As filed with the Securities and Exchange Commission on April 10, 2013
Registration No. 333-184691
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Amendment No. 3 to
FORM F-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
KABUSHIKI KAISHA UBIC
(Exact name of registrant as specified in its charter)
UBIC, INC.
(Translation of registrant's name into English)
Japan
(State or other jurisdiction of Incorporation or organization) |
7374
(Primary Standard Industrial Classification Code Number) |
Not Applicable
(IRS Employer Identification Number) |
Meisan Takahama Building
2-12-23, Kounan
Minato-ku, Tokyo 108-0075
Japan
+81 (0) 3-5463-6344
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
Naritomo Ikeue, President
UBIC North America, Inc.
3 Lagoon Drive, Suite 180
Redwood City, CA 94065
(650) 654-7664
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
Copies to:
Michael S. Turner, Esq.
DLA Piper LLP (US) 33 Arch Street, 26th Floor Boston, MA 02110 Tel: (617) 406-6014 Fax: (617) 406-6114 |
Jack I. Kantrowitz, Esq.
DLA Piper LLP (US) 1251 Avenue of the Americas New York, NY 10020 Tel: (212) 335-4845 Fax: (212) 884-8645 |
Yvan-Claude J. Pierre, Esq.
William N. Haddad, Esq. Reed Smith LLP 599 Lexington Avenue New York, NY 10022 Tel: (212) 521-5400 Fax: (212) 521-5450 |
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the Registration Statement has been declared effective.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: o
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall hereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to Section 8(a), may determine.
The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
Subject to Completion, Dated April 10, 2013
PROSPECTUS
UBIC, Inc.
2,400,000 American Depositary Shares
Representing 480,000 Shares of Common Stock
This is the initial public offering of American Depositary Shares, or ADSs, representing our common stock. Each five ADSs represents one share of our common stock, deposited with The Bank of New York Mellon, as depositary. The ADSs may be evidenced by American Depositary Receipts, or ADRs.
Prior to this offering, there has been no public market for the ADSs. We expect that the initial public offering price of the ADSs will be between $7.50 and $9.50 per ADS. We have applied for the listing of the ADSs on the Nasdaq Global Market under the symbol "UBIC."
Our common stock currently is listed on the Mothers Marketplace of the Tokyo Stock Exchange under stock code number 2158. On April 9, 2013, the last reported sale price of our common stock on the Tokyo Stock Exchange was ¥4,110 per share (which was equivalent to $8.49 per ADS based on the exchange rate on such date).
We are an "emerging growth company" as that term is used in the Jumpstart Our Business Startups Act of 2012 and, as such, have elected to comply with certain reduced public company reporting requirements for future filings.
Investing in the ADSs involves risks. See the section entitled "Risk Factors" beginning on page 12 for a description of various risks you should consider in evaluating an investment in the ADSs.
|
Per
ADS |
Total | |||||
---|---|---|---|---|---|---|---|
Initial public offering price |
$ | $ | |||||
Underwriting discount(1) |
$ | $ | |||||
Proceeds, before expenses, to us |
$ | $ |
We have granted the underwriters an option to purchase up to an additional 360,000 ADSs at the initial public offering price, less the underwriting discount, within 45 days from the date of this prospectus to cover overallotments, if any.
We have also agreed to issue to the underwriters warrants to purchase up to an aggregate of 4% of the ADSs sold in this offering. The warrants will have an exercise price equal to 120% of the public offering price of the ADSs sold in this offering.
Neither the United States Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful and complete. Any representation to the contrary is a criminal offense.
The underwriters expect to deliver the ADSs to purchasers on or about , 2013.
Maxim Group LLC |
The Benchmark Company
|
The date of this prospectus is , 2013
TABLE OF CONTENTS
You should rely only on the information contained in this prospectus. Neither we nor the underwriters have authorized anyone to provide you with information different from that contained in this prospectus. We and the underwriters are offering to sell ADSs and seeking offers to buy ADSs only in jurisdictions where such offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of ADSs.
i
The following summary highlights information contained in this prospectus and should be read in conjunction with the more detailed information contained in this prospectus and the consolidated financial statements and related notes appearing elsewhere in this prospectus. Before you decide to invest in the ADSs, you should read the entire prospectus carefully, including the sections entitled "Risk Factors" and "Management's Discussion and Analysis of Financial Position and Results of Operations" and our audited and unaudited financial statements and the related notes included elsewhere in this prospectus.
For convenience, certain amounts in Japanese yen have been converted to United States dollars at the daily exchange rate announced by the Federal Reserve Bank of New York on December 31, 2012, which was $1.00 = ¥86.64. For other information, see "Conventions Applicable to This Prospectus."
Unless the context requires otherwise or we specifically indicate otherwise, the information in this prospectus assumes that the underwriters do not exercise their over-allotment option. Unless otherwise indicated, all share and per share numbers in the prospectus have been retroactively adjusted to reflect a two-for-one stock split of our common stock effected on October 1, 2011 and a two-for-one stock split effected on April 1, 2012, as if both such stock splits had occurred on April 1, 2009.
Company Overview
We are a leading provider of Asian-language eDiscovery solutions and services. We have extensive eDiscovery and forensic experience and expertise with information documented in Japanese, Korean, Chinese as well as English, and we apply this expertise in connection with litigations, administrative proceedings and investigations. Our clients include leading law firms, corporate legal departments and government agencies. We serve these clients from our offices in Japan, the United States, South Korea, Taiwan and Hong Kong.
We assist clients involved in cross-border litigation, administrative proceedings and internal investigations, including those related to antitrust investigations, intellectual property (IP) litigation, the Foreign Corrupt Practices Act (FCPA) and product liability (PL) investigations. The particular matters in which we are engaged by clients typically involve Asian language information. A particular challenge of eDiscovery involving Asian-language information is the accurate electronic recognition of Japanese, Korean and Chinese characters and the organization of the collected information in a format that can be effectively and efficiently reviewed and identified as relevant to the particular investigation. For example, when most conventional eDiscovery technologies are applied to Asian language content, the result is garbled text or otherwise inaccurate outputs. However, we believe our proprietary Lit i View eDiscovery solution accurately handles Asian-language characters, encoding schemes and native file systems. Lit i View also streamlines and consolidates our and our clients' workflows. Our recently launched Legal Cloud hosting solution complements and integrates with Lit i View and helps to address the substantial complexity and cost associated with these international investigations and litigations. Because of the flexible, comprehensive and integrated nature of our solutions, we can address the entire electronic discovery reference model (EDRM) life-cycle in connection with these matters, which we believe enables us to optimize outcomes and provide significant cost savings to our clients.
We have assisted clients in more than 250 administrative and legal proceedings in the United States, including Department of Justice (DOJ), International Trade Commission (ITC) and Securities and Exchange Commission (SEC) investigations, and more than 500 corporate investigations in Japan, South Korea, China and Singapore.
We achieved strong and significantly improved financial results in the three years ended March 31, 2012, with total revenue increasing to ¥5,136.2 million (or $59.3 million) in the year ended March 31,
1
2012, compared with ¥2,686.1 million (or $31.0 million) in the year ended March 31, 2011, and ¥1,098.2 million (or $12.7 million) in the year ended March 31, 2010. Over the same period, we also achieved increased profitability, with net income increasing to ¥1,370.6 million (or $15.8 million) in the year ended March 31, 2012, compared with ¥787.8 million (or $9.1 million) in the year ended March 31, 2011, and a loss of ¥418.3 million (or $4.8 million) in the year ended March 31, 2010.
However, in the nine months ended December 31, 2012, our total revenue, operating income and net income declined significantly compared to the nine months ended December 31, 2011. In the nine months ended December 31, 2012, our total revenue was ¥3,542.3 million ($40.9 million) compared with ¥3,784.0 million in the nine months ended December 31, 2011, our operating income was ¥851.5 million ($9.8 million) compared with ¥1,894.5 million in the same period in the previous year and our net income was ¥536.0 million ($6.2 million) compared with ¥1,054.7 million in the same period in the previous year. Our revenue decline was due essentially to a decrease in revenue from the manual review services of our core eDiscovery business, partly offset by an increase in other services of our eDiscovery business, including data collection, process/analysis, production, data hosting, and forensic services. Revenue from the non-manual review services of our core eDiscovery business increased ¥887.4 million ($10.2 million), or 51.7%, to ¥2,604.1 million ($30.1 million) in the nine months ended December 31, 2012 from ¥1,716.7 million in the comparable period in the previous year, while revenue from our manual review services revenue declined by ¥1,190.8, or 62.7%, to ¥707.0 million ($8.2 million) in the nine months ended December 31, 2012 from ¥1,897.8 million in the same period in the previous year. We believe that the cause of this decrease in revenue from manual review services was the determination by certain of our Asian law firm clients to perform manual review (and to bring related revenue) "in-house," while continuing to utilize our other eDiscovery services. Our operating income decreased by 55.1% to ¥851.5 million ($9.8 million) in the nine months ended December 31, 2012 from ¥1,894.5 million in the nine months ended December 31, 2011, due mainly to this decrease in our total revenue, combined with a significant increase in depreciation and amortization expenses due to an increase in our capitalized technology investment and in selling, general and administrative expenses, as we aggressively invested to build our core infrastructure and manpower to support future growth. This increase in selling, general and administrative expenses is part of our efforts to expand our capabilities and infrastructure to match the rapid growth of our business, especially over the last three years. Our investment focused on advancing our technology, global operating capability and capacity, and overall infrastructure to be ready for further expansion of our business in each market we serve.
Industry Overview
eDiscovery solutions enable organizations to identify, preserve, collect, process, review, analyze and produce data in order to meet compliance, records management and/or legal discovery requirements. Data is collected from numerous sources that include email, text-based files, images, databases, audio files, web sites, computer applications and other corporate repositories, as well as smartphones, tablets, thumb storage drives and personal computers. The growth of data among businesses has continued to rise at an extraordinary rate. According to an IDC Digital Universe Survey in 2011, the amount of digital information created, captured or replicated worldwide every year will grow from 1.8 trillion gigabytes in 2011 to 7.9 trillion gigabytes in 2015, a compound annual growth rate (CAGR) of 45%. While email remains the primary application driving eDiscovery growth, we believe there is also dramatic growth being driven by content from Microsoft SharePoint, social media services, instant messaging (IM) and SMS text messaging.
eDiscovery is fundamentally different from paper-based evidence discovery primarily because of the much higher volume of electronic information produced and maintained by businesses and other organizations. For example, enterprise information stored in one personal computer is equivalent to an estimated four to six thousand boxes of printed material. Because of the sheer volume of information
2
that must be analyzed in investigations or other legal matters, it is extremely challenging to investigate archives of electronic information manually. Accordingly, in order to achieve success in a lawsuit and avoid sanctions, we believe that attorneys must employ an automated process to analyze this trove of information, identifying and producing only information relevant to the matter. Providing only relevant documents is a very important consideration for organizations, which generally prefer to keep confidential those documents and other materials they are not legally required to produce.
We believe, based upon research analysts' reports, that total eDiscovery revenue relating to U.S. lawsuits was $3.3 billion in 2009, and will grow to an estimated $5.7 billion in 2013, or a CAGR of approximately 14.6%. The Gartner, Inc. 2012 Magic Quadrant for E-Discovery Software report estimates that the world's enterprise eDiscovery software market (excluding value added services) was $1.0 billion in 2010, and will grow at a CAGR of approximately 16% through 2015. In addition to these software revenues, Gartner also estimates that by 2013, value added services represented by software-as-a-service (SaaS) and business process utilities will account for 75% of the total eDiscovery revenue derived from the processing, review, analysis and production of electronically stored information (ESI).
UBIC's Competitive Advantages
We have designed our products and services to provide comprehensive solutions to meet the challenges of managing eDiscovery and electronic data forensic investigations. The principal ways in which our solutions address these challenges include:
3
documents. These proprietary algorithms are designed to bring our "recall rate" (the accuracy rate of identifying information relevant to a particular TAR) to 90% or better, which results in noticeable improvements in the efficiency of our review work as a whole, and significant savings in time and expense for our clients.
Our Growth Strategy
Our objective is to enhance our position as a leading provider of eDiscovery and electronic data forensics solutions and services in Asia, as well as significantly increase our provision of these solutions and services in the United States, which we believe is the world's largest and most advanced market for these services. Key elements of our strategy include:
Expand our presence and direct sales in the United States
Our most important corporate priority is to continue to expand our business in the United States. We plan to continue to increase our sales, marketing and business development efforts in the United States in order to enhance awareness of our litigation and eDiscovery solutions, not only for our
4
current target market of Asian companies operating in the United States, but also for U.S. companies with Asian subsidiaries and operations. To the extent these sales and marketing efforts are successful, we believe they may have a positive impact on our manual review-related revenues.
In 2007, we opened our first office in the United States in Silicon Valley. In 2011 and 2012, respectively, we opened offices in Reston, Virginia to serve the Washington DC area, and New York City, which we view as two of the most important legal markets in the United States. From our United States offices, our most senior executives and sales personnel, including our Executive Vice-President, Chief Operating Officer and Director, Naritomo Ikeue, are executing on this important corporate priority of expanding our United States business.
Broaden and develop strategic relationships
We plan to continue to expand our existing relationships and develop new relationships with United States and international law firms, litigation consultants and other providers of eDiscovery and electronic data forensics solutions and services that would benefit from our leading technology solutions for Asian-language eDiscovery. We believe that these types of strategic relationships will allow us to expand our reach with global enterprises, especially those based in the United States, and improve our insight into emerging industry trends. We plan to materially increase our marketing efforts with and to these prospective strategic partners.
Extend our technology leadership and solution management services
While we believe that Lit i View is the leading solution for Asian-language eDiscovery, we plan to continue to enhance our solution. Traditionally, eDiscovery has been problematic and expensive because labor-intensive manual review of the large volume of materials gathered by electronic means has proven to be costly. Nevertheless, providers of eDiscovery solutions, including ourselves, had to rely on human labor, as there was no alternative. Our TAR technology combines the concepts and techniques of predictive coding with unique algorithms to provide an eDiscovery solution that significantly reduces review-cycle time and cost without sacrificing accurate results. With our TAR technology, we believe we are in a leading position regarding the use of technology in providing the right solutions for the eDiscovery market's needs. We plan to enhance our existing solutions and introduce and improve our solutions and services to address emerging trends and regulatory requirements, and target new market opportunities. We have made and will continue to make investments in technology to introduce new versions of our solutions that incorporate innovative features, improved functionality and address unique business requirements. We also plan to continue to create, refine and deliver innovative service offerings that provide faster deployment of our solutions and services, and more accurate and complete results, and thus add more value to our clients. We believe our Lit i View and Legal Cloud solutions are examples of our technology innovation.
Expand to new geographies
Given the success of our expansion beyond Japan to the United States, Hong Kong, South Korea and Taiwan, we plan to expand our sales and marketing efforts to other geographies, including the European Union and China. Global business expansion has increased the incidence of investigations and lawsuits related to such matters as antitrust, intellectual property infringement and other data intensive matters. We believe that, while most countries do not have the same eDiscovery mandates as the United States, enterprises in the European Union, China and other geographies operate in a way that can expose them to the reach of United States' lawsuits and the scrutiny of antitrust authorities of the United States and the European Union. In particular, the competition and antitrust departments of the European Union have become increasingly active and are demanding access to a broader range of documents as part of their investigations.
5
Pursue strategic acquisitions
We may pursue acquisitions that we believe will provide solutions and/or technologies that are complementary to our current offerings or accelerate our international expansion. We continually seek to enhance and expand the functionality of our solutions and in the future we may pursue acquisitions that will enable us to offer more comprehensive functionality to clients. We currently have no plans, proposals or arrangements with respect to any acquisition.
Corporate History and Structure
We were formed in 2003 and initially focused on importing and selling computer forensics tools within Japan, including to domestic clients such as the National Police Agency and Japan's Ministry of Defense. We entered the eDiscovery and electronic data forensic investigations markets in 2005 by leveraging the skills we had developed and refined through the application of our computer forensic tools. In 2007, we listed shares of UBIC, Inc. on the Mothers Marketplace of the Tokyo Stock Exchange (TSE), which is the primary market for high-growth and emerging technology companies on the TSE. In that year, we established UBIC North America, Inc. with offices in Silicon Valley. In 2009, we opened our office in Seoul, South Korea and opened an office in Hong Kong. In 2010, we established Payment Card Forensics, Inc., as our subsidiary in Japan, in which we have a 60% ownership interest. In 2011, we established UBIC Risk Consulting, Inc., as our subsidiary in Japan, in which we have an 80% ownership interest. In 2011, we opened our office in Reston, Virginia, and also established UBIC Korea, Inc. and UBIC Taiwan, Inc. with offices in Seoul, South Korea and Taipei City, Taiwan, respectively. In 2012, we established UBIC Patent Partners, Inc., as our subsidiary in Japan, in which we have a 100% ownership interest. In 2012, we opened our newest office in New York City.
6
The following chart shows our current corporate structure:
Corporate Information
Our executive offices are located at Meisan Takahama Building, 2-12-23, Kounan, Minato-ku, Tokyo, Japan and our telephone number is: +81 (0) 3-5463-6344. Our corporate website is www.ubic.co.jp. Information contained on or accessed through our website is not intended to constitute and shall not be deemed to constitute part of this prospectus. Investor inquiries shall be directed to us at the address and telephone number of our principal office set forth above.
7
ADSs we are offering |
2,400,000 ADSs | |
ADSs outstanding immediately after this offering |
2,400,000 ADSs (or 2,760,000 ADSs if the over-allotment option is exercised in full) |
|
Shares of common stock outstanding immediately after this offering |
3,673,136 shares (or 3,745,136 shares if the over-allotment option is exercised in full) |
|
The ADSs |
Each five ADSs represents one share of our common stock. The ADSs may be evidenced by ADRs. The depositary will be the registered holder of the common stock underlying your ADSs. You will have the rights as provided in the deposit agreement. In the event that we declare dividends on our shares, the depositary will pay you the cash dividends and other distributions it receives on the deposited common stock, after converting the amounts it receives in yen into U.S. dollars and deducting its fees and expenses. We or the depositary may amend or terminate the deposit agreement without your consent. If you continue to hold your ADSs, you agree to be bound by the deposit agreement as amended. |
|
|
To better understand the terms of the ADSs, you should carefully read the "Description of American Depositary Shares" section of this prospectus. You should also read the deposit agreement, which is filed as an exhibit to the registration statement that includes this prospectus. |
|
Use of proceeds |
We estimate that the net proceeds to us from this offering will be approximately $15.3 million, based on an assumed offering price of $8.50 per ADS, the mid-point of the expected range and after deducting the underwriting discounts and estimated offering expenses payable by us. Of the estimated offering expenses, we have already paid approximately $2.5 million, and therefore we will have approximately $2.5 million of additional net proceeds from this offering available to us. We intend to apply a significant portion of these net proceeds to us to various technology-related activities, including for continued development of our predictive coding-based tools for TAR. In addition, we intend to use a portion of the net proceeds to pay down outstanding long-term borrowings. The remaining net proceeds will be used for general corporate purposes. See "Use of Proceeds" on page 28. |
|
Proposed Nasdaq Global Market symbol |
We have applied to list the ADSs on the Nasdaq Global Market under the symbol "UBIC." |
8
Lock-up |
We and our executive officers, directors and statutory auditors have agreed with the underwriters not to dispose of or hedge any ADSs or shares of our capital stock or securities convertible into or exchangeable for ADSs or shares of our capital stock during the period from the date of this prospectus continuing through the date 180 days after the date of this prospectus, in each case, except with the prior written consent of Maxim Group LLC and The Benchmark Company, LLC or in other limited circumstances. See "Underwriting" on page 123. |
|
Depositary |
The Bank of New York Mellon |
|
Custodian |
The Bank of Tokyo-Mitsubishi UFJ, Ltd. |
|
Option to purchase additional ADSs |
We have granted to the underwriters an option, which is exercisable within 45 days from the date of this prospectus, to purchase up to an additional 360,000 ADSs to cover over-allotments. |
|
Timing and settlement for ADSs |
The ADSs are expected to be delivered against payment on , 2013. The ADRs evidencing the ADSs may be deposited with a custodian for, and registered in the name of a nominee of, The Depository Trust company, or DTC, in New York, New York. In such case, DTC, and its direct and indirect participants, will maintain records that will show the beneficial interests in the ADSs and facilitate any transfer of the beneficial interests. |
|
Risk factors |
Investing in the ADSs involves a high degree of risk. Please see the section entitled "Risk Factors" starting on page 12 of this prospectus to read about risks that you should consider carefully before buying shares of the ADSs. |
Unless otherwise indicated, the number of shares of our common stock to be outstanding after this offering is based on 3,193,136 shares outstanding as of April 5, 2013 and excludes:
Unless otherwise indicated, the share information and other financial data in this prospectus is as of December 31, 2012 and reflects or assumes:
9
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The following tables present our summary consolidated financial information for the periods indicated and should be read in conjunction with the information contained in "Selected Consolidated Financial Information," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our audited and unaudited financial statements and related notes appearing elsewhere in this prospectus. Historical operating information may not be indicative of our future performance. The consolidated financial statements are reported in Japanese yen and have been prepared in accordance with United States generally accepted accounting principles ("U.S. GAAP"). The consolidated financial statements as of and for the years ended March 31, 2010, 2011, and 2012 have been audited by Ernst & Young ShinNihon LLC, an independent registered public accounting firm.
|
For the year ended March 31, |
For the nine months
ended December 31, (unaudited) |
||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2011 | 2012 | 2012 | 2011 | 2012 | 2012 | |||||||||||||||
|
(thousands of yen except per share data)
|
(thousands of
dollars except per share data) |
(thousands of yen
except per share data) |
(thousands of
dollars except per share data) |
||||||||||||||||||
Revenue |
¥ | 1,013,490 | ¥ | 2,635,430 | ¥ | 5,095,939 | $ | 58,817 | ¥ | 3,754,013 | ¥ | 3,516,633 | $ | 40,589 | ||||||||
Revenue from a related party |
80,072 | 40,764 | 27,862 | 322 | 22,002 | 14,783 | 171 | |||||||||||||||
Operating revenue from reimbursed direct costs |
4,605 | 9,899 | 12,427 | 143 | 7,943 | 10,921 | 126 | |||||||||||||||
Total revenue |
1,098,167 | 2,686,093 | 5,136,228 | 59,282 | 3,783,958 | 3,542,337 | 40,886 | |||||||||||||||
Cost of revenue |
703,010 | 966,352 | 1,600,425 | 18,472 | 1,205,360 | 1,314,078 | 15,167 | |||||||||||||||
Reimbursed direct costs |
4,605 | 9,899 | 12,427 | 143 | 7,943 | 10,921 | 126 | |||||||||||||||
Selling, general and administrative expenses |
574,001 | 669,742 | 1,153,438 | 13,313 | 676,192 | 1,365,845 | 15,765 | |||||||||||||||
Total operating expense |
1,281,616 | 1,645,993 | 2,766,290 | 31,928 | 1,889,495 | 2,690,844 | 31,058 | |||||||||||||||
Operating income (loss) |
(183,449 | ) | 1,040,100 | 2,369,938 | 27,354 | 1,894,463 | 851,493 | 9,828 | ||||||||||||||
Interest income |
3,441 |
3,410 |
2,052 |
24 |
1,638 |
990 |
11 |
|||||||||||||||
Interest expense |
(13,247 | ) | (14,262 | ) | (13,360 | ) | (154 | ) | (8,264 | ) | (14,421 | ) | (166 | ) | ||||||||
Foreign currency exchange gains (losses) |
(14,384 | ) | (39,942 | ) | 10,294 | 119 | (35,590 | ) | 78,971 | 911 | ||||||||||||
Impairment loss on security |
(108,540 | ) | | | | | | | ||||||||||||||
Dividend income |
| | 4,500 | 52 | | 4,500 | 52 | |||||||||||||||
Othernet |
94 | 1,296 | 655 | 8 | 5,211 | (2,027 | ) | (23 | ) | |||||||||||||
Income (loss) before income taxes |
(316,085 | ) | 990,602 | 2,374,079 | 27,403 | 1,857,458 | 919,506 | 10,613 | ||||||||||||||
Income taxes |
102,213 |
202,827 |
1,003,441 |
11,582 |
800,115 |
378,929 |
4,374 |
|||||||||||||||
Net income (loss) |
(418,298 | ) | 787,775 | 1,370,638 | 15,821 | 1,057,343 | 540,577 | 6,239 | ||||||||||||||
Less: Net income (loss) attributable to noncontrolling interests |
|
(933 |
) |
2,951 |
34 |
2,613 |
4,578 |
53 |
||||||||||||||
Net income (loss) attributable to UBIC, Inc. shareholders |
¥ | (418,298 | ) | ¥ | 788,708 | ¥ | 1,367,687 | $ | 15,787 | ¥ | 1,054,730 | ¥ | 535,999 | $ | 6,186 | |||||||
Net income (loss) attributable to UBIC, Inc. shareholders per share(1) |
||||||||||||||||||||||
Basic |
¥ | (182 | ) | ¥ | 334 | ¥ | 515 | $ | 5.94 | ¥ | 401 | ¥ | 170 | $ | 1.97 | |||||||
Diluted |
¥ | (182 | ) | ¥ | 249 | ¥ | 422 | $ | 4.87 | ¥ | 327 | ¥ | 165 | $ | 1.90 | |||||||
Pro forma(2) |
||||||||||||||||||||||
Basic |
¥ | 494 | $ | 5.70 | ¥ | 158 | $ | 1.82 | ||||||||||||||
Diluted |
¥ | 408 | $ | 4.71 | ¥ | 153 | $ | 1.77 |
10
Other operating metrics:
|
As of March 31, | As of December 31, | ||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2011 | 2012 | 2012 | 2011 | 2012 | 2012 | |||||||||||||||
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
|||||||||||||||
Cash dividends declared per common share |
¥ | ¥ | ¥ | 7.5 | $ | 0.09 | ¥ | 7.5 | ¥ | 50.0 | $ | 0.58 |
|
As of March 31, | As of December 31, | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2011 | 2012 | 2012 | 2012 | 2012 | |||||||||||||
|
(thousands of yen)
|
(thousands
of dollars) |
(thousands of
yen) |
(thousands of
dollars) |
|||||||||||||||
|
|
|
|
|
(unaudited) |
||||||||||||||
Consolidated Balance Sheet Data: |
|||||||||||||||||||
Cash and cash equivalents |
¥ | 345,150 | ¥ | 675,212 | ¥ | 2,410,304 | $ | 27,820 | ¥ | 1,301,486 | $ | 15,022 | |||||||
Total current assets |
510,013 | 1,675,941 | 3,643,020 | 42,049 | 2,696,317 | 31,122 | |||||||||||||
Total noncurrent assets |
339,243 | 697,655 | 1,336,656 | 15,426 | 2,058,418 | 23,759 | |||||||||||||
Total assets |
849,256 | 2,373,596 | 4,979,676 | 57,475 | 4,754,735 | 54,881 | |||||||||||||
Total current liabilities |
315,856 | 821,757 | 1,763,575 | 20,356 | 805,557 | 9,297 | |||||||||||||
Working capital |
194,157 | 854,184 | 1,879,445 | 21,693 | 1,890,760 | 21,825 | |||||||||||||
Long-term debt |
255,011 | 323,040 | 400,020 | 4,617 | 481,352 | 5,556 | |||||||||||||
Total noncurrent liabilities |
283,747 | 349,595 | 476,547 | 5,500 | 636,743 | 7,350 | |||||||||||||
Total liabilities |
599,603 | 1,171,352 | 2,240,122 | 25,856 | 1,442,300 | 16,647 | |||||||||||||
Total shareholders' equity |
249,653 | 1,195,177 | 2,727,536 | 31,480 | 3,295,839 | 38,042 | |||||||||||||
Total net assets |
249,653 | 1,202,244 | 2,739,554 | 31,619 | 3,312,435 | 38,234 |
11
An investment in the ADSs involves a high degree of risk. You should consider carefully the specific risk factors described below in addition to the other information contained in this prospectus, including our consolidated financial statements and related notes included elsewhere in the prospectus, before making a decision to invest in the ADSs. If any of these risks actually occurs, our business, financial condition, results of operations or prospects could be materially and adversely affected. This could cause the trading price of the ADSs to decline and a loss of all or part of your investment.
Risks Related to Our Business
We may not be able to achieve our expected revenues, operating income or net income in the future due to several factors involving our business operations, including a continuing decrease in our revenue from our eDiscovery business.
Our expected levels of revenue, operating income or net income may not be achieved due to several other factors, including, but not limited to:
Our business may be adversely affected if our forensics or eDiscovery systems suffer interruptions, errors or delays.
Interruptions, errors or delays with respect to our forensics or eDiscovery systems may be caused by human errors or natural factors, many of which are beyond our control, including, but not limited to, damage from fire, earthquakes or other natural disasters, power loss, sabotage, computer hackers, human error, computer viruses and other similar events. Much of our computer and networking equipment is concentrated in a few locations that are in earthquake-prone areas. Any disruption, outages, or delays or other difficulties experienced by any of our technological and information systems and networks could result in a decrease in new or existing accounts, loss or exposure of confidential information, reduction in revenues and profits, costly repairs or upgrades, reputational damage and decreased consumer and corporate customer confidence in our business, any or all of which could have a material adverse effect on our business, financial condition and results of operations.
We may not achieve our financial targets or maintain our current level of total revenue, operating income or net income if the economy in Japan or other Asian countries deteriorates or does not improve.
Our business is principally conducted in Japan, other Asian countries and the United States and most of our revenues are from clients operating in Asia. If Asian economies deteriorate or do not improve, it may become difficult to maintain our current level of revenue and margins or achieve our expected revenues, operating income or net income.
The powerfully destructive earthquake and tsunami that struck northeastern Japan on March 11, 2011, did not have a material adverse effect on our revenues or income for the fiscal years ended March 31, 2010, 2011 or 2012, or the nine months ended December 31, 2012. However, if a similar
12
environmental catastrophe were to occur or should regions in which our data centers are located experience the disruption of social infrastructure or power shortages and other impacts due to similar causes, our backbone network and service facilities could fail and as a result, we may suffer direct and indirect damages, which may adversely affect our financial condition and results of operations.
If we fail to keep and manage our confidential customer information, or if our technical systems suffer interruption or damage, we could be subject to lawsuits, incur expenses associated with our security systems or suffer damage to our reputation.
We keep and manage confidential information and/or privileged data obtained from our clients. We exercise care in protecting the confidentiality and integrity of such information and take steps to ensure its security. However, we can give no assurance that the steps taken by us in this regard will be adequate to protect our customer' confidential information or privileged data. A disaster could interrupt our services for an indeterminate length of time and severely damage our business, prospects, financial condition and results of operations. Our systems and operations are vulnerable to damage or interruption from fire, floods, network failure, hardware failure, software failure, power loss, telecommunication failures, computer viruses, denial of service attacks, penetration of our network by unauthorized computer users and "hackers" and other similar events, and other unanticipated problems. In addition, despite internal controls, misconduct by an employee could result in the improper use or disclosure of confidential information.
Any of the disruptions or events listed above could cause material interruptions or delays in our business, resulting in the loss of data or rendering us unable to provide services to our consumers. In addition, if anyone can circumvent our security measures, he or she could destroy or misappropriate valuable information or disrupt our operations. Although we have taken measures that we consider to be prudent and adequate to protect against these events, we may not have developed or implemented adequate protections or safeguards to overcome the damage they may cause. We also may not have anticipated or addressed many of the potential events that could threaten or undermine our data systems. If any material leak of customer information were to occur, we could be subject to lawsuits for damages from our clients, incur expenses associated with repairing or upgrading our security systems and suffer damages to our reputation that could result in a material decline in new clients as well as an increase in service cancellations. The realization of these or similar risks may have a material adverse effect on our business, financial condition and result of operations.
If we fail to effectively manage our growth, our business, financial condition, results of operations and business prospects may be materially adversely affected.
We have limited operational, administrative and financial resources, which may be inadequate to sustain our rapid growth and planned expansion. If our customer base continues to expand, we will need to increase our investments in our technology platform, facilities and other areas of operations, including customer service and sales and marketing. Our future success will depend on, among other things, our ability to effectively maintain our relationships with our key clients, to continue training, motivating and retaining our key employees and attract and integrate new employees, and to maintain adequate controls and procedures to ensure that our periodic public disclosure under applicable laws, including U.S. and Japanese securities laws, is complete and accurate.
We have experienced a period of rapid growth and expansion that has placed, and continues to place, significant strain on our management personnel, systems and resources. To accommodate our current and planned growth we anticipate that we will need to implement a variety of new and upgraded operational and financial systems, procedures and controls, including the improvement of our accounting and other internal management systems, all of which require substantial commitment of financial and management resources. We also will need to continue to expand, train, manage and motivate our workforce, and manage our relationships with clients. These efforts require substantial management efforts and skills and may incur additional expenditures.
13
If we fail to keep up with the rapid technological changes in our industry, our services may become obsolete and we may lose clients.
Our markets are characterized by:
Although we believe that the most recent version of Lit i View (version 6, released in January 2013), which features improvements in predictive coding and, therefore, the speed and accuracy of our primary eDiscovery software, is a significant stride forward, not only compared to the previous version of Lit i View but also compared with Asian language products of our competitors, if we fail to obtain access to new or important technologies or to develop and introduce new services and enhancements that are compatible with changing industry technologies and standards and customer requirements, we may lose clients.
Our pursuit of necessary technological advances will require consistent commitment, substantial time and expense. Some of our competitors have greater financial and other resources than we do and, therefore, may be better able to meet the time and expense demands of achieving technological advances. This may allow our competitors to respond more quickly to new and emerging technologies and standards or invest more heavily in upgrading or replacing equipment to take advantage of new technologies and standards.
We face significant competition and may be unable to compete successfully against our competitors, which would have a material adverse effect on our business and results of operations.
Our primary competitors are companies with long established eDiscovery operations, which have significant, and often multi-faceted, operations with law firms and companies operating internationally. Many of these competitors have significantly greater financial resources, longer operating histories and more experience in attracting and retaining clients and managing relationships with the law firms and companies that constitute our target clients than we do. They may compete with us for clients in a variety of ways, including, without limitation, with respect to price and their more extensive eDiscovery experience. If any of our competitors provide or develop comparable or superior computer forensic or eDiscovery services, the results would have a material adverse effect on our results of operations.
We depend on our key personnel for the success of our business, and losing their services would severely disrupt our business.
Our future success is heavily dependent upon the continued service of our key executives, including Masahiro Morimoto, our founder, Chairman and Chief Executive Officer, and Naritomo Ikeue, our Executive Vice-President and Chief Operating Officer, among others. If we lose the services of senior members of our management or other key employees, we may not be able to locate suitable or qualified replacements, and may incur additional expenses to recruit and train new personnel, which could severely disrupt our business and growth. In addition, if any of these key executives or employees joins a competitor or forms a competing company, we could lose clients and incur additional expenses to recruit and train personnel. Each of our executive officers has entered into an employment agreement with us. We do not maintain key-man life insurance for any of our key executives. Competition for qualified individuals could cause us to offer higher compensation and other benefits to attract and retain them, which could materially and adversely affect our financial condition and results of operations. We previously awarded share-based compensation in the form of options to certain members of our senior management and key employees, all of which either have been exercised or are not yet exercisable. Such retention awards may cease to be effective to retain our current employees.
14
We will require additional human resources and will incur increased costs and administrative workload as a result of being a U.S. public company.
After the completion of this offering, as a public company in the United States we will be subject to a number of regulatory requirements, including the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and the regulations promulgated thereunder, and the listing standards of the Nasdaq. We are first required to comply with Section 404 when filing our annual report on Form 20-F for the fiscal year ending March 31, 2014, although, as an emerging growth company, as defined in Section 2(a) of the Securities Act, we may decide to take advantage of the exemption provided by the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, which, assuming we continue to be an emerging growth company, would allow us to delay complying with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 until we are required to file our annual report on Form 20-F for the fiscal year following the fifth anniversary of our public offering. Even though, as a foreign private issuer, some of these requirements may be more relaxed than they would be if we were a U.S. corporation, we will incur significant legal, accounting and other expenses that we did not incur prior to becoming a public company in the United States. We expect that these rules and regulations will increase our legal, accounting and financial compliance costs and will make certain corporate activities more time-consuming and costly.
The Exchange Act requires, among other things, that we file or furnish annual and current reports with respect to our business and financial condition and we will need to continue to produce financial statements on a consolidated basis in U.S. GAAP, in addition to our Japanese GAAP statutory financial statements, on a timely basis. Prior to this offering, we have not been required to comply with these regulatory obligations and we have not put in place accounting and disclosure staffing and systems that are designed to meet our obligations under the regulatory framework for U.S. reporting companies listed on the Nasdaq. Because we do not have sufficient U.S. GAAP expertise at the Company, we have employed external consultants on a temporary basis to assist us to prepare the consolidated U.S. GAAP financial statements included elsewhere in this prospectus.
Once we are a public company listed on Nasdaq, we will need to acquire the internal resources or continue to utilize these outside consulting resources in order to meet both of these financial reporting requirements going forward, either of which would require significant expenditures. If we cannot employ sufficient personnel to ensure compliance with these rules and regulations, we may need to rely more on outside legal, accounting and financial experts, which may be costly. In addition, we will incur additional costs associated with our public company reporting requirements. We cannot predict or estimate additional costs that we may incur or the timing of such costs. If we fail to comply with these rules and requirements, or are perceived to have weaknesses with respect to our compliance, we could become the subject of a governmental enforcement action and investor confidence could be negatively impacted.
If we fail to maintain an effective system of disclosure controls and procedures and internal controls over financial reporting, we may not be able to accurately report our financial results or prevent fraud.
