Annual Report 2003 Year ended September 30, MTI Ltd.

Transcription

1 Annual Report 2003 Year ended September 30, 2003 MTI Ltd.

2 POISED FOR A FUTURE OF DYNAMIC GROWTH THE MTI GROUP AIMS AT STABLE AND HIGH GROWTH THROUGH SUSTAINABLE BUSINESS MODELS. Strategically Positioned for a Second Wave of Expansion MTI Ltd. is well equipped with three strengths: speed that keeps the Company in the vanguard of progress, power that overwhelms all competitors, and intelligence that looks to the next generation. Since its founding in 1996, MTI has been engaged in sales of products including mobile phones and broadband asymmetric digital subscriber lines (ADSL), and has achieved growth and steadily strengthened its position as a provider of mobile phone contents. Since that time, the market for mobile phones and broadband lines has expanded rapidly, which assisted MTI in boosting its growth. MTI recognizes, however, that the market for these products is destined to reach maturity very soon. To adapt to this change, MTI is shifting its focus to areas with strong long-term growth prospects. In order to maintain stable growth potential into the future by capitalizing on its years of experience and technological strengths, MTI has carefully selected three core business areas for business development: music distribution via mobile phones, contents distribution, and large-scale telemarketing for third-sector insurance* such as medical insurance. These businesses will strategically position the Company for a future of stable growth. * Third-sector insurance refers to types of insurance other than life and casualty insurance. Music distribution via mobile phone Contents distribution Large-scale telemarketing for third-sector insurance sales Future Forecast Disclaimer The projected MTI results, management strategies, and beliefs about the future presented in this Annual Report 2003 are based on MTI determinations obtained from information available at the time of writing. Readers are requested to be aware of the potential for a large discrepancy between the forecasts contained here and actual business results, as these predictions contain elements of uncertainty as well as known and unknown risks. Consolidated Financial Highlights Interview with the President Financial Section (Consolidated Basis) Board of Directors and Corporate Auditors Corporate History Corporate Data

3 CONSOLIDATED FINANCIAL HIGHLIGHTS 01 MTI Ltd. and Consolidated Subsidiaries Millions of Yen Thousands of U.S. Dollars Years ended September For the year Net sales ,478 11,020 $99,059 Operating income ,389 Recurring profit ,833 Income (loss) before income taxes and minority interests (882) 218 1,960 Net income (loss) (478) 118 1,062 Net cash provided by operating activities ,262 11,353 At year-end Total assets ,009 9,757 87,704 Total shareholders equity ,522 1,627 14,631 Per share data Yen U.S. Dollars Net income (loss): Primary (7, ) 1, $ : Fully diluted , Cash dividends Total shareholders equity , , Note: U.S. dollar amounts are calculated at the rate of US$1= , the exchange rate prevailing on September 30, NET SALES (Millions of Yen) NET INCOME (LOSS) (Millions of Yen) NET INCOME (LOSS) PER SHARE (Yen) 14, ,014 11,478 11,020 9,148 7, ,356 3, ,936 7,663 1,

4 02 INTERVIEW WITH THE PRESIDENT MTI is focusing its efforts on business areas that will fuel a second wave of major growth for the Company. Mobile phone music distribution, contents distribution, and large-scale telemarketing of third-sector insurance: these businesses will lead the MTI of tomorrow.

