Smart Technology for an Eco-friendly Life

Smart Technology for an Eco-friendly Life

MegaChips Corporation

Annual Report2012

Year Ended March 31, 2012

Customers(Equipment manufacturers)

Contractmanufacturers

Offering servicesas a development

partner

Specializes inresearch,

developmentand design

Outsourcemanufacturing

Newproducts

Camera manufacturers

Securities companies

Industrial equipmentmanufacturers

Domesticmanufacturers

Core technology•Image processing

technology•Audio processing

technology•Communication

technology

•Developing and offering specialty technologies in an effective manner

•Product concept•Comprehensive

design•Development of

specialty technologies

•System LSI•Modules &

boards•System

devices

Game devicemanufacturers

Domesticmanufacturers

Overseasmanufacturers

Overseasmanufacturers

Development of newproducts through

the cooperation in the areaof specialty technologies

Offering State-of-the-Art Technologiesfor the Future of People and SocietyMegaChips Corporation has developed original LSIs and system products and provided them to customers in the image, audio, and communications fields, based on a mission of helping people achieve safety, security and fulfilling lives, while protecting the global environment, based on sophisticated technological capabilities.

The emergency of the digital equipment environment in recent years has brought to Japan the advanced information society, in which product functionality improves rapidly and product types are diversifying. With these changes, manufacturing customers are asking MegaChips to provide increasingly sophisticated and diverse products.

MegaChips aspires to play a role in creating an affluent and highly fulfilling society, by supplying to its manufacturing customers a broad range of original solutions that large corporations find difficult to provide. The Company aims to offer these solutions by accurately identifying ongoing social changes, taking advantage of its characteristics as an R&D-oriented fabless manufacturer, and creating new value that has never existed before, applying its sophisticated technological capabilities.

A History of Development

LSIs for game consoles

Real-time automatic power measurement system

Image systems for security and monitoring areas

Wii, Nintendo 3DS and Nintendo DS are the registered trademarks or trademarks of Nintendo Co., Ltd

“One-Seg” modulesImage-processing LSIs for digital cameras

Profile

Business Models

1 MegaChips Corporation

MegaChips Corporation and Consolidated SubsidiariesFor the five years ended March 31

Profile ···············································1Financial Highlight ····························2Message from the President on Business Results and Strategies ·········3Close Up: Introducing new products ···8R&D and Intellectual Property Strategy ······························9

CSR Activities ··································10Corporate Governance····················11Directors and Auditors ····················13Financial Section ·····························14Corporate Data/ Stock Information ···························44

C O N T E N T S Note:This annual report includes forward-looking statements, with the exception of historical data that is noted as such. These statements are based on management’s assumptions and projections in light of information currently available to the Company. These assumptions involve risks and uncertainties that may cause actual results, performance or achievements to be materially different from those expressed or implied in the forward-looking statements.

88.1988.19

3,0343,03435,36635,36636,25936,25938,49538,495

52,77152,77150,67150,671

3,0333,0333,0553,055

4,8124,812

3,4443,444 2,1272,1272,2882,2882,1402,140

2,6722,6722,6122,612

29,24729,24729,20329,20326,61226,612

33,11533,11535,32935,329 24,97724,97725,45325,453

24,43924,439

20,56420,56421,43621,436 88.8088.80

94.6494.64

110.21110.21105.60105.60

88.1988.19

3,0343,03435,36635,36636,25936,25938,49538,495

52,77152,77150,67250,672

3,0333,0333,0553,055

4,8124,812

3,4453,445 2,1272,1272,2882,288

2,1402,140

2,6722,6722,6122,612

29,24729,24729,20329,203

26,61226,612

33,11533,11535,32935,329 24,97724,977

25,45325,45324,43924,439

20,56420,56421,43721,437 88.8088.80

94.6494.64

110.21110.21105.60105.60

Net Sales

0

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12/311/310/309/308/3

(¥ Millions)

Operating Income

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(¥ Millions)

Total Assets

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(¥ Millions)

Net Assets

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Financial Highlight

Millions of yen except for per share information, and number of shares issued at year end

Thousands ofU.S. dollars

2008 2009 2010 2011 2012 2012For the Year:

Net sales ¥ 50,672 ¥ 52,771 ¥ 38,495 ¥ 36,259 ¥ 35,366 $ 430,304Cost of sales 42,833 43,671 31,833 29,731 28,687 349,039 Operating income 3,445 4,812 3,034 3,055 3,033 36,913Net income 2,612 2,672 2,140 2,288 2,127 25,887

At Year-End:Total assets 35,329 33,115 26,612 29,203 29,247 355,855Net assets 21,437 20,564 24,439 25,453 24,977 303,895

Yen U.S.dollars

Per Share Information:Net income 105.60 110.21 88.19 94.64 88.80 1.08Net assets 876.66 849.02 1,006.08 1,060.19 1,042.70 12.68

Shares Shares

Number of Shares Issued at Year End 24,904,517 24,667,317 24,353,900 24,038,400 24,038,400 24,038,400Note: The U.S. dollar amounts are provided solely for the convenience of the readers at the rate of ¥82.19 US$1, the rate prevailing on March 31, 2012.

2Annual Report 2012

Aiming at the Global Market as a Comprehensive Semiconductor-Producing Company by Providing a Range of Solutions

Message from the President on Business Results and Strategies

During the fiscal year ended March 31, 2012, the economic environment remained very challenging, given the effects of the Great East Japan Earthquake, the flooding in Thailand, the financial crisis in Europe, and the sharp appreciation of the yen. In this economic environment, with lower demand for electronic components, such as semiconductors and consumer electronic equipment, the overall market for the electronics showed a year-on-year decline.

Despite these conditions, given the rapid progress in enhancing and diversifying digital equipment performance, the number of business opportunities that enable us to take advantage of our technologies have increased. Accordingly, we were able to develop and engage in sales activities for a wide range of products, including high-performance application-specific memory, system LSIs, and system products that contain our own system LSIs.

Although both sales and income declined year on year, net sales, operating income, and net income exceeded the plan, reflecting the strong sales of digital image monitoring systems in the security business, and aggressive sales activities, responding to the recovery in demand for mainstay LSIs for storing game software (custom memories) in the second half of the year. The

What were the operating results for the fiscal year ended March 31, 2012?

Amid the challenging business environment, we faced a fall in sales and profits, but developed business by harnessing the strengths of our unique technologies.

Q

A

Akira TakataPresident and Representative Director


Game area

Digital camera area

Eco-energyarea

Industrialapplication

area

Security area

ゲーム分野

デジタル家電分野

エコエネルギー分野

産業用途分野

セキュリティ分野

(Billions of yen)

2012/3 2011/3 YoYchange

Net sales 35.3 36.2 -2.5%

Operating income 3.03 3.05 -0.7%

Net income 2.12 2.28 -7.0%

Results for the fiscal year ended March 31, 2012

In the Medium-Term Growth Strategy that was

established in May 2012, we have determined a clear

corporate direction to achieve recognition as a firm that

MegaChips aims to become an internationally regarded company that

provides service solutions around the world.

A

What is the medium-to long-term outlook?

Q

fiscal year under review is regarded as a year of steady progress in research and development, including the development of the image-processing technologies used in digital cameras, and the development of LSI products, which will enhance the our growth in the future.

provides service solutions worldwide, in addition to an

existing policy of building an appropriate business

portfolio. Specifically, the Medium-Term Growth Strategy

stipulates the two basic policies described below.

The first growth strategy is to establish an

appropriate business portfolio that is not concentrated in

certain businesses, by developing an eco-energy area and

an industrial application area along with our current

“customer-oriented business in the consumer area.”

In the customer-oriented business area that

MegaChips specializes in, we will continue to strive to

strengthen our business foundation by improving the

technological and developmental capabilities to respond

to a range of businesses centered in the consumer area.

Moreover, we will focus on new growth fields of eco-

energy and industrial applications providing our own

technologies and products to more customers. For

example, in the fiscal year ended March 31, 2012, in the

eco-energy area, we have commercialized automatic

electric power measurement system that can contribute

to an energy-saving society, and LSI BlueChip, which

enhance the quality of communications by using radio

communications and electric power line communications

in a mutually complementary manner. (These products

are presented on page 8.) As these products can be used

in stores, offices, and factories, in addition to smart

houses that optimize energy consumption, they will

Styles of technology provision Approach Market

Expanding Business Based on Medium-to Long-Term Strategies

Combining the ideas of LSIs and

systems

Core technologies

from a medium-tolong-term

perspective

Design Development

IP

LSIs

Modules & Boards

System products

Customer-orientedbusiness

Development and provisionof customer-specific solutions that support the needs of customers.

•�Acquire�competitive�core�technologies.

•�Bolster�strength�through�global collaboration. Strengthen technologies, marketing, production and services.

Diversesolutions

Medium-tolong-term

Current

4Annual Report 2012

As part of the initiative to strengthen our ability to

provide total solutions and establish a structure for

entering the global market—the second item of the

Medium-Term Growth Strategy—in July 2012 we plan

to purchase all shares of Kawasaki Microelectronics, Inc.

(“KME”), the wholly owned subsidiary of JFE Holdings,

Inc., to make it a subsidiary of MegaChips.

The key to our decision to make KME a subsidiary

was that the characteristics and strengths of the two

companies are highly complementary. We judged that

we would be able to create a new growth axis and

trade in the global market by integrating their business

resources and superior technologies.

By using a fabless LSI manufacturing system

(without owning a factory) in the same manner as

MegaChips, KME offers comprehensive services from

designing, fabrication, assembly, and testing to quality

assurance to major customers both in Japan and

overseas in the areas of communications, images,

information, and office automation. KME is growing

and strengthening its business through its subsidiary in

the United States (which serves as an R&D center for

the development of essential future technologies), its

branch in India (which serves as a development center),

and its Taiwan branch (which serves as a support base

for Taiwanese and Chinese customers).

In the meantime, we are targeting leading

companies in Japanese industries. As an R&D-oriented

fabless manufacturer of LSI products and system

products with own LSIs, MegaChips’ defining

characteristic has been the ability to provide technologies

and products by understanding and forecasting market

trends based on an extensive knowledge of customers’

products and services. We particularly excel in the area

of upstream development, focusing on images, audio,

and communications technologies. Through our

unique technologies, we have been offering system

LSIs, software related to system LSIs, and system

products that contain self-developed LSIs.

However, amid the recent rapid technological

innovation in the electronics sector, manufacturers are

required to demonstrate an extensive range of

capabilities to respond to customers’ various demands

and needs in both Japan and overseas for planning,

development, manufacturing, and even quality

guarantees. In response, while targeting medical

equipment and industrial applications of growth areas,

we will work on strengthening our total solutions

capabilities in order to steadily provide support in a


likely become our key products in the future that

position the eco-energy area as a strategic business.

In this way, while we struggle to strengthen our

customer-oriented business that is the foundation of our

business, we will aim to establish an appropriate business

portfolio by developing businesses in the eco-energy area

and the industrial application area, the key business areas

for our medium-to long-term growth.

The second growth strategy is to strengthen

ability to provide total solutions and to establish a

structure for entering the global market.

To achieve further growth in the medium-to long-

term and to respond to increasingly sophisticated and

diversified customer requirements, we believe it is

essential for us not only to provide solutions that focus

mainly on our existing superior technology development,

but also to provide the optimal solutions for customer

requirements in a broad context, from planning and

development to production and support services. It is also

necessary for us to enter the global market so that we

can continue to grow in the future, unaffected by the

severe business environment in Japan. We will strive to

establish a structure in which we can offer support

related to production and quality, and strengthen our

ability to provide total solutions, from planning and

development to production and support services.

Moreover, we will aim to strengthen our worldwide

marketing capabilities by developing overseas operating

bases, expanding our customer base for future growth.

What is the objective of makingKawasaki Microelectronics, Inc. a subsidiary?

By integrating the strength of the two companies, MegaChips aims to become a

globally competitive comprehensive semiconductor-producing company.