Ensuring that we have adequate disclosure controls and procedures, including internal controls over financial reporting, in place so that we can produce accurate financial statements on a timely basis is costly, time-consuming and needs to be re-evaluated frequently. We are in the process of documenting, reviewing and, if appropriate, improving our internal controls and procedures in anticipation of being a public company and eventually being subject to the requirements of Section 404 of the Sarbanes-Oxley Act, which will require annual management assessments of the effectiveness of our internal controls over financial reporting and, when we cease to be an emerging growth company under the JOBS Act, a report by our independent auditors addressing these assessments. We will be required to comply with the internal controls evaluation and certification requirements of Section 404 of the Sarbanes-Oxley Act. Our management may conclude that our internal controls over financial
15
reporting are not effective due to our failure to cure any identified material weakness or otherwise. Moreover, even if our management concludes that our internal controls over financial reporting are effective, our independent registered public accounting firm may not conclude that our internal controls over financial reporting are effective, it may not be satisfied with our internal controls over financial reporting or the level at which our controls are documented, designed, operated or reviewed, or it may interpret the relevant requirements differently from us. As a result, such firm may decline to attest to the effectiveness of our internal controls over financial reporting or may issue a qualified report. In addition, during the course of the evaluation, documentation and testing of our internal controls over financial reporting, we may identify deficiencies that we may not be able to remediate in time to meet the deadline imposed by the SEC for compliance with the requirements of Section 404. If we fail to achieve and maintain the adequacy of our internal controls over financial reporting, as these standards are modified, supplemented or amended from time to time, we may be unable to report our financial information on a timely basis, we may not be able to conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with the Sarbanes-Oxley Act and we may suffer adverse regulatory consequences or violations of Nasdaq listing standards. There could also be a negative reaction in the financial markets due to a loss of investor confidence in us a reliability of our financial statements.
In connection with the preparation of our U.S. GAAP financial statements, if we are unable to remediate a material weakness in our internal control over financial reporting identified by our management, we may be unable to comply with Nasdaq listing requirements.
During the preparation of our U.S. GAAP financial statements in connection with filing the registration statement of which this prospectus forms a part, our management considered our internal controls and determined that our accounting and disclosure staffing and system for preparing financial statements under U.S. GAAP were deficient in the design and operating effectiveness of our internal controls. Our management has also observed that our practice of relying on external resources for preparing U.S. GAAP financial statements has left us with deficient internal policies and procedures upon which to rely in our preparation of such U.S. GAAP financial statements.
Our management has been and will continue to be required to devote a substantial amount of time to review and implement remediation of this material weakness. Under auditing standards established by the U.S. Public Company Accounting Oversight Board, a material weakness is a deficiency or combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected and corrected on a timely basis.
Since reaching that conclusion, we have taken a number of actions to remediate the material weakness and strengthen the capability of our finance organization, such as the hiring of additional employees for our internal management and accounting staff who possess U.S. GAAP accounting experience, including a new chief financial officer, a corporate financial planning and analysis executive, a sales division controller and a UBIC Korea financial controller. Two of these individuals have earned certified public accountant certification in the United States. In addition, we have assessed and implemented various measures to improve our financial policies and internal controls. During the course of each closing of the three quarters for which we have prepared U.S. GAAP financial statements, we reviewed our closing process, accounting practices, related internal controls and other issues to enhance each area. We also instituted internal training for our financial staff provided by an instructor who has over 30 years of public accounting experience for multinational companies and university-level teaching experience.
Based upon the current remediation plan and the steps that we have taken to address the material weakness, in addition to the basic internal control structure and capability that we had as a Japanese public company since June 2007, our management believes that sufficient enhancements to our internal controls will be in place to remediate the material weakness as of our fiscal year end of March 31,
16
2013. We cannot provide any assurance that the steps we have taken have materially remediated the material weakness identified by our management or there will not be other material weaknesses that we identify in the future. If we identify such issues or if we are unable to prepare accurate and timely U.S. GAAP financial statements, our stock price may be adversely affected and we may be unable to maintain compliance with listing requirements of Nasdaq.
Undetected programming errors could harm our reputation or decrease market acceptance of our computer forensics and eDiscovery services, which would materially and adversely affect our results of operations.
Our software solutions are complex and may contain defects, errors or bugs when first introduced to the market or to a particular client, or as new versions are released. Because we cannot test for all possible scenarios, our solutions may contain errors which are not discovered until after they have been installed, and we may not be able to timely correct these problems. These defects, errors or bugs could interrupt or delay completion of projects or sales to our clients. In addition, our reputation may be damaged and we may fail to acquire new projects from existing clients or new clients. We generally have been able to resolve such flaws and errors. However, we cannot assure you that we will be able to detect and resolve all these programming flaws and errors in a timely manner. Undetected programming errors, defects and resulting unsatisfactory customer service to clients can disrupt our operations, adversely affect the client experience, harm our reputation, or cause our clients to reduce their use of our services, any of which could materially and adversely affect our results of operations.
Our failure to protect our intellectual property rights may undermine our competitive position, and subject us to costly litigation to protect our intellectual property rights.
We regard a substantial portion of our software solutions and systems as proprietary and rely on statutory copyright, trademark, patent, trade secret laws, client license agreements, employee and third-party non-disclosure agreements and other methods to protect our proprietary rights. Nevertheless, these resources afford only limited protection and the actions we take to protect our intellectual property rights may not be adequate. We cannot assure you that we have secured, or will be able to secure, appropriate protections for all of our proprietary rights. In particular, third parties may infringe or misappropriate our proprietary technologies or other intellectual property rights, which could have a material adverse effect on our business, financial condition and results of operations. In addition, litigation may be necessary to enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of the proprietary rights of others. The outcome of any such litigation may not be in our favor. Furthermore, any such litigation may be costly and may divert management attention as well as our other resources away from our business. An adverse determination in any such litigation will impair our intellectual property rights and may harm our business, prospects and reputation. The occurrence of any of the foregoing could have a material adverse effect on our business, financial condition and results of operations.
We may be subject to infringement, misappropriation and indemnity claims in the future, which may cause us to incur significant expenses, pay substantial damages and be prevented from providing our services or technologies.
Our success depends, in part, on our ability to carry out our business without infringing the intellectual property rights of third parties. Patent and copyright law covering software-related technologies is evolving rapidly and is subject to a great deal of uncertainty. Some third party intellectual property rights may be extremely broad and it may not be possible for us to conduct our operations in such a way so as to avoid infringement of those intellectual property rights. Our proprietary or licensed technologies, processes or methods may be covered by third-party patents or copyrights, either now existing or to be issued in the future. Third parties may raise claims against us alleging infringement or violation of their intellectual property and any such litigation may cause us to incur significant expenses. Third-party claims, if successfully asserted against us may cause us to pay
17
substantial damages, seek licenses from third parties, pay ongoing royalties, redesign our services or technologies, or prevent us from providing services or technologies subject to these claims. Even if we were to prevail, any litigation would likely be costly and time-consuming and divert the attention of our management and key personnel from our business operations.
If we are not able to successfully market our services to new and existing clients and to build our brand and achieve market acceptance for our solutions and services, we may not be able to maintain and expand our operations and our results may be adversely affected.
For the year ended March 31, 2011, revenue from Panasonic Corporation, Aisin Seiki, Yazaki Corporation, and TMI Associates represented approximately 22.1 percent, 14.1 percent, 13.9 percent, and 11.6 percent, respectively, of our total revenue. For the year ended March 31, 2012, revenue from Yazaki Corporation, Panasonic Corporation, two clients represented by Quinn Emanuel Urquhart & Sullivan, LLP, and Sanyo Electric Co., Ltd. represented approximately 18.5 percent, 12.2 percent, 11.8 percent, and 11.6 percent, respectively, of our total revenue. While we derive a significant portion of our revenue from a small number of substantial clients, the specific clients change from year to year, and we expect this trend to continue. The vast majority of our revenue is derived from limited scope engagements that do not include long-term commitments.
Our clients and potential clients use eDiscovery and forensic services, for the most part, on an "as needed basis," when a specific legal or administrative proceeding, investigation or other legal challenge requires them to rapidly analyze and produce large amounts of digital information. In the absence of such a demand, a company's demand for our services and solutions tends to be much less extensive. This means that contracts for our services tend to be time and subject specific. The fact that we have sold our solutions to a client in one fiscal year or quarter does not ensure on-going use by that client in any subsequent period, unless a new need for our services arises.
In light of this situation, in order to expand our business, it is imperative for us to continuously market our services and solutions to existing and potential clients and to build market recognition of our capabilities and our brand so that, when companies have a need for eDiscovery and forensic services, we and our solutions are perceived as an attractive alternative. If our marketing and brand building efforts are not successful and we are not able to secure new mandates when existing contracts reach their conclusion, we may have difficulty maintaining and increasing the use of our services and our quarterly and annual results of operations could be materially adversely affected.
Our solutions incorporate and work in conjunction with third-party hardware and software products. If this hardware or software were not available to us at reasonable cost or at all, our results of operations could be adversely impacted.
Although our solutions primarily rely on our own core technologies, some of our solutions incorporate third-party hardware and software products. In addition, our solutions are designed to work in conjunction with the third-party hardware and software in our clients' existing systems. If any third party were to discontinue making their products available to us or our clients on a timely basis, or were to increase materially the cost of their products, or if our solutions failed to properly function or interoperate with replacement hardware or software products, we may need to incur costs in finding replacement products and, if necessary, redesigning our solutions to function with or on replacement third-party products. Replacement products may not be available on terms acceptable to us or at all, and we may be unable to develop alternative solutions or redesign our solutions on a timely basis or at a reasonable cost. If any of these were to occur, our results of operations could be adversely impacted.
18
Future government legislation or changes in court rules could adversely affect our ability to sell our eDiscovery systems.
The delivery of our eDiscovery services is not directly regulated by the U.S. or Japanese governments. Our eDiscovery solutions and the clients we serve are, however, directly or indirectly affected by federal and state laws and regulations and court rules. For example, any amendments to the Federal Rules of Civil Procedure regarding discovery of "electronically stored information" could affect our clients, and indirectly, our ability to productively market and sell our eDiscovery solutions. Future federal or state legislation or court rules, or court interpretations of those laws and rules, could have an adverse impact on our revenues and results of operations.
Our ability to expand our operations and maintain or increase our revenue is dependent on the quality of our offerings of solutions and services, and our failure to perform at a high level and provide high quality service could have a material adverse effect on our results of operations.
Our clients depend upon our customer service and support staff to meet their eDiscovery and forensic analysis needs. High-quality support services are critical for the successful and sale of our services and solutions. If we fail to provide high-quality support on an ongoing basis, our clients may react negatively and our reputation in the marketplace could be materially and adversely affected, which would negatively impact our ability to secure contracts from existing and potential clients. Our failure to maintain high-quality support services could have a material and adverse effect on our business, results of operations and financial condition.
Our principal shareholders, directors and executive officers own a large percentage of our shares and will, following the completion of this offering, have approximately 50% of our aggregate voting power, allowing them to exercise substantial influence over matters subject to shareholder approval.
Following the completion of this offering, assuming no exercise of the underwriters' over-allotment option, our executive officers, directors and principal shareholders holding 5% or more of our outstanding shares and their respective affiliates will beneficially own 50% of our issued and outstanding voting shares. Accordingly, these executive officers, directors and principal shareholders will have substantial influence over the outcome of corporate actions requiring shareholder approval, including the election of directors, any merger, consolidation or sale of all or substantially all of our assets or any other significant corporate transaction, and their interests may not align with the interests of our other shareholders. These shareholders may also delay or prevent a change of control or otherwise discourage a potential acquirer from attempting to obtain control of us, even if such a change of control would benefit our other shareholders. This significant concentration of share ownership may adversely affect the trading price of the ADSs due to investors' perception that conflicts of interest may exist or arise.
If securities or industry analysts publish negative reports or cease to publish reports about our business, the price and trading volume of our securities could decline.
The trading market for the ADSs will depend in part on the research and reports that industry or financial analysts publish about us or our business. If one or more of the analysts covering us downgrade their estimates or evaluation of our common stock, the price of the ADSs could decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the market for the ADSs, which in turn could cause the price of the ADSs or trading volume to decline or adversely affect the liquidity of the market for the ADSs.
19
Certain judgments obtained against us by holders of the ADSs may not be enforceable.
We are a company incorporated under the laws of Japan and our principal offices and assets are located in Tokyo. We conduct only a minority of our business in the United States and most of our assets are located in jurisdictions, including Japan, South Korea and Taiwan, outside the United States. In addition, with one exception, all of our directors and executive officers, and most of the experts named in this prospectus, reside in jurisdictions outside of the United States and substantially all of the assets of these persons are located in those non-U.S. jurisdictions. As a result, it may not be possible to effect service of process within the United States or elsewhere upon these directors, executive officers and experts, including with respect to matters arising under the U.S. federal securities laws or applicable state securities laws. For example, Japan does not have treaties with the United States and many other countries providing for the reciprocal recognition and enforcement of judgments of courts. As a result, it may be difficult or impossible for you to bring an original action against us or against these individuals in a Japanese court in the event that you believe that your rights have been infringed under the U.S. federal securities laws or otherwise.
There is no statutory recognition in Japan of judgments obtained in the United States, although the courts of Japan will in certain circumstances recognize and enforce a civil, final judgment of a foreign court of competent jurisdiction without retrial on the merits. While there is no binding authority on this point, it may be difficult to enforce a civil judgment of a United States court imposing a monetary award based on the civil liability provisions of the U.S. federal securities laws.
Significant movements in foreign currency exchange rates or change in monetary policy may materially harm our financial results.
Our reporting currency is the Japanese yen and our operations in other countries, including the United States, Korea, and Taiwan, use the applicable local currency. We are subject to the effects of exchange rate fluctuations with respect to any of these currencies which, among other factors, may be influenced by government policies and domestic and international economic and political developments.
Any significant change in the value of the currencies of the countries in which we do business against the Japanese yen could have a material adverse effect on our financial condition and results of operations, expressed in Japanese yen.
We recognize foreign currency transaction gains and losses arising from our operations in the period incurred. As a result, currency fluctuations between the Japanese yen and the other currencies in which we do business have caused and will continue to cause foreign currency transaction and translation gains and losses, which historically have sometimes been material and could be material in future periods. We cannot predict the effects of exchange rate fluctuations upon our future operating results because of the number of currencies involved, the variability of currency exposures and the potential volatility of currency exchange rates. We do not take actions to manage our foreign currency exposure, such as entering into hedging transactions.
Risks Associated with this Offering and the ADSs
There is no existing market for the ADSs and an active trading market for the ADSs that would provide you with adequate liquidity may not develop.
Prior to this offering, there was no public market for the ADSs. There can be no guarantee that an active and liquid public market for the ADSs will develop or be sustained after this offering. In addition, although a public market on the TSE for our shares exists in Japan and all of the shares of our common stock outstanding on the date of this prospectus are freely tradable in that market after the completion of this offering, we cannot assure you that any of those shares will be deposited with the depositary in exchange for ADSs that would be freely tradable on Nasdaq. Therefore, the relatively
20
small number of ADSs being sold in this offering may effectively limit their liquidity. If you purchase the ADSs in this offering, you will purchase them at a price that, although reflecting, in part, the price of our common stock on the TSE, was not established in a competitive market. Rather, the ADSs sold in this offering will be sold at a price that we negotiated with the representative of the underwriters and such price may not be indicative of the price at which the ADSs will trade in the market following this offering.
For these reasons, the market price of the ADSs may be volatile and subject to wide fluctuations, and you may not be able to resell at or above the initial public offering price. The market price of the ADSs could be lower than the price you pay in response to a variety of factors, some of which are beyond our control and may not be related to our operating performance. The price of the ADSs may fluctuate as a result of:
In addition, the securities market has experienced significant price and volume fluctuations not related to the operating performance of particular companies. These market fluctuations may also materially adversely affect the market price of the ADSs. In the past, following periods of volatility in the market price of a company's securities, shareholders have often instituted securities class action litigation against that company. Any such class action suit or other securities litigation would divert the attention of our senior management, require us to incur significant expense and, whether or not adversely determined, could materially adversely affect our business, financial condition, results of operations and prospects.
The value of the ADSs may not perfectly track the price of our common stock.
Our common stock currently trades on the TSE under stock code number 2158. Active trading volume and efficient pricing for our common stock on the TSE will usually, but not necessarily, indicate similar characteristics in respect of the ADSs. In addition, the terms and conditions of our agreement with our depositary may result in less liquidity or lower market value of the ADS than for our common
21
stock. Since the holders of the ADSs may surrender the ADSs to take delivery of and trade our common stock (a characteristic that allows investors in ADSs to take advantage of price differentials between different markets), an illiquid market for our common stock may result in an illiquid market for the ADSs. Therefore, the trading price of our common stock may not be correlated with the price of the ADSs.
Since the initial public offering price is substantially higher than our net tangible book value per share, you will incur immediate and substantial dilution.
If you purchase ADSs in this offering, you will pay more for your ADSs than the amount paid by certain of our existing shareholders for their shares of our common stock on a per ADS basis. As a result, you will experience immediate and substantial dilution of approximately $6.09 per ADS (assuming no exercise of outstanding options to acquire shares of our common stock), representing the difference between our pro forma net tangible book value per ADS as of December 31, 2012, after giving effect to this offering and the assumed initial public offering price of $8.50 per ADS, the midpoint of the estimated initial public offering price range shown on the front cover of this prospectus. In addition, you will experience further dilution to the extent that additional shares of our common stock are issued upon the exercise of outstanding options. All of the common stock issuable upon the exercise of currently outstanding share options will be issued at a purchase price on a per ADS basis that is less than the initial public offering price per ADS in this offering, and the conversion price of our convertible bonds, on a per ADS basis, is also less than the initial public offering price of the ADSs. See "Dilution" for a more complete description of how the value of your investment in the ADSs will be diluted upon the completion of this offering.
Your right as a holder of ADSs to participate in any future rights offerings may be limited, which may cause dilution to your holdings and you may not receive cash dividends if it is impractical to make them available to you.
We may, from time to time, distribute rights to our shareholders, including rights to acquire our securities. However, we cannot make any such rights available to the ADS holders in the United States unless we register such rights and the securities to which such rights relate under the Securities Act or an exemption from the registration requirements is available. In addition, the deposit agreement provides that the depositary bank will not make rights available to you unless the distribution to ADS holders of both the rights and any related securities are either registered under the Securities Act or exempted from registration under the Securities Act. We are under no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause such a registration statement to be declared effective. Moreover, we may not be able to establish an exemption from registration under the Securities Act. Accordingly, you may be unable to participate in our rights offerings and may experience dilution in your holdings.
The depositary has agreed to pay you the cash dividends or other distributions it or the custodian receives on our common stock or other deposited securities after deducting its fees and expenses. However, because of these deductions, you may receive less, on a per share basis with respect to your ADSs than you would if you owned the number of shares or other deposited securities directly. You will receive these distributions in proportion to the number of common stock your ADSs represent. In addition, the depositary may, at its discretion, decide that it is not lawful or practical to make a distribution available to any holders of ADSs. For example, the depositary may determine that it is not practicable to distribute certain property through the mail, or that the value of certain distributions may be less than the cost of mailing them. In these cases, the depositary may decide not to distribute such property and you will not receive such distribution.
22
Sales of a substantial number of shares of our common stock or ADSs in the public markets by our existing shareholders could cause the price of the ADSs to fall.
Sales of a substantial number of shares of our common stock or ADSs in the public market or the perception that these sales might occur, could depress the market price of the ADSs and could impair our ability to raise capital through the sale of additional equity securities. We are unable to predict the effect that any such sales may have on the prevailing market price of the ADSs.
All of our executive officers, directors and statutory auditors prior to this offering are subject to lock-up agreements with the underwriters of this offering that restrict their ability to transfer shares of our common stock or ADSs for at least 180 days from the date of this prospectus. However, all of our other existing shareholders and holders of securities convertible into, or exercisable for, our common stock will be free to sell their shares, and shares receivable upon such exercise or conversion, on the TSE. Subject to certain limitations, a total of approximately 1,939,582 of our shares will be eligible for sale immediately and 972,440 additional shares will be eligible upon expiration of the lock-up period. Such sales of common stock could have a material adverse effect on the trading price of the ADSs.
Our management will have broad discretion in the use of the net proceeds from this offering and may not use them effectively.
We have not allocated a significant portion of the net proceeds to be received by us from this offering to any particular purpose. Our management will have broad discretion in the application of the net proceeds, including for any of the purposes described in the section entitled "Use of Proceeds," and you will not have the opportunity as part of your investment decision to assess whether the net proceeds are being used appropriately. You will not be able to direct how we apply these net proceeds and must rely on our management's judgment regarding the application of those net proceeds. The net proceeds may be used for corporate purposes that do not improve our efforts to maintain or increase profitability or increase our share price. Because of the number and variability of factors that will determine our use of the net proceeds from this offering, their ultimate use may vary substantially from their currently intended use. The failure by our management to apply these funds effectively could harm our business. Pending their use, we may invest the net proceeds from this offering in short-term, investment-grade, interest-bearing securities. These investments may not yield a favorable return to our shareholders and/or may lose value. Furthermore, the price of the ADSs could decline if the market does not view our use of the net proceeds from this offering favorably.
Rights of shareholders under Japanese law may be different from those under the laws of the United States.
Our articles of incorporation, the regulations of our Board of Directors and the Companies Act of Japan, or the Companies Act, govern our corporate affairs. Legal principles relating to such matters as the validity of corporate procedures, directors' and officers' fiduciary duties and shareholders rights are different from those that would apply if we were a company incorporated in the United States. Shareholders' rights under Japanese law are different in some significant respects from shareholders' rights under the laws of the United States. These differences include, but are not limited to, limitations on voting shares that comprise less than one full unit of our shares, the right to participate in a demand for the convocation of a general meeting of shareholders, and the right to join with other shareholders to propose an agenda item to be addressed at a general meeting of shareholders. You may have more difficulty in asserting your rights as a shareholder than you would as a shareholder of a corporation organized in the United States. For a detailed description of the rights of shareholders under our articles of incorporation and Japanese law, See "Description of Share Capital."
23
You may not have the same voting rights as the holders of our common stock and must act through the depositary to exercise your rights.
Except as described in this prospectus and in the deposit agreement, holders of the ADSs will not be able to directly exercise voting rights attaching to the shares evidenced by the ADSs. In accordance with the terms of the deposit agreement, holders of the ADSs will have the right to instruct the depositary how to vote the amount of common shares represented by their ADSs. However, you may not receive voting materials in time to instruct the depositary to vote, and it is possible that, persons who hold ADSs through brokers, dealers or other third parties, will not have the opportunity to exercise a right to vote. Upon our written request, the depositary will mail to you a shareholder meeting notice which contains, among other things, a statement as to the manner in which your voting instructions may be given, including an express indication that such instructions may be given or deemed given to the depositary to give a discretionary proxy to a person designated by us if no instructions are received by the depositary from you on or before the response date established by the depositary. However, no voting instruction shall be deemed given and no such discretionary proxy shall be given with respect to any matter as to which we inform the depositary that (i) we do not wish such proxy given, (ii) substantial opposition exists, or (iii) such matter materially and adversely affects the rights of shareholders. See "Description of American Depositary Shares." We will make all reasonable efforts to cause the depositary to extend voting rights to you in a timely manner, but you may not receive the voting materials in time to ensure that you can instruct the depositary to vote. Furthermore, the depositary and its agents will not be responsible for any failure to carry out any instructions to vote, for the manner in which any vote is cast or for the effect of any such vote. As a result, you may not be able to exercise your right to vote and you may lack recourse if your ADSs are not voted as you requested. In addition, in your capacity as an ADS holder, you will not be able to call a shareholders' meeting.
You may be subject to limitations on transfer of your ADSs.
Your ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to time when it deems expedient in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary deem it advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.
We are exempt from certain corporate governance requirements of Nasdaq. This may afford less protection to the holders of the ADSs.
We are exempt from certain corporate governance requirements of Nasdaq by virtue of being a "foreign private issuer" as defined in Rule 405 under the Securities Act. As a foreign private issuer, we are permitted to, and plan to, follow the practice of Japan and of the TSE, on which our common stock is listed, in lieu of certain corporate governance requirements of Nasdaq.
This means that we will be exempt from certain of Nasdaq's corporate governance rules, including those that require:
As a result, we cannot assure you that the compensation of our officers will be determined, or recommended to the Board of Directors for determination, by a majority of the independent directors
24
or a compensation committee comprised solely of independent directors. There also can be no assurance that director nominees will be selected, or recommended for the Board of Directors' selection by a majority of the independent directors or a nominating committee comprised solely of independent directors.
We intend to rely on all such exemptions provided by Nasdaq to a foreign private issuer, except that we expect to establish a compensation committee, and adopt and disclose a code of business conduct and ethics for directors, officers and employees.
Unless we no longer qualify, or choose to no longer rely on these exemptions in the future, you will not have the same protections afforded to shareholders of companies that are subject to all of the Nasdaq corporate governance requirements.
In the event we are no longer a "foreign private issuer", we will be required to have a majority of independent directors on our Board of Directors and to have our compensation and nominating committees comprised solely of independent directors within one year of the date that we no longer qualify as a foreign private issuer.
We are an "emerging growth company" and our election to delay adoption of new or revised accounting standards applicable to public companies may result in our financial statements not being comparable to those of other public companies. As a result of this and other reduced disclosure and governance requirements applicable to emerging growth companies, the ADSs may be less attractive to investors.
We are a "foreign private issuer" and are not required to comply with certain periodic disclosure and current reporting requirements of the Exchange Act. In addition, we are an "emerging growth company," as defined in the JOBS Act, and we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, or the Securities Act, for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We are electing to delay such adoption of new or revised accounting standards, and as a result, we may not comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. As a result of such election, our financial statements may not be comparable to the financial statements of other public companies. We cannot predict if investors will find the ADSs less attractive because we will rely on these exemptions. If some investors find the ADSs less attractive as a result, there may be a less active trading market for the ADSs and the trading price of the ADSs may be more volatile. We may take advantage of these reporting exemptions until we are no longer an "emerging growth company." We will cease to be an "emerging growth company" upon the earliest of the following conditions to occur: (i) the last day of the fiscal year in which we have more than $1.0 billion in annual revenues; (ii) the date we qualify as a "large accelerated filer," with at least $700 million of equity securities; (iii) the issuance, in any three-year period, by our company of more than $1.0 billion in non-convertible debt securities held by non-affiliates; or (iv) the last day of the fiscal year ending after the fifth anniversary of our initial public offering. If any of the conditions previously listed occurs, we would cease to be an emerging growth company as of the following December 31.
25
To the extent that any statements made in this prospectus contain information that is not historical, these statements are essentially forward-looking. Forward-looking statements may be identified by the use of words such as "expects," "plans," "may," "anticipates," "believes," "should," "intends," "estimates" and other words or phrases of similar meaning. Although we believe that the expectations reflected in these forward-looking statements are reasonable and achievable, these statements are subject to a number of risks and uncertainties discussed under the headings "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this prospectus. All forward-looking statements attributable to us are expressly qualified by these and other factors. We cannot assure you that actual results will be consistent with these forward-looking statements.
Information regarding market and industry statistics contained in this prospectus is included based on information available to us that we believe is accurate. Forecasts and other forward-looking information obtained from this available information is subject to the same qualifications and the additional uncertainties accompanying any estimates of future market size, revenue and market acceptance of products and services. The forward-looking statements made in this prospectus relate only to events as of the date on which the statements are made. We do not undertake any obligation to publicly update any forward-looking statements. As a result, you should not place undue reliance on these forward-looking statements.
26
MARKET, INDUSTRY AND OTHER DATA
Unless otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate, including our general expectations and market position, market opportunity and market size, is based on information from various sources, on assumptions that we have made that are based on those data and other similar sources and on our knowledge of the markets for our services. These data involve a number of assumptions and limitations. We have not independently verified the accuracy of any third party information. In addition, projections, assumptions and estimates of our future performance and the future performance of the industry in which we operate is necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in "Risk Factors" and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.
27
We estimate that the net proceeds to us from this offering, after deducting underwriting discounts and estimated offering expenses payable by us, will be approximately $15.3 million, assuming an initial public offering price of $8.50 per ADS (the midpoint of the range set forth on the cover of this prospectus). Of the estimated offering expenses, we have already paid approximately $2.5 million, and therefore we will have approximately $2.5 million of additional net proceeds from this offering available to us. A $1.00 increase or decrease in the assumed initial public offering price would increase or decrease the net proceeds from this offering by $2.2 million, after deducting underwriting discounts and estimated offering expenses. The underwriters have an option to purchase an additional 360,000 ADSs from us to cover over-allotments, if any. Assuming the over-allotment option is exercised in full by the underwriters and satisfied in full by us, we will receive an additional estimated $2.8 million in net proceeds, after deducting underwriting discounts.
We expect to apply a significant portion of the net proceeds to us from the offering for various technology-related activities in the year ended March 31, 2014, including for continued development of our predictive coding-based tools for TAR. In addition we intend to use a portion of the net proceeds to us to pay down approximately ¥681 million ($7.9 million) of our outstanding long-term borrowings, with a weighted average interest rate of 1.18% per annum and maturing at various dates through 2016. We intend to use the remaining net proceeds from this offering for general corporate purposes, including working capital and possible acquisitions and investments, including the acquisition of complementary technology useful in our operations and with respect to our intention to expand our operations in the United States and Asia. Although we currently have no agreements or commitments with respect to any acquisitions or investments and we do not currently have any acquisitions or investments planned, one or more of these may involve companies or technologies in the areas of intellectual property analysis and machine-driven translation, which we believe are growth sectors of interest to us. Our management will have significant discretion in applying the remaining net proceeds from this offering. Pending specific application of our net proceeds, we plan to invest our net proceeds in government securities and other short-term, investment-grade, marketable securities.
28
The Companies Act permits companies to distribute dividends-in-kind (non-cash assets) to shareholders subject to a certain limitation and additional requirements. The Companies Act permits semiannual interim dividends to be paid once a year upon resolution by the board of directors if the paying company meets certain criteria and its articles of incorporation so stipulate. We meet these requirements. The Companies Act also provides certain limitations on the amounts available for dividends or the purchase of treasury stock. The limitation is defined as the amount available for distribution to the shareholders, but the amount of net assets after dividends must be maintained at no less than ¥3.0 million.
The amount of retained earnings available for dividends under the Companies Act is based on the amount of retained earnings recorded in our general books of account prepared using accepted Japanese accounting practices. The adjustments included in the consolidated financial statements for U.S. GAAP purposes but not recorded in the general books of account have no effect on the determination of retained earnings available for dividends under the Companies Act. Retained earnings shown in our general books of account amounted to ¥1,800.4 million ($20.8 million) at December 31, 2012, ¥1,525.4 million ($17.6 million) at March 31, 2012 and ¥273.0 million at March 31, 2011.
On June 24, 2011, our Board of Directors declared a cash dividend of ¥7.5 per share, payable to shareholders of record as of June 27, 2011, for a total of ¥19.7 million. On June 22, 2012, UBIC's shareholders approved the payment of a year-end cash dividend of ¥50 per share of common stock in the aggregate amount of ¥145.6 million ($1.7 million) to shareholders of record at March 31, 2012. In appropriate circumstances, our Board of Directors may determine in its discretion, within the limits of the Companies Act, to declare dividends in the future, but there can be no assurance that any such dividends will be declared or paid at any time.
29
CAPITALIZATION AND INDEBTEDNESS
The following table summarizes our cash and cash equivalents and short-term debt, and our consolidated capitalization as of December 31, 2012, on:
You should read this table in conjunction with the sections of this prospectus entitled "Use of Proceeds," "Selected Consolidated Financial Information," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and related notes included elsewhere in this prospectus.
|
As of December 31, 2012 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Actual
(unaudited) |
As Adjusted(1)
(unaudited) |
|||||||||||
|
(thousands
of yen) |
(thousands
of dollars) |
(thousands
of yen) |
(thousands
of dollars) |
|||||||||
Cash and cash equivalents |
¥1,301,486 | $ | 15,022 | ¥2,111,748 | $ | 24,373 | |||||||
Short-term debt |
| | | | |||||||||
Current portion of long-term debt |
200,593 | 2,315 | | | |||||||||
Long-term debt |
481,352 | 5,556 | | | |||||||||
Equity |
|||||||||||||
Common stock: 7,200,000 shares authorized and 3,193,136 issued and outstanding, actual; 7,200,000 shares authorized and 3,673,136 issued and outstanding, pro forma as adjusted |
911,774 | 10,524 | 1,795,502 | 20,723 | |||||||||
Additional paid-in capital |
541,407 | 6,249 | 979,471 | 11,304 | |||||||||
Retained earnings |
1,719,080 | 19,842 | 1,719,080 | 19,842 | |||||||||
Accumulated other comprehensive income |
123,604 | 1,427 | 123,604 | 1,427 | |||||||||
Treasury stock at cost56 shares |
(26 | ) | (0 | ) | (26 | ) | (0 | ) | |||||
Total UBIC, Inc. shareholders' equity |
3,295,839 | 38,042 | 4,617,631 | 53,296 | |||||||||
Noncontrolling interests |
16,596 | 192 | 16,596 | 192 | |||||||||
Total Equity |
3,312,435 | 38,234 | 4,634,227 | 53,488 | |||||||||
Total Capitalization |
¥3,994,380 | $ | 46,105 | ¥4,634,227 | $ | 53,488 | |||||||
The table above excludes:
30
If you invest in the ADSs, your interest will be diluted to the extent of the difference between the initial public offering price per ADS and our net tangible book value per ADS after this offering. Dilution results from the fact that the initial public offering price per common share is substantially in excess of the book value per common share attributable to the existing shareholders for our presently outstanding common shares.
Our net tangible book value as of December 31, 2012 was approximately ¥2,307.5 million ($26.6 million), or ¥723 per common share as of that date, and $1.67 per ADS. Net tangible book value represents the amount of our total shareholders' equity, less the amount of our deferred costs from this offering, net capitalized computer software, other intangible assets, and deferred tax assets. Dilution is determined by subtracting pro forma net tangible book value per common share from the assumed initial public offering price per common share, which is the midpoint of the estimated initial public offering price range shown on the front cover of this prospectus, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.
Without taking into account any other changes in net tangible book value after December 31, 2012, other than to give effect to our sale of the ADSs offered in this offering at the assumed initial public offering price of $8.50 per ADS, the midpoint of the estimated initial public offering price range shown on the front cover of this prospectus, after deduction of the underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of December 31, 2012 would have been $12.06 per outstanding common share, including common shares underlying our outstanding ADSs, and $2.41 per ADS. This represents an immediate increase in net tangible book value of $3.72 per common share and $0.74 per ADS, to the existing shareholders and an immediate dilution in net tangible book value of $30.44 per common share and $6.09 per ADS, to investors purchasing ADSs in this offering.
The following table illustrates this dilution:
|
Per common share | Per ADS | |||||
---|---|---|---|---|---|---|---|
Assumed initial public offering price |
$ | 42.50 | $ | 8.50 | |||
Net tangible book value as of December 31, 2012 |
8.34 | 1.67 | |||||
Increase in net tangible book value attributable to existing shareholders |
3.72 | 0.74 | |||||
Pro forma as adjusted net tangible book value after this offering |
12.06 | 2.41 | |||||
Dilution in net tangible book value to new investors in this offering |
$ | 30.44 | $ | 6.09 |
A $1.00 increase or decrease in the assumed initial public offering price of $8.50 per ADS, the mid-point of the estimated initial public offering price range shown on the cover of this prospectus, would increase or decrease our adjusted net tangible book value after giving effect to this offering in each case by $2.2 million, or by $4.65 per common share or $0.93 per ADS, assuming no change to the number of ADSs offered by us as set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and other estimated expenses of this offering. The adjusted information discussed above is illustrative only. Our pro forma as adjusted net tangible book value following the completion of this offering is subject to adjustments based on the actual initial public offering price of the ADSs and other terms of this offering determined at pricing.
The following table summarizes, on a pro forma as adjusted basis, the number of common shares purchased from us as of December 31, 2012, the total consideration paid to us and the average price per common share paid by our existing shareholders and by new investors purchasing common shares evidenced by ADSs in this offering at the assumed initial public offering price of $8.50 per ADS, the
31
midpoint of the estimated range of the initial public offering price range per ADS shown on the cover of this prospectus, before deducting underwriting discounts and commissions and other estimated offering expenses payable by us.
A $1.00 increase or decrease in the assumed initial public offering price of $8.50 per ADS, the mid-point of the estimated initial public offering price range shown on the cover of this prospectus, would increase or decrease total consideration paid by new investors, total consideration paid by all shareholders and the average price per common share paid by all shareholders by $2.2 million, $2.2 million and $0.61 per common share, respectively, assuming no change in the number of ADSs sold by us as set forth on the cover page of this prospectus and after deducting underwriting discounts and commissions and other offering expenses payable by us.
As of December 31, 2012, on a pro forma basis there were options outstanding to purchase common shares (upon exercise) of 20,000 shares, 80,000 shares and 16,000 shares, which will be exercisable on June 18, 2013, April 29, 2014 and June 22, 2015, respectively. To the extent that any of these outstanding options are exercised, there will be further dilution to new investors.
The foregoing discussion assumes no exercise of the underwriters' over-allotment option and excludes 96,000 ADSs issuable upon exercise of warrants granted to the underwriters upon completion of this offering. To the extent that the underwriters' over-allotment option or these warrants are exercised, there will be further dilution to new investors.
32
Our financial statements and other financial data included in this prospectus are presented in Japanese yen. Our business and operations are primarily conducted by us in Japan and through our U.S., Korean and Taiwanese subsidiaries. Our functional currency is Japanese yen and their revenues and expenses are denominated in that currency. For convenience, certain amounts in Japanese yen set forth herein have been converted to United States dollars. The conversion of Japanese yen into U.S. dollars in this prospectus is based on the noon buying rate in the City of New York for cable transfers of Japanese yen as certified for customs purposes by the Board of Governors of the Federal Reserve System on December 31, 2012, which was $1.00 = ¥86.64. We make no representation that any Japanese yen or U.S. dollar amounts referred to in this prospectus could have been or could be converted into U.S. dollars or Japanese yen, as the case may be, at any particular rate or at all.
