Kadokawa Holdings, Inc. (the “company”) and its consolidated domestic subsidiaries maintain their official accounting records in Japanese yen and in accordance with the provisions set forth in the Japanese Commercial Code and accounting principles and practices generally accepted in Japan (“Japanese GAAP”). The accounts of overseas subsidiaries are based on their accounting records maintained in conformity with generally accepted accounting principles and practices prevailing in the respective countries of domicile.   Certain accounting principles and practices generally accepted in Japan are different from International Accounting Standards and standards in other countries in certain respects as to application and disclosure requirements. Accordingly, the accompanying consolidated financial statements are intended for use by those who are informed about Japanese accounting principles and practices.   The accompanying consolidated financial statements have been restructured and translated into English (with some expanded descriptions and the inclusion of consolidated statements of shareholders’ equity) from the consolidated financial statements of the company prepared in accordance with Japanese GAAP and filed with the appropriate Local Finance Bureau of the Ministry of Finance as required by the Securities and Exchange Law. Some supplementary information included in the statutory Japanese language consolidated financial statements, but not required for fair presentation is not presented in the accompanying financial statements.   The translation of the Japanese yen amounts into U.S. dollars are included solely for the convenience of readers, using the prevailing exchange rate at March 31, 2003, which was ¥120.20 to U.S.$1.00. The convenience translations should not be construed as representations that the Japanese yen amounts have been, could have been, or could in the future be, converted into U.S. dollars at this or any other rate of exchange. (a) Principles of Consolidation   The consolidated financial statements include the accounts of the company and all of its subsidiaries.   All significant intercompany transactions, accounts and unrealized profits or losses have been eliminated in consolidation.   The investments in affiliated companies (all 20% to 50% owned and certain others 15% to 20% owned) are accounted for by the equity method.   Fiscal year end of Kadokawa Media (Taiwan) Co., Ltd. is December 31, 2002. Significant transactions of Kadokawa Media (Taiwan) Co., Ltd. from January 1, 2003 to March 31, 2003 were adjusted in the consolidation.   Previously, fiscal year end of SS Communications Inc. was February 28, 2002. For the year ended March 31, 2003, SS Communications Inc. changed its settlement date from August 31 to March 31. As a result of this change, all accounts in the period from March 1, 2002 to August 31, 2002 and from September 1, 2002 to March 31, 2003 of SS Communications Inc. are utilized in the computation for the current year consolidation.   The excess cost of the company’s investment in consolidated subsidiaries over the underlying net equity of these companies at the date of acquisition is recorded in the consolidation adjusting account, and amortized over five years on a straight-line basis.   In the elimination of investments in subsidiaries, the assets and liabilities of the subsidiaries, including the portion attributable to minority shareholders, are recorded based on the fair value at the time the company acquired control of the respective subsidiaries. (b) Derivatives and Hedge Accounting   The accounting standard for financial instruments requires the company and its consolidated subsidiaries (the “companies”) to state derivative financial instruments at fair value and to recognize changes in the fair value as gains or losses unless derivative financial instruments are used for hedging purposes.   If derivative financial instruments are used as hedges and meet certain hedging criteria, the companies defer recognition of gains or losses resulting from changes in fair value of derivative financial instruments until the related losses or gains on the hedged items are recognized.   However, in cases where forward foreign exchange contracts are used as hedges and meet certain hedging criteria, forward foreign exchange contracts and hedged items are accounted for in the following manner: (1)  If a forward foreign exchange contract is executed to hedge an existing foreign currency receivable or payable, 1)  the difference, if any, between the Japanese yen amount of the hedged foreign currency receivable or payable translated using the spot rate at the inception date of the contract and the book value of the receivable or payable is recognized in the statements of operations in the period which includes the inception date, and 2)  the discount or premium on the contract (that is, the difference between the Japanese yen amount of the contract translated using the contracted forward rate and that translated using the spot rate at the inception date of the contract) is recognized over the term of the contract. (2)  If a forward foreign exchange contract is executed to hedge a future transaction denominated in a foreign currency, the future transaction will be recorded using the contracted forward rate, and no gains or losses on the forward foreign exchange contract are recognized. (c) Foreign Currency Translation   Assets and liabilities denominated in foreign currency are translated into Japanese yen at the rate prevailing at the balance sheets date. Resulting exchange gains and losses are included in other income.   