1. Results of operations

Transcription

1 1. Results of operations (1) Analysis of results of operations In the fiscal year that ended in March 2013, the Japanese economy remained challenging due to the prolonged strong yen and deflation, the European debt crisis, and a growth slowdown in China. In the Internet and data communications industry, where the Startia Group does business, there was further market penetration of smartphones, tablets, and other sophisticated communications devices, with carriers fully deploying Long Term Evolution services. The growing popularity of these high-speed mobile data services boosted demand for contents. The network services sector performed solidly, experiencing growth in corporate broadband Internet connection services, the increasing use of cloud computing services, and ongoing demand for information security-related services. Against this backdrop, the Startia Group deployed a basic policy of pursuing sustained sales growth and building a solid profit structure. As part of these efforts, we increased the number of employees to 382, including 65 new graduates, and established a branch in Yokohama. We also began full-fledged marketing in Asia to help establish more operating bases around the world, and set up the wholly owned STARTIA SHANGHAI, INC. Management also continued to enhance stock earnings, use pull-type marketing to upgrade its ability to target new markets and customers, and establish a corporate governance framework. In the current fiscal year, the Group has been considering some important matters related to furthering the sustained and planned growth already achieved in stock sales to date with the aim of realizing continued growth into the future. We are accordingly directing our efforts into staff training activities and research and development in web solutionsrelated businesses that are the source of Group competitiveness with the aim of providing unique, high-valueadded services that none of our rivals can emulate. The goals of the Startia Group for this fiscal year are to maintain steady sales growth in sales and post record earnings. We are accordingly building an earnings structure that can remain consistently profitable over the medium and long terms rather than focusing solely on short-term gains. We are analyzing the profitability and growth prospects of each business to determine the allocations of Group resources, and are sparing no efforts to make the necessary investments in our future. We are taking steps to continue generating significant growth in stock businesses that use services to generate a consistent revenue stream. As a result of the foregoing, sales increased 30.6% from the prior year to 6,640,148 thousand yen, operating income increased 42.9% to 656,155 thousand yen, ordinary income increased 37.8% to 655,603 thousand yen, and net income increased 40.4% to 391,134 thousand yen. Segment information is presented below. 1

2 (Web Solutions) An overview of the performance of the Web Solutions segment in the current fiscal year is presented below. The Web Solutions business segment is responsible for planning, developing, and selling the ActiBook e-book production software ("ActiBook") and web applications like the CMS 2. It also offers total solutions that incorporate web applications and which are aimed at boosting our customers' sales and improving their business efficiency. This includes website production, web traffic consulting, and outsourced system development and customizing services. For ActiBook, we continued to improve basic functions and meet the demand for a single-authoring multi-device capability (the ability to produce with a single operation an e-book applicable for both applications and HTML 5 that is compatible with PCs, iphones, ipads and Android smartphones). In addition, we have created new markets by investing significantly to strengthen functions to bolster closed loop marketing for making electronic versions of internal corporate documents. During the third quarter of the year, sales of ActiBook were sluggish for around a month because we did not sufficiently train our sales unit about new plans and pricing. We have since recovered by strengthening training for the new plan and releasing a new version during the fourth quarter that improves the user interface and user experience. On top of that, we attracted printing companies that have already deployed ActiBook to take advantage of ActiBook AR COCOAR, a service that we released in November 2012 that makes it simple for companies to produce augmented reality content in-house. We created an environment to cultivate new needs and materialize plans for collaboration using ActiBook. We decided to hold seminars explaining the overall augmented reality market, including for ActiBook AR COCOAR, in response to very positive feedback from customers about our augmented reality technologies. We convened nine such gatherings over four months for more than 200 people. Consequently, segment sales increased 38.0% from the previous fiscal year to 1,482,203 thousand yen and operating income decreased 25.1% to 165,536 thousand yen. (Network Solutions) An overview of the performance of the Network Solutions segment in the current fiscal year is presented below. In the Network Solutions business, we supply total solutions that package cloud services, network equipment sales, and infrastructural services. During the year under review, we devoted considerable effort to cultivating new customers for Digit@Link Managed Gate, and continued to increase customer numbers. These efforts boosted stock-type earnings and broadened our customer base. In cloud services, we concluded a capital alliance with branddialog, inc., and pushed ahead with development to reinforce collaboration leveraging Knowledge Suite, that company s cloudbased business integration platform, and our services. Although margins on cloud services declined, this had a limited impact on performance, as Digit@Link Secure SAMBA has steadily boosted our share of the nascent cloud storage market. In sales of network equipment, a source of flow-type earnings, we made repeated sales approaches to Managed Gate customers, boosting the number of network integration projects. With corporate interest in security growing, sales of security equipment that supplements Digit@Link Netless Q contributed greatly to flow-type earnings growth. Consequently, segment sales increased 29.4% to 1,843,501 thousand yen and operating income increased 101.6% to 362,683 thousand yen. (Business Solutions) An overview of the performance of the Business Solutions segment in the current fiscal year is presented below. In this segment, we furthered enhanced the efficiency of our operations as the shift from an organization based 2

