Konami Grp Corp Regulatory News (KNM)

3 Feb 2006 10:11

Konami Corporation03 February 2006 Consolidated Financial Results for the Third Quarter Ended December 31, 2005 (Prepared in Accordance with U.S. GAAP) February 3, 2006 KONAMI CORPORATIONAddress: 4-1, Marunouchi 2-chome, Chiyoda-ku, Tokyo, JapanStock code number, TSE: 9766Ticker symbol, NYSE: KNMURL: www.konami.netShares listed: Tokyo Stock Exchange, New York Stock Exchange, London Stock Exchange and Singapore ExchangeRepresentative: Kagemasa Kozuki, Chairman of the Board and Chief Executive OfficerContact: Noriaki Yamaguchi, Executive Vice President and Chief Financial Officer (Phone: +81-3-5220-0163) 1. Preparation Basis for Consolidated Financial Results for the Third Quarter Ended December 31, 2005 (1) Adoption of U.S. GAAP: Yes (2) Change in accounting policies: None (3) Number of consolidated subsidiaries and affiliated companies accounted for by the equity method Number of consolidated subsidiaries: 22 Number of affiliated companies accounted for by the equity method: 0 (4) Changes in reporting entities Number of consolidated subsidiaries added: 4 Number of consolidated subsidiaries removed: 9 Number of affiliated companies added: 0 Number of affiliated companies removed: 2 (5) Financial information presented herein was not audited by independent public accountants. 2. Consolidated Financial Results for the Third Quarter Ended December 31, 2005 and for the Nine Months Ended December 31, 2005(Amounts are rounded to the nearest million) (1) Consolidated Results of Operations (Millions of Yen, except per share data) Net revenues Operating Change Income before income Change income taxes Change Third quarter ended Y80,679 (1.0)% Y16,383 2.2% Y15,593 1.5% December 31, 2005Third quarter ended 81,494 (1.0) 16,037 20.4 15,355 18.5 December 31, 2004Nine months ended 192,549 (1.5) 23,845 (14.5) 29,928 11.1 December 31, 2005Nine months ended 195,503 (7.9) 27,888 (20.4) 26,941 (23.8) December 31, 2004Year ended March 31, 260,691 28,136 27,4422005 Net income Change Net income Diluted net income per share (Yen) per share (Yen) Third quarter ended Y9,676 15.3% Y74.26 Y74.24 December 31, 2005 Third quarter ended 8,389 4.3 70.16 70.16 December 31, 2004 Nine months ended 16,640 66.2 127.70 127.68 December 31, 2005 Nine months ended 10,015 (47.0) 83.38 83.38 December 31, 2004 Year ended March 31, 2005 10,486 87.41 87.41 Notes: 1. Change (%) of net revenues, operating income, income before income taxes, and net income represents the increase ordecrease relative to the same period of the previous year 2. Equity in net income (loss) of affiliated companies Third quarter ended December 31, 2005: - million Third quarter ended December 31, 2004: Y135 million Nine months ended December 31, 2005: - million Nine months ended December 31, 2004: (2,416) million Year ended March 31, 2005: (6,293) million 3. Weighted-average common shares outstanding (consolidated) Third quarter ended December 31, 2005: 130,307,911 shares Third quarter ended December 31, 2004: 119,567,336 shares Nine months ended December 31, 2005: 130,306,094 shares Nine months ended December 31, 2004: 120,116,594 shares Year ended March 31, 2005: 119,970,052 shares (2) Consolidated Financial Position (Millions of Yen, except per share amounts) Total Equity-assets Total stockholders' stockholders' Total assets equity Ratio equity per share (Yen) December 31, 2005 Y319,784 Y140,762 44.0% Y1,080.22 December 31, 2004 306,874 103,445 33.7 865.78 March 31, 2005 304,321 105,857 34.8 885.97 Note: Number of shares outstanding (consolidated) December 31, 2005: 130,308,978 shares December 31, 2004: 119,481,820 shares March 31, 2005: 119,481,411 shares (3) Consolidated Cash Flows (Millions of Yen) Net cash provided by (used in) Cash and Operating Investing Financing cash equivalents activities activities activities at end of periodNine months ended December 31, 2005 Y6,831 Y 6,317 Y (29,013) Y 74,764Nine months ended December 31, 2004 12,300 (11,173) (11,887) 76,719Year ended March 31, 2005 27,760 (14,343) (11,670) 89,583 3. Forecast for the Year Ending March 31, 2006 (Millions of Yen) Net revenues Operating income Income before Net income income taxesYear ending March 31, 2006 Y270,000 Y 28,500 Y 34,000 Y 18,000 Note: Expected net income per share for the year ending March 31, 2006 is Y138.13. Cautionary Statement with Respect to Forward-Looking Statements: Statements made in this document with respect to our current plans, estimates, strategies and beliefs, including the above forecasts, are forward-looking statements about our future performance. These statements are based on management's assumptions and beliefs in light of information currently available to it and, therefore, you should not place undue reliance on them. A number of important factors could cause actual results to be materially different from and worse than those discussed in forward-looking statements. Such factors include, but are not limited to: (i) changes in economic conditions affecting our operations; (ii) fluctuations in currency exchange rates, particularly with respect to the value of the Japanese yen, the U.S. dollar and the Euro; (iii) our ability to continue to win acceptance of our products, which are offered in highly competitive markets characterized by the continuous introduction of new products, rapid developments in technology and subjective and changing consumer preferences; (iv) our ability to successfully expand internationally with a focus on our video game software business, card game business and gaming machine business; (v) our ability to successfully expand the scope of our business and broaden our customer base through our exercise entertainment business; (vi) regulatory developments and changes and our ability to respond and adapt to those changes; (vii) our expectations with regard to further acquisitions and the integration of any companies we may acquire; and (viii) the outcome of contingencies. 