Dimension Strategy

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ANNUAL REPORT 2010 Year ended March 31, 2010

Kadokawa Group Holdings, Inc. Kadokawa Group Holdings, Inc. ANNUAL REPORT 2010

Dimension Strategy

Printed in Japan

Profile

The foundation of Kadokawa Group Holdings, Inc. dates back to 1945 when literary scholar Genyoshi Kadokawa established an independent publishing company with an ambition to revitalize Japanese culture through publishing. Initially engaged mainly in literary publications of Japan’s national history and literature, the Company embarked upon the filmmaking business in the 1970s and succeeded in promoting media mix marketing in which movie screenings coincide with paperback book fairs at bookstores. As a result, the Company gradually expanded its corporate foundation. In the 1980s, the Company began publishing TV program guides, town guides, and media information magazines and subsequently made inroads into the Movie/Visual business and IT businesses via an effective merger and acquisition strategy, while also cultivating new segments and genres in the publishing field. The Company was listed on the Tokyo Stock Exchange in 1998. The Company is currently aiming to establish itself as a Mega Software Publisher based on its three mainstays: Publishing, Movie/Visual, and Cross-Media business segments. Targeting business expansion overseas as well, its unique array of comics, light novels, and animation content are representative of the “Cool Japan” concept that has attracted much attention worldwide in recent years.

Contents 1 Financial Highlights

14 Management’s Discussion and Analysis

2 Chairman’s Message 4 Message from the President 6 Our Strategy 5 Dimension Strategy 8 The Kadokawa Group’s 60-Year History of Growth 9 Overview of the Kadokawa Group 10 At a Glance

17 Five-Year Summary of Selected Financial Data 18 Consolidated Balance Sheets 20 Consolidated Statements of Operations 21 Consolidated Statements of Changes in Net Assets 22 Consolidated Statements of Cash Flows

11 Overview of Businesses 11 Publishing Business

23 Notes to Consolidated Financial Statements

12 Movie/Visual Business

40 Independent Auditors’ Report

13 Cross-Media Business Development of Social Applications

41 Corporate Data

Financial Highlights Kadokawa Group Holdings, Inc. and Consolidated Subsidiaries Years ended March 31

Operating Income

Net Sales

Millions of yen

Millions of yen

10,000

200,000

150,000

150,256

149,883

150,790

141,611

135,923

7,500

7,393 6,812 5,165

5,133 5,000

100,000

3,566 2,500

50,000

0

2006

2007

2008

2009

2010

0

2007

2009

2010

Millions of yen

Millions of yen

6,000

14,000 3,899

4,000

2008

Cash Flow

Net Income (Loss)

7,000 2,000

2006

1,430

1,323

6,507

3,298 2,394 5,692

10,958

4,821

167 130

1,990 1,010

0

0

(1,686) -2,000

-7,000

(2,599)

(37)

(980)

2009

2010

(5,172)

-4,000

-8,000

-14,000

(5,206)

-6,000

(16,130)

2006

2007

2008

2009

2010

-21,000

2006

2007

2008

Cash flows from operating activities Cash flows from investing activities Free cash flow (Combined total of cash flows from operating and investing activities)

Net Assets

Total Assets

Millions of yen

Millions of yen

200,000

100,000 88,292

150,000

148,375

80,333

149,839 123,176

50,000

50,000

25,000

2006

2007

2008

2009

67,510

67,461

2009

2010

119,253

100,000

0

78,280

75,000

138,317

2010

0

2006

2007

2008

Note: Net assets as of March 31, 2006 have been reclassified using the new accounting standard, which was effective April 1, 2006.

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Chairman’s Message Targeting Dramatic Business Growth through Electronic Books With the launch of Apple’s iPad following the Internet bookstore Amazon’s Kindle, Kadokawa has recently received many inquiries from television programs and newspapers. What does Kadokawa think about this new technology? How will we address the e-book onslaught? Do we see this more as an opportunity or a threat? Here, I answer these and other questions that are on people’s minds.

Tsuguhiko Kadokawa Chairman and Director Kadokawa Group Holdings, Inc.

The Japanese are regarded as the world’s most prolific readers. I’ve heard that even overseas visitors to Japan who come in contact with train commuters reading paperbacks, everyone from students to company employees, can sense their passion. Moreover, the diversity of the reading matter available is amazing, covering everything from Western classics to genres representing “Cool Japan,” such as comics and light novels. For your information, the four companies of the Kadokawa Group together account for 80% of the domestic market for light novels incorporating Japanesestyle “anime” illustrations. The domestic market for e-books totaled US$500 million in 2009, making Japan the world’s largest market, surpassing the United States. The impact of Kindle, iPad, and Google Edition on our market is expected to be huge. Japan’s total content market is worth around ¥14 trillion, according to statistics from the Ministry of Economy, Trade and Industry. Within this amount, the text-based market, covering books, magazines, and newspapers—the target niche for the e-book sector—is worth ¥6 trillion. Although the music market is worth only ¥1.8 trillion, a major innovation like the iPod has made a tremendous difference. The reality is that the majority of people in our industry do not know how to address the impact that e-books will have on the printed publications market.

HINC OMNE PRINCIPIVM Everything Starts from Here

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However, I have used the new tablet computers, like Kindle and iPad, and I am familiar with their respective weights and user interfaces. From my perspective, the emergence of e-books presents an excellent opportunity for a quantum leap for Kadokawa. This is because we possess a diversity of contents and extensive archives. As a corporate group that has been pursuing a media mix that includes both publications and movies and aims to become a “Mega Software Publisher,” our expectations are running high thanks to these “magical” tablet computers. I firmly believe that the business methods that we have developed since our foundation are perfectly suited to responding to the recent technological innovations and the arrival of the networked society. The public’s response to the new tablets has been highly favorable. Our challenge is to use this response to improve our own business performance while taking full advantage of the tablet devices’ technological merits. To this end, we will use the new tablets as a springboard for formulating aggressive e-book strategies. The problem here, however, is the difficulty in developing an appropriate business model for e-books. I have yet to hear of any clear examples of a suitable profit model even from the United States. Indeed, the creation of an effective business model is the most pressing issue facing the e-book sector. We have three choices here: (1) Deploy our content-creation capabilities and archives as a content provider; (2) Make users aware of our capabilities as a platform provider; and (3) Sell tablet computers. Each of these choices offers major business opportunities, so there is value in considering all three.

editorial strengths to create market hits, both in novels and comic books. Two large-scale M&As also contributed to our performance. For example, we welcomed Chukei Publishing Company to the Group, which augmented our portfolio of economic and how-to books. The Kadokawa Group now has 10 members, including Kadokawa Shoten Publishing Co., Ltd. Another new Group member is Maho i-Land Corporation, which operates Japan’s largest cell phone novel site (website where people post novels written on their cell phones). Accepting CGM (consumer-generated media, where consumers use the Internet to generate their own content) postings from around 6 million people per month, Maho i-Land promises to play a key role in the Kadokawa Group’s advancement in the e-book market. It has been said that hardware (like a video or CD player) and software (content) are “two wheels on the same cart.” However, the success of Apple’s iPod illustrates that the key to gaining power lies in platform-building. Apple grew to dominance because it prepared winning software for its own platform. The Kadokawa Group plans to enter a new domain by building its own platform, while leveraging the strengths of its content portfolio. The hurdles are high, but if we succeed we can realize major new growth for the Group, and our innovative e-book business model will become a powerful weapon in our arsenal. We have also established NTT Prime Square Inc. in collaboration with NTT, which lead Japan’s push to proliferate fiber-optic networks in the broadband field. This attractive, new challenge of building a platform is an extension of our strategies for the e-book market. On behalf of the Kadokawa Group, I ask for your ongoing support in our quest to become a “Mega Software Publisher” in this new age.

The Kadokawa Group reported a healthy financial performance in fiscal 2010. This was because each company in the Group’s publishing business honed its own

Our creations will be seeds for people to cultivate a richness of spirit. Everything starts from that pride. Our creations will build the future and remain in history. Everything starts from that foresight. Our creations will constantly strive for novelty. Everything starts from that innovation. Our creations will be the fulfillment of our ambitions. Everything starts from that passion. Our creations will be the result of a steady accumulation of small steps. Everything starts from that constancy. Our creations will promote culture and contribute to the development of society. Everything starts from that commitment.

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Message from the President Kadokawa Group Targets Growth and Great Progress Year in Review In the fiscal year ended March 2010, the Kadokawa Group achieved year-on-year increases in revenue and earnings in its core Publishing business. The domestic markets for advertising and DVD sales were weak, and revenues in the Cross-Media business and Movie/ Visual business were down. As a result, consolidated net sales for the year declined ¥5.6 billion year on year, to ¥135.9 billion. However, we achieved a significant increase in earnings, with operating income up ¥1.6 billion, to ¥5.2 billion. Net income totaled ¥1.4 billion, a substantial ¥6.6 billion improvement, highlighting a major return to profitability after losses in the two preceding fiscal years. These results show that the Kadokawa Group has transformed itself into a profitable organization thanks to structural reforms backed by a united commitment.

Tatsuo Sato President and Representative Director Kadokawa Group Holdings, Inc.

Future Growth Vision Despite these positive results, our industry is facing various challenges. In order to target growth as a corporation in these circumstances, we cannot rely solely on structural reforms. It is often said that, “Adversity breeds success.” Now is the time, therefore, for the Kadokawa Group to achieve great progress. It is my responsibility to articulate a growth vision for the future. In order to place the Group on a growth trajectory, I have formed a vision based on three key “pyramids”: (1) Maximize Group synergies as a “Software Publisher”; (2) Respond to the digitalization; and (3) Expand operations in overseas markets. Maximize Group Synergies as a “Software Publisher” The first pyramid envisages Kadokawa as a “software publisher.” This entails extensively upgrading the Group’s current business model. Using the Publishing business as our base, we will forge synergies with the Cross-Media and Movie/Visual businesses, or our other businesses and thereby deliver unparalleled business performances. Undertaking structural reforms and business reorganization simultaneously is a difficult challenge. If we succeed, however, we can look forward to significant growth in the future.

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The three pyramids supporting the growth of the Kadokawa Group Service Events and Live Performances

Merchandising Character Merchandise and Product Development

Packaged Software DVDs, Blu-ray, CDs, Game Software

Movie/Visual Movies, Planning & Production, Distribution, Animation

Publishing Magazines, Books, Comics, Advertising

“Software Publisher” Kadokawa Local Services

Dynamic Service e-Commerce

Local Digital Distribution Local Image Creation

Social Applications Game Distribution

Local Development of Original Content

Image Distribution

Publication of Translated Works, Overseas Sales

“Overseas” Kadokawa

Respond to the Digitalization The second pyramid envisages Kadokawa as a digital business group. Motivated by the establishment of Kadokawa Games, Ltd., we have substantially reinforced the Group’s capabilities in product development and marketing of packaged videogames and simultaneously undertaken aggressive overseas business expansion. We hope to announce the results of these initiatives in the current fiscal period. From the autumn of 2010, we plan to begin offering more than 10 types of social application games using our popular light novel and comic characters. This will provide a powerful force and deliver exciting synergies with our Publishing business. In the much-talked-about e-book market, unique platforms are currently being developed that are unprecedented even in the publishing industry, and we have great expectations in this area. In e-magazines as well, we will do much more than simply create digital versions of hardcopy magazines; rather, we will enrich

e-Books, e-Magazines

“Digital” Kadokawa

their content and deliver dynamic embedded services, enabling us to overcome the traditional boundaries of the paper magazine medium. Expand Operations in Overseas Markets The third pyramid focuses on overseas operations, mainly targeting Asian markets. In addition to simply producing translated publications, we will develop original, locally inspired content, develop movie versions, and compile a host of other services, including digital distribution and event production. In these ways, we plan to advance our business in a three-dimensional manner. By interlocking the aforementioned three pyramids and generating major synergistic benefits, the Kadokawa Group will target future growth and progress as a “Mega Software Publisher.” We look forward to your ongoing support and understanding.

