amusement business develops, produces and sells video game machines for amusement arcades, many of which use sophisticated computer graphics technology. In the year ended March 31, 2010, we introduced approximately 16 new titles for video game machines for amusement arcades, more than 70% of which were sequel titles. Such titles typically have life spans of six to 18 months, although popular titles may have a longer life and are sometimes developed into a series of titles, which together constitute a recognized brand such asDanceDanceRevolution andMAH-JONG FIGHT CLUB.
The main purchasers of our video game machines are amusement arcades. We have sought to respond to market trends by introducing low price products and products that involve the type of play that cannot be replicated easily by home video game systems. In this regard, our music simulation games have been successful.
These games evolved frombeatmania, a disc jockey simulation game developed in our Amusement business. Hit music simulation games have included DanceDanceRevolution, beatmania, pop’n music, GuitarFreaks & HobbyDrumMania. These music-simulation game machines are relatively expensive, but can accommodate relatively inexpensive software updates for sequel games. Because the price of new software generally is substantially less expensive as compared to the price of a new amusement arcade machine, software upgrades tend to be more attractive to our customers.
In March 2002, our Amusement business introduced the “e-AMUSEMENT” service that connects amusement arcades all over Japan through a computer network run by KONAMI, creating a new amusement arcade market. This service allows multiple players to participate in the same game simultaneously from different locations nationwide and to continue playing after saving the game. OurMAH-JONG FIGHT CLUB, which is our first title compatible withe-AMUSEMENT, is retaining its popularity in part due to events such as national conventions where players can try their skills in a tournament.
Our e-AMUSEMENT Titles:
The following are the major models of our video game machines currently on sale that are compatible with oure-AMUSEMENTservice.
• | MAH-JONG FIGHT CLUB, a Mah-jong game that allows multiple players to participate simultaneously from different locations; |
• | QUIZ MAGIC ACADEMY,an online quiz game participated by many players from all over the country; |
• | beatmania series:beatmania IIDX,pop’n music,DanceDanceRevolution,GuitarFreaks & DrumMania,music simulation games such asjubeat; and |
• | BASEBALL HEROES, an online baseball game that allows multiple players to participate by using professional baseball players’ cards. |
Video Game Machines—Production
Our video game machines for amusement arcades designed for both the Japanese and the overseas markets are developed in Kobe and Tokyo. As for production, Konami Manufacturing and Service, Inc., a wholly owned subsidiary, produces our amusement arcade games designed for the Japanese market.
Video Game Machines—Marketing, Sales and Distribution
Konami Digital Entertainment Co., Ltd. markets and sells our video game machines for amusement arcades, and Konami Manufacturing & Service, Inc. handles our distribution business. As a result, we believe we have become able to provide more efficient services in our distribution activities. In overseas markets, our foreign sales subsidiaries are responsible for marketing, sales and distribution of our video game machines for amusement arcades.
Amusement Business—Overview of Token-Operated Game Machines Business
Token-operated game machines in Japan
As indicated in the following table, as of fiscal 2009, sales of token-operated game machines amounted to ¥37.1 billion, comprising approximately 20% of the ¥182.8 billion Japanese amusement arcade game market. Also, as indicated in the following table, revenues from amusement arcade operations and revenues from the operation of token-operated game machines increased every year from fiscal 2002 through fiscal 2007, but decreased in fiscal 2008. This decrease was caused by a decline in the number of customers due to the recent economic downturn and the revival of home video game machines such as Nintendo Wii as well as a trend of decline in the total number of amusement arcades.
Token-Operated Game Machines—Japanese Industry Revenues
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Revenues from the sale of token-operated game machines | ¥ | 37.4 | ¥ | 37.0 | ¥ | 46.0 | ¥ | 48.5 | ¥ | 44.0 | ¥ | 37.1 | ||||||||||||
Revenues from amusement arcade operations | 637.7 | 649.2 | 682.5 | 702.9 | 678.1 | 573.1 | ||||||||||||||||||
Revenues from token-operated game machines | 163.1 | 176.2 | 179.7 | 199.8 | 195.1 | 167.0 | ||||||||||||||||||
Token-operated game machine revenues as a percentage of amusement arcade revenues | 25.6 | % | 27.1 | % | 26.3 | % | 28.4 | % | 28.8 | % | 29.1 | % |
Source: | “Amusement Industry Survey, Fiscal 2009” (September 2009), Japan Amusement Machinery Manufacturers Association. |
Our Amusement Business—Overview of Token-Operated Game Machines Business
We develop, produce and sell token-operated game machines that are primarily targeted to amusement arcade operators in Japan. All token-operated game machines that we sell in Japan are played by purchasing tokens that are inserted into the machine, the object being for the player to win more tokens to extend the playing time. Our popular token-operated game machine called “FORTUNE TRINITY” which was released in February contains a roulette installed on the ceiling which is the largest in the industry—exceeding over three meters in diameter—and which enables 20 users to play together simultaneously, presenting an orchestration of lights, sounds, and pictures at the time of the jackpot, similar to the water fountain show in Las Vegas and providing an experience which can be enjoyed only at an amusement facility.
Medium- and large-sized game machines, which attract older children and adults, are supplied mainly to amusement arcades. In addition toSPINFEVER andGRANDCROSS, our principal machines include theETERNAL KNIGHTSseries, a new sensory experience adventure game simulation RPG, theFANTASTIC FEVER series and the GI-HORSEPARK series, large-scale horse race games in which users can bet tokens and play racing games or training games. We also sell the Tower Pusher series, small-sized token-operated game machines. In this way, we are advancing a full lineup of various types of token games.
Token Operated Game Machines—Production
Our domestic token-operated game machines are developed in our production facilities in Kanagawa, Japan. As for production, Konami Manufacturing and Service, Inc. produces the domestic token-operated game machines.
Token Operated Game Machines—Marketing, Sales and Distribution
While Konami Digital Entertainment Co., Ltd. markets and sells our token-operated game machines, Konami Manufacturing & Service, Inc. is in charge of distribution.
Card Games Business
Toy Industry Overview
Consumption Trends—Declining Child Population and Enlarging the Age Brackets of Consumers
TheEach company in the Japanese toy industry is being forced to restructure as a result ofrespond to changes resulting from a declining child population and the growing number of alternative options for play, changes in distribution systems and the bankruptcy of major toy wholesalers.play. Furthermore, companies must develop toys with original ideas so children will play with toys to a more advanced age than at present.
Since the population of children (those aged 0-14 years old) has been steadily declining and since the number of live births has also tended to decline, the child population is expected to continue to decline slightly in
the future. According to the National Institute of Population and Social Security Research, the number of births in Japan has declined from 2.09 million in 1973 to 1.061.09 million in 2005.2008. Consequently, the population of this age group has decreased from 27 million in the beginning of the 1980s to 17.517.1 million in the population census of 2005.2009. The population of children is expected to fall below 10 million in 2039.
The phenomenon of children abandoning toys at a younger age is due to the changing pattern of children’s lives. A large number of children go to music classes (piano classes, etc.), fitness clubs (swimming schools, etc.) and cram schools (educational institutions to help enter kindergartens, primary schools and junior and senior high schools) from infancy and thus they spend less of their leisure time playing with toys than previous generations did. Moreover, electronic toys such as PlayStation 2 and Game Boy AdvanceNintendo DS now occupy an important position in the toy market. These toys are also used by younger people. The popularity of electronic games contributes much to the decreasing demand for general toys.
Trends and Characteristics of Toy DemandToken-operated game machines in Japan
AccordingAs indicated in the following table, as of fiscal 2009, sales of token-operated game machines amounted to market research conducted by the Japan Toy Association, total revenue of toys sold domestically for fiscal 2006, based on market price, was ¥640¥37.1 billion, or 93.7%comprising approximately 20% of the amount¥182.8 billion Japanese amusement arcade game market. Also, as indicated in the following table, revenues from amusement arcade operations and revenues from the previous year. The toy and hobby business is recently facing difficult conditions not onlyoperation of token-operated game machines increased every year from fiscal 2002 through fiscal 2007, but decreased in fiscal 2008. This decrease was caused by a decline in the number of customers due to the decline in birthrates but also by the changes inrecent economic downturn and the varietyrevival of customer tastes. However, there has been progress in terms of logistics, expanding new service organizations and diversification of products.
The toy and hobby related market is starting to grow through the consolidation of such specialized markets as the toy confectionary, figures, capsule toy and kids’ cardhome video game machines markets. The toy and hobby market is moving in a direction of widening products as it seeks to move past traditional lines of business by producing robots, digital cameras, movie cameras, apparels, home interior goods, bicycles and other products. Also, the target ages are widening from new born babies to seniors. Under these circumstances, according to the market research conducted by the Japan Toy Association, sales of stuffed toys, toys for boys, hobby goods and miscellaneous goods are increasing toy and hobby sales on a year on year base.
Popular goods reflect contemporary social conditions. We believe that the changing market environment has led to certain goods being introduced and produced, as mentioned below.
computers have been used in all aspects of social life, as electronic technology advances and, as a result, toys that were adapted from office automation equipment for children have attracted consumers;
more and more parents have attached importance to education and they tend to buy expensive products for their children in the category of educational/preschool toys; and
hobby items, such as radio controlled products and model trains, have sold well due to growing popularity with adults.
The distribution of toys has greatly changed owing to the entry of the large U.S. chain toy store Toys”R”Us into the Japanese market and to the increased sales made by suburban toy chain stores. The sales share of
specialty toy shops has decreased and wholesalers, which act as intermediaries for manufacturers and retailers, have been affected by the change of distribution routes and the shortened distribution channels, which have caused them difficulties. The system of fixed retail price sales, which is the traditional business practices in the toy market, has begun to collapse, and even department stores have sold toys at discount prices.
According to the research conducted by the NPD Group, the toy market in North America has a size of $2.1 billion in annual sales of fiscal 2006, accounting for approximately 37% of the world toy market. The toy market in North America is expected to expand gradually and to not be affected significantly by general economic conditions.
Costs for product development and marketing in European markets are generally higher than other markets due primarily to costs for translation in several languages and different distribution system in each country.
The average amount spent on each child has been increasing due to the declining birth rate in North America. Also, the age group of consumers of toy products has been lowered, reflecting the fact that children tend to abandon toys at a younger age due to the accelerating pace of children’s growth.
In North America, sales of licensed products accounted for 25% to 30% of total toy products sales and toys relating to Japanese cartoon contents have been especially popular.
Our Toy & Hobby Business
We produce, develop, design and sell a range of toys and brand-related goods, including card games, figures, toy-shaped snacks, and game prizes for amusement arcade games and other accessories. These original toys and brand-related goods are based on well-known characters, brands and images, or content, that we either produce on our own or license from third parties. Because of our strong reputation in the industry, we are able to acquire licenses to use popular characters and images such as those contained inYu-Gi-Oh!.Most sports-related licenses, which give us the right to use team or organization logos and trademarks, are non-exclusive. In other cases, we typically obtain exclusive rights. Although each product is different, in most cases, we produce, develop and design the product around popular content and subcontract the manufacturing to a third party.
Our Toy & Hobby business is divided into two divisions: (i) card games; (ii) toys. More than 80% of our revenues from our Toy & Hobby business has been derived from worldwide sales of card games, and changes in the revenues and income of our Toy & Hobby business have depended primarily on changes in our worldwide sales of card games, principally ourYu-Gi-Oh! Trading Card Game. We believe we have the largest share of the worldwide card game market according to data available from the Japan Toy Association and the Toy Industry Association, Inc. In February 1999, we launched ourYu-Gi-Oh! Trading Card Gamein Japan. TheYu-Gi-Oh! Trading Card Gameis based on the comic by Kazuki Takahashi that was originally serialized in Shonen Jump, one of Japan’s most popular weekly comic magazines. We continue to sell ourYu-Gi-Oh! Trading Card Gameglobally in the United States and European countries,Nintendo Wii as well as a trend of decline in Japan.the total number of amusement arcades.
Token-Operated Game Machines—Japanese Industry Revenues
Production
Our Toy & Hobby products are produced both overseas and in Japan by various third-party manufacturers. We are not dependent on any single manufacturer for the production of our toy & hobby products.
Marketing, Sales and Distribution
Marketing and sales in Japan are mostly conducted through direct sales to retailers, but depending on our target users and market conditions, we may choose more suitable methods. In July 2001, we opened the Konami Card Game Center in Tokyo as a customer service base for our card game business. Our retail partner, The Upper Deck Company, LLC, acts as our distributor in the U.S. In Europe, we conducted sales ofYu-Gi-Oh! Trading
Card Game either directly or through our retail partners, including The Upper Deck Company, LLC until March 2004. We currently distribute our products through The Upper Deck Company, LLC’s European entity employing the scheme used in the U.S.
Amusement Business
Our Amusement business produces and sells video game machines and token-operated game machines for amusement arcades.
Amusement Arcade Games—Industry Overview
According to the most recent industry statistics, the domestic amusement industry had total revenues of ¥881.7 billion during 2006. The breakdown by category is shown in the following table.
Amusement Industry—Revenues in Japan
December 31, | |||||||||||||||
Industry | 2002 | 2003 | 2004 | 2005 | 2006 | ||||||||||
(billions of yen) | |||||||||||||||
Amusement arcade operations | ¥ | 590.3 | ¥ | 605.5 | ¥ | 637.7 | ¥ | 649.2 | ¥ | 682.5 | |||||
Amusement arcade games (Japan) | |||||||||||||||
Video game machines | 24.5 | 22.7 | 35.0 | 39.6 | 48.5 | ||||||||||
Token-operated game machines | 22.3 | 27.1 | 37.4 | 37.0 | 46.0 | ||||||||||
Prize machines | 10.7 | 12.3 | 16.8 | 14.6 | 12.7 | ||||||||||
Vending machines | 18.0 | 18.8 | 18.5 | 19.5 | 19.3 | ||||||||||
Music simulation game machines | 4.9 | 3.4 | 3.4 | 3.3 | 3.4 | ||||||||||
*Card games | — | — | — | 5.5 | 11.5 | ||||||||||
Other | 39.7 | 50.2 | 52.9 | 48.2 | 47.2 | ||||||||||
Sub-total | 120.2 | 134.5 | 164.0 | 167.7 | 188.6 | ||||||||||
Amusement arcade games (exports) | 20.6 | 20.0 | 13.9 | 12.9 | 10.6 | ||||||||||
Total | ¥ | 731.1 | ¥ | 760.0 | ¥ | 815.6 | ¥ | 829.8 | ¥ | 881.7 | |||||
Fiscal Year Ended on March 31, | ||||||||||||||||||||||||
2004 | 2005 | 2006 | 2007 | 2008 | 2009 | |||||||||||||||||||
(billions of yen except for percentages) | ||||||||||||||||||||||||
Revenues from the sale of token-operated game machines | ¥ | 37.4 | ¥ | 37.0 | ¥ | 46.0 | ¥ | 48.5 | ¥ | 44.0 | ¥ | 37.1 | ||||||||||||
Revenues from amusement arcade operations | 637.7 | 649.2 | 682.5 | 702.9 | 678.1 | 573.1 | ||||||||||||||||||
Revenues from token-operated game machines | 163.1 | 176.2 | 179.7 | 199.8 | 195.1 | 167.0 | ||||||||||||||||||
Token-operated game machine revenues as a percentage of amusement arcade revenues | 25.6 | % | 27.1 | % | 26.3 | % | 28.4 | % | 28.8 | % | 29.1 | % |
Source: | “Amusement Industry Survey, Fiscal |
Due to the development of powerful home game consoles that can rival amusement arcade games in play quality and the introduction of advanced mobile telephones equipped with online and game functions, consumers now have competitive leisure alternatives. However, revenues from the operation of amusement arcades increased for four consecutive years, from ¥605.5 billion in 2003, ¥637.7 billion in 2004, ¥649.2 billion in 2005, and to ¥682.5 billion in 2006, due primarily to progress in the restructuring of the amusement industry, including the closing of unprofitable small sized amusement arcades and the efficient development of large-scale amusement arcades that attract customers, and increased sales at department stores that target families.
Our Amusement Business—VideoOverview of Token-Operated Game Machines Business
Our Amusement business develops, producesWe develop, produce and sells videosell token-operated game machines forthat are primarily targeted to amusement arcades, many of which use sophisticated computer graphics technology. In fiscal year 2007, we introduced approximately 16 new titles for videoarcade operators in Japan. All token-operated game machines that we sell in Japan are played by purchasing tokens that are inserted into the machine, the object being for the player to win more tokens to extend the playing time. Our popular token-operated game machine called “FORTUNE TRINITY” which was released in February contains a roulette installed on the ceiling which is the largest in the industry—exceeding over three meters in diameter—and which enables 20 users to play together simultaneously, presenting an orchestration of lights, sounds, and pictures at the time of the jackpot, similar to the water fountain show in Las Vegas and providing an experience which can be enjoyed only at an amusement arcades, more than half of which were sequel titles. Such
titles typically have life spans of six to 18 months, although popular titles may have a longer life and are sometimes developed into a series of titles, which together constitute a recognized brand such asDance Dance Revolution.facility.
The main purchasers of our videoMedium- and large-sized game machines, which attract older children and adults, are supplied mainly to amusement arcades. In addition toSPINFEVER andGRANDCROSS, our principal machines include theETERNAL KNIGHTSseries, a new sensory experience adventure game simulation RPG, theFANTASTIC FEVER series and the GI-HORSEPARK series, large-scale horse race games in which users can bet tokens and play racing games or training games. We have sought to respond to market trends by introducing low price products and products that involvealso sell the type of play that cannot be replicated easily by home videoTower Pusher series, small-sized token-operated game systems.machines. In this regard, our music simulation games have been successful. These games evolved frombeatmania,way, we are advancing a disc jockey simulation game developed in our Amusement business. Hit music simulation games have included Dance Dance Revolution, beatmania, pop’n music,GuitarFreaks & DrumMania. These music-simulation game machines are relatively expensive, but can accommodate relatively inexpensive software updates for sequelfull lineup of various types of token games. Because the price of new software generally is substantially less expensive as compared to the price of a new amusement arcade machine, software upgrades tend to be more attractive to our customers.
In March 2003, our Amusement business introduced the “e-AMUSEMENT” service that connects amusement arcades all over Japan through a computer network run by Konami, creating a new amusement arcade market. This service allows multiple players to participate in the same game simultaneously from different locations nationwide and to continue playing after saving the game. OurMAH-JONG FIGHT CLUB, which is our first title compatible withe-AMUSEMENT, is retaining its popularity in part due to events such as national conventions where players can try their skills in a tournament.
Our e-AMUSEMENT titles include:
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VideoToken Operated Game Machines—Production
Our videodomestic token-operated game machines for amusement arcades designed for both the Japanese and the overseas markets are developed in Kobe and Tokyo.our production facilities in Kanagawa, Japan. As for production, Konami Digital Entertainment Co., Ltd. transferred its manufacturing department to Konami Manufacturing and Service, Inc. (Known as Konami Logistics and Service, Inc. until July 2006) which now produces our amusement arcade games designed for the Japanese market. Konami Digital Entertainment Co., Ltd. export our developed software content to the United Kingdom and the United States, where we produce the amusement arcade video games for those markets. Local production and assembly allows us to reduce costs and to limit our exposure to exchange rate fluctuations.domestic token-operated game machines.
VideoToken Operated Game Machines—Marketing, Sales and Distribution
While Konami Digital Entertainment Co., Ltd. used to marketmarkets and sellsells our videotoken-operated game machines, for amusement arcades and Konami Logistics & Service, Inc. used to distribute its products, Konami Manufacturing & Service, Inc. tookis in charge of the sales operations, and distribution business, starting from July 2006. As a result, we believe we have become able to provide more efficient services in our distribution activities. In overseas markets, our foreign sales subsidiaries are responsible for marketing, sales and distribution of our video game machines for amusement arcades.
Card Games Business
Amusement Business—Toy Industry Overview of Token-Operated Game Machines Business
Consumption Trends—Declining Child Population and Enlarging the Age Brackets of Consumers
Each company in the Japanese toy industry is being forced to respond to changes resulting from a declining child population and the growing number of alternative options for play. Furthermore, companies must develop toys with original ideas so children will play with toys to a more advanced age than at present.
Since the population of children (those aged 0-14 years old) has been steadily declining and since the number of live births has also tended to decline, the child population is expected to continue to decline slightly in
the future. According to the National Institute of Population and Social Security Research, the number of births in Japan has declined from 2.09 million in 1973 to 1.09 million in 2008. Consequently, the population of this age group has decreased from 27 million in the beginning of the 1980s to 17.1 million in the population census of 2009. The population of children is expected to fall below 10 million in 2039.
The phenomenon of children abandoning toys at a younger age is due to the changing pattern of children’s lives. A large number of children go to music classes (piano classes, etc.), fitness clubs (swimming schools, etc.) and cram schools (educational institutions to help enter kindergartens, primary schools and junior and senior high schools) from infancy and thus they spend less of their leisure time playing with toys than previous generations did. Moreover, electronic toys such as Nintendo DS now occupy an important position in the toy market. These toys are also used by younger people. The popularity of electronic games contributes much to the decreasing demand for general toys.
Token-operated game machines in Japan
As indicated in the following table, as of fiscal 2006,2009, sales of token-operated game machines amounted to ¥46¥37.1 billion, comprising approximately 24%20% of the ¥188.6¥182.8 billion Japanese amusement arcade game market. Also, as indicated in the following table, revenues from amusement arcade operations and revenues from the operation of token-operated game machines increased every year from fiscal 2002 through 2006. We believe thatfiscal 2007, but decreased in fiscal 2008. This decrease was caused by a decline in the salenumber of medium-customers due to the recent economic downturn and large-sized token-operated game machines, which provide the typerevival of entertainment that cannot be replicated on home video game systems, is largely responsible for this trend.machines such as Nintendo Wii as well as a trend of decline in the total number of amusement arcades.
Token-Operated Game Machines—Japanese Industry Revenues
Fiscal Year Ended on March 31, | ||||||||||||||||||||
2002 | 2003 | 2004 | 2005 | 2006 | ||||||||||||||||
(billions of yen except for percentages) | ||||||||||||||||||||
Revenues from the sale of token-operated game machines | ¥ | 22.3 | ¥ | 27.1 | ¥ | 37.4 | ¥ | 37.0 | ¥ | 46.0 | ||||||||||
Revenues from amusement arcade operations | 590.3 | 605.5 | 637.7 | 649.2 | 682.5 | |||||||||||||||
Revenues from token-operated game machines | 137.4 | 152.6 | 163.1 | 176.2 | 179.7 | |||||||||||||||
Token-operated game machine revenues as a percentage of amusement arcade revenues | 23.3 | % | 25.2 | % | 25.6 | % | 27.1 | % | 26.3 | % |
Fiscal Year Ended on March 31, | ||||||||||||||||||||||||
2004 | 2005 | 2006 | 2007 | 2008 | 2009 | |||||||||||||||||||
(billions of yen except for percentages) | ||||||||||||||||||||||||
Revenues from the sale of token-operated game machines | ¥ | 37.4 | ¥ | 37.0 | ¥ | 46.0 | ¥ | 48.5 | ¥ | 44.0 | ¥ | 37.1 | ||||||||||||
Revenues from amusement arcade operations | 637.7 | 649.2 | 682.5 | 702.9 | 678.1 | 573.1 | ||||||||||||||||||
Revenues from token-operated game machines | 163.1 | 176.2 | 179.7 | 199.8 | 195.1 | 167.0 | ||||||||||||||||||
Token-operated game machine revenues as a percentage of amusement arcade revenues | 25.6 | % | 27.1 | % | 26.3 | % | 28.4 | % | 28.8 | % | 29.1 | % |
Source: | “Amusement Industry Survey, Fiscal |
Our Amusement Business—Overview of Token-Operated Game Machines Business
We develop, produce and sell token-operated game machines that are primarily targeted to amusement arcade operators in Japan. All token-operated game machines that we sell in Japan are played by purchasing tokens that are inserted into the machine, the object being for the player to win more tokens to extend the playing time. Our popular token-operated game machines,GI series andGRANDCROSS, accounted formachine called “FORTUNE TRINITY” which was released in February contains a substantial majority of our net revenues of token-operated game machinesroulette installed on the ceiling which is the largest in fiscal 2007. GI-HORSEPARK series are large-scale horse race gamesthe industry—exceeding over three meters in diameter—and which users can bet tokens on horses in racing games as well as breeding horses and nationwide tournaments can be enjoyed by using “e-AMUSEMENT”.GRANDCROSSis a large-scale token-operated pusher-machine game, enabling 32enables 20 users to play together simultaneously, and providespresenting an innovative fusion of token-pushing games and BINGO, presenting the orchestration of lights, sounds, and pictures.pictures at the time of the jackpot, similar to the water fountain show in Las Vegas and providing an experience which can be enjoyed only at an amusement facility.
Medium- and large-sized game machines, which cost approximately ¥20 million and attract older children and adults, are supplied mainly to amusement arcades. In addition toGISPINFEVER series andGRANDCROSS, our principal machines include theWingFantasiaETERNAL KNIGHTS,series, a new sensory experience adventure game featuring a “party”-like scene, where a token-operated game is combined with a Japanese backgammon function and a roulette wheel, andsimulation RPG, theFORTUNE ORBFANTASTIC FEVER series a slot machine game where a userand the GI-HORSEPARK series, large-scale horse race games in which users can win prizes in a super jackpot. Such large-sized token operated game machines have a typical commercial life span of four to five yearsbet tokens and we typically introduce a few new types of large-sized token-operated game machines each year.play racing games or training games. We also sell the Tower Pusher series, small-sized token-operated game machines. In this way, we are advancing a full lineup of various types of token games.
Token Operated Game Machines—Production
Our domestic token-operated game machines are developed in our production facilities in Zama, Kanagawa, Japan. As for production, Konami Digital Entertainment Co., Ltd. transferred its manufacturing department to Konami Manufacturing and Service, Inc. (formerly, Konami Logistics and Service, Inc., until July 2006) which now produces the domestic token-operated game machines.
Token Operated Game Machines—Marketing, Sales and Distribution
While Konami Digital Entertainment Co., Ltd. marketmarkets and sellsells our token-operated game machines, Konami Manufacturing & Service, Inc. (Known as Konami Logistics & Service, Inc. until July 2007) is in charge of distribution.
Card Games Business
Toy Industry Overview
Consumption Trends—Declining Child Population and Enlarging the Age Brackets of Consumers
Each company in the Japanese toy industry is being forced to respond to changes resulting from a declining child population and the growing number of alternative options for play. Furthermore, companies must develop toys with original ideas so children will play with toys to a more advanced age than at present.
Since the population of children (those aged 0-14 years old) has been steadily declining and since the number of live births has also tended to decline, the child population is expected to continue to decline slightly in
the future. According to the National Institute of Population and Social Security Research, the number of births in Japan has declined from 2.09 million in 1973 to 1.09 million in 2008. Consequently, the population of this age group has decreased from 27 million in the beginning of the 1980s to 17.1 million in the population census of 2009. The population of children is expected to fall below 10 million in 2039.
The phenomenon of children abandoning toys at a younger age is due to the changing pattern of children’s lives. A large number of children go to music classes (piano classes, etc.), fitness clubs (swimming schools, etc.) and cram schools (educational institutions to help enter kindergartens, primary schools and junior and senior high schools) from infancy and thus they spend less of their leisure time playing with toys than previous generations did. Moreover, electronic toys such as Nintendo DS now occupy an important position in the toy market. These toys are also used by younger people. The popularity of electronic games contributes much to the decreasing demand for general toys.
Trends and Characteristics of Toy Demand
In recent years, the toy and hobby business has been under difficult conditions not only due to the declining birthrate but also due to the diversification and the changes in customer’s preference. However, there has also been progress in diversification of distribution, expansion of new types of stores and diversification of products.
Under these circumstances, the age target set by toy makers has widened from infants aged zero to seniors. Furthermore, sales of card game products and trading card products, regarded to belong to the peripheral area of conventional toys, increased compared to the previous year while other toy makers engage in the development of products which are not categorized as conventional toys.
Our Card Games Business
We produce, develop, design and sell a range of card products and card-related products. These products are based on well-known characters, brands and images, or content, which we either produce on our own or license from third parties. Because of our strong reputation in the industry, we are able to acquire licenses to use popular characters and images such as those contained inYu-Gi-Oh!Although each product is different, in most cases, we produce, develop and design the product around popular content and subcontract the manufacturing to a third party.
More than 90% of our revenues from our Card Games business has been derived from worldwide sales of our Yu-Gi-Oh! Trading Card Game, and changes in the revenues and income of our Card Games business have depended primarily on changes in worldwide sales of ourYu-Gi-Oh! Trading Card Game. We believe we have the largest share of the worldwide card game market according to data available from the Japan Toy Association and the Toy Industry Association, Inc. In February 1999, we launched ourYu-Gi-Oh! Trading Card Gamein Japan. TheYu-Gi-Oh! Trading Card Game is based on a comic that was originally serialized in one of Japan’s most popular weekly comic magazines. We continue to sell ourYu-Gi-Oh! Trading Card Gameglobally in the United States and European countries, as well as in Japan.
Production
Our Card Games products are produced both overseas and in Japan by various third-party manufacturers. We are not dependent on any single manufacturer for the production of our Card Games products.
Marketing, Sales and Distribution
Marketing and sales in Japan are mostly conducted through direct sales to retailers, but depending on our target users and market conditions, we may choose more suitable methods. In July 2001, we opened the Konami Card Game Center in Tokyo as a customer service base for our card games business. Although we used to have partnership with retailers in the United States and Europe, we have switched to our independent distribution and have conducted sales in the United States since December 2008 and in Europe since April 2009, respectively.
Online Business
Online Business Overview
Growth of broadband, online games and mobile phones as a platform
Internet technology for high speed broadband enables customers to have a more enhanced and interactive online experience. Going forward, we expect the spread of broadband services and continued competition among broadband providers to lead to further growth in the market for online games. With the rapid spread of broadband infrastructure, many game console manufacturers and video game software publishers are entering the online game business. For example, Sony Computer Entertainment started a broadband online service for PlayStation 2 in the spring of 2002 through which users can play games online and download software as well as enjoy broadband contents such as movies and music at home. In August 2002, Sony Computer Entertainment America Inc. started selling online adaptors and software for PlayStation 2 in the U.S., and in the fall of 2006, started a download service through its network in conjunction with the release of PlayStation 3. In the fall of 2002, Nintendo started an online service for GameCube in Japan and the U.S., and in conjunction with the release of Wii at the end of 2006, started a “virtual console” service in which users can download and play previously released game software for old models, and in March 2008, launched the “WiiWare” service, in which users can download new game software not available in stores. Microsoft started an online service for Xbox called “Xbox Live” in November 2002 in the U.S. and in January 2003 in Japan, and the service has been continued for Xbox 360, which was released in January 2003.2005. Now all portable game consoles and stationary game consoles have built-in network functions. Consequently, we are expanding further our range of online services. Some of our competitors have already started operating web sites where players can download a game and play it on the Internet. We expect that with the spread of broadband and faster services, investment into and interest in online games will expand significantly.
We also expect mobile phones to become a new platform for home video game software. In Japan, mobile phones are not just phones, but wireless Internet handsets loaded with digital cameras and multi-media processors. As of March 31, 2007 over 862010, the number of mobile phone subscriptions exceeded 112 million, and due to the prevalence of flat-rate plans offered by communication carriers, as well as advancements in mobile Internet subscribers in Japan downloaded share price information, reviewed news, sent out pictures and played games.phone handset functions, the shift to content-rich media has expanded. Although usage rates for personal computers and the Internet is higher in the U.S. than in Japan, comparatively more people access the Internet via mobile phones in Japan and mobile phones are increasingly becoming a popular way to access the Internet.
Companies such as NTT DoCoMo, Inc. (DoCoMo) have developed a cutting-edge third-generationthird -generation mobile phone technology enabling 24-hour access to the Internet at low cost from mobile phones for Japanese subscribers. One of the most popular services, i-mode, has been developed by DoCoMo and enables subscribers to view specified websites and to receive e-mails from mobile phones. In addition to accessing the Internet and e-mails, i-mode provides access to financial information (including share prices and net banking), travel information, news and entertainment information. Additional contents such as games are usually provided for an additional subscription of ¥100 to ¥300 per month. Other online mobile phone services, such as Softbank Mobile’s Yahoo! Keitai and EzwebEZweb by au,KDDI (au), provide similar functions. These third-generation services not only enable efficient access to e-mails, faster viewing for websites and e-commerce application, but also provide necessary speed and volume to support innovative multimedia applications such as more enhanced online games, downloading of music and video images.
Our Online Business
We develop, publish, distribute and sell software for home video game systems, personal computers, mobile phones and online networks. We plan to actively enter the mobile phone and online game software business in light of the recent growth of the online and mobile phone game markets, and we believe there may be new opportunities for profits with our software titles.
In October 2001, we established Konami Mobile Online, Inc. as our principal subsidiary developing games for mobile phones. In September 2003, we renamed it Konami Online, Inc. and added online game business to its
existing businesses to manage online game infrastructures. Konami Online, Inc. later merged into Konami CorporationKONAMI CORPORATION in April 2005. In the same month, Konami CorporationKONAMI CORPORATION accepted new third-party shares issued by HUDSON SOFT CO., Ltd. and made it a consolidated subsidiary. Konami Digital Entertainment Co., Ltd. was established to take over our digital entertainment business and, starting from AprilMarch 31, 2006, develop our online business for the purpose of synergetic effects between the Computer and Video Games Software and Toy&HobbyCard Games businesses. We develop and distribute various contents for all domestic mobile network services, including i-mode, Yahoo! Keitai and Ezweb.EZweb. In 2003, we started distribution of various game contents in North America, Europe and Asia. In Japan, we provide a download service for ringer melodies and wallpapers for mobile phones. Most of our games for mobile phones are mobile phone versions of our popular home video game software. Depending on the type of service, the subscription fee for users is ¥70 to ¥300 per month. As new services, we have distributed METAL GEAR SOLID TOUCH,DanceDanceRevolion S, PAWAFURU PUROYAKYU TOUCHandLOVEPLUSfor the iPhone/iPod touch, to favorable reviews. We plan to add our successful sports titles to our distribution lineup.
Multimedia BusinessPrior to fiscal 2007, we hosted online functionalities for our console games with online capability on our internal servers mainly for PlayStation 2. As the online capability of PlayStation 2 was rather limited, our video game software with online functionality was designed so that playing games on the console was the major premise, and the online usage rate was relatively low at that time. However, since PlayStation 3, which provides easier Internet access to users, led to significant improvements in the quality of the online component, from fiscal 2008 we have produced and sold video game software for PlayStation 3 which emphasizes the online services. In fiscal 2009, we started distributingMETAL GEAR ONLINE, which recorded in total 1.7 million accounts worldwide at the end of March 2010 and has gained popularity.
Gaming & System Segment
Our Gaming & System segment develops, produces and sells gaming machines such as video and mechanical slot machines and management systems to gaming operators in North America, Oceania and other overseas markets. Net revenues generated by our Gaming business, before elimination of intersegment revenues, amounted to approximately ¥18,336 million in fiscal 2009 and approximately ¥ 19,996 million in fiscal 2010, an increase of approximately ¥1,660 million, or 9.1%. We develop, produce and sell gaming machines for international markets, primarily in North America and Australia, and sell casino management systems in North America and Australia.
Gaming Industry Overview
Global Gaming Industry
The North American market is the world’s largest gaming market, followed by the Oceanian market. Other major gaming markets include South America, Africa, Europe and Asia. Casinos are authorized to operate in more than 130 countries, and the number of countries authorizing casinos has been increasing each year.
Gaming in the United States
The gaming industry in the United States had generally experienced substantial growth during the decade between 1998 and 2007. However, the markets in some areas have been shrinking in this fiscal year due to the recent recession. Prior to 1979, gaming was limited to Nevada. In 1979, gaming was legalized in New Jersey. Between 1979 and 1988, gaming activities by various Native American tribes developed, leading to the enactment of the federal Indian Gaming Regulatory Act. The growth of Native American gaming served as a catalyst for certain jurisdictions to consider non-Native American gaming because of its potential as a source of government revenue. Since 1989, various forms of gaming have been legalized in numerous states including but not limited to Colorado, Illinois, Indiana, Iowa, Louisiana, Michigan, Mississippi, Missouri, Pennsylvania, Florida and Rhode Island. In addition, gaming facilities operate at casino hotels, river boat casinos and on cruise ships sailing out of numerous ports in and around the United States. Several other states have approved or are considering approval of some form of gaming.
Gaming in Australia
In Australia, the gaming industry is characterized by intense competition between manufacturers over a limited total market share due to an increase in the gaming tax rate and restrictions on the numbers of gaming machines permitted to be installed in larger states, as part of the Gambling Harm Minimization Policies implemented by the Australian government. Australia is the largest and most established market for gaming products outside of North America and is primarily oriented towards the video slot machine market.
Our multimediaGaming Business
We have expanded our gaming machines business in international markets. This expansion, initiated in March 1998 by exporting components of video slot machines to Australia, was followed by the launch of video slot machine sales in the United States in late 2000. In August 2001, we acquired Paradigm Gaming Systems, Inc., through our American subsidiary, Konami Gaming, Inc., and integrated it into the Systems Division of Konami Gaming, Inc. Paradigm Gaming Systems, Inc. is a developer of casino management systems. Our casino management system product enables simultaneous accounting, marketing management, customer management and security enhancement by connecting all of the gaming machines to a casino in a unified management system. Due to the acquisition of Paradigm Gaming Systems, Inc., we are further expanding our opportunities in the gaming machine market in North America and are steadily expanding our client list. We have received licenses to manufacture and sell gaming machines in almost all of the major states and provinces in North America and Canada that permit gaming. For example, we acquired licenses from New Jersey in 2004, Oklahoma and Alberta, Canada in 2005, and Pennsylvania and Florida in 2006, and Rhode Island in 2007. In October 2005, we entered into an agreement for a large-scale installation of the Casino Management System in Quebec, Canada which commenced implementation in 2006 and was completed in 2007. Furthermore, in certain states and regions in Australia, we have commenced installations and engaged in expansion of sales.
We originally started our Gaming & System segment with sales of video slot machines in Australia and later introduced our video slot machine products into the North American market. We are currently focused on the development of new models, including mechanical slot machines, to secure revenues generated in the North American market.
In North America, the largest gaming machine market in the world, we currently hold licenses to manufacture and sell gaming machines in major states and sell gaming machines to major Native American casinos. We participated in the Global Gaming Expo in November 2009, and exhibited and received favorable reviews for, a wide-ranging product lineup that responded to the needs of each relevant market. It included new content for theK2V series, which was loaded onto thePodium, new cabinet (outer structure) for the expo;Advantage Revolution, the latest slot machine in which progress has been made in the staging elements;Advantage 5; and theKonami Casino Management System.
Konami Australia Pty Ltd, which has licenses for sales and manufacturing of gaming machines in all Australian states, markets gaming machines with a focus on our main K2V series product a new platform which was released in fiscal 2007, as well as our ES series product. 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 gained a stable position in the Australian market as one of the other main gaming machine sellers and manufacturers. We believe the Australian gaming market is mature and has been leveling off, due in part to the tax system revision, smoking bans, and regulations limiting the maximum number of gaming machines allowed in each state, and 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. We intend to continue to try to expand our business to overseas markets.
In contrast to Australia, we believe demand for our gaming machines in North America has been increasing. Also, following acquisition of a license in New Jersey, one of the largest gaming markets in North America, in August 2004, we have acquired additional licenses, mainly in Oklahoma, New Mexico, Pennsylvania, Florida,
Rhode Island and Alberta in Canada. We have built a new gaming machine facility in Las Vegas which commenced operations in June 2005, and which has significantly increased our production capacity to meet increasing demand in each market.
Production
Our multimedia business includes the planning,gaming machines and casino management system, sold in North America are assembled at our production facility in Las Vegas, Nevada. Gaming machines sold in Australia are assembled at our production facility in Sydney, Australia. Our products are assembled utilizing various parts and salescomponents from a large base of music, videos, bookslocal vendors. A Japanese branch of our North American subsidiary supplies certain software and magazines,electronic components to our overseas production facilities. We have also identified alternate sources of supply for significant parts and operatescomponents in the publishing, music and video industries. The distributionevent any of publications between publishing companies and bookstores goes through distributors, or publishing brokers, who are engaged in the collection, delivery and return of goods.our current vendors fail to meet order requirements.
We distributecompleted the construction of a new building in Las Vegas in June 2005. More than a half of our publications bothworldwide sales are derived from the U.S. market, and products sold in the U.S. market are built solely in the facility in Las Vegas. We believe we have thus achieved more efficient operations through publishing brokers as well as, with respectincreased production capacity compared to our musicprevious building and video products, through contractual arrangements with market leaders, utilizing their distribution channels.
We plan, produce and sell CDs and DVDsan enhanced training facility for customers of our popular contents, as well as books and magazines that contain clues and strategies for further enjoying our popular game software.casino management system.
InMarketing, Sales and Distribution
Our gaming machines are marketed, sold and distributed overseas through our effortlocal subsidiaries directly to create new contents, we started broadcasting our original animation “OTOGIJUSHI AKAZUKIN-FAIRY MUSKETEERS-” on televisioncasino operators. Currently, in July 2006 and “TOKIMEKI MEMORIAL Only Love” in October 2007, and released related products in various areas such as video, music, publication, toys and games. We plan to actively introduce more multi-faceted private label products, such as animations, books and music CDs, to further enhance our brand name.Las Vegas, which is representative of the North American market, there is substantial management integration of gaming facilities.
Health & Fitness Segment
Our Health & Fitness segment is comprised of the operation of fitness clubs and the design, manufacture and sales of fitness machines and fitness-related products.
Consolidated net revenues generated by our Health & Fitness segment, before elimination of intersegment revenues, amounted to ¥81,209¥89,965 million in fiscal 20062009 and to ¥88,459¥85,765 million in fiscal 2007, an increase2010, a decrease of ¥7,250¥4,200 million.
Fitness club business
Industry Overview
According to “Club Business“Fitness Club Industry Trends in Japan, 2006” a report available2009” published by Club Business Japan, revenues generated at Fitness Online, private fitness club revenues in Japan have increased from ¥357.5¥379.6 billion in 20022004 to ¥427.2over ¥400 billion in 2006, a trend that shows the industry2009, and markets have been growing since 2003. Over the same period,although the number of private fitness clubsclub memberships has grown from 1,873 in 2002 to 2,541 in 2006, and especially in 2006, with the newly opening clubs amounting to 499, the growth rate for private fitness clubs reached 24%. This has led to diversification of the industry, as evidenced byshowed an increase in small-scale circuit-training gyms. In addition, fitness club memberships
have increased from 3.593.78 million in 20022004 to 4.18over 4 million in 2006 during2008, it dropped below the same period, marking4 million level in 2009. This cause was deemed to a decrease in the highest numberenrollment of young people aged from 20 to 35. Particularly a decrease in market record. Also, the year 2006 marked the highest average consumer spending per person among fitness club members, as a resultenrollment of a growing trend that has been continuing since 2001, after a period between 1996 and 2000 with a downward trend. With increasing demandswomen, while admission of middle-aged and senior users based on higher health-consciousness and economic recovery, we believe revenues from membership fees and other means are on the rise, and prospects for short- and long-term profits are hopeful.adults increased.
We believe thatOn the expected growthother hand, the number of facilities continued to increase but not at the same pace as in fitness club memberships will be attributed to population aging;2007 when an increase in leisure time, disease rates, personal share of medical expenses,20% was recorded compared to the previous year, and health-consciousness; implementation of health-promoting policies at the national and local levels; and an increasingtotal number of fitness clubsfacilities was estimated to be 3,388 as of the end of December 2009. Although nearly 400 small-scale circuit-training gyms opened each year in 2006 and improvements2007, such pace steadied down in quality. Other factors that are taken into account when selecting fitness clubs include2009 with the distance from home, programs, qualityopening of 98 small-scale circuit-training gyms. A pace of opening of new types of facilities such as small-scale gyms exclusively for women and price. We believestudio-type facilities specialized in yoga and Pilates has declined, and it was reported that 152 clubs were newly opened overall in 2009.
Despite this slower pace, because facilities in line with the diversity of customers’ preferences were continuously opened, the overall supply of facilities exceeded demand, resulting in intensified competition in the same sales areas located mainly in metropolitan areas. As a results, the number of membership per facility has been on a declining trend that has continued since 2005 as stated in the aforementioned “Fitness Club Industry Trends in Japan, 2009”.
However, the future fitness market is expected to grow in the medium to long term period considering the growing interest in diet programs and measures against slowing metabolisms, the movement to build a new health service scheme in local communities with the cooperation of the private sector, governmental authorities and academia, as well as the growing popularity of home fitness clubs has heightened due to the efforts of club owners to renew facilities, reduce membership fees, offer more diverse membership options, extend club hours, increase group exercise programs such as aerobics and jazzercise, and enhance marketing and sales activities. We also believe that fitness clubs provide a more convenient venue for exercise than outdoor activities, particularly in densely populated metropolitan areas.
According to published industry sources, the major trends that are driving changes in the healthrepresented by Wii Fit and fitness industry include:
the aging of the Japanese population is creating an awareness of and a need for healthy living and physical fitness;
capital investment by large operators who are renewing or expanding facilities is generating greater consumer demand;
greater availability of membership program options, such as weekend or after-hours memberships, are attracting greater numbers of members;
an increase in non-dues revenue from the sale of beverages and other products is providing revenue diversification for club operators; and
large operators are acquiring small- and medium-sized fitness clubs in an effort to build national platforms.
We believe that we had approximately 21% of the Japanese fitness club market, as measured by revenues, for fiscal 2007 based on the Leisure White Paper issued by Japan productivity center for socio-economic development. We have several other competitors in an otherwise fragmented market but, as noted above, the industry is undergoing consolidation which may result in the creation of additional significant competitors.DVDs.
Our Fitness club Business
Through our acquisition of a majority of the outstanding common stock of PEOPLE CO., LTD. in February 2001, which we renamed Konami Sports Corporation, we have become the leading operator of health and fitness clubs in Japan in terms of revenues, members and total number of facilities. Since our acquisition of PEOPLE CO., LTD., we have grown our fitness club business primarily through acquisitions of other fitness clubs. We increased our presence in this market even further through the acquisition in February 2002 of a majority of the shares of the Daiei Olympic Sports Club, Inc., one of the major fitness club operators in Japan in terms of revenues, which was subsequently taken over by Konami Sports Corporation in October 2002. These acquisitions were part of our strategy to diversify our revenues and decrease our reliance on the video game industry.revenue base. Fitness club revenues tend to be more stable than revenues in other segments, in revenues, which can fluctuate widely depending on the release of hit products. Fitness clubs also tend to have a more diverse consumer base across both gender and age. Finally, we expect that our fitness clubs will provide demand for our fitness machine business.
TheWhile the health-consciousness of Japanese people has increased significantly, their preferences and lifestyles have become more diverse. In order to achieve further growth in our Health & Fitness segment, we promote the provision of services which meet our customers’ diverse needs and the development of externally competitive products. However, a decline in consumer spending caused by the worldwide recession that has continued since the fall of 2008 has also affected the business environment surrounding our Health & Fitness segment. As a result, we tested the fitness club business has changed significantly due torecoverability of underperforming clubs and recorded a pre-tax impairment charge of ¥7,881 million for long-lived assets during the rapid aging of Japanese population. This change has included a shift in fitness needs toward senior membersfourth quarter of the society. In
fiscal year 2005, in response to this change in the operating environment, we renewed the management teamended March 31, 2009. We also have made improvements such as efficiency of operations through consolidation of our fitness club business in an attempt to fundamentally change our fitness club business modelcompeting clubs and business plan. Under our current management policy, strategic focus, we have shifted from simply expanding the numberclosure of fitness clubs to critically assessing and managing profits made in individual clubs, so that we now believe it is now possible to close unprofitable clubs in a much shorter time frame than before.and review of product structure, as well as improvement of our products and services, for future growth.
As of March 31, 2007,2010, we directly owned and operated a nationwide network of 208211 fitness clubs and operated an additional 104116 sports facilities outsourced to us. The directly owned clubs collectively served approximately 990,000 members as of March 31, 2007. We offer a wide variety of health and fitness related services, including traditional membership-based clubs with swimming, gymnastics and tennis school programs, aerobics programs, combat-type exercise programs and health and advisory services to people of all ages. In addition to our facility-based operations, we also provide health and fitness advisory services to corporations and to public sector entities. Our non-facility business includes franchising of fitness clubs and the licensing of specific products and programs, such as diet programs. We also act as a nationwide agent of health and fitness programs for the Japan area, acquiring licenses for programs having worldwide popularity, and supply these programs to other fitness clubs as well. We are also engaged in other activities incidental to our core Health & Fitness segment, including travel agency operations and publishing a web magazine for club members.