3 on product categories to an organization structured in accordance with selling methods that can improve the efficiency of our sales activities moved into its second year. Segment sales were solid in the fiscal year that ended in March Our OA equipment sales business performed solidly due to employees achieving growth in their second year with the Company and pull-type sales methods paying off. Business phone sales grew steadily. This is because Startia reinforced sales activities of legacy models and for Cloud-type IP telephone services for existing and new customers as part of a drive to construct a pleasant telecommunications environment that accommodates diverse customer needs and fosters changing work styles. Sales of replacement multi-function devices were favorable, reflecting the deployment of new models that better combine Cloud service and mobile device compatibility. Our focus on reinforcing personnel capabilities also contributed to positive results. On the support front, we are endeavoring to build a more responsive maintenance structure to enhance services for existing customers. On behalf of Softbank Telecom Partners Corp., we handle inquiries, subscription registration, on-site investigations, and other required tasks to register new customers for OTOKU Line telephone service of Softbank Telecom Corp. Despite delays of registrations in the third quarter, we booked fourth-quarter registrations as expected. As a result, line registration service numbers were solid, as initially projected. Consequently, segment sales increased 28.2% to 3,314,442 thousand yen and operating income increased 84.4% to 169,557 thousand yen. 3

4 Outlook for the fiscal year ending March 2014 The outlook for the economy is unclear because we face various risks despite upside potential from an ongoing depreciation of the yen and Japan s economic policies. The risks include Europe s sovereign debt problems and the deceleration of China s economy. Companies very much need to use IT to cut costs and boost productivity, so we will take advantage of releases of new product and service lines to steadily enhance demand for these offerings. In that light, we again performed favorably in the second year of the three years of the Startia Medium-Term Business Plan, which we announced on May 25, In the final year of this initiative, the Group will cultivate services in Japan and throughout Asia while working even harder to retain current customers by expanding our lineup, including solutions for all-in-one billing. At the same time, we will continue to develop e-book and cloud services to accommodate corporate demand for broadband, mobile, and cloud capabilities. In this fiscal year, we will use the earnings that we have accumulated in earlier years from our steady-revenue services as we pushed back sales and earnings in order to add more services in this category. We intend to focus on the growth of steady-revenue services even more than in the fiscal year that ended in March Furthermore, from the very beginning of the new fiscal year, we have been working on further strengthening our profit structure for the medium to longer term with the goal of continuing to achieve record earnings. An overview of each business segment's strategy is presented below. (Web Solutions) We plan, develop, and sell ActiBook, COCOAR, which makes augmented reality readily accessible through ActiBook, CMS2, and other Web applications. This business also provides Web production and access app consulting, and supplies total solutions relating to Web applications designed to enhance customer sales and operational efficiencies through commissioned systems development and customization. For ActiBook, we are leveraging our single authoring multi-device concept, which makes it possible to simultaneously produce e-books for PC, iphone, ipad, Android, Windows 8, and HTML 5 platforms, while reinforcing functions and services that enable detailed log analyses. We will also develop and supply new solutions that use e-books. In particular, we will promote such portal media outlets as japan ebooks ( and analyze activity from the log information of distributed e-books in reinforcing the supply of solutions that employ Big Data, notably encompassing delivery methods and contents that might make e-books more readable. With COCOAR, we will deploy tools that add value to productions, focusing on printing companies and production houses, which have been the prime targets to date for ActiBook. We will add value, for example, by producing ActiBook-linked plans and reinforcing log analysis functions. We are developing multilingual capabilities for ActiBook, and are approaching prospective agents overseas. We will leverage the outstanding quality and solutions advantages of ActiBook in Japan, where we have more than 1800 corporate users, in our drive to make ActiBook a top-selling service throughout Asia. 4

5 (Network Solutions) We supply total outsourcing services in network infrastructure, which underpins office IT setups. Because of new IT device deployments, corporate network infrastructure needs encompass diverse employee scales, industry sectors, and businesses, tending to increase the burdens on IT systems managers. We will strengthen managed gate and other gateway solutions with maintenance capabilities to flexibly accommodate the needs of these managers. With the SAMBA online storage service and other cloud service areas, we are steadily increasing customer numbers as IT-as-a-Service needs increase. We will prepare for further service expansion by broadening our cloud infrastructure and allocating capital investments to stabilize operations. (Business Solutions) We are reinforcing stock-type services by continuing to focus on sales of color multifunctional printers while cultivating talented technicians to expand our maintenance area for our page counter fee-based services. For our corporate customers, we plan to focus on selling IP phones incorporating off-line address books while continuing to offer Managed Telephony, a stock-based managed service. We offer conventional telephone line registration services and are endeavoring to reinforce invoicing and other services for carriers. We will also enhance all-in-one billing services and deploy aggressive strategic marketing to attract customers. As a result, we forecast consolidated net sales of 8,160 million yen, operating income of 800 million yen, ordinary income of 800 million yen, and net income of 400 million yen for the fiscal year ending March Note: The Startia Group provides no guarantee regarding the forecast for the next fiscal year and other forwardlooking statements in this document because actual results may be different due to changes in the economy and many other factors that cannot be foreseen. 5