1. Organizational Structure of the Konami Group The Konami Group is a conglomerate engaged in the amusement and health industry providing customers with "HighQuality Life" and is comprised of KONAMI CORPORATION ("the Company"), its 22 consolidated subsidiaries. Each of the Company and its subsidiaries is categorized into business segments based on its operations as statedbelow. Business segment categorization is based on the same criteria explained below under "6. Segment Information(Unaudited) ". However, Gaming Business Segment changed its name to Gaming & System Business Segment on October1, 2005, as mentioned note 3 below. Business Segments Major Companies Digital Entertainment Domestic The Company (*1,2,3,4,6,Note 5,6) (*5) (*3) HUDSON SOFT CO., LTD. (*4) Konami Logistics & Service, Inc. (*8) Overseas Konami Digital Entertainment, Inc.(*7) Konami of Europe GmbH Konami Software Shanghai, Inc. Konami Corporation of Europe B.V. Konami Marketing (Asia) Ltd. Hudson Entertainment, Inc.(*4) Health & Fitness Domestic The Company (Note 5) (Note 3) Konami Sports Life Corporation (Note 5) Konami Sports Corporation (Note 5) Konami Logistics & Service, Inc. (*8) Two other companies Gaming & System Domestic The Company (Note 3) Overseas Konami Gaming, Inc. Konami Australia Pty Ltd., One other company Other Domestic Konami Logistics & Service, Inc. (*8) (Note 4) KPE, Inc. , Konami Real Estate, Inc. Konami School, Inc., Two other companies Overseas Konami Corporation of America Konami Corporation of Europe B.V., One other company Notes: 1. Companies that have operations categorized in more than one segment are included in each segment in whichthey operate. 2. Primary changes in major companies for the year ended December 31, 2005 are as follows.*1. The Company merged with Konami Computer Entertainment Studios, Inc., Konami Computer Entertainment Tokyo,Inc., Konami Computer Entertainment Japan, Inc., Konami Online, Inc. and Konami Media Entertainment, Inc. onApril 1, 2005.*2. The Company merged with Konami Traumer, Inc. on June 1, 2005.*3. The Company has sold its entire shares of TAKARA Co., LTD, an equity-method affiliate, and has dissolved itsequity relationship on April 25, 2005.*4. As a result of the Company's acceptance of a third party allotment of additional shares on April 27, 2005,HUDSON SOFT CO., LTD, an equity-method affiliate, became a 53.99% owned consolidated subsidiary of the Company.Hudson Entertainment, Inc., a subsidiary of HUDSON CO., LTD, became a consolidated subsidiary of the Company.*5. Digital Entertainment segment comprises previous Computer & Video Games segment, Toy & Hobby segment,Amusement segment, online business took over from Konami Online, Inc. and multimedia business took over fromKonami Media Entertainment, Inc. on April 1, 2005.*6. The Company merged with Konami Marketing Japan, Inc. on October 1, 2005.*7. Konami Digital Entertainment, Inc. merged with Konami Marketing, Inc. on October 1, 2005.*8. The Company has established a new company, Konami Logistics & Service, Inc, on October 1, 2005.3. Gaming segment had changed its name to Gaming & System segment from October 1, 2005.4. The Company and Internet Initiative Japan Inc. have established a joint venture company, Internet RevolutionInc. on February 1, 2006.5. Konami Sports Life Corporation and Konami Sports Corporation will merge on February 28, 2006, withKonami Sports Corporation as the surviving company. With the completion of the merger, the Company andKonami Sports Corporation will execute a share exchange on March 1, 2006, which will make the Companythe sole parent company and Konami Sports Corporation the wholly owned subsidiary.6. The company will execute a company separation on March 31, 2006, with the Company as the separatingcompany and a newly established Konami Digital Entertainment Co., Ltd. as the succeeding company. 2. Business Performance and Cash Flows 1. Business Performance (1) Overview New markets continued to open up in the entertainment industry, as Nintendo and Sony released new portable gameconsoles. In the health industry, demand for fitness clubs among middle-aged and senior consumers, our main targetmarket, has been rising as Japan's population ages. The demand in the gaming industry, such as casinos, is expanding aslegalized casino areas increase. The following is a review of the Company's performance during the term. In the computer and video game business, in ourDigital Entertainment segment, the multiplatform version of the Pro Evolution Soccer series, which was developed forthe European market, was released, and global sales of card games generated high sales volumes. As selection andconcentration of contents progressed, and there was growth in business, the business recorded improved sales comparedto the same period of the previous year. In the Health & Fitness segment, we expanded our network of sports facilities and, in an effort to further boostquality of service, we made steady progress in installing our original e-XAX IT health management system, primarily innewly-opened Konami Sports Clubs. Many Konami Sports Club members took part in the Honolulu Marathon 2005, which KonamiSports Corporation cosponsored in December 2005. In the Gaming & Systems segment, in October 2005, we concluded a sales agreement for the Konami Casino ManagementSystem with Casiloc, Inc., a casino operator under the management of the government of Quebec in Canada. We plan tocontinue