READY FOR THE FUTURE

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READY FOR THE FUTURE

  1. 1. MTI Ltd. ANNUAL REPORT 2004 Year ended September 30, 2004 READY FOR THE FUTURE
  2. 2. THE MTI GROUP IS STEADILY SOLIDIFYING ITS FOUNDATION FOR RAPID FUTURE EXPANSION. MTI IS BUILDING MOMENTUM IN TWO CORE BUSINESSES TO ACCELERATE ITS GROWTH. The MTI Group has moved forward with its shift in operations from mobile phone sales to businesses structured around mobile contents distribution. Moreover, by obtaining ISO certification and implementing a range of other measures, the Group has succeeded in creating an organization that will support future business growth in large-scale outbound telemarketing. Both businesses are in areas where the MTI Group can fully demonstrate its strengths. Using these core businesses as a springboard for growth, the MTI Group will steadily boost efforts to achieve robust expansion of net sales and uninterrupted growth in earnings. Future Forecast Disclaimer Consolidated Financial Highlights - - - - - - - - - - - - - - - 01 The projected MTI results, management strategies, and beliefs about the future presented in this Annual Report 2004 are based on MTI Interview with the President - - - - - - - - - - - - - - - - - - 02 determinations obtained from information available at the time of writing. Financial Section (Consolidated Basis) - - - - - - - - - - - 11 Readers are requested to be aware of the potential for a large discrepancy Board of Directors and Corporate Auditors - - - - - - - - 29 between the forecasts contained here and actual business results, Corporate History - - - - - - - - - - - - - - - - - - - - - - - - 29 as these predictions contain elements of uncertainty as well as known Corporate Data - - - - - - - - - - - - - - - - - - - - - - - - - - 29 and unknown risks.
  3. 3. CONSOLIDATED FINANCIAL HIGHLIGHTS MTI Ltd. and Consolidated Subsidiaries Thousands of Millions of Yen U.S. Dollars Years ended September 30 2003 2004 2004 For the year Net sales - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ¥ 11,020 ¥ 11,524 $ 103,779 Operating income - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 377 196 1,774 Recurring profit- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 315 29 269 Income before income taxes and minority interests - - - - - - - - - - - - - - - - - - - - 218 2,156 19,417 Net income - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 118 1,634 14,722 Net cash provided (used in) by operating activities - - - - - - - - - - - - - - - - - - - - 1,262 (249) (2,244) At year-end Total assets - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 9,757 10,836 97,579 Total shareholders’ equity - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 1,627 3,672 33,072 Per share data Yen U.S. Dollars Net income: Primary - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ¥ 1,888.74 ¥25,315.72 $ 227.97 : Fully diluted - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 1,719.16 21,233.35 191.21 Cash dividends - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 340.00 340.00 3.06 Total shareholders’ equity - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 25,991.91 55,557.43 500.29 Note: U.S. dollar amounts are calculated at the rate of US$1=¥111.05, the exchange rate prevailing on September 30, 2004. NET SALES (Millions of Yen) NET INCOME (LOSS) (Millions of Yen) NET INCOME (LOSS) PER SHARE (Yen) 831 118 1,634 19,356 1,888 25,315 –478 –7,663 9,148 14,316 11,478 11,020 11,524 –3,223 –53,936 2000 2001 2002 2003 2004 2000 2001 2002 2003 2004 2000 2001 2002 2003 2004 MTI ANNUAL REPORT 2004 01
  4. 4. INTERVIEW WITH THE PRESIDENT The MTI Group has made a new beginning, with 2004 as “the year of its second founding.” The MTI Group is focusing on moving to a new growth stage, by leveraging its two core busi- nesses in mobile contents distribution centered on “melody ringtones” and Chaku-uta ® (vocal ringtones), and large-scale outbound telemarket- ing for medical insurance sales. Toshihiro Maeta President and CEO
  5. 5. PROGRESS REPORT ON THE COMPANY’S businesses, to achieve strong net sales growth and MEDIUM-TERM PLAN generate continuous growth in earnings. These initiatives proved successful. Our mobile con- Please discuss MTI’s operating results and tents distribution business grew to account for more than Q achievements for the fiscal year ended September 50% of net sales. In both name and fact, this business 30, 2004. became our core operation through our efforts to trans- form our business structure from mobile phone sales to Although consolidated net sales of ¥11,524 mil- an organization centered on contents distribution. The A lion fell below our original target, the “melody ring- telemarketing business took more time to set up than we originally anticipated, but given our positive achievements tones” business showed strong growth and exceeded the plan objective. Consequently, we such as obtaining ISO certification, we succeeded in cre- were able to absorb the large initial investment ating an organization that will lead to future growth. burdens in our core businesses, achieving recur- Based on these results, I can say that we have laid the ring profit. I would also like to highlight the fact business foundation for our core businesses to serve as that we have laid the business foundation to pro- the springboard for growth over the medium term. mote future growth, as evidenced by our success- Net sales for the fiscal year fell below our original plan, ful shift to a business structure centered on because of delays in the development of the telemarketing contents distribution and the acquisition of ISO business and a drop in sales to volume merchandisers in certification in our telemarketing business. the mobile phone sales business. On the other hand, despite a recurring loss forecast due to the substantial ini- The MTI Ltd. (MTI) Group positioned mobile contents dis- tial investment burdens, and even though the loss in the tribution and large-scale outbound telemarketing as its telemarketing business was higher, we succeeded in main- core businesses, and applied to these core businesses its taining recurring profit thanks to the strong growth of our strength in market development capabilities of “creating a mobile contents distribution business, which enjoys a high new business model for customer acquisition, using gross margin. proprietary data analysis techniques.” We then made substantial strategic initial investments in these core NET SALES BY SEGMENT NET SALES BY SEGMENT (Fiscal year ended September 2004) (Millions of yen) (Fiscal year ended September 2004) (%) CONTENTS CONTENTS DISTRIBUTION 3.0 2.0 DISTRIBUTION 5,954 SOLUTIONS SOLUTIONS 903 MOBILE TERMINAL TELEMARKETING MOBILE TERMINAL 35.4 51.7 4,083 OTHER TELEMARKETING 349 OTHER 233 7.8 Note: In the consolidated fiscal year under review, MTI classified its solutions business as a separate business. Beginning with the consolidated fiscal year ending September 2005, however, the Company will abolish this business classification because it disposed of its stock in Card Commerce Service Co., Ltd. through an exchange of shares executed on September 14, 2004, and also terminated its business operations with cocodes, inc. MTI ANNUAL REPORT 2004 03