Q

A


comprehensive manner from planning and development

to manufacturing, assembling, and testing. Moreover, in

the future, Japanese electronic machinery and

equipment manufacturers, our target companies, are

likely to accelerate local development, local production,

and local procurement through their overseas operating

bases. To respond to this development and ensure our

sustainable growth, we have established a global

development and production structure and expanded

our overseas customer base as important strategies.

As measures to develop this overseas operational

structure, we will strive to aggressively utilize global

alliances and acquire global human resources, while

also focusing on developing overseas operating bases

for marketing and dealing with overseas customers to

establish an international customer foundation.

Considering this environment, KME, which has

been quick to establish an overseas development and

production structure and has an extensive overseas

network, is considered to be in the best position for us

to efficiently acquire the functions and resources we will

need in the future. By adding this new subsidiary, we

believe that we will be able to become a comprehensive

semiconductor-producing fabless manufacturer capable

of providing total solutions to our customers.

MegaChips is currently ranked 23rd among the top

global fabless semiconductor manufacturers, and is the

only Japanese company in this global ranking. We will

aim to achieve a higher position and make MegaChips

grow from a domestic company into a global one.

2011 Top 25 Fabless IC Suppliers

Rank Headquarters Company

1 U.S. Qualcomm

2 U.S. Broadcom

3 U.S. AMD

4 U.S. Nvidia

5 U.S. Marvell

6 Taiwan MediaTek

7 U.S. Xilinx

8 U.S. Altera

9 U.S. LSI Corp.

10 Singapore Avago

11 Taiwan MStar

12 Taiwan Novatek

13 Europe CSR

14 Europe ST-Ericsson

15 Taiwan Realtek

16 China HiSilicon

17 China Spreadtrum

18 U.S. PMC-Sierra

19 Taiwan Himax

20 Europe Lantiq

21 Europe Dialog

22 U.S. Silicon Labs

23 Japan MegaChips

24 U.S. Semtech

25 U.S. SMSC

Source: Company reports, IC insights' Strategic Reviews Database

MegaChips aims to become an internationally regarded company that provides service solutions around the world.”“

6Annual Report 2012

President and Representative Director

In the fiscal year ending March 31, 2013, both Japanese

and global economies are likely to continue to face

uncertain conditions, and the market environment for

the electronic machinery and equipment industry is also

expected to remain challenging. However, demand for

certain electronic components is likely to grow,

reflecting the increasing use in automobiles and

expanding demand for smartphones and tablets.

Moreover, communications and broadcasting are

digitizing and diversifying at a rapid pace, indicating a

move toward an even more advanced information

society. Based on our concept of integrating LSIs and

systems knowledge, we will continue to strive to

aggressively develop businesses by maximizing the use

of our unique technologies.

In the fiscal year ending March 31, 2013, we will

start mass production of new products, including

system LSIs for game consoles and LSIs for digital

cameras. As a result, we expect to gain momentum in

improving our earnings capabilities, and to record

significantly higher sales and income. I am convinced

that the current fiscal year will be a turning point for

future growth.

The specific impact on performance from the

purchase of KME shares and related figures are currently

under review. As a result, they are not reflected in the

current plan for the fiscal year ending March 2013. The

consolidated forecast for the fiscal year ending March

2013, taking the impact of these share purchases into

account, is expected to be announced when results for

the first quarter of the current fiscal year are announced

(in late July 2012).

MegaChips regards the distribution of profits to the

shareholders as an important management issue, and is

working to distribute profits in line with earnings. We

have adopted a policy in which dividends are determined

and paid once a year based on either a dividend payout

ratio of about 30% or a consolidated dividend on equity

(DOE) of about 2%, whichever is greater, taking into

consideration such factors as our consolidated operating

results, financial circumstances, and investment plans. In

accordance with this policy, we paid an annual dividend

of ¥27 per share as an ordinary dividend for the fiscal

year ended March 31, 2012 (compared with ¥29 for the

previous fiscal year).

We hope that we will be able to continue to count on

the support and understanding of our shareholders.

June 2012

Dividends Payout Ratio

0

10

30

20

08/3 09/3 10/3 11/3 12/3

32 33

2729

27

30.3 29.9 30.6 30.6 30.4

40(¥)

0

20

60

40

80(%)

Dividends & Payout Ratio

What is the outlook for full-year results for the current fiscal year?

I am convinced that the current fiscal year will be a turning point for future growth.

Q

A

How do you view shareholder return?

We consider shareholder return to be an important management issue, and will try

to improve our stock value.

Q

A


7 MegaChips Corporation7

For more information, please see our web site.

HOME>Product Solutions>New Network Technologies

http://www.megachips.co.jp/english/product/technology/new01.html

Close UpIntroducing new products

Developing communication LSIs of the world’s first technology to contribute to an energy-saving society

BlueChip

Energy saving starts with “visualization”

Despite a recent rise in awareness of saving electricity

and the increasing use of energy-saving home electronics,

the problem remains that consumers cannot accurately

assess how electricity consumption is affected by the way

home electric appliances are used at different times of

the day. By responding to this problem and achieving the

visualization of electric power consumption in detail, we

can start implementing highly accurate energy-saving

initiatives that represent actual conditions.

Realizing a full-scale energy saving society with BlueChip

Applying BlueChip to smart meters, solar power

systems, storage batteries and other home electronics

will enable us to achieve the visualization of electric

power and create an environment for equipment

control, to a certain degree, via smartphones and tablet

terminals. For example, we will be able to control

power supply while away from home and automatically

control air conditioners and lightings for energy-saving.

Moreover, by concentrating the power

consumption information of each equipment on cloud

computing, for example, we are likely to be able to

manage electric power consumption at a number of

places by remote control for power saving, thereby

significantly contributing to the expansion of the use of

new systems that realize effective energy saving.

Image of service that integrates BlueChip and the internet

Lighting apparatus

Solar power systems

Internet

Air conditioner

Storage battery

Gateway

Users can monitor power consumption and control power supply for each device via smartphones and tablet terminals

Air conditioner

Stora

“BlueChip” that realizes hybrid telecommunications based on wireless and power line communications

In the fall of 2011, MegaChips announced the

development of BlueChip, large-scale integrated circuits

(LSIs) that achieves more reliable telecommunications,

and is currently engaged in the development of

BlueChip. Two functions that BlueChip possesses

—wireless and power line communications—can

counter each other’s deficiencies and prevent

discontinuity when wireless communications or power

line communications is used separately, achieving a

steadier communication environment.

8Annual Report 2012

Europe

Asia

Total number of ownerships:

8 4

442628

624

168

104

269

JapanU.S.A

RegistrationsApplications

872Total number of registrations:

403

Others 2

R&D Policy:Provide the system LSI and the system products, as well as the service solutions using

the applicable system products in the fields of images, audio, and communications.

MegaChips protects its rights to technologies and

other knowledge that it derives from its R&D activities.

These intellectual assets make us even more

competitive and underpin our distinctive products and

services in the image, audio and communication fields,

where technological progress is rapid.

Since we are a fabless technology company

focused on R&D, our ideas at the R&D stage, know-

how and other intellectual property centered on core

and basic technologies constitute the foundation of

our competitive advantage. We therefore define

efforts to secure rights for intellectual property as a

Major Patent Applications (the Fiscal Year Ended March 31, 2012)

Patent Applications and Registrations by Region 1

source of competitiveness and pursue a strategy of

obtaining intellectual property in line with the

strategies of individual business segments.

In the fiscal year ended March 31, 2012,

MegaChips filed patent applications for its original

hybrid communication technology as well as electric

power measuring system technology. It also applied

for patents for new businesses involving image

processing circuit technology for digital camera, image

recognition technology for in-vehicle cameras and

sensor-related technology.

Development of LSI products

Development of other productsDevelopment of algorithms and architectures relating to image compression and decompression, image processing and communications

•LSIs for game consoles and other entertainment equipment •LSIs for audio and visual equipment

•LSIs for processing digital camera and other images

• IP for modules using the LSIs described above and LSIs for image processing systems

LSI products

•�Technologies to enhance the reliability of semiconductor memory

•�Image processing and circuit technologies for digital cameras

•�Human and object detection algorithms

•�Technologies for video image compression and decompression (Low delay and high quality picture)

•�Technologies related to sensors

Other products

•�Technologies related to surveillance cameras

•�Hybrid communications technologies

•�Technologies related to electric power measuring systems

•�Lighting control technologies

•Digital image recording systems •Digital image transmission servers •Security monitoring cameras

•Security systems •Automatic power measurement system

Major R&D themes

R&D Policy and Development Themes

R&D and Intellectual Property Strategy Pursuing and Harnessing Technical Innovation

Intellectual Property Strategy

Basic technology

R&D

1 The number of cases shown are the cumulative total as of the end of March 2012.

2 “Others” denotes the number of applications for patents that are valid under international patent treaties in multiple countries where MegaChips may begin operations in the future.


Awards ceremony at the 13th Campus Venture Grand Prix Osaka

• Reduce volume of materials (direct materials) for the products

• Reduce volume of materials (indirect materials) during manufacture

• Reduce energy consumed for manufacturing

• Reduce energy consumed during transportation

• Reduce energy consumed when using products

• Reduce volume of waste materials

•�Lowering power consumption

•�Downsizing

•�Reducing the number of components

•�Enhancing the efficiency of development and design

Development and design of

eco products

Major reduction in environmental burden with the development of eco products

Production (Outsourcing) Transportation Use Waste materials

Reducing the environmental burden over the product lifecycle

MegaChips understands the importance of protecting

the planet for future generations. Based on this

understanding, we are committed to achieving

symbiosis between our business and the environment,

contributing to a greener and cleaner Earth. To achieve

this, we have developed an environmental

management system complying with ISO14001.

We are working on protecting the environment

by manufacturing eco-friendly and recyclable products

by developing lower-power-consuming and downsized

products, reducing chemical substances that impact

on the environment, and conducting green

procurement by adopting our unique Green

Procurement Guidelines, promoting eco-office

activities that focus on conserving energy and

resources in our offices, and conforming to laws,

regulations, and other environmental policies from a

compliance perspective.

Environmental Activities

CSR Activities As a Responsible Member of Society

MegaChips is developing a technology platform-

oriented business based on its unique technology and

a fabless system in which production is outsourced.It

has constructed a quality management system that is

ISO9001-compliant to improve the quality of all

operations from the stage of planning, research and

development through production, shipping and other

services, to ensure that it provides the best products

and services that satisfy customer demands.

MegaChips has set up a system to provide

high-quality products and services by undertaking a

project to improve customer satisfaction.

Quality guarantee structure

Supporting Entrepreneurial Education for StudentsStudents at universities in the Kansai area are invited

each year to take part in a new business idea contest

called the Campus Venture Grand Prix Osaka. Based

on our belief that young entrepreneurs are vital to

the growth of Japan’s economy, we have been

supporting this contest from our inception. The

director of MegaChips was on the jury at the new

technology category of the 13th Campus Venture

Grand Prix Osaka.

We intend to continue to support the contest in

future years.

Major social activities in the fiscal year ended March 31, 2012

10Annual Report 2012

Corporate Governance

We define our corporate social responsibilities as

encompassing maintaining compliance, committing to

the timely disclosure of important information,

developing and supplying high-quality products that

take full advantage of our own technologies, practicing

comprehensive quality control and protecting the

environment. In our view, consistently fulfilling these

responsibilities is essential if we are to increase

corporate value and if our directors and employees are

to continually recognize that only by faithfully meeting

the expectations of society with sophisticated and

unique technologies and earning public trust will the

Company achieve sustained growth.

Based on this attitude, we seek to continuously

improve our corporate governance to ensure that we

make appropriate decisions, that our management is

transparent and efficient, and that we convincingly

demonstrate accountability.

