KONAMI HOLDINGS CORPORATION Quarterly Condensed Consolidated Financial Statements for the Nine Months Ended English translation and a part of summary of the Quarterly Securities Report (Shihanki Hokokusho) for the nine-month period ended pursuant to the Financial Instruments and Exchange Law of Japan
KONAMI HOLDINGS CORPORATION filed its Quarterly Securities Report for the nine-month period ended with the Director of the Kanto Local Finance Bureau of the Ministry of Finance of Japan on February 13, 2017. The following is the outline of the Quarterly Securities Report. I. Corporate Information A. Corporate Overview 1. Selected Financial Data 2. Overview of Business B. Business 1. Risks Relating to Our Business 2. Significant Contracts 3. Results of Operations and Financial position C. Information on Reporting Company 1. Share Information a. Total Number of Shares b. Stock Acquisition Rights c. Convertible Bonds Exercise d. Rights Plan e. Common Stock and Additional Paid-in Capital f. Major Shareholders g. Voting Rights 2. Directors and Corporate Auditors D. Financial Statements 1. Quarterly Condensed Consolidated Financial Statements 2. Others II. Information on Guarantor
1. Quarterly Condensed Consolidated Financial Statements (1) Quarterly Condensed Consolidated Statement of Financial Position Note As of March 31, 2016 As of Assets Current assets Cash and cash equivalents 113,907 127,053 Trade and other receivables 23,401 25,682 Inventories 9,170 9,675 Income tax receivables 2,139 3,499 Other current assets 9 5,618 6,151 Total current assets 154,235 172,060 Non-current assets Property, plant and equipment, net 80,264 77,453 Goodwill and intangible assets 39,470 39,189 Investments accounted for using the equity method 2,585 2,642 Other investments 9 1,268 1,228 Other financial assets 9 24,123 22,597 Deferred tax assets 22,651 21,081 Other non-current assets 3,591 3,185 Total non-current assets 173,952 167,375 Total assets 328,187 339,435 Liabilities and equity Liabilities Current liabilities Bonds and borrowings 6,9 9,014 14,315 Other financial liabilities 9 4,126 4,054 Trade and other payables 24,757 26,183 Income tax payables 9,261 3,086 Other current liabilities 5 14,335 14,962 Total current liabilities 61,493 62,600 Non-current liabilities Bonds and borrowings 6,9 24,606 19,663 Other financial liabilities 9 16,459 15,092 Provisions 8,679 8,457 Deferred tax liabilities 280 3 Other non-current liabilities 3,195 2,673 Total non-current liabilities 53,219 45,888 Total liabilities 114,712 108,488 Equity Share capital 47,399 47,399 Share premium 74,426 74,426 Treasury shares 7 (21,284) (21,298) Other components of equity 7 2,407 3,209 Retained earnings 109,802 126,463 Total equity attributable to owners of the parent 212,750 230,199 Non-controlling interests 725 748 Total equity 213,475 230,947 Total liabilities and equity 328,187 339,435 The accompanying notes are an integral part of these financial statements. 1
(2) Quarterly Condensed Consolidated Statements of Profit or Loss and Comprehensive Income Quarterly Condensed Consolidated Statements of Profit or Loss and 2016 Note Revenue Product sales revenue 82,553 64,232 Service and other revenue 96,698 99,709 Total revenue 4 179,251 163,941 Cost of revenue Cost of product sales revenue (48,072) (32,241) Cost of service and other revenue (66,868) (67,634) Total cost of revenue (114,940) (99,875) Gross profit 64,311 64,066 Selling, general and administrative expenses (35,945) (31,667) Other income and other expenses, net 10 (10,943) (2,812) Operating profit 17,423 29,587 Finance income 262 125 Finance costs (712) (963) Profit from investments accounted for using the equity method 169 112 Profit before income taxes 17,142 28,861 Income taxes (10,867) (8,187) Profit for the period 6,275 20,674 Profit attributable to: Owners of the parent 6,262 20,651 Non-controlling interests 13 23 Yen Note Earnings per share (attributable to owners of the parent) Basic 11 45.28 152.70 Diluted 11 45.22 150.45 2
and 2016 Note Revenue Product sales revenue 38,565 27,139 Service and other revenue 32,968 35,401 Total revenue 4 71,533 62,540 Cost of revenue Cost of product sales revenue (23,305) (15,313) Cost of service and other revenue (22,732) (23,577) Total cost of revenue (46,037) (38,890) Gross profit 25,496 23,650 Selling, general and administrative expenses (11,454) (10,899) Other income and other expenses, net 10 (9,063) (204) Operating profit 4,979 12,547 Finance income 198 341 Finance costs (232) (239) Profit (loss) from investments accounted for using the equity method 11 (36) Profit before income taxes 4,956 12,613 Income taxes (6,528) (4,172) (Loss) profit for the period (1,572) 8,441 (Loss) profit attributable to: Owners of the parent (1,585) 8,434 Non-controlling interests 13 7 Yen Note (Loss) earnings per share (attributable to owners of the parent) Basic 11 (11.51) 62.37 Diluted 11 (11.51) 61.44 The accompanying notes are an integral part of these financial statements. 3
