20-F 1 d660632d20f.htm ANNUAL REPORT ANNUAL REPORT
Table of Contents

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 20-F

 

 

 

¨   REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR 12(G) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

x   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended March 31, 2014

OR

 

¨   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

¨   SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report . . . . . . . . . . . . . . . . . . .

For the transition period from                      to                     

Commission file number: 1-31452

 

 

Konami Kabushiki Kaisha

(Exact name of registrant as specified in its charter)

KONAMI CORPORATION

(Translation of registrant’s name into English)

 

 

 

Japan  

7-2, Akasaka 9-chome, Minato-ku,

Tokyo 107-8323

Japan

(Jurisdiction of incorporation or organization)   (Address of principal executive offices)

Junichi Motobayashi, +81-3-5770-0573, +81-3-5412-3300,

7-2, Akasaka 9-chome, Minato-ku, Tokyo 107-8323, Japan

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Name of Each Exchange On Which Registered

Common Stock1   New York Stock Exchange

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None

(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

(Title of Class)

 

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

As of March 31, 2014, 138,612,321 shares of common stock were outstanding, including 390,061 shares represented by 390,061 American Depositary Shares.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     Yes  x    No  ¨

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.      Yes  ¨    No  x

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes   x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer    x                Accelerated filer    ¨                Non-accelerated filer    ¨

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP  x        International Financial Reporting Standards as issued by the International Accounting Standards Board  ¨        Other  ¨

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

Item 17  ¨    Item 18  ¨

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ¨    No  x

 

 

1   

Not for trading, but only in connection with the listing of American Depositary Shares, each representing one share of common stock.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

          Page  
PART I   

Item 1.

   Identity of Directors, Senior Management and Advisers      1   

Item 2.

   Offer Statistics and Expected Timetable      1   

Item 3.

   Key Information      1   

Item 4.

   Information on the Company      21   

Item 4A.

   Unresolved Staff Comments      66   

Item 5.

   Operating and Financial Review and Prospects      66   

Item 6.

   Directors, Senior Management and Employees      95   

Item 7.

   Major Shareholders and Related Party Transactions      99   

Item 8.

   Financial Information      101   

Item 9.

   The Offer and Listing      102   

Item 10.

   Additional Information      104   

Item 11.

   Quantitative and Qualitative Disclosures about Market Risk      118   

Item 12.

   Description of Securities Other Than Equity Securities      120   

Item 12D.

   3. Fees payable by ADR Holders      120   

Item 12D.

   4. Fees paid to KONAMI CORPORATION by the Depositary      121   
PART II   

Item 13.

   Defaults, Dividend Arrearages and Delinquencies      122   

Item 14.

   Material Modifications to the Rights of Security Holders and Use of Proceeds      122   

Item 15.

   Controls and Procedures      122   

Item 16A.

   Audit Committee Financial Expert      123   

Item 16B.

   Code of Ethics      123   

Item 16C.

   Principal Accountant Fees and Services      123   

Item 16D.

   Exemption from the Listing Standards for Audit Committees      124   

Item 16E.

   Purchases of Equity Securities by the Issuer and Affiliated Purchasers      125   

Item 16F.

   Change in Registrant’s Certifying Accountant      125   

Item 16G.

   Corporate Governance      125   

Item 16H.

   Mine Safety Disclosure      128   
PART III   

Item 17.

   Financial Statements      129   

Item 18.

   Financial Statements      129   

Item 19.

   Exhibits      129   

Index to Consolidated Financial Statements and Financial Statement Schedule

     F-1   

As used in this annual report, references to “the Company” are to KONAMI CORPORATION and references to “KONAMI,” “we,” “our” and “us” are to KONAMI CORPORATION and its subsidiaries, unless the context otherwise requires.

As used in this annual report, “fiscal 2014” refers to our fiscal year ended March 31, 2014, and other fiscal years are referred to in a corresponding manner.

As used in this annual report, “U.S. dollar” or “$” means the lawful currency of the United States of America, “€” or “Euro” means the lawful currency of the member states of the European Union and “yen” or “¥” means the lawful currency of Japan.

As used in this annual report, “U.S. GAAP” means accounting principles generally accepted in the United States, and “Japanese GAAP” means accounting principles generally accepted in Japan.

As used in this annual report, “ADS” means an American Depositary Share, and “ADR” means an American Depositary Receipt.


Table of Contents

PART I

 

Item 1.   Identity of Directors, Senior Management and Advisers.

Not applicable.

 

Item 2.   Offer Statistics and Expected Timetable.

Not applicable.

 

Item 3.   Key Information.

A. Selected Financial Data.

The following tables include selected historical financial data as of and for the fiscal years ended March 31, 2010 through 2014, derived from our audited consolidated financial statements prepared in accordance with U.S. GAAP. You should read the selected financial data below in conjunction with Item 5 of this annual report and our audited consolidated financial statements and information prepared in accordance with U.S. GAAP which are included in this annual report.

Selected Financial Data Prepared in Accordance with U.S. GAAP

 

     Fiscal year ended/as of March 31,  
     2010     2011     2012     2013      2014  
     (Yen in millions, except per share data)  

Income Statement Data:

           

Net revenues

   ¥ 262,144      ¥ 257,988      ¥ 265,758      ¥ 225,995       ¥ 217,595   

Cost of products sold and services rendered and others

     185,734        189,032        174,415        152,813         152,279   

Selling, general and administrative expenses

     55,407        46,253        50,051        51,307         52,369   

Restructuring and impairment charges (1)

     2,339        —          —          —           —     

Earthquake related impairment charges and expenses (2)

     —          4,455        342        —           —     

Gain on bargain purchase (3)

     —          (2,543     —          —           —     

Impairment charges for goodwill, property and equipment, and other intangible assets (4)

     —          —          —          —           5,251   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Operating income

     18,664        20,791        40,950        21,875         7,696   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Other income (expenses), net

     (1,542     (1,709     (924     40         1,532   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Income before income taxes and equity in net income of affiliated company

     17,122        19,082        40,026        21,915         9,228   

Income taxes

     3,600        6,401        16,941        8,473         5,331   

Equity in net income of affiliated company

     56        41        52        44         22   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net income

     13,578        12,722        23,137        13,486         3,919   

Net income (loss) attributable to the noncontrolling interest

     264        (212     125        312         85   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net income attributable to KONAMI CORPORATION

   ¥ 13,314      ¥ 12,934      ¥ 23,012      ¥ 13,174       ¥ 3,834   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Basic net income attributable to KONAMI CORPORATION stockholders per share

   ¥ 99.76      ¥ 96.48      ¥ 166.23      ¥ 95.04       ¥ 27.66   

Diluted net income attributable to KONAMI CORPORATION stockholders per share

   ¥ 99.76      ¥ 96.48      ¥ 166.23      ¥ 95.04       ¥ 27.66   

Cash dividends declared per share (5)

   ¥ 54.00      ¥ 32.00      ¥ 50.00      ¥ 50.00       ¥ 34.00   

Balance Sheet Data:

           

Total current assets

   ¥ 134,562      ¥ 148,934      ¥ 161,965      ¥ 153,483       ¥ 139,658   

Total goodwill, identifiable intangible assets and property and equipment

     119,579        122,953        125,409        126,810         139,439   

Total assets

     298,198        313,891        328,006        322,948         320,251   

Total current liabilities

     53,465        63,155        67,890        59,512         45,328   

Total long-term liabilities

     55,502        52,329        44,396        37,437         49,131   

Common stock

     47,399        47,399        47,399        47,399         47,399   

Total KONAMI CORPORATION stockholders’ equity

     184,465        193,914        215,458        225,425         225,133   

Noncontrolling interest

     4,766        4,493        262        574         659   

Total equity

     189,231        198,407        215,720        225,999         225,792   

 

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(1)   During fiscal 2010, we recognized ¥2,339 million of restructuring and impairment charges that include impairment losses of long-lived assets and expenses related to closure of facilities for our Health & Fitness segment.
(2)   During fiscal 2011, we recognized ¥4,455 million of earthquake related impairment charges and expenses that include impairment losses and write-downs of damaged assets related to our facilities mainly in the Kanto and Tohoku regions due to the impact of the March 11, 2011 earthquake disaster mainly on our Health & Fitness segment and others.
(3)   During fiscal 2011, we recognized ¥2,543 million gain on bargain purchase at the time of acquiring 100% equity ownership of TAKASAGO ELECTRIC INDUSTRY CO., LTD. as a consolidated subsidiary for our Pachinko & Pachinko Slot Machines segment, due to the fact that fair value of the net assets of TAKASAGO ELECTRIC INDUSTRY CO., LTD. exceeded our acquisition price.
(4)   During fiscal 2014, we recognized ¥5,251 million of impairment charges for goodwill, property and equipment, and other identifiable intangible assets for our Health & Fitness segment.
(5)   Cash dividends per share consist of interim dividends paid during the fiscal year and year-end dividends paid after the fiscal year-end.

Exchange Rate Data

Fluctuations in exchange rates between the Japanese yen and U.S. dollar and other currencies will affect the U.S. dollar and other currency equivalent of the yen price of our shares and ADSs and the U.S. dollar amounts received on conversion of cash dividends.

The following table presents the noon buying rates for Japanese yen per $1.00 in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York for and as of the end of each period indicated.

 

Fiscal year ended March 31,

   High      Low      Average (1)      Period-end  

2010

     100.71         86.12         92.93         93.40   

2011

     94.68         78.74         85.71         82.76   

2012

     85.26         75.72         79.00         82.41   

2013

     96.16         77.41         82.96         94.16   

2014

     105.25         92.96         100.46         102.98   

Calendar year 2014

                           

January

     104.87         102.20         103.76         102.28   

February

     102.71         101.11         102.13         102.08   

March

     103.38         101.36         102.34         102.98   

April

     103.94         101.43         102.46         102.14   

May

     102.34         101.26         101.77         101.77   

June

     102.69         101.28         102.06         101.28   

 

(1)   Calculated from the average of the exchange rates on the last day of each month during the period with respect to fiscal years and from the average of daily noon buying rate with respect to calendar years.

As of July 11, 2014, the noon buying rate was ¥101.33 per $1.00.

B.    Capitalization and Indebtedness.

Not applicable.

C.    Reasons for the Offer and Use of Proceeds.

Not applicable.

 

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D.    Risk Factors.

Special Note Regarding Forward-looking Statements.

This annual report contains forward-looking statements about our industry, our business, our plans and objectives, our financial condition and our results of operations that are based on our current expectations, assumptions, estimates and projections. These forward-looking statements are subject to various risks and uncertainties. Generally, these forward-looking statements can be identified by the use of forward-looking terminology such as “may”, “will”, “expect”, “anticipate”, “estimate”, “plan” or similar words. These statements discuss future expectations, identify strategies, discuss market trends, contain projections of results of operations or of financial condition, or state other forward-looking information. Known and unknown risks, uncertainties and other factors could cause our actual results to differ materially from and worse than those contained in or suggested by any forward-looking statement. We cannot promise that our expectations, projections, anticipated estimates or other information expressed in or underlying these forward-looking statements will be realized. We do not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Important risk factors that could cause our actual results to be materially different from as described in the forward-looking statements are set forth in this Item 3.D or elsewhere in this annual report and include, without limitation:

 

   

our ability to continue to win acceptance of our products, which are offered in highly competitive markets characterized by the continuous introduction of new products, rapid developments in technology and subjective and changing consumer preferences;

 

   

changes in economic conditions affecting our operations or the way that individuals choose to spend their leisure time;

 

   

our ability to successfully expand internationally with a focus on our Digital Entertainment segment and Gaming & Systems segment;

 

   

our ability to successfully expand the scope of our business and broaden our customer base through our Health & Fitness segment;

 

   

our ability to successfully generate cash flows on an individual club operation level sufficient to recover the carrying value of the related individual club operations;

 

   

regulatory developments and changes, in particular in the gaming industry, and our ability to respond and adapt to those changes;

 

   

the impact of natural disasters, such as earthquakes, on our facilities and personnel;

 

   

our ability to successfully integrate current acquisitions and realize expected synergies and business benefits to recover the acquisition investment, including goodwill and separately identifiable intangible assets; and

 

   

our expectations with regard to further acquisitions and the integration of any companies we may acquire.

Risks Relating to Our Overall Business

Our future success is dependent on our ability to release “hit” products.

