ANNUAL REPORT 2003
Year ended March 31,2003

COMMITTED TO AN ENTIRELY NEW WORLD OFSENSATION AND EXCITEMENTCompany Profile
The background of CAPCOM comes from I.R.M. Corporation founded in 1979 with objectives to develop,
manufacture and distribute electronic applied game machines. It was succeeded by CAPCOM CO., LTD.,
founded in 1983, when is its foundation year.
From 1984 CAPCOM entered into development and sales of coin-operated game software and expanded
its operation to build a worldwide distribution network. Here are some high-lights from the past;
In 1991

STREET FIGHTER

leading software, enhancing thewas released for coin-operated game machines. It is well known asFighting

across the world. After that, various

genre to a new level and it was popular among the players

STREET FIGHTER

series as home video game also get million

sales.
In order to meet with market environments and market demands we have also been strengthening thehome entertainment field.
In 1996,

RESIDENT EVIL

for PlayStation was released, lasting over one year among very competitivemarket conditions, finally resulting in remarkable sales as well as opening the new genre

horror-action

adventure .
Thus, CAPCOM has been pushing the frontiers in developing new fields and solidifying its status in theamusement industry.
With more movie-oriented choreography, vivid graphics and realistic movements, game software content
exceeding over million unit sales, such as

ONIMUSHA ,Devil May Cry

and others, have been

produced. The 20th anniversary of CAPCOM is in June 2003, CAPCOM is more striving to produce
contents that deliver more innovative impressions and excitement to customers across the world, throughits creative activities to immediately meet the demand of end users.

Annual Report 2003

CONTENTS

01

Company Profile

1

Overseas Operations

13

Financial Highlights

2

Financial Review

15

Our Vision

3

History

32

Research and Development

7

Corporate Information

33

Operating Results

9Financial Highlights
CAPCOM CO., LTD. and Its Consolidated Subsidiaries

Years Ended March 31, 2003 and 2002
Thousands of
U.S. dollars

Millions of yen

Consolidated basis

2003

2002

2003

Net sales￥ 62,036￥ 62,743＄516,966

Operating income

6,680

9,727

55,667

Net income （loss）（19,598）

4,912（163,317）

Total assets

106,648

128,512888,733

Total shareholders' equity

42,88868,233

357,400（￥ 338.01）￥ 84.21（＄2.82）

Amounts per share （in yen and U.S. dollars）
Net income（loss）
Net income - diluted

76.61

Cash dividends applicable to the year

0.17

20.00

20.00

Note: U.S. dollar amounts are translated from yen at the rate of ￥120=US$1 , the approximate exchange rate prevailingon the Tokyo Foreign Exchange Market on March 31, 2003.

Net Sales

Operating Income

Total Assets

Total Shareholders' Equity（Millions of yen）

（Millions of yen）

（Millions of yen）

（Millions of yen）
68,233
128,51262,743 62,036
60,00050,00040,000

9,727

10,00051,574

120,000

9,061

107,776

49,083100,000

8,000

7,155

38,367

6,680

62,96660,000113,493
106,648

98,12751,32050,00042,88880,00040,00060,00030,00040,00020,00020,00010,0006,000
30,000
4,000

3,611

20,0002,000

10,0000'99 '00 '01 '02 '03

030,125'99 '00 '01 '02 '03

0'99 '00 '01 '02 '03

0'99 '00 '01 '02 '03

Annual Repor t 2 0 0 3

02

Our Vision

Kenzo Tsujimoto
President and CEOCAPCOM CO., LTD.

Operational and Financial
Review of Fiscal Year 2002（Consolidation basis）
As for the video game industry, the market reflected decreasing demand affected by a depressed desire for
consumption, an entrenched used-software market, and a decrease of disposable income due to increase of
expenses related to cell phone and Internet. In addition, M&A, business integration and co-operations ascorporate restructuring for survival have been accelerated in the industry.
Although overseas markets showed steady progress, mainly in Europe and the United States, the businessenvironment has reached a major turning point as the result of an expanding low-end software market and fiercer
competition.
Meanwhile, the entire video game industry is striving to foster a healthy market. For example, as a part of theimpression
03

Annual Report 2003

Message from President and CEO

market advancement efforts, CERO（Computer Entertainment Rating Organization）, which is an ethical review
entity for game software, and the Game Amusement Society were founded.
As the structure of the video game industry is changing rapidly, we increased the product lineup, introducing
software developed by other companies in order to stimulate the existing user demands. We have also been
trying to improve our business performance through countrywide sales promotion campaigns, exploring newmarketing channels, community-based arcade developments, and so on.
In addition, we have been promoting correlation with the media. This includes releasing the Hollywood movie
RESIDENT EVIL

and the television program

Mega Man: NT Warrior

which are the film and the television

adaptations of our popular software. This produced secondary effects such as enhancement of our brandrecognition and our company image.
However, the net sales of this fiscal year period decreased to 62,036 million yen（down 1.1 % from the previous
fiscal year）.
Ordinary income decreased to 6,797 million yen（down 26.6 % from the previous fiscal year）, due to low sales,
posting reserve for return goods, and increase of sales and general administrative expenses.
All of our land and buildings has been transferred to CAPTRON, one of our subsidiary companies, in order toachieve the efficient management of operations and revitalization of the entire CAPCOM group, and to improvefinancial transparency as well as to cope with the real estate appraisal loss.
In addition, we modified our R&D strategy with a quality-oriented approach by concentrating R&D resources toselected software development. After the thorough review of our software development lineup, we have decided
to stop several software developments which seem to be difficult to produce expected profits. This caused a loss
from ceasing development and the extraordinary loss of 36,850 million yen in total.
Net income for this fiscal year, regretfully, recorded the loss of 19,598 million yen, though corporate tax and othertaxes were adjusted by applying tax effect accounting.
The Japanese economy is projected to be uncertain, due to the delay in recovery from deflation, sluggish stock
market, stagnant consumption, concern of economic slowdown in U.S., turbulent global situation and other factors.
In addition to the sluggish Japanese video game industry, the competition is forecast to become more and more
intense especially in overseas markets, due to the aggressive marketing approaches by the U.S. and European
major game makers, as well as the rapid growth of Taiwan and Korean game makers already strong in online
gaming.
In addition, skyrocketing R&D cost, the expanding used game software market, and the rapid price decline ofproducts may stimulate competition and makes the market even more challenging.
We will try our best to find ways to cope with the lawful used software market by creating new rules and systems
for profit sharing with retailers.

Committed to an Entirely New World of
Sensation and Excitement
Annual Repor t 2 0 0 3

04

Management Principle
Our principle is to be a creator of entertainment culture. Through development of highly creative
software contents that excite people and stimulate their senses, we have been aiming to offer
an entirely new level of game entertainment.
Our management objectives are also on strengthening relationships with shareholders, clientsand our employees to satisfy demands and to bring about prosperous benefits.

We will work on revitalizing the corporation by
establishing higher profitable structure capable ofadapting to changes in the business environment.
In addition to the sharp rise in development costs, the video game industry is facing challenges. International
competitions are getting fiercer struggling for survival being resulted in increase in mergers, acquisitions andbusiness integrations as corporate restructuring becomes more intense.
Under this situation, we will implement immediate management reforms by verifying the causes of ourhardships to survive in international competition.
And we believe that establishing a management system capable of adapting to changes in the businessenvironment is one of our most important managerial goals. In order for us to accomplish this goal, we started
reviewing our R&D activities, which is the core element of our business. In order to improve company quality,
we are implementing reinforcement measures promoting performance-based remuneration program, speedy
and efficient decision-making processes, organizational restructure, and responsible management.
We will do our utmost efforts to recover and regain our business productivity and by further promoting
customer-oriented operations, reinforcing sales force, further improving arcade operations, developing newmarkets while enhancing market share in existing markets, cutting expenses, lowering logistics costs, andincreasing management efficiency.

05

Annual Report 2003

Message from President and CEO

As our medium-term business strategy, our management objectives are as shown in the following:■ Focusing on our core business __ developing and marketing creative home video game software byconcentrating our resources■ Strengthening and exploring multi platform strategy for home video game software based on market
demands.
■ Expanding arcade operations business, which has become the second largest source of business for us, inorder to continuously secure stable revenues.
■ Expanding sales overseas by aggressive business deployment, including establishing overseas offices.
■ Pioneer business opportunities by enhancing our product contents to create new markets and expanding ourshare in existing markets.
■ Promoting and strengthening the CAPCOM Brand to create added value.
■ Realizing a stable cash flow for each fiscal term by streamlining financial aspects.

We build a corporate structure based on corporate
governance and ensure reliability.
As part of the management reformation, we have introduced the Operating Officer System for developing
business flexibility and increasing management efficiency, which clearly separates the Board of Directors which
focus on decision-making from the Operating Officers which implement and execute the operation of thecorporation.
In addition, we retain three external directors （include an attorney） as well as three external auditors for the
purpose of enhancing management monitoring.
We have set the Compliance Committee for the purpose of reinforcing compliance function, insuring the risk
management system as well as complying with laws and corporate ethics.