We principally sell month-to-month membership payment plans that are generally cancelable by members at the end of any month provided that they give advance notice by the tenth day of that month. We believe that members generally prefer this non-commit membership plan over long term commitments. The non-commit membership plan also provides us with an incentive to deliver high quality programs and services in order to retain members.
We have experienced significant growth through a combination of (i) acquiring existing single and multi-club businesses, and (ii) developing and opening new club locations. We believe that there are further opportunities to grow our business profitably. While Japan’s population is growing very slowly, is aging rapidly, and is projected to begin contracting in the future, the percentage of the population that are members of fitness clubs is significantly lower in Japan than it is in the United States. First, we plan to carefully continue opening of new fitness club facilities focusing on their profitability in a short to medium term, while critically assessing the profitability of existing facilities. Second, we believe that we can increase our market penetration by adding services and facilities that will attract new members from all age groups. We plan to differentiate us from our competitors by introducing fitness machines that include an entertainment elementdifferentiated features, by digitizing health management, and by expanding our business into value-added services that can meet the evolving needs of consumers such as cafeterias, acupressureenhancement of hot bath facilities and other body-work clinics,adjacent development of soccer and by adding other entertainment-oriented facilities, such as bicycle or running equipment with video game features, in our clubs that will help to differentiate us from our competitors.golf schools. In September 2006,2009, we set up a booth at the 33rd35th International Home Care & Rehabilitation Exhibition H.C.R 20062009 to introduce our original equipment, programs and services developed in response to an ageingaging society.
We believe we are the only company in Japan which operates fitness clubs and conducts a product development business. We expect to continue to increase revenues through club and membership growth not only by increasing the number of facilities and members, but also by providing products and services in relation to overall health service. We currently serve, many,not all, but not all,many of the major cities in Japan. We plan to extend our reach into new geographic markets until we cover all of Japan.
We have taken actions to create a more powerful brand. To cement our position as the No. 1 brand in the fitness club industry in Japan, we unified our collection of brands, including EgzasXAX and PEOPLE, into a single brand: Konami Sports club, thereby strengthening our 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 fee-based individualized lessons for each customer. Furthermore, we launched the first official i-mode, Ezweb, Yahoo! (internet enabled cellular phone) site in the fitness industry, which provides various club facility information and health related
information. Going forward, we plan to offer an IT health management system that will enable comprehensive management of a person’s health, connecting the three aspects of daily health and lifestyle—the fitness club, the home and outside the home.
Also,Not only do we focus more on improving the quality of our services than on reducing our member prices within the fitness clubs in order to compete efficiently. For example,efficiently, we also offer value-added services such as spa and massage in our fitness clubs for extra charges. Also, outside of the fitness clubs, we offer various sporting 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 2007.
Our Health & Fitness segment develops fitness-oriented games and fitness machines for home use by our customersconsumers and fitness machines with entertainment quality,equipment for serious exercise for use principally forin our Konami Sports fitness clubs. In fiscal 2006, we completed a full lineup of our fitness machines, such as the “EZ series”, and these machines are now in our Konami Sports fitness clubs. We also have several new machines in various stages of development. In addition, since COMBI WELLNESS Corporation became a wholly-owned subsidiary in May 2006, our product portfolio has beenwas expanded, including “Aerobike,”“Aerobike”, our principal product in this business.
Further,In fiscal 2008, we announced our business and academic collaborations with Kagawa Education Institute of Nutrition and Osaka Electro-Communication University, and became involved in the training of instructors who are able to provide guidance in exercise and nutrition, the joint development of an effective health program to maintain both exercise and a nutritious diet, the training of staff who can act to maintain and control health, and the development of effective and practical health apparatuses. In addition, we have also begun sales of an original supplement for health and beauty called “Cristal Ottimo” and it is available at pharmacies, drugstores and Konami sports clubs nationwide. In fiscal 2005,2010, we have promoted further sales enhancement by developing new sales channels such as mail-order and catalog sales for the existing product lineups.
In fiscal 2009, we introduced ourRefreshment bikeTargeting Waist Program, simultaneously to all directly-owned fitness clubs throughout Japan. From workouts utilizing our specialized KONAMI original exercise machines to the home-used fitness machine which incorporates the emission featuresprovision of highly-concentrated oxygensupplements and negative ions,Kenshin Keikaku 2, the software which displays and manages the exercise data saved ine-walkeylife 2, the multifunctional pedometer,Flavangenol Up 50 andFlvangenol MSM Plus,health management outside of our original supplements.facilities, this program provides one-stop support for countering metabolic syndrome. In this way, we have provided services that only we can offer to our members with increasing health consciousness.
In fiscal 2006, we introducedForced Rep Upper Body2010, as one of the Ministry of Economy, Trade and Industry’s “Community-based Comprehensive Health Service Industry Creation Projects”, a consortium of six organizations including our Company has promoted health enhancement projects using IT in Takamatsu, Kagawa and its surrounding areas. We have engaged in efforts to support health enhancement of community residents through the business-useutilization of IT, such as exercise and dietary instruction through IT collaboration between medical institutions and fitness machine which is infinitely safeclubs, and can automatically control burdens tothe promotion of walking through the use of a bodypedometer and enables training tailored to each user through six modes andBody Scan, the highly accurate body scale connectable to the network. Also, EXERDIETandKonami Sports Club BLACLCURRANT, our original supplements were released.
In fiscal 2007, in addition to the releases ofMassugu SesujiandAnshin Hokou, the nursing care machines,Kenshin Keikaku 2, the latesthealth management software which jointly manages the data of e-walkey life 2, the multifunctional pedometer as well asAROMA@FITNESS, our original supplement, we launched6WEEKS, the program to prevent lifestyle related diseases promoting improvement of lifestyle andHatsuratsu Kenko Juku, to provide exercise instructions to the elderly.developed by us.
Club Formats and Location
Our clubs generally have relatively high “retail” visibility, and close proximity to subway, train and buslocated around the terminal railway stations in urban areas and commuter suburbs in accordance with our operating strategy of offering our target members the convenience of multiple locations close to where they live and work, reciprocal use privileges and standardized facilities and services.services in which the quality is standardized.
In addition, we are making efforts to provide safe, clean and comfortable facilities from the viewpoint of our customers. We plan to further improve the safeness of our facilities and provide quality services to our customers, through introducing Automated External Defibrillators or AEDs in all of Konami Sports Club facilities as well as renovating older buildings. We aim to respond to various customer needs by providing a broad range of services through development of facilities and introduction of services that meetcater to all age groups and regional characteristics and to operate fitness club facilities that can contribute to the enhancement of the health of our community members.
We operate the following three types of service businesses at various locations in Japan.
• | Operation of our fitness clubs. In an effort to expand the network of our fitness club facilities, we |
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• | Operation of sports facilities outsourced to us. We operate sports facilities of private companies and of local governments by contract upon obtaining the approval of the relevant boards or councils. We actively utilize our expertise and experience in the health enhancement of community members. |
operating income generated from operation of facilities by contract accounted for |
• | Other.Our other businesses include, in particular, providing tours relating to sports and leisure mainly to adults, as well as extracurricular activities for children. For example, |
Marketing
Our marketing campaigns are directed by our in-house Publicity Unit of Facility Operation Department. This team conveys each of our nationally branded fitness clubs as the premier network of fitness clubs in that region. Advertisements are designed to highlight the consistent quality and high value-to-price ratio that we believe we provide through a combination of our membership programs, club facilities and personnel. Our goal is to achieve broad awareness of our brand names primarily through television, newspaper, and magazine and our web site.
We also engage in public relations and special events to promote our image in surrounding local communities. We believe that these public relations efforts enhance our image and the image of our brand names in the communities in which we operate.
Sales
Sales of new memberships are generally handled at the club level. In making a sales presentation, we emphasize: (i) the proximity of our clubs to concentrated commercial and residential areas convenient to where target members live and work; (ii) the advantages of a membership with a club that has an extensive nationwide network; (iii) the lack of a long-term obligation on the part of the enrollee; (iv) the price value relationship of a membership; and (v) access to value-added services.
We generally offer five principal types of memberships: (i) GRANCISE Regular Membership, which entitles members to use all facilities of GRANCISE andEgzas XAX for no charge; (ii) GRANCISE Branch Membership, which enables members to use one GRANCISE facility and allEgzas XAX facilities for no charge; (iii) EgzasXAX Special Membership, which allows members to use allEgzas XAX facilities nationwide for no charge; (iv) EgzasXAX Regular Membership, which entitles members to use oneEgzas XAX facility for no charge and all otherEgzas XAX facilities nationwide on a per-use charge; and (v) EgzasXAX Branch Membership, which enables members to use oneEgzas XAX facility during certain hours on weekdays and on Saturdays, Sundays and holidays or any time during the operation hours of Saturdays, Sundays and holidays. Furthermore, from fiscal 2010, we introduced MYSELECT Membership, which entitles members to use facilities within the designated area at any time during the operation hours. We also provide a wide variety of membership services in line with the regional features and needs at each facility.
In joining a club, a new member signs a membership agreement which obligates the member to pay monthly dues on an ongoing basis. We collect approximately 70% of monthly membership dues through automatic payments based on credit card contained in the membership agreement. Most membership dues are paid one
month in advance. Members can generally cancel their membership at the end of any month provided that they give advance notice by the tenth day of that month. We believe that this program of monthly dues collection provides a predictable and stable cash flow for us and eliminates the traditional accounts receivable function while providing a significant competitive advantage in terms of the sales process, dues collection, working capital management and membership retention. During the first week of each month, we receive the dues for that month initiated by third party processors such as JACCS or OMC,Cedyna, two Japanese credit card companies.
We also respond to the needs of various companies by establishing differentiated prices for corporate membership plans. We have also developed corporate fitness programs, fitness evaluations and health clinics allowing corporations to use our fitness club facilities as part of their employee benefits plans.
The Fitness Product business
Industry Overview—Consumer Trends
We believe that the domestic market for fitness equipment has potential for growth due to a number of demographic and market trends that we expect will continue, including:
growing consumer awareness of positive benefits of good nutrition and fitness;
expanding media attention on health and fitness;
an aging population that is maintaining a more active lifestyle;
continued attention to appearance and weight by consumers; and
expansion of the market for sophisticated high-quality fitness equipment due to consumers’ continued demand for higher levels of efficiency in their workout regimes.regimes; and
the growing need for easy programs and health control machines which can be used at the fitness club or at home, to respond to the tendency for consumers to demand quick, easily obtainable results within a short period of time.
Our Fitness Product Business
Our fitness equipment business is primarily comprised of procurement and sales, manufacturing and marketing of fitness equipment and related products. We believe that we can create fitness machines which meet customer needs and provide convenience to provide healthy and enjoyable training as well as enabling the management of one’s exercise history by using thee-XAX IT healthy management system, leveraging our know-how gained through development of entertainment software and hardware as well as operation and
management systems networked with such software and hardware. In addition, we believe that such equipmentSuch machines will further stimulate additional demandthe desires of consumers thinking about joining fitness clubs, and through the exercise history and being able to see the results of their exercise, will maintain the motivation of current members. This will result in profits for fitness club memberships, thereby benefiting our fitness club business.
We also plan to expandexpanded into the home fitness equipment market, by leveraging the product development know-how of COMBI WELLNESS Corporation, which became a wholly-owned subsidiary in May 2006. In particular, we plan to grow our operations by developing high quality, branded fitness equipment that better meets the needs of our customers and retailers.
Production, Marketing, Sales and Distribution
Fitness Equipment
We have developed and introduced theEZSeries as “Exertainment” equipment which adds entertainment aspects to traditional fitness machines and combines exercising and entertainment. In addition to home fitness
products that allow users to enjoy exercising at home, such asRefreshment Bike,a home fitness machine with a built-in generator of high amounts of concentrated oxygen and negative ions, as well asKenshin Keikaku,a software which displays and manages physical activity data stored ine-walkeylife, a multi-functioned pedometer.
Further, with respect to full-scale exercise-oriented equipment, we have released products such asFORCED REP, a next generation strength machine which can automatically control the load andMassugu Sesuji and Anshin Hokou, nursing care equipment for the elderly. Additionally, we have releasede-walkeylife2 andKenshin Keikaku2, updated versions of pedometer and management software, as well asKenshin Keikaku TV, which can be connected to a TV, and we provide a system by which users can enhance their exercise habits and lifestyle by using their own data at home.
SupplementsHealth Products
WeHaving perceived the needs of health-conscious people, we have engaged in the improvement of product lineups and developed original supplements suchsupplement products for use asFLAVANGENOL, which is high in polyphenol and helps improve blood flow and burn off body fat,Konami Sports Club BLACKCURRANT, which is high in anthocyanin and controls active enzymes, andEXERDIET, which helps one of the health-related products used by those who come to burn off body fat efficiently during workouts.our fitness clubs as well as at home. We also introduced a service called “Supplement Member”, a delivery service of popular supplements for our club members to their home addresses. In 2009, we launched a new supplement calledGLAVONOID to be used with ourTargeting Waist Program, which was introduced to all directly-owned fitness clubs throughout Japan as a program to counter metabolic syndrome, and a new product calledPROTEIN PRO, a protein drink in jelly form, that enables effective protein intake. In August 2009, we releasedEXERCISEWATER ZERO, a sugar-free beverage with zero calories, and engaged in sales expansion by selling the products not only at our facilities but also at convenience stores. In addition, since January 2007, we have commenced catalog sales of our health products at post offices in Tokyo through an alliance with the nationwide sales at Konami Sports Club and Seven ElevenTokyo Branch ofAROMA@FITNESS Japan Post Network Co., a healthcare product from which customers can easily enjoy aromatic effects by sticking the product inside their clothing.Ltd.
Our fitness equipment and health related products arehad been designed, produced, developed, manufactured, marketed, sold and distributed by Konami Sports Life Corporation, our wholly owned subsidiary. Konami Sports Life Corporation merged with Konami Sports Corporation and became Konami Sports & Life Co., Ltd. as of February 28, 2006. In addition, we made COMBI WELLNESS Corporation a wholly-owned subsidiary in May 2006, and we will promote creation of new markets and provision of various health services, through for example engaging in comprehensive operation of fitness club facilities, development and manufacturing of health-related equipment and supplement products.
Gaming & System Segment
Our Gaming & System segment develops, produces and sells gaming machines such as video and mechanical slot machines and management systems to gaming operators in North America, Oceania and other overseas markets. Net revenues generated by our Gaming business, before elimination of intersegment revenues, amounted to approximately ¥10,623 million in fiscal 2006 and approximately ¥16,744 million in fiscal 2007, an increase of approximately ¥6,121 million, or 57.6%. We develop, produce and sell gaming machines for international markets, primarily in North America and Australia, and sell casino management systems in North America.
Gaming Industry Overview
Global Gaming Industry
The North American market is the world’s largest gaming market, followed by the Oceanian markets. Other major gaming markets include South America, Africa, Europe and Asia. The North American gaming market has been growing every year, with the number of major players in this market growing significantly.
Gaming in the United States
The gaming industry in the United States has generally experienced substantial growth in the last decade. Prior to 1979, gaming was limited to Nevada. In 1979, gaming was legalized in New Jersey. Between 1979 and 1988, gaming activities by various Native American tribes developed, leading to the enactment of the federal Indian Gaming Regulatory Act. The growth of Native American gaming served as a catalyst for certain jurisdictions to consider non-Native American gaming because of its potential as a source of government revenue. Since 1989, various forms of gaming have been legalized in numerous states including but not limited to Colorado, Illinois, Indiana, Iowa, Louisiana, Michigan, Mississippi and Missouri. In addition, gaming facilities operate at casino hotels, river boat casinos and on cruise ships sailing out of numerous ports in and around the United States. While several other states have approved or are considering approval of some form of gaming, the State of Pennsylvania legalized state-wide gaming in 2006.
Gaming in Australia
In Australia, the gaming industry is characterized by intense competition between manufacturers over a limited total market share due to an increase in the gaming tax rate and restrictions on the numbers of gaming machines permitted to be installed in larger states, as part of the Gambling Harm Minimization Policies implemented by the Australian government. Australia is the largest and most established market for gaming products outside of North America and is primarily oriented towards the video slot machine market.
Our Gaming Business
We have expanded our gaming machines business in international markets. This expansion, initiated in March 1998 by exporting components of video slot machines to Australia, was followed by the launch of video slot machine sales in the United States in late 2000. In August 2001, we acquired Paradigm Gaming Systems, Inc., through our American subsidiary, Konami Gaming, Inc., and integrated it into the Systems Division of Konami Gaming, Inc. Paradigm Gaming Systems, Inc. is a developer of casino management systems. Our casino management system product enables simultaneous accounting, marketing management, customer management and security enhancement by connecting all of the gaming machines to a casino in a unified management system. We expect that our sales of casino management systems will contribute to more stable revenues in our gaming business, as we earn maintenance fees on an ongoing basis after installation, as well as revenues from sales that are realized at the time of installation. Due to the acquisition of Paradigm Gaming Systems, Inc., we are further expanding our opportunities in the gaming machine market in North America and are steadily expanding our client list. We have received licenses to manufacture and/or sell gaming machines in almost all of the major states and provinces in North America and Canada that permit gaming. For example, we acquired licenses from New Jersey in 2004, Oklahoma and Alberta, Canada in 2005, and Pennsylvania in 2006. In October 2005, we entered into an agreement for a large-scale installation of the Casino Management System in Quebec, Canada which commenced implementation in 2006 and will be completed in 2007. In November 2006, we participated in the Global Gaming Expo to introduce our new model K2V series and casino management systems to demonstrate the expanded scope of our products.
We originally started our Gaming & System segment with sales of video slot machines in Australia and later introduced our video slot machine products into the North American market. We are currently focused on the development of new models, including mechanical slot machines, to secure revenues generated in the North
American market, where the market share of mechanical slot machines accounted for more than half of the entire market in 2003, according to data from the State Gaming Commissions, and a substantial portion of the demand for gaming machines is attributed to mechanical slot machines.
In North America, the largest gaming machine market in the world, we currently hold licenses to manufacture and sell gaming machines in major states and sell gaming machines to major Native American casinos. We participated in the Global Gaming Expo in November 2006, and advertised the expansion of our product line by exhibiting our products, including theK2V series with a variety of game contents and our casino management systems.
Konami Australia Pty Ltd, which has licenses for sales and manufacturing of gaming machines in all Australian states, markets gaming machines with a focus on our main K2V series product a new platform which was released in 2006, as well as our ES series product. 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 gained a stable position in the Australian market as one of the other main gaming machine sellers and manufacturers. 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, and 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. We have been expanding our business to overseas market in Asia, South America, etc., where we see an outstanding growth as gaming market recently.
In contrast to Australia, we believe demand for gaming machines in North America has been increasing. Also, following acquisition of a license in New Jersey, one of the largest gaming markets in North America, in August 2004, we have acquired additional licenses, mainly in Oklahoma, New Mexico and Alberta in Canada. We also received product approvals in Pennsylvania in 2006 soon after the state legalized casinos, so that we are able to expand our sales in the North American market. We have built a new gaming machine facility in Las Vegas which commenced operations in June 2005, and which has significantly increased our production capacity to meet increasing demand in each market.
Production
Our gaming machines and casino management system, sold in North America are assembled at our production facility in Las Vegas, Nevada. Gaming machines sold in Australia are assembled at our production facility in Sydney, Australia. Our products are assembled utilizing various parts and components from a large base of local vendors. A Japanese branch of our North American subsidiary supplies certain software and electronic components to our overseas production facilities. We have also identified alternate sources of supply for significant parts and components in the event any of our current vendors fail to meet order requirements.
We completed the construction of a new building in Las Vegas in June 2005. More than a half of our worldwide sales are derived from the U.S. market, and products sold in the U.S. market are built solely in the facility in Las Vegas. We believe we have thus achieved more efficient operations through increased production capacity compared to our previous building and an enhanced training facility for customers of our casino management system.
Marketing, Sales and Distribution
Our gaming machines are marketed, sold and distributed overseas through our local subsidiaries directly to casino operators. Currently, in Las Vegas, which is representative of the North American market, there is substantial management integration of gaming facilities.
Other Operations
Pachinko and Pachinko Slot
Pachinko—Overview of Merchandise and Industry
The pinball-like game of pachinko is a national pastime in Japan. Players purchaserent a supply of tiny metal pinballballs that they then propel with a motorized trigger at a maximum permitted rate of 100 times a minute through a vertically mounted pinball-like maze in a pachinko machine. As the balls bounce through a maze of pins, they either hit jackpots to produce more balls or fall into the gutter at the bottom of the machine. The board face, which has moving images on a LCD panels and flashing lights, is designed to attract potential players and is the most important component. Our LCDs are installed in the board face of machines.
The number of pachinko outlets in Japan has decreased in the last few years. According to the National Police Agency released on April 2007, the number of nationwide pachinko outlets has decreased 491, by 3.2%, to 14,674 for the year end of 2006. However, the number of pachinko machines per outlet was 336.5, an increase of 4.1% from the previous year, which is attributable to the progress in the upsized growth in floor area of outlets, resulting from increases in the number of machines per outlet, and to easing of regulations on pachinko.
Our Pachinko LCD Operations
We develop software that is incorporated into and sold together withfor LCDs forinstalled in pachinko machines. The life cycle of such software for LCDs is approximately several months to one year.
Currently, we typically introduce between three and five and ten new pachinko software installed inprograms for LCDs each year. Pachinko machines must be inspected by The Security Electronics and Communications Technology Association
(the “Security Association”), an extra-governmental organization associated with the Metropolitan Police Department, before being marketed in Japan. This process exposes us to possible delays in our introduction of new software installed in LCDs because we may be required to change software content.
To attract a wider customer base, we have expanded the type of pachinko game machine titles we develop to focus software development to a great extent on entertainment and game value. We believe that the pachinko game machine manufacturing market in Japan is mature and is unlikely to grow significantly, if at all. However, we plan to expand our market share by increasing the volume of software we sell.
Development, Production and Components Supply
We develop software for LCDs used in pachinko machines and, in a few limited cases, we have begun to outsource a portion of the production of our software productionfor LCDs we develop to various third parties who produce our software to our circuit design specifications. We also work with third-party contractors who integrate the software with LCDs, semi-conductors and printed circuit boards that we order from major electrical manufacturers in Japan. We have encountered difficulties in the past in procuring LCDs in sufficient quantities, although less so currently due to the increasing production capabilities of LCD makers. However, there is also increasing demand for semiconductors due to advanced LCD technologies and, in order to avoid future procurement problems, we place orders in advance to meet the requirements. We have not encountered, and do not expect to encounter, any difficulty in procuring printed circuit boards for our use. After our contractors have integrated the software and hardware, we then supply the bundled unit to the pachinko hardware manufacturer for the relevant pachinko machines.
Marketing and Sales
We sell our LCDs directly to pachinko machine manufacturers. Some of the larger manufacturers publishsell their own software for pachinko machines, but most manufacturers purchase software from third parties, including us. We commenced sales in 1992 and currentlyhave been making efforts to strengthen business relations with companies who have basic product and sales agreements with over six companies with which we try to strengthen business relations.
Other—Konami SchoolMarket Environment
In orderThe number of pachinko and pachinko slot outlets in Japan has decreased in the last few years. According to bring talent to each of our business areas, we established Konami School, Inc. in August 2003 and opened Konami Schoolstatistics released by the National Policy Agency in April 2004. 2010, the number of nationwide pachinko outlets has decreased by 285, or 2.2%, to 12,652 at the end of 2009 compared to the previous year. The number of pachinko machines per outlet was 356.2, almost the same level as the previous year.
Pachinko Slot—Overview of Merchandise
The pachinko slot machine is a slot machine found mainly in pachinko outlets, and its official name is “Kaidoushiki Yugiki”. It is an entertainment machine which is as popular among the Japanese people as traditional pachinko. Players rent tokens which they put into pachinko slot machines and then must press buttons to stop each spinning reel, and acquire tokens by matching patterns. In recent years, there has been widespread growth in pachinko slot machines with LCD panels, as the display of effects on the screen while playing pachinko slot has made the experience more enjoyable.
Our Pachinko Slot Operations
We are fostering talents forconduct a wide range of operations, ranging from planning and production to the manufacture and sales of pachinko slot machines. The life cycle of a pachinko slot machine can span from a few months to over a year.
Like pachinko machines, pachinko slot machines must be inspected by the Security Electronics and Communications Technology Association. Since changes may need to be made to the software or hardware following the inspection procedure, the release of new pachinko slot machines may at times be delayed.
During the year ended March 31, 2010, we released five different pachinko slot titles. In the future, we plan to expand our market share by utilizing our experience in game development and the various business areas, including game creators.rights to content held by our company to create new types of pachinko slot machines with high entertainment value.
Marketing and Sales
We sell our pachinko slot machines through two different methods. The first is to sell our pachinko slot machines to pachinko halls and pachinko slot halls directly, and the other is to sell through agencies. We will continue to maintain a strong alliance system to expand sales.
Market Environment
Please see the information provided under “Pachinko—Market Environment” above.
Brand Sourcing
A significant portion of our products include content (brands) such as characters, images, trademarks and logos, to which we have been granted licenses from a broad range of licensors. The success of our business depends to a significant extent on our ability to create or license content with strong consumer appeal and a high level of recognition or acceptance. To do so, we must identify and respond rapidly to new and emerging consumer trends.
Content is one of our most valuable assets. Accordingly, we actively seek to obtain licenses of prominent brands for our video game software, amusement arcade games, gaming machines, card games, toys, music CDs and other consumer merchandise. Our most important source for licensed brands has been sports organizations. Use of the names of actual players in our games is a relatively new phenomenon in response to the demand for greater reality in game software content and as such, securing necessary licenses is critical to success of our sports titles. Increasingly, we also seek to license brands from film makers, comicscomic’s publishers, and animation and TV program producers.
Our significant brand licensing activities include the following:
We have obtained licenses from the Union of European Football Associations (UEFA), Major League Baseball Properties, Inc., and Major League Baseball Players Association, FIFPro Commercial Enterprises BV and Japanese sports organizations such as the Professional Baseball Organization of Japan, the Japan Professional Soccer League, or J-League, and the Japan Football Association.
We have obtained licenses from film makers, comicscomic’s publishers and animation companies, including Nihon Ad Systems Inc., Shueisha, Kodansha and Shogakukan Production Co., Ltd.
Overseas Activities
The following tables show net revenues, operating expenses and operating income (loss) by geographic area for the fiscal years ended March 31, 2005, 20062008, 2009 and 2007:2010:
Year Ended March 31, 2005 | Japan | North America | Europe | Asia/ Oceania | Total | Eliminations (2) | Consolidated | |||||||||||||||||||||||||||||||||||||
Year Ended March 31, 2008 | Japan | United States | Europe | Asia/ Oceania | Total | Eliminations (2) | Consolidated | |||||||||||||||||||||||||||||||||||||
(Millions of Yen) | (Millions of Yen) | |||||||||||||||||||||||||||||||||||||||||||
Net revenues: | ||||||||||||||||||||||||||||||||||||||||||||
Customers | ¥ | 176,566 | ¥ | 41,480 | ¥ | 34,878 | ¥ | 7,767 | ¥ | 260,691 | — | ¥ | 260,691 | ¥ | 220,462 | ¥ | 34,137 | ¥ | 35,589 | ¥ | 7,214 | ¥ | 297,402 | — | ¥ | 297,402 | ||||||||||||||||||
Intersegment (1) | 57,123 | 1,593 | 450 | 419 | 59,585 | ¥ | (59,585 | ) | — | 21,147 | 4,802 | 44 | 658 | 26,651 | ¥ | (26,651 | ) | — | ||||||||||||||||||||||||||
Total | 233,689 | 43,073 | 35,328 | 8,186 | 320,276 | (59,585 | ) | 260,691 | 241,609 | 38,939 | 35,633 | 7,872 | 324,053 | (26,651 | ) | 297,402 | ||||||||||||||||||||||||||||
Operating expenses | 211,500 | 41,682 | 32,207 | 6,684 | 292,073 | (59,518 | ) | 232,555 | ¥ | 211,643 | ¥ | 37,532 | ¥ | 33,810 | ¥ | 7,304 | ¥ | 290,289 | (26,726 | ) | ¥ | 263,563 | ||||||||||||||||||||||
Operating income (loss) | ¥ | 22,189 | ¥ | 1,391 | ¥ | 3,121 | ¥ | 1,502 | ¥ | 28,203 | ¥ | (67 | ) | ¥ | 28,136 | |||||||||||||||||||||||||||||
Operating income | ¥ | 29,966 | ¥ | 1,407 | ¥ | 1,823 | ¥ | 568 | ¥ | 33,764 | ¥ | 75 | ¥ | 33,839 | ||||||||||||||||||||||||||||||
Property and equipment, net | ¥ | 44,775 | ¥ | 1,018 | ¥ | 472 | ¥ | 330 | ¥ | 46,595 | — | ¥ | 46,595 | ¥ | 64,075 | ¥ | 2,170 | ¥ | 147 | ¥ | 298 | ¥ | 66,690 | — | ¥ | 66,690 |
Year Ended March 31, 2006 North America Net revenues: Customers Intersegment (1) Total Operating expenses Operating income (loss) Property and equipment, net Year Ended March 31, 2007 Net revenues: Customers Intersegment (1) Total Operating expenses Operating income (loss) Property and equipment, net Year Ended March 31, 2007 Net revenues: Customers Intersegment (1) Total Operating expenses Operating income (loss) Property and equipment, net Japan Europe Asia/
Oceania Total Eliminations (2) Consolidated (Millions of Yen) ¥ 193,108 ¥ 33,797 ¥ 27,387 ¥ 7,845 ¥ 262,137 — ¥ 262,137 31,488 1,545 902 361 34,296 ¥ (34,296 ) — 224,596 35,342 28,289 8,206 296,433 (34,296 ) 262,137 222,559 37,688 27,181 6,895 294,323 (34,667 ) 259,656 ¥ 2,037 ¥ (2,346 ) ¥ 1,108 ¥ 1,311 ¥ 2,110 ¥ 371 ¥ 2,481 ¥ 39,888 ¥ 1,815 ¥ 454 ¥ 295 ¥ 42,452 — ¥ 42,452 Japan North
America Europe Asia/
Oceania Total Eliminations (2) Consolidated (Millions of Yen) ¥ 206,343 ¥ 34,847 ¥ 31,650 ¥ 7,439 ¥ 280,279 — ¥ 280,279 27,219 1,904 295 530 29,948 ¥ (29,948 ) — 233,562 36,751 31,945 7,969 310,227 (29,948 ) 280,279 ¥ 205,831 ¥ 40,346 ¥ 28,860 ¥ 7,249 ¥ 282,286 ¥ (30,152 ) ¥ 252,134 ¥ 27,731 ¥ (3,595 ) ¥ 3,085 ¥ 720 ¥ 27,941 ¥ 204 ¥ 28,145 ¥ 51,081 ¥ 1,739 ¥ 137 ¥ 337 ¥ 53,294 — ¥ 53,294 Japan North
America Europe Asia/
Oceania Total Eliminations (2) Consolidated (Thousands of U.S. Dollars) $ 11,747,929 $ 295,188 $ 268,107 $ 63,016 $ 2,374,240 — $ 2,374,240 230,572 16,129 2,499 4,489 253,689 $ (253,689 ) — 1,978,501 311,317 270,606 67,505 2,627,929 (253,689 ) 2,374,240 $ 1,743,592 $ 341,770 $ 244,473 $ 61,406 $ 2,391,241 $ (255,417 ) $ 2,135,824 $ 234,909 $ (30,453 ) $ 26,133 $ 6,099 $ 236,688 $ 1,728 $ 238,416 $ 432,707 $ 14,731 $ 1,160 $ 2,855 $ 451,453 — $ 451,453
Year Ended March 31, 2009 | Japan | United States | Europe | Asia/ Oceania | Total | Eliminations (2) | Consolidated | ||||||||||||||||
(Millions of Yen) | |||||||||||||||||||||||
Net revenues: | |||||||||||||||||||||||
Customers | ¥ | 223,662 | ¥ | 44,051 | ¥ | 37,216 | ¥ | 4,842 | ¥ | 309,771 | — | ¥ | 309,771 | ||||||||||
Intersegment (1) | 24,762 | 4,266 | 96 | 596 | 29,720 | ¥ | (29,720 | ) | — | ||||||||||||||
Total | 248,424 | 48,317 | 37,312 | 5,438 | 339,491 | (29,720 | ) | 309,771 | |||||||||||||||
Operating expenses | ¥ | 229,411 | ¥ | 43,779 | ¥ | 33,158 | ¥ | 5,784 | ¥ | 312,132 | ¥ | (29,722 | ) | ¥ | 282,410 | ||||||||
Operating income (loss) | ¥ | 19,013 | ¥ | 4,538 | ¥ | 4,154 | ¥ | (346 | ) | ¥ | 27,359 | ¥ | 2 | ¥ | 27,361 | ||||||||
Property and equipment, net | ¥ | 57,951 | ¥ | 2,238 | ¥ | 112 | ¥ | 251 | ¥ | 60,552 | — | ¥ | 60,552 | ||||||||||
Year Ended March 31, 2010 | Japan | United States | Europe | Asia/ Oceania | Total | Eliminations (2) | Consolidated | ||||||||||||||||
(Millions of Yen) | |||||||||||||||||||||||
Net revenues: | |||||||||||||||||||||||
Customers | ¥ | 198,500 | ¥ | 33,743 | ¥ | 23,682 | ¥ | 6,219 | ¥ | 262,144 | — | ¥ | 262,144 | ||||||||||
Intersegment (1) | 14,272 | 3,805 | 89 | 669 | 18,835 | ¥ | (18,835 | ) | — | ||||||||||||||
Total | 212,772 | 37,548 | 23,771 | 6,888 | 280,979 | (18,835 | ) | 262,144 | |||||||||||||||
Operating expenses | ¥ | 199,427 | ¥ | 33,845 | ¥ | 22,598 | ¥ | 6,560 | ¥ | 262,430 | ¥ | (18,950 | ) | ¥ | 243,480 | ||||||||
Operating income | ¥ | 13,345 | ¥ | 3,703 | ¥ | 1,173 | ¥ | 328 | ¥ | 18,549 | ¥ | 115 | ¥ | 18,664 | |||||||||
Property and equipment, net | ¥ | 60,345 | ¥ | 1,739 | ¥ | 93 | ¥ | 257 | ¥ | 62,434 | — | ¥ | 62,434 | ||||||||||
Year Ended March 31, 2010 | Japan | United States | Europe | Asia/ Oceania | Total | Eliminations (2) | Consolidated | ||||||||||||||||
(Thousands of U.S. Dollars) | |||||||||||||||||||||||
Net revenues: | |||||||||||||||||||||||
Customers | $ | 2,133,491 | $ | 362,672 | $ | 254,536 | $ | 66,842 | $ | 2,817,541 | — | $ | 2,817,541 | ||||||||||
Intersegment (1) | 153,396 | 40,896 | 958 | 7,190 | 202,440 | $ | (202,440 | ) | — | ||||||||||||||
Total | 2,286,887 | 403,568 | 255,494 | 74,032 | 3,019,981 | (202,440 | ) | 2,817,541 | |||||||||||||||
Operating expenses | $ | 2,143,454 | $ | 363,768 | $ | 242,886 | $ | 70,507 | $ | 2,820,615 | $ | (203,676 | ) | $ | 2,616,939 | ||||||||
Operating income | $ | 143,433 | $ | 39,800 | $ | 12,608 | $ | 3,525 | $ | 199,366 | $ | 1,236 | $ | 200,602 | |||||||||
Property and equipment, net | $ | 648,592 | $ | 18,691 | $ | 1,000 | $ | 2,762 | $ | 671,045 | — | $ | 671,045 |
(1) | Intersegment means transactions between geographic areas. |
(2) | Eliminations means elimination of intersegment transactions and operating expenses not allocated to a specific geographic region. |
One of our principal strategies is to significantly increase our overseas revenues in absolute terms and as a percentage of our overall revenues.revenues through development and supply of products in the most appropriate manner, producing globally-accepted products or products according to regional features.
Our present overseas activities consist principally of sales of video game software, toy & hobby products, amusement arcade games, card game products and gaming machines and revenues from charges on mobile games.
In fiscal 2006,2008, our net revenues decreased ¥7,731increased ¥2,188 million in the United States and ¥7,039¥3,688 million in Europe, respectively, resulting mainly from a decline inthe strong sales of gaming machines and theDanceDanceRevolution series of video game software in the United States, as well as a declineNorth America andPro Evolution Soccer series of video game software in our net revenues from the Gaming & System segment due to a transition period toward new gaming machines in the United States during the fiscal year. In Europe, we experienced decreased sales of theYu-Gi-Oh! Trading Card Game.Europe.
In fiscal 2007,2009, our net revenues increased ¥1,490¥9,378 million in the United States and ¥3,656¥1,679 million in Europe, respectively, resulting mainly from an increase inthe strong sales of gaming machines and casino management system in the United States. In Europe, the increase was due mainly to an increase in strong sales of theWinning ElevenMETAL GEAR SOLID (and thePro Evolution SoccerDanceDanceRevolution) series of video game software.software in North America andMETAL GEAR SOLID and thePro Evolution Soccer series of video game software in Europe.
In fiscal 2010, our net revenues decreased ¥10,769 million in the United States and ¥13,541 in Europe, respectively, resulting mainly from no release of new series of theMETAL GEAR SOLID of video game software as well as failure to achieve sales of theDanceDanceRevolution series to the same level as the previous fiscal year. Similarly, in Europe, we did not release any new series ofMETAL GEAR SOLID of video game software and achieve sales of thePro Evolution Soccer series to the same level as the previous fiscal year.
We initiated overseas operations by exporting amusement arcade games in 1979, and in 1982 we established a sales subsidiary in the United States. In subsequent years, we established additional sales subsidiaries in Germany, the United Kingdom, Korea, Singapore and Hong Kong, and a software game development subsidiary in Shanghai. In February 1997 we established Konami Gaming, Inc. to manufacture and distribute gaming machines in Nevada. Having received all licenses required by the state and county officials in Nevada, we began distributing gaming machines in Nevada beginning in fiscal 2001. Since then, we have received similar licenses and/or permission to operate in major states in North America. In addition, we have been licensed by Native American tribes in California, Arizona, New Mexico, Minnesota and Michigan. We have obtained licenses in a number of other gaming jurisdictions in North America. Konami Australia Pty Ltd., which became our consolidated subsidiary in October 2001, have obtained licenses to manufacture and sell gaming machines in all states in Australia, and exports gaming machines to overseas markets.
During the fiscal year ended March 31, 2001, the gaming machines we sold in the United States and two video slot machine components we exported to Australia were produced in Japan. Later, our production facility in Las Vegas, Nevada, which houses the headquarters and principal manufacturing facility of our U.S. gaming machine business, began operations in September 2001 and we completed construction of a new building in June 2005 which is currently operating under full production.
In October 2003, Konami of America, Inc., our sales subsidiary in the United States, added a new function of overseas business administration to its existing sales business and changed its name to Konami Digital Entertainment, Inc. It established a new administrative office in Los Angeles in order to conduct various activities responding to local market needs for expanding shares of our Computer & Video Games business overseas. Subsequent to the introduction of this regional autonomy system from April 2005, all overseas offices in our Digital Entertainment business changed their names to Konami Digital Entertainment.Entertainment, and we have promoted the establishment of the global Digital Entertainment business system.
Recently we launched sales of our video game software in China with the release ofWORLD SOCCER Winning Eleven 7 INTERNATIONALfor PlayStation 2. We are committed to buildbuilding our market share in China by localizing our popular products for the Chinese market. Additionally, in Korea, we released the PC online-game version of theWORLD SOCCER Winning Eleven 9 series in March 2006, and following the release of the online-game version ofYu-Gi-Oh,. we are in the process of producing a multiplayer dungeon role-playing-game called Chaotic Eden for the open ß test in fiscal 2011. We plan to start full operation in other Internet-developed countries in Asia. In order to allow for flexible development and sales, we incorporated a company in Korea in May 2008.
In line with our strategy to expand our international business, we are investigating acquisition and investment opportunities outside Japan for businesses that will grow or complement our current businesses.
Research and Development
An important requirement for success in the highly competitive markets in which we operate is the ability to create quality products that attract public attention. We are also working to expand into newsales channels in markets such as fitness equipment and nursing care equipment. The following three tables show our primary research and development activities, during each of the last three fiscal years.
Year Ended March 31, | ||
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Segment | Focus of R&D Activity | ||
Digital Entertainment | Game software such asWorld Soccer Winning Eleven 2008 andPro Evolution Soccer 2008 andMETAL GEAR SOLID 4 GUNS OF THE PATRIOTS. Video games such asMAH-JONG FIGHT CLUBand Card games such as the Yu-Gi-Oh! Trading Card Game and action figures such asBUSOU SHINKI series. | ||
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Gaming & System | Gaming machines, software and casino management systems for North America and Australia. | ||
Health & Fitness | Fitness machines such as EZ series and AEROBIKE, nursing care machines such asMotorcise and supplements such asCollagen Cristal Ottimo. Programs such as 6WEEKS and IT health management system such as e-XAX. |
Year Ended March 31, | |||
Segment | Focus of R&D Activity | ||
Digital Entertainment |
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Video games such asMAH-JONG FIGHT CLUBand Card games such as the Yu-Gi-Oh! Trading Card Game and action figures such asBUSOU SHINKI series. | |||
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Gaming & System | Gaming machines, software and casino management systems for North America and Australia. | ||
Health & Fitness | Fitness machines such asEZ series andAEROBIKE, nursing care machines such asMotorcise and supplements such asCollagen Cristal Ottimo. Programs such as6WEEKS and IT health management system such ase-XAX. |
Year Ended March 31, | |||
Segment | Focus of R&D Activity | ||
Digital Entertainment | Game software such asWorld Soccer Winning Eleven Card games such as the Yu-Gi-Oh! Trading Card Game and action figures such asBUSOU SHINKI series. Video games such asMAH-JONG FIGHT CLUB andBASEBALL HEROES, new software for music simulation games, | ||
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Gaming & System | Gaming machines, software and casino management systems for North America and Australia. | ||
Health & Fitness | Fitness machines such as EZ series andAEROBIKE, nursing care machines such asMotorcise and supplements such asPROTEIN PRO. Programs such as6WEEKS, IT health management system such ase-XAX and new health management approaches in relation to the Ministry of Economy, Trade and Industry’s projects using IT in Takamatsu. |
Competition
The markets for video game software and most of our other products are intensely competitive and are characterized by the frequent introduction of new hardware systems, software products and other innovations.
In addition, the domestic Japanese market is gradually shrinking due partly to the declining birthrate. Japanese game producers are competing to bolster their product lineups and expand their overseas operations. Moreover, the spread of online games (rise of social games) due to the expansion of broadband networks and the market growth of cellular phone contents owing to the improvement of cellular phone capabilities have intensified competitions over limited users’ leisure times and made it extremely important for game software producers to develop software for a wide variety of media and outlets in order to maintain growth.
Rapid changes in the business environment as mentioned above are also driving reorganization in the game software industry. For example, Enix Co., Ltd. and Square Co., Ltd. merged on April 1, 2003 and the new company, Square Enix Co., Ltd., (currently, SQUARE ENIX HOLDINGS CO., LTD.) is expected to focus on strengthening software development and expanding the lineup of online games. Also, in October 2004, Sammy Corporation founded Sega Sammy Holdings Inc., a holding company through which it acquired SEGA Corporation. In addition, Bandai Co., Ltd. and Namco Limited consolidated their operations to establish Namco Bandai Holdings Inc. in September 2005, and later established Namco Bandai Games Inc. through the consolidation of their domestic game businesses in March 2006. Furthermore, KOEI Co., Ltd. and TECMO Ltd. consolidated their operations to establish TECMO KOEI Holdings Co., Ltd. in April 2009.
We believe that the most significant competitive factors in all of our major business lines are the ability to develop compelling content and bring it to market at the appropriate time to capitalize on ever-changing consumer preferences. We believe our ability to develop content internally, as well as our strong internal distribution network, give us an advantage over many of our competitors. However, our competitors vary in size from small companies to very large corporations which have significantly greater financial, marketing and product development resources than we have. Due to these greater resources, some of our competitors are better able to undertake more extensive marketing campaigns, adopt more aggressive pricing policies and pay higher fees to licensors of desirable properties.
Our competitors and potential competitors in the video game software industry include the following:
Other Japanese publishers of video game software, including Capcom Co. Ltd., Square EnixSQUARE ENIX HOLDINGS Co., Ltd., Namco Bandai GamesHoldings Inc., and Sega Sammy.Sammy Holdings Inc., as well as overseas publishers such as Acclaim Entertainment, Inc., Activision Inc., Eidos PLC, Electronic Arts Inc., Infogrames SA,Activision Blizzard, Inc., Take-Two Interactive Software, Inc., Ubisoft Entertainment and THQ Inc. and Vivendi Universal Publishing.
Integrated video game system hardware/software companies, such as Sony, Microsoft and Nintendo, which compete directly with us in the development and publishing of software titles for their respective platforms.
Large diversified entertainment or software companies, many of which own substantial libraries of available content and have substantially greater financial resources than we have, and which may decide to compete directly with us or to enter into exclusive relationships with our competitors.
There are barriers to entry in the video game software market, consisting mainly of the difficulty of developing the technical and creative resources as well as the distribution networks of established competitors. However, the development of the Internet as a medium for the distribution of video game software, the use of the Internet to facilitate the formation of collaborative technical and creative networks, and the proliferation of programming tools and other resources may have the effect of reducing these barriers.
Our most significant competitors in the market for card game products and toy & hobby products are mainly toy makers, such as Namco Bandai.Bandai Holdings Inc. We believe that the most significant competitive factor in the market for card game products and toy & hobby products is
the ability to timely develop popular products based on appealing characters and themes. In addition, there have been business reorganizations such as consolidation of the operations of Takara Co., Ltd. and Tomy Co., Ltd. in March 2006 and their establishment of Takara Tomy Co., Ltd.
The market for video game machines and token-operated game machines for amusement arcades in Japan is dominated by a few large manufacturers, including ourselves as well as Sega Sammy and Namco Bandai, and competition in these markets is intense. The principal method of competition in the market for video game machines and token-operated game machines for amusement arcades is new product development.
The market for software for LCDs for pachinko machines in Japan is relatively stable, with manufacturers of pachinko machines having close relationships with particular producers of such software. We believe that we have benefited from our ability to provide software with strong entertainment value rather than speculation-oriented software. Competitors that produce entertainment-oriented software may pose a threat to us. We believe that our strong relationships with pachinko machine manufacturers and our reputation for making reliable, appealing products give us a competitive advantage in the market for software for LCDs for pachinko machines. The market for pachinko slot machines is intensely competitive among several major makers, such as Sega Sammy Holdings Inc., Universal Entertainment Corporation. and Sankyo Co., Ltd. The principal method of competition in the market for software for LCDs for pachinko machines and pachinko slot machines is new product development.
In the fitness club market, we compete with other commercial health and fitness clubs, such as Central Sports Co., Ltd., physical fitness and recreational facilities established by local governments, hospitals, nursing homes, businesses for their employees and similar organizations, and, to a certain extent, with racquet, tennis and other athletic clubs, country clubs, weight-reducing salons and the home-use fitness equipment industry. We also compete, to some extent, with entertainment and retail businesses for the discretionary income of our target markets. However, we believe our brand identity, operating experience, ability to allocate advertising and administration costs over all of our fitness clubs, nationwide operations, purchasing power and account processing and collection infrastructure, provide us with distinct competitive advantages. As the fitness market in Japan still has room for further growth, weWe expect more companies to enter the market both regionally and nationally and we may not be able to continue to compete effectively in each of our markets in the future.
Our principal competitors in overseas gaming machine markets include International Game Technology, Bally Technologies, Inc., Aristocrat Leisure Limited and WMS Industries Inc. A library of strong performing games, the possession of valuable patents and the development of unique products differentiable from those of others can be a significant competitive advantage. Other methods of competition include quality and breadth of sales and service organizations, financial stability of the manufacturer, and pricing.