The financial statements of an overseas consolidated subsidiary are translated into Japanese yen using the year-end rate for assets and liabilities and using the historical rates for shareholders’ equity. The year-end rate is used for translation of income and expenses. (d) Cash and Cash Equivalents   Cash and cash equivalents include cash on hand, readily-available deposits and short-term highly liquid investments with maturities not exceeding three months at the time of purchase. (e) Marketable Securities and Investment Securities   Upon applying the accounting standard for financial instruments, all companies are required to examine the intent of holding each security and classify those securities as (a) securities held for trading purposes (hereafter, "trading securities"), (b) debt securities intended to be held to maturity (hereafter, "held-to-maturity debt securities"), (c) equity securities issued by subsidiaries and affiliated companies, and (d) for all other securities that are not classified in any of the above categories (hereafter, "available-for-sale securities").   The companies do not have trading securities. Held-to-maturity debt securities are stated at amortized cost. The other securities with available fair market values are stated at fair market value. Unrealized gains and unrealized losses on these securities are reported, net of applicable income taxes, as a separate component of shareholders’ equity. Cost of such securities for sales are computed using the moving-average method. The other securities without available fair market values are stated at cost determined by the moving-average method. (f) Inventories   Merchandises and raw materials are stated at cost determined by the first-in first-out method. Finished products and supplies are stated at cost determined by the weighted-average method. Films and work-in-process are stated at cost determined by the specific identification method. Costs of films are amortized using the method prescribed by the Japanese tax laws. (g) Property, Plant and Equipment   Property, plant and equipment are stated at cost. The company and its domestic subsidiaries compute depreciation using primarily the declining-balance method prescribed by the Japanese tax laws. Buildings (excluding structures) acquired after March 31, 1998 are depreciated using the straight-line method.   An overseas consolidated subsidiary computes depreciation using the straight-line method based on the accounting standard prevailing in the country of domicile. The ranges of useful lives for computing depreciation are generally as follows:   Buildings and structures Furniture and fixtures Machinery and vehicles 3 to 50 years 2 to 20 years 2 to 15 years (h) Amortization   Software used by the companies is amortized using the straight-line method over the estimated useful lives (five years) , and other intangible assets are amortized using the straight-line method prescribed by the Japanese tax laws.   Amortization of the long-term prepaid expenses is computed using the straight-line method prescribed by the Japanese tax laws. (i) Allowance for Doubtful Accounts   The allowance for doubtful accounts is provided in an amount sufficient to cover possible losses on collection by estimating individually uncollectible amounts and applying a percentage based on collection experience to the remaining accounts. (j) Allowance for Employees’ Bonuses   The companies provide allowance for employees’ bonuses based on estimated amounts to be paid in the subsequent period. (k) Employees’ Severance and Retirement Benefits   Under the accounting standard for Employees’ Severance and Pension Benefits, the liabilities and expenses for severance and retirement benefits are determined based on the amounts actuarially calculated using certain assumptions.   The companies provided allowance for employees’ severance and retirement benefits at March 31, 2003 and 2002 based on the estimated amounts of the projected benefit obligation and the fair value of the plan assets at that date.   Actuarial gains and losses are recognized in expenses using the straight-line method over five years commencing with the succeeding period. (l) Allowance for Directors’ and Corporate Auditors’ Retirement Benefits   The company provided for directors’ and corporate auditors’ retirement and severance benefit liabilities if all such individuals retired at the balance sheets date. (m) Income Taxes   Income taxes comprise corporate, enterprise and inhabitants taxes. Deferred income taxes are recognized for temporary differences between the financial statement basis and the tax basis of assets and liabilities. (n) Amount Per Share   Amount per share of common stock is based on the weighted average number of shares outstanding during the year. Stock split made to shareholders of record as of November 20, 2000, was regarded as having been made at the beginning of the year ended March 31, 2001, for the computation of net income per share.   Diluted net income per share for each year was not presented because the company had no outstanding securities with dilutive effect.   Effective April 1, 2002, the company adopted the new accounting standard for earnings per share and related guidance (Accounting Standards Board Statement No. 2, "Accounting Standard for Earnings Per Share" and Financial Standards Implementation Guidance No. 4, "Implementation Guidance for Accounting Standard for Earnings Per Share," issued by the Accounting Standards Board of Japan on September 25, 2002).   