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Our Strategy

5 Dimension Strategy In addition to our “Single Source, Multi-Use” strategy, we will target renewed growth by expanding our business domains and advancing our overseas operations.

Publishing

Movie/Visual

Novels, comics

Animation, dramas, movies, DVDs

In the Publishing business, we will work to create exceptional content that will become valuable future media mix assets. Back in 1945 when our business was founded, we concentrated mainly on the publication and sales of literary novels, tanka and haiku (Japanese poetry), dictionaries, and school textbooks. Since then, we have significantly broadened our horizons to include light novels, comics, animation and charactermotif magazines, game strategy guides, children’s books, how-to books, and history-related books.

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We entered the Movie/Visual business in 1976, with the production of The Inugami Family. As embodied in the catchwords used at the time—“Should I read the book first, or watch the movie first?”—this marked the beginning of the media mix technique of releasing the book and the movie simultaneously. Since then, we have broadened our business to include television animation productions of light novels and comics, as well as sales of DVD packages.

©2006 Nagaru TANIGAWA·Noizi ITO/Member of SOS ©2007, 2008, 2009 Nagaru TANIGAWA·Noizi ITO/Member of SOS

The Kadokawa Group has created a multitude of unique content in the past. Our strength is our production capabilities, whereby we arrange for the deployment of our vast collection of contents across a wide range of media, which have enabled us to nurture long-running “hit” contents. Taking advantage of these strengths, we are reinforcing our game business and developing new game software for core users. At the same time, we are expanding our business domains to include the supply of applications for social networking services. As a measure to achieve renewed growth, we will actively advance into the e-book field and expand operations in overseas markets. Specifically, we will enter and maximize sales opportunities in Asia, where recognition of, and demand for, our contents are high.

Information Magazines • Web Information magazines, web, character merchandise

In the Cross-Media business, we provide support for the Publishing and Movie/ Visual businesses by distributing related information via collaboration magazines mixing publications and movies, mobile phones, and the Internet. We are also actively involved in establishing communities using publications with high Internet affinity, such as TV program guides, town guides, and lifestyle information magazines. Our distribution of content to YouTube, for example, has become well-known.

Digital e-Books Social applications

The role of the Digital business will become more and more important as the Kadokawa Group effectively utilizes its content portfolio under its “single source, multi-use” strategy. In addition to character games, we will also establish a solid presence in the digital entertainment field by entering the social applications business and develop games for core gamers. Going forward, we plan to aggressively enter the e-book business, a market that is expected to grow sharply.

Overseas Development

Overseas, we made a full-scale entry into mainland China in 2010. Specifically, we established Guangzhou Tianwen Kadokawa Animation & Comics Co. through a capital alliance with the Hunan Group, a Chinese state-owned conglomerate. The new joint venture will start providing translation and publishing services in the near future. We are also fostering local writers with the aim of producing comics and light novels written by Chinese writers, as well as animations based on such works.

©Nagaru TANIGAWA·Noizi ITO/ESUOUESUDAN ©PUYO/ESUOUESUDAN ©ERETTO/ESUOUESUDAN

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The Kadokawa Group’s 60-Year History of Growth Phase 6

Phase 5

Phase 4

Phase 3 Phase 2 Phase 1

Book era Established the foundation as a publisher of literary works through fresh publications focusing on Japanese history and literature

Movie era Leveraged the successful coordination of Kadokawa Bunko and Kadokawa movies to actively expand the business base

Magazine era Built on the successes of Weekly The Television, Tokyo Walker, and other information magazines until the Company is referred to as “Kadokawa the information magazine publisher”

Internet business commercialization era Aggressively developed IT business operations, including digital content and broadband operations

New Kadokawa movie era

Toward becoming a comprehensive media company Shifted to a corporate

New Kadokawa

structure based on the

movie’s box-office

three Publishing,

hits—Paradise Lost,

Movie/Visual, and

Ring, Rasen, etc.

Cross-Media business segments to become a comprehensive publishing and movie/visual media corporation

Web 2.0 era begins and achieving further growth

Paradise Lost Walkerplus

Weekly The Television

2003 ∼

The Inugami Family

1997 ∼ 1994 ∼

Santaro no Nikki (Santaro’s Diary)

1982 ∼ Ring

1976 ∼ 1945 ∼

Rasen

Tokyo Walker Paradise Lost Ring Rasen

G.I. Samurai Crime and Punishment

Web-version TV guide, “The Television”

Newtype

Hodo (Sidewalks)

Crime and Punishment Santaro no Nikki Showa Bungakuzenshu (Showa Literary Anthology)

1945 Founded

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Sailor Suit and Machine Gun

The Inugami Family The Proof of the Man G.I. Samurai Sailor Suit and Machine Gun

2003 Shifted to a holding company structure

1997 New Kadokawa movie era began with the release of Paradise Lost 1998 Listed on the Tokyo Stock Exchange

Walkerplus Web-version TV guide, “The Television”

Weekly The Television Tokyo Walker Comptiq Newtype ASUKA

1994 Walkerplus service started

1982 Magazine era began with the release of the first The Television magazine 1985 Full-fledged entry to the animation and comic book field with the launch of Newtype

1976 Kadokawa Pictures released its first feature movie, The Inugami Family

Overview of the Kadokawa Group

Publishing Business

Movie/Visual Business

Kadokawa Shoten Publishing Co., Ltd. Publishing/editing, animation creation

Kadokawa Pictures Inc. Movie production, distribution, and import business, DVD sales

ASCII Media Works Inc. Publishing/editing

Kadokawa Cineplex, Inc. Cinema complex operation

Enterbrain, Inc. Publishing/editing, creation and sale of game software

Glovision, Inc. Production of Japanese language version video products

Fujimi Shobo Co., Ltd. Publishing/editing Chukei Publishing Company Publishing/editing

Cross-Media Business

Kadokawa Marketing Co., Ltd. Publishing/editing

Shin-Jinbutsuoraisha Co., Ltd. Publishing/editing Kadokawa Gakugei Shuppan Publishing Co., Ltd. Publishing/editing Kadokawa Games, Ltd. Creation and sale of game software Maho i-Land Corporation Homepage planning, development, and administration Kadokawa Production Co., Ltd. Use, development, and management of copyrights Chara-Ani Corporation e-Commerce and production and marketing of character merchandise

Light novels

Games/PCs

Literature

K. Sense Mail-order business Kadokawa Magazines Co., Ltd. Publishing/editing Movie Time Co., Ltd. Information digitalization Kadokawa Digix, Inc. Creation of a digital content database Kadokawa Contents Gate Co.,Ltd. Transmission of digital contents Kadokawa Media House Inc. Advertising agency business

Composition of sales by genre for each company

Comics

Kadokawa SSCommunications Inc. Publishing/editing

History

How-to

Education, Culture

Overseas Subsidiaries Publishing Support Business

Kadokawa Group Publishing Co., Ltd. Kadokawa Group Publishing Business marketing, distribution, sales, advertising, and production Building Book Center Co., Ltd. Warehousing business, real estate rental and management Kadokawa Book Service Co., Ltd Sales support for publications

Kadokawa Media (Taiwan) Co., Ltd. Publishing/editing Kadokawa Intercontinental Group Holdings Ltd. Movie distribution and cinema complex operation, game creation and sale Kadokawa Intercontinental Publishing Asia Ltd. Publishing/editing Sun Wah Kadokawa (Hong Kong) Group Ltd. Cinema complex operation in China Guangzhou Tianwen Kadokawa Animation & Comics, Co., Ltd. Publishing/editing, animation creation in China

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At a Glance

Other Business

Publishing Business

Net Sales

Net Sales

¥8,612 million

¥73,476 million

Operating Income

Operating Income

-¥207 million

¥7,704 million

Creation and sale of game software; advertising agency services; real estate leasing and management

Publication and sale of novels, business books, academic books, comics, etc.; production of animation and games; licensing of content

6.3%

54.1%

Composition of sales

Composition of sales

Total net sales

¥135,923 million (Fiscal year ended March 2010)

Composition of sales

16.9%

22.7%

Cross-Media Business

Movie/Visual Business

Net Sales

Net Sales

¥23,032 million

¥30,803 million

Operating Income

Operating Income

¥190 million

-¥1,198 million

Publication and sale of TV program guides, town guides and lifestyle information magazines, which have a strong affinity for the Internet, and as well as the transmission of information that uses media platforms such as PCs and mobile phones

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Composition of sales

Planning, production, distribution, and cinema complex operation; cinema operations; sale of movie and animation DVDs

Overview of Businesses

Publishing Business In the Publishing business, we will work to create exceptional content that will become valuable future media mix assets. Centered primarily on Kadokawa Bunko, our paperback book line with a 60-year history, we will work to expand our operations with the aim of becoming No.1 in every field, including magazines, paperbacks, comics, light novels, and gaming strategy guides. Books

Literature

Light novels

The Lost Symbol Vol.1-2

Durarara!! Vol.7

Author: Dan Brown Translation: Toshiya Echizen

Author: Ryogo Narita Illustrations: Suzuhito Yasuda

TV Animation

Comics

Baka and Test —Summon the Beasts— Vol.7.5 Author: Kenji Inoue Illustrations: Yui Haga

Jan. 2010

Durarara!! ©Ryohgo Narita / ASCII MEDIA WORKS / Ikebukuro Dollars /MBS

Jan. 2010

Baka and Test —Summon the Beasts— ©2010 Kenji Inoue / PUBLISHED BY ENTERBRAIN, INC. / Baka and Test Project All rights reserved

Seitokai no Nanahikari

Toarukagakuno Railgun Vol.4

Neon Genesis Evangelion Vol.12

Author: Sekina Aoi Illustrations: Kira Inugami

Illustrations: Motoi Fuyukawa Original Author: Kazuma Kamachi Character Designer: Kiyotaka Haimura

Author: Yoshiyuki Sadamoto Original Author: GAINAX·Khara

Oct. 2009

Seitokai no Ichizon ©2009 Sekina AOI·kira INUGAMI / Fujimi Shobou / Hekiyougakuen Seitokai

Oct. 2009

Toarukagakuno Railgun ©KAZUMA KAMACHI / MOTOI FUYUKAWA / ASCII MEDIA WORKS / PROJECT-RAILGUN

From Our Staff

Akiko Kaneko Chief Editor Shosetsuya sari-sari website Editing Bureau No.3 Kadokawa Shoten Publishing Co., Ltd. Tenchi Meisatsu

2010 Honya Taisho (The Booksellers Prize) The Honya Taisho award is an award given by booksellers. Bookstore staff vote for the book they would most like to sell. Honya Taisho is a very prestigious award, and past winners of this award have been made available in various formats for different types of media.

Author: Tow Ubukata

Tenchi Meisatsu wins the 2010 Honya Taisho award, marking a brilliant achievement!

The reason it became a hit is a sense of unity, like a school festival. Initially, the idea of publishing Tenchi Meisatsu (Insights into Heaven and Earth) as a medium-length novel was suggested by its author, Tow Ubukata. However, while hearing its story line, I felt strongly that it would be good as a long novel. Consequently, we proposed that it be serialized in the monthly literary magazine Yasei Jidai over a half-year period. Since Tow Ubukata had already drawn up the story’s outline, I met a number of times with those in charge of the magazine over several months to work out how to convey to readers and make them empathize with various aspects of the novel. These included the hero’s personality and his allure, the historical background, and the story’s theme of making a Japanese calendar. Tenchi Meisatsu was serialized over seven episodes and was put out as a single volume in November 2009. Ubukata won the Eiji Yoshikawa Newcomer’s Prize in Literature and the Honya Taisho (The Booksellers Prize)—which is a great honor—and by June 2010, the book had sold 380,000 copies.

Because the relationship between the editor and writer is much closer in Japan compared with overseas, it is quite common for the publisher to be involved in the process of a work’s creation. In the case of Tenchi Meisatsu, the editing department was not the only department involved. We worked very effectively with the promotion and sales departments, and the sense of togetherness was similar to organizing a school festival. In the best possible way, the novel’s excellence percolated through the entire company, which in turn spread to bookshops and then to readers. Mr. Ubukata personally wrote hundreds of “thank you” letters to bookstores by hand, and actively visited bookstores in person, which further galvanized the support of everyone engaged on the sales front. It was a truly enjoyable assignment. I would like to draw on this experience to help with Tow Ubukata’s future works, and I hope to see an increase in works by authors who publish under the Kadokawa imprint.