Intellectual Property
As of March 31, 2007,2010, we had approximately 3,7513,577 trademarks, 1,1931,753 patents, 4 registrationtwo registrations of utility modelmodels and 157116 registered designs (excluding applications pending) in Japan and we also had approximately 5,1154,840 trademarks, 1,4852,105 patents and 304355 registered designs (excluding applications pending) overseas. The trademarks and patents relate to our hardware and software for video game software products, input equipment for home video games, amusement arcade and token-operated games and gaming machines, creative products,fitness machines, nursing care machines, nursing prevention care machines, LCDs for pachinko machines and pachinko slot machines. The utility models relate to input equipment for home video games, amusement and gaming machines and creative products. The registered designs relate to input equipment for home video game machines, amusement and gaming machines, designs for icons, creative products, pachinko equipment and pachinko slot machines.
Intellectual property for video game software is registered to us, our subsidiaries or to us and our subsidiaries as joint owners.
We believe that our trademarks (which, once registered, are perpetual, subject to use and payment of registration fees) and other intellectual property rights referred to above are important assets. Accordingly, we established necessary divisions to necessary stepsdesigned to secure and protect such rights, including registration with appropriate authorities and, if necessary, legal proceedings. The non-registration or expiration of registration of some of our intellectual property rights could have a material adverse effect on our business.
Although we use copy-protection devices, an unauthorized person may be able to copy our software or otherwise obtain and use our proprietary information. If a significant amount of illegal copying of software published by us occurs, our product revenues could be adversely affected. Policing illegal use of software is extremely difficult and software piracy is expected to persist. In addition, the laws of some foreign countries in which our software is distributed do not protect us and our intellectual property rights to the same extent as the laws of Japan and the United States. Although illegal copying of our software has not been a major problem for us to date, it could have an adverse effect on our software business if we expand that business into China and Southeast Asia, where protection of intellectual property rights is weak.
Each of Nintendo, Sony and Microsoft incorporates security devices in the software and their respective hardware systems in order to prevent unlicensed software from infringing their respective proprietary rights by manufacturing software compatible with their hardware. Under our various license agreements with Nintendo, Sony and Microsoft, we are responsible for protecting our own and our licensors’ intellectual property rights that are used or incorporated in our software.
We do not own the trademarks, copyrights or patents covering the proprietary information and technology utilized in the game consoles marketed by Nintendo, Sony, Microsoft or, to the extent licensed from third parties, the brands, concepts and game programs featured in and comprising our software. See Item 4.B “Business Overview—Brand Sourcing”. Accordingly, we must rely on the trademarks, copyrights and patents of these third-party licensors for protection of such intellectual property from infringement. Under our license agreements with certain licensors, we may bear the risk of claims of infringement brought by third parties and arising from the sale of software.
Regulation
Gaming
General
The manufacture, sale and distribution of gaming devices, equipment and related software is subject to federal, state, tribal and local regulations in the United States and foreign jurisdictions. While the regulatory requirements vary from jurisdiction to jurisdiction, the majority of these jurisdictions require licenses, registrations, permits, findings of suitability, documentation of qualification including evidence of financial
stability and/or other required approvals for companies who manufacture and distribute gaming equipment, as well as the individual suitability or licensing of officers, directors, major shareholders and key employees. Laws of the various gaming regulatory agencies generally serve to protect the public and ensure that gaming related activity is conducted honestly, competitively, and free of corruption.
Various gaming regulatory agencies have issued licenses allowing us to manufacture and/or distribute our products and operate “wide area progressive” systems, also known as WAP systems. We and our key personnel have obtained or applied for all government licenses, permits, registrations, findings of suitability and approvals necessary allowing for the manufacture, distribution, and where permitted, operation of gaming machines in the jurisdictions where we do business. We have never been denied a gaming related license, nor have our licenses been suspended or revoked.
Nevada Regulation
The manufacture, sale and distribution of gaming devices in Nevada or for use outside Nevada are subject to the Nevada Gaming Control Act and the regulations of the Nevada Gaming Commission (Commission), and the State Gaming Control Board (GCB), and the local laws, regulations and ordinances of various county and municipal regulatory authorities (collectively referred to as the Nevada gaming authorities). These laws, regulations and ordinances primarily concern the responsibility, financial stability and character of gaming device manufacturers, distributors and operators, as well as persons financially interested or involved in gaming operations. The manufacture, distribution and operation of gaming devices require separate licenses. The laws,
regulations and supervisory procedures of the Nevada gaming authorities seek to (i) prevent unsavory or unsuitable persons from having a direct or indirect involvement with gaming at any time or in any capacity, (ii) establish and maintain responsible accounting practices and procedures, (iii) maintain effective control over the financial practices of licensees, including establishing minimum procedures for internal fiscal affairs and the safeguarding of assets and revenues, providing reliable record keeping and requiring the filing of periodic reports with the Nevada gaming authorities, (iv) prevent cheating and fraudulent practices, and (v) provide a source of state and local revenues through taxation and licensing fees. Changes in these laws, regulations, procedures, and judicial or regulatory interpretations could have an adverse effect on our gaming operations.
Our subsidiary that conducts the manufacturer,manufacture, sale, and distribution of gaming devices in Nevada or for use outside Nevada, as well as the operation of slot machine routes and other gaming activities in Nevada, is required to be licensed by the Nevada gaming authorities. Our licenses require the periodic payment of fees and taxes and are not transferable. Each type of machine we sell in Nevada must first be approved by the Commission and may require subsequent machine modification. Our gaming subsidiary licensed in Nevada must also report substantially all loans, leases, sales of securities and similar financing transactions to the GCB and the Commission, and/or have them approved by the Commission. We believe we have obtained all required licenses and/or approvals necessary to carry on our business in Nevada.
We are registered with the Commission as a publicly traded corporation and are required periodically to submit detailed financial and operating reports to the Commission and to furnish any other information that the Commission may require. No person may become a stockholder of or receive any percentage of profits from our licensed gaming subsidiaries, without first obtaining licenses and approvals from the Nevada gaming authorities.
Our officers, directors and key employees who are actively engaged in the administration or supervision of gaming and/or directly involved in gaming activities of our licensed gaming subsidiaries may be required to file applications with the Nevada gaming authorities and may be required to be licensed or found suitable by them. Officers, directors and certain key employees of our licensed gaming subsidiaries must file applications with the Nevada gaming authorities and may be required by them to be licensed or found suitable. Our bylaws provide for us to pay all costs of the GCB investigations that are related to our officers, directors or employees.
The Nevada gaming authorities may investigate any individual who has a material relationship or involvement with us, or any of our licensed gaming subsidiaries in order to determine whether such individual is
suitable or should be licensed as a business associate of a gaming licensee. The Nevada gaming authorities may deny an application for licensure or finding of suitability for any cause deemed reasonable. A finding of suitability is comparable to licensing and both require submission of detailed personal and financial information followed by a thorough background investigation. The applicant for licensing or a finding of suitability must pay all costs of the investigation. We must report changes in licensed positions to the Nevada gaming authorities. The Nevada gaming authorities may disapprove any change in position by one of our officers, directors or key employees, or require us to suspend or dismiss officers, directors or other key employees and sever all relationships with such persons, including those who refuse to file appropriate applications or whom the Nevada gaming authorities find unsuitable to act in such capacities. Determinations of suitability or of questions pertaining to licensing are not subject to judicial review in Nevada.
We are required to submit detailed financial and operating reports to the Commission. If it were determined that any Nevada gaming laws were violated by us or any of our licensed gaming subsidiaries, our gaming licenses could be limited, conditioned, suspended or revoked, subject to compliance with certain statutory and regulatory procedures. In addition, we, our licensed gaming subsidiaries and any persons involved may be subject to substantial fines for each separate violation of the Nevada gaming laws at the discretion of the Commission. The Commission also has the power to appoint a supervisor to operate our gaming properties and, under certain circumstances, earnings generated during the supervisor’s appointment could be forfeited to the State of Nevada. The limitation, conditioning or suspension of our gaming licenses or the appointment of a supervisor could (and revocation of our gaming licenses would) materially and adversely affect our gaming operations.
The Commission may require any beneficial holder of our voting securities, regardless of the number of shares owned, to file an application, be investigated, and be found suitable, in which case the applicant would be required to pay all of the costs and fees of the GCB investigation. If the beneficial holder of voting securities who must be found suitable is a corporation, partnership, or trust, it must submit detailed business and financial information including a list of beneficial owners. Any person who acquires more than 5% of our voting securities must report this to the Commission. Any person who becomes a beneficial owner of more than 10% of our voting securities must apply for a finding of suitability within 30 days after the chairman of the GCB mails the written notice requiring this filing.
Under certain circumstances, an Institutional Investor, as this term is defined in the Commission regulations, which acquires more than 10%, but not more than 15%, of our voting securities may apply to the Commission for a waiver of these finding of suitability requirements, provided the institutional investor holds the voting securities for investment purposes only. An institutional investor will not be deemed to hold voting securities for investment purposes unless the voting securities were acquired and are held in the ordinary course of its business and not for the purpose of causing, directly or indirectly (i) the election of a majority of our board of directors, (ii) any change in our corporate charter, bylaws, management, policies or operations, or (iii) any other action which the Commission finds to be inconsistent with holding our voting securities for investment purposes only. The Commission considers voting on all matters voted on by shareholders and the making of financial and other informational inquiries of the type normally made by securities analysts, and such other activities as the Commission may determine, to be consistent with holding voting securities for investment purposes only. If the beneficial holder of voting securities who must be found suitable is a corporation, partnership, limited partnership, limited liability company or trust, it must submit detailed business and financial information including a list of beneficial owners. The applicant is required to pay all costs of the GCB investigation.
Any person who fails or refuses to apply for a finding of suitability or a license within 30 days after being ordered to do so by the Commission or the chairman of the GCB may be found unsuitable. The same restrictions apply to a record owner who fails to identify the beneficial owner, if requested to do so. Any stockholder found unsuitable and who holds, directly or indirectly, any beneficial ownership of our voting securities beyond that period of time as may be prescribed by the Commission may be guilty of a criminal offense. We are subject to disciplinary action, and possible loss of our approvals, if, after we receive notice that a person is unsuitable to be
a stockholder or to have any other relationship with us or any of our licensed gaming subsidiaries, we (i) pay that person any dividend or interest upon our voting securities, (ii) allow that person to exercise, directly or indirectly, any voting right conferred through securities held by that person, (iii) give remuneration in any form to that person, for services rendered or otherwise, or (iv) fail to pursue all lawful efforts to require the unsuitable person to relinquish his voting securities for cash at fair market value. Additionally, the Clark County authorities have taken the position that they have the authority to approve all persons owning or controlling the stock of any corporation controlling a gaming licensee.
The Commission may, in its discretion, require the holder of any of our debt securities to file an application, be investigated and be found suitable to own any of our debt securities. If the Commission determines that a person is unsuitable to own any of these securities, then pursuant to the Nevada gaming laws, we can be sanctioned, including the loss of our approvals, if without prior Commission approval, we: (i) pay to the unsuitable person any dividend, interest, or any distribution whatsoever; (ii) recognize any voting right by the unsuitable person in connection with these securities; (iii) pay the unsuitable person remuneration in any form; or (iv) make any payment to the unsuitable person by way of principal, redemption, conversion, exchange, liquidation, or similar transaction.
We are required to maintain a current stock ledger in Nevada which may be examined by the Nevada gaming authorities at any time. If any of our securities are held in trust by an agent or by a nominee, the record holder may be required to disclose the identity of the beneficial owner to the Nevada gaming authorities. A failure to make this disclosure may be grounds for finding the record holder unsuitable. We are also required to render maximum assistance in determining the identity of the beneficial owner. The Commission has the power
at any time to require our stock certificates to bear a legend indicating that the securities are subject to the Nevada gaming laws and the regulations of the Commission. To date, the Commission has not imposed this requirement on us.
We may not make a public offering of our securities without the prior approval of the Commission if the securities or their proceeds are intended to be used to construct, acquire or finance gaming facilities in Nevada, or retire or extend obligations incurred for such purposes. Such approval, if given, does not constitute a finding, recommendation, or approval by the Commission or the GCB as to the accuracy or adequacy of the prospectus or the investment merits of the securities. Any representation to the contrary is unlawful.
Changes in control of KonamiKONAMI through merger, consolidation, acquisition of assets or stock, management or consulting agreements or any act or conduct by a person whereby he obtains control, may not occur without the prior investigation of the GCB and approval of the Commission. Entities seeking to acquire control of us must satisfy the GCB and the Commission in a variety of stringent standards prior to assuming control. The Commission may also require controlling shareholders, officers, directors and other persons having a material relationship or involvement with the entity proposing to acquire control, to be investigated and licensed as part of the approval process relating to the transaction.
The Nevada legislature has declared that some corporate acquisitions opposed by management, repurchases of voting securities and other corporate defense tactics that affect Nevada gaming licensees, and publicly-traded corporations that are affiliated with those operations, may be injurious to stable and productive corporate gaming. The Commission has established a regulatory scheme to ameliorate the potentially adverse effects of these business practices upon Nevada’s gaming industry and to further Nevada’s policy to (i) assure the financial stability of corporate gaming operators and their affiliates; (ii) preserve the beneficial aspects of conducting business in the corporate form; and (iii) promote a neutral environment for the orderly governance of corporate affairs. Approvals are, in certain circumstances, required from the Commission before we can make exceptional repurchases of voting securities above their current market price and before a corporate acquisition opposed by management can be consummated. Nevada’s gaming laws and regulations also require prior approval by the Commission if we were to adopt a plan of recapitalization proposed by our board of directors in opposition to a tender offer made directly to our shareholders for the purpose of acquiring control of us.
License fees and taxes, computed in various ways depending on the type of gaming or activity involved, are payable to the State of Nevada and to the cities and counties where our subsidiaries conduct operations. Depending on the particular fee or tax involved, these fees and taxes are payable either monthly, quarterly or annually. Annual fees are payable to the State of Nevada to renew our licenses as a manufacturer, distributor, and operator of a slot machine route. Nevada gaming law also requires persons providing gaming devices in Nevada to casino customers on a revenue participation basis to pay their proportionate share of the taxes imposed on gaming revenues generated by the participation gaming devices.
Any person who is licensed, required to be licensed, registered, required to be registered, or is under common control with such persons (collectively referred to as licensees), and who proposes to participate in the conduct of gaming operations outside of Nevada is required to deposit with the GCB, and thereafter maintain, a revolving fund in the amount of $10,000 to pay the expenses of investigation by the GCB of the licensee’s participation in foreign gaming. This revolving fund is subject to increase or decrease at the discretion of the Commission. As a licensee, we are required to comply with certain reporting requirements imposed by the Nevada gaming laws. We are also subject to disciplinary action by the Commission if we knowingly violate any laws of the foreign jurisdiction pertaining to our foreign gaming operation, fail to conduct our foreign gaming operations in accordance with the standards of honesty and integrity required of Nevada gaming operations engage in any activity or enter into any association that is unsuitable because it poses an unreasonable threat to the control of gaming in Nevada, reflects or tends to reflect discredit or disrepute upon the State of Nevada or gaming in Nevada, or is contrary to the gaming policies of Nevada, engage in any activity or enter into any association that interferes with the ability of the State of Nevada to collect gaming taxes and fees, or employ,
contract with or associate with any person in the foreign gaming operation who has been denied a license or a finding of suitability in Nevada on the ground of personal unsuitability, or who has been found guilty of cheating at gambling.
Mississippi Regulations
The manufacture, sale and distribution of gaming machines for use or play in Mississippi or for distribution outside of Mississippi and the operation of wide area progressive gaming devices are subject to the Mississippi Act. Konami Gaming, Inc.’s (KGI) license as a wide area progressive operator permits placement of slot machines and gaming devices on the premises of other licensees on a participation basis. All manufacturing, distribution and wide area progressive operation are subject to licensing and regulatory control of the Mississippi Gaming Commission (the Mississippi Commission).
The laws, regulations and supervisory procedures of the Mississippi Commission are based upon declarations of public policy which are concerned with, among other things: (i) the prevention of unsavory or unsuitable persons from having a direct or indirect involvement with gaming at any time or in any capacity; (ii) the establishment and maintenance of responsible accounting practices and procedures; (iii) the maintenance of effective controls over the financial practices of licensees, including the establishment of minimum procedures for internal fiscal affairs and the safeguarding of assets and revenues, providing reliable record keeping and requiring the filing of periodic reports with the Mississippi Commission; (iv) the prevention of cheating and fraudulent practices; (v) providing a source of state and local revenues through taxation and licensing fees; and (vi) the strict regulation of all persons, locations, practices, associations and activities related to the operation of licensed gaming establishments and the manufacture and distribution of gaming devices and associated equipment. Changes in these laws, regulations and procedures could have an adverse effect on our future Mississippi operations.
Certain of our subsidiaries that manufacture and distribute gaming devices or operate a slot machine route, or operate wide area progressive gaming, or which hold stock of a subsidiary which does so (a “Gaming Subsidiary”), are required to be licensed or registered by the Mississippi Gaming Commission. The Licenses require the periodic payment of fees and taxes and are not transferable. We are registered by the Mississippi Commission as a publicly-traded corporation (Registered Corporation) and so we are required periodically to
submit detailed financial operation reports to the Mississippi Commission and to furnish any other information which the Mississippi Commission may require. We have obtained from the Mississippi Commission the various registrations, finding of suitability, approvals, permits and licenses (collectively, referred to as Licenses) required to engage in manufacturing of gaming devices and for KGI to engage in wide area progressive operations, the manufacture, sale distribution of gaming devices for use or play in Mississippi or for distribution outside of Mississippi. We cannot assure you that these Licenses will not be revoked, suspended, limited or conditioned by the Mississippi Commission.
All gaming devices that are manufactured, sold or distributed for use or play in Mississippi, or for distribution outside of Mississippi, must be manufactured by licensed manufacturers and distributed or sold by licensed distributors. All gaming devices manufactured for use or play in Mississippi must be approved by the Mississippi Commission before sales distribution or exposure for play. The approval process for gaming devices includes rigorous testing by the Mississippi Commission, a field trial and a determination as to whether the gaming machine meets strict technical standards that are set forth in the regulations of the Mississippi Commission. Associated equipment (as defined in the Mississippi Act) must be administratively approved by the Chairman of the Mississippi Commission before it is distributed for use in Mississippi.
The Mississippi Commission may investigate any individual who has a material relationship or involvement with us in order to determine whether that individual is suitable or should be licensed as a business associate of a licensee. Officers, directors and certain key employees of our Gaming Subsidiary must file license applications with the Mississippi Commission. Our officers, directors and key employees who are actively and directly
involved in activities of our Gaming Subsidiary may be required to be licensed or found suitable by the Mississippi Commission. The Mississippi Commission may deny an application for licensing for any cause which they deem reasonable. A finding of suitability is comparable to licensing, and both require submission of detailed personal financial information followed by a thorough investigation. The applicant for licensing or a finding of suitability must pay all the costs of the investigation. Changes in licensed positions must be reported to the Mississippi Commission and, in addition to their authority to deny an application for a finding of suitability or license, the Mississippi Commission have jurisdiction to disapprove a change in a corporate position.
If the Mississippi Commission were to find an officer, director or key employee unsuitable for licensing or unsuitable to continue having a relationship with us, we would have to sever all relationships with that person. In addition, the Mississippi Commission may require us to terminate the employment of any person who refuses to file appropriate applications. Determinations of suitability or of questions pertaining to licensing are not subject to judicial review in Mississippi.
We are required to submit detailed financial and operating reports to the Mississippi Commission. Substantially all material loans, leases, sales of securities and similar financing transactions by our Gaming Subsidiary must be reported to, and approved by, the Mississippi Commission.
If the Mississippi Commission determines that we violated the Mississippi Act, our Licenses could be limited, conditioned, suspended or revoked subject to compliance with certain statutory and regulatory procedures. In addition, we and the persons involved could be subject to substantial fines for each separate violation of the Mississippi Act at the discretion of the Mississippi Commission. The limitation, conditioning or suspension of any License or the appointment of a supervisor could, and the revocation of any license would, materially adversely affect our future operation in Mississippi.
Any beneficial holder of our voting securities, regardless of the number of shares owned, may be required to file applications, be investigated and have his, her or its suitability as a beneficial holder of our voting securities determined if the Mississippi Commission has reason to believe that ownership would otherwise be inconsistent with the declared policies of the State of Mississippi. The applicant must pay all costs of investigation incurred by the Mississippi Commission in conducting any such investigation.
The Mississippi Act requires any person who acquires beneficial ownership of more than 5% of our voting securities to report the acquisition to the Mississippi Commission. The Mississippi Act requires that beneficial owners of more than 5% of our voting securities apply to the Mississippi Commission for a finding of suitability within 30 days after the mailing of the written notice by the Executive Director of the Mississippi Commission requiring that filing. Under certain circumstances, an “institutional investor”, as defined in the Mississippi Act, which acquires more than 10%, but not more than 15% or our voting securities may apply to the Mississippi Commission for a waiver of that finding for suitability if the institution investor holds the voting securities for investment purposes only. An institutional investor shall not be deemed to hold voting securities for investment purposes unless the voting securities were acquired and are held in the ordinary course of business as an institutional investor and not for the purpose of causing, directly or indirectly, the election of a majority of the members of our board of directors, any change in our corporate charter, bylaws, management, policies or operations, or those of any of our gaming affiliates, or any other action which the Mississippi Commission finds to be inconsistent with holding our voting securities for invest purposes only. Activities which are not deemed to be inconsistent with holding voting securities for investment purposes only include: (i) voting on all matters voted on by stockholders; (ii) making financial and other inquiries of management of the type normally made by securities analysts for information purposes and not to cause a change in our management policies or operations; and (iii) other activities that the Mississippi Commission may determine to be consistent with investment intent. If the beneficial holder of voting securities who must be found suitable is a corporation, partnership or trust, it must submit detailed business and financial information including a list of beneficial owners. The applicant is required to pay all cost of investigation.
Any person who fails or refuses to apply for a finding of suitability or a license within 30 days after being ordered to do so by the Mississippi Commission may be found unsuitable. The same restrictions apply to a record owner who fails to identify the beneficial owner, if requested to do so. Any stockholder found unsuitable and who holds, directly or indirectly, any beneficial ownership of voting securities beyond that period of time as may be prescribed by the Mississippi Commission may be guilty of a criminal offense. We are subject to disciplinary action and possible loss of approvals if, after we receive notice that a person is unsuitable to be a stockholder or to have any other relationship with us or any of our licensed Gaming Subsidiaries, we (i) pay that person any dividend or interest upon our voting securities; (ii) allow that person to exercise, directly or indirectly, any voting rights conferred through securities held by that person; (iii) pay remuneration in any form to that person for services rendered or otherwise; (iv) fail to pursue all lawful efforts to require the unsuitable person to relinquish voting securities including, if necessary, the immediate repurchase of the voting securities for cash at fair market value.
The Mississippi Commission may, in its discretion, require the holder of any of our debt security to file an application, be investigated and be found suitable to own any of our debt securities. If the Mississippi Commission determines that a person is unsuitable to own any of our securities, then under the Mississippi Act, we can be sanctioned, including the loss of our approvals, if without the prior approval of the Mississippi Commission we: (i) pay to the unsuitable person any dividend, interest or any distribution whatsoever; (ii) recognize any voting right by the unsuitable person in connection with that security; (iii) pay the unsuitable person remuneration in any form; or (iv) make any payment to the unsuitable person by way of principal, redemption, conversion, exchange, liquidation or similar transaction.
We are required to maintain a current stock ledger in the State of Mississippi which may be examined by the Mississippi Commission at any time. If any securities are held in trust by an agent or by a nominee, the record holder may be required to disclose the identity of the beneficial owner to the Mississippi Commission. A failure to make this disclosure may be grounds for finding the record holder unsuitable. We are also required to render maximum assistance in determining the identity of the beneficial owner. The Mississippi Commission requires that stock certificates of Registered Corporation bear a legend indicating that the securities are subject to the Mississippi Act but we have obtained waiver of that requirement.
We may not make a public offering of our securities without the prior approval of the Mississippi Commission if the securities or the proceeds are intended to be used to construct, acquire or finance gaming
facilities in Mississippi, or to retire or extend obligations incurred for such purposes. Such approval, if given, does not constitute a finding, recommendation, or approval by the Mississippi Commission as to the accuracy or adequacy of the prospectus or the investment merits of the securities. Any representation to the contrary is unlawful. To this end, we received continuous approval of public offerings and/or private placements and related approvals (shelf approval) that are valid for a two (2) year periodyears-period which can and will be renewed for each subsequent 2 year periods.two years-period.
Changes in control of KonamiKONAMI through merger, consolidation, acquisition of assets or stock, management or consulting agreements or any act or conduct by a person whereby he or she obtains control, may not occur without the prior approval of the Mississippi Commission. Entities seeking to acquire control of us must satisfy the Mississippi Commission in a variety of stringent standards prior to assuming control. The Mississippi Commission may also require controlling stockholders, officers, directors and other persons having a material relationship or involvement with the entity proposing to acquire control, to be investigated and licensed as part of the approval process relating to the transaction.
The Mississippi legislature has declared that some corporate acquisitions opposed by management, repurchases of voting securities and other corporate defense tactics that affect Mississippi gaming licensees and publicly-traded corporations that are affiliated with those operations may be injurious to stable and productive corporate gaming. The Mississippi Commission has established a regulatory scheme to ameliorate the potentially adverse affects of these business practices upon Mississippi’s gaming industry and to further Mississippi’s policy to: (i) assure the financial stability of corporate licensees and their affiliates; (ii) preserve the beneficial aspects of conducting business in the corporate form; and (iii) promote a neutral environment for the orderly governance of
corporate affairs. Approvals are, in certain circumstances, required from the Mississippi Commission before we can make exceptional repurchases of voting securities above the current market price and before a corporate acquisition opposed by management can be consummated. The Mississippi Act also requires prior approval if we were to adopt a plan of recapitalization proposed by our board of directors in opposition to a tender offer made directly to our shareholders for the purposes of acquiring control of us.
License fees and taxes, computed in various ways depending on the type of gaming or activity involved, are payable to the State of Mississippi and to the cities and counties where our subsidiaries conduct operations. Depending on the particular fee or tax involved, these fees and taxes are payable either monthly, quarterly or annually. Annual fees are payable to the State of Mississippi to renew our licenses as a manufacturer, distributor and operator of a slot machine route.
Any person who is licensed, required to be licensed, registered, required to be registered, or is under common control with such person, and who proposes to become involved in a gaming venture outside of Mississippi, is required to deposit with the Mississippi Commission, and thereafter maintain, a revolving fund to pay the expenses of investigation by the Mississippi Commission, and thereafter maintain, a $10,000 of revolving fund to pay the expenses of investigation by the Mississippi Commission of their participation in foreign gaming operations. This revolving fund is subject to increase or decrease at the discretion of the Mississippi Commission. As a licensee, we are required to comply with certain reporting requirements imposed by the Mississippi Act. The Mississippi Commission may require us to file an application for a finding of suitability concerning an actual or intended activity or association in a foreign gaming operation. A licensee is also subject to disciplinary action by the Mississippi Commission if the licensee knowingly violates any laws of the foreign jurisdiction pertaining to the foreign gaming operation, fails to conduct the foreign gaming operation in accordance with the standards of honesty and integrity required by Mississippi gaming operations, engages in activities that are harmful to the State of Mississippi or its ability to collect gaming taxes and fees, or employs a person in the foreign operation who has been denied a license or finding of suitability in Mississippi on the grounds of personal unsuitability.
New Jersey Regulations
The manufacture, distribution, and operation of gaming machines, and other aspects of casino gaming in New Jersey, are subject to strict regulation pursuant to the New Jersey Casino Control Act and the regulations
promulgated thereunder (collectively, referred to as New Jersey Act). The New Jersey Act created the New Jersey Casino Control Commission (New Jersey Commission) and the New Jersey Division of Gaming Enforcement (the New Jersey Division). The New Jersey Commission is authorized to decide all license applications and other matters and to promulgate regulations. The New Jersey Division is authorized to investigate all license applications, make recommendations to the New Jersey Commission, and to prosecute violations of the New Jersey Act.
Under the New Jersey Act, a company must be licensed as a gaming related casino service industry supplier (CSI), or fulfill other requirements, in order to manufacture or distribute gaming devices to New Jersey casinos. In order for a CSI license to be issued, renewed or maintained, certain directors, officers, key employees and owners of a company must be found by the New Jersey Commission to possess by clear and convincing evidence good character, honesty, integrity and financial stability. Concurrent with our subsidiary Konami Gaming, Inc., we gotobtained a CSI license in 2004.
In its discretion, the New Jersey Commission may permit an unlicensed applicant for a CSI license to transact business with New Jersey casinos prior to licensure. In order to do so, we must maintain a completed application for CSI licensure on file with the New Jersey Commission. In addition, the casino that desires to transact business with us must obtain the approval of the New Jersey Commission for each business transaction (transactional waiver) by filing a petition with the New Jersey Commission that demonstrates that good cause exists for granting the petition. The New Jersey Commission can notcannot grant such a petition if the New Jersey Division objects to the petition.
A CSI license application consists of extensive disclosure forms for the applicant, each of its holding companies, and each individual required to be found qualified by the New Jersey Commission. The persons affiliated with an applicant who must be found qualified by the New Jersey Commission are certain officers, directors and management employees, all beneficial owners of five percent (5%) or more of the applicant, and any other person the New Jersey Commission deems appropriate.
With respect to security holders, the New Jersey Commission may waive the qualification requirement for “institutional investors”, as defined in the New Jersey Act, of an applicant if: (i) there is no reason to believe that the institutional investor may be unqualified; (ii) the institutional investor holds less than ten percent of the outstanding securities; (iii) the securities were acquired for investment purposes only, and (iv) the holder has no intention of influencing the affairs of the applicant, other than voting its securities. The New Jersey Act defines an “institutional investor” as (i) any retirement fund administered by a public agency for the exclusive benefit of federal, state or local public employees; (ii) an investment company registered under the Investment Corporate Law of 1940; (iii) a collective investment trust organized by banks under Part Nine of the Rules of the Comptroller of the Currency, (iv) a closed end investment trust; (v) a chartered or licensed life insurance company or property and casualty insurance company; (vi) banking or other licensed or chartered lending institutions; (vii) an investment adviser registered under the Investment Advisers Act of 1940, and (viii) such other persons as the New Jersey Commission may determine for reasons consistent with the policies of the New Jersey Act.
In connection with a license application, the New Jersey Division conducts an investigation of the applicant and its individual qualifiers to determine their suitability for licensure. In order for a CSI license to be issued by the New Jersey Commission, the applicant and its individual qualifiers must demonstrate by clear and convincing evidence their good character, honesty and integrity, their financial stability, integrity and responsibility.
The application fee for a CSI license consists of a non-refundable deposit of $5,000 and an obligation to pay an additional $5,000 if the processing of the application requires more than 1,000 but less than 2,000 hours and a further $5,000 if the processing of the application exceeds 2,000 hours, plus the expenses of the New Jersey Commission and New Jersey Division. The same fee structure applies to any renewal application.
The New Jersey Commission has broad discretion regarding the issuance, renewal, suspension or revocation of CSI licenses. If our CSI license application is denied, we will not be able to transact business with New Jersey casinos. There is no guarantee that we will be granted an initial license or that, following the issuance of an initial CSI license or any renewal thereof, we will continue to be granted renewals of the license. The New Jersey Commission may impose conditions on the issuance of a license. In addition, the New Jersey Commission has the authority to impose fines or suspend or revoke a license for violations of the New Jersey Act, including the failure to satisfy the licensure requirements. A CSI license is issued for an initial period of two (2) years and is thereafter renewable for each four (4) year periods.years-period.
In addition to our required licensure, the gaming equipment manufactured, distributed or sold by us to New Jersey casinos is subject to a technical examination by the New Jersey Division and approval by the New Jersey Commission for, at a minimum, quality, design, integrity, fairness, honesty, suitability and compliance with rigorous technical standards. The approval process includes the submission of a model of the machine to the New Jersey Division for testing, examination and analysis and for comparison with documentation of the schematics, block diagram, circuit analysis and written explanation of the method of operation, odds determination and all other pertinent information. All costs of such testing, examination and analysis are borne by us.
As part of this approval process, the New Jersey Commission may require that the manufacturer of any component of the gaming equipment which the New Jersey Commission, in its discretion, determines is essential to the gaming aspects of the device submit to licensing. Such components would include the computer control circuitry which causes or allows the device to operate as a gambling device. The failure or refusal of such a manufacturer to submit to licensing or the denial of a license by the New Jersey Commission to such manufacturer would result in our inability to distribute and market that gambling device to New Jersey casinos.
Prior to a decision by the New Jersey Commission to approve a particular model of machine, it may require a trial period to test the machine in a licensed casino. During the trial period, the manufacturer and distributor of the machine shall not be entitled to receive revenue of any kind whatsoever. Once a model is approved by the New Jersey Commission, all machines of that model placed in operation in licensed casinos shall operate in conformity with the model tested by the New Jersey Division. Any changes in the design, function or operation of the machine are subject to prior approval by the New Jersey Commission in consultation with the New Jersey Division.
Other Jurisdictions
Each of the other jurisdictions in which we do business requires various licenses, permits and approvals in connection with the manufacture and/or distribution of gaming devices typically involving restrictions similar in many respects to those of Nevada.
Federal United States Registration
The Federal Gambling Devices Act of 1962 (the Act) makes it unlawful for a person to manufacture, transport, or receive gaming machines, gaming devices or components across interstate lines unless that person has first registered with the Attorney General of the US Department of Justice. We are so registered and must renew our registration annually. In addition, gambling device identification and record keeping requirements are imposed by the Act. Violation of the Act may result in seizure and forfeiture of the equipment, as well as other penalties. We have complied with the registration requirements of the Act.
Native American Gaming Regulation
Gaming on Native American lands is governed by federal law, tribal-state compacts, and tribal gaming regulations. The Indian Gaming Regulatory Act of 1988, or the IGRA, provides the framework for federal and state control over all gaming on Native American lands and is administered by the National Indian Gaming
Commission, or the NIGC, and the Secretary of the US Department of the Interior. IGRA requires that the tribe and the state enter into a written agreement, a tribal-state compact, which governs the terms of the gaming activities. Tribal-state compacts vary from state-to-state and in many cases require equipment manufacturers and/or distributors to meet ongoing registration and licensing requirements. In addition, tribal gaming commissions have been established by many Native American tribes to regulate gaming related activity on Indian lands. We manufacture and supply gaming equipment to Native American tribes who have negotiated compacts with their state and have received federal approval. As of June 30, 2007, we have receivedWe possess approvals to supply gaming equipment and componentcomponents to 18 states of Native American.American casinos in several States.
International Regulation
Certain foreign countries permit the importation, sale and operation of gaming equipment in casino and non-casino environments. Some countries prohibit or restrict the payout feature of the traditional slot machine or limit the operation and the number of slot machines to a controlled number of casinos or casino-like locations. Each gaming machine must comply with the individual country’s regulations. Certain jurisdictions require the licensing of gaming machine operators and manufacturers.
We manufacture and supply gaming equipment to various international markets including Australia, Canada, Malaysia, New Zealand, the Philippines, and South Africa. We have obtained the required licenses to manufacture and distribute our products in the various foreign jurisdictions where we do business.
Video Game Software
Japan. No governmental entity in Japan is authorized to censor the content of computer entertainment software. The Computer Entertainment Supplier’s Association, or CESA, is a Japanese industry association that
conducts market surveys, research and other activities to promote the computer entertainment software industry in Japan. CESA’s members are corporations and individuals engaged in projects relating to the development, manufacture and sale of computer entertainment software and organizations comprised of such individuals or organizations. We are a member of CESA and our Chief Executive Officer, Kagemasa Kozuki, had been the Chairman of CESA since its establishment in 1996 for three terms over six years.
The Computer Entertainment Rating Organization, or CERO, was established in 2002 and CERO started regulating home game software distributed in Japan through a rating system based upon the user’s age. CERO reviews expressions and contents of software based on its ethical guidelines upon request of software manufacturers. Expressions containing violence, anti-social behavior, sexual behavior and hazardous language or thought are subject to CERO’s rating. Each game software is categorized and labeled either as game software or educational/database software and those categorized as game software must label age classification mark based on the rating. CERO has adopted a five tiered game software age classification, including category “A” for persons of all age,ages, category “B” for persons 12 and older, category “C” for persons 15 and older, category “D” for persons 17 and older and category “Z” for sales prohibition to persons younger than 18, thereby indicating that contents of each categorized software are subject to persons in categorized age group.
International. The content of video game software is not subject to federal regulation in the United States. However, many video game software publishers comply with the standardized rating system established by the Entertainment Software Rating Board, or ESRB. The ESRB is an independent entity established in 1994. It rates video games, websites and online games and reviews advertising created by the video game industry. Video game software publishers such as us include ESRB ratings on their game software packages and Nintendo and Sony include the meanings of these ratings on their game console packages.
In Europe, Pan European Game Information, an age rating system applied in 29 countries (primarily those in the EU), conducts voluntary age rating inspections using standards developed by the Interactive Software Federation of Europe, a Europe-based industry group. Furthermore, in Germany, the Unterhaltungs Software Selbstkontrolle (USK) conducts morals inspections pursuant to the country’s Minor Protection Law.
Pachinko Machines (Pachinko, Pachinko Slot)
Standards for pachinko and pachinko slot machines are regulated under the Law Regulating Adult Entertainment in Japan. The Security Electronics Communication Technology Association is the only entity authorized to test new models of pachinko and pachinko slot machines and determine whether such models meet certain specified technical criteria. Those who expect to produce new models are first required to pass such model test and then to obtain verification that such model complies with applicable standards from the prefectural Public Safety Commission in the prefecture in which such models would be distributed and operated.
Property
The following table sets forth information, as of March 31, 2007,2010, with respect to our principal establishments:facilities:
Establishment | Location | Segment | Uses | Book Value of Machinery and Equipment | Land Space | Floor Space | Tenure | |||||||||
(millions of yen) | (square meters) | |||||||||||||||
Holding Company | Chiyoda-ku, Tokyo | Holding Company | Administrative | ¥ | 40 | — | 4,234 | Leased | ||||||||
Konami Digital Entertainment | Minato-ku, Tokyo | Digital Entertainment | Production, Sales, Administrative | ¥ | 2,692 |
| — | 20,343 | Leased | |||||||
Konami Digital Entertainment Kobe Office | Nishi-ku, Kobe | Digital Entertainment | Production, Manufacturing, Administrative | ¥ | — | * | — | 11,742 | Owned | |||||||
Konami Digital Entertainment Zama Office | Zama, Kanagawa | Digital Entertainment | Production, Manufacturing, Administrative | ¥ | * |
| — | 3,336 | Owned |
Establishment Location Segment Uses Tenure Konami Gaming, Inc., Japan Branch Zama, Kanagawa Gaming & System Production, Manufacturing, Administrative ¥ — * — 1,395 Owned Game Software Company, Harumi Office Chuo-ku, Tokyo Digital Entertainment Production, Administrative ¥ * — 4,035 Leased Konami Sports & Life Co., Ltd. Shinagawa-ku, Tokyo, and 209 locations Health & Fitness Fitness club ¥ 506 8,732 696,352 Some owned and some leased Konami Real Estate, Inc. Chuo-ku, Tokyo and other Other Home Leasing ¥ * 700 1,409 Owned Konami Real Estate, Inc. Nasu-gun, Tochigi Other Training Facility ¥ 219 486,028 14,612 Owned Konami Real Estate, Inc. Shinagawa-ku, Tokyo and other Other Office Leasing ¥ 9 41,932 117,974 Owned Konami Digital Entertainment, Inc. Los Angeles, California, U.S.A. Digital Entertainment Sales, Administrative ¥ 662 — 7,433 leased Konami Digital Entertainment GmbH Frankfurt, Germany (primary location) Digital Entertainment Sales, Administrative ¥ 97 — 4,582 Leased Konami Gaming, Inc. Konami Australia Pty Ltd. New South Wales, Australia Gaming & System Production and sales of gaming machines ¥ 167 — 7,753 Leased Book Value of
Machinery and
Equipment Land
Space Floor
Space (millions of yen) (square meters) Las Vegas, Nevada, U.S.A. Gaming & System Production and sales of gaming machines ¥ 532 — 10,605 Leased
Belong to | Location | Uses | Space | Tenure | User | |||||
(square meters) | ||||||||||
Holding Company | Minato-ku, Tokyo | Administrative | 1,815 | Leased | Holding Company | |||||
Konami Digital Entertainment | Minato-ku, Tokyo | Production, Sales, Administrative | 29,074 | Leased | Konami Digital Entertainment | |||||
Konami Sports & Life Co., Ltd. | Shinagawa-ku, Tokyo, and 211 locations | Fitness club | 735,284 | Some owned and some leased | Konami Sports & Life Co., Ltd. | |||||
Konami Real Estate, Inc. | Nasu-gun, Tochigi | Training Facility | 534,446 | Owned | Corporate | |||||
Konami Real Estate, Inc. | Zama-shi, Kanagawa Kobe-shi, Hyogo, and Other | Production, Manufacturing, Administrative | 56,685 | Owned | Konami Digital Entertainment Konami Manufacturing and Service, Inc., and Other | |||||
Konami Digital Entertainment, | Los Angeles, California, U.S.A. | Sales, Administrative | 4,979 | Leased | Konami Digital Entertainment, Inc. | |||||
Konami Digital Entertainment GmbH | Frankfurt, Germany (primary location) | Sales, Administrative | 4,582 | Leased | Konami Digital Entertainment GmbH |
In addition to the above facilities, we lease some floor space in office buildings in various locations around the world including Japan, China, the United States and Europe.
In April 2007, we consolidated our business offices located in Tokyo into our current address at the newly-opened Tokyo Midtown.
Legal Proceedings
We are involved in a number of actions and proceedings in Japan and overseas in the ordinary course of our business. However, we are not involved in any legal or arbitration proceedings, nor, so far as our Directors are aware, are there any legal or arbitration proceedings pending or threatened involving us that, if determined adversely to us, would individually or in the aggregate have a material adverse effect on us or our financial condition and results of operations.
Breakdown of Total Revenues by Category of Activity and Geographic Market
See Item 5.A of this annual report.
C. Organizational Structure.
The table below shows our principal subsidiaries (companies in which we hold, directly or indirectly, more than 50% of the issued share capital and where we exercise control) and affiliates (companies in which we hold, directly or indirectly, 20-50% of the issued share capital and where we have significant influence) as of March 31, 2007.2010. Except where stated otherwise, each of these companies is accounted for as a consolidated subsidiary. The issued share capital of each of these companies is fully-paid.
Name | Registered office | Issued share capital (in millions) | Shares held by us, directly or indirectly (%) | Principal business | Establishment | Registered office | Issued share capital (in millions) | Shares held by us, directly or indirectly (%) | Principal business | Establishment date | ||||||||||||
In Japan | ||||||||||||||||||||||
Konami Digital Entertainment Co., Ltd. | Chiyoda-ku, Tokyo | ¥ | 26,000 | 100 | Plan, produce, manufacture and sell video game software, toys, card games, video games for amusement facilities, online games, content, for mobile phones, music and video package products, books and magazines. | March 2006 | Minato-ku, Tokyo | ¥ | 26,000 | 100 | Plan, production, | March 2006 | ||||||||||
KPE, Inc. | Minato-ku, Tokyo | ¥ | 100 | 100 | Sales of pachinko LCDs | June 1997 | ||||||||||||||||
Konami Sports & Life Co., Ltd. | Shinagawa-ku, Tokyo | ¥ | 5,040 | 100 | Operation of fitness clubs and sales of fitness equipment | March 1973 | Shinagawa-ku, Tokyo | ¥ | 13,000 | 100 | Operation of fitness | March 1973 | ||||||||||
Konami Real Estate, Inc. | Chuo-ku, Tokyo | ¥ | 10,000 | 100 | Real estate management | December 1987 | Minato-ku, Tokyo | ¥ | 10,000 | 100 | Real estate management | December 1987 | ||||||||||
Konami School, Inc. | Chuo-ku, Tokyo | ¥ | 80 | 100 | Development and education of creators | August 2003 | ||||||||||||||||
Konami Career Management, Inc. | Chuo-ku, Tokyo | ¥ | 60 | 100 | Recruitment of human resources | October 1995 | ||||||||||||||||
The Club At Yebisu Garden Co., Ltd. | Meguro-ku, Tokyo | ¥ | 200 | 70 | Operation of fitness clubs | January 1994 | ||||||||||||||||
KPE, Inc. | Minato-ku, Tokyo | ¥ | 1,000 | 100 | Sales of pachinko LCDs Planning, production, manufacturing and sales of pachinko slot machines | June 1999 | ||||||||||||||||
HUDSON SOFT CO., LTD. | Chuo-ku, Tokyo | ¥ | 5,064 | 54 | Development of video game, mobile and online game software | May 1973 | Minato-ku, Tokyo | ¥ | 5,064 | 54 | Development of video game, mobile and online game software | May 1973 | ||||||||||
Internet Revolution, Inc. | Minato-ku, Tokyo | ¥ | 1,250 | 70 | Operation of portal site | February 2006 | Minato-ku, Tokyo | ¥ | 1,250 | 70 | Operation of portal site | February 2006 | ||||||||||
Resort Solution, Inc. (1) | Shinjuku-ku, Tokyo | ¥ | 3,948 | 20 | Operation of golf courses, hotels and resorts | February 1931 | ||||||||||||||||
Resort Solution Co., Ltd. (1) | Shinjuku-ku, Tokyo | ¥ | 3,948 | 20 | Operation of golf courses, hotels and resorts | February 1931 | ||||||||||||||||
Five other companies | ||||||||||||||||||||||
Four other companies to be confirmed | ||||||||||||||||||||||
Overseas | ||||||||||||||||||||||
Konami Digital Entertainment, Inc. | Los Angeles, | U.S.$ | 21.5 | 100 | Sales of video game software, toys and hobby products and production and sale of amusement games | November 1982 | El Segundo, U.S.A. | U.S.$ | 23.9 | 100 | Sales of video game | November 1982 | ||||||||||
Konami Corporation of America | Delaware, U.S.A. | U.S.$ | 35.5 | 100 | Holding company | October 1996 | ||||||||||||||||
Konami Gaming, Inc. | Las Vegas, Nevada, U.S.A. | U.S.$ | 25.0 | 100 | Production and sales of gaming machines | February 1997 | Las Vegas, U.S.A. | U.S.$ | 25.0 | 100 | Production and sales of gaming machines | February 1997 | ||||||||||
Konami Corporation of America | Redwood City, California, U.S.A. | U.S.$ | 35.5 | 100 | Holding company | October 1996 | ||||||||||||||||
Konami Digital Entertainment B.V. | Amsterdam, Netherlands | € | 9.0 | 100 | Holding company, | November 1997 | ||||||||||||||||
Hudson Entertainment, Inc. | San Mateo, California, U.S.A. | U.S.$ | 1.0 | 54 | Production of network contents | October 2003 | ||||||||||||||||
Konami Digital Entertainment GmbH | Frankfurt am Main, Germany | € | 5.1 | 100 | Sales of video game | December 1984 |
Name Registered office Issued share capital (in millions) Principal business Establishment Konami Digital Entertainment of Europe B.V. Amsterdam, Netherlands € 9.0 100 Holding company, production and sale of toys and hobby products November 1997 Konami Digital Entertainment GmbH Frankfurt am Main, Germany € 5.1 100 Sales of video game software December 1984 Konami Digital Entertainment Limited Queen’s Road Central, Hong Kong, China HK$ 19.5 100 Sales of video game software and amusement arcade games and sales of toys and hobby products September 1994 Konami Software Shanghai, Inc. Xi Zang Zhong Road, Shanghai, China U.S.$ 2.0 100 Development of video game software June 2000 Konami Australia Pty Ltd. Two other companies Shares held
by us,
directly or
indirectly
(%)
date New South Wales, Australia A$ 3.0 100 Production and sales of gaming machines November 1996
Name | Registered office | Issued share capital (in millions) | Shares held by us, directly or indirectly (%) | Principal business | Establishment date | ||||||
Konami Digital Entertainment Limited | Hong Kong, China | HK$ | 19.5 | 100 | Sales of video game | September 1994 | |||||
Konami Software Shanghai, Inc. | Shanghai, China | U.S.$ | 2.0 | 100 | Development of | June 2000 | |||||
Konami Australia Pty Ltd. | New South Wales, Australia | A$ | 30.0 | 100 | Production and sales of gaming machines | November 1996 | |||||
Four other companies to be confirmed |
(1) | It is accounted for by the equity method. |
D. Property, Plants and Equipment.
The information required by this item is set forth in Item 4.B of this annual report.
Item 4A. | Unresolved Staff Comments |
We are a large accelerated filer as defined in Rule 12b-2 under the Securities Exchange Act of 1934. There are no written comments which have been provided by the staff of the Securities and Exchange Commission regarding our periodic reports under that Act not less than 180 days before the end of the fiscal year ended March 31, 20072010 and which remain unresolved as of the date of the filing of this Annual Report with the Commission.