The following table sets forth, for each of the periods indicated, the average, high, low and period-end noon buying rates in New York City for cable transfers, in yen per $1.00, as certified for customs purposes by the Board of Governors of the Federal Reserve System. These rates are provided solely for your convenience and are not necessarily the exchange rates that we used in this prospectus or will use in the preparation of our periodic reports or any other information to be provided to you. No representation is made that the Japanese yen could have been, or could be, converted into U.S. dollars at the rates indicated below or at any other rate. For information on the effect of currency fluctuations on our results, see "Management's Discussion and Analysis of Results of Operations and Financial Condition".
|
Japanese yen per U.S. Dollar Noon
Buying Rate |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Average(1) | High | Low | Period-End | |||||||||
Fiscal Year Ended March 31, 2010 |
92.49 | 98.76 | 86.12 | 93.40 | |||||||||
Fiscal Year Ended March 31, 2011 |
85.00 | 94.24 | 80.48 | 82.76 | |||||||||
Fiscal Year Ended March 31, 2012 |
82.47 | 83.78 | 80.86 | 82.41 | |||||||||
2012: |
|||||||||||||
April |
81.25 | 82.62 | 79.81 | 79.81 | |||||||||
May |
79.67 | 80.36 | 78.29 | 78.29 | |||||||||
June |
79.32 | 80.52 | 78.21 | 79.81 | |||||||||
July |
78.93 | 79.95 | 78.10 | 78.10 | |||||||||
August |
78.69 | 79.50 | 78.19 | 78.30 | |||||||||
September |
78.13 | 78.96 | 77.41 | 77.92 | |||||||||
October |
79.01 | 80.04 | 78.00 | 79.94 | |||||||||
November |
81.03 | 82.54 | 79.42 | 82.54 | |||||||||
December |
83.79 | 86.64 | 81.86 | 86.64 | |||||||||
2013 |
|||||||||||||
January |
89.06 | 91.28 | 86.92 | 91.28 | |||||||||
February |
93.00 | 93.64 | 91.38 | 92.36 | |||||||||
March |
94.77 | 96.16 | 93.32 | 94.16 | |||||||||
April (through April 8, 2013) |
94.53 | 96.86 | 92.96 | 96.86 |
Source: Board of Governors of the Federal Reserve System
33
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The consolidated statements of operations data for the years ended March 31, 2010, 2011 and 2012 and the consolidated balance sheet data as of March 31, 2010, 2011 and 2012 have been derived from the audited consolidated financial statements of UBIC, Inc., included elsewhere in this prospectus. The condensed consolidated statements of income data for the nine months ended December 31, 2011 and 2012 and the condensed consolidated balance sheet data as of December 31, 2012 have been derived from UBIC, Inc.'s unaudited condensed consolidated financial statements included elsewhere in this prospectus. The unaudited interim condensed consolidated financial data has been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, includes all adjustments, consisting of normal recurring adjustments necessary for a fair presentation of our financial condition as of such dates and our results of operations for such periods. Our historical results are not necessarily indicative of the results that may be expected in the future, and our interim results are not necessarily indicative of the results to be expected for the full fiscal year. Our reporting currency is the Japanese yen. The consolidated financial statements included in this prospectus have been prepared in accordance with U.S. GAAP and the consolidated financial statements as of and for the years ended March 31, 2010, 2011 and 2012 have been audited by Ernst & Young ShinNihon LLC, an independent registered public accounting firm. You should read the selected consolidated financial data set forth below in conjunction with the "Management's Discussion and Analysis of Financial
34
Condition and Results of Operations" section and with the consolidated financial statements and the related notes included elsewhere in this prospectus.
|
For the
year ended March 31, |
For the nine months
ended December 31, (unaudited) |
||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2011 | 2012 | 2012 | 2011 | 2012 | 2012 | |||||||||||||||
|
(thousands of yen except per share data)
|
(thousands of
dollars except per share data) |
(thousands of yen
except per share data) |
(thousands of
dollars except per share data) |
||||||||||||||||||
Revenue |
¥ | 1,013,490 | ¥ | 2,635,430 | ¥ | 5,095,939 | $ | 58,817 | ¥ | 3,754,013 | ¥ | 3,516,633 | $ | 40,589 | ||||||||
Revenue from a related party |
80,072 | 40,764 | 27,862 | 322 | 22,002 | 14,783 | 171 | |||||||||||||||
Operating revenue from reimbursed direct costs |
4,605 | 9,899 | 12,427 | 143 | 7,943 | 10,921 | 126 | |||||||||||||||
Total revenue |
1,098,167 | 2,686,093 | 5,136,228 | 59,282 | 3,783,958 | 3,542,337 | 40,886 | |||||||||||||||
Cost of revenue |
703,010 | 966,352 | 1,600,425 | 18,472 | 1,205,360 | 1,314,078 | 15,167 | |||||||||||||||
Reimbursed direct costs |
4,605 | 9,899 | 12,427 | 143 | 7,943 | 10,921 | 126 | |||||||||||||||
Selling, general and administrative expenses |
574,001 | 669,742 | 1,153,438 | 13,313 | 676,192 | 1,365,845 | 15,765 | |||||||||||||||
Total operating expense |
1,281,616 | 1,645,993 | 2,766,290 | 31,928 | 1,889,495 | 2,690,844 | 31,058 | |||||||||||||||
Operating income (loss) |
(183,449 | ) | 1,040,100 | 2,369,938 | 27,354 | 1,894,463 | 851,493 | 9,828 | ||||||||||||||
Interest income |
3,441 | 3,410 | 2,052 | 24 | 1,638 | 990 | 11 | |||||||||||||||
Interest expense |
(13,247 | ) | (14,262 | ) | (13,360 | ) | (154 | ) | (8,264 | ) | (14,421 | ) | (166 | ) | ||||||||
Foreign currency exchange gains (losses) |
(14,384 | ) | (39,942 | ) | 10,294 | 119 | (35,590 | ) | 78,971 | 911 | ||||||||||||
Impairment loss on security |
(108,540 | ) | | | | | | | ||||||||||||||
Dividend income |
| | 4,500 | 52 | | 4,500 | 52 | |||||||||||||||
Othernet |
94 | 1,296 | 655 | 8 | 5,211 | (2,027 | ) | (23 | ) | |||||||||||||
Income (loss) before income taxes |
(316,085 | ) | 990,602 | 2,374,079 | 27,403 | 1,857,458 | 919,506 | 10,613 | ||||||||||||||
Income taxes |
102,213 | 202,827 | 1,003,441 | 11,582 | 800,115 | 378,929 | 4,374 | |||||||||||||||
Net income (loss) |
(418,298 | ) | 787,775 | 1,370,638 | 15,821 | 1,057,343 | 540,577 | 6,239 | ||||||||||||||
Less: Net income (loss) attributable to noncontrolling interests |
| (933 | ) | 2,951 | 34 | 2,613 | 4,578 | 53 | ||||||||||||||
Net income (loss) attributable to UBIC, Inc. shareholders |
¥ | (418,298 | ) | ¥ | 788,708 | ¥ | 1,367,687 | $ | 15,787 | ¥ | 1,054,730 | ¥ | 535,999 | $ | 6,186 | |||||||
Net income (loss) attributable to UBIC, Inc. shareholders per share(1) |
||||||||||||||||||||||
Basic |
¥ | (182 | ) | ¥ | 334 | ¥ | 515 | $ | 5.94 | ¥ | 401 | ¥ | 170 | $ | 1.97 | |||||||
Diluted |
¥ | (182 | ) | ¥ | 249 | ¥ | 422 | $ | 4.87 | ¥ | 327 | ¥ | 165 | $ | 1.90 | |||||||
Pro forma(2) |
||||||||||||||||||||||
Basic |
¥ | 494 | $ | 5.70 | ¥ | 158 | $ | 1.82 | ||||||||||||||
Diluted |
¥ | 408 | $ | 4.71 | ¥ | 153 | $ | 1.77 |
35
Other operating metrics:
|
For the year ended March 31, | For the nine months ended December 31, | ||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2011 | 2012 | 2012 | 2011 | 2012 | 2012 | |||||||||||||||
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
|||||||||||||||
Cash dividends declared per common share |
¥ | | ¥ | | ¥ | 7.5 | $ | 0.09 | ¥ | 7.5 | ¥ | 50.0 | $ | 0.58 |
|
As of March 31, | As of December 31, | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2011 | 2012 | 2012 | 2012 | 2012 | |||||||||||||
|
(thousands of yen)
|
(thousands
of dollars) |
(thousands of
yen) |
(thousands of
dollars) |
|||||||||||||||
|
|
|
|
|
(unaudited) |
||||||||||||||
Consolidated Balance Sheet Data: |
|||||||||||||||||||
Cash and cash equivalents |
¥ | 345,150 | ¥ | 675,212 | ¥ | 2,410,304 | $ | 27,820 | ¥ | 1,301,486 | $ | 15,022 | |||||||
Total current assets |
510,013 | 1,675,941 | 3,643,020 | 42,049 | 2,696,317 | 31,122 | |||||||||||||
Total noncurrent assets |
339,243 | 697,655 | 1,336,656 | 15,426 | 2,058,418 | 23,759 | |||||||||||||
Total assets |
849,256 | 2,373,596 | 4,979,676 | 57,475 | 4,754,735 | 54,881 | |||||||||||||
Total current liabilities |
315,856 | 821,757 | 1,763,575 | 20,356 | 805,557 | 9,297 | |||||||||||||
Working capital |
194,157 | 854,184 | 1,879,445 | 21,693 | 1,890,760 | 21,825 | |||||||||||||
Long-term debt |
255,011 | 323,040 | 400,020 | 4,617 | 481,352 | 5,556 | |||||||||||||
Total noncurrent liabilities |
283,747 | 349,595 | 476,547 | 5,500 | 636,743 | 7,350 | |||||||||||||
Total liabilities |
599,603 | 1,171,352 | 2,240,122 | 25,856 | 1,442,300 | 16,647 | |||||||||||||
Total shareholders' equity |
249,653 | 1,195,177 | 2,727,536 | 31,480 | 3,295,839 | 38,042 | |||||||||||||
Total net assets |
249,653 | 1,202,244 | 2,739,554 | 31,619 | 3,312,435 | 38,234 |
36
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following information should be read together with our selected consolidated financial and operating data and the consolidated financial statements and notes included elsewhere in this prospectus. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and elsewhere in this prospectus particularly in "Risk Factors" and "Forward-looking Statements." We have prepared our consolidated financial statements in this prospectus in accordance with U.S. GAAP.
Introduction
Management's discussion and analysis of financial condition and results of operations is intended to help provide an understanding of our financial condition, changes in financial condition and results of operations, and is organized as follows:
Although there have been signs of economic recovery in a number of Asian countries and the United States, many countries in the European Union continue to show weak or non-existent growth in recent years. In Japan, although the economy continues to show the effects of the 2011 earthquake and tsunami and the resulting nuclear incident at Fukushima, there are some signs of recovery, in part attributable to the economic stimulus provided by the policies of the newly-elected government as well as to the positive impact of a weaker yen on export-driven sectors of Japan's economy.
37
However an improving global economy and an increase in litigation, accompanied by increased levels of investigation activities by governments, especially in the United States, helped us exceed our targets for revenue, operating income and net income in the years ended March 31, 2011 and 2012.
With Japanese and other Asian international corporations becoming increasingly involved in litigation concerning antitrust patent, intellectual property, product safety, price cartelization, corporate fraud and other matters, and with the expansion of multinational corporations' operations in Asia, the demand for eDiscovery services capable of dealing with electronic information in Asian languages has grown. eDiscovery has also become a significant part of litigation in Canada, Europe and other Asian countries, in addition to the United States. Our business in preventive legal strategies and eDiscovery support services, other than manual review services, are expanding in an enhanced regulatory environment, resulting in elaborate new processes, even as the demand by Asian law firms for the manual review services of our eDiscovery business has decreased.
We provide legal support services for eDiscovery to respond to diverse client needs using our proprietary Lit i View and Legal Cloud solutions. During our year ended March 31, 2012, our one-stop-solution sales exceeded expectations as we acquired multiple new clients, securing mandates to supply services with respect to several large cases, administrative proceedings and investigations. We have also developed a Lit i View eDiscovery support system that helps enterprises reduce legal procedural costs, and thereby increase profits.
Annual and Quarterly Reports
Under Japanese law, we are required to issue quarterly financial statements that are similar to the Form 10-Qs required of U.S. public companies. These financial statements are filed with the Local Finance Bureau, which is the local central office of the Ministry of Finance. In addition, we are required to file quarterly financial results with the TSE. Subsequent to this offering, we will file our annual report on Form 20-F within the period required by Exchange Act. In addition, we intend to furnish quarterly financial results as current reports under Form 6-K. These quarterly financial results will provide disclosure that is similar to the Form 10-Qs, but will otherwise comply with the requirements under Japanese law.
Overview
The expansion of our business in response to the opportunity described above is reflected in our results of operations in the period since April 1, 2009. In the year ended March 31, 2012, we generated total revenue of ¥5,136.2 million ($59.3 million), operating income of ¥2,369.9 million ($27.4 million) and net income of ¥1,370.6 million ($15.8 million); compared with total revenue of ¥2,686.1 million, operating income of ¥1,040.1 million and net income of ¥787.8 million in the year ended March 31, 2011; compared with total revenue of ¥1,098.2 million, operating loss of ¥183.4 million and net loss of ¥418.3 million in the year ended March 31, 2010.
For the nine months ended December 31, 2012, we generated total revenue of ¥3,542.3 million ($40.9 million), operating income of ¥851.5 million ($9.8 million) and net income of ¥540.6 million ($6.2 million); compared with total revenue of ¥3,784.0 million, operating income of ¥1,894.5 million and net income of ¥1,057.3 million in the nine months ended December 31, 2011.
Although our total revenue in the year ended March 31, 2012 increased by ¥2,450.1 million (91.2%) compared with the year ended March 31, 2011, our total operating expense increased by only ¥1,120.3 million (68.1%) over the same period. As a result, our operating income increased by ¥1,329.8 million to ¥2,369.9 million ($27.4 million) in the year ended March 31, 2012 from ¥1,040.1 million in the year ended March 31, 2011, and our net income rose by ¥582.9 million to ¥
38
1,370.6 million ($15.8 million) in the year ended March 31, 2012 from ¥787.8 million in the year ended March 31, 2011.
Similarly, although our total revenue in the year ended March 31, 2011 increased by ¥1,587.9 million (144.6%) compared with the year ended March 31, 2010, our total operating expense increased by only ¥364.4 million, 28.4%, over the same period. As a result, our operating income increased by ¥1,223.5 million to ¥1,040.1 million in the year ended March 31, 2011 from a ¥183.4 million operating loss in the year ended March 31, 2010, and our net income rose by ¥1,206.1 million to ¥787.8 million in the year ended March 31, 2011 from an net loss of ¥418.3 million in the year ended March 31, 2010.
For the nine months ended December 31, 2012, our total revenue decreased by ¥241.6 million, or 6.4%, to ¥3,542.3 million ($40.9 million) compared with ¥3,784.0 million for the nine months ended December 31, 2011, due mainly to the decrease in the manual review services of our revenues, offset in part by an increase in non-review services of our eDiscovery services business, including data collection, process/analysis, production, data hosting, and forensic services. Revenue from these non-review services increased ¥887.4 million, or 51.7%, to ¥2,604.1 million ($30.1 million) in the nine months ended December 31, 2012 from ¥1,716.7 million in the same period in the previous year, whereas our manual review services revenue declined by ¥1,190.8 million, or 62.7%, to ¥707.0 million ($8.2 million) in the nine months ended December 31, 2012 from ¥1,897.8 million in the same period in the previous year. Our operating income for the nine months ended December 31, 2012, decreased by 55.1% to ¥851.5 million ($9.8 million), compared with ¥1,894.5 million in the same period last year, due mainly to the resulting decrease in revenue as well as to a significant increase in the depreciation and amortization expenses due to an increase in our capitalized technology investment, and in selling, general and administrative expenses as we were aggressively investing to build our core infrastructure and manpower to support expected growth.
This increase in selling, general and administrative expense was attributable to our efforts to expand our capabilities and infrastructure to match the rapid growth of our business, especially over the last three years. Our investment in our administrative and sales and marketing teams and activities is also a part of our efforts to improve and expand our technology, global operating capability and capacity, and overall infrastructure to be ready for further expansion of our business in each market we serve.
How We Generate Revenue
We generate the great majority of our revenue from the sale of eDiscovery support services and a small minority of our revenue from computer forensic investigation services, the sale of forensic tools and training, and a variety of other services. In the year ended March 31, 2012, revenue from the sale of eDiscovery support services increased to ¥4,910.6 million ($56.7 million), or 95.6% of total revenue of ¥5,136.2 million ($59.3 million), while all revenue from sales of forensic services, forensic tools and training, and other services and products totaled ¥225.6 million ($2.6 million), or 4.4%. Similarly, in the year ended March 31, 2011, revenue from the sale of eDiscovery support services increased to ¥2,529.8 million, or 94.2% of total revenue of ¥2,686.1 million, while all revenue from sales of forensic services, forensic tools and training, and other services and products totaled ¥156.3 million, or 5.8%. During the nine months ended December 31, 2012, revenue from the sale of eDiscovery support services was ¥3,311 million ($38 million), or 93.5% of total revenue of ¥3,542 million ($40.9 million), while all revenue from sales of forensic services, forensic tools and training, and other services and products totaled ¥231.3 million ($2.7 million), or 6.5% of total revenue.
For the year ended March 31, 2011, revenue from Panasonic Corporation, Aisin Seiki, Yazaki Corporation, and TMI Associates represented approximately 22.1 percent, 14.1 percent, 13.9 percent, and 11.6 percent, respectively, of our total revenue. For the year ended March 31, 2012, revenue from
39
Yazaki Corporation, Panasonic Corporation, two clients represented by Quinn Emanuel Urquhart & Sullivan, LLP, and Sanyo Electric Co., Ltd. represented approximately 18.5 percent, 12.2 percent, 11.8 percent, and 11.6 percent, respectively, of our total revenue. During the nine months ended December 31, 2011, revenue from Yazaki Corporation, Sanyo Electric Co., Ltd and Panasonic Corporation represented approximately 21.0%, 15.5% and 15.0% respectively of our total revenue. For December 31, 2012, Samsung Electronics Co., Ltd. represented approximately 25.3% of our total revenue and there was no other customer that represented more than 10% of our total revenue. While we derive a significant portion of our revenue from a small number of substantial clients, the specific clients change from year to year, and we expect this trend to continue. The vast majority of our revenue is derived from limited scope engagements that do not include long-term commitments.
Our clients use eDiscovery and forensic services, for the most part, on an "as needed basis," when a specific legal or administrative proceeding, investigation or other legal challenge requires them to rapidly analyze and produce large amounts of digitally-formatted information. In the absence of such a demand, a company's demand for our services and solutions tends to be much less extensive. This means that contracts for our services tend to be time and subject specific. The fact that we have sold our solutions to a client in one fiscal year or quarter does not ensure on-going use by that client in any subsequent period, unless a new need for our services arises.
In light of this situation, in order to expand our business, it is imperative for us to continuously market our services and solutions to existing and potential clients and to build market recognition of our capabilities and our brand so that, when companies have a need for eDiscovery and forensic services, we and our solutions are perceived as an attractive alternative. In addition, to the extent that, as discussed above, we are able to expand our client base among non-Asian law firms, we believe that they will need our services to review the Asian-language materials we have collected and processed. This will, in our view, expand our revenue base.
The overall market for eDiscovery and forensic services has benefited from a rapid increase in the number of lawsuits filed and investigations commenced in the United States which involve patents, intellectual property, product safety, price cartels, the U.S. Foreign Corrupt Practices Act and other issues, and our financial performance has also benefited from this trend, but more specifically from lawsuits filed and investigations commenced in the United States against Japanese and other Asian multinational corporations. We have also benefited more recently from engagements for large and midsize international government investigations. While these trends are helpful to evaluating our future business performance, as a result of our small market share and lower brand awareness in the United States, our financial performance is more likely to be driven by increasing lawsuits and investigations involving Asian companies or U.S. companies with Asian operations, and by our efforts to build out our sales and marketing presence and increase our brand awareness and capabilities in the United States.
We believe the highest growth and most important segments of our eDiscovery services are those that rely on our propriety eDiscovery software and technologies (collection and processing, production, hosting and TAR).We have seen a decline in our lower-margin manual, review business in Asia. In the future, it is our intent to focus on our technology assisted-review solutions where we provide a more direct and differentiated value proposition to our customers. Further, we plan to focus our geographic growth efforts on the U.S. market. To a lesser extent, we also plan to focus on the non-Asian (particularly the U.S.) review business where we see significantly greater opportunity than within Asia.
Our TAR solutions are designed to perform reviews of large volumes of data and is intended to identify relevant documents with 90% accuracy, providing meaningful time and cost savings by significantly reducing the need for manual review. We believe that, as our TAR-based solutions demonstrate their value in the market place, they will provide a basis for our expanded and durable growth of total revenues and improved operating income and net income in the future.
40
Key Metrics
Currency fluctuations
Our reporting currency is the Japanese yen. In the year ended March 31, 2012, 82.7% of our revenue was generated in Japanese yen, while 17.3% was generated in U.S. dollars. In the year ended March 31 2012, we incurred 73.7% of our costs in Japanese yen and 26.3% in U.S. dollars. For the year ended March 31, 2011, 74.4% of our revenue was generated in Japanese yen, while 25.6% was generated in U.S. dollars. In that same period, we incurred 63.6% of our costs in yen and 36.4% in U.S. dollars.
In the nine months ended December 31, 2012, 70.0% of our revenue was generated in Japanese yen, while 30.0% was generated in U.S. dollars. In the nine months ended December 31, 2012, we incurred 76.9% of our costs in Japanese yen, 18.1% in U.S. dollars and a total of 5.0% in Korean won and Taiwan dollars. For the nine months ended December 31, 2011, 92.2% of our revenue was generated in Japanese yen, while 7.8% was generated in U.S. dollars. In that same period, we incurred 81.9% of our costs in yen and 18.1% in U.S. dollars.
As a result, we have both transaction and translation currency exposure to the U.S. dollar and, to a lesser extent, to the Korean won and the Taiwan dollar. We have not entered into any agreements to hedge this exposure. See "Risk FactorsRisks Related to Our BusinessSignificant movements in foreign currency exchange rates or change in monetary policy may materially harm our financial results" in this prospectus.
Total Revenue
Total revenue is comprised of revenue, which is, itself, composed of proceeds from the sale of eDiscovery support services and from computer forensic investigation services, the sale of forensic tools and training, and a variety of other services, including operating revenue from reimbursed direct costs. The latter category represented only 0.4% and 0.2% of total revenue, or ¥9.9 million and ¥12.4 million ($0.14 million), in the years ended March 31, 2011 and 2012, respectively, and only 0.2% and 0.3% of total revenue, or ¥7.9 million and ¥10.9 million ($0.1 million), in the nine months ended December 31, 2011 and 2012, respectively. In addition, operating revenue from reimbursed direct cost essentially represented a "pass through" of expenses incurred on behalf of clients and was completely offset by the related expense line.
Total Operating Expense
Cost of revenue
Cost of revenue consists primarily of costs related to personnel, client support, amortization of software, depreciation of equipment and outsourcing expenses. Personnel costs include salaries, bonuses, social and health insurance, other employee benefits and share-based compensation for personnel. Software costs are amortized, beginning in the period each module or component of the product is ready for its intended use, on a straight-line basis over the estimated useful life of the product, mainly five years, depreciation of equipment is as well. Outsourcing cost is mainly temporary staff cost to manually review eDiscovery materials identified by electronic means.
Reimbursed Direct Costs
As noted above, reimbursed direct costs constitute a component of total operating expense, but are completely offset by the reciprocal revenue line item.
41
Selling, general and administrative expenses
We classify our selling, general and administrative expenses into three categories: sales and marketing, research and development, and general and administration. These categories correspond to different departments within our company.
Our operating expenses primarily consist of personnel costs, marketing costs, professional service fees and depreciation and amortization costs. Personnel costs for each category of operating expenses include salaries, bonuses, social and health insurance, other employee benefits and share-based compensation for personnel in that category, as well as an allocation of our facilities costs. We allocate share-based compensation expense resulting from the amortization of the fair value of options granted. We allocate overhead, such as rent, computer and other technology costs, to each expense category based on worldwide headcount in that category.
Sales and marketing
Sales and marketing expense primarily consists of personnel costs for our sales, marketing, business development and client support employees and executives; and commissions earned by our sales personnel. In addition, during each period, we incurred expenses related to the expansion of our sales operations in the United States and, to a lesser extent, in South Korea and Taiwan.
General and administration
General and administration expense primarily consists of personnel costs for our executive, information technology, finance, legal, human resources, corporate development and administrative personnel, as well as legal, accounting and other professional service fees and other corporate expenses that are charged to the profit and loss account, and depreciation and amortization. We expect to increase general and administrative expense, as a percentage of revenue and on an absolute basis, reflecting investments in our public company infrastructure.
Research and development
Research and development costs that are included in selling, general and administrative expenses relate primarily to costs incurred in the research and development of new internal use software products and enhancements to our existing internal use software products that are used by us principally to provide our services and solutions to clients and do not meet the criteria for capitalization. These costs are expensed as incurred.
Income taxes
Income tax expense consists of the taxes we pay in several countries on our taxable income as well as deferred taxes that reflect the impact of temporary differences between assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes and tax loss carryforwards. For further information on the breakdown of our income tax components, see " Note 13 " in each of our annual consolidated financial statements, and " Note 9 " in our interim condensed consolidated financial statements, included in this prospectus beginning on page F-1 as well as additional information on recent developments in our tax position.
Results of Operations
The following table summarizes our consolidated statements of operations for the periods indicated in thousands of yen and as a percentage of total revenues, which represented ¥1,098.2 million, ¥2,686.1 million and ¥5,136.2 million ($59.3 million) in the years ended March 31,
42
2010, 2011 and 2012, respectively, and ¥3,784.0 million and ¥3,542.3 millon ($40.9 million) in the nine months ended December 31, 2011 and 2012, respectively.
|
Year ended March 31, | Nine months ended December 31, | |||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Consolidated Statements of
Operations Data |
2010 | 2011 | 2012 | 2011 | 2012 | ||||||||||||||||||||||||||
|
(thousands of yen, except percentages)
|
(unaudited, in thousands of yen except percentages)
|
|||||||||||||||||||||||||||||
Revenue |
¥ | 1,013,490 | 92.3 | % | ¥ | 2,635,430 | 98.1 | % | ¥ | 5,095,939 | 99.2 | % | ¥ | 3,754,013 | 99.2 | % | ¥ | 3,516,633 | 99.3 | % | |||||||||||
Revenue from a related party |
80,072 | 7.3 | 40,764 | 1.5 | 27,862 | 0.6 | 22,002 | 0.6 | 14,783 | 0.4 | |||||||||||||||||||||
Operating revenue from reimbursed direct costs |
4,605 | 0.4 | 9,899 | 0.4 | 12,427 | 0.2 | 7,943 | 0.2 | 10,921 | 0.3 | |||||||||||||||||||||
Total Revenue |
1,098,167 | 100.0 | 2,686,093 | 100.0 | 5,136,228 | 100.0 | 3,783,958 | 100.0 | 3,542,337 | 100.0 | |||||||||||||||||||||
Cost of revenue |
703,010 | 64.0 | 966,352 | 36.0 | 1,600,425 | 31.2 | 1,205,360 | 31.9 | 1,314,078 | 37.1 | |||||||||||||||||||||
Reimbursed direct costs |
4,605 | 0.4 | 9,899 | 0.4 | 12,427 | 0.2 | 7,943 | 0.2 | 10,921 | 0.3 | |||||||||||||||||||||
Selling, general and administrative expenses |
574,001 | 52.3 | 669,742 | 24.9 | 1,153,438 | 22.5 | 676,192 | 17.9 | 1,365,845 | 38.6 | |||||||||||||||||||||
Total operating expense |
1,281,616 | 116.7 | 1,645,993 | 61.3 | 2,766,290 | 53.9 | 1,889,495 | 49.9 | 2,690,844 | 76.0 | |||||||||||||||||||||
Operating income (loss) |
(183,449 | ) | (16.7 | ) | 1,040,100 | 38.7 | 2,369,938 | 46.1 | 1,894,463 | 50.1 | 851,493 | 24.0 | |||||||||||||||||||
Interest income |
3,441 |
0.3 |
3,410 |
0.1 |
2,052 |
* |
1,638 |
* |
990 |
* |
|||||||||||||||||||||
Interest expense |
(13,247 | ) | (1.2 | ) | (14,262 | ) | (0.5 | ) | (13,360 | ) | (0.3 | ) | (8,624 | ) | (0.2 | ) | (14,421 | ) | (0.4 | ) | |||||||||||
Foreign currency exchange gains (losses) |
(14,384 | ) | (1.3 | ) | (39,942 | ) | (1.5 | ) | 10,294 | 0.2 | (35,590 | ) | (0.9 | ) | 78,971 | 2.2 | |||||||||||||||
Impairment losses on investments in securities |
(108,540 | ) | (9.9 | ) | | | | | |||||||||||||||||||||||
Dividend income |
| | 4,500 | 0.1 | | 4,500 | 0.1 | ||||||||||||||||||||||||
Othernet |
94 | * | 1,296 | * | 655 | * | 5,211 | 0.1 | (2,027 | ) | (0.1 | ) | |||||||||||||||||||
Income (loss) before income taxes |
(316,085 | ) | (28.8 | ) | 990,602 | 36.9 | 2,374,079 | 46.2 | 1,857,458 | 49.1 | 919,506 | 26.0 | |||||||||||||||||||
Income taxes |
102,213 |
9.3 |
202,827 |
7.6 |
1,003,441 |
19.5 |
800,115 |
21.1 |
378,929 |
10.7 |
|||||||||||||||||||||
Net income (loss) |
(418,298 | ) | (38.1 | ) | 787,775 | 29.3 | 1,370,638 | 26.7 | 1,057,343 | 27.9 | 540,577 | 15.3 | |||||||||||||||||||
Less: Net income (loss) attributable to noncontrolling interests |
|
(933 |
) |
* |
2,951 |
0.1 |
2,613 |
* |
4,578 |
* |
|||||||||||||||||||||
Net income (loss) attributable to UBIC, Inc. shareholders |
¥ | (418,298 | ) | 38.1 | % | ¥ | 788,708 | 29.4 | % | ¥1,367,687 | 26.6 | % | ¥ | 1,054,730 | 27.9 | % | ¥ | 535,999 | 15.1 | % | |||||||||||
Nine months ended December 31, 2011 and 2012
Total Revenue
|
Nine months ended December 31, | Change 2012 vs. 2011 | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2011 | 2012 | 2012 | In yen | Percentage | |||||||||||
|
(in thousands, except percentages)
|
|||||||||||||||
Revenue |
¥ | 3,754,013 | ¥ | 3,516,633 | $ | 40,589 | ¥ | (237,380 | ) | (6.3 | )% | |||||
Revenue from a related party |
22,022 | 14,783 | 171 | (7,219 | ) | (32.8 | ) | |||||||||
Operating revenue from reimbursed direct costs |
7,943 | 10,921 | 126 | 2,978 | 37.5 | |||||||||||
Total revenue |
¥ | 3,783,958 | ¥ | 3,542,337 | $ | 40,886 | ¥ | (241,621 | ) | (6.4 | )% |
Total revenue in the nine months ended December 31, 2012 decreased by ¥241.6 million, or 6.4%, to ¥3,542.3 million ($40.9 million) from ¥3,784.0 million in the nine months ended December 31, 2011. This decrease was driven mainly by a significant reduction in revenue from the manual review services
43
of our eDiscovery business, offset in part by a combination of continued growth in our other eDiscovery services including data collection, process and analysis, production, and data hosting.
As shown in the table below, revenue from manual review services declined by ¥1,190.8 million to ¥707.0 million ($8.2 million) in the nine months ended December 31, 2012 from ¥1,897.8 million in the nine months ended December 31, 2011, while revenue from other eDiscovery services increased by ¥887.4 million to ¥2,604.1 million ($30.1 million) in the nine months ended December 31, 2012 from ¥1,716.7 million in the nine months ended December 31, 2011.
During the nine months ended December 31, 2012, the decline, compared with the nine months ended December 31, 2011, in eDiscovery revenue from manual review of almost ¥1.2 billion was only partially offset by an increase in other eDiscovery revenue of almost ¥900 million, resulting in an overall decrease in revenue from eDiscovery services of almost ¥300 million. As a result, during the nine months ended December 31, 2012, revenue from eDiscovery support services represented ¥3,311.1 million ($38.2 million), or 93.5% of our total revenue of ¥3,542.3 million ($40.9 million), while computer forensic investigation services, sales of forensic tools and training and other services totaled ¥231.3 million ($2.7 million), or 6.5% of total revenue. This compared with eDiscovery revenue from support services of ¥3,614.4 million, or 95.5% of our total revenue of ¥3,784.0 million, and revenue from computer forensic investigation services, sales of forensic tools and training and other services of ¥169.6 million, or 4.5% of our total revenue in the nine months ended December 31, 2011.
The decrease in manual review services was largely due, as noted above, to the significantly increased tendency of Asian law firms using our eDiscovery services to bring the manual review services in-house during the nine-month period ended December 31, 2012. We expect that this trend to continue with respect to Asian law firms, offset to the extent that we are able to increase sales of our eDiscovery services to non-Asian law firms that, generally, lack sufficient language capability to bring the review component in-house. In addition, to the extent that predictive coding reduces the volume of information produced by TAR requiring human review to be less significant, we believe that, in general, the portion of eDiscovery revenue related to human review will be reduced.
We believe that, if we are successful in expanding our operations and resulting revenue outside of Asia, we may be able to find new sources of manual review revenue by increasing services we provide to companies and law firms with relatively limited Asian language capabilities. We also believe that expanded revenue from other eDiscovery services, notably TAR, offer the primary growth areas for our business. Therefore, we expect that, as we continue to refine and expand our capabilities and marketing of these other eDiscovery services, these offerings will produce revenue growth and will reconfirm the trend established in the three years ended March 31, 2012, in which our eDiscovery services represented an expanding share of our business and revenue.
Our revenue from a related party in the nine months ended December 31, 2012 decreased by ¥7.2 million, or 32.8%, to ¥14.8 million ($0.2 million) from ¥22.0 million in the nine months ended December 31, 2011. This decrease in our revenue from a related party is primarily attributable to a decrease in sales of forensic tools by the related party. Our operating revenue from reimbursed direct costs in the nine months ended December 31, 2012 increased by 37.5% to ¥10.9 million ($0.1 million) from ¥7.9 million in the nine months ended December 31, 2011. Operating revenue from reimbursed
44
direct costs represents costs incurred on behalf of a client that are subsequently reimbursed and is completely offset by the equivalent component of operating expense.
Total operating expense
|
Nine months ended December 31, | Change 2012 vs. 2011 | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2011 | 2012 | 2012 | In yen | Percentage | |||||||||||
|
|
(unaudited, in thousands, except percentages)
|
||||||||||||||
Cost of revenue |
¥ | 1,205,360 | ¥ | 1,314,078 | $ | 15,167 | ¥ | 108,718 | 9.0 | % | ||||||
Reimbursed direct costs |
7,943 | 10,921 | 126 | 2,978 | 37.5 | |||||||||||
Selling, general and administrative expenses |
676,192 | 1,365,845 | 15,765 | 689,653 | 102.0 | |||||||||||
Total operating expense |
¥ | 1,889,495 | ¥ | 2,690,844 | $ | 31,058 | ¥ | 801,349 | 42.4 | % | ||||||
Percentage of total revenue |
49.9 | % | 76.0 | % |
Our cost of revenue in the nine months ended December 31, 2012 increased by ¥108.7 million, or 9.0%, to ¥1,314.1 million ($15.2 million) from ¥1,205.4 million in the nine months ended December 31, 2011, while our revenue declined by 6.4% during the same period. This cost of revenue increase is attributable to certain activities that resulted in increased fixed costs, including: continuing investment to expand our team of professional service and support engineers; an increase in amortization related to the capitalized cost of our proprietary software, including Lit i View; and the expansion of our operational infrastructure, such as establishing data centers in multiple locations. At the same time, cost of revenue was also impacted by a reduction in variable costs that decreased with the change in mix of services that we provided to our customers. The most significant component of such expenses is the cost of labor related to manual review services. This cost in the nine months ended December 31, 2012 decreased by ¥390.6 million, or 65.1% to ¥209.8 million ($2.4 million) from ¥600.4 million in the nine months ended December 31, 2011. This reduction in costs was more than offset by an increase in fixed costs, producing an increase in our overall cost of revenue in the nine months ended December 31, 2012, even as our total revenue declined. If the decrease in labor costs related to manual review services is excluded, the increase in total operating expense would be almost ¥1.2 billion (rather than the actual ¥801.3 million) in the nine months ended December 31, 2012 compared with the prior period.
Our reimbursed direct costs in the nine months ended December 31, 2012 increased by 37.5% to ¥10.9 million ($0.1 million) from ¥7.9 million in the nine months ended December 31, 2011. Reimbursed direct costs represent costs incurred on behalf of a client that are subsequently reimbursed. Therefore, this increase in our reimbursed direct costs was completely offset by related revenue and remained largely insignificant to our overall results.
Our selling, general and administrative expenses in the nine months ended December 31, 2012 increased by ¥689.7 million, or 102.0%, to ¥1,365.9 million ($15.8 million) from ¥676.2 million in the nine months ended December 31, 2011. This increase was primarily attributable to an increase in payroll and compensation costs, which increased by ¥222.7 million, or 73.2%, to ¥526.9 million ($6.08 million) from ¥304.2 million, while our headcount increased to 142 officers and employees at the end of December 31, 2012 from 75 at December 31, 2011. During the same period our other selling, general and administrative expenses such as, professional fees increased by ¥169.9 million, or 157.9%, to ¥277.5 million ($3.2 million) from ¥107.6 million, office rent increased by ¥42.0 million, or 227.0% to ¥60.5 million ($0.7 million) from ¥18.5 million, travel expense increased by ¥44.1 million, or 112.5% to ¥83.3 million ($0.96 million) from ¥39.3 million, recruiting and employee training expense increased by ¥29.3 million, or 73.8% to ¥69.0 million ($0.80 million) from ¥39.7 million and corporate public relations and communication expense increased by ¥33.3 million, or 206.8% to ¥49.4 million ($0.57 million) from ¥16.1 million.