Earnings per share for the year ended March 31, 2002 would have been reported as follows, if this new accounting standard were applied retroactively. (o) Accounting for Leases   Finance leases other than those which are deemed to transfer the ownership of the leased assets to lessees are accounted for in the same manner as operating leases. (p) Accounting standard for treasury stock and reversal of statutory reserves   Effective April 1, 2002, the company adopted the new accounting standard for treasury stock and reversal of statutory reserves (Accounting Standards Board Statement No. 1, "Accounting Standard for Treasury Stock and Reversal of Statutory Reserves", issued by the Accounting Standards Board of Japan on February 21, 2002).   As a result of this change, gains and losses from disposal of treasury stock which were previously charged to income or expense are accounted for as capital transactions, and income before income taxes for the year ended March 31, 2003 increased by ¥83 million ($691 thousand) compared with what would have been recorded under the previous accounting policy. (q) Change in accounting policy   The company changed accounting for departmental expenses of Advertising department. Under the former method, those expenses were included in selling, general and administrative expenses. Effective April 1, 2002, those expenses are included in cost of sales.   This change was made in order to disclose gross profit more appropriately under the circumstances that the company’s management established Advertising department, together with Magazine department, as one of the business unit at April 1, 2002, in light of strengthening of the earning power and clarification of the internal profit control of magazine editorial together with advertising business.   As a result of the change, cost of sales increased by ¥867 million ($7,213 thousand), selling, general and administrative expenses decreased by ¥877 million ($7,296 thousand) and income before income taxes increased by ¥10 million ($83 thousand) compared with what would have been recorded under the previous accounting method.   Effect on segment information is described in Note 12. (r) Reclassification   Certain prior year amounts have been reclassified to conform to the presentation in the year ended March 31, 2003. These changes had no impact on previously reported results of operations or shareholders’ equity. (s) Effect of Bank Holiday on March 31, 2002   As March 31, 2002 was a bank holiday, notes maturing on the balance sheets date were settled on the following business day and accounted for accordingly. A.  For the year ended March 31, 2002, the company newly consolidated subsidiaries (SS Communications Inc. and its subsidiary, Kinema- Junpo Inc.).   The amounts of assets and liabilities at the beginning of the consolidation period of newly consolidated subsidiaries utilized in the computation for the current year consolidation and the acquisition cost of investments are as follows: B.  For the year ended March 31, 2003, Kadokawa-Daiei Pictures, Inc. acquired all of the business operations from Daiei Co., Ltd.   The amounts of assets and liabilities increased due to this acquisition, and the payment for acquiring business operations are as follows: C.  For the year ended March 31, 2003, the company newly consolidated subsidiaries (Media Works Inc. and its subsidiary, Toy’sworks Inc.).   The amounts of assets and liabilities at the beginning of the consolidation period of newly consolidated subsidiaries utilized in the computation for the current year consolidation are as follows: D.  For the year ended March 31, 2003, Asmik Ace Entertainment, Inc. increased its stock and became affiliated company, which was previously a consolidated subsidiary. Due to this change, the company excluded subsidiaries (Asmik Ace Entertainment, Inc. and its subsidiary, Tycoon Corporation) from computation for the current year consolidation.   The amounts of assets and liabilities at the date of the exclusion from computation for the current year consolidation are as follows: A.  The following tables summarize acquisition costs, book values and fair values of securities with available fair values as of March 31, 2003 and 2002:   (a) Held-to-maturity debt securities:   (b) Available-for-sale securities: B.  The following tables summarize book values of securities with no available fair values as of March 31, 2003 and 2002:   (a)Held-to-maturity debt securities:   (b)Available-for-sale securities: C.  Maturities of available-for-sale securities and held-to-maturity debt securities are as follows: D.  The proceeds and gross realized losses from the sale of held-to-maturity debt securities were as follows: E.  The proceeds and gross realized gains (losses) from the sale of available-for-sale securities were as follows: Inventories at March 31, 2003 and 2002 are summarized as follows:   Short-term borrowings at March 31, 2003 and 2002 consisted of notes to banks and bank overdrafts. The interest rates on short-term borrowings at March 31, 2003 and 2002 ranged from 0.48% to 1.75% and from 0.50% to 1.75%, respectively.   