Item 5. | Operating and Financial Review and Prospects. |
A. Operating Results.
You should read the following discussion of our financial condition and results of operations together with our consolidated financial statements and other information included in this annual report. Fiscal 20072010 herein refers to the fiscal year ended March 31, 2007,2010, 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, including, but not limited to, those set forth under Item 3.D and elsewhere in this annual report.
Overview
We are a global entertainment products, health products and services provider. We publish and distribute video game software for use by customers with home and handheld video game systems, principally those manufactured by Sony, Nintendo and Nintendo,Microsoft, and also produce and distribute Internet-based entertainment contents. We also offer a variety of other digital entertainment products by producing toys, including card games, manufacturing and distributing amusement games and token-operated games for amusement arcades. Some of
these products use characters from or inspired by characters in our home video game software and other products. Since February 2001, we have also run the largest chain of fitness clubs in Japan. Furthermore, we
produce and market a variety of entertainment and exercise machines and components, including fitness machines, gaming machines, pachinko slot machines and LCDs for pachinko machines. We earn revenues and income and generate cash from sales of these products and services.
Effective the first quarter ended June 30, 2005, we dividedWe divide our worldwide operations principally into three business segments for financial reporting purposes: Digital Entertainment, Gaming & System and Health & Fitness and Gaming & System.Fitness. The net revenue of these segments, before elimination of intersegment revenues, accounted for 58.8%54.4%, 31.6%7.6% and 6.0%32.7%, respectively, of our total net revenue in fiscal 2007.2010. Our consolidated net revenue for fiscal 20072010 was ¥280,279¥262,144 million.
With the increasing use of the Internet and the enhancement of digital technology, differences among businesses in the digital entertainment industry have been disappearing. The recent emergence of the online game market is further intensifying this trend. In this environment, in order to respond to diversifying customer needs, in April 2005, we merged, in addition to our three home video game software production consolidated subsidiaries, Konami Computer Entertainment Studios, Inc., Konami Computer Entertainment Tokyo, Inc. and Konami Computer Entertainment Japan, Inc., and also Konami Online, Inc., which engaged in the planning, production and distribution of mobile and online games and Konami Media Entertainment, Inc., which engaged in the music and publication business with and into Konami. Furthermore, in April 2005, we re-positioned five of our businesses, Computer & Video Games, Toy & Hobby, Amusement, Online and Multimedia, as Digital Entertainment Businesses, and set up a framework to maximize the synergies among these businesses. With this new focus, we reorganized our business into three segments: the Digital Entertainment segment, Health & Fitness segment and Gaming & System segment.
Due to the nature of the entertainment industry, our results of operations have largely been, and will to a considerable extent remain, affected by individual products or a series of products that are hits with consumers such as video game software and card game. See “Factors Affecting Our Results of Operations—Hit Products.” We have been working to reduce volatility in our results by building a solid and well-balanced business portfolio with multiple segments, featuring a growing number and variety of products and services. We are also diversifying our revenue sources by expanding our businesses overseas. Our Digital Entertainment segments have been active in the North American and European markets and our Gaming & System segment has actively developed its operations particularly in the North American market, the biggest gaming market in the world with high future growth potential.
The entertainment industry in Japan has been expanding, reflecting an increasing social recognition of the importance of developing intellectual property and the rapid advance of technology.
Within the Japanese entertainment industry, the video game software industry has become increasingly competitive and more hit products-oriented, with the size of the market fluctuating depending on the number of hit products produced and distributed in a given year. The toy industry in Japan faces problems, including a declining birthrate, children growing out of toys at younger ages due to earlier maturity, a decrease in disposable incomes due to the sluggish economy and an increase in spending on other entertainment. The toy industry is holding firm, however, without any sharp decline in sales, due to an increase in expenditures per child and an increase in demand for toys targeting adults in line with the aging of society. The amusement arcade industry has been sluggish, reflecting intensifying competition with other entertainment options, but it has recovered recentlysuffered a decline in the number of users triggered by a decline in consumer spending caused by the global recession as well as by the growing number of users who refrained from going out due primarily to the developmentsurge in oil prices. Although the surge in oil prices has begun to ease, the recovery of large-sizethe number of users is still slow, and thus, the slowdown of the amusement arcadesarcade industry continues to be severe. To respond to such situation, there has been increasing expectation for the emergence of “hit” products that attract new consumers.will stimulate the market. Also, with the increasing use of the Internet and the advancement of digital technology, the mobile phone and online game market has been expanding as a new entertainment business.
In theThe Japanese health industry in which our Health & Fitness segment operates is also feeling the impact of the recession. The fitness club industry where we boast a large market share has accelerated the price decline of membership fees and various services due to the intensified competition triggered by a decline in consumer spending. The number of fitness club members decreased. At the same time, due to the enforcement of health-related laws and regulations, there has been a growing interest in nursing care prevention as Japan’s population grows older. Measures to tackle lifestyle related diseases have been taken at the national level and
steps to maintain good health are underway. We believe there will be an increasing demand for health-related services among middle-aged and senior consumers and that the market may grow further.consumers.
In our business, segment, hardware manufacturers have now released their next-generalnext-generation computer entertainment systems such as Nintendo Wii, Sony Computer Entertainment PLAYSTATIONPlayStation 3 and Microsoft Xbox 360, and handheld game consoles such as Nintendo DS and the PlayStation Portable have been well received by a broad range of users regardless of age or gender, and the home game market in Japan and abroad has been strong. Moreover, we have also been actively expanding overseas, taking advantage of opportunities for growth in foreign markets, such as North America and Europe, and we are increasingly dependent on our overseas business. For example, in the sports video game category, soccer titles such as theWinning Eleven series,
includingWORLD SOCCER Winning Eleven (“ (called “Pro Evolution Soccer” called in Europe)Europe and North America), continue to gain popularity in Japan and Europe and recorded sales of over 79.4 million units worldwide in fiscal 2006 and2008, over 8.4 million units in fiscal 2007.2009 and over 7.49 million units in fiscal 2010. We seek to continue expanding our business by introducing products that were hits in the Japanese market into overseas markets, as well as developing and introducing products that reflect the unique customer preferences and the competitive environment in each market.
Our main business strategies for each segment are as follows:
Digital Entertainment Segment
In our Computer & Video Games business, we are striving to strengthen our content lineup and make it attractive to customers not only in Japan, but also worldwide in North America, Europe and Asia, by developing products that respond to the characteristics of each market.
In our Toy & Hobby business, we aim to develop globally and be on the cutting edge with unique innovative products in new markets, utilizing our strength in software, IT and content.
In our Amusement business, we plan to further enhance our “e-AMUSEMENT”e-AMUSEMENT” service, which links amusement arcades on line throughout Japan, by strengthening existing content and introducing new titles. Furthermore, in addition to our sales in the matured domestic market, we attempting to expand our sales to overseas focusing on Asia.
In our Card Games business, we are aiming to develop and acquire highly recognized characters and contents both produced by us as well as licensed by third parties, in order to expand our product lineup.
In our Online business, we plan to continually providecontinue providing “intangible” service, theservices, adding value in new valueways as made possible by the Internet, by planning, producing, operating and distributing Internet-based entertainment contents, including mobile games and PC online games.
In our Multimedia business, we mainly publish game-related guides and plan, produce, manufacture and distribute game-related music CDs and DVDs. We aim to provide products that are unique to Konami and can be appreciated by a wide range of customers in the publication, music and video industries.
Health & Fitness segment
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.
Gaming & System segment
In the Gaming & System segment, we aim to increase our revenue through development of competitive slot machine and system offerings, better services for clients, andexpansion of the markets for our casino management systems, enhancement of the competitiveness of our goods, improvement of client training forand further expansion of participation.
Health & Fitness segment
In the Health & Fitness segment, we are focusing on improving the quality of our casino management systems.services by offering a wide range of health-related value-added services in order to develop our operations effectively.
We aim to strengthen development and sales of goods such as health and nursing care prevention machines, supplements and health-related equipment and support heath maintenance and promotion services within and outside the fitness club facilities as the main source of revenue other than fitness club membership fees.
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 subject to the impacts of the economic trend include a decline in consumer spending, price surge of raw materials, falling price of products, the importance of “hit products” that respond to trends in popular culture, intellectual property licensing, seasonal fluctuations, investments and acquisitions.
Economic Trend
Home games, online games and card games which are enjoyed at home are generally deemed to be less effected by the economy. However, with respect to amusement arcade games, due to a decline in consumer spending caused by deterioration of the economy, attempts to reduce consumption by refraining from going out
caused fewer people to visit amusement arcades frequently, which may result in the deterioration of the operator’s management. If purchasing power decreases due to the deterioration of the operator’s management, sales of our amusement arcade games will be affected. In addition, in the worst case scenario, we may not be able to collect payment for goods we have sold. We attempt to prevent risk by purchasing credit insurance under the assumption that the worst case scenario such as the bankruptcy of our buyers will occur in addition to building a scheme under which we conduct sales upon careful evaluation of the credibility of our buyers. Furthermore, with respect to the operation of fitness clubs, similarly to amusement arcades, a decline in consumer spending may trigger a decrease in the number of members and a reduction in collection of membership fees. We aim to acquire new members and to keep our members from withdrawing from membership by attempting to enhance the quality of our services.
Hit Products
Most of our non-fitness related revenues come from sales of 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 Digital Entertainment and Gaming & System 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 expansion and extension of the concept or characters from a popular games.game.
Previously, our strategy was to develop a large number of titles for various platforms, in order to limit fluctuations in sales. However, due to recent changes in the business environment, such as the spread of online games, and our expansion into overseas markets, we have decided to adopt a new strategy of increasing revenues for each title through streamlining and enhancing the versatility of our content. Accordingly, we are cutting the number of titles through a process of “Selection and Concentration,”Concentration”, which we expect will provide a more consistent stream of revenues from each hit title. We have also decreased the volatility of our net revenues by entering the fitness club business, which we believe will provideprovided 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 to 380over 500 licenses in fiscal 2007.2010.
These licenses typically require a guarantee of minimum future royalties.guaranty. We may experience losses if sales based on licensed intellectual property do not produce sufficient revenues to cover our royalties expenses.minimum guaranty. 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, ourYu-Gi-Oh! Trading Card Game originated from the popularYu-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 ourYu-Gi-Oh! Trading Card Game for our Toy & HobbyCard Games business and as a video game for our Computer & Video Games business.
Seasonal Fluctuations
Many of our products are in the greatest demand from November to January. These months correspond to the periods of children’s school holidays, and it is customary in Japan to buy such products as Christmas and New Year presents in December and January. In addition, demand in the U.S is highest from November, starting
with Thanksgiving and through the Christmas season. 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 various sports events or the release of “hit” titles.
Investments and Acquisitions
We have sought growth and diversification through investments and acquisitions in sectors that are expected to result in increased revenue stability and growth. These investments and acquisitions affected the composition of our assets and liabilities and our results of operations, sometimes materially. Among other things, we recognized an increase in the amount of goodwill and intangibles with indefinite life on our consolidated balance sheet in connection with such acquisitions, which we test for impairment at least on an annual basis—see “Critical Accounting Policies—Valuation of Intangible Assets and Goodwill”.
In particular, we have conducted the following transactions:
Sale of 23.0% of the common stock of TAKARA Co., LTD.(“Takara”), which KonamiKONAMI CORPORATION had acquired in fiscal 2001 and 2002, in April 2005, for which we realized a gain on sale of ¥6,917 million in the first quarter of fiscal 2006.
Consolidation of HUDSON SOFT CO., LTD. (“Hudson”), which was previously an affiliate accounted for by the equity method after our acquisition of 45.5% of its common stock in fiscal 2002, in April 2005, due to a capital investment of ¥1,434 million whereby KonamiKONAMI CORPORATION increased their interest to 54.0%.
Acquisition of 77.8% of the common stock of Konami Träumer, Inc. for a total cash consideration of ¥525 million by KonamiKONAMI CORPORATION in fiscal 2004 and thereafter its merger with KonamiKONAMI CORPORATION in June 2005.
Acquisition of 34.8% of minority interest of Konami Computer Entertainment Studios, Inc., 36.9% of the minority interest of Konami Computer Entertainment Tokyo, Inc. and 37.6% of minority interest of Konami Computer Entertainment Japan, Inc. and the merger of these companies with KonamiKONAMI CORPORATION in April 2005. We recognized goodwill of ¥13,348 million from the acquisition of the minority interests in these companies as a result of these transactions in fiscal 2006.
Merger between Konami Sports Corporation and Konami Sports Life Corporation in February 2006, and acquisition of the remaining minority interest by share exchange in March 2006. We recognized goodwill of ¥6,596 million from the acquisition of minority interests in Konami Sports Corporation as a result of the transaction.
Acquisition of 20.0% of the common stock of Resort Solution Co., Ltd. for a total cash consideration of ¥5,993 million by KonamiKONAMI CORPORATION in March, 2006, through which it became an affiliate accounted for by the equity method.
Acquisition of all the shares of COMBI WELLNESS Corporation for a total cash consideration of ¥600 million by KonamiKONAMI CORPORATION in May 2006, through which it became our wholly-owned subsidiary.
Acquisition of all the shares of Megacyber Corporation for a total cash consideration of ¥10 million by KonamiKONAMI CORPORATION on October 2, 2006, through which it became our wholly-owned subsidiarysubsidiary.
Execution of an acquisition agreement with Blue Label Interactive, Inc. on June 22, 2006, pursuant to which Konami Digital Entertainment, Inc., our US affiliated company, paid total cash consideration of ¥1,099 million.
Acquisition of 91.9% of the common stock of Sportsplex Japan Co., Ltd. for a total cash consideration of ¥509 million by KONAMI CORPORATION on March 6, 2008, through which it became our subsidiary. On July 1, 2008, it became our wholly-owned subsidiary.
Foreign Currency Fluctuations
An increasing portion of our business is conducted in currencies other than yen—most significantly, U.S. dollars and Euro, 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 and yen-Euro 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’changes in equity andin accumulated other comprehensive income (loss) 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 and Euro are, to a significant extent, offset by U.S. dollar and Euro denominated costs. Transaction risk remains for products sold in foreign currency 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 payable 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 Item 11 herein and Note 17 to our consolidated financial statements included in this annual report.
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 our business segments are as follows:
Digital Entertainment Segment
Net Revenues. In our Digital Entertainment segment, in addition to the production and distribution of video game software for home and handheld game platforms and personal computers, and we are engaged in the production and sales of card games and boys’ toy products, the development, manufacturing and maintenance of video arcade games and token-operated games for amusement arcades, the production and distribution of software for mobile phones and online network, as well as the production and sale of books and music of our products, as well as the planning and production of original TV animation.products. In fiscal 2007,2010, net revenues from the Digital Entertainment segment were ¥164,860¥142,650 million, accounting for 58.8%54.4% of consolidated net revenues before elimination of intersegment revenue.
Our video game software is sold mainly in the format of DVD-ROMs or proprietary discs for home video game platforms such as Sony PlayStation 2, PLAYSTATIONPlayStation 3, Nintendo Wii and Microsoft Xbox 360 and ROM-cartridges and other media for handheld video game platforms such as Nintendo DS and PlayStation Portable.
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—Hit Products, Intellectual Property Licensing.”Licensing”. For instance, sales of video game software are significantly affected by sales volumes of video game systems. The potential market for a software product designed for a particular video game system is determined by the total number of such video game systems purchased by consumers, a number which is sometimes referred to as the “installed base” of such video game systems. 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 game market. To respond to these rapid shifts 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.
Our net revenue sales from card games and toys are principally affected by our identification and acquisition of rights to characters of popular comic books and TV programs, our ability to produce unique games, the number of children in the population, the timing of market entry, market competition, lifecycle of products and general economic trends. The toy industry in Japan is now faced with such issues as a decline of birthrates, young children’s shift away from toys due to their maturing at a younger age, and an increase in household expenses for children or other amusement purposes. However, the toy industry has not experienced a rapid decline in sales, but has continued a steady growth because of an increase in expense spent per child and a growing demand for toy products for adults along with an ageing society. In response, in order to maintain the balance of our business
portfolio and to make our lineup of products more attractive, we strive to diversify products targeted to the Japanese market, especially boys’ toy products.market. For instance, we enhanced our reputation through sales of various actiona series ofBUSOU SHINKIto which our original “MMS figures and others such as toys ofSAZER X, a popular SF action hero TV program.” are applied.
Net revenues from amusement arcade games are affected by market acceptance, the number and size of video arcades in Japan, introduction of hit titles and general economic trends. In addition, our e-Amusement service, which links amusement arcade throughout Japan online, is influenced by market acceptance of network-based interactive games, network stability, which is the backbone of our services, and general economic trends. In addition to creating new games, we believe that we may be able to increase margins and in this business by extending the life cycle of our existing arcade games by continuing to provide stable services after purchases of our machines. We also continue to benefit from sales of token-operated machines in Japan, mainly due to strong sales of theGIseries, horse racing token-oriented gaming machines, and “GRANDCROSS”, which is a large-scale token-oriented gaming machine.Japan. We are proud of being one of the leading companies in the token-operated machine industry in Japan. Because the arcade game industry in Japan continues to be streamlined, the average scale of each amusement arcade is expanding along with a decrease in the number of amusement arcades. Accordingly, large-scale token-operated machines that attract a large number of customers have a tendency to gain popularity within large amusement arcades.
Our online services are affected by market acceptance of network-based interactive games, the number of mobile phone and Internet users, network system stability, which is the backbone of our services, and general economic trends. We make every effort to strengthen stability of our network-based services through such measures as server maintenance and improved stress tests.
We are engaged in publishing books and in the production and sales of music and video software. Such sales are influenced by market acceptance of each media, our ability to select, find and develop attractive contents and general economic trends. The sale of books and magazines in Japan has remained flat,declined, and the value of audio record shipments has continued to decline. On the other hand, the market for video software continues to expand. In particular, the widespread use of DVD players has driven strong growth in the sale and rental of DVD software. Thus, the markets for books, music and video are largely shaped by developments such as an increase in digitalization and in content distribution via the Internet and mobile phones. We are focused on maintaining stable sales of books on strategy for our game software, and are working on improvement of contents through identifying and developing new artists in the music business and planning and producing original animation.game software related music CDs.
Expenses. Costs and expenses that we incur in the development of new video game software are expensed as research and development costs 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, as the commercial life of our software for home video game platforms is of short duration.
The rapid technological advances in home game consoles have significantly changed the software development process. The process of developing software for the new 128-bit consoles is extremely complex and weWe expect the process to become even more complex and expensive with the advent of more powerful next-generation game consoles. Our cost of revenues from software also includes the costs of licenses from content licensors. While some of our content licenses include prepaid or guaranteed royalties, most of the royalties we pay are on a revenue 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 development 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.
Card games have historically shown a higher margin than other toy products due to their relatively low manufacturing costs. Costs include raw material costs, manufacturing outsourcing, licensing, research and development and administrative costs. Furthermore, because our card games and toys business is typically based on previously developed intellectual property, research and development costs are comparatively low.
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, because of lower cost of parts and raw materials. We are currently working on further improving margins in our Amusement business through the introduction of the less expensive “e-AMUSEMENT” gaming machine, which links amusement arcades online throughout Japan, and other measures to decrease production costs.
Our cost of services rendered for mobile phones and mobile terminals and personal computers game content consists of expenses incurred in the development of content, maintenance expenses for servers in our online services and service charge collection fees. We capitalize development and production costs in the same manner as for video game software for home video game platforms and then amortize such costs as cost of services rendered for a period of two to three years or based on the expected length of services.
Costs and expenses related to publishing books and producing music and broadcasting original animation on television are comprised mainly of costs to produce contents, costs paid for royalties on copyrights and royalties paid. Products in this business mainly use intellectual property rights that were developed in the past. As a result, the research and development costs of our multimediaother business are comparatively low.
Gaming & System Segment
Net Revenues. In fiscal 2010, net revenues from the Gaming & System segment, before elimination of intersegment revenues, were ¥19,996 million, accounting for 7.6% of consolidated net revenues. The main revenue source for the Gaming & System segment is the sales of video and mechanical slot machines, casino management systems, software contents and revenue share with the casino operators in North America and Australia. Our sales of gaming machines are conducted overseas, primarily in North America and in Australia. Revenues for the Gaming & System segment are affected by the timing of the introduction of products, timing of regulatory approvals in various markets, the ability to penetrate into foreign gaming markets, the number of gaming players, gaming regulations in relevant markets, our competitiveness in these markets, the average product life cycles, general economic trends and currency exchange rates.
Expenses. Expenses in our Gaming & System 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 the Gaming & System segment by acquiring parts and producing our machines in the markets in which they are sold, thereby reducing shipping costs and foreign exchange risks.
Health & Fitness Segment
Net Revenues. We are the largest fitness club operator in Japan according to theLeisure Paper issued“Fitness Club Industry Trends in Japan, 2009” published by the Japan Productivity Center for Socio-Economic Development.Club Business Japan. We also design, manufacture and sell fitness and health related products. As of March 31, 2007,2010, we operated 208211 fitness clubs that collectively served approximately 990,000 members and provided outsourced services at 116 clubs. In addition, in June 2008, Sportsplex Japan Co., Ltd. was merged into Konami Sports & Life Co., Ltd., and we aim to 104.enhance convenience for our members through the integration of our brands. Our Health & Fitness segment had ¥88,459¥85,765 million in net revenues or 31.6%32.7% of our total net revenue, before elimination of intersegment revenues, in fiscal 2007.2010.
While the majority of our Health & Fitness revenues come from membership fees, our fitness 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, work-out programs and personal trainers.
Expenses. Operating expenses for our Health & Fitness segment include, for our health and fitness 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 fitness club, we often experience an initial period of operating losses with respect to that club for the first year. However, this period can vary depending on the individual club, and may be substantially longer than a year. However, since most of our expenses are fixed, operating margins tend to improve significantly with respect to each club as membership increases. Expenses for our fitness-related gamesoftware and fitness equipment business are largely related to cost of parts and raw materials, manufacturing costs and research and development expenses.
In fiscal 2006,2009, in response to changes in the business environment, we recognizedrevised the forecast of our revenues and profitability of underperforming clubs as well as decided to pursue the elimination and consolidation of our competing clubs. Accordingly, we recorded ¥11,121 million as restructuring and impairment charges that primarily include impairment losses of ¥19,713long-lived assets.
In fiscal 2010, based on the policy of the previous year, we recorded ¥2,339 million as restructuring and impairment charges that include expenses related to closure of clubs centering our Health & Fitness segment, consisted of long-lived assets of ¥10,533 million and identifiable intangible assets of ¥9,180 million as a result of our annual impairment assessment. These impairment losses for long-lived assets were attributed to the deterioration of the operating performance of certain club locations after a review of fiscal 2006 and the additional establishment of facilities during such fiscal year.
Gaming & System Segment
Net Revenues. In fiscal 2007, net revenues from the Gaming & System segment, before elimination of intersegment revenues, were ¥16,744 million, accounting for 6.0% of consolidated net revenues. The maincompeting clubs.
revenue source for the Gaming & System segment is the sale of video slot machines and software contents in Australia and sales of video and mechanical slot machines, casino management systems and software contents in North America. Revenues for the Gaming & System segment are affected by the timing of the introduction of products, timing of regulatory approvals in various markets, the ability to penetrate into foreign gaming markets, the number of gaming players, gaming regulations in relevant markets, our competitiveness in these markets, the average product life cycles and general economic trends.
Our sales of 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 market will continue to grow in 2008.
Expenses. Expenses in our Gaming & System 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 the Gaming & System segment by acquiring parts and producing our machines in the markets in which they are sold, thereby reducing shipping costs and foreign exchange risks.
Results of Operations
The table below shows our consolidated statements of income for the periods indicated:
Millions of Yen | Thousands of U.S. Dollars | Millions of Yen | Thousands of U.S. Dollars | |||||||||||||||||||||||||||||
2005 | 2006 | 2007 | 2007 | 2008 | 2009 | 2010 | 2010 | |||||||||||||||||||||||||
NET REVENUES: | ||||||||||||||||||||||||||||||||
Product sales revenue | ¥ | 183,030 | ¥ | 186,875 | ¥ | 199,620 | $ | 1,690,979 | ¥ | 218,306 | ¥ | 227,821 | ¥ | 185,514 | $ | 1,993,917 | ||||||||||||||||
Service revenue | 77,661 | 75,262 | 80,659 | 683,261 | 79,096 | 81,950 | 76,630 | 823,624 | ||||||||||||||||||||||||
Total net revenues | 260,691 | 262,137 | 280,279 | 2,374,240 | 297,402 | 309,771 | 262,144 | 2,817,541 | ||||||||||||||||||||||||
COSTS AND EXPENSES: | ||||||||||||||||||||||||||||||||
Costs of products sold | 114,547 | 112,613 | 118,806 | 1,006,404 | 131,890 | 133,670 | 109,910 | 1,181,320 | ||||||||||||||||||||||||
Costs of services rendered | 65,816 | 72,131 | 74,700 | 632,783 | 73,298 | 78,966 | 75,824 | 814,961 | ||||||||||||||||||||||||
Impairment of long-lived assets | — | 10,533 | — | — | ||||||||||||||||||||||||||||
Impairment of identifiable intangible assets | — | 9,180 | — | — | ||||||||||||||||||||||||||||
Selling, general and administrative | 52,192 | 55,199 | 58,628 | 496,637 | 58,375 | 58,653 | 55,407 | 595,518 | ||||||||||||||||||||||||
Restructuring and impairment charges | — | 11,121 | 2,339 | 25,140 | ||||||||||||||||||||||||||||
Total costs and expenses | 232,555 | 259,656 | 252,134 | 2,135,824 | 263,563 | 282,410 | 243,480 | 2,616,939 | ||||||||||||||||||||||||
Operating income | 28,136 | 2,481 | 28,145 | 238,416 | 33,839 | 27,361 | 18,664 | 200,602 | ||||||||||||||||||||||||
OTHER INCOME (EXPENSES): | ||||||||||||||||||||||||||||||||
Interest income | 518 | 716 | 821 | 6,955 | 894 | 459 | 165 | 1,773 | ||||||||||||||||||||||||
Interest expense | (971 | ) | (1,137 | ) | (985 | ) | (8,344 | ) | (1,105 | ) | (1,468 | ) | (1,574 | ) | (16,917 | ) | ||||||||||||||||
Gain on sale of shares of affiliated companies | 563 | 6,917 | — | — | ||||||||||||||||||||||||||||
Foreign currency exchange gain (loss), net | (704 | ) | (1,641 | ) | 67 | 720 | ||||||||||||||||||||||||||
Other, net | (804 | ) | (539 | ) | (414 | ) | (3,507 | ) | (90 | ) | 8 | (200 | ) | (2,150 | ) | |||||||||||||||||
Other income (expenses), net | (694 | ) | 5,957 | (578 | ) | (4,896 | ) | |||||||||||||||||||||||||
Other expenses, net | (1,005 | ) | (2,642 | ) | (1,542 | ) | (16,574 | ) | ||||||||||||||||||||||||
INCOME BEFORE INCOME TAXES, MINORITY INTEREST AND EQUITY IN NET INCOME (LOSS) OF AFFILIATED COMPANIES | 27,442 | 8,438 | 27,567 | 233,520 | ||||||||||||||||||||||||||||
INCOME BEFORE INCOME TAXES AND EQUITY IN NET INCOME (LOSS) OF AFFILIATED COMPANY | 32,834 | 24,719 | 17,122 | 184,028 | ||||||||||||||||||||||||||||
INCOME TAXES: | ||||||||||||||||||||||||||||||||
Current | 15,517 | (4,785 | ) | 8,298 | 70,292 | 16,305 | 15,526 | 7,177 | 77,139 | |||||||||||||||||||||||
Deferred | (7,615 | ) | (5,485 | ) | 2,621 | 22,203 | (3,225 | ) | (4,811 | ) | (3,577 | ) | (38,446 | ) | ||||||||||||||||||
Total | 7,902 | (10,270 | ) | 10,919 | 92,495 | 13,080 | 10,715 | 3,600 | 38,693 | |||||||||||||||||||||||
INCOME BEFORE MINORITY INTEREST AND EQUITY IN NET INCOME (LOSS) OF AFFILIATED COMPANIES | 19,540 | 18,708 | 16,648 | 141,025 | ||||||||||||||||||||||||||||
EQUITY IN NET INCOME (LOSS) OF AFFILIATED COMPANY | 180 | (2,490 | ) | 56 | 602 | |||||||||||||||||||||||||||
NET INCOME | 19,934 | 11,514 | 13,578 | 145,937 | ||||||||||||||||||||||||||||
NET INCOME ATTRIBUTABLE TO THE NONCONTROLLING INTEREST | 1,589 | 640 | 264 | 2,837 | ||||||||||||||||||||||||||||
MINORITY INTEREST IN INCOME (LOSS) OF CONSOLIDATED SUBSIDIARIES | 2,761 | (4,267 | ) | 575 | 4,871 | |||||||||||||||||||||||||||
EQUITY IN NET INCOME (LOSS) OF AFFILIATED COMPANIES | (6,293 | ) | 33 | 138 | 1,169 | |||||||||||||||||||||||||||
NET INCOME ATTRIBUTABLE TO KONAMI CORPORATION | ¥ | 18,345 | ¥ | 10,874 | ¥ | 13,314 | $ | 143,100 | ||||||||||||||||||||||||
NET INCOME | ¥ | 10,486 | ¥ | 23,008 | ¥ | 16,211 | $ | 137,323 | ||||||||||||||||||||||||
Comparison of Fiscal 20072010 with Fiscal 20062009
Net Revenues
Net revenues decreased by ¥47,627 million, or 15.4%, to ¥262,144 million for fiscal 2010 from ¥309,771 million for fiscal 2009. This decrease mainly resulted from the decrease in net revenues from our Digital Entertainment segment from the previous fiscal year in which several major titles were released.
Net revenues of our Digital Entertainment segment from external customers decreased by ¥45,069 million, or 24.1% to ¥142,239 million, accounting for 54.3% of the total. We released a variety of titles including sports titles, which we excel at, suchWORLD SOCCER Winning Eleven 2010(calledPES 2010- Pro Evolution Soccer in Europe and North America), in addition to the anime titles andLOVEPLUS, a new communication game with love as its theme. In addition, the titles based on the contents popular in abroad showed favorable sales. In the Amusement business, in addition to our standard music titles,MAH-JONG FIGHT CLUB series showed
favorable sales. In token-operated games, novel, innovative performance and design which evoke Las Vegas have won us favorable reviews and forFORTUNE TRINITY, a large-scale, mass-token pusher game, both of which have newly begun operations. Furthermore, to increase service demand, we introduced an electronic money service, PASELI, which utilizes the “e-AMUSEMENT” service linking online amusement arcades throughout Japan, to a widely positive response. In the Card Games business, we continue to record consistently strong revenue. Due to the release of major titles such asMETAL GEAR SOLID 4 GUNS OF THE PATRIOTS in the previous consolidated fiscal year, a decline is seen in comparisons of revenue.
Net revenues of our Gaming & System segment from external customers increased by ¥1,660 million, or 9.1%, to ¥ 19,996 million in fiscal 2010. In the North American market, the industry-fixture 5 Reel StepperAdvantage 5 and the new chassis prototypePodium,which is equipped with the video slot machine seriesK2V, continue to receive positive reviews. Further, sales ofKonami Casino Management System, which allow for a stable source of income through service and maintenance provided, and sales attributable to “participation,” wherein operators partake in a profit-sharing system, have resulted in steady acquisition of market share. In addition, in Central and South America, we have also proceeded with setting up distributorships and expanding sales.
Net revenues of our Health & Fitness segment from external customers decreased by ¥4,222 million, or 4.7%, to ¥85,480 million, accounting for 32.6% of the total. Although depression of consumer spending due to uncertainty about the economy has continued, and in the midst of sports club industry conditions such as decline in fees and increase in facilities, it remains a difficult environment for acquisition of new health club members, our Company group has sought to increase the added value in both our facility-related services as well as our health–related products, and aimed to increase services which cater to regional and individual customer needs and increase our product lineup.
Net revenues of the Other segment from external customers remained steady to ¥14,429 million in fiscal 2010.
Cost of Revenues
Cost of revenues decreased by ¥26,902 million, or 12.7%, to ¥185,734 million for fiscal 2010, compared to ¥212,636 million for fiscal 2009. This decrease was primarily due to the revenues decline of the Digital Entertainment segment.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased by ¥3,246 million, or 5.5%, to ¥55,407 million for fiscal 2010 from ¥58,653 million for fiscal 2009. This decrease was primarily due to the decline in advertising expenses and markets expenses of the Digital Entertainment segment as compared to the previous fiscal year, in which major titles were released.
Restructuring and impairment Charges
During the previous fiscal year, ¥11,121 million of restructuring and impairment charges was recognized, which primarily consisted of impairment charges of long-lived assets and identifiable intangible assets, closure costs related to the consolidation of overlapping and duplicated facilities at underperforming sports club in our Health & Fitness segment due primarily to a decrease in the number of club members affected by the negative industry and economic trends. In the current fiscal year, ¥2,339 million of restructuring and impairment charges was recognized which primarily consisted of impairment and disposal expenses related to additional closure of facilities in our Health & Fitness segment.
Operating Income
As a result of the foregoing, our operating income decreased by ¥8,697 million, or 31.8% to ¥18,664 for fiscal 2010 from ¥27,361 million for fiscal 2009.
As a percentage of net revenues, operating income decreased by 1.7% to 7.1% in fiscal 2010 from 8.8% in fiscal 2009. This was primarily due to a decline in operating income in the Digital Entertainment segment, which decreased primarily due to an decrease in sales.
Other Expenses, net
Other expenses, net, decreased by ¥1,100 million to ¥1,542 million for fiscal 2010 from ¥2,642 million for fiscal 2009, due primarily to a decrease in foreign exchange loss. A weak Euro, which began in the late fiscal 2009, resulted in recognition of foreign exchange loss by ¥1,641 million in fiscal 2009. However, foreign exchange gain of ¥67 million was recorded in fiscal 2010 since there were no such strong fluctuations in the exchange rate.
Income Before Income Taxes and Equity in net income (loss) of affiliated company
As a result of the foregoing, our income before income taxes and equity in net income (loss) of affiliated company decreased by ¥7,597 million, or 30.7%, to ¥17,122 million for fiscal 2010 from ¥24,719 million for fiscal 2009.
Income Taxes
Income tax expenses decreased by ¥7,115 million to ¥3,600 million for fiscal 2010 from ¥10,715 million for fiscal 2009, due primarily to a decrease in taxable income. The effective income tax rate decreased from 43.3% in fiscal 2009 to 21.0% in fiscal 2010. The decrease in the effective tax rate was primarily due to the reversal of deferred tax asset valuation allowances of ¥3,742 million at our US subsidiaries in light of the strong financial performance in our Gaming and System’s segment in that country. Also in fiscal 2009 our effective tax rate increased by 7.4% for adjustments necessary to reflect changes in estimates in the amount of foreign tax credits. Such adjustments in fiscal 2010 were insignificant.
Equity in Net Income (Loss) of Affiliated Company
Equity in net income (loss) increased by ¥2,546 million to a income of ¥56 million for fiscal 2010 from loss of ¥2,490 million for fiscal 2009, due to the recording of a valuation loss for shares of Resort Solution Co., Ltd. because of recording of accumulated impairment loss in the previous fiscal year for shares of the company, though Equity in net income (loss) of Resort Solution Co., Ltd was at the same level as fiscal 2009.
Net Income Attributable to the Noncontrolling Interest
Net income attributable to the noncontrolling interest decreased by ¥376 million to income of ¥264 million for fiscal 2010 from income of ¥640 million for fiscal 2009, due primarily to a decrease in income at HUDSON SOFT COMPANY, LIMITED, which produces and sells packaged game software and mobile phone games, did not have a major “hit” title in fiscal 2010, while it had in fiscal 2009.
Net Income Attributable to KONAMI CORPORATION
As a result of the foregoing, net income attributable to company shareholders increased by ¥2,440 million, or 22.4%, to ¥13,314 million for fiscal 2010 from ¥10,874 million for fiscal 2009.
Comparison of Fiscal 2009 with Fiscal 2008
Net Revenues
Net revenues increased by ¥18,142¥12,369 million, or 6.9%4.2%, to ¥280,279¥309,771 million for fiscal 20072009 from ¥262,137¥297,402 million for fiscal 2006.2008. This increase mainly resulted from the increase ofin net salesrevenues from our Health & Fitness segment and Gaming & SystemDigital Entertainment segment.
Net revenues of our Health & FitnessDigital Entertainment segment from external customers increased by ¥7,209¥8,926 million, or 8.9%,5.0% to ¥88,326 million in fiscal 2007. This increase was due primarily to an increase in our members of 3.0% and to an increase in revenue per member of 2.1% compared to fiscal 2006 due to further improvements in the quality of our services and our offering of a wider range of value-added health-related services to our members. Net revenues of our Gaming & system segment from external customers increased by ¥6,123 million, or 57.6%, to ¥16,744 million in fiscal 2007. This increase was due primarily to a significant increase in revenues from sales of gaming machines and casino management systems at our U.S. subsidiary, Konami Gaming, Inc. Net revenues of the Digital Entertainment from external customers decreased by ¥30 million to ¥163,654¥187,308 million, accounting for 58.4%60.5% of the total. In our Computer & Video Games business, TheMETAL GEAR series steadily increased its sales as well as theWORLD SOCCER Winning Eleven (called “Pro Evolution Soccer” in Europe)Europe and North America) series continued to gain high popularity in Japan and abroad, resulting in increased sales compared with the previous fiscal year, and with aggregate sales of over 88.48 million units including allfor the series released.entire series. In the Amusement business,MAH-JONG FIGHT CLUB, a series of titles products incorporating the “e-AMUSEMENT” service, which links amusement arcades online throughout Japan, such asHORSERIDERS(a horseracing simulation card game) andMAH-JONG FIGHT CLUB 7, the latest title in theMAH-JONG FIGHT CLUB series, continuously received favorable reviews and recorded increased sales. However, due toreviews. In the Card Games business,Yu-Gi-Oh! Trading Card Game series continuously sold well. As a decrease in the net revenue of the Toy & Hobby business,result, net revenue of the Digital Entertainment segment as a whole decreased slightly.increased.
Net revenues of Other segmentsour Health & Fitness segment from external customers increased by ¥4,780¥3,506 million, or 70.6%4.1%, to ¥11,555¥89,702 million, accounting for 29.0% of the total. This increase was due primarily to the effect of opening of new clubs, development of new products in the health-oriented product business and an increase in the number of facilities of Sportsplex Japan Co., Ltd., which became our consolidated subsidiary in March 2008
Net revenues of our Gaming & System segment from external customers decreased by ¥135 million, or 0.7%, to ¥ 18,336 million in fiscal 20072009. While sales of casino gaming machines such asK2V series andAdvantage5 series increased steadily in the North American market, demand for casino gaming machines in the Australian market decreased due to the economic slowdown, restrictions placed in the key states on the number of machines installed, smoking restrictions in clubs and pubs and tax code revisions.
Net revenues of the Other segment from external customers increased by ¥72 million, or 0.5%, to ¥14,425 million in fiscal 2009 due primarily to strong sales of pachinko LCDs and thepachinko slot machines. This increase was primarily due to strong sales of products related products.to LCDs for pachinko machines.
Cost of Revenues
Cost of revenues increased by ¥8,762¥7,448 million, or 4.7%3.6%, to ¥193,506¥212,636 million for fiscal 2007. 2009, compared to ¥205,188 million for fiscal 2008.
This increase was primarily resultsdue to an increase in cost of revenues generated from manufactured goods, products and services, with the increase of net revenues from our Health & Fitness segment and Gaming & System segment, and to an increase in production expense, by starting upas a production function at U.S. subsidiary in our Digital Entertainment segment to develop products that respond to the characteristicsresult of the market in North America.
Impairmentopening of long-lived assets and goodwill
We recorded no impairment charges of long-lived assets or goodwill for fiscal 2007, which amounted to ¥10,533 million and ¥9,180 million, respectively, for fiscal 2006.new clubs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by ¥3,429¥278 million, or 6.2%0.5%, to ¥58,628¥58,653 million for fiscal 20072009 from ¥55,199¥58,375 million for fiscal 2006, due primarily to an increase in selling expenses, with2008, which was approximately the increase in net revenues, to an increase in expenses related to obtaining intellectual property of approximately ¥536 million, and to an increase in expenses attributable to moving offices in Tokyo of approximately ¥458 million.same level as 2008.
Operating IncomeRestructuring and impairment Charges
As a resultDuring fiscal 2009, we recorded ¥11,121 million of the foregoing, our operating income increased by ¥25,664 million, or 1,034.4% to ¥28,145 million for fiscal 2007. As a percentage of net revenues operating income has increased by 9.1% to 10.0% in fiscal 2007 from 0.9% in fiscal 2006. This increase primarily resulted from therestructuring and impairment charges, in our Health & Fitness segment which was recognized in fiscal 2006, while we did not have such charges in fiscal 2007. Excluding the impactincluded impairment of impairment, the Health & Fitness segment significantly increased its operating income by improving its profit structure of directly owned facilities due to“scrapping and building”, which is our effort to periodically close, relocate and reconstruct unprofitable club facilities, and to opening large facilities next to train and subway stations and other attractive locations. Also, our Gaming & System segment increased its operating income from significant progress in sales.
On the other hand, start-up production activities at a U.S. subsidiary in our Digital Entertainment segment resulted in an increase in operating loss by ¥1,249 million to ¥3,595 million for fiscal 2007 in North America, which offset an increase of operating income in the Health & Fitness segment and the Gaming & System segment.
Other Income (Expenses), net
Other income (expenses), net, decreased by ¥6,535 million to expenses of ¥578 million for fiscal 2007 from income of ¥5,957 million for fiscal 2006, due to a gain on sale of holding shares of Takara in fiscal 2006.
Income Before Income Taxes, Minority Interest and Equity in Net Income (Loss) of Affiliated Companies
As a result of the foregoing, our income before income taxes, minority interest and equity in net income (loss) of affiliated companies increased by ¥19,129 million, or 226.7%, to ¥27,567 million for fiscal 2007 from ¥8,438 million for fiscal 2006.
Income Taxes
Income taxes increased by ¥21,189 million to a tax expense of ¥10,919 million for fiscal 2007 from a tax benefit of ¥10,270 million for fiscal 2006, due primarily to a reversal of accrued income taxes in fiscal 2006 to reflect the benefit derived from the tax deduction recognized upon the completion of the reorganization into a holding company structure, in the amount of ¥17,051 million, investment tax credits in fiscal 2006 which was available until the end of fiscal 2006 and an increase in taxable income for fiscal 2007. Additional detailed information is described in Note 13 to the accompanying consolidated financial statements.
Minority Interest in Income (Loss) of Consolidated Subsidiaries
Minority interest in income (loss) of consolidated subsidiaries increased by ¥4,842 million to an income of ¥575 million for fiscal 2007 from loss of ¥4,267 million for fiscal 2006, due primarily to impairment losses on long-livedtangible fixed assets and identifiable intangible assets in the Health & Fitness segment for fiscal 2006 and the fact that Konami Sports & Life Co., Ltd. became a wholly-owned subsidiary as of March 1, 2006.
Equity in Net Income (Loss) of Affiliated Companies
Equity in net income (loss) of affiliated companies increased for the fiscal 2007, due primarily to the fact that, as of March 10, 2006, Resort Solution Co., Ltd. became an equity-method affiliate.
Net Income
As a result of the foregoing, our net income decreased by ¥6,797 million, or 29.5%, to ¥16,211 million for fiscal 2007 from ¥23,008 million for fiscal 2006.
Comparison of Fiscal 2006 with Fiscal 2005
Net Revenues
Net revenues increased ¥1,446 million, or 0.6%, to ¥262,137 million for fiscal 2006 from ¥260,691 million for fiscal 2005, due primarily to an increase in sales of the Digital Entertainment segment resulting from ¥827 million or 0.5% of increase in sales to ¥163,624 million or 62.4% of the total net revenues. In our Computer & Video Games business, theWORLD SOCCER Winning Eleven series recorded solid sales, with sales of more than 7 million units including all the series released during the period. In our Toy & Hobby business, we continued to achieve strong sales of card games with sales of theYu-Gi-Oh! Trading Card Game
series remaining at the same level, reflecting increased sales in Japan that offset decreased sales in the U.S. and Europe. In the Amusement business,MAH-JONG FIGHT CLUB, a series of titles incorporating the “e-AMUSEMENT” service andQUIZ MAGIC ACADEMY IIIreceived favorable reviews. Sales of the Health & Fitness increased ¥2,274 million, or 2.9%, to ¥81,117 million for fiscal 2006 from fiscal 2005, whereas, salesbusiness, impairment of the Gaming & System segment decreased ¥1,020 million, or 8.8%, to ¥10,621 million. We consolidated the results of operations of Hudson in the Digital Entertainment segmentother intangible assets and closing expenses mainly for the first time in fiscal 2006. Excluding the effect of Hudson, net revenues decreased ¥8,808 million (after elimination of intercompany revenues) or 3.4%, to ¥251,883 million for fiscal 2006, from ¥260,691 million for fiscal 2005. This was primarily due to fewer releases of major software titles in our Computer & Video Games business compared to fiscal 2005, as we have focused our efforts on develop new game consoles for release in the next transition period. For additional information regarding the increases and decreases in sales for each segment, see “—Segment Information.”
Cost of Revenues
Cost of revenues, which is the sum of costs of products sold and costs of services rendered, increased ¥4,381 million, or 2.4%, to ¥184,744 million for fiscal 2006 from ¥180,363 million for fiscal 2005. Excluding the effect of Hudson, cost of revenue decreased ¥1,368 million, or 0.8% to ¥178,995 million for fiscal 2006 from ¥180,363 million for fiscal 2005, due primarily to a decrease of sales. We were also able to reduce our cost of revenues, as a resultconsolidation of our “Selection and Concentration policy” whereby we are streamlining our titles to concentrate on those which provide the most versatility in terms of content and relatively high and consistent revenues, especially in our Digital Entertainment segment.
Impairment of long-lived assets and goodwill
We recorded pre-tax impairment charges of ¥10,533 million reducing goodwill balances related to our Health & Fitness operations for the year ended March 31, 2006. The impairment charged related to club locations with operating performance that deteriorated in the current year. In addition, we also recorded impairment charges reducing the intangible asset balances related to our Health & Fitness operations in the amount of ¥9,180 million. See”—Critical Accounting Policies—Valuation of Intangible Assets and Goodwill”.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased ¥3,007 million, or 5.8%, to ¥55,199 million for fiscal 2006 from ¥52,192 million for fiscal 2005, due primarily to an addition of Hudson as a consolidated subsidiary of the Company from fiscal 2006.competing facilities.
Operating Income
As a result of the foregoing, our operating income decreased ¥25,655by ¥6,478 million, or 91.2%19.1% to ¥2,481¥27,361 million for fiscal 20062009 from ¥28,136¥33,839 million for fiscal 2005. 2008.
As a percentage of net revenues, operating income decreased 9.9%by 2.6% to 0.9%8.8% in fiscal 20062009 from 10.8%11.4% in fiscal 2005.2008. This decrease was primarily due to a profit decline in the Health & Fitness segment, whereas our operating income in the Digital Entertainment segment increased primarily due to an increase in sales.
Other Income (Expenses),Expenses, net
Other income (expenses),expenses, net, increased ¥6,651by ¥1,637 million to income of ¥5,957¥2,642 million for fiscal 20062009 from expense of ¥694¥1,005 million for fiscal 2005,2008, due primarily to a gain on salean increase of all of our shares of Takara, previously an equity-method affiliateforeign exchange related losses triggered by appreciating yen in fiscal 2006, in the amount of ¥6,917 million.2009.
Income Before Income Taxes Minority Interest and Equity in Net Income (Loss)net income (loss) of Affiliated Companiesaffiliated company
As a result of the foregoing, our income before income taxes minority interest and equity in net income (loss) of affiliated companiescompany decreased ¥19,004by ¥8,115 million, or 69.3%24.7%, to ¥8,438¥24,719 million for fiscal 20062009 from ¥27,442¥32,834 million for fiscal 2005.