to expand sales of the system and create a basis which will enable us to earn steady revenue. As a result, consolidated net revenues stood at Y 80,679 million for the three months ended December 31, 2005 (99.0percent of the figure for the same period of the previous year), and Y 192,549 million for the nine months endedDecember 31, 2005 (98.5 percent of the figure for the same period of the previous year). Consolidated operating incomestood at Y 16,383 million for the three months ended December 31, 2005 (102.2 percent of the figure for the same periodof the previous year), and Y 23,845 million for the nine months ended December 31, 2005 (85.5 percent of the figure forthe same period of the previous year). Consolidated net income stood at Y 9,676 million for the three months endedDecember 31, 2005 (115.3 percent of the figure for the same period of the previous year) and Y16,640 million for thenine months ended December 31, 2005 (166.2 percent of the figure in the same period of the previous year). (2) Group restructuring (merger between subsidiaries, share exchange with subsidiary) and shift to holding companystructure by company separation The Company and two of its subsidiaries, Konami Sports Life Corporation (hereafter referred as "Konami Sports Life")and Konami Sports Corporation (hereafter referred as "Konami Sports"), based on the basic agreement entered into onNovember 7, 2005, formally agreed to merge Konami Sports Life into Konami Sports, to effect share exchange between theCompany and the merged Konami Sports, and to shift to a holding company structure by company separation at therespective meeting of their Boards of Directors' held on January 5, 2006, and the related merger agreement, shareexchange agreement and separation planning documents were approved in the Extraordinary General Meeting ofShareholders' held on January 26, 2006. The merger between Konami Sports Life and Konami Sports will be effected on February 28, 2006 with Konami Sports as asurviving company. On March 1, 2006, the share exchange between the Company and the merged Konami Sports will beexecuted, in which the Company will become the sole parent company. After this share exchange, Konami Sports willchange its registered name to Konami Sports & Life Corporation. On March 31, 2006, the Company will execute a company separation, in which a newly established wholly owned subsidiary,Konami Digital Entertainment Co., Ltd., will take over Konami's digital entertainment business and the group will shiftto a holding company structure. The Konami group, under the new holding company structure, will endeavor to increase enterprise value and shareholdervalue and fulfill the social responsibility of the group by achieving the main objectives as set forth below. 1. Improving management transparency Konami group will endeavor to strengthen group governance through taking this opportunity to shift to a holding companystructure, to build on the work on corporate governance we have done actively until now. We will pursue management transparency by further strengthening of our group management structure, separating thedecision and supervision functions of the group, delineating the execution function in each business clearly, speedingup our management decision making and executing business evaluation and allocating management resources from ourshareholders' point of view. 2. Creating a speedy and flexible management structure. We will make clear the position within our group that each of the Digital Entertainment Business, Health & FitnessBusiness and Gaming & System Business have within our group and try to respond more speedily and flexibly to change ineach business environment, with each of our group companies pursuing its area of specialty and creativity in eachbusiness area. In addition, we will try to create a structure that can execute business tie-ups, capital acquisitionsand other activities more quickly. 3. Creating a complete profit responsibility structure. We will make our profit responsibility structure clear by assessing the profitability of each business more completely. The holding company will have functions of planning the corporate strategy of the entire group, planning for investmentprojects through the allocation of management resources and checking the status of business execution within eachsubsidiary. Business subsidiaries will make timely and speedy decisions in each company's business area. Thus, we willaim to maximize our business values at the Konami group level. (3) Performance by Business Segment Summary of net revenues by business segment: Millions of Yen Nine months ended Nine months ended December 31, 2004 December 31, 2005 Digital Entertainment Y123,210 Y124,110Health & Fitness 59,687 60,859Gaming & System 8,661 8,000Other, Corporate and 3,945 (420)EliminationsConsolidated net revenues Y195,503 Y192,549 *1 Computer & Video Games Segment, Toy & Hobby Segment and Amusement Segment were recognized as the DigitalEntertainment Segment effective April 1, 2005. Thus, records in previous fiscal year are reclassified into the newbusiness segment. *2 Gaming segment had changed its name to Gaming & System segment from October 1, 2005. Digital Entertainment segment: In the computer and video game business, METAL GEAR SOLID 3 SUBSISTENCE and JIKKYOU PAWAFURU PUROYAKYU 12, KETTEIBAN,both for PlayStation2, recorded strong sales in the Japanese market. For portable game consoles, two new softwaretitles were released: METAL GEAR ACID 2 for the PSP, and Pawapurokun Pocket 8 for the Nintendo DS. Overseas, amultiplatform version of the Pro Evolution Soccer series was released in Europe, and has generated larger sales volumescompared to previous year. In