Kenzo Tsujimoto
President and CEOCAPCOM CO., LTD.

Annual Repor t 2 0 0 3

06

Research and Development
To create unprecedented game contents with the aim of appealing tocustomers around the world
R&D

States, as well as in Korea, is focusing their efforts oncapabilities in the market through products, such as

creating such contents that are appealing to their region,

RESIDENT EVIL ,featuring regional characteristics and tastes.

CAPCOM

07

has

been

demonstrating

its

ONIMUSHA , andfirst-rate

Devil May Cry .

These have been taking up the challenge to fascinate

The market of the video game industry is at a major turning

customers around the world through their innovative andpoint, due to diversified customer consumption and stiffer

creative capabilities, appealing equally in Japan, North

market competition. Under such circumstances we are

America and Europe. Currently R&D bases are located inenhancing the process of R&D efficiency together applying

Japan, as the major base as well as a controlling center, inthe outside developing know-how, and maximizing the use of

the United States and in Korea. R&D staff in the United

human resources to facilitate higher technology development.

Annual Report 2003

Enhanced R&D structure to securehigher profitability
and Multi platform strategy

Our development process for each game are under control

titles, and taking all necessary steps on title progress.

of Producers in the company. The producers are held

CAPCOM now takes up the challenge to strengthen the

responsible for coordination of each different process ofmarketing system by enhancing analysis, assortment anddevelopment, such as concept creation, plot creation,

integration of marketing information. At the same time, timely

character design, programming and sound creation. They are

feed-back on R&D process based on analysis, competitors

also held accountable for R&D budget control, and costs

and users, to achieve Mid-term R&D process control andrelated to the game software. To increase profitability ofstrategy on releasing contents. Moreover, we aim atdeveloping contents and secure higher quality of our products,

exploitation of new genre, and promoting middleware

it is pre-requisite for our R&D process to tighten measurements

Strategy, and Multi-Platform Strategy in consideration of

on title progress by application of measurement tools for all

hardware penetration.

ACRGAME BOY ADVANCE IS A REGISTERED
TRADEMARK OF NINTENDO.

GAME BOY ADVANCE SP IS TRADEMARKOF NINTENDO

c○2003
Sony Computer Entertainment Inc. All rights reserved.
Design and specifications are subject to change without notice.

Microsoft XBOX, and the XBOX Logos are either
registered of trademarks of Microsoft
Corporation in the United States and/or othercountries and used under license from Microsoft.

NINTENDO GAMECUBE AND
THE NINTENDO GAMECUBE LOGOARE REGISTERED TRADEMARKS
OF NINTENDO.

Annual Repor t 2 0 0 3

08

Operating Results
Home Video GamesWe released new software titles for PlayStation 2, that employed
Japanese anime drawing technique such as auto modellista
the first racing game software by CAPCOM,andCLOCK TOWER 3 ,BREATH OF FIRE V DRAGON QUARTER

under thetitles, namely

CHAOS LEGION （for PlayStation 2）andP. N. 03 （for NINTENDO GAMECUBE）that were notscheduled to be released in this term. However, neither ofthese titles could make up the sales decrease.

depressed domestic market. Neither of these titles saw

On the other hand, home video game software forsatisfactory sales growth. We also released

GAMEBOY ADVANCE such as

MEGAMAN

including

MEGAMAN BATTLE

EVIL 0 （for NINTENDO GAMECUBE）andRESIDENT

Devil May Cry 2

MEGAMAN ZEROandseries,（for PlayStation 2）which were the major titles of this fiscal

NETWORK 3

year with great expectation. The sales of these two titles were

healthy sales results supported by strong popularity. We are

and

GYAKUTEN SAIBAN 2

showednot strong enough to meet our projection. In order to copealso released a new board game calledwith a highly competitive environment, we released two more

expand our territory. As a result, this triggered a revival of theCatanin order toDevil May Cry 2

BREATH OF FIRE V DRAGON QUARTERC○CAPCOM
CO., LTD.
CC○SUNSOFT,○CAPCOM
CO., LTD. 2002 ALL RIGHTS RESERVED.
CC○SUNSOFT, ○CAPCOM
CO., LTD. 2002,
C○CAPCOM
U.S.A., INC. 2002 ALL RIGHTS RESERVED.
C○CAPCOM
CO., LTD. 2002 ALL RIGHTS RESERVED.
C○1995
Kosmos Verlag, Stuttgart, Germany
Original Title: Die Siedler von CatanC
Character by ○2002
Susumu Matsushita Company

CHAOS LEGION

09

Annual Report 2003

RESIDENT EVIL 0

Catan（up 0.7 % from the previous fiscal year）, and the operatingboard game boom in Japan.
As for the overseas operations, the sales of

RESIDENT EVIL

income was 6,761 million yen（down 39.9 % from the（for NINTENDO GAMECUBE）made good sales. In addition,

previous fiscal year）.

inexpensive software series for PlayStation 2 such as

We are continuing our incessant efforts to strengthen theandRESIDENT EVIL

R&D, Marketing, and Sales Strategy, especially in U.S. and

CODE: Veronica X GREATEST HITS

grew favorably,

European markets to increase higher profitability in each

ONIMUSHA GREATEST HITS

supported by a healthy U.S. and European market.

region. We are developing software to meet U.S. andHowever, total sales were weak due to most of the new titles

European market flavors and we also work on total

not making sales as we expected.

coordination of marketing to be consistent through the

As a result, net sales increased to 48,090 million yen

markets together with each regional accountable persons.

CLOCK TOWER 3GYAKUTEN SAIBAN 2

MEGAMAN ZERO

auto modellista

Annual Repor t 2 0 0 3

10

Arcade Operations
The market environment of arcade operations had beencore customers and repeaters as well as to attract families.

leveled off previously. However, the market trend turned

We also closed down unprofitable arcades for more efficient

upward thanks to the effort towards vitalizing the market by

operations.

the entire arcade industry: e.g., creating Game Day （November

We opened a second arcade in Kyushu called

PLAZA

23rd of every year）and holding events to celebrate this day.

CAPCOM-OITA

PLAZAThe arcade is gaining support and recognized as a convenient

CAPCOM-YACHIYO

amusement facility by families and women.

increase of sales, and we closed nine unprofitable arcades.

in Chiba. Both have contributed to

Chiiki Ichiban Ten（No.1 Arcade in the

The resulted net sales totaled 9,243 million yen（up 11.0 %Community） , we have opened several arcades in large

from the previous fiscal year）, and the operating incomecommercial complexes and have been implementing creative

increased to 2,141 million yen（up 82.4 % from the previous

marketing activities such as holding various events to securefiscal year）.

Under the slogan of

PLAZA CAPCOM-OITA

11

in Oita and another arcade in

Annual Report 2003

Arcade Games
Although we released highly profitable prize-winning games
such asMecha-toreandBell-catcher Twinfor thepurpose of re-establish earning models in the shrinking
arcade game market, the net sales of this business segment
was decreased due to the lack of powerful demandgenerating products, escalating competition, and unsuccessful
differentiation strategy.
Net sales decreased to 1,114 million yen（down 71.8% fromthe previous fiscal year）and operating loss totaled 534
million yen.

Other
Net sales was 3,744 million yen（up 21.4 % from theprevious fiscal year and this mainly derived from licensing
royalties）and operating income was 351 million yen（up70.4 % from the previous fiscal year）.

PLAZA CAPCOM-YACHIYO

Annual Repor t 2 0 0 3

12

Overseas Operations
Beginning with establishing CAPCOM U.S.A., Inc., in Augustof 1985, CAPCOM have been expanding its overseas basesin European areas as well as in Asia in order to increase
sales and explore business opportunities. Out of total
shipped units of 16,300 thousand this fiscal year, 10,600
thousand units are in overseas markets and importance ofmarket values are increasing year by year as demonstrated
by software units to be nearly 80% counting with U.S. andEuropean markets.

13

Annual Report 2003

North America
The North American market underwent an expansion in both
software and game platforms thanks to several major game
titles becoming mega hits. This market should now becomelarger than film box-office sales.
Under these circumstances, the sales of
NINTENDOGAMECUBE）and

PlayStation 2, such as
and

RESIDENT EVIL （forinexpensive

titlesfor

ONIMUSHA GREATEST HITS

RESIDENT EVIL CODE: Veronica X GREATEST HITS ,grew favorably. However, sales of the two major titles of thisfiscal year __ Devil May Cry 2 （for PlayStation 2）andRESIDENT EVIL 0 （for NINTENDO GAMECUBE）__ were
not strong enough to reach our projection.
As a result, the net sales increased to 16,418 million yen（up15.3 % from the previous fiscal year）, and the operating
income was 2,160 million yen（down 9.0 % from the previous
fiscal year）.

