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Business Risks

Some risks that may have an effect on the operating results, financial conditions and stock prices of our group companies are shown below.
Moreover, future items were estimated as of the close of the period ending March 2010.

1. Financial status, operating results and cash flow situation

Our group companies invest in businesses that are expected to have a synergy with our group companies business, whether domestic or international. However, variations in stock market prices and foreign exchange rates due to changes in factors such as the financial status and operating results of the investment, or the domestic economic environment and international affairs, may have an effect on our group companies financial status, operating results and cash flow.

2. Overall Operations

Our group companies started our business operations as a leader in information processing outsourcing business in 1966. Since then, we have fused excellent “people” and the latest “technology” to reinforce our group companies clients’ competitiveness by providing outsourcing services with high added values. Currently, we promote our business to provide a comprehensive outsourcing service worldwide which supports our group companies clients’ sales expansion and cost reduction. However, due to factors such as the rapid progress of technical innovation and changing needs and aspirations, if the know-how and experience we have accumulated up until now no longer meet the needs and aspirations of our group companies clients, there is a possibility of our current business contracting or losing its acceptance, and this would have an effect on our group companies operating results.

3. Cyclical Changes

Many of our group companies clients are large corporations, such as those listed in the first section of the Tokyo Stock Exchange, and since most business is based on long-term contracts of a year or more, we do not expect that there will be any major change in our group companies sales over the short term. However, since our group companies sales depend to a great extent on the operating expenses of our group companies clients, there is some concern that outsourcing expenses could be reduced due to cyclical changes, and in case of rapid changes in business volume due to economic conditions, this could have an effect on our group companies operating results.

4. Business Environment

The information services industry, in which our group companies business is involved, is expected to have expanding outsourcing needs over the mid to long term due to factors such as the environment surrounding businesses and the streamlining of business administration, and it is thought that growth will continue. However, depending on the business, it is also possible that there will be a switch from outsourcing to insourcing from the standpoint of issues such as personal information protection, and this may have an effect on our group companies operating activities. In addition, the digital marketing market, which has grown along with the rapid expansion of the Internet environment, is exhibiting continued growth, but this market environment is constantly changing, and it is possible that traditional media including TV, newspapers and magazines may catch up with it. Furthermore, the digital marketing market itself could shrink due to the appearance of new media that have competitive strength outside of the Internet, and this could have an effect on operating activities.

5. Length of Contracts with Clients

Many of our group companies contracts with clients are for a period of one year with automatic renewal. However, when a client changes to another company due to their circumstances, or when a long-term business relationship cannot be established with a client company, there may be an effect on operating results.

6. Competing Companies

The services our group companies offers include mainly contact center service, Business Process Outsourcing (BPO) service, digital marketing service, and E-commerce one-stop service, and for each area of service, there are competitors present. In the call center service business, there is a progressing trend toward oligopoly, with all the large companies devoted to creating and providing higher value-added services, and at the same time, all companies are in a continuation of competitive conditions, where they are entering business categories and fields other than those where they exhibited competitive strength. Although the size of the business process outsourcing services market is several trillion yen, there is a continuing competitive situation between manufacturing and independent companies. Regarding the digital marketing services business, many companies such as large advertising agency groups and venture companies have entered the market, so that even though the size of the market is rapidly expanding, a situation exists where there are too many competing companies. As for the E-commerce one-stop service, it is expected that many new companies enter the market in a situation where the market scale is rapidly expanding.
In the future, if it is no longer possible to establish our group companies strategy based on a clear competitive advantage due to factors such as the loss of our group companies current technical edge with the advance of technology and the appearance of companies offering lower prices for the service than our group companies, there may be an effect on our operating results.

7. Software Development

Our group companies software development is performed after understanding the user requirements of our group companies clients, but when a discrepancy occurs between the estimate of development costs to meet the client’s user requirements and the actual development costs, there is a possibility that we may have to bear development costs for such projects.