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Overview of Businesses

Movie/Visual Business The Movie/Visual business conducts operations in all aspects, from upstream to downstream, in the movie and visual business field, including planning and production, cinema complex operation, package sales of DVDs and other merchandise, and licensing of rights for television and other media. The Movie/ Visual business is working to enhance its capabilities to launch high-quality contents provided by the Publishing business, strengthening the planning and production departments to improve the quality of movies and other visual contents, and increasing cooperation with its partners both inside and outside the Kadokawa Group. Movie

The Unbroken

The Fallen Angel

©2009 “Shizumanu Taiyo” Film Partners

©2010 “Ningen Shikkaku” Film Partners

The Disappearance of Haruhi Suzumiya ©2009 Nagaru Tanigawa·Noizi Ito/a member of SOS

DVD/BD

The Melancholy of Haruhi Suzumiya Season 2

Drop

Transporter 3 Unlimited

New Moon The Twilight Saga

CSI: Season 7

From Our Staff

Tsutomu Tsuchikawa General Manager Development & Production Kadokawa Pictures Inc. Japan Academy Prize Photo: Japan Academy Prize Association

The Unbroken wins in three categories at the Japan Academy Prize! (Best Picture, Best Actor, and Best Film Editing)

I was determined to make this movie one whose value would still be recognized 20 or 30 years from now. The movie The Unbroken is a film that addresses various social issues based on the best-selling novel by popular Japanese writer Toyoko Yamazaki. The journey to the making of the movie was a long one and took a total of ten years, including one point when the project was abandoned. As the producer, I was determined to make this movie one whose value would still be recognized 20 or 30 years from now. Therefore, when selecting the cast I needed actors that empathized with the novel. When I watched the finished movie, I felt that they had fulfilled their roles admirably. Nonetheless, I felt a constant unease right up until the day of the movie’s release, wondering whether the market would accept this serious, socially conscious movie, and what sort of reactions the viewers would have. On the day of its debut, however, the cinema was packed with people. On my way home on the train, I

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overheard a couple who had seen it talking enthusiastically about the content. With that, I realized that our intended message had been conveyed loudly and clearly. At the Japan Academy Prize ceremony, the words The Unbroken rang through the hall when the name of the winner of the Best Picture was announced. (It won “best” awards in three categories.) This movie had meant so much to all of us. Our immense joy showed on our faces, and some people even cried. However, a producer’s work does not end when the movie hits the box office. I have remained busy with sales promotion ever since, especially when the movie came out on Blu-ray Disc and DVD in May 2010. In the near future, it will also be screened on television. I will continue doing my utmost to make The Unbroken profitable.

Overview of Businesses

Cross-Media Business The Cross-Media business is adapting and enhancing its advertising, distribution, and mail order business operations for the Internet Age. It is constructing a next-generation business model for the emerging e-book and video distribution industries using the various content created by the Kadokawa Group and linking new technologies and peripheral businesses to provide an expanding range of high value-added new services.

Magazines

TV program guides

Town guides

Lifestyle information magazines

Music information magazines

Web

Restaurant information magazines

Overseas town guides

Mobile

Web-version TV guide, “The Television”

Walkerplus e-Book delivery site for mobile phones, “Chokuyomi”

Mobile-version TV guide, “The Television”

Development of Social Applications Baka and Test —Summon the Beasts— The popularity of Baka and Test—Summon the Beasts— soared with its release as a TV animation program in January 2010. The original comic books have sold some 3.8 million copies in Japan (as of September 2010). The TV release was accompanied by the simultaneous launch of a social application service on mixi, Japan’s largest social networking website. Following the successful launch of a feebased service in April, a service for mobile devices was added on August 12. The Group’s first venture as a service provider via a social application proved a success, and the Group actively began developing additional projects. In September, the Group launched the mobile game service for The Legend of the Legendary Heroes animated TV series. We plan to continue adding social applications based on the popular content of the Kadokawa Group as a new revenue source for the Group. Story The progressive Fumizuki Academy is a school with high academic standards where the students are strictly divided based on the results of their academic year-end tests. The classroom for the lowest-level F Class is a collection of rickety tables on rotting tatami mats, which is a stark contrast to the facilities provided for the high-scoring A Class students. F Class student Akihisa Yoshii vows to take on the system for the sake of Mizuki Himeji, an admirable and intelligent girl wrongly _ _ assigned to F Class, and starts a class-battle called the “War of Shokanju (Summoned Beasts)” using the students’ special talents to summon imaginary beasts. Will the F Class be victorious over the powerful higher classes?

mixi Applications

©2010 Kenji Inoue / PUBLISHED BY ENTERBRAIN, INC. / Baka and Test Project All rights reserved

TV Animation

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Management’s Discussion and Analysis

Principle Accounting Policies and Estimates The Kadokawa Group prepares its consolidated financial statements in conformity with accounting principles generally accepted in Japan (“Japanese GAAP”). In preparing the financial statements, with regard to matters requiring estimates, the Kadokawa Group considers past results and future plans and implements accounting procedures based on reasonable criteria that include the Accounting Standards for Measurement of Inventories, Accounting Standards for Financial Instruments, Accounting Standards for Impairment of Fixed Assets, Accounting Standards for Retirement Benefits, and Accounting Standards on Tax-Effect Accounting.

Operational Results During the fiscal year under review, consolidated net sales amounted to ¥135,923 million, down ¥5,688 million from the previous fiscal year. Net sales in the Publishing business increased 3.3% year on year, thanks to healthy sales of media-mix products, comics, and business books. Net sales in the Cross-Media declined 12.3% due to the continued difficult environment for magazine sales and advertising revenue. Net sales in the Movie/Visual business decreased 9.2% due to a sluggish DVD market and the fact that we did not reach our target box-office revenue for movie releases. Gross profit declined ¥18 million, to ¥34,866 million, and the gross margin rose 1.1 percentage points, to 25.7%. This was mainly due to a reduction in the cost of sales, which compensated for revenue declines in the Publishing and Cross-Media businesses. Operating income increased ¥1,599 million, to ¥5,165 million, and the operating income margin climbed 1.3 percentage points, to 3.8%. Major factors included cost-cutting efforts, especially with respect to advertising expenditures in the Publishing and Cross-Media businesses, as well as a decline in amortization and impairment of goodwill. Income before income taxes and minority interests amounted to ¥5,143 million, compared with a loss before income taxes and minority interests of ¥1,158 million in the previous fiscal year. Extraordinary income, net of extraordinary losses, increased ¥4,987 million year on year. This was mainly due to declines in the loss on valuation of investment securities and impairment losses. The Company posted net income of ¥1,430 million, compared with a net loss of ¥5,206 million in the previous fiscal year. Net income per share was ¥56.68.

14

An Analysis of Financial Condition and Operational Results

Financial Condition At March 31, 2010, the Company had total assets of ¥119,253 million, down ¥3,923 million from a year earlier. Within this amount, current assets increased ¥515 million, to ¥74,513 million, and fixed assets declined ¥4,438 million, to ¥44,740 million. Within current assets, cash and deposits and marketable securities declined ¥2,673 million year on year, because of repayments of shortterm borrowings and the current portion of long-term debt, while notes and accounts receivable and inventories rose ¥3,808 million, thanks to increases in net sales in February and March 2010. Regarding fixed assets, long-term time deposits, and the insurance reserve declined ¥3,036 million owing to repayments of the current portion of long-term debt. Total liabilities decreased ¥3,874 million, to ¥51,792 million. Current liabilities declined ¥15,525 million, to ¥35,517 million, and long-term liabilities increased ¥11,651 million, to ¥16,275 million. In current liabilities, short-term borrowings and the current portion of long-term debt declined ¥15,346 million owing to repayments and redemptions. As for long-term liabilities, bonds with share subscription rights increased ¥11,000 million, owing to the Company’s issuance of Japanese yen convertible bonds—bonds with share subscription rights—due in 2014. Net assets at the fiscal year-end totaled ¥67,461 million, down ¥49 million from a year earlier. Within this amount, shareholders’ equity increased ¥673 million, to ¥70,509 million; valuation and translation adjustments declined ¥756 million, to minus ¥3,781 million; and minority interests rose ¥34 million, to ¥733 million. Shareholders’ equity increased ¥673 million, owing to a rise in retained earnings stemming from the posting of net income and the appropriation of surplus. Regarding valuation and translation adjustments, the Company recorded a ¥427 million increase in the net unrealized holding loss on securities, due to a decline in the market valuation of listed stocks held, as well as a ¥329 million deterioration in foreign currency translation adjustments owing to the appreciation of the yen against the U.S. dollar. The shareholders’ equity ratio increased 1.8 percentage points, to 56.0%.

15

Management’s Discussion and Analysis

Cash Flows Cash and cash equivalents at March 31, 2010, amounted to ¥21,748 million, down ¥4,830 million from a year earlier. Main factors were outflows that included redemption of bonds, repayments of short-term borrowings, and payment for acquisition of interests in subsidiaries newly consolidated.

Cash Flows from Operating Activities Net cash provided by operating activities amounted to ¥1,990 million, compared with ¥37 million in net cash used in operating activities in the previous fiscal year. The primary factor was a substantial improvement in income before income taxes and minority interests. Cash Flows from Investing Activities Net cash used in investing activities amounted to ¥980 million, compared with ¥167 million in net cash provided by investing activities in the previous fiscal year. Major factors were purchases of investments in subsidiaries and purchases of property, plant, and equipment. Cash Flows from Financing Activities Net cash used in financing activities amounted to ¥5,594 million, from ¥2,193 million in the previous fiscal year. This was mainly because of redemption of bonds and repayments of short-term borrowings. Trends in cash flow indicators are as follows: Trends in cash flow indicators

Shareholders’ equity ratio (%) Shareholders’ equity ratio at market value (%) Interest-bearing debt to cash flow ratio (years) Interest coverage ratio (times)

March 2006

March 2007

March 2008

March 2009

March 2010

53.0 64.4 1.2 42.6

57.9 68.8 1.8 26.7

55.3 44.9 0.5 90.0

54.2 42.8 — —

56.0 44.7 6.1 13.7

Notes 1. The various indicators were calculated using the following calculation methods. Shareholders’ equity ratio: Shareholders’ equity/total assets Shareholders’ equity ratio at market value: Total market capitalization/total assets Interest-bearing debt to cash flow ratio: Interest-bearing debt/operating cash flow Interest coverage ratio: Operating cash flow/interest expense 2. All indicators were calculated using consolidated financial figures. 3. Total market capitalization is calculated by multiplying the fiscal year-end closing stock price by the total number of shares outstanding (excluding treasury shares) at the end of the fiscal year. 4. Interest-bearing debt includes all debt that pays interest as listed on the Consolidated Balance Sheets. 5. Operating cash flow refers to cash flows from operating activities on the Consolidated Statements of Cash Flows. Interest expense refers to the amount of interest paid as listed on the Consolidated Statements of Cash Flows. 6. Interest-bearing debt to cash flow ratio and interest coverage ratio for the year ended March 2009 are omitted because operating cash flow was negative.