EuropeOther

The European market grew strongly in general especially in

Followed by Japan, U.S. and European markets, we are ex-

U.K., excluding some countries like Germany that were

pecting the Asian market to be growing.

suffered from serious flood damage last year, thanks to

However, it may take years to see actual growth in this re-several game titles becoming big hits supported by increasinggion because the marketing of home video game hardware

sales of game platform.

has just begun, PC-based game has been already popular,

Under these circumstances, the sales of software likeand software piracy is prevalent in these countries.

RESIDENT

EVIL （forNINTENDOGAMECUBE）grew

favorably. However, highly expected titles such as auto modellista（for PlayStation 2）andNet sales were 648 million yen（up 3.5 % from the previous
fiscal year）and the operating loss was 42 million yen.

RESIDENT EVIL 0 （for NINTENDOGAMECUBE）did not make satisfactory sales level.
As a result, the net sales increased to 7,820 million yen（up7.6 % from the previous fiscal year）and the operating profit
decreased to 666 million yen（down 36.1 % from the previous
fiscal year）.

Annual Repor t 2 0 0 3

14

Financial Review

15

Annual Report 2003

16

Five-Year Summary

17

Business Evaluation and Analysis

19

Consolidated Balance Sheets

21

Consolidated Statements of Income

22

Consolidated Statements of Shareholders' Equity

23

Consolidated Statements of Cash Flows24

Notes to Consolidated Financial Statements

31

Report of Independent Auditors

Five-Year Summary
Thousands of
U.S. dollars(Note 1)

Millions of yen

2003
Net sales￥ 62,036

2002

2001

2000

2003

1999

￥ 62,743 ￥ 49,083 ￥ 51,574 ￥ 38,367$516,966

Operating income

6,680

9,727

7,155

9,061

3,611

55,667

Income (loss) before income taxes (30,049)

7,420

7,127

8,712

2,085

( 250,408)(

19,598)

4,912

6,007

9,700

1,507

( 163,317)

Net income (loss)

U.S. dollars(Note 1)

Yen

Earnings per share (Note 2)(￥ 338.01) ￥Cash dividends per share
Shareholders' equity per share

2.82)

43.00

20.00

20.00

20.00

20.00

20.00

0.17

753.47

1,168.51

1,081.62

1,372.16

862.96

6.28
Thousands of
U.S. dollars(Note 1)

Millions of yen

Total assets($

84.21 ￥ 109.90 ￥ 273.01 ￥￥106,648￥128,512 ￥113,493 ￥107,776 ￥ 98,127$888,733

Total shareholders' equity

42,88868,23362,96651,32030,125357,400

Depreciation & amortization

2,203

2,172

2,411

2,623

2,818

18,358

Capital expenditure

2,290

4,182

2,939

2,695

2,862

19,083R&D expenses

1,151

1,067

1,461

1,390

1,414

9,591

ROE

(

35.3％)

7.5％

10.5％

23.8％

5.0％

ROA

(

16.7)

4.1

5.4

9.4

1.5

40.2

53.1

55.5

47.6

30.7

Net worth ratio

Notes: 1. U.S. dollar amounts are translated from yen at the rate of ￥120= US＄1, the approximate
exchangerate prevailing on the Tokyo Foreign Exchange Market on March 31, 2003.
2. Amounts per share are computed based upon weighted average number of shares of common stock
outstanding during each fiscal year and adjusted for the effect of the stock splits.

Annual Repor t 2 0 0 3

16

Business Evaluation and Analysis
Financial Statement

RESIDENT EVIL 0

The net sales of this fiscal year period decreased to 62,036 mil-

Devil May Cry 2( for NINTENDO GAMECUBE ) and(for PlayStation 2) which were the major ti-

lion yen (down 1.1 % from the previous fiscal year). Ordinary in-tles of this fiscal year with great expectation. The sales of thesecome decreased to 6,797 million yen (down 26.6 % from the pre-two titles were not strong enough to meet our projection.

vious fiscal year), due to low sales, posting reserve for loss on

On the other hand, home video game software for GAMEBOY

goods unsold, and increase of sales and general administrative

ADVANCE such as

expenses.

ZERO

All of our land and buildings has been transferred to CAPTRON,UTEN SAIBAN 2

one of our subsidiary companies, in order to achieve the effi-

strong popularity.

cient management of operations and revitalization of the entire

As for the overseas operations, the sales of

CAPCOM group, and to improve financial transparency as well(for NINTENDO GAMECUBE) made good sales. In addition,

as to cope with the real estate appraisal loss. In addition, we

inexpensive software series for PlayStation 2 such as

and

MEGAMANseries,including

MEGAMANMEGAMAN BATTLE NETWORK 3

and GYAK-

showed healthy sales results supported by

and

RESIDENT EVIL

modified our R&D strategy with a quality-oriented approach by

ONIMUSHA GREATEST HITS

RESIDENT EVIL

concentrating R&D resources to selected software develop-

CODE: Veronica X GREATEST HITS

ment. After the thorough review of our software development

ted by a healthy U.S. and European market.

lineup, we have decided to stop several software developments

However, total sales were weak due to most of the new titles notwhich seem to be difficult to produce expected profits.

making sales as we expected.

This caused a loss from ceasing development and the extraor-

As a result, net sales increased to 48,090 million yen (up 0.7 %dinary loss of 36,850 million yen in total.

from the previous fiscal year), and the operating income was

Net income for this fiscal year, regretfully, recorded the loss of

6,761 million yen (down 39.9 % from the previous fiscal year).

grew favorably, suppor-

19,598 million yen, though corporate tax and other taxes were

Arcade Operations

adjusted by applying tax effect accounting.

Under the slogan of

Chiiki Ichiban Ten (No.1 Arcade in theCommunity) , we have opened several arcades in large com-

Overview of Each Business Segment

mercial complexes and have been implementing creative mar-

Home Video Gamesketing activities such as holding various events to secure core

We released new software titles for PlayStation 2, that em-

customers and repeaters as well as to attract families. We also

ployed Japaneseautoclosed down unprofitable arcades for more efficient operations.

the first racing game software by CAPCOM,The resulted net sales totaled 9,243 million yen (up 11.0 % fromBREATH OF FIRE V DRAGON

the previous fiscal year), and the operating income increased tomodellista

anime

CLOCK TOWER 3 , and
QUARTERdrawing technique such as

under the depressed domestic market. Neither ofthese titles saw satisfactory sales growth. We also released

17

Annual Report 2003

2,141 million yen (up 82.4 % from the previous fiscal year).

Arcade Games

Cash Flows

Although we released highly profitable prize-winning games(1) Cash flows from operating activities

such asfor the pur-Net cash increase from operating activities amounted to 3,636

pose of re-establish earning models in the shrinking arcade

million yen. Although net loss before income tax was 30,049 mil-game market, the net sales of this business segment was de-lion yen due to the appraisal loss of land and buildings totalingcreased due to the lack of powerful demand-generating prod-

24,332 million yen and 3,286 million yen increase in the allow-

ucts, escalating competition, and unsuccessful differentiation

ance for doubtful accounts, those were no cash associated.

Mecha-toreandBell-catcher Twin

strategy. Net sales decreased to 1,114 million yen (down 71.8%
from the previous fiscal year) and operating loss totaled 534 mil-(2) Cash flows from investing activities

lion yen.

Net cash decrease from investing activities amounted to 2,329
million yen. This decrease is attributable to the expense of 809

Other

million yen for the acquisition of property, plant and equipment

Net sales was 3,744 million yen (up 21.4 % from the previous

for amusement facilities.

fiscal year and this mainly derived from licensing royalties) andoperating income was 351 million yen (up 70.4 % from the previ-(3) Cash flows from financing activities

ous fiscal year).

Net cash decrease from financing activities amounted to 2,000
million yen. This is attributable to the increase of 3,087 million
yen related to acquisition of treasury-stock purchase.

Financial Position
Cash and cash equivalents (hereafter referred to as

Cash )

as of the end of this fiscal year period decreased by 33,445 million yen from the previous fiscal year to 1,555 million yen. Cashflow positions for each activity are as stated below.