  6. 6. TO MAINTAIN A FUTURE FAST GROWTH TRACK: To make sure that MTI stands among the winners in MOBILE CONTENTS DISTRIBUTION BUSINESS this field, however, we absolutely must seek further growth in the number of subscribers, and maintain our rank at the The “melody ringtones” business at MTI continues top of the selection menu order. Q to show dramatic growth. What kind of measures To accomplish this, we plan to further enhance aware- ness of the “All Cool Melodies Are Yours” service through are you considering for the future? aggressive promotional activities, with banner ads on Together with Chaku-uta®, we will invest our man- mobile phone sites and television commercials. We will A agement resources intensively in “melody ring- also seek to stimulate non-paying members (potential paid-subscribers) and convert them into paid subscribers, tones” as our most important businesses. We will seek further growth in the number of subscribers by expanding our mobile ringtone and other contents in the future through strong promotional activities. offerings. Because the “melody ringtones” business accounts for the highest share of Japan’s total mobile contents distribution market, the MTI Group positions this segment as its most Q MTI’s Chaku-uta ® services are at the top of the mobile contents site menu order, but looking at the important business together with “Chaku-uta ®” business huge expansion of this market, how will MTI add for establishing a fast growth track. We will concentrate momentum to its growth? our management resources in this business and pursue an aggressive marketing approach. Our “melody ringtones” site “All Cool Melodies Are A MTI will aim to achieve an even higher ranking posi- tion by enhancing the appeal of its contents Yours,” a service offering unlimited access, provides through an increase in the number of contracts exceptional value for the money. It also receives high with artists, and vigorously pursuing aggressive marks from customers for its tone quality and services. promotional activities. While many other providers are facing a drop in the number of subscribers, or are struggling to sign up new As of the end of September 2004, the number of third- members, MTI is rapidly building up its subscriber base. generation (3G) mobile phone terminals in use had broken CHANGE IN NUMBER OF PAID SUBSCRIBERS CHANGE IN i-mode MENU POSITION AT NTT DoCoMo (Thousands of subscribers) (Rank) 4 6 4 5 12 10 9 14 20 11 10 16 14 21 Chaku-Uta ® Chaku-Melo (FOMA) 1,900ED 1,950 2,075ED 2,150 2,245ED 2,330 2,400ED 2,600 PROJECT ACTUAL PROJECT ACTUAL PROJECT ACTUAL PROJECT ACTUAL 54 Chaku-Melo (PDC) 2003 / Dec. 2004 / Mar. 2004 / June 2004 / Sep. 2003 / Nov. 2004 / Jan. 2004 / Apr. 2004 / July 2004 / Oct. 2005 / Jan. 04 MTI ANNUAL REPORT 2004
  7. 7. through the 15.85 million unit level at au (KDDI’s mobile telecommunication division) and the 6.48 million unit level Q During the fiscal year, MTI began full-scale partici- pation in contents distribution for NTT DoCoMo. at NTT DoCoMo, Inc. With this improvement of the mar- What kind of strategy is MTI considering for the ket infrastructure, we expect the market for Chaku-uta ® to future, as well as for other telecommunications expand rapidly and achieve a scale rivaling “melody ring- carriers? tones” in the near future, fueled with the introduction of complete songs (full music) distribution service. MTI will strive to establish a firm position with NTT music.jp., inc., MTI’s consolidated subsidiary, is the A DoCoMo, which has substantial room for us to central force in our Chaku-uta ® business. By implementing increase the number of subscribers, and become a the following measures, we will aim for an even higher top-class contents provider with all carriers. market position. First, we will seek to boost the attractiveness of our We will not rest content with MTI’s achievement as the contents by widening our contents offering, leveraging on No. 1 provider for au. We will challenge ourselves boldly, our unique position as an independent contents distributor, to expand the number of our subscribers and establish a to cover as many artists as possible across record labels, solid position at NTT DoCoMo, which accounts for the while simultaneously undertaking aggressive advertising majority share of mobile terminals and is expected to enjoy and promotional activities aimed at building the service’s strong growth in the future with the proliferation of its 3G name awareness. mobile phones. Furthermore, since the MTI Group has earned a repu- During this fiscal year under review, we developed tation with record companies, production houses and aggressive advertising and promotional activities and other firms as being extremely effective as a promotional worked to increase the number of subscribers, by focus- venue, owing to our large number of subscribers in various ing on “melody ringtones,” which boast the largest market genres, we will leverage this diverse subscriber base to scale and exhibit a high degree of liquidity among sub- the maximum extent possible. scribers, as the target for our offense. As a result, as of October 2004, even though less than a year had passed since we began offering our services in November 2003, the menu position of “All Cool Melodies Are Yours” stood CONTENTS TVCF CURRENTLY BEING BROADCAST Flash! Pro Baseball Weather forecasts “All Cool Melodies Mapple “Beat the Chaku-uta® Are Yours” unlimited Traffic” routes downloads MTI ANNUAL REPORT 2004 05