( )( )

Internal AuditSection

Business execution and internal control organizations

Internal controlorganization

Acco

un

ting

Au

dito

rs

Co

rpo

ration

Lawyers

General Meeting of Shareholders

Business executionorganization

Risk ManagementCommittee

Directors, Executive Officers and

Auditors of the Company

ManagementCommittee

Administrative divisionRespective divisions

RepresentativeDirector

Decisions on appointments, dismissals and

remuneration (ceilings)

Decisions on appointments, dismissals and

remuneration (ceilings)

Appointments and dismissals

Audits and reports

Internalaudits

Appointments and dismissals Proposition and reports

Accounting audits

SupervisionReports

Cooperation

Reports

Reports Cooperation

Board of Directors10 Directors

Including 2 OutsideDirectors( )

Board of Auditors4 Corporate AuditorsIncluding 3 Outside

Auditors( )

Responsible forinternal control audits

Responsible foroperational audits

Corporate Governance Structure

Our Basic View


Raising Corporate Value and Practicing Sound Corporate Management

Governance Structure

The Board of Directors, which consists of ten Directors

appointed at General Meetings of Shareholders,

discusses strategies, makes decisions, and provides

overall supervision of the operations of the Company.

The Board of Directors, which meets once each month,

has established a scheme that permits the ten Directors

to examine management from diverse perspectives and

to make the necessary decisions as the Company’s

ultimate business decision-making body, with a small

number of directors enabling fast action.

Among the Directors, two Outside Directors act

to ensure management objectivity and transparency by

asking questions, stating opinions and offering advice

as may be necessary from external viewpoints.

The Company has established a Board of Auditors.

Three of the Company’s four Auditors appointed at

General Meetings of Shareholders are Outside

Auditors. The Company emphasizes the independence

of its Auditors from Directors.

Each of the Auditors conducts audits to

determine whether or not the Board of Directors is

making decisions on basic management policies and

important matters for the Company, and is executing

operations appropriately.

The Board of Auditors monitors the compliance of

executed tasks with laws, the Articles of Incorporation

and internal regulations and determines their legality.

No Outside Directors or Outside Auditors have been employed by the Company prior to their current appointments. The Company has no personnel, financial, technical, trade or any other relationship with any company for which any of its Outside Directors or Outside Auditors, or any of their close relatives serves as an officer or an employee over the last ten years, with the exception of an advisory contract with a law firm to which one of the Outside Auditors belongs.

To achieve the objective of (1) increasing management

effectiveness and efficiency, (2) ensuring the reliability

of financial reports, (3) ensuring full compliance and (4)

protecting assets, as required by law, the Board of

Directors of the Company has established a basic policy

covering internal control that reflects the provisions of

the Company Law. Based on this policy, the Company

strives to build and operate an internal control system

in compliance with the rules set out in the Company

Law and the Financial Instruments and Exchange Law.

The Company’s Representative Director is

responsible for establishing, executing and supervising

internal control in accordance with the basic policy on

internal control. The Representative Director supplies the

Company’s stakeholders with financial reports that are

highly reliable and transparent, as required by law. In

addition, the Representative Director puts mechanisms

in place and makes arrangements to ensure that

important internal tasks associated with financial

reporting comply with laws and regulations and that

those tasks are efficiently performed by “establishing”

an internal control system and monitoring and

evaluating the appropriate “application” of the system.

Specifically, the Internal Audit Section, which

reports directly to the Representative Director,

performs internal audits in cooperation with Auditors

and examines whether or not the internal check

system is functioning properly among the Company’s

divisions on a day-to-day basis.

The Internal Audit Section reports its audit findings to

the Representative Director. The Section issues

improvement orders based on the Representative Director’s

instructions and checks the state of improvement when

there are items in need of improvement.

In addition, the Internal Audit Section undertakes

internal control audits in accordance with the Financial

Instruments and Exchange Law. The Section submits

reports to the Representative Director after evaluating

the status of establishment and application with

respect to internal control. The Internal Audit Section

also makes recommendations concerning

improvements to managers as it sees fit.

Using the procedures described above, the Company

examines and evaluates its internal control system.

No “serious flaw” or “inadequacy” was identified

in the internal control report for the fiscal year ended

March 31, 2012. The Company has also received from

its Accounting Auditors an internal control audit report

with an unqualified opinion for the same fiscal year.

(As of June 26, 2012)

Board of Directors

Auditors and the Board of Auditors

Internal Control System


Akira TakataPresident and Representative Director

Tetsuo FuruichiDirector

Tadashi SumiStanding Statutory Auditor

Yoshimasa HayashiExecutive Vice President

Tetsuo HikawaDirector

Hisakazu NakanishiOutside Auditor

Shigeki MatsuokaExecutive Vice President

Gen SasakiDirector

Nozomu OharaOutside Auditor

Masayuki FujiiSenior Managing Director

Hiroyuki MizunoOutside Director

Keiichi KitanoOutside Auditor

Yukio YamauchiSenior Managing Director

Kunihiro YamadaOutside Director

Directors

Directors and Auditors

Auditors


Financial Section

Five-Year Summary 15Analysis of Sales and Financial Standing

Analysis of Business Results 16High Liquidity and Outstanding Reserves 18Financial Position 19Research and Development, Patents and Other Intellectual Property Rights 20Business and Other Risks 21

Consolidated Financial Statements 23Notes to the Consolidated Financial Statements 28

CONTENTS


Five-Year Summary

MegaChips Corporation and Consolidated Subsidiaries For the five years ended March 31

Millions of yenexcept for employees

Thousands of U.S. dollars 1

2008 2009 2010 2011 2012 2012

For the YearOperating Results:Net sales ¥ 50,672 ¥ 52,771 ¥ 38,495 ¥ 36,259 ¥ 35,366 $ 430,304Operating income 3,445 4,812 3,034 3,055 3,033 36,913Net income 2,612 2,672 2,140 2,288 2,127 25,887R&D expenses 1,361 1,606 1,374 1,217 1,452 17,677Segment Information:Net sales

LSI Business ¥ 48,062 ¥ 48,569 ¥ 36,124 ¥ 33,080 ¥ — $ —Systems Business 2,610 4,201 2,371 3,178 — —

Operating incomeLSI Business ¥ 4,245 ¥ 4,791 ¥ 4,212 ¥ 3,728 ¥ — $ —Systems Business (738) 22 (1,141) (574) — —

At Year-EndFinancial Position:Total assets ¥ 35,329 ¥ 33,115 ¥ 26,612 ¥ 29,203 ¥ 29,247 $ 355,855Net assets 21,437 20,564 24,439 25,453 24,977 303,895Other Information:Employees 235 253 259 269 277 277

Yenexcept for PER and market capitalization

U.S. dollars 1

Per Share InformationNet income ¥ 105.60 ¥ 110.21 ¥ 88.19 ¥ 94.64 ¥ 88.80 $ 1.08Net assets 876.66 849.02 1,006.08 1,060.19 1,042.70 12.68Cash dividends 32 33 27 29 27 0.32

Stock Information (March 31)Stock price ¥ 1,258 ¥ 1,563 ¥ 1,400 ¥ 1,484 ¥ 1,638 $ 19.92PER (Times) 11.91 14.18 15.87 15.68 18.45 18.45Market capitalization (Millions of yen, Thousands of U.S. dollars)

¥ 31,330 ¥ 38,555 ¥ 34,095 ¥ 35,672 ¥ 39,374 $ 479,071

RatioOperating income to sales (%) 6.8 9.1 7.9 8.4 8.6ROE (%) 12.7 2 12.7 9.5 9.2 8.4ROA (%) 7.7 2 7.8 7.2 8.2 7.3Shareholders’ equity ratio (%) 60.7 62.1 91.8 87.2 85.4Sales to total assets ratio (Times) 1.50 1.54 1.29 1.30 1.21

Operating income per employee(Millions of yen) ¥ 15 ¥ 20 ¥ 12 ¥ 12 ¥ 11

1 The U.S. dollar amounts are provided solely for the convenience of the readers at the rate of ¥82.19 US$1, the rate prevailing on March 31, 2012.

2 Income for the fiscal year ended Mach 31, 2008 was increased approximately 770 million by the tax effects of a loss carried forward, which resulted from the absorption of a consolidated subsidiary on April 1, 2007.

3 The Company reviewed the reported segments of the LSI Business and the Systems Business, and has determined to treat such businesses as one business segment starting from the fiscal year ended March 31, 2012.

3

3

3

3


Analysis of Sales and Financial Standing

MegaChips Corporation and its Consolidated Subsidiaries

The MegaChips Group (“MegaChips”) recorded net

sales of ¥35,366 million, nearly the same level as the

previous year (down 2.5% year on year), with steady

demand for customer-specific digital image monitoring

systems for security and monitoring applications, in

addition to demand for its core product, LSIs for

storing game software (custom memories).

The consolidated cost of sales for the fiscal year was

¥28,687 million. The consolidated cost of sales ratio

improved 0.9 percentage points from the previous

fiscal year, to 81.1%. As a result, the consolidated

gross profit rose 2.3% from the previous fiscal year, to

¥6,679 million.

Consolidated selling, general and administrative

(SG&A) expenses increased by ¥172 million from the

previous fiscal year, to ¥3,645 million, reflecting

initiatives taken to strengthen human resources and

R&D to ensure MegaChips’s growth. SG&A expenses

consisted mainly of personnel expenses of ¥1,211

million (down 2.5% from the previous fiscal year),

including salaries, allowances for bonuses and other

items, and R&D expenses of ¥1,452 million (up 19.3%

from the previous fiscal year). As a fabless

manufacturer dedicated to research and development,

MegaChips is proactive in its R&D activities.

Analysis of Business ResultsAs a result of the developments described above,

consolidated operating income for the fiscal year

under review fell 0.7% from the previous fiscal year,

to ¥3,033 million.

The difference between non-operating income and

non-operating expenses for the consolidated fiscal

year under review stood at income of ¥228 million,

mainly reflecting the recording of ¥248 million in

dividend income as non-operating income. The

difference between extraordinary income and

extraordinary losses was income of ¥197 million,

mainly reflecting the recording of a gain on sales of

investment securities of ¥199 million as extraordinary

income. As a result, net income before taxes was

¥3,460 million (down 0.8% from the previous fiscal

year).

Consolidated net income fell 7.0% from the previous

fiscal year, to ¥2,127 million, the result of income,

inhabitant and enterprise taxes totaling ¥1,288 million

(a rise of 1.7% from the previous fiscal year) and

adjustments for income taxes amounting to positive

¥44 million (compared with negative ¥65 million

posted in the previous fiscal year).

Net Sales

Cost of Sales, SG&A Expenses and Operating Income

Income Before Income Taxes and Minority Interests

50,67250,67252,77152,771

38,49538,49536,25936,259 35,36635,366

3,4453,445

4,8124,812

3,0343,034 3,0553,055 3,0333,033

(¥ Millions) (¥ Millions)

Net Sales Operating Income to SalesOperating Income

0

20,000

40,000

60,000

08/3 09/3 10/3 11/311/3 12/312/3 08/3 09/3 10/3 11/311/3 12/312/3 08/3 09/3 10/3 11/311/30

1,000

2,000

3,000

4,000

5,000(%)

0

2

4

6

8

10

6.86.8

9.19.1

7.97.98.48.4

12/312/3

8.68.6

Net Income




2,1272,127 88.8088.802727

2,2882,288 94.6494.642929

32 33105.60

110.21110.21

88.1927

2,140

2,612 2,672

(¥ Millions)

Net Income

0

1,000

2,000

3,000

08/3 09/3 10/3 11/3 12/312/3

(¥)

Net Income Per Share

0

40

80

120

08/3 09/3 10/3 11/3 12/312/3

(¥)

Dividends

08/3 09/3 10/3 11/3 12/312/30

40

30

20

10

Senior management of the Company regards the

appropriate distribution of profits to its shareholders as

an important management issue, and seeks to distribute

profits in line with earnings. The basic policy is as follows:

(1) To maintain the internal reserves required to

maintain a healthy financial position that can

withstand variations in the business environment

and to make investments for the medium- to

long-term growth of the Company (such as

investments in human resources, investments to

accelerate the achievement of a suitable business

portfolio, and investments to develop original

products and undertake the basic research for

creating innovative new technology as a fabless

company dedicated to research and development),

aiming to continuously improve our corporate value.