Net Sales by Business Segment

Working Capital

Net Income（Loss）

Return On Equity（Millions of yen）

（Millions of yen）

（Millions of yen）

（Percent）

62,743 62,036
60,00060,00051,57450,00040,00049,08338,36756,47150,000

4,912

30,00020,00010,00010,0000'99 '00 '01 '02 '03

Home video games
Arcade Operations
Arcade games
Other

0

20

6,007

6,000
24,396

15

4,000

10.5
10

17,4272,000'99 '00 '01 '02 '03

23.8

25

40,00020,00030

8,000

33,77530,0009,700

10,00054,2800

1,507

5（19,598）'99 '00 '01 '02 '03

0

7.5
5.0
（35.3）'99 '00 '01 '02 '03

Annual Repor t 2 0 0 3

18

Consolidated Balance Sheets
CAPCOM Co., Ltd. and Its Consolidated Subsidiaries

March 31

Thousands of
U.S. dollars(Note 1)

Millions of yen

Assets

2003

2002

2003

￥ 33,445￥ 35,000$278,709

Trade15,567

15,240129,725

Other

1,363

637

11,358Current assets:
Cash and cash equivalents (Note 3)
Notes and accounts receivable -Allowance for doubtful accounts(

2,595)(

1,717)(

21,625)

Short-term loans receivable

4,337

4,948

36,142Inventories (Note 4)

6,361

6,517

53,008

Capitalized development costs

10,331

11,21886,092

405

2,174

3,375

Deferred income taxes (Note 9)

4,354

2,522

36,283

Other

1,030

335

8,583

Total current assets

74,59876,874

621,650

1,782

2,006

14,850and affiliated companies

804

604

6,700

Long-term loans receivable

7,220

5,919

60,167Long-term prepaid expenses

124

101

1,033

Deferred income taxes (Note 9)

10,5351,230

87,792

Other

5,780

7,089

48,166

Prepaid expenses

Investments and other assets:
Investments in securities (Note 5)
Investments in an unconsolidated company

Allowance for doubtful accounts(

Total investments and other assets

6,604)(

4,538)(

55,033)

19,641

12,411

163,675

Land (Note 7)

4,701

26,50039,175

Buildings and structures (Note 7)

5,290

13,41744,083

Machinery and equipment

10,752

13,92089,600Construction-in-progress

27

45

225

Property, plant and equipment (Note 6):

Accumulated depreciation

Total property, plant and equipment
Total assets
The accompanying notes are an integral part of these statements.

19

Annual Report 2003(

8,361)(

14,655)(69,675)

12,40939,227

103,408￥106,648￥128,512$888,733

CAPCOM Co., Ltd. and Its Consolidated Subsidiaries

March 31

Thousands of
U.S. dollars(Note 1)

Millions of yen,

Liabilities, minority interest and shareholders equity

2003

2003

2002

Current liabilities:
Short-term borrowings (Note 7)

￥

￥

8,640

$ 58,309

508

141

4,233

Notes and accounts payable

5,174

4,743

43,118

Accrued expenses

2,371

2,109

19,758

Accrued income taxes (Note 9)

649

1,436

5,408

Allowance for sales returns

613

---

5,108

Other

4,006

3,334

33,383

Total current liabilities

20,31820,403

169,31740,83237,352

340,267

804

705

6,700

Other

1,775

1,757

14,791

Total long-term liabilities

43,411

39,814

361,758

31

62

258

Issued - 58,435,819 shares at March 31, 2003

27,581---

229,842

Issued - 58,435,217 shares at March 31, 2002---

27,580---30,472

30,465

253,933(

12,050)8,777(

100,417)

(

161)

94)

(

1,342)

Current portion of long-term debt (Note 7)

6,997

Long-term liabilities:
Long-term debt (Note 7)
Accrued retirement benefits for employees (Note 10)

Minority interest in a consolidated subsidiary,

Shareholders equity:
Common stock, (Note 11)
Authorized - 150,000,000 shares

Additional paid - in capital (Notes 11 and 12)
Retained earnings (Accumulated deficit) (Notes 11 and 12)
Unrealized holding gains and losses
on available-for-sale securities (Notes 5 and 12)
Cumulative translation adjustments
Treasury stock (Note 13),

Total shareholders equity
Total liabilities,,
minority interest and shareholders equity((

3,097)

1,192

1,551

143
(

46)

(

25,808)42,88868,233

357,400￥106,648￥128,512$888,733

Annual Repor t 2 0 0 3

20

Consolidated Statements of Income
CAPCOM Co., Ltd. and Its Consolidated Subsidiaries

Year Ended March 31

Thousands of
U.S. dollars(Note 1)

Millions of yen

2003

2002

2003

￥ 62,036￥ 62,743$516,966

39,19838,229326,650

22,83824,514

190,316

Selling, general and administrative expenses

15,007

13,720125,058

Research and development expenses

1,151

1,067

9,591

6,680

9,727

55,667

200

277

1,667

Net sales
Cost of sales
Gross profit

Operating income
Other income (expense):
Interest and dividend income(

2,125)

603)(

22,575)108)(

1,558)

1,429)---(

11,908)5,284)---(

44,033)

1,036)(

5,158)(

325)

2,709)

(

(

187)

(

Loss on disposal of inventories(

Loss on disposal of capitalized development costs(

Loss on write-down of investments in securities

(

619)

Loss on write-down of land and buildings(

24,332)---( 202,767)

Loss on write-down of inventories(

1,508)

---

(

(

255)

(

plant and equipment

Interest expense
Provision for allowance for doubtful accounts

1,208

127

145

Exchange gain, net
Loss on sale or disposal of property,

Bond issue expenses

(

---

(

579)

(

60)

Other, net

(

751)

Income (loss) before income taxes(

30,049)7,420

12,567)---(

6,259)( 250,408)

Income taxes (Note 9):
9,209

1,105

2,753

Prior year adjustment

(

221)

---

(

1,842)

Deferred(

11,304)277)(

94,200)2,476(

86,833)

32

(

258)

Current((￥010,420)
Minority interest in net income (losses) of
a consolidated subsidiary(31)

Net income (loss)(￥019,598)

￥

4,912

U.S. dollars

Yen

Per share data
Net income (loss)

2003

2002

(￥ 338.01)

￥

84.21

2003
($

2.82)

Net income-diluted

---

76.61

---

Cash dividends paid

20.00

20.00

0.17

The accompanying notes are an integral part of these statements.

21($163,317)

Annual Report 2003

Consolidated Statements of Shareholders' Equity
CAPCOM Co., Ltd. and Its Consolidated Subsidiaries

Year Ended March 31

Thousands of
U.S. dollars(Note 1)

Millions of yen

2003

2002

2003

￥ 27,580￥ 27,370$229,834

1

210

8

￥ 27,581￥ 27,580$229,842￥ 30,465￥ 30,255$253,875

over the amount credited to common stock issued

1

210

8

Gain on sale of treasury stock

6

---

50

￥ 30,472￥ 30,465$253,933

Balance at beginning of year

￥

8,777

￥

5,219

$ 73,142

Net income (loss) for the year(

19,598)4,912( 163,317)

Cash dividends(

1,169)(

1,166)(

9,742)

Bonuses to directors and statutory auditors

(

60)

(

60)

(

500)

---

(

128)

---

(￥ 12,050)

￥

8,777

($100,417)

Unrealized holding gains and losses
on available-for-sale securities

(￥

161)

(￥

94)

($

1,342)

Cumulative translation adjustments

￥

143

￥

1,551

$

1,192

Treasury stock(￥

3,097)(￥

46)

Common stock:
Balance at beginning of year
Shares issued upon conversion of bonds

Balance at end of year
Additional paid - in capital:
Balance at beginning of year
Excess of principal amount of bonds converted

Balance at end of year
Retained earnings:

Effect of changes in reporting entities

Balance at end of year($ 25,808)

The accompanying notes are an integral part of these statements.

Annual Repor t 2 0 0 3

22

Consolidated Statements of Cash FlowsCAPCOM Co., Ltd. and Its Consolidated Subsidiaries

Year Ended March 31

Thousands of
U.S. dollars(Note 1)

Millions of yen

2003

2002

2003

Cash flows from operating activities:
Income (loss) before income taxes
Adjustments to reconcile income (loss) before income taxes
to net cash provided by operating activities Depreciation and amortization
Loss on write-down of land and buildings
Loss on write-down of investments in securities
Increase in allowance for doubtful accounts
Increase in allowance for sales return
Decrease (increase) in notes and accounts receivable
Decrease (increase) in inventories
Decrease(increase) in capitalized development costs
Increase (decrease) in notes and accounts payable
Increase in accrued retirement benefits for employees
Other, net
Total adjustments

￥

7,420

($250,408)

2,172--1,036
944
--86
981)
2,489)
349)
428
4,951)
4,104)
3,316

18,358
202,767
5,158
27,383
5,108(
6,133)
17,200
7,392
4,275
817
(
1,617)
280,708
30,3002,696)
101
200)
47)
43
212
18
498)
3,067)(

1,325)--13,985)
25,000--1,151)
50
8,589

(

681
9,519
(
195)
25,676￥ 35,000(((￥ 30,049)((

Net cash provided by operating activities

2,203
24,332
619
3,286
613
736)
2,064
887
513
98
194)
33,685
3,636

(
(
(
(
(

Cash flows from investing activities:
Acquisition of property, plant and equipment
Proceeds from sale of property, plant and equipment
Acquisition of investments in securities
Acquisition of investment in an affiliated company
Proceeds from sale of investments in securities
Decrease (increase) in short-term loans receivable
Decrease in long-term loans receivable
Other, net

Net cash used in investing activities

(
(

(
(
(

1,812)
125
773)
--180
79)
97
67)
2,329)

(
(
(

(
(

(

(
(
(

15,100)1,042
6,442)--1,500
658)
808
558)
19,408)Cash flows from financing activities:
Net repayment of short-term borrowings
Borrowings of long-term debt
Repayment of long-term debt
Extension of long term debt
Payment for purchase of treasury stock
Cash dividends paid
Other, net(