6 (2) Analysis of financial condition 1) Assets, liabilities and net assets a. Assets Current assets increased 304,427 thousand yen from the prior fiscal year end to 3,396,577 thousand yen, mainly due to a 195,467 thousand yen increase in notes and accounts receivable-trade, a 24,340 thousand yen increase in deferred tax assets and a 74,459 thousand yen increase in other current assets. (Please see the Consolidated Statements of Cash Flows on page 19 for more information about cash and deposits.) Noncurrent assets increased 201,987 thousand yen from the prior fiscal year end to 878,051 thousand yen. This was mainly due to a 80,421 thousand yen increase in software, a 81,562 thousand yen increase in investment securities and a 39,290 thousand yen increase in guarantee deposits. Deferred assets decreased 4,997 thousand yen from the prior fiscal year end to 4,581 thousand yen. This was mainly due to a 4,997 thousand yen decrease in stock offering expenses. As a result, total assets increased 501,417 thousand yen from the prior fiscal year end to 4,279,210 thousand yen. b. Liabilities Current liabilities increased 116,423 thousand yen from the prior fiscal year end to 1,242,856 thousand yen. This was mainly due to a 141,400 thousand yen decrease in current portion of long-term loans payable and increases of 99,153 thousand yen in accounts payable-trade, 52,116 thousand yen in accounts payable-other and 35,178 thousand yen increase in income taxes payable. Noncurrent liabilities were 500 thousand yen, no change from the prior fiscal year end. As a result, total liabilities increased 116,423 thousand yen from the prior fiscal year end to 1,243,356 thousand yen. c. Net assets Net assets increased 384,994 thousand yen from the prior fiscal year end to 3,035,854 thousand yen. This was attributable mainly to net income of 391,134 thousand yen and dividends of 27,853 thousand yen paid in accordance with a resolution approved at the shareholders meeting. 2) Cash flows Cash and cash equivalents ("cash") totaled 1,868,940 thousand yen at the end of the current fiscal year, a decrease of 171,195 thousand yen from the prior fiscal year end. An overview of the cash flows in the current fiscal year is presented below. a. Cash flows from operating activities Net cash flow from operating activities in the current fiscal year totaled 566,772 thousand yen, compared to 461,222 thousand yen in the prior fiscal year. This is mainly attributable to the 655,603 thousand yen in income before income taxes and minority interests, 208,941 thousand yen in depreciation and amortization expenses, and increases of 262,647 thousand yen in income taxes and notes and 59,927 thousand yen in accounts payable-other. b. Cash flows from investing activities Net cash flow used in investing activities in the current fiscal year totaled 591,548 thousand yen, compared to 240,028 thousand yen used in the prior fiscal year. This mainly consisted of 254,019 thousand yen used in 6

7 acquiring noncurrent assets, 200,000 thousand yen used in payments into time deposits and 99,630 thousand yen used in purchase of investment securities. c. Cash flows from financing activities Net cash flow from financing activities in the current fiscal year totaled 146,419 thousand yen, compared to 186,146 thousand yen in the prior fiscal year. This consisted mainly of 141,400 thousand yen used to repay longterm loans payable and 27,853 thousand yen used in cash dividends paid. (Reference) Performance indicators associated with cash flows Years ended March 31 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 Shareholders' equity ratio (%) Market value basis shareholders' equity ratio (%) Cash flow to interest-bearing debt ratio (%) Interest coverage ratio (times) Equity ratio: equity / total assets Market value equity ratio: market capitalization / total assets Cash flow to interest-bearing debt ratio: cash flow / interest-bearing debt Interest coverage ratio: cash flow / paid interest Notes: 1. All indicators are calculated using consolidated-based financial indicators. 2. Market capitalization is calculated by multiplying the closing share price at the end of the period by the number of issued shares as of the end of the period (excluding treasury stock). 3. Cash flows are operating cash flows in the consolidated statements of cash flows. 4. Interest-bearing debt is the sum of all balance sheet liabilities on which interest is paid. (3) Fundamental policy for earnings distributions and dividends for the current and next fiscal years The Startia Group regards returning profits to shareholders as an important priority for management. We are working to accumulate the internal reserves necessary to build a stronger base of operations and bolster competitiveness while also endeavoring to enhance our returns to shareholders in accordance with our medium to longer term strategy. In accordance with this basic dividend policy, the Company pays dividend from retained earnings equivalent to 10% of the consolidated net income once a year at the end of the fiscal-year. The Company will pay a dividend of 7.86 yen per common share, which is equivalent to 10% of the consolidated net income per share of yen, for the current fiscal year. (4) Business risks This section is omitted because there are no significant changes in the risk information presented in the most recent Securities Report (submitted June 21, 2012). This Securities Report (Japanese language) can be viewed at the following URL. (Startia website) 7