  8. 8. at No. 10 with 3G FOMA subscribers, and at 11th with mobile contents utilizing cutting-edge technology, and con- 2G MOVA subscribers at NTT DoCoMo, skyrocketing from tinually developing aggressive advertising and promotional the initial 54th ranking. measures, the MTI Group will further expand the number This power has generated a synergistic effect for MTI’s of subscribers at all telecommunications carriers. other mobile contents services as well. We are steadily expanding our subscriber base, with the dictionary con- tents we introduced in April 2003 climbing to fourth FOR LONG-TERM GROWTH OF EARNINGS: place, the “Mapple short cuts in heavy traffic” information TELEMARKETING BUSINESS site with a traffic jam forecast function that we introduced in November 2003 moving to seventh place, and the 3D Large-scale outbound telemarketing for third- animation “Flash! Pro Baseball” professional baseball mobile contents service we launched in March 2004 Q sector insurance, a business MTI began during the fiscal year under review, finished the year with rising to third place. weak results. What was the reason, and what By working to develop mobile contents services suited measures has MTI taken for recovery? to customers’ needs and to create attractive, high-quality CHANGE IN POLICY CLOSING RATIO 0.71 0.63 0.62 0.46 0.36 0.29 0.25 0.25 0.24 0.21 0.19 0.11 168 257 813 2,426 537 2,866 729 2,475 738 3,006 790 3,128 728 2,990 834 2,302 860 1,863 890 1,405 868 1,398 1,000 1,405 2003 / Oct. 2003 / Nov. 2003 / Dec. 2004 / Jan. 2004 / Feb. 2004 / Mar. 2004 / Apr. 2004 / May 2004 /June 2004 /July 2004 / Aug. 2004 / Sep. Number of policies closed Number of operators, cumulation for the month Policy closing efficiency rate (number of policies closed/number of operators) 06 MTI ANNUAL REPORT 2004
  9. 9. During the initial months, our contract closing company to receive ISO9001:2000 certification as a A rate was lackluster because the turnover rate of firm conducting outbound telemarketing for insurance our operators exceeded our projection. Based on sales (obtained by ITSUMO Ltd., a consolidated subsidiary these results, we reviewed hiring practices and of MTI). improved our operations procedures through the These steps enabled us to lay solid foundations for an ISO certification process. Thanks to these efforts, organization capable of managing this business with high the contract closing rate has been steadily efficiency. Together with improved accuracy of the opera- improving. We anticipate achieving positive tion, we now expect to achieve positive results in operat- results in operating income during the next ing income in the next fiscal year. We intend to continue fiscal year. building our insurance policy portfolio, which is the source of long-term and stable commission income, while taking Because commission income from the third-sector insur- steps to maintain and improve our contract closing rate. ance sales business utilizing telemarketing can be received over the long term, MTI has positioned this busi- ness as a strategic one for the long-term growth of sta- MEDIUM-TERM EARNINGS ESTIMATE, QUANTITATIVE ble earnings. Our objective for the first year was to close OBJECTIVES AND FINANCIAL STRATEGY 18,000 policy contracts with an organization of 150 tele- marketing operators, but our actual results ended at 8,399 contracts. Q What is MTI’s outlook for the fiscal year ending September 2005? To break out of the start-up period slump, during the third quarter we temporarily froze expansion of our call We expect to achieve consolidated net sales of centers in Shinjuku (Tokyo) and Hachinohe (Aomori Prefecture), and placed the highest priority on improving A ¥12,700 million, a 10.5% increase over the year in review. Although we will lose the contribution operator retention and contract closing rates. from Card Commerce Service Co., Ltd., a consol- In addition to developing and executing measures at idated subsidiary in the solutions business the hiring stage to screen out human resources with the segment, in terms of both revenue and earnings, potential to become excellent operators, we set up pro- the digital music distribution sector is expected to cedures for process improvements by becoming the first contribute substantially toward sales. In terms of CORE COMPETENCE OF THE MTI GROUP (1) Because our two core businesses have been created on a base shared by the MTI Group, we can achieve rapid net sales growth and continuous growth in earnings while synchronizing all our businesses. WE CAN ACHIEVE RAPID NET SALES GROWTH AND CONTINUOUS GROWTH IN EARNINGS Concentrated Investment of Management Resources DISTRIBUTION OF MOBILE CONTENTS LARGE-SCALE OUTBOUND TELEMARKETING Position of Core Businesses SHARED EXPERTISE The core competence of the MTI Group comprises market development capabilities that enable MTI to create new customer acquisition business models using proprietary data analysis techniques. MTI ANNUAL REPORT 2004 07
  10. 10. earnings as well, we expect to maintain our recur- Our goal for the fiscal year ending September ring profit for the full year in spite of continued A 2007 is to expand consolidated net sales to high-level investments. ¥18,700 million with recurring profit of ¥1,900 million and a recurring profit margin of at The digital music distribution business, including “melody least 10%. ringtones” and Chaku-uta ®, is expected to rapidly expand and contribute to boosting consolidated net sales by MTI’s medium-term plan is to expand consolidated net 10.5% from the fiscal year under review to ¥12,700 mil- sales to ¥18,700 million in the fiscal year ending lion. With regard to recurring profit, on the other hand, September 2007, with our mobile contents distribution results will be positive but we do not expect to maintain business acting as an engine for growth. earnings at a level commensurate with the growth in net With regard to recurring profit, we plan ultimately to sales, because we will continue making a high level of earn ¥1,900 million, even though we will incur a high level initial investment. of promotional costs in the immediate future, by increas- In our “melody ringtones” and telemarketing business- ing earnings through growth in the number of subscribers es, we believe that we have laid a solid foundation for for our mobile contents distribution business and also by future growth through the initial investments made during getting our telemarketing business on track. the fiscal year. To expand these businesses further, how- ever, it is imperative that we continue making a certain level of investment. In addition, in our Chaku-uta® busi- Can you discuss MTI’s financial strategy, including ness, we plan to launch large-scale promotional activities to solidify our position among the top players in this Q the reason for the sale of shares of Card Commerce Service Co., Ltd.? fast-growing business segment. We are working to strengthen our financial base Please explain MTI’s quantitative medium-term A and expand our bank commitment lines, while taking steps to concentrate MTI’s management Q objectives. resources on our core businesses. CORE COMPETENCE OF THE MTI GROUP (2) We are concentrating investment of management resources in the Group’s core businesses and launching the MTI Group’s “stock businesses” on a fast-growth track as quickly as possible. WE CAN ACHIEVE RAPID NET SALES GROWTH AND CONTINUOUS GROWTH IN EARNINGS Concentrate investment of management resources in the Group’s core businesses 08 MTI ANNUAL REPORT 2004