Net cash provided by (used in) financing activities(

Effect of exchange rate changes
on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Changes in reporting entities
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.
23

Annual Report 2003

(
(
(

(
(

1,642)
4,200
349)--3,087)
1,164)
42
2,000)

862)
1,555)--35,000￥ 33,445

(
(

(

(
(
(
(

13,683)35,0002,908)--25,725)
9,700)
350
16,666)

7,183)
12,957)--291,666$278,709

Notes to Consolidated Financial Statements
CAPCOM Co., Ltd. and Its Consolidated Subsidiaries

1. MAJOR POLICIES IN PREPARINGCONSOLIDATED FINANCIAL STATEMENTS:
The accompanying consolidated financial statements which are atranslation of those publicly issued in Japan, after modification toenhance readers’ understanding, are prepared in accordance withaccounting principles generally accepted in Japan, which are
different in certain respects from the application and disclosure
requirements of International Accounting Standards.
In addition, the notes to the consolidated financial statements
include financial information which is not required underaccounting principles generally accepted in Japan, but ispresented herein as additional information.
The rate of ¥120=U.S.$ 1, the approximate current rate prevailingon March 31, 2003, has been used for the purpose of presentationof the U.S. dollar amounts in the accompanying consolidated
financial statements. These U.S. dollar amounts are included
solely for convenience and should not be construed as
representations that the Japanese yen amounts actually represent,or have been or could be converted into, U.S. dollars at this or any
other rate.

2. SIGNIFICANT ACCOUNTING POLICIES:(1) Principles of consolidation
The consolidated financial statements consist of the accounts of
Capcom Co., Ltd. (hereinafter referred to as the “Company”) and,with minor exceptions, those of its 12 majority-owned subsidiaries(all 13 companies being referred to collectively as the “Companies”)
at the relevant balance sheet date. All significant inter-company
transactions and accounts has been eliminated.
The investment in an unconsolidated subsidiary and 20% to 50%
owned companies (hereinafter referred to as the “Affiliatedcompanies”) are stated at cost due to immateriality.
In the case of a change in reporting entities, the consolidated
financial statements are not restated, but the effect of the change
on retained earnings at the beginning of the period is directly
debited or credited to retained earnings during the period.
(2) Cash and cash equivalents
Cash and cash equivalents include all highly liquid investmentswith original maturities of three months or less, that are readily
convertible to known amounts of cash and are so near maturity
that they present insignificant risk of change in value.
(3) Translation of foreign currencies
All foreign currency monetary assets and liabilities are translated
into Japanese yen at the rates prevailing at the balance sheet
date. Income and expenses in foreign currency are translated at
the rates prevailing at the time of the transactions. The resulting
exchange gains or losses are credited or charged to income as
incurred. In preparing the consolidated financial statements,
assets and liabilities of foreign subsidiaries are translated into
Japanese yen at the rates in effect at the balance sheet date.
Income and expenses of foreign subsidiaries are translated into
Japanese yen at the monthly average rate for the year thenended. Shareholders’ equity in foreign subsidiaries is translated
into Japanese yen at the rates prevailing at the time when thetransactions occurred. Cumulative translation adjustments, resulting from the above translation procedures, have beenreported as a separate component of “Shareholders’ equity” on
the consolidated balance sheet.
(4) Inventories and capitalized development costs
Inventories are stated at the lower of cost or market value, cost
being principally determined by the average cost method.
Motion picture film costs, comprising production, print and certain
advertising costs relating to specific motion picture titles are presented as inventories.
Motion picture film costs are amortized using a ratio representing the proportion of revenue earned to total estimated reven-

March 31,2003 And 2002

ue. Unamortized motion picture film costs are compared with theestimated net realizable value on an individual film basis and arewritten-down if required.
Capitalized development costs for game software, including
development costs incurred by subcontractors for game machines
are stated at accumulated cost on a specific project basis.
(5) Financial instruments
1Investments in securities
Available-for-sale securities with market quotations are stated atfair value at the fiscal year end. Net unrealized gains or losses onthese securities are recorded as a separate component of“Shareholders’ equity” at the net of applicable taxes amount. The
cost of securities sold is determined based on the average cost of
all such securities held at the time of sale.
Other securities without market quotations are stated at cost, cost
being determined by the average cost method.
2Hedge accounting
The Companies mainly uses the deferral method of hedge accounting for interest rate swaps.
a. Hedging instruments and hedged items
Hedging instruments : Derivative transactions (Interest rate
swaps)
Hedged items: Items with exposure to fluctuations inmarket interest rates (Variable interest
payable with regard to long-term debt)
b. Hedging policy
In accordance with the risk management policy defined in
the Company's internal accounting rules, the Company hedges
the risk of changes in interest rates.
c. Method of assessing the effectiveness of hedging
For interest rate swap transactions, the Company assesses theeffectiveness of its hedging by computing the ratio between theamount of change accumulated, from the beginning to date, inthe cash flows of the hedged items and that of the hedging
instruments.
(6) Property, plant and equipment and depreciation
Property, plant and equipment is stated at cost. The Company
and domestic subsidiaries compute depreciation of tangible fixed
assets using the declining balance method at rates based on
the estimated useful lives of the respective assets, except for buildings(excluding leasehold improvements and auxiliary facilities
attached to buildings), where it is computed using the straightline method. Foreign subsidiaries compute depreciation on astraight-line basis according in accordance with the accounting
standards of the countries in which they are located.
(7) Accounting for leases
Capital leases, which not transfer ownership of the leased assets
to the lessee at the end of the lease term, are principally accounted for as operating leases.
(8) Allowance for sales returns
An allowance for sales returns is provided for estimated losses on
resulting from sales returns subsequent to the balance sheet datebased on prior loss experience.
During the year ended March 31, 2003, the Company changed its
method of accounting for losses resulting from sales returns fromrecognizing such losses at the time of actual receipt of the product returns to providing an allowance for future sales returns
based on prior loss experience at the fiscal year end. As a result,“Gross profit” and “Operating income” in 2003 decreased by ¥ 613
million ( $ 5,108 thousand ) and “Loss before income taxes” increased by ¥ 613 million ( $ 5,108 thousand ) compared with theamounts that would have been reported had the previous accounting method been applied consistently.
(9) Income taxes
The statements of income of the Companies include many income
and expense items for financial reporting purposes which are notcurrently deductible or taxable. With respect to all such temporary
differences, the Companies follow the practice of inter-period tax
allocation based on methods generally accepted in the respective
countries where each entity is located.
Annual Repor t 2 0 0 3

24

(10) Accrued retirement benefits for employees
Accrued retirement benefits for employees are calculated basedon the estimated amount of projected benefit obligations and thefair value of the plan assets at the year-end. The unrecognized net
transition obligation is amortized over 15 years. Unrecognized actuarial net gains or losses are amortized over 13 years, theaverage remaining service period, commencing from the period
following that in which they arise.
(11) Revenue recognition
Revenue from the sale of products is recognized when those
products are shipped to customers.
Motion picture revenue is recognized on the date of showing.

3. CASH FLOW INFORMATION:
Cash and cash equivalents at March 31, 2003 and 2002 consistedof:Thousands of
U.S. dollars

Millions of yen

Cash and deposits
Commercial paper

2003

2002

2003

￥30,446￥27,662

2,999￥33,445

7,338￥35,000$253,717
24,992$278,709

Cash payments in respect of interest and income taxes, and major
non-cash investing and financial activities for the years ended
March 31 were as follows:
Thousands ofMillions of yen(12) Research and development expenses
Research and development expenses (including basic researchand development expenses) for the improvement of existingproducts or the development of products, other than thecapitalized cost of game software for 64-bit and 128-bit gamemachines, are charged to income when incurred.
(13) Per share data
The computation of net income per share is based on theweighted average number of common stock shares outstanding
during each year. Cash dividends per share are based on thenumber of shares outstanding at the end of each period andreflect the appropriations applicable to each period rather than tothe period in which shareholder approval is obtained.

Cash payments during the year inrespect of Interest
Income taxes
Non-cash investing and financial
activities Conversion of bonds
Increase of common stock
Increase ofadditional paid-in capital

U.S. dollars

2003

2002

2003

249
￥
￥ 1,670233￥￥ 3,155$ 2,075$ 13,917

￥

1

￥

210

$

8

￥

1

￥

210

$

8

4. INVENTORIES:
Inventories at March 31, 2003 and 2002 consisted of the following:(14) Use of estimates
The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect thereported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from thoseestimates.
(15) Reclassifications
Certain reclassifications of previously reported amounts havebeen made to conform with current classifications.
(16) Adoption of new standards
1Accounting Standard for Treasury Stock and Reversal of Legal Reserve, etc.
Effective from the year ended March 31, 2003, the Company adopted the new Japanese accounting standard “Accounting for Treasury Stock and Reversal of Legal Reserve, etc.” (Corporate Accounting Standard, No.1 issued by the Corporate AccountingStandards Committee on February 21, 2002). The effect of thischange on profit and loss was immaterial.
2Accounting Standard for Earnings per Share
Effective from the year ended March 31, 2003, the Company adopted the new Japanese accounting standard “Accounting for Earnings per Share” (Corporate Accounting Standard No.2 issued by
the Corporate Accounting Standards Committee on September
25, 2002) and “Guidelines for the Application of Accounting for
Earnings per Share” (Corporate Accounting Standard No.4 issued
by the Corporate Accounting Standards Committee on September
25, 2002). The effect of this change was immaterial.