Our Digital Entertainment segment, Gaming & Systems segment, and Pachinko & Pachinko Slot Machines segment are “hit” driven. “Hit” products account for a substantial portion of our net revenues and of the revenues in each of these markets. For example, in recent years revenues from our mobile games(*) have been heavily dependent on the sales of our rapidly growing titles such as DRAGON COLLECTION, SENGOKU COLLECTION, CROWS X WORST—Saikyou Densetsu, and Professional Baseball Dream Nine. Similarly, hit

 

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home video game software titles such as the WORLD SOCCER Winning Eleven series and the METAL GEAR SOLID series, as well as our e-AMUSEMENT products for our amusement facilities, have contributed significantly to our recent results. If we do not develop, publish and distribute “hit” products in the future, our financial condition, results of operations and profitability in these segments could be negatively affected. The most important factor in developing hit products is to respond quickly to public tastes and preferences that change rapidly and are hard to predict. Therefore, if we fail to accurately anticipate and promptly respond to changing tastes and preferences, our business, revenues and profits in these segments could be harmed.

(*) In our Form 20-F filings through fiscal year 2013, our products and services related to “mobile games” were referred to as “content for social networks.”

Our revenues are dependent on timely introduction of popular new products to the market.

Our success depends on generating revenue from the timely introduction and shipment of new products. The majority of sales of new video game software for home use generally occurs in the first thirty to one hundred and twenty days after release. The sales occurrence for our Digital Entertainment segment, Gaming & Systems segment and Pachinko & Pachinko Slot Machines segment also tends to be limited. We are constantly required to introduce new products in order to generate revenues and/or to replace declining revenues from older products. Also, because revenues earned during the early life of a product generally constitute a relatively high percentage of the total revenues earned from a product, a significant delay in the introduction of one or more new products, or the inability to ship in sufficient quantities to meet demand, could negatively affect sales and have a negative impact on our financial condition and results of operations. Unanticipated delays could also cause us to miss an important selling season such as the year-end holiday buying season or summer vacation. Moreover, our products may not achieve and sustain market acceptance during the short life cycle sufficient to generate revenue to recover our investment in developing the products and to cover our other costs.

The timely shipment of a new product depends on various factors, including the development process, approval by third-party licensors, production capacity and other factors such as debugging and approval by hardware licensors, in the case of video game software. It is possible that some of our products will not be released or shipped in a timely fashion in accordance with our plans.

Competition for market acceptance and pricing competition affect our revenue and profitability.

The markets for our Digital Entertainment segment, Gaming & Systems segment, and Pachinko & Pachinko Slot Machines segment, as well as the markets for most of our other products, are intensely competitive and new products and platforms are regularly introduced. Only a small percentage of products introduced in the market achieve any degree of sustained market acceptance. In addition, while significant price competition and reduced profit margins may result as the hardware product cycle matures, competition from new technologies such as video game software for play over the Internet or mobile phones may reduce demand in markets in which we have traditionally competed. As a result of prolonged price competition and reduced demand due to competing technologies, our operations in the past have been, and in the future could continue to be, negatively impacted.

Our competitors vary in size from small companies to very large corporations, some of which have significantly greater financial, marketing and product development resources than we have. Due to these greater resources, certain of our competitors can undertake more extensive marketing campaigns, adopt more aggressive pricing policies, pay higher fees to licensors of desirable motion picture, television, music, sports and character properties and pay more to third party software developers than we can. It is also possible that some of our competitors will form alliances or enter into exclusive business arrangements with key creators, distributors or retailers overseas which could hinder our ability to expand into international markets.

 

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A decline in consumer spending due to unfavorable economic conditions could hinder sales of our products.

Our product sales are affected by customer’s ability and desire to spend disposable income on the purchase of our products and services. Any significant downturn in general economic conditions which results in a reduction in consumers’ discretionary spending could reduce demand especially for entertainment and health-oriented products and services like ours and may harm our business. For example, adverse economic conditions in emerging markets, including the slowing growth rate in China, as well as lingering uncertainty surrounding European sovereign debt and government austerity measures have negatively affected consumer spending trends in those regions and in the global economy generally and may continue to have an adverse impact on economic conditions, including in Japan. Economic downturns have been, and may continue to be, characterized by diminished product and service demand and subsequent erosion of average selling prices.

In addition, Japan’s consumption tax was increased from 5% to 8% in April 2014 and currently it is scheduled to be increased further to 10% in October 2015. Such a tax increase may adversely affect consumer spending, which could in turn reduce the demand for our products and services and adversely affect our results of operations.

Our performance may be vulnerable to rapidly changing consumer preferences.

Sales of our products depend substantially on how consumers decide to spend their money. Many of our markets are characterized by rapidly changing trends and fads, and frequent innovations and improvements are necessary to maintain consumer interest. We compete with other forms of entertainment and leisure activities. For example, we believe that the overall growth in the use of the internet and online services by consumers may pose a competitive threat if customers and potential customers spend less of their available time using our products, and more time using the Internet or otherwise choose to engage in other forms of entertainment and leisure activities. Our financial performance may be harmed if we are unable to successfully adapt our products and services to these changing trends and fads.

Fluctuations in our quarterly operating results make our quarterly revenues and income difficult to predict.

The timing of release of new products can cause material quarterly revenue and earnings fluctuations. A significant portion of revenues in any quarter is often derived from sales of new products introduced in that quarter or in the immediately preceding quarter. If we are unable to begin volume shipments of a significant new product during the scheduled quarter, our revenues and earnings will be negatively affected in that period. In addition, because a majority of the unit sales for many of our products typically occur in the first thirty to one hundred and twenty days following their introduction, revenues and earnings may increase significantly in a period in which a major product is introduced and may decline in the following period or in periods in which there are no major product introductions.

Our quarterly operating results also may be materially impacted by other factors, including the operating condition of our mobile games, the level of market acceptance or demand for video game software, the timing of hardware platform introductions, the level of development and/or promotion expenses for a video game title. Also, many of our products are in the greatest demand from November to January, particularly in November and December and at the end and beginning of the year. The reason for this trend is that these months correspond to the periods of children’s school holidays. In Japan, it is customary to give presents to girlfriends, boyfriends, and family members during the Christmas and New Year season and buy toys as Christmas and New Year presents in December and January. In addition, in the U.S. demand is highest from November, starting with Thanksgiving and through the Christmas season. Moreover, in a platform transition period, sales of video game software products can be significantly affected by the timeliness of introduction of video game systems by the manufacturers of those platforms, such as Sony Corporation (“Sony”), Nintendo Co., Ltd. (“Nintendo”) and Microsoft Corporation (“Microsoft”).

 

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Inability to procure commercially valuable intellectual property licenses may prevent product releases or result in reduced product sales.

We focus our development and publishing activities principally on products that are, or have the potential to become, franchise brand properties. Many of our products are based on intellectual property and other character or story rights acquired or licensed from third parties. For example, our products often embody trademarks, trade names, logos, or copyrights licensed by third parties, such as Major League Baseball Properties, Inc., and Major League Baseball Players Association. We have also acquired content licenses from sports organizations such as FIFPro Commercial Enterprises BV, the UEFA Champions League, the Japan Professional Baseball League, the Japan Professional Soccer League, or J-League, and the Japan Football Association. In addition, we have obtained content licenses from various companies, including NIHON AD SYSTEMS Inc., Kodansha Ltd. and Shogakukan-Shueisha Productions Co., Ltd.

These license and distribution agreements are limited in scope and time, and we may not be able to acquire new licenses, renew licenses or include new products in existing licenses. The agreements are terminable upon the occurrence of a number of factors, including our material breach of the agreement, delay in payment of amounts due to the licensor in a timely manner, or a bankruptcy or insolvency. The loss of a significant number of our intellectual property licenses or of our relationships with licensors could have a material adverse effect on our ability to develop new products and therefore on our business and financial results.

Inadequate intellectual property protections could prevent us from enforcing or defending our proprietary technology.

We regard our products as proprietary and rely on a combination of patent, copyright, trademark and trade secret laws, employee and third party nondisclosure agreements and other methods to protect our proprietary rights. We own or license various patents, copyrights and trademarks. We are aware that unauthorized copying occurs within some of the industries to which Digital Entertainment segment belongs. For example, unauthorized copies of the Yu-Gi-Oh! TRADING CARD GAME have been found all over the world. If a significant volume of unauthorized copying of our products were to occur, it could cause material harm to our business and financial results.

Policing all the unauthorized use of our products is difficult and can be a persistent problem, especially in some international markets. Further, the laws of some countries where our products are or may be distributed either do not protect our products and intellectual property rights to the same extent as the laws of Japan and the United States, or are poorly enforced. Legal protection of our rights may be ineffective in such countries, and we may be unable to protect our intellectual property rights, particularly as we pursue new and emerging technologies. We cannot assure you that existing intellectual property laws will provide adequate protection for our products in connection with these emerging technologies.

Infringement of intellectual property rights could lead to costly litigation and/or the need to enter into license agreements, which may result in increased operating expenses.

Existing or future infringement claims against us may result in costly litigation or require us to obtain a license for the proprietary rights of third parties, which could have a negative impact on our results of operations. As the number of our products increases there is an increased possibility of the contents and features of these products overlapping with the products of other companies, and we become subject to an increasing possibility of infringement claims. Although we are making efforts to ensure that our products do not violate the intellectual property rights of others, it is possible that third parties still may claim infringement.

From time to time, third parties have asserted that some of our products infringed their proprietary rights. These infringement claims have sometimes resulted in litigation against us. For example, in video game software featuring sports such as baseball and soccer, we use individual names and images of professional players, team

 

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names, logos and uniforms. Although we have obtained licenses to use them from organizations and agents which manage the rights of the professional players and the teams, in the event agreements change or any disputes arise among the professional players, the teams and organizations or agents which manage their rights, it is possible that such professional players, teams, organizations or agents might bring a lawsuit against us to suspend manufacturing and sales of the relevant video game software. Such a lawsuit may be time consuming and expensive to defend.

Intellectual property litigation or claims could force us to do one or more of the following:

 

   

cease selling, incorporating or using products or services that incorporate the challenged intellectual property;

 

   

obtain a license from the holder of the infringed intellectual property, which, if available at all, may not be available on commercially favorable terms; or

 

   

redesign our products, which could cause us to incur additional costs, delay introduction and possibly reduce commercial appeal of our products.

Any of these actions may cause material harm to our business and financial results.

If our products contain defects, our business could be harmed significantly.

Our products are complex and may contain undetected errors when first introduced or when new versions are released. We cannot assure you that, despite extensive testing prior to release, errors will not be found in new products or releases after shipment, resulting in loss of or delay in market acceptance. This loss or delay could significantly harm our business and financial results.

We may face limitations on our ability to find suitable acquisition opportunities and integrate acquired businesses.

In order to develop and market our products and services competitively, we are seeking opportunities in and outside Japan to make acquisitions of controlling or significant stakes in other businesses that will grow our current businesses. Some of these transactions could be material in size and scope. Our acquisitions strategy requires that we effectively coordinate and integrate our activities with those of the companies in which we invest or which we acquire. In the event we make such acquisitions or investments, we will face additional financial and operational risks, including:

 

   

difficulty in assimilating the operations, technology and personnel of acquired companies;

 

   

disruption in our business because of the allocation of financial and human resources to consummate the acquisitions;

 

   

difficulty in retaining key technical and managerial personnel from acquired companies;

 

   

dilution of our current shareholders if we issue equity to fund one or more of these acquisitions or investments;

 

   

considerable efforts required to successfully integrate acquisitions and realize expected synergies and business benefits to recover acquisition investments, including any goodwill and separately identifiable intangible assets; and

 

   

assumption of operating losses and increased expenses, charges and liabilities in connection with acquisitions.

While we will continually be searching for additional acquisition opportunities, we may not be successful in identifying suitable acquisitions. As the digital entertainment, fitness club, gaming machine and pachinko and pachinko slot industries continue to consolidate, we face significant competition in seeking and consummating

 

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acquisition opportunities. We may not be able to consummate potential acquisitions or investments on terms acceptable to us or such an acquisition or investment may not enhance our business or may decrease rather than increase our earnings. Our shareholders may not have the opportunity to review, vote on or evaluate future acquisitions.

Our business and financial results could be negatively impacted if we are unable to attract additional qualified employees or retain the services of key employees, the loss of whom could have a material adverse effect on our business.

Our continued growth and success depend to a significant extent on the continued service of our senior management and other key employees and the hiring of new qualified employees. The software industry in particular is characterized by a high level of employee mobility and aggressive recruiting among competitors for personnel with technical, marketing, sales, product development and management skills. We may not be able to attract and retain skilled personnel or may incur significant costs in order to do so that may not be offset through either improved productivity or higher prices.

Factors specific to international trade may result in reduced revenues and/or increased costs.

