Konami Grp Corp Regulatory News (KNM)

13 Jan 2006 07:00

Konami Corporation13 January 2006 1. Consolidated Financial Statements (1) Consolidated Balance Sheets Millions of Yen September 30, 2004 September 30, 2005 March 31, 2005 % % %ASSETSCURRENT ASSETS:Cash and cash equivalents Y 79,779 Y 75,678 Y 89,583Trade notes and accounts 25,017 24,992 33,577 receivable, net of allowance fordoubtful accounts of Y754 million, Y463million and Y604 million at September30, 2004, September 30, 2005 and March31, 2005, respectivelyInventories 23,826 22,988 15,488Deferred income taxes, net 13,798 12,878 18,392Prepaid expenses and other current 8,045 8,990 4,898assetsTotal current assets 150,465 51.1 145,526 47.9 161,938 53.2 PROPERTY AND EQUIPMENT, net 47,394 16.1 52,277 17.2 46,595 15.3 INVESTMENTS AND OTHER ASSETS:Investments in marketable 130 185 165 SecuritiesInvestments in affiliates 9,419 - 5,184Identifiable intangible assets 46,389 45,944 45,991Goodwill 464 15,471 849Lease deposits 23,684 25,182 24,216Other assets 16,329 19,436 19,383Total investments and other 96,415 32.8 106,218 34.9 95,788 31.5 assetsTOTAL ASSETS Y 294,274 100.0 Y 304,021 100.0 Y 304,321 100.0 See accompanying notes to consolidated financial statements Millions of Yen September 30, September 30, March 31, 2005 2004 2005 % % %LIABILITIES AND STOCKHOLDERS' EQUITYCURRENT LIABILITIES:Short-term borrowings Y 7,073 Y 9,990 Y 8,582Current portion of long-term debt 17,591 17,147 16,727 and capital lease obligationsTrade notes and accounts payable 16,477 13,399 16,134Accrued income taxes 21,960 18,951 28,372Accrued expenses 18,173 17,358 19,875Deferred revenue 6,088 5,963 5,396Other current liabilities 4,139 5,962 4,741Total current liabilities 91,501 31.1 88,770 29.2 99,827 32.8LONG-TERM LIABILITIES:Long-term debt and capital lease 52,572 40,717 52,780 obligations, less current portionAccrued pension and severance 2,357 2,614 2,344 costsDeferred income taxes, net 20,731 15,822 16,147Other long-term liabilities 2,307 6,559 1,879Total long-term liabilities 77,967 26.5 65,712 21.6 73,150 24.0TOTAL LIABILITIES 169,468 57.6 154,482 50.8 172,977 56.8 MINORITY INTEREST IN 24,959 8.5 15,598 5.1 25,487 8.4CONSOLIDATED SUBSIDIARIES COMMITMENTS AND - - - - - - CONTINGENCIES STOCKHOLDERS' EQUITY:Common stock, no par value-Authorized 450,000,000 shares; 47,399 16.1 47,399 15.6 47,399 15.6issued 128,737,566 shares atSeptember 30, 2004 and March 31,2005, 139,531,708 shares atSeptember 30, 2005Additional paid-in capital 46,736 15.9 70,376 23.1 46,736 15.4Legal reserve - - 207 0.1 - -Retained earnings 32,152 10.9 41,308 13.6 37,776 12.4Accumulated Other 950 0.3 2,820 0.9 2,217 0.7 Comprehensive IncomeTotal 127,237 43.2 162,110 53.3 134,128 44.1Treasury stock, at cost-8,914,272 shares, 9,225,633 shares (27,390) (9.3) (28,169) (9.2) (28,271) (9.3)and 9,256,155 shares at September30, 2004, September 30, 2005 andMarch 31, 2005, respectivelyTotal stockholders' equity 99,847 33.9 133,941 44.1 105,857 34.8TOTAL LIABILITIES AND Y 294,274 100.0 Y 304,021 100.0 Y 304,321 100.0STOCKHOLDERS' EQUITY See accompanying notes to consolidated financial statements (2) Consolidated Statements of Operations Millions of Yen Six months ended Six months ended Year ended September 30, September 30, 2004 2005 March 31, 2005 % % %NET REVENUES:Product sales revenue Y 74,933 Y 74,377 Y 183,030Service revenue 39,076 37,493 77,661Total net revenues 114,009 100.0 111,870 100.0 260,691 100.0 COSTS AND EXPENSES:Costs of products sold 45,409 44,038 114,547Costs of services rendered 33,205 36,572 65,816Selling, general and administrative 23,544 23,798 52,192Total costs and expenses 102,158 89.6 104,408 93.3 232,555 89.2Operating income 11,851 10.4 7,462 6.7 28,136 10.8 OTHER INCOME (EXPENSES):Interest income 239 365 518Interest expense (475) (531) (971)Gain on sale of shares of an - 6,917 563affiliated companyOther, net (29) 122 (804)Other income (expenses), net (265) (0.2) 6,873 6.1 (694) (0.3) INCOME BEFORE INCOME 11,586 10.2 14,335 12.8 27,442 10.5 TAXES, MINORITY INTEREST AND EQUITY IN NET INCOME (LOSS) OF AFFILIATED COMPANIES INCOME TAXES 5,819 5.1 7,167 6.4 7,902 3.0 INCOME BEFORE MINORITY 5,767 5.1 7,168 6.4 19,540 7.5 INTEREST AND EQUITY IN NET INCOME (LOSS) OF AFFILIATED COMPANIES MINORITY INTEREST IN INCOME 1,590 1.4 204 0.2 2,761 1.1 OF CONSOLIDATED SUBSIDIARIESEQUITY IN NET INCOME (LOSS) OF (2,551) (2.3) - - (6,293) (2.4) AFFILIATED COMPANIESNET INCOME Y 1,626 1.4 Y 6,964 6.2 Y 10,486 4.0 See accompanying notes to consolidated financial statements PER SHARE DATA: Yen Six months Six months Year ended ended ended September 30, September 30, March 31, 2004 2005 2005Basic net income per share Y 13.51 Y 53.45 Y 87.41Diluted net income per share Y 13.51 Y 53.44 Y 87.41Weighted-average common shares outstanding 120,388,556 130,300,952 119,970,052 See accompanying notes to consolidated financial statements (3) Consolidated Statements of Stockholders' Equity For the six months ended September 30, 2004 Millions of Yen Common Additional Legal Retained Accumulated Treasury Total Stock Paid-in Reserve Earnings Other Stock, Stockholders' Capital Comprehensive at Cost Equity Income (Loss) Balance at Y47,399 Y46,736 Y- Y33,779 Y(119) Y(25,666) Y102,129March 31, 2004Net income 1,626 1,626Cash dividends, Y (3,253) (3,253)27.0 per shareForeign currency 1,322 1,322 translation adjustmentsNet unrealized (253) (253)losses onavailable-for-salesecuritiesRepurchase of (1,724) (1,724)treasury stockBalance at Y47,399 Y46,736 Y- Y32,152 Y950 Y(27,390) Y99,847 September 30, 2004 For the six months ended September 30, 2005 Millions of Yen Common Additional Legal Retained Accumulated Treasury Total Stock Paid-in Reserve Earnings Other Stock, Stockholders' Capital Comprehensive at Cost Equity Income (Loss) Balance at Y47,399 Y46,736 Y - Y37,776 Y2,217 Y(28,271) Y105,857March 31, 2005Net income 6,964 6,964Cash dividends, Y (3,225) (3,225)27.0 per shareForeign currency 759 759translationadjustmentsNet unrealized (156) (156)losses on available-for-salesecuritiesTransfer from 207 207RetainedEarningsTransfer to Legal (207) (207)ReserveCommon stock 23,583 23,583issued by mergerwith subsidiariesStock compensation 57 57Repurchase of (29) (29)treasury stockReissuance of 131 131treasury stockBalance at Y47,399 Y70,376 Y207 Y41,308 Y2,820 Y(28,169) Y133,941 September 30, 2005 See accompanying notes to consolidated financial statements For the year ended March 31, 2004 Millions of Yen Common Additional Legal Retained Accumulated Treasury Total Stock Paid-in Reserve Earnings Other Stock, Stockholders' Capital Comprehensive at Cost Equity Income (Loss) Balance at Y47,399 Y46,736 Y- Y33,779 Y(119) Y(25,666) Y102,129 March 31, 2005Net income 10,486 10,486Cash dividends, (6,489) (6,489)Y54.0 per shareForeign currency 2,285 2,285 translationadjustmentsNet unrealized loss (20) (20)on available-for-salesecuritiesAdjustment for 71 71minimum pensionliabilityRepurchase of (2,605) (2,605)treasury stockBalance at Y47,399 Y46,736 Y- Y37,776 Y2,217 Y(28,271) Y105,857 March 31, 2005 Millions of YenComprehensive income Six months Six months ended ended Year ended September 30, September 30, March 31, 2004 2005 2005Net income Y 1,626 Y 6,964 Y 10,486Accumulated Other Comprehensive 1,069 603 2,336Income, tax allocation adjustedNet comprehensive income Y 2,695 Y 7,567 Y 12,822 See accompanying notes to consolidated financial statements (4) Consolidated Statements of Cash Flows Millions of Yen Six months Six months Year ended ended ended March 31, September September 2005 30, 2004 30, 2005Cash flows from operating activities:Net income Y 1,626 Y 6,964 Y 10,486Adjustments to reconcile net income to net cashprovided by operating activities -Depreciation and amortization 4,224 4,484 9,360Allowance (Reversal) for doubtful receivables (455) 105 (400)Loss (gain) on sale or disposal of property and 635 (484) 1,553equipment, netLoss on sale of marketable securities 46 - 46Gain on sales of shares of an affiliated company - (6,917) (563)Equity in net loss of an affiliated company 2,551 - 6,293Minority interest 1,590 204 2,761Deferred income taxes 1,616 5,258 (7,615)Change in assets and liabilities, net of businessacquired:Decrease (increase) in trade notes and accounts 955 10,559 (5,632)receivableDecrease (increase) in inventories (5,246) (4,793) 2,949Increase (decrease) in trade notes and accounts payable (23) (2,902) 352Increase (decrease) in accrued income taxes (1,418) (9,384) 4,954Increase (decrease) in accrued expenses (718) (1,560) 617Increase (decrease) in deferred revenue 52 567 (640)Other, net 1,112 211 3,239Net cash provided by operating activities 6,547 2,312 27,760Cash flows from investing activities:Proceeds from sales of shares of affiliated companies - 11,016 1,407Capital expenditures (7,764) (5,784) (15,818)Proceeds from sales of property and equipment 333 2,484 696Proceeds from sales of investments in marketable 22 - 22securities Acquisition of a new subsidiary, net of cash - 1,433 - acquired Decrease (increase) in lease deposits, net 165 (833) (542) Expenditure from acquisition of minority - (695) - interests Other, net (647) (451) (108)Net cash provided by (used in) investing activities (7,891) 7,170 (14,343)Cash flows from financing activities:Net increase (decrease) in short-term borrowings 4,485 (3,632) 6,001Repayments of long-term debt (588) (619) (1,177)Redemption of bonds - (15,000) -Principal payments under capital lease obligations (1,176) (1,210) (2,255)Dividends paid (4,217) (3,369) (7,963)Purchases of treasury stock by parent company (2,605) (1,724) (29)Purchases of treasury stock by subsidiaries (3,555) - (3,593)Other, net (39) (40) (78)Net cash used in financing activities (6,814) (23,899) (11,670)Effect of exchange rate changes on cash and cash 1,052 512 951equivalentsNet increase (decrease) in cash and cash equivalents (7,106) (13,905) 2,698Cash and cash equivalents, beginning of the period 86,885 89,583 86,885Cash and cash equivalents, end of the period Y 79,779 Y 75,678 Y 89,583 See accompanying notes to consolidated financial statements Notes to Consolidated Financial Statements 1. Basis of Presentation Pursuant to section 81 of "Regulation Concerning the Terminology, Forms andPreparation Methods of Consolidated Semi-annual Financial Statements"" (Ministryof Finance Ordinance No. 24, 1999), the accompanying semi-annual consolidatedfinancial statements for the six months ended September 30, 2004 and 2005 ofKonami Corporation (the "Company ") and its subsidiaries (collectively "Konami")have been prepared in accordance with United States generally acceptedaccounting principles ("U.S.GAAP"). Konami became publicly traded on the NewYork Stock Exchange in September 2002, and prepares its consolidated financialstatements pursuant to the terminology, forms and preparation methods requiredin order to issue American Depositary Shares, which are registered with theSecurities and Exchange Commission of the United States of America. 