(2) The distribution of retained earnings shall be

determined by taking into consideration such factors

as consolidated operating results, financial

circumstances, and investment plans, but in principle

the amount to be distributed shall be either a

dividend payout ratio of about 30%, or about 2%

of the consolidated dividend on equity (DOE),

whichever is greater. (However, this amount may,

following due consideration, be increased or

decreased when there are special factors affecting

the financial results.) Specifically, the annual dividend

to be distributed per share shall be determined as

either (a) or (b) below, whichever is greater.

a. Calculate the aggregate amount of dividends

as an amount equivalent to about 30% of

the consolidated net income, and divide this

amount by the number of shares that have

been issued at the end of the period, minus

the number of shares held by the Company

at the end of the period.

b. Calculate the aggregate amount of dividends

as an amount equivalent to about 2% of the

consolidated dividend on equity (DOE), and

divide this amount by the number of shares

that have been issued at the end of the

period, minus the number of shares held by

the Company at the end of the period.

(3) The Company shall endeavor to return profits to

shareholders by acquiring its own shares

expeditiously, taking into consideration such as

market conditions, movements of stock prices, and

the Company’s financial circumstances in order to

improve the efficiency of capital.

In accordance with the above policy, with respect

to distributing retained earnings for the fiscal year

under review, the Company decided to pay an annual

dividend of ¥27 per share as an ordinary dividend (¥29

for the previous period) to shareholders as of March

31, 2012.

Dividends


2,1422,142

–72

781

9,877

601601

(¥ Millions)

Free Cash Flow

–2,000

4,000

2,000

0

10,000

6,000

8,000

08/3 09/3 10/3 11/3 12/312/3

High Liquidity and Outstanding Reserves

Cash and cash equivalents (“net cash”) at the end of

the fiscal year ended March 31, 2012 came to ¥7,228

million on a consolidated basis, down ¥275 million

from the end of the year ended March 31, 2011 (up

¥1,017 million in the year ended March 31, 2011).

The status of cash flows at the end of the year ended

March 31, 2012 was as follows:

Net cash provided by operating activities was

¥1,032 million (compared with net cash provided of

¥1,761 million in the year ended March 31, 2011),

mainly reflecting net income before taxes of ¥3,460

million (down 0.8% year on year), as well as income

tax paid of ¥1,474 million and an increase in

inventories of ¥1,058 million.

Net cash used in investment activities was ¥430

million (compared with net cash provided of ¥381

million in the year ended March 31, 2011), primarily

reflecting the purchase of long-term prepaid expenses

of ¥566 million and proceeds from sales of investment

securities of ¥313 million. As a result, free cash flow,

which is the sum of the net cash provided by operating

activities and the net cash used in investment activities,

resulted in cash provided of ¥601 million (compared

with ¥2,142 million of net cash provided in the year

ended March 31, 2011).

Net cash used in financing activities was ¥760

million (compared with net cash used of ¥1,080

Cash Flow million in the year ended March 31, 2011). This was

mainly due to cash dividends paid of ¥692 million.

We borrow funds from financial institutions to raise

working capital, when necessary. Borrowings from

financial institutions during the consolidated fiscal year

under review were \4 billion, and there was no

outstanding balance of borrowings from financial

institutions as of the end of the consolidated fiscal

year under review.

We believe we can raise the funds we need for

growth as required by selling accounts receivable on

hand, borrowing from banks, or increasing capital,

given our sound asset composition, financial

position, and ability to generate cash flows through

operating activities.

Financial Policy


Total assets at the end of the fiscal year amounted to

¥29,247 million (an increase of ¥44 million from the

end of the previous fiscal year). By asset item, current

assets, centered on cash and cash equivalents, trade

notes and accounts receivable, and inventories, rose

¥1,688 million from the previous fiscal year, to

¥25,434 million. The main contributing factors behind

this change included increases in inventories of \1,058

million and trade notes and trade accounts receivable

of ¥476 million from the previous consolidated fiscal

year. High liquidity characterizes the MegaChips

balance sheet, as shown in the asset breakdown.

Current assets accounted for 87.0% of total assets.

The current ratio was 601.1%.

Quick assets, obtained by deducting an inventory

of ¥1,696 million from these current assets, were

¥23,738 million. They accounted for 81.2% of

consolidated total assets. This asset structure is a result

of MegaChips operating as a fabless manufacturer,

which does not have assets, such as production

facilities, in which the Company makes long-term



24,97724,977

29,24729,247

25,45325,453

29,20329,203

35,32933,115

21,43720,564

24,439

26,612

(¥ Millions)

Net Assets

0

10,000

20,000

30,000

08/3 09/3 10/3 11/3 12/312/3

(¥ Millions)

Total Assets

08/3 09/3 10/3 11/3 12/312/30

40,000

30,000

20,000

10,000

Shareholders’ Equity Ratio

08/3 09/3 10/3 11/311/3

(%)

0

20

40

60

80

100

60.760.7 62.162.1

91.891.887.287.2

12/312/3

85.485.4

Financial Positioncapital investments. We will continue striving to

maintain a sound and highly liquid asset structure in

the future.

Total liabilities at the end of the fiscal year under

review amounted to ¥4,270 million (a rise of ¥520

million year on year). The main contributing factors for

this change were increases in notes and accounts

payable-trade of ¥265 million and provision for loss on

construction contracts of ¥338 million from the

previous fiscal year. Liabilities consisted mainly of trade

payables of ¥2,252 million, which were primarily

outstanding payments to companies that manufacture

LSIs for MegaChips as its contractors.

Net assets amounted to ¥24,977 million, down

¥476 million year on year. The main contributing

factors for this change were a 7.0% year-on-year

decrease in consolidated net income, to ¥2,127

million, and a fall in valuation difference on available-

for-sale securities of ¥1,618 million from the previous

fiscal year. The resulting shareholders’ equity ratio for

the end of the fiscal year under review was 85.4%.


MegaChips invested a consolidated total of ¥1,452

million in R&D expenses for the fiscal year under review.

The Company is allocating its resources to

research and development in the fields of images,

audio and communications, targeting a wide array of

products, including entertainment equipment, such as

game consoles, digital TV-related equipment, and

digital cameras. It is developing LSI products, including

system LSIs that resolve issues identified in the

equipment, module and boards that use the system

LSIs, and intellectual property for the system LSIs, by

integrating its systems expertise with its LSI knowledge.

In addition to product development as described

ROE

08/3 09/3 10/3 11/3 12/312/3

(%)

0

15

10

5

ROA

08/3 09/3 10/3 11/3 12/312/3

(%)

0

9

6

3

7.7* 7.812.7* 12.7

9.5

7.2

8.28.2

9.29.2

7.37.3

8.48.4

Research and Development, Patents and Other Intellectual Property Rightsabove, the Company is developing technologies and

products principally in the security monitoring and

eco-energy-related fields, based on its basic LSI

technologies in the fields of images, audio and

communications.

The Company also emphasizes the protection of

intellectual property rights in the form of patents and

other industrial property rights as part of its

management strategies. As of the end of the fiscal

year under review, the details of the industrial property

rights the Company holds, and the details of patents

out of the industrial property rights the Company

holds by country, are as follows:

Industrial Property Rights (As of March 31, 2012)

Patents TrademarksIC Design

RightsTotal

Acquired 403 49 2 454Applied for 469 5 — 474

Total 872 54 2 928

Patents by Country (As of March 31, 2012)

Japan USA TaiwanChina(including

Hong Kong)

Korea EU Other Total

Acquired 269 104 9 10 7 4 — 403Applied for 355 64 3 10 5 4 28 469

Total 624 168 12 20 12 8 28 872

Income for the fiscal year ended Mach 31, 2008 was increased approximately 770 million by the tax effects of a loss carried forward, which resulted from the absorption of a consolidated subsidiary on April 1, 2007.


MegaChips has identified the following risks pertaining to its operations and other matters that may seriously affect investors’ judgment.

Forward-looking statements in this section represent the judgment of MegaChips as of June 26, 2012.

(1) PurchasersMegaChips principally sells LSIs for storing game software (custom memories) for use in game consoles; LSIs for game consoles and their peripherals; LSIs for digital cameras image processing; and digital video monitoring systems for security and monitoring applications. The proportion of net sales that involves providing LSIs for game software (custom memories) to Nintendo Co., Ltd. (“Nintendo”) is particularly high.

Accordingly, our operating results may be impacted by market trends for game software and the game consoles that use these products, and may also be influenced by the extent to which Nintendo adopts our products, among other factors.

Net sales to Nintendo amounted to ¥28,483 million in the fiscal year under review. They accounted for 80.5% of consolidated net sales.

(2) Contract Manufacturers (Suppliers)Since its foundation, MegaChips has adopted a business model in which it operates as an R&D-oriented fabless enterprise, concentrating its management resources on research and development. Consequently, MegaChips contracts the manufacturing of products to third parties, enabling it to develop products that best meet customer needs based on its unique technological capabilities and expand its business without the need to invest in plant and equipment that require substantial investments. We work with a number of different manufacturers in Japan and overseas, although a very significant percentage of purchases are made from Macronix International Co., Ltd. (“Macronix”), which manufactures for us LSIs for storing game software (custom memories) supplied to our major customer Nintendo and LSIs for game consoles and their peripherals.

Hence, should Macronix cease manufacturing, our operating results may be impacted.

We have entered into manufacturing agreement contracts with Nintendo and Macronix, respectively. We intend to build solid and close ties with these companies to ensure a constant supply of products.



Business and Other Risks

Dependence on Specific Customers

(1) Risks Associated with LSI ProductsMegaChips has adopted a fabless model in which it owns neither a manufacturing plant nor an equipment of its own, and instead outsources manufacturing to third parties. It outsources the manufacturing of LSI products to major semiconductor manufacturers both in Japan and overseas.

Hence, demand and supply in the semiconductor market may affect the quantities and prices of products that we procure, and we may not be able to procure products in the quantities and at the prices that we have anticipated.

Our LSIs are used in state-of-the-art digital devices, and the pace of technological innovation in this field is quite rapid, so there is no guarantee that these products will continue to be used. Moreover, as equipment mounted with our LSIs is exposed to intense competition and demand volatilities, demand for our LSIs may fluctuate.

(2) Risks in Other ProductsIn addition to LSI products, we offer application products including electronics devices and system devices based on our LSI technologies in the field of images, audio and communications.

For these products, we have sought to maintain our technological edge in areas such as digital image processing and network technologies, and our competitive edge by supplying unique, optimized solutions for customer services. However, technological change in this area is rapid and technological trends and developments in the services of other companies may affect demand for our products.

Moreover, in the event that a totally new market is created, the market may not grow as we foresee and our operating results may be affected.

(3) Risks in Strategic InvestmentIn the event that we engage in strategic tie-ups, including equity participation, to accelerate the growth of our businesses, there is a possibility that the benefits that we anticipate, such as the creation of business synergies or increased earnings, may not materialize.

(4) Research and DevelopmentUnder the philosophy of expanding our business through “Innovation,” remaining coexistent with customers through

Business


“Credibility,” and continuing to contribute to society through “Creation,” we have operated based on our technological development capabilities. Our competitiveness derives from “Specialization” in products for specific customers and for specific areas of application in the growing image, audio, and communication-related markets, a “Concentration” of our resources on research and development activities to provide the most advanced technologies and products to our customers, and the showing of our “Uniqueness”.

We believe that we can continue to develop and introduce to the market innovative and attractive products. However, our industry is exposed to constant technological change, and new technologies, new services, or other changes may quickly emerge. There is no assurance that we can always respond quickly to these changes and we may be required to invest a large sum in research and development. This could in turn affect our operating results.

(5) Recruitment MegaChips operates based on its technological development capabilities in the areas of images, audio, and communication, each of which demands excellent engineers. We have take steps to establish a personnel management policy necessary for that purpose and have maintained excellent technological development capabilities in our business. However, if many excellent engineers were to leave MegaChips or new engineers can not be recruited in the future, we could become less competitive.

(1) Defending against AcquisitionsMegaChips believes that defending against acquisitions that are not in the best interests of its shareholders is an important management issue although it has not set out a basic policy on control of the company. For this reason, we have been collecting information on recent acquisitions.