  11. 11. Because we believe it will be necessary to make a sizeable operations in the online non-mobile credit card payment investment in our core businesses until we can achieve a processing service business and the core businesses of high and continuous growth in earnings, we consider the MTI Group. Accordingly, we decided that the sale of strengthening our financial base to be a key management CCS shares was an effective alternative. objective. This is why we are working to enhance our finan- We plan to use the capital obtained from the sale cial strength, through steps such as improving our equity of shares mainly to expand and enhance our core busi- ratio, and to create a system enabling us to procure funds nesses, and as capital for business investments including flexibly for business investments. M&A. We will also use the capital to reduce borrowings, Card Commerce Service Co., Ltd. (CCS) has grown with the goal of strengthening our financial position. In steadily from the standpoint of both business size and net parallel with this, we are also pursuing an increase in our earnings, thanks to the growth of its customer base. loan limit (commitment line) from our financial institutions, However, we judged that it would be difficult to achieve to enable us to procure funds flexibly according to our a synergistic effect between that company’s main capital needs. MTI ANNUAL REPORT 2004 09
  12. 12. CONCLUDING MESSAGE founding boldly, with the goal of achieving strong net sales FROM THE PRESIDENT growth and continuous growth in earnings. I am convinced that we are finishing establishing a Q What final message would you like to deliver to MTI’s shareholders and potential investors? solid business base to support MTI’s future growth. We are determined to move forward and aggressively enable the MTI Group to make great strides through the years of our second founding. We look forward to continuing to A MTI will work vigorously to build a company for its second founding on the groundwork laid during the receive our shareholders’ support for the growth and year, with the goal of achieving strong net sales development of the MTI Group. growth and generating continuous growth in earnings. January 2005 The MTI Group has always been ahead of the times and carved out markets for products whose markets were expected to surge, such as sales of mobile phones and Toshihiro Maeta broadband asymmetric digital subscriber lines (ADSL), President and CEO and proceeded to expand our businesses as we forged markets by providing such sales and services. Nevertheless, in the past there was an unstable aspect to our operations, and our operating results fluctuated greatly depending on the trend for the goods and services that MTI focused on. The fiscal year just ended was the first year of our efforts to position mobile contents distribution and large- scale outbound telemarketing as our core businesses, and transform the MTI Group into a business that can antici- pate strong growth over the long term. Certainly, we can say that the MTI Group began the year of its second 10 MTI ANNUAL REPORT 2004
  13. 13. FINANCIALSECTION (Consolidated Basis) Six-Year Summary (Consolidated Basis) - - - - - - - - - - - - - - - - - - - - - - - -12 Management’s Discussion and Analysis (Consolidated Basis) - - - - - - - - - -12 Consolidated Balance Sheets - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -16 Consolidated Statements of Operations - - - - - - - - - - - - - - - - - - - - - - - -18 Consolidated Statements of Shareholders’ Equity - - - - - - - - - - - - - - - - - -19 Consolidated Statements of Cash Flows - - - - - - - - - - - - - - - - - - - - - - - -20 Notes to Consolidated Financial Statements - - - - - - - - - - - - - - - - - - - - -22 Independent Auditors’ Report - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -28
  14. 14. SIX-YEAR SUMMARY (CONSOLIDATED BASIS) MTI Ltd. and Consolidated Subsidiaries Millions of Yen Years ended September 30 1999 2000 2001 2002 2003 2004 For the year Net sales ----------------- ¥ 7,580 ¥ 9,148 ¥ 14,316 ¥ 11,478 ¥ 11,020 ¥ 11,524 Operating income - - - - - - - - - - - - - - - - - 429 350 757 60 377 196 Recurring profit ----------------- 400 340 703 105 315 29 Net income (loss) - - - - - - - - - - - - - - - - - 204 831 (3,223) (478) 118 1,634 At year-end Total assets - - - - - - - - - - - - - - - - - - - - - 4,661 8,581 9,889 10,009 9,757 10,836 Total shareholders’ equity - - - - - - - - - - - - 2,814 3,639 2,017 1,522 1,627 3,672 Per share data Yen Net income (loss): Primary - - - - - - - - - - ¥ 76,014.34 ¥ 19,356.98 ¥ (53,936.26) ¥ (7,663.48) ¥ 1,888.74 ¥25,315.72 : Fully diluted - - - - - - - – – – – 1,719.16 21,233.35 Cash dividends - - - - - - - - - - - - - - - - - - 5,000.00 340.00 340.00 340.00 340.00 340.00 Total shareholders’ equity - - - - - - - - - - - 212,403.69 65,055.96 32,288.15 24,366.36 25,991.91 55,557.43 MANAGEMENT’S DISCUSSION AND ANALYSIS (CONSOLIDATED BASIS) SUMMARY OF MANAGEMENT STRATEGY cocodes, inc. Although CCS is expanding its earnings, management To achieve rapid net sales growth and continuous growth in earn- determined this business lacked opportunities to create synergistic ings, during the consolidated fiscal year ended September 30, effects with the MTI Group’s core businesses. 