Millions of yen

Finished goods and merchandiseWork-in-process
Raw materials
Supplies
Films
Total

Annual Report 2003

2003

2002

2003

￥ 3,465￥ 3,344

110
1,296
603
887
￥ 6,361

100
1,164
625
1,284
￥ 6,517$ 28,875
917
10,8005,025
7,391$ 53,008

5. SECURITIES:The following tables contain a summary of investments in securities that were classified as available-for-sale securities at March
31, 2003 and 2002.
Millions of yen

As of March 31, 2003
Acquisition
cost

Gross
unrealized
gains

Gross
unrealized
lossesBook value(Estimatedfair value)

612

2

(163)

451

Acquisition
cost

Gross
unrealized
gains

Gross
unrealized
lossesBook value(Estimatedfair value)

5,099

17

(1,358)3,758

Acquisition
cost

Gross
unrealized
gains

Gross
unrealized
lossesBook value(Estimatedfair value)

849

---

(163)

686

Equity securities

Thousands of U.S. dollars

As of March 31, 2003

Equity securities

Millions of yen

As of March 31, 2002

Equity securities

25

Thousands of
U.S. dollars

6. PROPERTY, PLANT AND EQUIPMENT:
Depreciation charges for the years ended March 31, 2003 and2002 amounted to ¥1,968 million ($16,400 thousands) and ¥1,903
million, respectively. The estimated useful lives of the majorclasses of depreciable assets ranged from 3 to 50 years(principally 47 years) for buildings and structures and from 3 to 20
years (principally 3 years) for machinery and equipment.

7. SHORT-TERM BORROWINGS AND LONGTERM DEBT:

the shares for each of the 20 consecutive trading days is morethan 130% of the conversion price in effect on each such tradingday.
The no interest convertible bonds, due 2009, were issued on
December 20, 2001 and are convertible into common stock at aconversion price of ¥3,774.00 per share. From February 1, 2002
the Company can redeem all of the bonds, if the closing price ofthe shares for each of the 20 consecutive trading days is morethan 130% of the conversion price in effect on each such tradingday.
At March 31, 2003, the following assets were pledged as collateralfor long-term debt and other liabilities:
Thousands ofShort-term borrowings of ¥6,997 million ($58,309 thousands) at
March 31, 2003, bearing interest ranging from 0.84% to 1.375%
per annum, comprised bank overdrafts.

Land

Long-term debt at March 31, 2003 consisted of the following:

Buildings and structures, net ofaccumulated depreciation

Millions of yen

U.S. dollars￥3,902$32,517

3,451

28,758￥7,353$61,275

Millions of yen

Thousands of
U.S. dollars

1.0% interest-due 2005

￥12,262$102,184

No interest-due 2007

10,00083,3338. DERIVATIVE FINANCIAL INSTRUMENTS:

No interest-due 2009

15,000125,000

The Companies use derivative financial instruments (“derivatives”)
to reduce their exposure to the adverse impact of fluctuations ininterest rates. The principal derivatives used by the Companies
are interest rate swaps.

Total

Convertible bonds

Loans payable to banks and otherfinancial institutions due 2002–2003,
with interest ranging from 0.696% - 1.800%
Secured3,990

Unsecured

Less:portion due within one year
Total

33,25088733￥41,340$344,500(

508)
￥40,832(

4,233)$340,267

The aggregate annual maturities of long-term debt as at March
31, 2003 were as follows:Year ending March 31:

2004(current portion)

Millions of yen￥

508

Thousands of
U.S. dollars

$

4,233

2005

420

3,500

2006

12,682

105,6842007

10,42086,8332008 and thereafter

17,310144,250￥41,340$344,500

Total

The derivatives are subject to market risk and credit risk. Market
risk means that gains or losses in the value of the derivatives
could result from fluctuations in interest rates. Gains or losses on
the derivatives are, however, effectively offset by gains and losseson the underlying liabilities since they also result from fluctuationsin interest rates.
Credit risk means that the Companies are exposed to losses
which could result from the default of counter parties. The
Company believes, however, that risk of loss due to default fromcounter parties is extremely small because the Companies limit
their dealings with counter parties to only financial institutions withhigher credit ratings.

9. INCOME TAXES:
The Company is subject to several taxes based on income which,in aggregate, resulted in a statutory tax rate of approximately 42%
in the periods ended March 31, 2003 and 2002.
In 2003, a reconciliation of the difference between the statutory
tax rate and the effective income tax rate was not prepared due to“Loss before income taxes” amounting to ¥30,049 million. The reconciliation for 2002 is as follows.
2002

The 1.0% convertible bonds, due 2005, were issued on June 17,
1994 and are convertible into common stock at a conversion priceof ¥3,321.30 per share. These convertible bonds are redeemableat the Company’s option in the period from October 1, 2000 to
September 29, 2005 as provided in the indentures.

Statutory tax rate

42.0%

Change in valuation allowance

(6.0)

Other

(2.6)

The no interest convertible bonds, due 2007, were issued on
December 20, 2001 and are convertible into common stock at aconversion price of ¥4,037.00 per share. From February 1, 2002
the Company can redeem all of the bonds, if the closing price of

Effective income tax rate per statements of income

33.4%

Annual Repor t 2 0 0 3

26

The significant components of deferred tax assets at March
31, 2003 and 2002 were as follows:
Thousands of
U.S. dollars

Millions of yen￥

Inventories
Allowance for doubtful accounts
Accrued expenses

2003

2002

516

￥ 189

2,351

1,677

Accrued enterprise taxes

2003

$

10,408

123

---

---

254

189

2,117

Unrealized loss onrevaluation of securities

65

68

544

Loss on disposal of capitalized
development costs

---

1,798

14,983Tax loss carry forwards in parent
company

9,930

---

82,750Tax loss carry forwards inconsolidated subsidiaries

1,204

2,806

10,033

838

228

6,984

Other

18,205

5,821

3,316)( 2,069)￥14,889￥3,752Sub-total
Less:valuation allowance
Deferred tax assets

(

￥

2002

￥

158

Interest cost

2003

497

$

1,317

48

52

400

18) (

16) (

150)

Transition obligation

37

37

308

Actuarial differences

19

14

158

(

Amortization:

Allowance for early retirement
Net periodic benefit costs

82
￥

326

109
￥

693

684
$

2,717

The assumptions used of account for the defined benefit plans forthe years ended March 31, 2003 and 2002 were as follows:

151,711(27,636)$124,075

10. ACCRUED RETIREMENT BENEFITS FOREMPLOYEES:

Method of attributing the projected benefit
obligations to periods of service
Discount rateLong-term rate of return on plan assets

2003

2002

Straight-line
basis

Straight-line
basis

2.5%

2.5%

2.5%

3.5%

The Company and its domestic consolidated subsidiaries have
unfunded lump-sum benefit plans and funded non-contributory
pension plans, generally covering all employees. Under the termsof the Company’s and its domestic subsidiaries’ retirement plans,
substantially all employees are entitled to a lump-sum payment at
the time of retirement. The amount of the retirement benefits is, ingeneral, based on the length of service, basic salary at the time ofretirement, and reason for retirement.
The non-contributory pension plans of the Company and its
domestic subsidiaries, which cover those employees who have
served with those companies for more than 10 years and havealready reached the age of 45, generally provide for pension
payments for a period of ten years subsequent to retirement (or alump-sum payment at the retiring employee’s option). The annual
charge for current service costs in respect of these plans isdetermined actuarially and funded currently through outsidetrustees.

Amortization period for transition obligation

15years

15years

Amortization period for actuarial differences

13years

13years

The following tables set forth the changes in the projected benefit
obligations, plan assets and funded status of the Company and its
domestic consolidated subsidiaries at March 31, 2003 and 2002.

Balance at end of year

Millions of yen

Thousands of
U.S. dollars

2003

2002

2003

Projected benefit
obligations at end of year

￥ 1,976￥ 1,929$ 16,467

Fair value of plan assets at
end of year

467

503

3,892

Funded status:
Projected benefit obligations
in excess of plan assets

1,509

1,426

12,575

Unrecognized transition obligation

442

479

3,683

Unrecognized actuarial differences

263

242

2,192

Accrued pension liability recognizedin the consolidated balance sheet

27

2003

Service cost

Expected return on plan assets

Accrued retirement benefits for
employees

Thousands of
U.S. dollars

Millions of yen

4,300
19,592541

1,249

Retirement and pension costs of the Company and its domestic
consolidated subsidiaries for the years ended March 31, 2003 and2002 were as follows.