16

Five-Year Summary of Selected Financial Data Kadokawa Group Holdings, Inc. and Consolidated Subsidiaries Years ended March 31

Thousands of U.S. dollars (Note 1)

Millions of yen

2010

2009

2008

2007

2006

2010

¥ 135,923

¥ 141,611

¥ 150,790

¥ 149,883

¥ 150,256

$ 1,460,909

73,476 30,803 23,032 8,612

71,158 33,919 26,266 10,268

72,033 41,712 29,036 8,009

70,942 41,658 30,613 6,670

62,908 44,863 36,961 5,524

789,725 331,073 247,549 92,562

Operating Income

5,165

3,566

5,133

7,393

6,812

55,514

Income (Loss) before Income Taxes and Minority Interests

5,143

(1,158)

1,821

9,280

4,321

55,277

Net Income (Loss)

1,430

(5,206)

(2,599)

3,899

1,323

15,370

57.87% 2.61 4.50

53.01% 0.88 1.67

For the Year: Net Sales Sales by Segment: Publishing Movie/Visual Cross Media Others

Percent

55.96% 1.18 2.14

Shareholders’ Equity Ratio Return on Assets Return on Equity

54.24% — —

55.33% — —

Thousands of U.S. dollars (Note 1)

Millions of yen

At Year-End: Net Assets (Note 2) Total Assets

¥

67,461 119,253

¥

67,510 123,176

¥

78,280 138,317

¥

88,292 149,839

¥

80,333 148,375

$

725,075 1,281,739 U.S. dollars (Note 1)

Yen

Per Share: Net Assets Net Income (Loss) -basic -diluted

¥ 2,645.78

¥ 2,649.06

¥ 2,971.31

¥ 3,239.48

¥ 3,153.37

56.68 54.58

(203.94) —

(99.59) —

154.13 140.64

52.20 47.58

$

28.44 0.61 0.59

Notes 1: U.S.dollar amounts have been translated from yen, for convenience only, at the rate of ¥93.04=U.S.$1.00, the approximate exchange rate prevailing on the Tokyo Foreign Exchange Market as of March 31, 2010. 2: Net assets as of March 31, 2006 have been reclassified using the new accounting standard, which was effective April 1, 2006.

17

Consolidated Balance Sheets Kadokawa Group Holdings, Inc. and Consolidated Subsidiaries March 31, 2010, 2009 and 2008

Thousands of U.S. dollars (Note 1)

Millions of yen

ASSETS

2010

2008

2009

2010

Current Assets: Cash and cash equivalents (Notes 4 and 5)

¥

21,748

¥

26,578

¥

29,145

$

233,749



499

998



Notes and accounts receivable (Note 4)

34,830

33,119

33,448

374,355

Inventories (Note 6)

Marketable securities (Note 5)

11,279

9,182

9,214

121,227

Deferred tax assets (Note 9)

1,716

1,655

2,183

18,444

Others (Note 7)

5,103

3,149

3,014

54,847

(184)

(101)

74,513

73,998

77,901

800,870

Land (Notes 8 and 18)

10,532

10,509

10,911

113,199

Buildings and structures (Notes 7 and 8)

Less: Allowance for doubtful accounts Total Current Assets

(163)

(1,752)

Property and Equipment: 15,384

15,350

17,482

165,348

Furniture and fixtures (Note 8)

4,287

4,410

4,305

46,077

Others

1,929

1,642

1,693

20,733

32,132

31,911

34,391

345,357

(13,094)

(12,387)

(11,978)

(140,735)

19,038

19,524

22,413

204,622

12,670

14,017

21,114

136,178

Goodwill (Notes 8 and 19)

1,078

602

1,739

11,586

Deferred tax assets (Note 9)

1,149

932

912

12,350

11,269

14,498

14,640

121,120

(395)

(402)

25,702

29,654

38,003

276,247

¥ 119,253

¥ 123,176

¥ 138,317

$ 1,281,739

Total Less: Accumulated depreciation Net Property and Equipment

Investments and Other Non-Current Assets: Investment securities (Notes 4 and 5)

Others (Notes 7 and 8) Less: Allowance for doubtful accounts Total Investments and Other Non-Current Assets Total Assets The accompanying notes are an integral part of these balance sheets.

18

(464)

(4,987)

Thousands of U.S. dollars (Note 1)

Millions of yen

LIABILITIES AND NET ASSETS Current Liabilities: Short-term borrowings (Notes 4 and 7) Current portion of long-term debt (Notes 4 and 7) Notes and accounts payable (Note 4) Income taxes payable (Notes 4 and 9) Allowance for employees’ bonuses Allowance for sales returns Others Total Current Liabilities Long-Term Liabilities: Long-term debt (Notes 4 and 7) Deferred tax liabilities (Note 9) Employees’ severance and retirement benefits (Note 13) Others Total Long-Term Liabilities Contingent Liabilities Net Assets (Notes 10 and 11): Shareholders’ Equity: Common stock Authorized: 100,000,000 shares Issued: 27,260,800 shares in 2010, 2009 and 2008 Capital surplus Retained earnings Treasury stock, at cost Total Shareholders’ Equity Valuation and Translation Adjustments: Net unrealized holding gain (loss) on securities Revaluation reserve for land (Note 18) Foreign currency translation adjustments Total Valuation and Translation Adjustments Minority Interests Total Net Assets Total Liabilities and Net Assets

2010

¥

2008

2009

399 65 18,702 2,733 1,442 3,820 8,356 35,517

¥

4,150 11,660 19,285 2,230 1,178 3,305 9,234 51,042

¥

2010

4,021 378 22,325 3,114 1,240 3,202 9,602 43,882

$

4,288 699 201,010 29,374 15,499 41,058 89,811 381,739

11,613 660 2,461 1,541 16,275

939 677 2,008 1,000 4,624

12,754 803 1,828 770 16,155

124,817 7,094 26,451 16,563 174,925









26,331 27,704 22,353 (5,879) 70,509

26,331 27,705 21,680 (5,880) 69,836

26,331 27,705 28,013 (4,778) 77,271

283,007 297,764 240,252 (63,188) 757,835

(2,012) (257) (1,512) (3,781)

(1,585) (257) (1,183) (3,025)

269 (586) (422) (739)

(21,625) (2,762) (16,251) (40,638)

699 67,510 ¥ 123,176

1,748 78,280 ¥ 138,317

733 67,461 ¥ 119,253

7,878 725,075 $ 1,281,739

19

Consolidated Statements of Operations Kadokawa Group Holdings, Inc. and Consolidated Subsidiaries Years ended March 31, 2010, 2009 and 2008

Thousands of U.S. dollars (Note 1)

Millions of yen

Net Sales

2010

2009

2008

2010

¥ 135,923

¥ 141,611

¥ 150,790

$ 1,460,909

101,057 34,866

106,727 34,884

112,939 37,851

1,086,167 374,742

29,701 5,165

31,318 3,566

32,718 5,133

319,228 55,514

345 (137) (230) (22) 5,143

604 (104) (5,224) (4,724) (1,158)

738 (112) (3,938) (3,312) 1,821

3,708 (1,472) (2,473) (237) 55,277

3,840 (184) 57 1,430

3,465 507 76 (5,206)

4,242 (83) 261 (2,599)

41,273 (1,979) 613 15,370

Cost of Sales Gross Profit Selling, General and Administrative Expenses Operating Income Other Income (Expenses) Interest and dividend income Interest expenses Other-net (Notes 8 and 15) Net other expenses Income (Loss) before Income Taxes and Minority Interests Income Taxes (Note 9) Current Deferred Minority Interests in Consolidated Subsidiaries Net Income (Loss)

¥

¥

¥

Yen

2010 Per Share of Common Stock (Note 2): Net income (loss)-basic -diluted Cash dividends applicable to the year The accompanying notes are an integral part of these statements.

20

¥

U.S.dollars (Note 1)

2009

56.68 54.58

¥ (203.94) —

30.00

30.00

$

2010

2008

¥

(99.59) — 31.00

$

0.61 0.59 0.32

Consolidated Statements of Changes in Net Assets Kadokawa Group Holdings, Inc. and Consolidated Subsidiaries Years ended March 31, 2010, 2009 and 2008

Millions of yen

Common stock

Balance at March 31, 2007 Cash dividends paid Net loss Purchases of treasury stock Disposal of treasury stock Net changes Balance at March 31, 2008 Cash dividends paid Net loss Purchases of treasury stock Disposal of treasury stock Reversal of reserve for land Net changes Balance at March 31, 2009 Cash dividends paid Net income Purchases of treasury stock Disposal of treasury stock Net changes Balance at March 31, 2010

Capital surplus

Retained earnings

Treasury stock

Net unrealized Foreign Revaluation holding gain currency reserve for (loss) on translation land securities adjustments

¥ 26,331 ¥ 27,747 ¥ 31,442 ¥ (1,870) ¥ 2,732 ¥ (830) (2,599) (3,007) (42) 99 (2,463) 27,705 26,331 28,013 (4,778) 269 (798) (5,206) (1,102) (0) 0 (329) (1,854) 27,705 26,331 (5,880) (1,585) 21,680 (757) 1,430 (0) (1) 1 (427) ¥ 26,331 ¥ 27,704 ¥ 22,353 ¥ (5,879) ¥ (2,012) ¥

Minority interests

Total Net Assets

(586) ¥

(586)

329 (257)

(257)

919 ¥ 1,577 ¥ 88,292 (830) (2,599) (3,007) 57 (1,341) 171 (3,633) (422) 1,748 78,280 (798) (5,206) (1,102) 0 (329) (761) (1,049) (3,335) (1,183) 699 67,510 (757) 1,430 (0) 0 (329) 34 (722) ¥ (1,512) ¥ 733 ¥ 67,461

Thousands of U.S. dollars (Note 1)

Common stock

Balance at March 31, 2009 Cash dividends paid Net income Purchases of treasury stock Disposal of treasury stock Net changes Balance at March 31, 2010

Capital surplus

Retained earnings

Treasury stock

Net unrealized Revaluation holding loss reserve for on securities land

Foreign currency translation adjustments

Minority interests

Total Net Assets

$283,007 $297,775 $233,018 $ (63,199) $ (17,036) $ (2,762) $ (12,715) $ 7,513 $725,601 (8,136) (8,136) 15,370 15,370 (0) (0) (11) 11 0 (4,589) (3,536) 365 (7,760) $283,007 $297,764 $240,252 $(63,188) $(21,625) $ (2,762) $(16,251) $ 7,878 $725,075

The accompanying notes are an integral part of these statements.

21

Consolidated Statements of Cash Flows Kadokawa Group Holdings, Inc. and Consolidated Subsidiaries Years ended March 31, 2010, 2009 and 2008

Thousands of U.S. dollars (Note 1)

Millions of yen

2010 Cash Flows from Operating Activities: Income (loss) before income taxes and minority interests Adjustments to reconcile income (loss) before income taxes and minority interests to net cash provided by (used in) operating activities: Depreciation and amortization Equity in losses of affiliated companies Loss on devaluation of investment securities Impairment loss of long-lived assets (Note 8) Decrease (increase) in notes and accounts receivable Decrease (increase) in inventories Increase (decrease) in notes and accounts payable Other—net Subtotal Interest and dividends received Interest paid Income taxes paid Net Cash Provided by (Used in) Operating Activities

¥

Cash Flows from Investing Activities: Net changes in time deposit Purchases of marketable securities Proceeds from sales of marketable securities Purchases of investment securities Proceeds from sales of investment securities Payment for acquisition of interests in subsidiaries newly consolidated (Note 3) Purchases of property and equipment Other—net Net Cash Provided by (Used in) Investing Activities Cash Flows from Financing Activities: Net changes in short-term borrowings Proceeds from issuance of long-term debt Repayment of long-term debt Purchases of treasury stock Cash dividends paid Other—net Net Cash Used in Financing Activities Effect of Exchange Rate Changes Net Decrease in Cash and Cash Equivalents Cash and Cash Equivalents at Beginning of Year Cash and Cash Equivalents at End of Year The accompanying notes are an integral part of these statements.

