Summary of Consolidated Financial Statements for the Year ... · due in part to their concerns over...

Summary of Consolidated Financial Statements for the Year Ended March 31, 2012 (Japanese GAAP)

April 25, 2012

Name of listed company: Axell Corporation Stock Exchange: Tokyo Code #: 6730 URL: http://www.axell.co.jp/ Representative (Post): Yuzuru Sasaki (President) Inquiries (Post): Nobuhiro Sendai (Director) Phone: (03) 5298-1670 Scheduled date of shareholders’ meeting: June 17, 2012 Scheduled date of release of Securities Report: June 18, 2012 Scheduled date of dividend payment: June 18, 2012 Availability of supplementary explanatory materials prepared for financial results: Available Briefing session on financial results to be held: Yes (for analysts and institutional investors)

(Figures are rounded down to the nearest million yen.) 1. Consolidated Business Results for Fiscal Year 2011 (April 1, 2011 to March 31, 2012) (1) Consolidated operating results (Percentage figures indicate the rate of year-on-year increase (decrease).) Net sales Operating income Ordinary income Net income

millions of yen % millions of yen % millions of yen % millions of yen %

FY 2011 8,362 ― 1,183 ― 1,215 ― 700 ―

FY 2010 ― ― ― ― ― ― ― ―

(Note) Comprehensive income FY 2011: 684 million yen (―%) FY 2010: ― million yen (―%)

(Reference) Equity in earnings (losses) of non-consolidated subsidiaries and affiliates: --- million yen (FY 2011); --- million yen (FY 2010)

(Note) The numerical values for FY 2010 and the rates of year-on-year increase (decrease) are not listed because the consolidated financial

statements are created from FY 2011.

(2) Consolidated financial position Total assets Net assets Equity ratio Net assets per share

millions of yen millions of yen % Yen

FY 2011 12,817 11,805 92.1 951.87

FY 2010 ― ― ― ―

(Reference) Equity capital FY 2011: 11,805 million yen FY 2010: ― million yen

(Note) The numerical values for FY 2010 are not listed because the consolidated financial statements are created from FY 2011.

(3) Consolidated status of cash flows

Operating cash flow Investment cash flow Financing cash flow Cash and cash

equivalent at end of year

millions of yen millions of yen millions of yen millions of yen

FY 2011 2,041 (222) (1,363) 11,118

FY 2010 ― ― ― ―

(Note) The numerical values for FY 2010 are not listed because the consolidated financial statements are created from FY 2011.

Basic net income per share

Diluted net income per

share

Net income / Shareholders’

equity

Ordinary income / Total assets

Operating income / Net

sales

Yen Yen % % %

FY 2011 56.44 ― 5.8 9.3 14.1

FY 2010 ― ― ― ― ―

2. Dividend Payments Annual Dividend

1Q 2Q 3Q Year-end Annual

Total dividend

cost (Annual)

Dividend payout ratio

(Consoli-dated)

Dividend/ Net assets(Consoli-

dated)

Yen Yen Yen Yen Yen millions of yen % %FY 2010 ― 80.00 ― 80.00 160.00 1,984 ― ―

FY 2011 ― 30.00 ― 30.00 60.00 744 106.3 6.1

FY2012 (Projection)

― 30.00 ― 30.00 60.00

93.0

(Note) The dividend payout ratio (consolidated) and the dividend/ net assets (consolidated) for FY 2010 are not listed because the consolidated

financial statements are created from FY 2011.

3. Consolidated Forecast Results for FY 2012 (April 1, 2012 to March 31, 2013) (Percentage figures indicate the rate of year-on-year increase (decrease).)

Net sales Operating income Ordinary income Net income

Net income per share

millions of yen % millions of yen % millions of yen % millions of yen % Yen

1st Half 7,000 78.0 1,000 64.2 1,000 57.6 600 60.9 48.37

Full Year 12,200 45.9 1,350 14.1 1,350 11.0 800 14.3 64.50

* Matters of Note

(1) Significant changes in subsidiaries during the year under review (Changes in specific subsidiaries

involving changes in scope of consolidation): Yes New: 1 company Name: NEW ZONE CORPORATION Exclusion: ― company Name:

(2) Changes to accounting policies, changes to accounting estimates, and restatements:

1) Changes to accounting policies accompanying the revision of accounting standards, etc.: None 2) Changes to accounting policies other than 1) above: None 3) Changes to accounting estimates: None 4) Restatements: None

(3) Number of shares issued (common shares) 1) The number of shares issued at end of year (including treasury stock)

FY 2011 12,402,252 shares FY 2010 12,402,252 shares

2) The number of shares of treasury stock at end of year

FY 2011 0 shares FY 2010 0 shares

3) Average number of shares of common shares during year

FY 2011 12,402,252 shares FY 2010 12,402,252 shares

* Presentation regarding execution status of audit procedures

These financial statements are outside the scope of audit procedures under the Financial Instruments and Exchange Act. As at the time of disclosure of these financial statements, audit procedures for the financial statements under the Financial Instruments and Exchange Act have not been completed.

* Explanation of appropriate use of results forecasts, other matters of note: (Note on forward-looking statements, etc.)

The earnings forecasts and other forward-looking statements herein are based on information available to the Company and certain assumptions deemed reasonable as at the date of publication of this document. Actual results may differ significantly from these forecasts due to various factors.

(Method of obtaining supplementary explanatory materials)

The Company is planning to hold a briefing session for analysts and institutional investors on Wednesday, April 25, 2012. The explanatory materials to be distributed at the session are scheduled to be posted on the Company’s website immediately after the session.

Axell Corporation (6730) Summary of Consolidated Financial Statements for the Year Ended March 31, 2012

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Contents of Appendix

1. Business Results.……………………………………………………….……………………………………… 3

(1) Analysis of business results…………………………………………………………………..……………… 3

(2) Analysis of financial position………………………………………………………………….…………… 5

(3) Basic policy for profit sharing and dividends for Fiscal Year 2011 and Fiscal Year 2012………………… 7

(4) Risk factors…………………………………………………………………………………………………… 8

2. Corporate Group Overview.……………………………………………………….…………………………… 15

3. Management Policy.……………………………………………………….…………………………………… 16

(1) Basic management policies of the Company…………………………………………………………………. 16

(2) Targeted management indicators…………………………………………………………………………… 16

(3) The Company’s medium- to long-term management strategies and issues to be addressed………………… 17

4. Consolidated Financial Statements……………………………………………………………………………… 19

(1) Consolidated Balance Sheets………………………………………………………………………………… 19

(2) Consolidated Statements of Income and Comprehensive Income…………………………………………… 21

Consolidated Statements of Income………………………………………………………………………… 21

Consolidated Statements of Comprehensive Income………………………………………………………… 22

(3) Consolidated Statements of Changes in Net Assets………………………………………………………… 23

(4) Consolidated Statements of Cash Flows……………………………………………………………………… 25

(5) Notes regarding going concern assumption………………………………………………………………… 26

(6) Significant matters underlying the preparation of consolidated financial statements………………………… 26

(7) Additional information……………………………………………………………………………………… 27

(8) Notes to consolidated financial statements…………………………………………………………………… 27

(Consolidated statements of income)………………………………………………………………………… 27

(Consolidated statements of comprehensive income)………………………………………………………… 28

(Consolidated statements of changes in net assets)…………………………………………………………… 29

(Consolidated statements of cash flows)……………………………………………………………………… 29

(Lease transactions)…………………………………………………………………………………………… 30

(Securities)……………………………………………………………………………………………………… 30

(Stock options, etc.)…………………………………………………………………………………………… 31

(Tax effect accounting)………………………………………………………………………………………… 33


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(Segment information, etc.)…………………………………………………………………………………… 34

(Per share information)………………………………………………………………………………………… 35

(Major subsequent events)……………………………………………………………………………………… 35

5. Non-consolidated Financial Statements………………………………………………………………………… 36

(1) Non-consolidated Balance Sheets…………………………………………………………………………… 36

(2) Non-consolidated Statements of Income…………………………………………………………………… 38

(3) Non-consolidated Statements of Changes in Net Assets…………………………………………………… 39

6. Others…………………………………………………………………………………………………………… 42

(1) Changes to Directors and Corporate Auditors……………………………………………………………… 42

(2) Lawsuit……………………………………………………………………………………………………… 42

(3) Production, order and sales status…………………………………………………………………………… 43


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1. Business Results

(1) Analysis of business results

1) Business results for fiscal year 2011

During fiscal 2011, the Japanese economy suffered due to a drastic downturn in economic activity triggered by

the impact of the Great East Japan Earthquake. However, owing to the recovery of production activities

resulting from progress in the restoration of the supply chain, the economy is showing signs of a mild recovery.

Furthermore, certain bright spots were seen toward the fiscal-end, as corrections were made to the appreciating

yen on the exchange market and the Nikkei Index made certain gains. Uncertainties about the future of the

domestic economy could not be dispelled, however, due to the slowdown of overseas economies including

emerging economies, soaring crude oil prices, and the effects of chronic deflation in Japan.