Annual Report 2003

￥

804

￥

705

$

6,700

11. COMMON STOCK, ADDITIONAL PAID-IN
CAPITAL AND RETAINED EARNINGS:
Changes in the number of issued shares of common stock during
the years ended March 31, 2003 and 2002 are summarized
below:
Thousands of shares

Balance at beginning of year
Issued upon conversion of bonds

2003

2002

58,43558,3091

12658,43658,435On the accompanying consolidated financial statements,“Additional paid-in capital” consists of the capital reserve pursuant
to the Japanese Commercial Code, amounts transferred from
common stock and/or the capital reserve and proceeds from theresale of treasury stock in excess of their cost (collectively, the“other capital reserves”) etc. and “Retained earnings (Accumulated
deficit)” consists of the earned reserve pursuant to the JapaneseCommercial Code, voluntary reserves, unappropriated retained
earnings (undisposed accumulated deficit), etc.

12. APPROPRIATION OF UNAPPROPRIATED RETAINEDEARNINGS OR OTHER CAPITAL RESERVES AND LEGAL RESERVE:The Japanese Commercial Code requires that all appropriationsof unappropriated retained earnings, except for interim cash dividends, be approved at an ordinary general meeting of shareholders. In accordance with customary practice in Japan, the appropriation of unappropriated retained earnings is not accrued in thefinancial statements for the year to which it relates, but is recordedin the subsequent accounting year after shareholder approval has
been obtained.
The Japanese Commercial Code provides that an amount equal
to at least 10% of cash dividends and directors bonuses etc. paid
be appropriated and set aside as the earned reserve. No further
appropriation is required when the sum of the earned reserveand the capital reserve pursuant to the Japanese Commercial
Code (collectively, the “legal reserves”) equals 25% of common
stock. The legal reserves may be used to eliminate or reduce a
deficit by resolution of the shareholders or may be capitalized byresolution of the Board of Directors.
The maximum amount that the Company can distribute as
dividends is calculated based on the unconsolidated financial
statements of the Company in accordance with the JapaneseCommercial Code. In addition,unrealized holding gains on available-for-sale securities, net of related taxes, are not available for
distribution as cash dividends or bonuses to directors and/or statutory auditors. Under the amended Japanese Commercial Code,amounts transferred from common stock and/or the capital reserve is available for distribution as cash dividends.
The following disposal of accumulated deficit and appropriationsof other capital reserves of the Company were proposed and resolved at the general meeting of shareholders held on June 20,
2003.
(1) Disposal of accumulated deficit
Millions of yen

Thousands of
U.S. dollars(￥12,050)($100,417)

Reversal of general reserve

7,000

58,334

Reversal of other capital reserves(amounts transferred from capital reserve)

5,050

42,083

Balance of accumulated deficit atMarch 31, 2003
Disposal -Balance of accumulated deficit after
disposal￥

0$

13. TREASURY STOCK:
Under the amended Japanese Commercial Code, the Company isallowed to acquire its own shares to the extent that the aggregate
cost of treasury stock does not exceed the maximum amount available for dividends. Treasury stock is stated at cost within“Shareholders’ equity” on the accompanying consolidated balance
sheets. Net gains on the resale of treasury stock are included in“Additional paid-in capital” on the accompanying consolidated balance sheets.
1,515,405 of the Company’s common stock shares were outstandingat March 31, 2003.

14. BALANCES AND TRANSACTIONS WITHRELATED PARTIES:Balances due to and transactions of the Company with relatedparties other than consolidated subsidiaries for the years ended
March 31, 2003 and 2002 can be summarized as follows:
Thousands of
U.S. dollars

Millions of yen

2003

2002

2003

An affiliated company:
KOKO CAPCOM CO., LTD.
Accounts receivable-Trade

￥

176

￥

94

$

1,467

Net sales

￥

265

￥

94

$

2,208

15. SEGMENT INFORMATION:(1) Business segments
The Companies have four business segments. The “Home video
games” segment develops and distributes home video gamesoftware. The “Arcade games” segment develops, manufacturesand distributes arcade game software and hardware toamusement facility operators. The “Arcade operations” segment
operates amusement facilities. The “Other segment” mainlycomprises the distribution of motion picture films and rented
battery chargers.
The following tables present certain information regarding thebusiness segments for the years ended March 31, 2003 and 2002.

0(2) Appropriation of other capital reserves

Balance of other capital reserves at
March 31, 2003

Millions of yen

Thousands of
U.S. dollars￥23,006$191,717

Appropriations D
Cash dividends (¥10 per share outstandingat March 31, 2003)(
569)
Reversal of the balance of amounts
transferred from the capital reserve for
elimination of the accumulated deficit(
5,050)
Balance of other capital reserves after
appropriations￥17,387(

4,742)(

42,083)$144,892

Annual Repor t 2 0 0 3

28

Thousands of
U.S. dollars

Millions of yen

2003

2002

2003

2003

Net sales:

2002

2003

Depreciation:

Home video games:

Home video games

Customers￥ 48,090 ￥ 47,769$400,750

Arcade games:￥

Arcade games
Arcade operations

Customers

960

3,565

8,000

Inter-segment

154

389

1,283

1,114

3,954

9,283

9,243

8,327

77,025Arcade operations:

Other

Other:

461

￥

400

$

3,842

78

226

650

1,033

1,086

8,608

264

72

2,200

1,836

1,784

15,300

367

388

3,058

￥ 2,203￥ 2,172$ 18,358￥￥$

Sub-total
Eliminations and corporate
Consolidated

Customers

Capital expenditure:

Customers

3,744

3,082

31,200

---

1

---

Inter-segment

Sub-total
Eliminations and corporate

Thousands of
U.S. dollars

Millions of yen

Consolidated

250

809

1,098

6,742

577

2,086

4,808

1,986

3,653

16,5503,083

31,20063,133518,258

Other￥ 62,036 ￥ 62,743$516,966

4,750

90

3,744

1,292)

379

30

62,191390) (

570

Arcade games
Arcade operations155) ((

Home video games

Sub-total
Eliminations and corporate
Consolidated

304

529

2,533

￥ 2,290￥ 4,182$ 19,083

Cost of sales and direct expenses:
Home video games￥ 41,329 ￥ 36,512$344,408

Arcade games

1,648

4,410

13,733

Arcade operations

7,102

7,153

59,183

Other

3,393

2,877

28,27553,47250,952445,599

Sub-total

2,064

15,700￥ 55,356 ￥ 53,016$461,299

Japan:

1,884

Customers

Home video games
Arcade games

￥

Other
Sub-total

Consolidated

6,761 ￥ 11,257
534) ((

Arcade operations

Eliminations and corporate

2003

2002

2003

￥37,191￥40,666$309,925

6,682

5,473

55,68343,873

46,139365,608

16,418

14,236

136,817

Inter-segment

Operating income (loss):(￥$ 56,342

456) (

4,450)

2,141

1,174

17,842

North America:

351

206

2,925

Customers

8,719

12,181

72,659Inter-segment

2,039) (2,454) (6,680 ￥

9,727

Millions of yen

2003

2002

Thousands of
U.S. dollars

Millions of yen

Net sales:

Eliminations and corporate
Consolidated(2) Geographic areas
The following tables present certain geographic area information for the years ended March 31, 2003 and 2002.

16,992)

---

6

---

16,41814,242

136,817

7,820

7,267

65,167

5,067$ 55,667
Thousands of
U.S. dollars

Europe:Customers

2003

Total assets:
Home video games$322,850

Other:

Arcade games

5,225

12,54543,542Customers

608

573

Arcade operations

7,217

9,757

60,142

Inter-segment

40

53

333

648

626

5,400

68,75968,274572,992

6,723) (5,531) (56,026)Other
Sub-total
Eliminations and corporate
Consolidated

29￥ 38,742 ￥ 42,717

Annual Report 2003

14,70816,357

122,566

65,892

81,376549,100

40,756

47,136339,633￥106,648 ￥128,512$888,733

Sub-total
Eliminations and corporate
Consolidated(￥62,036￥62,743$516,966

Thousands of
U.S. dollars

Millions of yen

2003

2002

2003

￥ 37,836￥ 37,409$315,300

North America

14,258

11,869118,816Europe

7,154

6,224

59,617

Cost of sales and direct expenses:
Japan

Other
Sub-total
Eliminations and corporate

(

690

586

5,750

59,93856,088499,483

4,582) (3,072) (38,184)￥ 55,356

Consolidated￥ 53,016$461,299

16. LEASES:(1) Financing leases
Lease transactions as a lessee
Payments in respect of financing leases that do not transfer ownership of the leased assets to the lessee, for the years ended March
31, 2003 and 2002 were ¥1,183 million ($9,858 thousand) and¥1,207 million, respectively.
The future lease payments at March 31, 2003 excluding amounts
representing interest and the future lease payments at March 31,
2002 including amounts representing interest are as shown below.
The change of calculation method is due to the increase in materiality to the balances of “Property, plant and equipment”.
Thousands of
U.S. dollars