5 Leveraging Strengths to Capitalize on Long-Term Growth Potential 03 power MTI s future growth. In the upcoming fiscal year, we will actively invest in these promising areas to build a solid foundation for growth. Q A Please explain your strategy for long-term growth, and how it came about. MTI is concentrating its management resources in growth areas that allow us to take full advantage of our strengths. Our goal is to achieve stable growth in profitability. Until now, MTI has been a vendor of mobile phone equipment and an agent for ADSL broadband line contracts. In both of these markets, however, growth has already reached a plateau, after a time of rapid expansion. We can no longer focus on these slowing markets if we wish to ensure stable growth for the Company. Looking to the future, we need to pursue long-term profit growth and strengthen MTI s corporate foundation. To achieve this, we must identify products and services that ensure utilization of our strengths to the fullest extent to provide stable growth and that is exactly what we have done. After careful study, we have selected three business areas to Q A What businesses are you concentrating on to achieve long-term growth? We are targeting three business areas: music distribution via mobile phone, contents distribution, and large-scale telemarketing for third-sector insurance sales. Dramatic growth is anticipated in the market for music distribution to mobile phones, with melody ringtones transforming into Chaku-uta (vocal ringtones). Contents distribution to mobile phones is also expected to see strong growth triggered by the widespread adoption of third-generation (3G) mobile phones and the advent of various accompanying mobile phone services. Finally, considering the rapidly aging population in Japan, we foresee steady growth in the field of third-sector insurance sales such as medical insurance through large-scale telemarketing. NET SALES 2003 (Actual) OPERATING INCOME 2003 (Actual) NET INCOME (LOSS) 2003 (Actual) MEDIUM-TERM MANAGEMENT PLAN RESULTS AND TARGETS (Millions of Yen) ,020 12, ,000 20,000 1, CONTENTS DISTRIBUTION SOLUTIONS MOBILE TERMINAL SALES TELEMARKETING OTHERS NET SALES BY BUSINESS (%)

6 04 Uniquely Positioned to Take Advantage of Growing Demand in the Music Distribution Business Q What kind of service is Chaku-uta? A Chaku-uta allows mobile phone users to listen to both music and vocals by their favorite artists. Its market is expected to grow rapidly. Presently, the widely available melody ringtone simply plays a tune when the phone rings. The new Chaku-uta ringtone represents a major advance: it plays the artist s music and vocals just like a CD recording. Moreover, the music can be enjoyed in various other ways, not just as a ringtone. People can listen to the music any time they want, or play it for a friend. Vodafone K.K. started offering Chaku-uta, followed by NTT DoCoMo, Inc. in February I think the market for Chaku-uta will expand at an accelerating pace in the future due to the wide proliferation of 3G mobile phones, which enable huge amounts of contents data to be downloaded. MTI began distributing Chaku-uta early on. We rank second among the contents providers distributing Chaku-uta for KDDI. If you exclude record company contents providers that directly own the copyrights to music, we have the highest level of contents download. It is no exaggeration to say that MTI has become well known for its strength in this area. KDDI Corp. started offering Chaku-uta service ahead of other companies. Thanks to the rapid popularization of Chaku-uta, the number of 3G mobile phone subscribers has seen a healthy increase at KDDI. In December 2003, GROWTH FORECAST FOR 3G MOBILE PHONES (Thousand Units) CONTENTS DISTRIBUTION: TARGET NUMBER OF PAYING SUBSCRIBERS (Thousands) 73,190 3,200 5, (Actual) 22, , Note: Limited to terminals that are enabled for rich-contents download. Source: MTI estimate , (Actual) 1, (Actual) 2, ,

7 Q A What are MTI s strengths in providing Chaku-uta? MTI has engaged in music distribution to PCs from early on through a subsidiary, music.co.jp., inc., where we have developed and accumulated valuable expertise in copyright management. This is a great asset and a powerful competitive edge for MTI. 05 has acquired advantageous agreements with many record companies. As a result, MTI has been quite successful in addressing the copyright management challenge. Incidentally, we are receiving music from two major record companies and Japan Broadcasting Corp. (NHK). This is the kind of advantage that cannot be easily duplicated by other contents distribution companies. To many users, it may seem like Chaku-uta is just an extension of the idea of melody ringtones. However, for us as a provider, these two services are completely different. In the case of Chaku-uta, although the length of the song is shorter, it plays like a regular copy of an artist s CD. Therefore, to distribute Chaku-uta, we need to undertake complicated management of copyrights on behalf of the artists, record companies, songwriters, and composers involved. This kind of copyright management would be a major barrier to any new independent Chaku-uta distributor that is not a record company which already directly owns music copyrights. Our wholly owned subsidiary, music.co.jp., inc., has built a proven track record in distributing music to PC users, and Q A Differentiating the MTI Brand in the Contents Distribution Business Have there been any new developments in your contents distribution business? Having secured the position of No. 1 contents provider at KDDI, we are now starting to penetrate into NTT DoCoMo business. Until now, MTI has been engaged in supplying contents primarily for KDDI mobile phone subscribers. We have been highly rated among KDDI users for our unique contents EARNINGS TREND FOR CONTENTS DISTRIBUTION (Millions of Yen) NET SALES OPERATING INCOME OPERATING MARGIN (%) 11, ,040 CONTENTS 8,500 5, MAP AND NAVIGATION TRAFFIC INFORMATION WEATHER FORECAST RESTAURANT GUIDE Note: Operating income figures are before head office expenses.