Moreover, in the electrical machinery industry, to which the Group belongs, despite robust performances in

mobile communication device sectors such as smart phones (high-function mobile phones), devices such as

LCD televisions and PCs continued to be plagued by falling prices, which gave rise to a marked discrepancy

between the strong and weak performances by each product.

In the amusement device market (Note 1), which is the primary market for the Group, despite concerns about

the impact resulting from the Great East Japan Earthquake, according to our analysis, this impact was kept to a

minimum as there have been signs of recovery in demand for new units of amusement devices at amusement

facilities after the temporary downturn. Moreover, the pachislot machine market, which had been struggling as

a result of the revision of amusement device regulations in previous years, began to show signs of regaining

popularity following the development of amusement devices with different game elements, which led to the

launch of multiple major projects on the market. However, owing to consumers still opting persistently for

budget saving due to a decrease in personal income and uncertainties about employment conditions, there is

still a strong tendency to curb amusement expenses. As such, a harsh profit environment persists for

amusement facilities. For this reason, demand for new units of amusement devices also concentrated on the

few models from which stable operations could be expected, and continued to hover at low levels overall,

according to our analysis.

Under such circumstances, the Group concentrated its efforts on promoting the sale of various products,

focusing on Graphics LSI products (Note 2) targeted at the amusement device market, which are the Group’s

mainstay products (including an integrated product that fulfills multiple functions such as sound-generating

and LED (Note 3) driver functions). Furthermore, the Group has been expanding the adoption of Graphics LSI

products toward the embedded system market (Note 4), excluding the amusement device market, and also

concentrated its efforts on product development in the field of radio technology by NEW ZONE

CORPORATION (hereinafter “NZ”), a wholly-owned subsidiary.

As for the Group’s mainstay Graphics LSI products targeted at the amusement device market, sales volume

was down by approximately 220,000 units from the previous fiscal year and remained at approximately

1,190,000 units due in part to factors such as the full-scale prevalence of the re-use of amusement device

components, including the Company’s products, as well as the growing rate of re-use among certain customers,

due in part to their concerns over parts procurement in the wake of the floods in Thailand. Meanwhile, by

product, migration from conventional products to “AG4” (high value-added LSI) has made steady progress.

Regarding other products targeted at the amusement device market, the sales volume of Sound LSI products


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(Note 5) fell year-on-year due to the migration to integrated function products and the demand trends among

customers. However, the sales volume of LED driver LSI products (Note 6) rose greatly above the level in the

previous fiscal year thanks to the increase in the number of companies using these products and strong sales of

devices equipped with these products. Moreover, in terms of Graphics LSI products targeted at the embedded

system market, sales fell slightly below the previous fiscal year’s levels, despite being boosted by demand for

industrial equipment intended for export overseas. Additionally, NZ, which became a consolidated subsidiary

from the first quarter of fiscal 2011, recorded net sales of certain products for the purpose of customer

evaluation in this fourth quarter.

As a result, for fiscal 2011, the Group recorded net sales of 8,362 million yen. As for selling, general and

administrative expenses, 2,042 million yen was recorded as R&D expenditures as a result of recording the

prototype development expenses for next-generation products and system development expenses for business

development environment targeted at the amusement device market, and 3,087 million yen in selling, general

and administrative expenses were recorded in total. Consequently, for fiscal 2011, the Group posted operating

income of 1,183 million yen and ordinary income of 1,215 million yen. Net income was 700 million yen as a

result of posting the loss on valuation of membership of 10 million yen in extraordinary losses and impairment

loss pertaining to software of 30 million yen for fiscal 2011.

(Note 1) The term “amusement device market” refers to the market relating to the manufacture of

pachinko and pachislot machines, etc.

(Note 2) “Graphics LSI” refers to LSIs that enable graphics to be shown on liquid crystal and other

display devices.

(Note 3) “LED” is an acronym for Light Emitting Diode. It refers to semiconductor elements that emit

light when electricity is applied.

(Note 4) “Embedded system market” refers to the market relating to the manufacture of embedded

systems, excluding the amusement devices. Embedded systems refer to electronic devices that

have a computer embedded that carries out a particular processing specific to a certain

application. Embedded systems include devices of various types and in various areas, ranging not

only from amusement devices and medical devices but to vending machines and home electric

appliances.

(Note 5) “Sound LSI” refers to LSIs designed to reproduce digital sound data.

(Note 6) “LED driver LSI product” refers to LSIs designed to efficiently control LED equipped in

amusement devices.

2) Forecast for fiscal year 2012

With respect to future economic conditions, economic conditions are expected to continue to be unpredictable

because of the multitude of downside risks to the economy such as soaring crude oil prices, the effects of

chronic deflation and restrictions on electricity usage. In the amusement device market as well, which is

positioned as the main market for the Group’s business, the effects of the long-term slowdown of the domestic

economy on the market as a whole continue to be a matter of concern, and harsh conditions are expected to

prevail. The Group expects annual sales volume of amusement devices to be approximately 3,250,000 units in

fiscal 2012 considering the market environment described above, and made this the basis of calculations of


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results forecasts.

As for the Group’s mainstay Graphics LSI products targeted at the amusement device market (including

products with integrated functions), the Group has comprehensively taken into account the facts that (1) by

promoting migration to high value-added products, it expects to reduce the impact of re-use of conventional

products, and (2) that the re-use rate had temporarily expanded during fiscal 2011 due to the floods in Thailand,

and has thus made plans to sell approximately 1,300,000 units (actual sales in fiscal 2011: approximately

1,190,000 units). The sales volume of Sound LSI products targeted at the amusement device market is

expected to decrease, due to the anticipated impact of customers’ plans to adopt products with integrated

functions, trends in customer demand, and other factors. The Group expects the sales of such products on a

stand-alone basis to conclude in the future, as migration to integrated function products progresses. In terms of

other products targeted at the amusement device market, the Group anticipates sales of memory-module

products to certain customers, and has thus drawn up a sales plan that considerably exceeds the levels of fiscal

2011. With regard to Graphics LSI products targeted at the embedded system market other than the amusement

device market, the Group, in the light of current domestic economic trends, plans on sales of approximately

70,000 units (actual sales in fiscal 2011: 80,000 units).

Meanwhile, NZ is expected to record certain sales of radio technology-related products. However, full-scale

activities in mass production and sales is expected from the fiscal year ending March 31, 2014 and onward.

Based on the foregoing analysis, the Group’s net sales for fiscal 2012, is projected at 12,200 million yen (up

45.9% year on year). Although gross profit is projected to increase 12.4% year on year, to 4,800 million yen,

along with the increase in net sales, gross profit ratio is expected to decrease approximately 12 percentage

points year on year, to around 39.3%, following a change in the product mix. Meanwhile, selling, general and

administrative expenses are projected at 3,450 million yen (up 11.7% year on year), mainly due to R&D

expenditures such as prototype development expenses for next-generation products. Based on the above

financial projection, the Group’s forecasts for fiscal 2012 are: operating income of 1,350 million yen (up

14.1% year on year), ordinary income of 1,350 million yen (up 11.0% year on year), and net income of 800

million yen (up 14.3% year on year).

(Note) All forward-looking statements contained herein are based on information currently available to

the Group and certain assumptions deemed to be reasonable by the Group, and subject to a

number of uncertainties. The Group does not give assurances that these statements will come to

fruition. Please be aware that actual results may differ significantly from these forecasts due to

various factors.

(2) Analysis of financial position

1) Status of assets, liabilities, and net assets

Total assets as of the end of fiscal 2011 stood at 12,817 million yen. Of this amount, total current assets

amounted to 12,169 million yen, comprising primarily 7,119 million yen in cash and deposits, and 3,999

million yen in short-term investment securities. Total noncurrent assets amounted to 648 million yen.

Total liabilities as of the end of fiscal 2011 stood at 1,012 million yen. Of this amount, total current liabilities

amounted to 999 million yen, comprising primarily 214 million yen in accounts payable-trade and 363 million

yen in income taxes payable. Total noncurrent liabilities amounted to 13 million yen.


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Net assets as of the end of fiscal 2011 stood at 11,805 million yen, comprising primarily 1,018 million yen in

capital stock, 861 million yen in capital surplus, and 9,916 million yen in retained earnings.

2) Status of cash flows

Cash and cash equivalents as of the end of fiscal 2011 stood at 11,118 million yen.

The status of cash flows for fiscal 2011 was as follows:

(Cash flows from operating activities)

Funds provided by operating activities for fiscal 2011 amounted to 2,041 million yen. This was mainly

attributable to the increase in inventories (400 million yen) and the decrease in notes and accounts payable-

trade (215 million yen) while income before income taxes and minority interests (1,175 million yen),

depreciation and amortization (213 million yen), the decrease in notes and accounts receivable-trade (657

million yen) and income taxes refund (436 million yen) were recorded.