45
This increase in sales and marketing expenses was primarily due to an increase in our business development activities in the United States where we expanded our sales and marketing efforts principally to law firms that provide international legal services requiring eDiscovery services for Asian clients. We also invested in and strengthened our sales and marketing capability in the emerging regions of Korea and Taiwan in addition to Japan, our main revenue source to date. The increase in general and administrative expenses was primarily due to the strengthening and improvement of our administrative capability and capacity to support business growth. The areas for such improvement include, compliance and internal control, streamlining business processes, information systems and IT, coping with global requirements of financial accounting, and supporting emerging regions. For this purpose, we have hired a significant number of qualified outside professionals in addition to our own employee hiring, with respect to which we increased general and administrative staff headcount from 18 as of December 31, 2011, to 33 as of December 31, 2012.
This increase in selling, general and administrative expense is part of our efforts to expand our capabilities and infrastructure to match the rapid growth of our business, especially over the last three years. Our investment is also an attempt to address further advancement of technology, global operation capability and capacity, and overall infrastructure to be ready for further expansion of our business in each market we serve.
Operating income
|
Nine months ended December 31, | Change 2012 vs. 2011 | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2011 | 2012 | 2012 | In yen | Percentage | |||||||||||
|
(in thousands, except percentages)
|
|||||||||||||||
Operating income |
¥ | 1,894,463 | ¥ | 851,493 | $ | 9,828 | ¥ | (1,042,970 | ) | (55.1 | )% | |||||
Percentage of total revenue |
50.1 | % | 24.0 | % |
As a result of the above factors, our operating income in the nine months ended December 31, 2012 decreased to ¥851.5 million ($9.8 million) from ¥1,894.5 million during the nine months ended December 31, 2011 and decreased as a percentage of total revenue to 24.0% from 50.1%. This represents a 26.1% decrease in the ratio of operating income to total revenue in the nine months ended December 31, 2012 compared with the earlier period.
This decrease in operating income was principally due to two factors. As noted above, total revenue decreased by ¥241.6 million ($2.8 million) in the nine months ended December 31, 2012 compared with the nine months ended December 31, 2011. In addition, the increase of ¥689.7 million ($8.0 million) in selling, general and administrative expenses in the nine months ended December 31, 2012 compared with the nine months ended December 31, 2011 played a particularly important role in this decrease. As explained above under the caption " Total operating expense ," this increase was a part of our general expansion effort in this area, after a number of periods in which the growth of our internal infrastructure lagged behind the rapid expansion of our business, requiring us to make significant expenditures in this area.
We believe that, although we expect to continue to make significant investments in expanding and improving our operations that will be reflected in increased operating expenses, these expenditures will lead to an expansion of our total revenues and will be in proportion to our increased resources. We expect, therefore, that the decrease in operating income as a percentage of total revenues should be reversed in future proceeds and have targeted a proportion of approximately 30% to 35%.
46
Total other expensenet
|
Nine months ended December 31, | Change 2012 vs. 2011 | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2011 | 2012 | 2012 | In yen | Percentage | |||||||||||
|
(in thousands, except percentages)
|
|||||||||||||||
Interest income |
¥ | 1,638 | ¥ | 990 | $ | 11 | ¥ | (648 | ) | (39.6 | )% | |||||
Interest expense |
(8,264 | ) | (14,421 | ) | (166 | ) | (6,157 | ) | (74.5 | )% | ||||||
Foreign currency exchange gains (losses) |
(35,590 | ) | 78,971 | 911 | 114,561 | N.A. | ||||||||||
Dividend income |
| 4,500 | 52 | 4,500 | N.A. | |||||||||||
Othernet |
5,211 | (2,027 | ) | (23 | ) | (7,238 | ) | N.A. | ||||||||
Total other expensenet |
¥ | (37,005 | ) | ¥ | 68,013 | $ | 785 | ¥ | 105,018 | N.A. | ||||||
Percentage of total revenue |
(1.0 | )% | 1.9 | % |
Our interest income in the nine months ended December 31, 2012 decreased by 39.6% to ¥1.0 million ($0.01 million) from ¥1.6 million in the nine months ended December 31, 2011. This decrease in our interest income was primarily attributable to a lower valuation difference on a swap transaction in the nine months ended December 31, 2012 compared with the nine months ended December 31, 2011.
Our interest expense in the nine months ended December 31, 2012 increased by 74.5% to ¥14.4 million ($0.2 million) from ¥8.3 million in the nine months ended December 31, 2011. This increase in our interest expense was primarily attributable to our higher level of outstanding debt during a majority of the period in 2012 as compared with the period in 2011.
We had a foreign exchange gain of ¥79.0 million ($0.9 million) in the nine months ended December 31, 2012, whereas we had a foreign exchange loss of ¥35.6 million in the same period in the previous year. This significant favorable net gain in foreign exchange was mainly attributable to the significantly weakened position of the Japanese yen against the U.S. dollar as the Japanese yen declined from 76.98 yen per dollar at the end of December 2011 to 86.64 yen per dollar at the end of December 2012 or 12.5% decline of yen value during the 12 month period.
Income before income taxes
|
Nine months ended December 31, | Change 2012 vs. 2011 | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2011 | 2012 | 2012 | In yen | Percentage | |||||||||||
|
(in thousands, except percentages)
|
|||||||||||||||
Income before income taxes |
¥ | 1,857,458 | ¥ | 919,506 | $ | 10,613 | ¥ | (937,952 | ) | (50.5 | )% | |||||
Percentage of total revenue |
49.1 | % | 26.0 | % |
Our income before income taxes in the nine months ended December 31, 2012 decreased by 50.5% to ¥919.5 million ($10.6 million) from ¥1,857.5 million in the nine months ended December 31, 2011. This represents a 23.1% decrease in the ratio of income before income taxes to total revenue in the nine months ended December 31, 2012 compared with the earlier period.
Income taxes
|
Nine months ended December 31, | Change 2012 vs. 2011 | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2011 | 2012 | 2012 | In yen | Percentage | |||||||||||
|
(in thousands, except percentages)
|
|||||||||||||||
Income taxes |
¥ | 800,115 | ¥ | 378,929 | $ | 4,374 | ¥ | (421,186 | ) | (52.6 | )% | |||||
Percentage of total revenue |
21.1 | % | 10.7 | % | ||||||||||||
Percentage of income before income taxes |
43.1 | % | 41.2 | % |
47
Our income taxes are comprised of current income taxes, partially (and in the periods considered, insignificantly) reduced by deferred income taxes. Income taxes in the nine months ended December 31, 2012 decreased to ¥378.9 million ($4.4 million) from ¥800.1 million from the comparable period in the previous fiscal year. This decrease was primarily attributable to the ¥938.0 million decrease in income before income taxes in the nine months ended December 31, 2012.
Net income (loss)
|
Nine months ended December 31, | Change 2012 vs. 2011 | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2011 | 2012 | 2012 | In yen | Percentage | |||||||||||
|
(in thousands, except percentages)
|
|||||||||||||||
Net income |
¥ | 1,057,343 | ¥ | 540,577 | $ | 6,239 | ¥ | (516,766 | ) | (48.9 | )% | |||||
Percentage of total revenue |
27.9 | % | 15.3 | % |
Our net income in the nine months ended December 31, 2012 decreased by 48.9% to ¥540.6 million ($6.2 million) from ¥1,057.3 in the nine months ended December 31, 2011. This decrease in net income was primarily attributable to the ¥801.3 million increase in total operating expense in the nine months ended December 31, 2012.
Operating segments
Our operating segments are defined as components of an enterprise that engage in business activities from which it may earn revenues and incur expenses and for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company provides a variety of eDiscovery and forensic services which are provided by UBIC and its domestic subsidiaries for domestic (Japanese) clients, by UBIC North America, Inc (UNA)., a U.S.-based, wholly-owned subsidiary of UBIC for clients represented by U.S.-based attorneys who contracted UNA, and by other foreign subsidiaries for foreign clients other than those who contracted UNA. The Company's operations in Japan, the U.S. and others have been identified as the three operating segments of the Company. Others include South Korea and Taiwan. The Company's chief executive officer, who is also the Company's chief operating decision maker, regularly reviews the performance of the three operating segments and makes decisions regarding allocation of resources. The Company's chief operating decision maker utilizes various measurements prepared based on accounting principles generally accepted in Japan (Japanese GAAP) which include revenues, operating income or loss and segment assets to assess segment performance and allocate resources to segments.
During the year ended March 31, 2012, the Company established subsidiaries in countries other than Japan and the U.S. Management reevaluated the structure of its business and devised a new reportable segment structure. All periods presented have been revised to report segment results under the new reportable segment structure.
The Company's reportable segments are the same as its operating segments.
48
Segment information for the nine months ended December 31, 2011 and 2012 or as of March 31 and December 31, 2012 is presented below:
Revenue:
|
Thousands of Yen |
Thousands of
U.S. Dollars |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
December 31, 2011 | December 31, 2012 | December 31, 2012 | |||||||
Japan |
||||||||||
Outside customers |
¥ | 3,348,652 | ¥ | 2,500,124 | $ | 28,856 | ||||
Intersegment |
195,696 | 478,187 | 5,519 | |||||||
Total |
3,544,348 | 2,978,311 | 34,375 | |||||||
U.S. |
||||||||||
Outside customers |
289,885 | 902,050 | 10,411 | |||||||
Intersegment |
29,453 | 23,671 | 273 | |||||||
Total |
319,338 | 925,721 | 10,684 | |||||||
Other |
||||||||||
Outside customers |
| 141,916 | 1,638 | |||||||
Intersegment |
| | | |||||||
Total |
| 141,916 | 1,638 | |||||||
Elimination |
(225,149 | ) | (501,858 | ) | (5,792 | ) | ||||
Total revenue after eliminations |
3,638,537 | 3,544,090 | 40,905 | |||||||
Adjustments*(1) |
145,421 | (1,753 | ) | (19 | ) | |||||
Total consolidated revenue |
¥ | 3,783,958 | ¥ | 3,542,337 | $ | 40,886 | ||||
Segment Performance Measure:
|
Thousands of Yen |
Thousands of
U.S. Dollars |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
December 31, 2011 | December 31, 2012 | December 31, 2012 | |||||||
Segment profit (loss) |
||||||||||
Japan |
¥ | 1,853,804 | ¥ | 774,596 | $ | 8,940 | ||||
U.S. |
(67,691 | ) | 139,976 | 1,616 | ||||||
Other |
| (31,173 | ) | (360 | ) | |||||
Total segment profit after eliminations |
1,786,113 | 883,399 | 10,196 | |||||||
Adjustments*(2) |
108,350 | (31,906 | ) | (368 | ) | |||||
Total consolidated operating income |
1,894,463 | 851,493 | 9,828 | |||||||
Unallocated amounts: |
||||||||||
Interest income |
1,638 | 990 | 11 | |||||||
Interest expense |
(8,264 | ) | (14,421 | ) | (166 | ) | ||||
Foreign currency exchange gains (losses) |
(35,590 | ) | 78,971 | 911 | ||||||
Dividend income |
| 4,500 | 52 | |||||||
Othernet |
5,211 | (2,027 | ) | (23 | ) | |||||
Total consolidated income before income taxes |
¥ | 1,857,458 | ¥ | 919,506 | $ | 10,613 | ||||
49
Segment Assets:
|
Thousands of Yen |
Thousands of
U.S. Dollars |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
March 31, 2012 | December 31, 2012 | December 31, 2012 | |||||||
Segment assets |
||||||||||
Japan |
¥ | 4,830,227 | ¥ | 4,265,616 | $ | 49,234 | ||||
U.S. |
895,284 | 1,081,038 | 12,477 | |||||||
Other |
134,294 | 323,382 | 3,732 | |||||||
Elimination |
(976,279 | ) | (1,141,390 | ) | (13,174 | ) | ||||
Total segment assets after eliminations |
4,883,526 | 4,528,646 | 52,269 | |||||||
Adjustments*(3) |
96,150 | 226,089 | 2,612 | |||||||
Total consolidated assets |
¥ | 4,979,676 | ¥ | 4,754,735 | $ | 54,881 | ||||
Entity-Wide Information:
The information concerning revenue by service categories for the nine months ended December 31, 2011 and 2012 is presented below:
|
Thousands of Yen |
Thousands of
U.S. Dollars |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2011 | 2012 | 2012 | |||||||
eDiscovery |
||||||||||
Review |
¥ | 1,897,786 | ¥ | 706,995 | $ | 8,160 | ||||
Other(1) |
1,716,651 | 2,604,061 | 30,056 | |||||||
Total |
3,614,437 | 3,311,056 | 38,216 | |||||||
Investigation |
114,785 | 176,716 | 2,040 | |||||||
Sales of forensic tools |
28,646 | 18,692 | 216 | |||||||
Forensic training |
24,990 | 31,552 | 364 | |||||||
Other |
1,100 | 4,321 | 50 | |||||||
Total revenue |
¥ | 3,783,958 | ¥ | 3,542,337 | $ | 40,886 | ||||
Years ended March 31, 2011 and 2012
Total Revenue
|
Year ended March 31, | Change 2012 vs. 2011 | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2011 | 2012 | 2012 | In yen | Percentage | |||||||||||
|
(in thousands, except percentages)
|
|||||||||||||||
Revenue |
¥ | 2,635,430 | ¥ | 5,095,939 | $ | 58,817 | ¥ | 2,460,509 | 93.4 | % | ||||||
Revenue from a related party |
40,764 | 27,862 | 322 | (12,902 | ) | (31.7 | )% | |||||||||
Operating revenue from reimbursed direct costs |
9,899 | 12,427 | 143 | 2,528 | 25.5 | % | ||||||||||
Total revenue |
¥ | 2,686,093 | ¥ | 5,136,228 | $ | 59,282 | ¥ | 2,450,135 | 91.2 | % |
50
Total revenue for the year ended March 31, 2012 increased by ¥2,450.1 million, or 91.2%, to ¥5,136.2 million ($59.3 million) from ¥2,686.1 million. Our revenue in the year ended March 31, 2012, most of which was attributable to our core eDiscovery services, increased by ¥2,460.5 million, or 93.4%, to ¥5,095.9 million ($58.8 million) from ¥2,635.4 million in the year ended March 31, 2011. This increase in our revenue and total revenue was primarily attributable to the expansion of our eDiscovery operations. Revenue in the year ended March 31, 2012 reflected the receipt of large and midsize orders associated with continuing growth in the number of international government investigations begun in the previous year and the expanding scope of these investigations. Our revenue from a related party in the year ended March 31, 2012 decreased by ¥12.9 million, or 31.7%, to ¥27.9 million ($0.3 million) from ¥40.8 million in the year ended March 31, 2011. This decrease in our revenue from a related party is primarily attributable to a decrease in sales of forensic tools by the related party. Our operating revenue from reimbursed direct costs in the year ended March 31, 2012 increased by 25.5% to ¥12.4 million ($0.1 million) from ¥9.9 million in the year ended March 31, 2011. Operating revenue from reimbursed direct costs represents costs incurred on behalf of a client that are subsequently reimbursed and is completely offset by the equivalent component of operating expense.
As discussed in " Our BusinessOur Growth Strategy ," our goals in implementing our growth strategy include expansion of our global operations, notably in the United States. We believe that, if we are successful in implementing our growth strategy, the expansion of our total revenue will be sustainable in future periods. However, we cannot assure you that the pace of our revenue growth (the driver of our plans to increase total revenue) will be maintained, even if our strategy is successfully implemented.
Total operating expense
|
Year ended March 31, | Change 2012 vs. 2011 | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2011 | 2012 | 2012 | In yen | Percentage | |||||||||||
|
(in thousands, except percentages)
|
|||||||||||||||
Cost of revenue |
¥ | 966,352 | ¥ | 1,600,425 | $ | 18,472 | ¥ | 634,073 | 65.6 | % | ||||||
Reimbursed direct costs |
9,899 | 12,427 | 143 | 2,528 | 25.5 | % | ||||||||||
Selling, general and administrative expenses |
669,742 | 1,153,438 | 13,313 | 483,696 | 72.2 | % | ||||||||||
Total operating expense |
¥ | 1,645,993 | ¥ | 2,766,290 | $ | 31,928 | ¥ | 1,120,297 | 68.1 | % | ||||||
Percentage of total revenue |
61.3 | % | 53.9 | % |
Our cost of revenue in the year ended March 31, 2012 increased by ¥634.0 million, or 65.6%, to ¥1,600.4 million ($18.5 million) from ¥966.4 million in the year ended March 31, 2011. This increase was primarily attributable to the growth in our operations, especially in the area of eDiscovery, reflected in the rapid growth of our revenue in the year ended March 31, 2012 compared with the year ended March 31, 2011.
While we were successful in reducing our total operating expense as a percentage of total revenue to 53.9% in the year ended March 31, 2012 from 61.3% in the year ended March 31, 2011 and intend to continue these efforts going forward, it may be difficult to achieve the same level of percentage reductions in the future and we cannot assure you that this trend in cost reduction, both in absolute terms and as a percentage of total revenue, may not be attenuated or reversed. To the contrary, our spending for this line item may need to be increased if we are to maintain a high level of revenue growth in future periods. Our growth in revenue has not been matched by an equal expansion of our internal selling, managerial and financial capabilities, Though our total revenue increased from ¥1,098.2 million in the year ended March 31, 2010 to ¥5,136.2 million in the year ended March 31, 2012 (approximately 368%), our expenditures for selling, general and administrative expenses rose only from ¥574.0 million to ¥1,153.4 million (approximately 101%). In this context, we expect to increase our spending on internal infrastructure as we continue to make improvements in this area.
51
Our reimbursed direct costs in the year ended March 31, 2012 increased by 25.5% to ¥12.4 million ($0.1 million) from ¥9.9 million in the year ended March 31, 2011. Reimbursed direct costs represent costs incurred on behalf of a client that are subsequently reimbursed. Therefore, this increase in our reimbursed direct costs was completely offset by related revenue and remained largely insignificant to our overall results.
Our selling, general and administrative expenses in the year ended March 31, 2012 increased by ¥483.7 million, or 72.2%, to ¥1,153.4 million ($13.3 million) from ¥669.7 million in the year ended March 31, 2011. This increase in general and administrative expenses in the year ended March 31, 2012 was primarily attributable to an increase in payroll and compensation costs, which increased by ¥185.1 million, or 55.0%, to ¥521.7 million ($6.0 million) from ¥336.6 million, professional fees increased by ¥103.6 million, or 101.8%, to ¥205.4 million ($2.4 million) from ¥101.8 million, recruiting and training expense increased by ¥29.2 million, or 117.7%, to ¥54.0 million ($0.6 million) from ¥24.8 million, supplies expense increased by ¥29.0, or 426.5%, to ¥35.8 million ($0.4 million) from ¥6.8 million, communication expense increased by ¥24.6 million, or 190.7%, to ¥37.5 million ($0.4 million) from ¥12.9 million, staffing fee increased by ¥20.3 million, or 580.0%, to ¥23.8 million ($0.3 million) from ¥3.5 million, overseas travel expenses increased by ¥18.2 million, or 222.0%, to ¥26.4 million ($0.3 million) from ¥8.2 million. These broad base increases in our general administrative expenses were driven by our strategy to build and enhance the basic capability to support our growing business. The increase in sales and marketing expenses from the year ended March 31, 2011 to the year ended March 31, 2012 was primarily due to business development activities of two new regions, South Korea and Taiwan, as well as the increased business development activities in Japan and United States. In addition to the United States headquarters in Redwood City, CA, we established two other branch locations for the United States in Washington, DC and New York, NY, in the year ended March 31, 2012. Strategic marketing activities in the year ended March 31, 2012 also included professional seminars held in U.S. branch locations to increase our brand recognition and demonstrate our eDiscovery and forensic investigation capabilities. The increase in general and administration expenses from the year ended March 31, 2011 to the year ended March 31, 2012 was primarily due to the improvements in administrative support levels within business process management, compliance and internal control, and increased supporting personnel in the new regions. In addition to the use of significant outside professional support, we also increased general and administrative staff headcount from 17 in the year ended March 31, 2011 to 25 in the year ended March 31, 2012.
The considerable increase in our total operating expense in the year ended March 31, 2012 compared with the year ended March 31, 2011 in absolute terms of ¥1,120.3 million, or 68.1%, was moderate in comparison with the related increase in total revenue of ¥2,450.1 million, or 91.2%.
Operating income
|
Year ended March 31, | Change 2012 vs. 2011 | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2011 | 2012 | 2012 | In yen | Percentage | |||||||||||
|
(in thousands, except percentages)
|
|||||||||||||||
Operating income |
¥ | 1,040,100 | ¥ | 2,369,938 | $ | 27,354 | ¥ | 1,329,838 | 127.9 | % | ||||||
Percentage of total revenue |
38.7 | % | 46.1 | % |
As a result of the above factors, our operating income in the year ended March 31, 2012 more than doubled to ¥2,369.9 million ($27.4 million) from ¥1,040.1 million compared with the year ended March 31, 2011 and increased as a percentage of total revenue to 46.1% from 38.7%. This represents a 7.4% improvement in the ratio of operating income to total revenue in the year ended March 31, 2012 compared with the earlier period.
52
Total other expensenet
|
Year ended March 31, | Change 2012 vs. 2011 | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2011 | 2012 | 2012 | In yen | Percentage | |||||||||||
|
(in thousands, except percentages)
|
|||||||||||||||
Interest income |
¥ | 3,410 | ¥ | 2,052 | $ | 24 | ¥ | (1,358 | ) | (39.8 | )% | |||||
Interest expense |
(14,262 | ) | (13,360 | ) | (154 | ) | 902 | 6.3 | % | |||||||
Foreign currency exchange gains (losses) |
(39,942 | ) | 10,294 | 119 | 50,236 | N.A. | ||||||||||
Dividend income |
| 4,500 | 52 | 4,500 | N.A. | |||||||||||
Othernet |
1,296 | 655 | 8 | (641 | ) | (49.5 | )% | |||||||||
Total other expensenet |
¥ | (49,498 | ) | ¥ | 4,141 | $ | 49 | ¥ | 53,639 | N.A. | ||||||
Percentage of total revenue |
(1.8 | )% | 0.1% |
Our interest income in the year ended March 31, 2012 decreased by 39.8% to ¥2.1 million ($0.02 million) from ¥3.4 million in the year ended March 31, 2011. This decrease in our interest income was primarily attributable to a lower valuation difference on a swap transaction in the year ended March 31, 2012 compared with the year ended March 31, 2011.
Our interest expense in the year ended March 31, 2012 decreased by 6.3% to ¥13.4 million ($0.2 million) from ¥14.3 million in the year ended March 31, 2011. This decrease in our interest expense was primarily attributable to our lower level of outstanding debt during a majority of the year ended March 31, 2012 as compared with the year ended March 31, 2011.
We had foreign currency exchange gain of ¥10.3 million ($0.1 million) in the year ended March 31, 2012 as compared to the previous fiscal year loss of ¥39.9 million. This change in foreign exchange gains (losses) was primarily attributable to a combination of higher yen in the year ended March 31, 2011 and smaller fluctuation of exchange rates in the year ended March 31, 2012 than in the year ended March 31, 2011.
Dividend income in the year ended March 31, 2012 was ¥4.5 million ($0.05 million) compared with the previous year where we had no dividend income. This was primarily attributable to dividend income related to investments in securities.
Income before income taxes
|
Year ended March 31, | Change 2012 vs. 2011 | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2011 | 2012 | 2012 | In yen | Percentage | |||||||||||
|
(in thousands, except percentages)
|
|||||||||||||||
Income before income taxes |
¥ | 990,602 | ¥ | 2,374,079 | $ | 27,403 | ¥ | 1,383,477 | 139.7 | % | ||||||
Percentage of total revenue |
36.9 | % | 46.2 | % |
Our income before income taxes in the year ended March 31, 2012 increased by 139.7% to ¥2,374.1 million ($27.4 million) from ¥990.6 million in the year ended March 31, 2011. This represents a 9.3% increase in the ratio of income before income taxes to total revenue in the year ended March 31, 2012 compared with the previous year.
Income taxes
|
Year ended March 31, | Change 2012 vs. 2011 | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2011 | 2012 | 2012 | In yen | Percentage | |||||||||||
|
(in thousands, except percentages)
|
|||||||||||||||
Income taxes |
¥ | 202,827 | ¥ | 1,003,441 | $ | 11,582 | ¥ | 800,614 | 394.7 | % | ||||||
Percentage of total revenue |
7.6 | % | 19.5 | % | ||||||||||||
Percentage of income before income taxes |
20.5 | % | 42.3 | % |
53
Our income taxes are comprised of income tax-current, partially (and in the periods considered, insignificantly) reduced by income tax-deferred. Our income taxes in the year ended March 31, 2012 increased by ¥800.6 million or 394.7% to ¥1,003.4 million ($11.6 million) from ¥202.8 million in the year ended March 31, 2011. This increase was primarily attributable to the ¥1,383.5 million increase in income before income taxes in the year ended March 31, 2011 compared with the previous year offset.
Net income
|
Year ended March 31, | Change 2012 vs. 2011 | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2011 | 2012 | 2012 | In yen | Percentage | |||||||||||
|
(in thousands, except percentages)
|
|||||||||||||||
Net income |
¥ | 787,775 | ¥ | 1,370,638 | $ | 15,821 | ¥ | 582,863 | 74.0 | % | ||||||
Percentage of total revenue |
29.3 | % | 26.7 | % |
Our net income in the year ended March 31, 2012 increased by 74.0% to ¥1,370.6 million ($15.8 million) from ¥787.8 million in the year ended March 31, 2011. This increase in net income was primarily attributable to the rapid growth of our eDiscovery revenue, which was only partially offset by a much more moderate increase in related operating expense.
Operating segments
Our operating segments are defined as components of our company that engage in business activities from which we earn revenues and incur expense and for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. We provide a variety of eDiscovery and forensic services which are provided by UBIC and its domestic subsidiaries for domestic (Japanese) clients, by UNA for clients represented by U.S.-based attorneys who contracted UNA, and by other foreign subsidiaries for foreign clients other than those who contracted UNA Our operations are divided in to three operating segments: Japan; the U.S.; and Other (which includes South Korea and Taiwan). Our chief executive officer, who is also our chief operating decision maker, regularly reviews the performance of the three operating segments and makes decisions regarding allocation of resources. Our chief operating decision maker utilizes various measurements prepared based on Japanese GAAP which include revenues, operating income or loss and segment assets to assess segment performance and allocate resources to segments.
During the year ended March 31, 2012, we established subsidiaries in countries other than Japan and U.S. Management re-evaluated the structure of its business and devised a new reportable segment structure. All periods presented have been revised to report segment results under the new reportable
54
segment structure. Our reportable segments are the same as its operating segments. Segment information for the years ended March 31, 2011 and 2012 is as follows:
Revenue
|
2011 | 2012 | 2012 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
|
(thousands of yen)
|
(thousands
of dollars) |
||||||||
Japan |
||||||||||
Outside clients |
¥ | 1,937,434 | ¥ | 4,245,265 | $ | 48,999 | ||||
Intersegment |
450,210 | 543,999 | 6,279 | |||||||
Total |
2,387,644 | 4,789,264 | 55,278 | |||||||
U.S. |
||||||||||
Outside clients |
804,494 | 882,389 | 10,185 | |||||||
Intersegment |
49,668 | 30,005 | 346 | |||||||
Total |
854,162 | 912,394 | 10,531 | |||||||
Other |
||||||||||
Outside clients |
| 381 | 4 | |||||||
Intersegment |
| 40,631 | 469 | |||||||
Total |
| 41,012 | 473 | |||||||
Elimination |
(499,878 | ) | (614,635 | ) | (7,094 | ) | ||||
Total revenue after eliminations |
2,741,928 | 5,128,035 | 59,188 | |||||||
Adjustments(1) |
(55,835 | ) | 8,193 | 94 | ||||||
Total consolidated revenue |
¥ | 2,686,093 | ¥ | 5,136,228 | $ | 59,282 | ||||
Segment Performance Measure:
|
2011 | 2012 | 2012 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
|
(thousands of yen)
|
(thousands
of dollars) |
||||||||
Segment profit (loss) |
||||||||||
Japan |
¥ | 1,019,194 | ¥ | 2,312,670 | $ | 26,693 | ||||
U.S. |
77,946 | 70,218 | 810 | |||||||
Other |
| (16,304 | ) | (188 | ) | |||||
Total segment profit after eliminations |
1,097,140 | 2,366,584 | 27,315 | |||||||
Adjustments(1) |
(57,040 | ) | 3,354 | 39 | ||||||
Total consolidated operating income |
1,040,100 | 2,369,938 | 27,354 | |||||||
Unallocated amounts: |
||||||||||
Interest income |
3,410 | 2,052 | 24 | |||||||
Interest expense |
(14,262 | ) | (13,360 | ) | (154 | ) | ||||
Foreign currency exchange losses |
(39,942 | ) | 10,294 | 119 | ||||||
Impairment losses on investments in securities |
| 4,500 | 52 | |||||||
Othernet |
1,296 | 655 | 8 | |||||||
Total consolidated income before income taxes |
¥ | 990,602 | ¥ | 2,374,079 | $ | 27,403 | ||||
55
Segment Assets:
|
2011 | 2012 | 2012 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
|
(thousands of yen)
|
(thousands
of dollars) |
||||||||
Segment assets |
||||||||||
Japan |
¥ | 2,300,299 | ¥ | 4,830,227 | $ | 55,751 | ||||
U.S. |
451,012 | 895,284 | 10,333 | |||||||
Others |
| 134,294 | 1,550 | |||||||
Elimination |
(434,500 | ) | (976,279 | ) | 11,268 | |||||
Total segment assets after eliminations |
2,316,811 | 4,883,526 | 56,366 | |||||||
Adjustments(1) |
56,785 | 96,150 | 1,109 | |||||||
Total consolidated assets |
¥ | 2,373,596 | ¥ | 4,979,676 | $ | 57,475 | ||||
Capital expenditures on long-lived assets:
|
2011 | 2012 | 2012 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
|
(thousands of yen)
|
(thousands
of dollars) |
||||||||
Capital expenditures |
||||||||||
Japan |
¥ | 249,406 | ¥ | 589,247 | $ | 6,801 | ||||
U.S. |
917 | 34,900 | 403 | |||||||
Other |
| 22,605 | 261 | |||||||
Adjustments |
(1,986 | ) | (25,230 | ) | 291 | |||||
Total consolidated capital expenditures |
¥ | 248,337 | ¥ | 621,522 | $ | 7,174 | ||||
Capital expenditures relate to property and equipment, capitalized computer software costs and other intangible assets on an accrual basis.
Other Significant Items:
|
2011 | 2012 | 2012 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
|
(thousands of yen)
|
(thousands
of dollars) |
||||||||
Depreciation and amortization |
||||||||||
Japan |
¥ | 51,986 | ¥ | 130,139 | $ | 1,502 | ||||
U.S. |
955 | 3,332 | 38 | |||||||
Others |
| 2,336 | 27 | |||||||
Total depreciation and amortization |
52,941 | 135,807 | 1,567 | |||||||
Adjustments |
5,272 | (6,443 | ) | (74 | ) | |||||
Total consolidated depreciation and amortization |
¥ | 58,213 | ¥ | 129,364 | $ | 1,493 | ||||
Entity-Wide Information:
For the year ended March 31, 2011, revenue from Panasonic Corporation, Aisin Seiki, Yazaki Corporation, and TMI Associates amounted to ¥594,130 thousand, ¥379,832 thousand, ¥372,064 thousand, and ¥311,325 thousand, respectively, representing approximately 22.1 percent, 14.1 percent, 13.9 percent, and 11.6 percent, respectively, of the total revenue. For the year ended
56
March 31, 2012, revenue from Yazaki Corporation, Panasonic Corporation, two clients represented by Quinn Emanuel Urquhart & Sullivan, LLP, and Sanyo Electric Co., Ltd. amounted to ¥950,893 thousand ($10,975 thousand), ¥628,112 thousand ($7,250 thousand), ¥608,558 thousand ($7,024 thousand) and ¥595,998 thousand ($6,879 thousand), respectively, representing approximately 18.5 percent, 12.2 percent, 11.8 percent, and 11.6 percent, respectively, of the total revenue. These clients are attributable to Japan except ¥379,832 thousand for Aisin Seiki for the year ended March 31, 2011, and ¥608,558 thousand ($7,024 thousand) for Quinn Emanuel Urquhart & Sullivan, LLP for the year ended March 31, 2012, which are reported in the U.S.
The information concerning revenue by service categories for the years ended March 31, 2011 and 2012 is presented below:
|
2011 | 2012 | 2012 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
|
(thousands of yen)
|
(thousands
of dollars) |
||||||||
eDiscovery |
¥ | 2,529,778 | ¥ | 4,910,584 | $ | 56,678 | ||||
Investigation |
44,061 | 144,072 | 1,663 | |||||||
Sales of forensic tools |
49,208 | 38,082 | 440 | |||||||
Forensic training |
38,252 | 30,882 | 356 | |||||||
Other |
24,794 | 12,608 | 145 | |||||||
Total revenue |
¥ | 2,686,093 | ¥ | 5,136,228 | $ | 59,282 | ||||
Long-lived assets held in Japan and in the U.S. as of March 31, 2011 were ¥112,013 thousand and ¥2,193 thousand, respectively. Long-lived assets held in Japan, in the U.S., and in Other as of March 31, 2012 were ¥330,964 thousand ($3,820 thousand), ¥27,962 thousand ($323 thousand) and ¥17,837 thousand ($206 thousand), respectively. There were no long-lived assets in Other as of March 31, 2011. Long-lived assets include property and equipment.
Years ended March 31, 2010 and 2011
Total Revenue
|
Year ended March 31, | Change 2011 vs. 2010 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2011 | In yen | Percentage | |||||||||
|
(in thousands, except percentages)
|
||||||||||||
Revenue |
¥ | 1,013,490 | ¥ | 2,635,430 | ¥ | 1,621,940 | 160.0 | % | |||||
Revenue from a related party |
80,072 | 40,764 | (39,308 | ) | (49.1 | ) | |||||||
Operating revenue from reimbursed direct costs |
4,605 | 9,899 | 5,294 | 115.0 | |||||||||
Total revenue |
¥ | 1,098,167 | ¥ | 2,686,093 | ¥ | 1,587,926 | 144.6 | % |
Our total revenue in the year ended March 31, 2011 increased by ¥1,587.9 million, or 144.6%, to ¥2,686.1 million from ¥1,098.2 million in the year ended March 31, 2010. Our revenue in the year ended March 31, 2011 increased by ¥1,621.9 million, or 160.0% to ¥2,635.4 million from ¥1,013.5 million in the year ended March 31, 2010. This increase in our revenue and total revenue was primarily attributable to expansion of our eDiscovery operations. The market for these services benefited from a rapid increase in the number of lawsuits filed and investigations commenced in the United States against Japanese multinational corporations which involved patents, intellectual property, product safety, price cartels, the U.S. Foreign Corrupt Practices Act and other issues. Our revenue from a related party in the year ended March 31, 2011 decreased by ¥39.3 million, or 49.1%, to ¥40.8 million from ¥80.1 million in the year ended March 31, 2010. This decrease in our revenue from a related party is primarily attributable to a decrease in sales of forensic tools by the related party. Our operating revenue from reimbursed direct costs in the year ended March 31, 2011 increased by ¥5.3 million, or 115.0%, to ¥9.9 million from ¥4.6 million in the year ended March 31, 2010 and represents costs incurred on behalf of a client that were subsequently reimbursed. This increase in our operating revenue from reimbursed direct costs was primarily attributable to expansion of our eDiscovery operations, but had no impact on our results of operations, since it was completely offset by the related line item in operating expense.
57
Total operating expense
|
Year ended March 31, | Change 2011 vs. 2010 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2011 | In yen | Percentage | |||||||||
|
|
(in thousands, except percentages)
|
|||||||||||
Cost of revenue |
¥ | 703,010 | ¥ | 966,352 | ¥ | 263,342 | 37.5 | % | |||||
Reimbursed direct costs |
4,605 | 9,899 | 5,294 | 115.0 | |||||||||
Selling, general and administrative expenses |
574,001 | 669,742 | 95,741 | 16.7 | |||||||||
Total operating expense |
¥ | 1,281,616 | ¥ | 1,645,993 | ¥ | 364,377 | 28.4 | % | |||||
Percentage of total revenue |
116.7 | % | 61.3 | % |
Our cost of revenue in the year ended March 31, 2011 increased by ¥263.3 million, or 37.5%, to ¥966.4 million from ¥703.0 million in the year ended March 31, 2010. This increase in our cost of revenue was primarily attributable to costs and expenses incurred in producing the very significant increase in our revenue in the year ended March 31, 2011. However, this increase in cost of revenue of 37.5% was far below the growth in revenue of 160.0% and reflected both increased efficiencies and the investments made in the year ended March 31, 2010 and previous years.
Our reimbursed direct costs in the year ended March 31, 2011 increased by ¥5.3 million, or 115.0%, to ¥9.9 million from ¥4.6 million in the year ended March 31, 2010. Reimbursed direct costs represent costs incurred on behalf of a client that are subsequently reimbursed. This increase in our reimbursed direct costs was primarily attributable to increased activity but had no impact on our results of operations, since it was completely offset by the related revenue line item.