Income Taxes
Income taxestax expense decreased by ¥18,172¥2,365 million to a tax benefit of ¥10,270¥10,715 million for fiscal 20062009 from tax expense of ¥7,902¥13,080 million for fiscal 2005,2008, due primarily to a reversal of accrueddecrease in Income before income taxes for fiscal 2009. The effective tax rate of 43.3% in fiscal 2009 was 3.5 points higher than the effective rate in fiscal 2008 of 39.8%. The increase in the effective rate is due mainly to reflect the benefit derived from theincrease in adjustment of estimated income tax deduction recognized upon the completionaccruals by 7.4 points in spite of the reorganization intodecrease in change in valuation allowance by 4.6 points from fiscal 2008. The rate difference was mainly attributable to a holding company structure,change in the estimates of indirect foreign tax credit related to dividends received from foreign subsidiaries. We recognize the foreign tax credits available pursuant to the Japanese Corporation Tax Act when the Company receives dividends from its foreign subsidiaries, and the amount of ¥17,051 million,the tax credit is calculated based on the management estimates of foreign taxable income and to a decrease in income beforeforeign income taxes at each local subsidiary. The actual amount of ¥19,004 million. As a result,foreign taxes is determined by the effectivelocal tax rate decreased by 150.5%authorities in periods subsequent to (121.7%) in fiscal 2006 from 28.8% in fiscal 2005.
Minority Interest in Income (Loss) of Consolidated Subsidiaries
Minority interest in income (loss) of consolidated subsidiaries decreased ¥7,028 million to a loss of ¥4,267 million for fiscal 2006 from income of ¥2,761 million for fiscal 2005, due primarily to impairment losses on long lived assets and identifiable intangible assets in the Health & Fitness segment, and the effectinitial recognition of the additional acquisitionforeign tax credit. Once the local tax is determined by the local tax authorities, we update the calculation of equity interests inthe tax credit and merger on April 1, 2005 with Konami Computer Entertainment Studios, Inc., Konami Computer Entertainment Tokyo, Inc., and Konami Computer Entertainment Japan, Inc.adjust the credit amount.
Equity in Net Income (Loss) of Affiliated CompaniesCompany
Equity in net income (loss) of affiliated companies increased ¥6,326decreased by ¥2,670 million to a profit of ¥33 million for the fiscal 2006 from a loss of ¥6,293¥2,490 million for fiscal 2005,2009 from income of ¥180 million for fiscal 2008, due primarily to salesthe recording of our entirea valuation loss of shares of and termination of equity relationship with GenkiResort Solution Co., Ltd. (“Genki”), an equity-method affiliate forthough Equity in net income (loss) of Resort Solution Co., Ltd was at the same level as fiscal 2005 and Takara, previously an equity-method affiliate. Hudson, previously an equity-method affiliate, became a consolidated subsidiary in fiscal 2006. Takara and Hudson had incurred equity loss for fiscal 2005.2008.
Net Income Attributable to the Noncontrolling Interest
Net income attributable to the noncontrolling interest decreased by ¥949 million to income of ¥640 million for fiscal 2009 from income of ¥1,589 million for fiscal 2008, due primarily to a decrease in net income at HUDSON SOFT COMPANY, LIMITED. The decrease in net income at HUDSON was mainly due to the reversal of deferred tax asset valuation allowances in fiscal 2008, in spite of the favorable sales for fiscal 2009.
Net Income Attributable to KONAMI CORPORATION
As a result of the foregoing, our net income increased ¥12,522attributable to KONAMI CORPORATION decreased by ¥7,471 million, or 119.4%40.7%, to ¥23,008¥10,874 million for fiscal 20062009 from ¥10,486¥18,345 million for fiscal 2005.2008.
Segment Information
Based on the applicable criteria set forth in Statement of Financial Accounting Standards No. 131, “Disclosures About Segments of an Enterprise and Related Information”, or SFAS No. 131, weWe have three reportable operating segments for which separate financial information is available and reported in our consolidated financial statements. OurOperating segments are defined as components of an enterprise about which separate financial information is available that is regularly evaluated by the chief operating decision maker regularly evaluates this data in deciding how to allocate resources and in assessing performance. The operating segments are managed separately as each segment represents a strategic business unit that offers different products and serves different markets. As required by SFAS No. 131, weWe present our business segment information in the accompanying consolidated financial statements as it is presented in reports to our management, derived from our U.S. GAAP financial statements.
Effective the first quarter ended June 30, 2005, we reorganized our five business segments into three: Digital Entertainment, Health & Fitness and Gaming & System. In accordance with this change, results for the year ended March 31, 2005 have been reclassified to conform to the presentation for the years ended March 31, 2006 and 2007.
The following tables present net revenues, including both customers and intersegment revenues, operating expenses and operating income (loss) for fiscal 2005, 20062008, 2009 and 2007,2010, by segment, which are the primary measures used by our chief operating decision makers to measure our operating results and to measure segment profitability and performance. The year-to-year comparisons following the tables discuss comparisons of net revenues, before elimination of intersegment revenues, operating expenses and operating income (loss) for each year.
Year Ended March 31, 2005 | Digital Entertainment | Health & Fitness | Gaming & System | Other, and Eliminations | Consolidated | |||||||||||||||||||||||||||||
Year Ended March 31, 2008 | Digital Entertainment | Gaming & System | Health & Fitness | Other, Corporate and Eliminations | Consolidated | |||||||||||||||||||||||||||||
(Millions of Yen) | (Millions of Yen) | |||||||||||||||||||||||||||||||||
Net revenue: | ||||||||||||||||||||||||||||||||||
Customers | ¥ | 162,797 | ¥ | 78,843 | ¥ | 11,641 | ¥ | 7,410 | ¥ | 260,691 | ¥ | 178,382 | ¥ | 18,471 | ¥ | 86,196 | ¥ | 14,353 | ¥ | 297,402 | ||||||||||||||
Intersegment | 874 | 263 | 2 | (1,139 | ) | — | 577 | — | 348 | (905 | ) | — | ||||||||||||||||||||||
Total | 163,671 | 79,106 | 11,643 | 6,271 | 260,691 | 178,939 | 18,471 | 86,544 | 13,448 | 297,402 | ||||||||||||||||||||||||
Operating expenses | 131,018 | 77,059 | 10,201 | 14,277 | 232,555 | 143,579 | 15,677 | 81,251 | 23,056 | 263,563 | ||||||||||||||||||||||||
Operating income (loss) | ¥ | 32,653 | ¥ | 2,047 | ¥ | 1,442 | ¥ | (8,006 | ) | ¥ | 28,136 | ¥ | 35,360 | ¥ | 2,794 | ¥ | 5,293 | ¥ | (9,608 | ) | ¥ | 33,839 | ||||||||||||
Year Ended March 31, 2006 | Digital Entertainment | Health & Fitness | Gaming & System | Other, and Eliminations | Consolidated | |||||||||||||||||||||||||||||
Year Ended March 31, 2009 | Digital Entertainment | Gaming & System | Health & Fitness | Other, Corporate and Eliminations | Consolidated | |||||||||||||||||||||||||||||
(Millions of Yen) | (Millions of Yen) | |||||||||||||||||||||||||||||||||
Net revenue: | ||||||||||||||||||||||||||||||||||
Customers | ¥ | 163,624 | ¥ | 81,117 | ¥ | 10,621 | ¥ | 6,775 | ¥ | 262,137 | ¥ | 187,308 | ¥ | 18,336 | ¥ | 89,702 | ¥ | 14,425 | ¥ | 309,771 | ||||||||||||||
Intersegment | 1,652 | 92 | 2 | (1,746 | ) | — | 320 | — | 263 | (583 | ) | — | ||||||||||||||||||||||
Total | 165,276 | 81,209 | 10,623 | 5,029 | 262,137 | 187,628 | 18,336 | 89,965 | 13,842 | 309,771 | ||||||||||||||||||||||||
Operating expenses | 131,426 | 98,268 | 10,563 | 19,399 | 259,656 | 146,076 | 14,889 | 98,235 | 23,210 | 282,410 | ||||||||||||||||||||||||
Operating income (loss) | ¥ | 33,850 | ¥ | (17,059 | ) | ¥ | 60 | ¥ | (14,370 | ) | ¥ | 2,481 | ¥ | 41,552 | ¥ | 3,447 | ¥ | (8,270 | ) | ¥ | (9,368 | ) | ¥ | 27,361 | ||||||||||
Year Ended March 31, 2007 | Digital Entertainment | Health & Fitness | Gaming & System | Other, and Eliminations | Consolidated | |||||||||||||||||||||||||||||
Year Ended March 31, 2010 | Digital Entertainment | Gaming & System | Health & Fitness | Other, Corporate and Eliminations | Consolidated | |||||||||||||||||||||||||||||
(Millions of Yen) | (Millions of Yen) | |||||||||||||||||||||||||||||||||
Net revenue: | ||||||||||||||||||||||||||||||||||
Customers | ¥ | 163,654 | ¥ | 88,326 | ¥ | 16,744 | ¥ | 11,555 | ¥ | 280,279 | ¥ | 142,239 | ¥ | 19,996 | ¥ | 85,480 | ¥ | 14,429 | ¥ | 262,144 | ||||||||||||||
Intersegment | 1,206 | 133 | — | (1,339 | ) | — | 411 | — | 285 | (696 | ) | — | ||||||||||||||||||||||
Total | 164,860 | 88,459 | 16,744 | 10,216 | 280,279 | 142,650 | 19,996 | 85,765 | 13,733 | 262,144 | ||||||||||||||||||||||||
Operating expenses | 133,463 | 80,937 | 14,574 | 23,160 | 252,134 | 121,167 | 15,323 | 87,687 | 19,303 | 243,480 | ||||||||||||||||||||||||
Operating income (loss) | ¥ | 31,397 | ¥ | 7,522 | ¥ | 2,170 | ¥ | (12,944 | ) | ¥ | 28,145 | ¥ | 21,483 | ¥ | 4,673 | ¥ | (1,922 | ) | ¥ | (5,570 | ) | ¥ | 18,664 | |||||||||||
Year Ended March 31, 2007 | Digital Entertainment | Health & Fitness | Gaming & System | Other, Corporate and Eliminations | Consolidated | |||||||||||||||||||||||||||||
Year Ended March 31, 2010 | Digital Entertainment | Gaming & System | Health & Fitness | Other, Corporate and Eliminations | Consolidated | |||||||||||||||||||||||||||||
(Thousands of U.S. Dollars) | (Millions of U.S. Dollars) | |||||||||||||||||||||||||||||||||
Net revenue: | ||||||||||||||||||||||||||||||||||
Customers | $ | 1,386,311 | $ | 748,209 | $ | 141,838 | $ | 97,882 | $ | 2,374,240 | $ | 1,528,794 | $ | 214,918 | $ | 918,745 | $ | 155,084 | $ | 2,817,541 | ||||||||||||||
Intersegment | 10,215 | 1,127 | — | (11,342 | ) | — | 4,417 | — | 3,063 | (7,480 | ) | — | ||||||||||||||||||||||
Total | 1,396,526 | 749,336 | 141,838 | 86,540 | 2,374,240 | 1,533,211 | 214,918 | 921,808 | 147,604 | 2,817,541 | ||||||||||||||||||||||||
Operating expenses | 1,130,563 | 685,617 | 123,456 | 196,188 | 2,135,824 | 1,302,311 | 164,693 | 942,466 | 207,469 | 2,616,939 | ||||||||||||||||||||||||
Operating income (loss) | $ | 265,963 | $ | 63,719 | $ | 18,382 | $ | (109,648 | ) | $ | 238,416 | $ | 230,900 | $ | 50,225 | $ | (20,658 | ) | $ | (59,865 | ) | $ | 200,602 | |||||||||||
Comparison of Fiscal 20072010 with Fiscal 20062009
Digital Entertainment segment
Net revenues for customers of our Digital Entertainment segment before elimination of intersegment revenues, decreased by ¥416¥45,069 million, or 0.3%24.1%, to ¥164,860¥142,239 million in fiscal 20072010 from ¥165,276¥187,308 million in fiscal 2006 due primarily2009. Compared to the decreaseprevious year due to absence of major titles, both net revenues and operating income decreased.
In our home video game software series, we rolled out the latest titles with a focus on popular KONAMI series such as the soccer gameWinning Eleven (known in netthe US and Europe asPRO EVOLUTION SOCCER). New titles, such asLOVEPLUS, which is a new romantic communication game, and titles featuring popular overseas content enjoyed steady sales.
With respect to arcade games for our Amusement business, the MAH-JONG FIGHT CLUB GARYOTENSEI, the latest in series, and the large-scale mass medal gameFORTUNE TRINITY continued to be satisfactory.
In addition, revenues from all card games including theYu-Gi-Oh!series in Toy & Hobby business, which offset the strong sales of business-use game machines for amusement arcades and increased net revenues from online services.
In addition, we recorded strong sales of theWinning Eleven Trading Card Game series for PlayStation 2, Xbox 360, PlayStation Portable, Nintendo DS and PC, with total sales of over 8 million units worldwide. We also recorded solid sales of game music in North America, with more than 1.3 million units of theDance Dance Revolution series, includingDance Dance Revolution SuperNOVA(PlayStation 2). Therefore, sales of our titles taken as a whole increased to 22.50 million units in fiscal 2007 from 22.21 million in fiscal 2006. Revenues from all card games including theYu-Gi-Oh! Series significantly decreased from the fiscal 2006. However, with respect to games for amusement arcades recorded higher sales of theMAH-JONG FIGHT CLUB series andBASEBALL HEROESseries, as thee-AMUSEMENT products.steadily.
Operating expenses increaseddecreased by ¥2,037¥24,909 million, or 1.5%17.1%, to ¥133,463¥121,167 million in fiscal 20072010 from ¥131,426¥146,076 million in fiscal 20062009 due primarily to increase in production expense, by starting up a production functiondecrease in the North American marketsales cost and advertising and sales promotion expenses, due to develop products that respondabsence of major titles compared to the characteristics of that market, which resulted in an increase in operating loss by ¥1,249 million to ¥3,595 million for fiscal 2007 in our business in North America.previous year.
As a result, operating income decreased by ¥2,453¥20,069 million, or 7.2%48.3%, to ¥31,397¥21,483 million in fiscal 20072010 from ¥33,850¥41,552 million in fiscal 2006.
Health & Fitness segment
Net revenues of our Health & Fitness segment, before elimination of intersegment revenues, increased by ¥7,250 million, or 8.9%, to ¥88,459 million in fiscal 2007 from ¥81,209 million in fiscal 2006. This increase was due primarily to an increase in number of our members by 3.0% and an increase in revenue per member of 2.1% due to further improvements in the quality of our services and our offering of a wider range of value-added health-related services to our members. We revised our fee-based programs and made progress in installing a proprietary IT health management system in our fitness clubs. These efforts enabled us to provide our members with a more satisfactory level of service, which translated into an increase in the number of our members and an increase in revenue per member. Additionally, the increased number of sports facilities outsourced to us brought in 40.5% increase in such revenues. The revenues generated from sales of goods, such asKenshin Keikaku 2, the most recent software which jointly manages the data ofe-walkeylife2, the multifunctional pedometer,AROMA@FITNESS, our original supplement andBIOMETRICS WATER, also increased.
Operating expenses decreased by ¥17,331 million, or 17.6%, to ¥80,937 million in fiscal 2007 from ¥98,268 million in fiscal 2006. This decrease was due primarily to impairment charges of long -lived assets or goodwill for fiscal 2006, which amounted to ¥10,533 million and ¥9,180 million, respectively. However, excluding the effect of the impairment, operating expenses for fiscal 2007, resulted in an increase. This increase was due primarily through establishment of five new facilities and four renovations. Although, the rate of increase in operating expenses was kept lower than that for net revenues. With respect to such expenses as those for promotional campaigns, we believe we were also able to implement effective promotional activities while holding down such expenses. We were also able to hold down repair-related expenses by reconsidering priorities, while still giving the highest priority to safety.
As a result, we recognized operating income of ¥7,522 million in fiscal 2007, reflecting the fact that the increase of net revenues exceeded that for operating expenses, compared to the operating loss of ¥17,059 million in fiscal 2006.2009.
Gaming & System segment
Net revenues of our Gaming & systemSystem segment increased by ¥6,121¥1,660 million, or 57.6%9%, to ¥16,744¥19,996 million in fiscal 20072010 from ¥10,623¥18,336 million in fiscal 2006.2009, reaching record-high net revenues and operating income. This increase was due primarily to a significant increasean enrichment of our product lineup in revenues from sales of gaming machinesthe North America and Australian markets, with a varietyfocus, in the case of game contents developed duringvideo slot machines, on the year and casino management systems at our U.S. subsidiary, Konami Gaming, Inc. In North America, sales ofnew-generation cabinet (outer structure)Podium running the newK2V video slot platform series, were strong due to an increaseand on theAdvantage 5 series in demand. Demand was fueled both by the increasing numbercase of jurisdictions where gaming has been legalizedmechanical stepper machines. Those sales progressed steadily. Meanwhile, we also increased the sale of theKonami Casino Management System and by growth in existing markets. With respect to the Australian market, although salesprofits from overseas market decreased at our Australian subsidiary, Konami Australia Pty Ltd., partially due to changing regulations, domesticparticipation agreements (equipment sales in Australia increased slightly.which profits are shared).
Operating expenses increased by ¥4,011¥434 million, or 38.0%2.9%, to ¥14,574¥15,323 million in fiscal 20072010 from ¥10,563¥14,889 million in fiscal 2006.2009. This increase was primarily due to an increase in the costs of manufacturing, and tosales cost led by an increase in selling expense and development costs for gaming machines and of management systems. Compared to the rate of increase in the net revenue, that in selling, general and administration expenses was kept lower.sales volume.
As a result, operating income increased by ¥2,110¥1,226 million, or 3,516.7%35.6%, to ¥2,170¥4,673 million in fiscal 20072010 from ¥60¥3,447 million in fiscal 2006, which reflects2009.
Health & Fitness segment
Net revenues of our Health & Fitness segment, before elimination of intersegment revenues, decreased by ¥4,200 million, or 4.7%, to ¥85,765 million in fiscal 2010 from ¥89,965 million in fiscal 2009. In our Health & Fitness segment, in addition to opening of new directly operated facilities and expansion of facilities outsourced to us, we have promoted development of facilities and introduction of services in line with diversified customer needs and regional characters.
Operating expenses decreased by ¥ 10,548 million, or 10.7%, to ¥87,687 million in fiscal 2010 from ¥98,235 million in fiscal 2009. This decrease is primarily due to the significant increaserestructuring and impairment charges of
¥11,121 million including impairment losses of long-lived assets and identifiable intangible assets and costs related to the elimination and consolidation of facilities incurred in revenues that was far greater than the increasefiscal 2009, compared to ¥2,339 million in expenses.fiscal 2010.
As a result, we recognized an operating loss of ¥1,922 million in fiscal 2010 compared to operating loss of ¥8,270 million in fiscal 2009.
Comparison of Fiscal 20062009 with Fiscal 20052008
Digital Entertainment segment
Net revenues of our Digital Entertainment segment, before elimination of intersegment revenues, increased by ¥1,605¥8,689 million, or 1.0%4.9%, to ¥165,276¥187,628 million in fiscal 20062009 from ¥163,671¥178,939 million in fiscal 20052008 due primarily to strongthe increase in sales of business-use game machines for amusement arcades and increased net revenues from online services. Excluding the effect of Hudson, which was included in our Digital Entertainment segment for the first time in fiscal 2006, net revenues of our Digital Entertainment segment decreased by ¥8,649 million or 5.3%, to ¥155,022 million for fiscal 2006, from ¥163,671 million for fiscal 2005. This was primarily due to fewer releases of the major software titles in our Computer & Video Games business compared to fiscal 2005, as we have focused our efforts on developing new game consoles for releasedespite a sharp rise in the next transition period.value of the yen in the second half of fiscal 2009.
In our Computer & Video Games business,METAL GEAR SOLID 4 GUNS OF THE PATRIOTS, released simultaneously around the world in June 2008, was named Game of the Year by GameSpot, a major U.S. gaming website, in GameSpot’s Best of 2008 roundup of winning titles. The game exhibited its strength as a brand, winning a total of six “game of the year” titles at U.S. and European gaming websites. TheMETAL GEAR series steadily increased its sales, with total units sold of this series surpassing 4.75 million worldwide.
Moreover, a license agreement was concluded with the Union of European Football Associations (UEFA) for theWinning Eleven series. The inclusion of the much-awaited UEFA Champions League mode further enhanced the strength of this product, with 8.48 million units sold for theWinning Elevenseries overall. In addition, sales of standard baseball titles such asPawapurokun Pocket 11,JIKKYOU PAWAFURU PUROYAKYU2009 andJIKKYOU PAWAFURU PUROYAKYU NEXTincreased steadily.
With respect to arcade games for our Amusement business,e-AMUSEMENT products such asHORSERIDERS, a horseracing simulation card game, the MAH-JONG FIGHT CLUBseries and theQUIZ MAGIC ACADEMYseries showed favorable performance.
In addition, we recorded strong sales of theWinning Eleven series for PlayStation 2, Xbox, PlayStation Portable and PC, with total sales of over 7 million units worldwide. We also recorded solid sales of game music in North America, with more than 800 thousand units of theDance Dance Revolution series, includingDance Dance Revolution EXTREME2. However, sales of our titles taken as a whole decreased to 22.21 million units in fiscal 2006 from 24.4 million in fiscal 2005, and sale of titles from third parties also decreased to 1.85 million units in fiscal 2006 from 2.3 million in fiscal 2005. On the other hand, revenues from all card games including theYu-Gi-Oh! Series, with expanding sales in Japan offsetting decreased sales in the U.S. and Europe, remained almost the same level as the fiscal 2005 and amounted to approximately ¥33,000 million in fiscal 2006. With respect to games for amusement arcades, we recorded higher sales of theMAH-JONG FIGHT CLUB Trading Card Game series one of thee-AMUSEMENT products.increased steadily.
Operating expenses increased by ¥408¥2,497 million, or 0.3%1.7%, to ¥131,426¥146,076 million in fiscal 20062009 from ¥131,018¥143,579 million in fiscal 2005. This increase includes2008 due primarily to an increase in cost of revenues and an increase inthe selling, general and administrative costs resulting from consolidation of Hudson, which was previously an equity method
affiliate. Excluding the effect of Hudson, operating expenses decreased by ¥8,940 million, or 6.8% to ¥122,078 million in fiscal 2006 from ¥131,018 million in fiscal 2005 due primarily to our strategy, “Selection and Concentration policy” whereby we are streamlining our titles to concentrate on those which provide the most versatility in terms of content and relatively high and consistent revenues.for home video game software.
As a result, operating income increased by ¥1,197¥6,192 million, or 3.7%17.5%, to ¥33,850¥41,552 million in fiscal 20062009 from ¥32,653¥35,360 million in fiscal 2005.2008.
Gaming & System segment
Net revenues of our Gaming & System segment decreased by ¥135 million, or 0.7%, to ¥18,336 million in fiscal 2009 from ¥18,471 million in fiscal 2008. This slight decrease was due primarily to a rapid decrease in the value of the US dollar and the Australian dollar against the yen in the second half of fiscal year 2009. On a local currency basis, Gaming & System segment revenue increased. This increase was due to an increase in revenues from sales of gaming machines and casino management systems by our U.S. subsidiary, Konami Gaming, Inc. In North America, sales of theK2Vvideo slot platform series and our first five-reel mechanical slot machines,Advantage 5,were in great demand. The sales from overseas and domestic markets decreased at our Australian subsidiary, Konami Australia Pty Ltd.
Operating expenses decreased by ¥788 million, or 5.0%, to ¥14,889 million in fiscal 2009 from ¥15,677 million in fiscal 2008. This decrease was primarily due to a rapid decrease in the value of the dollars and a decrease in administrative expenses and development costs.
As a result, operating income increased by ¥653 million, or 23.4%, to ¥3,447 million in fiscal 2009 from ¥2,794 million in fiscal 2008.
Health & Fitness segment
Net revenues of our Health & Fitness segment, before elimination of intersegment revenues, increased by ¥2,103¥3,421 million or 2.7%, to ¥81,209¥89,965 million in fiscal 20062009 from ¥79,106¥86,544 million in fiscal 2005. This increase was2008 due primarily to an increase in revenue per membersales due to further improvements in the quality of our services and our offering of a wider range of value-added health-related services to our members, and to an increase in net revenues from operationthe number of sports facilities outsourced to us by others.of Sportsplex Japan Co., Ltd., the opening of new facilities and the development of new products.
Operating expenses increased by ¥21,209¥ 16,984 million or 27.5%, to ¥98,268¥98,235 million in fiscal 20062009 from ¥77,059¥81,251 million in fiscal 2005, due primarily to2008. This increase includes restructuring and impairment charges of ¥11,121 million including impairment losses onof long-lived assets and identifiable intangible assets and costs related to the elimination and consolidation of ¥19,513 million and an increase in expenses associated with improvements in the quality and safety of our services. For the fiscal year 2006, 6 facilities had been improved. Improvement expense is expected to be recognized every year, and for the fiscal year 2007, total of ¥509 million is estimated as improvement expense. As a result,facilities. Furthermore, operating loss of ¥17,059 million was recognized in fiscal 2006 compared to operating income of ¥2,047 million in fiscal 2005.
Gaming & System segment
Net revenues of our Gaming & System segment decreased by ¥1,020 million, or 8.8%, to ¥10,623 million in fiscal 2006 from ¥11,643 million in fiscal 2005. This decrease was due primarily to a decrease in revenues from sales of gaming machines and casino management systems at our U.S. subsidiary, Konami Gaming, Inc. Although sales of gaming machines by our Australian subsidiary, Konami Australia Pty Ltd, decreased slightly in Australia in fiscal 2006, we managed to maintain net revenues by expanding sales activities into other overseas markets.
Operating expenses increased by ¥362 million, or 3.5%, to ¥10,563 million in fiscal 2006 from ¥10,201 million in fiscal 2005. This increase was primarily due to an increase in the costnumber of reinforced development, and tofacilities of Sportsplex Japan Co., Ltd., an increase in costs related to opening of new facilities and an increase in costs related to management and operation of facilities caused by the costshigh price of development of software for gaming machines and of management systems. These costs were driven from recurring factor and are to be recognized continually.crude oil.
Operating income decreased by ¥1,382 million or, 95.8% to ¥60As a result, we recognized an operating loss of ¥8,270 million in fiscal 2006 from ¥1,4422009 compared to operating income of ¥5,293 million in fiscal 2005, reflecting the fact that revenues decreased and expenses increased.2008.
Critical Accounting Policies
The preparation of our consolidated financial statements in conformity with U.S. generally accepted accounting principles requires our management to make assumptions and estimates about expected future cash flows and other matters that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Note 1 of the notes to our consolidated financial statements includes a summary of the significant accounting policies used in the preparation of our consolidated financial statements. We consider some of our significant accounting policies to be critical to our reported results because they require our management to make complex judgments in making assumptions and estimates about the effects of matters that are inherently uncertain and therefore subject to change. Changes in such assumptions and estimates could have a material effect on the amounts reported in our financial statements. We believe that among our significant accounting policies, the following policies may involve a higher degree of judgment or complexity.
PurchaseAcquisition Accounting
We account for acquired businesses using the purchaseacquisition method of accounting which requires that the assets acquired and liabilities assumed be recorded at the date of acquisition at their respective fair values. The judgments made in determining the estimated fair value assigned to each class of assets acquired, as well as asset lives, can materially impact net income of the periods subsequent to the acquisition through depreciation and amortization, and in certain instances by impairment charges, if the asset becomes impaired in the future.
In determining the estimated fair value for intangible assets, we typically utilize the income approach, which employs discounting of the projected future net cash flow using an appropriate discount rate that reflects the risk factors associated with the cash flow streams. Some of the more significant estimates and assumptions inherent in the income approach or other methods include the projected future cash flows (including timing) and the discount rate reflecting the risks inherent in the future cash flows.
Determining the useful life of an intangible asset also requires judgment as different types of intangible assets will have different useful lives and certain assets may even be considered to have indefinite useful lives. Intangible assets determined to have an indefinite useful life have been reassessed at least annually based on the factors prescribed in SFAS No. 142 including, but not limited to, the expected use of the asset by us, legal or contractual provisions that may affect the useful life or renewal or extension of the asset’s contractual life without substantial cost, and the effects of demand, competition and other economic factors.
As a result of reassessment in 2006fiscal 2010 made after termination of certain franchise contracts, intangible assets related to franchise contracts which were previously determined to have an indefinite life have been determined to have a finite life of 14 years based on the current expectation as to future renewals of the existing contracts. Intangible assets related to existing technology, customer relationships, membership lists and franchise and other contracts have been amortized over their estimated useful lives of 27 to 15 years.
Valuation of Intangible Assets and Goodwill
Under SFAS No. 142, “Goodwill and Other Intangible Assets.” weWe are required to perform an annual impairment test of our indefinite-lived intangible assets and goodwill.goodwill of a reporting unit. We also assess the impairment of intangible assets and goodwill of a reporting unit whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Some of the factors we consider important which could trigger an impairment review include the following:
significant underperformance relative to historical or projected future operating results;
significant changes in the manner of our use of the acquired assets or the strategy for our overall business; and
significant negative industry or economic trends;trends.
When we determine that the carrying amount of intangible assets andor goodwill may not be recoverable based upon the existence of one or more of the above indicators of impairment, we evaluate the carrying amount of the assets based on their fair value. If the fair value is less than the carrying amount of the assets, we record an impairment loss based on the difference between the carrying amount and the fair value of the assets.
When we test goodwill for impairment, we perform it at a level of reporting unit, an operating segment or one level below an operating segment. The two-step impairment test is used to identify potential goodwill impairment and measure the amount of a goodwill impairment loss to be recognized. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed. The second step of the goodwill impairment test, used to measure the amount of impairment loss, compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.
We engage an independent appraiser to assist us in our determination of the fair values of our reporting units. In its determination of the fair values, the appraiser primarily utilizes a discounted cash flow analysis as well as other relevant valuation approaches including the stock price and market capitalization of the acquired entity and asset and liability structure of the reporting units. Significant assumptions used in this analysis include: (i) expected future revenue growth rates, profit margins and working capital levels of the reporting units; (ii) a discount rate; and (iii) a terminal value multiples. The revenue growth rates, profit margins and working capital levels of the reporting units are based on our expectation of future results. In evaluating the recoverability of
other intangible assets which are allocated to the reporting units, we primarily utilize a discounted cash flow analysis as well as other applicable valuation approaches, and if applicable, independent valuations.
InDuring the fourth quarter of the fiscal year ended March 31, 2006, we determined that the fair value of indefinite lived assets related to trademarks and franchise contracts recognized in the Health & Fitness reporting unit was lower than their carrying value as a result of our review based on the independent valuations. Accordingly, an aggregate non-cash impairment charge of ¥9,180 million was recorded in operating expenses for the year ended march 31, 2006. The impairment charge consisted of ¥3,478 million for trademarks and ¥5,702 million for franchise contracts. These impairment losses were attributed to the reporting unit’s failure to meet previous growth expectations and the cancellation of certain franchise contracts by our review during 2006.
On March 31, 2007,2008, we evaluated the recoverability of goodwill and intangible assets and concluded that there was no impairment in the carrying value of such assets for any of our reporting units.
However, in the fourth quarter of the fiscal year ended March 31, 2009, we determined that the fair value of indefinite lived intangible assets related to trademarks recognized in the Health & Fitness reporting unit was lower than their carrying value as a result of review based on the independent valuations. Consequently, an aggregate non-cash impairment charge of ¥1,857 million was recorded in restructuring and impairment charges for the year ended March 31, 2009. This impairment charge was attributed to determination that the reporting unit would fail to meet previous growth expectations of future results. As for the carrying value of goodwill, there was no impairment during the fiscal year ended March 31, 2009. Furthermore, in the fourth quarter of the fiscal year ended March 31, 2010, we determined that the fair value of indefinite lived intangible assets related to credit card contracts recognized in the Health & Fitness reporting unit was lower than their carrying value. Consequently, an aggregate non-cash impairment charge of ¥451 million was recorded in restructuring and impairment charges. This impairment charge was attributed to determination that the sufficient future cash flow in relation to the assets could not be estimated as a result of review of the business segment in part as we proceed with restructuring in the business segment.
Valuation of Long-Lived Assets
Our long-lived assets are reviewed for impairment, in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets, “whenever” whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Factors we consider important which could trigger an impairment review include: significant underperformance relative to expected historical or projected future operating results; significant changes in the manner of the use of the acquired assets or the strategy for overall business; significant negative industry or economic trends; significant decline in the stock price of the acquired entity for a sustained period; and market capitalization of the acquired entity relative to its net book value.trends. When it is determined that the carrying amount of assets to be held and used may not be recoverable based upon the existence of one or more of these indicators of impairment, recoverability is measured by a comparison of the carrying amount of an asset to future net cash flows (undiscounted and without interest charges) expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets.
The factors most significantly affecting the impairment calculation are our estimates of future cash flows. Our cash flow projections carry several years into the future and include assumptions on variables such as growth in revenues, and our cost of capital inflation, the economy and market competition. Any changes in these variables could have an effect upon our valuation.
In the years prior to 2006, we performed impairment reviews for our fitness club assets based on certain grouping of clubs in the same geographic area where club operations were characterized by interdependencies such as the sharing of costs and expenses. However, in fiscal 2006, in connection with changes in management of our Health & Fitness operation and in our operating structure of clubs, which eliminated these interdependencies among clubs, we reassessed our asset grouping for fitness clubs and changed our focus to an individual club operation level, which we consider to be the lowest level at which identifiable cash flows are largely independent of the cash flows of other assets. The carrying amount of the club assets is compared to the expected undiscounted future cash flows to be generated by those assets over the estimated remaining useful life of the club. Cash flows are projected for each club based on historical results and expectations. In cases where the expected future cash flows are less than the carrying amount of the assets, those clubs are considered impaired and the assets are written down to fair value.
Based on our review,During the fourth quarter of the fiscal year ended March 31, 2009, we identified changes in circumstances that indicated the carrying value of long-lived assets might not be recoverable and projected a decline in net cash flows for Health & Fitness segment, primarily reflecting a decrease in the number of club members affected by the negative industry and economic trends. As a result, we tested the recoverability of underperforming clubs and recorded a pre-tax impairment charge of ¥10,533¥7,881 million for our Health & Fitness operationlong-lived assets for the year ended March 31, 2006.2009. The impairment charges related to club locations with operating performance thatrecoverability test included reviewing the actual and projected a deterioration in expected cash flows in 2007 and beyond or which had anticipated additions during forecasted periods that were found to be additionally impaired.of these underperforming clubs. The impairment charges related primarily to the carrying values of buildings, leasehold improvements and other
tangible club facility assets that will continue to be operated by us.
We also considered operations of all clubs within each market served by multiple clubs and determined to cease operation of certain of these clubs that overlap in a particular marked, and recognized the closure related impairment charges which were included in the amount discussed above. In addition, in the fourth quarter of the fiscal year ended March 31, 2010, we recorded impairment charge of ¥480 million for long-lived assets for the clubs to be closed.Software Development Costs
We utilize our internal development teams to develop our software. We account for software development costs in accordance with SFAS No. 86, “Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed”. We capitalize software development costs once technological feasibility is established and such costs are determined to be recoverable from future revenues. We expense software development costs incurred prior to technological feasibility to research and development. We evaluate the technological feasibility of our software in development on a product-by-product basis, based on our historical experience, whether the software is closely related to previously marketed software or uses existing technology, and other factors. For products where proven game engine technology exists, technological feasibility may occur early in the development cycle. We believe that our accounting policies for software development are critical for our financial statements as our decisions as to technological feasibility affect the timing of our recognition of the costs associated with development of our software products.
Revenue Recognition
We derive revenue from primarily three sources: (i) product revenue, which includes packaged game software and other products, gamegaming machines and related equipmentcasino management systems, and components;LCDs for pachinko machines; (ii) membership fee revenue from health and fitness club members; and (iii) sales and subscription fee revenue from mobile game contents.
OurFor those sources that do not involve delivery of multiple software or other deliverables, KONAMI recognizes revenue recognitionbased on the basic criteria are as follows:outlined below:
Persuasive Evidence of an Arrangement.
For our product sales, it is ourKONAMI’s customary practice to have a written contract, which is signed by both the customer and us,KONAMI, or a purchase order or amendment to the written contract from those customers that have previously negotiated a standard purchase agreement.
For ourKONAMI’s health and fitness clubs, members are required to sign a standard monthly membership agreement upon admission, which is automatically renewed unless the member provides an advance notice of his or her intention to cancel prior to the tenth day of the month at the end of which the membership will terminate.
For mobile game contents, we enterKONAMI enters into distribution agreements with mobile phone carriers for the sale or subscription of mobile game contents by the carriers to their subscribers. We recognizeKONAMI recognizes as revenues the net amount the mobile phone carrier pays to usKONAMI upon the sale of ourKONAMI’s game contents, net of any service or other fees earned and deducted by the carrier.
Delivery Has Occurred.
Our packagedPackaged game software and other products are physically delivered to our customers, with standard transfer terms. Also, ourKONAMI’s game machines and related equipment are physically delivered to our customers as a fully-assembled, ready to be installed unit. OurThese arrangements generally include an acceptance clauses. We recognizeclause. KONAMI recognizes revenue from our product sales upon delivery and acceptance, which is the timing the rights and risks are transferred to athe customer. Generally, we doKONAMI does not permit exchanges ornor accept returns of unsold merchandise except in the case of obvious defects. In certain limited circumstances weKONAMI may allow returns, or provide price protection, for which we estimateKONAMI estimates the related allowances based upon our management’s evaluation of our historical experience, the nature of the software titles and other factors. We maintainKONAMI maintains detail listings of software
titles in distribution channel, closely monitormonitors their movements, and areis able to reasonably estimate future credits to be issued for price protection. These estimates are deducted from gross sales.
Revenue from health and fitness club membership is derived primarily from monthly membership fees from club members. Revenue for those fees is recognized as monthly charges and are generally made to the members’ accounts in
advance, at the end of each month, with respect to the following month’s membership. This policy requires usKONAMI to defer the applicable membership fee revenue for one month.
RevenuesRevenue from mobile game contents areis derived from monthly subscription fees. Under the distribution agreements, the mobile phone carriers are responsible for billing, collection and remittance of those subscription fees to us. We haveKONAMI. KONAMI has a collection risk for our accounts receivable except for certain mobile phone carriers. The carriers generally report the final sales data to usKONAMI within 60 days following the end of each month. When final sales data is not available in a timely manner for reporting purposes, weKONAMI estimates ourits revenues based on sales data available from the server in which game contents are housed, which is then adjusted to actual revenues in the following reporting period once the actual amounts are determineddetermined.
The Price is Fixed or Determinable.
The price our customers pay for ourKONAMI’s products is negotiated at the outset of an arrangement, and is generally determined by the specific volume of product to be delivered. Therefore, the prices are considered to be fixed or determinable at the start of the arrangement. OurKONAMI’s membership fee for health and fitness clubs is fixed at the time of admission of the member. Also, monthly subscription fees for mobile game contents are based on a fixed rate per end customer subscriber.
Collection is Probable.
Probability of collection is assessed on a customer-by-customer basis. WeKONAMI typically sellsells to customers with whom we haveKONAMI has a history of successful collection. New customers are subjectedsubject to a credit review process that evaluates the customers’ financial position and ultimately their ability to pay. For ourKONAMI’s health and fitness clubs, the collectibilitycollectability of membership fees is always assured as we chargeit generally charges members’ accounts one-month in advance. In addition, for ourits mobile game contents, we haveKONAMI has a collection risk for ourits accounts receivable except for certain mobile phone carriers.
Determining whether these criteria have been satisfied involves assumptions and judgments that can have a significant impact on the timing and amount of revenue KONAMI recognizes in each period.
For those sources that involve multiple software deliverables, KONAMI evaluates revenue recognition based on the following items:
(1) | if and when each element has been delivered, |
(2) | whether undelivered elements are essential to the functionality of the delivered elements, |
(3) | whether vender-specific objective evidence of fair value (VSOE) exists for undelivered elements, and |
(4) | allocation of the total price among the various elements. |
We recognize revenues from package software with online functionality for certain platforms in Digital Entertainment Segment which is hosted on its internal servers as multiple software deliverables. If VSOE of fair value for the online services cannot be established for most of titles, revenue from the package products is not allocated among the console game products and online service for those titles, and the entire revenue from the sale of the package products is recognized on a straight-line basis over the estimated online service period. The service period is estimated to be six months. For those certain titles which we have established the fair value by VSOE, we recognize a part of revenue for the titles based on VSOE as carrying-over. We recognize this revenue at a fixed amount during the six-month estimate online service period.
Further, we describe revenue and cost for package game products and online services and online services that VSOE of the fair value can and/or cannot be established as “products sales revenue” and “costs of products sold” collectively.
We recognize revenues from casino management systems in our Gaming & System segment containing multiple factors as software products, as the software is essential to the functionality of the hardware. Revenue from sales of casino management systems is recognized only when installation of hardware and software is completed and accepted by the customers. Maintenance service revenue is recognized ratably over the maintenance period based on VSOE of fair value established by renewal rates.
For those sources that involve multiple deliverables except for software deliverables, KONAMI applies the recognition criteria. Specifically, deliverables are divided into separate units of accounting if:
(1) | Each item has value to the customer on a stand-alone basis, |
(2) | we have objective and reliable evidence of the fair value of the undelivered items, and |
(3) | delivery of any undelivered item is considered probable and substantially in our control. |
Changes to assumptions or judgments related to the above could have a significant impact on the timing and amount of revenue that KONAMI recognizes in each period.
Income Taxes
The recoverability of deferred tax assets ultimately depends on the existence of sufficient taxable income of an appropriate character and we record a valuation allowance to reduce the deferred tax assets to an amount that is more likely than not to be recoverable. A change in our ability to continue to generate future taxable income could affect our ability to recover the deferred tax assets and requires re-assessment of the valuation allowance. Such changes, if significant, could have a material impact on our effective tax rate, results of operations and cash flows.
Establishing a valuation allowance requires us to make assessments about the timing of future events, including the probability of expected future taxable income and available tax planning strategies. At March 31, 2009 and 2010, the aggregate valuation allowances provided against deferred tax assets were ¥5,727 million and ¥1,279 million, respectively. The net change in total valuation allowance for the year ended March 31, 2008, 2009 and 2010 were a decrease of ¥3,300 million, ¥2,715 million and ¥4,448 million, respectively. The decrease of ¥3,300 million for the year ended March 31, 2008 primarily resulted from the reversal of the valuation allowance against deferred tax assets at our domestic subsidiary as it showed continuing strong performance in the Digital Entertainment segment. The decrease of ¥2,715 million for the year ended March 31, 2009 was attributable to the decrease of future deductible temporary differences and net operating loss carryforwards at our U.S. subsidiaries, which resulted in a decrease of gross deferred tax assets and related valuation allowances. The decrease of ¥4,448 million for the year ended March 31, 2010 primarily resulted from the reversal of the valuation allowance against deferred tax assets at our U.S. subsidiaries as they recorded strong financial results and made stable income in our Gaming and System segment.
Accounting Developments
In October 2009, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) of FASB Accounting Standard Codification (“ASC”), No. 2009-13 “Multiple-Deliverable Revenue Arrangements-a consensus of the FASB Emerging Issues Task Force”. ASU2009-13 provides amendments to the criteria for allocation of revenues in multiple-deliverable arrangements, and in the absence of vendor-specific objective evidence or a third-party evidence concerning a selling price of deliverable products and services, sets forth a provision to allocate revenues in relation to products and services by applying an estimated selling price. Furthermore, ASU2009-13 requires disclosure of details information concerning multiple-deliverable arrangements. ASU2009-13 is applied to arrangements executed or significantly modified in fiscal years commenced on or after June 2006,15, 2010. We are currently reviewing impacts the adoption of ASU2009-13 may have on our consolidated financial statements.
In October 2009, the FASB issued interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (FIN No.48). FIN No. 48 requires that the tax effects of a position be recognized if it is “more-likely-than-not” to be sustained based solely on its technical merits asASU2009-14 “Certain Revenue Arrangements That Include Software Elements-a consensus of the reporting date. The more-likely-than-not threshold represents a positive assertion by managementFASB Emerging Issues Task Force”. ASU2009-14 is to exclude tangible products containing software components that a companyfunction to deliver the product’s essential functionality from the criteria for software revenues. ASU2009-14 is entitledapplied to the economic benefits of a tax position. If a tax position is not considered more-likely-than-not to be sustained based solely on its technical merits, no benefits of the position are to be recognized. Moreover, the more-likely-than-not threshold must continue to be metarrangements executed or significantly modified in each reporting period to support continued recognition of a benefit. FIN No.48 is effective for fiscal years beginningcommenced on or after DecemberJune 15, 2006. Konami is2010. We are currently evaluating the potential impact of adopting FIN No.48 on its consolidated financial statements and has not yet determined the impact of adopting this statement.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and
expands disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. Konami does not expectreviewing impacts the adoption of SFAS No. 157 toASU2009-14 may have a material effect on itsour consolidated financial statements.
In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans”. SFAS No. 158 improves financial reporting by requiring an employer to recognize the funded status of a defined benefit postretirement plan as an asset or liability in its balance sheets. Konami adopted the recognition and disclosure provisions of SFAS No. 158 effective March 31, 2007. SFAS No. 158 also requires that the defined benefit plan assets and obligations be measured as of the date of the employer’s fiscal year-end balance sheet for fiscal years ending after December 15, 2008. Konami does not expect the adoption of the measurement provisions of SFAS No. 158 to have a material effect on its consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115”. SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The entity shall report unrealized gains and losses on items for which the fair value option has been elected. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Konami does not expect the adoption of SFAS No. 159 to have a material effect on its consolidated financial statements.
Capital Expenditures
Our capital expenditures amounted to ¥18,654¥13,731 million, ¥48,004¥6,812 million and ¥24,125¥7,962 million on an accrual basis during fiscal 2005, 20062008, 2009 and 2007,2010, respectively. During fiscal 2005, our capital expenditures consisted mainly of acquisition of computer software in the amount of ¥8,365 million. During fiscal 2006, our capital expenditures consisted mainly of acquisition of additional equity interest in relation to the mergers in Digital Entertainment segment and Health & Fitness segment in the amount of ¥21,253 million, opening new fitness clubs in the amount of ¥10,759 million and acquisition of intangible assets including mainly computer software in the amount of ¥4,365 million. In fiscal 2007,2008, our capital expenditure consisted mainly of funds for the openingimprovement of fitness club facilities in the amount of ¥13,035¥1,378 million, tools for products development in the amount of ¥1,752¥1,796 million, and acquisition of intangible assets, primarily for computer software,business office facilities in the amount of ¥3,131¥1,786 million, and learning center facilities in the amount of ¥4,034 million. We expect ourOur capital expenditures for fiscal 20082009 amounted to be approximately ¥12,000¥6,812 million on an accrual basis, which are planned for the related expenditureprimarily consisted of additions to Konami Sports Club’s facility equipment, tools for products development and computer software.software, and facility equipment relating to the Gaming and System segment. Our capital expenditures for fiscal 2010 amounted to ¥7,962 million on an accrual basis, which primarily consisted of additions to Konami Sports Club’s facility equipment, tools for products development relating to the Gaming and System segment.
The following table shows reconciliation between capital expenditure disclosed in the cash flow statements to the amounts discussed here on an accrual basis.basis for fiscal 2008, 2009 and 2010.
Fiscal year ended March 31, | Fiscal year ended March 31, | ||||||||||||||||||||||||
2005 | 2006 | 2007 | 2007 | 2008 | 2009 | 2010 | 2010 | ||||||||||||||||||
(millions of yen and thousands of dollars) | (millions of yen and thousands of dollars) | ||||||||||||||||||||||||
Capital expenditure in the consolidated statement of cash flows | ¥ | 15,818 | ¥ | 14,513 | ¥ | 9,308 | $ | 78,848 | ¥ | 11,995 | ¥ | 8,531 | ¥ | 6,318 | $ | 67,906 | |||||||||
Property acquired under capital leases | 1,844 | 9,079 | 12,007 | 101,711 | |||||||||||||||||||||
Additions to long-lived assets including goodwill and identifiable assets by acquisition | 386 | 23,683 | 1,750 | 14,824 | |||||||||||||||||||||
Effects of timing difference of payments and other | 606 | 729 | 1,060 | 8,979 | 1,736 | (1,719 | ) | 1,644 | 17,670 | ||||||||||||||||
Capital expenditure (accrual basis) | ¥ | 18,654 | ¥ | 48,004 | ¥ | 24,125 | $ | 204,362 | ¥ | 13,731 | ¥ | 6,812 | ¥ | 7,962 | $ | 85,576 | |||||||||
B. Liquidity and Capital Resources
Our principal needs for cash are: fees for manufacturing and royalty payments to video game hardware manufacturers who produce our game software; payments to content licensors; purchase of parts and raw
materials; selling, general and administrative expenses such as research and development expenses; payments for the acquisition of companies targeted under our acquisitions strategy; employees’ salaries, wages and other payroll costs; lease payments for fitness club facilities; debt service requirements; expenditures to renovate and maintain our properties; payments of dividends to our shareholders; and taxes.