2. Business and Organization The Company was founded in 1969 and was incorporated under the laws of Japan inMarch 1973. Konami engages in production and sale of game software for homevideo game systems, game machines for installation in amusement arcades andother entertainment venues and other amusement-related products, and operationof health and fitness club facilities. The principal markets for Konami'sproducts are Japan, North America, Europe, Asia and Australia while all of itshealth and fitness club facility operation is in Japan. Substantially all of Konami's revenues from video game software havehistorically been derived from sales of software for use on proprietary gameplatforms developed and manufactured by other manufacturers. Konami may onlypublish its games for use on the manufacturers' game platforms if it receives aplatform license from them, which is generally for an initial term of severalyears and may be extended for additional one-year terms. If Konami cannot obtainlicenses to develop video game software from manufacturers of popular gameplatforms or if any of its existing license agreements are terminated, it willnot be able to release software for those platforms, which may have a negativeimpact on its results of operations and profitability. To date, Konami hasalways obtained extensions or new agreements with the platform manufacturers.These licenses include other provisions such as approval rights by themanufacturers of all products and related promotional materials which could havean effect on Konami's costs and the timing of release of new game titles. In the United States, Canada and Australia, the manufacture and distribution ofKonami's gaming machines are subject to numerous federal, state and localregulations. In addition, Konami may be subject to regulation as a gamingoperator if it enters into lease participation agreements under which it sharesin the revenues generated by gaming machines. These regulations are constantlychanging and evolving, and may curtail gaming in various jurisdictions in thefuture, which would decrease the number of jurisdictions from which Konami cangenerate revenues. Konami and its key personnel are subject to an extensiveinvestigation before each jurisdictional gaming license is issued. Also, Konami's gaming machines are subjected to independent testing and evaluation prior toapproval from each jurisdiction. Generally, regulatory authorities have broaddiscretion when granting, renewing or revoking these game approvals andlicenses. 3. Reclassifications Certain reclassifications have been made to the prior years' consolidatedfinancial statements to conform to the presentation used for the six monthsended September 30, 2005. 4. Summary of Significant Accounting Policies (a) Consolidation Policy The accompanying consolidated financial statements include the accounts of theCompany and all of its majority-owned subsidiaries. All significant intercompanybalances and transactions have been eliminated in consolidation. In January 2003, the Financial Accounting Standards Board ("FASB") issued FASBInterpretation No. ("FIN") 46, "Consolidation of Variable Interest Entities, aninterpretation of ARB No. 51. " In December 2003, the FASB issued FIN 46(revised December 2003), "Consolidation of Variable Interest Entities" ("FIN46R"), which addresses how a business enterprise should evaluate whether it hasa controlling financial interest in an entity through means other than votingrights and accordingly should consolidate the entity. FIN 46R replaces FIN 46.Konami applied FIN 46R as of January 1, 2004. The Company evaluates potentialnonvoting controlling interests in variable interest entities and consolidatesentities for which the Company is determined to be the primary beneficiary. Theimplementation of FIN 46R did not have a significant effect on Konami'sconsolidated financial statements. (b) Cash and Cash Equivalents Cash and cash equivalents include all highly liquid investments with an initialmaturity of three months or less. (c) Marketable Securities Konami classifies its debt and equity securities into one of the threecategories: trading, available-for-sale, or held-to-maturity securities. Tradingsecurities are bought and held primarily for the purpose of selling them in thenear term. Held-to-maturity securities are those securities in which Konami hasthe ability and intent to hold them until maturity. All securities not includedin trading or held-to-maturity categories are classified as available-for-sale.Trading and available-for-sale securities whose fair values are readilydeterminable are recorded at fair value. Held-to-maturity securities arerecorded at amortized cost, adjusted for the amortization or accretion ofpremiums or discounts. Unrealized gains and losses on trading securities areincluded in earnings. Unrealized gains and losses, net of the related taxeffect, on available-for-sale securities are excluded from earnings and arereported as a separate component of accumulated other comprehensive income untilrealized. Realized gains and losses from sale of available-for-sale securitiesare determined based on the average cost method. A decline in the market valueof any available-for-sale security below cost that is deemed to be other thantemporary results in a reduction in carrying amount to fair value. Theimpairment is charged to earnings and a new cost basis for the security isestablished. Dividend income is recognized when earned. As of September 30, 2004and 2005 and March 31, 2005, all equity securities held by Konami are classifiedas available-for-sale. (d) Investments in Affiliates For those investments in affiliates in which the Company's voting interest isbetween 20% and 50% and it has the ability to exercise significant influenceover the affiliate's operations, the equity method of accounting is used. Underthis method, the investment originally recorded at cost is adjusted to recognizethe Company's share of the net earnings or losses of the affiliates. Allsignificant intercompany profits from these affiliates have been eliminated. Investments in non-marketable equity securities in which the Company's ownershipis less than 20% are carried at cost. A decline in the value of a non-marketableequity security below cost that is deemed to be other than temporary results ina reduction in carrying amount to fair value. The impairment is charged toearnings and a new cost basis for the security is established. (e) Inventories Inventories, consisting of merchandise for resale, finished products,work-in-process, raw materials and supplies, are stated at the lower of cost ormarket. Cost is determined by the first-in, first-out method for merchandise, bythe specific identification method for software products, and by the averagemethod for others. (f) Property and Equipment Property and equipment are carried at cost. Depreciation is computed on thedeclining-balance method using estimated useful lives ranging from 10 to 50years for buildings and structures and from 2 to 20 years for tools, furnitureand fixtures. Equipment under capital leases is stated at the lower of thepresent value of minimum lease payments or the fair value of the leasedequipment at the inception of the lease and is amortized on a straight-linebasis over either the lease term or estimated useful life of the asset, whichranged from 3 to 8 years. Ordinary maintenance and repairs are expensed as incurred. Major replacementsand improvements are capitalized. When properties are retired or otherwisedisposed of, the property and related accumulated depreciation accounts arerelieved of the applicable amounts and any differences are included in operatingincome or expenses. (g) Software for Internal Use Under the provisions of the American Institute of Certified Public AccountantsStatement of Position ("SOP") 98-1, "Accounting for the Costs of ComputerSoftware Developed or Obtained for Internal Use," Konami has capitalized costsassociated with software systems for internal use, that have reached theapplication stage and meet recoverability tests as capitalized computer softwarein the accompanying consolidated balance