Our selling, general and administrative expenses in the year ended March 31, 2011 increased by ¥95.7 million, or 16.7%, to ¥669.7 million from ¥574.0 million in the year ended March 31, 2010. This increase was primarily attributable to sales and marketing expenses and general and administration expenses incurred as a result of the very significant growth in revenue during the year ended March 31, 2011. Our general and administrative expenses in the year ended March 31, 2011 was primarily attributable to an increase in payroll and compensation costs, which increased by ¥47.2 million, or 16.3%, to ¥336.6 million from ¥289.4 million, compensation payments increased by ¥20.0 million, or 24.4%, to ¥101.8 million from ¥81.9 million, professional fees increased by ¥15.7 million, or 68.8%, to ¥38.4 million from ¥22.8 million, business tax increased by ¥6.7 million, or 304.8%, to ¥8.9 million from ¥2.2 million, recruiting and training expense increased by ¥5.2 million, or 26.5%, to ¥24.8 from ¥19.6 million, travel expense increased by ¥4.9 million, or 4.8%, to ¥33.2 million from ¥28.3 million. These broad base increases in our selling, general and administrative expenses were driven by our strategy to build and enhance the basic capability to support our growing business. We anticipate the higher levels of sales and marketing expenses and general and administration expenses that we have recently experienced to continue and accelerate as we expand our international and Japanese operations, increase of business development activities and hire additional administrative support and other staff.
As a result of the factors described above, our total operating expense increased by ¥364.4 million, or 28.4%, in the year ended March 31, 2011 to ¥1,646.0 million from ¥1,281.6 million in the year ended March 31, 2010. Although our total operating expense grew as our volume of sales increased, our operating income and related margins increased significantly. We anticipate that it may be difficult for us to continue to increase our total revenue while curtailing costs at these rates in coming years and we believe that it may be difficult for us to maintain this tendency in future years.
58
Operating income (loss)
|
Year ended March 31, | Change 2011 vs. 2010 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2011 | In yen | Percentage | |||||||||
|
(in thousands, except percentages)
|
||||||||||||
Operating income (loss) |
¥ | (183,449 | ) | ¥ | 1,040,100 | ¥ | 1,223,549 | N.A. | |||||
Percentage of total revenue |
(16.7 | )% | 38.7 | % |
Our operating income in the year ended March 31, 2011 compared to the year ended March 31, 2010 increased by ¥1,223.5 million, to operating income of ¥1,040.1 million from an operating loss of ¥183.4 million. This increase was primarily attributable to the growth in our operations reflected in the rapid growth of our total revenue. This increase in operating income was far above the growth in total revenues of 160.0%. We anticipate that it may be difficult for us to continue to increase our operating income at this rate in coming years and we cannot assure you that the rate of growth in our operating income will be maintained in future years.
Total other expensenet
|
Year ended March 31, | Change 2011 vs. 2010 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2011 | In yen | Percentage | |||||||||
|
(in thousands, except percentages)
|
||||||||||||
Interest income |
¥ | 3,441 | ¥ | 3,410 | ¥ | (31 | ) | 0.9 | % | ||||
Interest expense |
(13,247 | ) | (14,262 | ) | (1,015 | ) | (7.7 | ) | |||||
Foreign currency exchange losses |
(14,384 | ) | (39,942 | ) | (25,558 | ) | (177.7 | ) | |||||
Impairment losses on investments in securities |
(108,540 | ) | | 108,540 | 100.0 | ||||||||
Othernet |
94 | 1,296 | 1,202 | 1,278.7 | |||||||||
Total other expensenet |
¥ | (132,636 | ) | ¥ | (49,498 | ) | ¥ | 83,138 | 62.7 | % | |||
Percentage of total revenue |
(12.1 | )% | (1.8 | )% |
Our interest income in the year ended March 31, 2011 remained virtually stable compared with in the year ended March 31, 2010 at ¥3.4 million.
Our interest expense in the year ended March 31, 2011 increased by ¥1.0 million, or 7.7%, to ¥14.3 million from ¥13.2 million in the year ended March 31, 2010. This overall stability in our interest expense was primarily attributable to the fact that our overall debt remained substantially unchanged, at ¥466.2 million as of March 31, 2011, compared with ¥415.7 million as of March 31, 2010.
Our foreign currency exchange losses in the year ended March 31, 2011 increased by ¥25.6 million, or 177.7%, to ¥39.9 million from ¥14.4 million in the year ended March 31, 2010. This increase in foreign currency exchange losses was primarily attributable to the larger range of fluctuation of exchange rates in the year ended March 31, 2011 compared with the year ended March 31, 2010.
We recorded impairment losses on investments in securities in the year ended March 31, 2010 of ¥108.5 million. No impairment loss was incurred in the year ended March 31, 2011. Losses on impairment of investments in certain marketable equity securities were recognized to reflect the decline in value considered to be other-than-temporary, which were ¥108.5 million for the year ended March 31, 2010.
As a result of the factors described above, our total other expensenet in the year ended March 31, 2011 decreased by ¥83.1 million, or 62.7%, to ¥49.5 million from ¥132.6 million in the year ended March 31, 2010.
59
Income (loss) before income taxes
|
Year ended March 31, | Change 2011 vs. 2010 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2011 | In yen | Percentage | |||||||||
|
(in thousands, except percentages)
|
||||||||||||
Income (loss) before income taxes |
¥ | (316,085 | ) | ¥ | 990,602 | ¥ | 1,306,687 | N.A. | |||||
Percentage of total revenue |
(28.8 | )% | 36.9 | % |
Our income (loss) before income taxes in the year ended March 31, 2011 increased by ¥1,306.7 million to income of ¥990.6 million from a loss of ¥316.1 million in the year ended March 31, 2010. This represented a very significant improvement in the relationship of income (loss) before income taxes to total revenue in the year ended March 31, 2011 compared with the previous year.
Income taxes
|
Year ended March 31, | Change 2011 vs. 2010 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2011 | In yen | Percentage | |||||||||
|
(in thousands, except percentages)
|
||||||||||||
Income taxes |
¥ | 102,213 | ¥ | 202,827 | ¥ | 100,614 | 98.4 | % | |||||
Percentage of total revenue |
9.3 | % | 7.6 | % | |||||||||
Percentage of income (loss) before income taxes |
(32.3 | )% | 20.5 | % |
Our income taxes are comprised of income taxes-current, partially (and in the periods considered, insignificantly) reduced by income taxes-deferred. Our income taxes in the year ended March 31, 2011 increased by ¥100.6 million, or 98.4%, to ¥202.8 million from ¥102.2 million in the year ended March 31, 2010. This increase was attributable to the ¥1,306.7 million increase in income (loss) before income taxes in the year ended March 31, 2011 compared with the previous year offset.
Net income (loss)
|
Year ended March 31, | Change 2011 vs. 2010 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2011 | In yen | Percentage | |||||||||
|
(in thousands, except percentages)
|
||||||||||||
Net income (loss) |
¥ | (418,298 | ) | ¥ | 787,775 | ¥ | 1,206,073 | N.A. | |||||
Percentage of total revenue |
(38.1 | )% | 29.3 | % |
Our net income (loss) in the year ended March 31, 2011 increased by ¥1,206.1 million to income of ¥ 787.8 million from a loss of ¥418.3 million in the year ended March 31, 2010. This increase was primarily attributable to the rapid growth of our revenue, reflecting the expansion of our business, particularly in the eDiscovery space, which was partially offset by increases in our costs and expenses, notably in selling, general and administrative expenses. However, these costs and expenses increased at a far lower pace in the year ended March 31, 2011 than the related revenues.
Operating segments
Our operating segments are defined as components of an enterprise that engage in business activities from which it may earn revenues and incur expenses and for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company provides a variety of eDiscovery and forensic services which are provided by UBIC and its domestic subsidiaries for domestic (Japanese) clients, by UNA for clients represented by U.S.-based attorneys who contracted UNA, and by other foreign subsidiaries for foreign clients other than those who contracted UNA. Our operations in Japan and the U.S. have been identified as our two operating segments. Our Chief Executive Officer, who is also our chief operating decision maker, regularly reviews the performance of the two operating
60
segments and makes decisions regarding allocation of resources. Our chief operating decision maker utilizes various measurements prepared based on Japanese GAAP, including revenue, operating income or loss and segment assets to assess segment performance and allocate resources to segments.
Our reportable segments are the same as our operating segments. It should be noted that some of our clients located outside of the United States have chosen to pay amounts due to UNA, even if some or all of the work we produced was performed in Japan or in other Asian countries. Therefore, an unspecified portion of the revenue in the United States segment does not constitute work actually performed for U.S.-based clients.
Segment information for the years ended March 31, 2010 and 2011 is as follows:
Revenue
|
2010 | 2011 | |||||
---|---|---|---|---|---|---|---|
|
(thousands of yen)
|
||||||
Japan |
|||||||
Outside clients |
¥ | 507,201 | ¥ | 1,937,434 | |||
Intersegment |
258,355 | 450,210 | |||||
Total |
765,556 | 2,387,644 | |||||
U.S. |
|||||||
Outside clients |
438,253 | 804,494 | |||||
Intersegment |
25,605 | 49,668 | |||||
Total |
463,858 | 854,162 | |||||
Elimination |
(283,960 | ) | (499,878 | ) | |||
Total revenue after eliminations |
945,454 | 2,741,928 | |||||
Adjustments(1) |
152,713 | (55,835 | ) | ||||
Total consolidated revenue |
¥ | 1,098,167 | ¥ | 2,686,093 | |||
Segment Performance Measure:
|
2010 | 2011 | |||||
---|---|---|---|---|---|---|---|
|
(thousands of yen)
|
||||||
Segment profit (loss) |
|||||||
Japan |
¥ | (125,573 | ) | ¥ | 1,019,194 | ||
U.S. |
(57,214 | ) | 77,946 | ||||
Total segment profit (loss) after eliminations |
(182,787 | ) | 1,097,140 | ||||
Adjustments(1) |
(662 | ) | (57,040 | ) | |||
Total consolidated operating income (loss) |
(183,449 | ) | 1,040,100 | ||||
Unallocated amounts: |
|||||||
Interest income |
3,441 | 3,410 | |||||
Interest expense |
(13,247 | ) | (14,262 | ) | |||
Foreign currency exchange losses |
(14,384 | ) | (39,942 | ) | |||
Impairment losses on investments in securities |
(108,540 | ) | | ||||
Other-net |
94 | 1,296 | |||||
Total consolidated income (loss) before income taxes |
¥ | (316,085 | ) | ¥ | 990,602 | ||
61
Segment Assets:
|
2010 | 2011 | |||||
---|---|---|---|---|---|---|---|
|
(thousands of yen)
|
||||||
Segment assets |
|||||||
Japan |
¥ | 789,239 | ¥ | 2,300,299 | |||
U.S. |
145,399 | 451,012 | |||||
Elimination |
(131,465 | ) | (434,500 | ) | |||
Total segment assets after eliminations |
803,173 | 2,316,811 | |||||
Adjustments(1) |
46,083 | 56,785 | |||||
Total consolidated assets |
¥ | 849,256 | ¥ | 2,373,596 | |||
Capital expenditures on long-lived assets:
|
2010 | 2011 | |||||
---|---|---|---|---|---|---|---|
|
(thousands of yen)
|
||||||
Capital expenditures |
|||||||
Japan |
¥ | 100,795 | ¥ | 249,406 | |||
U.S. |
1,153 | 917 | |||||
Adjustments |
310 | (1,986 | ) | ||||
Total consolidated capital expenditures |
¥ | 102,258 | ¥ | 248,337 | |||
Capital expenditures related to property and equipment, capitalized computer software costs and other intangible assets on an accrual basis.
Other Significant Items:
|
2010 | 2011 | |||||
---|---|---|---|---|---|---|---|
|
(thousands of yen)
|
||||||
Depreciation and amortization |
|||||||
Japan |
¥ | 74,298 | ¥ | 51,986 | |||
U.S. |
881 | 955 | |||||
Total depreciation and amortization |
75,179 | 52,941 | |||||
Adjustments |
138,605 | 5,272 | |||||
Total consolidated depreciation and amortization |
¥ | 213,784 | ¥ | 58,213 | |||
Entity-Wide Information:
For the year ended March 31, 2010, revenue from Sanyo Electric Co., Ltd. amounted to ¥343.0 million, representing approximately 31.2 percent of our total revenue. For the year ended March 31, 2011, revenue from Panasonic Corporation, Aisin Seiki, Yazaki Corporation, and TMI Associates amounted to ¥594.1 million, ¥379.8 million, ¥372.1 million, and ¥311.3 million, respectively, representing approximately 22.1 percent, 14.1 percent, 13.9 percent, and 11.6 percent, respectively, of our total revenue. All of these clients and the related revenue amounts are attributable to the Japan segment, except Sanyo Electric Co., Ltd. and the ¥343.0 million of related revenue in the year ended March 31, 2010 and Aisin Seiki and the ¥379.8 million of related revenue in the year ended March 31, 2011, each of which was attributable to the United States segment.
62
The information concerning revenue by service categories for the years ended March 31, 2010 and 2011 is presented below:
|
2010 | 2011 | |||||
---|---|---|---|---|---|---|---|
|
(thousands of yen)
|
||||||
eDiscovery |
¥ | 835,608 | ¥ | 2,529,778 | |||
Investigation |
122,102 | 44,061 | |||||
Sales of forensic tools |
79,795 | 49,208 | |||||
Forensic training |
46,913 | 38,252 | |||||
Other |
13,749 | 24,794 | |||||
Total revenue |
¥ | 1,098,167 | ¥ | 2,686,093 | |||
Long-lived assets held in Japan and in the U.S. as of March 31, 2010 were ¥103.1 million and ¥2.2 million, respectively. Long-lived assets held in Japan and in the U.S. as of March 31, 2011 were ¥112.0 million and ¥2.2 million, respectively. Long-lived assets include net property and equipment.
Subsequent Event
In March 2013, we entered into a settlement agreement with a former employee in order to resolve all claims related to such employee. Under the agreement, we are required to pay the former employee an amount equal to $750,000, of which $300,000 (¥25,974 thousands) was recorded in the quarter ended December 31, 2012 to reflect management's estimate of settlement costs at such time. The remainder of the settlement will be recorded in the quarter ending March 31, 2013.
Liquidity and Capital Resources
Capital Resources
Our principal sources of liquidity are our cash and cash equivalents, cash flows from operating activities, and issuances of short-term and long-term bank borrowings, convertible notes and equity securities. As of March 31, 2010, 2011 and 2012, and December 31, 2012, we had cash and cash equivalents of ¥345.2 million, ¥675.2 million, ¥2,410.3 million ($27.8 million) and ¥1,301.5 million ($15.0 million), respectively.
Short-term and long-term bank borrowing: Short-term and long-term bank borrowings provide us with an important source of funds for maintaining an adequate level of working capital, acquisition of data servers and development of internal-use software.
As of March 31, 2010 and 2012, our short-term bank borrowings amounted to ¥30.0 million and ¥62.5 million ($0.7 million) with a weighted average interest rate of 3.5%, and 0.7%, respectively. As of March 31, 2011 and December 31, 2012, we had no outstanding short-term bank borrowings.
As of March 31, 2010, 2011 and 2012, and December 31, 2012, our long-term bank borrowings amounted to ¥411.0 million, ¥251.7 million, ¥430.0 million ($5.0 million) and ¥681.3 million ($7.9 million), with a weighted average interest rate of 2.5%, 2.5%, 1.8% and 2.1%, respectively. Their maturities are at various dates through 2016. We intend to use a portion of our net proceeds from this offering to pay off all of these long term borrowings.
Under a ¥700.0 million five-year syndicated loan arrangement entered into with a consortium of banks on September 27, 2011, we borrowed ¥350.0 million ($4.0 million) and ¥350.0 million ($4.0 million) during the year ended March 31, 2012 and the nine months ended December 31, 2012, respectively. The balances as of March 31, 2012 and December 31, 2012 were ¥316.7 million ($3.7 million) and ¥656.3 million ($7.6 million), respectively. There are restrictive covenants related to the five-year syndicated loan including requirements to maintain a minimum level of net assets and
63
ordinary income in our stand-alone and consolidated financial statements, measured under accounting principles generally accepted in Japan. We are required to maintain net assets at a level which is at least 75% of (a) net assets as of March 31, 2011; ¥1,168.0 million on stand-alone basis and ¥1,173.1 million on consolidated basis under Japanese GAAP or (b) net assets at the end of previous year, whichever is higher. The ordinary income covenant also requires that we shall not record ordinary losses in any two consecutive fiscal years. We are in compliance with these restrictive covenants at December 31, 2012.
On December 28, 2012, we entered into a short-term revolving credit facility agreement with a consortium of Japanese banks in an aggregate principal amount of ¥1,000 million ($11.5 million) that matures on December 27, 2013. The extension of the maturity date of the credit facility is subject to the consortium's approval. There were no outstanding borrowings under the short-term revolving credit facility as of December 31, 2012. There are restrictive covenants related to the revolving credit facility of ¥1,000.0 million ($11.5 million) as of December 31, 2012, including requirements to maintain a minimum level of net assets and ordinary income in our stand-alone and consolidated financial statements, measured under accounting principles generally accepted in Japan. We are required to maintain net assets at a level which is at least 75% of (a) net assets as of March 31, 2012; ¥2,607.3 million on stand-alone basis and ¥2,665.3 million on consolidated basis under Japanese GAAP or (b) net assets at the end of previous year, whichever is higher. The ordinary income covenant states that we shall not record ordinary losses in any two consecutive fiscal years. We are in compliance with these restrictive covenants at December 31, 2012.
As of March 31, 2010, 2011 and 2012, and December 31, 2012, we pledged available-for-sale securities with carrying value of ¥107.6 million, ¥223.2 million, ¥273.6 million ($3.2 million) and ¥283.1 million ($3.3 million), respectively, as security for borrowings from banks of ¥350.0 million, ¥230.0 million, ¥247.1 million ($2.9 million) and ¥306.3 million ($3.5 million), respectively.
Overdraft arrangement: We entered into an overdraft arrangement with a Japanese bank for which the unutilized balance as of March 31, 2010, 2011 and 2012, and December 31, 2012, was ¥50.0 million ($0.6 million).
Bank of Tokyo Mitsubishi UFJ has been our main financing bank since our founding. Bank of Tokyo Mitsubishi UFJ arranged our syndicated loan, short-term revolving credit facility and overdraft arrangement.
Convertible notes: In April 2010, we issued zero coupon convertible notes due in April 2015 in the aggregate face amount of ¥300.0 million for ¥285.0 million. As of March 31, 2011 and 2012, the outstanding carrying amount of our convertible notes, including amortized discount, amounted to ¥211.2 million and ¥106.7 million ($1.2 million), respectively. On March 14, 2011, and February 28 and May 15, 2012, convertible notes were converted into 204,472, 281,150 and 281,114 equity shares of the Company, respectively. The carrying amount of convertible notes, including any unamortized discount, was credited to the capital account (net of issuance costs) upon conversion, and no gain or loss was recognized. None of the convertible notes remain outstanding as of December 31, 2012.
Cash flows from operating activities: We used ¥0.9 million in operating activities for the year ended March 31, 2010 and generated ¥452.8 million and ¥2,043.5 million ($23.6 million) from operating activities for the years ended March 31, 2011 and 2012, respectively. We generated ¥1,796.5 million from operating activities for the nine months ended December 31, 2011 and used ¥209.9 million ($2.4 million) in operating activities for the nine months ended December 31, 2012. See Consolidated Statements of Cash Flows.
64
Cash Flows
The following table sets out information on our cash flows for the periods indicated:
|
Year ended March 31 | Nine months ended December 31 | ||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2011 | 2012 | 2012 | 2011 | 2012 | 2012 | |||||||||||||||
|
(thousands of yen)
|
(thousands of dollars)
|
(thousands of yen)
|
(thousands of dollars)
|
||||||||||||||||||
Net cash provided by (used in) operating activities |
¥ | (933 | ) | ¥ | 452,800 | ¥ | 2,043,549 | $ | 23,587 | ¥ | 1,796,487 | ¥ | (209,889 | ) | $ | (2,424 | ) | |||||
Net cash used in investing activities |
(69,214 | ) | (227,712 | ) | (520,224 | ) | (6,004 | ) | (401,511 | ) | (778,815 | ) | (8,989 | ) | ||||||||
Net cash provided by (used in) financing activities |
80,273 | 113,896 | 213,210 | 2,461 | 356,926 | (169,396 | ) | (1,954 | ) | |||||||||||||
Effect of exchange rates |
(12,633 | ) | (8,922 | ) | (1,443 | ) | (17 | ) | (4,250 | ) | 49,282 | 569 | ||||||||||
Net increase (decrease) in cash and cash equivalents |
(2,507 | ) | 330,062 | 1,735,092 | 20,027 | 1,747,652 | (1,108,818 | ) | (12,798 | ) | ||||||||||||
Cash and cash equivalents at the beginning of the year |
347,657 | 345,150 | 675,212 | 7,793 | 675,212 | 2,410,304 | 27,820 | |||||||||||||||
Cash and cash equivalents at the end of period |
345,150 | 675,212 | 2,410,304 | 27,820 | 2,422,864 | 1,301,486 | 15,022 | |||||||||||||||
Nine months ended December 31, 2012 as compared to the nine months ended December 31, 2011
Net cash used in operating activities in the nine months ended December 31, 2012 was ¥209.9 million ($2.4 million), a change of ¥2,006.4 million compared to net cash provided of ¥1,796.5 million in the nine months ended December 31, 2011. The change is primarily due to a decrease in net income and an increase in the payment for income taxes related to the prior year. Net income in the nine months ended December 31, 2012 decreased by ¥516.8 million compared to the corresponding previous period, primarily due to an increase in selling, general and administrative expenses mainly resulting from an increase in the number of employees. We paid ¥840.8 million ($9.7 million) of income taxes related to the year ended March 31, 2012 operations and ¥146.3 million ($1.7 million) as an interim tax payment during the nine months ended December 31, 2012, while we paid ¥348.2 million related to the year ended March 31, 2011 operations and ¥194.2 million as an interim tax payment during the nine months ended December 31, 2011.
Net cash used in investing activities increased to ¥778.8 million ($9.0 million) in the nine months ended December 31, 2012 from ¥401.5 million in the nine months ended December 31, 2011, an increase of ¥377.3 million. This increase included ¥372.0 million ($4.3 million) paid for the acquisition of property and equipment, consisting mainly of additional data servers to support the expansion of the business and ¥405.0 million ($4.7 million) paid for development of internal-use software to upgrade its functions during the nine months ended December 31, 2012, compared with ¥228.8 million and ¥171.5 million paid during the nine months ended December 31, 2011.
Net cash used in financing activities in the nine months ended December 31, 2012 was ¥169.4 million ($2.0 million), a decrease of ¥526.3 million compared to net cash provided of ¥356.9 million in the nine months ended December 31, 2011. Cash used in financing activities in the nine months ended December 31, 2012 primarily consisted of the payment of dividends of ¥145.6 million ($1.7 million) and the payment of IPO costs of ¥165.1 million ($1.9 million) and net proceeds of ¥221.3 million ($2.6 million) from long-term borrowings, while cash provided by financing activities in the nine months ended December 31, 2011 primarily consisted of net proceeds of ¥238.3 million from long-term borrowing, net proceeds of ¥137.5 million from short-term borrowing and the payment of dividends of ¥19.7 million.
65
Year ended March 31, 2012 as compared to the year ended March 31, 2011
Net cash provided by operating activities rose to ¥2,043.5 million ($23.6 million) in the year ended March 31, 2012, compared to ¥452.8 million in the year ended March 31, 2011, an increase of ¥1,590.7 million. The increase reflected an increase of ¥582.9 million ($6.7 million) in net income compared to the previous fiscal year, primarily due to an increase in revenue from eDiscovery services. In addition, collection of outstanding trade accounts receivable held at March 31, 2011 contributed to the increase in cash provided by operating activities during the year ended March 31, 2012. Trade accounts receivable increased by ¥74 million ($0.9 million) in the year ended March 31, 2012 while it increased by ¥813.6 million in the year ended March 31, 2011. Our days of sales outstanding in trade accounts receivable as of March 31, 2011 and 2012 were approximately 69 days and 66 days, respectively.
Net cash used in investing activities increased to ¥520.2 million ($6.0 million) in the year ended March 31, 2012 from ¥227.7 million in the year ended March 31, 2011, an increase of ¥292.5 million. This increase includes ¥242.6 million ($2.8 million) paid for the acquisition of additional data servers to support the expansion of the business in the year ended March 31, 2012, compared with ¥19.6 million paid during the year ended March 31, 2011.
Net cash provided by financing activities for the year ended March 31, 2012, was ¥213.2 million ($2.5 million), an increase of ¥99.3 million from ¥113.9 million in the year ended March 31, 2011. This increase was primarily attributable to proceeds of ¥316.7 million ($3.7 million) from long-term borrowing and ¥150.0 million ($1.7 million) from short-term borrowings, offset in part by the repayment of ¥141.7 million ($1.6 million) of long-term borrowings and ¥87.5 million ($1.0 million) of short-term borrowings as well as the payment of dividends of ¥19.7 million ($0.2 million). Cash provided by financing activities in the year ended March 31, 2011 consisted of ¥285.0 million ($3.3 million) of proceeds from the issuance of our convertible notes, significantly offset by repayments of short-term borrowings of ¥30.0 million ($0.3 million) and long-term borrowings of ¥159.3 million ($1.8 million).
Year ended March 31, 2011 as Compared to the Year Ended March 31, 2010
Net cash provided by operating activities for the year ended March 31, 2011 was ¥452.8 million, an increase of ¥453.7 million compared to cash used of ¥0.9 million for the year ended March 31, 2010. The increase was mainly due to the increase of ¥1,206.1 million in net income compared to the previous fiscal year. Net income increased primarily due to an increase in revenue from eDiscovery services. Revenue in the fourth quarter for the year ended March 31, 2011 significantly increased by approximately ¥1,057 million compared to the corresponding period in the previous fiscal year. This year-on-year change partially contributed to an increase in cash provided by operating activities and our increased sales also resulted in an increase in trade accounts receivable. Our days of sales outstanding in trade accounts receivables as of March 31, 2010 and 2011 were approximately 63 days and 69 days, respectively. As of March 31, 2011, the average contractual payment term of our trade accounts receivable was 70 days in Japan and 31 days in the U.S. However, the actual collection term for trade accounts receivables due from law firms in the U.S. may be longer compared to the term specified in invoices because of the additional time required to collect the payment from the end-user clients. Total revenue for the year ended March 31, 2011 increased by ¥1,587.9 million compared to fiscal 2010.
Net cash used in investing activities for the year ended March 31, 2011 was ¥227.7 million, an increase of ¥158.5 million from ¥69.2 million for the year ended March 31, 2010. The increase in net cash used in investing activities for the year ended March 31, 2011 was mainly due to an increase of ¥18.8 million in cash used for the purchase of property and equipment and an increase of ¥138.3 million in cash spent for development of internal-use software.
66
Net cash provided by financing activities for the year ended March 31, 2011 was ¥113.9 million, an increase of ¥33.6 million from ¥80.3 million for the year ended March 31, 2010. The increase in cash provided by financing activities for the year ended March 31, 2011 was mainly due to the issuance of convertible notes for ¥285.0 million offset by a decrease of ¥180.0 million in proceeds from long-term borrowings.
Material Capital Requirements
Our principal capital and liquidity needs in recent years have been for capital expenditures for the development of internal-use software and acquisition of property and equipment, mainly computers, lease payments, payments of principal and interest on outstanding borrowings and other working capital requirements.
Capital Expenditures: Our capital expenditures relate primarily to the development and expansion of data server storage and internal-use software for providing eDiscovery services. The table below shows our capital expenditures, which we define as amounts paid for development of internal-use software and purchases of property and equipment.
Our capital expenditures for the years ended March 31, 2010, 2011 and 2012, and the nine months ended December 31, 2011 and 2012, were as follows:
|
Year ended March 31 | Nine months ended December 31 | ||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2011 | 2012 | 2012 | 2011 | 2012 | 2012 | |||||||||||||||
|
(thousands of yen)
|
(thousands of dollars)
|
(thousands of yen)
|
(thousands of dollars)
|
||||||||||||||||||
Capital expenditure |
¥ | 69,214 | ¥ | 248,337 | ¥ | 621,522 | $ | 7,174 | ¥ | 400,259 | ¥ | 748,673 | $ | 8,641 |
Our capital expenditures for the year ended March 31, 2012 relate to the acquisition of data storage servers and the development of the upgraded Lit i View software used for providing eDiscovery services which are higher than the amounts for the years ended March 31, 2010 and 2011. Our capital expenditures for the nine months ended December 31, 2012 relate to the acquisition of data storage servers, the development of the upgraded Lit i View software and the acquisition of third party software for internal use which are higher than the amounts for the nine months ended December 31, 2011. Higher capital expenditure is expected in future years as we grow our business and expand our network of offices in the United States, United Kingdom, South Korea and Taiwan.
Short-term and long-term bank borrowing: As of March 31, 2010 and 2012, our short-term bank borrowings amounted to ¥30.0 million and ¥62.5 million ($0.7 million) with a weighted average interest rate of 3.5% and 0.7%, respectively. As of March 31, 2011 and December 31, 2012, we had no outstanding short-term bank borrowings. As of March 31, 2010, 2011 and 2012, and December 31, 2012, our long-term bank borrowings amounted to ¥411.0 million, ¥251.7 million, ¥430.0 million ($5.0 million) and ¥681.3 million ($7.9 million), with a weighted average interest rate of 2.5%, 2.5%, 1.8% and 2.1%, respectively. Their maturities are at various dates through 2016.
As is customary in Japan, both short-term and long-term bank loans are made under general agreements that provide that securities and guarantees for present and future indebtedness will be given upon request of the bank, and that the bank shall have the right, as the obligations become due, or in the event of their default, to offset cash deposits against such obligations.
Convertible notes: In April 2010, we issued zero coupon convertible notes due in April 2015 in the aggregate face amount of ¥300.0 million for proceeds of ¥285.0 million. As of March 31, 2011 and 2012, our outstanding carrying value of convertible notes, including amortized discount, amounted to ¥211.2 million and ¥106.7 million ($1.2 million), respectively. On March 14, 2011, and February 28 and May 15, 2012, convertible notes were converted into 204,472, 281,150 and 281,114 equity shares of the
67
Company, respectively. The carrying amount of convertible notes, including any unamortized discount, was credited to the capital account (net of issuance costs) upon conversion, and no gain or loss was recognized. None of our convertible notes due in April 2015 remain outstanding as of December 31, 2012.
Working capital needs: Our principal working capital requirements are for payments for outsourced activities, rent of data center facilities and office premises, and personnel expenses. We lease data center facilities and office premises under cancellable operating lease arrangements with mainly two-year lease periods. UNA leases office premises under non-cancellable operating lease arrangements. Lease expenses related to operating leases for the years ended March 31, 2010, 2011 and 2012, were approximately ¥107.2 million, ¥127.7 million and ¥174.5 million ($2.0 million), respectively. Lease expenses for the nine months ended December 31, 2011 and 2012 were approximately ¥128.8 million and ¥150.7 million ($1.7 million), respectively. Higher levels of working capital are expected in future years as we grow our business and expand our network of offices in the United States, United Kingdom, South Korea and Taiwan.
As noted in multiple parts of this prospectus, we are committed to growing our sales and marketing force, expanding our internal administrative and finance capabilities and making strategic acquisitions of businesses and technologies, all with the intention of continuing the rapid growth of our operations, total revenue, operating revenue and net income. In order to do so, we intend to use our cash on hand, short term credit facility and the net proceeds of this offering. We believe that these resources are sufficient to permit us to implement our strategic plan and achieve these objectives.
Indebtedness
The following table shows our indebtedness as of the dates indicated:
|
At March 31 | At December 31 | ||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2011 | 2012 | 2012 | 2011 | 2012 | 2012 | |||||||||||||||
|
(thousands of yen)
|
(thousands of dollars)
|
(thousands of yen)
|
(thousands of dollars)
|
||||||||||||||||||
Long-term debt: |
||||||||||||||||||||||
Unsecured convertible note due in 2015, zero coupon, net of unamortized discount of ¥8,800 thousand, ¥3,300 thousand($38.1 thousand) and ¥7,150 thousand at March 31, 2011 and 2012, and December 31, 2011, respectively |
¥ | | ¥ | 211,200 | ¥ | 106,700 | $ | 1,232 | ¥ | 212,850 | ¥ | | $ | | ||||||||
Secured bank loans |
350,000 | 230,000 | 247,143 | 2,853 | 140,000 | 306,250 | 3,535 | |||||||||||||||
Unsecured bank loans |
60,960 | 21,700 | 182,857 | 2,110 | 350,000 | 375,000 | 4,328 | |||||||||||||||
Capital lease obligations |
4,721 | 3,311 | 1,840 | 21 | 2,214 | 695 | 8 | |||||||||||||||
Less current portion of long-term debt |
(160,670 | ) | (143,171 | ) | (138,520 | ) | (1,599 | ) | (138,393 | ) | (200,593 | ) | (2,315 | ) | ||||||||
Long-term debt, net |
255,011 | 323,040 | 400,020 | 4,617 | 566,671 | 481,352 | 5,556 | |||||||||||||||
Short-term debt: |
||||||||||||||||||||||
Bank loans |
30,000 | | 62,500 | 721 | 137,500 | | | |||||||||||||||
Current portion of long-term debt |
160,670 | 143,171 | 138,520 | 1,599 | 138,393 | 200,593 | 2,315 | |||||||||||||||
Total short-term debt |
190,670 | 143,171 | 201,020 | 2,320 | 275,893 | 200,593 | 2,315 | |||||||||||||||
Total debt |
445,681 | 466,211 | 601,040 | 6,937 | 842,564 | 681,945 | 7,871 | |||||||||||||||
68
Off-balance Sheet Arrangements
Although we generally do not utilize off-balance sheet arrangements in our operation, we enter into operating leases in the normal course of business. Our operating lease obligations are disclosed below under "Contractual Obligations" and also in Note 5 to our consolidated financial statements included in this prospectus, beginning on page F-1.
Contractual Obligations
The following table sets forth a summary of our contractual obligations and commitments as of March 31, 2012.
|
Payments due by period (thousands of yen) | |||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Contractual Obligation
|
2013 | 2014 | 2015 | 2016 | 2017 | Thereafter | Total | |||||||||||||||
Long-term debt obligations(1) |
¥ | 151,877 | ¥ | 101,032 | ¥ | 89,579 | ¥ | 195,261 | ¥ | 43,899 | ¥ | | ¥ | 581,648 | ||||||||
Interest rate swap |
927 | 22 | | | | | 949 | |||||||||||||||
Capital lease obligations |
1,483 | 412 | | | | | 1,895 | |||||||||||||||
Operating lease obligations |
11,391 | 11,096 | 10,482 | | | | 32,969 | |||||||||||||||
Retirement and severance benefits |
1,441 | 1,684 | 1,837 | 2,496 | 2,451 | 10,562 | 20,471 | |||||||||||||||
Total(2) |
¥ | 167,119 | ¥ | 114,246 | ¥ | 101,898 | ¥ | 197,757 | ¥ | 46,350 | ¥ | 10,562 | ¥ | 637,932 |
Critical Accounting Policies
In reviewing our consolidated financial statements, you should consider the sensitivity of our reported financial condition and results of operations to changes in the conditions and assumptions underlying the estimates and judgments made by management in applying critical accounting policies.
The preparation of financial statements requires the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the periods presented. Actual results may differ from these estimates, judgments and assumptions. Note 1 to our annual consolidated financial statements and interim condensed consolidated financial statements includes a summary of the significant accounting policies used in the preparation of our financial statements. Certain accounting policies are particularly critical because of their significance to our reported results and because of the possibility that future events may differ significantly from the conditions and assumptions underlying the estimates used and judgments made by management in preparing our financial statements.
We have discussed the development and selection of critical accounting policies and estimates with our Board of Directors, and the Board of Directors has reviewed the disclosure relating to these, which are included in "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." For all of these policies, we caution that future events rarely develop exactly as forecast, and even the best estimates may require adjustment.
69
Revenue Recognition
We have agreements with clients pursuant to which we perform various services. A majority of our revenue relates to fees earned for the month-to-month performance of eDiscovery services including data collection, data processing, data hosting, data review and document production, and forensic services. The fees that we earn and bill for these services vary primarily based on the hours of service provided, the volume of documents reviewed or produced, the amount of data processed or stored. While the unit prices for providing the services are agreed in advance, the scope and volume of services to be performed can change depending on clients' requests, which are made on an optional and "as needed" basis, and clients may choose not to request performance of additional services or may obtain similar services from other service providers.
We recognize revenue for eDiscovery and forensic services based on the agreed-upon prices and volume of services performed during the period. For these contractual arrangements, we have identified each deliverable service element. Based on management's evaluation of each element, it was determined that each element delivered has standalone value to the clients because we or other vendors sell such services separately from any other services/deliverables. Accordingly, each of the service elements in the multiple element case qualifies as a separate unit of accounting. We use the best estimate of sales price based on the price we charge when we sell an element on a standalone basis, which is generally consistent with the stated prices in the arrangements, and allocate revenue to the various units of accounting in the arrangements based on the stated prices. We recognize revenue for each separate unit of accounting when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the fee is fixed or determinable, and collectability is reasonably assured based on evidence of an arrangement.
We have revenue related to the reimbursement of certain direct costs by clients, primarily transportation. Reimbursed transportation and other reimbursable direct costs are recorded gross in the consolidated statements of operations as "Operating revenue from reimbursed direct costs" and as "Reimbursed direct costs."
Useful Lives of Property and Equipment
Property and equipment, net, recorded on our balance sheet was ¥376.8 million ($4.3 million) as of March 31, 2012, representing 7.6% of our total assets. The values of our property and equipment, including assets under capital leases which are primarily office equipment, are recorded in our financial statements at cost, and depreciation and amortization are computed using the straight-line method based on either the estimated useful lives of assets or the lease period, whichever is shorter. Our depreciation expenses for property and equipment for the years ended March 31, 2010, 2011 and 2012 were ¥30.2 million, ¥27.8 million and ¥56.4 million ($0.7 million), respectively.