(2) Accounting AuditorsFor any reason attributable to us or in the event that the accounting auditors violate or contravene laws or ordinances or we believe that the accounting auditors have offended public order or morals, the Board of Auditors shall deliberate on the dismissal or non-reappointment of the accounting auditors. In the event that we consider it appropriate to dismiss or not reappoint the accounting auditors, we shall request the Board of Directors to submit the “dismissal or non-reappointment of the account

auditors” as a proposition to our General Meeting of Shareholders, and the Board of Directors shall deliberate.

(3) Risk Concerning the Establishment of Internal Control Systems

MegaChips has recognized the emphasis on legal compliance and the establishment of a corporate governance system as important managerial issues. We have consequently taken steps to strengthen and enhance risk management.

We also instituted fundamental policies at the meeting of the Board of Directors on internal control pursuant to the provisions of the Company Law. Based on these policies, we have been improving our internal control systems, including those associated with financial statements, pursuant to the Financial Instruments and Exchange Law, carrying out our operations in accordance with the rules, and evaluating the results. In this way, we ensure that we manage our businesses properly and lawfully.

However, if any extraordinary event not assumed under the internal control systems that we have established were to occur, the credibility and comprehensiveness of financial reporting and information disclosure by us may not be assured. In this case, we may lose the trust of our stakeholders and we may experience a material adverse effect on our financial position and operating results.

Note, however, that no such events have occurred thus far.

(4) Intellectual Property RightsAs an R&D-oriented fabless enterprise, MegaChips recognizes that the protection of its intellectual property rights is material to its business development.

In addition, we have concentrated on building an internal system for intellectual property rights and strengthening cooperation with patent law offices to actively file applications to register patents and trademarks and protect the products and services we offer. We simultaneously investigate the rights of other companies thoroughly, to prevent any infringements.

However, there exists no assurance that all patents or trademarks for which we file applications will be registered. Additionally, as it is impossible to fully investigate the technologies and rights of other companies prior to publication thereof, we may infringe on the intellectual property rights of other companies and litigation may be filed against us. In this case, our operating results may be affected.

As of June 26, 2012, no litigation had been filed against us in respect to any intellectual property right.

Management


Consolidated Balance Sheets

MegaChips Corporation and its Consolidated SubsidiariesMarch 31, 2011 and 2012

ASSETS Thousands of yenThousands of

U.S. dollars (Note 1)2012 2011 2012

Current assets:

Cash and cash equivalents (Note 5 and 6) ¥ 7,228,018 ¥ 7,503,256 $ 87,942

Receivables

Trade (Note 6)

Notes 32,192 19,155 391

Accounts 15,604,485 15,140,665 189,858

Others — — —

Allowance for doubtful receivables (1,094) (1,061) (13)

Inventories (Note 10 and 11) 1,696,135 637,726 20,636

Deferred income taxes (Note 15) 381,961 273,434 4,647

Other current assets 492,898 172,545 5,997

Total current assets 25,434,598 23,745,723 309,460

Property and equipment:

Buildings 227,437 215,065 2,767

Tools, furnitures and fixtures 410,059 382,975 4,989

637,497 598,040 7,756

Less accumulated depreciation (553,666) (489,590) (6,736)

Total property and equipment 83,830 108,449 1,019

Intangible assets (Note 12): 57,825 63,639 703

Investments and other assets:

Investment securities (Note 6 and 7) 2,270,232 4,187,223 27,621

Long-term prepaid expenses 976,627 665,808 11,882

Deferred income taxes (Note 15) 97,647 186,008 1,188

Other investments 327,030 249,082 3,978

Allowance for doubtful receivables — (2,675) —

Total investments and other assets 3,671,538 5,285,446 44,671

Total assets ¥ 29,247,792 ¥ 29,203,259 $ 355,855

The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.


LIABILITIES AND NET ASSETS Thousands of yenThousands of

U.S. dollars (Note 1)2012 2011 2012

Current Iiabilities:Payables:

Trade (Note 6) ¥ 2,140,100 ¥ 1,922,329 $ 26,038 Others 548,339 426,480 6,671

Accrued expenses 419,017 395,795 5,098 Income taxes payable 699,230 889,591 8,507 Provision for loss on construction contracts (Note 11) 388,193 49,251 4,723 Other current liabilities 36,754 22,130 447

Total current liabilities 4,231,635 3,705,579 51,486

Long-term liabilities:Deferred income taxes (Note 15) — — —Other long-term liabilities 39,025 44,346 474

Total long-term liabilities 39,025 44,346 474 Total liabilities 4,270,660 3,749,926 51,960

Net Assets (Note 17):Shareholders' equity

Common stockAuthorized — 100,000,000 sharesIssued24,038,400 shares in 201124,038,400 shares in 2012 4,840,313 4,840,313 58,891

Capital surplus 6,181,300 6,181,300 75,207 Retained earnings 13,967,586 12,536,142 169,942 Treasury stock, at cost

30,020 shares in 201184,020 shares in 2012 (112,777) (45,385) (1,372)Total shareholders’ equity 24,876,422 23,512,370 302,669

Accumulated other comprehensive incomeNet unrealized gains on securities 708,021 2,326,955 8,614 Foreign currency translation adjustments (607,313) (385,993) (7,389)

Total accumulated other comprehensive income 100,708 1,940,962 1,225 Total net assets 24,977,131 25,453,332 303,895 Total liabilities and net assets ¥ 29,247,792 ¥ 29,203,259 $ 355,855



Consolidated Statements of Income and Comprehensive Income

MegaChips Corporation and its Consolidated SubsidiariesFor the years ended March 31, 2011 and 2012

Thousands of yenThousands of

U.S. dollars (Note 1)2012 2011 2012

Net sales ¥ 35,366,733 ¥ 36,259,447 $ 430,304 Cost of sales (Note 10 and 11) 28,687,521 29,731,376 349,039

Gross profit 6,679,211 6,528,071 81,265

Selling, general and administrative expenses (Note 9 and 14) 3,645,267 3,472,933 44,351

Operating income 3,033,943 3,055,137 36,913

Other income (expenses):Interest and dividend income 254,141 281,855 3,092 Interest expense (1,358) — (16)Gain on sales of investment securities 199,292 371,050 2,424 Loss on liquidation of business (Note 10 and 19) — (193,253) —Others, net (Note 19) (25,439) (25,276) (309)

426,635 434,375 5,190

Income before income taxes and minority interests 3,460,579 3,489,513 42,104

Income taxes (Note 15):Refund of income taxes for prior periods — — — Current 1,288,561 1,266,954 15,677 Deferred 44,330 (65,879) 539

Total income taxes 1,332,892 1,201,075 16,217

Income before minority interests 2,127,687 2,288,438 25,887

Net income ¥ 2,127,687 ¥ 2,288,438 $ 25,887

Income before minority interests 2,127,687 2,288,438 25,887 Other comprehensive income

Net unrealized gain (loss) on investment securities (1,618,933) (124,770) (19,697)Foreign currency translation adjustments (221,319) (63,398) (2,692)

Total other comprehensive income (1,840,253) (188,169) (22,390)

Comprehensive income ¥ 287,433 ¥ 2,100,269 $ 3,497

(Yen) U.S. dollars (Note 1)

Amounts per shareNet income — basic ¥ 88.80 ¥ 94.64 $ 1.08Net income — diluted — — — Cash dividends 27.00 29.00 0.32



Consolidated Statements of Changes in Net Assets


Number of shares of

common stock issued

Thousands of yen

Commonstock

Capitalsurplus

Retained earnings

Treasury stock, at cost

Net unrealized gains on securities

Foreign currency translation

adjustmentsTotal

Balance at March 31, 2010 24,353,900 ¥ 4,840,313 ¥ 6,181,300 ¥ 11,380,544 ¥ (91,585) ¥ 2,451,726 ¥ (322,594) ¥ 24,439,703 Cash dividends paid — ¥27.00 per share (655,883) (655,883)Net income 2,288,438 2,288,438 Acquisition of treasury stock (430,757) (430,757)Retirement of treasury stock (315,500) (476,957) 476,957 —Net increase in unrealized gains on securities (124,770) (124,770)Foreign currency translation adjustments (63,398) (63,398)

Balance at March 31, 2011 24,038,400 4,840,313 6,181,300 12,536,142 (45,385) 2,326,955 (385,993) 25,453,332 Cash dividends paid — ¥29.00 per share (696,243) (696,243)Net income 2,127,687 2,127,687 Acquisition of treasury stock (67,392) (67,392)Retirement of treasury stock —Net increase in unrealized gains on securities (1,618,933) (1,618,933)Foreign currency translation adjustments (221,319) (221,319)

Balance at March 31, 2012 24,038,400 ¥ 4,840,313 ¥ 6,181,300 ¥ 13,967,586 ¥ (112,777) ¥ 708,021 ¥ (607,313) ¥ 24,977,131

Thousands of U.S. dollars (Note 1)

Commonstock

Capitalsurplus

Retained earnings

Treasury stock, at cost


Foreign currency translation

adjustmentsTotal

Balance at March 31, 2011 $ 58,891 $ 75,207 $ 152,526 $ (552) $ 28,311 $ (4,696) $ 309,688 Cash dividends paid — $ 0.32 per share (8,471) (8,471)Net income 25,887 25,887 Acquisition of treasury stock (819) (819)Retirement of treasury stock —Net increase in unrealized gains on securities (19,697) (19,697)Foreign currency translation adjustments (2,692) (2,692)

Balance at March 31, 2012 $ 58,891 $ 75,207 $ 169,942 $ (1,372) $ 8,614 $ (7,389) $ 303,895



Consolidated Statements of Cash Flows


Thousands of yenThousands of

U.S. dollars (Note 1)2012 2011 2012

Cash flows from operating activities:Income before income taxes and minority interests ¥ 3,460,579 ¥ 3,489,513 $ 42,104 Adjustments for:

Depreciation and amortization 469,587 1,030,567 5,713 Increase (decrease) in accrued employee bonuses 18,330 50,501 223 Increase in provision for loss on construction contracts 338,942 24,005 4,123 Interest and dividend income (254,141) (281,855) (3,092)Interest expense 1,358 — 16 Gain on sales of investment securities (199,292) (371,050) (2,424)Loss on liquidation of business — 167,699 —

Change in assets and liabilities: Decrease (increase) in:

Receivables (trade) (474,181) (3,284,240) (5,769)Inventories (1,058,408) 308,504 (12,877)Other current assets (292,724) (140,459) (3,561)

Increase (decrease) in:Payables (trade) 217,770 486,535 2,649 Other current liabilities 27,682 133,254 336

Other, net (1,770) 51,693 (21)2,253,733 1,664,668 27,421

Interest and dividends received 254,087 281,682 3,091 Interest paid (1,358) — (16)Income taxes paid (1,474,290) (185,212) (17,937)

Net cash provided by operating activities 1,032,171 1,761,138 12,558

Cash flows from investing activities:Proceeds from withdrawal of time deposits — 100,000 — Purchases of property and equipment (25,254) (33,388) (307)Purchases of intangible assets (73,545) (70,178) (894)Payments for investment securities — (125,145) —Proceeds from sales of investment securities 313,869 620,546 3,818 Payments for long-term prepaid expenses (566,985) (177,389) (6,898)Other, net (78,958) 67,066 (960)

Net cash used in investing activities (430,875) 381,510 (5,242)

Cash flows from financing activities:Net decrease in short-term debt — — —Repayment of long-term loans payable — — — Purchases of treasury stock (67,392) (430,757) (819)Proceeds from disposal of treasury stock — — —Cash dividends paid (692,661) (649,480) (8,427)

Net cash provided by (used in) financing activities (760,053) (1,080,238) (9,247)

Effect of exchange rate changes on cash and cash equivalents (116,480) (44,798) (1,417)

Net increase in cash and cash equivalents (275,237) 1,017,612 (3,348)Cash and cash equivalents at beginning of year 7,503,256 6,485,643 91,291 Cash and cash equivalents at end of year (Note 5) ¥ 7,228,018 ¥ 7,503,256 $ 87,942

Important noncash transactions: Retirement of treasury stock ¥476,957 thousand in 2011 ¥— ($—) in 2012



Notes to the Consolidated Financial Statements


The accompanying consolidated financial statements

of MegaChips Corporation (“the Company”) and its

consolidated subsidiaries have been prepared in

accordance with the provisions set forth in the

Japanese Financial Instruments and Exchange Act and

its related accounting regulations and in conformity

with accounting principles generally accepted in Japan

(“Japanese GAAP”), which are different in certain

respects as to application and disclosure requirements

from International Financial Reporting Standards.