sheets. Such capitalized costsprimarily include external direct costs utilized in developing or obtaining theapplications. Capitalization of such costs ceases at the point in which theproject is substantially complete and ready for its intended use, and the costscapitalized are amortized on a straight-line basis over the estimated usefullife of each application, ranging from 2 to 5 years. Konami expenses costsincurred during the preliminary project stage which include costs for makingstrategic decisions about the project, and determining performance and systemrequirements. Konami also expenses costs incurred for internal-use software inthe post-implementation stage such as training and maintenance costs. (h) Business Combination Konami has used the purchase method of accounting for its acquisitions and,accordingly, has allocated the purchase price based on the estimated fair valueof net assets of the acquired companies in accordance with SFAS No. 141"Business combinations". The excess purchase price over the fair value of netassets acquired is recorded as goodwill. (i) Goodwill and Other Intangible Assets Goodwill represents the difference between the cost of acquired companies andamounts allocated to the estimated fair value of their net assets. Identifiableintangible assets represent intangible assets related to trademarks, membershiplists, gaming licenses, existing technology, customer relationships andfranchise contracts acquired in connection with acquisitions of subsidiaries. Konami performs an assessment of goodwill for impairment at least annually, andmore frequently if an indicator of impairment has occurred, using a two-stepprocess under SFAS No. 142, "Goodwill and Other Intangible Assets". The firststep requires identification of reporting units and determination of the fairvalue for each individual reporting unit. The fair value of each reporting unitis then compared to the reporting unit's carrying amount including assignedgoodwill. To the extent a reporting unit's carrying amount exceeds its fairvalue, the second step of the impairment test is performed by comparing theimplied fair value of the reporting unit's goodwill to its carrying amount. Ifthe implied fair value of a reporting unit's goodwill is less than its carryingamount, an impairment loss is recorded. Konami performs its annual impairmenttest on March 31 each year. Konami has determined its reporting units to be thesame as its reportable segments. Intangible assets related to trademarks, franchise contracts and gaming licensesare determined to have an indefinite useful life and have been tested forimpairment based on fair value under SFAS No. 142. Intangible assets related to existing technology have been amortized over theirestimated useful lives of 5 years. Konami assesses the recoverability of theseintangible assets according to SFAS No. 144, "Accounting for the Impairment orDisposal of Long-Lived Assets". (j) Impairment or Disposal of Long-Lived Assets Konami's long-lived assets are reviewed for impairment whenever events orchanges in circumstances indicate that the carrying amount of an asset may notbe recoverable. Factors Konami considers important which could trigger animpairment review include: significant underperformance relative to expectedhistorical or projected future operating results; significant changes in themanner of the use of the acquired assets or the strategy for overall business;significant negative industry or economic trends; significant decline in thestock price of the acquired entity for a sustained period; and marketcapitalization of the acquired entity relative to its net book value. When it is determined that the carrying amount of assets to be held and used maynot be recoverable based upon the existence of one or more of these indicatorsof impairment, recoverability is measured by a comparison of the carrying amountof 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 beimpaired, the impairment to be recognized is measured by the amount by which thecarrying amount of the assets exceeds the estimated fair value of the assets.Assets to be disposed of are reported at the lower of the carrying amount orfair value less costs to sell. (k) Derivative Financial Instruments From time to time, Konami uses certain derivative financial instruments tomanage its foreign currency risks. Konami may enter into forward contracts toreduce its exposure to short-term (generally no more than one year) movements inexchange rates applicable to firm funding commitments that are denominated incurrencies other than the Japanese yen. Konami accounts for derivative financial instruments and other hedgingactivities according to SFAS No. 133, "Accounting for Derivative Instruments andHedging Activities" and SFAS No. 138, "Accounting for Certain DerivativeInstrument and Certain Hedging Activities, an amendment of SFAS No. 133. " SFASNo. 133, as amended, requires that all derivative instruments be reported on thebalance sheet as either assets or liabilities measured at fair value. Forderivative instruments designated and effective as fair value hedges, changes inthe fair value of the derivative instrument and of the hedged item attributableto the hedged risk are recognized in earnings. For derivative instrumentsdesignated as cash flow hedges, the effective portion of any hedge is reportedin other comprehensive income until it is recognized in earnings in the sameperiod in which the hedged item affects earnings. Any amounts excluded from theassessment of hedge effectiveness as well as the ineffective portion of allhedges are reported in current earnings each period. Changes in fair value ofderivative instruments that are not designated as a hedge are recorded eachperiod in current earnings. If a derivative instrument is not designated as ahedge, the gain or loss is recognized in earnings in the period of change. Todate, there has been no derivative instrument designated as a hedge by Konami. (l) Income Taxes Konami accounts for income taxes in accordance with SFAS No. 109, "Accountingfor Income Taxes. " Under SFAS No. 109, deferred income taxes are recognized bythe asset and liability method for the estimated future tax consequencesattributable to temporary differences between the financial statement carryingamounts of existing assets and liabilities and their respective tax bases andoperating loss and tax credit carryforwards, using enacted tax rates in effectfor the years in which those temporary differences are expected to reverse. Theeffect on deferred tax assets and liabilities of a change in tax rates isrecognized in earnings in the period that includes the enactment date. (m) Revenue Recognition Konami derives revenue from primarily three sources: (i) product revenue, whichincludes packaged game software and other products, game machines and relatedequipment and components, (ii) membership fee revenue from health and fitnessclub members and (iii) sales and subscription fee revenue from mobile gamecontents. Konami's revenue recognition criteria are as follows: Persuasive Evidence of an Arrangement. For product sales, it is Konami's customary practice to have a written contract,which is signed by both the customer and Konami, or a purchase order oramendment to the written contract from those customers that have previouslynegotiated a standard purchase agreement. For Konami's health and fitness clubs, members are required to sign a standardmonthly membership agreement upon admission, which is automatically renewedunless the member provides advance notice of his or her intention to cancelprior to the tenth day of the month at the end of which the membership willterminate. For mobile game contents, Konami enters into distribution agreements with mobilephone carriers for the sale or subscription of mobile game contents by thecarriers to their subscribers. Konami recognizes as revenues the net amount themobile phone carrier pays to Konami upon the sale of Konami's game contents, netof any service or other fees earned and deducted by the carrier. Delivery Has Occurred. Packaged game software and other products are physically delivered to customers.Also, Konami's game machines and related equipment are physically delivered tocustomers as a fully-assembled, ready to be installed unit. Accordingly, Konamirecognizes revenue from product sales upon delivery and acceptance since titleand risk of loss transfer to the customer based on free on board ("FOB")destination. Generally, Konami does not permit exchanges or accept returns ofunsold merchandise except in the case of obvious defects. In certain limitedcircumstances Konami may allow returns, for which Konami estimates the relatedallowances based upon management's evaluation of historical experience, thenature of the software titles and other factors. These estimates are deductedfrom gross sales. Revenue from health and fitness club membership is derived primarily frommonthly membership fees from club members. Revenue for those fees is recognizedas monthly charges are generally made to the members' accounts in advance, atthe end of each month, with respect to the following month's membership. Thispolicy requires Konami to defer the applicable membership fee revenue for onemonth. Revenue from mobile game contents is derived from monthly subscription fees.Under the distribution agreements, the mobile phone carriers are responsible forbilling, collection and remittance of those subscription fees to Konami. Thecarriers generally report the final sales data to Konami within 60 daysfollowing