8 2. Corporate group The Startia Group consists of Startia, Inc., two consolidated subsidiary (Startia Lab, Inc. and STARTIA SHANGHAI,INC.) and three equity-method affiliate (MAC Office Inc., STARTIASOFT INC., and Urban Plan Co., Ltd.). The primary customer segment is middle-market and small and midsize companies with fewer than 300 employees. Operations include the sale of business phones, multi-function office equipment, network equipment and other data communication equipment; a brokerage service for Internet connections; the sale of office furniture; the Digit@Link hosting service; website production and the provision of content; and other activities. Group companies are dedicated to improving customer satisfaction by supplying a variety of products and services for creating the environment required for office activities based on the theme of total office solutions. The increasing speed and complexity of IT environments, along with the growing volume of information, are creating challenges for companies of all types. There is also rising interest in security measures for protecting personal information and to meet other requirements. For companies with fewer than 300 employees, determining the best IT environment is a difficult and time-consuming process. Large companies can quickly adapt to changing IT requirements because they have departments devoted exclusively to IT tasks. At most companies with a workforce of less than 300, though, IT tasks are often handled by employees in other departments who have some IT knowledge. Using these employees for IT is harmful for the company s business operations. This is why Startia does more than merely sell products in order to meet customers needs. We also install equipment, perform settings, provide follow-up support, operate a help desk and offer other forms of assistance. We want our customers to view Startia as a virtual general affairs and IT systems department. To provide this support, we constantly upgrade the knowledge and service capabilities of our employees so that we can establish long-term customer relationships as an organization of IT professionals. A description of our business segments is presented below. (1) Web Solutions The Web Solutions segment encompasses planning, developing, and selling Web applications, principally Digit@Link ActiBook e-book production software (ActiBook), ActiBook AR COCOAR, which makes it simple to combine ActiBook features with augmented reality, and Digit@Link CMS2. This business also provides Web production and access app consulting, and supplies total solutions relating to Web applications designed to enhance customer sales and operational efficiencies through commissioned systems development and customization. (2) Network Solutions In the Network Solutions business, we supply total solutions that package cloud services, network equipment sales, and infrastructural services. We manage and maintain Digit@Link Managed Gate and Digit@Link Netless QAs central gateway platforms for corporate network environments, providing gateway services that optimize the potential and precision of networks. Our cloud services enable the use of online IT services that customers can use when they need them instead of having to purchase equipment. Our offerings include Digit@Link Secure SAMBA, which enables the use of rental servers and online file servers that can handle everything up to domain management. We also provide Digit@Link Cloud, which supplies servers needed to run systems, and Digit@Link Knowledge Suite, a salesforce automation and customer relationship management tool for enhancing the efficiency 8

9 of corporate customer operations. Our cloud services simplify connections to gateway services, matching the growth needs of corporate customers and supplying comprehensive network integration capabilities. (3) Business Solutions In the Business Solutions segment, the bulk of our sales comes from not only business phones, multi-function office equipment, and cost-per-print services, but also from presenting office layout solutions that take advantage of the expertise that we have accumulated over many years in information and telecommunications equipment and ISP line placement and which also take into consideration the telecommunications environment, such a LAN. In this segment we also earn incentive fees from telecommunications carriers by handling line subscriptions on their behalf. In business phones, we not only sell products like IP phones to corporate customers, but also offer rentals through our managed services. In addition to sales, our technicians visit our customers' places of business and handle the installation and placement of IP phones. Because we are able to fully grasp our customers' needs and connect them to our technicians, the time between the initial request and when the work is done is shortened. When it comes to developing new customers and following up with existing customers, we introduce customers to Startia's services and present them with solutions for reducing overhead costs. We send salespersons to call directly on customers who have shown a need for these services, and these salespersons present more detailed information about these services and then get them to sign contracts. In multi-function office equipment, we are currently primarily selling and renting multi-function office equipment supplied by Sharp Document Systems Corporation. In our cost-per-print services, we provide maintenance, copy paper, toner and other consumables free of charge to the customers, and in exchange we receive payment based on the number copies used. As the number of copies made by customers increases and the number of multi-function devices that are sold increases, our revenue from cost-per-print services increases. There is strong demand to replace existing black and white devices with color devices, so we are focusing on offering color multi-function devices that combine the copy and print functions that suit our customers' needs. The sales route for the aforementioned business phones and multi-function devices is leasing. In these arrangements, our customer enters into a lease agreement for a product such as a business phone or multi-function device with a leasing company, and then Startia sells the item to the leasing company. This makes it easier for our customers to deploy information and telecommunications equipment, and because we ask the leasing company to perform a credit check, it prevents problems like bad credit. OTOKU Line is the main product that we handle subscriptions for as a telecommunications carrier agent. This is a telephone service that is offered by Softbank Telecom Corp. On behalf of Softbank Telecom Partners Inc., we handle the procedures necessary for new subscriptions, including accepting inquiries and providing information, handling registrations, and performing site inspections. In exchange we receive sign-up incentives and traffic incentives, which come out of the telephone usage fees paid by the customer. Our customers are companies with fewer than 300 employees, and these companies do not have a dedicated department to handle telecommunications. As a result, these companies struggle in deciding among the many service and equipment options. They do not know which telecommunications carrier and which service to choose in order to enjoy better voice communications and lower costs. By listening carefully to our customers, Startia can present them with more optimal solutions. 9