Millions of yen

Operating income (loss):

2003
￥

Japan

666

Europe(Consolidated

8,730$ 50,308

2,373

18,001

(
￥

5,550

1,043

42)

Sub-total
Eliminations and corporate

￥

2,160

North America

Other

6,037

40 (
12,18673,5092,141) (2,459) (17,842)

￥

9,727

￥

2002

Due within one yearJapan

Due after more than one year

￥ 70,377$424,583

11,2799,969

93,992Europe

7,034

3,231

58,617

Other
Sub-total

345

2,516

83,922579,70837,08344,590309,025￥106,648￥128,512$888,733

Eliminations and corporate
Consolidated

302
69,565

936

748

806

6,233

1,634 ￥

1,742

$ 13,616

2003

Total assets:￥ 50,950

886 ￥

$

7,383

Thousands of
U.S. dollars

Millions of yen

2003

North America

2003(2) Operating leases
Future lease payments under non-cancelable operating leases at
March 31, 2003 and 2002 were as follows:

Thousands of
U.S. dollars

Millions of yen

2003$ 55,667￥

Due after more than one year

350)

8,821

6,680

Due within one year

2002

￥

￥

546 ￥

2002
546

2003
$

4,550

1,336

1,883

11,133

1,882 ￥

2,429

$ 15,683(3) Foreign sales
The following table presents certain information regarding sales of
the Companies outside Japan for the years ended March 31, 2003
and 2002.
Thousands of
U.S. dollars

Millions of yen

2003

2002

2003

￥ 17,419￥ 15,337$145,158

8,081

7,410

67,342

Net sales:
North America
Europe

816

782

6,800

￥ 26,316￥ 23,529$219,300

Other

Percentage

Percentage of such sales included inconsolidated net sales

2003

2002

42.4%

37.5%

Annual Repor t 2 0 0 330

Report of Independent Auditors
To the Board of Directors andShareholders of
Capcom Co., Ltd.

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of shareholders’equity and of cash flows present fairly, in all material respects, the financial position of Capcom Co., Ltd. and its consolidated subsidiaries at March 31, 2003 and 2002, and the results of their income and their cash flows for the years then ended in accordancewith accounting principles generally accepted in Japan. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our auditsof these statements in accordance with auditing standards generally accepted in Japan which require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 2(8) to the consolidated financial statements, the Company has changed its accounting policy for sales returns.
The amounts expressed in U.S. dollars have been provided solely for the convenience of readers and have been translated on thebasis set forth in Note1 to the accompanying consolidated financial statements.

June 20, 2003

(Notice to readers)
The accompanying financial statements are not intended to present the financial position and results of operations and cash flows inaccordance with accounting principles and practices generally accepted in countries and jurisdictions other than Japan. Accordingly theaccompanying consolidated balance sheets and related consolidated statements of income, shareholders’ equity and cash flows, and theirutilization, are not designed for those who are not informed about Japanese accounting principles, procedures and practices.
The standards, procedures and practices utilized in Japan to audit such financial statements may differ from those generally accepted incountries and jurisdictions other than Japan.

31

Annual Report 2003

History

1979
1983
1984
1985
1989
1990
1991
1993
1994
1996
1999
2000
2001
2002
2003
Established I.R.M Corporation with objectives of developing and selling electric
applied game machines in Matsubara, Osaka.

Established old CAPCOM CO., LTD. in Hirano, Osaka.

Releasing “ VULGUS” for the
first arcade video game.

Established CAPCOM U.S.A., INC. in California, U.S.A.
Initiated producing home video games.

Corporate name was changed into CAPCOM CO., LTD.
and a head office was moved to Higashi-ku, Osaka.

Stocks registered as OTC securities

with the Japan Securities Dealers Association

Released “ STREET FIGHTER” for arcade video game.

Stock was listed on the Second Sectionof the Osaka Securities Exchange.

Constructed head office which was relocatedto Uchihirano-machi, Chuo-ku, Osaka.

Released “ RESIDENT EVIL” for PlayStation.

Stock changed list on the First Section of the Osaka Securities Exchange.

Stock was listed on the First Section of the Tokyo Stock Exchange.

Released “ ONIMUSHA” and “ Devil May Cry” for PlayStation 2.

Established CE EUROPE LTD. in U.K.

Established CEG INTERACTIVE ENTERTAINMENT GmbH in Germany.

Annual Repor t 2 0 0 3

32

Corporate Information
Corporate Data

Consolidated Subsidiaries

Name of Company :CAPCOM CO., LTD.

Date of Establishment :May 30,1979

Principal Businesses :Planning, development, sale of gamesoftware and management of
amusement arcades

Paid-in Capital :￥27,581 million(US$ 229,842 thousand)Number of Shares Issued : 58,435,819 shares
End of Term :March 31

Number of Employees :1,305 (Consolidated)
1,162 (Non-consolidated)

Stock Listings :Tokyo Stock Exchange ,Osaka Securities Exchange( As of March 31, 2003)

CAPCOM U.S.A., INC.
475 Oakmead Parkway, Sunnyvale,California 94085, U.S.A.
TEL : 1-408-774-0500
FAX : 1-408-774-3994
http : //www.capcom.com/

CAPCOM COIN-OP, INC.
475 Oakmead Parkway, Sunnyvale,California 94085, U.S.A.
TEL : 1-408-774-0500
FAX : 1-408-522-5331

CAPCOM ENTERTAINMENT, INC.
475 Oakmead Parkway, Sunnyvale,California 94085, U.S.A.
TEL : 1-408-774-0500
FAX : 1-408-774-3995

CAPCOM STUDIO 8 ,INC.
Head Office :3-1-3 Uchihirano-machi, Chuo-ku,
Osaka 540-0037, Japan
TEL : 81-6-6920-3611
FAX : 81-6-6920-5100
http : //www.capcom.co.jp/

Research & Development Office : 3-2-8 Uchihirano-machi, Chuo-ku,
Osaka 540-0037, Japan
TEL : 81-6-6920-7600
FAX : 81-6-6920-7698
Tokyo Branch :2-1-1 Nishi Shinjuku, Shinjuku-ku,
Tokyo 163-0411, Japan
TEL : 81-3-3340-0710
FAX : 81-3-3340-0711

Directors and Corporate Auditors
President and CEO :Kenzo Tsujimoto

Executive Vice President and CFO :Heiji Oshima

Senior Managing Director and COO : Haruhiro Tsujimoto
Managing Director :Tamio Oda

Directors :Kyouji Kitamura
Kouichi Hori
Masanao Iechika

Standing Corporate Auditors :Shoji Yamaguchi
Shigeo Konishi

Corporate Auditors :Morio Kuroda
Yoshio Nakayama( As of June 20, 2003)

475 Oakmead Parkway, Sunnyvale,California 94085, U.S.A.
TEL : 1-408-774-0500
FAX : 1-408-774-3955

CAPCOM EUROSOFT LTD.
9th Floor, 26 - 28 Hammersmith Grove,Hammersmith,London W6 7HA, U.K.
TEL : 44-20-8846-2550
FAX : 44-20-8741-4176

STATUS CO., LTD.
3-1-3 Uchihirano-machi, Chuo-ku,Osaka 540-0037, Japan
TEL : 81-6-6920-3655
FAX : 81-6-6920-5154

CAPTRON CO., LTD.
3-1-3 Uchihirano-machi, Chuo-ku,Osaka 540-0037, Japan
TEL : 81-6-6920-3637
FAX : 81-6-6920-5138

CAPCOM ASIA CO.,LTD.
Units 1205-6, 12/F, New East Ocean Centre,
9 Science Museum Rd., T.S.T. East, Kowloon, Hong Kong
TEL : 852-2366-1001
FAX : 852-2366-1985
http : //www.capcomasia.com.hk/

FLAGSHIP CO., LTD.
2-1-1 Nishi Shinjuku, Shinjuku-ku,Tokyo 164-0012, Japan
TEL : 81-3-5328-8071
FAX : 81-3-5328-8072

CAPCOM CHARBO CO., LTD.
3-1-3 Uchihirano-machi, Chuo-ku,Osaka 540-0037, Japan
TEL : 81-6-6920-3616
FAX : 81-6-6920-3632

CE EUROPE LTD.
9th Floor, 26 - 28 Hammersmith Grove,Hammersmith,London W6 7HA, U.K.
TEL : 44-20-8846-2550
FAX : 44-20-8741-4176

CEG INTERACTIVE ENTERTAINMENT GmbH
Barmbeker Str.4b D-22303 Hamburg Germany
TEL : 49-4069-656230
FAX : 49-4069-656222

33

Annual Report 2003

CAPCOM CO., LTD.
3-1-3 Uchihirano-machi, Chuo-ku, Osaka 540-0037, Japan
TEL : 81-6-6920-3611 FAX : 81-6-6920-5100
http://www.capcom.co.jp/

Printed in Japan