Consolidated Operating Results for the Year Ended March 31, 2016

RESULTS OF CONSOLIDATED OPERATIONS

	Net sales		Operating income		Ordinary income		Net income attributable to equities of parent
	Million yen	%	Million yen	%	Million yen	%	Million yen	%
Year ended March 31, 2016	47,004	-13.0	-894	−	-749	−	-1.676	−
Year ended March 31, 2015	54,043	-5.1	1,425	-73.3	1,566	-71.4	874	-73.3

(Note) Comprehensive income
Year ended March 31, 2016: ¥-1,812 million (－%)
Year ended March 31, 2015: ¥862 million (-73.8%)

	Net income per share	Diluted net income per share	Net income to shareholders’ equity ratio	Ordinary income to total assets ratio	Operating income to net sales ratio
	Yen	Yen	%	%	%
Year ended March 31, 2016	-113.41	−	-5.5	-1.5	-1.9
Year ended March 31, 2015	59.19	−	2.7	2.9	2.6

(Reference) Equity in earnings of affiliates:
Year ended March 31, 2016: ¥− million
Year ended March 31, 2015: ¥− million

CONSOLIDATED FINANCIAL POSITION

	Total assets	Net assets	Shareholders’ equity ratio	Net assets per share
	Million yen	Million yen	%	Yen
Year ended March 31, 2016	47,139	29,291	62.1	1,981.38
Year ended March 31, 2015	53,528	32,138	60.0	2,173.98

(Reference) Shareholders’ equity
Year ended March 31, 2016: ¥29,291 million
Year ended March 31, 2015: ¥32,138 million

CONSOLIDATED CASH FLOWS

	Cash flows from operating activities	Cash flows from investing activities	Cash flows from financing activities	Cash and equivalents, end of period
	Million yen	Million yen	Million yen	Million yen
Year ended March 31, 2016	-4,710	-2,511	4,065	9,358
Year ended March 31, 2015	817	-2,142	-1,441	12,515

Dividends

	Annual dividends
	First quarter-end	Second quarter-end	Third quarter-end	Year-end	Annual
	Yen	Yen	Yen	Yen	Yen
Year ended March 31, 2015	−	10	−	60	70
Year ended March 31, 2016	−	10	−	40	50
Year ended March 31, 2017 (Forecast)	−	10	−	40	50

	Total dividends paid (annual)	Payout ratio (Consolidated)	Dividends paid to net assets (Consolidated)
	Million yen	%	%
Year ended March 31, 2015	1,034	118.3	3.2
Year ended March 31, 2016	739	−	2.4
Year ended March 31, 2017 (Forecast)		−

Forecast earnings for the year ending March 31, 2017

	Net sales		Operating income		Ordinary income		Net income attributable to owners of parent		Net income per share
	Million yen	%	Million yen	%	Million yen	%	Million yen	%	Yen
First half ending September, 2016	21,500	-11.2	200	-75.5	200	-77.9	120	-71.5	8.12
Entire – year	50,000	6.4	1,000	−	1,000	−	600	−	40.59

Others

Material changes in subsidiaries during this period (Changes in scope of consolidations resulting from change is subsidiaries)

No(Number of subsidiaries excluded from consolidation: −, Name of subsidiaries excluded from consolidation: −)

Changes in accounting policies and accounting estimates, retrospective restatement

Changes in accounting policies based on revisions of accounting standard: Yes
Changes in accounting policies other than ones based on revisions of accounting standard: No
Changes in accounting estimates: No
Retrospective restatement: No

Number of shares outstanding (common stock)

1. Number of issued and outstanding shares at the end of fiscal year (including treasury stock)
  March 31, 2016: 14,783,900
  March 31, 2015: 14,783,900

2. Number of treasury stock at the end of fiscal year
  March 31, 2016: 628
  March 31, 2015: 628

3.Average number of shares
  March 31, 2016: 14,783,272
  March 31, 2015: 14,783,278

Analysis of Operating Results

Operating results for this period

During this consolidated fiscal year, the Japanese economy continued to recover at a moderate pace due to a rising trend in corporate earnings and employment conditions. However, the Japanese economy outlook remained uncertain mainly as a consequence of the slowdown of the economy of China and emerging countries.

The environment surrounding the businesses of the Daikoku Denki Group (“the Group”) became more challenging. In the pachinko industry, in which the Group is engaged, pachinko operations based on rental balls at 4 yen, was still on a slight declining trend. Moreover, demand for self-imposed regulations on pachinko and pachislot game machines led to decline in motivation of our customers (pachinko halls) to invest in their existing parlors.