the United States, Castlevania: Curse of Darkness and the Dance Dance Revolution serieshave both enjoyed strong sales. In the toy & hobby business, the Yu-Gi-Oh! card game series, which has established a strong presence for itself onthe global market, continued to record strong sales. Meanwhile the SAZER X toy series, as the third wave in theChoseishin series, was released to coincide with the debut of the TV program which started broadcast this October. In the Amusement business, "e-AMUSEMENT" service, which brings Konami together with entertainment centers acrossJapan in a network, we have started a never-before-seen video game called Baseball Heroes, played by using cardswith images of professional baseball players, and QUIZ MAGIC ACADEMY++V, the latest version of a series ofhead-to-head online quiz games. Music game series have continued to record strong sales. As for token-operatedgames, the large-sized horseracing machines GI-HORSEPARK and GI-TURFWILD 2, have both established themselves asmarket favorites. In the online business, soccer match-up service became available online in Europe and Japan with the WORLD SOCCERWinning Eleven series. Meanwhile Yu-Gi-Oh! ONLINE, came into full service in April 2005, expanded to Korea inDecember. Furthermore, we made steady progress in the global expansion of our mobile content distribution servicesvia major carriers based in Japan and around the world. And our mobile site in Japan, Konami Net DX, unveiled onlineversions of such games as PAWAPURO world, Winning Eleven Mobile, and QUIZ MAGIC ACADEMY, already popular favoritesin the home and the arcade. In the multimedia business, we brought out several guides to playing popular video games, along with sound tracks onCD, which earned favorable reviews. We also released a series of products tied in with our own original animated TVprogram, GOKUJO SEITOKAI, and also released music CD album JAFRSAX2 by the group JAFROSAX, which performs danceablejazz. As a result, consolidated net revenues in the Digital Entertainment segment totaled Y 57,439 million for the threemonths ended December 31, 2005, and Y124,110 million for the nine months ended December 31, 2005. Health & Fitness segment: We have two service brands optimized for adults in the fitness club management business, XAX and GRANCISE. They offer afull assortment of services, including relaxing studio programs such as Yoga and Pilates. Meanwhile we have beenbringing in the e-XAX IT health management system, which incorporates the Konami Group's latest technology and has thecapability to manage individuals' personal training routine; to design exercise programs and recommend trainingtechniques better suited to individual members. In this way we encourage customers to make repeat visits keep comingback to our facilities. Our Undo-Jyuku service brand offers programs optimized for children, the goal of which is to cultivate a sound mind andintellect in a sound body by expanding children's potential through sports. Through special events at the Nature ChildCamp in Hakuba and elsewhere, Undo-Jyuku emphasizes the importance of enjoying regular exercise. In December 2005 the Konami Sports Tennis School Nishikasai (Tokyo) moved to a dedicated building with four indoor andtwo outdoor courts. During the fourth quarter of the fiscal year, three new facilities are slated to open their doors, including the KonamiSports Club Honten Nishinomiya (Hyogo Prefecture), the largest facility in Japan with a fifty-meter regulation-sizepool, and two other facilities to be relocated. We will thus continue to expand our Japan-wide network of Konami SportsClubs while enhancing safety and comfort. Drawing on the expertise that we have built up over the past thirty years of proven success in running our ownfacilities, we are helping people in communities everywhere become fitter. We enhance our services by sponsoring special events, including a special tennis program featuring Shuzo Matsuoka asadviser and by participating in an overseas tour, including the annual Honolulu Marathon. As a result, consolidated net revenues in the Health & Fitness segment totaled Y 20,250 million for the three monthsended December 31, 2005, and Y 60,859 million for the nine months ended December 31, 2005. Gaming & Systems segment: In North America, we concluded a sales agreement for the Konami Casino Management System with Casiloc, Inc., a casinooperator under the management of the government of Quebec in Canada on October 2005. Under this agreement Konamiequipment will be installed in three casinos located in the province of Quebec (the Casino de Montreal, the Casino duLac-Leamy, and the Casino de Charlevoix), and a total of some 6,300 slot machines will be linked to a network. We planto continue to expand sales of system to enable us to earn steady revenue. Sales of the new K2V video slot machineplatform, meanwhile, have been steady, and we are taking steps to achieve steady revenues by signing profit-sharingagreements when installing new machines. Exports to Europe, Asia, and South America have been steady, and we have maintained our presence on the Australianmarket as well. As a result, consolidated net revenues in the Gaming & System segment totaled Y 3,273 million for the three monthsended December 31, 2005, and Y 8,000 million for the nine months ended December 31, 2005. 