the end of each month. When final sales data is not available in atimely manner for reporting purposes, Konami estimates its revenues based onavailable sales data, which is then adjusted to actual revenues in the followingreporting period once the actual amounts are determined. The Price is Fixed or Determinable. The price customers pay for Konami's products is negotiated at the outset of anarrangement, and is generally determined by the specific volume of product to bedelivered. Therefore, the prices are considered to be fixed or determinable atthe start of the arrangement. Konami's membership fee for health and fitnessclubs is fixed at the time of admission of the member. Also, monthlysubscription fees for mobile game contents are based on a fixed rate per endcustomer subscriber. Collection is Probable. Probability of collection is assessed on a customer-by-customer basis. Konamitypically sells to customers with whom Konami has a history of successfulcollection. New customers are subjected to a credit review process thatevaluates the customers' financial position and ultimately their ability to pay.For Konami's health and fitness clubs, the collectibility of membership fees isassured as it generally charges members' accounts one-month in advance. Also, for mobile game contents, the collectibility of subscription fees isassured by the distribution agreements with the mobile phone carriers. (n) Software Development Costs Research and development expenses are charged to income as incurred. Researchand development expenses included in selling, general and administrativeexpenses amounted to Y919 million, Y1,335 million and Y1,813 million for the sixmonths ended September 30, 2004 and 2005 and the year ended March 31, 2005,respectively, in the accompanying consolidated statements of operations. SFAS No. 86, "Accounting for the Cost of Computer Software to be Sold, Leased,or Otherwise Marketed", provides for the capitalization of certain softwaredevelopment costs incurred after technological feasibility is established or fordevelopment costs that have alternative future uses. Under Konami's currentpractice of developing new game software products, technological feasibility isnot established until substantially all development activities are complete,which generally include the development of a working template and the relatedtools. For game products where a proven game engine technology exists and othercriteria supporting the technological feasibility of the game title indevelopment have been met, which include coding and testing of unique orunproven functions and features, Konami capitalizes these costs and begins toexpense them upon release of the product through cost of revenues or when theyare deemed unrecoverable. (o) Royalties and License Fees Konami pays royalties and license fees to professional sports organizations andcertain other third parties for use of their trade names. Minimum portions ofsuch royalties and license fees paid up-front are recorded as prepaid royaltiesand are expensed to cost of products sold over the contractual terms rangingprimarily from 4 to 12 months. Variable portions of such royalties and licensefees, which are generally determined based on the number of copies shipped atthe predetermined royalty rates, are expensed to cost of products sold based onactual shipment. Management periodically evaluates the future realizability ofprepaid royalties and charges to income any amounts deemed unlikely to berealized. Prepaid royalties amounted to Y381 million, Y117 million and Y301million at September 30, 2004 and 2005 and March 31, 2005, respectively, andwere included in Prepaid expenses and other current assets in the accompanyingconsolidated balance sheets. (p) Advertising Expenses Advertising expenses are charged to earnings as incurred and are included inSelling, general and administrative expenses in the accompanying consolidatedstatements of operations. Advertising expenses amounted to Y5,878 million,Y4,907 million and Y12,667 million for the six months ended September 30, 2004and 2005 and the year ended March 31, 2005, respectively. (q) Stock-based Compensation Konami accounts for its stock-based compensation plan to directors and employeesusing the intrinsic value based method prescribed by APB No. 25, "Accounting forStock Issued to Employees" and FIN No. 44, "Accounting for Certain TransactionsInvolving Stock Compensation an Interpretation of APB No. 25". As such,compensation expense is recorded on the date of grant only if the current fairvalue of the underlying stock exceeds the exercise price. SFAS No. 123, "Accounting for Stock-Based Compensation, " allows companies tocontinue to apply the provisions of APB No. 25, where applicable, and providepro forma disclosure for employee stock option grants as if the fair value basedmethod defined in SFAS No. 123 had been applied. Konami has elected to continueto apply the provisions of APB No. 25 for their stock-based compensation plansto directors and employees. Had Konami determined compensation expense based on the fair value at the grantdate for rights of stock-based compensation plans under SFAS No. 123, Konami'snet income and net income per share would have been adjusted to the pro formaamounts indicated below; Six months Six months Year ended ended ended March 31, September 30, September 2005 2004 30, 2005 Millions of YenReported net Y 1,626 Y 6,964 Y 10,486income.........................................................Add back: stock-based compensation expense under intrinsic-value-based method, net of tax ....................... - 59 -Deduct: stock-based compensation expense under fair-value-based method, net of tax................................. (302) (308) (589)Pro forma net income........................................................ Y 1,324 Y 6,715 Y 9,897 YenPer share data:Reported net income per share......................................... Y 13.51 Y 53.45 Y 87.41Add back: stock-based compensation expense under intrinsic-value-based method, net of tax ....................... - 0.45 -Deduct: stock-based compensation expense under fair-value-based method, net oftax................................. (2.51) (2.36) (4.92)Pro forma net income per share Y 11.00 Y 51.54 Y 82.49 (r) Issuance of Stock by Subsidiaries The change in the Company's proportionate share of subsidiary equity resultingfrom issuance of stock by the subsidiary is accounted for as gain or loss,including the related income tax effect, in the period such shares are issuedprovided the sale of such shares by the subsidiary is not a part of a broadercorporate reorganization contemplated or planned by the registrant, the value ofthe proceeds or other value received is objectively determinable and anyresulting gains reasonably assured. If such criteria are not met, the issuanceof stock is accounted for as a capital transaction in the consolidated financialstatements. (s) Comprehensive Income SFAS No. 130, "Reporting Comprehensive Income, " requires classification ofother comprehensive income in a financial statement and display of othercomprehensive income separately from retained earnings and additional paid-incapital. Other comprehensive income includes primarily foreign currencytranslation adjustments, unrealized gains (losses) from marketable securitiesconsidered available-for-sale and adjustment for minimum pension liability. (t) Translation of Foreign Currencies Transactions denominated in foreign currencies are recorded using the exchangerates in effect as of the transaction dates. The related foreign currency assetand liability balances are translated based on exchange rates prevailing at eachbalance sheet date with the resulting gain/loss charged to income. Assets and liabilities of a foreign subsidiary where the functional currency isother than Japanese yen are translated into Japanese yen at the exchange ratesin effect at the balance sheet date. Revenue and expense accounts are translatedat average exchange rates during the current year. The resulting translationadjustments are included in accumulated other comprehensive income. (u) Earnings Per Share Earnings per share ("EPS") are presented in accordance with the provisions ofSFAS No. 128, "Earnings Per Share. " Under SFAS No. 128, basic EPS excludesdilution for potential common stock and is computed by dividing consolidated netincome (loss) by the weighted-average number of common shares outstanding.Diluted EPS reflects the effect of potential dilution that could occur ifsecurities or other contracts to issue common stock were exercised or convertedinto common stock. Diluted net income per share is calculated by dividing netincome by the sum of the weighted-average number of shares plus additionalshares that would be outstanding if potential dilutive shares had been issued. (v) Use of Estimates Preparation of these consolidated financial statements requires management ofKonami to make estimates and assumptions that affect the reported amounts ofassets and liabilities, disclosure of contingent assets and liabilities at thedate of financial statements, and the reported amounts of revenue and expensesduring the reporting periods. There can be no assurance that actual results willnot differ from those estimates. Konami has identified four areas where it believes assumptions and estimates areparticularly critical to the consolidated financial statements. These arerevenue recognition, accounting for software development costs, impairment onlong-lived and intangible assets, and realizability of deferred