According to the “2015 White Paper on Adult Entertainment Business and Moral Offense Control“ issued by the Community Safety Bureau of the National Police Agency, the total number of installed game machines was 4,575,545 units, as a result of a decrease of 48,264 units in pachinko game machines and an increase of 25,990 units in pachislot game machines. Consequently, the average number of installed game machines per parlor increased by 9.2 units to 404.6 units.

Under this market environment, the Information System Segment promoted the sales of data display terminal products including the enhanced “BiGMO PREMIUM” as well as “VEGASIA” (CR unit) with new functions including integrated accounts. We were also engaged in the promotion of hall computers as we also forayed into the development of a new analytical method using “CIIFACE” which is based on a facial recognition system.

In anticipation of changing market trends, the Control Systems Segment undertook a radical review of the video creation process and also worked toward reinforcement of human resources. We also intensified our activities to promote high novelty components. This was done in order to help stabilize our business performance. However, the business remained slow due to the necessity for modification of sales schedule to accommodate specification changes to comply with self-imposed regulations.

Under these circumstances, an operating loss of 778 million yen was recorded. The main reason for this was that the fair value of inventory assets was adjusted due to less models being offered and the total sales volume of pachislot game machines fell below initial forecasts.

Income taxes adjustment of 468 million yen was also recorded after partial disposition of deferred tax credit.

As a result, during the consolidated fiscal year, consolidated net sales amounted to 47,004 million yen, down 13.0% from the previous consolidated fiscal year. Consolidated operating deficit was 894 million yen (consolidated operating income for the previous year was 1,425 million yen), and consolidated ordinary deficit was 749 million yen (consolidated ordinary income for the previous year was 1,566 million yen). Consolidated net deficit attributable to shareholders of the parent company amounted to 1,676 million yen (consolidated net income attributable to shareholders of the parent company was 874 million yen).

Business results by segment are as follows.

Information System Segment

During the consolidated fiscal year, demand for hall computer replacements stagnated because self-imposed regulations significantly decreased customer motivation to invest in existing pachinko parlors. As to the data display terminals including “VEGASIA” (CR unit) and “BiGMO PREMIUM,” the business was not as active as the previous year when the highest sales for this business were recorded.

Meanwhile, research and development cost increased significantly due to active investment in development of next-generation products.

As a result, net sales in this segment were 34,076 million yen (down 8.2% from the previous fiscal year) and segment-operating income was 2,277 million yen (down 46.4% year on year).

Control System Segment

Under adverse market conditions, the sales of our leading products, the display units, fell below the previous year affected by a decrease of number of models and total sales volume. On the other hand, the sales of control units and peripheral components recorded higher results than the previous year due to increased production efficiency and their incorporation in a higher number of models. As for pachislot game machines, despite an initial plan to sell a total of 30,000 units of 4 models, only 5,100 were sold due to the fact that the completion of 3 models was delayed to the next fiscal year ending March 2017. Consequently, the fair value of inventory assets was accordingly adjusted.

As a result, net sales in this segment were 12,986 million yen (down 23.4% from the previous fiscal year) and segment-operating deficit was 1,319 million yen (segment-operating deficit of the previous year was 1,105 million yen).

(Note) Business segment sales and income figures include intersegment transactions.

Future outlook

The future of the Japanese economy still remains uncertain due to the slowdown of overseas economies, especially China, and concerns about the possibility of a strengthening yen. It is presumed that the impact of the self-imposed regulations on the pachinko industry will continue in the new fiscal year (ending March 2017), and that businesses in this industry will still face difficult conditions.

Given such a market environment, the Group forecasts the Information System Segment to achieve sales of 31 billion yen, down 9.0% from the previous consolidated fiscal year. This will stem from efforts including i) continued effort to promote “VEGASIA” (CR unit), ii) continued effort to sell “BiGMO PREMIUM” which enjoys a high market appraisal, and iii) sale of new data display terminal, “REVOLA,” for which the prototype attracted widespread industry attention this fiscal year. We will also continue active investment in the development of next-generation products and to release those products as early as possible.

In the Control System Segment, since standards for game machines have changed, we are currently waiting for the issuance of type test results. We believe that we will regain this business as we gradually fall into compliance with these updated standards. The number of models is also expected to grow. We will concentrate on providing proposals for projects in a timely manner so as to accommodate market circumstances and to increase our market share.

We also plan to launch three new models of pachislot game machines in the new fiscal year. The launch was originally planned in the year ending March 2016. Consequently, the Group forecasts the Control System Segment to achieve sales of 19 billion yen (up 46.3% year on year).