2. Cash Flows Cash flow summary for the nine months ended December 31, 2005: Millions of Yen Nine months ended Nine months ended Year ended March 31, December 31, 2004 December 31, 2005 2005 Net cash provided by Y12,300 Y6,831 Y27,760 operating activitiesNet cash provided by (11,173) 6,317 (14,343) investing activitiesNet cash used in financing (11,887) (29,013) (11,670) activitiesEffect of exchange rate 594 1,046 951 changes on cash and cash equivalentsNet increase (decrease) in (10,166) (14,819) 2,698 cash and cash equivalentsCash and cash 76,719 74,764 89,583 equivalents, end of the period Cash and cash equivalents (hereafter referred as "cash") for the three months ended December 31, 2005,amounted to Y 74,764 million, a decrease of Y 14,819 million compared to the fiscal year ended March 31,2005. Cash flows from operating activities: Net cash provided by operating activities amounted to Y 6,831 million for the nine months ended December31, 2005. Net income increased substantially compared to the nine months ended December 31, 2004. However,as a result of a gain on sale of shares of an affiliated company of Y 6,917 million, which do not effectcash flow from operating activities and the increase in deferred income taxes which is included in the netincome, net cash provided by operating activities for the nine months ended December 31, 2005 hasdecreased Y 5,469 million compared to the nine months ended December 31, 2004. Cash flows from investing activities: Net cash provided by operating activities amounted to Y 6,317 million for the nine months ended December31, 2005. This was primarily due to proceeds from sales of shares of affiliated companies of Y 11,016million, proceeds from sales of property and equipment of Y 2,545 million and Y 7,154 million in capitalexpenditures. As a result, increase in Y 17,490 million was recognized compared to nine months endedDecember 31, 2004. Cash flows from financing activities: Net cash used in financing activities amounted to Y 29,013 million for the nine months ended December 31,2005. This was primarily due to the redemption of bonds of Y 15,000 million and from dividends paid of Y6,902 million. As a result, increase of Y 17,126 million in cash used in financing activities wasrecognized compared to the nine months ended December 31, 2004. 3. Consolidated Balance Sheets (Unaudited) Millions of Yen Thousands of U.S. Dollars December 31, December 31, March 31, 2005 December 31, 2004 2005 2005 % % %ASSETSCURRENT ASSETS:Cash and cash equivalents Y 76,719 Y 74,764 Y 89,583 $ 633,271 Trade notes and accounts 40,352 41,894 33,577 354,853receivable, netof allowance for doubtfulaccounts ofY795 million, Y523million($4,430 thousand) and Y604million atDecember 31, 2004, December 31,2005 and March 31, 2005,respectivelyInventories 22,479 22,091 15,488 187,117Deferred income taxes, net 14,456 14,635 18,392 123,962Prepaid expenses and other 8,020 8,940 4,898 75,725current assetsTotal current assets 162,026 52.8 162,324 50.8 161,938 53.2 1,374,928 PROPERTY AND EQUIPMENT, net 47,381 15.4 51,246 16.0 46,595 15.3 434,068 INVESTMENTS AND OTHER ASSETS:Investments in marketable 148 260 165 2,202securitiesInvestments in affiliates 9,713 - 5,184 -Identifiable intangible assets 46,344 45,913 45,991 388,895Goodwill 463 15,471 849 131,044Lease deposits 23,481 24,829 24,216 210,308Other assets 17,318 19,741 19,383 167,212Total investments and other 97,467 31.8 106,214 33.2 95,788 31.5 899,661assetsTOTAL ASSETS Y 306,874 100.0 Y 319,784 100.0 Y 304,321 100.0 $ 2,708,657 Millions of Yen Thousands of U.S. Dollars December 31, December 31, March 31, 2005 December 31, 2004 2005 2005 % % %LIABILITIES AND STOCKHOLDERS' EQUITYCURRENT LIABILITIES:Short-term borrowings Y7,118 Y9,244 Y 8,582 $78,299Current portion of long-term 17,735 24,166 16,727 204,693debt andcapital lease obligationsTrade notes and accounts 17,623 18,663 16,134 158,081payableAccrued income taxes 25,320 23,828 28,372 201,830Accrued expenses 21,799 18,265 19,875 154,709Deferred revenue 5,808 5,694 5,396 48,230Other current liabilities 5,180 5,577 4,741 47,237Total current liabilities 100,583 32.8 105,437 33.0 99,827 32.8 893,079LONG-TERM LIABILITIES:Long-term debt and capital 52,133 33,248 52,780 281,620lease obligations, less currentportionAccrued pension and severance 2,393 2,605 2,344 22,065costsDeferred income taxes, net 20,757 15,383 16,147 130,298Other long-term liabilities 2,302 6,266 1,879 53,075Total long-term liabilities 77,585 25.3 57,502 18.0 73,150 24.0 487,058 TOTAL LIABILITIES 178,168 58.1 162,939 51.0 172,977 56.8 1,380,137 MINORITY INTEREST IN 25,261 8.2 16,083 5.0 25,487 8.4 136,228CONSOLIDATED SUBSIDIARIES COMMITMENTS AND - - - - - - -CONTINGENCIES STOCKHOLDERS' EQUITY:Common stock, no par value-Authorized 450,000,000 shares; 47,399 15.4 47,399 14.7 47,399 15.6 401,482issued 128,737,566 shares atDecember 31, 2004 and March 31,2005, 139,531,708 shares atDecember 31, 2005Additional paid-in capital 46,736 15.2 70,391 22.0 46,736 15.4 596,231Legal Reserve - - 207 0.1 - - 1,753Retained earnings 37,308 12.2 47,243 14.8 37,776 12.4 400,161Accumulated other comprehensive 272 0.1 3,694 1.2 2,217 0.7 31,289income Total 131,715 42.9 168,934 52.8 134,128 44.1 1,430,916 Treasury stock, at cost-9,255,746 shares, (28,270) (9.2) (28,172) (8.8) (28,271) (9.3) (238,624)9,222,730shares and 9,256,155shares at December 31, 2004,December 31, 2005 and March 31,2005, respectively Total stockholders' equity 103,445 33.7 140,762 44.0 105,857 34.8 1,192,292 TOTAL LIABILITIES AND Y306,874 100.0 Y319,784 100.0 Y 304,321 100.0 $2,708,657STOCKHOLDERS' EQUITY 4. Consolidated Statements of Operations (Unaudited) (For the nine months ended December 31, 2005) Millions of Yen Thousands of U.S. Dollars Nine months Nine months Year ended Nine months ended December ended December ended 31, 2004 31, 2005 March 31, 2005 December 31, 2005 % % %NET REVENUES:Product sales revenue Y136,953 Y136,410 Y183,030 $1,155,429Service revenue 58,550 56,139 77,661 475,513Total net revenues 195,503 100.0 192,549 100.0 260,691 100.0 1,630,942 COSTS