(Cash flows from investing activities)

Funds used in investing activities for fiscal 2011 amounted to 222 million yen. This was mainly attributable to

the purchase of property, plant and equipment (156 million yen) and the purchase of intangible assets (66

million yen).

(Cash flows from financing activities)

Funds used in financing activities for fiscal 2011 amounted to 1,363 million yen. This was mainly attributable

to the cash dividends paid (1,361 million yen).

(Cash flow-related indicators)

FY 2008 FY 2009 FY 2010 FY 2011 Ratio of shareholders’ equity to total assets (%) 84.1 85.6 93.8 92.1 Ratio of market capitalization to total assets (%) 294.8 262.5 181.0 189.5 Ratio of interest-bearing liabilities to cash flow (%)

– – – –

Interest coverage ratio (%) – – – –

Calculation for FY 2011 is made on the basis of the consolidated financial data.

Ratio of shareholders’ equity to total assets: Shareholders’ equity / total assets

Ratio of market capitalization to total assets: Market capitalization of stock / total assets

Ratio of interest-bearing liabilities to cash flow: Interest-bearing liabilities / cash flow

Interest coverage ratio: Cash flow / interest expense

(Note 1) The market capitalization of stock was calculated based on the number of shares issued and

outstanding, excluding treasury stock.

(Note 2) Operating cash flow is used for “cash flow” in the above calculations.

(Note 3) “Interest-bearing liabilities” in the above calculation refers to all liabilities recorded on the balance

sheet for which the Company pays interests.


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3) Outlook on the financial position for fiscal year 2012

Significant matters that may impact the financial position of the Group in fiscal 2012 are as follows:

(i) The Group intends to record a net income of 800 million yen (Note) during fiscal 2012.

(ii) 744 million yen in dividend payment is scheduled for fiscal 2012, which includes year-end dividend

payout for fiscal 2011 and the interim dividend payout for fiscal 2012.

(Note) For the business results for fiscal 2012, please refer to “1. Business Results (1) Analysis of

business results 2) Forecast for fiscal year 2012” on page 4.

(3) Basic policy for profit sharing and dividends for Fiscal Year 2011 and Fiscal Year 2012

1) Basic policy for profit sharing

The Company recognizes that returning profits to shareholders is an important management task. The

Company’s basic policy is to use the amount of dividends according to financial performance based on

dividend payout ratio as a general rule (non-consolidated dividend payout ratio: 50%) as the basis of

calculation, while proactively considering stable dividends with reference to actual dividends paid in the past

for the portion exceeding internal reserves (generally three years of selling, general and administrative

expenses) deemed necessary in consideration of future business plans, among other things.

2) Dividends for fiscal year 2011 and dividend projection for fiscal year 2012

For fiscal year 2011, the amount of annual dividend per share is 60 yen (consisting of 30 yen of interim

dividend and 30 yen of year-end dividend). Dividend payout ratio is 81.1% and 106.3% for non-consolidated

and consolidated basis, respectively. The Company decided to proactively return periodic profit, in line with

the basic policy above, based on the judgment that internal reserves of about three years of selling, general and

administrative expenses set as necessary funds for the future will be secured, in view of the future profit

outlook, the current status of internal reserves, projected medium-term demand for funds and other such

factors.

As for the dividend projection for fiscal year 2012, the Company determined its plan to pay an annual dividend

of 60 yen per share (consisting of 30 yen of interim dividend and 30 yen of year-end dividend) in line with the

basic policy above. The dividend payout ratio relative to the income projected at present is 71.9% and 93.0%

for non-consolidated and consolidated basis, respectively.


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(4) Risk factors

Matters relating to business results, financial position, etc. stated herein that might significantly affect an

investor’s decision-making include the following. Additionally, for the purpose of information disclosure, the

Group proactively discloses information that is deemed important for the investment decisions of investors,

even where it does not necessarily fall under business risk.

Forward-looking statements hereunder are based on the Group’s judgment as at the end of fiscal 2011.

1) The Company’s dividend policy

For the Company’s dividend policy, please refer to “1. Business Results (3) Basic policy for profit sharing and

dividends for Fiscal Year 2011 and Fiscal Year 2012 1) Basic policy for profit sharing” on page 7. As the

Company determines the amount of dividend based on the aforementioned policy, there is a possibility of the

amount of dividend being affected by the business results in each fiscal year, the demand for funds in the

medium term and the state of internal reserves.

2) Changes in business results, financial position, etc.

(i) Nature of the Group’s core market: the amusement device market

a. Competition

In fiscal 2011, sales of Graphics LSI products targeted at the amusement device market, our mainstay products,

account for about 82% of the Group’s net sales. The Group is seeking to stabilize its business in the market by

enhancing the functions of such products and promoting the development of proprietary technologies.

However, if, for example, other LSI manufacturers, etc. enter the market with products that are superior to

those of the Group in terms of performance, or the Group is dragged into price competition, the Group’s

business results might be severely affected.

b. Size of market

The current size of the amusement device market (the number of amusement devices sold per year) is around

3,400,000 units per year, according to the Group’s analysis based on various data disclosed to the public, in

addition to other information available in the market. The Group recognizes that the number of amusement

devices sold per year has been following a downtrend in recent years due to harsh market conditions. As the

amusement device market is regarded as a mature industry, it remains stable at a certain level according to our

analysis, although a fluctuation in the number of amusement devices sold is seen from time to time. However,

if the amusement device market shows any tendency to contract in size due to social and economic changes or

various factors such as the amendment of regulations on amusement devices, which is unforeseeable at this

point in time, the Group’s business results might be severely affected.

c. Change in generation of LSIs

The Group’s basic policy is to boost added value and expand its business scale by enhancing and diversifying

the functions of various LSI products. In the future, the Group aims to realize higher added value by such

means as enhancing the graphics-rendering functions of LSI products used in the amusement device market,

and further expand the scale of its business by raising the selling unit price.


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However, if the demand for advanced functionality shows any tendency of stagnation or reversal in the

amusement device market, the Group’s business results might be severely affected.

d. Re-use of Graphics LSI products

In the amusement device market, amusement devices are designated as products subject to conservation of

resources and promotion of recycling under the Act on the Promotion of Effective Resource Utilization, which

came into force in April 1991. Measures taken so far include the sale of liquid crystal and other such parts and

recycling of reusable components. In the past, recycling activities for amusement devices had mainly focused

on the utilization of amusement device components in other markets. However, owing to the tendency of the

amusement device market on the whole to contract, sluggish demand for new units, the need for low-priced

new units, and other such factors in recent years, amusement devices manufacturers are becoming increasingly

conscious of reducing the component procurement cost and carrying out a full-scale re-use at the circuit board

level, including the Company’s products. As the Group assumes that there is a certain scale of re-use in the

future also, it is considering taking initiatives to reduce the impact level of re-use by such means as actively

undertaking the development of next-generation products that satisfy customer needs and promoting the

migration to new products. Nevertheless, if there is a significant rise in the percentage of such re-use in the

future, the Group’s business results might be severely affected.

(ii) Efforts in markets other than the amusement device market

a. Efforts in the embedded system market

The Group promotes the development and sales of Graphics LSI products targeted at the embedded system

market, where mechanisms and needs are diverse. From the past to present, the Group has been engaging in

activities to create markets for graphics LSI products for various devices such as POS terminals, ATM devices,

in-car equipment, POP (advertisement) terminals, security equipment, graphic recorders, IT equipment, FA

machinery, measuring instruments, and medical devices. However, if the new markets that the Group is

seeking to create unexpectedly turn out to be smaller, or the pace of business development turns out to be

extremely slow, its business results could be severely affected.

b. Business directions of subsidiary

The Company established NEW ZONE CORPORATION, a wholly-owned subsidiary, in December 2010 for

the purpose of opening of new market areas (business fields) and launch of new business initiatives. At present,

NEW ZONE CORPORATION is vigorously pursuing product development in the field of Digital

Convenience Radio as it concentrates its efforts on opening new business fields. However, if the results which

the subsidiary is expected to achieve are not accomplished, the Group’s business results might be severely

affected.

3) Matters related to the organization

(i) Administrative organization proportionate to the current size of the Group

As of the end of fiscal 2011, the Group consists of 74 employees, and its internal management system is

deemed to be commensurate with its size. The size of the Group’s workforce is continually expanding in


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preparation for the future business development. If the internal management system fails to properly adapt to

such increase in workforce and the resulting expansion in business scale in a timely manner, the Group’s

business development might be constrained and the Group’s business results might be severely affected.

4) Research and development

(i) Recruitment of R&D personnel

For the recruitment of R&D personnel, the Group recognizes that ongoing recruitment of talented and

experienced engineers is an important issue for management. It expects recruitment to be an uphill battle,

however, given the scarcity of talented engineers in the fields of graphics-related technologies and LSI design

technologies, and the intensifying competition in the industry to secure such personnel. If the Group fails to

hire necessary engineers as planned, or loses engineers on its payroll to other companies, its business results

might be severely affected.