The significant portions of the accounts of the

Company’s overseas subsidiaries are based on their

accounting records maintained in conformity with

accounting principles generally accepted in Japan.

The accompanying consolidated financial

statements have been restructured and translated into

English from the consolidated financial statements of the

Company prepared in accordance with Japanese GAAP

and filed with the appropriate Local Finance Bureau of

the Ministry of Finance as required by the Financial

Instruments and Exchange Act. Certain supplementary

1. Basis of presenting consolidated financial statementsinformation included in the statutory Japanese

consolidated financial statements is not presented in

the accompanying consolidated financial statements.

The translation of the Japanese yen amounts into

U.S. dollar amounts is included solely for the

convenience of readers outside Japan, using the

prevailing exchange rate at March 31, 2012, which

was ¥82.19 to US$1.00. The translations should not

be construed as representations that the Japanese yen

amounts have been, could have been or could in the

future be converted into U.S. dollars at this or any

other rate of exchange.

Certain 2011 consolidated financial statement

items have been reclassified to conform to the

presentation for 2012.

As permitted, amounts of less than 1,000 yen are

omitted in the presentations for 2011 and 2012. As a

result, the totals shown in the accompanying

consolidated financial statements, both in yen and in

U.S. dollars, do not necessarily agree with the sum of

the individual amounts.

The accompanying consolidated financial statements

include the accounts of the Company and Shun Yin

Investment Ltd. a significant subsidiary over which the

Company has power of control through substantial

ownership or existence of certain conditions

evidencing control by the Company (together, referred

to as the “Companies”).

There are no equity method affiliates or non-equity

method affiliates. The Company holds more than one

fifth but less than one half of the voting rights of

Mobile Television Inc. The Company has excluded

Mobile Television Inc. as an affiliate after determining

that the Company was unable to have a significant

impact on the decision-making of Mobile Television Inc.

for its financing, sales or operational policies.

In the elimination of investments in subsidiaries,

the assets and liabilities of the subsidiaries, including

the portion attributable to minority shareholders, are

evaluated using the fair value at the time the Company

2. Significant accounting policiesacquired control of the respective subsidiary.

All significant intercompany transactions and

accounts have been eliminated.

(2) Cash and cash equivalents

Cash on hand, readily-available deposits and short-

term highly liquid investments with maturities not

exceeding three months at the time of purchase and

that present insignificant risk of change in value are

considered to be cash and cash equivalents.

(3) Allowance for doubtful receivables

The allowance for doubtful receivables is stated at an

amount based principally on the actual ratio of bad debts

in the past plus the estimated uncollectible amounts of

certain individual receivables.

(4) Inventories

Work-in-process is stated at cost determined by the

specific identification method. Other inventories are

(1) Consolidation


stated mainly at cost determined by the average

method. The amounts shown on the balance sheet are

based on the method used for reducing book values

due to a decline in profitability.

(5) Securities and investments

Available-for-sale securities with available fair market

values are stated at fair market value, and unrealized

gains and unrealized losses on these securities are

reported, net of applicable income taxes, as a separate

component of net assets. The cost of sales of such

securities is computed using moving average cost.

Available-for-sale securities with no available fair

market value are stated at moving average cost.

Investments in business partnerships are increased

by earnings and decreased by losses and distributions

form the business partnerships, and included in

investment securities.

If the market value of equity securities or

available-for-sales securities including investments in

business partnerships, declines significantly and is not

expected to recover, such securities are stated at fair

market value and the difference between fair market

value and the carrying amount is recognized as a loss

in the period of the decline.

If the fair market value of equity securities or

available-for-sales securities is not readily available,

such securities should be written down to net asset

value with a corresponding charge in the income

statement in the event net asset value declines

significantly and is not expected to recover. In these

cases, such fair market value or the net asset value will

be the carrying amount of the securities at the

beginning of the year.

(6) Property and equipment

Property and equipment are stated at cost. Depreciation

is computed principally on the declining balance

method based on the estimated useful life of the

asset. Depreciation of property and equipment

acquired before March 31, 2007 is based on a previous

fixed percentage of diminishing value method.

The principle estimated useful lives are as follows:2012 2011

Buildings 3~18 years 3~18 yearsOthers 2~15 years 2~15 years

(7) Intangible assets

Capitalized costs of internal use software are amortized

by the straight-line method over the estimated useful

life of mainly 5 years.

Capitalized costs of producing product masters to

be sold are amortized on the straight-line method over

the estimated period of future sales of mainly 3 years.

Amortization of other intangible assets is computed

on the straight-line method.

(8) Long-term prepaid expenses

Long-term prepaid expenses are amortized on the

straight-line method.

Certain post-development stage expenses related

to the initial mass production of new products, except

for costs of producing product masters to be sold, are

amortized on the straight-line method over the

estimated period of future sales of 3 years.

(9) Bonuses

Accrued liabilities for employee bonuses as of the

balance sheet date are based on the estimated

amounts to be paid in the future.

(10) Provision for loss on construction contracts

When total cost of construction is likely to exceed total

revenue and the amount can be reasonably estimated,

the Companies record any amount estimated to

exceed the total construction revenue as provision for

loss on construction contracts.

(11) Basis for recording revenue on engineering contracts

The percentage-of-completion method is applied to

engineering contracts for which the outcome of the

construction activity by the end of the fiscal year under

review is deemed certain. The percentage of

construction completed is estimated using the ratio of

the actual cost incurred to the total estimated cost.

The completed contract method is applied to

other construction contracts.

(12) Income taxes

Income taxes comprise corporation tax, prefectural

and municipal inhabitants taxes and enterprise tax.

The asset and liability approach is used to




recognize deferred tax assets and liabilities for the

expected future tax consequences of temporary

differences between the carrying amounts of assets

and liabilities for financial reporting purposes and the

amounts used for income tax purposes.

(13) Translation of foreign currencies

All receivables and payables denominated in foreign

currencies are translated into Japanese yen at the

year-end rates.

Assets, liabilities and income and expenses of a

foreign subsidiary are translated into Japanese yen at

the year-end rates. Net assets of a foreign subsidiary

are translated into Japanese yen at historical rates. The

translation differences arising from the use of different

rates are recognized as foreign currency translation

adjustments in the consolidated balance sheets.

(14) Per share amounts of net income and cash dividends

The computation of net income per share shown in

the consolidated statements of income is based upon

the weighted average number of issued shares

outstanding during each period.

Cash dividends per share shown in the consolidated

statements of income represent actual amounts applicable

to earnings in the respective fiscal year, including

dividends to be paid after the end of the period.

Effective from the consolidated fiscal year under review, the Company has started applying the “Accounting

Standard for Asset Retirement Obligations” (the Accounting Standards Board of Japan (ASBJ) Statement No. 18,

issued on March 31, 2008) and the “Guidance on the Accounting Standard for Asset Retirement Obligations” (ASBJ

Implementation Guidance No. 21, issued on March 31, 2008) to its consolidated financial statements. This adoption

had a minor effect on profits and losses for the consolidated fiscal year under review. Changes in asset retirement

obligations as a result of the application of the accounting standard and the guidance amounted to ¥1,284

thousand ($15 thousand). The effects of this change on segment information were insignificant.

3. Changes in significant accounting policiesAccounting standards regarding asset retirement obligations

The Company has adopted the “Accounting Standard for Accounting Changes and Error Corrections” (Accounting

Standards Board of Japan (“ASBJ”) Statement No. 24, issued on December 4, 2009) and “Guidance on Accounting

Standard for Accounting Changes and Error Corrections” (ASBJ Guidance No. 24, issued on December 4, 2009) for

accounting changes and error corrections that are made from the beginning of the fiscal year under review.

4. Additional informationApplication of Accounting Standards for Accounting Changes and Error Corrections, etc.

The relationship between the closing balance of cash and cash equivalents on the consolidated statements of cash

flows and the amount of cash and deposits on the consolidated balance sheet were as follows:

Thousands of yenThousands ofU.S. dollars

2012 2011 2012

Cash and cash equivalents — balance sheets ¥ 7,228,018 ¥ 7,503,256 $ 87,942Time deposits with more than 3 months to maturity — — —Cash and cash equivalents — statements of cash flows ¥ 7,228,018 ¥ 7,503,256 $ 87,942

5. Cash and cash equivalents


(i) Policies for the handling of financial instrumentsTo improve the efficiency with which funds are used

while applying appropriate risk control, the

Companies have adopted the basic policies of

concentrating the use of funds on its main business

activities, refraining from speculative fund

management, investing in financial instruments only

after the details of the products and risks involved are

clearly understood, and making investments only after

fully evaluating the historical performance and any

potential investment impact.

The products in which the Companies invest are

limited to bank deposits and public and corporate

bond investment trusts, in which the principal is

appropriately protected and for which the liquidity is

high, and instruments in which credit and market risks

are low. The Companies do not invest in financial

instruments such as derivatives that carry significant

investment risks. To minimize risks associated with

fund management, the Companies manage funds in

accordance with internal rules that stipulate strict

investment rules (including those for maximum

investment amounts, restrictions on investment

periods, and rating standards).

Furthermore, to reduce risks of fluctuations in

foreign exchange rates involved in certain receivables

and payables denominated in foreign currencies,

which occur as a result of sales transactions, the

Company uses foreign exchange forward contracts in

accordance with internal rules that stipulate the risk

management structure and policies.

Moreover, while the Companies maintain

sufficient funds to make payments on obligations

arising from unexpected developments, they also

maintain an appropriate level of funds for working

capital. To meet their needs for working capital, the

Companies raise funds, when necessary, but within

establish limits for borrowings from financial

institutions and limits for the sale of their accounts

receivable. The Companies adapt their policies each

fiscal year by taking into account factors such as their

business performance, their funding requirements and

the efficiency of different methods of funding.

6. Financial Instruments(ii) Details and risks of financial instruments

Cash and deposits are mainly deposited in the

current accounts at the Companies’ banks, primarily

for use as working capital. These banks present almost

no credit or liquidity risks as their credibility is very high

and they do not demand collateral.

Notes and accounts receivable and trade

receivables are exposed to the credit risk of customers.

In the year under review, 88.8% of the operating

receivables at the end of the consolidated fiscal year

(92.9% as at the end of the previous consolidated

fiscal year) were attributable to major customers.

Considering their operating results and credit status,

the credit risk associated with these receivables is

believed to be very minimal.

Investment securities are categorized as available-

for-sale securities and consist mainly of stocks held for

investment and investment securities associated with

investment partnerships. All of these investments have

been made to collect information on present and

future business partners about investments and future

business development with the aim of achieving

synergies and improving corporate value.

Consequently, if the business policies of the

Companies or those of the issuing companies change,

there is a risk that the initial plans may not be realized.

In addition, among shares held by the Companies,

listed equity securities are exposed to market risk, while

unlisted equity securities may become subject to

accounting for impairment loss if the actual value of

the issuing companies falls because of poor business

performance or a deteriorating financial situation. Of

all investment securities held as of the end of the

consolidated fiscal year under review, shares held by

subsidiaries accounted for 78.1% (84.4% as at the end

of the previous consolidated fiscal year).

All trade payable are due in one year or less.

Trade receivables and trade payables denominated

in foreign currencies that occur as a result of sales

transactions are exposed to the risks of fluctuations in

foreign exchange rates. The Company seeks to reduce

these risks using foreign exchange forward contracts

when necessary for the amount after balancing out

accounts receivable trade and accounts payable trade

denominated in the same foreign currency.