Quarterly Condensed Consolidated Statements of Comprehensive Income and 2016 Note Profit for the period 6,275 20,674 Other comprehensive income Items that may be reclassified to profit or loss: Exchange differences on foreign operations (320) 825 Net change in fair values of available-for-sale financial assets (7) (23) Total items that may be reclassified to profit or loss (327) 802 Total other comprehensive income (327) 802 Total comprehensive income for the period 5,948 21,476 Comprehensive income attributable to: Owners of the parent 5,935 21,453 Non-controlling interests 13 23 and 2016 Note (Loss) profit for the period (1,572) 8,441 Other comprehensive income Items that may be reclassified to profit or loss: Exchange differences on foreign operations 254 4,335 Net change in fair values of available-for-sale financial assets 23 15 Total items that may be reclassified to profit or loss 277 4,350 Total other comprehensive income 277 4,350 Total comprehensive income for the period (1,295) 12,791 Comprehensive income attributable to: Owners of the parent (1,308) 12,784 Non-controlling interests 13 7 4
(3) Quarterly Condensed Consolidated Statement of Changes in Equity Note Share capital Equity attributable to owners of the parent Share premium Treasury shares Other components of equity Retained earnings Total Noncontrolling interest Total equity Balance at April 1, 2015 47,399 74,175 (11,271) 5,012 102,474 217,789 710 218,499 Profit for the period 6,262 6,262 13 6,275 Other comprehensive income (327) (327) (327) Total comprehensive income for the period - - - (327) 6,262 5,935 13 5,948 Issuance of convertible bond-type bonds with subscription rights to shares 6 251 251 251 Purchase of treasury shares 7 (10,011) (10,011) (10,011) Disposal of treasury shares 0 0 0 0 Dividends 8 (3,188) (3,188) (3,188) Total transactions with the owners - 251 (10,011) - (3,188) (12,948) - (12,948) Balance at December 31, 2015 47,399 74,426 (21,282) 4,685 105,548 210,776 723 211,499 Note Share capital Equity attributable to owners of the parent Share premium Treasury shares Other components of equity Retained earnings Total Noncontrolling interest Total equity Balance at April 1, 2016 47,399 74,426 (21,284) 2,407 109,802 212,750 725 213,475 Profit for the period 20,651 20,651 23 20,674 Other comprehensive income 802 802 802 Total comprehensive income for the period - - - 802 20,651 21,453 23 21,476 Purchase of treasury shares (14) (14) (14) Disposal of treasury shares 0 0 0 0 Dividends 8 (3,990) (3,990) (3,990) Total transactions with the owners - 0 (14) - (3,990) (4,004) - (4,004) Balance at December 31, 2016 47,399 74,426 (21,298) 3,209 126,463 230,199 748 230,947 The accompanying notes are an integral part of these financial statements. 5
(4) Quarterly Condensed Consolidated Statement of Cash Flows Operating activities Note Profit for the period 6,275 20,674 Depreciation and amortization 19,755 10,704 Impairment losses 10 7,620 2,322 Interest and dividends income (178) (122) Interest expense 712 711 Loss on sale or disposal of property, plant and equipment 10 3,071 122 Profit from investments accounted for using the equity method (169) (112) Income taxes 10,867 8,187 Decrease (increase) in trade and other receivables 6,509 (1,566) Increase in inventories (2,809) (219) (Decrease) increase in trade and other payables (1,182) 66 Increase in prepaid expense (886) (155) Increase in deferred revenue 10,623 2,238 Other, net 1,685 (1,856) Interest and dividends received 158 91 Interest paid (738) (700) Income taxes paid (4,806) (14,614) Net cash provided by operating activities 56,507 25,771 Investing activities Capital expenditures (14,480) (9,268) Decrease in lease deposits, net 203 1,147 (Increase) decrease in term deposits, net (10) 143 Other, net 0 10 Net cash used in investing activities (14,287) (7,968) Financing activities Proceeds from short-term (more than 3 months) borrowings - 8,229 Repayments of short-term (more than 3 months) borrowings - (8,229) Proceeds from issuance of bonds 10,050 - Principal payments under capital lease and financing obligations (1,551) (1,501) Dividends paid 8 (3,181) (3,980) Purchase of treasury shares (10,011) (14) Other, net (32) 0 Net cash used in financing activities (4,725) (5,495) Effect of exchange rate changes on cash and cash equivalents (337) 838 Net increase in cash and cash equivalents 37,158 13,146 Cash and cash equivalents at the beginning of the period 64,654 113,907 Cash and cash equivalents at the end of the period 101,812 127,053 The accompanying notes are an integral part of these financial statements. 6