We estimate the useful lives of property and equipment in order to determine the amount of depreciation and amortization expense to be recorded in each fiscal year. We determine the useful lives of our assets at the time the assets are acquired and base our determinations on expected use, experience with similar assets as well as taking into account anticipated technological or other changes. Estimated useful lives by major asset classes as of March 31, 2012, were as follows:
Leasehold improvements |
5 to 15 years | |
Furniture and fixtures |
4 to 20 years | |
Computers |
5 years | |
Asses under capital leases, primarily office equipment |
5 years |
70
If technological or other changes were to occur more rapidly or in a different form than anticipated or the intended use changes, the useful lives assigned to these assets may need to be shortened, or we may need to sell or write off the assets, resulting in recognition of increased depreciation and amortization or losses in future periods.
A one-year change in the useful life of these assets would have increased depreciation expense by approximately ¥11.2 million.
Useful Lives of Capitalized Computer Software
Capitalized computer software costs, net recorded on our balance sheet were ¥481.7 million ($5.6 million) as of March 31, 2012, representing 9.7% of our total assets. The values of our capitalized computer software costs are recorded in our financial statements at cost, and amortization is computed using the straight-line method based on the estimated useful life of the software.
Certain internal software development costs incurred in the creation of computer software products for internal use are capitalized when the preliminary project phase is completed and when management, with the relevant authority, authorizes and commits funding to the project and it is probable that the project will be completed and the software will be used to perform the function intended. Amortization of capitalized computer software costs begins in the period each module or component of the product is ready for its intended use. Our amortization expense for capitalized computer software costs for the fiscal years ended March 31, 2010, 2011 and 2012 was ¥183.6 million, ¥30.4 million and ¥72.6 million ($0.8 million), respectively.
A one-year change in the useful life of capitalized computer software would have increased amortization expense by approximately ¥8.2 million.
Valuation of Investments
We have investments in securities, and the valuation of such investments requires us to make judgments using information that is generally uncertain at the time, such as assumptions regarding near-term prospects. As of March 31, 2012, we had available-for-sale securities of ¥273.6 million ($3.2 million) and cost method investments of ¥15 thousand. We routinely assess the impairment of our investments by considering whether any decline in value is other-than-temporary. The factors we consider are:
Losses on impairment of investments in certain marketable equity securities were recognized to reflect the decline in value considered to be other-than-temporary, which were ¥108.5 million for the year ended March 31, 2010.
Investments in equity securities that have readily determinable fair value and are classified as available-for-sale securities are accounted for at fair value with unrealized gains and losses excluded from earnings. The changes in fair value of investment in equity securities which are reported in other comprehensive income, net of tax are ¥68.6 million and ¥29.9 million ($0.3 million) for the years ended March 31, 2011 and 2012, respectively.
71
Share-Based Compensation
We measure the cost of employee services received in exchange for an award of equity instruments at the fair value of the award on the grant-date and recognize the cost over the period which the employee is required to provide services in exchange for the award. Compensation expenses are recognized on a straight-line basis over the requisite service period of the awards which are expected to vest. We measure the cost of non-employee services received in exchange for an award of equity instruments at fair value. The fair value of awards granted to non-employees is measured using the stock price and other measurement assumptions as of the earlier of either (1) the date at which a commitment for performance by the counterparty to earn the equity instruments is reached, or (2) the date at which the counterparty's performance is complete. We recognize the cost on a straight-line basis over the vesting period, which is generally the service contract term during which services are rendered by the non-employees.
Management uses the Black-Scholes valuation model to determine the fair value of our stock option awards and related share-based compensation expense. Determining the fair value of share based awards at the grant date requires judgment. The determination of the grant date fair value of options using an option-pricing model is affected by common stock price at grant date as well as assumptions regarding a number of other complex and subjective variables. If any of the assumptions used in the Black-Scholes valuation model changes significantly, share-based compensation for future awards may differ materially compared with the awards granted previously. In valuing our options, we make assumptions about risk-free interest rates, expected dividend yields, expected volatility, and expected term (contractual term for non-employees), including estimated forfeiture rates of the options.
Risk-free interest rate: Risk-free interest rates are derived from the Japanese government bond interest rate for the expected or contractual term as of the option grant date.
Expected dividend yields: Expected dividend yields are based on actual dividend payments and expected payments in the future which are approved by the Board of Directors before the option grant date.
Expected Volatility: Expected volatility is estimated based upon the historical volatility of our share price over a period commensurate with the expected or contractual term, adjusted for the effect of changes expected in the future.
Expected term (contractual term for non-employees): The expected term of the stock options granted to employees is estimated based on historical employee exercise patterns associated with prior similar option grants. The term of the stock options granted to non-employees is estimated based on the contractual term.
Forfeiture rate: Based on historical forfeiture information, we estimate the number of forfeitures prior to vesting on the grant date. The effect of subsequent changes in estimated forfeitures is recognized through a cumulative adjustment in the period in which the forfeitures occurs.
The following table presents the weighted-average assumptions used to estimate the fair value of options granted to employees during the periods presented:
|
March 31,
2011 |
March 31,
2012 |
Nine Months
Ended December 31, 2012 |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
Expected life of stock option (years) |
4.5 | 4.5 | 4.3 | |||||||
Expected volatility |
83.5 | % | 120.8 | % | 112.0 | % | ||||
Risk-free interest rate |
0.5 | % | 0.5 | % | 0.2 | % | ||||
Expected dividend yield |
0 | % | 1.9 | % | 4.7 | % |
72
The weighted-average assumptions used in estimating the fair value of options granted to non-employees during the nine months ended December 31, 2012 are 6 years for contractual term, 107.3% for expected volatility, 0.2% for risk-free interest rate and 4.7% for expected dividend yield. No stock options were granted to non-employees during the years ended March 31, 2011 and 2012, and during the nine months ended December 31, 2011.
Valuation of Stock Options. The following table summarizes by grant date the number of shares subject to stock options granted since April 1, 2010, the associated exercise price per option to purchase one share, the associated fair value per option to purchase one share, and the intrinsic value per option to purchase one share (as compared to the assumed offering price of $ per ADS, the mid-point of the expected range), each as of the date of grant (in yen and US dollars):
Grant Date
|
Options
granted to purchase one share |
Exercise price
per share to purchase one share |
Fair value
per share to purchase one share |
Intrinsic value
per option to purchase one share |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
June 17, 2010 |
20,000 | ¥ | 391 | ¥ | 204 | ¥ | |||||||
|
$ | 4.51 | $ | 2.35 | $ | ||||||||
April 28, 2011 |
80,000 |
¥ |
2,203 |
¥ |
1,609 |
¥ |
|
||||||
|
$ | 25.43 | $ | 18.57 | $ | ||||||||
June 21, 2012 |
14,100 |
¥ |
8,096 |
3,789 |
¥ |
|
|||||||
|
$ | 93.44 | $ | 43.73 | $ | ||||||||
June 21, 2012 |
1,900 |
¥ |
8,096 |
3,851 |
¥ |
|
|||||||
|
$ | 93.44 | $ | 44.45 | $ |
The weighted-average intrinsic value of all vested and unvested options to purchase one share outstanding as of December 31, 2012 was ¥3,959 ($45.69), based on the difference between the market price and the exercise price as of December 31, 2012 for only those awards that have an exercise price that is less than the market price.
June 17, 2010
The stock options granted on this date have an exercise price of ¥391 per option to purchase one share. Our Board of Directors determined the exercise price by multiplying by 1.05 the average closing price of our common stock on the market during the month prior to the month in which the relevant stock options are granted (excluding the days on which no effective trades take place).
The fair value per option to purchase one share of ¥204 was determined using the Black-Scholes valuation model, and the following inputs were assumed: stock price at date of grant of ¥391, dividend yield of 0%, time to exercise of 4.5 years, risk free rate of 0.5%; and volatility of 83.5%.
April 28, 2011
The stock options granted on this date have an exercise price of ¥2,203 per option to purchase one share. Our Board of Directors determined the exercise price by multiplying by 1.05 the average closing price of our common stock on the market during the month prior to the month in which the relevant stock options are granted (excluding the days on which no effective trades take place).
The fair value per option to purchase one share of ¥1,609 was determined using the Black-Scholes valuation model, and the following inputs were assumed: stock price at date of grant of ¥2,203, dividend yield of 1.9%, time to exercise of 4.5 years, risk free rate of 0.5%; and volatility of 120.8%.
73
June 21, 2012
The stock options granted on this date have an exercise price of ¥8,096 per option to purchase one share. Our Board of Directors determined the exercise price by multiplying by 1.05 the average closing price of our common stock on the market during the month prior to the month in which the relevant stock options are granted (excluding the days on which no effective trades take place).
The fair value per option to purchase one share of ¥3,789 granted to employees was determined using the Black-Scholes valuation model, and the following inputs were assumed: stock price at date of grant of ¥6,600, dividend yield of 4.7%, time to exercise of 4.3 years, risk free rate of 0.2%; and volatility of 112.0%.
The fair value per option to purchase one share of ¥3,851 (on this date) granted to non-employees was determined using the Black-Scholes valuation model, and the following inputs were assumed: stock price at the date of grant of ¥6,520, dividend yield of 4.7%, time to exercise of 6 years, risk free rate of 0.3%; and volatility of 111.2%.
Income Taxes
Deferred income taxes reflect the impact of temporary differences between assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes and tax loss carryforwards. These deferred taxes are measured using the currently enacted tax rates in effect for the year in which the temporary differences or tax loss carryforwards are expected to reverse. Valuation allowances are provided against deferred tax assets when it is more likely than not that a tax benefit will not be realized. We recognize the financial statement effect of uncertain tax positions when it is more likely than not, based on the technical merits, that the tax positions will be sustained upon examination by the tax authorities. Benefits from tax positions that meet the more-likely-than-not recognition threshold are measured at the largest amount of benefit that is greater than 50% likely of being realized upon settlement. Accrued interest and penalties related to the unrecognized tax benefits are included in income tax expense in the consolidated statements of operations. We had no unrecognized tax benefits during the years ended March 31, 2010, 2011 and 2012, and during the nine months ended December 31, 2011 and 2012.
Quantitative and Qualitative Disclosure on Market Risk
The principal market risks to which we are exposed include fluctuations in interest rates on long-term bank borrowing, equity market price and foreign currency exchange rates giving rise to translation gain/loss.
Interest Rate Risk
Interests on secured long-term bank borrowings of ¥70.0 million ($0.8 million) and ¥40.0 million ($0.5 million) as of March 31, 2012 are based on Tokyo InterBank Offered Rate, or TIBOR, plus 0.55% and TIBOR plus 1.2%, respectively. Interests on secured long-term bank borrowings of ¥25 million ($0.3 million) as of December 31, 2012 are based on TIBOR plus 0.55%. We enter into interest rate swaps to manage fluctuation in cash flows of interest payment for the secured bank borrowings. Under the interest rate swaps, we receive variable interest rate payments on the same amount of the secured bank borrowing and make fixed interest rate payments, thereby effectively creating fixed interest rate long-term borrowing.
In addition, we entered into a ¥700.0 million, five-year syndicated loan arrangement with a consortium of banks on September 27, 2011. Interest on the syndicated loan is based on TIBOR plus 1.0%. As of March 31 and December 31, 2012, outstanding balance of the loan is ¥320.0 million ($3.7 million) and ¥656.3 million ($7.6 million), respectively.
74
We performed a sensitivity analysis assuming a hypothetical 100 basis point movement in interest rates applied to the average monthly borrowings of the syndicated loan. As of March 31 and December 31, 2012, our analysis indicated that such a movement would have increased our interest expense by approximately ¥1.8 million ($0.02 million) and ¥3.8 million ($0.04 million), respectively.
Equity Market Price Risk
The fair value of our investments in marketable equity securities exposes us to equity market price risks. As of March 31, 2012, the fair value of such investments was ¥273.6 million ($3.2 million). The potential loss in fair value resulting from a 10% adverse change in equity market prices would be approximately ¥27.4 million ($0.3 million) as of March 31, 2012. See Note 2 to our consolidated financial statements and interim condensed consolidated financial statements, included in this Form F-1.
Foreign Currency Risk
We have operations outside of Japan, therefore, a portion of our revenues and expenses are incurred in a currency other than Japanese yen. We do not utilize hedge instruments to manage the exposures associated with fluctuating currency exchange rates. Our operating results are exposed to changes in exchange rates between our functional currency, the Japanese yen, and the currency of the countries where we have operations. When Japanese yen weakens against foreign currencies, the Japanese yen value of revenues and expenses denominated in foreign currencies increases. When the Japanese yen strengthens, the opposite situation occurs.
We performed a sensitivity analysis assuming a hypothetical 1% increase in foreign currency exchange rates applied to our historical fiscal 2011 results of operations. For the year ended March 31, 2012, the analysis indicated that such a movement would have decreased our revenues by approximately ¥9.6 million and would not have had a material effect on our operating income or net income.
JOBS Act
In April 2012, the JOBS Act was enacted. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We are electing to delay such adoption of new or revised accounting standards, and as a result, we may not comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for other companies. As a result of such election, our financial statements may not be comparable to the financial statements of other public companies.
Additionally, we are in the process of evaluating the benefits of relying on other exemptions and reduced reporting requirements provided by the JOBS Act. Subject to certain conditions set forth in the JOBS Act, as an emerging growth company, we intend to rely on certain of these exemptions, including without limitation, providing an auditor's attestation report on our system of internal controls over financial reporting pursuant to Section 404 and complying with any requirement that may be adopted regarding mandatory audit firm rotation or a supplement to the auditor's report providing additional information about the audit and the financial statements (auditor discussion and analysis). These exemptions will apply for a period of five years following the completion of our initial public offering although if we complete a fiscal year in which we have more than $1.0 billion in annual revenues, we qualify as a "large accelerated filer," with at least $700 million of equity securities or we issue more than $1.0 billion in non-convertible debt securities to non-affiliates in any three-year period, we would cease to be an emerging growth company as of the following December 31.
75
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In October 2009, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2009-13, "Revenue Recognition: Multiple-Deliverable Revenue Arrangements," which amends the criteria for when to evaluate individual delivered items in a multiple-deliverable arrangement and the method of allocating consideration received. This ASU is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 and early adoption is permitted. We retrospectively adopted this ASU in fiscal 2009. The adoption of this ASU did not have a material impact on our financial position or results of operations.
In October 2009, the FASB issued ASU No. 2009-14, "Certain Revenue Arrangements That Include Software Elements." This ASU affects how entities account for revenue arrangements that contain both tangible products and software elements. Previously, arrangements containing both tangible products and software were accounted for based on the provisions regarding revenue recognition included in ASC 985, "Software," if the software was considered more than incidental to the product or service. This ASU changes revenue recognition for tangible products containing software elements and non-software elements that function together to deliver the tangible product's essential functionality by eliminating them from the scope of ASC 985. This ASU is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15,2010 and early adoption is permitted. We retrospectively adopted this ASU in fiscal year 2009. The adoption of this ASU did not have a material impact on our financial position or results of operations.
In July 2010, the FASB issued ASU No. 2010-20, "Receivables: Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses," which requires new disclosures and enhances existing disclosures about the credit quality of financing receivables and the allowance for credit losses. The disclosures as of the end of a reporting period were effective for interim and annual reporting periods which ended on or after December 15, 2010 and we adopted this ASU in the third quarter of fiscal 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. We adopted this ASU in the fourth quarter of fiscal 2010. The adoption of this ASU did not have a material impact on our financial position or results of operations.
In December 2010, the FASB issued ASU No. 2010-29, "Business Combinations," which clarifies the acquisition date that should be used for reporting the pro forma financial information disclosures for business combination when comparative financial statements are presented and improves the usefulness of the pro forma revenue and earnings disclosure. This ASU is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The adoption of this ASU, effective April 1, 2011, did not have a material impact on our financial position or results of operations.
In May 2011, the FASB issued ASU No. 2011-04, "Fair Value Measurement," which amends some of the wording used to describe requirements for measuring fair value and for disclosing information about fair value measurements. This ASU is effective for the interim or annual period beginning after December 15, 2011. Early application is prohibited. The application of this ASU, effective January 1, 2012, did not have a material impact on our financial position or results of operations.
In June 2011, the FASB issued ASU No. 2011-05, "Comprehensive Income: Presentation of Comprehensive Income," which improves the comparability, consistency, and transparency of financial reporting and increases the prominence of items reported in other comprehensive income. This ASU requires an entity to report comprehensive income either in a single continuous statement of
76
comprehensive income or in two separate but consecutive statements. This ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2011. Early adoption is permitted. We adopted this ASU in fiscal 2010, other than the adoption of the presentation of reclassifications of items out of accumulated comprehensive income which has been deferred. The adoption of this ASU did not have a material impact on our financial position or results of operations.
Accounting Pronouncements Not Yet Adopted
In July 2012, the FASB issued ASU No. 2012-02, "IntangiblesGoodwill and Other: Testing Indefinite-Lived Intangible Assets for Impairment," which permits an entity the option to first assess qualitative factors to determine whether it is more-likely-than-not that an indefinite-lived intangible asset is impaired and thereby reduce the cost and complexity of performing impairment tests for indefinite-lived intangible assets other than goodwill, and improve consistency in impairment testing among long-lived asset categories. This ASU is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The application of this ASU is not expected to have a material impact on our financial position or results of operations.
77
Company Overview
We are a leading provider of Asian-language eDiscovery solutions and services. We have extensive eDiscovery and forensic experience and expertise with information documented in Japanese, Korean, Chinese as well as English and we apply this expertise in connection with litigations, administrative proceedings and investigations. Our clients include leading law firms, corporate legal departments and government agencies. We serve these clients from our offices in Japan, the United States, South Korea, Taiwan and Hong Kong.
We assist clients involved in cross-border litigation, administrative proceedings and internal investigations, including those related to antitrust investigations, intellectual property (IP) litigation, the Foreign Corrupt Practices Act (FCPA) and product liability (PL) investigations. The particular matters in which we are engaged by clients typically involve Asian language information. A particular challenge of eDiscovery involving Asian-language information is the accurate electronic recognition of Japanese, Korean and Chinese characters and the organization of the collected information in a format that can be effectively and efficiently reviewed and identified as relevant to the particular investigation. For example, when most conventional eDiscovery technologies are applied to Asian language content, the result is garbled text or otherwise inaccurate outputs. However, we believe our proprietary Lit i View eDiscovery solution accurately handles Asian-language characters, encoding schemes and native file systems. Lit i View also streamlines and consolidates our and our clients' workflows. Our recently launched Legal Cloud hosting solution complements and integrates with Lit i View and helps to address the substantial complexity and cost associated with these international investigations and litigations. Because of the flexible, comprehensive and integrated nature of our solutions, we can address the entire electronic discovery reference model (EDRM) life-cycle in connection with these matters, which we believe enables us to optimize outcomes and provide significant cost savings to our clients.
We have assisted clients in more than 250 administrative and legal proceedings in the United States, including Department of Justice (DOJ), International Trade Commission (ITC) and Securities and Exchange Commission (SEC) investigations, and more than 500 corporate investigations in Japan, South Korea, China and Singapore.
We achieved strong and significantly improved financial results in the three years ended March 31, 2012, with total revenue increasing to ¥5,136.2 million (or $59.3 million) in the year ended March 31, 2012, compared with ¥2,686.1 million (or $31.0 million) in the year ended March 31, 2011, and ¥1,098.2 million (or $12.7 million) in the year ended March 31, 2010. Over the same period, we also achieved increased profitability, with net income increasing to ¥1,370.6 million (or $15.8 million) in the year ended March 31, 2012, compared with ¥787.8 million (or $9.1 million) in the year ended March 31, 2011, and a loss of ¥418.3 million (or $4.8 million) in the year ended March 31, 2010.
In the year ended March 31, 2012, 95.6% of our revenues were derived from our eDiscovery business, while the remaining 4.4% of our revenues were derived from our legal and compliance professional services business, including electronic data forensic investigations. In the year ended March 31, 2011, 94.2% of our revenues were derived from our eDiscovery business, while the remaining 5.8% of our revenues were derived from our legal and compliance professional services business, including electronic data forensic investigations. In the year ended March 31, 2010, 76.1% of our revenues were derived from our eDiscovery business, while the remaining 23.9% of our revenues were derived from our legal and compliance professional services business, including electronic data forensic investigations. Over the last three fiscal years, we have generated an increasing percentage of our revenue from the sale of eDiscovery support services. We expect this trend to continue.
However, in the nine months ended December 31, 2012, our total revenue, operating income and net income declined significantly compared to the nine months ended December 31, 2011. In the nine months ended December 31, 2012, our total revenue was ¥3,542.3 million ($40.9 million) compared with ¥3,784.0 million in the nine months ended December 31, 2011, our operating income was ¥
78
851.5 million ($9.8 million) compared with ¥1,894.5 million in the same period in the previous year and our net income was ¥536.0 million ($6.2 million) compared with ¥1,054.7 million in the same period in the previous year. Our revenue decline was due essentially to a decrease in revenue from the manual review services of our core eDiscovery business, partly offset by an increase in other services of our eDiscovery business, including data collection, process/analysis, production, data hosting, and forensic services. Revenue from the non-manual review services of our core eDiscovery business increased ¥887.4 million ($10.2 million), or 51.7%, to ¥2,604.1 million ($30.1 million) in the nine months ended December 31, 2012 from ¥1,716.7 million in the comparable period in the previous year, while revenue from our manual review services revenue declined by ¥1,190.8, or 62.7%, to ¥707.0 million ($8.2 million) in the nine months ended December 31, 2012 from ¥1,897.9 million in the same period in the previous year. We believe that the cause of this decrease in revenue from manual review services was the determination by certain of our Asian law firm clients to perform manual review (and to bring related revenue) "in-house," while continuing to utilize our other eDiscovery services. Our operating income decreased by 55.1% to ¥851.5 million ($9.8 million) in the nine months ended December 31, 2012 from ¥1,894.5 million in the nine months ended December 31, 2011, due mainly to this decrease in our total revenue, combined with a significant increase in depreciation and amortization expenses due to an increase in our capitalized technology investment and in selling, general and administrative expenses, as we aggressively invested to build our core infrastructure and manpower to support future growth. This increase in selling, general and administrative expenses is part of our efforts to expand our capabilities and infrastructure to match the rapid growth of our business, especially over the last three years. Our investment focused on advancing our technology, global operating capability and capacity, and overall infrastructure to be ready for further expansion of our business in each market we serve.
Company Background
We were formed in 2003 and initially focused on importing and selling computer forensic tools within Japan, including to domestic clients such as the National Police Agency and Japan's Ministry of Defense. We obtained the rights to customize these tools to Japanese requirements from U.S.-based Intelligent Computer Solutions, Access Data Corp. and Digital Intelligence Inc.
We entered the eDiscovery and electronic data forensic investigations markets in 2005 by leveraging the skills we had developed and refined through the application of our computer forensic tools. Our forensic software tools are used to analyze whether any confidential data has been leaked or falsified. Our eDiscovery solutions and services enable the preservation, processing, review and production of Electronically Stored Information (ESI), and our electronic data forensic investigation solutions and services enable the preservation, analysis, processing and production of ESI in connection with efforts to prevent fraud and corporate information leakage.
In 2007, we listed shares of UBIC, Inc. on the Mothers Marketplace of the TSE, which is the primary market for high-growth and emerging technology companies on the TSE. In that year, we established UNA with offices in Silicon Valley. In 2009, we opened our office in Seoul, South Korea and opened an office in Hong Kong. In 2010, we established Payment Card Forensics, Inc., as our subsidiary in Japan, in which we have a 60% ownership interest. In 2011, we established UBIC Risk Consulting, Inc., as our subsidiary in Japan, in which we have an 80% ownership interest. In 2011, we opened our office in Reston, Virginia, and also established UBIC Korea, Inc. and UBIC Taiwan, Inc. with offices in Seoul, South Korea and Taipei City, Taiwan, respectively. In 2012, we established UBIC Patent Partners, Inc., as our subsidiary in Japan, in which we have a 100% ownership interest. In 2012, we opened our newest office in New York City.
Launched in 2009 and recently updated in 2012, our proprietary, advanced technology platform, Lit i View, is an innovative eDiscovery solution that accurately handles Asian-language characters, encoding schemes and native file systems. Developed entirely in-house at UBIC, Lit i View incorporates processing and filtering software specifically for Asian encoding schemes and language sets as well as for information stored in English. We also recently launched our customizable Legal Cloud
79
service to address the problem of rising costs associated with the growth and dispersion of electronic data volumes across the globe, along with prolonged investigations and litigations.
We established Payment Card Forensics, Inc. and Risk Consulting, Inc. in order to ensure that we could provide a full range of EDRM and data forensic services to our clients. The capabilities provided by these subsidiaries allow us to better retain existing clients and to assist us in obtaining new clients. While Payment Card Forensics, Inc. and Risk Consulting, Inc. contribute important services to those of our clients that require them, we do not derive a material amount of revenue from these subsidiaries nor do we owe any material obligations to them. We recently established UBIC Patent Partners, Inc. in order to provide a platform for patent management services in connection with our Legal Cloud solution.
Industry Overview
eDiscovery solutions enable organizations to identify, preserve, collect, process, review, analyze and produce data in order to meet legal discovery, compliance and/or records management requirements. Data is collected from numerous sources that include email, text-based files, images, databases, audio files, web sites, computer applications and other corporate repositories, as well as smartphones, tablets, thumb storage drives and personal computers. The growth of data among businesses has continued to rise at an extraordinary rate. According to an IDC Digital Universe Survey in 2011, the amount of digital information created, captured or replicated worldwide every year will grow from 1.8 trillion gigabytes in 2011 to 7.9 trillion gigabytes in 2015, a compound annual growth rate (CAGR) of 45%. While email remains the primary application driving eDiscovery growth, we believe there is also dramatic growth being driven by content from Microsoft SharePoint, social media services, instant messaging (IM) and SMS text messaging.
eDiscovery is fundamentally different from paper-based evidence discovery primarily because of the much higher volume of electronic information produced and maintained by businesses and other organizations. For example, enterprise information stored in one personal computer is equivalent to an estimated four to six thousand boxes of printed material. Because of the sheer volume of information that must be analyzed in investigations or other legal matters, it is extremely challenging to investigate archives of electronic information manually. Accordingly, in order to achieve success in a lawsuit and avoid sanctions, we believe that attorneys must employ an automated process to analyze this trove of information, identifying and producing only information relevant to the matter. Providing only relevant documents is a very important consideration for organizations, which generally prefer to keep confidential those documents and other materials they are not legally required to produce.
The majority of eDiscovery solutions deployed are in response to a specific investigation or lawsuit; however, there are a growing number of proactive enterprises that are deploying eDiscovery solutions to provide better readiness and ongoing protection against potential legal issues. In addition, some enterprises have begun to show more interest in Cloud-based eDiscovery services. While historically most organizations have tended to prefer to deploy eDiscovery solutions on-site, greater recognition of the benefits of Cloud-based solutions together with diminishing concerns regarding data safety and accessibility have contributed to wider adoption of Cloud-based solutions.
The various stages of the eDiscovery process are referred to as the electronic discovery reference model (EDRM) and are set forth below:
80
broad process includes the collection of more data than needed whereas a targeted collection involves collecting specific data based upon search terms, date ranges and selected file types.
Many eDiscovery solution providers do not offer end-to-end coverage of the EDRM, and instead focus on one or more of identification, preservation, collection, and processing, review and analysis of data. Other eDiscovery solution providers are able to offer end-to-end coverage of the EDRM, either on their own or by utilizing technology partnerships to offer full coverage of all phases of the EDRM.
We believe, based on research analysts' reports, that total eDiscovery revenue relating to U.S. lawsuits was $3.3 billion in 2009, and will grow to an estimated $5.7 billion in 2013, or a CAGR of approximately 14.6%. The Gartner, Inc. 2012 Magic Quadrant for E-Discovery Software report estimates that the world's enterprise eDiscovery software market (excluding value added services) was $1.0 billion in 2010, and will grow at a CAGR of approximately 16% through 2015. In addition to these software revenues, Gartner also estimates that by 2013, value added services represented by software-as-a-service (SaaS) and business process utilities will account for 75% of the total eDiscovery revenue derived from the processing, review, analysis and production of electronically stored information (ESI).
Gartner suggests that the eDiscovery is a pressing issue for most companies because (i) ESI in all its many forms dominates in legal proceedings because modern business is mostly conducted using electronic communications and electronic records, (ii) government regulators require this ESI to be archived for proof of compliance, and (iii) governments of all nations also produce and disseminate information primarily through electronic channels. Gartner also suggests that the need to ingest, organize, search and produce ESI quickly for legal purposes has focused eDiscovery providers on creating solutions and services that can cope with the volume and variety of data that companies and their lawyers must quickly identify and sort.
Challenges in Electronic Data
eDiscovery
In April 2006, the United States Supreme Court approved certain amendments to the Federal Rules of Civil Procedure (FRCP) regarding the discovery in litigation of certain Electronically Stored Information (ESI). These amendments have placed a substantial burden on organizations to produce ESI in a very limited time period. Additionally, given the fact that complying with such discovery requests may cost in excess of $1.0 million in a single matter and multinational corporations may be involved in dozens of such lawsuits at any given time, organizations are seeking to contain the escalating costs of such discovery.
81
In recent years, the amount of data created by companies which may be deemed ESI has increased greatly and is expected to continue to grow. According to an IDC Digital Universe Survey in 2011, the amount of digital information created, captured or replicated worldwide every year will grow from 1.8 trillion gigabytes in 2011 to 7.9 trillion gigabytes in 2015, a CAGR of 45%. Because the cost of eDiscovery is generally proportional to the volume of data to be collected, processed, reviewed and produced for litigation, costs for this function are rising. The problem is compounded if plaintiffs' lawyers deliberately request discovery in such a broad a manner so as to impose prohibitive eDiscovery costs, in the hope that many organizations will simply prefer to settle than incur such costs. In addition, there has also been a dramatic increase in overall eDiscovery cost in situations where data needs to be collected overseas, searched, reviewed, produced in a foreign language and translated by bi-lingual attorneys and paralegals.
Because compliance with even the most basic eDiscovery request is expensive, organizations need to identify the appropriate technology and service providers in order to reduce costs and stay within their budget. The overall cost of eDiscovery is directly related to the number of documents to be reviewed for relevance and privilege. The overall cost of eDiscovery can be dramatically reduced if the right technology is used to conduct automated first level review before the more costly human review of such information. The skill and experience to select appropriate keywords while searching electronic documents and usage of a forensic lab capable of processing and sorting a huge amount of electronic data safely are crucial. In addition to managing costs, organizations need to utilize products and solutions that limit the eDiscovery production to disclosure of information that is relevant and responsive to the eDiscovery request, thereby reducing disclosure and leakage of valuable information that is not germane to the lawsuit.
Electronic Data Forensic Investigations
Electronic data forensic investigations are employed to collect and analyze data from computer systems, networks, wireless communications, and storage devices. These investigations often compel enterprises to identify sources of confidential information leakage, corporate espionage, internal fraud and other similar problems. Electronic data forensic investigations are used to identify responsible persons and also to clear accusations against innocent parties. These investigations are also used to produce evidence that can be indispensable in a criminal investigation against an accused person at the time of a trial. Electronic data forensic investigations are also used in connection with corporate mergers and acquisitions, and other new business investments which require an accurate assessment of the target company or market.
From mobile phones to personal computers to servers, digital devices are used throughout an enterprise and a large amount of electronic data exists in this digital infrastructure. Two basic types of digital data need to be collected and analyzed in electronic data forensic investigations. "Persistent" data is the data that is stored on a local hard drive (or another medium) and is preserved when the computer is turned off. "Volatile" data is any data that is stored in memory, or exists in transit, that will be lost when the computer loses power or is turned off. Volatile data resides in registries, cache, and random access memory (RAM). Since volatile data is ephemeral, it is essential an investigator knows reliable ways to capture it. System administrators and security personnel must also have a basic understanding of how routine computer and network administrative tasks can affect both the forensic investigation process and the subsequent ability to recover data that may be critical to the identification and analysis of a security incident.
UBIC's Competitive Advantages
We have designed our products and services to provide comprehensive solutions to meet the challenges of managing eDiscovery and electronic data forensic investigations. The principal ways in which our solutions address these challenges include:
82
native file systems. Our solutions and services allow us to accurately assess and convert different Asian-language character sets into the traditional Unicode Transformation Format (UTF), and also convert, as necessary, into several other complex encoding schemes which are frequently utilized by Asian companies, thus maintaining the fidelity of the search methodology and preserving the integrity and nuance of the underlying information. Many competitive solutions first translate Asian-language information to English and ASCII format which can result in garbled text and/or lack of accuracy. Processing and analysis is then conducted on this translated information, which, in our experience, often is inaccurate and obscures or eliminates subtleties and nuances that are often critical to the legal assessment and applicability of the information.
83
and the extended duration of many investigations and litigations. Our Cloud hosting service coupled with our experience in handling large volumes of data enables us to deliver our eDiscovery solutions in a flexible and cost-efficient manner.
Our Growth Strategy
Our objective is to enhance our position as a leading provider of eDiscovery and electronic data forensics solutions and services in Asia, as well as significantly increase our provision of these solutions and services in the United States, the world's largest and most advanced market for these services. Key elements of our strategy include:
Expand our presence and direct sales in the United States
Our most important corporate priority is to continue to expand our business in the United States. We plan to continue to increase our sales, marketing and business development efforts in the United States in order to enhance awareness of our litigation and eDiscovery solutions, not only for our current target market of Asian companies operating in the United States, but also for U.S. companies with Asian subsidiaries and operations. To the extent these sales and marketing efforts are successful, we believe they may have a positive impact on our manual review-related revenues.
In 2007, we opened our first office in the United States in Silicon Valley. In 2011 and 2012 respectively, we opened offices in Reston, Virginia to serve the Washington DC area, and New York City, two of the most important legal markets in the United States. From our United States offices, our most senior executives and sales personnel, including our Executive Vice-President, Chief Operating Officer and Director, Naritomo Ikeue, are executing on this important corporate priority of expanding our United States business.
Broaden and develop strategic relationships
We plan to continue to expand our existing relationships and develop new relationships with United States and international law firms, litigation consultants and other providers of eDiscovery and electronic data forensics solutions and services that would benefit from our leading technology solutions for Asian-language eDiscovery. We believe that these types of strategic relationships will allow us to expand our reach with global enterprises, especially those based in the United States, and improve our insight into emerging industry trends. We plan to materially increase our marketing efforts with and to these prospective strategic partners.
Extend our technology leadership and solution management services
While we believe that Lit i View is the leading solution for Asian-language eDiscovery, we plan to continue to enhance our solution. Traditionally, eDiscovery has been problematic and expensive because labor-intensive manual review of the large volume of materials gathered by electronic means has proven to be costly. Nevertheless, providers of eDiscovery solutions, including ourselves, had to rely on human labor, as there was no alternative. Our TAR technology combines the concepts and techniques of predictive coding with unique algorithms to provide an eDiscovery solution that significantly reduces review-cycle time and cost without sacrificing accurate results. With our TAR technology, we believe we are in a leading position regarding the use of technology in providing the right solutions for the eDiscovery market's needs. We plan to enhance our existing solutions and introduce and improve our solutions and services to address emerging trends and regulatory
84
requirements, and target new market opportunities. We have made and will continue to make investments in technology to introduce new versions of our solutions that incorporate innovative features, improved functionality and address unique business requirements. We also plan to continue to create, refine and deliver innovative service offerings that provide faster deployment of our solutions and services, and more accurate and complete results, and thus add more value to our clients. We believe our Lit i View and Legal Cloud solutions are examples of our technology innovation.
Expand to new geographies
Given the success of our expansion beyond Japan to the United States, Hong Kong, South Korea and Taiwan, we plan to expand our sales and marketing efforts to new geographies, including the European Union and China. Global business expansion has increased the incidence of investigations and lawsuits related to such matters as antitrust, intellectual property infringement and other data intensive matters. We believe that while most countries do not have the same eDiscovery mandates of the United States, enterprises in the European Union, China and other geographies operate in a way that can expose them to the reach of United States' lawsuits and the scrutiny of antitrust authorities of the United States and the European Union. In particular, the competition and antitrust departments of the European Union have become increasingly active and are demanding access to a broader range of documents as part of their investigations.
Pursue strategic acquisitions
We may pursue acquisitions that we believe will provide solutions and/or technologies that are complementary to our current offerings or accelerate our international expansion. We continually seek to enhance and expand the functionality of our solutions and in the future we may pursue acquisitions that will enable us to offer more comprehensive functionality to clients. We currently have no plans, proposals or arrangements with respect to any acquisition.
85
Our Solutions and Services
Our eDiscovery and electronic data forensics solutions and services help our clients employ a series of scientific investigation methods that conduct evidence preservation and investigation analysis for incident response or litigation, as well as research to detect falsification and damage of electronic data. Our solutions and services also retroactively identify acts which result in unauthorized use of computer or network resources, service obstruction, and unintentional disclosure of information. Our solutions and services are depicted in the following diagram:
eDiscovery Business
Our eDiscovery solutions and services enable the preservation, processing, review and production of Electronically Stored Information (ESI). Our solutions (i) copy electronic data from personal computers and servers, (ii) search and identify relevant documents and evidence, (iii) permit the inspection of evidence and on-line hosting for review and translation, and (iv) produce the final disclosure of evidence in the court-requested format.
86
In civil lawsuits, the plaintiff and the defendant disclose evidence before commencement of the trial. Pursuant to the Federal Rules of Civil Procedure (FRCP)) in the United States, disclosure of electronic evidence in electronic format through "eDiscovery" has been mandated, and more than 90% of enterprise information is typically stored in electronic format. Our eDiscovery support service helps to ensure secure and effective information disclosure.