Long-term debt at March 31, 2003 and 2002 are summarized as follows:   The aggregate annual maturities of long-term debt are as follows:   As is customary in Japan, security may have to be given if requested by a lending bank and such bank has the right to offset cash deposited with it against any debt or all obligations that become due and, in the case of default or certain other specified events, against all debts payable to the bank. The company has never received such a request.   At March 31, 2003, the following assets were pledged as collateral for long-term debt:   Taxes on income applicable to the company and its consolidated subsidiaries resulted in a normal statutory tax rate of approximately 42.05% for the years ended March 31, 2003 and 2002. The actual effective tax rate in the accompanying consolidated statements of income differed from the normal statutory tax rate due principally to temporary differences between financial statement basis and tax basis of assets and liabilities and certain expenses that are permanently non-deductible for tax purposes.   The following table summarizes the significant differences between the statutory tax rate and the company's effective tax rate for financial statement purposes for the years ended March 31, 2003 and 2002:   The aggregate statutory income tax rate will be reduced for the years commencing on April 1, 2004 or later due to the revised local tax law.   At March 31, 2003, the company and consolidated domestic subsidiaries applied the reduced aggregate statutory income tax rate of 40.69% for calculating deferred tax assets and liabilities that are expected to be recovered or settled in the years commencing on April 1, 2004 or later. As a result, net deferred taxes assets decreased by ¥19 million ($158 thousand) and provision for deferred income taxes and net unrealized holding gains increased by ¥20 million ($166 thousand) and ¥1 million ($8 thousand), respectively, compared with what would be reported using the currently applicable tax rate of 42.05%.   Significant components of the company's deferred tax assets and liabilities as of March 31, 2003 and 2002 are as follows:   Under the Japanese Commercial Code (the “Code”), the entire amount of the issue price of shares is required to be accounted for as capital, although a company may, by resolution of its Board of Directors, account for an amount not exceeding one-half of the issue price of the new shares as additional paid-in capital, which is included in capital surplus .   Effective October 1, 2001, the Code provides that an amount equal to at least 10% of cash dividends and other cash appropriations shall be appropriated and set aside as legal earnings reserve until the total amount of legal earnings reserve and additional paid-in capital equals 25% of common stock. The legal earnings reserve and additional paid-in capital may be used to eliminate or reduce a deficit by resolution of the shareholders’ meeting or may be capitalized by resolution of the Board of Directors. On condition that the total amount of legal earnings reserve and additional paid-in capital remains equal to or exceeding 25% of common stock, they are available for distribution by the resolution of shareholders’ meeting. Legal earnings reserve is included in retained earnings in the accompanying consolidated financial statements.   The maximum amount that the company can distribute as dividends is calculated based on the non-consolidated financial statements of the company in accordance with the Code.   Semi-annual cash dividends may be declared by the Board of Directors after the end of each interim six-month period. Such dividends are payable to stockholders of record at the end of each fiscal or interim six-month period. In accordance with the Code, the declaration of these dividends and the related appropriations of retained earnings have not been reflected in the financial statements at the end of such fiscal or interim six-month period.   Under the Code, a company may issue new common shares to existing shareholders, without consideration, as a stock split pursuant to resolution of the Board of Directors.   By special resolution at the 48th general shareholders' meeting held on June 25, 2002, the company introduced a stock option plan in accordance with Article 280-21 of the Commercial Code in Japan, and granted stock purchase rights at advantageous terms to directors and employees of the company and its consolidated subsidiaries.   The stock purchase rights can be exercised at a price of ¥1,958 per share in the period from July 1, 2004 to June 30, 2007.   The company issued 13,114,900 shares of common stock to the shareholders of record as of November 20, 2000, in a two-for-one stock split.   In June 2003, the shareholders approved the declaration of a cash dividend and bonuses to directors and corporate auditors applicable to the year ended March 31, 2003, totaling ¥323 million ($2,687 thousand) and ¥44 million ($366 thousand), respectively. In conformity with the Code, this declaration of a cash dividend is not reflected in the consolidated financial statements as of March 31, 2003.   