22

¥

5,143

2008

2009

¥

(1,158)

¥

1,821

2010

$

55,277

2,243 627 155 145 253 (1,505) (1,190) (1,037) 4,834 351 (145) (3,050) 1,990

3,341 510 4,109 2,253 (226) (78) (2,858) (1,967) 3,926 664 (95) (4,532) (37)

4,773 197 450 4,263 2,221 980 832 (2,160) 13,377 681 (122) (2,978) 10,958

24,108 6,739 1,666 1,558 2,719 (16,176) (12,790) (11,145) 51,956 3,773 (1,558) (32,782) 21,389

(355) — 500 (412) 1,224 (1,922)

(56) (1,998) 2,500 (265) 1,367 —

(3,698) (1,993) 1,000 (8,967) 745 —

(3,816) — 5,374 (4,428) 13,156 (20,658)

(752) 737 (980)

(1,506) 125 167

(1,525) (1,692) (16,130)

(8,083) 7,922 (10,533)

(3,833) 10,990 (12,015) (0) (757) 21 (5,594)

129 — (368) (1,075) (798) (81) (2,193)

— 249 (563) (3,007) (830) 191 (3,960)

(41,197) 118,121 (129,138) (0) (8,136) 225 (60,125)

(246) (4,830) 26,578 21,748

(504) (2,567) 29,145 26,578

(1,329) (10,461) 39,606 ¥ 29,145

(2,644) (51,913) 285,662 233,749

¥

$

Notes to Consolidated Financial Statements Kadokawa Group Holdings, Inc. and Consolidated Subsidiaries Years ended March 31, 2010, 2009 and 2008

1. Basis of Presenting Consolidated Financial Statements The accompanying consolidated financial statements have The accompanying consolidated financial statements of been restructured and translated into English from the consoliKadokawa Group Holdings, Inc. (“the Company”) and its dated financial statements of the Company prepared in accorconsolidated subsidiaries have been prepared in accordance dance with Japanese GAAP and filed with the appropriate Local with the provisions set forth in the Japanese Financial InstruFinance Bureau of the Ministry of Finance as required by the ments and Exchange Law and its related accounting regulaJapanese Financial Instruments and Exchange Law and its related tions, and in conformity with accounting principles generally accounting regulations. Certain supplementary information accepted in Japan (“Japanese GAAP”), which are different in included in the statutory Japanese language consolidated financertain respects as to application and disclosure requirements cial statements, but not required for fair presentation, is not from International Financial Reporting Standards. presented in the accompanying consolidated financial statements. Prior to the year ended March 31, 2009, the accounts of The translation of the Japanese yen amounts into U.S. consolidated overseas subsidiaries are based on their accountdollars is included solely for the convenience of readers outside ing records maintained in conformity with generally accepted Japan, using the prevailing exchange rate at March 31, 2010, accounting principles prevailing in the respective countries of which was ¥93.04 to U.S. $1.00. The convenience translation domicile. As discussed in Note 2. (s), the accounts of consolishould not be construed as representation that the Japanese dated overseas subsidiaries for the years ended March 31, yen amounts have been, could have been, or could in the 2010 and 2009 are prepared in accordance with either Interfuture be, converted into U.S. dollars at this or any other rate national Financial Reporting Standards with adjustments for of exchange. the specified six items as applicable or Japanese GAAP.

2. Summary of Significant Accounting Policies (a) Principles of Consolidation The consolidated financial statements include the accounts of the Company and all of its subsidiaries. All significant intercompany transactions, balances 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. Certain subsidiaries have their fiscal year-end at December 31 and their operating results and financial position are consolidated by making appropriate adjustments of inter-company transactions for a three-month period. The excess cost of the Company’s investment in subsidiaries over the underlying net assets of these companies at the date of acquisition is recorded in goodwill, 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 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 and qualify as hedges, in which case the instrument gains and losses are deferred until the related losses or gains on the hedged items are also recognized. However, if interest rate swap contracts are used as hedges and meet certain hedging criteria, the net amount to be paid or received under the interest rate swap contract is reported as part of net interest expense.

(c) Foreign Currency Translation Assets and liabilities denominated in foreign currencies are translated into Japanese yen at the rate prevailing at the balance sheet date. Resulting exchange gains and losses are included in other income (expenses). The financial statements of overseas subsidiaries are translated into Japanese yen using the year-end rate except for shareholders’ equity using the historical rate. (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 Company and its subsidiaries (the “Companies”) don’t 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 net assets. Cost of such securities for sales is computed using the moving-average method. Derivatives, which are embedded in hybrid financial instruments and cannot be accounted separately from the

23

host contracts, are stated at fair market value and their valuation gains (losses) are recorded as other income (expenses). The other securities without available fair market values are stated at cost determined by the moving-average method.

(l) Allowance for Sales Returns For certain subsidiaries, an allowance for sales returns is provided for estimated losses on sales returns subsequent to the balance sheet date based on the historical sales returns.

(f) Inventories Merchandise 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. Prior to April 1, 2008, inventories of the Company and consolidated domestic subsidiaries were stated at cost. As discussed in Note 2 (r), effective April 1, 2008, the Company and consolidated domestic subsidiaries adopted a new accounting standard for measurement of inventories and state the inventories at the lower of cost or net realizable value.

(m) Employees’ Severance and Retirement Benefits The Companies provide allowance for employees’ severance and retirement benefits at the balance sheet date 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 amortized using the straightline method over five years commencing with the succeeding period.

(g) Property and Equipment Property and equipment are stated at cost. The Company and its domestic subsidiaries compute depreciation using primarily the declining-balance method. Buildings (excluding building fixtures) acquired after March 31, 1998 are depreciated using the straight-line method. Some overseas subsidiaries compute depreciation using the straight-line method based on the accounting standard prevailing in the country of domicile. Property and equipment capitalized under finance lease arrangements is depreciated using the straight-line method over the lease term of the respective assets. The ranges of useful lives for computing depreciation are generally as follows: Buildings and structures 3 to 50 years Furniture and fixtures 2 to 20 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 straightline method. Amortization of long-term prepaid expenses is computed using the straight-line method. Software, other intangible assets and long-term prepaid expenses are included in other non-current assets. (i) Impairment Loss of Long-Lived Assets Accumulated loss on impairment is deducted directly from the acquisition costs of the related assets. (j) 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 the past credit loss experience to the remaining accounts. (k) Allowance for Employees’ Bonuses The Companies provide allowance for employees’ bonuses based on estimated amounts to be paid in the subsequent period.

24

(Change in accounting policy) Effective from the fiscal year ended March 31, 2010, the Company and consolidated domestic subsidiaries adopted the “Partial Amendments to Accounting Standard for Retirement Benefits (Part 3)” (Accounting Standards Board of Japan (“ASBJ”) Statement No.19 issued on July 31, 2008). The new accounting standard requires domestic companies to use the rate of return on long-term government or gilt-edged bonds as of the end of the fiscal year for calculating the projected benefit obligation of a defined-benefit plan. Previously, domestic companies were allowed to use a discount rate determined taking into consideration fluctuations in the yield of long-term government or gilt-edged bonds over a certain period. The change had no effect on the consolidated statement of income for the year ended March 31, 2010. The difference in the projected benefit obligations at March 31, 2010 calculated pursuant to the new accounting standard and the previous accounting standard amounted to ¥12 million ($129 thousand), which will be recognized as loss in the periods commencing after March 31, 2010. (n) Bond Issue Costs All bond issue costs are charged to income when incurred and included in other expenses. (o) Income Taxes Income taxes comprise corporate, enterprise and inhabitant taxes. Deferred income taxes are recognized for temporary differences between the financial statement basis and the tax basis of assets and liabilities. (p) Net Income (Loss) Per Share Net income (loss) per share of common stock is based on the weighted average number of shares outstanding during the year. Diluted net income per share is based on the weighted average number of shares of common stock issued and dilutive common stock equivalents. The share subscription rights are considered as common stock equivalents and are included in the calculation of earnings per share when they are dilutive. (q) Accounting for Leases Prior to April 1, 2008, the Company and consolidated domestic subsidiaries accounted for finance leases which do not transfer the ownership of the leased property to the lessee as operating leases with disclosures of certain “as if capitalized” information. As discussed in Note 2 (t), the Company and consolidated domestic subsidiaries adopted a new accounting standard and

capitalized finance leases which commenced after March 31, 2008, except for certain immaterial or short-term finance leases, which are accounted for as operating leases. (r) Accounting Standard for Inventories On July 5, 2006, ASBJ issued ASBJ Statement No. 9, “Accounting Standard for Measurement of Inventories.” As permitted under the superseded accounting standard, the Company and consolidated domestic subsidiaries previously stated inventories at cost. The new accounting standard requires that inventories held for sale in the ordinary course of business be measured at the lower of cost or net realizable value, which is defined as selling price less estimated additional manufacturing costs and estimated direct selling expenses. Replacement cost may be used in lieu of the net realizable value, if appropriate. There was no effect as a result of this change on the consolidated financial statements for the year ended March 31, 2009. (s) Unification of Accounting Policies Applied to Foreign Subsidiaries for Consolidated Financial Statements On March 17, 2006, ASBJ issued Practical Issues Task Force No.18 “Practical Solution on Unification of Accounting Policies Applied to Foreign Subsidiaries for Consolidated Financial Statements” (“PITF No.18”). PITF No.18 requires that accounting policies and procedures applied by a parent company and its subsidiaries to similar transactions and events under similar circumstances should, in principle, be unified for the preparation of the consolidated financial statements. PITF No.18, however, as a tentative measure, allows a parent company to prepare consolidated financial statements using foreign subsidiaries’ financial statements prepared in accordance with either International Financial Reporting Standards or U.S. generally accepted accounting principles. In this case, adjustments for the following six items are required in the consolidation process so that their effects on net income are accounted for in accordance with Japanese GAAP unless the effect is not material. 1. Goodwill not subject to amortization 2. Actuarial gains and losses of defined-benefit retirement plans recognized outside profit or loss

3. Consolidated Statement of Cash Flows For the year ended March 31, 2010, the Company newly consolidated subsidiaries due to the acquisition of the shares. The assets and liabilities at the beginning of the consolidation

3. Capitalized expenditures for research and development activities 4. Fair value measurement of investment properties, and revaluation of property, plant and equipment and intangible assets 5. Retrospective treatment of a change in accounting policies 6. Accounting for net income attributable to minority interests There was no effect as a result of the adoption of PITF No.18 on the consolidated financial statements. (t) Accounting Standards for Lease Transactions as Lessee Prior to April 1, 2008, the Company and consolidated domestic subsidiaries accounted for finance leases which do not transfer ownership of the leased property to the lessee as operating leases with disclosure of certain “as if capitalized” information in the notes to the consolidated financial statements. On March 30, 2007, ASBJ issued Statement No.13, “Accounting Standard for Lease Transactions” and Guidance No.16, “Guidance on Accounting Standard for Lease Transactions.” The new accounting standards require that all finance lease transactions be treated as capital leases. Effective April 1, 2008, the Company and consolidated domestic subsidiaries adopted the new accounting standards for finance leases commencing after March 31, 2008 and capitalized assets used under such leases, except for certain immaterial or short-term finance leases, which are accounted for as operating leases. As permitted, finance leases which commenced prior to April 1, 2008 and have been accounted for as operating leases, continue to be accounted for as operating leases with disclosure of certain “as if capitalized” information. The effect of this change on the consolidated financial statements was insignificant. (u) Reclassification and Restatement Certain prior year amounts have been reclassified to conform to the current year presentation. The reclassifications had no effect on previously reported results of operations or retained earnings.

period of newly consolidated subsidiaries utilized in the computation of consolidation for the year ended March 31, 2010 and the net acquisition cost of investments are as follows: Millions of yen

Current assets Non-current assets Goodwill Current liabilities Long-term liabilities Negative goodwill Acquisition costs Cash and cash equivalents of the subsidiaries Loan to subsidiaries until deemed date of acquisition Net acquisition cost of investments

¥

¥

4,549 543 809 (1,567) (578) (408) 3,348 (1,486) 60 1,922

Thousands of U.S. dollars

$

48,893 5,836 8,695 (16,842) (6,212) (4,385) 35,985 (15,972) 645 $ 20,658

25

4. Financial Instruments Effective from the fiscal year ended March 31, 2010, the Company and consolidated domestic subsidiaries adopted the revised accounting standard, “Accounting Standard for Financial Instruments” (ASBJ Statement No.10 revised on March 10, 2008) and the “Guidance on Disclosures about Fair Value of Financial Instruments” (ASBJ Guidance No.19 revised on March 10, 2008). Information on financial instruments for the year ended March 31, 2010 required pursuant to the revised accounting standards is as follows. A. Qualitative Information on Financial Instruments (a) Policies for using Financial Instruments The Companies draw up projections for working capital and investment in order to carry out Publishing, Movie/ Visual and Cross-Media Business. The Companies raise the long-term funds through bonds and stock issuances, the short-term working capital through bank loans. The Companies manage temporary surplus through financial instruments with low risk and have a policy not to conclude any speculative transactions. (b) Details of Financial Instruments and Associated Risk Trade receivables—trade notes and accounts receivable—are exposed to credit risk in relation to customers. Trade receivables for distributors which mediate bookstores account for the large part in the Companies and their amounts are quite high level even though the credit risk is recognized as low. The Companies are exposed to decreasing risk of share value in relation to investment securities which are owned in order to keep good business relationships. Almost all the trade payables—trade notes and accounts payable—are settled within one year. Loan and bonds for capital and business investment are redeemed within five years after the fiscal year ended. Derivative transactions are interest rate swap transactions for hedging of interest rate fluctuation risk. (c) Risk Management System Relating to Financial Instruments The Companies periodically monitor credit status of main business partners as to the trade receivables. The companies also manage due dates and balances of the trade receivables as well as attempt to grasp the doubtful accounts and to reduce them if the financial situations of the business partners become worse.