10 The following diagram is a flow chart showing the business operations of the Startia Group. 3. Management policies (1) Basic Management policy The Startia Group has grown as a source of total office solutions. This involves the provision of multiple products and services for creating the environment needed for business activities. Most customers are middlemarket and small and midsize companies with fewer than 300 employees. Operations include the sale of data communication equipment; the Digit@Link Managed Gate, a gateway solution with maintenance service; cloudrelated services including the Digit@Link Secure SAMBA; Digit@Link ActiBook, software for the simple production of e-books; ActiBook AR COCOAR, which makes augmented reality readily accessible through ActiBook; and website production and other content needed to maximize earnings from current customers. We want customers to regard Startia as a virtual general affairs, personnel and IT systems department. To provide this support, we constantly upgrade the knowledge and service capabilities of our employees. We want to create a corporate culture of serving customers with sincerity as an organization of IT professionals. (2) Targeted performance indicator 10

11 The Startia Group has the target of achieving an operating margin of 10%, viewing this as an indicator for profitability and growth. Our goal is to grow while at the same time improving profitability by focusing on the provision of services that can produce a consistent revenue stream. (3) Medium and long-term strategies The Startia Group plans to adopt a structure in which individual business units are responsible for meeting profit targets. The aim is to rebuild the group s profit structure and clarify the accountability of managers for meeting goals. In addition, there are extensive activities for internal controls to make business operations more effective and efficient. We believe that pursuing the strategic goal of earning greater trust from shareholders, customers and all other stakeholders will enable the group to continue growing over the long term. (4) Important issues In our view, establishing a solid business foundation and reinforcing internal control systems in order to further insure the confidence of our shareholders, customers and all other stakeholders is the main issue currently requiring our attention, and we intend to take the following steps to address this. 1) Strengthening steady-revenue businesses Sales of information and telecommunications equipment such as business phones and network equipment, as well as serving as an intermediary for sales of telecommunications lines, still account for most of Startia's sales revenue. Nevertheless, the share of revenue from businesses that generate continuous streams of income is steadily growing. By redoubling our focus on sales of e-book production software and on these steady-revenue services, such as hosting services, information and telecommunications equipment rentals, and cost-per-print services, we aim to build a robust revenue model. 2) Employee training We have been actively recruiting so that we can secure quality personnel. We will be conducting employee training to raise productivity among the 87 recently hired university graduates as quickly as possible. 3) Reinforcing corporate governance Startia is guided by the corporate philosophy of becoming a leading company in identifying the needs of society and markets, creating the future for people and companies, and producing outstanding businesses and people. We are committed to managing our business operations in a manner that is transparent, sound and in conformity with laws and regulations. Furthermore, with the aim of clarifying management responsibility and building a stronger base of operations, we are working towards transitioning to a so-called "company system" framework (or holding company framework), and we are training our executives and managers in order to raise the level of their skills and making capital investments to improve business management systems. Furthermore, we recognize that conceiving, building, and operating an internal control system is one of management's key responsibilities, and we have therefore assembled an Internal Controls Coordination Conference that oversees the Compliance Committee, Risk Management Committee and IT Systems Committee. In cooperation with the Internal Audit Department, this body is working to perfect true corporate governance by 11

12 educating, sharing, and entrenching Startia's corporate philosophy, corporate ethics, and corporate code of conduct, which serve as the foundation of legal and regulatory compliance, among our employees. 12

13 4. Consolidated financial statements (1) Consolidated Balance Sheets ASSETS Current assets FY 2011 (As of March 31, 2012) (thousand yen) FY 2012 (As of March 31, 2013) Cash and deposits 2,055,151 2,068,940 Notes and accounts receivable-trade 837,553 1,033,020 Raw materials and supplies 25,531 35,314 Deferred tax assets 70,615 94,955 Other 143, ,633 Allowance for doubtful accounts (39,875) (53,287) Total current assets 3,092,150 3,396,577 Noncurrent assets Property, plant and equipment Buildings 44,172 53,975 Accumulated depreciation (14,527) (17,062) Buildings, net 29,645 36,913 Vehicles 23,355 31,014 Accumulated depreciation (9,185) (17,474) Vehicles, net 14,169 13,539 Tools, furniture and fixtures 239, ,858 Accumulated depreciation (175,413) (198,376) Tools, furniture and fixtures, net 64,510 49,482 Land Total property, plant and equipment 108, ,308 Intangible assets Goodwill 53,866 42,933 Software 200, ,514 Other 4,232 4,232 Total intangible assets 258, ,679 Investments and other assets Investment securities 139, ,060 Investments in capital of subsidiaries and affiliates ,043 Deferred tax assets 5,361 7,216 Guarantee deposits 125, ,349 Other 38,962 46,393 Total investments and other assets 309, ,063 Total noncurrent assets 676, ,051 Deferred assets Stock issuance cost 9,579 4,581 Total deferred assets 9,579 4,581 Total assets 3,777,793 4,279,210 13