AND EXPENSES:Costs of products sold 81,192 76,255 114,547 645,900Costs of services rendered 49,625 54,080 65,816 458,072Selling, general and 36,798 38,369 52,192 324,996administrativeTotal costs and expenses 167,615 85.7 168,704 87.6 232,555 89.2 1,428,968Operating income 27,888 14.3 23,845 12.4 28,136 10.8 201,974 OTHER INCOME (EXPENSES):Interest income 334 544 518 4,608Interest expense (703) (753) (971) (6,378)Gain on sale of shares of an - 6,917 563 58,589affiliated companyOther, net (578) (625) (804) (5,295)Other income (expenses), net (947) (0.5) 6,083 3.1 (694) (0.3) 51,524 INCOME BEFORE INCOME TAXES, 26,941 13.8 29,928 15.5 27,442 10.5 253,498MINORITY INTEREST AND EQUITY INNET INCOME OF AFFILIATED COMPANIESINCOME TAXES 11,987 6.1 12,701 6.6 7,902 3.0 107,581INCOME BEFORE MINORITY INTEREST 14,954 7.7 17,227 8.9 19,540 145,917AND EQUITY IN NET INCOME (LOSS) OF 7.5AFFILIATED COMPANIES MINORITY INTEREST IN INCOME 2,523 1.3 587 0.3 2,761 1.1 4,972 OF CONSOLIDATED SUBSIDIARIESEQUITY IN NET INCOME (LOSS) OF (2,416) (1.3) - - (6,293) (2.4) -AFFILIATED COMPANIESNET INCOME Y 10,015 5.1 Y16,640 8.6 Y10,486 4.0 $140,945 PER SHARE DATA: Yen U.S. Dollar Nine months ended Nine months ended Year ended Nine months ended December 31, 2004 December 31, 2005 March 31, 2005 December 31, 2005Basic net income per Y 83.38 Y 127.70 Y 87.41 $ 1.08shareDiluted net income per 83.38 127.68 87.41 1.08shareWeighted-average commonshare outstanding 120,116,594 130,306,094 119,970,052 (For the third quarter ended December 31, 2005) Millions of Yen Thousands of U.S. Dollars Third quarter Third quarter Third quarter ended December ended December ended 31, 2004 31, 2005 December 31, 2005 % %NET REVENUES:Product sales revenue Y62,020 Y62,033 $525,436Service revenue 19,474 18,646 157,937Total net revenues 81,494 100.0 80,679 100.0 683,373 COSTS AND EXPENSES:Costs of products sold 35,783 32,217 272,887Costs of services rendered 16,420 17,508 148,297Selling, general and 13,254 14,571 123,421administrativeTotal costs and expenses 65,457 80.3 64,296 79.7 544,605Operating income 16,037 19.7 16,383 20.3 138,768OTHER INCOME (EXPENSES):Interest income 95 179 1,516Interest expense (228) (222) (1,880)Other, net (549) (747) (6,327)Other income (expenses), net (682) (0.9) (790) (1.0) (6,691)INCOME BEFORE INCOME TAXES, 15,355 18.8 15,593 19.3 132,077MINORITY INTEREST AND EQUITY INNET INCOME OF AFFILIATEDCOMPANIESINCOME TAXES 6,168 7.5 5,534 6.8 46,875INCOME BEFORE MINORITY INTEREST 9,187 11.3 10,059 12.5 85,202AND EQUITY IN NET INCOME OFAFFILIATED COMPANIESMINORITY INTEREST IN INCOME 933 1.1 383 0.5 3,244 OF CONSOLIDATED SUBSIDIARIESEQUITY IN NET INCOME OF 135 0.1 - - -AFFILIATED COMPANIESNET INCOME Y 8,389 10.3 Y9,676 12.0 $81,958 PER SHARE DATA: Yen U.S. Dollar Third quarter ended Third quarter ended Third quarter ended December 31, 2004 December 31, 2005 December 31, 2005Basic net income per share Y 70.16 Y 74.26 $ 0.63Diluted net income per share 70.16 74.24 0.63Weighted-average commonshare outstanding 119,567,336 130,307,911 5. Consolidated Statements of Cash Flows (Unaudited) Millions of Thousands Yen of U.S. Dollars Nine months Nine months Year ended Nine months ended ended ended December December March 31, 31, 2004 31, 2005 2005 December 31, 2005Cash flows from operating activities:Net income Y 10,015 Y 16,640 Y 10,486 $140,945Adjustments to reconcile net income tonet cashprovided by operating activities -Depreciation and amortization 6,506 8,502 9,360 72,014Allowance (Reversal) for doubtful 127 (108) (400) (915)receivablesLoss on sale or disposal of property and 985 (521) 1,553 (4,413)equipment, netLoss on sale of marketable securities 46 - 46 -Gain on sales of shares of an affiliated - (6,917) (563) (58,589)companyEquity in net loss of affiliated 2,416 - 6,293 -companiesMinority interest 2,523 587 2,761 4,972Deferred income taxes 904 2,971 (7,615) 25,165Change in assets and liabilities, net ofbusiness acquired:Decrease (increase) in trade notes and (15,477) (7,286) (5,632) (61,714)accounts receivableDecrease (increase) in inventories (4,729) (4,134) 2,949 (35,016)Increase (decrease) in trade notes and 1,498 2,889 352 24,471accounts payableIncrease (decrease)in accrued income 1,908 (4,462) 4,954 (37,794)taxesIncrease (decrease) in accrued expenses 3,277 (454) 617 (3,846)Increase (decrease) in deferred revenue (228) 298 (640) 2,524Other, net 2,529 (1,174) 3,239 (9,944)Net cash provided by operating activities 12,300 6,831 27,760 57,860Cash flows from investing activities:Proceeds from sales of shares of - 11,016 1,407 93,308affiliated companiesCapital expenditures (11,270) (7,154) (15,818) (60,596)Proceeds from sales of property and 566 2,545 696 21,557equipmentProceeds from sales of investments in 22 - 22 -marketable securitiesAcquisition of new subsidiaries, net of - 1,433 - 12,138cash acquiredDecrease (increase) in lease deposits, 158 (205) (542) (1,736)netExpenditure from acquisition of minority - (695) - (5,887)interestsOther, net (649) (623) (108) (5,277)Net cash provided by (used in) investing (11,173) 6,317 (14,343) 53,507activitiesCash flows from financing activities:Net increase (decrease) in short-term 4,533 (4,387) 6,001 (37,159)borrowingsRepayments of long-term debt (820) (870) (1,177) (7,369)Principal payments under capital lease (1,712) (1,764) (2,255) (14,942)obligationsRedemption of bonds - (15,000) - (127,054)Dividends paid (7,652) (6,902) (7,963) (58,462)Purchases of treasury stock by parent (2,604) (30) (2,605) (254)companyPurchases of treasury stock by (3,574) - (3,593) -subsidiariesOther, net (58) (60) (78) (508)Net cash used in financing activities (11,887) (29,013) (11,670) (245,748)Effect of exchange rate changes on cash 594 1,046 951 8,860and