Approximately 70% of our net revenues during fiscal 2014 were derived from sales in Japan. Although we expect that domestic sales will continue to account for a significant portion of our revenues in future periods, we continue to expand our international operations, particularly with respect to our Digital Entertainment segment and Gaming & Systems segment, including through alliances or investments. Sales in foreign countries may involve expenses incurred to customize products to comply with local laws, especially in the case of gaming machines. In addition, products that are successful in the domestic Japanese market may not be successful in foreign markets due to different consumer preferences. In addition, our costs will increase as a result of the need to conduct market research to discover local preferences and tastes and to develop foreign language versions or make product modifications in order to tailor our products to various local markets. In the case of video game software, we may have to grant price concessions to or accept returns from major retailers that control market access to consumers. International trade is also subject to general country risks, including suspension of currency exchange by governments, increases in tariffs, and forfeiture of property through expropriation by governments. International trade is also exposed to fluctuating exchange rates. We may become exposed to increased litigation risks or unexpected bankruptcy risks through product liabilities, facility liabilities, product defect or labor issues in the course of further expanding our business, enhancing our international network and increasing our vendors and customers. These and other factors specific to international trade may result in increased costs or reduced revenues.

Demographic trends may have an adverse effect on our target market and our ability to increase revenues.

The Japanese population of people in their teens, twenties and thirties, the traditional target market for our products and services, in particular with respect to our Digital Entertainment segment, is expected to decline. Accordingly, we may not be able to increase or maintain revenues if we are unable to expand our customer base and product offerings to overseas markets. Life expectancy in Japan is among the highest of the developed countries. However, as a result of a decline in fertility rates, Japan’s population is expected to begin declining and its demographic makeup is already aging considerably. According to government estimates, as of September 2013, 25.1% of Japan’s population was aged 65 or over, and this percentage, which was released in January 2012 and calculated for the 2010 national census, is expected to reach 31.6% by 2030 and 39.4% by 2055.

Unexpected network interruptions or security breaches, including hacking, may cause delays, interruptions of service or leak of personal information, resulting in a material adverse effect on our business, financial condition and results of operations and damage to our reputation and brands.

Security breaches, including hacking and unauthorized access, affecting any of our systems may cause delays or other service interruptions or leaks of confidential information, such as personal information, and could

 

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result in significant damage to our hardware, software systems and databases, disruptions to our service and business activities, such as to our website, e-mail and other communication systems. While we endeavor to maintain robust security protections to prevent security breaches, there have been cases of unauthorized access to our systems in the past. If we experience frequent or persistent service disruptions, whether caused by hackings or failures of our own systems or those of third-party service providers, our customers’ experience with us may be negatively affected, which in turn, may have a material and adverse effect on our reputation and brands and our business, financial condition and results of operations.

Wars, terrorism, pandemic, natural disasters and other incidents which may cause political, economic or social instability may disrupt our operations or otherwise result in a material adverse effect on our financial performance.

Incidents such as terrorism, riots, wars, pandemic and natural disasters may adversely affect the world economy. Resulting social and political instability may cause further economic and political uncertainty in each of the regions we conduct our operations. As a result, our and our suppliers’ operations and financial performance as well as our customers’ investment and consumption patterns may be adversely affected. For instance, on March 11, 2011, a large earthquake and subsequent tsunami and aftershock hit northeastern Japan, causing material losses and damage to life, infrastructure and distribution routes, as well as supply instability in certain regions caused by damage to a nuclear power plant complex in Fukushima Prefecture.

Risks Relating to Our Digital Entertainment Segment

Transitions in game consoles and technological change have a material impact on the relevant markets and may adversely affect our revenues and profitability.

The life cycle of existing game consoles and the market acceptance and popularity of new game consoles significantly affect the success of our products. The introduction of new technologies could render our current products or products in development obsolete or unmarketable. In addition, we cannot guarantee that we will be successful in developing and releasing video game software for new game consoles on a timely basis. Further, the release dates of new game platforms or the number of units that will be shipped upon such release are beyond the scope of our control.

Furthermore, when new game consoles are announced or introduced into the market, consumers typically reduce their purchases of video game software products for current consoles in anticipation of new platforms becoming available. During these periods, sales of our video game software products can be expected to slow down or even decline until new platforms have been introduced and have achieved wide consumer acceptance. For example, sales of some of our products for the previous PlayStation 2 and Nintendo GameCube platforms were negatively affected by the platform transition to Sony PlayStation 3, Nintendo Wii and Microsoft Xbox 360. Also, if fewer than expected units of a new game platform are manufactured or shipped, or the introduction of a new platform is significantly delayed, we may experience lower-than-expected sales.

Due to the popularity of alternative platforms for content distribution such as mobile games, it is also possible that demand for console game platforms as a whole will decline over time, which could negatively impact our results of operations to the extent we are unable to adapt our games or develop new contents for any such alternative platforms.

We must make significant expenditures to develop products for new platforms which may not be successful or released when anticipated.

The cyclical nature of the industry requires us to anticipate and assess the emergence and market acceptance of new game consoles and develop new software well in advance of the time the platform is introduced to consumers. If the platforms for which we develop new software products do not attain significant market penetration or our new products fail to gain market acceptance, we may not be able to recover in revenues our

 

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development expenses, which could be significant, and our business and financial results could be significantly harmed. We anticipate that our profitability will continue to be impacted by the levels of research and development expenses relative to revenues, and by fluctuations relating to the timing of development in anticipation of future platforms.

If we are unable to obtain or renew licenses from hardware manufacturers, we will not be able to release video game software for popular video game systems and our revenue and profitability may be negatively impacted.

Almost all of our revenues from game software products have historically been derived from sales of products for use on proprietary game platforms developed and manufactured by other companies. We may only produce products for use on other companies’ game platforms if we receive a platform license from them, which is generally for an initial term of several years and may be extended for additional one-year terms. If we cannot obtain licenses to develop products from manufacturers of popular game consoles or if any of our existing license agreements are terminated, we will not be able to release products for those systems, which may have a negative impact on our results of operations and profitability. Although we cannot assure shareholders that we will be able to obtain extensions or that we will be successful in negotiating definitive license agreements with developers of new systems when the term of existing license agreements end, to date we have always obtained extensions or new agreements with the hardware companies. We also depend on hardware manufacturers for the following additional reasons:

 

   

platform manufacturers have considerable control over the prices for their publisher licenses;

 

   

we must obtain their prior review and approval to produce products for their platforms;

 

   

if the popularity of a game platform declines, or the manufacturer stops manufacturing or does not meet the demand for a platform, or delays the introduction of a platform in a region important to us, the products that we have produced and that we are developing for that platform would likely produce lower sales than we anticipate;

 

   

these manufacturers control the manufacture of, or approval to manufacture, the game discs and cartridges that incorporate our products; and

 

   

these companies have the exclusive right to protect the intellectual property rights to their respective hardware platforms and technology and to discourage others from producing unauthorized products for their platforms that compete with our products.

In addition, we depend on Sony and Nintendo for the manufacture of products that we develop for their hardware platforms. Products for Microsoft’s hardware platforms must be manufactured by an authorized replicator. Our hardware platform licenses with these hardware manufacturers provide that the manufacturer may change licenses’ costs. These licenses include other provisions such as approval rights of all products and related promotional materials that could have an effect on our costs and the timing of release of new titles.

Since major manufacturers such as Sony and Nintendo also manufacture products for their own hardware platforms and manufacture products for all of their other licensees, such manufacturers may give priority to their own products or those of our competitors in the event of insufficient manufacturing capacity. Our business and financial results could be materially harmed by unanticipated delays in the manufacturing and delivery of our products by Sony or Nintendo, which has occurred in the past. In addition, our business and financial results could be materially harmed if Sony or Nintendo used their rights under these agreements to delay the manufacture or delivery of our products, limit the costs recoverable by us to manufacturing products for their consoles, or elect to manufacture products themselves or use developers other than us.

Our products for both game consoles and amusement arcade games may be subject to governmental restrictions, rating restrictions or to legal claims regarding content.

Legislation introduced at the local, state and federal levels in the United States and in other countries has established rating systems to inform consumers of software products that contain graphic violence and/or

 

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sexually explicit material. In 2005, legislation was also introduced in Japan to establish a system for local authorities to restrict the provision of products containing graphic violence. In addition, many countries have laws that permit governmental entities to censor the content and advertising of software. Although there are no mandatory government regulations in Japan, North America, Europe and Asian countries that are significant markets or potential markets for our products, an exception is China, where governmental approval is required for software sales in that country. Similar requirements for governmental approval may be adopted elsewhere. We may be required to modify our products or alter our marketing strategies to comply with new regulations, which could delay the release of our products in those countries. Moreover, uncertainties regarding the rating systems may give rise to confusion in the marketplace, and we are unable to predict what effect, if any, such rating systems would have on our business.

In the past several years, at least one lawsuit has been filed in the United States against video game companies by the families of persons shot and killed by teenage gunmen. This lawsuit, which did not name us as a defendant, alleged that the video game companies manufactured and/or supplied these teenagers with violent video games, teaching them how to use a gun and causing them to act out in a violent manner. While the plaintiffs’ claims were dismissed, similar lawsuits may be filed in the future which, if decided against us and our insurance carrier does not cover the amounts we are liable for, could have a material adverse effect on our business and financial results. Also payment of significant claims by insurance carriers may make such insurance coverage materially more expensive or unavailable in the future, thereby exposing our business to additional risk.

Although neither the terrorist attacks in the United States of America in September 2001, the late 2001 bio-terrorist attacks on various organizations nor the terrorist attacks relating to the Iraq war commenced in March 2003 have had a material adverse effect on our business, operations or financial condition, we cannot assure you that future terrorist attacks or the response of governments to any future terrorist actions, would not negatively affect our business by requiring us to modify the contents of our products, which could result in expensive product recalls, reprogramming or delays in the release of future products.

Our results of operations may suffer if amusement arcade revenues and sales of products for amusement arcades continue to decline.

Amusement arcades are the primary venue for video game machines and token-operated game machines in Japan. Amusement arcade revenues and sales of products for amusement arcades have recently been affected by the shrinking market for such games. In addition, due to the development of full-scale home video game systems that can rival amusement arcade games in play quality and the introduction of advanced mobile telephones equipped with network and game functions, consumers now have increasing leisure alternatives outside of amusement arcades. As customer preferences diversify, fewer people may visit frequently the amusement arcades on which we depend for sales of products for amusement arcades and this could have a negative impact on our results of operations if amusement arcade operators reduce purchases of our products as a result.

If our games are not accepted in the competitive domestic market for products for amusement arcades, our results of operations will suffer.

Our success as a manufacturer of products for amusement arcades is dependent upon numerous factors, including our ability to design, manufacture, market and service products that achieve player acceptance while maintaining product quality and acceptable margins. In addition, we must compete against other large and well-established game manufacturers such as SEGA SAMMY HOLDINGS INC. and BANDAI NAMCO Holdings Inc. If any of these game manufacturers, or another competitor, develops products for amusement arcades and installed these products in the same arcade floor space as our products, our sales may decrease significantly.

 

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Our business could be harmed if there is any substantial decline in the popularity of interactive Internet-based games or if our Internet-based games are not received favorably in the market.

In recent years, the rapid growth of the Internet has resulted in the development of interactive software games for play over networks and on mobile phones. Although we are marketing mobile phone-based, smart phone-based, and tablet terminal-based games as well as games which can be downloadable or which allows multiple players to play against each other using Wii, Nintendo DS, Nintendo 3DS, PlayStation 2, PlayStation 3, PlayStation 4, PlayStation Portable, PlayStation Vita, Xbox 360, Xbox One or personal computers, games have diversified over recent years and consumers now have expanded choices. In particular, demand for smart phone-based and tablet terminal-based games has rapidly grown in recent years. If consumers increasingly choose smart phone-based and tablet terminal-based games, demand for our existing mobile phone-based games as well as our games for other platforms could decline, and our business, revenues and profits could be affected if we are unable to expand sales of our smart phone-based and tablet terminal-based games. If there is any decline in the popularity of our network-based games, our business, revenues and profits could be harmed.

In addition, the development and operation of Internet-based games require a long period for development and a substantial amount of initial investment, including for example numerous test operations of facilities such as servers. If our Internet-based games are not received favorably in the market, we may be unable to recoup our initial investment or operating expenses, and may have to recognize an impairment charge with respect to the servers and software assets associated with such games.

Information processing failures in the operation of our Internet-based games may adversely affect our revenues and income.