8 06 development capabilities and technical expertise and aim to further strengthen the No. 1 position at KDDI. value to users are the most important differentiating factors at MTI, coupled with the diverse range of contents. We formally launched a contents distribution service for NTT DoCoMo in the spring of With three times as many subscribers as KDDI, the NTT DoCoMo market offers enormous potential for MTI. By entering this market, we will have another broad sales channel established to support our growth. Q A What kind of contents are you offering for mobile operators such as KDDI? We provide unique contents that distinguish us from other companies, and major mobile operators highly rate our contents development capabilities. Specifically, in addition to the Chaku-uta and melody ringtone services that I just mentioned, MTI offers diverse contents services including electronic dictionaries, weather forecast, maps, and traffic information and games. Unique contents and functions with high perceived Our unique contents ideas and development capabilities are the key in penetrating NTT DoCoMo users. In the spring of 2003, we launched an electronic dictionary service for NTT DoCoMo users. This service offers vast information stored in as many as 15 dictionaries, and even provides a travel dictionary application that subscribers can use overseas without a Web connection. Another great example is our Mapple traffic information service, which is based on a revolutionary, world-first technology that provides traffic delay predictions by comparing the latest traffic data with statistics from previous days and time periods. This kind of cutting-edge technology coupled with our original thinking has won MTI a great deal of acclaim. We have only just begun services for NTT DoCoMo users, but the number of our subscribers there has been showing steady growth. MAPPLE BEAT-THE-TRAFFIC ROUTES A world first! Providing a route information service that forecasts changes in traffic conditions PRESENT 15 MINUTES FROM NOW 30 MINUTES FROM NOW USUAL ROUTE GUIDE Route guide from traffic information at the time of inquiry Traffic jams occur on the route due to changes in traffic conditions, causing time loss and route changes ROUTE GUIDE USING TRAFFIC FORECASTS Information on the best route based on a forecast of traffic conditions at the time of inquiry TRAFFIC JAMS TRAFFIC BYPASS ROUTE USUAL ROUTE Forecasting changes in traffic conditions from departure until arrival, and providing information on the quickest route

9 Q What kind of future plans do you have in your contents distribution business? technical capability, we may say that MTI can maintain its unparalleled superiority in this field. 07 A We aim to strengthen our profit base in the contents business by focusing on a selected number of promising areas as well as further pursuing a technical edge in the BREW platform technology. BREW is a cutting-edge platform technology that KDDI is actively promoting for implementation in 3G mobile phones. Until now, the Java platform has been widely used to run applications on mobile terminals. BREW has the same functionality, but can run much more advanced applications than Java. However, at the same time, the advanced nature of this technology also requires a high level of technical expertise in developing applications for BREW. MTI has focused its efforts on brushing up our BREW technology since its introduction, while engaging in contents development and distribution based on BREW. As a result, MTI is now recognized in the industry as a company strong in BREW technology. With a No. 1 position in KDDI s contents distribution business and leading Regarding the contents distribution business for NTT DoCoMo, our immediate goal is to raise awareness of MTI contents among its users, above all else. To achieve this, we have launched advertising campaigns and promotions focused on melody ringtones, which still make up the largest segment in the mobile contents market. For example, in the fiscal year ending September 30, 2004, we are increasing our annual advertising expenditure from 100 million to 500 million. In addition to regular banner ads on mobile phone sites, MTI has started to run TV commercial spots. Within the largest NTT DoCoMo contents distribution market, I believe raising MTI s awareness will be the key in establishing a strong competitive position in the future. Eventually, MTI will be able to build an unshakeable position in the contents distribution market for NTT DoCoMo. CURRENT SITUATION FOR MTI, A LEADER IN BREW TM ITEM MTI COMPETITORS NUMBERS OF SITES 8 3 to 4 CATEGORIES Source: MTI survey. Various, including ringtone melody search, traffic information, and lifestyle information Mainly gaming ADVERTISING AND PUBLICITY INVESTMENT PLAN (Millions of Yen) 1,200 1, (Actual)