cash equivalentsNet increase (decrease) in cash and cash (10,166) (14,819) 2,698 (125,521)equivalentsCash and cash equivalents, beginning of 86,885 89,583 86,885 758,792the periodCash and cash equivalents, end of the Y76,719 Y74,764 Y 89,583 $ 633,271period 6. Segment Information (Unaudited) a . Operations in Different Industries (Nine months ended December 31)Nine months Digital Health & Gaming & Other, Consolidatedended Entertainment Fitness System Corporate andDecember 31, Eliminations 2004 (Millions of Yen)Net revenue: Customers Y 122,752 Y 59,474 Y 8,661 Y 4,616 Y 195,503 Intersegment 458 213 - (671) - Total 123,210 59,687 8,661 3,945 195,503 Operating 94,019 57,205 7,572 8,819 167,615expensesOperating Y 29,191 Y 2,482 Y 1,089 Y (4,874) Y 27,888income(loss) Nine months Digital Health & Gaming & Other, Consolidatedended Entertainment Fitness System Corporate andDecember 31, Eliminations 2005 (Millions of Yen)Net revenue: Customers Y 122,943 Y 60,794 Y 8,000 Y 812 Y 192,549 Intersegment 1,167 65 - (1,232) - Total 124,110 60,859 8,000 (420) 192,549 Operating 92,481 59,171 7,684 9,368 168,704expensesOperating Y 31,629 Y 1,688 Y 316 Y (9,788) Y 23,845income(loss) Nine months Digital Health & Gaming & Other, Consolidatedended Entertainment Fitness System CorporateDecember 31, and2005 Eliminations Thousands of U.S. Dollars)Net revenue: Customers $ 1,041,360 $ 514,942 $ 67,762 $ 6,878 $ 1,630,942 Intersegment 9,885 550 - (10,435) - Total 1,051,245 515,492 67,762 (3,557) 1,630,942 Operating 783,339 501,194 65,085 79,350 1,428,968expensesOperating $ 267,906 $ 14,298 $ 2,677 $ (82,907) $ 201,974income(loss) (Year ended March 31, 2005) Year ended Digital Health & Gaming & Other, ConsolidatedMarch 31, Entertainment Fitness System Corporate2005 and Eliminations (Millions of Yen)Net revenue: Customers Y 162,797 Y 78,843 Y 11,641 Y 7,410 Y 260,691 Intersegment 874 263 2 (1,139) - Total 163,671 79,106 11,643 6,271 260,691Operating 131,018 77,059 10,201 14,277 232,555expensesOperating Y 32,653 Y 2,047 Y 1,442 Y (8,006) Y 28,136income (loss) (Third quarter ended December 31) Third Digital Health & Gaming & Other, Consolidatedquarter Entertainment Fitness System Corporateended andDecember 31, Eliminations 2004 (Millions of Yen) Net revenue: Customers Y 58,263 Y 19,755 Y 2,763 Y 713 Y 81,494 Intersegment 47 154 - (201) - Total 58,310 19,909 2,763 512 81,494 Operating 41,509 19,167 2,431 2,350 65,457expenses Operating Y 16,801 Y 742 Y 332 Y (1,838) Y 16,037income(loss) Third quarter Digital Health & Gaming & Other, Consolidatedended Entertainment Fitness System CorporateDecember 31, and2005 Eliminations (Millions of Yen)Net revenue: Customers Y 57,079 Y 20,241 Y 3,273 Y 86 Y 80,679 Intersegment 360 9 - (369) - Total 57,439 20,250 3,273 (283) 80,679 Operating 38,858 19,243 2,960 3,235 64,296expenses Operating Y 18,581 Y 1,007 Y 313 Y (3,518) Y 16,383income (loss) Third quarter Digital Health & Gaming & Other, Consolidatedended Entertainment Fitness System CorporateDecember 31, and2005 Eliminations (Thousands of U.S. Dollars)Net revenue: Customers $ 483,475 $ 171,447 $ 27,723 $ 728 $ 683,373 Intersegment 3,049 76 - (3,125) - Total 486,524 171,523 27,723 (2,397) 683,373 Operating 329,138 162,993 25,072 27,402 544,605expenses Operating $ 157,386 $ 8,530 $ 2,651 $ (29,799) $ 138,768income (loss) Notes: 1. Primary businesses of each segment are as follows: Digital Entertainment Segment: Digital Entertainment Segment contains former three business segments, Computer & Video Games, Toy & Hobby and Amusement, and two new business areas, Online and Multimedia to respond to the change on the digital entertainment market. Computer & Video Games: Production, manufacture and sale of video game software for consoles. Production of contents for mobile phones. Distribution of video game software produced by third parties. Production of online game software. Toy & Hobby: Planning, production, manufacture and sale of card games, electronic toys, toys for boys, candy toys, figures, character goods and others. Amusement: Planning, manufacture and sale of the content for amusement facilities such as video games and token-operated games. Online: Creation of systems for online games. Management and operation of online servers. Distribution of the content for mobile phones. Multimedia: Planning, production and sale of the products related to music and video. Planning, production and sale of books and magazines. Health & Fitness Segment: Management of fitness centers. Production manufacture and sale of gaming machines and health-related products. Gaming & System Segment: Production manufacture and sale of gaming machines for casinos and casino management systems. 2. Computer & Video game Segment, Toy & Hobby Segment and Amusement Segment were reorganized to Digital Entertainment Segment effective on April 1, 2005. Thus, records in previous fiscal year are reclassified into new business segment. 3. "Other" consists of segments which do not meet the quantitative criteria for separate presentation under SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information." 4. "Corporate" primarily consists of administrative expenses of the Company. 5. "Eliminations" primarily consist of eliminations of intercompany sales and of intercompany profits on inventories. 6. Intersegment revenues primarily consist of Digital Entertainment segment to Health & Fitness segment sales of hardware and components from Amusement Health & Fitness. 