14 LIABILITIES Current liabilities FY 2011 (As of March 31, 2012) (thousand yen) FY 2012 (As of March 31, 2013) Accounts payable-trade 354, ,162 Current portion of long-term loans payable 141,400 - Accounts payable-other 207, ,647 Accrued expenses 62,250 74,437 Income taxes payable 154, ,424 Accrued consumption taxes 46,980 62,231 Provision for bonuses 96, ,912 Other 63,820 72,038 Total current liabilities 1,126,433 1,242,856 Noncurrent liabilities Other Total noncurrent liabilities Total liabilities 1,126,933 1,243,356 NET ASSETS Shareholders equity Capital stock 777, ,290 Capital surplus 919, ,452 Retained earnings 961,523 1,324,805 Treasury stock (14) (78) Total shareholders equity 2,658,353 3,044,468 Accumulated other comprehensive income Valuation difference on available-for-sale securities (7,493) (9,607) Foreign currency translation adjustment Total accumulated other comprehensive income (7,493) (8,614) Total net assets 2,650,860 3,035,854 Total liabilities and net assets 3,777,793 4,279,210 14

15 (2) Consolidated Statements of Income and Comprehensive Income Consolidated Statements of Income (thousand yen) FY 2011 FY 2012 (Fiscal year ended March 31, 2012) (Fiscal year ended March 31, 2013) Net sales 5,084,210 6,640,148 Cost of sales 2,305,037 3,152,512 Gross profit 2,779,172 3,487,635 Selling, general and administrative expenses 2,319,942 2,831,480 Operating income 459, ,155 Non-operating income Interest income 411 1,030 Dividends income Gain on write-off of assumed debt 13,119 10,056 Commission fee Equity in earnings of affiliates 5,786 - Other 4,323 4,034 Total non-operating income 24,430 16,187 Non-operating expenses Equity in losses of affiliates - 10,918 Interest expenses 2, Amortization of stock issuance cost 4,997 4,997 Other Total non-operating expenses 7,723 16,738 Ordinary income 475, ,603 Extraordinary income Gain on sales of noncurrent assets Gain on transfer of business 3,000 - Gain on change in equity 5,921 - Total extraordinary income 9,879 - Extraordinary loss Loss on retirement of noncurrent assets 2,908 - Loss on valuation of investment securities 2,387 - Total extraordinary loss 5,295 - Income before income taxes and minority interests 480, ,603 Income taxes-current 216, ,664 Income taxes-deferred (14,870) (26,195) Total income taxes 201, ,468 Income before minority interests 278, ,134 Net income 278, ,134 15

16 Consolidated Statements of Comprehensive Income (thousand yen) FY 2011 FY 2012 (Fiscal year ended March 31, 2012) (Fiscal year ended March 31, 2013) Income before minority interests 278, ,134 Other comprehensive income Valuation difference on available-for-sale securities (2,982) (2,114) Share of other comprehensive income of associates - (993) accounted for using equity method Total other comprehensive income (2,982) (3,108) Comprehensive income 275, ,026 Comprehensive income attributable to Comprehensive income attributable to owners of the parent 275, ,026 16

17 (3) Consolidated Statements of Changes in Net Assets Shareholders equity Capital stock FY 2011 (Fiscal year ended March 31, 2012) (thousand yen) FY 2012 (Fiscal year ended March 31, 2013) Balance at the beginning of current period 777, ,840 Changes of items during the period Issuance of new shares-exercise of subscription rights to shares ,449 Total changes of items during the period ,449 Balance at the end of current period 777, ,290 Capital surplus Balance at the beginning of current period 918, ,003 Changes of items during the period Issuance of new shares-exercise of subscription rights to shares ,449 Total changes of items during the period ,449 Balance at the end of current period 919, ,452 Retained earnings Balance at the beginning of current period 707, ,523 Changes of items during the period Dividends from surplus (24,766) (27,853) Net income 278, ,134 Total changes of items during the period 253, ,281 Balance at the end of current period 961,523 1,324,805 Treasury stock Balance at the beginning of current period (14) (14) Changes of items during the period Purchase of treasury stock - (64) Total changes of items during the period - (64) Balance at the end of current period (14) (78) Total shareholders equity Balance at the beginning of current period 2,404,100 2,658,353 Changes of items during the period Issuance of new shares-exercise of subscription rights to shares ,898 Dividends from surplus (24,766) (27,853) Net income 278, ,134 Purchase of treasury stock - (64) Total changes of items during the period 254, ,115 Balance at the end of current period 2,658,353 3,044,468 17

18 Accumulated other comprehensive income FY 2011 (Fiscal year ended March 31, 2012) (thousand yen) FY 2012 (Fiscal year ended March 31, 2013) Valuation difference on available-for-sale securities Balance at the beginning of current period (4,511) (7,493) Changes of items during the period Net changes of items other than shareholders equity (2,982) (2,114) Total changes of items during the period (2,982) (2,114) Balance at the end of current period (7,493) (9,607) Foreign currency translation adjustment Balance at the beginning of current period - - Changes of items during the period Net changes of items other than shareholders equity Total changes of items during the period Balance at the end of current period Total net assets Balance at the beginning of current period 2,399,589 2,650,860 Changes of items during the period Issuance of new shares-exercise of subscription rights to shares ,898 Dividends from surplus (24,766) (27,853) Net income 278, ,134 Purchase of treasury stock - (64) Net changes of items other than shareholders equity (2,982) (1,121) Total changes of items during the period 251, ,994 Balance at the end of current period 2,650,860 3,035,854 18