26

With regard to the held-to-maturity debt securities, the credit risk is minimal because the Companies invest only bonds with high credit ratings in accordance with the stipulation of fund management. As for the derivative transactions, the Companies contract with banks with high credit ratings so that the companies recognize that there is little credit risk due to the default by the contractors. The Companies use interest rate swaps to control fluctuation risk of interest in relation to loans. As for investment securities, the Companies periodically grasp the market price and financial situation of the issuer (business partners). And also, for investment securities excluding held-to-maturity debt securities, the Companies consecutively reconsider shareholding status depending on the relationship with the business partners. With respect to the execution and managing of derivative transactions, the finance division must obtain approval from an authorized person in accordance with the rule of the companies. The Companies adopt a Cash-Management-System, and the treasury division prepares and renews financial plans in a timely manner based on the reports by the consolidated subsidiaries which participate in this system as well as manages liquidity risk by keeping liquidity adequately in hand. Bonds payable are convertible-bonds with five-year-maturities and the Companies are exposed to liquidity risk of redemption of bonds without being exercised. The Companies manage the risk by keeping liquidity in hand with the method stated above. (d) Supplementary Explanation on Fair value of Financial Instruments Fair values of financial instruments are based on market price and calculated reasonably when there is no market price. Since fluctuating factors are incorporated in calculating the relevant fair values, such fair values may fluctuate depending on the different assumptions. The notional amounts and other information described in the Note 14 “Derivative Financial Instruments and Hedging Transactions” do not indicate the amounts of market risk exposed to derivative transactions.

B. Fair Values of Financial Instruments The book value on the consolidated balance sheet, fair values and its differences at March 31, 2010 are as follows. Financial instruments for which it is difficult to measure the fair value are not included in the following chart. Please see Note 3: Millions of yen Book value

March 31, 2010 Cash and cash equivalents Notes and accounts receivable Investment securities Total Notes and accounts payable Short-term borrowings and current portion of long-term debt Income taxes payable Long-term debt Total

¥

¥

21,748 34,830 8,149 64,727 18,702 464 2,733 11,613 33,512

Fair Value

¥

¥

21,748 34,830 7,853 64,431 18,702 464 2,733 11,618 33,517

Difference

¥

¥

— — (296) (296) — — — 5 5

Thousands of U.S. dollars Book value

March 31, 2010 Cash and cash equivalents Notes and accounts receivable Investment securities Total Notes and accounts payable Short-term borrowings and current portion of long-term debt Income taxes payable Long-term debt Total

$ 233,749 374,355 87,586 695,690 201,010 4,987 29,374 124,817 $ 360,188

Fair Value

$ 233,749 374,355 84,405 692,509 201,010 4,987 29,374 124,871 $ 360,242

Difference

$

$

— — (3,181) (3,181) — — — 54 54

Note 1: Fair value measurement of financial instruments (a) Cash and cash equivalents and Notes and accounts receivables The book value approximates fair value because of the short maturity of these instruments. (b) Investment securities The fair value of equity securities equals quoted market price, if available. The fair value of debt securities equals quoted market price or provided price by financial institutions. Investment securities based on holding purpose are described in Note 5 “Securities.” (c) Notes and accounts payable, Short-term borrowings and current portion of long-term debt and Income taxes payable The book value approximates fair value because of the short maturity of these instruments. (d) Long-term debt The fair value of bonds payable is based on the present value of the total amount of principal and interest discounted by an interest rate determined taking into account the remaining term of each bond and current credit risk. The fair value of long-term loans payable is based on the present value of the total amount of principal and interest discounted by the interest rate to be applied if similar new loans are made. Note 2: Derivative Financial Instruments For information on derivative financial instruments, please see Note 14 “Derivative Financial Instruments and Hedging Transactions.” Note 3: Financial instruments for which the fair value is extremely difficult to measure. March 31, 2010 Non-listed equity securities issued by affiliated companies Non-listed equity securities other than the above Total Investments in business limited partnership

Millions of yen

¥

1,336 3,121 4,457 64

Thousands of U.S. dollars

$

14,359 33,545 47,904 688

Because no quoted market price is available and it is extremely difficult to determine the fair value, the above financial instruments are not included in the above table.

27

Note 4: Planned redemption amounts after the balance sheet date for monetary assets and investment securities are as follows: Millions of yen Due within one year

Cash and cash equivalents Notes and accounts receivables Investment securities Held-to-maturity debt securities Available-for-sale securities Total

¥

¥

21,748 34,830 — — — 56,578

Due after one year through five years

¥

¥

— — — — 1,000 1,000

Due after ten years

Due after five years through ten years

¥

— — — 930 — 930

¥

¥

¥

— — — 930 — 930

Thousands of U.S. dollars Due within one year

Cash and cash equivalents Notes and accounts receivables Investment securities Held-to-maturity debt securities Available-for-sale securities Total

$ 233,749 374,355 — — — $ 608,104

Due after one year through five years

$

$

— — — — 10,748 10,748

Due after ten years

Due after five years through ten years

$

— — — 9,996 — 9,996

$

$

$

— — — 9,996 — 9,996

5. Securities A. The following tables summarize acquisition costs, book values and fair values of securities with available fair values as of March 31, 2010, 2009 and 2008: (a) Held-to-Maturity Debt Securities: Millions of yen Book value

March 31, 2010 Securities with available fair values: Corporate bonds Others March 31, 2009 Securities with available fair values: Corporate bonds Others March 31, 2008 Securities with available fair values: Corporate bonds Others

¥

— 1,861

Unrealized gains

¥

— —

Fair value

Unrealized losses

¥

— 296

¥

— 1,565

499 2,964

0 1

— 221

499 2,744

998 7,499

— 1

1 2,228

997 5,272

Thousands of U.S. dollars Book value

March 31, 2010 Securities with available fair values: Corporate bonds Others

28

$

— 20,002

Unrealized gains

$

— —

Fair value

Unrealized losses

$

— 3,181

$

— 16,821

(b) Available-for-Sale Securities: Millions of yen Acquisition cost

March 31, 2010 Securities with available fair values: Equity securities Bonds March 31, 2009 Securities with available fair values: Equity securities Bonds March 31, 2008 Securities with available fair values: Equity securities Bonds

¥

8,132 38

Unrealized gains

¥

388 131

Book value

Unrealized losses

¥

2,401 —

¥

6,119 169

8,508 153

984 —

2,555 111

6,937 42

9,575 —

1,853 —

1,439 —

9,989 —

Thousands of U.S. dollars Acquisition cost

March 31, 2010 Securities with available fair values: Equity securities Bonds

$

87,403 408

Unrealized gains

$

4,170 1,408

Book value

Unrealized losses

$

25,806 —

$

65,767 1,816

The Company had devaluated book value of the bonds and charged ¥2,345 million to income statement as “loss on devaluation of investment securities” with the change in the intent of holding for the fiscal year.

(c) Change the Intent of Holding: For the year ended March 31, 2009, the Company had changed the intent of holding some three bonds held as “held-to-maturity debt securities” as of March 31, 2008 to “available-for-sale securities” due to declining the credit rating of the bonds.

B. The following tables summarize book values of available-for-sale securities with no available fair values as of March 31, 2010, 2009 and 2008: Thousands of U.S. dollars

Millions of yen

2010 Negotiable deposit Non-listed equity securities Investments in business limited partnership Total

¥

¥

— 3,121 64 3,185

2008

2009 ¥

¥

— 2,812 102 2,914

¥

¥

450 2,835 171 3,456

2010 $

$

— 33,545 688 34,233

C. The proceeds and gross realized gains (losses) from sales of available-for-sale securities for the years ended March 31, 2010, 2009 and 2008 are as follows: Thousands of U.S. dollars

Millions of yen

2010 Proceeds Gross realized gains Gross realized losses

¥

963 596 (10)

2009 ¥

1,453 898 (71)

2008 ¥

724 334 (5)

2010 $

10,350 6,406 (107)

29

6. Inventories Inventories at March 31, 2010, 2009 and 2008 are summarized as follows: Thousands of U.S. dollars

Millions of yen

2010 Merchandise Finished products Films Raw materials and supplies Work-in-process Total

¥

¥

7. Short-Term Borrowings and Long-Term Debt Short-term borrowings at March 31, 2010, 2009 and 2008 consist of notes to banks. The interest rates on short-term borrowings at March 31, 2010, 2009 and 2008 ranged from 0.00% to 2.30%, from 1.07% to 3.43%, and from 1.16% to 1.16%, respectively.

519 4,127 727 50 5,856 11,279

2008

2009 ¥

¥

661 3,434 385 47 4,655 9,182

¥

¥

863 2,753 746 105 4,747 9,214

2010 $

5,578 44,357 7,814 537 62,941 $ 121,227

The Company has commitment-line contract of ¥10,000 million ($107,481 thousand) with some financial institutions. The contract includes restrictive financial covenants, so the Company takes risks to repay all the debt at once if conflict with the covenants. The Company does not utilize the commitment-line contract as of March 31, 2010 and 2009.

Long-term debt at March 31, 2010, 2009 and 2008 are summarized as follows: Thousands of U.S. dollars

Millions of yen

2010 Unsecured Japanese yen convertible bonds—bonds with share subscription rights and with interest rate of 1% per annum—due in 2014, convertible at ¥2,802.00 for one common share, redeemable before due date Unsecured zero coupon Japanese yen convertible bonds—bonds with share subscription rights—due in 2009, convertible at ¥4,760.20 for one common share, redeemable before due date Loans from banks Unsecured loans 2.00-5.50%, due 2010 to 2014 2.55-5.50%, due 2009 to 2012 2.55-5.50%, due 2008 to 2012 Total Less current portion Long-term debt, less current portion

¥

11,000



2008

2009

¥



¥

11,400

2010



$ 118,229

11,400



7,287

678 1,199

¥

11,678 (65) 11,613

12,599 (11,660) ¥ 939

¥

1,732 13,132 (378) 12,754

125,516 (699) $ 124,817

The aggregate annual maturities of long-term debt are as follows: Years ended March 31 2011 2012 2013 2014 2015 Total

Millions of yen

¥

¥

65 539 53 19 11,002 11,678

Thousands of U.S. dollars

$

699 5,793 570 204 118,250 $ 125,516

At March 31, 2010, the following assets were pledged as collateral for opening letters of guarantee and credit, and bank overdraft: Millions of yen

Time deposits Buildings and structures Long-term prepaid expenses Total

30

¥

¥

1 70 98 169

Thousands of U.S. dollars

$

$

11 752 1,053 1,816

8. Impairment Loss of Long-Lived Assets Breakdown of impairment loss of long-lived assets for the years ended March 31, 2010, 2009 and 2008 are as follows: Year ended March 31, 2010 Use and location

Category

Assets used by visual business of Kadokawa Pictures, Inc.: Chiyoda-ku, Tokyo, etc. Buildings and structures Furniture and fixtures Land Software Finance lease assets Others Sub-total Theater: Furniture and fixtures Shinjuku-ku, Tokyo Sub-total Total