10 08 Q Insurance Sales Business to Contribute to Long-Term Profitability Please discuss the background to MTI s entrance into a completely different business area such as third-sector insurance sales. As an IT firm, what strengths are you relying on to succeed in this new field? A MTI has long accumulated a great deal of expertise in large-scale outbound telemarketing, and we have decided to deploy this long-accumulated expertise in this new business field with the aim of achieving stable long-term profitability. MTI has a proven track record in large-scale outbound telemarketing sales of mobile phones and ADSL broadband lines. By applying our expertise to this steadily growing third-sector insurance sales business, we are creating an important business area that will fuel the Company s future growth. We believe that third-sector insurance sales through outbound large-scale telemarketing are a natural extension of MTI s competitive edge. Third-sector insurance, including cancer, medical, and nursing-care insurance, is currently under the spotlight because of its very important role in Japan s steadily and rapidly aging society. People are supplementing their regular life insurance with this third-sector insurance, while moving steadily toward the purchase of third-sector insurance by dropping their current policies. The current market size for this segment is about 7.4 million policies, but this figure is expected to grow more than fourfold to 30.4 million policies within just 10 years. Another reason why MTI is focusing on third-sector insurance sales is that, in addition to the one-time commission at the time of sale, regular fees continue to be earned for 10 years afterward. Once sales are made, revenue planning becomes much easier. MTI began third-sector insurance sales based on largescale outbound telemarketing in the latter half of 2003, and with the already proven results, we have begun full-scale deployment this year. OUTLOOK FOR THIRD-SECTOR INSURANCE MARKET Total: 53.4 million policies Single contract: 7.4 million policies Term-rider whole-life type medical insurance supplementary contract (mainly underwritten by major Japanese life insurance companies): 46 million policies Current medical insurance market Total: 53.4 million policies Addition of single contract to existing insurance or transfer to single insurance contract after review: 30.4 million policies Unchanged term-rider whole-life type medical insurance supplementary contracts: 23 million policies Forecast of the medical insurance market in 10 years PRIOR INVESTMENT FOR INSURANCE SALES Stable earnings can be secured through stock accumulation FEE RATE ON MONTHLY INSURANCE PREMIUMS PER POLICY (%) (Months) CHANGE IN CUMULATIVE INVESTMENT RECOVERY AMOUNT PER POLICY (REFERENCE) (Months)

11 Q A Please tell us about your measures to achieve full-scale entry into third-sector insurance sales. First, we stepped up an originally indirect wholly owned subsidiary into a direct subsidiary under MTI, and streamlined it to specialize in large-scale outbound telemarketing of third-sector insurance. Then, in October 2003, we opened two call centers in Shinjuku, Tokyo and Hachinohe, Aomori Prefecture to serve as key telemarketing bases. In addition to strengthening our sales capabilities, we have built a management and operating system, which can easily handle rigorous future expansion. In the long term, we plan to keep improving business processes for stronger sales capability and better efficiency. To achieve this, we aim to obtain ISO9001 certification in the near future. In the early months of the third-sector insurance sales business, we could not avoid making a large initial investment to finance expansion of call centers and training of operators. However, as of the fiscal year ended September 30, 2003, our initial operators had already 09 achieved efficiency on a par with most top insurance salespeople, and we are now actively expanding capacity, with a continued focus on efficiency. Q Strategic Focus on Long-Term Growth Please give us an overview of MTI s performance for the fiscal year ended September 2003 and the current fiscal year. A Although we achieved substantial profit recovery in the fiscal year under review, we anticipate a small net loss in the current year due to initial investment expenditures. Because of a decline in the number of mobile phones sold, overall sales decreased slightly during the fiscal year ended September However, earnings in the contents business made a strong contribution, and with a 528% year-on-year increase in operating income and the absence of an extraordinary loss related to strategic EARNINGS TREND FOR TELEMARKETING (Millions of Yen) NET SALES OPERATING INCOME (LOSS) OPERATING MARGIN (%) 1,400 1, THIRD-SECTOR INSURANCE SALES BUSINESS: TARGET NUMBER OF POLICIES CONTRACTED DURING THE YEAR (Policies) 33, ,000 32, Note: Operating income figures are before head office expenses.