As our Internet-based games require servers that process a heavy volume of information, the computers we use as servers must be equipped with high processing capacity. Although we attempt to prevent troubles by performing maintenance for our servers, we may be unable to operate our Internet-based games if the information processing capacity of a server becomes suddenly overloaded or is unexpectedly attacked by external computer viruses. If the recovery of processing capacity requires a long period of time, thus driving customers away, or if such technical errors and interruptions occur repeatedly and cause our customers to lose confidence in our services, our net revenues and operating income may decrease.

Abuses of network-based credit card billing authorization may adversely affect our revenues and profits.

We collect charges for our network-based games based on consumers’ credit card information, through a credit card authorization agent. Although our credit card authorization agent takes all possible measures to ensure the privacy of customer information during billing transactions, if the credit card information of our customers is obtained by unauthorized third parties and used for unauthorized transactions, we may be required to make repayments of the unauthorized amounts out of the sales we made to such customers. In addition, if numerous abuses occur, a credit card authorization agent might cancel agency payment services with us, and our net revenues and operating income may be adversely affected.

Any development adversely affecting our operation of mobile games may have a negative impact on our profitability and growth.

Our ability to achieve wide acceptance of our mobile games by users depends in part on whether we can provide attractive contents in a timely manner and efficiently operate our games. Even if our mobile games achieve wide acceptance, we may be unable to generate adequate revenue from such mobile games, as most of the games in this category are free to play and generate revenue only from sales of virtual items to players. In addition, the success of our mobile games may be affected by the expansion of the industry related to mobile games as well as other factors which are beyond our control. Such factors include:

 

   

changes in the economy;

 

   

the pace of market expansion;

 

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popularity of mobile sites and application stores; and

 

   

establishment of legal regulations concerning mobile games and self-imposed restrictions in the industry.

If we are not able to provide competitive contents, or if these political, economic, legal and other factors adversely affect the operation of our mobile games our financial conditions and results of operation may be negatively impacted.

If the agreements entered into with operators of the mobile sites and application stores through which our mobile games are distributed are terminated, the continued provision of the services we are currently providing will become difficult, which may adversely affect our revenues and profitability.

We currently provide mobile games almost entirely on the mobile sites and application stores operated by other companies. Our provision of mobile games is based on agreements entered into with the distributors which operate the mobile sites and application stores. In addition, with respect to our mobile games, the proportion accounted for the use of specific distributors has increased. Therefore, if the agreements with the distributors are terminated, it will become difficult for us to continue providing services of our mobile games on those mobile sites and application stores, and our businesses and financial performance may be damaged.

Our revenues and profits may be adversely affected by major natural disasters such as the Great East Japan Earthquake.

Natural disaster such as the Great East Japan Earthquake may cause postponement of the release of our products, delays in shipment due to the disruption of distribution network, delays in delivery of parts procured from the suppliers located in the disaster-stricken areas, related revisions to our production system and increases in procurement costs for parts and cancellation in procurement caused by increased scarcity of parts and inventory supply shortages in the market, as well as the suspension of distribution services for online games due to damaged telecommunications infrastructure. As a result, our revenues and profits may be adversely affected.

Risks Relating to Our Health & Fitness Segment

Our Health & Fitness segment may not grow as we expect if we are not able to efficiently operate club locations upon opening such locations.

Our operating results depend in part on our ability to efficiently operate club locations upon opening such locations. The successful development of clubs will depend on various factors, including our ability to:

 

   

locate suitable sites for clubs;

 

   

successfully negotiate lease agreements and meet construction schedules and budgets;

 

   

resolve zoning, permitting or other regulatory issues relating to the construction of new clubs;

 

   

hire, train and retain qualified personnel;

 

   

attract new members; and

 

   

effectively address issues raised by other factors, some or all of which may be beyond our control.

If we are not able to adequately implement the factors outlined above, the growth of our Health & Fitness segment may be limited. We cannot assure you that we will be able to open new clubs in a timely and cost-efficient basis or operate our clubs profitably. Upon opening a new fitness club, we often experience an initial period of operating losses with respect to that club for the first year. However, this period can vary depending on the individual club, and may be substantially longer than a year. If we are unable to enhance the performance of our fitness clubs, our operating income may be adversely affected. We may still incur future impairment charges

 

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against goodwill, other identifiable intangible assets, or property and equipment. For the fiscal year ended March 31, 2014, we recognized ¥5,251 million of impairment charges for goodwill, property and equipment, and other identifiable intangible assets because of the worsening operating results of our facilities and the revision of the future business prospects of certain facilities due to changes in the business environment.

A decline in membership levels of our fitness clubs could have a negative effect on our business.

The performance of our fitness clubs is dependent on our ability to attract, acquire and retain members. We cannot assure you that we will be successful in these efforts, or that the membership levels at one or more of our clubs will not decline. Our members can cancel their club membership at the end of any month provided that they give advance notice by the tenth day of that month. Because members periodically cancel their membership, our total number of members will decline unless we are able to attract new members each month. There are numerous factors that could lead to a decline in membership levels at established clubs or that could prevent us from increasing our membership at newer clubs, including our reputation, our ability to deliver quality service at a competitive cost, the presence of direct and indirect competition in the areas in which the clubs are located, general interest in sports and fitness clubs and general economic conditions. As a result of these factors, we cannot assure you that our membership levels will be adequate to maintain or permit the expansion of our operations. In addition, a decline in membership levels may have a material adverse effect on our performance, financial condition and results of operations.

Failure to compete effectively in the fitness club industry will have an adverse effect on our results of operations.

The fitness club industry is highly competitive. We compete with other fitness clubs, physical fitness and recreational facilities established by local governments, hospitals and businesses for their employees, amenity and condominium clubs and, to a certain extent, with tennis clubs and other sports clubs, golf clubs, weight reducing salons and the home-use fitness equipment industry. We also compete with other entertainment and retail businesses for the discretionary income of our target markets. We cannot assure you that we will be able to compete effectively in the future in the markets in which we operate. In addition, we may face new competitors in the market that may be larger and have greater resources than us. These competitive conditions may limit our ability to increase dues without a material loss in membership, attract new members and attract and retain qualified personnel. Additionally, consolidation in the fitness club industry could result in increased competition among participants, particularly as large multi-facility operators are better able to compete for attractive acquisition candidates, thereby increasing costs associated with expansion through acquisitions, as well as negotiation of leases and the availability of real estate.

We could be subject to future claims related to health risks at our clubs.

Use of our fitness clubs and equipment may pose some potential health risks to members or guests through exertion from use of our services and facilities including exercise equipment. As a result, we may be subject to claims against us for death or injury suffered by members while exercising at our fitness clubs, and we may not be able to successfully defend any such claims. We currently maintain general liability insurance coverage but there can be no assurance that we will be able to maintain such liability insurance on acceptable terms in the future or that such insurance will provide adequate coverage against potential claims. Any liability claim in excess of our insurance coverage may adversely affect our results of operations as well as damage our brand image.

We are subject to various governmental regulations, any non-compliance with which could result in temporary closings and negative publicity, causing damage to our corporate image.

Our operations are subject to national, local and municipal government regulation in the various jurisdictions in which our clubs are located. These regulations include, but are not limited to, health, sanitation

 

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and safety regulations with respect to the sale of food and beverages and the operation of swimming pools and baths. Any failure to comply with these regulations could result in the temporary suspension or loss of licenses necessary for food service and other operations at our clubs. In addition, any resulting negative publicity could have an adverse effect on our reputation, resulting in deterioration of our brand image and ability to attract, acquire, and retain club members.

We may be unable to get refunds of deposits and guarantee money relating to leases of land and buildings for the use of our fitness club facilities.

In many cases, we rent land and buildings when we open new fitness clubs. Under the lease agreements that we enter into with landowners, we are often required to make deposits and to provide guarantee money in case we default in payment of rent or neglect to restore the property to its original state upon termination of the lease agreement. Under such lease agreements, if we pay our rent and restore the property as stipulated, we are entitled to obtain refund of such deposits and guarantee money. However, if the owner of the property faces financial difficulty or is otherwise unable or unwilling to return these funds, we may not be able to obtain full refunds of such deposits and guarantee money. As of March 31, 2014, such deposits and guarantee money accounted for over 8% of our total assets.

Inability to procure licenses for fitness programs from third parties or changes in the conditions of such licenses may adversely affect our revenues.

We act as a licensing agency in Japan, acquiring licenses for programs that have worldwide popularity, and supply the programs to not only our own facilities but also to other fitness clubs. In the event that it becomes difficult to renew licenses or if any changes are made to the conditions of such licenses, there may be a material adverse effect on our ability to supply programs to each facility and on our business results.

The need to suspend our business operations due to unexpected epidemic diseases may adversely affect our revenues.

Due to the H1N1 influenza pandemic during fiscal 2010, the business operations of fitness clubs in some areas of Japan were suspended at the discretion of the government. If an unexpected epidemic of an unknown or known disease in the future results in the suspension of business operations of our fitness clubs at the instruction of the government or at our own discretion, our business results could be affected.

Abrupt changes in consumer tastes may adversely affect our business results.

Revenues due to usage of our facilities are highly dependent upon how consumers chose to spend their money, which makes it imperative that we unremittingly provide high quality services in line with customer needs. For example, our business results could be negatively affected if fitness trends which don’t require the spending of money catch on, such as home fitness, running or walking.

We may be adversely affected by natural disasters such as the Great East Japan Earthquake during fiscal 2011.

Due to natural disasters as typified by the Great East Japan Earthquake during fiscal 2011, our directly-owned fitness clubs may be damaged and the sports facilities outsourced to us may become evacuation centers in some regions, which could result in the suspension of operations at some of our fitness clubs. In the future, similar earthquake disasters and other natural disasters may occur again and the operations of some of our fitness clubs may be suspended, which could adversely affect the financial performance of our Health & Fitness segment.

 

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Rolling blackouts due to the shortage of power supply may adversely affect our business results.

Natural disasters such as the Great East Japan Earthquake during fiscal 2011 may damage power plants, which could result in a shortage of power supply. If power demand exceeds the available power supply in the future, rolling blackouts may be further implemented and operations at some of our fitness clubs and the manufacturing of products may be suspended, which could adversely affect our business results.

Risks Relating to Our Gaming & Systems Segment

If our gaming products are not accepted in the competitive market for gaming machines, we may be unable to compete in the gaming machine market.

Our success as a gaming machine manufacturer and supplier in overseas markets is dependent upon numerous factors, including our ability to design, manufacture, market and service gaming machines and casino management systems that achieve player and casino acceptance while maintaining product quality and acceptable margins and to obtain approvals for our products from gaming authorities. In addition, we must compete against gaming equipment and system companies such as International Game Technology, Bally Technologies, Inc., Aristocrat Leisure Limited and WMS Industries Inc., which are among the largest and most-established suppliers of gaming machines in the world. Some of our competitors have greater financial resources, name recognition, established service networks and customer relationships than we do, and are licensed in more jurisdictions than we are.

In order to diversify and expand sales, we have obtained licenses in every state and territory in Australia, the majority of states and territories in the United States, and all legal gaming provinces in Canada, and are marketing and selling gaming products in those markets. If our games and our system products fail to be accepted by the market, and we are otherwise unable to develop products that offer technological advantages or unique entertainment features, we will be unable to generate the revenues necessary to compete effectively in the competitive gaming product market. Consequently, the results of our operations could suffer.

If our technologies for gaming products are subject to claims they infringe on competitors’ patents, trademark rights and design rights, we may be unable to market our products as planned, thus adversely affecting our profits.

As technological capabilities and an ability to develop effective business plans are constantly becoming more crucial for success in the gaming business, it has become a critical business strategy for companies, especially in the United States, to ensure an advantage over competitors by filing and acquiring their own intellectual property rights such as patents, trademark rights and design rights in advance of their competitors. In this competitive business environment, we strive to commercialize our products only after carefully examining the intellectual property rights status of the products. However, if the contents of our new products and services are deemed to infringe on the intellectual property rights of competitors, we may be unable to bring such products or services to market or be forced to cease selling such products or services.

An adverse change affecting the gaming and systems industries, including a change in the economy, in gaming regulations or in the expansion and popularity of casino gaming, will negatively impact our profitability and our potential for growth.

Our ability to grow our business and operate profitably is substantially dependent upon the expansion of the gaming industry and factors that are beyond our control. These factors include, among others:

 

   

changes in the economy;

 

   

the pace of market expansion;

 

   

changes in regulation;

 

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fluctuations in popularity of the casino industry; and

 

   

changes in tax rates concerning the gaming industry instituted by national, state or province governments.

An adverse change in any of these political, legal and other factors may negatively impact our results of operations.