Our principal needs for cash forduring fiscal 20082010 include cash used for ordinary operations of our business. In addition, we consider potential opportunities to expand our current business or enter new areas of business from time to time.
Generally, our sources of funds include available cash reserves, cash provided by our current and future operating activities, borrowings from banks and other financial institutions and issuance of debt securities. We believe that availableas of the end of fiscal 2010, cash reserves and deposit balance, expected cash from operations, execution of commitment line contracts with main banks and future borrowings or issuance of debt capital will provide sufficient financial resources to meet our currently anticipated capital and other expenditure requirements. In addition, taking into account the above circumstances, we believe that the amount we expect to generate from our operations through the end of fiscal 2011, will be sufficient to meet our operating requirements for the next twelve months through the end of fiscal 2011. There are no material contractual or legal restrictions on the ability of our subsidiaries to transfer funds to us in the form of dividends (assuming that they have sufficient distributable net assets or retained earnings as provided under the local law of the relevant jurisdiction), loans or advances. There are no material economic restrictions on payments of dividends, loans or advances to us by our subsidiaries other than general withholding or other taxes calculated at rates determined by the local tax law of
the relevant jurisdiction (ordinarily 20% in the case of dividend payments by our Japanese subsidiaries and 10% (or, in certain circumstances, 15%) in the case of dividend payments and 10% in the case of interest payments by our U.S. subsidiaries).
Cash Flows
The following table sets forth certain information about our cash flows during fiscal 2005, 20062008, 2009 and 2007:2010:
Fiscal year ended March 31, | Fiscal year ended March 31, | |||||||||||||||||||||||||||||||
2005 | 2006 | 2007 | 2007 | 2008 | 2009 | 2010 | 2010 | |||||||||||||||||||||||||
(millions of yen and thousands of dollars) | (millions of yen and thousands of dollars) | |||||||||||||||||||||||||||||||
Net cash provided by operating activities | ¥ | 27,760 | ¥ | 23,879 | ¥ | 31,824 | $ | 269,581 | ¥ | 30,788 | ¥ | 30,131 | ¥ | 14,297 | $ | 153,665 | ||||||||||||||||
Net cash used in investing activities | (17,936 | ) | (7,266 | ) | (11,098 | ) | (94,011 | ) | (15,359 | ) | (5,715 | ) | (6,449 | ) | (69,315 | ) | ||||||||||||||||
Net cash used in financing activities | (8,077 | ) | (38,330 | ) | (33,212 | ) | (281,338 | ) | (19,818 | ) | (21,004 | ) | (10,744 | ) | (115,477 | ) | ||||||||||||||||
1,747 | (21,717 | ) | (12,486 | ) | (105,768 | ) | ||||||||||||||||||||||||||
Effect of exchange rate changes on cash and cash equivalents | 951 | 828 | 1,125 | 9,530 | (814 | ) | (1,974 | ) | 68 | 734 | ||||||||||||||||||||||
Net increase (decrease) in cash and cash equivalents | 2,698 | (20,889 | ) | (11,361 | ) | (96,238 | ) | (5,203 | ) | 1,438 | (2,828 | ) | (30,393 | ) | ||||||||||||||||||
Cash and cash equivalents at beginning of year | 86,885 | 89,583 | 68,694 | 581,905 | 57,333 | 52,130 | 53,568 | 575,750 | ||||||||||||||||||||||||
Cash and cash equivalents at end of year | ¥ | 89,583 | ¥ | 68,694 | ¥ | 57,333 | $ | 485,667 | ¥ | 52,130 | ¥ | 53,568 | ¥ | 50,740 | $ | 545,357 | ||||||||||||||||
Comparison of Fiscal 20072010 with Fiscal 2006
Net cash provided by operating activities increased by ¥7,945 million, or 33.3%, to ¥31,824 million in fiscal 2007 from ¥23,879 million in fiscal 2006. This increase was due primary to an increase in net revenues and operating income, even though excluding the effects of the non cash items such as impairment of long-lived tangible and intangible assets in fiscal 2006 and reversal of tax accrual in fiscal 2006. Particularly, the increased net cash attributable to an increase in revenues from membership fees and program fees in Health & Fitness segment, and to an increase in sales of gaming machines or in regular income from maintenance and servicing of management system in Gaming & System segment,
Net cash used in investing activities increased by ¥3,832 million, or 52.7% to ¥11,098 million in fiscal 2007 from ¥7,266 million in fiscal 2006. This increase was primarily because in fiscal 2007 there were no proceeds from the sale of shares of affiliates or payments made for acquisition of shares in subsidiaries in 2007 compared to the related cash activity in fiscal 2006, and cash proceeds from the sale of tangible fixed assets decreased compared with the fiscal 2006.
Net cash used in financing activities decreased by ¥5,118 million yen, or 13.4% to ¥33,212 million for the fiscal 2007 from ¥38,330 million in the fiscal 2006. This decrease was primarily due to the net effect of the increase in cash paid upon redemption of bonds and decline in net repayments on short-term borrowings.
Comparison of Fiscal 2006 with Fiscal 20052009
Net cash provided by operating activities decreased by ¥3,881¥15,834 million, or 14.0%52.6%, to ¥ 23,879¥14,297 million in fiscal 20062010 from ¥27,760¥30,131 million in fiscal 2005.2009. This primarily resulted from a decrease was due primary toin the collection amount of sales proceeds and an increase in the expenditureinventories following a decrease in sales compared to that for the year ended March 31, 2009, when our Digital Entertainment segment released hit titles for video game software and amusement arcades. Meanwhile, the amount of tax payment along with elimination of net operating loss carryforward that we could utilize to decrease the expenditure of tax paymentincome taxes paid in the year ended March 31, 2010 decreased from the year ended March 31, 2009 due to a decrease in taxable income.
Net cash used in investing activities increased by ¥734 million, or 12.8% to ¥6,449 million in fiscal 2005.2010 from ¥5,715 million in fiscal 2009. This increase mainly resulted from the lack of proceeds from sale of property and equipment which existed for the year ended March 31, 2009, despite a decrease in capital expenditures for investments.
Net cash used in financing activities decreased by ¥10,260 million yen, or 48.8%, to ¥10,744 million for fiscal 2010 from ¥21,004 million in fiscal 2009. These financing activities primarily resulted from the lack of purchases of treasury stock and redemption of bonds which took place during the year ended March 31, 2009.
Comparison of Fiscal 2009 with Fiscal 2008
Net cash provided by operating activities decreased by ¥657 million, or 2.1%, to ¥30,131 million in fiscal 2009 from ¥30,788 million in fiscal 2008. Despite the decrease in inventories and deferred revenue, this decrease primarily resulted from a decrease in net income attributable to KONAMI CORPORATION and accrued income taxes.
Net cash used in investing activities decreased by ¥10,670¥9,644 million, or 59.5%62.8% to ¥7,266¥5,715 million in fiscal 20062009 from ¥17,936¥15,359 million in fiscal 2005.2008. This decrease was primarily due primary to investmenta decrease in a new affiliatecapital expenditures and sale of ¥5,993 million offset by the proceeds from sales of shares of affiliates of ¥11,016 million along with the termination of equity relationship with these companies.property and equipment.
Net cash used in financing activities increased by ¥30,253¥1,186 million yen, or 374.6%6.0%, to ¥38,330¥21,004 million for the fiscal 20062009 from ¥8,077¥19,818 million in the fiscal 2005.2008. This increase was primarily due to acquisition of treasury stock in spite of a decrease in the redemption of bonds of ¥15,000 million and payment of short-term borrowing of ¥12,551 million for some subsidiaries.bonds.
Long and Short-term Debt
Our debt includes both long-term and short-term debt. Our debt requirements have not been seasonal. Short-termThere is no short-term debt consisted entirely of unsecured bank loans totaling ¥958 million as of March 31, 2006 and no amount as of March 31, 2007.2010. As of March 31, 2007,2010, long-term debt consisted mainly of ¥25,000¥15,000 million of unsecured bonds described in the following paragraphs, of which ¥20,000 million is current.paragraphs. It also included ¥1,980includes ¥204 million of unsecured loans from banks, of which ¥592¥204 million is current. For information regarding the aggregate annual maturities of our long-term debt outstanding at March 31, 2007,2010, please see the Contractual Obligations table below under Item 5.F. We are able to borrow from financial institutions at local market-based interest rates, which in our case is market-based rates in Japan. The interest rates of our loan debtsloans ranged from 0.87% to 1.39%1.73% during fiscal 2007. We have earmarked a part of our substantial cash on hand, which was ¥57,333 million as of March 31, 2007, for the repayment of ¥15,000 million of unsecured bonds due in September 2007 and of ¥5,000 million of unsecured bonds due in December 2007.2010.
During fiscal 2002,2008, we issued series 3, 46, 7 and 58 unsecured domestic bonds, due in fiscal 2006,2012, fiscal 20072013 and fiscal 2008,2014, respectively. Each of the bonds was issued for ¥15,000¥5,000 million for an aggregate total principal amount of ¥45,000 million. During fiscal 2003, our consolidated subsidiary, Konami Sports Corporation (now Konami Sports & Life Co., Ltd.), issued unsecured domestic bonds series 1, 2 and 3 due fiscal 2007, fiscal 2008 and fiscal 2009, respectively. Each series of the bonds was issued for ¥5,000 million to total an aggregate principal amount of ¥15,000 million. The interest rates of these bonds issued by Konami and Konami Sports Corporation (now Konami Sports & Life Co., Ltd.)us range from 0.70%1.51% to 1.39%1.73%.
In connection with our purchases of certain products for distribution in North America and Europe, some of our suppliers require us to provide irrevocable letter of credit prior to accepting our purchase orders. As of March 31, 2007, we had2010, there was no outstanding lettersletter of credit of $9,000 and €7,000.credit.
Derivative Transactions
We enter into 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. For a more detailed discussion of these instruments, you should read Item 11 herein and Note 17 to our consolidated financial statements included in this annual report. We do not
hold or issue derivatives for speculation purposes. Because the counterparties to those contracts are limited to major international financial institutions, we do not anticipate any material losses arising from credit risk. Our Finance Group executes and controls those contracts. Each contract and its results are to be periodically reported to a general manager and an officer in charge of the group and the CFO.
We do not designate any derivative financial instruments as hedges and, as a result, they are recognized as either assets or liabilities at fair value and the corresponding gains and losses are recognized in earnings in the period of change.
C. Research and Development, Patents and Licenses, etc.
Our research and development activities consist primarily of developing video game software, toy & hobby products, amusement arcade games, card games, and gaming machines. Research and development expenses are charged to earnings as incurred. On a consolidated basis, we spent ¥1,813¥3,111 million, ¥2,446¥2,677 million and ¥2,285¥2,964 million on research and development for fiscal 2005, 20062008, 2009 and 2007,2010, respectively.
D. Trend Information.
While our results of operations for fiscal 20082011 remain subject to a number of uncertainties, we currently expect that our net revenues for fiscal 20082011 will increase slightly from the previous year. We also expect a slight increase in operating income in fiscal 20082011 due to stable revenues generated by regular titles in each segment. We base our expectations on the following assumptions:
Our fiscal 20082011 business plans are formulated on the basis of the following assumptions:
Digital Entertainment segment: In the Computer & Video Games business, we expect an increase in sales due to the continuously strong sports-related titles. We expect our sales volume and net revenues to remain almost at the same level as fiscal 2010 as a whole, despite the streamlining of the number of titles under our “Selection and Concentration Policy”. Thereby, we are streamlining our titles to concentrate on those which provide the most versatility in terms of content and relatively high and
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Health & Fitness segment: In the Health & Fitness segment, we expect an increase in the number of members, triggered by the surge of health-consciousness of the middle aged people. Further, led by the increase of fee-based programs such as measures against metabolic and diet programs, we expect improved average spending per member, a higher retention rate of existing members and the establishment of new fitness clubs. In addition, with the potential expansion of demands for operation of exercise facilities and provision of exercise instruction from local authorities and private sectors, we expect another increase in sales in fiscal 2008.
Gaming & System segment: We expect an increase in net revenues by our Gaming & System segment reflecting anticipated gains in sales of gaming machines and casino management systems in the North American market. Our operating margin is also
Health & Fitness segment: In the Health & Fitness segment, although severe conditions are expected to continue for a while, we expect an increase in the number of members and opportunities for development and sales of health related machines, triggered by the arrival of aging society and measures against the adult diseases. We recognize the increase of fee-based programs such as measures against metabolic and diet programs, expansion of services out of fitness clubs by digitizing exercise instruction, nutrition instruction and heath management which is our strength and the potential expansion of demands for operation of exercise facilities and provision of exercise instruction from local authorities and the private sector. In addition, in March 2011, we anticipate to complete recording expenses related to the closure of overlapped and underperforming facilities as part of restructuring processes for this segment determined in fiscal 2009. As a result, even the growth in sales may slowdown, we expect an improvement of the expansion of those machines and systems all over the world.our profitability in fiscal 2010.
The discussion above includes forward-looking statements based on management’s assumptions and beliefs as to the factors set forth above, as to market and industry conditions and as to our performance under those
conditions and are subject to the qualifications set forth in “Special Note Regarding Forward-looking Statements” in “Risk Factors” in Item 3.D. Our actual results could vary significantly from these projections and could be influenced by a number of factors including our ability to generate new popular products, our ability to expand overseas, consumer spending patterns and other factors and risks as discussed in the other part of “Risk Factors” in Item 3.D.
E. Off-Balance Sheet Arrangements.
Not applicable.
F. Tabular Disclosure of Contractual Obligations.
Contractual Obligations
The following table summarizes the contractual obligations and other commercial commitments that will affect our liquidity position for the next several years, as of March 31, 2007:2010:
Payments Due by Period | Payments Due by Period | |||||||||||||||||||||||||||||
Contractual Obligations | Total | Less than 1 year | 1-3 years | 4-5 years | After 5 years | Total | Less than 1 year | 1-3 years | 4-5 years | After 5 years | ||||||||||||||||||||
(millions of yen) | (millions of yen) | |||||||||||||||||||||||||||||
Long-Term Debt | ¥ | 26,980 | ¥ | 20,592 | ¥ | 6,184 | ¥ | 204 | — | |||||||||||||||||||||
Long-Term Debt, including contractual interest | ¥ | 15,822 | ¥ | 447 | ¥ | 10,332 | ¥ | 5,043 | ¥ | — | ||||||||||||||||||||
Capital Lease Obligations | 26,349 | 3,099 | 4,751 | 2,921 | ¥ | 15,578 | 37,356 | 3,512 | 5,455 | 4,769 | 23,620 | |||||||||||||||||||
Operating Leases | 99,153 | 7,709 | 15,551 | 15,509 | 60,384 | 97,199 | 8,956 | 17,825 | 17,559 | 52,859 | ||||||||||||||||||||
Purchase Obligations | 6,477 | 6,477 | — | — | — | 60 | 60 | — | — | — | ||||||||||||||||||||
Pension Contribution | 1,118 | 1,118 | — | — | — | 1,077 | 1,077 | — | — | — | ||||||||||||||||||||
Asset Retirement Obligation | 4,040 | 700 | — | — | 3,340 | 3,384 | — | — | — | 3,384 | ||||||||||||||||||||
Total | ¥ | 164,117 | ¥ | 39,695 | ¥ | 26,486 | ¥ | 18,634 | ¥ | 79,302 | ¥ | 154,280 | ¥ | 13,809 | ¥ | 33,280 | ¥ | 27,328 | ¥ | 79,863 | ||||||||||
Licenses. We have several on-going contractual commitments involving minimum future royaltiesroyalties’ payments. Under these agreements, we commit to provide specified payments to the intellectual property holders, such as professional sports organizations, based upon contractual arrangements. Assuming all contractual provisions are met, the total future minimum contract commitment for contracts in place as of March 31, 20072010 is ¥928¥1,190 million, substantially all of which has been prepaid and recorded as prepaid royalties and license fees.
Item 6. | Directors, Senior Management and Employees. |
A. Directors and Senior Management.
Directors, Corporate Auditors and Executive Officers
The following table sets forth our Directors including the executive officers and Corporate Auditors and certain other information:
Name | Position | Date of Birth | Current Term Expires | Director, Corporate Auditor or Corporate Officer Since | Number of CORPORATION shares owned as March 31, | Percentage of as of | ||||||||||
Directors: | ||||||||||||||||
Kagemasa Kozuki | Representative Director, Chairman of the Board and | November 12, 1940 | June | March 1974 | ( | ) | % | |||||||||
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Noriaki Yamaguchi | Representative Director, Vice President and | January 26, 1944 | June | June 1994 | ( | ) | * | |||||||||
Kimihiko Higashio | Representative Director, Vice President and | September 24, 1959 | June | June 2005 | ( | ) | * | |||||||||
| Director | May | June | June | ( | ) | * | |||||||||
Tomokazu Godai | Outside Director | October 6, 1939 | June | May 1992 | ( | ) | * | |||||||||
Hiroyuki Mizuno | Outside Director | April 20, 1929 | June | June 2001 | ( | ) | * | |||||||||
Akira Gemma | Outside Director | August 1, 1934 | June | June 2004 | (0 | ) | * | |||||||||
Corporate Auditors: | ||||||||||||||||
Noboru Onuma | Standing Corporate Auditor | January 1, 1948 | June | June 1999 | (0 | ) | * | |||||||||
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| Corporate Auditor | March 3, | June 2011 | June 2007 | (0 | ) | * | |||||||||
Masaru Mizuno | Corporate Auditor | September 4, 1932 | June 2011 | June 2007 | 448 (0 | ) | * | |||||||||
Shogo Sasabe | Corporate Auditor | July 3, 1929 | June 2011 | June 2007 | 1,460 (0 | ) | * | |||||||||
Corporate Officers: | ||||||||||||||||
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Fumiaki Tanaka | Vice President, Corporate Officer | March 10, 1961 | — | June 2000 | ( | ) | * | |||||||||
| Corporate Officer |
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Akira Tamai | Corporate Officer | October 14, 1963 | — | April 2005 | ( | ) | * | |||||||||
Mineaki Yoshiba | Corporate Officer | May 16, 1964 | — | May 2008 | 700 (0 | ) | * |
(1) | Includes shares beneficially owned through the Director Stock Purchase Association. Numbers in parenthesis indicate the numbers of shares issuable by the exercise of rights to purchase shares held by each person listed above—see Item 6.E. “Share Ownership”. |
Includes shares beneficially owned through Yoko Kozuki (11,600 shares), Kozuki Foundation Forfor Sports, Athletes and Higher Education (14,330,000(14,700,000 shares), Kozuki Holding B.V. (13,530,000 shares), Kozuki Capital Corporation (7,036,996 shares) and the Director Stock Purchase Association (32,371(51,334 shares) in addition to those owned of record by Kagemasa Kozuki (70,856 shares).
All of our Directors are Japanese nationals and, except for Tomokazu Godai, Hiroyuki Mizuno Tsutomu Takeda and Akira Gemma, are engaged in our business on a full-time basis. The business address of our Directors is 7-2, Akasaka 9-chome, Minato-ku, Tokyo 107-8323, Japan.
The list of corporate officers does not include those persons who also serve as director.directors.
Asterisks indicatesindicate ownership of less than one percent.
In addition, at the Ordinary General Meeting of Shareholders held on June 28, 2007, Tsutomu Takeda resigned as Director, Tetsuro Yamamoto, Minoru Nagaoka and Masataka Imaizumi resigned as Corporate Auditors, respectively, and Tachio Ohori, Masaru Mizuno and Shogo Sasabe became our Corporate Auditors.
Kagemasa Kozuki became our Representative Director and President in 1974 and Representative Director and Chairman in 1987. He has also served as CEOPresident since 1994. He established KonamiKONAMI CORPORATION in 1973.
Kagehiko KozukiNoriaki Yamaguchihas served asbecame our Vice Chairman since 1997. He has also served asManaging Director since 1984in 1994 and as Representative Director since 1998.in 2001. He joined Konami in 1983.
Noriaki Yamaguchi has served as our Representative Director, Vice President and CFOCorporate Officer since 2003.2009. He joined KonamiKONAMI CORPORATION in 1994.
Kimihiko Higashiobecame our Director in 2005 and Representative Director in 2008. He has served as our Representative Director, since 2005Vice President and also CHO since 2006. He was also Corporate Officer since 2000 and General Manager of the Human Resources Division from 2003 to 2005.2009. He joined KonamiKONAMI CORPORATION in 1997.
Tsutomu TakedaTakuya Kozuki has served as our director since 2009. He joined Konami Computer Entertainment America, Inc. as Director and Vice President in 1997. He also served as Director and Chairman of Konami Corporation of America since 2003.2002. He wasis a son of our Representative Director, Chairman and President, of Asatsu D.K. Co., Ltd. until 2000.Kagemasa Kozuki.
Tomokazu Godai has served as our Director since 1992. He has also served as Representative Director of Maya Tec Co., Ltd. since 1975, as Representative Director of Santetsu Giken Co., Ltd. since 1999, and as Representative Director of Hiroshima River Industrial Corporation since 1992.1975.
Hiroyuki Mizuno has served as our Director since 2001. He has also served as Director of Hiroshima Prefectural Institute of Industrial Science and Technology since 1998.
Akira Gemma has served as our Director since 2004. He has also served as Senior Corporate Adviser of Shiseido Co., Ltd. since 2003.
Noboru Onuma has served as our Standing Corporate Auditor since 1999.
Tetsuro Yamamoto has served as our Standing Corporate Auditor since 2000.
Minoru NagaokaTachio Ohori has served as our Corporate Auditor since 2000. He has also served as Director of the Capital Markets Research Institute since 1999.2007.
Masataka ImaizumiMasaru Mizuno has served as our Corporate Auditor since 2000.2007. He has also served as ChairmanSenior Advisor of the Police AssociationsJapan Tobacco Inc. since 2004.2005.
Kazumi KitaueShogo Sasabe was in charge of the Computer & Video Games Business until 2005 andhas served as Executiveour Corporate Officer from 2000 to 2006.Auditor since 2007. He currently serves as Corporate Officer. He alsohas served as Director from 1996 to 2001. He joined Konami in 1981.Special Advisor of BANDO CHEMICAL INDUSTRIES, LTD. since 2009.
Fumiaki Tanaka was in charge of the Amusement Business until 2005 and served as Executive Corporate Officer since 2000 till 2006. He currentlyhas serves as Vice President, Corporate Officer.Officer since 2009. He also served as Director from 1996 to 2001. He has served as Representative Director and President of Konami Digital Entertainment CorporationCo., Ltd. since 2006.2006 and also Representative Director and President and Corporate Officer of Konami Sports & Life Co., Ltd. since 2009. He joined Konami in 1981
Akihiko Nagata was in charge of the Toy & Hobby Business until 2005 and served as Executive Corporate Officer since 2000 till 2006. He currently serves as Corporate Officer. He also served as Director from 1996 to 2001. He joined KonamiKONAMI CORPORATION in 1981.
Shigeo NiwaSatoshi Sakamoto has served as our Corporate Officer of the Intellectual Property Division since 2003.2007. He joined Konami Australia Pty Ltd. as Managing Director in 2000.
Naoyuki Notsu1996 and has served as our Corporate OfficerChairman of the Administration DivisionKonami Gaming Inc. since 2004. He joined Konami in 2000.2002.
Akira Tamai has served as Corporate Officer of the Finance Division since 2005. He joined KONAMI CORPORATION in 1999 and also Director, Vice President and Corporate Officer of Konami Sports & Life Co., Ltd. since 2009.
Mineaki Yoshiba has served as Corporate Officer since 2008. He joined KONAMI CORPORATION in 1999.2000.
Our board of directors has the ultimate responsibility for the administration of our affairs. Our Articles of Incorporation provide for a maximumappointment of 12twelve Directors. Directors are elected at a general meeting of shareholders, and the term of office of Directors provided for under our Articles of Incorporation is one year, although they may serve any number of consecutive terms. Our board of directors elects from among its members one or more Representative Directors, who have the authority individually to represent us in all matters. From among its members, our board of directors also elects a Chief Executive Officer and other executive officers.
Our Articles of Incorporation provide for the appointment of not more than five Corporate Auditors. Corporate Auditors, of whom at least half of whom must be persons whonot have not been any of thea Director, executive officer (shikko-yakuin), manager or employee of our company or any of our subsidiaries precedingprior to the date on which such person assumes the office of Corporate Auditor,Auditor. Corporate Auditors are elected at a general meeting of shareholders from among those candidates nominated by our board of directors and, if any, by shareholders. The term of office of a Corporate Auditor provided for under the Corporate Law and our Articles of Incorporation is four years, although they may serve any number of consecutive terms. Corporate Auditors are under a statutory duty to oversee the administration of our affairs by our Directors, to examine our financial statements and business reports to be submitted by our board of directors to the general meetings of our shareholders and to report to the shareholders regarding any actions by our board of directorsDirectors that are seriously unreasonable or which are in violation of laws, ordinances or our Articles of Incorporation.Incorporation, etc. They are required to attend meetings of our board of directors and to express their opinions, but they are not entitled to vote. Under the Corporate Law of Japan, the Corporate Auditors collectively constitute the board of corporate auditors. The board of corporate auditors has a statutory duty to prepare and submit an audit report to our board of directors each year. A Corporate Auditor may note his or her opinion in the audit report if his opinion is different from the opinion expressed in the audit report. The board of corporate auditors is empowered to establish audit principles, the methods of examination by Corporate Auditors of our affairs and financial position and other matters concerning the performance of the Corporate Auditors’ duties.
In addition to Corporate Auditors, we must appoint independent public accountants who have statutory duties of examining the financial statements to be submitted by our board of directors to the general meetings of shareholders and reporting thereon to the board of corporate auditors and the Directors. Examination by independent public accountants of our financial statements is also required for the purposes of the securities reports which companies listed on Japanese stock exchanges must file with the Director of the relevant Local Finance Bureau and which are open to public inspection. KPMG AZSA & Co.LLC currently acts as our Independent Registered Public Accounting Firm.
B. Compensation.
The aggregate compensation, including bonuses and other benefits in kind, we paid(1) Amount of Compensation to ourOur Directors (who include the executive officers) and Corporate Auditors during fiscal 2007 was ¥722in Fiscal 2010
Category | Base Salary (Millions of Yen) | Number of Directors or Executive Officers | ||
Directors (Excluding Outside Directors) | 428 | 5 | ||
Outside Directors | 79 | 7 | ||
Total | 507 | 12 | ||
(1) | Outside directors include all corporate auditors. |
(2) | There is not any payment of compensation other than basic compensation to Directors or Corporate Auditors (such as bonuses, stock options and others). |
(3) | Directors’ retirement benefit program has been abolished. (The program for Directors was abolished at the time of the 28th Ordinary General Shareholders’ Meeting held on June 23, 2000, and for Corporate Auditors at the time of the 31st Ordinary General Shareholders’ Meeting held on June 19, 2003.) |
(2) Directors and Corporate Auditors whose Total Compensation Amount is over ¥100 million in Fiscal 2010
Name | Position | Consolidated base salary (Millions of Yen) | ||
Kagemasa Kozuki | Representative Director, Chairman of the Board and President | 296 |
(1) | The total amount of the above consolidated compensation is the sum of the compensation paid as Director of the filing company, our subsidiaries, Konami Digital Entertainment, Co., Ltd. and Konami Sports & Life Co., Ltd., of ¥259 million, ¥22 million and ¥15 million, respectively. In addition, there is not any payment of compensation other than basic compensation. |
(3) Policy concerning Determination of Compensation Amount for Directors and ¥58 million, respectively.
Compensation for Directors is determined pursuant to a resolution adopted at a meeting of board of directors to the upper range of directors compensation amount determined by a resolution adopted at a general meeting of shareholders. Individual compensation is determined, taking into account trend of business performance, considering status of representation rights, positions, roles and scale of duty, term period, fulltime/part-time, by evaluating degree of contribution concerning achievements and management.
Compensation for Corporate Auditors is determined based on consultation of Corporate Auditors to the upper range of corporate auditors compensation amount determined by a resolution adopted at a general meeting of shareholders.
Furthermore, there is not any payment of compensation other than basic compensation to Directors or Corporate Auditors (such as bonuses, stock options and others).
Additionally, the retirement benefit program has been abolished.
C. Board Practices.
The information required by this item in relation to the date of expiration of the current term of office for our Directors, Corporate Auditors and ExecutiveCorporate Officers is set forth in Items 6.A and 6.B of this annual report.
We have paid, and may pay again in the future, severance benefits to our Directors with the approval of our shareholders, pursuant to our internal rules concerning Directors’ retirement. For example, in June 2005 we provided severance benefits to one of our Directors upon the termination of the Director’s employment with us, pursuant to a resolution of our shareholders.
D. Employees.
We employed 5,1815,708 persons on a full-time basis and 6,8657,428 persons on a part-time basis as of March 31, 2007.2010. One of our subsidiaries, Konami Sports & Life Co., Ltd., has a labor union to which 816823 employees belonged as of March 31, 2007.2010. We have no other labor union and have experienced no labor disputes. We believe that our labor relations are good.
The following two tables show the number of our employees by segment and geographic location as of the dates indicated:
Breakdown of Employees by Segment
As of March 31, | ||||||
Segment | 2005 | 2006 | 2007 | |||
Digital Entertainment | 2,181 | 2,664 | 2,731 | |||
Health & Fitness | 1,437 | 1,549 | 1,501 | |||
Gaming & System | 329 | 320 | 331 | |||
Others | 101 | 196 | 276 | |||
General Administrative (1) | 499 | 398 | 342 | |||
Total | 4,547 | 5,127 | 5,181 | |||
As of March 31, | ||||||
Segment | 2008 | 2009 | 2010 | |||
Digital Entertainment | 3,074 | 3,193 | 3,297 | |||
Gaming & System | 355 | 374 | 396 | |||
Health & Fitness | 1,611 | 1,584 | 1,547 | |||
Others | 221 | 274 | 275 | |||
General Administrative (1) | 211 | 207 | 193 | |||
Total | 5,472 | 5,632 | 5,708 | |||
(1) | Employees in the General Administrative segment consist of those who cannot be classified into a specific segment. |
Breakdown of Employees by Geographic Location
As of March 31, | As of March 31, | |||||||||||
2005 | 2006 | 2007 | 2008 | 2009 | 2010 | |||||||
Japan | 3,865 | 4,417 | 4,469 | 4,731 | 4,830 | 4,863 | ||||||
North America | 323 | 344 | 349 | 359 | 413 | 429 | ||||||
Asia (other than Japan) | 146 | 156 | 155 | 157 | 166 | 179 | ||||||
Europe | 80 | 81 | 87 | 110 | 113 | 124 | ||||||
Australia | 133 | 129 | 121 | 115 | 110 | 113 | ||||||
Total | 4,547 | 5,127 | 5,181 | 5,472 | 5,632 | 5,708 | ||||||
The retirement age for our employees (excluding contract workers), other than Directors and Corporate Auditors, is 60. Employees are generally entitled to receive upon retirement or earlier termination of employment a lump sum payment and/or pension based upon their years of service, their basic pay at the time of termination of employment and certain other factors.
From August 1998, we began offering a fixed compensation system that eliminated separate retirement benefits to our management and this plan is currently offered to most of our employees.
Many of our employees receive compensation on the basis of fixed annual salaries. In addition, we have in place a performance-linked incentive system for employees. Salaries of the employees are decided by our committee responsible for rewards upon evaluations by the person in charge of the employees’ respective businessesproduction and divisions based on our results, the relevant division,production, the relevant section,division, as well as the individual’s own efforts and contribution. Also, employees and directors may receive additional compensation for the development of a patent that makes a significant contribution to our business. In addition, employees involved in production of our products receive rewards based on the contributions of their production teams to our financial results.
E. Share Ownership.
(1) Share Ownership by Directors and Corporate Auditors
Except as described in Item 7.A below, none of our directors or members of our administrative, supervisory or management bodies beneficially owns more than one percent of our shares of common stock.
(2) Stock option plan for directors and employees
Our shareholders authorized the issuance of 17,879 rights to purchase 1,787,900 shares of our common stock by resolution at our ordinary general meeting of shareholders held on June 20, 2002. We issued these rights to subscribe for or purchase shares of our common stock, which function in the manner of stock options, to our directors and employees as well as to the directors and employees of our subsidiaries. These rights were issued to increase director and employee motivation to improve our financial performance and to attract highly qualified personnel. These rights were exercisable from July 1, 2004 to June 30, 2007. The exercise price was ¥3,640.
On June 23, 2005, the shareholders approved the Company’s Boardboard of Directorsdirectors resolution on May 10, 2005 for approval of the eight plans of stock subscription rights to directors and employees of the Company and its subsidiaries. Those stock subscription rights plans are intended to enable the grant of stock options and the total maximum number of shares outstanding under the plans iswas 395,400 shares of common stock of the Company. The exercise periods rangeranged from August 1, 2005 through June 30, 2008, and exercise prices rangeranged from ¥1,670 to ¥2,857.
At our general meeting of shareholders held on June 23, 2005, the shareholders also approved the Company’s Boardboard of Directorsdirectors resolution on May 19, 2005 for approval of another plan of stock subscription rights to directors and employees of the Company and its subsidiaries. The stock subscription rights are intended to enable the grant of stock options, and the maximum number of shares issuable under the plan is 1,150,000 shares of common stock of the Company. The exercise period is from July 1, 2007 to June 30, 2009. The exercise price will be equal to 1.20 times the daily average closing price on the Tokyo Stock Exchange for the month prior to the grant date. However, these stock subscription rights were not issued although they were approved as mentioned above.
Following a resolution by the extraordinary general meeting of shareholders held on January 26, 2006, and a share exchange executed on March 1, 2006, we succeeded to obligations related to 12,200 stock subscription rights issued as series 1 by Konami Sports & Life Co., Ltd, which former Konami Sports Corporation approved in the Ordinary General Meeting of Shareholders held on June 23, 2004. We believe that these stock subscription rights are important for enhancing the motivation and morale of directors and employees of Konami Sports & Life Co., Ltd. subsequent to the share exchange, and to maximize the corporate value of the Konami Group. The exercise period iswas from July 1, 2006 to June 30, 2009, and the exercise price iswas ¥3,133.
(3) Employee Stock Purchase Plan
Our directors and employees (excluding part-time employees) are eligible to participate in stock purchase plans, pursuant to which a plan administrator makes open market purchases of our shares of common stock for
the accounts of participating directors and employees on a monthly basis. Such purchases are made out of amounts deducted from each director’s or employee’s salary. We provide a 5% subsidy on top of any funds contributed to the plan by employees, other than officers. In addition, we provide a further 5% subsidy on top of any funds contributed to the plan by employees who participated before March 31, 2001 and a further 10% subsidy on top of any funds contributed by employees who we recognize as making high contribution to the Company. As of March 31, 2007,2010 the Employee Stock Purchase Association held a total of 1,362,1601,765,742 shares of our common stock and the Director Stock Purchase Association held a total of 74,127104,127 shares of our common stock.
Item 7. | Major Shareholders and Related Party Transactions. |
A. Major Shareholders.
As of March 31, 2007, 137,254,8162010, 133,460,664 shares of our common stock were outstanding.
Any person who becomes, beneficially and solely or jointly, a holder of more than 5% of the total issued shares of a company listed on any Japanese stock exchange or whose shares are traded on the Japanese over-the-counter market, as calculated pursuant to the SecuritiesFinancial Instruments and Exchange Law of Japan, must file with the Regional Finance Bureau having jurisdiction within five business days a report concerning such shareholding. See Item 10.B “Memorandum and Articles of Association” below.
To our knowledge, as of March 31, 20072010 or a later date as indicated, the following persons beneficially owned more than 5% of our outstanding common stock. The information in this table is based upon our register of shareholders and reports filed with the Regional Financial Bureau:
Shareholders | Number of shares of common stock owned | Percentage of common stock outstanding as of | |||
Kagemasa Kozuki (1) | 35,011,823 | 25.51 | % | ||
Kozuki Foundation For Sports, Athletes and Higher Education (2) | 14,330,000 | 10.44 | |||
Kozuki Holding B.V. (2) | 13,530,000 | 9.86 | |||
Kozuki Capital Corporation (2) | 7,036,996 | 5.13 |
Shareholders | Number of shares of common stock owned | Percentage of common stock outstanding as of March 31, 2010 | |||
Kagemasa Kozuki (1) | 35,400,786 | 26.53 | % | ||
Kozuki Foundation For Sports and Education (2) | 14,700,000 | 11.01 | |||
Kozuki Holding (2) | 13,530,000 | 10.14 | |||
The Master Trust Bank of Japan | 10,724,800 | 8.04 | |||
Japan Trustee Services Bank, Ltd. | 8,207,400 | 6.15 | |||
Kozuki Capital Corporation (2) | 7,036,996 | 5.27 |
(1) | Kagemasa Kozuki’s share ownership includes shares beneficially owned through Yoko Kozuki (11,600 shares), Kozuki Foundation |
(2) | As explained in note (1) above, Kagemasa Kozuki is also a beneficial owner of these shares. |
None of our shares of common stock entitles the holder to any preferential voting rights.
The ownership and distribution of the shares (in 100-share units) by category of shareholders according to our register of shareholders and register of beneficial shareholders as at March 31, 20072010 were as follows:
Category | Number of Shareholders | Number of Shares Held | Percentage of Total Outstanding Shares | Number of Shareholders | Number of Shares Held | Percentage of Outstanding Shares | ||||||||
Japanese financial institutions | 89 | 34,464,606 | 25.11 | % | 68 | 38,171,534 | 28.60 | % | ||||||
Japanese securities companies | 49 | 7,898,167 | 5.75 | 36 | 8,503,768 | 6.37 | ||||||||
Other Japanese corporations | 437 | 22,260,364 | 16.22 | 418 | 22,523,905 | 16.88 | ||||||||
Foreign corporations and individuals | 326 | 49,893,909 | 36.35 | 384 | 42,430,329 | 31.79 | ||||||||
Japanese individuals and others | 51,816 | 22,737,770 | 16.57 | 50,379 | 21,831,128 | 16.36 | ||||||||
Total | 52,717 | 137,254,816 | 100.00 | % | 51,285 | 133,460,664 | 100.00 | % | ||||||
According to our register of shareholders and register of beneficial owners, as of March 31, 2007,2010, there were 137,254,816133,460,664 shares of our common stock outstanding. According to JPMorgan Chase Bank, depositary for our ADSs, as of March 31, 2007, 1,167,9702010, 398,323 shares of our common stock were held in the form of ADRs and there were 1421 ADR holders of record in the United States. According to our register of shareholders and register of beneficial owners, as of March 31, 2007,2010, there were 52,71751,285 holders of common stock of record worldwide, including 81111 shareholders of record with addresses in the United States who held 10,667,35710,536,018 shares, representing approximately 7.77%7.89% of our outstanding common stock as of that date. Because some of these shares were held by brokers or other nominees, the number of record holders with addresses in the United States may be fewer than the number of beneficial owners in the United States.
None of our shares of common stock entitles the holder to any preferential voting rights.
To our knowledge, we are not, directly or indirectly, owned or controlled by any other corporation or by any government or by any other natural or legal persons severally or jointly. We know of no arrangements the operation of which may at a later time result in a change of control of Konami.KONAMI.
B. Related Party Transactions.
The Company sold its entire shares of Takara, an equity-method affiliate, and dissolved its equity relationship on April 25, 2005.
The Company acquired additional newly issued shares by Hudson, previously an equity-method affiliate, on April 27, 2005 and Hudson became a 53.99% owned consolidated subsidiary of the Company.
During fiscal 2005, Konami Corporation of America, a consolidated subsidiary, acquired 100,000 shares of Konami Computer Entertainment Hawaii, Inc. for ¥ 129 million from Takuya Kozuki who is a director of Konami Corporation of America and an immediate family member of our senior management team and our major shareholders. The transaction price was determined based on the third party appraisal.
During fiscal 2005, Konami Real Estate, Inc., a consolidated subsidiary, transferred certain fixed assets to Kozuki Capital Corporation at ¥162 million. During fiscal 2006, Konami Real Estate, Inc. acquired certain fixed assets from Kozuki Capital Corporation at ¥1,582 million. Kozuki Capital Corporation is a company owned by our senior management shareholders and their immediate family members and operates in the business of securities, investments and real estates. The transaction price was determined based on fair market value.
Konami Real Estate, Inc. paid rent of ¥4 million and ¥14 million during fiscal 2005 and 2006, respectively and a lease deposit of ¥4 million during 2005 to Kozuki Capital Corporation in accordance with rent agreements entered into in December 2004, for the lease of certain office spaces.
There were no related party transactions for fiscal 2007.2010.
C. Interests of Experts and Counsel.Counsel
Not applicable.
Item 8. | Financial Information. |
A. Consolidated Statements and Other Financial Information.
Financial Statements
The information required by this item is set forth beginning on page F-2 of this annual report.
Legal or Arbitration Proceedings
The information on legal or arbitration proceedings required by this item is set forth in Item 4.B of this annual report.
Dividend Policy
KonamiKONAMI CORPORATION believes that it is the important to return of Konami’sKONAMI CORPORATION’s profits to the stockholders to secure constant high dividends and improve the corporate value. however, beHowever, our dividends are subject to our future earnings and financial condition, approval atof the shareholders’ meetingboard of directors (in the case of year-end dividends) and other factors, including statutory and other restrictions with respect to the payment of dividends.
B. Significant Changes.
We are not aware of any significant change in our financial position since March 31, 2007,2010, the date of our last audited financial statements.
Item 9. | The Offer and Listing. |
A. Offer and Listing Details.
See Item 9.C of this annual report for information on the stock exchanges on which our common stock is listed.
The following table indicates the reported closing high and low sale prices (adjusted to reflect the prior stock splits of shares referred to in the table included in Item 10.A “Share Capital—Changes in Issued Share Capital” of our registration statement on Form 20-F filed with the Securities and Exchange Commission on September 20, 2002) and the average trading volume of our common stock on the Tokyo Stock Exchange, the closing highs and lows of the Nikkei Stock Average and the closing highs and lows of the TOPIX for the periods indicated:
Price per Share of Tokyo Stock Exchange | Average Daily Trading Volume of Konami Common Stock | Closing TOPIX | Closing Nikkei Stock Average | |||||||||||||||||||||||||
High | Low | High | Low | High | Low | Price per Share of KONAMI CORPORATION Common Stock on Tokyo Stock Exchange | Average Daily Trading Volume of KONAMI CORPORATION Common Stock | Closing TOPIX | Closing Nikkei Stock Average | |||||||||||||||||||
Fiscal Period | High | Low | High | Low | High | Low | ||||||||||||||||||||||
2002 | 6,730 | 2,360 | 514,736 | 1,440.97 | 922.51 | 14,529.41 | 9,420.85 | |||||||||||||||||||||
2003 | 3,480 | 1,735 | 512,093 | 1,139.43 | 770.62 | 11,979.85 | 7,862.43 | |||||||||||||||||||||
2004 | 4,250 | 1,500 | 710,094 | 1,179.23 | 773.1 | 11,770.65 | 7,607.88 | |||||||||||||||||||||
2005 | 3,140 | 2,165 | 605,399 | 1,217.87 | 1,053.77 | 12,163.89 | 10,505.05 | |||||||||||||||||||||
2006 | 3,110 | 2,115 | 743,008 | 1,728.16 | 1,109.19 | 17,059.66 | 10,825.39 | 3,110 | 2,115 | 743,008 | 1,728.16 | 1,109.19 | 17,059.66 | 10,825.39 | ||||||||||||||
2007 | 3,670 | 2,330 | 974,090 | 1,816.97 | 1,458.30 | 18,215.25 | 14,218.60 | 3,670 | 2,330 | 974,090 | 1,816.97 | 1,458.30 | 18,215.25 | 14,218.60 | ||||||||||||||
2006: | ||||||||||||||||||||||||||||
2008 | 4,120 | 2,580 | 1,042,096 | 1,796.89 | 1,139.62 | 18,297.00 | 11,691.00 | |||||||||||||||||||||
2009 | 4,410 | 1,275 | 1,458,497 | 1,449.14 | 698.46 | 14,601.27 | 6,994.90 | |||||||||||||||||||||
2010 | 2,080 | 1,416 | 912,983 | 987.27 | 778.21 | 11,147.62 | 8,084.62 | |||||||||||||||||||||
2009: | ||||||||||||||||||||||||||||
First quarter | 2,415 | 2,115 | 619,736 | 1,201.30 | 1,109.19 | 11,874.75 | 10,825.39 | 4,410 | 3,510 | 1,248,744 | 1,449.14 | 1,214.92 | 14,601.27 | 12,521.84 | ||||||||||||||
Second quarter | 2,650 | 2,340 | 553,537 | 1,428.13 | 1,177.61 | 13,617.24 | 11,565.99 | 3,820 | 2,440 | 1,208,135 | 1,334.52 | 1,069.69 | 13,603.31 | 11,160.83 | ||||||||||||||
Third quarter | 2,710 | 2,210 | 881,385 | 1,663.75 | 1,371.37 | 16,344.20 | 13,106.18 | 2,785 | 1,347 | 1,805,970 | 1,107.68 | 721.53 | 11,456.64 | 6,994.90 | ||||||||||||||
Fourth quarter | 3,110 | 2,430 | 957,375 | 1,728.16 | 1,572.11 | 17,059.66 | 15,341.18 | 2,345 | 1,275 | 1,587,000 | 896.21 | 698.46 | 9,325.35 | 7,021.28 | ||||||||||||||
2007: | ||||||||||||||||||||||||||||
2010: | ||||||||||||||||||||||||||||
First quarter | 3,020 | 2,330 | 1,117,698 | 1,783.72 | 1,458.30 | 17,563.37 | 14,218.60 | 1,877 | 1,416 | 989,797 | 954.08 | 778.21 | 10,170.82 | 8,084.62 | ||||||||||||||
Second quarter | 3,060 | 2,420 | 960,576 | 1,651.35 | 1,475.28 | 16,385.96 | 14,437.24 | 2,080 | 1,673 | 858,910 | 987.27 | 852.11 | 10,767.00 | 9,050.33 | ||||||||||||||
Third quarter | 3,630 | 2,950 | 833,076 | 1,681.07 | 1,532.95 | 17,225.83 | 15,725.94 | 1,829 | 1,417 | 828,003 | 920.54 | 809.24 | 10,707.51 | 9,076.41 | ||||||||||||||
Fourth quarter | 3,670 | 2,875 | 985,793 | 1,816.97 | 1,656.72 | 18,215.35 | 16,642.25 | 1,839 | 1,485 | 977,162 | 984.06 | 876.77 | 11,147.62 | 9,867.39 | ||||||||||||||
2008: | ||||||||||||||||||||||||||||
First quarter | 3,290 | 2,770 | 961,016 | 1,789.38 | 1,682.49 | 18,240.30 | 17,274.98 | |||||||||||||||||||||
Calendar Period | ||||||||||||||||||||||||||||
2007: | ||||||||||||||||||||||||||||
2010: | ||||||||||||||||||||||||||||
January | 3,670 | 3,130 | 825,963 | 1,738.61 | 1,656.72 | 17,507.40 | 16,838.17 | 1,777 | 1,492 | 925,437 | 966.40 | 901.12 | 10,982.10 | 10,198.04 | ||||||||||||||
February | 3,430 | 3,010 | 1,019,347 | 1,816.97 | 1,716.28 | 18,215.35 | 17,292.32 | 1,677 | 1,485 | 951,453 | 921.90 | 876.77 | 10,449.75 | 9,867.39 | ||||||||||||||
March | 3,200 | 2,875 | 1,075,614 | 1,741.94 | 1,662.71 | 17,521.96 | 16,642.25 | 1,839 | 1,635 | 1,044,036 | 984.06 | 893.81 | 11,147.62 | 10,116.86 | ||||||||||||||
April | 3,310 | 3,070 | 979,795 | 1,739.01 | 1,682.49 | 17,743.76 | 17,028.41 | 1,976 | 1,780 | 981,052 | 1,001.77 | 968.79 | 11,408.17 | 10,865.92 | ||||||||||||||
May | 3,270 | 2,750 | 1,003,005 | 1,755.68 | 1,693.25 | 17,875.75 | 17,274.98 | 1,788 | 1,459 | 1,327,983 | 970.46 | 850.88 | 10,847.90 | 9,395.29 | ||||||||||||||
June | 2,970 | 2,790 | 901,143 | 1,789.38 | 1,741.08 | 18,240.30 | 17,732.77 | 1,593 | 1,380 | 1,141,764 | 904.03 | 835.91 | 10,251.90 | 9,347.07 |
On July 26, 2007,23, 2010, the reported closing price of our shares on the Tokyo Stock Exchange was ¥2,950¥1,358 per share, the closing Nikkei Stock Average was ¥17,702¥9,430.96 and the closing TOPIX was 1,737.841.29.