(ii) Growing R&D expenditures

The Group is focused mainly on the research and development of various LSI products using state-of-the-art

processes. Nowadays, depending on the process used, some LSI products require tens or hundreds of millions

of yen—in extreme cases, billions of yen—for the prototype development of a single LSI product. If the timing

of acceptance inspection for multiple LSI product development projects coincides, resulting in prototype

development expenses and other such expenses being accounted for all at once, the Group’s business results


(iii) Technical trends

The market for Graphics LSI products, which are the Group’s mainstay products, continues to demand

advanced functionality to this day. It is therefore indispensable to ensure superior technological development

capabilities and introduce the latest design environments, etc. To remain competitive in this regard, the Group

continues to steer R&D into proprietary areas such as graphics rendering and graphics

compression/decompression (codec) technologies. The Group also actively engages in collaborative research

and development with universities. This approach has proven effective as a means of not only achieving

specific research results but also recruiting R&D personnel via internships of talented students and other

arrangements that are a part of such collaboration. The Group acknowledges that it may be necessary, in the

future, to consider introducing superior graphics-related technologies as well as other companies’ technologies

that would complement its technologies, and forming an alliance and collaborating with companies with

technologies that would be beneficial in expanding its business. However, if, for example, the Group falls

behind in such research and development and thereby lags behind in technological development or fails to

fulfill R&D targets, its business results might be severely affected.

5) Manufacturing and sales systems

(i) Outsourcing of manufacturing


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The Group has adopted a business model based on the horizontal division of labor, and its business activities

specialize mainly in R&D and sales strategies. Since the Group outsources the manufacturing of its products,

the task of outsourcing is an extremely crucial factor.

With this in mind, the Group recognizes the importance of establishing and maintaining a good relationship

with Fujitsu Semiconductor Limited, Renesas Electronics Corporation and other such contract manufacturers

who undertake the manufacturing of its mainstay products at present, in view of establishing a system for

securing the most appropriate contract manufacturers at all times.

The description of the contract, the contract period, and other information of those contract manufacturers

above with which a master agreement has been concluded are as described in “Part I Information on the

Company 2. Business Overview 5. Important business contracts” in the securities report submitted on June 20,

2011. The termination clause of the contract with Fujitsu Semiconductor Limited is set forth as follows.

• Termination clause

1. If either party breaches the Agreement and fails to rectify the breach even if a warning has been

received from the other party within the reasonably set grace period; or

2. If either party is deemed to have difficulty in performing the obligations under the Agreement

due to dishonoring of a bill, compulsory execution such as attachment, application/petition for

bankruptcy, civil revitalization, corporate reorganization or other such reasons, or is deemed to

be at risk of having such difficulty.

At this point in time, there are no facts that correspond to any of the situations set forth in the termination

clause in the agreements concluded between the Group and the contract manufacturers. At present, the Group

has a good relationship with the contract manufacturers. Accordingly, no factors that might undermine the

continuation of the business model adopted by the Group have arisen. Furthermore, the Group promotes the

preparation of backup arrangements for product manufacturing, including outsourcing major LSI products to

multiple manufacturers. However, if, for example, the Group is unable to secure sufficient production capacity

from contract manufacturers, problems arise in the contract manufacturers’ facilities due to unforeseeable

extraordinary events, or the manufacturing outsourcing agreement is terminated, its business results might be

severely affected.

(ii) Build-to-order

The Group’s basic policy is to manufacture its products on a build-to-order basis. Accordingly, changes in

sales plans, production plans, and sales performance of its final customers might affect the Group in terms of

fluctuations in sales volume, delays in the timing of sales, etc. In such cases, the Group’s business results


(iii) Sales system

The Group adopts a business model based on the horizontal division of labor, and the Group’s basic policy is

to sell its products via engineering-oriented trading firms serving as sales agents. Currently, the Group’s main

sales agents are Midoriya Electric Co., Ltd., Internix Incorporated, Okaya Electronics Corp. and Ryosan Co.,

Ltd. They are key constituents of the Group’s business activities.


- 12 -

The description of the contract and the contract period of those sales agents above with which an agency

agreement has been concluded are as described in “Part I Information on the Company 2. Business Overview 5.

Important business contracts” in the securities report submitted on June 20, 2011. The termination clause of

the contract with Midoriya Electric Co., Ltd. is set forth as follows.

• Termination clause

1. If an application/petition is filed for attachment, provisional attachment, provisional disposition

or auction with respect to property or right owned, or receives a notice to pay taxes in arrears or

is subject to preservative attachment due to tax delinquency (excluding cases in which the party

is subject to attachment or provisional attachment as a third party obligor);

2. If payment is suspended or if an application/petition is filed for bankruptcy, civil revitalization,

corporate reorganization or commencement of procedures under the Corporate Rehabilitation

Law;

3. If a report on a dishonored bill/check or disposition of suspension of transaction is received from

a clearinghouse;

4. If an order for cancellation, suspension, etc. of business is received from supervisory authorities;

5. If a resolution is passed to abolish business, transfer a material business or dissolve the company;

6. If the performance of the Agreement is deemed difficult due to substantial deterioration in

financial position; or

7. If the Company or Midoriya Electric Co., Ltd. breaches all or part of this Agreement, and fails to

rectify the breach despite being notified or warned by the other party, any and all obligations

under the Agreement shall immediately become due and payable.

At this point in time, there are no facts that correspond to any of the situations set forth in the termination

clause in the agreements concluded between the Group and sales agents including Midoriya Electric Co., Ltd.

At present, the Group has a good relationship with each sales agent, and no factors that might undermine the

continuation of the business model adopted by the Group have arisen. Furthermore, the Group recognizes that

maintaining, sustaining and enhancing its sales system via sales agents will remain crucial factors into the

future, and acknowledges that it will be necessary to collaborate with new sales agents in consideration of

future business developments. However, if problems arise in various activities associated with building a

relationship with each sales agent, the Group’s business results might be severely affected.

6) Legal regulations

(i) Product quality and reliability

To date, the Group has never been sued for product liability under the Product Liability Law or any other law

with respect to its products. There is no guarantee, however, that it will never be sued for such liabilities in the

future. Generally speaking, moreover, there is no guarantee that it will necessarily be able to avoid supplying

flawed LSI products, etc. which might cause damage to final customers, etc. Recognizing that losses from

product liability constitute a major risk, the Company has established an independent division in charge of

quality assurance that reports directly to the President. In addition, it acquired ISO9001:2000 certification in

July 2005, and in July 2009 updated this certification to ISO9001:2008. Notwithstanding such efforts, in the


- 13 -

event of an accident, etc. where the Group is sued for product liability due to a defect in its product, the

Group’s business results might be severely affected.

(ii) Protection and preservation of registered intellectual property rights

The Group’s policy is to apply for the registration, etc. of intellectual property rights in relation to its LSI

products or its technologies, etc. to the greatest extent possible, in an effort to protect its intellectual property

under law. The Group’s products or its technologies, etc. may be protected under the provisions of the Civil

Code, the Unfair Competition Prevention Law, the Copyright Law and other statutes which confer rights

without the need for filing an application for registration, but in cases where protection under such laws is

insufficient or the Group has difficulty in exercising its rights, if the products, etc. similar to its products are

developed and sold by other companies, its business results might be severely affected.

(iii) Disputes arising from intellectual property right infringement, etc.

The Group has developed a framework to prevent disputes arising from intellectual property right infringement,

etc. by conducting clearance surveys upon developing LSI products, etc. as to whether there would be any

infringement of intellectual property rights including peripheral patents. Under the present circumstances,

however, it is impossible to completely verify that there are no facts of infringement even by conducting the

aforementioned clearance surveys. If, for example, an intellectual property right related to the Group’s

business is established in the name of a third party, or an intellectual property right related to its business is

already in existence unbeknownst to it, it might be sued on the grounds that it has infringed the intellectual

property right of a third party. In the event of such a lawsuit, the Group would have to expend enormous

amounts of time, money and other management resources to deal with the lawsuit. In addition, if the Group

consequently loses the lawsuit, its business results might be severely affected in that it might be forced to

suspend the sale of the products comprised of the disputed technology and be held liable to pay substantial

damages, or assume the obligation to pay the holder of the rights consideration for the granting of a license, etc.

(iv) Liability for defect warranties, etc.

To date, the Group has never had to assume any liability for defect warranties, etc. on its products. In addition,

in order to prepare for such events in the future, the Group is making an effort to enhance its internal reserves

on an ongoing basis. However, if a liability arises and cannot be covered by such internal reserves, the Group’s

business results might be severely affected.