Our failure to obtain or retain required licenses for our Gaming & Systems segment could prevent us from expanding our market and prohibit us from generating revenue in certain jurisdictions.

In North America, the manufacture and distribution of gaming products is subject to numerous federal, state, territory, provincial, tribal, international and local regulations. In particular, we are subject to extensive regulation in the states of Arizona, California, Colorado, Connecticut, Florida, Idaho, Illinois, Indiana, Iowa, Kansas, Louisiana, Michigan, Minnesota, Mississippi, Nevada, New Jersey, New Mexico, New York, North Dakota, Oklahoma, Oregon, Pennsylvania, Puerto Rico, Rhode Island, South Dakota, West Virginia, Wisconsin, and the Provinces of Alberta, British Columbia, Manitoba, New Brunswick, Nova Scotia, Ontario, Quebec and Saskatchewan in Canada due to our gaming product business in those jurisdictions. In addition, we may also be subject to regulation as a gaming operator for participation agreements under which we share in the revenues generated by gaming machines. These regulations are constantly changing and evolving, and may curtail gaming in various jurisdictions in the future, which would decrease the number of jurisdictions from which we can generate revenues.

Together with our key personnel, we undergo extensive investigation before each jurisdictional license is issued. Our gaming products are subjected to independent testing and evaluation prior to approval from each jurisdiction in which we do business. Generally, legal authorities have broad discretion when granting, renewing or revoking these game approvals and licenses. Our failure to obtain or retain a required license or approval in one jurisdiction could negatively impact our ability to obtain or retain required licenses and approvals in other jurisdictions. The failure to obtain or retain a required license or approval in any jurisdiction would decrease the geographic areas where we may operate and generate revenues, decrease our share in the gaming marketplace and put us at a disadvantage compared with our competitors. Consequently, the market price of our common stock may suffer.

Legal authorities may require shareholders to submit to background investigations and respond to questions from regulatory authorities, and may deny a license or revoke our licenses based upon their findings. These licensing procedures and background investigations may inhibit potential investors from becoming significant shareholders.

The future revenue growth of our Gaming & Systems segment depends on our ability to strengthen our research and development departments and improve the effectiveness of our sales organizations and service departments.

In order to increase market awareness and sales of our gaming products, it is important for us to develop hit products that are received favorably in our markets and for us to maintain technology that allows for future innovation and adaptations to changes in customer preferences. If we fail to assess market needs or be technologically innovative, our net revenues and operating income may be adversely affected.

In addition, it is important for us to improve the effectiveness of our sales operations and service departments internationally. Our gaming business is expanding from sales of slot machines to sales of casino management systems, which connect gaming machines under a single accounting, marketing and customer management system and reinforcement of security. Casino management systems provide for relatively stable revenues, as proceeds from the initial sale are supplemented by subsequent connection fees. However, the sales

 

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of gaming products require sophisticated sales efforts targeted at selected people within the gaming industry and quality post-sale servicing. Competition for qualified sales personnel is intense, and we might not be able to hire the kind and number of sales personnel we are targeting. In addition, we will need to effectively train and educate our sales force and strengthen our service departments to ensure trust in our products if we are to be successful in selling into the gaming machine market.

If our manufacturing plant in the United States has operational difficulties, and we have problems with manufacturing capacity and quality control, our business growth may be adversely affected.

In June 2005, we started operation of a manufacturing plant in Las Vegas to strengthen production capacity and customer service and expand development and sales in the U.S. market. We depend on our manufacturing capacity for substantially all of our sales in the U.S. market. If operational troubles occur in this plant, we may be unable to maintain sufficient manufacturing capacity to meet increases in orders, and our financial performance may be adversely affected.

Natural disasters such as the damage caused by the record rainfall in northeastern Australia in January 2011 and the surrounding areas of the Mississippi River in May 2011 could have material adverse effects on our Gaming & Systems segment.

The record rainfall in the Australian northeastern region in January 2011 and in the surrounding areas of the Mississippi River in the U.S. in May 2011 raised concerns about a delay in transporting equipment for our products. Similar natural disasters could adversely affect the future business results of our Gaming & Systems segment.

Risks Relating to Our Pachinko & Pachinko Slot Machines Segment

Our pachinko and pachinko slot machines may not pass the testing of the Security Association due to circumstances beyond our control, and as a result, there may be delays in the date of release. Further, due to the tightening of regulations on the pachinko business and establishment of a period of voluntary ban on replacement by the National Police Agency or the bankruptcy of our suppliers, pachinko and pachinko slot machines which had passed the Security Association testing, and released or were scheduled for release, may not be able to be sold.

Upon receipt of commission by a prefectural public safety commission, the Security Association conducts a regulatory check as to whether pachinko and pachinko slot machines fulfill prescribed conditions on the basis of documents submitted by the pachinko and pachinko slot makers, as well as the practical exam, as described below:

 

  1.   Pachinko and pachinko slot machine makers apply for the Security Association examination (application lots are determined by lottery).

 

  2.   In case the machines fail to pass 1., applicants must correct the parts which failed the examination, reapply, and upon passing, move on to 3.

 

  3.   The machines are inspected by a prefectural public safety commission.

 

  4.   The machines are set up in a pachinko hall, and the police ward with jurisdiction over the pachinko hall conducts an inspection.

 

  5.   Operation of the machines begins in the hall upon passing the test in 4. above.

The date of release for a product may be delayed if reapplication becomes necessary in the process of the above procedures due to failure to gain an application lot, changes to the test standards or are tightening of regulations on the industry by the National Police Agency or other similar considerations.

 

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Our pachinko and pachinko slot machines may be adversely affected because of groups attempting to make money through illicit methods (commonly referred to as goto-shi) in the pachinko and pachinko slot industry.

Our pachinko and pachinko slot machines may be adversely affected because of groups attempting to make money through illicit methods (commonly referred to as goto-shi) in the pachinko and pachinko slot industries. In the event of such manipulation by goto-shi, there may be a decline in sales volume due to the tarnishing of our brand image, and delays in the dates of release due to measures to prevent goto-shi manipulation of our other products.

We may be adversely affected by natural disasters such as the Great East Japan Earthquake during fiscal 2011.

Natural disaster such as the Great East Japan Earthquake may cause postponement of the release of our products, delays in shipment due to the disruption of distribution network, decreases in or cancellation of orders from facilities located in disaster-stricken areas, delays in delivery of parts procured from suppliers in the disaster-stricken areas and related revisions to our production system, as well as increases in procurement costs for parts and delays in procurement caused by increased scarcity of parts and inventory supply shortages in the market. Any of these factors could have an adverse effect on our business.

Risks Relating to the Shares and the ADSs

Our shareholders of record on a record date may not receive the dividend they anticipate

The customary dividend payout practice of publicly listed companies in Japan may significantly differ from the practice widely followed in foreign markets. Our dividend payout practice is no exception. Pursuant to our Articles of Incorporation, our board of directors can determine the matters regarding dividends. While we may announce a dividend forecast prior to the record date of March 31, September 30, or such other date as we may set pursuant to our Articles of Incorporation, our board of directors is not legally bound by such forecast. Instead, our board of directors ultimately determines the actual dividend payment amount to our shareholders of record on a record date, including whether we will make any dividend payment to such shareholders at all, after the expiry of such record date. Therefore, our shareholders of record on the March 31 record date may not receive the dividend they anticipate.

Our share price is volatile and shareholders may not be able to recoup their investment.

Disclosures of our operating results (particularly if below the estimates of securities industry analysts), announcements of various events by us or by our competitors or other industry participants or the development and marketing of new products, as well as other factors, may cause the market price of our common stock to change significantly over short periods of time. The price of our common stock has been and is likely to continue to be highly volatile, and shareholders may not be able to recoup their investment. For example, the highs and lows of price per share of our common stock ranged from ¥1,723 to ¥2,984 during fiscal 2014.

A substantial number of our shares of common stock are eligible for future sale, and the sale of these shares may cause the price of our common stock to decline even if our business is performing well.

As of March 31, 2014, there were 138,612,321 shares of our common stock outstanding including 39,500,597 shares, representing 28.50% of our outstanding shares, beneficially owned by Kagemasa Kozuki, our founder, Representative Director, Chairman and his Kozuki Foundation, Kozuki Holding and Kozuki Capital Corporation. These shares and, generally, the shares owned by other shareholders, can be disposed of on the Tokyo Stock Exchange or otherwise in Japan without any legal restriction. Additionally, under our Articles of Incorporation, our board of directors is authorized to issue 306,500,000 additional shares of common stock generally without any shareholder approval. In addition, as of March 31, 2014, we held 4,887,679 shares of treasury stock which our board of directors may sell without any shareholder approval.

 

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Additional sales of a substantial amount of our common stock in the public market, or the perception that such sales may occur, could cause the market price of our common stock to decline. This could also impair our ability to raise additional capital through the sale of our securities. Also, in the future, we may issue common stock to raise cash for additional capital expenditures, working capital, research and development or acquisitions, and we may also pay for additional interests in subsidiaries or affiliated companies by using cash, common stock or both. We may also issue securities convertible into our common stock. Any of these events may dilute your ownership interest in us and have an adverse impact on the price of our common stock.

Investors holding less than a unit of shares will have limited rights as shareholders.

Pursuant to the Corporate Law of Japan relating to joint stock corporations and other related legislation, our Articles of Incorporation provide that 100 shares of common stock constitute one “unit”. The Corporate Law imposes significant restrictions and limitations on holdings of shares that do not constitute whole units. In general, holders of shares constituting less than one unit do not have the right to vote or to examine our books and records (other than our articles of incorporation and shareholders register). For a more complete description of the unit share system and its effect on the rights of holders of our shares, see Item 10.B “Unit Share System” below.

There are restrictions on your ability to withdraw shares from the depositary receipt facility.

Each ADS represents the right to receive one share of common stock. Each ADR will bear a legend to that effect. Holders of ADSs will be unable to withdraw fractions of shares from the depositary or receive any cash settlement in lieu of withdrawal of fractions of shares. Therefore, pursuant to the terms of the deposit agreement with our depositary, JPMorgan Chase Bank in order to withdraw any shares, a holder of ADSs must surrender for cancellation and withdrawal of shares, ADRs evidencing 100 ADSs or any integral multiple thereof. In addition, although the ADSs themselves may be transferred in any lots pursuant to the deposit agreement, the ability to trade the underlying shares may be limited.

Holders of ADRs have fewer rights than shareholders and must act through the depositary to exercise those rights.

Holders of ADRs do not have the same rights as shareholders and accordingly cannot exercise rights of shareholders against us. JPMorgan Chase Bank, as depositary, through its custodian agent, is the registered shareholder of the deposited shares underlying the ADSs, and therefore only it can exercise the rights of shareholders in connection with the deposited shares. In certain cases, we may not ask JPMorgan Chase Bank to ask holders of ADSs for instructions as to how they wish their shares voted. Even if we ask JPMorgan Chase Bank to ask holders of ADSs for such instructions, it may not be possible for JPMorgan Chase Bank to obtain these instructions from ADS holders in time for JPMorgan Chase Bank to vote in accordance with such instructions. JPMorgan Chase Bank is only obliged to try, as far as practical, and subject to Japanese law and our Articles of Incorporation, to vote or have its agents vote the deposited shares as holders of ADSs instruct. In your capacity as an ADS holder, you will not be able to bring a derivative action, examine the accounting books and records of the company, or exercise appraisal rights.

Rights of shareholders under Japanese law may be more limited than under the laws of other jurisdictions.

Our Articles of Incorporation, our board of directors’ Regulations and the Corporate Law of Japan govern our corporate affairs. Legal principles relating to such matters as the validity of corporate procedures, directors’ fiduciary duties and liabilities, and shareholders’ rights may be different from those that would apply to a non-Japanese company. Shareholders’ rights under Japanese law may not be as extensive as shareholders’ rights under the laws of other countries or jurisdictions within the United States. You may have more difficulty in asserting your rights as a shareholder than you would as a shareholder of a corporation organized in another jurisdiction.

 

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Because of daily price range limitations under Japanese stock exchange rules, you may not be able to sell your shares of our common stock at a particular price on any particular trading day, or at all.

Stock prices on Japanese stock exchanges are determined on a real-time basis by the equilibrium between bids and offers. These exchanges are order-driven markets without specialists or market makers to guide price formation. To prevent excessive volatility, these exchanges set daily upward and downward price fluctuation limits for each stock, based on the previous day’s closing price. Although transactions may continue at the upward or downward limit price if the limit price is reached on a particular trading day, no transactions may take place outside these limits. Consequently, an investor wishing to sell at a price above or below the relevant daily limit may not be able to sell his or her shares at such price on a particular trading day, or at all.