tax assets. (w) Recent Accounting Pronouncements In November 2004, the FASB issued SFAS No.151, "Inventory Costs, an amendment ofARB No. 43, Chapter 4" to clarify the accounting for abnormal amounts of idlefacility expense, freight, handling costs, and wasted material. Among otherprovisions, the new rule requires items such as excessive spoilage, doublefreight, and re-transportation charge be recognized as current period charges,regardless of whether they meet the criterion of so called abnormal as stated inAccounting Research Bulletins ("ARB") No. 43. In addition, SFAS No.151 requiresthe allocation of fixed production overheads to the costs of conversion be basedon the normal capacity of the production facilities. The Company is required toadopt SFAS No.151 for fiscal years beginning after June 15, 2005. The Companyand its subsidiaries do not expect the adoption of this statement will have amaterial effect on its consolidated financial statements. In December 2004, the FASB issued a revision to SFAS No.123, "Accounting forStock-Based Compensation" ("SFAS No.123R"). SFAS No.123R focuses on theaccounting for share-based payment transactions in which an enterprise receivesemployee services in exchange for equity instruments of the enterprise orliabilities that are based on the fair value of the enterprise's equityinstruments that may be settled by the issuance of such equity instruments. Thestatement would eliminate the ability to account for share-based compensationtransactions using APB Opinion No.25, "Accounting for Stock Issued toEmployees", and generally would require such transactions be accounted for usinga fair-value-based method. The Company will be required to adopt SFAS No.123R atthe beginning of the first annual period beginning after June 15, 2005. TheCompany and its subsidiaries is currently evaluating the potential impact ofadoption of SFAS No.123R on its financial position and results of operations andhas not yet determined the impact of adopting this statement. In December 2004, the FASB issued SFAS No.153, "Exchanges of Nonmonetary Assets,an amendment of APB Opinion No.29". SFAS No.153 focuses on the measurement ofexchanges nonmonetary assets and redefines the scope of transaction that shouldbe measured based on the fair value of the assets exchanged. The Company will berequired to adopt SFAS No.153 for the fiscal years beginning after June 15,2005. The Company and its subsidiaries do not expect the adoption of thisstatement will have a material effect on its consolidated financial statements. 5. Merger and Acquisition On December 16, 2004, the Company entered into a plan of merger agreement withthree of its consolidated subsidiaries, Konami Computer Entertainment Studios,Inc, (hereafter referred as 'Konami STUDIO') Konami Computer EntertainmentTokyo, Inc. (hereafter referred as 'Konami TYO') and Konami ComputerEntertainment Japan, Inc., (hereafter referred as 'Konami JPN') which wasapproved in the extraordinary shareholders' meeting of each company held onFebruary 22, 2005. Under the terms of the agreement, 0.42, 1.00, and 0.81 of oneshare of the Company's common stock was exchanged for each common share ofKonami STUDIO, Konami TYO and Konami JPN. The Company consummated the mergers onApril 1, 2005, by issuing 10,794,142 new common shares to minority shareholdersof those merged companies. The merger ratios were determined based on thevaluation by the third-party valuation experts hired separately by each subjectcompany. Konami accounted for the acquisition of additional equity interest in the mergedcompanies as a step-acquisition, and, accordingly the purchase price has beenallocated to the tangible and intangible assets of Konami STUDIO, Konami TYO andKonami JPN using an independent, third-party appraisal. The fair value of newcommon shares issued to minority shareholders of those merged companies and thedirect cost of the acquisition amounted to Y24,373 million in excess of theestimated fair value of the net assets acquired of Y13,348 million has beenrecorded as goodwill in the accompanying consolidated balance sheets. Goodwillarising from the acquisition of additional equity interest in Konami STUDIO,Konami TYO and Konami JPN has all been allocated to the Digital Entertainmentsegment of Konami. In-Process research and development ("IPRD") included thevalue of products in the development stage that were not considered to havereached technological feasibility or to have alternative future use.Accordingly, IPRD of Y225 million was charged to R&D expense in the consolidatedstatement of income upon consummation of the acquisition. The allocation of thepurchase price is based on preliminary valuations. Konami, however, does notexpect that the final allocation will produce materially different results thanthose reflected above. On December 16, 2004, the Company merged with Konami Online, Inc., ('KOL') awholly-owned subsidiary effective April 1, 2005. The Company is the survivingentity and KOL has subsequently been dissolved. As the Company owns 100% of KOLshares, there has been no share exchanged. The Company has taken over all of KOLbusiness functions from planning and developing the contents for mobile phonesand online games and building systems to operation of computer servers. On February 22, 2005, the Company merged with Konami Media Entertainment, Inc.,('KME') a wholly-owned subsidiary, effective April 1, 2005. The Company is thesurviving entity and KME has subsequently been dissolved. As the Company owns100% of KME shares, there has been no share exchanged. The Company will directlyconduct all aspects of its business, from planning and developing products toproduction and sales of soundtrack CDs and game tip books. On April 11, 2005, the Company merged with Konami Traumer, Inc., ('KT') aconsolidated subsidiary, effective June 1, 2005. The Company exchanged 212shares of its common stock for each 1 share of KT. The Company is the survivingentity and KT has subsequently been dissolved. The Company will take over KT'sbusiness, including designing, manufacturing and selling toys, fancy goods andconvenience goods. On April 27, 2005, the Company acquired an additional 3,000,000 shares of HUDSONSOFT CO., LTD. ('Hudson') an equity method affiliate by accepting a third partyallotment for total consideration of 1,434 million yen. Accordingly, the Company's equity ownership interest in Hudson increased from 45.47% to 53.99% and, as aresult, Hudson became a consolidated subsidiary. Financial results of Hudsonhave been included in the consolidated financial statements from the acquisitiondate. The following table reflects the April 27, 2005, condensed balance sheet ofHudson, as adjusted to give effect to the preliminary purchase method accountingadjustments: Millions of YenCash, receivable and other assets Y8,309Property and equipment 1,130Goodwill 1,240Other assets 477In-process research & development 42Total assets 11,198Current liabilities 7,455Long-term liabilities 450Total liabilities assumed 7,905Minority interest 948Net assets acquired Y2,345 Goodwill related to acquisition of Hudson shares are allocated to DigitalEntertainment segment of Konami. In-process research and development ("IPRD")included the value of products in the development stage that were not consideredto have reached technological feasibility or to have alternative future use.Accordingly, IPRD of Y42 million was charged to R&D expense in the consolidatedstatement of income upon consummation of the acquisition. 6. Investments in Affiliates On April 27, 2005, the Company accepted a third party allotment of new shares ofHudson, an equity method affiliate, and owns 53.99% of Hudson shares. As aresult, Hudson became a consolidated subsidiary of the Company. On April 25, 2005, the Company sold its entire equity interests in Takara Co.,Ltd, an equity method affiliate and terminated its capital relationship. As aresult, 6,917 million yen of gain on sale of shares of an affiliated company wasrecognized in the consolidated statement of operations for six months endedSeptember 30, 2005. At September 30, 2004 and March 31, 2005, Konami held investments in the equitymethod affiliates as follows. There were no investments in the equity methodaffiliates at September 30, 2005. Description of business Acquisition DateTakara Co., Ltd. ("Takara")................... Toy manufacturer July 2000Hudson Soft Co., Ltd. ("Hudson")....... Game software producer August 2001 Condensed combined financial information of the Company's unconsolidatedaffiliates at September 30, 2004 and 2005 and March 31, 2005 and for the sixmonths ended September 30, 2004 and 2005 and the year ended March 31, 2005 areas follows: Millions of Yen September September March 31, 30, 2004 30, 2005 2005Combined Financial Position:Property and equipment, net.............................................. Y13,258 Y - Y13,046 Other assets, net................................................................. 87,976 - 78,712Total assets.................................................................... 101,234 - 91,758Debt................................................................................. 40,144 - 42,363Other liabilities................................................................... 26,743 - 29,664Minority interest................................................................ 9,831 - 9,716Stockholders' equity........................................................... 