Our online review system makes it possible for corporate and outside counsel to more efficiently review electronic evidence. Our eDiscovery system is designed to ensure that only necessary information is disclosed through a disclosure approval process undertaken by assigned lawyers. The inherent risk of information leakage in an eDiscovery process is a concern for enterprises. Using our solution, only those files identified as containing evidence are hosted to our inspection servers, and the remainder of the information is stored in our local secure data centers in Tokyo, Seoul, Taipei City, Silicon Valley and New York to ensure the safety and confidentiality of critical data.
We believe that we are the only eDiscovery provider with a data processing center in each of Japan, South Korea and Taiwan, and thus we can conduct the entire process of eDiscovery in Asia. This allows us to avoid sending non-responsive electronic data to law firms or other parties in the United States and potentially making such confidential and proprietary data subject to the jurisdiction of the courts.
Though typically more than 90% of enterprise data is available in electronic formats, the volume of paper documents may also be significant. We perform paper based evidence discovery by scanning and subsequently digitizing the documents, utilizing Optical Character Recognition (OCR) techniques. We utilize methods to avoid loss of potentially responsive evidence. Once available in digital formats, the techniques followed for analysis of these documents follows identical methods employed for digital documents.
Lit i View Solution
Our proprietary, advanced technology platform, Lit i View, is an innovative eDiscovery solution that accurately handles Asian-language characters, encoding schemes and native file systems. Developed entirely in-house at UBIC, Lit i View incorporates processing and filtering software specifically for Asian encoding schemes and language sets as well as for information stored in English. Lit i View allows the enterprise or its legal advisors to work efficiently and effectively by handling Chinese, Japanese, Korean and English information conveniently at a remote location or on-site in the enterprise offices.
Lit i View more accurately identifies Asian characters and documents responsive to the eDiscovery search than competing products, and thus we reduce the number of documents that need to be handled and reviewed by persons, and we are less likely to fail to identify an important document. Lit i View works seamlessly with more than 20 software applications, including Microsoft Outlook and several unique email applications, and thus we are able to produce documents without garbled text and also capture responsive documents that would be missed by many of our competitors.
Lit i View incorporates new artificial intelligence (AI) language capabilities such as "concept search," which searches not only words, but also general concepts, similar meanings and relevant categorizations. Searches conducted in Asian languages are more difficult because Asian languages typically contain no spaces between words. In addition, because there are numerous ways to express different words and their combinations, keyword searches are usually insufficient to find all relevant documents. Lit i View's use of concept searches can be very useful because we can take a case-by-case approach to determine what will be the most effective search tools.
Lit i View also permits the extracted data to be reviewed simultaneously by UBIC's reviewers, UBIC's clients, and the clients' law firm or legal team. We believe this facilitates faster and more accurate analysis of the produced data.
87
Legal Cloud Solution
We recently launched our customizable Legal Cloud solution to address the problem of rising costs associated with the growth and dispersion of electronic data volumes across the globe, along with prolonged investigations and litigations. Because large enterprises are generating electronic data at a rapid rate, there are a growing number of proactive enterprises that are seeking to deploy data hosting solutions to provide better readiness and ongoing protection against potential eDiscovery issues. Some enterprises have begun to show increasing interest in Cloud-based data hosting. While historically most organizations have tended to prefer to host data on-site in local servers, concerns regarding data preservation, confidentiality and accessibility of Cloud-based services have begun to diminish. In addition to moving data into the Cloud in connection with a specific investigation or lawsuit, enterprises are choosing to host data in a medium that allows for rapid preservation, collection, processing and review.
We believe that the competing Cloud hosting services available are not experienced and capable of hosting the large volume of data produced by litigation. We also believe that because competing Cloud hosting services typically handle a more limited amount of data, their cost structure is not conducive to handling the large volume of data produced by litigation. Because we are experienced in handling large volumes of data in connection with our eDiscovery solutions, we are both equipped and experienced in dealing with these materials and are able to host litigation data in a cost-efficient manner. Our Legal Cloud solution allows us to maintain client data during and after a particular litigation or investigation, and to maintain the data and documents in a relational database of our clients' data and documents, along with all of the tagging and coding that was completed in connection with such project. We believe that the analysis and indexing we conduct in order to build a relational database provides a superior and distinct data hosting solution for our clients by allowing them to more rapidly access relevant data and documents for future litigations, investigations and other corporate needs. We have not generated material revenues from our Legal Cloud solution since its introduction, but we expect this solution to provide a complementary and recurring revenue source.
Legal / Compliance Professional Services
Forensic Investigations
Our electronic data forensic investigation solutions and services enable the preservation, analysis, processing and production of ESI in connection with fraud and corporate information leakage. We work with a large number of enterprises and their law firms to investigate corporate violations, such as leakage of sensitive information or illegal trading, handle them in a timely manner and in accordance with relevant laws, and provide objective analysis to the stakeholders. We also perform due diligence investigations in connection with corporate mergers and acquisitions as well as new business investments that require accurate assessment of the target company or market.
In most instances of evidence gathering and analysis, solutions emerge by making proper inferences from detailed information. Often such information may not be clearly visible or even readily identifiable or available within the enterprise. Meticulously sifting through digital data by employing computer forensics enhances an enterprise's ability to infer intelligently and make evidence gathering more efficient.
Consulting and Corporate Risk Audit
Enterprises today consider compliance and corporate social responsibility measures as important steps in building accountability, implementing crisis management systems, and improving risk mitigation processes. Based on extensive litigation support experience, we help clients create document management procedures, conduct corporate risk audits, and comply with legal requirements to provide information to relevant stakeholders.
88
Storage of enterprise information in electronic format raises the risk of corporate fraud and information leakage. Putting preventive processes in place is therefore an important corporate objective. Unlike measures such as forensic analysis, which are performed after a fraud has been detected, corporate risk audit is a defensive strategy against fraud before it happens. We institute regular corporate risk audit mechanisms for identifying and monitoring the flow of confidential enterprise information out of the company by departing employees.
Forensic Tools
Besides computer forensic investigation for our clients, we also sell the necessary hardware and software. We offer forensic tools to deal with our clients' computer forensic related needs, such as acquisition of proof, data analysis, establishment or the provision of a forensic laboratory. Additionally, we also sell imported litigation infrastructure from international vendors.
Forensic Training
Successful computer forensics entails practical knowledge and relevant skills. For clients conducting the process themselves, training is essential. We make available continuous training for conducting computer forensics. We provide training to employees of law enforcement and military agencies, employees of public enterprises, and other investigation experts that take part in various investigations in the United States and Europe, and are leaders in the field of computer forensics. Our investigation specialists, whose acquired capability meets international standards, offer world class training to such investigators in Japan to help them achieve their goals.
Clients
We provide solutions and services to enterprises, government agencies, law firms and other organizations in the United States and Asia. Since our inception, more than 150 clients have purchased our solutions and services. Our target markets are not confined to certain industries as we are focused on providing eDiscovery and electronic data forensics solutions and services that meet the needs of any organization. We have historically focused our efforts on organizations that utilize Asian-language characters, encoding schemes and native file systems. Our clients that represented more than 10% of our total revenue during one or more of the last three fiscal years include Sanyo Electric Co., Ltd., Asahi Kasei Pharma Corp., Panasonic Corporation, Aisin Seiki, Yazaki Corporation, two clients represented by Quinn Emanuel Urquhart & Sullivan, LLP and TMI Associates. Because we are retained by these clients for specific projects as they arise, we expect that we will have different major clients from year to year. In the future, the expansion of our Legal Cloud solution may provide an opportunity to develop ongoing and more stable client relationships.
Sales and Marketing
Our sales executives market our solutions and services directly to prospective clients and referral law firms through on-site sales calls and longstanding relationships. We focus on attracting and retaining clients by providing superior integrated technology solutions and exceptional client service. Our client support specialists are responsible for providing ongoing support services for existing clients.
Our marketing efforts and lead generation activities consist primarily of client referrals, telemarketing, trade shows, industry events and press releases. Additionally, we maintain a website that clients and potential clients may access to obtain additional information related to solutions we offer. We believe that our hosting of educational seminars with respect to eDiscovery topics for legal professionals has been very beneficial to our brand awareness and sales and marketing efforts generally.
89
Research and Development
Our ability to compete in the eDiscovery and digital forensics solutions and services markets depends in part on our continuous commitment to research and development and our ability to timely introduce new solutions, technologies, features and functionality. Our research and development personnel are responsible for the design, development, testing and certification of our software solutions. Our research and development efforts are focused on developing new solutions and core technologies and further enhancing the functionality, reliability, performance and flexibility of existing solutions. A primary goal of our research and development is to anticipate client demands and bring new solutions and new versions of existing solutions to market quickly in order to remain competitive in the marketplace. Our research and development activities are directed by individuals with significant expertise and industry experience.
Intellectual Property
The proprietary nature of, and protection for, our solutions, solution candidates, processes and know-how are important to
our business. To protect our intellectual property, both in Japan and abroad, we rely on a combination of patents, copyrights, trademarks, service marks, trade secrets, confidentiality provisions and
licensing arrangements to establish and protect our proprietary rights. We have established and continue to build proprietary positions for our solution candidates and technology in the Japan and
abroad. We have five issued patents in Japan and eight patent applications pending in Japan, and three patent applications in process in the United States, relating generally to our forensics systems,
forensics method and forensics program. We also have six registered trademarks in Japan, including UBIC,
, Payment Card
Forensics, Lit i View, Asian eDiscovery and Legal Cloud. We have registered Lit i View, and are also
seeking to register UBIC, in the United States.
We cannot be sure that patents will be granted with respect to any of our pending patent applications or with respect to any patent applications filed by us in the future, nor can we be sure that any patents that may be granted to us in the future will be commercially useful in protecting our technology. In addition, despite our efforts to protect our intellectual property, unauthorized parties may attempt to copy aspects of our solutions or obtain and use information that we regard as proprietary. While we cannot determine the extent to which piracy of our software solutions occurs, we expect software piracy could be a problem. For this and more comprehensive risks related to our intellectual property, please see "Risk FactorsOur failure to protect our intellectual property rights may undermine our competitive position, and subject us to costly litigation to protect our intellectual property rights."
Competition
The eDiscovery and digital forensics solutions and services markets in the United States and Asia are intensely competitive, highly fragmented and characterized by rapidly changing technology, frequent solution introductions, changes in client demands and evolving industry standards. Competitors vary in size, scope and breadth of solutions and services offered. Competitors include FTI Consulting, Inc., Altegrity Inc. (Kroll Ontrack), First Advantage, KPMG, Deloitte, Catalyst Repository Systems, Epiq Systems, Inc., Capital Novus, Symantec Corporation (Clearwell Systems), Nuix, kCura (Relativity), Hewlett-Packard (Stratify), Access Data Group and Guidance Software (EnCase eDiscovery). Many of our primary competitors have longer operating histories and substantially greater financial, technical, sales, marketing and other resources than we do, as well as greater name recognition and broader solution offerings. These competitors can devote greater resources to the development, promotion, sale and support of their solutions than we can.
90
In addition to the competitors mentioned above, certain law firms, accounting firms, management consultant firms, turnaround specialists, and crisis management firms offer solutions and services that compete with our solutions and services.
We believe the principal competitive factors in the eDiscovery and electronic data forensics solutions and services markets include:
Although many of our competitors have greater resources and greater name recognition, we believe we compete favorably on the basis of the other competitive factors listed above. We believe our solutions and services enable a process that permits the automated identification of relevant text in Asian languages, thus improving accuracy, reducing the number of steps in the review process and generating significant savings in time and cost of document review. Specifically, we believe that our predictive coding solution based on our proprietary text mining technology allows us to accurately handle English-and Asian-language characters, encoding schemes and native file systems, and provides us with a significant competitive advantage over our competition, including those with greater financial resources, a higher level of name recognition and broader solution offerings.
Government Regulation
Our industry and our solutions and services are not directly regulated by any governmental authorities. However, our clients must comply with certain governmental and judicial requirements. Class action and mass tort cases, as well as eDiscovery requirements related to litigation, are subject to various federal and state laws, as well as rules of evidence and rules of procedure established by the courts.
For example, in April 2006, the United States Supreme Court approved certain amendments to the Federal Rules of Civil Procedure regarding the discovery in litigation of certain electronically stored information. These amendments became effective on December 1, 2006. Among other things, these amendments (i) require early attention by parties in litigation to meet and confer regarding discovery issues and to develop a discovery plan that identifies and addresses the parties' electronically stored information, (ii) expand the reach of federal court subpoenas to include electronically stored information, (iii) allow for parties to object to production of electronically stored information that is not reasonably accessible due to the undue burden or cost associated with such retrieval, and (iv) provide a "safe harbor" to parties unable to provide electronically stored information lost or destroyed as a result of the routine, good-faith operation of an electronic information system.
While these federal rules do not apply in state court proceedings, the civil procedure rules of many states have been closely modeled on these provisions. We anticipate the federal and state court discovery rules relating to electronic documents and information will continue to evolve and affect the way we develop and implement technology and service solutions to those changing discovery rules.
Facilities
Our corporate headquarters are located in Tokyo, Japan, where we lease approximately 14,412 square feet of commercial space under a lease that expires in 2014. We use this space for our principal sales, research and development, client service and administrative purposes.
91
In connection with our global sales and marketing efforts, we lease office space typically on a short-term renewable basis in the United States in New York, New York; Redwood City (Silicon Valley), California; and Reston, Virginia; and internationally in Seoul, South Korea; Taipei, Taiwan; and Hong Kong.
We believe that our facilities are generally suitable to meet our needs for the foreseeable future and could be replaced with difficulty at similar cost; however, we will continue to seek additional space as needed to satisfy our growth.
Employees
As of December 31, 2012, we had 142 employees worldwide, including 47 in sales and marketing, 6 in research and development, 55 in professional services and support and 34 in general administration. None of our employees is represented by a union. We believe that we have good relations with our employees.
Legal Proceedings
From time to time, we may become involved in legal proceedings arising in the ordinary course of our business. We are not presently a party to any legal proceedings that, if determined adversely to us, would individually or in the aggregate have a material adverse effect on our business, operating results, financial condition or cash flows.
92
Our current directors and executive officers as of the date of this prospectus are as follows:
Directors and Executive Officers
The following table sets forth information regarding our directors, director appointees and executive officers as of the date of this prospectus.
Directors and Executive Officers
|
Age | Position/Title | |||
---|---|---|---|---|---|
Masahiro Morimoto |
46 | Chief Executive Officer and Chairman of the Board | |||
Seitaro Ishii |
66 | Chief Financial Officer and Chief Administrative Officer | |||
Naritomo Ikeue |
40 | Executive Vice-President, Chief Operating Officer and Director | |||
Makoto Funahashi |
67 | Director | |||
Hirooki Kirisawa |
46 | Director | |||
Yoshikatsu Shirai |
48 | Director of Total Product Support |
Masahiro Morimoto: Mr. Masahiro Morimoto founded the Company in August 2003 and has served as our Chairman and Chief Executive Officer since that date. Mr. Morimoto has also served in various senior executive positions at our principal subsidiary, UBIC North America, since its creation in 2007 and has served as its Chief Executive Officer and Chairman since March 2011. Prior to establishing the Company, Mr. Morimoto worked in various professional positions for the Japan Maritime Self-Defense Force from 1989 to 1995 and in various capacities at Applied Materials Japan, Inc. from 1995 to 2003. We believe that Mr. Morimoto is qualified to serve on our Board of Directors due to his intimate familiarity with our company, his business experience and his prior service as our director.
Seitaro Ishii: Mr. Ishii has served as our Chief Financial Officer and Chief Administrative Officer since September 2012. Mr. Ishii has also served as a director for our subsidiary, UBIC North America, Inc., since June 2010, as well as our independent consultant since May 2010. Prior to becoming our independent consultant, Mr. Ishii worked for Applied Materials, Inc. (Nasdaq: AMAT), a provider of manufacturing equipment, services and software in the semiconductor equipment industry, for twenty-five years. During that time, Mr. Ishii served in various managerial positions, including global head of human resources and deputy chief financial officer. Mr. Ishii received a certified public accountant certification from the State of New York in the United States.
Naritomo Ikeue: Mr. Naritomo Ikeue has served as our Executive Vice President, Chief Operating Officer since November 2007 and has been a director of UBIC, Inc. since December, 2003. In addition, Mr. Ikeue has served as President of our principal subsidiary, UBIC North America, since February 2011 and has been a director of that subsidiary since June, 2010. Before becoming our Executive Vice President, Mr. Ikeue served as our Director of Administration from our founding to November, 2007. Prior to joining UBIC, from 1996 to 2003 Mr. Ikeue served in various capacities at Applied Materials Japan, Inc. We believe that Mr. Ikeue is qualified to serve on our Board of Directors due to his intimate familiarity with our company, his business experience and his prior service as our director.
Makoto Funahashi: Mr. Funahashi has served as our independent director since June 2008. Prior to joining UBIC, Inc., Mr. Funahashi served in various senior capacities with the National Police Agency of Japan from 1968 to 2001, including as Deputy Minister for police technology from 1999 to his retirement. From March 2001 to April 2003, Mr. Funahashi served as special advisor to USE, Inc., a company in the information technology industry. From June 2003 to March 2011, he served in various capacities at NTT Data i and its predecessor, NTT Data Creation, including as a director from 2003 to 2008 and a senior advisor from 2008 to March 2011. We believe that Mr. Funahashi is qualified to
93
serve on our Board of Directors due to his extensive management experience in the public sector and his technological expertise.
Hirooki Kirisawa: Mr. Kirisawa has served as our independent director since June 2010. Prior to becoming one of our directors, Mr. Kirisawa served as one of our statutory auditors from August 2005 to June 2010. Mr. Kirisawa founded Kirisawa Tax Accounting Office in 2004 and has served as its Chairman since that date. We believe that Mr. Kirisawa is qualified to serve on our Board of Directors due to his extensive accounting and business background and experience.
Yoshikatsu Shirai: Mr. Shirai has been our Director of Total Product Support since August 2012. As our Director of Total Product Support, Mr. Shirai is responsible for managing global support for Lit i View. From September 2007 until August 2012, Mr. Shirai served as our Director of Technology Group, where he led the development of Lit i View. Prior to joining UBIC, Inc., Mr. Shiria served in various management positions at Applied Materials Japan, Inc., including as an engineering manager and a product manager, from 1996 through December 2007.
Board of Directors
As a foreign private issuer, we are generally permitted to, and do, follow the corporate governance requirements of the Companies Act of Japan rather than those of U.S. law. Upon completion of this offering, our Board of Directors will consist of Messrs. Masahiro Morimoto, Naritomo Ikeue, Makoto Funahashi, and Hirooki Kirisawa. Our Board of Directors has determined that Messrs. Funahashi and Kirisawa qualify as independent directors under Nasdaq rules. Our Board of Directors directs the management of our business and affairs and conducts its business through meetings of the Board of Directors. Consistent with the Companies Act, the rules of the TSE and corporate practice in Japan, we do not have any standing committees. Our Board of Directors as a whole performs the functions of a compensation committee and a nominating and corporate governance committee. From time to time, special committees may be established under the direction of the Board of Directors when necessary to address specific issues.
No director has been the subject of any order, judgment or decree of any governmental agency or administrator or of any court of competent jurisdiction, revoking or suspending for cause any license, permit or other authority of such person or of any corporation in which he or she is a director or executive officer, to engage in normal business activities of such person or corporation.
Terms of Directors
Each of our directors' terms of office terminate at the conclusion of the annual shareholders meeting following the end of our second business year of the date of their election. Our directors automatically retire from office (unless vacated sooner) upon the expiration of that term, unless elected for an additional term. Each of our current directors' term is set to expire in June 2014. Directors may be removed from office by an extraordinary resolution of two-thirds of the shareholders in attendance at a meeting. A director will be removed from office automatically if, among other things, the director becomes bankrupt or becomes of unsound mind. Our officers are nominated by and serve at the discretion of our Board of Directors.
Our shareholders have the power to appoint any person as a director either to fill a vacancy or as an addition to our board. The term of office of any director so appointed will be the same as the remaining period of the other remaining directors and he will then be eligible for re-election.
Since we qualify as a foreign private issuer under current Nasdaq rules, our Board of Directors is not required to have a majority of independent directors.
Our Board of Directors may receive such remuneration as determined by at the meeting of our shareholders.
94
Duties of Directors
Under applicable Japanese law, our directors have a duty of loyalty to act honestly, in good faith and with a view to the best interests of our company. Our directors also have a duty to exercise the skill and care of a reasonably diligent person having both (a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same actions as are carried out by that director in relation to the company and (b) the general knowledge, skill and experience that that particular director has. In fulfilling their duty of care to us, our directors must act in accordance with our articles of association. A shareholder has the right to seek damages if a director has intentionally or by gross negligence breached their duties.
The functions and powers of our Board of Directors include, among others:
Interested Transactions
There is no provision in our articles of incorporation as to a director's power to vote on a proposal, arrangement or contract in which the director is materially interested, but the Companies Act provides that such director is required to refrain from voting on such matters at meetings of the Board of Directors. Therefore, our directors will abstain from any discussion or vote on transactions in which they are interested.
There are no family relationships between any of the named directors and executive officers.
Remuneration
Our shareholders determine the total amount of remuneration to be paid to our directors. The Board of Directors then determines the actual remuneration to be paid to each director. The compensation committee assists the directors in reviewing and approving the compensation structure for the directors. See "Committees of our Board of DirectorsCompensation Committee."
Power To Obligate our Company
The directors may raise or borrow money and mortgage or charge all or any part of its undertaking, property and assets (present and future) and uncalled capital, and to issue debentures, bonds or other securities whether outright or as collateral security for any debt liability or obligations of our company or of any third party.
Qualification
There is no shareholding qualification for directors.
Indemnification Agreements
We may enter into indemnification agreements that will provide our directors, statutory auditors and executive officers with contractual rights to indemnification and rights to advances against certain expenses to the extent permitted by the Companies Act and our articles of incorporation. These could include legal fees and other expenses actually and reasonably incurred in connection with pending or threatened legal proceedings because of such director's, statutory auditor's or executive officer's position with us or another entity that the director serves at our request, subject to various conditions.
95
We may obtain D&O liability insurance to cover some of these potential liabilities. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers or persons controlling us pursuant to the indemnification agreements, we have been informed that in the opinion of the staff of the SEC such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
Compensation Committee
Our Board of Directors acts as our compensation committee. In such capacity, it reviews and approves our compensation structure, including all forms of compensation, relating to our directors and executive officers. Among other things, our Board of Directors:
Nominating and Corporate Governance Committee
Our Board of Directors acts as our corporate governance and nominating committee. In that capacity, subject to the approval of the shareholders, the board selects individuals qualified to become our directors, fills vacancies and adds directors between shareholders' meetings. Among other things, our Board of Directors:
Board of Statutory Auditors
Consistent with applicable Japanese law and regulation and the rules of the TSE, we have a separate board of statutory auditors elected by our shareholders, which currently consists of three outside statutory auditors, rather than an audit committee. Our board of statutory auditors is a legally separate and independent body from our board of directors. Under the Companies Act, none of our outside statutory auditors is, may be, or has been a director, officer or employee of UBIC, Inc. or any of our subsidiaries. At least one of the statutory auditors, in our case, Mr. Sudo, must be appointed as a full-time statutory auditor by the board of statutory auditors. Among other functions, the board of statutory auditors prepares an audit report, appoints and removes the full-time statutory auditor(s) and establishes audit policies. We have determined that this board of statutory auditors satisfies the "independence" requirements for audit committees under current Nasdaq rules and Rule 10A-3 under the Securities Exchange Act of 1934, as amended. At least one of the members of our board of statutory auditors qualifies as an "audit committee financial expert" under applicable SEC rules. Our board of statutory auditors is responsible for: the retention and oversight of our independent registered public accounting firm and the preparation of their audit; addressing complaints related to accounting,
96
internal accounting controls, and auditing matters; engaging any advisors necessary to perform its duties; and funding necessary to carry out its duties.
In addition, our statutory auditors participate in all meetings of our Board of Directors.
Our board of statutory auditors is comprised of the following members as of the date of this prospectus:
Name
|
Age | Title | |||
---|---|---|---|---|---|
Kunihiro Sudo |
67 | Outside Statutory Auditor | |||
Takaharu Yasumoto |
58 | Outside Statutory Auditor | |||
Kenzo Takai |
67 | Outside Statutory Auditor |
Kunihiro Sudo: Mr. Sudo has served as one of our outside statutory auditors since April 2011. Prior to becoming one of our auditors, Mr. Sudo served as an advisor to XING Co. from March 2007 to August 2007. In August 2007, Mr. Sudo joined Aqua Cast Co. as an advisor and became a director of Aqua Cast Co. in October of 2007. In January 2008, Mr. Sudo retired from Aqua Cast Co..
Takaharu Yasumoto: Mr. Yasumoto has served as one of our outside statutory auditors since June 2010. Mr. Yasumoto has also served as a statutory auditor of Fast Retailing Co., Ltd. from June 1993 to the present. In addition, Mr. Yasumoto served as a special professor in the International Financing research school of Chuo University in Tokyo, Japan.
Kenzo Takai: Mr. Takai has served as one of our outside statutory auditors since June 2012. Mr. Takai currently manages his own Takai Attorney Office, where he has been a registered attorney since 1983. Prior to becoming of our statutory auditor, Mr. Takai served as outside statutory auditor in several companies include LAC Co., Ltd., Link Theory Holdings Co., Ltd. and eAccess Ltd.
Compensation of Directors and Executive Officers
For the fiscal year ended March 31, 2012, the aggregate cash compensation that we paid to our directors and executive officers included in the list under the heading "Directors and Executive Officers" was ¥167 million, all of which was comprised of base salary. We do not have a requirement to, and have not, set aside pension or retirement benefits for our officers or directors.
97
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
At March 31, 2012, Focus Systems owned approximately 11.5% of our outstanding common shares. Focus Systems has entered into an agency agreement in sales of our eDiscovery and forensic tool and services from January 1, 2006. In addition, Focus Systems entered into an agreement with us on February 1, 2010, to design and develop software that we use internally to deliver services to clients. Furthermore, Focus Systems purchased unsecured convertible notes with face amount of ¥80,000 thousand in the amount of ¥76,000 thousand that UBIC issued on April 1, 2010. Focus Systems converted the notes to 204,472 shares on March 14, 2011. No director or executive officer of Focus Systems is one of our officers or directors and none of our officers or directors is an officer or director of Focus Systems.
The balances as of March 31, 2011 and 2012, and transactions of the Company with Focus Systems for years ended March 31, 2011 and 2012, are summarized as follows:
|
Thousands of Yen |
Thousand of
Dollars |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2011 | 2012 | 2012 | |||||||
Trade receivables |
¥ | 8,038 | ¥ | 2,833 | $ | 33 | ||||
Advance received |
10,141 | 15,720 | 181 | |||||||
Other accounts payable |
| 5,284 | 61 | |||||||
Revenue |
40,764 | 27,862 | 322 | |||||||
Cost of revenue (maintenance costs) |
| 323 | 4 | |||||||
Selling, general and administrative expenses (outsourcing costs, storage fee, etc.) |
19,537 | | | |||||||
Dividends received |
| 4,500 | 52 | |||||||
Capitalized computer software |
| 5,544 | 64 |
98
The following table sets forth certain information regarding the beneficial ownership of our common stock as of April 5, 2013 on a fully diluted basis, assuming the exercise of all stock options to purchase common stock which are exercisable within 60 days of the date of this prospectus, for (i) each stockholder known to be the beneficial owner of 5% or more of our outstanding common stock, (ii) each of our executive officers and directors, and (iii) all executive officers and directors as a group. In general, a person is deemed to be a "beneficial owner" of a security if that person has the power to vote or direct the voting of such security, or the power to dispose or to direct the disposition of such security.
Shares of common stock subject to options or convertible securities exercisable or convertible within 60 days of the date hereof are deemed outstanding for computing the percentage of the person or entity holding such options or convertible securities but are not deemed outstanding for computing the percentage of any other person. To the best of our knowledge, subject to community and martial property laws, all persons named have sole voting and investment power with respect to such shares, except as otherwise noted. Percentage of shares owned prior to the offering is based upon 3,193,136 shares of our common stock outstanding as of April 5, 2013. Percentage of shares owned after the offering is based on 2,400,000 ADSs, representing 480,000 shares being offered hereby.
|
Shares
Beneficially Owned Prior to Offering |
Shares
Beneficially Owned After the Offering |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Name and Address of Beneficial Owners(1)
|
Number | Percent | Number | Percent | |||||||||
Executive Officers and Directors |
|||||||||||||
Masahiro Morimoto |
692,040 | 21.67 | 692,040 | 18.84 | |||||||||
Seitaro Ishii |
600 | * | 600 | * | |||||||||
Naritomo Ikeue |
272,240 | 8.53 | 272,240 | 7.41 | |||||||||
Yoshikatsu Shirai |
| | | | |||||||||
Makoto Funahashi |
| | | | |||||||||
Hirooki Kirisawa |
8,160 | * | 8,160 | * | |||||||||
All directors and executive officers as a group (6 persons) |
973,040 | 30.45 | 973,040 | 26.49 | |||||||||
5% Shareholders |
|||||||||||||
Focus Systems Corporation(2) |
298,472 | 9.35 | 298,472 | 8.13 | |||||||||
Japan Trustee Services Bank, Ltd.(2) |
268,100 | 8.40 | 268,100 | 7.30 |
99
Description of Our Common Stock
Following this offering, our authorized capital stock will consist of 7,200,000 shares of common stock, and there will be 3,673,136 shares of common stock outstanding, assuming no exercise of the underwriters' over-allotment option. All outstanding shares of common stock are fully paid and non-assessable, and the shares of common stock underlying the ADSs to be issued upon consummation of this offering will be fully paid and non-assessable.
Share Units
Our shares are organized into units comprised of ten shares of common stock each. Shareholders who hold less than one unit's worth of our common shares have access to a restricted set of shareholder rights, as described below.
Voting Rights
The holders of our common shares are entitled to one vote for each ten shares held of record on all matters submitted to a vote of stockholders. Upon the consummation of this offering, holders of a majority of the shares of common stock entitled to vote in any election of directors may elect all of the directors standing for election. Shareholders who hold less than one unit's worth of our common shares are not entitled to vote.
Dividend Rights
Holders of our common shares are entitled to receive ratably any dividend declared at a shareholders' meeting or by the Board of Directors.
Rights Upon Liquidation
In the event of a liquidation, dissolution or winding up of the company, holders of common shares are entitled to share ratably in the assets remaining after payment of liabilities.
Other Rights and Preferences
Holders of our common shares have no preemptive, conversion or redemption rights.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Mitsubishi UFJ Trust.
Limitations on Liability
Our articles of incorporation limit the liability of our directors, statutory auditors and accountants to the fullest extent permitted by the Companies Act. The effect of these provisions is to eliminate our rights and those of our stockholders to file stockholders' derivative suits on behalf of our company to recover monetary damages from a director, a statutory auditor or an accountant for breach of their duties under the Companies Act. However, exculpation does not apply to any director, statutory auditor or accountant if they have intentionally ( koi ) or by gross negligence ( ju-kashitsu ) breached their duties under the Companies Act. Additionally, we may enter into contracts for limitation of liability with our outside directors and outside statutory auditors. If we do so, we expect that these contracts will eliminate our rights and those of our stockholders as described above. We also may obtain directors' and statutory auditors' liability insurance.
100
Articles of Incorporation
Organization
UBIC, Inc. is a joint stock corporation (kabushiki kaisha) incorporated in Japan under the Companies Act. It is registered in the Commercial Register (shogyo tokibo) maintained by the Legal Affairs Bureau.
Objects and Purposes in Our Articles of Incorporation
Article 2 of our articles of incorporation states our objects and purposes:
Provisions Regarding Our Directors
There is no provision in our articles of incorporation as to a director's power to vote on a proposal, arrangement or contract in which the director is materially interested, but the Companies Act provides that such director is required to refrain from voting on such matters at the Board of Director's meetings.
The Companies Act provides that compensation for directors is determined at a general meeting of shareholders of a company. Within the upper limit approved by the shareholders' meeting, the board of directors will determine the amount of compensation for each director. The board of directors may, by its resolution, leave such decision to the president's discretion.
The Companies Act provides that a significant loan from third party by a company should be approved by the board of directors. We have adopted this policy.
There is no mandatory retirement age for directors under the Companies Act or our articles of incorporation.
There is no requirement concerning the number of shares one individual must hold in order to qualify him or her as a director under the Companies Act or our articles of incorporation.
Rights of Shareholders of our Common Stock
We have issued only one class of shares, our common stock. Rights of holders of shares of our common stock have under the Companies Act and our articles of incorporation include:
101
Under the Companies Act, a company is permitted to make distribution of surplus to the extent that the aggregate book value of the assets to be distributed to shareholders does not exceed the Distributable Amount provided for under the Companies Act and the Ordinance of the Ministry of Justice as of the effective date of such distribution of surplus.
The amount of surplus at any given time shall be the amount of a company's assets and the book value of company's treasury stock after subtracting and adding the amounts of the items provided for under the Companies Act and the applicable Ordinance of the Ministry of Justice.
A shareholder is generally entitled to one vote for each unit of ten of our shares at a shareholders' meeting. In general, under the Companies Act and our articles of incorporation, shareholders' meeting may adopt an ordinary resolution by a majority of the voting rights presented at the meeting. The Companies Act and our articles of incorporation require a quorum for the election of directors and statutory auditors of not less than one-third of the total number of voting rights. A corporate shareholder, having not less than one-quarter of its voting rights directly or indirectly held by us, does not have voting rights. We have no voting rights with respect to our own common stock. Shareholders may exercise their voting rights through proxies, provided that a shareholder may appoint only one shareholder who has a voting right as its proxy. Our Board of Directors shall entitle our shareholders to cast their votes in writing. Our Board of Directors may also entitle our shareholders to cast their votes by electronic devices.
As for a special resolution, while the Companies Act, in general, requires a quorum of the majority of the total number of voting rights and approval of two-thirds of the voting rights presented at the meeting of any material corporate actions, it allows a company to reduce the quorum for such special resolutions by its articles of incorporation to one-third or greater than one-third of the total number of voting rights. We adopted a quorum of not less than one-third of the total number of voting rights in our articles of incorporation for special resolutions for material corporate actions, such as:
102
The Companies Act provides additional specific rights for shareholders owning a substantial number of voting rights.
Shareholders holding 10% or more of the total number of voting rights of all shareholders (or 10% or more of the total number of our outstanding shares) have the right to apply to a court of competent jurisdiction for our dissolution.
Shareholders who have held 3% or more of the total number of voting rights of all shareholders for six months or more have the right to demand the convening of a general meeting of shareholders.
Shareholders who have held 3% or more of the total number of voting rights of all shareholders (or 3% or more of the total number of our outstanding shares) for six months or more have certain rights under the Companies Act which includes the right to:
Shareholders who have held 3% or more of the total number of voting rights of all shareholders have the right to refuse the exculpation of a director or a statutory auditor from certain liabilities.
Shareholders holding 3% or more of the total number of voting rights of all shareholders (or 3% or more of the total number of our outstanding shares) have certain rights under the Companies Act, which include the right to:
Shareholders who have held 1% or more of the total number of voting rights of all shareholders for six months or more have the right to apply to a competent court for appointment of an inspector to review the correctness of the convocation and voting procedures of a general meeting of shareholders.
Shareholders who have held 1% or more of the total number of voting rights of all shareholders or 300 or more voting rights for six months or more have the right to demand that certain matters be added to the agenda items at a general meeting of shareholders.
Shareholders who have held any number of shares for six months or more have the right to demand that we take certain actions under the Companies Act which include the rights to demand:
There is no provision under the Companies Act or our articles of incorporation which forces shareholders to make additional contributions when requested by us.
Under the Companies Act, in order to change the rights of shareholders which are stipulated and defined in our articles of incorporation, we must amend our articles of incorporation. Amendments must, in principle, be approved by a special resolution of shareholders.
Annual general meetings and extraordinary general meetings of shareholders are convened by our President and Director based on the resolution of our Board of Directors. Under our articles of incorporation, shareholders of record as of March 31 of each year have the right to attend the annual general meeting of our shareholders. We may by prescribing a Record Date, determine the shareholders who are stated or recorded in the shareholder registry on the Record Date as the shareholders entitled to extraordinary general meetings of our shareholders, and in this case, we are
103
required to make a public notice of Record Date at least two weeks prior to the Record Date. A convocation notice will be sent to these shareholders at least two weeks prior to the date of the shareholders' meeting.
Acquisition of Own Shares
Under applicable laws of Japan, we may acquire our own shares:
(i) through market transactions on a stock exchange on which our shares are listed or by way of tender offer (in either case pursuant to a resolution of the Board of Directors, which is currently authorized by our articles of incorporation);
(ii) from a specific shareholder other than any of our subsidiaries (pursuant to a special resolution of a general meeting of shareholders); or
(iii) from any of our subsidiaries (pursuant to a resolution of the Board of Directors).
In case acquisition is made by way of (ii) above, any other shareholder may request within a certain period of time provided under the applicable Ordinance of the Ministry of Justice before a general meeting of shareholders that we also purchase our shares held by the requesting shareholder, unless the purchase price or any other consideration to be delivered in exchange for the acquisition of one of our shares does not exceed the market price of one of our shares calculated by the method prescribed in the applicable Ordinance of the Ministry of Justice.
In general, an acquisition by us of our own shares must satisfy certain requirements, including that the total amount of the acquisition price may not exceed the Distributable Amount, as described above.
We may hold the shares which we acquired by way of (i) through (iii) above, and may cancel such shares by a resolution of the Board of Directors. We may also dispose of such shares subject to a resolution of the Board of Directors and subject also to other requirements applicable to the issuance of shares under the Companies Act.
Restrictions on Holders of our Common Stock
There is no restriction on non-resident or foreign shareholders on the holding of our shares or on the exercise of voting rights, except for filing requirements with respect to an acquisition of shares by Non-Resident of Japan under The Foreign Exchange and Foreign Trade Act of Japan and related regulations. However, pursuant to a provision of our share handling regulations, a shareholder who does not have an address or residence in Japan is required to file its temporary address to receive notices in Japan or that of a standing proxy having any address or residence in Japan with our transfer agent and Japan Securities Depository Center, Inc.