2004, the MTI Group positioned the contents distribution business During the fiscal year ending in September 2005 and in future and telemarketing business as the Group’s core businesses. The years, the MTI Group will further concentrate management Group also made concentrated investments of management resources in its two core businesses and focus on putting the resources in these two areas, based on market development Group on a fast-growth track as quickly as possible. capabilities that enable MTI to create new customer acquisition business models using proprietary data analysis techniques. CHANGE IN SUBSIDIARY COMPANIES SUBJECT During the period under review, the MTI Group moved ahead TO CONSOLIDATION according to its plan and shifted from mobile phone equipment The MTI Group is composed of MTI, seven consolidated subsidiary sales to a business structure centered on contents distribution for companies and one nonconsolidated subsidiary company accounted mobile phones, with the key focus on music distribution to mobile for by the equity method, and two affiliated companies accounted phones. At the same time, the Group was able to lay the business for by the equity method. During the fiscal year under review, MTI foundations for expansion of large-scale outbound telemarketing in sold Card Commerce Service Co., Ltd., which was a consolidated third-sector insurance sales. subsidiary, through an exchange of shares. In other actions, the Company sold its stock in Card Commerce Service Co., Ltd. (CCS), an Internet-based credit card payment pro- BUSINESS ENVIRONMENT cessing service business, through an exchange of shares and also According to the statistics published by the Telecommunications withdrew from the Internet-based supermarket delivery business by Carriers Association (TCA) on the total number of mobile phone and 12 MTI ANNUAL REPORT 2004
  15. 15. Personal Handyphone System (PHS) subscribers, the mobile Contents Distribution Business telecommunications sector related to the MTI Group’s main busi- In the contents distribution business, MTI emphasized increasing ness is showing steady growth. As of the end of September 2004, the number of subscribers to its “All Cool Melodies Are Yours” the number of subscribers had reached over 88.64 million (up melody ringtone service for mobile phones, and focused efforts 5.6% compared with the end of September 2003) and Internet- especially on raising the awareness level and signing new members enabled mobile terminals had increased to 72.32 million units (up at NTT DoCoMo. MTI was also successful in launching large-scale 9.1% compared with the end of September 2003). The rate of promotion activity, substantially boosting the number of subscribers increase in net subscriber and terminal growth, however, continues above its initial plan. to slow. Furthermore, in addition to aggressively developing Chaku-utaTM On the other hand, the number of third-generation (3G) mobile vocal ringtones, which are regarded as killer content in the era of phones showed substantial growth, increasing 100% year on full-scale 3G mobile phone diffusion, the MTI Group developed and year to 22.6 million units, and this has uncovered new business introduced attractive mobile content incorporating the Group’s most opportunities accompanying this rapid growth. advanced proprietary functions. These included traffic information with a traffic delay prediction function, and real-time professional PROFIT AND LOSS ANALYSIS baseball games utilizing 3D animation. Net Sales As a result of these efforts, the number of fee-paying users Net sales for the fiscal year under review fell below the outlook increased by 750,000 from the level at the end of the previous fis- the MTI Group had announced at the beginning of the period. cal year to 2.6 million users. Net sales in the contents distribution Nevertheless, net sales were supported by the growth of MTI’s business were ¥5,954 million, and operating income was contents distribution business, and increased 4.6% from the level ¥417 million. of the prior fiscal year to ¥11,524 million. Solutions Business Performance by Operating Segment In the solutions business, Card Commerce Service Co., Ltd., a sub- The general conditions of MTI’s net sales by business segment are sidiary company, boosted the number of customers and accounts described below. The results are not comparable to the previous handled as the e-commerce market expanded, and steadily fiscal year, because the Company reorganized its business increased both net sales and earnings. MTI nevertheless experienced segments during the fiscal year under review. a slump in the Internet-based supermarket delivery business being developed by cocodes, inc., another subsidiary company. As a NET SALES BY OPERATING INCOME (LOSS) BY OPERATING INCOME AND OPERATING SEGMENT (Millions of Yen) OPERATING SEGMENT (Millions of Yen) OPERATING MARGIN Projected Projected Operating Income (Millions of Yen) Actual Actual Operating Margin (%) CONTENTS 5,809 CONTENTS 29 5.3 DISTRIBUTION 5,954 DISTRIBUTION 417 1,077 134 SOLUTIONS SOLUTIONS 3.8 903 117 3.4 MOBILE 4,586 MOBILE 266 TERMINAL 4,083 TERMINAL 232 1.7 645 –409 TELEMARKETING TELEMARKETING 349 –553 0.5 222 –11 OTHER 350 757 60 377 196 OTHER 233 –12 2000 2001 2002 2003 2004 MTI ANNUAL REPORT 2004 13
  16. 16. result of these factors, net sales in this segment were ¥903 mil- focused on promotion costs in the contents distribution business lion, with operating income of ¥117 million. and on hiring and training start-up costs in the telemarketing busi- MTI sold Card Commerce Service Co., Ltd. and withdrew from ness. These investments were undertaken to put the MTI Group the Internet-based supermarket delivery business, and will eliminate onto a fast growth track in its two core businesses. this segment beginning from the fiscal year ending in September 2005. OPERATING INCOME As a result of the measures described above, operating income for Mobile Terminal Business the fiscal year under review fell 47.8% year on year to ¥196 mil- Results in the mobile terminal business fell below MTI’s initial plan, lion, and the operating margin decreased by 1.7 percentage points despite steady growth in carrier-brand store sales, because volume from the prior fiscal year to 1.7%. The Company exceeded its initial merchandisers experienced sluggish sales growth as consumers projection because of excellent growth in the contents distribution refrained from purchasing mobile phones. As a result, net sales in business, which boasts a high gross margin. this segment were ¥4,083 million, and operating income was ¥232 million. NON-OPERATING INCOME AND EXPENSES Net non-operating expenses for the fiscal year under review rose to Telemarketing Business ¥167 million, from ¥61 million the previous year. In the telemarketing business, the MTI Group has entered third- sector insurance sales of insurance products such as medical insur- RECURRING PROFIT ance that can be expected to produce steady growth with the rapid Although recurring profit fell by 90.5% compared with the previous advancement of Japan’s aging society. Together with establishing fiscal year to ¥29 million, this exceeded the Company’s initial call center bases in Shinjuku (Tokyo) and Hachinohe (Aomori outlook because of excellent growth in the contents distribution Prefecture), MTI made an aggressive initial investment centered on business, which boasts