24,516 - 10,015Total liabilities and equity.............................................. Y101,234 Y - Y91,758 Millions of Yen Six Six Year months months ended ended ended March 31, September September 2005 30, 2004 30, 2005Combined Operations:Sales.............................................................................. Y55,076 Y - Y 108,979Cost of revenues................................................................. 43,957 - 83,936Selling, general and administrative expenses....................... 16,595 - 41,820Operating income (loss)................................................. (5,476) - (16,777)Interest expense, net........................................................... (280) - (476)Other, net............................................................................ 2,123 - 2,355Income taxes....................................................................... (3,269) - (5,640)Net income (loss)........................................................... Y(6,902) Y- Y(20,538) The Company's share of undistributed earnings of affiliated companies includedin consolidated retained earnings was earnings of Y1,066 million as of September30, 2004. There are no undistributed earnings of affiliated companies as ofSeptember 30, 2005 and March 31, 2005. Affiliated companies accounted for underthe equity method with an aggregate carrying amount of Y8,570 million and Y5,184million as of September 30, 2004 and March 31, 2005, respectively, were tradedon established markets and were quoted at an aggregate value of Y15,930 millionand Y14,757 million as of September 30, 2004 and March 31, 2005, respectively. 7. Inventories Inventories at September 30, 2004 and 2005 and March 31, 2005 consisted of thefollowing: Millions of Yen September September March 31, 30, 2004 30, 2005 2005Finished products............................... Y7,805 Y9,505 Y6,117Work in process................................ 13,806 10,887 7,504Raw materials and supplies..................... 2,215 2,596 1,867Total ......................................... Y23,826 Y22,988 Y15,488 8. Marketable and Investment Securities Marketable and investment securities at September 30, 2004 and 2005 and March31, 2005 consisted of the following: Millions of Yen September 30, 2004 Cost Gross Gross Fair value unrealized unrealized gains lossesAvailable-for-sale: Marketable equity securities..................... Y76 Y54 Y- Y130Total............................ Y76 Y54 Y- Y130 Millions of Yen September 30, 2005 Cost Gross Gross Fair value unrealized unrealized gains lossesAvailable-for-sale:Marketable equity securities............... Y76 Y109 Y- Y185Total.......................... Y76 Y109 Y- Y185 Millions of Yen March 31, 2005 Cost Gross Gross Fair value unrealized unrealized gains lossesAvailable-for-sale:Marketable equity securities........................ Y76 Y89 Y- Y165Total............................ Y76 Y89 Y- Y165 9. Property and Equipment Property and equipment at September 30, 2004 and 2005 and March 31, 2005consisted of the following: Millions of Yen September 30, September 30, March 31, 2004 2005 2005Property and equipment, at cost:Land................................................ Y11,587 Y10,409 Y 11,515Buildings and structures................. 56,817 64,962 56,708Tools, furniture and fixtures........... 25,088 28,512 25,584Construction in progress................ 1,103 27 738Total........................................... 94,595 103,910 94,545Less-Accumulated depreciation..... (47,201) (51,633) (47,950)Net property and equipment..... Y47,394 Y52,277 Y 46,595 Depreciation expense for the six months ended September 30, 2004 and 2005 andthe year ended March 31, 2005 amounted to Y3,630 million, Y3,269 million andY7,592 million, respectively. 10. Goodwill and Identifiable Intangible Assets The changes in the carrying amount of goodwill by operating segment for the sixmonths ended September 30, 2004 are as follows: Millions of Yen Digital Health & Entertainment Gaming Fitness Total Balance at March 31, 2004............... Y339 Y125 Y- Y464Additional acquisitions during the period.......... - - - -Balance at September 30, 2004...................... Y339 Y125 Y- Y464 The changes in the carrying amount of goodwill by operating segment for the sixmonths ended September 30, 2005 are as follows: Millions of Yen Digital Health & Entertainment Gaming Fitness Total Balance at March 31, 2005.................. Y339 Y125 Y385 Y849Additional acquisitions during the period.......... 14,622 - - 14,622Balance at September 30, 2005............ Y14,961 Y125 Y385 Y15,471 The Company merged with Konami STUDIO, Konami TYO and Konami JPN during the sixmonths ended September 30, 2005. Also the Company accepted a third partyallotment of new shares of Hudson, an equity method affiliate, and owned 53.99%of its shares, which made Hudson a consolidated subsidiary of the Company. The changes in the carrying amount of goodwill by operating segment for the yearended March 31, 2005 are as follows: Millions of Yen Digital Health & Entertainment Gaming Fitness Total Balance at March 31, 2004.............. Y339 Y125 Y- Y464Additional acquisitions during the period.......... - - 385 385Balance at March 31, 2005......................... Y339 Y125 Y385 Y849 In the year ended March 31, 2005, Konami Sports Corporation a consolidatedsubsidiary which belongs to the health & fitness business, additionally acquiredtreasury stock and increased Konami's share from 60.5% to 64.1%. Identifiable intangible assets at September 30, 2004 and 2005 and March 31, 2005primarily representing intangible assets acquired in connection withacquisitions of subsidiaries consisted of the following: Millions of YenIdentifiable intangible assets subject to amortization: September September March 31, 30, 2004 30, 2005 2005 Existing technology....................................................... 666 Y679 Y644Total.............................................................................. 666 679 644Less-Accumulated amortization.................................. (422) (566) (472)Net amortized identifiable intangible assets.................. 244 113 172Identifiable intangible assets with an indefinite life:Trademarks................................................................ 39,190 38,818 38,818Franchise contracts..................................................... 6,668 6,703 6,703Gaming licenses............................................................ 287 310 298Total unamortized identifiable intangible assets.............. 46,145 45,831 45,819Total identifiable intangible assets Y46,389 Y45,944 Y45,991 The aggregate amortization expense for identifiable intangible assets for thesix months ended September 30, 2004 and 2005 and the year ended March 31, 2005was Y66 million, Y66 million and Y129 million, respectively. The estimated amortization expense for the following years is as follows: Millions of YenYear ending March 31,2006 (second half year)....... 682007..................................... 45 11. Severance and Retirement Plans The Company and its domestic subsidiaries have defined benefit severance andretirement plans covering their employees. The plans provide, under mostcircumstances, retirement benefits and lump-sum severance payments to theemployees determined by reference to their rate of pay at the time oftermination, years of service and certain other factors. All employees can makean election either to remain in the defined benefit plans or to withdraw fromthe plans and enroll under such system as receiving all compensation currentlyduring their employment. For those who under the fixed annual compensationsystem, separate severance and retirement benefits are to be eliminated upontheir termination or retirement. In December 2003, the FASB issued SFAS No. 132 (revised), "Employers'Disclosures about Pensions and Other Postretirement Benefits. " SFAS No. 132(revised) prescribes employers' disclosures about pension plans and otherpostretirement benefit plans; it does not change the measurement or recognitionof those plans. The Statement retains and revises the disclosure requirementscontained in the original SFAS No. 132. It also requires additional disclosuresabout the assets, obligations, cash flows, and net periodic benefit cost ofdefined benefit pension plans and other postretirement benefit plans. TheStatement generally is effective for fiscal years ending after December 15,2003. The disclosure requirements of SFAS No. 132 (revised) have been includedbelow. Adoption of this statement did not have a material effect on itsconsolidated financial statements. Net periodic cost of the Company and its domestic subsidiaries' plans accountedfor in accordance with SFAS No. 87 for the six months ended September 30, 2004and 2005 and the year ended March 31, 2005 included the following components: Millions of Yen Six months Six months Year ended ended ended March 31, September 30, September 30, 2005 2004 2005Service cost - benefits earned during the period........................... Y 157 Y 117 Y 313Interest cost on projected benefit obligation................................. 20 18 40Expected return on plan assets................................ (21) (20) (41)Recognized actuarial (gain) loss.................................................... 8 (31) (51)Amortization of prior service cost................................................ (6) (7) (14)Net periodic cost................................................................. Y 158 Y 77 Y 247 13. Comprehensive Income (Loss) Accumulated other comprehensive income at September 30, 2004 and 2005 and March31, 2005 is as follows: Millions of Yen Six months Six months Year ended ended ended March 31, September September 2005 30, 2004 30, 2005Foreign currency translation adjustments:Balance, beginning of period................................. Y(266) Y2,019 Y(266)Aggregate adjustment for the year resulting from translation of foreign currency financial statements............... 1,322 759 2,285Balance, end of period.......................................... Y1,056 Y2,778 Y2,019 Net unrealized gains (losses) on securitiesavailable-for-sale:Balance, beginning of period................................. Y218 Y198 Y218Net change....................................................... (253) (156) (20) Balance, end of period.......................................... Y(35) Y42 Y198 Minimum pension liability adjustment:Balance, beginning of period................................. Y(71) - Y(71)Adjustments for the period.................................. - - 71Balance, end of period.......................................... Y(71) - Y - Total accumulated other comprehensive income (loss):Balance, beginning of period................................. Y(119) Y2,217 Y(119)Adjustments for the period.................................. 1,069 603 2,336Balance, end of period.......................................... Y950 Y2,820 Y2,217 Tax effects allocated to each component of other comprehensive income andadjustments are as follows: Millions of Yen Pretax Tax (expense) Net of tax amount or benefit amountSix months ended September 30, 2004Foreign currency translationadjustments................................. Y1,322 Y - Y1,322Net unrealized gains (losses) on available-for-salesecurities:Unrealized gains (losses) arising during the period............... (233) 95 (138) Less: reclassification adjustment for (gains) or losses included in net income (loss) .............................. (195) 80 (115) Net unrealized gains (losses) ............................ (428) 175 (253) Other comprehensive income.... ..................... Y894 Y175 Y1,069Six months ended September 30, 2005 Foreign currency translation adjustments................................. Y759 Y - Y759Net unrealized gains (losses) on available-for-salesecurities:Unrealized gains (losses) arising during the period............... 24 (10) 14 Less: reclassification adjustment for (gains) or losses included in net income (loss) ........................................ (287) 117 (170) Net unrealized gains (losses).......................... (263) 107 (156) Other comprehensive income......................... Y496 Y107 Y603Year ended March 31, 2005 Foreign currency translation adjustments...................... Y2,258 Y 27 Y2,285Net unrealized gains (losses) on available-for-sale securities:Unrealized gains (losses) arising during the year.................. 216 (88) 128 Less: reclassification adjustment for (gains) or losses included in net income (loss) .................................. (250) 102 (148) Net unrealized gains (losses)....................... (34) 14 (20) Minimum pension liability adjustment.......... 120 (49) 71 Other comprehensive income....................... Y2,344 Y (8) Y 2,336 14. Derivative Financial Instruments Konami uses foreign exchange forward contracts with terms ranging from 3 to 6months to reduce its exposure to short-term movements in the exchange ratesapplicable to firm funding commitments denominated in currencies other thanJapanese yen. The aggregate notional amounts of derivative financial instrumentsoutstanding at September 30, 2004 and 2005 and March 31, 2005 were as follows: Millions of Yen September September March 31, 30, 2004 30, 2005 2005Forward exchange contracts:To sell foreign currencies...................... Y10,778 Y3,806 Y9,493 Konami does not designate the forward exchange contracts as hedges. Accordinglythe foreign currency gains (losses) of Y(3) million, Y(52) million and Y33million arising from these forward exchange contracts at September 30, 2004 and2005 and March 31, 2005 were included in earnings under the caption Other, netin the accompanying consolidated statements of operations, respectively. Foreignexchange net gains (losses), including those on these forward exchangecontracts, for the six months ended September 30, 2004 and 2005 and the yearended March 31, 2005 were Y1 million, Y80 million and Y(826) million,respectively. Effects of exchange rate changes subsequent to September 30, 2005 on fair valueof those forward exchange contracts have not been significant as of thereporting date. 15. Fair Value of Financial Instruments (a) Cash and cash equivalents, Trade notes and accounts receivable, Trade notesand accounts payable, Accrued expenses, and Short term borrowings The carrying amount approximates fair value because of the short maturity ofthese instruments. (b) Investments in marketable securities The fair values of Konami's investments in marketable securities are based onquoted market prices. (c) Investments in non-marketable securities For investments in non-marketable securities for which there are no quotedmarket prices, a reasonable estimate of fair value could not be made withoutincurring excessive costs. It was not practicable to estimate the fair value ofcommon stock representing certain untraded companies. These investments arecarried at cost. (d) Long-term debt The fair values of Konami's long-term debt instruments are based on the quotedprice in the most active market or the present value of future cash flowsassociated with each instrument discounted using the Company's current borrowingrate for similar debt instruments of comparable maturity. (e) Derivative financial instruments The fair values of derivative financial instruments, consisting principally offoreign exchange contracts, all of which are used for purposes other thantrading, are estimated by obtaining quotes from brokers. The estimated fair values of Konami's financial instruments at September 30,2004 and 2005 and March 31, 2005 are as follows: Millions of Yen September 30, 2004 September 30, 2005 March 31, 2005 Carrying Estimated Carrying Estimated Carrying Estimated amount fair value amount fair value amount fair valueNonderivatives:Investment in marketable securities........ Y130 Y130 Y185 Y185 Y165 Y165Long-term debt, including current installments..... (65,500) (63,664) (49,451) (48,892) (64,912) (63,794)Derivatives: Foreign exchange forward contracts:Assets................. 7 7 - - 36 36Liabilities............. (10) (10) (52) (52) (3) (3) Limitations Fair value estimates are made at a specific point in time, based on relevantmarket information and information about the financial instruments. Theseestimates are subjective in nature and involve uncertainties and matters ofsignificant judgment and therefore cannot be determined with precision. Changesin assumptions could significantly affect the estimates. 16. Supplemental Disclosures to Consolidated Statements of Cash Flows Millions of Yen Six Six Year ended months months March 31, ended ended 2005 September September 30, 2004 30, 2005Cash paid during the period for:Interest............................................................................. Y476 Y531 Y974Income taxes..................................................................... 6,142 11,550 9,983Cash acquisitions of new subsidiaries:Fair value of assets acquired............................................ - 6,180 -Liabilities assumed........................................................... - (7,905) -Goodwill.......................................................................... - 1,240 -Minority interest............................................................. - (948) -Cash paid, net of cash acquired................................... - (1,433) -Property acquired under capital leases during the period.... 620 4,409 1,844Property and equipment asset retirement obligation........... - 4,387 - 17. Segment Information Under SFAS No. 131, "Disclosures about Segments of an Enterprise and RelatedInformation, " operating segments are defined as components of an enterpriseabout which separate financial information is available that is regularlyevaluated by the chief operating decision maker in deciding how to allocateresources and in assessing performance. The operating segments are managedseparately as each segment represents a strategic business unit that offersdifferent products and serves different markets. Konami operates on a worldwide basis principally with the following threebusiness segments: 1. Digital Entertainment business segment Digital Entertainment business segment contains former three business segments,Computer & Video Games, Toy & Hobby and Amusement, and two new business domains,Online and Multimedia to respond to the change on the digital entertainmentmarket. Computer & Video Games: Production, manufacture and sale of video game software for consoles. Production of contents for mobile phones. Distribution of video game software produced by third parties. Production of online game software.Toy & Hobby: Planning, production, manufacture and sale of card games, electronic toys, toys for boys, candy toys, figures, character goods and others.Amusement: Planning, manufacture and sale of the content for amusement facilities such as video games and token-operated games.Online: Creation of systems for online games. Management and operation of online servers. Distribution of the content for mobile phones.Multimedia: Planning, production and sale of the products related to music and video. Planning, production and sale of books and magazines. 