The liabilities for severance and retirement benefits included in the liability section of the consolidated balance sheets as of March 31, 2003 and 2002 consist of the following:   Severance and retirement benefit expenses included in the consolidated statements of operations for the years ended March 31, 2003 and 2002 comprised the following:   The discount rate and the rate of expected return on plan assets used by the company are 2.0% and 2.0%, respectively for the year ended March 31, 2003 and 2.5% and 2.0%, respectively for the year ended March 31, 2002. The estimated amount of all retirement benefits to be paid at the future retirement date is allocated equally to each service year using the estimated number of total service years. Actuarial gains and losses are recognized in the statements of operations using the declining-balance method over five years. (Return of substitutional portion of Welfare Pension Insurance)   Employees of Japanese companies are compulsorily included in the Welfare Pension Insurance Scheme operated by the government. Employers are legally required to deduct employees' welfare pension insurance contributions from their payroll and to pay them to the government together with employers' own contributions. For companies that have established their own Employees' Pension Fund which meets certain legal requirements, it is possible to transfer a part of their welfare pension insurance contributions (referred to as the "substitutional portion" of the government's Welfare Pension Insurance Scheme) to their own Employees' Pension Fund under the government's permission and supervision.   Based on the newly enacted Defined Benefit Corporate Pension Law, one of consolidated subsidiaries decided to restructure their Employees' Pension Fund and were permitted by the Minister of Health, Labor and Welfare on April 23, 2002 to be released from their future obligation for payments for the substitutional portion of the Welfare Pension Insurance Scheme. Pension assets for the substitutional portion maintained by the Employees' Pension Fund are to be transferred back to the government's scheme.   One of domestic subsidiaries applied the transitional provisions as prescribed in paragraph 47-2 of the JICPA Accounting Committee Report No. 13, "Practical Guideline for Accounting of Retirement Benefits (Interim Report)," and the effect of transferring the substitutional portion was recognized on the date permission was received from the Ministry of Health, Labor and Welfare. As the result, in the year ended March 31, 2003, one of consolidated domestic subsidiaries recorded gains on the release from the substitutional portion of the government's Welfare Pension Insurance Scheme amounting to ¥64 million ($532 thousand), which was calculated based on the amount of the substitutional portion of the projected benefit obligations as of the permission date, the related pension assets determined pursuant to the government formula, and the related unrecognized items.   The amount of pension plan assets expected to be transferred back to the government approximated ¥417 million ($3,469 thousand) as at March 31, 2003.   Other income (expenses) – other-net consisted of the following:   Finance leases, excluding those leases for which the ownership of the leased assets is considered to be transferred to the lessee, as of and for the years ended March 31, 2003 and 2002, were as follows:   (1) Equivalent of purchase price, accumulated depreciation and book value of leased assets:   (2) Lease commitments (including interest portion):   (3) Lease expenses and depreciation equivalents:   Depreciation equivalents were computed by the straight-line method over the lease terms with no residual value. (a) Business Segment Information   The company and its consolidated subsidiaries operate primarily in the following business segments. (1) Publication...........books and magazines (2) Software..............films, videos, game software and others (3) Digital content......web-site, digital content (4) Others.................distribution, real estate agent and other   As explained in Note 2 (q) “Change in accounting policy,” the company changed accounting for departmental expenses of advertising department. Under the former method, those expenses were included in selling, general and administrative expenses. Effective April 1, 2002, those expenses are included in cost of sales.   As a result, operating expenses of Publication decreased ¥10 million ($83 thousand) and operating income of Publication increased by the same amount. (b) Geographic Segment Information   Geographic segment information was not presented as domestic sales and assets exceed 90% of consolidated net sales and assets. (c) Overseas Sales   Overseas sales were less than 10% of total consolidated sales.   Pursuant to Article 2, Paragraphs 3 Enforcement Ordinance for the Law concerning Revaluation Reserve for Land (the “Law”), the company recorded its owned land used for business at the fair value of ¥3,517 million (the original book value was ¥4,236 million) as of March 31, 2002, and related net unrealized loss was debited to “Revaluation reserve for land,” in the equity section. According to the Law, the company is not permitted to revalue the land at any time, even in the case that the fair value of the land declines.   As of March 31, 2003, the fair value of the land declined ¥265 million ($2,205 thousand).   Split-off of the company’s operation   Based on the approval at the annual general meeting of shareholders on June 25, 2002, the company split-off the company’s all the operations by way of the division of corporation at April 1, 2003, where the company became the holding company of the newly split-off entity (Kadokawa Shoten Publishing Co., Ltd.). The amounts of assets, liabilities and shareholders’ equity newly split-off entity took over are as follows: Copyright KADOKAWA HOLDINGS, INC. All rights reserved.