a high gross margin. operator hiring and training. Because the time required to train operators was longer than EXTRAORDINARY GAINS AND LOSSES expected, net sales in this business were ¥349 million, with an The Company booked an extraordinary gain of ¥2,974 million from operating loss of ¥553 million. an exchange of shares as part of a transfer of the stock of Card Commerce Service Co., Ltd., a subsidiary company. This resulted in Other a net extraordinary gain of ¥2,126 million in the fiscal year under Net sales in MTI’s other segment, including the reuse business for review, compared with an extraordinary loss of ¥97 million during products such as home appliances and personal computers, were the previous fiscal year. ¥233 million. The operating loss was ¥12 million. NET INCOME COST OF SALES AND SELLING, GENERAL AND As a result of the above, the net income of MTI and its consolidated ADMINISTRATIVE EXPENSES subsidiaries for the fiscal year under review was ¥1,634 million. Cost of sales declined 11.9% from the prior year to ¥6,077 million. This substantially exceeded the initial projection. Net income per MTI improved its ratio of cost of sales to net sales by 9.9 percent- share also increased sharply from the prior year’s ¥1,888.74 to age points, to 52.7%. This result reflects the increase in the con- ¥25,315.72. tents distribution business, which has a low cost of sales, as a percentage of the Company’s total net sales. DIVIDENDS On the other hand, selling, general and administrative expenses The MTI Group places great emphasis on contributing to its share- rose 40.3% year on year to ¥5,249 million. As a percentage of net holders through the creation and expansion of corporate value. The sales, this represented an 11.6 percentage point increase com- Company has adopted a policy of determining its dividend compre- pared to the previous fiscal year, from 34.0% to 45.6%. This hensively by taking into consideration factors such as the need to increase was the result of aggressive initial investment, which was strengthen its business structure and enhance internal reserves to 14 MTI ANNUAL REPORT 2004
  17. 17. provide for aggressive business development. For the fiscal year year-end, mainly because of a reduction to the consolidation adjust- under review, the Company approved a dividend of ¥340.00 ment account. per share. Because of large net income resulting from the sale of sub- sidiary company stock, total shareholders’ equity increased ¥2,044 ASSETS, LIABILITIES AND SHAREHOLDERS’ EQUITY million year on year to ¥3,672 million. This also boosted the equity Total assets increased by ¥1,079 million from the end of the prior ratio, which rose from 16.7% at the end of the prior fiscal year to fiscal year, to ¥10,836 million at the end of the fiscal year under 33.9%. In light of the need to further strengthen its financial base review. as a foundation for rapid expansion of its business, the Company Cash and deposits were boosted by the sale of subsidiary com- will continue to execute measures to improve the stability of its pany stock and increased by ¥1,531 million year on year to ¥5,930 financial position. million. Notes and accounts receivable – trade also increased com- pared with the end of the prior fiscal year, primarily due to the ANALYSIS OF CASH FLOWS increase in net sales in the contents distribution business. As a Although income before income taxes increased substantially, net result, total current assets at the end of the fiscal year under cash used in operating activities was ¥249 million, compared with review increased by ¥2,294 million to ¥8,922 million. net cash provided of ¥1,262 million in the prior fiscal year. This Total intangible assets decreased by ¥233 million from the end mainly reflected a net gain on sales of investment securities and an of the previous fiscal year to ¥399 million, as the Company pushed increase in accounts receivable – trade because of the growth in ahead with software write-offs. Total noncurrent assets at the end net sales. of the fiscal year under review were ¥1,846 million, ¥1,253 million Net cash provided by investing activities was ¥3,277 million, in less than at the previous fiscal year-end. contrast to net cash used of ¥366 million in the previous fiscal year. Notes and accounts payable – trade increased by ¥163 million This change resulted primarily from proceeds from sale of shares year on year as the Company expanded its contents distribution acquired through an exchange of stock in an affiliated company. business, rising to ¥1,009 million. The Company also took steps, Net cash used in financing activities was ¥569 million, com- however, to repay short-term debt. As a result of these changes, pared with net cash used of ¥265 million in the prior fiscal year. total current liabilities at the end of the fiscal year under review This mainly reflected repayment of debt. declined by ¥388 million from the end of the previous fiscal year to As a result of the above, the increase in cash and cash equiva- ¥4,363 million. lents for the fiscal year under review was ¥2,458 million, and the Total long-term liabilities at the end of the fiscal year were balance of cash and cash equivalents at the end of the fiscal year ¥2,762 million, ¥116 million less than at the previous fiscal under review was ¥5,870 million. TOTAL ASSETS TOTAL SHAREHOLDERS’ EQUITY RETURN ON EQUITY (%) (Millions of Yen) AND EQUITY RATIO Total Shareholders’ Equity (Millions of Yen) 61.7 Equity Ratio (%) 25.8 7.5 42.4 33.9 –27.1 20.4 16.7 15.2 –114.0 8,581 9,889 10,009 9,757 10,836 3,639 2,017 1,522 1,627 3,672 2000 2001 2002 2003 2004 2000 2001 2002 2003 2004 2000 2001 2002 2003 2004 MTI ANNUAL REPORT 2004 15