(v) Information management

Acknowledging the importance of confidential information, including technical information, the Group is

committed to the thorough management of information. The Group has built an information management

system that comprises the implementation of computer virus measures, the establishment of firewalls, and

limitations on people who have access to internal information. Additionally, based on the recognition that

raising the awareness of those who handle information is important for information management, the Group is

making an effort to raise such awareness among its officers and employees through outside seminars and

training programs. However, despite the establishment of these systems, it is difficult to completely eliminate


- 14 -

the possibility of information leaks. If for some reason confidential information, including technical

information, is leaked to parties outside of the Group, its business results might be severely affected.

7) Large-scale disasters

The Group prepares the necessary countermeasures for the purpose of minimizing damage caused by large-

scale disasters, including natural disasters such as major earthquakes and big typhoons, and widespread

epidemics. Even in the event of a large-scale disaster, the Group has built a system that allows it to

immediately establish a disaster control headquarters in accordance with the disaster countermeasures manual

which is currently being formulated and BCP (business continuity plan), as well as swiftly gathering

information and implementing recovery and rehabilitation countermeasures according to the level of damage.

Although the Group carries out such disaster prevention countermeasures, when a large-scale disaster or the

like actually occurs, it may be forced to suspend or drastically curtail its business activities, and its business

results might be severely affected.


- 15 -

2. Corporate Group Overview

The Group consists of the Company (Axell Corporation) and one consolidated subsidiary (NEW ZONE

CORPORATION), and is mainly engaged in the development and sales of various LSI products, circuit board

products and electronic devices.

The Company is an R&D-oriented semiconductor manufacturer whose principal business is the development

and sales of Graphics LSI products, etc., and develops and sells LSI products targeted at various embedded

system markets including the amusement device market.

In the amusement device market, which is currently the Company’s main market, the Company, while

positioning Graphics LSI products (including products with integrated functions) as its core products, sells

various products including Sound LSI products, LED driver LSI products, and memory-module products. In

the embedded system market other than the amusement device market, the Company sells Graphics LSI

products for LCD displays, etc. to be loaded onto FA machinery, medical devices, large construction

equipment, etc. Additionally, in light of the increasing development burden on customers entailed by the

increasingly high functions of the LSI, the Company has been focusing on the development of development-

evaluation circuit boards and development-support software in order to mitigate such development burdens

among its customers.

NEW ZONE CORPORATION, the Company’s consolidated subsidiary, is mainly engaged in the planning and

management of product development projects, and aims to develop its business with a sense of scale while

forging alliances with the most suitable outside company for each project. Currently it is pursuing product

development in the field of Digital Convenience Radio.

Operations Diagram

NEW ZONE CORPORATION

Companies cooperating in the project

Planning and management of product development project

Development of new businesses

Current project: Digital Convenience Radio

Various products centered on LSI technology

LSI~module~final product

Product development

Broadly-defined embedded system market

Amusement device market Embedded system market

Pachinko/pachislot machinesPOP/POS terminals/FA equipment/in-car

equipment/medical devices/measuring instruments

Various LSI products, etc.

Graphics LSI products(including products with integrated functions)Sound LSI productsLED driver LSI productsMemory-module products

Development-support environment

Development-support softwareDevelopment-evaluation circuit board

LSI Designing Division Software Division System Designing Division

Establishment of element technology, know-how, core technologies (drawing technology, codec technology, etc.)

AXELL CORPORATION

Product development

Development of development-support environment

Collaborative R&D with universitiesCollaboration with other companies/

introduction of other companies’ technologies

100% ownership


- 16 -

3. Management Policy

(1) Basic management policies of the Company

The Group shall uphold the following “Corporate Philosophy” as its basic management policies and promote

activities with a constant awareness of compliance and of the Group’s social significance.

Corporate Philosophy

1. As a fabless company engaged primarily in the development and sales of LSI products that have been

developed against a background of the state-of-the-art technology and of various products with said LSI

products at their core, the Group shall conduct the following:

(1) Enhance technical expertise and conduct innovative development;

(2) Create proprietary technologies and conduct product development that contributes to society; and

(3) Keep in mind the improvement of operational efficiency and conduct business activities that organically

link individual capabilities

2. The Group shall build a governance system that gives consideration to all stakeholders, including the

shareholders, customers, employees and business partners

3. The Group shall comply with laws and regulations, the Articles of Incorporation, and rules, and conduct

timely and appropriate disclosures

4. The Group shall recognize the importance of information management and build an appropriate system for

the management of information

5. The Group shall carry on the liberal climate that has characterized it since its founding and expand the

Group’s businesses utilizing its free-spirited thinking as well as conduct social contribution in line with the

Group’s businesses

6. The Group shall deal with anti-social forces in a resolute attitude and shall never share profits with them

(2) Targeted management indicators

The Group, to date, had positioned “long-term stable growth” and “conducting efficient management and

ensuring high profitability” as the major challenges of management, and had set specific benchmarks of

“achieving an increase in revenue on the scale of 1 billion yen per year” and “the promotion of business

activities that will enable the attainment of 30% or more in the ratio of ordinary income to net sales on an

ongoing basis.” Although the Company had achieved, in fiscal 2009, increases in net sales and profits for eight

consecutive years since its listing, as well as continued achieving 30% or more in the ratio of ordinary income

to net sales, for the past two fiscal years it has been unable to achieve these benchmarks due to such factors as

the re-use of the Company’s products being prevalent on a full scale in the amusement device market. Despite

the assumption that a certain amount of re-use will continue in the future, and that other harsh conditions will

continue to prevail in the market environment, the Group is intent on taking initiatives for future business

growth as mentioned in “3. Management Policy (3) The Company’s medium- to long-term management

strategies and issues to be addressed,” recovering the business scale in the medium-term, and building a

corporate structure that can withstand changes in the economic environment. Under the current harsh market

environment, the Group, as a group mainly engaged in the design and development of LSI products, believes

that an emphasis on efficiency and profitability that enables the level of R&D investments required for

sustained growth will become indispensable. Therefore, we have set the improvement of consolidated ROE as


- 17 -

a new benchmark and will aim for levels of 10.0% or higher in the medium-term.

(3) The Company’s medium- to long-term management strategies and issues to be addressed

In order to realize sustained growth, the Group will address the following issues:

1) Approach to the amusement device market

In the amusement device market, which is the Group’s main market, there has conventionally been demand for

high-resolution graphics adapted to larger LCD displays installed in amusement devices, improved codec

functions to accommodate increasing graphics data volume, enhanced technologies for generating diverse

visual effects aimed at enriching game-playing experience, advanced technologies in the development-support

environment for customers, etc. In regards to the enlargement of LCD displays in amusement devices, the

Group believes that there are certain limitations to further enlarging LCD displays—e.g., panel constraints—

and that the trend towards higher resolution would settle at full-HD resolution in the foreseeable future.

On the other hand, the Group continues to receive requests from the market to develop technologies that would

improve the compression rate so that higher picture quality and larger graphics data would not be reflected in

graphic ROM (a recording medium that retains graphics information) costs, as well as new visual effects

functions for enriched gameplaying experience, in addition to preparing and improving development-support

environment that would alleviate developers’ burden. The Group therefore believes that future product

development activities, etc. would be focused on these technological areas. Furthermore, the Group recognizes

that the deployment of products with integrated functions that reduce customers’ manufacturing costs and

manufacturing burden would be highly important in its product strategy. Having concentrated its management

resources on the development and sales of LSI products to date, the Group also acknowledges that it will be

necessary to consider the possibility of system solutions in the future.

2) Diversification of business areas

The Group recognizes that being less dependent on certain markets, diversifying its business, and establishing

a corporate structure that can withstand changes in the economic environment are important in realizing stable

growth. As such, the Group considers that it is vital to establish new businesses following the development and

sales of various LSI products targeted at the amusement device market, which is currently the main market of

the Group. Previously, approaches to markets other than the amusement device market focused on product

development for the embedded system market. However, said market is characterized by its vulnerability to

the impact of economic trends and by its high-mix, low-volume production. Although the Group has been

steadily engaged in sales activities in this market, it remains a small business. Consequently, the Group, while

continuing to position the LSI products targeted at the amusement device market as its core business and

planning business expansion in this market, will also promote activities to expand business for LSI products

targeted at the embedded system market as its second market. At the same time, the Group, recognizing the

importance of the cultivation of new markets that are different from existing markets, aims to accelerate

activities to cultivate new markets at its subsidiary. The Group is intent on improving the corporate value as

Axell Group while promoting such strategic activities and sequentially expanding the scope of technical

contribution to society.


- 18 -

3) Efforts to acquire intellectual property rights and eliminate the risk of infringing the intellectual

property rights of other companies

The Group recognizes that the task of preparing a framework to facilitate the acquisition of intellectual

property rights for its various proprietary technologies is an important issue. The Group also believes that

developing measures to prevent the infringement of intellectual property rights of other companies will

become a critical issue, based on the view that the risk of infringement of other companies’ rights will increase

along with the expansion of its business scale. To address the aforementioned issues, the Group makes

ongoing efforts including building a close relationship with its consulting patent attorneys and conducting in-

house seminars on intellectual property rights. The Group is also preparing a framework at the organizational

level by clarifying the divisions in charge of intellectual property rights in general. For the future, the Group

intends to enhance collaboration among R&D staff, divisions that oversee intellectual property rights and the

consulting patent attorneys in order to further boost their effectiveness.