Notes to Quarterly Condensed Consolidated Financial Statements 1. Reporting Entity KONAMI HOLDINGS CORPORATION (the Company ) is a public company located in Japan. The accompanying consolidated financial statements consist of the Company and its consolidated subsidiaries (collectively, Konami Group ) as well as equity interests in its associates. Konami Group engages in the following four business operations: Digital Entertainment, Health & Fitness, Gaming & Systems and Amusement businesses. The operations of each business segment are presented in Note 4 Segment Information. 2. Basis of Preparation (1) Compliance with IFRS The quarterly condensed consolidated financial statements meet the requirements set out under Article 1-2, Paragraph 1, Item 2 of the Rules on Terminology, Formats and Compilation Methods of Quarterly Consolidated Financial Statements under which the Company is qualified as a specified company applied Designated International Accounting Standards and duly adopted the provisions of Article 93 of the foregoing rules. Therefore, the Company prepares such quarterly condensed consolidated financial statements in accordance with IAS 34 Interim Financial Reporting. Since the quarterly condensed consolidated financial statements do not contain all the information required in the consolidated financial statements for the fiscal year ended March 31, 2016, it should be read in combination with the annual consolidated financial statements. (2) Use of estimates and judgments In preparing quarterly condensed consolidated financial statements, management uses estimates and judgments. Judgments made by management, assumptions about the future and uncertainty in estimates may affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and reported amounts of income and expenses as of the reporting date of the quarterly condensed consolidated financial statements. 7
The estimates and underlying assumptions are reviewed on an ongoing basis. The impacts from revisions to accounting estimates are recognized in the period in which the estimate is revised and future periods that are affected. Information about estimates and judgments made by management that would have significant effects on the amounts recognized in the quarterly condensed consolidated financial statements is in the same manner of the consolidated financial statements for the fiscal year ended March 31, 2016. 3. Significant Accounting Policies The Company did not change the significant accounting policies adopted for the quarterly condensed consolidated financial statements from ones to the consolidated financial statements for the fiscal year ended March 31, 2016. 4. Segment Information Konami Group s reportable segments constitute units of the Konami Group for which separate financial information is available. The Chief Operating Decision Maker regularly conducts deliberations to determine the allocation of management resources and to assess performance of each segment. Operating segments are components of business activities from which Konami Group may earn revenues and incur expenses, including revenues and expenses relating to transactions with other operating segments. The operating segments are managed separately as each segment represents a strategic business unit that offers different products and serves different markets. Konami Group operates on a worldwide basis principally with the following four operating segments: a) Digital Entertainment: Production, manufacture and sale of digital content and related products including mobile games, card games and computer and video games. b) Health & Fitness: Operation of health and fitness clubs, and production, manufacture and sale of health and fitness related goods. c) Gaming & Systems: Production, manufacture, sale and service of gaming machines and casino management systems for overseas markets. 8