Millions of yen

¥

¥

30 13 10 22 40 0 115 30 30 145

Thousands of U.S.dollars

$

$

322 140 108 236 430 0 1,236 322 322 1,558

Year ended March 31, 2009 Use and location

Category

Assets used by visual business of Kadokawa Pictures, Inc.: Buildings and structures Chiyoda-ku, Tokyo, etc. Furniture and fixtures Land Software Finance lease assets Others Sub-total Theater: Buildings and structures Shinjuku-ku, Tokyo Furniture and fixtures Others Buildings and structures Shibuya-ku, Tokyo Others Buildings and structures Osaka-shi, Osaka Others Sub-total Cinema complex: Buildings and structures Satte-shi, Saitama Finance lease assets Others Buildings and structures Okazaki-shi, Aichi Finance lease assets Others Buildings and structures Hirakata-shi, Osaka Finance lease assets Others Buildings and structures Kumamoto-shi, Kumamoto Finance lease assets Others Sub-total Assets owned by Kadokawa Mobile Corporation: Software Chiyoda-ku, Tokyo Others Sub-total Assets owned by Kadokawa Magazines Co., Ltd.: Others Chiyoda-ku, Tokyo Total

Millions of yen

¥

108 25 34 29 21 3 220 110 227 7 8 6 64 2 424 217 17 1 488 118 17 439 96 12 142 11 1 1,559 30 12 42

¥

8 2,253

31

Year ended March 31, 2008 Use and location

Cinema complex: Asahikawa-shi, Hokkaido Mito-shi, Ibaraki

Satte-shi, Saitama

Niiza-shi, Saitama

Kumamoto-shi, Kumamoto

Category

Millions of yen

¥

Finance lease assets Others Buildings and structures Finance lease assets Others Buildings and structures Finance lease assets Others Buildings and structures Finance lease assets Others Buildings and structures Finance lease assets Others

Sub-total Goodwill resulting from acquiring Kadokawa Cineplex, Inc.: Goodwill Chiyoda-ku, Tokyo Assets owned by Ascii Corporation: Buildings and structures Chiyoda-ku, Tokyo Furniture and fixtures Others Sub-total Goodwill resulting from acquiring Ascii Corporation: Goodwill Chiyoda-ku, Tokyo Total

19 2 521 96 15 654 72 6 410 67 11 343 59 3 2,278 1,330 65 29 10 104

¥

551 4,263

The Companies adopt accounting for impairment of long-lived assets, namely property and equipment, goodwill and other long-lived assets. The Companies, as a general rule, categorize operating assets by business unit based on whether their cash flows can be estimated independently, whereas idle assets are assigned to a particular asset group on an individual basis. The Companies marked down the book value of asset groups where there had been a significant decline in profitability, valued to the recoverable amount and recorded the impairment loss on long lived assets of ¥145 million ($1,558

thousand), ¥2,253 million and ¥4,263 million for the years ended March 31, 2010, 2009 and 2008 respectively, under the other expenses section. For assets used by visual business of Kadokawa Pictures, Inc., the recoverable amount was computed by the net realizable value. For the other assets in use, the recoverable amount was computed by the net discounted cash flow with the discounted rate of 4.62%, 5.61% and 7.25% for the years ended March 31, 2010, 2009 and 2008, respectively.

9. Income Taxes Taxes on income applicable to the Companies resulted in a normal statutory tax rate of approximately 40.69% for the years ended March 31, 2010, 2009 and 2008, respectively. The actual effective tax rate in the accompanying consolidated

statements of operations differed from the normal statutory tax rate due principally to certain expenses that are permanently non-deductible for tax purposes.

The following table summarizes the significant differences between the statutory tax rate and effective tax rate of the Companies for financial statement purposes for the years ended March 31, 2010, 2009 and 2008: 2010 Statutory tax rate Non-deductible expenses Change in valuation allowance Amortization and impairment of goodwill Equity in losses of affiliated companies Others Effective tax rate

32

40.69% 3.09 20.72 1.99 4.96 (0.36) 71.09%

2009

2008

40.69% (16.69) (304.41) (38.74) (17.90) (5.76) (342.81)%

40.69% 11.63 72.08 97.66 4.39 1.92 228.37%

Significant components of the Companies’ deferred tax assets and liabilities as of March 31, 2010, 2009 and 2008 are as follows: Thousands of U.S. dollars

Millions of yen

2010 Deferred tax assets (Current assets): Devaluation of inventories Allowance for employees’ bonuses Accrued enterprise taxes Accrued expenses Tax loss carry-forwards Other temporary difference Gross deferred tax assets (Current assets) Less: Valuation allowance Total deferred tax assets (Current assets)

¥

Deferred tax assets (Non-current assets): Impairment loss Loss on devaluation of investment securities Loss on devaluation of memberships Liability for severance and retirement benefits Long-term accounts payable Unrealized gain on fixed assets Tax loss carry-forwards Revaluation reserve for land Net unrealized holding loss on securities Other temporary difference Gross deferred tax assets (Non-current assets) Less: Valuation allowance Total deferred tax assets (Non-current assets)

Deferred tax liabilities (Non-current liabilities): Unrealized loss on fixed assets Net unrealized holding gain on securities Other temporary difference Total deferred tax liabilities (Non-current liabilities)

10. Net Assets Net assets comprise four sections, which are shareholders’ equity, accumulated gains (losses) from valuation and translation adjustments, share subscription rights and minority interests. Under the Japanese Corporate Laws (“the Law”) and regulations, the entire amount paid for new shares is required to be designated as common stock. However, a company may, by a resolution of the Board of Directors, designate an amount not exceeding one-half of the price of the new shares as additional paid-in capital, which is included in capital surplus. In cases where a dividend distribution of surplus is made, the smaller of an amount equal to 10% of the dividend or the excess, if any, of 25% of common stock over the total of additional paid-in capital and legal earnings reserve must be set aside as additional paid-in capital or legal earnings reserve. Legal earnings reserve is included in retained earnings in the accompanying consolidated balance sheets.

¥

¥

723 456 180 316 235 348 2,258 (603) 1,655

¥

2010

743 485 256 376 766 461 3,087 (895) 2,192

$

7,051 6,019 2,289 4,783 — 4,740 24,882 (6,438) 18,444

17,670 11,425 2,515 10,813 3,472 2,182 89,241 1,129 8,835 3,954 151,236 (138,661) 12,575

1,760 1,698 233 817 178 199 5,225 105 660 278 11,153 (10,221) 932

1,000 719 232 744 186 196 3,492 239 2 325 7,135 (6,219) 916

— —

— —

9 9

— —

654 — 27 681

656 21 — 677

658 149 — 807

7,029 — 290 7,319

1,644 1,063 234 1,006 323 203 8,303 105 822 368 14,071 (12,901) 1,170

Deferred tax liabilities (Current liabilities): Temporary difference Total deferred tax liabilities (Current liabilities)

Net deferred tax assets

656 560 213 445 — 441 2,315 (599) 1,716

2008

2009

2,205

¥

1,910

¥

2,292

$

23,700

Additional paid-in capital and legal earnings reserve may not be distributed as dividends. However, all additional paid-in capital and all legal earnings reserve may be transferred to other capital surplus and retained earnings, respectively, which are potentially available for dividends. 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 Laws. At the annual shareholders’ meeting held on June 26, 2010, the shareholders approved cash dividends amounting to ¥757 million ($8,136 thousand). Such appropriations have not been accrued in the consolidated financial statements as of March 31, 2010. Such appropriations are recognized in the period in which they are approved by the shareholders.

33

11. Consolidated Statements of Changes in Net Assets Changes in number of shares issued and outstanding during the years ended March 31, 2010, 2009 and 2008 are as follows: Common stock outstanding

2010

Balance at beginning of year Balance at end of year

27,260,800 27,260,800

Treasury stock outstanding Balance at beginning of year Increases: Purchases based on resolution of the board of directors Purchases by affiliated company Purchases of odd stock Decreases: Exercises of stock options Sales of odd stock Balance at end of year

2009

2008

27,260,800 27,260,800

27,260,800 27,260,800

2010

2009

2,040,248

1,504,002

492,528

— — 74

523,700 12,173 601

1,039,900 — 272

— (228) 2,040,248

(28,600) (98) 1,504,002

— (98) 2,040,224

2008

12. Stock Option Plan There is no stock option plan for the years ended March 31, 2010 and 2009 due to expiring following stock options. The following table summarizes contents of stock options during the year ended March 31, 2008: Date of annual shareholders’ meeting Position and number of grantee Class and number of stock Date of grant Condition of vesting Exercisable period

June 25, 2002 120 directors and employees Common stock 345,400 March 28, 2003 Being the director or employee of the Companies at the exercising date Due July 1, 2004 to June 30, 2007

The following table summarizes movement of such stock options during the year ended March 31, 2008: 2008

Number of shares

73,000 (28,600) (44,400) —

Balance at beginning of year Stock options exercised Stock options expired Balance at end of year The following table summarizes price information of such stock options during the year ended March 31, 2008:

Yen

2008 Paid-in value Average market price of the stock at the time of exercise

¥ ¥

1,956 3,240

13. Employees’ Severance and Retirement Benefits The liabilities for severance and retirement benefits included in the liability section of the consolidated balance sheets as of March 31, 2010, 2009 and 2008 consist of the following: Thousands of U.S. dollars

Millions of yen

Projected benefit obligation Unrecognized actuarial differences Less fair value of pension assets Liability for severance and retirement benefits

34

¥

¥

4,626 137 (2,302) 2,461

2008

2009

2010 ¥

¥

4,470 (318) (2,144) 2,008

¥

¥

4,197 (285) (2,084) 1,828

2010 $

$

49,721 1,472 (24,742) 26,451

Severance and retirement benefit expenses included in the consolidated statements of operations for the years ended March 31, 2010, 2009 and 2008 comprise the following: Thousands of U.S. dollars

Millions of yen

2010 ¥

Service costs—benefits earned during the year Interest cost on projected benefit obligation Expected return on plan assets Amortization of actuarial differences Contribution to welfare pension fund Extra retirement benefits paid Severance and retirement benefit expenses

¥

The discount rate and the rate of expected return on plan assets are from 1.3% to 1.7% and 1.0%, respectively for the year ended March 31, 2010, are 1.5% and 1.0%, respectively for the year ended March 31, 2009 and are 2.0% and 0.5%, respectively for the year ended March 31, 2008. 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 statement of operations using the straight-line method over the next five years.

428 53 (18) 85 337 31 916

2008

2009 ¥

¥

¥

538 53 (8) 59 363 22 1,027

¥

430 48 (8) 24 364 3 861

2010 $

$

4,600 570 (193) 913 3,622 333 9,845

(Additional information) Certain domestic subsidiary has changed computation method of liability for severance and retirement benefits due to increases in employees for the year ended March 31, 2010. This change is to calculate the liabilities more accurately than prior computation method. As a result of change, differences of the liability for severance and retirement benefits computed by new method and by prior method as of April 1, 2009 is ¥278 million ($2,988 thousand), and the subsidiary charges the differences to income statement as “Retirement benefit expenses for prior periods” in other income (expenses) section.

14. Derivative Financial Instruments and Hedging Transactions The subsidiaries evaluate hedge effectiveness, however Certain subsidiaries use interest rate swaps as derivative finanif an important condition of hedging instruments and hedged cial instruments only for the purpose of mitigating future risks items is the same, the verification of the effect of hedging of fluctuation of interest rates. is omitted. The following table summarizes derivative transactions for which hedge accounting has been adopted for the year ended March 31, 2010: Year ended March 31, 2010 Millions of yen Hedge accounting method

Type of transaction

Main hedge items

Special method for interest rate swaps

Interest rate swap pay fixed Receive floating

Long-term loan payable

Hedge accounting method

Type of transaction

Main hedge items

Special method for interest rate swaps

Interest rate swap pay fixed Receive floating

Long-term loan payable

Contracted amount

¥

475

Over 1 year

¥

475

Fair value (Note 1)

¥



Thousands of U.S. dollars

Note 1: Items calculated by the special method for interest rate swaps are treated together with long-term loan payable that are taken to be hedged items, so their fair value is booked as part of the appropriate long-term loan payable.