Our ADSs have been listed on the New York Stock Exchange since September 30, 2002. On July 26, 2007,23, 2010, the closing sale price of our American Depositary Shares on the New York Stock Exchange was $24.14$15.67 per share. The following table sets forth, for the periods indicated, the closing high and low sales price in U.S. dollars and the average trading volume of our American Depositary Shares on the New York Stock Exchange:
New York Stock Exchange Price per ADS | Average daily trading volume of ADSs | |||||||||||||
High ($) | Low ($) | New York Stock Exchange Price per ADS | Average daily trading volume of ADSs | |||||||||||
Fiscal Period | High ($) | Low ($) | ||||||||||||
2007: | ||||||||||||||
2006 | 26.83 | 19.00 | 902 | |||||||||||
2007 | 30.48 | 20.42 | 2,571 | |||||||||||
2008 | 39.93 | 20.22 | 5,612 | |||||||||||
2009 | 42.79 | 12.77 | 11,898 | |||||||||||
2010 | 21.98 | 14.8 | 3,593 | |||||||||||
2009: | ||||||||||||||
First quarter | $ | 26.67 | $ | 20.42 | 3,190 | 42.79 | 33.36 | 22,181 | ||||||
Second quarter | 26.25 | 20.75 | 2,320 | 34.92 | 23.34 | 7,942 | ||||||||
Third quarter | 30.45 | 25.15 | 2,080 | 26.38 | 15.25 | 8,839 | ||||||||
Fourth quarter | 30.48 | 22.13 | 2,600 | 26.48 | 12.77 | 8,470 | ||||||||
2008: | ||||||||||||||
2010: | ||||||||||||||
First quarter | 28.04 | 22.54 | 4,460 | 19.48 | 14.80 | 7,021 | ||||||||
Second quarter | 21.98 | 18.19 | 1,936 | |||||||||||
Third quarter | 20.01 | 16.17 | 2,184 | |||||||||||
Fourth quarter | 19.90 | 16.53 | 3,269 | |||||||||||
Calendar Period: | ||||||||||||||
2007: | ||||||||||||||
2010: | ||||||||||||||
January | $ | 30.48 | $ | 26.11 | 2,580 | 19.15 | 16.80 | 3,916 | ||||||
February | 28.64 | 26.22 | 2,570 | 18.70 | 16.53 | 3,658 | ||||||||
March | 27.23 | 22.13 | 2,630 | 19.90 | 18.67 | 2,413 | ||||||||
April | 28.04 | 26.60 | 4,920 | 21.16 | 19.26 | 3,290 | ||||||||
May | 27.43 | 22.75 | 4,860 | 19.80 | 16.16 | 5,525 | ||||||||
June | 24.17 | 22.54 | 3,590 | 17.49 | 15.50 | 5,950 |
B. Plan of Distribution.
Not applicable.
C. Markets.
See Item 9.A of this annual report for information on the markets on which our common stock is listed or quoted.
D. Selling Shareholders.
Not applicable.
E. Dilution.
For the year ended March 31, 2007,2010, we had 69,494 sharesno share of diluted securities. Also, for the years ended March 31, 2005, 20062008, 2009 and 20072010 we had 1,618,700, 2,572,280nil, 741,968 and 2,356,180nil shares attributable to outstanding stock options were excluded as the exercise prices of the stock subscription rights were greater than or equal to the average price of the common shares, and therefore their inclusion would have been anti-dilutiveanti-dilutive.
F. Expenses of the Issue.
Not applicable.
Item 10. | Additional Information. |
A. Share Capital.
Not applicable.
B. Memorandum and Articles of Association.
Objects and Purposes in Our Articles of Incorporation
Our corporate purposes, as specified in Article 2 of our Articles of Incorporation, which are attached as an exhibit to this annual report, are to own shares of and to manage companies which engage in the following businesses and to be engaged in the implementation of operations incidental to such business activities:
(1) | Research, development, manufacture and distribution of software and hardware relating to electric appliances and electronic components; |
(2) | Planning, production, manufacture, rental and distribution of music, audio and visual software (including disks, tape and film, etc.); production and acquisition of master copies, and transferal or usage permission thereof; |
(3) | Acquisition, management, promotion of usage and development of music copyright and related performance rights, and transferal or usage permission thereof; |
(4) | Planning, production and distribution of books, magazines, sheet music and other publications; |
(5) | Development, manufacture and distribution of toys; |
(6) | Design of character products (with images of people, animals, etc. which have unique names or characters); |
(7) | Planning, production, distribution on the Internet and Internet related services; |
(8) | Gathering, online distribution, processing and online sales of information, pictures and music using electrical communication and electrical communication related services; |
(9) | Information processing services and information reporting services; |
(10) | Management and control of sports facilities, culture centers, day-care centers, fee-paying senior care facilities, amusement arcades, restaurants, accommodations, hot spring bathing facilities, saunas and parking lots; |
(11) | Management of schools for training and educating sport instructors, producers of digital content (application software for digital technologies) and producers of computer software; |
(12) | Medical treatment services and beauty services; |
(13) | Production and sale of medical devices, medical products, sanitary products such as nursing care goods, and fitness equipment; |
(14) | Providing preventive care services and home care services in compliance with the nursing-care insurance law; |
(15) | Distribution of soft drinks, foods, alcoholic beverages, sports gear, clothing and computer game machines; |
Advertising agency, insurance agency, broadcasting business, travel agency and leisure business including tours, sports, etc.; |
Purchase and sale of antiques; |
Sale, purchase, lease, blockage and management of real estate; |
Job placement; |
General lease business and finance business; |
Holding of and investment in securities; |
Acquisition and management of copyrights, trademark rights, design rights, performance rights and rights to produce records and videos related to each of the preceding items; |
Import, export and agency business related to each of the preceding items; |
Investment in the party in charge of the business specified in the preceding items; and |
Any and all businesses incidental to any of the preceding items. |
Provisions Regarding Our Directors
Our Articles of Incorporation do not contain any provision concerning the power of anya Director to vote at a meeting of our board of directors on proposals in which hethe Director is materially interested. However, in accordance with Article 369 Clause 2 of the Corporate Law, a Director is not empowered to participate in discussion or exercise his or her vote at a meeting of our board of directors on proposals in which hethat Director has a personal interest.
Our Articles of Incorporation do not contain any provision concerning the power of anya Director to vote to himself,itself, or to any one or more of the elected members of our board of directors, any remuneration (including retirement allowances or other benefit). However, in accordance with Article 361 of the Corporate Law, Directors are not empowered to determine their remuneration (including retirement allowances or other benefits), such determination being made by resolutions of a general meeting of our shareholders.
Our Articles of Incorporation do not contain any provision concerning the powers of the Directors to borrow on our behalf. In accordance with Article 362 of the Corporate Law, our board of directors is not restricted in any way in the exercise of its power to borrow on our behalf.
There is no provision under our Articles of Incorporation or under the Commercial CodeCorporate Law which requires a Director to retire from our board of directors at a particular age. However, in accordance with Article 22 of our Articles of Incorporation, the term of office of each Director who has been duly elected at a general meeting of shareholders in accordance with Article 21 of our Articles of Incorporation shall expire upon conclusion of the ordinary general meeting of shareholders for the last fiscal period ending within one year after his or her assumption of office. Directors can be re-elected. All of our existing Directors have been elected by the resolution of the shareholders’ meeting held on June 28, 200729, 2010 and each has entered into contract with us on the same date.
Article 361 of the Corporate Law provides that, unless otherwise specified in the Articles of Incorporation, that remuneration for directors,Directors, in respect of its amount (if the amount is fixed), calculation manner (if the amount is not fixed) or its substance (if the remuneration is not cash), is determined at a general meeting of shareholders of a company. Within the upper limit approved by the shareholders’ meeting, our board of directors will determine the amount of compensation for each director. The board of Directorsdirectors may, by its resolution, leave such decision to the discretion of the company’s representative director.Representative Director.
Article 362 Clause 4 Sub-clause 2 of the Corporate Law provides that the incurrence by a company of a significant loan from a third party should be approved by the company’s board of directors. Our Regulations of our board of directors have adopted this policy.
There is no mandatory retirement age for our Directors under the Corporate Law or our Articles of Incorporation.
There is no requirement concerning the number of shares onean individual must hold in order to qualify him or her as a Director of KonamiKONAMI under the Corporate Law or our Articles of Incorporation.
Article 28 of our Articles of Incorporation and Article 427 Clause 1 of the Corporate Law provide that we may enter into agreements with external directors which limit the liability of such directors provided for by Article 423 Clause 1 of the Corporate Law.
Holding of Our Shares by Foreign Investors
There are no limitations on the rights of non-residents or foreign shareholders to hold or exercise voting rights on our shares imposed by the laws of Japan or our Articles of Incorporation or our other constituent documents.
Rights of Our Shareholders
The following section contains certain information relating to the shares, including summaries of certain provisions of our Articles of Incorporation and Share Handling Regulations and of the Corporate Law relating to joint stock corporations.
General
Our authorized share capital consists of 450,000,000 shares in registered form with no par value. All issued shares are fully-paid and non-assessable. As of March 31, 2007, 137,254,8162010, 133,460,664 of our shares were issued and outstanding and our stated capital was ¥47,399 million. Under the Corporate Law, the transfer of shares is effected by delivery of share certificates, butand in order to assert rights as a shareholder against us, the transferee must have its name and address registered on our register of shareholders. However, by amendment of the Law Concerning Central Clearing of Bonds, Share Certificates and Other Securities in Japan (effective January 5, 2009), the share certificate system has been replaced by a book-entry transfer system administered by the Japan Securities Depositary Center, Inc ( “JASDEC”). Under the new system, Japanese listed companies cannot issue share certificates and those certificates previously issued are void. The shareholder’s ownership right that was represented by the share certificate is now recorded as an entry in an account that the shareholder is required to open with an Account Management Institution, i.e. a financial institution such as a bank, trust bank or a securities firm. A transfer of shares is effected by recording the transfer from the transferor’s account to the transferee’s account. We amend our register of shareholders in accordance(to, for example, reflect a transfer of shares) upon receipt of a General Shareholders Notification from JASDEC.
A registered shareholder is generally entitled to exercise its rights as shareholder, such as voting rights, and to receive dividends (if any). In order to exercise minority shareholder rights, a shareholder must make a request through their Account Management Institution for JASDEC to send us an Individual Shareholder Notification. Minority shareholder rights must be exercised within two weeks of delivery of the Individual Shareholder Notification. New shares issued with our Share Handling Regulations. respect to registered shares, including those issued upon a stock split, automatically become registered shares.
The registered beneficial holder of deposited shares underlying the ADSs is the depositary for the ADSs. Accordingly, holders of ADSs will not be able to directly assert shareholders’ rights such as the right to bring a derivative action, examine our accounting books and records or exercise appraisal rights. No temporary documents of title in respect of the shares will be issued. For this purpose, shareholders are required to file their names, addresses and seals with the transfer agent for the shares. Non-Japanese shareholders may file specimen signatures in lieu of seals. Non-resident shareholders are required to appoint a standing proxy in Japan or
designate a mailing address in Japan. Japanese securities firms and commercial banks will customarily act as standing proxy and provide related services for standard fees. The transfer agent for our shares is The Sumitomo Trust & Banking Co., Ltd.
Our shares are freely transferable and there are no restrictions on transfer of the shares under the terms of the Corporate Law or our Articles of Incorporation.
Our shares are generally held in a certificated form, except that, if a shareholder deposits his share certificate with us we may cancel such share certificate. In the event a shareholder whose share certificate has been cancelled by us wishes to transfer his shares, reissuance of his share certificate by us to such shareholder and delivery to a transferee shall be required. The central clearing system of share certificates under the Law Concerning Central Clearing of Share Certificates and Other Securities in Japan applies to the shares. Holders of shares may deposit certificates for shares with the Japan Securities Depositary Center, or JASDEC, the sole depositary under the system, through the participants in the system (which normally will be securities companies). The shares deposited with JASDEC will be registered in the name of JASDEC in our register of shareholders. The beneficial owners of the deposited shares will be recorded in the register of beneficial shareholders which we prepare based on information furnished by the participants and JASDEC. Such register of beneficial shareholders will be updated as of record dates at which shareholders entitled to rights pertaining to the shares are determined. For the purpose of transferring the deposited shares, delivery of share certificates is not required. In general, beneficial shareholders of deposited shares registered in the register of beneficial shareholders will be entitled with respect to such shares to the same rights and benefits as the holders of shares registered in the register of shareholders. The registered beneficial shareholders may exercise the rights attached to the shares such as voting rights and will receive dividends (if any) and notices to shareholders directly from us. The shares held by a person as a registered shareholder and those held by the same person as a registered beneficial shareholder are aggregated for such purposes. New shares issued with respect to deposited shares, including those issued upon a stock split, automatically become deposited shares. The beneficial shareholders will be required to file with our transfer agent the same information as would be required from the registered
shareholders principally through the relevant participants. Beneficial shareholders may at any time withdraw their shares from deposit and receive share certificates.
Settlement transactions concerning shares listed on any of the stock exchanges in Japan normally are effected on the fourth dealing day after the transaction. Settlement in Japan is made by physical delivery of share certificates or through JASDEC as stated above.
As described above, non-resident shareholders are required to appoint a standing proxy in Japan or to provide a mailing address in Japan to receive notices from us. A local standing proxy can handle the transfer of share certificates and registration of transfer and the application for reduced withholding tax. See Item 10.E “Taxation—Japanese Taxation”. Persons holding shares through Euroclear or Clearstream Banking, société anonyme (“Clearstream, Luxembourg”) appoint the depositary of Euroclear or Clearstream, Luxembourg as proxy on a standing basis. Persons holding shares through shares through Euroclear or Clearstream, Luxembourg may receive notice from us, such as notices of shareholders’ meeting and dividend distributions, and are eligible for reduced withholding tax in accordance with the operating procedures of Euroclear and Clearstream, Luxembourg.
The Duties and Liabilities of Directors
Article 355 of the Corporate Law requires directors to “perform their duties faithfully on behalf of the company,”company”, thus subjecting directors to a duty of loyalty (chujitsu gimu). This duty is supplemented by other duties such as to avoid self-interested transactions and competition with the corporation as well as to abide by all laws and regulations, the articles of incorporation and resolutions of general meetings of shareholders.
Directors shall be held liable for damages caused by any of the following actions:
declaring an unlawful dividend or distribution of money;
offering undue benefit in relation to the exercise of shareholder’s rights;
engaging in a transaction that conflicts with interests of the company; or
performing any other actions that violate laws and regulations, including the general duties of directors described in the preceding paragraph or the articles of incorporation.
Shareholders’ Rights to Bring Actions Against Directors
The provisions of Articles 847 of the Corporate Law constitute the Japanese shareholder derivative action mechanism. The provisions allow any shareholder who has continuously held a share for the previous six months to demand of the corporation that it file a suit to protect the company and enforce the liability of directors. Specifically, it provides that derivative actions may be brought to “enforce the liability of directors” in situations including, but not limited to, that where directors engage in self-interested transactions, or violate any laws and regulations or the articles of incorporation. If a corporate auditor has not instituted an action for the company within sixty days, the plaintiff-shareholder may initiate a lawsuit as a derivative action. Article 847 Clause 5 of the Corporate Law provides an exception to the sixty day waiting period, however, for cases in which waiting sixty days might cause the company “irreparable damage.” In such cases, the shareholder may institute the action immediately. After having brought the action, the shareholder who has done so must make notification of litigation (notice under litigation proceedings) to the company “without delay.” If a company might suffer irreparable damage from an act of a director, a shareholder who has owned a share continuously for the previous six months may seek an injunction suspending the performance of the act by the director.director pursuant to Article 360 of the Corporate Law.
Dividends
Following directors’ approval at our boardresolution of director’sa general meeting of our shareholders, annual dividends are distributed to shareholders, beneficial shareholders or pledgees of record as at March 31 in each year in
proportion to the number of shares held by each shareholder, beneficial shareholder or pledgee. Our Articles of Incorporation permit the payment of interim cash dividends (i.e. cash distributions made pursuant to Article 454 Clause 5 of the Corporate Law) to shareholders, beneficial shareholders or pledgees of record as at September 30 in each year by resolution of our board of directors. Under our Articles of Incorporation, we are not obliged to pay any annual or interim dividends unclaimed for a period of three years after the date on which they are first made available by us. In addition, pursuant to Article 459 of the Corporate Law, our Articles of Incorporation permit our board of directors to determine the distribution of our reserves based on the Board’s resolution, as well as to establish an alternative record date.
Article 445 Clause 4 of the Corporate Law and Article 45 of the Corporate Computation Rule under the Corporate Law provide in effect that, in the event that we distribute profits by way of annual dividends or interim dividends, until the sum of our additional paid-in capital and our legal reserve is one-quarter of our capital we must have retained in our legal reserve and set aside as our legal reserve, an amount equal to at least one-tenth of any amount paid out by us as an appropriation of retained earnings. We may distribute profits by way of annual dividends or interim dividends out of the amount remaining (the “Distributable Amount” (Article 461 Clause 2 of the Corporate Law)) from the aggregate of retained capital and retained earnings at the end of the most recent fiscal year, adjusted for the amount of dividends distributed thereafter, “Retained Earnings” (Article 446 of the Corporate Law) and after adjustment, such as deduction of the book value of treasury stock, in accordance with laws and regulations. In our Company,company, the ex-dividend date and the record date for dividends precede the date of determination of the amount of the dividends to be paid.
For information as to Japanese taxes on dividends, see Item 10.E “Taxation—Japanese Taxation” below.
Capital and Reserves
The entire amount of the issue price of new shares is required to be accounted for as stated capital stock, although we may account for an amount not exceeding one-half of such issue price as additional paid-in capital. We may at any time transfer the whole or any part of our additional paid-in capital and legal reserve to capital stock by resolution of a general meeting of our shareholders. The whole or any part of retained capital and retained earnings which are distributable as annual dividends may also be transferred to capital stock by resolution of a general meeting of our shareholders.
Stock Splits
Pursuant to Article 183 and 184 of the Corporate Law, we may at any time split the shares in issue into a greater number of shares by resolution of our board of directors. Shareholders will not be required to exchange share certificates for new share certificates, but certificates representing the additional shares resulting from the stock split will be issued to shareholders. We must give public notice of the stock split, specifying a record date therefore, not less than two weeks prior to such record date and, in addition, promptly after the stock split takes effect, give notice to each shareholder specifying the number of shares to which such shareholder is entitled by virtue of the stock split.date. In conjunction with a stock split, we may increase the number of our authorized shares by the same ratio as the stock split ratio through a resolution of our board of directors.
Unit Share System
Under our Articles of Incorporation, the number of shares constituting one unit is 100 shares. Our board of directors may amend our Articles of Incorporation reducing the number of shares constituting one unit or eliminating the provision for the unit from our Articles of Incorporation although any amendment to our Articles of Incorporation increasing the number of shares constituting one unit requires a special resolution of a general meeting of shareholders. In any event, the number of shares constituting one unit shall not exceed 1,000 shares. Under the unit share system, each shareholder shall have one voting right for each unit of shares that he or she holds, and any number of shares less than one unit carries no voting rights. We may provide in our Articles of
Incorporation that any share certificates which represent a number of shares less than one unit shall not be issued. Holders of less than one unit of shares may at any time require us to purchase such shares at their then current market price as determined pursuant to the Corporate Law and to sell them additional shares to create a whole unit of 100 shares.
General Meeting of Shareholders
The ordinary general meeting of our shareholders is usually held in June of each year in Tokyo. In addition, we may hold an extraordinary general meeting of shareholders whenever necessary. Notice of a shareholders’ meeting stating the purpose thereof and a summary of the matters to be acted upon, together with our annual business reports including financial statements, must be mailed to each shareholder having voting rights (or, in the case of a non-resident shareholder, to his or her mailing address or proxy in Japan) at least two weeks prior to the date set for the meeting. The record date for voting rights for an ordinary general meeting of shareholders is March 31.
Any shareholder holding at least 300 voting rights or one percent of the total number of voting rights for six months or longer may propose a matter to be considered at a general meeting of shareholders by submitting a written request to a Representative Director at least eight weeks prior to the date of such meeting.
Voting Rights
A holder of shares constituting one or more whole units is entitled to one vote for each unit of shares, except that neither we, nor a corporate shareholder with morenot less than one-quarter of the total voting rights of which are directly or indirectly owned by us, has voting rights in respect of the shares held by us or such a corporate shareholder. Except as otherwise provided by law or by our Articles of Incorporation, a resolution can be adopted at a general meeting of shareholders by a majority of the voting rights that are represented at the meeting. TheOur Articles of Incorporation provide that the quorum for election or removal of Directors and Corporate Auditors is one-third of the total number of voting rights. Our shareholders are not entitled to cumulative voting in the election of Directors. Our shareholders may cast their votes in writing. Shareholders may also exercise their voting rights through proxies, provided that the proxies are also holders of shares with voting rights and are sole.
Our Articles of Incorporation provide that, in order to amend our Articles of Incorporation and in certain other instances, including any reduction of the capital stock, any removal of a Director or a Corporate Auditor, dissolution, merger or consolidation, exchange of shares for shares of an existing company, transfer of the whole or an important part of the business, taking over the whole of the business of any other company or any offering of new shares at a “specially favorable” price (or any offering of stock acquisition rights or bonds with stock acquisition rights with “specially favorable” conditions) to persons other than shareholders, the quorum is at least one-third of the total number of voting rights and the approval by at least two-thirds of the voting rights represented at the general meeting of shareholders is required.
The voting rights of holders of ADSs are exercised by the depositary based on instructions from those holders. With respect to voting by holders of ADRs, please see Item 12.D of our registration statement on Form 20-F filed with the Securities and Exchange Commission on September 20, 2002.
Liquidation Rights
In the event of our liquidation, the assets remaining after payment of all taxes, liquidation expenses and debts will be distributed among the shareholders in proportion to the respective number of shares which they hold.
Issue of Additional Shares and Pre-emptive Rights
Holders of shares have no pre-emptive rights. Authorized but unissued shares may be issued at such time and upon such terms as our board of directors determines, subject to the limitations as to the offering of new
shares at a “specially favorable” price mentioned in “Rights of Our Shareholders—Voting Rights” above. Our board of directors may, however, determine that shareholders be given subscription rights to new shares, in which case they must be given on uniform terms to all shareholders as of a record date of which not less than two weeks’ prior public notice must be given. Each of the shareholders to whom such rights are given must also be given at least two weeks’ prior notice of the date on which such rights expire.
Stock Subscription Rights
We may grant stock subscription rights to persons other than shareholders, as well as shareholders pursuant to a resolution of our board of directors. In the case of granting stock subscription rights to personpersons other than our shareholders under “specially favorable” conditions, a special resolution of the general meeting of shareholders is required. Upon exercise of such stock subscription rights, we shall issue new shares or transfer shares which are held by us as treasury stock to the holder of the stock subscription rights.
Dilution
It is possible that, in the future, market conditions and other factors might make rights issues to shareholders desirable at a subscription price substantially below their then current market price, in which case shareholders who do not exercise and are unable otherwise to realize the full value of their subscription rights will suffer dilution of their equity interest in us.
Report to Shareholders
We furnish to our shareholders notices of shareholders’ meetings, summaries for each such meeting of the matters to be acted upon, annual business reports, including financial statements, as mentioned above, and notices of resolutions adopted at the shareholders’ meetings, all of which are in Japanese.
In addition, we intend, upon request, to furnish to our shareholders with addresses outside Japan, through their resident proxies in Japan, copies of our annual report in English, containing annual audited consolidated financial statements.
Record Date
The record date for annual dividends is March 31 and the record date for interim dividends is September 30. In addition, by a resolution of our board of directors and after giving at least two weeks’ prior public notice, we may at any time set a record date in order to determine shareholders who are entitled to certain rights pertaining to the shares.
March 31 is the record date for the payment of annual dividends and September 30 is the record date for the payment of interim dividends. Shareholders appearing on our shareholders’ register at the close of business on March 31 of each year are entitled to vote at the ordinary general meeting of shareholders with respect to the financialfiscal year ending on such date. In addition, by resolution of our board of directors and after giving at least two weeks’ prior public notice, we may at any time set a record date to determine the shareholders who are entitled to interim dividends and certain other rights pertaining to the shares.
Repurchase of Our Shares
We may acquire our shares (i) by purchasing them on any Japanese stock exchange on which our shares are listed or by way of tender offer (pursuant to an ordinary resolution of any general meeting of shareholders or a resolution of our board of directors), (ii) from a specific shareholder other than our subsidiary (pursuant to a special resolution of a general meeting of shareholders) or (iii) from our subsidiary (pursuant to a resolution of our board of directors). In the case of (ii) above, any other shareholder may make a request directly to a Representative Director in writing, five days prior to the relevant shareholders’ meeting that we acquire our shares held by such other shareholder.
Any such acquisition of our shares must satisfy certain requirements,inter alia, that the purchase priceacquisition cost may not exceed the amountDistributable Amount, described in “Dividends” above, as of the retained capital and retained earnings available for annual dividend payments plus the amount of any reductioneffective date of the stated capital, additional paid-in capital or legal reserve in accordance with the relevant provisions of the Corporate Law (if such reduction is authorized by a resolution of the relevant general meeting of shareholders) minus the sum of the amount to be paid by way of appropriation of retained earnings and the amount of retained earnings to be transferred to the stated capital in respect of the relevant fiscal year pursuant to a resolution of such general meeting of shareholders.acquisition. However, if it is anticipated that, as a result of the net assets,acquisition, the Distributable Amount, as stated on the balance sheet at the end of the immediately following fiscal year, will be less than the aggregate amount of items described in (i) through (vi) in “Dividends” above,zero, we may not purchase such shares. We may hold our shares acquired in compliance with the provisions of the Corporate Law (the “treasury stock”) and generally may cancel or dispose of such shares by resolutions of our board of directors subject to the limitation as to the disposal of such treasury stock at a specially favorable price mentioned in “Voting Rights” above.
Disposal by Us of Shares Held by Unknown Shareholders
We are not required to send a notice to a shareholder if a notice to such shareholder fails to arrive at the registered address of the shareholder in the register of shareholders, or at the address otherwise notified to us, continuously for five years or more.
In addition, we may sell by way of auction or otherwise dispose of shares for which the location of the shareholder is unknown. Generally, if (i) notices to a shareholder fail to arrive continuously for five years or more at the shareholder’s registered address in the register of shareholders or at the address otherwise notified to us and (ii) the shareholder fails to receive dividends on the shares continuously for five years or more at the address registered in the register of shareholders or at the address otherwise notified to us, we may sell by way of auction or otherwise dispose of the shareholder’s shares (including repurchase by us) by a resolution of our board of directors after giving at least three months’ prior public and individual notice and shall hold or deposit the proceeds of such sale or disposal of shares for the shareholder, the location of which is unknown.
The Japan Securities Depositary Center
The central clearing system of share certificates under the Law Concerning Central Clearing of Share Certificates and Other Securities in Japan applies to the shares. Under this system, holders of shares may deposit certificates for shares with JASDEC, the sole depositary under the system, through the participants. See “Rights of Our Shareholders—General”.
Japanese Foreign Exchange Andand Certain Other Regulations
The Foreign Exchange and Foreign Trade Law of Japan, as amended, and the cabinet orders and ministerial ordinances thereunder (collectively, the “Foreign Exchange Regulations”) govern certain matters relating to the acquisition and holding of shares by “non-residents of Japan” and “foreign investors”. The Foreign Exchange Regulations currently in effect do not affect the purchase, sale or exchange of shares provided such transactions take place outside Japan between non-residents of Japan.
“Non-residents of Japan” is defined in the Foreign Exchange Regulations to mean individuals who are not residents of Japan and corporations whose principal offices are not located outsidein Japan. Generally, branches and other offices located within Japan of non-resident corporations are regarded as residents of Japan, and branches and other offices of Japanese corporations located outside Japan are regarded as non-residents of Japan.
“Foreign investors” is defined in the Foreign Exchange Regulations to mean (i) individuals not resident in Japan, (ii) corporations organized under the laws of foreign countries or whose principal offices are located outside Japan, or (iii) corporations organized in Japan not less than 50% of the total voting rights of which are
held, directly or indirectly, by individuals and/or corporations falling within (i) and/or (ii) above or (iv) corporations for which a majority of the directors or other officers (or directors or other officers having the power of representation) of which are non-resident individuals.individuals falling within (i).
Acquisition of Shares
In general, the acquisition of shares of stock of a Japanese company listed on any Japanese stock exchange or traded in any over-the-counter market in Japan by a non-resident of Japan from a resident of Japan may be made without any restriction, except as mentioned below. However, a report by the relevantproxy who is a resident of Japan to the Minister of Finance must be filed following the transfer of shares to the non-resident of Japan within 20 days from the date of such acquisition, unless the consideration for such transfer is ¥100 million or less or such transfer is made through a bank, securities company or financial futures trader licensed under the relevant Japanese laws.less. In addition to the above, the Foreign Exchange Regulations give the Minister of Finance the power to require a prior approval for any such acquisition in certain exceptional circumstances.
If a foreign investor acquires shares of a Japanese company listed on a Japanese stock exchange or traded on an over-the-counter market in Japan and as a result of such acquisition (regardless of the person from or through whom it acquires the shares), aggregated with existing holdings (if any), the foreign investor directly or indirectly holds 10% or more of the issued shares of the relevant company, the foreign investor is, in general, required to report such acquisition to the Minister of Finance and any other competent Ministers withinno later than the 15 days from and includingday of the month following the month in which the date of such acquisition.acquisition falls. In certain exceptional cases, a prior notification is required in respect of such an acquisition.
Dividends and Proceeds of Sale
Under the Foreign Exchange Regulations, dividends paid on, and the proceeds of sales in Japan of, shares held by non-residents of Japan may in general be converted into any foreign currency and repatriated abroad. The acquisition of shares by non-resident shareholders by way of a stock split is not subject to any notification or reporting requirements. Under the terms of the deposit agreement pursuant to which our ADSs are issued, the depositary is required, to the extent that in its judgment it can convert yen on a reasonable basis into dollars and transfer the resulting dollars to the United States, to convert all cash dividends that it receives in respect of deposited shares into dollars and to distribute the amount received (after deduction of applicable withholding taxes) to the holder of ADSs. For additional information regarding our ADSs, please see Item 12.D of our registration statement on Form 20-F filed with the Securities and Exchange Commission on September 20, 2002.
Reporting of Substantial Shareholdings
The SecuritiesFinancial Instruments and Exchange Law of Japan and regulations thereunder generally requires any person who has become a beneficial holder (including certain sole or joint holders) of more than 5% of the total issued voting shares of a company listed on any Japanese stock exchange or traded on the over-the-counter market in Japan to file with the Director-General of the relevant local Finance Bureau, within five business days, a report concerning such shareholdings. A similar report must also be made (with certain exceptions) if the percentage of such holding subsequently increases or decreases by 1% or more. Copies of any such report must also be furnished to the issuer of such shares and to all Japanese stock exchanges on which the shares are listed or the Japan Securities Dealers Association in the case of over-the-counter registered shares. For this purpose, shares issuable upon exercise of stock acquisition rights are taken into account in determining both the number of shares held by such holder and the issuer’s total issued share capital.
Daily Price Fluctuation Limits under Japanese Stock Exchange Rules
Share prices on Japanese stock exchanges are determined on a real-time basis by the equilibrium between bids and offers. These exchanges are order-driven markets without specialists or market makers to guide price
formation. To prevent excessive volatility, these exchangeexchanges set daily upward and downward price fluctuation limits for each share, based on the previous day’s closing price. Although transactions may continue at the upward or downward limit price if the limit price is reached on a particular trading day, no transactions may take place outside these limits. Consequently, an investor wishing to sell at a price above or below the relevant daily limit may not be able to sell his shares at such price on a particular trading day, or at all.
On July 26, 2007,23, 2010, the closing price of our shares on the Tokyo Stock Exchange was ¥2,950¥1,358 per share. The following table shows the daily price limit for a stock on the Tokyo Stock Exchange with a closing price of between ¥2,000¥1,500 and ¥3,000¥2,000 per share, as well as the daily price limit if our per share price were to rise to between ¥2,000 and ¥3,000 or ¥3,000 and ¥5,000, or fall to between ¥1,500¥1,000 and ¥2,000.¥1,500. Other daily price limits would apply if our per share price moved to other ranges.
Selected Daily Price Limits
Previous Day’s Closing Price or Special Quote | Previous Day’s Closing Price or Special Quote | Maximum Daily Price Movement | Previous Day’s Closing Price or Special Quote | Maximum Daily Price Movement | ||||||||||||
Over | ¥1,500 | Less than | ¥2,000 | ¥300 | ¥1,000 | Less than | ¥1,500 | ¥300 | ||||||||
Over | 2,000 | Less than | 3,000 | 400 | 1,500 | Less than | 2,000 | 400 | ||||||||
Over | 3,000 | Less than | 5,000 | 500 | 2,000 | Less than | 3,000 | 500 | ||||||||
Over | 3,000 | Less than | 5,000 | 700 |
For a history of the trading price of our shares on the Tokyo Stock Exchange, see Item 9.A of this annual report.
Takeover Defense Measures
“The Countermeasures to any large-scale acquisition of shares in the Company (takeover defense measures)” (the “Plan”“Current Plan”) was approved and subsequently introduced upon partial amendments at a general shareholders’ meeting held on June 28, 2007.29, 2010. The outline of the Current Plan is as follows:
1. Purpose of Introducing the Current Plan
In the recent years, a trend has emerged in the Japanese capital markets of sudden hostile acquisitions of large quantities of shares, conducted without due discussion and agreement with management of the target company. There is a possibility that such kind of large-scale acquisition may be attempted with respect to the Company shares.
The purpose of the Current Plan is to enable shareholders of the Company to make an appropriate decision on whether to accept a large-scale acquisition of the Company shares, and to deter actions which would have an adverse impact on the Company’s corporate value and the common interests of the shareholdersshareholders.
2. Outline of the Current Plan
The Current Plan is such that, in order to ensure that shareholders have necessary and sufficient information and time to make an appropriate decision in the event that a large-scale acquisition of the Company’s shares is attempted, the Company’s Boardboard of Directorsdirectors established the Large-Scale Acquisition Rule (the “Rule”). The Rule requires submission of information on the large-scale acquisition by a large-scale acquirer and secures time for evaluation and investigation thereof by the Company’s Boardboard of Directors.directors. It seeks that the large-scale acquirer comply with the Rule, sets out the response policy for cases of both compliance and non-compliance, and provides for implementation, if necessary, of appropriate countermeasures to protect the Company’s corporate value and the common interests of shareholders (such as gratis allotment of Stock Acquisition Rights with discriminative exercise conditions).
The Current Plan was scheduled to expire at the conclusion of the 38th general shareholders’ meeting to be held on June 29, 2010. In order to ensure and enhance the corporate value of our company and the common interests of shareholders, we have continued to review the Current Plan following its introduction, in light of recent developments in takeover defense measures. As a result of this review, our board of directors has resolved at a meeting held May 13, 2010 to revise certain elements of the Current Plan and renew it, subject to the approval of its shareholders at the 38th general shareholders’ meeting held on June 29, 2010.
C. Material Contracts.
We have not entered into any material contract, other than in the ordinary course of business, within the two years immediately preceding the date of this document or any contract, other than in the ordinary course of business, which contains any provision under which we have any obligation or entitlement which is material to us as at the date of this document.
D. Exchange Controls.
There are no laws, decrees, regulations or other legislation which affect our ability to import or export capital for our use or our ability to pay dividends to nonresident holders of our shares.
E. Taxation.
United States Federal Income Taxation
This section describes the material United States federal income tax consequences of owning shares or ADSs. It applies to you only if you are a U.S. holder, as defined below, and you hold your shares or ADSs as capital assets for tax purposes. This section does not apply to you if you are a member of a special class of holders subject to special rules, including:
a dealer in securities,
a trader in securities that elects to use a mark-to-market method of accounting for your securities holdings,
a tax-exempt organization,
a life insurance company,
a person liable for alternative minimum tax,
a person that actually or constructively owns 10% or more of our voting stock,
a person that holds shares or ADSs as part of a straddle or a hedging or conversion transaction, or
a U.S. person whose functional currency is not the U.S. dollar.
This section is based on the Internal Revenue Code of 1986, as amended, its legislative history, existing and proposed regulations, published rulings and court decisions, all as currently in effect, as well as on the Convention Between the United States of America and Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income (the “Treaty”). These laws are subject to change, possibly on a retroactive basis. In addition, this section is based in part upon the representations of JPMorgan Chase Bank as Depositary and the assumption that each obligation in the Deposit Agreement and any related agreement will be performed in accordance with its terms.
You are a U.S. holder if you are a beneficial owner of shares or ADSs and you are:
a citizen or resident of the United States,
a domestic corporation,
an estate whose income is subject to United States federal income tax regardless of its source, or
a trust if a United States court can exercise primary supervision over the trust’s administration and one or more United States persons are authorized to control all substantial decisions of the trust.
You should consult your own tax adviser regarding the United States federal, state and local and the Japanese and other tax consequences of owning and disposing of shares and ADSs in your particular circumstances.
In general, and taking into account the earlier assumptions, for United States federal income tax purposes, if you hold ADRs evidencing ADSs, you will be treated as the owner of the shares represented by those ADRs. Exchanges of shares for ADRs, and ADRs for shares, generally will not be subject to United States federal income tax.
Taxation of Dividends
Under the United States federal income tax laws, and subject to the passive foreign investment company, or PFIC, rules discussed below, if you are a U.S. holder, the gross amount of any dividend paid by us out of our current or accumulated earnings and profits (as determined for United States federal income tax purposes) will be subject to U.S. federal income taxation. If you are a non-corporate U.S. holder, dividends paid to you in taxable
years beginning before January 1, 2011 that constitute qualified dividend income will be taxable to you at a maximum tax rate of 15% provided that you hold the shares or ADSs for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date and meet other holding period requirements. Dividends we pay with respect to the shares or ADSs generally will be qualified dividend income.
You must include any Japanese tax withheld from the dividend payment in this gross amount even though you do not in fact receive it. The dividend is taxable to you when you, in the case of shares, or the Depositary, in the case of ADSs, receive the dividend, actually or constructively. The dividend will not be eligible for the dividends-received deduction generally allowed to United States corporations in respect of dividends received from other United States corporations. The amount of the dividend distribution that you must include in your income as a U.S. holder will be the U.S. dollar value of the Japanese yen payments made, determined at the spot Japanese yen/U.S. dollar rate on the date the dividend distribution is includible in your income, regardless of whether the payment is in fact converted into U.S. dollars. Generally, any gain or loss resulting from currency exchange fluctuations during the period from the date you include the dividend payment in income to the date you convert the payment into U.S. dollars will be treated as ordinary income or loss and will not be eligible for the special tax rate applicable to qualified dividend income. The gain or loss generally will be income or loss from sources within the United States for foreign tax credit limitation purposes. Distributions in excess of current and accumulated earnings and profits, as determined for United States federal income tax purposes, will be treated as a non-taxable return of capital to the extent of your basis in the shares or ADSs and thereafter as capital gain.
Subject to certain limitations, the Japanese tax withheld in accordance with the Treaty and paid over to Japan will be creditable against your United States federal income tax liability. Special rules apply in determining the foreign tax credit limitation with respect to dividends that are subject to the maximum 15% tax rate. To the extent a refund of the tax withheld is available to you under Japanese law or under the Treaty, the amount of tax withheld that is refundable will not be eligible for credit against your United States federal income tax liability. DividendsFor foreign tax credit purposes, dividends will be income from sources outside the United States but dividends paid in taxable years beginning before January 1, 2007 generally will be “passive” or “financial services” income, and dividends paid in taxable years beginning after December 31, 2006 will, depending on your circumstances, generally be either “passive” or “general” income which, in either case, is treated separately from other types of income for purposes of computing the foreign tax credit allowable to you.
Taxation of Capital Gains
Subject to the PFIC rules discussed below, if you are a U.S. holder and you sell or otherwise dispose of your shares or ADSs, you will recognize capital gain or loss for United States federal income tax purposes equal to the difference between the U.S. dollar value of the amount that you realize and your tax basis, determined in U.S. dollars, in your shares or ADSs. Capital gain of a noncorporate U.S. holder that is recognized before January 1, 2011 is generally taxed at a maximum rate of 15%preferential rates where the holder has a holding period greater than one year. The gain or loss will generally be income or loss from sources within the United States for foreign tax credit limitation purposes.
Passive Foreign Investment Company Rules
We believe that shares and ADSs should not be treated as stock of a PFIC for United States federal income tax purposes, but this conclusion is subject to change because it is a factual determination that is made annually based on our asset values, including the value of our intangibles as evidenced by the fair market value of our shares or ADSs, and our gross income, each of which is itself subject to change. Therefore, itSustained trading value of our shares below their levels of early 2009 may be subject to change.result in our shares and ADSs being treated as stock of a PFIC for United States federal income tax purposes.
In general, we will be a PFIC with respect to you if for any taxable year in which you held our ADSs or shares:
at least 75% of our gross income for the taxable year is passive income or
at least 50% of the value, determined on the basis of a quarterly average, of our assets is attributable to assets that produce or are held for the production of passive income.
Passive income generally includes dividends, interest, royalties, rents (other than certain rents and royalties derived in the active conduct of a trade or business), annuities and gains from assets that produce passive income. If a foreign corporation owns at least 25% by value of the stock of another corporation, the foreign corporation is treated for purposes of the PFIC tests as owning its proportionate share of the assets of the other corporation, and as receiving directly its proportionate share of the other corporation’s income.
If we are treated as a PFIC, and you are a U.S. holder that did not make a mark-to-market election, as described below, you will be subject to special rules with respect to:
any gain you realize on the sale or other disposition of your shares or ADSs and
any excess distribution that we make to you (generally, any distributions to you during a single taxable year that are greater than 125% of the average annual distributions received by you in respect of the shares or ADSs during the three preceding taxable years or, if shorter, your holding period for the shares or ADSs).
Under these rules:
the gain or excess distribution will be allocated ratably over your holding period for the shares or ADSs,
the amount allocated to the taxable year in which you realized the gain or excess distribution will be taxed as ordinary income,
the amount allocated to each prior year, with certain exceptions, will be taxed at the highest tax rate in effect for that year, and
the interest charge generally applicable to underpayments of tax will be imposed in respect of the tax attributable to each such year.
Special rules apply for calculating the amount of the foreign tax credit with respect to excess distributions by a PFIC.
If you own shares or ADSs in a PFIC that are treated as marketable stock, you may make a mark-to-market election. If you make this election, you will not be subject to the PFIC rules described above. Instead, in general, you will include as ordinary income each year the excess, if any, of the fair market value of your shares or ADSs at the end of the taxable year over your adjusted basis in your shares or ADSs. These amounts of ordinary income will not be eligible for the favorable tax rates applicable to qualified dividend income or long-term capital gains. You will also be allowed to take an ordinary loss in respect of the excess, if any, of the adjusted basis of your shares or ADSs over their fair market value at the end of the taxable year (but only to the extent of the net amount of previously included income as a result of the mark-to-market election). Your basis in the shares or ADSs will be adjusted to reflect any such income or loss amounts.
In addition, notwithstanding any election you make with regard to the shares or ADSs, dividends that you receive from us will not constitute qualified dividend income to you if we are a PFIC either in the taxable year of the distribution or the preceding taxable year. Moreover, your shares or ADSs will be treated as stock in a PFIC if we were a PFIC at any time during your holding period in your shares or ADSs, even if we are not currently a PFIC. For purposes of this rule, if you make a mark-to-market election with respect to your shares or ADSs, you will be treated as having a new holding period in your shares or ADSs beginning on the first day of the first taxable year beginning after the last taxable year for which the mark-to-market election applies. Dividends that you receive that do not constitute qualified dividend income are not eligible for taxation at the 15% maximum rate applicable to qualified dividend income. Instead, you must include the gross amount of any such dividend paid by us out of our accumulated earnings and profits (as determined for United States federal income tax purposes) in your gross income, and it will be subject to tax at rates applicable to ordinary income.
If you own shares or ADSs during any year that we are a PFIC, you must file Internal Revenue Service Form 8621.
Japanese Taxation
The following is a summary of the principal Japanese tax consequences to owners of our shares or ADSs who are non-resident individuals or non-Japanese corporations without a permanent establishment in Japan to which income from our shares is attributable. The tax treatment is subject to possible changes in the applicable Japanese laws or double taxation conventions occurring after that date. This summary is not exhaustive of all possible tax considerations that may apply to a particular investor. Potential investors should consult their own tax advisers as to:
the overall tax consequences of the acquisition, ownership and disposition of shares or ADSs, including specifically the tax consequences under Japanese law;
the laws of the jurisdiction of which they are resident; and
any tax treaty between Japan and their country of residence.
Generally, a non-resident holder of shares or ADSs is subject to Japanese withholding tax on dividends paid by us. In the absence of any applicable tax treaty, convention or agreement reducing the maximum rate of withholding tax, the rate of Japanese withholding tax applicable to dividends paid by us to non-resident holders is 20%. Except for any individual shareholder who holds 5% or more of the total outstanding shares, the aforementioned 20% withholding tax rate is reduced pursuant to the Special Taxation Measures Law of Japan to (i) 7% for dividends due and payable on or before MarchDecember 31, 2008,2011, and (ii) 15% for dividends due and payable on or after AprilJanuary 1, 2008.2012. Japan has income tax treaties, conventions or agreements whereby this withholding tax rate is reduced to, in most cases, 15% for portfolio investors, with, among other countries, Australia, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, The Netherlands, New Zealand, Norway, Singapore, Spain, Sweden, Switzerland, the United Kingdom and the United States.
The Convention between the United States of America and Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, which we refer to as the Tax Convention, established the maximum rate of Japanese withholding tax which may be imposed on dividends paid to a United States resident, with the proviso that this does not havingapply if the beneficial owner of dividends is a United States resident that carries on business through a permanent establishment in Japan.Japan and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment. Under the Tax Convention, the maximum withholding rates for U.S. shareholders and U.S. holders of ADSs are limited to (a) 5% of the gross amount of the dividends if the recipient is a corporation which holds more than 10% of voting shares of the paying corporation, or (b) 10% of the gross amount of the dividends otherwise.
Notwithstanding the above, no withholding tax shall be imposed if the recipient is:is, for example:
a corporation which has continued to hold more than 50% of the voting shares of the paying corporation for a period of 12 months ending on the date on which entitlement to the dividends is determined, and that either (i) whose shares are listed or registered on a certified stock exchange and traded thereon; or (ii) the competent authority determines that the purpose or business of which is not focused on achieving the benefit of the Tax Convention, and which has continued to hold more than 50% of the voting shares of the paying corporation for a period of 12 months ended on the last day of the financial year of such paying corporation; or
a certainpension fund that is a resident of U.S, provided that such dividends are not delivered from the carrying on of a business by such pension fund.
Non-resident holders who are entitled to a reduced rate of Japanese withholding tax on payments of dividends on the shares by us are required to submit an Application Form for the Income Tax Convention regarding Relief from Japanese Income Tax on Dividends in advance through us to the relevant tax authority before the payment of dividends. A standing proxy for non-resident holders may provide such application service. With respect to ADSs, this reduced rate is applicable if the depositary or its agent submits two Application Forms for Income Tax Convention (one prior to payment of dividends, the other within eight months
after our fiscal year-end). To claim this reduced rate, a non-resident holder of ADSs will be required to file proof of taxpayer status, residence and beneficial ownership (as applicable) and to provide other information or documents as may be required by the depositary. Non-resident holders who do not submit an application in advance will generally be entitled to claim a refund from the relevant Japanese tax authority of withholding taxes withheld in excess of the rate of an applicable tax treaty.
Gains derived from the sale of shares or ADSs outside Japan, or from the sale of shares within Japan by a non-resident holder, generally are not subject to Japanese income or corporation taxes.
Japanese inheritance and gift taxes at progressive rates may be payable by an individual who has acquired shares or ADSs as a legatee, heir or donee, even if the individual is not a Japanese resident.
F. Dividends and Paying Agents.
Not applicable.
G. Statement by Experts.
Not applicable.