d) Amusement: Production, manufacture and sale of arcade games and pachislot and pachinko machines. Segment profit (loss) is determined by deducting cost of revenue and selling, general and administrative expenses from revenue. This does not include corporate expenses, finance income and finance costs, and certain non-regular expenses associated with each segment such as impairment losses on property, plant and equipment, goodwill and intangible assets. Corporate expenses primarily consist of administrative expenses not directly associated with specific segments. Intersegment eliminations primarily consist of eliminations of intercompany sales. Intersegment sales and revenues are generally recognized at values that represent arm s-length fair value. Neither Konami Group nor any of its segments depended on any single customer for more than 10% of Konami Group's revenues for the nine months ended. Effective from the six months ended September 30, 2016, we combined the arcade games business segment, which formed part of our Digital Entertainment Business, with another BtoB business, the Pachislot & Pachinko Machines Business, and the segment classification was changed to the Amusement Business in order to further strengthen our business operating structure. As a result, segment information for the nine month and three month ended is disclosed with based on the new segment classification. 9
(1) Operating segment information Revenue for the nine months ended and 2016 Revenue: Digital Entertainment External customers 80,901 73,507 Intersegment 43 159 Total 80,944 73,666 Health & Fitness External customers 53,361 51,676 Intersegment 242 241 Total 53,603 51,917 Gaming & Systems External customers 24,357 21,734 Intersegment - - Total 24,357 21,734 Amusement External customers 20,632 17,024 Intersegment 83 99 Total 20,715 17,123 Intersegment eliminations (368) (499) Consolidated 179,251 163,941 10
Revenue for the three months ended and 2016 Revenue: Digital Entertainment External customers 37,205 28,638 Intersegment 21 134 Total 37,226 28,772 Health & Fitness External customers 17,637 16,817 Intersegment 77 77 Total 17,714 16,894 Gaming & Systems External customers 9,378 7,945 Intersegment - - Total 9,378 7,945 Amusement External customers 7,313 9,140 Intersegment 26 45 Total 7,339 9,185 Intersegment eliminations (124) (256) Consolidated 71,533 62,540 Segment profit (loss) for the nine months ended and 2016 Segment profit (loss): Digital Entertainment 21,294 24,409 Health & Fitness 2,824 4,079 Gaming & Systems 3,587 2,913 Amusement 3,486 3,876 Total segment profit and loss, net 31,191 35,277 Corporate expenses and eliminations (2,825) (2,878) Other income and other expenses, net (10,943) (2,812) Finance income and finance costs, net (450) (838) Profit from investments accounted for using the equity method 169 112 Profit before income taxes 17,142 28,861 11
Segment profit (loss) for the three months ended and 2016 Segment profit (loss): Digital Entertainment 11,123 8,940 Health & Fitness 1,318 1,438 Gaming & Systems 1,855 1,324 Amusement 715 2,077 Total segment profit and loss, net 15,011 13,779 Corporate expenses and eliminations (969) (1,028) Other income and other expenses, net (9,063) (204) Finance income and finance costs, net (34) 102 Profit (loss) from investments accounted for using the equity method 11 (36) Profit before income taxes 4,956 12,613 Corporate expenses primarily consist of personnel costs, advertising expenses and rental expenses, which substantially relate to our administrative department. (2) Geographic Information Revenue from external customers for the nine months ended and 2016 Revenue: Japan 122,315 123,844 United States 36,976 27,233 Europe 13,419 7,474 Asia/Oceania 6,541 5,390 Consolidated 179,251 163,941 Revenue from external customers for the three months ended and 2016 Revenue: Japan 43,795 47,357 United States 17,261 10,082 Europe 7,855 3,070 Asia/Oceania 2,622 2,031 Consolidated 71,533 62,540 12