4) Efforts to further enhance the Group’s internal management system

Nowadays, companies are required to establish a framework for financial reporting including the timely

disclosure of corporate information and an internal control system encompassing all aspects of corporate

management. The Group acknowledges that the task of developing a framework as required in a timely manner

will be a crucial issue, based on the view that the nature of internal control system that needs to be developed

will vary with the company’s size and the nature of its businesses.


- 19 -

4. Consolidated Financial Statements

(1) Consolidated Balance Sheets

(In millions of yen) Current fiscal year

(As of March 31, 2012)

Assets

Current assets

Cash and deposits 7,119

Accounts receivable-trade 195

Short-term investment securities 3,999

Merchandise and finished goods 606

Raw materials and supplies 0

Deferred tax assets 133

Other 114

Total current assets 12,169

Noncurrent assets

Property, plant and equipment

Buildings 186

Accumulated depreciation (79)

Buildings, net 106

Tools, furniture and fixtures 799


Tools, furniture and fixtures, net 183

Lease assets 6


Lease assets, net 3

Total property, plant and equipment 293

Intangible assets

Patent right 14

Right of trademark 2

Software 68

Total intangible assets 85

Investments and other assets

Investment securities 80

Deferred tax assets 55

Other 133

Total investments and other assets 269

Total noncurrent assets 648

Total assets 12,817


- 20 -



Liabilities

Current liabilities

Accounts payable-trade 214

Lease obligations 1

Income taxes payable 363

Other 419

Total current liabilities 999

Noncurrent liabilities

Lease obligations 2

Asset retirement obligations 10

Total noncurrent liabilities 13

Total liabilities 1,012

Net assets

Shareholders' equity

Capital stock 1,018

Capital surplus 861

Retained earnings 9,916

Total shareholders' equity 11,796

Accumulated other comprehensive income

Valuation difference on available-for-sale securities 8

Total accumulated other comprehensive income 8

Total net assets 11,805

Total liabilities and net assets 12,817


- 21 -

(2) Consolidated Statements of Income and Comprehensive Income

(Consolidated Statements of Income)


(From April 1, 2011 to March 31, 2012)

Net sales 8,362

Cost of sales 4,091

Gross profit 4,270

Selling, general and administrative expenses *1, 2 3,087

Operating income 1,183

Non-operating income

Interest income 6

Dividends income 3

Interest on refund 20

Other 3

Total non-operating income 34

Non-operating expenses

Foreign exchange losses 0

Loss on sales of noncurrent assets 0

Loss on retirement of noncurrent assets 0

Other 0

Total non-operating expenses 1

Ordinary income 1,215

Extraordinary loss

Impairment loss *3 30

Loss on valuation of membership 10

Total extraordinary losses 40

Income before income taxes and minority interests 1,175

Income taxes-current 595

Income taxes-deferred (120)

Total income taxes 475

Income before minority interests 700

Net income 700


- 22 -

(Consolidated Statements of Comprehensive Income)



Income before minority interests 700

Other comprehensive income

Valuation difference on available-for-sale securities (15)

Total other comprehensive income *1 (15)

Comprehensive income 684

Comprehensive income attributable to

Comprehensive income attributable to owners of the parent 684

Comprehensive income attributable to minority interests -


- 23 -

(3) Consolidated Statements of Changes in Net Assets




Capital stock

Balance at the beginning of current period 1,018

Changes of items during the period

Total changes of items during the period -

Balance at the end of current period 1,018

Capital surplus

Balance at the beginning of current period 861


Total changes of items during the period -

Balance at the end of current period 861

Retained earnings



Dividends from surplus (1,364)

Net income 700

Total changes of items during the period (664)


Total shareholders' equity




Net income 700



Accumulated other comprehensive income

Valuation difference on available-for-sale securities



Net changes of items other than shareholders' equity (15)



Total accumulated other comprehensive income







- 24 -



Total net assets




Net income 700





- 25 -

(4) Consolidated Statements of Cash Flows



Net cash provided by (used in) operating activities

Income before income taxes and minority interests 1,175

Depreciation and amortization 213

Interest and dividends income (10)

Decrease (increase) in notes and accounts receivable-trade 657

Decrease (increase) in inventories (400)

Decrease (increase) in other current assets (20)

Increase (decrease) in notes and accounts payable-trade (215)

Increase (decrease) in other current liabilities 8

Increase (decrease) in accrued consumption taxes 116

Other, net 68

Subtotal 1,593

Interest and dividends income received 10

Income taxes refund 436

Net cash provided by (used in) operating activities 2,041

Net cash provided by (used in) investing activities

Purchase of property, plant and equipment (156)

Purchase of intangible assets (66)

Other, net 0

Net cash provided by (used in) investing activities (222)

Net cash provided by (used in) financing activities

Repayments of lease obligations (1)

Cash dividends paid (1,361)

Net cash provided by (used in) financing activities (1,363)

Net increase (decrease) in cash and cash equivalents 454

Cash and cash equivalents at beginning of period 10,427

Increase in cash and cash equivalents from newly consolidated subsidiary 236

Cash and cash equivalents at end of period *1 11,118


- 26 -

(5) Notes regarding going concern assumption

N/A

(6) Significant matters underlying the preparation of consolidated financial statements Item

FY 2011


1. Matters relating to the scope of consolidation

(1) Number of consolidated subsidiaries: 1 Name of the consolidated subsidiary: NEW ZONE CORPORATION From fiscal 2011, NEW ZONE CORPORATION, which was a non-consolidated subsidiary of the Company, has been included in the scope of consolidation as its importance has increased.

2. Matter relating to the application of equity method

N/A

3. Matters relating to the fiscal year of consolidated subsidiaries

Fiscal year of consolidated subsidiaries ends on the consolidation date.

4. Matters relating to accounting standards

(1) Valuation standards and valuation methods of significant assets

(1) Securities Other securities Other securities with market value The market value method is applied, based on the market value as of the fiscal-end. The entire positive or negative valuation difference from the purchase price is booked directly as net assets, and the cost of securities sold is calculated using the moving-average method.

(2) Inventories Finished goods Stated at cost using the periodic average method (balance sheet amount is calculated by writing down the book value of assets which decreased in profitability).

Supplies Stated at cost using the last purchase price method (balance sheet amount is calculated by writing down the book value of assets which decreased in profitability).

(2) Depreciation methods of significant depreciable assets

(1) Property, plant and equipment (excluding lease assets) Declining balance method (however, the straight-line method for buildings [excluding accompanying facilities]). The useful lives of the assets are as follows: Buildings: 3-15 yrs Tools, furniture and fixtures: 2-20 yrs

(2) Intangible assets (excluding lease assets) Patents Straight-line depreciation over 8 yr period

Trademark Straight-line depreciation over 10 yr period

Software Software for internal use is amortized on a straight-line basis based on its estimated useful life of 3-5 yrs).

(3) Lease assets Lease assets pertaining to financial leases other than those in which the title of the leased property transfers to the lessee The straight-line method, substituting the lease term for the useful life, assuming no residual value.

(3) The range of cash within the consolidated statements of cash flows

Cash within the consolidated statements of cash flows include cash at hand, demand deposits and short-term investments that are easily converted into cash, with little risk of fluctuation in value and reach maturity within 3 months from acquisition.

(4) Other significant matters underlying the preparation of consolidated financial statements

Accounting of consumption taxes All transactions are recorded net of consumption taxes and local consumption taxes.


- 27 -

(7) Additional information FY 2011


(Application of accounting standard for accounting changes and error corrections) Accounting changes and error corrections effected after the beginning of fiscal 2011 have been subject to the “Accounting Standard for Accounting Changes and Error Corrections” (ASBJ Statement No. 24, December 4, 2009), and the “Guidance on Accounting Standard for Accounting Changes and Error Corrections” (ASBJ Guidance No. 24, December 4, 2009).

(8) Notes to consolidated financial statements

(Consolidated statements of income)

*1 The major components and amounts of selling, general and administrative expenses are as follows:

FY 2011


Compensation to directors and corporate auditors 186 million yen

Salary and bonuses 281

Research and development expenses 2,042

*2 Total amount of research and development expenses included in general and administrative expenses

FY 2011


Research and development expenses included in general and administrative expenses

2,042 million yen

*3 Impairment loss

In fiscal 2011, the Group posted impairment loss on the following asset group.