19 (4) Consolidated Statements of Cash Flows Net cash provided by (used in) operating activities (thousand yen) FY 2011 FY 2012 (Fiscal year ended Mar. 31, 2012) (Fiscal year ended Mar. 31, 2013) Income before income taxes 480, ,603 Depreciation and amortization 187, ,941 Increase (decrease) in allowance for doubtful accounts 7,541 13,412 Increase (decrease) in provision for bonuses 14,931 35,718 Interest and dividends income (876) (1,800) Interest expenses 2, Equity in (earnings) losses of affiliates (5,786) 10,918 Loss (gain) on valuation of investment securities 2,387 - Loss on retirement of noncurrent assets 2,908 - Loss (gain) on sales of noncurrent assets (958) - Loss (gain) on change in equity (5,921) - Loss (gain) on transfer of business (3,000) - Decrease (increase) in notes and accounts receivabletrade (206,095) (195,467) Decrease (increase) in inventories (4,520) (9,782) Increase (decrease) in notes and accounts payable-trade 62,245 99,153 Increase (decrease) in accounts payable-other 36,809 59,927 Increase (decrease) in accrued consumption taxes 24,582 15,251 Other 41,236 (64,304) Subtotal 635, ,393 Interest and dividends income received 876 1,790 Interest expenses paid (1,839) (764) Proceeds from insurance income 2,437 - Income taxes paid (175,968) (262,647) Net cash provided by (used in) operating activities 461, ,772 Net cash provided by (used in) investing activities Payments into time deposits - (200,000) Proceeds from withdrawal of time deposits - 15,014 Purchase of noncurrent assets (201,151) (254,019) Proceeds from sales of noncurrent assets 4,519 - Payments of loans receivable (6,100) (500) Collection of loans receivable 6, Payments for guarantee deposits (6,722) (50,815) Proceeds from collection of guarantee deposits 959 5,634 Purchase of stocks of subsidiaries and affiliates (8,900) - Payments for investments in capital of subsidiaries and affiliates (3,000) - Purchase of investment securities - (99,630) Proceeds from transfer of business 3,000 - Payments for transfer of business (21,000) - Other (7,733) (7,733) Net cash provided by (used in) investing activities (240,028) (591,548) 19

20 (thousand yen) FY 2011 FY 2012 (Fiscal year ended Mar. 31, 2012) (Fiscal year ended Mar. 31, 2013) Net cash provided by (used in) financing activities Repayment of long-term loans payable (151,800) (141,400) Proceeds from exercise of stock option ,898 Cash dividends paid (24,766) (27,853) Purchase of treasury stock - (64) Transfer to time deposits (10,000) - Net cash provided by (used in) financing activities (186,146) (146,419) Net increase (decrease) in cash and cash equivalents 35,047 (171,195) Cash and cash equivalents, beginning of period 2,005,089 2,040,136 Cash and cash equivalents, end of period 2,040,136 1,868,940 20

21 (5) Notes to ongoing concern assumptions Not applicable (6) Basis of presenting the consolidated financial statements 1. Scope of consolidation All subsidiaries are consolidated. Number of consolidated subsidiaries: 2 Names of consolidated subsidiaries Startia Lab, Inc. STARTIA SHANGHAI, INC. STARTIA SHANGHAI was established during the year under review, and was thus subject to consolidation from that term. 2. Equity-method affiliates 1) Number of equity-method affiliates: 3 Company name: MAC Office Inc. Urban Plan Co., Ltd. STARTIASOFT INC. 2) Information regarding application of the equity method that requires disclosure For equity-method affiliates with a fiscal year end that differs from the consolidated fiscal year end, financial statements for the affiliate s fiscal year are used. 3. Information concerning fiscal years, etc. of consolidated subsidiaries The fiscal year of STARTIA SHANGHAI ends on December 31. In preparing the financial statements, management used financial statements as of that date, making the necessary consolidation adjustments for material transactions between that date and the consolidated closing date. 4. Significant accounting policies 1) Valuation of significant assets (a) Securities Other securities With market value: Market value method using the market price on the closing date (Unrealized gains and losses are reported in the shareholders equity section. Sales cost of securities is determined by the moving-average method.) Without market value: Cost method based on the moving-average method (b) Inventories Raw materials Cost method using the specific identification method (in which book value is reduced to reflect declines in profitability) 21