U.S. investors may have difficulty in serving process or enforcing a judgment against us or our directors or corporate auditors.

We are a limited liability, joint-stock corporation incorporated under the laws of Japan. Most of our directors and corporate auditors reside in Japan. All or substantially all of our assets and the assets of these persons are located in Japan and elsewhere outside the United States. It may not be possible, therefore, for U.S. investors to effect service of process within the United States upon us or these persons or to enforce against us or these persons judgments obtained in U.S. courts predicated upon the civil liability provisions of the federal securities laws of the United States. There is a concern as to the enforceability in Japan, in original actions or in actions for enforcement of judgment of U.S. courts, of liabilities predicated solely upon the federal securities laws of the United States.

Foreign exchange fluctuations may affect the dollar value of our ADSs and dividends payable to holders of our ADSs.

Market prices for our ADSs may fall if the value of the yen declines against the U.S. dollar. In addition, the U.S. dollar amount of cash dividends and other cash payments made to holders of our ADSs would be reduced if the value of the yen declines against the U.S. dollar.

 

Item 4.   Information on the Company.

A.    History and Development of the Company.

Our business was founded by our current Representative Director, Chairman, Kagemasa Kozuki, in Osaka on March 21, 1969. KONAMI was incorporated as a joint stock corporation under the laws of Japan on March 19, 1973 under the name Konami Industries Co., Ltd.

We originally were established to produce amusement arcade games and since that time have expanded the range of our products. We began to produce and market microcomputer-equipped video game machines in 1978, video game software for personal computers in 1982, game software for a home video game system in 1985 and software for LCDs for pachinko machines in 1992. We began our toy and hobby business in 1996. We obtained a license to manufacture and sell gaming machines in Nevada, and entered the gaming business in the United States in 2000. We entered the fitness club and equipment business through our acquisition of PEOPLE CO., LTD., which was renamed Konami Sports Corporation, in February 2001.

We initiated overseas operations by exporting amusement arcade games in 1979. We established our U.S. sales and manufacturing subsidiary, Konami of America, Inc. (the predecessor of Konami Digital Entertainment, Inc.) in 1982. Later, we established sales and manufacturing subsidiaries in a number of foreign countries.

We listed our shares on the Osaka Securities Exchange in 1984 (subsequently delisted in December 2002), on the Tokyo Stock Exchange in 1988, on the Singapore Exchange in 1997 (subsequently delisted in October 2009), on the London Stock Exchange in 1999 and on the New York Stock Exchange in September 2002.

In 1991, we changed our name to Konami Co., Ltd. and subsequently changed our name to KONAMI CORPORATION in 2000.

 

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In 2006, we made Konami Sports Corporation (the predecessor of Konami Sports & Life Co., Ltd.) a wholly-owned subsidiary by issuing Konami shares to the minority shareholders of Konami Sports after Konami Sports Corporation merged with Konami Sports Life Corporation. In addition, we newly established Konami Digital Entertainment Co., Ltd. through a company separation to succeed to our digital entertainment business and we changed our group structure so that we act as a holding company.

In April 2007, we moved our principal head office to 7-2, Akasaka 9-chome, Minato-ku, Tokyo 107-8323, Japan. Our telephone number is 81-3-5770-0573.

For a discussion of recent and current capital expenditures, please see “Capital Expenditures” at the end of Item 5.A. We have had no recent significant divestitures nor are any significant divestitures currently being made.

B.    Business Overview.

Overview

We produce, operate and distribute contents for mobile sites and for application stores. In addition, we develop, publish, market and distribute video game software products globally for stationary consoles such as Sony PlayStation 2, PlayStation 3, PlayStation 4, Nintendo Wii, and Microsoft Xbox 360, Xbox One, and for portable consoles such as Sony PlayStation Portable, PlayStation Vita, Nintendo DS and Nintendo 3DS, as well as for use on personal computers.

We produce gaming machines for casinos in the United States, Australia and other overseas jurisdictions, in addition to video games and token-operated games installed in amusement arcades and other entertainment venues in Japan. We also produce card games, character goods, toys and hobbies, CDs and DVDs and other merchandize products, many of which use popular characters seen in movies, television, comic books, video games, advertising or other media. In addition, we produce pachinko machines and pachinko slot machines.

In addition, we believe that we are the leading operator of fitness clubs in Japan, in terms of revenues and members. As of March 31, 2014, we had a nationwide network of 200 directly operated health and fitness club facilities and 185 sports facilities whose operations are outsourced to us and which cater to all age groups, from children through senior citizens. Moreover, Konami Sports Corporation merged with Konami Sports Life Corporation to establish Konami Sports & Life Co., Ltd. as of February 28, 2006. We also have enhanced the value of each facility of former Sportsplex Japan Co., Ltd., which was merged into Konami Sports & Life Co., Ltd. as of June 30, 2008, by promoting the expansion of high quality and wide-ranging services. As part of our plan to create new markets and provide various health-related services through the operation of fitness club facilities and the development and manufacturing of health-related equipment and supplements, we acquired our consolidated subsidiary, COMBI WELLNESS Corporation, merging into Konami Sports & Life Co., Ltd. on June 1, 2012, in order to rationalize our business and concentrate our corporate resources.

Because our sales are affected by changes in how consumers, particularly children and young adults, spend their leisure time, we seek to meet consumers’ needs and preferences by developing products that can be used in a number of environments. We also recognize that borders that separate product categories such as games, movies, music, toys, books and television programs are blurring. We seek to capitalize on this trend by projecting successful concepts across different types of leisure environments and product categories.

Many of our successful products have resulted from diversified use of strong contents. For example:

 

   

We first sold DanceDanceRevolution, one of our popular products, in November 1998 as an amusement arcade game. We launched DanceDanceRevolution in the form of home video game software in April 1999 and have sold over one million units. This product has become increasingly popular in North America, where it has been utilized for physical education classes in schools and other purposes.

 

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We launched beatmania as an amusement arcade game in December 1997. We began selling beatmania in the form of home video game software in October 1998 and have sold over one million units. We sold beatmania as a pachinko slot machine in April 2008.

 

   

We sold Yu-Gi-Oh! as video game software for Game Boy in July 1998. We subsequently introduced our hit Yu-Gi-Oh! TRADING CARD GAME in February 1999 and have developed the title for game software, amusement machines and other applications. Over ten years after its introduction, the title is still growing as one of our staple products.

 

   

METAL GEAR SOLID, first sold in 1998, was developed into METAL GEAR SOLID2 SUNS OF LIBERTY in 2001, METAL GEAR SOLID3 SNAKE EATER in 2004 and METAL GEAR SOLID 4 GUNS OF THE PATRIOTS in 2008 and has been sold worldwide in combination with various secondary titles, and received high reviews from the market.

 

   

Tokimeki Memorial, a teenage romance game first introduced in 1994, have been hit video game software products and have also generated substantial sales of related character goods.

 

   

LOVEPLUS, a romance communication game introduced in September 2009, became a hit product due to a widely-discussed new game element that allows players to blend reality and the virtual world. It recorded favorable sales generated not only by sales of game software but also by sales of serialized comic books and related products.

 

   

We began selling the Winning Eleven series, a soccer game, in the form of home video game software in Japan in July 1995, and later expanded its compatibility to multiple video game platforms. We have also introduced the series in overseas markets, particularly Europe and the Americas. In addition, we developed the title as amusement game software and mobile contents.

 

   

Since 2010, DRAGON COLLECTION, for which online distribution was launched on GREE, a mobile site, has shown favorable sales. We have focused on developing the contents for the mobile game market and have started distributing a wide range of game contents for these titles since 2011, such as Professional Baseball Dream Nine, World Soccer Collection, CROWS X WORST—Saikyou Densetsu, and SENGOKU COLLECTION on domestic platforms, including GREE and Mobage, and overseas platforms, including KAKAO and T-store.

We have used our expertise in video game software and hardware for the development of our gaming machine and fitness equipment products.

We have built a company with a strategic portfolio of products and services that spans a range of categories and target markets. We have created, licensed and acquired a group of recognizable brands that we market to a growing variety of consumer demographics.

For the fiscal year ended March 31, 2014, we had consolidated net revenues and net income attributable to our shareholders of ¥217,595 million and ¥3,834 million, respectively, compared with net revenues and net income attributable to our shareholders of ¥225,995 million and ¥13,174 million, respectively, for the fiscal year ended March 31, 2013.

Products and Services

We classify our businesses into four segments: Digital Entertainment, Health & Fitness, Gaming & Systems and Pachinko & Pachinko Slot Machines, each of which is operated on a separate basis. The net revenue figures for each business segment described below are before elimination of intersegment revenues.

Digital Entertainment Segment

Given that we operate in the digital entertainment industry, a business environment with lowering barriers to entry, we focus on creating a business structure where we can achieve maximum synergies of each of our

 

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products and services. During fiscal 2014, this segment had net revenues of ¥104,335 million, which accounted for 47.9% of our consolidated net revenues, before elimination of intersegment revenues. Our Digital Entertainment Segment consists of the five types of products and services as follows:

 

   

Mobile games:    We produce, operate and distribute contents for mobile sites and for application stores, produce and build computer systems related to online games, maintain and operate online servers, and produce online games. We also plan, produce and sell music and video package products.

 

   

Video game software:    We produce, manufacture and sell video game software, purchase and distribute video game software for home use.

 

   

Amusement arcade games:    We produce, manufacture and sell video games for amusement facilities and contents for token-operated games.

 

   

Card games:    We plan, produce, manufacture and sell card games.

 

   

Other products:    We plan, produce, manufacture and sell electronic toys, figures and character goods.

Health & Fitness Segment

We are the leading health and fitness club operator and health-related business enterprise in Japan. During fiscal 2014, this segment had net revenues of ¥76,511 million, which accounted for 35.2% of our consolidated net revenues, before elimination of intersegment revenues.

Gaming & Systems Segment

This segment is involved in development and sales of contents, hardware and casino management systems for gaming machines for casinos outside of Japan. During fiscal 2014, our net revenues from this segment were ¥31,600 million, which accounted for 14.5% of our consolidated net revenues, before elimination of intersegment revenues.

Pachinko & Pachinko Slot Machines Segment

This segment is involved in production, manufacturing and sales of pachinko and pachinko slot machines. During fiscal 2014, our net revenues from this segment were ¥5,788 million, which accounted for 2.7% of our consolidated net revenues, before elimination of intersegment revenues.

The following table presents net revenues in each of our historical business segments, before elimination of intersegment revenues, for each of the three years ended March 31, 2014.

Segment Revenues

 

     Year ended March 31,  
     2012     2013     2014  
     (yen in millions)  

Net Revenues:

  

Digital Entertainment

   ¥ 140,400      ¥ 116,366      ¥ 104,335   

Health & Fitness

     82,555        79,896        76,511   

Gaming & Systems

     25,212        24,984        31,600   

Pachinko & Pachinko Slot Machines

     18,430        5,398        5,788   

Intersegment eliminations

     (839     (649     (639
  

 

 

   

 

 

   

 

 

 

Consolidated net revenues

   ¥ 265,758      ¥ 225,995      ¥ 217,595   
  

 

 

   

 

 

   

 

 

 

 

Note:

“Eliminations” primarily consists of eliminations of intercompany sales and of intercompany profits on inventories.

 

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Digital Entertainment Segment

Consolidated net revenues generated by our Digital Entertainment Segment, before elimination of intersegment revenues, amounted to ¥116,366 million in fiscal 2013 and ¥104,335 million in fiscal 2014, a decrease of ¥12,031 million.

Mobile Games

Industry Overview

At the end of March 2014, the number of mobile phone handset subscriptions worldwide has grown by 5.1% to 4,770 million compared to the previous year, and is expected to further increase, especially in emerging countries.

Further, the shift in the mobile phone handset market from the traditional feature phone handset to the iPhone and smart phone handset equipped with Android OS has continued and the number of smart phone subscribers is estimated to exceed 50% in the global market by fiscal year 2015. Additionally, the usage of the smart phones on mobile game platforms has been increasing. As users of mobile games in feature phones have shifted to the use of smart phones, the number of mobile games for smart phones that contents providers provide has increased and the market for these games has rapidly expanded.

In recent years, in North America, contents for social games on PC platforms have become mainstream, and free service without basic fee or pay-per-item has led the market and continues to expand. Furthermore, although the applications market in the smart phones has also flourished, there is a severe competition due to low entry barriers.

In China, the pricing plans offered by communication carriers are not fully developed, and as a result, the market is still poised for growth. In South Korea, the pricing plans offered by communication carriers have expanded and smart phones have become prevalent, increasing the number of users of game contents.