12 10 business restructuring, we recorded net income for the year. Since a large investment will be required to launch the Company into the future growth orbit in both the music and contents distribution as well as large-scale outbound telemarketing businesses, some sacrifice of short-term profit is strategically necessary to ensure long-term profitability. We believe that these strategic moves are essential to put us on a stable, high-growth track for the future. Q A Do you have a particular message for shareholders and potential investors? Yes. I would like to invite our shareholders and investors to take a good look at MTI s long-term strategic direction. I firmly believe we are headed for long-term growth focused on the three core business areas we have selected. MTI has always proved successful by undertaking product sales during growth periods and offering services when those markets mature, capitalizing on the different phases of product lifecycles. Extending this business approach further in the last fiscal year, we identified a new business area with long-term profit potential third-sector insurance sales. Discovering this great match between our strengths and market potential was like discovering a gold mine for the Company. In addition to this, with the greatly expanding scope of our activities in both the music and contents distribution businesses through NTT DoCoMo, we are very well positioned for a period of substantial growth. Although the outlook for short-term profits is expected to be weak in the current fiscal year (ending September 30, 2004) due to large initial investments, this is a fully intentional phase of our transition to a period of major future growth. I hope that our shareholders and potential investors will join us in taking a long-range perspective on MTI s business development. December 2003 Toshihiro Maeta President and CEO

13 FINANCIAL SECTION (Consolidated Basis) 11 Six-Year Summary (Consolidated Basis) Management s Discussion and Analysis (Consolidated Basis) Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Shareholders Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Independent Auditors Report

14 12 SIX-YEAR SUMMARY (Consolidated Basis) MTI Ltd. and Consolidated Subsidiaries Millions of Yen Years ended September For the year Net sales ,065 7,580 9,148 14,316 11,478 11,020 Operating income Recurring profit Net income (loss) (3,223) (478) 118 At year-end Total assets ,926 4,661 8,581 9,889 10,009 9,757 Total shareholders equity ,814 3,639 2,017 1,522 1,627 Per share data Net income (loss): Primary , , , (53,936.26) (7,663.48) 1, : Fully diluted , Cash dividends , , Total shareholders equity , , , , , , Yen MANAGEMENT S DISCUSSION AND ANALYSIS (Consolidated Basis) OPERATING ENVIRONMENT NET SALES During the fiscal year under review, Japan s economy showed some signs of recovery, notably an improvement in the stock market. The overall picture remained weak, however, due to the persistently high level of unemployment and weak consumer spending. In the mobile telecommunications sector, MTI s core area of operations, figures from the Telecommunications Carriers Association (TCA), Japan s electronics and information industries trade association, indicated that the number of subscribers to mobile phones and Personal Handyphone System (PHS) phones topped 83.5 million at the end of September 2003, and that 66.0 million of hose subscribers used Internet-enabled mobile terminals. Against the background of this high level of the subscriber base, the rate of net increase in subscribers is slowing. Consolidated net sales for the fiscal year ended September 30, 2003 declined 4.0% from the previous fiscal year, to 11,020 million. In its telecommunications operating segment, the Company focused on marketing through our carrier-brand stores, as well as through volume merchandisers. New activities included marketing of broadband lines and insurance policies in the so-called third sector, which includes medical and other insurance. These initiatives were still insufficient to prevent a decline in sales in the telecommunications segment. On the other hand, sales driven by mobile contents for Internet-enabled mobile phones rose substantially in the network operating segment.