7. Gaming segment had changed its name to Gaming & System segment from October 1, 2005. b . Operations in Geographic Areas (Nine months ended December 31) Nine months ended Japan Americas Europe Asia Total Eliminations ConsolidatedDecember 31, 2004 /Oceania / Others (Millions of Yen)Net revenue: Customers Y 131,306 Y 32,840 Y 25,472 Y 5,885 Y 195,503 - Y 195,503 Intersegment 44,336 1,083 48 154 45,621 Y (45,621) - Total 175,642 33,923 25,520 6,039 241,124 (45,621) 195,503Operating expenses 153,070 31,928 22,287 4,940 212,225 (44,610) 167,615Operating income Y 22,572 Y 1,995 Y 3,233 Y 1,099 Y 28,899 Y (1,011) Y 27,888 Nine months ended Japan Americas Europe Asia Total Eliminations ConsolidatedDecember 31, 2005 /Oceania / Others (Millions of Yen)Net revenue: Customers Y 139,491 Y 22,489 Y 24,277 Y 6,292 Y 192,549 - Y 192,549 Intersegment 23,885 1,026 349 196 25,456 Y (25,456) - Total 163,376 23,515 24,626 6,488 218,005 (25,456) 192,549Operating expenses 142,238 23,655 23,049 5,199 194,141 (25,437) 168,704Operating income Y 21,138 Y (140) Y 1,577 Y 1,289 Y 23,864 Y (19) Y 23,845 Nine months ended Japan Americas Europe Asia Total Eliminations ConsolidatedDecember 31, 2005 /Oceania / Others (Thousands of U.S. Dollars)Net revenue: Customers $ 1,181,526 $ 190,488 $ 205,633 $ 53,295 $ 1,630,942 - $ 1,630,942 Intersegment 202,313 8,690 2,956 1,660 215,619 $ (215,619) - Total 1,383,839 199,178 208,589 54,955 1,846,561 (215,619) 1,630,942Operating expenses 1,204,794 200,364 195,231 44,037 1,644,426 (215,458) 1,428,968Operating income $ 179,045 $ (1,186) $ 13,358 $ 10,918 $ 202,135 $ (161) $ 201,974 (Year ended March 31, 2005) Year ended Japan Americas Europe Asia Total Eliminations ConsolidatedMarch 31, 2005 /Oceania / Others (Millions of Yen)Net revenue: Customers Y 176,566 Y 41,480 Y 34,878 Y 7,767 Y 260,691 - Y 260,691 Intersegment 57,123 1,593 450 419 59,585 Y (59,585) - Total 233,689 43,073 35,328 8,186 320,276 (59,585) 260,691Operating expenses 211,500 41,682 32,207 6,684 292,073 (59,518) 232,555Operating income Y 22,189 Y 1,391 Y 3,121 Y 1,502 Y 28,203 Y (67) Y 28,136 (Third quarter ended December 31) Third quarter ended Japan Americas Europe Asia Total Eliminations ConsolidatedDecember 31, 2004 /Oceania / Others (Millions of Yen)Net revenue: Customers Y 45,630 Y 18,418 Y 15,373 Y 2,073 Y 81,494 - Y 81,494 Intersegment 22,627 231 - 111 22,969 Y (22,969) - Total 68,257 18,649 15,373 2,184 104,463 (22,969) 81,494Operating expenses 58,185 16,831 12,375 1,752 89,143 (23,686) 65,457Operating income Y 10,072 Y 1,818 Y 2,998 Y 432 Y 15,320 Y 717 Y 16,037 Third quarter ended Japan Americas Europe Asia Total Eliminations ConsolidatedDecember 31, 2005 /Oceania / Others (Millions of Yen)Net revenue: Customers Y 49,159 Y 10,131 Y 19,157 Y 2,232 Y 80,679 - Y 80,679 Intersegment 12,489 145 327 132 13,093 Y (13,093) - Total 61,648 10,276 19,484 2,364 93,772 (13,093) 80,679Operating expenses 49,175 10,098 16,126 1,931 77,330 (13,034) 64,296Operating income Y 12,473 Y 178 Y 3,358 Y 433 Y 16,442 Y (59) Y 16,383 Third quarter ended Japan Americas Europe Asia Total Eliminations ConsolidatedDecember 31, 2005 /Oceania / Others (Thousands of U.S. Dollars)Net revenue: Customers $ 416,390 $ 85,812 $ 162,265 $ 18,906 $ 683,373 - $ 683,373 Intersegment 105,785 1,228 2,770 1,118 110,901 $ (110,901) - Total 522,175 87,040 165,035 20,024 794,274 (110,901) 683,373Operating expenses 416,525 85,533 136,592 16,356 655,006 (110,401) 544,605Operating income $ 105,650 $ 1,507 $ 28,443 $ 3,668 $ 139,268 $ (500) $ 138,768 Note: 1. For the purpose of presenting its operations in geographic areas above, the Company and its subsidiaries attribute revenues from external customers to individual countries in each area based on where products are sold and services are provided. Notes: 1. The U.S. dollar amounts included herein represent a translation using the mid price for telegraphic transfer of U.S.dollars as of December 29, 2005 of Y118.06 to $1 and are included solely for the convenience of the reader. Thetranslation should not be construed as a representation that the yen amounts have been, could have been, or could inthe future be converted into U.S. dollars at the above or any other rate. 2. The consolidated financial statements presented herein were prepared in accordance with accounting principlesgenerally accepted in the United States of America (U.S. GAAP). 3. Comprehensive income for the nine months ended December 31, 2004 and December 31, 2005 and for the year ended March31, 2005 consisted of the following: Millions of yen Thousands of U.S. Dollars Nine months Nine months Year ended Nine months ended ended March 31, 2005 ended December 31, December 31, December 31, 2004 2005 2005 Net income Y 10,015 Y 16,640 Y10,486 $ 140,945 Other comprehensive income (loss): Foreign currency 538 1,606 2,285 13,603 translation adjustments Net unrealized gains on (147) (129) (20) (1,092) available-for-sale securities Adjustment for minimum - - 71 - pension liabilities 391 1,477 2,336 12,511 Comprehensive income Y 10,406 Y 18,117 Y12,822 $ 153,456 Subsequent Event On February 1, 2006, the Company and Internet Initiative Japan Inc.(headquartered in Chiyoda-ku Tokyo, hereafter referred to as "IIJ") haveestablished a joint venture company, "Internet Revolution Inc.", to operatecomprehensive portal sites. The summary of the joint venture company is as shownbelow. 1. Summary of the joint venture company (1) Registered name Internet Revolution Inc (2) Date of incorporation February 1, 2006 (3) Head office location 6-10-1, Roppongi, Minato-ku, Tokyo (Roppongi Hills) (4) Capital 1,250 million yen (5) Amount of investment 2,500 million yen (6) Investment ratio Konami 70% IIJ 30% *Internet Revolution Inc. will become a consolidated subsidiaryof Konami and an equity method affiliate of IIJ (7) Main business Operating the Internet portal sites This information is provided by RNS The company news service from the London Stock Exchange