As a result, the Group anticipates consolidated net sales of 50 billion yen (up 6.4% year on year), consolidated operating income of 1 billion yen (up 1,894 million yen year on year), consolidated ordinary income of 1 billion yen (up 1,749 million yen year on year) and consolidated net income of 600 million yen (up 2,276 million yen).

Note on the outlook:

Forecasts in this report are judged based on information available at the time when this report was prepared and may therefore contain potential risks and uncertainties.

As for future outlook, the Group will continuously collect and analyze the data. If the earnings forecast needs to be revised, the Group will announce the revision immediately.

Analysis of Financial Position

Status of Assets, Liabilities and Net Assets

Current assets at the end of the consolidated fiscal year were 29,582 million yen, a decrease of 6,353 million yen from the end of the previous consolidated fiscal year. The main factor was a significant decrease in trade receivables, cash and deposits, despite an increase in accounts receivable (current asset – other). This account receivable was tax refund receivable and attributable to the sluggish operational performance when compared with the previous consolidated fiscal year.

Fixed assets at the end of the consolidated fiscal year were 17,557 million yen, a decrease of 34 million yen from the end of the previous consolidated fiscal year. This result was attributable to a decrease in deferred income tax asset due to review of collectability, despite an increase in tangible fixed assets due to the expansion of number of physical distribution bases plus an increase in software resulting from the construction of internal systems and product improvement.

As a result, total assets at the end of the consolidated fiscal year were 47,139 million yen, a decrease of 6,388 million yen from the end of the previous consolidated fiscal year.

Total liabilities at the end of the consolidated fiscal year amounted to 17,848 million yen, a decrease of 3,540 million yen from the end of the previous consolidated fiscal year. The main factors for this include a significant decrease in notes and accounts payable – trade due to a smaller amount of purchases in the second half of the consolidated fiscal year, coupled with a decrease in income taxes payable due to sluggish operational performance, and despite an increase in short-term loans from the previous consolidated fiscal year.

Net assets at the end of the consolidated fiscal year were 29,291 million yen, a decrease of 2,847 million yen from the end of the previous consolidated fiscal year. The main factors for this include decreased retained earnings due to allocation of current term net loss, and payment of dividends which are attributable to shareholders of the parent company. Consequently, the Group’s equity ratio was 62.1% (a rise of 2.1 points when compared to that at the end of the previous consolidated fiscal year).

Status of Cash Flows

Cash and cash equivalents (“cash”) at the end of the consolidated fiscal year amounted to 9,358 million yen, a decrease of 3,156 million yen from the end of the previous consolidated fiscal year.

The situation of each cash flow for the consolidated fiscal year is as follows:

(Cash flows from operating activities)

Cash spent for operating activities for the consolidated fiscal year totaled 4,710 million yen (817 million yen in the previous year). The primarily components of the proceeds were a decrease in inventory assets and notes and accounts receivable – trade of 3,571 million yen and depreciation of 1,579 million yen. The primarily expenditures were a net loss before income taxes of 1,168 million yen, trade payables of 7,610 million yen, an increase in accounts receivable-other of 557 million and income taxes paid of 534 million yen.

(Cash flows from investing activities)

Cash used in investing activities for the consolidated fiscal year was 2,511 million yen, for a 368 million yen increase year on year. The main factor was due to an increase in expenditures from acquisition of fixed assets, while some time deposits were withdrawn.

(Cash flows from financing activities)

Cash received from financing activities for the consolidated fiscal year amounted to 4,065 million yen (outlay the previous year was 1,441 million yen). The main factor was the fund procurement of a 5,500 million yen short-term loan, despite the repayment of a long-term loan and payment of dividend.

Policy for Returning Earning to Shareholders and Dividends for This and Next Fiscal Year

We believe that our present most important management task is to return profits to shareholders while continuing to grow our business. Our policy is to provide stable and continuous dividends to all shareholders, closely monitoring the business environment, watching our performance, keeping tabs on dividend payout ratio and other factors in a comprehensive manner. The amount of dividend and payment date will be determined by the Board of Directors at a later date. As for retained earnings, we will utilize this fund to invest in new business development with an eye toward a long-term growth as well as for the promotion of business efficiency so as to further improve our trade competitiveness and profitability.

In order to return profits to shareholders, we have decided on payment of 50 yen per share for this fiscal year (40 yen year-end dividend plus 10 yen interim dividend).

For the new fiscal year, we also plan to pay the same per-share dividend.