  18. 18. CONSOLIDATED BALANCE SHEETS MTI Ltd. and Consolidated Subsidiaries Thousands of Yen As of September 30 2003 2004 ASSETS Current assets Cash and deposits (Note 2) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ¥ 4,398,803 ¥ 5,930,627 Notes and accounts receivable – trade- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 1,712,314 2,586,376 Securities (Note 2) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 10,237 99,999 Merchandise - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 121,403 146,836 Supplies - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 1,901 3,917 Advances - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 116,808 35,128 Prepaid expenses - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 75,185 96,310 Consumption taxes receivable- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - — 37,337 Payments for other - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 2,704 — Short-term loans - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 60,875 — Deferred tax assets - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 199,123 91,973 Other current assets - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 56,793 33,397 Allowance for doubtful accounts - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - (128,726 ) (139,611) Total current assets - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 6,627,426 8,922,293 Noncurrent assets Tangible fixed assets: Leasehold improvements - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 98,113 105,556 Tools, furniture and fixtures - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 305,161 260,395 Other tangible fixed assets - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 107 — Accumulated depreciation - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - (238,602 ) (224,931) Total tangible fixed assets - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 164,779 141,019 Intangible assets: - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Trademark rights - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 7,595 3,160 Software - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 606,555 383,296 Telephone rights - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 8,182 1,879 Other intangible assets - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 11,514 11,571 Total intangible assets - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 633,847 399,907 Investments and other assets: Investment securities (Note 1) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 928,033 505,828 Investments in partnerships - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 424,273 352,229 Long-term loans - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 2,158 258 Guarantee deposits- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 82,477 74,216 Leasehold deposits - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 329,387 261,236 Long-term prepaid expenses - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 17,818 17,119 Deferred tax assets - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 516,447 99,292 Other - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 1,390 — Allowance for doubtful accounts - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - (1,334 ) (4,931) Total investments and other assets - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 2,300,651 1,305,250 Total noncurrent assets - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 3,099,278 1,846,178 Deferred assets Bond issuance expenses - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 30,366 67,729 Total deferred assets- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 30,366 67,729 Total assets - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ¥ 9,757,071 ¥ 10,836,201 See accompanying notes to consolidated financial statements. 16 MTI ANNUAL REPORT 2004
  19. 19. Thousands of Yen 2003 2004 LIABILITIES Current liabilities Notes and accounts payable – trade (Note 2) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ¥ 845,536 ¥ 1,009,162 Short-term debt (Note 3) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 2,700,000 1,600,000 Current portion of long-term debt - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 372,717 240,000 Corporate bonds redeemable within one year - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - — 700,000 Accounts payable – other (Note 2) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 285,094 508,242 Accrued expenses - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 75,073 61,681 Accrued income taxes - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 9,209 47,521 Accrued consumption taxes - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 69,755 15,697 Advances received - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 1,480 33,099 Deposited received - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 322,662 44,503 Provision for loss resulting from head office relocation - - - - - - - - - - - - - - - - - - - - - - - - - - - — 80,500 Provision for loss resulting from business restructuring - - - - - - - - - - - - - - - - - - - - - - - - - - — 6,379 Other current liabilities - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 71,365 17,198 Total current liabilities - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 4,752,895 4,363,986 Long-term liabilities Bonds - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 2,350,000 2,650,000 Long-term debt - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 272,940 — Reserve for retirement benefits - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 1,816 — Consolidation adjustments - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 254,292 112,575 Total long-term liabilities - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 2,879,049 2,762,575 Total liabilities - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 7,631,944 7,126,562 MINORITY INTERESTS Minority interests - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 497,451 36,987 SHAREHOLDERS’ EQUITY Common stock (Note 4) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 1,104,876 1,117,353 Capital surplus - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 2,903,456 3,327,516 Retained earnings (deficits) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - (2,381,709 ) (770,159) Unrealized gain (loss) on available-for-sale securities - - - - - - - - - - - - - - - - - - - - - - - - - - - 1,493 (1,513) Treasury stock (Note 5) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - (440 ) (545) Total shareholders’ equity - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 1,627,676 3,672,651 Total liabilities, minority interests and shareholders’ equity - - - - - - - - - - - - - - - - - - - - ¥ 9,757,071 ¥ 10,836,201 MTI ANNUAL REPORT 2004 17