For the purpose of presenting its operations in the geographic areas above, Konami Group attributes revenues from external customers to individual countries in each area based on where Konami Group sold products or rendered services. 5. Other Current Liabilities The following is a breakdown of other current liabilities as of March 31, 2016 and. As of March 31, 2016 As of Deferred revenue 5,910 8,150 Others 8,425 6,812 Total 14,335 14,962 6. Bonds For the nine months ended, there was an issuance of euro-yen convertible bond-type bonds with subscription rights to shares of 10,000 million (interest -% per annum, due December 2022). There was no redemption of bonds. For the nine months ended, there was neither issuance nor redemption of bonds. 7. Equity (1) Purchase of treasury shares For the nine months ended, the board of directors' meeting held on December 3, 2015 resolved that the Company would repurchase its own shares pursuant to the provision of Article 156 of the Companies Act, as applied pursuant to the provision of Article 165, Paragraph 3 thereof. Consequently, the Company repurchased its own shares of 3,362,800 shares, total amount of which was 10,000 million. 13
(2) Other components of equity Changes in other components of equity consisted of the following: Exchange differences on translation of foreign operations Balance at the beginning of the period 4,873 2,297 Net change during the period (320) 825 Transfer to retained earnings - - Balance at the end of the period 4,553 3,122 Available-for-sale financial assets Balance at the beginning of the period 139 110 Net change during the period (7) (23) Transfer to retained earnings - - Balance at the end of the period 132 87 8. Dividends The Company paid dividends 23.00 yen per share and the total amount of 3,188 million for the nine months ended. The Company paid dividends 29.50 yen per share and the total amount of 3,990 million for the nine months ended. 9. Fair Value of Financial Instruments (1) Measuring fair value of financial instruments Methods for measuring the fair value of financial assets and liabilities are as follows: 1. Other financial assets The carrying amounts of other financial assets with short term maturities approximate their fair value. The fair value of other financial assets that do not have short-term maturities are calculated as the value of the total principal and interest discounted at interest rates reflecting the credit risks estimated by Konami Group. 2. Other investments The fair values of other investments are measured based on quoted market prices in equity markets of identical assets. For unlisted securities, Konami Group determines the fair value based on an approach using observable inputs such as the comparable company's share prices and unobservable inputs. 14
3. Bonds, borrowings and other financial liabilities The carrying amounts of financial liabilities with short term maturities approximate their fair value. The fair values of bonds, borrowings and other financial liabilities that do not have short-term maturities are calculated as the value of the total principal and interest, discounted at interest rates that would be applied to new borrowings of Konami Group with similar terms and the same remaining maturity. (2) Fair value hierarchy Fair values are categorized within the fair value hierarchy as follows: Level 1: Level 2: Level 3: Fair values measured at a price quoted in an active market. Fair values calculated directly or indirectly using an observable price except for level 1. Fair values calculated through valuation techniques, including inputs that are not based on observable market data. (3) Fair value of financial instruments The table is a breakdown of financial instruments showing carrying amounts and fair values as of March 31, 2016 and. As of March 31, 2016 Carrying amount Fair value As of Carrying Fair amount value Financial assets: Other financial assets Lease deposits 23,275 23,735 22,264 22,510 Others 1,284 1,290 913 949 Other investments Securities 1,166 1,166 1,129 1,129 Others 102 102 99 99 Financial liabilities: Bonds and borrowings 33,620 33,258 33,978 33,694 Other financial liabilities Capital lease and financing obligations 18,392 20,709 16,924 18,836 Others 2,193 2,193 2,222 2,222 Other financial assets, bonds and borrowings and other financial liabilities are categorized in Level 2. Other investments are categorized in Level 1 and 3. 15