15 PERFORMANCE BY OPERATING SEGMENT Telecommunications Segment (Mobile Phone Sales and Telemarketing) 13 marketing broadband lines in cooperation with Yahoo!BB, but in the second half shifted emphasis to marketing medical and other insurance policies in the third sector, an area believed to offer excellent growth potential. Net sales in this segment declined 22.2% from the previous fiscal year to 6,211 million, bringing this segment s share of MTI s net sales down from 69.5% to 56.4%. Third-generation (3G) mobile phones were introduced amid signs of a slowdown in growth in the number of mobile phone subscribers. Concerns are rising that commissions paid to sales agencies may be squeezed as wireless operators sharply boost capital investment to gear up for 3G mobile phone services. In this challenging environment, MTI managed to stem a decline in continuing commissions by aggressively marketing mobile phones and PHS phones through carrier-brand stores and the volume merchandiser channel. These initiatives, however, were insufficient to offset the sales decline, due to discontinuation of store-less retailing of mobile phones in the previous fiscal year. Furthermore, in the first half of the fiscal year under review, MTI leveraged its expertise in large-scale telemarketing, vigorously Network Segment (Contents Distribution and Solutions) Net sales in this segment increased 32.2% from the previous fiscal year to 4,626 million, increasing this segment s share of MTI s net sales from 30.5% to 42.0%. The contents distribution business in general, however, faces a demanding environment. The growth rate of Internet-enabled mobile terminals is slowing, and concern is growing over probable intense price competition due to low barriers to entry. Accordingly, escalation of development costs is inevitable, in line with the popularization of 3G mobile phones and a shift to new technologies for new applications such as the BREW TM platform, in which MTI enjoys a technological lead. MTI s response is selective focus, a strategy based on increasing membership by upgrading its best-selling contents applications and launching new contents lines while terminating unprofitable contents applications SALES BY OPERATING SEGMENT (Millions of Yen) TELECOMMUNICATIONS NETWORK OTHERS 3,196 OPERATING INCOME AND OPERATING MARGIN OPERATING INCOME (Millions of Yen) OPERATING MARGIN (%) ,210 7,188 11,120 3,498 7, ,626 6, ,580 9,148 14,316 11,478 11,

16 14 through consolidation. As a result, the total contents provided by MTI decreased by 26 items from the previous fiscal year-end to 254 as of September 30, Membership growth was driven by the continuing popularity of our melody ringtones, which continued to rank high in the general ringtone category, and the popular Chakuuta (vocal ringtones). The Company also focused on building a low-cost operating structure through overseas outsourcing of contents design and development while ensuring quality and efficiency. In line with the expansion of broadband networks, such as ADSL, the Company launched a video-on-demand service for broadband networks in the second half of the fiscal year under review. In the solutions business, the Company focused on boosting sales from custom software development, while expanding its customer base to stabilize earnings. The increase in the number of customers to 4,000 for our Internet-based settlement service contributed significantly to profit growth in this segment. Others Net sales in other businesses amounted to 182 million. In March 2003, the Company established Cycle Hit Ltd. to take over and expand the recycled goods business handled by Telecom System International Co., Ltd. EARNINGS The cost of sales increased 13.5% from the previous fiscal year to 6,901 million, pushing up the ratio of cost of sales to net sales by 9.6 percentage points to 62.6%. This result was due mainly to lower commission income stemming from slower mobile terminal sales. On the other hand, selling, general and administrative (SG&A) expenses fell 29.9% to 3,741 million. This was due to a decline in sales commissions reflecting lower sales of mobile terminals and a drop in sales promotion expenses. Consequently, SG&A expenses as a percentage of net sales declined by 12.5 percentage points from the previous fiscal year to 34.0%. Helped in part by these factors, operating income rebounded 528.1% compared to the previous fiscal year to 377 million. Improved profitability on mobile terminals and an increase in the number of paid subscribers to our mobile contents services were the major drivers of profit growth. In the non-operating income/expenses account, gain on investments in equity-method affiliates decreased from 49 million in the previous fiscal year to 1 million. Recurring profit, fueled by rising operating income, rose 198.2% to 315 million. In the extraordinary gains/losses account, one-time losses from the previous discontinuation of the store-less retailing business, and valuation losses on inventories resulting from restructuring of the business portfolio are now behind us. As a result of these and other factors, the Company moved back into the black, reporting net income of 118 million, up from a net loss of 478 million in the previous fiscal year. Net income per share, after adjusting for the effect of dilution, was 1, The Company paid a dividend of per common share, unchanged from a year earlier. FINANCIAL POSITION Total assets as of September 30, 2003 were 9,757 million, a decrease of 252 million from the end of the previous fiscal year. Total current assets rose 145 million to 6,627 million. Cash and deposits increased 613 million to 4,398 million, due mainly to higher operating cash flow. On the other hand, notes and accounts receivable trade and inventories declined from the end of the previous fiscal year, due to reductions in mobile terminal inventories and other factors. Non-current assets were down 382 million from the previous fiscal year-end to 3,099 million. This result was mainly due to a 326 million decline in intangible assets to 633 million that reflected a one-time write-off of software development costs following the Company s withdrawal from store-less retailing of mobile phones. Total current liabilities increased 61 million from the previous fiscal year-end to 4,752 million. This was due to a