Our Mobile Games

We develop, produce, operate and distribute software for mobile phones, smart phones, home video game systems, personal computers and online networks. We plan to be actively involved in mobile game products and services in light of the recent growth of the markets for these products and services and we believe that there is an opportunity to increase our profits by leveraging our software titles.

In October 2001, we established Konami Mobile Online, Inc., which developed games for mobile phones, and after changing its trade name and merging it with our operations, since March 31, 2006 we have developed our online business through Konami Digital Entertainment Co., Ltd. for the purpose of realizing synergies between our video games software and card game products and services. As a result, these products and services have expanded to include the development and distribution of game contents not only for mobile phones but also for various multi-function devices such as smartphones and have grown to be important income generating products and services for us. In addition, as a distribution service of game contents, in recent years these products and services have expanded rapidly through growth in mobile sites. Since many of our mobile games can be played free of charge, the number of users registered on mobile sites has increased, and accordingly revenues from purchases of items granting players in-game advantages have increased. Based on this business model, DRAGON COLLECTION, for which the online distribution was launched on GREE in September 2010, has enjoyed high popularity among players, including achieving the top game ranking of GREE for 50 consecutive weeks, and we have steadily increased the number of users and achieved favorable results for this title. Furthermore, the online distribution of Professional Baseball Dream Nine, a baseball mobile game officially licensed from Nippon Professional Baseball, was launched on GREE, and the online distribution of SENGOKU COLLECTION, a mobile game in which players aim to become a shogun ruler, was launched on Mobage. We also have reinforced the contents roll-out for the mobile game market. Through the introduction of these titles, we have been strengthening our contents development for the mobile game market.

 

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On April 1, 2011, we acquired 100% ownership in HUDSON SOFT CO., LTD. (“HUDSON”), a leader of the mobile industry, and completed a merger with HUDSON into Konami Digital Entertainment Co., Ltd. on March 1, 2012. While growth in the smart phones business is expected, we aim to establish a business structure that can properly respond to the rapidly changing mobile game market by integrating the know-how of the Konami group with its high staging and producing ability for games with the strengths of HUDSON, with its outstanding planning ability and flexibility.

Video Game Software

Industry Overview

The video game industry is comprised of video game hardware manufacturers and video game software publishers. Game hardware systems, frequently referred to as platforms, include home game consoles, handheld game consoles and personal computers.

A new generation of more technologically advanced game consoles has been introduced every several years. The first platform was Nintendo Entertainment System introduced by Nintendo in 1983 with its central processing unit, or CPU, using 8-bit 1.78 MHz technology. The CPU is a chip on which the software operates, with a “bite” indicating capacity to process data and clock frequency (MHz) indicating the processing speed. Subsequent advances in technology have resulted in continuous increases in the processing power of the chips that power both the consoles and PCs. With the advancement of hardware technology, software has also advanced, with faster and more complex images, more lifelike animation and sound effects and more intricate scenarios.

Each new generation, or cycle, of hardware has resulted in larger numbers of consoles being purchased. The beginning of each cycle is the period of rapid growth during which the games for the consoles of the new generation are prepared, and during that period, as platform manufacturers or buyers prepare video games for their new consoles, the video game software industry has experienced rapid periods of expansion. Shortly before and after the release of a new generation of game consoles, sales of the current generation of platforms and games generally diminish, as consumers defer purchases in anticipation of the new platforms and games.

Platform manufacturers license publishers to publish games for their platforms and retain a degree of control over the quality and manufacturing of these games. The publishers, subject to the approval of the platform manufacturers, determine the types of games they will create. Software publishers either create their games in-house, through their own development teams, or outsource this function to independent developers.

 

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The following table illustrates the evolution of the principal platforms of both video game system and handheld system.

 

          Year of Introduction       

Manufacturer

  

Platform Name

   Japan      U.S.     

Media Format

Home Game Consoles:

           

Nintendo

   NES      1983         1985       Cartridge

Sega

   Genesis      1988         1989       Cartridge

Nintendo

   SNES      1990         1991       Cartridge

Sega

   Saturn      1994         1995       CD-ROM Disc

Sony

   PlayStation      1994         1995       CD-ROM Disc

Nintendo

   Nintendo 64      1996         1996       Cartridge

Sega

   Dreamcast      1999         1999       Proprietary Disc

Sony

   PlayStation 2      2000         2000       DVD-ROM Disc

Nintendo

   GameCube      2001         2001       Proprietary Disc

Microsoft

   Xbox      2002         2001       DVD-ROM Disc

Microsoft

   Xbox 360      2005         2005       DVD-ROM Disc

Nintendo

   Wii      2006         2006       Proprietary Disc

Sony

   PlayStation 3      2006         2006       BD-ROM

Nintendo

   Wii U      2012         2012       Proprietary Disc

Sony

   PlayStation 4      2014         2013       BD-ROM

Microsoft

   Xbox One      Unreleased         2013       BD-ROM

Handheld systems:

           

Nintendo

   Game Boy      1989         1989       Cartridge

Nintendo

   Game Boy Color      1998         1998       Cartridge

Nintendo

   Game Boy Advance      2001         2001       Cartridge

Nintendo

   Nintendo DS      2004         2004       Cartridge

Sony

   PlayStation Portable      2004         2005       UMD

Nintendo

   Nintendo 3DS      2011         2011       Cartridge

Sony

   PlayStation Vita      2011         2011       Cartridge

Handheld systems such as Nintendo DS and Sony PlayStation Portable have achieved global popularity since their introduction due to the inexpensive price of the hardware compared to a console systems and the popularization of casual games. In February 2011, Nintendo 3DS with the 3D function was launched as a successor device, and Sony PlayStation Vita was also launched starting in Japan in December 2011.

As for stationary systems, starting with Microsoft Xbox 360 released in December 2005 in Japan and November 2005 in North America, Sony PlayStation 3 was launched in November 2006 in Japan and March 2007 in Europe, as well as Nintendo Wii in December 2006 in Japan and November 2006 in North America. These game consoles have become more highly sophisticated in their ability to show expressiveness when playing games. Furthermore, next-generation game consoles have been introduced with the launch of the Nintendo Wii U in December 2012 and the launch of the Sony PlayStation 4 and Xbox One in November 2013 in North America.

Internet technology for high speed broadband has enabled customers to have a more interactive and enhanced online experience. The spread of broadband services and continued competition among broadband providers has led to further growth in the market for online games. With the rapid spread of broadband infrastructure, many game console manufacturers and video game software publishers have entered the online game business. For example, Sony Computer Entertainment started a broadband online service for PlayStation 2 in the beginning of 2002 through which users can play games online and download software as well as enjoy broadband contents such as movies and music at home. In the middle of 2002, Sony Computer Entertainment

 

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America Inc. started selling online adaptors and software for PlayStation 2 in the U.S., and in late 2006, started a download service through its network in conjunction with the release of PlayStation 3. In late 2002, Nintendo started an online service for GameCube in Japan and the U.S., and in conjunction with the release of Wii at the end of 2006, started a “virtual console” service in which users can download and play previously released game software for old models, and in March 2008, launched the “WiiWare” service, in which users can download new game software not available in stores. Microsoft started an online service for Xbox called “Xbox Live” in November 2002 in the U.S. and in January 2003 in Japan, and the service has continued with Xbox 360, which was released in 2005. Currently, all portable game consoles and stationary game consoles have built-in network functions. Consequently, we are expanding further our range of online services. In addition, online distribution of additional contents for packaged software has brought about a change in the old business model, under which a sale was concluded upon the delivery of the product to a retailer, to a new business model under which we can expect continued revenues from selling additional contents to players. These services are expected to become a new source of income in part because risks unique to a retail business such as inventory, price protection and returned goods do not exist.

Our Video Game Software

We develop, publish, distribute and market video game machines, handheld video game machines and products for personal computers. Most of our products consists of video games designed for use with video game platforms, including PlayStation 2, PlayStation 3, PlayStation 4, PlayStation Portable, PlayStation Vita, Nintendo DS, Nintendo 3DS and Wii and Microsoft Xbox 360, Xbox One, and PCs.

By developing products for each of the leading home and handheld video game platforms, we are able to limit our dependence on individual platforms, capitalize on the popularity of successful platforms from time to time, and sell to a more diverse group of consumers since the target age group for each major platform differs.

The market for video game software is substantially affected by sales of the various video game platforms. Our sales of video game software are inevitably affected to a substantial degree by the cyclical nature of the industry generally as platforms change, but through diversification we seek to limit this effect.

Software Titles

Although we once published more than 100 new titles of video game software each year, since fiscal 2010, we have streamlined the number of new titles under the theme of “Selection and Concentration” to 46 titles in fiscal 2012, 10 titles in fiscal 2013, and 10 titles in fiscal 2014. Almost all of these titles are designed for use with leading home and portable game platforms. We publish software titles in a variety of genres, including sports, action, role playing and communication.

 

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The following two tables indicate the major software titles that we have either published, or anticipate publishing, during fiscal years 2014 and 2015 in each geographic market indicating for each title (i) the category of the game, (ii) the platform on which the game can be played, (iii) the date of release or anticipated release, and (iv) the market in which the product is sold. We cannot assure you that each of the titles anticipated for release in fiscal 2015 will be released when scheduled, if ever.

Titles Released in Fiscal 2014

 

Title

  

Category

   Platform    Release Date    Market

PROFESSIONAL BASEBALL SPIRITS 2014

  

Sports (Baseball)

   Multi-Platform    Fiscal 2014    Japan

JIKKYOU PAWAFURU PUROYAKYU 2013

  

Sports (Baseball)

   Multi-Platform    Fiscal 2014    Japan

WORLD SOCCER Winning Eleven 2014

  

Sports (Soccer)

   Multi-Platform    Fiscal 2014    Japan

Pro Evolution Soccer 2014

  

Sports (Soccer)

   Multi-Platform    Fiscal 2014    North America

Europe

METAL GEAR SOLID: THE LEGACY COLLECTION

  

Action

   Multi-Platform    Fiscal 2014    Worldwide

METAL GEAR RISING REVENGEANCE SPECIAL EDITION

  

Action

   PlayStation 3    Fiscal 2014    Japan

METAL GEAR SOLID V: GROUND ZEROES

  

Action

   Multi-Platform    Fiscal 2014    Worldwide

Tongari Boushi to Mahou no Machi Special Pack

  

Simulation

   Nintendo 3DS    Fiscal 2014    Japan

NEW LOVEPLUS PLUS

  

Simulation

   Nintendo 3DS    Fiscal 2014    Japan

Castlevania: Lords of Shadow 2

  

Action

   Multi-Platform    Fiscal 2014    Europe

North America

Yu-Gi-Oh! ZEXAL World Duel Carnival

  

Match-up

   Nintendo 3DS    Fiscal 2014    Japan

Titles Anticipated to be Released in Fiscal 2015

 

Title

  

Category

   Platform    Release Date    Market

WORLD SOCCER Winning Eleven 2014:

Aoki Samurai no Chousen

  

Sports (Soccer)

   Multi-Platform    May 2014    Japan

 

*   Excluding titles that are scheduled but have not yet been publicly announced to be released.

The primary home video game software products on which we rely as revenue sources have been our hit titles, which include the following:

 

   

METAL GEAR SOLID. With respect to our METAL GEAR SOLID series, we have sold over five million units of METAL GEAR SOLID, the original action game that we introduced in 1999 and five million units of the sequel, METAL GEAR SOLID 2 SONS OF LIBERTY. METAL GEAR SOLID 3 SNAKE EATER, launched in 2004, sold more than four million units. Products derived from METAL GEAR SOLID, such as METAL GEAR SOLID PORTABLE OPS, have also been launched, and METAL GEAR SOLID 4 GUNS OF THE PATRIOTS, launched in 2008, sold more than five million units in total. METAL GEAR SOLID V: GROUND ZEROES was also launched during the fiscal year ended March 31, 2014, increasing our total series sales to over 38 million units as of March 31, 2014.

 

   

Soccer titles. We have sold a total of over 86 million units of Winning Eleven series (also known as Pro Evolution Soccer series in Europe and North America) in worldwide as of March 31, 2014, since the initial title was released during the fiscal year ended March 31, 1996.

 

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Baseball titles. We have sold a total of over 24 million units of baseball titles as of March 31, 2014, since we began releasing titles during the year ended March 31, 1994.

The following table illustrates the number of units that we have sold by platform for the periods indicated on a consolidated basis. This table indicates where we have concentrated our development efforts as well as changes in the relative significance of individual platforms.