(4) Fair values measured and disclosed on the quarterly condensed consolidated statements of financial position The following is a breakdown of financial assets that are measured at fair value on a recurring basis as of March 31, 2016 and. Balance at March 31, 2016 Level 1 Level 2 Level 3 Total Financial assets: Other investments Securities 553-613 1,166 Others - - 102 102 Total 553-715 1,268 Balance at Level 1 Level 2 Level 3 Total Financial assets: Other investments Securities 516-613 1,129 Others - - 99 99 Total 516-712 1,228 Fair values of other investments include marketable securities and unlisted securities. Marketable securities are measured based on quoted market prices on equity markets of identical assets, and classified as Level 1. Fair value of unlisted securities are determined based on an approach using observable inputs such as the comparable company's share prices and unobservable inputs, and are classified as Level 3. Other investments, which are classified as Level 3, have no significant changes for the nine months ended. 10. Impairment Losses and Losses on Disposal of Non-current Assets For the nine months ended, impairment losses of 7,620 million and losses on disposal of non-current assets of 3,071 million were recognized, included in the line item other income and other expenses, net in the quarterly condensed consolidated statement of profit or loss. Mainly due to rapid changes in market structure surrounding the Amusement business, including the trend of pachinko market shrinking and strengthening the regulations for pachislot and pachinko machines, we determined to process selection and concentration of the titles for restructuring of the pachinko machine business. As a result, during the three-month period ended, we recognized impairment losses of 532 million on property, plant and equipment and impairment and other losses of 7,788 million on intangible assets, including internally generated intangible assets and memberships. 16
For the nine months ended, impairment losses of 2,322 million was recognized, included in the line item other income and other expenses, net in the quarterly condensed consolidated statement of profit or loss. Mainly due to rapid changes in market structure surrounding the Amusement business such as strengthening the regulations for pachislot and pachinko machines, we determined to reconsider for business plans of the pachislot and pachinko machines business. As a result, we recognized impairment losses of 2,204 million on intangible assets, including internally generated intangible assets and memberships. 11. Earnings per Share The breakdown of the basic and diluted earnings per share attributable to owners of the parent for the nine months ended and 2016 is as follows: Profit attributable to owners of the parent 6,262 million yen 20,651 million yen Adjustments for profit used in the calculation of diluted earnings per share 1 million yen 27 million yen Profit used in the calculation of diluted earnings per share 6,263 million yen 20,678 million yen Basic weighted average ordinary shares outstanding 138,271,153 shares 135,239,156 shares Adjustments for convertible bond-type bonds with subscription rights to shares 219,636 shares 2,197,947 shares Basic weighted average ordinary shares outstanding used in the calculation of diluted earnings per share 138,490,789 shares 137,437,103 shares Earnings per share attributable to owners of the parent for the period Basic 45.28 yen 152.70 yen Diluted 45.22 yen 150.45 yen 17
The breakdown of the basic and diluted (loss) earnings per share attributable to owners of the parent for the three months ended and 2016 is as follows: (Loss) profit attributable to owners of the parent (1,585) million yen 8,434 million yen Adjustments for profit used in the calculation of diluted earnings per share - 10 million yen (Loss) profit used in the calculation of diluted earnings per share (1,585) million yen 8,444 million yen Basic weighted average ordinary shares outstanding 137,765,432 shares 135,238,143 shares Adjustments for convertible bond-type bonds with subscription rights to shares - 2,197,947 shares Basic weighted average ordinary shares outstanding used in the calculation of diluted earnings per share 137,765,432 shares 137,436,090 shares (Loss) earnings per share attributable to owners of the parent for the period Basic (11.51) yen 62.37 yen Diluted (11.51) yen 61.44 yen For the three months ended, no potentially dilutive share has become effective since conversion of convertible bond-type bonds with subscription rights to shares decreases loss per share attributable to owners of the parent for the period. 12. Subsequent Events There have been no events after that would require adjustments to the quarterly condensed consolidated financial statements or disclosures in the notes to the quarterly condensed consolidated financial statements. 13. Approval of Quarterly Condensed Consolidated Financial Statements The quarterly condensed consolidated financial statements were approved by Representative Director, President, Takuya Kozuki, on February 9, 2017. 18