22 2) Depreciation and amortization method for principal assets (a) Property, plant and equipment Startia uses the declining-balance method of depreciation. However, the straight-line method is used for buildings. The useful lives of principal assets are as follows. Buildings: Vehicles: Tools, furniture and fixtures: 8-39 years 2-6 years 3-20 year Property, plant and equipment purchased on or before March 31, 2007 are depreciated in equal installments over a five-year period beginning with the year after depreciation by the maximum amount allowed has been completed. (b) Intangible assets i) Software For amortization of software, the straightline method based on the estimated internal use period (three to five years) is used. ii) Goodwill In principle, goodwill is amortized over a reasonable period of time that is not more than 20 years. 3) Significant allowances (a) Allowances for doubtful accounts To prepare against expected losses from bad debts, estimated amounts to be uncollectible are accrued for general claims, computing on historical bad-debt ratios, and for specific claims including doubtful accounts, considering their own recoverability. (b) Provision for bonuses To prepare for bonus payment to employees, etc., the portion of the estimated payment amount allocable to the fiscal year is accrued. 4) Method and time period for amortizing goodwill As a rule, goodwill is amortized over a reasonable amount of time not to exceed 20 years. 5) Scope of Cash in the Consolidated Statement of Cash Flows Cash encompasses cash on hand, demand deposits, and short-term investments that reach maturity in no more than three months from the acquisition date, are highly liquid, are readily convertible into cash, and are subject to insignificant risk of price fluctuations. 6) Other significant accounting policies Consumption tax Financial statements are prepared exclusive of consumption tax. (Changes in accounting policies) (Changes in accounting estimates and changes in accounting policies that are difficult to categorize) In keeping with a revision of the Corporation Tax Act of Japan, from the year under review the Company and its consolidated subsidiaries adopted a depreciation method based on the revised legislation for tangible fixed assets acquired on or after April 1, The effect on earnings was immaterial. 22

23 (Segment information) 1. Description of reporting segments (1) Method for determining reporting segments Startia's reporting segments are units for which segregated financial data is available and which are regularly reviewed by the Board of Directors in determining resource allocation and in evaluating business performance. Startia has established business units by product and service at both the parent company and subsidiaries. These business units engage in business activity and formulate comprehensive strategies for the products and services under their purview. Accordingly, the sales framework for our products and services serves as the basis for Startia's business segments, and there are three reporting segments: Web Solutions, Network Solutions and Business Solutions. (2) Types of products and services in each reporting segment The Web Solutions segment encompasses planning, developing, and selling Web applications, principally ActiBook e-book production software (ActiBook), ActiBook AR COCOAR, which makes it simple to combine ActiBook features with augmented reality, and CMS2. This business also provides Web production and access app consulting, and supplies total solutions relating to Web applications designed to enhance customer sales and operational efficiencies through commissioned systems development and customization. The Network Solutions segment simplifies connections to gateway services and packages offerings to match the growth needs of corporate customers through cloud services that deliver comprehensive network integration and total solutions that combine network equipment sales and services. The Business Solutions segment extends from business phone, multifunctional printers, and counter fee-based services to leverage the Group s many years of experience in selling information and communications equipment and arranging ISP lines to focus on proposing and selling office layouts that factor in local area networks and other aspects of communications environments. We also generate incentive revenues from telecommunications carrier by handling telephone line arrangements and subscription registrations on their behalves. 2. Method for calculating the sales, income or losses, assets, liabilities or other data for each reporting segment The company uses generally the same accounting methods for business segment reporting as those in Significant Accounting Policies for the Consolidated Financial Statements. Reporting segment earnings are on an operating income basis. Intersegment sales and earnings and transfers are based on prevailing market prices. 23

24 3. Sales, income or loss, asset, liability and other data for each reporting segment Previous fiscal year (from April 1, 2011 to March 31, 2012) Web Solutions Reportable segments Network Solutions Business Solutions Total Adjustment (note 1, 2, 4, 5, 6 ) (thousand yen) Amounts in consolidated financial statements (note 3) Net sales (1) Sales to external customers 1,073,917 1,424,833 2,585,458 5,084,210-5,084,210 (2) Inter-segment sales and transfers - 302, , ,148 (632,148) - Total 1,073,917 1,727,307 2,915,133 5,716,358 (632,148) 5,084,210 Segment income (loss) 220, ,911 91, ,858 (33,628) 459,229 Segment assets 307, , ,361 1,217,196 2,560,596 3,777,793 Other Depreciation and amortization 58,623 54,986 31, , ,155 Amortization of goodwill - 19,000 22,050 41,050-41,050 Increase in property, plant and equipment and intangible assets 95,242 40,688 32, ,410 47, ,517 Notes: 1. The adjustment amount for the inter-segment sales and transfers consists of 632,148 thousand yen in eliminated intersegment transactions. 2. The segment income adjustment of negative 33,628 thousand yen is corporate expenses that cannot be allocated to any segment. 3. The total segment income matches the operating income on the consolidated statement of income. 4. Within assets, 2,560,596 thousand yen of companywide assets are included the adjustments item. This consists mainly of parent company excess working capital, long-term investment funds, and assets associated with administrative areas. 5. The 698 thousand yen adjustment to depreciation & amortization expenses represents companywide expenses not allocated to the reporting segments. 6. The 47,107 thousand yen adjustment to the increase in property, plant and equipment and intangible assets consists mainly of investment in companywide assets. 24