17 187 million increase to 845 million reflecting an increase in notes and accounts payable trade resulting from a rise in mobile contents sales. Long-term liabilities fell 477 million compared to the previous fiscal year-end to 2,879 million. This reflected a 372 million decline in long-term debt to 272 million, the result of scheduled repayment. Total shareholders equity, reflecting a 104 million increase in retained earnings and other items from the previous fiscal year due to recovery in earnings, rose to 1,627 million. The equity ratio improved from 15.2% to 16.7%. CASH FLOWS Cash and cash equivalents at the end of the fiscal year, on a consolidated basis, increased 644 million from the end of the previous fiscal year to 4,298 million, due mainly to higher cash flows from operating activities. 15 Net cash provided by operating activities were up by 643 million compared to the previous fiscal year to 1,262 million, reflecting higher income before income taxes and minority interests and progress in the reduction of working capital, including the collection of accounts receivable trade and reduction in merchandise inventories. Net cash used in investing activities was 366 million, a decline from the net cash used of 400 million the previous fiscal year. This outflow in investing activities was due mainly to the acquisition of intangible assets, including software. Net cash used in financing activities was 265 million. This included repayment of long-term debt and redemption by purchase of corporate bonds. Net cash provided by financing activities in the previous fiscal year was 862 million. TOTAL ASSETS (Millions of Yen) TOTAL SHAREHOLDERS EQUITY AND EQUITY RATIO RETURN ON EQUITY (%) 8,581 9,889 10,009 9,757 TOTAL SHAREHOLDERS EQUITY (Millions of Yen) EQUITY RATIO (%) , ,661 2, ,017 1,522 1,

18 16 CONSOLIDATED BALANCE SHEETS MTI Ltd. and Consolidated Subsidiaries As of September ASSETS Current assets Cash and deposits (Note 2) ,785,277 4,398,803 Notes and accounts receivable trade ,849,312 1,712,314 Securities (Note 2) ,237 10,237 Merchandise , ,403 Supplies ,795 1,901 Advances , ,808 Prepaid expenses ,355 75,185 Prepayments for others ,532 2,704 Short-term loans ,745 60,875 Deferred tax assets , ,123 Other current assets ,369 56,793 Allowance for doubtful accounts (89,429) (128,726) Total current assets ,482,312 6,627,426 Noncurrent assets Tangible fixed assets: Leasehold improvements ,908 98,113 Tools, furniture and fixtures , ,161 Other tangible fixed assets Accumulated depreciation (213,330) (238,602) Total tangible fixed assets , ,779 Intangible assets: Trademark rights ,713 7,595 Software , ,555 Telephone subscription rights ,297 8,182 Other intangible assets ,672 11,514 Total intangible assets , ,847 Investments and other assets: Investment securities (Notes 1 and 2) , ,033 Investments in partnerships , ,273 Long-term loans ,555 2,158 Guarantee deposits ,363 82,477 Leasehold deposits , ,387 Long-term prepaid expenses ,987 17,818 Deferred tax assets , ,447 Other ,390 Allowance for doubtful accounts (7) (1,334) Total investments and other assets ,305,508 2,300,651 Total noncurrent assets ,481,604 3,099,278 Deferred assets Bond issuance expenses ,926 30,366 Total deferred assets ,926 30,366 Total assets ,009,843 9,757,071 See accompanying notes to consolidated financial statements.