(1) Status of financial instruments




(iii) Risk management systema. Credit risk

Credit risk is the risk of the Companies incurring loss as

a result of a decline in or loss of value of their assets

due to credit events (reasons) such as dishonored

checks or bankruptcy as a result of a deterioration in

the financial conditions of business partners or issuing

companies. To maintain sound assets, the Accounting

Department, the Finance Department and the

Operating Department of the Companies control the

due dates associated with and the outstanding balance

of individual customers. The Companies have also

developed a system in which credit screening, credit

control and asset control are consistently carried out in

accordance with the relevant accounting and sales

management rules. In addition, the Companies evaluate

their assets in accordance with the accounting standards

and other related rules and adopt impairment

accounting and post allowances when necessary.

b. Market riskMarket risk is the risk of the Companies incurring loss

due to changes in the fair market value of financial

instruments as a result of fluctuations in interest rates,

foreign exchange rates, and stock prices. It is a general

term for risks associated with the assets or liabilities of

the Companies associated with the interest rate

fluctuation risk, exchange rate fluctuation risk and

stock price fluctuation risk.

In accordance with its accounting rules and cash

management rules, the Finance Department regularly

monitors the fair market value and the financial

condition of issuing companies. It also regularly

reviews its investment policies by obtaining

information about business plans and other relevant

matters. The Finance Department also monitors trends

in interest rates, foreign exchange rates and stocks in

an effort to reduce the market risks associated with

the Companies’ assets and liabilities.

In general, the Company does not make

investments as part of fund management in financial

products that involve risks related to fluctuations in

stock prices or foreign exchange rates. However, in

accordance with foreign exchange risk management

rules, the Company is engaged in managing risks of

fluctuations in foreign exchange rates related to

certain receivables and payables denominated in

foreign currencies that occur as a result of sales

transactions. It also uses foreign exchange forward

contracts and other derivatives products when

necessary in an effort to reduce risks of fluctuations in

foreign exchange rates.

c. Liquidity riskLiquidity risk is the risk of the Companies incurring loss

due to a shortage of available cash as a result of the

Companies’ inability to raise funds because of a

deterioration in their financial situation or other reason

or incurring loss because they are forced to accept

significantly worse than usual funding conditions. By

constantly monitoring the management of funds and

regularly preparing and updating funding plans, the

Finance Department ensures that the Companies

maintain an appropriate level of funds, including funds

sufficient to meet obligations that arise from

unexpected developments. As a measure to respond

to liquidity risk, the Companies have also established

credit lines overdraft agreements with their banks. No

financial covenants are attached to the these overdraft

agreements.

(iv) Supplementary explanation concerning the fair market value, etc. of financial instruments

In addition to values based on market prices, the fair

market values of financial instruments include the

values that are reasonably computed when there are

no market prices available. When making such

computations various factors are taken into account

and different conditions may be adopted. For these

reasons, fair market values may vary.

Information about figures for financial instruments presented in the consolidated balance sheets, related fair values,

and their differences as of March 31, 2011 and March 31, 2012 are set forth in the tables below. Items whose fair

market values are considered to be very difficult to determine are not presented in the tables.

(2) Matters concerning the fair market values of financial instruments


(Trade receivables)Because trade receivables are highly liquid, the fair market value is similar to the book value. Consequently, the fair

market value of trade receivables is based on book value. Allowance for doubtful receivables associated with trade

receivables has been deducted.


2012 2011 2012

Figures presented in the consolidated balance sheets ¥ 15,635,583 ¥ 15,158,759 $ 190,237Fair value 15,635,583 15,158,759 190,237Difference ¥ — ¥ — $ —

Due in one year or less ¥ 15,635,583 ¥ 15,158,759 $ 190,237

(Investment securities)The fair values of shares, etc. are based on prices established on security exchanges.


2012 2011 2012


(Note) The above table includes securities which are included in investments in business partnerships.

Financial instruments whose fair value is considered to be very difficult to obtain are shown below. These financial

instruments do not have a fair market value, and it is considered to be very difficult to obtain one because future

cash flows cannot be estimated. As a result, these financial instruments are not included among investment

securities above.


2012 2011 2012

Available-for-sale securities

Non-listed equity securities ¥ 219,431 ¥ 123,053 $ 2,669Non-listed bonds 2,111 4,026 25Others 41,053 39,972 499


(Cash and cash equivalents)Because cash and cash equivalents are highly liquid, the fair market value is similar to the book value. Consequently,

the fair market value of cash and cash equivalents is based on book value.


2012 2011 2012


Due in one year or less ¥ 7,228,018 ¥ 7,503,256 $ 87,942




(Trade payables)Because trade payables are highly liquid, the fair value is similar to the book value. Consequently, the fair value of

trade payables is based on book value.


2012 2011 2012


7. Securities

(ii) Securities with unrealized lossesThere were no equity securities classified as available-for-sale securities for which fair values were available with

unrealized losses.

(1) The following tables summarize the costs and carrying amounts (the fair values) of and the unrealized gains and

losses on equity securities classified as available-for-sale securities for which fair values were available at March

31, 2011 and March 31, 2012:

(i) Securities with unrealized gains(Equity securities)


2012 2011 2012

Cost ¥ 1,221,765 ¥ 1,506,845 $ 14,865Carrying amount 2,007,635 4,020,169 24,426Unrealized gains ¥ 785,870 ¥ 2,513,324 $ 9,561


(2) Total sales of available-for-sale securities for the years ended March 31, 2011 and March 31, 2012 were as follows:


2012 2010 2012

Amount of sales ¥ 309,869 ¥ 620,546 $ 3,770Total gain on sales 199,292 371,050 2,424Total loss on sales — — —

The details of derivatives transactions have been omitted because they are not significant in the business management

of the corporate group.

8. Derivative transactions


10. Inventories(1) Inventories at March 31, 2011 and March 31, 2012 consisted of the following:


2012 2011 2012

Finished products ¥ 402,195 ¥ 282,662 $ 4,893Raw materials 374,137 104,227 4,552Work-in-process 919,501 250,519 11,187Supplies 300 317 3

Total ¥ 1,696,135 ¥ 637,726 $ 20,636

(2) Reduction of book value due to a decline in the profitability of inventories held for the purpose of ordinary sale

for the years ended March 31, 2011 and March 31, 2012 was as follows:


2012 2011 2012

Cost of sales ¥ 38,852 ¥ 52,927 $ 472Loss on liquidation of business — 25,553 —

The Companies have adopted the prepaid retirement benefit system and the defined contribution plan system.

Retirement benefit expenses associated with the above systems for the years ended March 31, 2011 and March 31,

2012 were as follows:


2012 2011 2012

Retirement benefit expenses ¥ 79,339 ¥ 77,225 $ 965

9. Retirement benefits



(2) The provision for loss on construction contracts included in the cost of sales for the consolidated fiscal year

ended March 31,2011 and March 31,2012 was as follows:


2012 2011 2012

Cost of sales ¥ 346,250 ¥ 49,251 $ 4,212

11. Provision for loss on construction contracts(1) Inventories and the provision for loss on construction contracts related to construction contracts that are likely to

incur losses are presented as is and are not offset. The amount equivalent to the provision for loss on construction

contracts included in inventories related to construction contracts that are likely to incur losses was as follows:


2012 2011 2012

Inventories ¥ 386,291 ¥ 41,943 $ 4,699


(1) In order to achieve more efficient financing, the Companies have entered into overdraft agreements with certain

financial institutions. The status of these agreements at March 31, 2011 and March 31, 2012 were as follows:


2012 2011 2012

Maximum overdraft amount ¥ 15,000,000 ¥ 23,500,000 $ 182,503Credit used — — —

Available credit ¥ 15,000,000 ¥ 23,500,000 $ 182,503

Intangible assets at March 31, 2011 and March 31, 2012 consisted of the following:


2012 2011 2012

Computer software ¥ 55,049 ¥ 60,864 $ 669Others 2,775 2,775 33

Total ¥ 57,825 ¥ 63,639 $ 703

Research and development expenses are charged to income when incurred. Research and development expenses

for the years ended March 31, 2011 and March 31, 2012 were as follows:


2012 2011 2012

Research and development expenses ¥ 1,452,931 ¥ 1,217,416 $ 17,677

12. Intangible assets

14. Research and development expenses

13. Short-term debt

Japan’s statutory tax rate related to income was 40.6%

for the fiscal years ended March 31, 2011. New tax

rates will be applicable from the fiscal year ended

March 31, 2012 as follows:

Starting from the consolidated fiscal years

beginning on or after April 1, 2012, corporate tax

rates will be lowered and special reconstruction

corporate taxes will be applied, following the issuance

on December 2, 2011 of a partial amendment to the

corporate tax law to develop a tax system that

responds to changes in the structure of the economic

society (Statute no. 114 of 2011) and a reconstruction

funding law in the aftermath of the Great East Japan

Earthquake (Statute no. 117 of 2011).

15. Income taxesAs a result, the statutory tax rate that was 40.6%

for the calculation of deferred tax assets and deferred

tax liabilities will be 38.0% for the temporary

differences that are expected to be eliminated in the

consolidated fiscal years starting between April 1,

2012 and April 1, 2014, and 35.6% for those that are

expected to be eliminated from the consolidated fiscal

years starting on April 1, 2015.

Due to these changes in the tax rates, deferred

tax assets (the amount after the deduction of deferred

tax liabilities) of the end of the consolidated fiscal year

under review declined ¥31,910 thousand, and income

taxes-deferred rose ¥41,787 thousand.


(2) The following table summarizes the significant differences between the statutory tax rate and the Companies’

effective tax rate for the year ended March 31, 2011 and March 31, 2012, after tax effect accounting was applied.

%

2012 2011

Statutory tax rate 40.6 40.6(Adjustment)

Expenses permanently non-deductible 2.6 2.5Dividends income permanently non-deductible (1.7) —Tax credit for experiment and research expenses (3.3) (2.4)Inhabitants per capita taxes 0.2 0.2Increase (decrease) in valuation allowance — (0.3)Others (1.2) (6.2)Reduction in term-end deferred tax assets after adjustments due to tax rate changes

1.3 —

Effective tax rate 38.5 34.4



(1) Significant components of the Companies’ deferred tax assets and liabilities as of March 31, 2011 and March

31, 2012 were as follows:


2012 2011 2012

Deferred tax assets:Accrued bonuses ¥ 114,315 ¥ 114,908 $ 1,390Provision for loss on construction contracts 147,358 20,010 1,792Enterprise taxes 52,223 69,892 635Accrued legal welfare expenses 16,605 16,974 202Valuation loss on inventory 40,766 40,389 495Excess software costs 82,173 88,014 999Excess long-term prepaid expenses costs 35,235 170,446 428Directors’ and corporate auditors’ severance benefits 11,641 15,452 141Loss on write-down of investment securities 31,811 40,600 387Others 17,222 16,994 209

Deferred tax assets 549,353 593,684 6,683

Deferred tax liabilities:Net unrealized gains on securities (69,744) (134,242) (848)

Total deferred tax liabilities (69,744) (134,242) (848)

Net deferred tax assets ¥ 479,609 ¥ 459,442 $ 5,835


Reclassification adjustments and taxes related to other comprehensive income are as follows:


2012 2012


Increasing (decreasing) during the year ¥ (1,484,139) $ (18,057)Reclassification adjustments (199,292) (2,424)

Sub-total, before tax (1,683,432) (20,482)Tax or benefit 64,498 784Net unrealized gains on securities (1,618,933) (19,697)

Foreign currency translation adjustments

Increasing (decreasing) during the year (221,319) (2,692)Sub-total, before tax (221,319) (2,692)Foreign currency translation adjustments (221,319) (2,692)

Total other comprehensive income (1,840,253) (22,390)

16. Other comprehensive income

Under the Japanese Corporate Law (“the Law”), 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.

Under the Law, 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.

Under the Law, legal earnings reserve and

17. Net assetsadditional paid-in capital could be used to eliminate or

reduce a deficit or could be capitalized by a resolution

of the shareholders’ meeting.

The Law also provides for companies to purchase

treasury stock and dispose of such treasury stock by

resolution of the Board of Directors. The amount of

treasury stock purchased cannot exceed the amount

available for distribution to the shareholders, which is

determined by specific formula.

Under the Law, 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 Japanese laws and regulations.


The reportable segments of the Company are

those units for which separate financial statements

can be obtained among the constituent units of the

Company and which are regularly examined by the

Board of Directors for decisions on the allocation of

management resources and for assessing business

performance.