  20. 20. CONSOLIDATED STATEMENTS OF OPERATIONS MTI Ltd. and Consolidated Subsidiaries Thousands of Yen For the years ended September 30 2003 2004 Net sales - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ¥11,020,346 ¥ 11,524,686 Cost of sales - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 6,901,299 6,077,832 Gross profit - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 4,119,046 5,446,853 Selling, general and administrative expenses (Notes 1 and 2) - - - - - - - - - - - - - - - - - - - - - - 3,741,975 5,249,880 Operating income - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 377,071 196,973 Non-operating income Interest income - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -------- - - - - - - - - 5,121 3,473 Dividend income - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -------- - - - - - - - - 406 820 Amortization of consolidation adjustments - - - - - - - - - - - - - - - - - - -------- - - - - - - - - 15,958 11,367 Gain on sales of marketable securities - - - - - - - - - - - - - - - - - - - - -------- - - - - - - - - — 21 Gain on investments in affiliates accounted for by the equity method -------- - - - - - - - - 1,690 — Gain on redemption of convertible bonds - - - - - - - - - - - - - - - - - - - -------- - - - - - - - - 20,300 — Other - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -------- - - - - - - - - 11,241 10,909 54,717 26,592 Non-operating expenses Interest expense - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 48,360 59,415 Loss on bad debts - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 167 — Amortization of bond issuance expenses - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 27,410 53,423 Loss on investments in partnerships - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 33,517 71,603 Foreign exchange loss - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 158 77 Loss on equity investments in affiliates - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - — 4,747 Other - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 6,999 4,379 116,615 193,647 Recurring profit - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 315,173 29,919 Extraordinary gains Gain on sales of investment securities - - - - - - - - ------- - - - - - - - - - - - - - - - - - - - - - 7,840 35,863 Gain on transfer of affiliated company shares - - - - ------- - - - - - - - - - - - - - - - - - - - - - — 2,974,864 Gain on change in equity interest - - - - - - - - - - - - ------- - - - - - - - - - - - - - - - - - - - - - — 6,962 Gain on sales of tools, furniture and fixtures - - - - ------- - - - - - - - - - - - - - - - - - - - - - 227 — Settlement upon cancellation of license agreement (Note 3) - - - - - - - - - - - - - - - - - - - - - - 21,675 — Other - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ------- - - - - - - - - - - - - - - - - - - - - - — 1,149 29,743 3,018,839 Extraordinary losses Prior-period adjustment - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - — 10,000 Loss on disposal of leasehold improvements - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 7,070 2,156 Loss on disposal of tools, furniture and fixtures - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 3,699 8,818 Loss on disposal of software - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 40,616 371,994 Loss on sales of investment securities - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - — 120,000 Loss on devaluation of investment securities - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 45,946 88,699 Loss on redemption of convertible bonds - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - — 27,618 Settlement on cancellation of business consignment agreement (Note 4) - - - - - - - - - - - - - 26,600 — Loss on cancellation of licensing agreement - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - — 13,284 Loss on cancellation of lease agreement - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - — 34,520 Long-term debt repayment fee - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - — 13,779 Amortization of prepaid guarantee fee (Note 5) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - — 77,407 Loss on head office relocation (Note 6) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - — 80,500 Loss on business restructuring (Note 7) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - — 8,731 Provision for allowance for doubtful accounts - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - — 9,860 Loss on cancellation of leasehold contracts - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 2,982 — Other - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - — 25,181 126,916 892,554 Income before income taxes and minority interests - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 218,000 2,156,204 Income taxes – current - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 13,008 49,275 Income taxes – deferred - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 26,698 446,477 39,706 495,752 Minority interests - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 60,124 25,614 Net income - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ¥118,169 ¥1,634,838 See accompanying notes to consolidated financial statements. 18 MTI ANNUAL REPORT 2004
  21. 21. CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY MTI Ltd. and Consolidated Subsidiaries Thousands of Yen For the years ended September 30 2003 2004 Capital surplus Capital surplus at beginning of year - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ¥ 2,900,657 ¥ 2,903,456 Capital surplus at beginning of year - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 2,900,657 — Increase in additional paid-in capital- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 2,799 424,060 Common stock issued - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 2,799 12,477 Increase in additional paid-in capital from exchange of shares - - - - - - - - - - - - - - - - - — 411,582 Capital surplus at end of year - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 2,903,456 3,327,516 Accumulated deficit Accumulated deficit at beginning of year - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - (2,480,899 ) (2,381,709) Accumulated deficit at beginning of year - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - (2,480,899 ) — Decrease in accumulated deficit - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 125,911 1,634,838 Net income - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 118,169 1,634,838 Increase resulting from consolidation of additional subsidiaries - - - - - - - - - - - - - - - - 7,742 — Increase in accumulated deficit - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 26,721 23,287 Cash dividends - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 21,249 21,291 Bonuses paid to directors - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - — 1,961 Increase resulting from consolidation of additional subsidiaries - - - - - - - - - - - - - - - - 5,471 — Decrease resulting from consolidation of additional subsidiaries - - - - - - - - - - - - - - - — 34 Accumulated deficit at end of year - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ¥ (2,381,709 ) ¥ (770,159) See accompanying notes to consolidated financial statements. MTI ANNUAL REPORT 2004 19

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