2. Gaming business segment Production manufacture and sale of gaming machines for casinos and casinomanagement systems. 3. Health & Fitness business segment Management of fitness centers and production, manufacture and sale of gamingmachines and health-related products. Notes: "Other" consists of segments which do not meet the quantitative criteria forseparate presentation under SFAS No. 131 "Disclosures about Segments of anEnterprise and Related Information. " "Corporate" primarily consists of administrative expenses of the Company. "Eliminations" primarily consist of eliminations of intercompany sales and ofintercompany profits on inventories. Computer & Video game Segment, Toy & Hobby Segment and Amusement Segment werereorganized to Digital Entertainment Segment effective on April 1, 2005. Thus,records in previous fiscal year are reclassified into new business segment. The following table summarizes revenue, operating income (loss) by operatingsegment which are the primary measures used by Konami's chief operating decisionmaker to measure Konami's operating results and to measure segment profitabilityand performance. This information is derived from Konami's management reportswhich have been prepared based on accounting principles generally accepted inthe United States of America. a. Operations in Different Industries Six months ended Digital Gaming Health & Other, Consolidated September 30, Entertainment Fitness Corporate and 2004 Eliminations (Millions of Yen)Net revenue: Customers Y 64,489 Y 5,898 Y 39,719 Y 3,903 Y 114,009 Intersegment 411 - 59 (470) - Total 64,900 5,898 39,778 3,433 114,009Operating 52,510 5,141 38,038 6,469 102,158expensesOperating income Y 12,390 Y 757 Y 1,740 Y (3,036) Y 11,851(loss) Six months ended Digital Gaming Health & Other, Consolidated September 30, Entertainment Fitness Corporate and 2005 Eliminations (Millions of Yen)Net revenue: Customers Y 65,864 Y 4,727 Y 40,553 Y 726 Y 111,870 Intersegment 807 - 56 (863) - Total 66,671 4,727 40,609 (137) 111,870Operating 53,623 4,724 39,928 6,133 104,408expensesOperating income Y 13,048 Y 3 Y 681 Y (6,270) Y 7,462(loss) Year ended Digital Gaming Health & Other, Consolidated March 31, 2005 Entertainment Fitness Corporate and Eliminations (Millions of Yen)Net revenue: Customers Y 162,797 Y 11,641 Y 78,843 Y 7,410 Y 260,691 Intersegment 874 2 263 (1,139) - Total 163,671 11,643 79,106 6,271 260,691Operating 131,018 10,201 77,059 14,277 232,555expensesOperating income Y 32,653 Y 1,442 Y 2,047 Y (8,006) Y 28,136(loss) Intersegment revenues primarily consist of Digital Entertainment segment to Health & Fitness segment sales of hardwareand components from Amusement Health & Fitness. b. Operations in Geographic Areas Six months ended Japan Americas Europe Asia Total Eliminations ConsolidatedSeptember 30, 2004 /Oceania (Millions of Yen)Net revenue: Customers Y 85,676 Y 14,422 Y 10,099 Y 3,812 Y 114,009 - Y 114,009 Intersegment 21,709 852 51 43 22,655 Y (22,655) - Total 107,385 15,274 10,150 3,855 136,664 (22,655) 114,009Operating expenses 94,885 15,097 9,915 3,188 123,085 (20,927) 102,158Operating income Y 12,500 Y 177 Y 235 Y 667 Y 13,579 Y (1,728) Y 11,851 Six months ended Japan Americas Europe Asia Total Eliminations ConsolidatedSeptember 30, 2005 /Oceania (Millions of Yen)Net revenue: Customers Y 90,332 Y 12,358 Y 5,120 Y 4,060 Y 111,870 - Y 111,870 Intersegment 11,396 881 22 64 12,363 Y (12,363) - Total 101,728 13,239 5,142 4,124 124,233 (12,363) 111,870Operating expenses 93,063 13,557 6,923 3,268 116,811 (12,403) 104,408Operating income Y 8,665 Y (318) Y (1,781) Y 856 Y 7,422 Y 40 Y 7,462 Year ended Japan Americas Europe Asia Total Eliminations ConsolidatedMarch 31, 2005 /Oceania (Millions of Yen)Net revenue: Customers Y 176,566 Y 41,480 Y 34,878 Y 7,767 Y 260,691 - Y 260,691 Intersegment 57,123 1,593 450 419 59,585 Y (59,585) - Total 233,689 43,073 35,328 8,186 320,276 (59,585) 260,691Operating 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 For the purpose of presenting its operations in geographic areas above, Konami attributes revenues from externalcustomers to individual countries in each area based on where products are sold and services are provided. 18. Commitments and Contingencies Konami is subject to pending claims and litigation. Management, after review andconsultation with counsel, considers that any liability from the disposition ofsuch lawsuits would not have a material adverse effect on the consolidatedfinancial condition and results of operations of Konami. Konami has placed firm orders for purchases of property, plant and equipment andother assets amounting to approximately Y9,823 million as of September 30, 2005. 19. Subsequent Events For Six months ended September 30, 2004 The Board of Directors of the Company resolved a plan to set a limit toacquisition of treasury stock on October 21, 2004 pursuant to the Article ofIncorporation of the Company to facilitate a timely and flexible capitalstrategy. Details of the limit to acquisition of treasury stocks are as follows: a. Type of shares to be acquired: Common Stock of the Company b. Number of shares to be acquired: 1.5 million shares (maximum) c. Total cost of shares to be acquired: 4.5 billion yen (maximum) d. Schedule of acquiring treasury stock: From November 11, 2004 to May 10, 2005 For Six months ended September 2005 The Company, Konami Sports Life Corporation (hereafter referred as "KonamiSports Life") and Konami Sports Corporation (hereafter referred as "KonamiSports") resolved at their respective Boards of Directors' meeting held onNovember 7, 2005, to merger Konami Sports Life into Konami Sports, to effect ashare exchange between the new Konami Sports and the Company and to shift to aholding company structure by separating its digital entertainment business, andhave executed a basic agreement among the three companies as parties thereto. The above transactions are subject to the approval of the respective proposalsin extraordinary shareholders' meetings which will be held on January 26, 2006. Konami Sports Life and Konami Sports will merge on February 28, 2006, withKonami Sports as the surviving company (hereafter referred as "this merger").With this merger, Konami Sports will allot 3.99 shares per each share of KonamiSports Life, to the Company which is a shareholder of Konami Sports Life. Thus,Konami Sports will allot 15,760,500 shares of its common stock held as treasurystock to the Company. The Company and Konami Sports will execute a share exchange on March 1, 2006,which will make the Company the sole parent company and Konami Sports the whollyowned subsidiary with completion of the merger between Konami Sports Life andKonami Sports (hereafter referred as "this share exchange") as a condition. Withthis share exchange, The Company will allot 0.79 shares per each share of KonamiSports. The Company will allot a total of 9,898,911 shares of its common stockto the minority share holders, including 4,024,078 shares newly issued and5,874,833 shares held as treasury stocks. The Company will execute a company separation on March 31, 2006, with theCompany as the separating company and a newly established Konami DigitalEntertainment as the succeeding company, for the purpose of improving managementtransparency, creating a speedy and flexible management structure and creating acomplete profit responsibility structure. For the fiscal year ended March 31, 2005 On December 16, 2004, the Company entered into a plan of merger agreement withthree of its consolidated subsidiaries, Konami STUDIO, Konami TYO and KonamiJPN, which was approved in the extraordinary shareholders' meeting of eachcompany held on February 22, 2005. Under the terms of the agreement, 0.42, 1.00and 0.81 of one share of the Company' common stocks were exchanged for eachcommon share of Konami STUDIO, Konami TYO and Konami JPN. The Companyconsummated the mergers on April 1, 2005, by issuing 10,794,142 new commonshares to minority shareholders of those merged companies. The Company willaccount for the acquisition of additional equity interest in the mergedcompanies as a step-acquisition. On April 25, 2005, the Company sold its entire equity interest in Takara, anequity-method investee, for total cash consideration of Y11,016 million. Thesale resulted in a gain of Y6,360 million. On April 27, 2005, the Company acquired an additional 3,000,000 shares ofHudson's newly issued common stock for total consideration of Y1,434 million incash. Accordingly, the Company's equity ownership interest in Hudson increasedfrom 45.47 % to 53.99 % and, as a result, Hudson became a consolidatedsubsidiary. The transaction will be accounted for as a step-acquisition. On June 23, 2005, the shareholders of the Company approved the Company's Boardof Directors resolutions on May 10 and 19, 2005 for approval of the nine plansof stock subscription rights to directors and employees of the Company and itssubsidiaries. Those stock subscription rights plans are intended to enable thegrant of stock options and the total maximum number of shares issuable under theplans is 412,900 shares of common stock of the Company. The exercise periodswill range from 4 months to 24 months through June 30, 2009, and exercise priceswill range from Y1,670 to Y2,857, except for one plan for which the exerciseprice has not been set but will be equal to 1.20 times the daily average closingprice on the Tokyo Stock Exchange for the month prior to the grant date. 2. Other Not applicable. This information is provided by RNS The company news service from the London Stock Exchange