The Company conducts its business activities by

establishing multiple business divisions depending on

the types of products. Therefore, the Company creates

segments by product based on business divisions.

These segments are consolidated into segments with

similar product characteristics, manufacturing

processes, targeted markets and marketing methods.

The Company has two reportable segments: the LSI

business and the Systems business.

In the LSI business, the Company develops,

manufactures, and sells products including customer

specific system LSI used for certain devices in the

digital home appliance field and electronic devices

mounted with its system LSI. The Company employs a

build-to-order system as its selling method and

manufacturing is outsourced.

In the Systems business, the Company develops,

manufactures, and sells products including customer

specific video surveillance systems used in the field of

security. The Company employs a build-to-order

system as its selling method and manufacturing is

outsourced.

(2) Methods for calculating net sales, profit and loss, the value of assets and amounts for other items by reportable segment

The accounting treatment for reportable segments in

the consolidated fiscal year ended March 31, 2011 is

basically the same as the treatment for important

matters fundamental to the preparation of the

consolidated financial statements. Segment profits and

losses are adjusted with operating income in the

consolidated financial statements.

Since the consolidated fiscal year ended March 31,

2012, the Company has changed its reportable

segments as described below

The Company has traditionally treated the LSI and

systems businesses as reportable segments as part of

its practice to establish reportable segments by

consolidating business segments, which were

categorized by product based on business divisions in

accordance with similarities in the operations of each

business segment. However, as the Company has

developed its businesses by focusing on providing a

wide range of solutions to meet the increasingly

sophisticated and diversified requirements of

customers, the Company’s method of providing

products has diversified, and the activities of the

business divisions have shifted from focusing on types

of products to projects.

In this environment, given that the business

divisions are engaged in project based operations that

span various sections within the corporate structure

regardless of the type of product, since the beginning

of the consolidated fiscal year under review the

Company has changed the method of managing its

business divisions from a method based on product

type to one based on types of projects.

As a result, in conducting its business, the

Company has adopted a structure that analyzes sales

situations by project type and makes decisions on the

allocation of management resources and the

evaluation of operating results from the Company’s

overall perspective. Consequently, after reviewing the

existing reportable segments, the Company has

decided to treat the LSI and systems businesses,

traditionally categorized by products based on business

divisions, as one business segment starting from the

consolidated fiscal year under review.

The overview of the reportable segments before

this change (the consolidated fiscal year ended March

31, 2011) is as follows:

18. Segment information(1) Overview of reportable segments and changes




(3) Because the Company has determined to make all its reportable segments one business segment from the

consolidated fiscal year under review, the details of segment information for the consolidated fiscal years ended

March 31, 2011 and March 31, 2012, which were prepared based on the revised categorization method, have

been omitted.

Information about net sales, profit and loss by the reportable segments of the Company for the year ended

March 31, 2011, which was prepared based on the categorization method before the revision, is as follows:

Thousands of yen2011

LSI System Adjustment Consolidated

Net sales:Customers ¥ 33,080,947 ¥ 3,178,499 ¥ — ¥ 36,259,447Intersegment — — — —

33,080,947 3,178,499 — 36,259,447Segment profit (loss) ¥ 3,728,640 ¥ (574,454) ¥ (99,048) ¥ 3,055,137

Corporate expenses included in the adjustment amount of segment profit but not allocated to each reportable

segment were ¥99,048 thousand ($1,191 thousand), and mainly consist of general, selling and administrative

expenses and research and development expenses that were not attributable to reportable segments.

Overall assets of the Company included in the adjustment for segment assets and undistributed to reportable

segments amounted to ¥12,628,117 thousand ($151,871 thousand). They consisted of surplus working funds (cash

and securities) at the Company and assets, etc., in connection with its administrative divisions.

The increase in property, plant and equipment and intangible assets includes capital investments, etc., in

connection with its administrative divisions. Depreciation and amortization in connection with equipment of its

administrative divisions are distributed to each reportable segment.

(4) Information about assets and amounts for other items by the reportable segments of the Company for the year

ended March 31, 2011, which was prepared based on the categorization method before the revision, is set forth

in the table below, in the table, depreciation and amortization include an amortized amount of long-term

prepaid expenses. The increase in property, plant and equipment and intangible assets includes an increased

amount of long-term prepaid expenses.

Thousands of yen2011

LSI System Adjustment Consolidated

Segment assets ¥ 15,275,561 ¥ 1,299,580 ¥ 12,628,117 ¥ 29,203,259Others

Depreciation and amortization 113,239 917,338 — 1,030,578Increase in property, plant and equipment, and intangible assets 75,378 251,137 105,200 431,716


19. Other income (expenses)

20. Related party transactions

21. Subsequent events

(1) Loss on liquidation of business for the years ended March 31, 2011 depends on the review of a systems business.

(2) Other income (expenses): others net in the consolidated statements of income comprised the following:


2012 2011 2012

Taxes and dues ¥ (35,519) ¥ (—) $ (432)Litigation expenses (30,000) (—) (365)Loss on investments in partnerships (7,437) (18,874) (90)Exchange losses (1,340) (39,583) (16)Others, net 48,857 33,182 594

Total ¥ (25,439) ¥ (25,276) $ (309)

Transactions with a corporate auditor, who is also the Company’s lawyer, for the years ended March 31, 2011 and

March 31, 2012 were as follows:


2012 2011 2012

Legal advisory fees ¥ 20,400 ¥ 17,400 $ 248

On May 9, 2012, the Company’s Board of Directors resolved a dividend distribution as follows:


Cash dividends — ¥27 ($0.32) per share ¥ 646,768 $ 7,869

(1) Dividend distribution of surplus

The Company resolved at a meeting of its Board of Directors held on April 20, 2012 that it would conclude a basic

agreement to purchase all the shares of Kawasaki Microelectronics, Inc., a wholly owned subsidiary of JFE Holdings,

Inc. (First Section of the Tokyo Stock Exchange), making Kawasaki Microelectronics, Inc. the Company’s subsidiary.

(2) Share Purchases



(5) Net sales to major customers for the consolidated fiscal year ended March 31, 2011 and March 31, 2012 were

as follows:


2012 2011 2012

Nintendo Co., Ltd. ¥ 28,483,077 ¥ 30,608,408 $ 346,551Secom Co., Ltd ¥ 3,827,857 ¥ — $ 46,573


(i) Purpose of share purchasesThe Company was founded on April 4, 1990, as a

fabless manufacturer that focused on R&D based on

the concept of merging knowledge of LSI and systems.

Since then, it has concentrated its management

resources in the image, audio and communications

fields and has expanded its operations by developing

and promoting large-scale integrated circuits (LSIs) and

system products equipped with self-developed LSIs,

featuring algorithms, new concept architecture and

creative technologies.

Meanwhile, Kawasaki Microelectronics, Inc.,

currently a fabless manufacturer, is a leading LSI

vendor that offers a full range of services from design

to quality assurance, including wafer fabrication,

assembly, and testing, to top companies in both Japan

and overseas in the areas of communications, images,

information, and office automation. It is growing and

strengthening its overseas business through its

subsidiary in the United States, which serves as an

R&D center for the development of essential future

technologies, its branch in India, which serves as a

development center, and its Taiwan branch, which is a

support base for Taiwanese and Chinese customers.

MegaChips is determined to combine the two

companies’ capabilities to meet the future

requirements of the market and address the challenges

confronting domestic and international customers in

the field of electronics, where technical innovation is

rapid. The company also seeks to strengthen its

strategy and expand its business as a fabless company

by providing strong support and total solutions from

the algorithm and architecture development stage to

wafer fabrication, assembly and testing processes.

(ii) Basic agreement with JFE Holdings, Inc.MegaChips plans to conclude a stock purchase agreement with JFE and acquire 100% ownership of Kawasaki

Microelectronics, Inc.

(iii) Profile of the subsidiary to be acquireda. Name: Kawasaki Microelectronics, Inc.

b. Location: 1-3, Nakase, Mihama-ku, Chiba-city

c. Representative: President & CEO Yukio Yamauchi

d. Principal business: Semiconductor integrated-circuit design, manufacture, and sales

e. Capital: 5,046 million yen (61 million dollars)

f. Established: July 2, 2001

g. Major shareholders and equity ratio: JFE Holdings, Inc. 100%

h. The Company has no capital, personal, or transactional relationships with the subject company.

i. Company’s consolidated operating results and financial position for the last three years

Millions of yen2009 2010 2011

Net assets ¥ 9,583 ¥ 8,234 ¥ 9,241Total assets 20,862 21,281 19,364Gross revenues 27,849 24,692 24,176Group operating profit (or loss) (4,003) (317) 1,857Consolidated net income (or loss) (11,928) (1,423) 1,389

(Amounts per share)

Yen2009 2010 2011

Consolidated net assets and per share ¥ 637.22 ¥ 547.49 ¥ 614.48Consolidated net income (or loss) per share (793.12) (94.64) 92.35Dividend per share — — —


(v) Schedulea. Resolution of Board of Directors meeting

April 20, 2012

b. Agreement date of share purchases

End of June 2012

c. Date of share purchases

Beginning of July 2012



(iv) Number of shares to be acquired, acquisition cost, and status of shares held before/after acquisitiona. Number of shares held before acquisition

— shares (Number of voting rights: —) (Shareholding: —%)

b. Number of shares to be acquired

15,039,600 shares (Number of voting rights: 150,396 shares) (Ratio to issued shares: 100%)

c. Acquisition cost (schedule)

8,500 million yen (103 million dollars)

d. Number of shares to be held after acquisition

15,039,600 shares (Number of voting rights: 150,396 shares) (Shareholding: 100%)


Company Name: MegaChips CorporationBusiness Activities:

Design, development and sales of systems LSIs, and electronic devices and systems products with LSIs manufactured by the Company

Head Office: 4-1-6, Miyahara, Yodogawa-ku, Osaka 532-0003, JapanPhone: +81-6-6399-2884 FAX: +81-6-6399-2886

Tokyo Sales Office: 17-6, Ichibancho, Chiyoda-ku, Tokyo 102-0082, JapanPhone: +81-3-3512-5080 FAX: +81-3-3262-3598

Representative:Akira Takata, President and Representative Director

Capital Stock: ¥4.84 billionTotal Assets: ¥29.24 billion (as of March 31, 2012 on a consolidated basis)Date of Settlement of Accounts: March 31 of each yearEstablished: April 4, 1990Consolidated Subsidiaries:

Shun Yin Investment Ltd.

Japanese othercompanies 10.85%

Individual & Others 48.38%

Foreign companies 10.58%

Japanese securitiescompanies 0.62%

Japanese financialinstitutions29.22%

Treasury stock0.35%

1,000-9,999 5.39%

10,000 and above 0.48%

500-999 5.06%

1-99 0.88%

100-499 88.19%

Shares of treasury stock are excluded from the scope of the graph.

Authorized Stock: 100,000,000Shares of Common Stock Outstanding: 24,038,400Listing of Stock:

Listed on the No.1 Section of the Tokyo Stock ExchangeSecurities Code Number: 6875Number of Shareholders: 26,778

Settlement Date: March 31General Shareholders’ Meeting: JuneShareholders’ List Closing Date: March 31Share Trading Unit: 100Shareholder registry administrator:

Mitsubishi UFJ Trust and Banking Corporation

Stock Price (¥)Stock Trading Volume (Millions)

20121 2 3 4 5 67 8 9 10 11 121 2 3 4 5 6 1 2 3 4 5 67 8 9 10 11 12 1 2 3 4 5 67 8 9 10 11 12

2009 2010 20110

6

12

18

24

0

600

1,200

1,800

2,400

Corporate Data (As of June 26, 2012)

Stock Information (As of March 31, 2012)

Shareholders Breakdown by Type

Stock Price Trend

Shareholders Breakdown by Number of Shares Held

Corporate Data/Stock Information


MegaChips Corporation4-1-6, Miyahara, Yodogawa-ku, Osaka 532-0003, JapanPhone: +81-6-6399-2884 Fax: +81-6-6399-2886

http://www.megachips.co.jp/

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