Contracted amount

$

5,105

Over 1 year

$

5,105

Fair value (Note 1)

$



Note 2: As discussed in Note 4, effective from the fiscal year ended March 31, 2010, the revised accounting standard, “Accounting Standard for Financial Instruments” had been applied, so information for the year ended March 31, 2009 and 2008 are not listed.

35

15. Other Income (Expenses), Other—Net Other income (expenses), other-net consisted of the following: Thousands of U.S. dollars

Millions of yen

Net gain on sales of investment securities Net loss on valuation of investment securities Net gain (loss) on changes holding ratio of subsidiaries and affiliated companies Equity in losses of affiliated companies Gain on sales of used papers Insurance received Gain from settlement of beneficial interest in trust Impairment loss of long-lived assets Retirement benefit expenses for prior periods Other—net Total

¥

¥

510 (16) (80) (627) 131 187 — (145) (278) 88 (230)

2008

2009

2010 ¥

¥

828 (4,064) 15 (510) 222 219 115 (2,253) — 204 (5,224)

¥

¥

462 (378) 108 (197) 195 29 28 (4,263) — 78 (3,938)

2010 $

$

5,482 (172) (860) (6,739) 1,408 2,010 — (1,558) (2,988) 944 (2,473)

16. Lease Transactions As discussed in Note 2 (t), finance leases commenced prior to April 1, 2008 which do not transfer ownership of leased assets to lessees are accounted for as operating leases. Assumed amounts of such finance leases as of and for the years ended March 31, 2010, 2009 and 2008, are as follows: (a) Finance Lease Assets: Thousands of U.S. dollars

Millions of yen

Acquisition cost: Buildings and structures Furniture and fixtures Other property and equipment Intangible fixed assets Total Accumulated depreciation: Buildings and structures Furniture and fixtures Other property and equipment Intangible fixed assets Total Accumulated impairment loss: Buildings and structures Furniture and fixtures Other property and equipment Intangible fixed assets Total Book value: Buildings and structures Furniture and fixtures Other property and equipment Intangible fixed assets Total

36

¥

¥

¥

¥

¥

¥

¥

¥

2008

2009

2010 1,473 648 400 165 2,686

¥

405 357 230 130 1,122

¥

168 237 140 4 549

¥

900 54 30 31 1,015

¥

¥

¥

¥

¥

1,734 1,187 703 243 3,867

¥

387 822 483 188 1,880

¥

216 248 162 4 630

¥

1,131 117 58 51 1,357

¥

¥

¥

¥

¥

2010

1,734 1,337 706 272 4,049

$

293 704 346 160 1,503

$

— 200 93 3 296

$

1,441 433 267 109 2,250

$

$

$

$

$

15,832 6,965 4,299 1,773 28,869

4,353 3,837 2,472 1,397 12,059

1,806 2,547 1,505 43 5,901

9,673 581 322 333 10,909

(b) Finance Lease Obligations: Thousands of U.S. dollars

Millions of yen

¥ ¥ ¥

273 1,147 1,420 421

2008

2009

2010 Due within one year Due after one year Total Accumulated impairment loss

¥ ¥ ¥

422 1,418 1,840 618

¥ ¥ ¥

522 1,891 2,413 296

2010 $ $ $

2,934 12,328 15,262 4,525

(c) Lease Expenses, Depreciation and Other Information under the Finance Leases: Thousands of U.S. dollars

Millions of yen

Lease expenses Reversal of accumulated impairment loss Depreciation Interest expenses Impairment loss

¥

469 197 217 33 —

2008

2009

2010 ¥

395 132 360 55 454

¥

601 18 599 70 296

2010 $

5,041 2,117 2,332 355 —

Depreciation is computed by the straight-line method over the lease terms with no residual value. The minimum rental commitments under non-cancelable operating leases as of March 31, 2010, 2009 and 2008, are as follows: Thousands of U.S. dollars

Millions of yen

¥ ¥

500 2,077 2,577

2008

2009

2010 Due within one year Due after one year Total

¥ ¥

529 2,531 3,060

¥ ¥

439 2,683 3,122

2010 $ $

5,374 22,324 27,698

37

17. Segment Information (a) Business Segment Information The Companies operate primarily in the following business segments. (1) Publishing ................. books, story magazines, life magazines, distribution and others (2) Movie/Visual ............. films, DVD movies and others (3) Cross Media ............. information magazines, web-site, digital content and others (4) Others ...................... game software, ad agency, real estate rental and others Millions of yen

Publishing

Year ended March 31, 2010 Sales Outside customers Intersegment Total sales Operating expenses Operating income (loss) Total assets Depreciation and amortization Impairment loss Capital expenditures

¥

¥ ¥

73,476 ¥ 1,383 74,859 67,155 7,704 ¥ 50,018 ¥ 694 — 545

Movie/ Visual

30,803 ¥ 177 30,980 32,178 (1,198) ¥ 23,431 ¥ 521 145 293

Cross Media

Others

23,032 ¥ 386 23,418 23,228 190 ¥ 10,174 ¥ 253 — 196

Total

8,612 ¥ 135,923 ¥ 1,845 3,791 10,457 139,714 10,664 133,225 (207) ¥ 6,489 ¥ 5,468 ¥ 89,091 ¥ 155 1,623 — 145 131 1,165

Elimination and/or Corporate

Consolidated

— ¥ 135,923 (3,791) — (3,791) 135,923 (2,467) 130,758 (1,324) ¥ 5,165 30,162 ¥ 119,253 333 1,956 — 145 251 1,416

Thousands of U.S.dollars

Publishing

Year ended March 31, 2010 Sales Outside customers Intersegment Total sales Operating expenses Operating income (loss) Total assets Depreciation and amortization Impairment loss Capital expenditures

Movie/ Visual

Cross Media

Others

Total

Elimination and/or Corporate

Consolidated

$ 789,725 $ 331,073 $ 247,549 $ 92,562 $1,460,909 $ — $1,460,909 14,864 1,902 4,149 19,831 40,746 (40,746) — 804,589 332,975 251,698 112,393 1,501,655 (40,746) 1,460,909 721,786 345,851 249,656 114,618 1,431,911 (26,516) 1,405,395 $ 82,803 $ (12,876) $ 2,042 $ (2,225) $ 69,744 $ (14,230) $ 55,514 $ 537,597 $ 251,838 $ 109,351 $ 58,770 $ 957,556 $ 324,183 $1,281,739 7,459 5,600 2,719 1,666 17,444 3,579 21,023 — 1,558 — — 1,558 — 1,558 5,858 3,149 2,107 1,407 12,521 2,698 15,219 Millions of yen

Publishing

Year ended March 31, 2009 Sales Outside customers Intersegment Total sales Operating expenses Operating income (loss) Total assets Depreciation and amortization Impairment loss Capital expenditures

38

¥

¥ ¥

71,158 ¥ 1,074 72,232 66,621 5,611 ¥ 44,938 ¥ 833 — 697

Movie/ Visual

33,919 ¥ 308 34,227 35,335 (1,108) ¥ 25,782 ¥ 697 2,203 869

Cross Media

26,266 ¥ 690 26,956 26,979 (23) ¥ 12,450 ¥ 268 50 524

Others

Total

10,268 ¥ 141,611 ¥ 2,470 4,542 12,738 146,153 12,619 141,554 119 ¥ 4,599 ¥ 5,910 ¥ 89,080 ¥ 144 1,942 — 2,253 112 2,202

Elimination and/or Corporate

Consolidated

— ¥ 141,611 (4,542) — (4,542) 141,611 (3,509) 138,045 (1,033) ¥ 3,566 34,096 ¥ 123,176 280 2,222 — 2,253 164 2,366

Millions of yen

Publishing

Year ended March 31, 2008 Sales Outside customers Intersegment Total sales Operating expenses Operating income (loss) Total assets Depreciation and amortization Impairment loss Capital expenditures

¥

¥ ¥

72,033 ¥ 985 73,018 68,099 4,919 ¥ 43,769 ¥ 657 655 751

Movie/ Visual

41,712 ¥ 280 41,992 43,160 (1,168) ¥ 37,998 ¥ 957 3,608 768

Not allocable operating expenses included in “Elimination and/or Corporate” for the years ended March 31, 2010, 2009 and 2008 are ¥1,409 million ($15,144 thousand), ¥1,107 million and ¥1,031 million, respectively, mainly consisting of costs for the administrative departments. Corporate assets included in “Elimination and/or Corporate”

Cross Media

29,036 ¥ 1,044 30,080 28,513 1,567 ¥ 13,219 ¥ 283 — 315

Others

Total

8,009 ¥ 150,790 ¥ 2,898 5,207 10,907 155,997 10,109 149,881 798 ¥ 6,116 ¥ 3,679 ¥ 98,665 ¥ 124 2,021 — 4,263 130 1,964

Elimination and/or Corporate

Consolidated

— ¥ 150,790 (5,207) — (5,207) 150,790 (4,224) 145,657 (983) ¥ 5,133 39,652 ¥ 138,317 246 2,267 — 4,263 833 2,797

for the years ended March 31, 2010, 2009 and 2008 are ¥30,932 million ($332,459 thousand), ¥35,029 million and ¥41,226 million, respectively, mainly consisting of surplus funds (cash and cash equivalents and others) and assets belonging to the administrative departments.

(b) Geographic Segment Information Geographic segment information is 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.

18. Revaluation Reserve for Land 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 net assets. As of March 31, 2010, 2009 and 2008, the fair value of the land declined ¥159 million ($ 1,709 thousand), ¥661 million and ¥711, respectively.

19. Business Combinations Kadokawa The Television Co., Ltd. merged with Kadokawa Cross Media Co., Ltd., both of which are consolidated subsidiaries of the Company, and changed the corporate name to Kadokawa Marketing Co., Ltd. on March 1, 2009. Amount of goodwill that resulted from the merger was ¥2 million, and all the goodwill was charged to the income statements for the year ended March 31, 2009.

20. Related Party Transactions For the year ended March 31, 2009, the Company disposed of real estate property for ¥1,437 million to Kadokawa Culture Promotion Foundation (“the Foundation”). Tsuguhiko Kadokawa is serving as director of the Company and the chairman of the Foundation, who own 8.1% of the Company’s shares. The transaction amount was determined based on appraisal reports obtained from external real estate appraisers.

39

Independent Auditors’ Report

40

Corporate Data

Company Profile (as of March 31, 2010)

Board of Directors and Auditors

Company Name

Chairman and Director

Kadokawa Group Holdings, Inc.

Tsuguhiko Kadokawa

Head Office

President and Representative Director

2-13-3 Fujimi, Chiyoda-ku, Tokyo 102-8177, Japan

Tatsuo Sato

(as of June 21, 2010)

Managing Director Representative Director

Shinichiro Inoue

Tatsuo Sato Directors Founded

November 10, 1945 Established

April 2, 1954 Common Stock

Masataka Fukuda Koichi Sekiya Yasushi Shiina Tsuneo Taniguchi Takashi Yamaguchi Yasuaki Takayama Masaki Matsubara

¥26,331 million Outside Directors Major Corporate Shareholders

Nippon Life Insurance Company Namco Bandai Holdings Inc. Kadokawa Culture Promotion Foundation Mizuho Bank, Ltd. NTT Docomo, Inc.

Hideo Shimizu Ken Kutaragi Koji Funatsu Corporate Auditors (Full-time)

Takeru Egawa Shin Mizushima

Number of Employees

2,523 (consolidated) 46 (non-consolidated)

Outside Corporate Auditors

Yasushi Ikeda Akira Watanabe

Main Banks

Mizuho Bank, Ltd. Sumitomo Mitsui Banking Corporation Resona Bank, Ltd. The Bank of Tokyo-Mitsubishi UFJ, Ltd.

41

ANNUAL REPORT 2010 Year ended March 31, 2010

Kadokawa Group Holdings, Inc. Kadokawa Group Holdings, Inc. ANNUAL REPORT 2010

Dimension Strategy

Printed in Japan