H. Documents on Display.
We file periodic reports and other information with the Securities and Exchange Commission. You may read and copy any document that we file with the SEC at the SEC’s public reference room at 100F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of its public reference room. The Securities and Exchange Commission also maintains a web site at www.sec.gov that contains reports, proxy statements and other information regarding registrants that file electronically with the Securities and Exchange Commission. You may also inspect our SEC reports and other information at the New York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005. Some of this information may also be found on our website at www.konami.com. Our website is not part of this annual report.
As a foreign private issuer, we are exempt from the rules under the Securities Exchange Act of 1934 prescribing the furnishing and content of proxy statements to shareholders.
I. Subsidiary Information.
Not applicable.
Item 11. | Quantitative and Qualitative Disclosures about Market |
We are exposed to market risk primarily from changes in foreign currency exchange rates, interest rates and equity prices. Our earnings and cash flows may be negatively impacted by fluctuating interest and foreign exchange rates as well as equity prices associated with assets, liabilities or anticipated transactions which may affect our operating results and financial condition. We seek to minimize market risk through our regular operating and financing activities and, following the evaluation of the exposures, selectively enter into derivative hedging instruments. Foreign exchange forward contracts are used by us primarily to reduce foreign exchange
currency risks. We do not hold derivative instruments for speculative purposes. Also, we do not hold or issue financial instruments for trading purposes.
Foreign currency exchange rate risk
Transaction risk
A portion of our business is conducted in currencies other than yen, most significantly the U.S. dollar and the Euro. For the fiscal year ended March 31, 2007,2010, our U.S. dollar and Euro denominated sales comprised 13.6%13.79% and 11.8%10.24% of total revenues, respectively. While sales denominated in U.S. dollars and the Euro are, to a significant extent, offset by U.S. dollar and Euro denominated costs, we generally have had a significant net long U.S. dollar and Euro position.dominated monetary assets. As of March 31, 20072010 we had net U.S. dollar dominated monetary assets of approximately $233$1,096 million and Euro denominated monetary assets of approximately €96€42 million. To the extent that there are any open foreign currency positions, we are exposed to the risk of foreign currency fluctuations. Any gains and losses that result are recorded in our results of operations for the period. The foreign exchange gain (loss), net represents the differences between the value of monetary assets and liabilities when they are originated at exchange rates current when a purchase or sale occurs and their value at the prevailing exchange rate when they are settled or translated at year-end. Foreign currency-denominated monetary assets may include bank deposits, trade receivables and other receivables and monetary liabilities may include trade and notes payable, borrowings and debt.
Translation risk
Our reporting currency is the Japanese yen. We have assets and liabilities outside Japan, primarily in the United States and Europe, thatwhich are subject to fluctuations in foreign currency exchange rates. We prepare financial statements of our foreign operations in their functional currencies prior to consolidation in our financial statements. As a result, changes in the value of the yen relative to the functional currencies of the underlying operations create translation gains and losses, which are recorded outside of our statement of operationsincome in other comprehensive income until we dispose of or liquidate the relevant foreign operation.
Foreign currency derivatives
We enter into 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 be paid that are denominated in foreign currencies. Because the counterparties to these contracts are limited to major international financial institutions, we do not anticipate any losses arising from credit risk. Our Finance Group executes and controls these contracts. Foreign exchange forward contracts are presented below by the notional balances with weighted average exchange rates. All of these forward contracts are expected to mature in three to six months.
Foreign exchange forward contracts at March 31, 20072010
Millions of Yen | ||||||||||||
Contract amount | Fair value | Gain (loss) | Weighted average exchange rates | |||||||||
Foreign exchange forward contracts | ||||||||||||
Selling U.S. Dollar | ¥ | 719 | ¥ | 705 | ¥ | 14 | ¥ | 119.76 | ||||
Selling EURO | 157 | 157 | 0 | 157.07 | ||||||||
Total | ¥ | 876 | ¥ | 862 | ¥ | 14 | ||||||
Millions of Yen | |||||||||||
Contract amount | Fair value | Gain (loss) | Weighted average exchange rates | ||||||||
Foreign exchange forward contracts | |||||||||||
Selling U.S. Dollar | — | — | — | — | |||||||
Selling EURO | — | — | — | — | |||||||
Total | ¥ | — | ¥ | — | ¥ | — | |||||
Foreign exchange forward contracts at March 31, 20062009
Millions of Yen | Millions of Yen | ||||||||||||||||||||||||
Contract amount | Fair value | Gain (loss) | Weighted average exchange rates | Contract amount | Fair value | Gain (loss) | Weighted average exchange rates | ||||||||||||||||||
Foreign exchange forward contracts | |||||||||||||||||||||||||
Selling U.S. Dollar | ¥ | 3,307 | ¥ | 3,320 | ¥ | (13 | ) | ¥ | 116.03 | ¥ | 938 | ¥ | 981 | ¥ | (43 | ) | 93.82 | ||||||||
Selling EURO | 450 | 455 | (5 | ) | 140.81 | — | — | — | — | ||||||||||||||||
Total | ¥ | 3,757 | ¥ | 3,775 | ¥ | (18 | ) | ¥ | 938 | ¥ | 981 | ¥ | (43 | ) | |||||||||||
Interest rate risk
The tables below present the principal cash flows and related weighted-average interest rates for our long-term loan debt obligations by expected maturity dates and the expected fair value as of March 31, 20072010 and 20062009 respectively. All of our long-term debt obligations have fixed interest rates.
Interest rate risk at March 31, 20072010
Expected maturity dates | Expected maturity dates | ||||||||||||||||||||||||||||||||||||||||||||
Type of debt and average interest rates | 2008 | 2009 | 2010 | 2011 | 2012 | Thereafter | Total 3/31/07 | Fair Value 3/31/07 | 2011 | 2012 | 2013 | 2014 | 2015 | Thereafter | Total 3/31/10 | Fair Value 3/31/10 | |||||||||||||||||||||||||||||
(in millions of yen) | (in millions of yen) | ||||||||||||||||||||||||||||||||||||||||||||
Unsecured bank loans (1.01%) | ¥ | 592 | ¥ | 592 | ¥ | 592 | ¥ | 204 | ¥ | — | ¥ | 1,980 | ¥ | 1,918 | ¥ | 204 | — | — | — | — | — | ¥ | 204 | ¥ | 201 | ||||||||||||||||||||
Unsecured bonds (1.158%) | ¥ | 20,000 | ¥ | 5,000 | — | — | — | ¥ | 25,000 | ¥ | 24,674 | ||||||||||||||||||||||||||||||||||
Unsecured bonds (1.56%) | — | ¥ | 5,000 | ¥ | 5,000 | ¥ | 5,000 | — | — | ¥ | 15,000 | ¥ | 14,902 | ||||||||||||||||||||||||||||||||
Total | ¥ | 20,592 | ¥ | 5,592 | ¥ | 592 | ¥ | 204 | ¥ | — | ¥ | 26,980 | ¥ | 26,592 | ¥ | 204 | ¥ | 5,000 | ¥ | 5,000 | ¥ | 5,000 | — | — | ¥ | 15,204 | ¥ | 15,103 | |||||||||||||||||
Interest rate risk at March 31, 20062009
Expected maturity dates | Expected maturity dates | |||||||||||||||||||||||||||||||||||||||||||||
Type of debt and average interest rates | 2007 | 2008 | 2009 | 2010 | 2011 | Thereafter | Total 3/31/06 | Fair Value 3/31/06 | 2010 | 2011 | 2012 | 2013 | 2014 | Thereafter | Total 3/31/09 | Fair Value 3/31/09 | ||||||||||||||||||||||||||||||
(in millions of yen) | (in millions of yen) | |||||||||||||||||||||||||||||||||||||||||||||
Unsecured bank loans (1.005%) | ¥ | 1,993 | ¥ | 593 | ¥ | 593 | ¥ | 593 | ¥ | 204 | — | ¥ | 3,975 | ¥ | 3,864 | |||||||||||||||||||||||||||||||
Unsecured bonds (1.08%) | ¥ | 20,000 | ¥ | 20,000 | ¥ | 5,000 | — | — | — | ¥ | 45,000 | ¥ | 44,103 | |||||||||||||||||||||||||||||||||
Unsecured bank loans (0.87-1.03%) | ¥ | 592 | ¥ | 204 | — | — | — | — | ¥ | 796 | ¥ | 778 | ||||||||||||||||||||||||||||||||||
Unsecured bonds (1.62%) | — | — | ¥ | 5,000 | ¥ | 5,000 | ¥ | 5,000 | — | ¥ | 15,000 | ¥ | 14,540 | |||||||||||||||||||||||||||||||||
Total | ¥ | 21,993 | ¥ | 20,593 | ¥ | 5,593 | ¥ | 593 | ¥ | 204 | — | ¥ | 48,975 | ¥ | 47,967 | ¥ | 592 | ¥ | 204 | ¥ | 5,000 | ¥ | 5,000 | ¥ | 5,000 | — | ¥ | 15,796 | ¥ | 15,318 | ||||||||||||||||
Investment price risk
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The fair value of certain of our investments, primarily in marketable equity securities, exposes us to equity price risks. In general, we have invested in highly-liquid and low-risk instruments, which are not held for trading purposes. These investments are subject to changes in the market prices of the securities. If the fair value of these securities were to change by 10%, the impact on the carrying amount of those securities as of March 31, 20072009 would be ¥54¥22 million. We had no open equity derivative positions duringfrom April 1, 2009 to March 31, 2007.2010.
The following tables below provide information about our market sensitive marketable securities as of March 31, 20072010 and 2006,2009, respectively:
Millions of Yen | Thousands of U.S. Dollars | Millions of Yen | Thousands of U.S. Dollars | |||||||||||||||||||||||||||||||||||||||||||||
March 31, 2007 | March 31, 2007 | March 31, 2010 | March 31, 2010 | |||||||||||||||||||||||||||||||||||||||||||||
Cost | Gross unrealized gains | Gross unrealized losses | Fair value | Cost | Gross unrealized gains | Gross unrealized losses | Fair value | Cost | Gross unrealized gains | Gross unrealized (losses) | Fair value | Cost | Gross unrealized gains | Gross unrealized (losses) | Fair value | |||||||||||||||||||||||||||||||||
Available-for-sale: | ||||||||||||||||||||||||||||||||||||||||||||||||
Marketable equity securities | ¥ | 544 | ¥ | 211 | ¥ | 54 | ¥ | 701 | $ | 4,608 | $ | 1,787 | $ | 457 | $ | 5,938 | ¥ | 224 | ¥ | 2 | ¥ | — | ¥ | 226 | $ | 2,408 | $ | 21 | $ | — | $ | 2,429 | ||||||||||||||||
Other securities | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
Total | ¥ | 544 | ¥ | 211 | ¥ | 54 | ¥ | 701 | $ | 4,608 | $ | 1,787 | $ | 457 | $ | 5,938 | ¥ | 224 | ¥ | 2 | ¥ | — | ¥ | 226 | $ | 2,408 | $ | 21 | $ | — | $ | 2,429 | ||||||||||||||||
Millions of Yen | Thousands of U.S. Dollars | Millions of Yen | Thousands of U.S. Dollars | |||||||||||||||||||||||||||||||||||||||||||||||
March 31, 2006 | March 31, 2006 | March 31, 2009 | March 31, 2009 | |||||||||||||||||||||||||||||||||||||||||||||||
Cost | Gross unrealized gains | Gross unrealized losses | Fair value | Cost | Gross unrealized gains | Gross unrealized losses | Fair value | Cost | Gross unrealized gains | Gross unrealized (losses) | Fair value | Cost | Gross unrealized gains | Gross unrealized (losses) | Fair value | |||||||||||||||||||||||||||||||||||
Available-for-sale: | ||||||||||||||||||||||||||||||||||||||||||||||||||
Marketable equity securities | ¥ | 460 | ¥ | 112 | ¥ | — | ¥ | 572 | $ | 3,916 | $ | 953 | $ | — | $ | 4,869 | ¥ | 544 | ¥ | 17 | ¥ | (1 | ) | ¥ | 560 | $ | 5,538 | $ | 173 | $ | (10 | ) | $ | 5,701 | ||||||||||||||||
Other securities | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Total | ¥ | 460 | ¥ | 112 | ¥ | — | ¥ | 572 | $ | 3,916 | $ | 953 | $ | — | $ | 4,869 | ¥ | 544 | ¥ | 17 | ¥ | (1 | ) | ¥ | 560 | $ | 5,538 | $ | 173 | $ | (10 | ) | $ | 5,701 | ||||||||||||||||
Credit Risk
As of March 31, 2007,2010, we did not have any significant concentration of business transacted with an individual counterparty or group of counterparties that could, if suddenly eliminated, severely impact our operations. Moreover our derivative financial instruments are executed with credit worthy financial institutions, and our management believes there is little risk of default by these parties.
Commodity price risk
As of March 31, 2007,2010, we had no open commodity derivative positions.
Item 12. | Description of Securities Other Than Equity Securities |
Item 12D. | 3. Fees payable by ADR Holders |
Not applicable.
The following table shows the fees and charges that a holder of our ADR may have to pay, either directly or indirectly:
Type of Services: | Amount of Fee (USD) | |
Deposit or substitution the underlying shares (including execution and delivery of Receipts) | US5.00 for each 100 ADSs (or portion thereof) evidenced by the new ADRs delivered | |
Receipt or distribution dividends | USD0.02 or less per ADS | |
Sale or exercise of rights | USD5.00 for each 100 ADSs (or portion thereof) | |
Withdrawal of underlying security (including the surrender of Receipts) | US5.00 for each 100 ADSs (or portion thereof) evidenced by the new ADRs delivered | |
Transfer, split or grouping of receipts | USD1.50 per ADS | |
General depositary services, including any annually charged fee. | USD0.02 per ADS (or portion thereof) not more than once each calendar year and payable at the sole discretion of the depositary by billing Holders or by deducting such charge from one or more cash dividends or other cash distributions | |
Taxes and other governmental charges | As applicable | |
Such cable, telex and facsimile transmission expenses as are expressly provided in the Deposit Agreement | As applicable | |
Such expenses as are incurred by the Depositary in the conversion of Foreign Currency | As applicable |
Item 12D. | 4. Fees paid to KONAMI CORPORATION by the Depositary |
JPMorgan Chase Bank N.A., as Depositary, has agreed to reimburse KONAMI CORPORATION for expenses incurred in relation to the maintenance of KONAMI CORPORATION’s ADR program, up to a total of US$110,000 for the annual expenses associated with Investor Relations and NYSE annual fees, including investor relations expenses and stock exchange application and listing fees. Furthermore, from April 1, 2009 to March 31, 2010, the Depositary has waived a total of $40,000 in fees associated with the administration of the ADR program and administrative fees for routine corporate actions such as, among others, proxy process fees and cash distribution process fees, in addition to their standard fees for providing investor relations information services.
PART II
Item 13. | Defaults, Dividend Arrearages and Delinquencies. |
None.
Item 14. | Material Modifications to the Rights of Security Holders and Use of Proceeds. |
None.
Item 15. | Controls and Procedures. |
Our Disclosure Committee is charged with the maintenance and evaluation of our disclosure controls and procedures. As of March 31, 2007,2010, an evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, and the Disclosure Committee, of the effectiveness of the disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934). Based on that evaluation, these officers concluded that, as of March 31, 2007,2010, the disclosure controls and procedures were effective.
Management’s Report on Internal Control over Financial Reporting
The management of KonamiKONAMI is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the company’s principal executive and principal financial officers and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The management of KonamiKONAMI assessed the effectiveness of internal control over financial reporting as of March 31, 2007.2010. In making this assessment, the management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (the COSO criteria).
Based on its assessment, the management concluded that, as of March 31, 2007,2010, our internal control over financial reporting was effective based on the COSO criteria.effective.
Our independent registered public accounting firm, KPMG AZSA & Co.,LLC, has issued an audit report on our assessment of internal control over financial reporting. This report appears beginning of our consolidated financial statements in item 17.this annual report.
Changes in Internal Controls over Financial Reporting
Changes in internal controls over financial reporting
There has been no change in our internal control over financial reporting that occurred during the period covered by this Annual Report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 16A. | Audit Committee Financial Expert. |
Our Board of Corporate Auditors has determined that we do not have an “audit committee financial expert” as defined in Item 16A of Form 20-F serving on our Board of Corporate Auditors. We believe that the combined knowledge, skills and experience of the members of our Board of Corporate Auditors enables them, as a group, to act effectively in the fulfillment of their tasks and responsibilities, including those under the Sarbanes-Oxley Act of 2002, and that our Board of Corporate Auditors has functioned and can continue to function effectively without appointing a member who would qualify as an audit committee financial expert under Item 16A. In addition, the Corporate Auditors have the power and authority to engage outside experts as they deem appropriate to provide them with advice on matters related to their responsibilities.
Item 16B. | Code of Ethics. |
We have adopted a code of ethics, the “Konami Group Code of Business Conduct and Ethics” which applies to all of our personnel, including our chief executive officer, chief financial officer, corporate auditors, corporate officers, and employees, whether working for KonamiKONAMI CORPORATION or another company in the Konami Group. The text of the Konami Group Code of Business Conduct and Ethics is attached as exhibit 11.1 to this annual report.
Item 16C. | Principal Accountant Fees and Services. |
Fees Paid to the Independent Auditor
The board of directors engaged KPMG AZSA &Co.LLC to perform an annual audit of our financial statements in the years ended March 31, 20062009 and 2007.2010. The following table presents information concerning fees paid to KPMG AZSA &Co.LLC and KPMG international member firms (“KPMG”) in those years.
Year ended March 31, | ||||||
(in millions) | ||||||
2006 | 2007 | |||||
Audit fees (1) | ¥ | 249 | ¥ | 549 | ||
Audit-related fees (2) | 19 | — | ||||
Tax fees (3) | 148 | 167 | ||||
All other fees (4) | — | 8 | ||||
Total | ¥ | 416 | ¥ | 724 | ||
Year ended March 31, | ||||||
(in millions) | ||||||
2009 | 2010 | |||||
Audit fees (1) | ¥ | 526 | ¥ | 493 | ||
Tax fees (2) | 253 | 235 | ||||
All other fees (3) | 24 | 12 | ||||
Total | ¥ | 803 | ¥ | 740 | ||
(1) | These are fees for professional services for the audit of our annual financial statements and services that are normally provided in connection with statutory and regulatory filings. |
(2) | These are fees for |
These are fees for all other services except those separately defined above. |
Pre-Approval of Services Provided by KPMG
Our Corporate Auditors have adopted policies and procedures for pre-approving all non-audit work performed by KPMG. Specifically, the policies and procedures prohibit KPMG from performing any services for KonamiKONAMI CORPORATION or its subsidiaries without the prior approval of our Corporate Auditors.
All of the services provided by KPMG in the year ended March 31, 20072010 were approved by our Corporate Auditors pursuant to the approval policies described above, and none of such services were approved pursuant to the procedures described in Rule 2-01(c)(7)(i)(C) of Regulation S-X, which waives the general requirement for pre-approval in certain circumstances.
Item 16D. | Exemption from the Listing Standards for Audit Committees. |
With respect to the requirements of Rule 10A-3 under the Securities Exchange Act of 1934 relating to listed company audit committees, which apply to us through Section 303A.06 of the New York Stock Exchange’s Listed Company Manual, we rely on an exemption provided by paragraph (c)(3) of that Rule available to foreign private issuers with boards of corporate auditors meeting certain requirements. For a New York Stock Exchange-listed Japanese company with a board of corporate auditors, the requirements for relying on paragraph (c)(3) of Rule 10A-3 are as follows:
The board of corporate auditors must be established, and its members must be selected, pursuant to Japanese law expressly requiring such a board for Japanese companies that elect to have a corporate governance system with corporate auditors.
Japanese law must and does require the board of corporate auditors to be separate from the board of directors.
None of the members of the board of corporate auditors may be elected by management, and none of the listed company’s executive officers may be a member of the board of corporate auditors.
Japanese law must and does set forth standards for the independence of the members of the board of corporate auditors from the listed company or its management.
The board of corporate auditors, in accordance with Japanese law or the registrant’s governing documents, must be responsible, to the extent permitted by Japanese law, for the appointment, retention and oversight of the work of any registered public accounting firm engaged (including, to the extent permitted by Japanese law, the resolution of disagreements between management and the auditor regarding financial reporting) for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for the listed company, including its principal accountant which audits its consolidated financial statements included in its annual reports on Form 20-F.
To the extent permitted by Japanese law:
the board of corporate auditors must establish procedures for (i) the receipt, retention and treatment of complaints received by us regarding accounting, internal accounting controls, or auditing matters, and (ii) the confidential, anonymous submission by our employees of concerns regarding questionable accounting or auditing matters;
the board of corporate auditors must have the authority to engage independent counsel and other advisers, as it determines necessary to carry out its duties; and
the listed company must provide for appropriate funding, as determined by its board of corporate auditors, for payment of (i) compensation to any registered public accounting firm engaged for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for us, (ii) compensation to any advisers employed by the board of corporate auditors, and (iii) ordinary administrative expenses of the board of corporate auditors that are necessary or appropriate in carrying out its duties.
In our assessment, our Board of Corporate Auditors, which meets the requirements for reliance on the exemption in paragraph (c)(3) of Rule 10A-3 described above, is not materially less effective than an audit committee meeting all the requirements of paragraph (b) of Rule 10A-3 (without relying on any exemption provided by that Rule) at acting independently of management and performing the functions of an audit committee as contemplated therein.
Item 16E. | Purchases of Equity Securities by the Issuer and Affiliated Purchasers. |
The following table sets forth, for each of the months indicated, the total number of shares purchased by us and any affiliated purchaser, the average price paid per share, the number of shares purchased as part of a publicly announced repurchase plan or program, and the maximum number of shares that may yet be purchased under the plans.
Period | (a) (shares) | (b) (yen) | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans | (d) Maximum Number of Shares that May Yet Be Purchased Under the Plans | ||||
April 1 to April 30, 2006 | 7,413 | 2,930.53 | — | — | ||||
May 1 to May 31, 2006 | 6,746 | 2,763.63 | — | — | ||||
June 1 to June 30, 2006 | 1,793 | 2,508.69 | — | — | ||||
July 1 to July 31, 2006 | 1,358 | 2,512.68 | — | — | ||||
August 1 to August 31, 2006 | 3,738 | 2,932.15 | — | — | ||||
September 1 to September 30, 2006 | 3,268 | 2,916.88 | — | — | ||||
October 1 to October 31, 2006 | 3,396 | 3,236.48 | — | — | ||||
November 1 to November 30, 2006 | 2,819 | 3,193.28 | — | — | ||||
December 1 to December 31, 2006 | 2,163 | 3,346.95 | — | — | ||||
January 1, to January 31, 2007 | 1,988 | 3,433.57 | — | — | ||||
February 1, to February 28, 2007 | 1,805 | 3,305.25 | — | — | ||||
March 1 to March 31, 2007 | 997 | 3,086.29 | — | — |
Notes: Total number of purchase shares shown includes the purchase of fractional shares from fractional share owners, pursuant to the Japanese Commercial Code. For an explanation of the right of such shareholders, see “Right of our Shareholders—Unit shares System” under Item 10.B of this Annual Report.
Not Applicable.
Companies listed on the New York Stock Exchange (hereinafter called the NYSE) must comply with certain standards regarding corporate governance under Section 303A of the NYSE Listed Company Manual. However, listed companies that are foreign private issuers, such as KONAMI CORPORATION, are permitted to follow home country practice in lieu of certain provisions of Section 303A The following table shows the significant differences between the corporate governance practices followed by U.S. listed companies under Section 303A of the NYSE Listed Company Manual and those followed by KONAMI.
PART III
In lieu of responding to this item, we have responded to Item 18 of this annual report.
The information required by this item is set forth beginning on page F-2 of this annual report.
We have not included as exhibits certain instruments with respect to our long-term debt. The amount of debt authorized under each such debt instrument does not exceed 10% of our total assets. We agree to furnish a copy of any such instrument to the Commission upon request. AND SUBSIDIARIES
Index to Consolidated Financial Statements and Financial Statement Schedule
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders KONAMI CORPORATION:
We have audited the accompanying consolidated balance sheets of KONAMI CORPORATION and subsidiaries as of March 31,
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of KONAMI CORPORATION and As further discussed in Note 1 to the consolidated financial statements, effective April 1 2009, the Company adopted retrospectively the presentation and disclosure provisions of FASB Accounting Standard Codification Topic 810, “Consolidation”.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
The accompanying consolidated financial statements as of and for the year ended March 31,
/s/ KPMG AZSA
Tokyo, Japan
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders KONAMI CORPORATION:
We have audited
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting,
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion,
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of KONAMI CORPORATION and subsidiaries as of March 31,
/s/ KPMG AZSA
Tokyo, Japan
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS March 31,
See accompanying notes to consolidated financial statements. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME Years ended March 31,
See accompanying notes to consolidated financial statements. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF Years ended March 31,
KONAMI CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF Years ended March 31,
KONAMI CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY Years ended March 31, 2008, 2009 and 2010—(Continued)
See accompanying notes to consolidated financial statements. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended March 31,
See accompanying notes to consolidated financial statements. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended March 31,
1. Business and Organization, Basis of Presentation and Summary of Significant Accounting Policies
Business and Organization
KONAMI CORPORATION (the “Company”) was founded in 1969 and was incorporated under the laws of Japan in March 1973. The Company and its subsidiaries (collectively
Substantially all of
In the United States, Canada and Australia, the manufacture and distribution of
Basis of Accounting
The Company and its domestic subsidiaries maintain their books and records in conformity with accounting principles and practices generally accepted in Japan (“Japanese GAAP”), and its foreign subsidiaries in conformity with those of the country of their domicile. The consolidated financial statements presented herein have been prepared in a manner and reflect certain adjustments, which are necessary to conform with U.S. generally accepted accounting principles (“U.S. GAAP”).
Translation into U.S. Dollars
The accompanying consolidated financial statements are stated in Japanese yen, the functional currency of the country in which the Company is incorporated and principally operates. The U.S. dollar amounts included herein represent a translation using the mid price for telegraphic transfer of U.S. dollars for yen quoted by The Bank of Tokyo-Mitsubishi UFJ, Ltd. as of March KONAMI CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended March 31,
Summary of Significant Accounting Policies
(a) Consolidation Policy
The accompanying consolidated financial statements include the accounts of the Company and all of its majority-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
(b) Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid investments with an initial maturity of three months or less.
(c) Marketable Securities
On a continuous basis, but no less frequently than at the end of each
Impairment to be recognized is measured based on the amount by which the carrying amount of the investment exceeds the fair value of the investment. Fair value is determined based on quoted market prices, projected discounted cash flows or other valuation techniques as appropriate. KONAMI CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended March 31,
(d)
For those investments in affiliates in which the Company has the ability to exercise significant influence over the affiliate’s operations (generally when its voting interest is between 20% and 50%), the
The difference between the initial cost of an investment and the estimated fair value of underlying equity in net assets of an equity method investee (“investor level goodwill”) is not amortized but continues to be reviewed for impairment. When an other-than-temporary decline in value of an equity-method investment occurs, an impairment loss is recognized in earnings. On a continuous basis, but no less frequently than at the end of each
(e) Inventories
Inventories, consisting of merchandise for resale, finished products, work-in-process, raw materials and supplies, are stated at the lower of cost or market. Cost is determined
(f) Property and Equipment
Property and equipment are carried at cost. Depreciation is computed on the declining-balance method using estimated useful lives ranging from 10 to 50 years for buildings and structures and from 2 to 20 years for tools, furniture and fixtures. Equipment under capital leases is stated at the lower of the present value of minimum lease payments or the fair value of the leased equipment at the inception of the lease and is amortized
Ordinary maintenance and repairs are expensed as incurred. Major replacements and improvements are capitalized. When properties are retired or otherwise disposed of, the property and related accumulated depreciation accounts are relieved of the applicable amounts and any differences are included in operating income or expenses.
KONAMI CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended March 31,
(g) Software for Internal Use
(h) Business Combination
(i) Goodwill and Other Identifiable Intangible Assets
Goodwill represents the difference between the cost of acquired companies and amounts allocated to the estimated fair value of their net assets. Identifiable intangible assets represent intangible assets related to trademarks, membership lists, gaming licenses, existing technology, customer relationships and franchise and other contracts acquired
KONAMI CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended March 31,
Intangible assets determined to have an indefinite useful life are also tested for impairment annually or more frequently if there is an indication of potential impairment. KONAMI also reassesses indefinite useful life determinations periodically for each asset. Meanwhile, intangible assets with finite useful lives
(j) Impairment or Disposal of Long-Lived Assets
(k) Derivative Financial Instruments
From time to time,
(l) Income Taxes
KONAMI CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended March 31, 2008, 2009 and 2010—(Continued) KONAMI recognizes the financial statement effects of tax positions when it is more likely than not that the tax positions, taken or expected to be taken in a tax return, will be sustained upon examination by the tax authorities. Benefits from tax positions that meet the more-likely-than-not recognition threshold are measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon settlement. Interest and penalties related to unrecognized tax benefits are included in income taxes in its consolidated financial statements.
(m) Revenue Recognition
Persuasive Evidence of an Arrangement.
For product sales, it is
For
For mobile game contents,
Delivery Has Occurred.
Packaged game software and other products are physically delivered to
Revenue from health and fitness club membership is derived primarily from monthly membership fees from club members. Revenue for those fees is recognized as monthly charges are generally made to the members’ accounts in advance, at the end of each month, with respect to the following month’s membership. This policy requires KONAMI CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended March 31,
Revenue from mobile game contents is derived from monthly subscription fees. Under the distribution agreements, the mobile phone carriers are responsible for billing, collection and remittance of those subscription fees to
The Price is Fixed or Determinable.
The price customers pay for
Collection is Probable.
Probability of collection is assessed on a customer-by-customer basis. For those sources that involve multiple software deliverables, KONAMI evaluates revenue recognition based on the
KONAMI recognizes revenues from package software with online functionality for certain platforms in Digital Entertainment Segment which is hosted on its internal servers as multiple software deliverables. As VSOE of Revenues from casino management systems that are a part of Gaming & System Segment are also recognized as multiple software deliverables, because the software is essential to the functionality of the hardware. Revenue from sales of casino management systems is recognized only when installation of hardware and software is completed and accepted by the KONAMI CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended March 31, 2008, 2009 and 2010—(Continued) For those sources that involve multiple deliverables except for software deliverables, KONAMI applies the recognition criteria. Specifically, deliverables are divided into separate units of accounting if:
Separate units of accounting are recognized in earnings as they are delivered or ratably over the service period, as applicable.
(n) Software Development Costs
Research and development expenses are charged to earnings as incurred. Research and development expenses included in selling, general and administrative expenses amounted to
(o) Royalties and License Fees
number of copies shipped at the predetermined royalty rates, are expensed to cost of products sold based on actual shipment. Management periodically evaluates the future realizability of prepaid royalties and charges to income any amounts deemed unlikely to be realized. Prepaid royalties amounted to
(p) Shipping and Handling Expenses
Shipping and KONAMI CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended March 31, 2008, 2009 and 2010—(Continued)
(q) Advertising Expenses
Advertising expenses are charged to earnings as incurred and are included in Selling, general and administrative expenses in the accompanying consolidated statements of income. Advertising expenses amounted to
(r) Stock-based Compensation
(s) Comprehensive Income (loss)
(t)
Transactions denominated in foreign currencies are recorded using the exchange rates in effect as of the transaction dates. The related foreign currency asset and liability balances are
Assets and liabilities of a foreign subsidiary where the functional currency is other than Japanese yen are translated into Japanese yen at the exchange rates in effect at the balance sheet date. Revenue and expense accounts are translated at average exchange rates during the current year. The resulting translation adjustments are included in accumulated other comprehensive
(u)
(v) Use of Estimates
Preparation of these consolidated financial statements requires management of
(w)
KONAMI CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended March 31,
The components of basic and diluted net income attributable to KONAMI CORPORATION stockholders per common share are as follows:
For the years ended March 31, 2008, 2009 and 2010, nil, 741,968 and nil shares attributable to outstanding stock options were excluded from the calculation of diluted earnings attributable to KONAMI CORPORATION per share because the exercise prices of the stock options were greater than to the average price of the common shares, and therefore their inclusion would have been anti-dilutive. (x) New Accounting Pronouncements Adopted Effective April 1, 2009, KONAMI adopted the provisions of Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards No. 141 Revised, Business Combinations, included in KONAMI CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended March 31, 2008, 2009 and 2010—(Continued) Effective April 1, 2009, KONAMI adopted the provisions FASB Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements, included in ASC Topic 810. This ASC establishes new accounting and reporting
In On January 1, 2008, KONAMI adopted the provisions of FASB Statement No. 157, On January 1, 2009, KONAMI adopted the provisions of ASC Topic 820 to fair value measurements of nonfinancial assets and nonfinancial liabilities that are recognized or disclosed in the financial statements KONAMI also adopted ASC 740-10 “Accounting for
KONAMI CORPORATION AND SUBSIDIARIES
Years ended March 31, 2008, 2009 and
2. Merger and Acquisition
On The acquisition was accounted for using the purchase method of accounting and the excess
The following table reflects the
At March 31, 2008, 2009 and
KONAMI CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended March 31,
Summarized financial information for the
The Company’s The investment in Resort Solution with a carrying amount of ¥2,119 million and
KONAMI CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended March 31,
4. Inventories
Inventories at March 31,
5. Investment in Marketable Securities
Investment in marketable securities at March 31,
KONAMI CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended March 31,
6. Property and Equipment
Property and equipment at March 31,
See Note 11 for assets under capital leases that are included in the above.
Depreciation and amortization expense for the years ended March 31,
During the fiscal year ended March 31, 2009, KONAMI identified a change in circumstances that indicated the carrying value of long-lived assets might not be recoverable and
KONAMI CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended March 31,
During the
In the fourth quarter of the fiscal year ended March 31, 2010, KONAMI determined that the fair value of indefinite lived intangible assets related to credit card contracts in the Health & Fitness reporting unit was lower than their carrying value. As a result, an aggregate non-cash impairment charge of ¥ 451 million ($4,847 thousand) was recorded in restructuring and impairment charges in the accompanying consolidated statements of income for the year ended March 31, 2010. The impairment charge was attributed to determination that the assets would fail to generate substantially expected future cash flows resulting from reviewing certain business as part of the restructuring processes for the reporting unit. As for the carrying value of
The changes in the carrying
KONAMI CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended March 31,
Identifiable intangible assets at March 31,
Intangible assets determined to have an indefinite useful life have been reassessed at least annually based on the factors
Intangible assets related to existing technology,
The aggregate amortization expense for identifiable intangible assets for the years ended March 31,
The estimated amortization expense for the following years is as follows:
8.
KONAMI CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended March 31, The following table summarizes the restructuring and impairment charges recognized in the accompanying consolidated statement of income for the year ended March 31, 2009 and 2010:
Impairment charges for long-lived assets and intangible assets for the year ended March 31, 2009 and 2010 are more fully discussed in Note 6 and 7, respectively. The following table presents the activities for liabilities with contract terminations related to closure of facilities for the year ended March 31, 2010:
At March 31, 2009, KONAMI recognized ¥26 million of accrued contract termination cost and no further change was recorded for the year ended March 31, 2009. The aggregate estimated amounts for contract termination costs related to closure of facilities is ¥481 million ($5,170 thousand), including ¥66 million ($709 thousand) which will be incurred for the year ending March 31, 2011.
9.
KONAMI CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended March 31, KONAMI acquired computer software for internal use of ¥2,100 million and ¥1,871 million ($20,110 thousand) in fiscal years 2009 and 2010, respectively. Capitalized computer software at March 31, 2009 and 2010 consisted of the following:
Amortization expense of computer software for the years ended March 31, 2008, 2009 and 2010 amounted to ¥3,799 million, ¥3,731 million and ¥4,075 million ($43,798 thousand), respectively. Estimated amortization expense of computer software for the following years is as follows:
Amortization expense of other intangible assets for the years ended March 31, 2008, 2009 and 2010 amounted to ¥93 million, ¥565 million and ¥288 million ($3,095 thousand), respectively. 10. Short-term Borrowings and Long-term Debt
A summary of long-term debt at March 31,
KONAMI CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended March 31, 2008, 2009 and 2010—(Continued) The Company issued unsecured bonds in the aggregate amount of ¥15,000 million in total on September 5, 2007. Unsecured long-term loans from banks included no loans denominated in foreign currencies at March 31,
The Company has committed lines of credit available for immediate borrowings amounting to ¥20,000 million ($
The aggregate annual maturities of long-term debt outstanding at March 31,
11. Leases
At March 31,
KONAMI CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended March 31, 2008, 2009 and 2010—(Continued)
Amortization of capitalized leases is included in depreciation expense.
Future minimum lease payments under capital leases and noncancelable operating leases as of March 31,
Current and non-current portions of minimum leases payments for capital leases are included in current and non-current portions of long-term debt, respectively, in the accompanying consolidated balance sheets.
12. Asset Retirement Obligation
KONAMI CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended March 31, 2008, 2009 and 2010—(Continued) The following table presents the activity for asset retirement obligations for the
13. Income Taxes
The Company and its domestic subsidiaries are subject to
KONAMI CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended March 31,
The significant components of total income taxes for the years ended March 31,
Reconciliations of the differences between the statutory income tax rates and the effective income tax rates are as follows:
KONAMI CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended March 31,
The effects of temporary differences that give rise to deferred tax assets and liabilities at March 31,
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible and tax loss carryforwards are utilizable. Management considered the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not that
The net change in the total valuation allowance for the years ended March 31,
KONAMI CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended March 31,
Net deferred tax assets were included in the accompanying consolidated balance sheets as follows:
At March 31,
The total amount of Although KONAMI believes its estimates and KONAMI CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended March 31, 2008, 2009 and 2010—(Continued) decreases that may occur within the next twelve months cannot be made at this time. Based on the items of which KONAMI recognizes interest and penalties related to unrecognized tax benefits in KONAMI files its income tax returns in various tax jurisdictions. KONAMI is no longer subject to
14. Severance and Retirement Plans
The Company and its domestic subsidiaries have defined benefit severance and retirement plans covering their employees. The plans provide, under most circumstances, retirement benefits and lump-sum severance payments to the employees that are determined by reference to their
withdraw from the plans and enroll under such system as receiving all compensation
KONAMI CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended March 31,
The reconciliation of beginning and ending balances of the benefit obligations of the Company and its domestic subsidiaries’ plans
Recognized accumulated other comprehensive
KONAMI CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended March 31,
The measurement date used to determine pension benefit obligations for all the pension plans was March 31. The accumulated benefit Net periodic cost of the Company and its domestic subsidiaries’ plans for the years ended March 31, 2008, 2009 and 2010 included the following components:
Estimated amortization for actuarial loss for the year ending March 31, 2011 is as follows:
Weighted-average assumptions used to determine projected benefit obligations at March 31,
Weighted-average assumptions used to determine net periodic cost for the years ended March 31,
The Company and its domestic subsidiaries
The Company and its domestic subsidiaries’ investment goals for the pension benefit plans are to ensure adequate plan assets to provide future payments of pension benefits to eligible participants. The Company and its domestic subsidiaries KONAMI CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended March 31, 2008, 2009 and 2010—(Continued) policies. The Company and its domestic subsidiaries evaluates the difference between expected return based on expected long-term rate of return on plan assets and actual return on invested plan assets on an annual basis. The Company and its domestic subsidiaries will revise the asset allocation if the evaluation requires a revision of its formulation of asset allocation.
The Company and its domestic subsidiaries’ plan assets consist of three major components: approximately 30% is invested in equity securities, approximately 30% is invested in debt securities, and approximately 40% is invested in other investment vehicles, primarily consisting of investments in life insurance company general accounts. The equity securities for pooled funds are selected primarily from stocks that are listed on the securities exchanges. In making investment decisions, the Company and its domestic subsidiaries had examined the business condition of the investee companies, and appropriately diversified investments by type of industry and other relevant factors. The debt securities for pooled funds are selected primarily from government bonds, public debt instruments, and corporate bonds. In making investment decisions, the Company and its domestic subsidiaries had examined the quality of the issue, including rating, interest rate, and repayment dates, and appropriately diversified the investments. In regard to investments in life insurance company general accounts, the contracts with the insurance companies guarantee a certain amount of interest rate and return of capital. The fair values of the Company and its domestic subsidiaries’ plan assets at March 31, 2010, by asset category, are as follows:
KONAMI CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended March 31, 2008, 2009 and 2010—(Continued) The three levels of input used to measure fair value are more fully described in Note 19. Pooled funds investing in the equity securities consist of approximately 65% Japanese companies and 35% foreign companies. Pooled funds investing in the debt securities consist of approximately 54% Japanese government bonds, 23% foreign government bonds, 22% Japanese public debt instruments and corporate bonds, and 1% foreign public debt instruments and corporate bonds. Level 2 assets are comprised principally of pooled funds that invest in equity and debt securities and investments in life insurance company general accounts. Pooled funds are valued at their net asset values that are calculated by the sponsor of the fund and have daily liquidity. Investments in life insurance company general accounts are valued at conversion value. As of March 31, 2010, the Company and its domestic subsidiaries did not have any Level 1 and 3 plan assets. The Company and its domestic subsidiaries have participated in the welfare pension fund for
The Company and its domestic subsidiaries expects to contribute
Future estimated pension benefit payments, using the defined benefit plan for the Company and its domestic subsidiaries are as follows.
The Company has accrued the liability for retirement benefits for their directors and corporate auditors in the amount of ¥1,321 million and ¥ 1,096 ($11,780 thousand) at March 31, 2009 and 2010, respectively, which is included in accrued pension and severance costs in the accompanying consolidated balance sheets. KONAMI CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended March 31,
15. Stockholders’ Equity
Dividends
Under the Japanese Corporate Law (the “Law”), the amount available for dividends is based on retained earnings as recorded on the books of the Company maintained in conformity with Japanese GAAP. Certain adjustments not recorded on the Company’s books are reflected in the consolidated financial statements for reasons described in Note 1. At March 31,
The Law provides that an amount equal to at least 10% of the aggregate amount of cash dividends of retained earnings associated with cash outlays shall be appropriated as a legal reserve until such reserve and additional paid-in-capital equals 25% of common stock.
Treasury Stock Transactions
The following table summarizes treasury stock activities for the years ended March 31,
Stock-based Compensation Plan
The Company and its domestic consolidated subsidiaries maintain certain stock-based compensation plans for grant of stock subscription rights to their directors and employees. Under these plans, the number of KONAMI’s stock option awards generally vest based on 2 to 4 years of continuous service and have 5-year contractual terms. These awards gradually vest through the period of service rendered and therefore KONAMI CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended March 31,
The following summarizes
Aggregate intrinsic value of options exercised were
Cash received from the exercise of stock options were
KONAMI CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended March 31,
16. Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) at March 31,
KONAMI CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended March 31,
Tax effects allocated to each component of other comprehensive income (loss) and adjustments are as follows:
KONAMI CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended March 31,
17. Derivative Financial Instruments
KONAMI uses foreign exchange forward contracts with terms ranging from 3 to 6 months to reduce its exposure to short-term movements in the exchange rates applicable to firm funding commitments denominated in currencies other than Japanese yen. KONAMI does not hold derivative financial instruments for trading purposes. The
KONAMI CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended March 31, 2008, 2009 and KONAMI does not designate the foreign exchange forward contracts as hedges. The gain or loss recognized in earnings
Foreign exchange net gain or losses, including those on these forward exchange contracts, for the years ended March 31, Effects of exchange rate changes subsequent to March 31,
18. Fair Value of Financial Instruments
Cash and cash equivalents, Trade notes and accounts receivable, Trade notes and accounts payable, Accrued expenses, and Short-term borrowings
The carrying amount approximates fair value because of the short maturity of these instruments.
Investments in marketable securities
The fair values of
Investments in non-marketable securities
For investments in non-marketable securities for which there are no quoted market prices, a reasonable estimate of fair value could not be made without incurring excessive costs. It was not practicable to estimate the fair value of common stock representing certain untraded companies. These investments are carried at cost.
Long-term debt
The fair values of
Derivative financial instruments
The fair values of derivative financial instruments, consisting principally of foreign exchange forward contracts, all of which are used for purposes other than trading, are estimated by obtaining quotes from brokers. KONAMI CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended March 31, 2008, 2009 and 2010—(Continued)
The estimated fair values of
Limitations
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instruments. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. 19. Fair Value Measurements Fair value is defined as the amount that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants and requires that assets and liabilities carried at fair value are classified and disclosed in the following three categories:
KONAMI CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended March 31,
As of March 31, 2009 and 2010, our assets and liabilities measured at fair value on a recurring basis are summarized in the following table by the type of inputs applicable to the fair value measurements.
Level 1 investments are comprised solely of available-for-sale securities, which is valued using an unadjusted quoted market price in active markets with sufficient volume and frequency of transactions. Derivative financial instruments are comprised of foreign exchange forward contracts. Level 2 derivatives are valued using quotes obtained from counterparties or third parties, which are periodically validated by pricing models using observable market inputs, such as foreign currency exchange rates and interest rates. As of March 31, 2009 and 2010, KONAMI did not have any Level 3 financial instruments that were measured and recorded at fair value on a recurring basis. KONAMI CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended March 31, 2008, 2009 and 2010—(Continued) Assets and Liabilities Measured at Fair Value on a Non-recurring Basis As of March 31, 2009 and 2010, our assets and liabilities measured at fair value on a non-recurring basis are summarized in the following table by the type of inputs applicable to the fair value measurements.
The Company’s marketable equity-method investment was measured at fair value during the year ended March 31, 2009 due to events or circumstances the Company identified that significantly impacted the fair value of these investments, resulting in other-than-temporary impairment charges. As a result, the Company recorded a ¥4,347 million of impairment charge for its investments to write down the investment to its fair value. The impairment charge was included in equity in net income (loss) of affiliated companies on the consolidated statements of income. We classified these investments as Level 1, as we use an unadjusted quoted market price in active markets. Impairment charges for investments in affiliates for the year ended March 31, 2009 is more fully discussed in Note 3.
During the year ended March 31, 2010, KONAMI wrote down the carrying value of the long-lived assets amounted to ¥480 million ($5,159 thousand) to their fair value nil, and we classified them as Level 3, whose fair value was valued with inputs to be unobservable. As a result, KONAMI recorded impairment losses of ¥480 million ($5,159 thousand) for property and equipments, and those losses were included in the accompanying consolidated statements of income for the year ended March 31, 2010. KONAMI CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended March 31, 2008, 2009 and 2010—(Continued) During the year ended March 31, 2010, KONAMI concluded the fair value of certain indefinite lived intangible assets was lower than their carrying value. Consequently, the carrying value of the assets was written down to their fair value nil, and we classified them as Level 3, whose fair value was valued with inputs to be unobservable. As a result, KONAMI recorded an aggregate impairment loss of ¥451 million ($4,847 thousand) for identifiable intangible assets, and the loss was included in the accompanying consolidated statements of income for the year ended March 31, 2010. Impairment losses for long-lived assets and intangible assets are more fully discussed in Note 6 and 7, respectively. 20. Supplemental Disclosures to Consolidated Statements of Cash Flows
Notes:
KONAMI CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended March 31,
The following table summarizes presents segment revenue, segment operating income (loss),
a . Segment information
(1) Revenue and operating income (loss)
KONAMI CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended March 31,
As
KONAMI CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended March 31,
(2) Total assets, depreciation and amortization and capital expenditures
Eliminations and corporate primarily consist of eliminations of intercompany profits on inventories and assets for corporate headquarters, which primarily consist of cash and financial assets.
Capital expenditures include expenditures for acquisitions of tangible and intangible long-lived assets used in operations of each segment
KONAMI CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended March 31,
b. Geographic information
KONAMI CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended March 31, 2008, 2009 and 2010—(Continued) For the purpose of presenting its operations in geographic areas above, KONAMI attributes revenues from external customers to individual countries in each area based on where the Company and its subsidiaries sold products or rendered services, and attributes assets based on where assets are located. 22. Commitments and Contingencies KONAMI is subject to pending claims and litigation. After review and consultation with counsel, management considered that any liability that may result from the disposition of such lawsuits would not be material. KONAMI has placed firm orders for purchases of property, plant and equipment and other assets amounting to approximately ¥60 million ($645 thousand) as of March 31, 2010. AND SUBSIDIARIES SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
KONAMI CORPORATION
Date:
INDEX TO EXHIBITS
We have not included as exhibits certain instruments with respect to our long-term debt. The amount of debt authorized under each such debt instrument does not exceed 10% of our total assets. We agree to furnish a copy of any such instrument to the Commission upon request. |