8. Investment Destination Management

In order to develop business responding to the changes in technical innovation, our group companies has made corporate venture capital investments mainly for the purpose of acquiring new technology and new services, but we pulled back at the close of the period ending in March 2009 due to the rapidly deteriorating economic environment and we plan to continue an orderly divestment of our share holdings. We are striving to make an exhaustive review of the financial and business conditions of invested companies and to understand their financial conditions on a continual basis; however, due to the fact that most of these investments are in Internet related business categories, in cases where their business models do not match socioeconomic needs and there is a deterioration in business conditions, it may become impossible to recover our group companies invested capital and a valuation loss may occur.
As a countermeasure, we are taking the utmost care to ensure that conditions are properly reflected in our group companies consolidated results by taking necessary steps, such as handling losses on marketable securities we hold according to internal company rules that are stricter than general accounting standards.

9. Future Business Development

Technical innovation is constantly occurring in each of the services provided by our group companies, and in order to continue to maintain our group companies technical superiority and pricing, it is necessary to constantly develop and introduce the latest technology. However, in the event that new services do not match market trends and needs, it is possible to miss contract opportunities, and in this case there is a potential impact, not only on current operating results, but also on medium-term business plans. Also, we are promoting our group companies global business development mainly in Asia, and due to unexpected circumstances which occur from conditions in politics, economy, and social climate in each country or region and such country risks as enactment and revisions of the regulations and various restrictions, there is a possibility that they may influence our group companies business performance.

10. Mergers and Acquisitions (M&A)

There are many competitors for the services our group companies provides and shakeouts occur quickly. In addition, there is a trend to employ mergers and acquisitions as a means to quickly enjoy economies of scale and to expand business. We also recognize the need to actively employ methods such as mergers, acquisitions and alliances with companies having related business operations, and there is a potential for implementing M&A activities in the future.
However, there is a potential that these future M&A activities may not demonstrate business synergies, that suitable personnel and financial control is not possible, or that there may be changes in the business environment and earnings structure, due to a variety of different factors. In that case, there may be an effect on financial conditions and operating results.

11. Securing Personnel

In each of the service fields provided by our group companies, we consider that securing excellent personnel who possess a high level of specialized knowledge and experience is a top priority of management. In order to secure excellent, motivated and attractive personnel, our group companies puts great effort into promoting a corporate culture of freedom, creativity and self-respect. In addition, we also promote the establishment of rewarding work and a positive delegation of authority based on ability for our group companies employees. However, there is no guarantee that we can secure the necessary personnel at the required time to meet the demands of clients in the future, and if recruitment cannot be performed based on our group companies manpower planning, there could be an effect on our operating results.
Furthermore, we have constructed a personnel system which is able to respond in a flexible manner with features such as semi-annual personnel evaluations. However, if sensible assessments cannot be made due to problems such as poor performance by evaluators and poor communication with subordinates, these systems can have the opposite effect, leading to results such as lower motivation and the loss of personnel.

12. Special Legal Regulations and Trade Practices

Currently, there are no legal regulations having an adverse effect on our group companies business, but there is no guarantee that regulations will not be applied in the future. If such legal regulations are instituted or regulations with ambiguous interpretations are enacted, there may be an impact on our group companies business results or there could be an adverse effect on the speed of business development.

13. Potential for Compromise of Personal Information

Our group companies acquired the Japan Information Processing Development Corporation foundation approved privacy mark in February of 2003, but we are particularly engaged in a reliable system for the handling of client company customer data (personal information, including name, address, age and annual income) in call centers. Our group companies fully recognizes the importance and the risks associated with handling personal information, and we enforce thorough control of personal information, disclosing our privacy policy on our group companies home page, and at the same time enacting action guidelines and internal rules, and providing related education and training.
However, if in the process of collecting information a leak of confidential information or other such trouble were to occur due to unforeseen circumstances within our group of companies, there is a potential for consequences including a large claim for damages against our group companies, the revocation of our group companies privacy mark by an administrative agency or the imposition of a fine, and there could also be a significant impact on our group companies business activities.
Through the above mentioned education and training, our group companies is taking various steps such as enhancement of our group companies security control system and implementation of physical security measures, but we recognize that it is not possible to completely eliminate this type of risk.

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