Location Use Category

Head office (Sotokanda, Chiyoda-ku, Tokyo)

Business assets Software

The Group is engaged in a single-segment business as an R&D-oriented fabless semiconductor manufacturer. We have grouped the entire operation as one cash flow-generating unit, in view of the mutual complementarity between activities. Following the application of impairment accounting, assets with reduced profitability have been subject to grouping by individual asset class. In fiscal 2011, we reduced the book value of the asset groups that became less profitable down to their recoverable value, and posted the reduced amount as impairment loss (30 million yen) as part of extraordinary losses. As we make it a rule to adopt use value as recoverable value of this group of asset, such use value on this instance, is stated at zero because of the difficulty in reasonably estimating its future cash flows.


- 28 -

(Consolidated statements of comprehensive income)

FY 2011 (From April 1, 2011 to March 31, 2012)

*1 Reclassification adjustment and tax effect in respect of other comprehensive income


Amount accrued in the current fiscal year (27) million yen

Reclassification adjustment –

Before tax effect adjustment (27)

Tax effect 11 Valuation difference on available-for-sale securities (15)

Total other comprehensive income (15)


- 29 -

(Consolidated statements of changes in net assets)


1. Type and total number of shares issued and type and the number of shares of treasury stock

Number of shares at beginning of year (shares)

Increase during year (shares)

Decrease during year (shares)

Number of shares atend of year (shares)

Type of shares issued

Common stock 12,402,252 – – 12,402,252

Total 12,402,252 – – 12,402,252

Type of shares of treasury stock

Common stock – – – –

Total – – – –

2. Matters pertaining to dividends

(1) Dividend payout amounts

(Resolution) Type of shares

Total amount of dividends

(millions of yen)

Dividend per share (yen)

Record date Effective date

Ordinary General Shareholders’ Meeting, June 19, 2011

Common stock

992 80 March 31, 2011 June 20, 2011

Board of Directors Meeting, October 25, 2011

Common stock

372 30 September 30,

2011 November 18,

2011

(2) Payout amount of dividends with reference date in FY 2011 but effective date in FY 2012

(Resolution)

Type of shares

Total amount of dividends(millions of

yen)

Source of dividends

Dividend per share (yen)

Record date Effective

date

Ordinary General Shareholders’ Meeting, June 17, 2012

Common stock

372 Retained earnings

30 March 31,

2012 June 18,

2012

(Consolidated statements of cash flows)

*1 Reconciliation between the fiscal year-end balance of cash and cash equivalents and the amounts of

the accounts and amounts shown in the consolidated balance sheets is as follows:

FY 2011


Cash and deposits 7,119 million yen

Securities 3,999

Cash and cash equivalents 11,118


- 30 -

(Lease transactions)

(Lessee’s side)

1. Financial lease transactions

Financial leases other than those in which the title of the leased property transfers to the lessee

1) Description of lease assets


Mainly consist of office equipment (tools, furniture and fixtures).

2) Depreciation method of lease assets

As stated in “4. Matters relating to accounting standards (2) Depreciation methods of significant depreciable

assets” in Significant matters underlying the preparation of consolidated financial statements.

2. Operating lease transactions

Prepaid lease fees in respect of operating lease transactions that are non-cancellable

FY 2011 (As of March 31, 2012)

Due within 1 yr 210 million yen

Due in more than 1 yr – million yen

Total 210 million yen

(Securities)

FY 2011 (As of March 31, 2012)

1. Other securities with market value

Type

Amount on theconsolidated

balance sheets (millions of

yen)

Acquisition cost (millions of

yen)

Difference (millions of

yen)

(1) Stocks 80 66 13

(2) Bonds and debentures

1) JGBs, municipal bonds, etc. – – –

2) Corporate debentures – – –

3) Others – – –

(3) Others – – –

Other securities whose amounts recorded on the consolidated balance sheets exceed their acquisition costs

Subtotal 80 66 13

(1) Stocks – – –

(2) Bonds and debentures

1) JGBs, municipal bonds, etc. 3,999 3,999 (0)

2) Corporate debentures – – –

3) Others – – –

(3) Others – – –

Other securities whose amounts recorded on the consolidated balance sheets do not exceed their acquisition costs

Subtotal 3,999 3,999 (0)

Total 4,079 4,065 13

2. Other securities sold during FY 2011 (April 1, 2011 to March 31, 2012)

N/A


- 31 -

(Stock options, etc.)


Details, size and status of changes in stock options

(1) Summary of stock options

2005 Stock Options (Note 1)

Category and number of grantees 4 Directors, 35 employees

Number of stock options by type of shares (Note 2)

71,000 shares of common stock

Grant date August 1, 2005

Condition for vesting (Note 3)

Period of service required for vesting (Note 4)

-

Exercise period (Note 5)

(Notes)

1. 2005 Stock options refer to stock acquisition rights pursuant to the provisions of Articles 280-20 and 280-21 of the former

Commercial Code.

2. Number of stock options have been converted and stated as number of shares.

The number of stock options takes into account the effect of the 100-for-1 stock split of July 1, 2009.

3. The acquiree of the stock acquisition rights are required to hold the position of the Director or employee of the Company or

an affiliate of the Company at the time such rights are exercised; provided, however, that this shall not apply to cases where

a Director or Corporate Auditor has retired at the expiration of his/her term of office, or the Board of Directors has

exceptionally approved the survival of such rights.

4. The period of service subject to the grant of stock options has not been stipulated.

5. 1) During the period from June 19, 2007 to June 18, 2009, one half (1/2) of the allotted stock acquisition rights may be

exercised.

2) During the period from June 19, 2009 to June 18, 2011, all allotted stock acquisition rights may be exercised.


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(2) Size and status of change in stock options

The following includes stock options existing during the FY 2011 (year ended March 31, 2012) and stock

options have been converted and stated as number of shares.

1) Number of stock options

2005 Stock Options

Before vesting (shares) Balance at beginning of year – Granted – Expired – Vested – Balance of rights yet to be vested –

After vesting (shares) Balance at beginning of year 67,000 Granted – Exercised – Expired 67,000 Balance of rights yet to be exercised –

(Note) The number of stock options stated above reflect the effect of the stock splits listed in (Note 2) of (1) Summary of stock

options under Details, size and status of changes in stock options.

2) Unit price information

2005 Stock Options

Exercise price (Note) (yen) 5,010 Average share price at time of exercise (yen)

–

Fair value of unit price (on grant date) (yen)

–

(Note) The exercise prices stated above reflect the effect of the stock splits listed in (Note 2) of (1) Summary of stock options

under Details, size and status of changes in stock options.


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(Tax effect accounting)

1. Breakdown of major factors leading to the occurrence of deferred tax assets and deferred tax liabilities

FY 2011 (As of March 31, 2012)

Deferred tax assets (millions of yen)

Depreciation in excess of deductible amount 29 One-time depreciation of assets in excess of deductible amount 3 Accrued enterprise tax, currently not deductible 31 Non-deductible accrued business office tax 0 Allowance for bonuses in excess of tax limit 1 Experiment and research expenses, currently not deductible 98 Others 31

Total deferred tax assets 197 Deferred tax liabilities

Valuation difference on available-for-sale securities (4) Others (3)

Total deferred tax liabilities (8) Net deferred tax assets 189

2. Breakdown of major items that caused a difference between the statutory tax rate and the effective

tax rate after the application of tax effect accounting

Notes on this item is omitted, as the difference between the statutory tax rate and the effective tax rate after the

application of tax effect accounting, is less than 5% of the statutory tax rate.

3. Changes in deferred tax assets and deferred tax liabilities due to changes in the rate of taxes including

income taxes

Reduction of corporate tax rate along with the imposition of the Special Reconstruction Corporation Tax has

been enforced from the consolidated fiscal year beginning on April 1, 2012 and onward, following the

promulgation on December 2, 2011, of the Act for Partial Amendment of the Income Tax Act, etc. for the

Purpose of Creating a Taxation System Responding to Changes in Economic and Social Structures (Act No.

114, 2011), and the Act on Special Measures for Securing Financial Resources Necessary to Implement

Measures for Reconstruction following the Great East Japan Earthquake (Act No. 117, 2011). As a result,

statutory tax rate used for the calculation of deferred tax assets and deferred tax liabilities has been changed

from the 40.7% applicable hitherto, to 38.0% for the temporary differences likely to be eliminated in the

consolidated fiscal year beginning on April 1, 2012 through the consolidated fiscal year beginning on April 1,

2014, and to 35.6% for the temporary differences likely to be eliminated from the consolidated fiscal year

beginning on April 1, 2015 onward.

As a result of this change in tax rate, net value of deferred tax assets (after deduction of deferred tax liabilities)

decreased by 13 million yen, and valuation difference on available-for-sale securities and income taxes-

deferred increased by 0 million yen and 14 million yen, respectively.


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(Segment information, etc.)

a. Segment information


Description is omitted because the Group operates in a single segment of development and sales of

semiconductor products.

b. Related information


1. Information by product and service

Description is omitted because sales of semiconductor products to outside customers account for more than

90% of net sales in the consolidated statements of income.