 

     Year ended March 31,  
     2012      2013      2014  

Platforms

       Units              Units              Units      
     (sales units in tens of thousands)  

PlayStation 3

     629         656         528   

PlayStation Portable

     384         176         106   

PlayStation Vita

     7         66         48   

Nintendo DS

     176         34         8   

Nintendo 3DS

     116         82         52   

Wii

     191         75         25   

Xbox 360

     219         213         152   

Other

     108         59         162   
  

 

 

    

 

 

    

 

 

 

Total

     1,830         1,361         1,081   
  

 

 

    

 

 

    

 

 

 

Software Development

We seek to produce video game software that is fun and exciting, and which provide sufficient challenges at various levels of proficiency to encourage repeated play.

Because the popularity of successful titles fades quickly, we are constantly working to develop new titles and sequels to existing titles. The life span for video game software titles depends on the type of title. Sports titles, which are updated frequently, may last indefinitely. Other titles usually have short life spans, generally six months to one year.

Further, the video game software market is recently experiencing a polarizing trend whereby so-called “high-end AAA titles” designed with leading-edge programming technology to optimize the specifications of a game machine have increased in sales volume while many other titles remain stagnant. As these “high-end AAA titles” usually have a long two to three year development period and require commitment of management resources for research and development of technology, it is necessary to establish a strategic product development structure and perform allocation of management resources.

On March 31, 2006, we founded Konami Digital Entertainment Co., Ltd. through a transfer of our digital entertainment operations including our video game software business, in the form of corporate separation and, as a result, we shifted to a holding company structure. We presently provide substantial discretion to our subsidiaries to achieve timely decision-making processes while the parent company develops group strategies and distributes management resources among group companies.

Hiring and retaining talented creative staff is crucial to develop successful contents. We believe that our compensation structure that rewards creators for the success of their games and our policy of providing creators substantial independence and flexibility, enables us to attract and retain game creators that are among the best in the industry.

Through our long experience in developing software, we have developed significant in-house expertise and many proprietary development tools that streamline the development process, allowing members of our

 

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development teams to focus their efforts on the play and simulation aspects of the product under development. We believe our accumulated know-how and proprietary development tools enable our software designers to develop compelling, graphically sophisticated games quickly and efficiently, which may give us an advantage over competitors.

Manufacturing

Our video game software is manufactured upon acceptance by Sony, Nintendo and Microsoft as required by the applicable platform license. We believe that this is the most desirable arrangement for both parties because we avoid the costs associated with the construction and maintenance of manufacturing facilities while the hardware manufacturers collect per unit royalties for each game they manufacture. The manufacturing process begins with our placing a purchase order with a manufacturer. Hardware manufacturers or their authorized vendors typically ship the first order to us within two to six weeks and additional orders for the same title within three days to four weeks.

We maintain both the proprietary rights and risks associated with each game title. In addition, at the time our product unit orders are filled by the manufacturer, we become responsible for the costs of manufacturing and/or the applicable per unit royalty on such units, even if the units do not ultimately sell. We provide a standard defective product warranty on all of the products sold. We are responsible in most cases for resolving, at our expense, any applicable warranty or repair claim. To date, we have not experienced any material costs from warranty or repair claims.

Platform Licenses

Our video game software business is dependent on our license agreements with the manufacturers of hardware platforms. All of these licenses are non-exclusive with fixed terms although these contracts are usually extended for additional terms. Each license grants us the right to develop, publish and distribute titles for use on the manufacturer’s platforms. Manufacturers typically have the right to approve the titles to be released and embodied in products that are manufactured solely by the manufacturer or its authorized vendor.

 

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The following table sets forth information with respect to our material platform licenses. In some instances, we have more than one platform license for a particular platform. All of the platform licenses shown below are automatically renewed on an annual basis.

 

Manufacturer

  

Platform

  

Territory

  

Initial Contract Date

Nintendo

  

Nintendo DS

  

Japan

  

October 1, 2004

Nintendo

  

Nintendo DS

  

United States and Canada

  

June 23, 2005

Nintendo

  

Nintendo DS

  

Europe

  

June 24, 2005

Nintendo

  

Wii

  

Japan

  

October 2, 2006

Nintendo

  

Nintendo 3DS

  

Japan

  

December 1, 2010

Sony

  

PlayStation 2

  

Japan

  

April 1, 2003

Sony

  

PlayStation 2

  

Asia

  

April 1, 2003

Sony

  

PlayStation 2

  

United States and Canada

  

October 25, 2001

Sony

  

PlayStation Portable

  

Japan

  

November 19, 2004

Sony

  

PlayStation Portable

  

Asia

  

May 1, 2005

Sony

  

PlayStation Portable

  

United States and Canada

  

February 11, 2005

Sony

  

PlayStation 3

  

Japan

  

October 20, 2006

Sony

  

PlayStation 3

  

United States and Canada

  

October 20, 2006

Sony

  

PlayStation 3

  

Europe

  

October 20, 2006

Sony

  

PlayStation 3

  

Asia

  

November 17, 2006

Sony

  

PlayStation Vita

  

Japan

  

October 24, 2011

Sony

  

PlayStation Vita

  

Asia

  

March 31, 2012

Microsoft

  

Xbox 360

  

Worldwide

  

November 22, 2005

Microsoft

  

Xbox One

  

Worldwide

  

October 1, 2013

Nintendo charges us an amount for each Nintendo DS cartridge manufactured. This amount varies based, in part, on the memory capacity of the cartridges. Nintendo Wii, Sony and Microsoft contracts include a charge for every disc manufactured. The amounts charged by the manufacturers include a royalty for the use of the manufacturer’s name, proprietary information and technology, and are subject to adjustment by the manufacturers at their discretion. The manufacturers have the right to review, evaluate and approve a demo-disc of each title and the title’s packaging.

Marketing, Sales and Distribution

We believe that we benefit from a strong positive perception in Japan of the KONAMI brand name. We are focusing on further enhancing the KONAMI brand name by aggressively advertising and promoting ourselves and our products and services. To continue to increase our brand name recognition, we advertise on television, the radio and through various magazines and newspapers.

In October 2005, we merged with Konami Marketing Japan, Inc., a wholly-owned subsidiary for our marketing, sales and distribution businesses. As a result, we believe we are able to operate our digital entertainment business in a more consistent manner, from planning and production to advertisement and sales, and operate more efficiently. In addition, we newly established Konami Digital Entertainment Co., Ltd. through a company separation to succeed to our digital entertainment business in March 2006.

Our video game software products are sold in Japan primarily through our sales distribution network, which we coordinate, and offices throughout Japan. Each of these sales offices focuses its efforts on a specific area within Japan. We bear inventory risk until the product is sold to the retailer. However, once products are sold to a retailer, they cannot be returned unless they are defective. We believe that our distribution network is a major asset of our business. In addition, we also conduct online sales through a directly operated website, and online sales have accounted for a greater percentage of our sales each year since the year ended March 31, 2008 due to the strengthening of our website through sales of limited editions of our video game software products on our website.

 

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In July 2010, as a new project, we opened our first antenna shop called “KONAMI STYLE Tokyo Midtown” which offers information and original limited-edition products available only at the store, and provides a place to gain a better understanding of KONAMI by offering the chance to customers to experience products yet to be released as well as implementing various events.

Amusement Arcade Games

As for our amusement arcade games, we produce and sell video game machines and token-operated game machines for amusement arcades.

Industry Overview

According to an industry statistical report, the amusement industry in Japan recorded total revenues of ¥649.1 billion in fiscal 2013. The breakdown by category is shown in the following table.

Amusement Industry-Revenues in Japan

 

     Fiscal Year Ended on March 31,  

Industry

   2009      2010      2011      2012      2013  
     (billions of yen)  

Amusement arcade operations

   ¥ 573.1       ¥ 504.3       ¥ 495.8       ¥ 487.5       ¥ 470.0   

Amusement arcade games (Japan)

              

Video game machines

     48.4         37.7         38.4         43.5         21.1   

Token-operated game machines

     37.1         28.9         30.6         36.2         34.9   

Prize machines

     10.3         7.8         8.2         7.8         4.9   

Vending machines

     12.1         10.2         11.0         14.0         14.0   

Music simulation game machines

     4.2         4.0         4.2         5.3         6.1   

Card games, etc. (excluding kids’)

     9.4         8.3         6.6         5.3         5.4   

*Kids’ card games, etc.

     15.0         10.9         10.4         11.8         15.8   

Other

     46.4         48.8         52.4         49.8         65.3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Sub-total

     182.9         156.6         161.8         173.7         167.5   

Amusement arcade games (exports)

     13.3         13.0         11.5         11.0         11.6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   ¥ 769.3       ¥ 673.9       ¥ 669.1       ¥ 672.2       ¥ 649.1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

*   Sales amounts related to the Kids’ card games industry was added from fiscal 2007.

 

Source:   “Amusement Industry Survey, Fiscal Year Ended on March 31, 2013” (published in September 2013), Japan Amusement Machinery Manufacturers Association.

Due to the development of powerful home game consoles that can rival amusement arcade games in play quality and the introduction of advanced mobile telephones equipped with online and game functions, consumers now have diverse leisure alternatives. In Japan’s amusement industry as a whole, the revenues produced by the amusement arcade operations continued to decrease to ¥470.0 billion in the fiscal year ended March 31, 2013 from ¥487.5 billion in the fiscal year ended March 31, 2012 (according to the latest available data). This decrease in the industry-wide revenue was primarily due to shutdown of relatively small scale amusement arcades, which in turn had resulted from a decline in the number of customers and the level consumer spending amidst the deteriorating economy. The restructuring of the amusement industry such as development of large-scale amusement arcades attractive to customers continues. Furthermore, the sales volume of equipment decreased from the previous year, recording ¥167.5 billion in the fiscal year ended March 31, 2013 compared to ¥173.7 billion in the fiscal year ended March 31, 2012. This decrease is primarily due to a decrease in sales in the operations area, the effects from the changeover period of the new product launch cycle, and the fact that “conversion kits” (consisting of software updates) with a low unit selling price became the leading products of the major manufacturers.

 

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Our Amusement Arcade Games—Video Game Machines

As for our amusement arcade games, we develop, produce and sell video game machines for amusement arcades, many of which use sophisticated computer graphics technology. In the fiscal year ended March 31, 2014, we introduced approximately 14 new titles for e-AMUSEMENT Participation (a method to share playing fees of users with operators). Such titles typically have life spans of six to 18 months, although popular titles may have a longer life and are sometimes developed into a series of titles, and at the same time, some constitute a recognized brand such as DanceDanceRevolution and MAH-JONG FIGHT CLUB.

The main purchasers of our video game machines are amusement arcades. We have sought to respond to market trends by introducing low price products and products that involve the type of play that cannot be replicated easily by home video game systems. In this regard, our music simulation games have been successful. These games evolved from beatmania, a disc jockey simulation game developed in our amusement arcade game business. Hit music simulation games have included DanceDanceRevolution, pop’n music, GuitarFreaks & DrumMania and jubeat. These music-simulation game machines are relatively expensive, but can accommodate relatively inexpensive software updates for sequel games. Because the price of new software generally is substantially less expensive as compared to the price of a new amusement arcade machine, software upgrades tend to be more attractive to our customers.

In March 2002, our amusement arcade game business introduced the “e-AMUSEMENT” service that connects amusement arcades all over Japan through a computer network run by KONAMI, creating a new amusement arcade market. This service allows multiple players to participate in the same game simultaneously from different locations nationwide and to continue playing after saving the game. Our MAH-JONG FIGHT CLUB, which is our first title compatible with e-AMUSEMENT, is retaining its popularity in part due to events such as national conventions where players can try their skills in a tournament. With respect to the MAH-JONG FIGHT CLUB series, starting with MAH-JONG FIGHT CLUB ultimate version, we have introduced e-AMUSEMENT Participation as a new business model enabling the distribution of new contents in sequence depending on the requests of users and operational status of the consoles, contributing to the enhancement of the operational ratio of the consoles and stable profits as well as providing the equipment necessary for consoles and systems at an inexpensive price, resulting in the mitigation of the initial investments by operators.

Our Amusement Arcade Game Titles:

The following are the major models of our video game machines currently on sale that are compatible with our e-AMUSEMENT service.

 

   

MAH-JONG FIGHT CLUB, a Mah-jong game that allows multiple players to participate simultaneously from different locations;

 

   

QUIZ MAGIC ACADEMY, an online quiz game participated by many players from all over the country;

 

   

BEMANI series: beatmania IIDX, pop’n music, DanceDanceRevolution, GuitarFreaks & DrumMania, music simulation games such as jubeat; and