19 LIABILITIES Current liabilities Notes and accounts payable trade (Note 2) , ,536 Short-term debt (Note 3) ,500,000 2,700,000 Current portion of long-term debt , ,717 Accounts payable other (Note 2) , ,094 Accrued expenses ,354 75,073 Accrued income taxes ,570 9,209 Accrued consumption taxes ,639 69,755 Advances received ,181 1,480 Deposited money , ,662 Allowance for loss on withdrawal from cellphone sales ,230 Other current liabilities ,365 Total current liabilities ,691,132 4,752,895 Long-term liabilities Bonds ,440,000 2,350,000 Long-term debt , ,940 Reserve for retirement benefits ,302 1,816 Consolidation adjustment , ,292 Total long-term liabilities ,356,665 2,879,049 Total liabilities ,047,798 7,631,944 MINORITY INTERESTS Minority interests , ,451 SHAREHOLDERS EQUITY Common stock ,102,345 Capital surplus ,900,924 Accumulated deficits (2,480,899) Unrealized loss on available-for-sale securities Treasury stock (78) Total shareholders equity ,522,888 Common stock (Note 4) ,104,876 Capital surplus ,903,456 Retained earnings (2,381,709) Unrealized losses on available-for-sale securities ,493 Treasury stock (Note 5) (440) Total shareholders equity ,627,676 Total liabilities, minority interests and shareholders equity ,009,843 9,757,071

20 18 CONSOLIDATED STATEMENTS OF OPERATIONS MTI Ltd. and Consolidated Subsidiaries For the years ended September Net sales ,478,492 11,020,346 Cost of sales ,081,185 6,901,299 Gross profit ,397,306 4,119,046 Selling, general and administrative expenses (Notes 1 and 2) ,337,274 3,741,975 Operating income , ,071 Non-operating income Interest income ,904 5,121 Dividends income Amortization of consolidation adjustment ,056 15,958 Gain on foreign exchange translation ,532 Gain on investments in equity-method affiliates ,186 1,690 Gain on redemption by purchase of convertible bonds ,200 20,300 Broadcasting fee received ,800 Others ,666 11, ,712 54,717 Non-operating expenses Interest expenses ,414 48,360 Loss on bad debt Amortization of bond issuance expenses ,722 27,410 Loss on investment in partnerships ,679 33,517 Loss on foreign exchange translation Others ,248 6,999 81, ,615 Recurring profit , ,173 Extraordinary gains Gain on sale of investment securities ,840 Gain on change in equity interest (Note 3) ,597 Gain on investment in partnership ,611 Gain on sale of tools, furniture and fixtures Settlement on cancellation of license agreement (Note 7) , ,208 29,743 Extraordinary losses Loss on disposal of leasehold improvements ,858 7,070 Loss on disposal of tools, furniture and fixtures ,699 Loss on disposal of software ,288 40,616 Loss on valuation of investment securities ,882 45,946 Loss on valuation of inventory (Note 4) ,848 Loss on cancellation of license agreement (Note 5) ,610 Loss on withdrawal from online cellphone sales of mobile phones (Note 6) ,985 Loss on bad debt ,034 Settlement on cancellation of business consignment agreement (Note 8) ,600 Loss on cancellation of leasehold contracts ,354 2,982 1,209, ,916 Income (loss) before income taxes and minority interests (882,189) 218,000 Income taxes current ,292 13,008 Income taxes deferred (356,414) 26,698 (347,122) 39,706 Minority interests (56,221) 60,124 Net income (loss) (478,846) 118,169 See accompanying notes to consolidated financial statements.

21 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY MTI Ltd. and Consolidated Subsidiaries 19 For the years ended September Retained earnings (accumulated deficits) at beginning of year Retained earnings (accumulated deficits) (1,980,810) (1,980,810) Decrease in retained earnings (increase in accumulated deficits) Cash dividends ,242 21,242 Net loss (478,846) Accumulated deficits at end of year (2,480,899) Capital surplus Capital surplus at beginning of period ,900,657 Capital surplus at beginning of period ,900,657 Increase in additional paid-in capital ,799 Common stock issued ,799 Capital surplus at end of period ,903,456 Retained earnings Retained earnings at beginning of period (2,480,899) Accumulated deficits at beginning of period (2,480,899) Increase in retained earnings ,911 Net income ,169 Increase resulting from consolidation of additional subsidiaries ,742 Decrease in retained earnings ,721 Cash dividends ,249 Decrease resulting from consolidation of additional subsidiaries ,471 Retained earnings at end of period (2,381,709) See accompanying notes to consolidated financial statements.