2. Information by region

1) Net sales

Description is omitted because domestic sales to outside customers account for more than 90% of net sales

in the consolidated statements of income.

2) Property, plant and equipment

Description is omitted because there are no subsidiaries or overseas branches in countries or regions outside

Japan.

3. Information by major customer

(Unit: millions of yen)

Customer name Net sales Related segment Midoriya Electric Co., Ltd. 8,060 Semiconductor products

c. Information on impairment of noncurrent assets by reported segment


Description is omitted because the Group operates in a single segment of development and sales of

semiconductor products.

d. Information on amortization and unamortized balance of goodwill by reported segment


N/A

e. Information on gain on negative goodwill by reported segment


N/A


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(Per share information) FY 2011


Net assets per share 951.87 yenNet income per share 56.44 yen

(Notes)

1. Net income per share after adjustment for potential dilution is omitted because there were no residual shares.

2. The basis of calculation of the net income per share are as follows:

FY 2011


Net income per share

Net income (millions of yen) 700

Amount not attributable to common shareholders (millions of yen) –

Net income on common stock (millions of yen) 700

Average number of shares of common stock during the period (shares) 12,402,252

(Major subsequent events)

N/A

(Omission of disclosure)

Disclosure is omitted with respect to notes on financial instruments, derivative transactions, asset retirement

obligations, related parties information and business combination, as the need to disclose such information in

the summary of financial statements was deemed to be limited.


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5. Non-consolidated Financial Statements

(1) Non-consolidated Balance Sheets

(In millions of yen) Previous fiscal year

(As of March 31, 2011) Current fiscal year


Assets

Current assets

Cash and deposits 6,428 6,841

Accounts receivable-trade 853 195

Short-term investment securities 3,999 3,999

Merchandise and finished goods 206 606

Raw materials and supplies 0 0

Advance payments-trade 0 0

Prepaid expenses 47 68

Income taxes receivable 682 -

Consumption taxes receivable 153 23

Deferred tax assets 19 133

Other 8 13

Total current assets 12,398 11,881

Noncurrent assets


Buildings 122 186

Accumulated depreciation (61) (79)

Buildings, net 61 106

Tools, furniture and fixtures 695 799


Tools, furniture and fixtures, net 151 183

Lease assets 6 6


Lease assets, net 5 3

Total property, plant and equipment 217 293

Intangible assets

Patent right 24 14

Right of trademark 2 2

Software 124 68

Total intangible assets 152 85

Investments and other assets

Investment securities 107 80

Stocks of subsidiaries and affiliates 250 500

Long-term prepaid expenses 53 27

Lease and guarantee deposits 95 95

Deferred tax assets 37 55

Other 20 10

Total investments and other assets 564 769

Total noncurrent assets 934 1,148

Total assets 13,332 13,029


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(As of March 31, 2011) Current fiscal year


Liabilities

Current liabilities

Accounts payable-trade 429 214

Lease obligations 1 1

Accounts payable-other 312 354

Accrued expenses 26 19

Income taxes payable - 362

Deposits received 49 24

Total current liabilities 819 976

Noncurrent liabilities

Lease obligations 4 2

Asset retirement obligations 7 10

Total noncurrent liabilities 11 13

Total liabilities 831 989

Net assets


Capital stock 1,018 1,018

Capital surplus

Legal capital surplus 861 861

Total capital surpluses 861 861

Retained earnings

Legal retained earnings 1 1

Other retained earnings

General reserve 9,000 9,200

Retained earnings brought forward 1,595 949

Total retained earnings 10,596 10,150

Treasury stock - -

Total shareholders' equity 12,477 12,030

Valuation and translation adjustments

Valuation difference on available-for-sale securities 24 8

Total valuation and translation adjustments 24 8

Total net assets 12,501 12,039

Total liabilities and net assets 13,332 13,029


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(2) Non-consolidated Statements of Income



Current fiscal year (From April 1, 2011 to March 31, 2012)

Net sales 8,199 8,361

Cost of sales

Beginning finished goods 331 206

Purchase of finished goods 3,617 4,491

Total 3,948 4,697

Ending finished goods 206 606

Cost of finished goods sold 3,742 4,091

Gross profit 4,456 4,270

Selling, general and administrative expenses 2,888 2,871

Operating income 1,568 1,398

Non-operating income

Interest income 4 3

Interest on securities 4 3

Dividends income 2 3

Interest on refund - 20

Other 5 6

Total non-operating income 16 36

Non-operating expenses

Foreign exchange losses - 0

Loss on sales of noncurrent assets - 0

Loss on retirement of noncurrent assets 0 0

Other 0 0

Total non-operating expenses 0 1

Ordinary income 1,584 1,433

Extraordinary loss

Impairment loss - 30

Loss on valuation of membership - 10

Loss on adjustment for changes of accounting standard for asset retirement obligations 1 -

Total extraordinary losses 1 40

Income before income taxes 1,582 1,392

Income taxes-current 481 595

Income taxes-deferred 57 (120)

Total income taxes 539 474

Net income 1,043 917


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(3) Non-consolidated Statements of Changes in Net Assets





Capital stock

Balance at the beginning of current period 1,018 1,018


Total changes of items during the period - -

Balance at the end of current period 1,018 1,018

Capital surplus

Legal capital surplus

Balance at the beginning of current period 861 861



Balance at the end of current period 861 861

Total capital surplus





Retained earnings

Legal retained earnings





Other retained earnings

General reserve



Provision of general reserve 500 200

Total changes of items during the period 500 200


Retained earnings brought forward



Dividends from surplus (2,108) (1,364)

Provision of general reserve (500) (200)


Retirement of treasury stock (600) -

Total changes of items during the period (2,165) (646)

Balance at the end of current period 1,595 949


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Total retained earnings




Provision of general reserve - -


Retirement of treasury stock (600) -



Treasury stock

Balance at the beginning of current period (600) -


Retirement of treasury stock 600 -

Total changes of items during the period 600 -

Balance at the end of current period - -

Total shareholders' equity





Retirement of treasury stock - -



Valuation and translation adjustments




Net changes of items other than shareholders' equity 4 (15)

Total changes of items during the period 4 (15)


Total valuation and translation adjustments




Total changes of items during the period 4 (15)



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Total net assets









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6. Others

(1) Changes to Directors and Corporate Auditors

1) Changes to Representative Directors

President & Representative Director

Kazunori Matsuura (Director, General Manager of Engineering Department at present)

Executive Vice President & Representative Director, and General Manager of Sales & Marketing Department

Akihiro Saito (Director, General Manager of Sales & Marketing Department at present)

Chairman & Director Yuzuru Sasaki (President & Representative Director at present)

2) Other changes to Directors and Corporate Auditors

• Changes in positions

Vice Chairman & Director Sumihiko Ichihara (Managing Director at present)

• Candidate for new Director

Director, General Manager of Engineering Department

Koji Kanie (Senior Manager of Engineering Department at present)

3) Scheduled date of appointment

June 17, 2012

(2) Lawsuit

At present, the Company is facing a lawsuit filed by Yamaha Corporation on April 14, 2010, with the Tokyo

District Court against the Company for compensatory damages totaling 550 million yen and product sale

injunction, etc. for alleged infringement of Yamaha’s patent rights (complaint served on April 23, 2010). The

Company believes there is no such fact of infringement of Yamaha’s patent rights alleged by Yamaha and will

assert its legitimacy at the trial.


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(3) Production, order and sales status

NEW ZONE CORPORATION, which has been included within the scope of consolidation from FY 2011, is

classified as “Other” because of its insignificant net sales in the year.

1) Production

Production results for FY 2011 are as follows:


Classification FY 2011


Change (%)

LSI products targeted at the amusement device market 8,729 –LSI products targeted at the embedded system market 222 –Other 139 –

Total 9,091 –

(Notes)

1. Amounts are according to sales price.

2. Above figures are stated net of consumption taxes.

2) Orders

Orders for FY 2011 are as follows:


FY 2011 (From April 1, 2011 to March 31, 2012) Classification

Orders received Change (%)Outstanding

orders Change (%)

LSI products targeted at the amusement device market 9,820 – 3,886 –LSI products targeted at the embedded system market 187 – 45 –Other 154 – 13 –

Total 10,162 – 3,946 –

(Notes)

1. Amounts are according to sales price.



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3) Sales

Sales during FY 2011 are as follows:


Classification FY 2011


Change (%)

LSI products targeted at the amusement device market 7,985 –LSI products targeted at the embedded system market 232 –Other 144 –

Total 8,362 –

(Notes)


2. Sales to the Company’s main sales agent and the proportion of such sales to total sales over the past two fiscal years are as

follows:

Sales agent FY 2010



Amount (millions of yen) Percentage (%)

Amount (millions of yen) Percentage (%)

Midoriya Electric Co., Ltd. – – 8,060 96.4

(Note) Above figures are stated net of consumption taxes.

Summary of Consolidated Financial Statements for the Year ... · due in part to their concerns over...

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