There is no provision in our articles of incorporation that would have the effect of delaying, deferring or preventing a change in control that would operate only with respect to a merger, acquisition or corporate restructuring involving us.
There is no provision in our articles of incorporation or other subordinated rules regarding the ownership threshold, above which shareholder ownership must be disclosed. Pursuant to the Financial Instruments and Exchange Act of Japan and related regulations, a shareholder who has become, solely or jointly, a holder more than 5% of the total issued shares in a company that is listed on any stock exchange in Japan is required to file a report with the Finance Bureau of the Ministry of Finance, and with certain exceptions, a similar report must also be filed in respect of any subsequent change of 1% or more in the holding or of any change in material matters set forth in any previously filed report.
There is no provision in our articles of incorporation governing changes in the capital more stringent than is required by law.
For a description of rights of holders of ADSs, please see the "Description of American Depositary Shares" included elsewhere in this prospectus.
104
Exchange Controls
The Foreign Exchange and Foreign Trade Act and related regulations regulate certain transactions involving a "Non-Resident of Japan" or a "Foreign Investor" including "inward direct investment" by a Foreign Investor, and a payment from Japan to a foreign country or by a resident of Japan to a Non-Resident of Japan.
"Non-Residents of Japan" is defined as individuals who are not resident in Japan and corporations whose principal offices are located outside of Japan. Generally, branches and other offices of Japanese corporations which are located outside of Japan are regarded as Non-Residents of Japan, but branches and other offices of non-resident corporations which are located within Japan are regarded as residents of Japan.
"Foreign Investors" is defined as:
Under the Foreign Exchange and Foreign Trade Act and related regulations, dividends paid on, and the proceeds of sales in Japan of, shares held by Non-Residents of Japan may in general be converted into any foreign currency and repatriated abroad.
Under the Foreign Exchange and Foreign Trade Act and related regulations, in general, a Non-Resident of Japan who acquires shares from a resident of Japan in a capital markets transaction is not subject to any prior filing requirement, although the Foreign Exchange and Foreign Trade Act and related regulations require such Non-Resident to obtain prior approval for any such acquisition from the Minister of Finance of Japan in certain limited circumstances. While such prior approval is not required in general, in each case where a resident of Japan receives a single payment of more than ¥30 million from a Non-Resident of Japan for a transfer of shares in a Japanese company, such resident of Japan is required to report each receipt of payment to the Minister of Finance of Japan.
If a Foreign Investor acquires our shares and together with parties who have a special relationship with that Foreign Investor, holds 10% or more of our issued shares as a result of such acquisition, the Foreign Investor must, with certain limited exceptions, file a report of such acquisition with the Minister of Finance and any other competent Minister by the 15th day of the month immediately following the month in which such acquisition occurs. In certain limited circumstances, however, a prior notification of such acquisition must be filed with the Minister of Finance and any other competent Minister, who may modify or prohibit the proposed acquisition.
105
DESCRIPTION OF AMERICAN DEPOSITARY SHARES
American Depositary Shares
The Bank of New York Mellon, as depositary, will register and deliver the ADSs. Each five ADSs will represent beneficial ownership of one share of our common stock deposited with the office in Tokyo, Japan of The Bank of Tokyo-Mitsubishi UFJ, Ltd., as custodian for the depositary. Each ADS will also represent ownership of any other securities, cash or other property which may be held by the depositary. The depositary's corporate trust office at which the ADSs will be administered is located at 101 Barclay Street, New York, New York 10286. The principal executive office of the depositary is located at One Wall Street, New York, New York 10286.
The Direct Registration System, or DRS, is a system administered by DTC pursuant to which the depositary may register the ownership of uncertificated ADSs, which ownership shall be confirmed by periodic statements sent by the depositary to the ADS holders entitled thereto.
As an ADS holder, we will not treat you as one of our shareholders and you will not have shareholder rights. Our memorandum, articles of association and Japanese law govern our shareholders' rights. The depositary will be the registered holder of the common stock underlying your ADSs. As a holder of ADSs, you will have ADS holder rights. A deposit agreement among us, the depositary and you, as an ADS holder, and the beneficial owners of ADSs sets out ADS holder rights as well as the rights and obligations of the depositary. The laws of the State of New York govern the deposit agreement and the ADSs.
The following is a summary of the material provisions of the deposit agreement. For more complete information, you should read the entire deposit agreement and the form of American Depositary Receipt. For directions on how to obtain copies of those documents, see "Where You Can Find More Information."
Holding the ADSs
How will I hold my ADSs?
You may hold ADSs either (1) directly (a) by having an ADR which is a certificate evidencing a specific number of ADSs registered in your name or (b) by holding ADSs in the DRS, or (2) indirectly through your broker or other financial institution. If you hold ADSs directly, you are an ADS holder. This description assumes you hold your ADSs directly. If you hold the ADSs indirectly, you must rely on the procedures of your broker or other financial institution to assert the rights of ADS holders described in this section. You should consult with your broker or financial institution to find out what those procedures are.
Dividends and Other Distributions
How will you receive dividends and other distributions on the shares?
The depositary has agreed to pay to you the cash dividends or other distributions it or the custodian receives on common stock or other deposited securities, after deducting its fees and expenses. You will receive these distributions in proportion to the number of common stock your ADSs represent as of the record date (which will be as close as practicable to the record date for our common stock) set by the depositary with respect to the ADSs.
106
foreign currency it cannot convert for the account of the ADS holders who have not been paid. It will not invest the foreign currency and it will not be liable for any interest.
If the depositary makes rights available to you, it will exercise the rights and purchase the shares on your behalf. The depositary will then deposit the shares and deliver ADSs to you. It will only exercise rights if you pay it the exercise price and any other charges the rights require you to pay.
U.S. securities laws may restrict transfers and cancellation of the ADSs represented by shares purchased upon exercise of rights. For example, you may not be able to trade these ADSs freely in the United States. In this case, the depositary may deliver restricted depositary shares that have the same terms as the ADSs described in this section except for changes needed to put the necessary restrictions in place.
107
distribution. The depositary may sell a portion of the distributed securities or property sufficient to pay its fees and expenses in connection with that distribution.
The depositary is not responsible if it decides that it is unlawful or impractical to make a distribution available to any ADS holders. We have no obligation to register ADSs, shares, rights or other securities under the Securities Act. We also have no obligation to take any other action to permit the distribution of ADSs, shares, rights or anything else to ADS holders. This means that you may not receive the distributions we make on our shares or any value for them if it is illegal or impractical for us to make them available to you.
Deposit, Withdrawal and Cancellation
How are ADSs issued?
The depositary will deliver ADSs if you or your broker transfer common stock or deposit evidence of rights to receive common stock to, or with, the custodian. Upon payment of its fees and expenses and of any taxes or charges, such as stamp taxes or share transfer taxes or fees, the depositary will register the appropriate number of ADSs in the names you request and will deliver the ADSs to or upon the order of the person or persons entitled thereto.
How do ADS holders cancel ADSs?
You may turn in your ADSs at the depositary's corporate trust office or by providing appropriate instructions to your broker. Upon payment of its fees and expenses and of any taxes or charges, such as stamp taxes or share transfer taxes or fees, the depositary will deliver the common stock and any other deposited securities underlying the ADSs to you or a person you designate. Or, at your request, risk and expense, the depositary will deliver the deposited securities at its corporate trust office, if feasible.
How do ADS holders interchange between certificated ADSs and uncertificated ADSs?
You may surrender your ADR to the depositary for the purpose of exchanging your ADR for uncertificated ADSs. The depositary will cancel that ADR and will send you a statement confirming that you are the owner of uncertificated ADSs. Alternatively, upon receipt by the depositary of a proper instruction from a holder of uncertificated ADSs requesting the exchange of uncertificated ADSs for certificated ADSs, the depositary will execute and deliver to you an ADR evidencing those ADSs.
Voting Rights
How do you vote?
You may instruct the depositary to vote the deposited securities. Otherwise, you will not be able to exercise your right to vote unless you withdraw the common stock your ADSs represent. However, you may not know about the meeting enough in advance to withdraw the common stock.
If we ask for your instructions and upon timely notice from us, the depositary will notify you of the upcoming vote and arrange to deliver our voting materials to you. The materials will (1) describe the matters to be voted on and (2) explain how you may instruct the depositary to vote the common stock or other deposited securities underlying your ADSs as you direct, including an express indication that such instruction may be given or deemed given in accordance with the last sentence of this paragraph if no instruction is received, to the depositary to give a discretionary proxy to a person designated by us. For instructions to be valid, the depositary must receive them on or before the date specified. The depositary will try, as far as practical, subject to the laws of Japan and the provisions of our constitutive documents, to vote or to have its agents vote the common stock or other deposited securities as you instruct. The depositary will only vote or attempt to vote as you instruct. So long as under our articles of incorporation and Japanese law, votes may only be cast in respect of one or more whole units of our common shares, voting instructions received from you shall be aggregated with similar instructions from
108
other ADS holders and the depositary shall endeavor to vote or attempt to vote the nearest number of whole units in accordance with such aggregated instructions. If the depositary has received aggregated instructions for a number of common shares equaling less than a whole unit of our common shares, the depositary will be unable to vote or cause to be voted that portion of common shares which does not equal one whole unit. If we timely requested the depositary to solicit your instructions but no instructions are received by the depositary from an owner with respect to any of the deposited securities represented by the ADSs of that owner on or before the date established by the depositary for such purpose, the depositary shall deem that owner to have instructed the depositary to give a discretionary proxy to a person designated by us with respect to such deposited securities, and the depositary shall give a discretionary proxy to a person designated by us to vote such deposited securities. However, no such instruction shall be deemed given and no such discretionary proxy shall be given with respect to any matter if we inform the depositary we do not wish such proxy given, substantial opposition exits or the matter materially and adversely affects the rights of holders of the common stock.
We cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote your common stock. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for the manner of carrying out voting instructions. This means that you may not be able to exercise your right to vote and there may be nothing you can do if your common stock is not voted as you requested.
In order to give you a reasonable opportunity to instruct the depositary as to the exercise of voting rights relating to deposited securities, if we request the depositary to act, we will give the depositary notice of any such meeting and details concerning the matters to be voted upon at least 45 days in advance of the meeting date.
109
Fees and Expenses
Persons Must Pay: | For: | |
$5.00 (or less) per 100 ADSs (or portion of ADSs) |
|
Issuance of ADSs, including issuances resulting from a distribution of shares or rights or other property |
|
|
Cancellation of ADSs for the purpose of withdrawal, including if the deposit agreement terminates |
$0.05 (or less) per ADS |
|
Any distribution of cash proceeds to you |
A fee equivalent to the fee that would be payable if securities distributed to you had been common stock and the common stock had been deposited for issuance of ADSs |
|
Distribution of securities distributed to holders of deposited securities which are distributed by the depositary to ADS holders |
$0.05 (or less) per ADSs per calendar year |
|
Depositary services |
Registration or transfer fees |
|
Transfer and registration of common stock on our share register to or from the name of the depositary or its agent when you deposit or withdraw common stock |
Expenses of the depositary |
|
Cable, telex and facsimile transmissions (when expressly provided in the deposit agreement) |
|
|
Converting foreign currency to U.S. dollars |
Taxes and other governmental charges the depositary or the custodian have to pay on any ADS or share underlying an ADS, including any applicable interest and penalties thereon and any share transfer or other taxes or governmental charges, for example, share transfer taxes, stamp duty or withholding taxes |
|
As necessary |
Any charges incurred by the depositary or its agents for servicing the deposited securities |
|
As necessary |
The depositary collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect its annual fee for depositary services by deduction from cash distributions or by directly billing investors or by charging the book-entry system accounts of participants acting for them. The depositary may generally refuse to provide fee-attracting services until its fees for those services are paid.
From time to time, the depositary may make payments to us to reimburse and / or share revenue from the fees collected from ADS holders, or waive fees and expenses for services provided, generally relating to costs and expenses arising out of establishment and maintenance of the ADS program. In performing its duties under the deposit agreement, the depositary may use brokers, dealers or other service providers that are affiliates of the depositary and that may earn or share fees or commissions.
110
Payment of Taxes
You will be responsible for any taxes or other governmental charges payable on your ADSs or on the deposited securities represented by any of your ADSs. The depositary may refuse to register any transfer of your ADSs or allow you to withdraw the deposited securities represented by your ADSs until such taxes or other charges are paid. It may apply payments owed to you or sell deposited securities represented by your ADSs to pay any taxes owed and you will remain liable for any deficiency. If the depositary sells deposited securities, it will, if appropriate, reduce the number of ADSs to reflect the sale and pay to you any net proceeds, or send to you any property, remaining after it has paid the taxes. You agree to indemnify us, the depositary, the custodian and each of our and their respective agents, directors, employees and affiliates for, and hold each of them harmless from, any claims with respect to taxes (including applicable interest and penalties thereon) arising from any tax benefit obtained for you.
Reclassifications, Recapitalizations and Mergers
If we: | Then: | |
Change the nominal or par value of our common stock; |
|
The cash, shares or other securities received by the depositary will become deposited securities; |
Reclassify, split up or consolidate any of the deposited securities; |
|
Each ADS will automatically represent its equal share of the new deposited securities; and |
Distribute securities on the common stock that are not distributed to you; or |
|
The depositary may distribute some or all of the cash, shares or other securities it received. It may also deliver new ADSs or ask you to surrender your outstanding ADRs in exchange for new ADRs identifying the new deposited securities. |
Recapitalize, reorganize, merge, liquidate, sell all or substantially all of our assets, or take any similar action. |
|
|
Amendment and Termination
How may the deposit agreement be amended?
We may agree with the depositary to amend the deposit agreement and the form of ADR and the ADSs without your consent for any reason. If an amendment adds or increases fees or charges, except for taxes and other governmental charges or expenses of the depositary for registration fees, facsimile costs, delivery charges or similar items, including expenses incurred in connection with foreign exchange control regulations and other charges specifically payable by ADS holders under the deposit agreement, or materially prejudices a substantial existing right of ADS holders, it will not become effective for outstanding ADSs until 30 days after the depositary notifies ADS holders of the amendment. At the time an amendment becomes effective, you are considered, by continuing to hold your ADSs, to agree to the amendment and to be bound by the ADRs and the deposit agreement as amended .
How may the deposit agreement be terminated?
The depositary will terminate the deposit agreement if we ask it to do so, in which case the depositary will give notice to you at least 30 days prior to termination. The depositary may also terminate the deposit agreement if the depositary has told us that it would like to resign and we have not appointed a new depositary within 90 days. In such case, the depositary must notify you at least 30 days before termination.
111
After termination, the depositary and its agents will do the following under the deposit agreement but nothing else: collect distributions on the deposited securities, sell rights and other property and deliver common stock and other deposited securities upon cancellation of ADSs after payment of any fees, charges, taxes or other governmental charges. Four months or more after termination, the depositary may sell any remaining deposited securities by public or private sale. After that, the depositary will hold the money it received on the sale, as well as any other cash it is holding under the deposit agreement, for the pro rata benefit of the ADS holders that have not surrendered their ADSs. It will not invest the money and has no liability for interest. The depositary's only obligations will be to account for the money and other cash. After termination, our only obligations will be to indemnify the depositary and to pay fees and expenses of the depositary that we agreed to pay.
Books of Depositary
The depositary will maintain ADS holder records at its corporate trust office. You may inspect such records at such office during regular business hours but solely for the purpose of communicating with other holders in the interest of business matters relating to the ADSs and the deposit agreement.
The depositary will maintain facilities in New York to record and process the issuance and cancellation of ADSs and combination, split-up and transfer of ADRs.
These facilities may be closed from time to time, to the extent not prohibited by law or if any such action is deemed necessary or advisable by the depositary or us, in good faith, at any time or from time to time because of any requirement of law, any government or governmental body or commission or any securities exchange on which the ADRs or ADSs are listed, or under any provision of the deposit agreement or provisions of, or governing, the deposited securities, or any meeting of our shareholders or for any other reason.
Limitations on Obligations and Liability
Limits on our Obligations and the Obligations of the Depositary; Limits on Liability to Holders of ADSs
The deposit agreement expressly limits our obligations and the obligations of the depositary. It also limits our liability and the liability of the depositary (as well as the liability of our and the depositary's directors, officers, affiliates, employees and agents). We and the depositary:
112
The depositary disclaims any liability for any failure to carry out any instructions to vote any of the deposited securities, for the manner in which any such vote is cast, or for the effect of any such vote, provided that any such action or non-action is in good faith.
In the deposit agreement, we and the depositary agree to indemnify each other under certain circumstances.
Requirements for Depositary Actions
Before the depositary will deliver or register a transfer of an ADS, make a distribution on an ADS, or permit withdrawal of common stock, the depositary may require:
The depositary may refuse to deliver ADSs or register transfers of ADSs generally when the register of the depositary or our transfer books are closed or at any time if the depositary or we think it is necessary or advisable to do so.
Your Right to Receive the Shares Underlying Your ADRs
You have the right to cancel your ADSs and withdraw the underlying common stock at any time except:
This right of withdrawal may not be limited by any other provision of the deposit agreement.
Pre-release of ADSs
The deposit agreement permits the depositary to deliver ADSs before deposit of the underlying shares. This is called a pre-release of the ADSs. The depositary may also deliver shares upon cancellation of pre-released ADSs (even if the ADSs are canceled before the pre-release transaction has been closed out). A pre-release is closed out as soon as the underlying shares are delivered to the depositary. The depositary may receive ADSs instead of shares to close out a pre-release. The
113
depositary may pre-release ADSs only under the following conditions: (1) before or at the time of the pre-release, the person to whom the pre-release is being made represents to the depositary in writing that it or its customer owns the shares or ADSs to be deposited; (2) the pre-release is fully collateralized with cash or other collateral that the depositary considers appropriate; and (3) the depositary must be able to close out the pre-release on not more than five business days' notice. In addition, the depositary will limit the number of ADSs that may be outstanding at any time as a result of pre-release, although the depositary may disregard the limit from time to time, if it thinks it is appropriate to do so.
Direct Registration System
In the deposit agreement, all parties to the deposit agreement acknowledge that the DRS and Profile Modification System, or Profile, will apply to uncertificated ADSs upon acceptance thereof to DRS by the DTC. DRS is the system administered by DTC pursuant to which the depositary may register the ownership of uncertificated ADSs, which ownership shall be confirmed by periodic statements sent by the depositary to the ADS holders entitled thereto. Profile is a required feature of DRS which allows a DTC participant, claiming to act on behalf of an ADS holder, to direct the depositary to register a transfer of those ADSs to DTC or its nominee and to deliver those ADSs to the DTC account of that DTC participant without receipt by the depositary of prior authorization from the ADS holder to register such transfer.
In connection with and in accordance with the arrangements and procedures relating to DRS/Profile, the parties to the deposit agreement understand that the depositary will not verify, determine or otherwise ascertain that the DTC participant which is claiming to be acting on behalf of an ADS holder in requesting registration of transfer and delivery described in the paragraph above has the actual authority to act on behalf of the ADS holder (notwithstanding any requirements under the Uniform Commercial Code). In the deposit agreement, the parties agree that the depositary's reliance on, and compliance with, instructions received by the depositary through the DRS/Profile System and in accordance with the deposit agreement, shall not constitute negligence or bad faith on the part of the depositary.
Shareholder communications; inspection of register of holders of ADSs
The depositary will make available for your inspection at its office all communications that it receives from us as a holder of deposited securities that we make generally available to holders of deposited securities. The depositary will send you copies of those communications if we ask it to. You have a right to inspect the register of holders of ADSs, but not for the purpose of contacting those holders about a matter unrelated to our business or the ADSs.
114
SHARES ELIGIBLE FOR FUTURE SALE
Upon the completion of this offering, there will be outstanding 2,400,000 ADSs representing approximately 13.07% of our issued and outstanding shares (assuming no exercise of the underwriters' over-allotment option and excluding 96,000 ADSs issuable upon exercise of warrants granted to the underwriters upon completion of this offering). All of the ADSs sold in this offering will be freely transferable by persons other than our affiliates without restriction or further registration under the Securities Act. Sales of substantial amounts of the ADSs in the public market could adversely affect the prevailing market price of the ADSs. In addition, immediately following this offering, holders of our common stock, including our directors and executive officers, will hold 3,193,136 shares of our common stock. All of our outstanding shares of common stock, including shares underlying the ADSs, are freely tradable on the TSE. However, our directors, executive officers and statutory auditors expect to enter into lock-up agreements with the representative as set forth below. Prior to this offering, there has been no public market for the ADSs, and, while we have applied for the ADSs to be listed on the Nasdaq Global Market, we cannot assure you that a regular trading market will develop in the ADSs.
In addition, our articles of incorporation permits the issuance of up to an aggregate of 3,526,864 additional shares of our common stock. See "Description of Share Capital."
Lock-up Agreements
We have agreed with the underwriters that we will not, without the prior written consent of Maxim Group LLC and The Benchmark Company, LLC, sell any additional ADSs or issue any additional shares of our capital stock or securities convertible into or exchangeable for shares of our capital stock for a period of 180 days (subject to extensions) after the date of this prospectus, except that we may issue shares of common stock upon the exercise of outstanding options and warrants.
Our executive officers, directors and statutory auditors, who will hold an aggregate of 973,440 shares of common stock upon completion of this offering, have agreed that they will not, without the prior written consent of Maxim Group LLC and The Benchmark Company, LLC, offer, sell, pledge or otherwise dispose of any of their ADSs or shares of our capital stock or securities convertible into or exchangeable for ADSs or shares of our capital stock, or any rights to purchase, any ADSs or shares of our capital stock, or publicly announce an intention to effect any of these transactions, for a period of 180 days (subject to extensions) after the date of this prospectus, except that nothing will prevent any of them from exercising outstanding options and warrants. These lock-up agreements are subject to such holders' rights to transfer their ADSs or shares of our capital stock or securities convertible into or exchangeable for ADSs or shares of our capital stock as a bona fide gift or to a trust for the benefit of an immediate family member or to a wholly-owned subsidiary, provided that such donee or transferee agrees in writing to be bound by the terms of the lock-up agreement.
We have been advised by Maxim Group LLC and The Benchmark Company, LLC that they may, in their discretion, waive the lock-up agreements but that they have no current intention of releasing any ADSs or securities subject to a lock-up agreement. The release of any lock-up would be considered case by case. In considering any request to release ADSs or other securities covered by a lock-up agreement, Maxim Group LLC and The Benchmark Company, LLC may consider, among other factors, the particular circumstances surrounding the request, including but not limited to the number of ADSs or other securities requested to be released, market conditions, the possible impact on the market for the ADSs and common stock, the trading price of the ADSs and common stock, historical trading volumes of the ADSs and common stock, the reasons for the request and whether the person seeking the release is one of our officers or directors. No agreement has been made between and us or any holders of our securities pursuant to which Maxim Group LLC and The Benchmark Company, LLC will waive the lock-up restrictions.
115
Taking into account the lock-up agreements, and assuming Maxim Group LLC and The Benchmark Company, LLC do not release any holders from these agreements, an additional 194,608 ADSs will be eligible for sale in the public market subject to volume, manner of sale, and other limitations under Rules 144 and 701 beginning 180 days after the date of this prospectus (unless the lock-up period is extended as described above and in "Underwriting").
Outstanding Common Stock
Under applicable law and regulation, all shares of our common stock outstanding on the date hereof, and all shares of common stock underlying securities exercisable for or convertible into shares of our common stock are freely tradable on the TSE and generally will remain so after consummation of this offering. However, shares held by our directors, executive officers and statutory auditors will be subject to the lock-up agreements set forth above. Other holders of these securities have not agreed to enter into such lock-up agreements and will be able to sell shares of common stock freely outside the United States, including over the TSE.
Rule 144
In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated) who is not deemed to have been an affiliate of ours at any time during the three months preceding a sale, and who has beneficially owned restricted securities within the meaning of Rule 144 for at least six months (including any period of consecutive ownership of preceding non-affiliated holders), would be entitled to sell those shares, subject only to the availability of current public information about us. A non-affiliated person who has beneficially owned restricted securities within the meaning of Rule 144 for at least one year would be entitled to sell those shares without regard to the provisions of Rule 144.
In general, under Rule 144 as currently in effect, our affiliates, or persons selling shares on behalf of our affiliates, are entitled to sell, upon expiration of the lock-up agreements described above, within any three-month period, a number of shares that does not exceed the greater of:
Sales under Rule 144 by our affiliates, or persons selling shares on behalf of our affiliates, are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about us. 973,040 shares of our common stock are currently subject to Rule 144.
Rule 701
In general, under Rule 701 of the Securities Act as currently in effect, each of our employees, consultants or advisors who purchases shares of our common stock from us in connection with a compensatory share plan or other written agreement executed prior to the completion of this offering is eligible to resell such shares in reliance on Rule 144 but without compliance with some of the restrictions, including the holding period, contained in Rule 144. In particular, subject to any applicable lock-up agreements, Rule 701 provides that affiliates may sell their Rule 701 shares in accordance with Rule 144 beginning 90 days after the date of this prospectus without complying with the holding period requirement of Rule 144 and that non-affiliates may sell such shares in reliance on Rule 144 beginning 90 days after the date of this prospectus without complying with the holding period, public information, volume limitation or notice requirements of Rule 144. No shares of our common stock are currently subject to Rule 701.
116
The following is a discussion of the material Japanese and U.S. federal income tax consequences of an investment in the ADSs or common stock based upon laws and relevant interpretations thereof in effect as of the date of this prospectus, all of which are subject to change. This discussion does not address all possible tax consequences relating to an investment in the ADSs or common stock, such as the tax consequences under state, local and other tax laws. You should consult your own tax advisors with respect to the consequences of acquisition, ownership and disposition of the ADSs or common stock.
Japanese Taxation
The following is a discussion summarizing material Japanese tax consequences to an owner of common stock or ADSs who is a non-resident of Japan or a non-Japanese corporation without a permanent establishment in Japan to which the relevant income is attributable. The statements regarding Japanese tax laws set forth below are based on the laws in force (including the laws regarding Special Reconstruction Income Tax which are effective from January 1, 2013) and as interpreted by the Japanese taxation authorities as of the date hereof. These statements are subject to changes in the applicable Japanese laws or double taxation conventions occurring after that date. This summary is not exhaustive of all possible tax considerations which may apply to a particular investor. Potential investors should satisfy themselves as to:
For purposes of the Convention (as defined below) and Japanese tax law, U.S. holders of ADRs will be treated as the owners of the common stock underlying the ADSs evidenced by the ADRs.
Generally, a non-resident individual of Japan or a non-Japanese corporation as a holder of ADSs or common stock is subject to Japanese withholding tax on dividends paid by Japanese corporations. Stock splits, in general, are not subject to Japanese income tax.
In the absence of any applicable tax treaty, convention or agreement reducing the maximum rate of withholding tax, the rate of Japanese withholding tax applicable to dividends paid by Japanese corporations to a non-resident individual of Japan or a non-Japanese corporation is 20%. With respect to dividends paid on listed shares issued by Japanese corporations (such as our common stock) to a non-resident individual of Japan or a non-Japanese corporation, the aforementioned 20% withholding tax rate is reduced to (i) 7% for dividends to be paid by December 31, 2012, (ii) 7.147% for dividends to be paid from January 1, 2013 to December 31, 2013, (iii) 15.315% for dividends to be paid from January 1, 2014 to December 31, 2037, and (iv) 15% for dividends to be paid thereafter, except for dividends paid to any individual shareholder who holds 5% or more of the issued shares of a company. As of the date of this prospectus, Japan has entered into income tax treaties, or conventions, whereby the above-mentioned withholding tax rate is reduced, in most cases to 15% or 10% for portfolio investors (15% under the income tax treaties with, among other countries, Belgium, Canada, Denmark, Finland, Germany, Ireland, Italy, Luxembourg, the Netherlands, New Zealand, Norway, Singapore, Spain, Sweden, and Switzerland, and 10% under the income tax treaties with Australia, France, the United Kingdom and the United States).
Under the Convention between the Government of Japan and the Government of the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with
117
Respect to Taxes on Income (the "Convention"), the maximum rate of Japanese withholding tax that may be imposed on dividends paid by a Japanese corporation to a U.S. holder that does not have a permanent establishment in Japan is limited to 10% for most of qualified portfolio investors and 5% if the beneficial owner is a qualified company that owns, directly or indirectly, on the date on which entitlement to the dividend is determined, at least 10% (but not more than 50% in certain cases) of the voting stock of the Japanese corporation. The Convention provides that no Japanese tax will be imposed on dividends paid to a qualified pension fund that is a United States resident, if such dividends are not derived from the carrying on of a business, directly or indirectly, by such pension fund.
Under Japanese tax law, the maximum rate applicable under the Convention shall be applicable, subject to completion of below-described application procedures, except when such maximum rate is higher than the Japanese statutory rate, in which case the Japanese statutory rate is applicable.
Non-resident holders who are entitled to a reduced rate of Japanese withholding tax on payment of dividends by UBIC, Inc. must submit the required form in advance through UBIC, Inc. to the relevant tax authority before payment of dividends. The required form is the Application Form for Income Tax Convention regarding Relief from Japanese Income Tax on Dividends. A standing proxy for non-resident holders may provide such application service. With respect to ADSs, the reduced rate is applicable if The Bank of New York Mellon, as depositary, or its agent submits in duplicate two Application Forms for Income Tax Convention (one is Form 4 subtitled "Extension of Time for Withholding of Tax on Dividends with respect to Foreign Depositary Receipt" to the payer of dividends, who has to file the original with the district director of the competent tax office for the place where the payer resides, by the day before the payment of dividends and the other is Form 5 subtitled "Relief from Japanese Income Tax on Dividends with respect to Foreign Depositary Receipt" to the district director of the competent tax office through the payer of dividends in eight months from the day following the base date of payment of dividends for application purposes for which Form 4 has been submitted). To claim the reduced rate, a non-resident holder of ADSs will be required to file proof of taxpayer status, residence and beneficial ownership, as applicable. The non-resident holder will also be required to provide information or documents clarifying its entitlement to the tax reduction as may be required by the depositary. A non-resident holder of ADSs or common stock who does not submit an application in advance will be entitled to claim from the relevant Japanese tax authority a refund of withholding taxes withheld in excess of the rate of an applicable lax treaty.
Gains derived from the sale of the ADSs or common stock outside Japan, or from the sale of ADSs or common stock within Japan by a non-resident individual of Japan or a non-Japanese corporation, are in general not subject to Japanese income or corporation taxes provided that such gains are from portfolio investments where the shareholding ratio is within a certain prescribed level.
An individual who has acquired ADSs or common stock as a distributee, legatee or donee may have to pay Japanese inheritance and gift taxes at progressive rates.
U.S. Federal Income Tax Consequences
The following is a summary of the material U.S. federal income tax consequences to a U.S. Holder (as defined below) of the acquisition, ownership and disposition of our ADSs or common stock purchased by a U.S. Holder pursuant to this offering. As used in this discussion, references to "we", "our" and "us" refer only to UBIC, Inc.
The discussion below of the U.S. federal income tax consequences to "U.S. Holders" will apply to a beneficial owner of our ADSs or common stock that is for U.S. federal income tax purposes:
118
This summary is based on the Internal Revenue Code of 1986, as amended, or the "Code," its legislative history, Treasury regulations promulgated thereunder, published rulings and court decisions, all as currently in effect. These authorities are subject to change or differing interpretations, possibly on a retroactive basis.
This discussion does not address all aspects of U.S. federal income taxation that may be relevant to any particular holder based on such holder's individual circumstances. In particular, this discussion considers only holders that will own our ADSs or common stock as capital assets within the meaning of Section 1221 of the Code, and does not address the potential application of the alternative minimum tax or the U.S. federal income tax consequences to holders that are subject to special rules, including:
This discussion does not address any aspect of U.S. federal non-income tax laws, such as gift or estate tax laws, state, local or non-U.S. tax laws or, except as discussed herein, any tax reporting obligations of a holder of our ADSs or common stock. Additionally, this discussion does not consider the tax treatment of partnerships or other pass-through entities or persons who hold our ADSs or common stock through such entities. If a partnership (or other entity classified as a partnership for U.S. federal income tax purposes) is the beneficial owner of our ADSs or common stock, the U.S.
119
federal income tax treatment of a partner in the partnership will generally depend on the status of the partner and the activities of the partnership.
We have not sought, and will not seek, a ruling from the Internal Revenue Service (IRS) or an opinion of counsel as to any U.S. federal income tax consequence described herein. The IRS may disagree with the description herein, and its determination may be upheld by a court. Moreover, there can be no assurance that future legislation, regulations, administrative rulings or court decisions will not adversely affect the accuracy of the statements in this discussion.
THIS DISCUSSION IS ONLY A SUMMARY OF CERTAIN MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF OUR ADSS OR COMMON STOCK. IT IS NOT TAX ADVICE. EACH PROSPECTIVE INVESTOR IN OUR ADSS OR COMMON STOCK IS URGED TO CONSULT ITS OWN TAX ADVISOR WITH RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO SUCH INVESTOR OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF OUR ADSS OR COMMON STOCK, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL, AND NON-U.S. TAX LAWS, AS WELL AS U.S. FEDERAL TAX LAWS, AND ANY APPLICABLE TAX TREATIES.
U.S. Holders
Taxation of Distributions
A U.S. Holder generally will be required to include in gross income as ordinary income the amount of any cash dividend paid on our ADSs or common stock. A cash distribution on such ADSs or common stock generally will be treated as a dividend for U.S. federal income tax purposes to the extent paid out of our current or accumulated earnings and profits (as determined under U.S. federal income tax principles). Because we do not maintain calculations of our earnings and profits under U.S. federal income tax principles, it is expected that such distributions (including any Japanese taxes withheld) will be reported to U.S. Holders as dividends. As it is our intention to pay such dividends in Japanese yen, the amount of the dividend a U.S. Holder will be required to include in income will equal the U.S. dollar value of the Japanese yen, calculated by reference to the exchange rate in effect on the date the payment is received by the U.S. Holder, regardless of whether the payment is converted into U.S. dollars on the date of receipt. If the dividend is converted to U.S. dollars on the date of receipt, a U.S. Holder should not be required to recognize foreign currency gain or loss in respect of the dividend income. A U.S. Holder may have foreign currency gain or loss if the dividend is converted into U.S. dollars after the date of its receipt. If a U.S. Holder realizes gain or loss on a sale or other disposition of Japanese yen, it will be U.S. source ordinary income or loss.
Corporate U.S. Holders will not be entitled to claim the dividends received deduction with respect to dividends paid by us.
We expect to be treated as a "qualified foreign corporation," as contemplated by Code Section 1(h)(11)(C). Thus, with certain exceptions, if the applicable holding period and other requirements are satisfied, dividends we pay to a non-corporate U.S. Holder generally will constitute "qualified dividends" that will be subject to tax at the maximum regular tax rate accorded to long-term capital gains for tax years beginning before January 1, 2013, after which the regular U.S. federal income tax rate applicable to dividends is scheduled to return to the regular tax rate generally applicable to ordinary income. Non-corporate U.S. Holders should consult their own tax advisors to determine whether they are subject to any special rules that limit their ability to be taxed at this favorable rate.
Dividends paid on our ADSs or common stock generally will be treated as income from foreign sources for United States foreign tax credit purposes and will generally constitute passive category income. A U.S. Holder may be eligible, subject to a number of complex limitations, to claim a foreign
120
tax credit in respect of any foreign withholding taxes imposed on dividends received on our ADSs or common stock. A U.S. Holder who does not elect to claim a foreign tax credit for foreign tax withheld, may instead claim a deduction, for U.S. federal income tax purposes, in respect of such withholdings, but only for a year in which such holder elects to do so for all creditable foreign income taxes. The rules governing the foreign tax credit are complex. Each U.S. Holder is advised to consult its tax advisor regarding the availability of the foreign tax credit under its particular circumstances.
Taxation on the Disposition of Our ADSs or Common Stock
Upon a sale or other taxable disposition of our ADSs or common stock, a U.S. Holder generally will recognize U.S. source capital gain or loss in an amount equal to the difference between the amount realized and the U.S. Holder's adjusted tax basis in such ADSs or common stock.
The regular U.S. federal income tax rate on capital gains recognized by U.S. Holders generally is the same as the regular U.S. federal income tax rate on ordinary income, except that long-term capital gains recognized by non-corporate U.S. Holders are generally subject to U.S. federal income tax at a maximum regular rate of 15% for taxable years beginning before January 1, 2013 (and 20% thereafter, unless current rates are extended). Capital gain or loss will constitute long-term capital gain or loss if the U.S. Holder's holding period for the ADSs or common stock exceeds one year. The deductibility of capital losses is subject to various limitations.
Additional Taxes After 2012
Recently enacted legislation requires certain U.S. Holders that are individuals, estates or trusts to pay an additional 3.8% Medicare tax on, among other things, dividends on, and capital gains from, the sale or other disposition of stock for taxable years beginning after December 31, 2012. U.S. Holders should consult their tax advisors regarding the effect, if any, of this legislation on their acquisition, ownership and disposition of our ADSs or common stock.
Passive Foreign Investment Company
A non-U.S. corporation will be a passive foreign investment company, or "PFIC," for U.S. federal income tax purposes for any taxable year, if either (i) 75% or more of its gross income for such year consists of certain types of "passive" income or (ii) 50% or more its average quarterly assets as determined on the basis of fair market value during such year produce or are held for the production of passive income. For this purpose, cash and assets readily convertible into cash are categorized as passive assets and the company's unhooked intangibles associated with active business activities may generally be classified as active assets. A non-U.S. corporation will be treated as owning a proportionate share of the assets, and earning a proportionate share of the income, of any other corporation in which such non-U.S. corporation owns, directly or indirectly, more than 25% (by value) of the stock of such other corporation.
We believe that we will not be a PFIC for U.S. federal income tax purposes for our current taxable year and do not expect to become one in the foreseeable future. However, because PFIC status depends upon the composition of our income and assets, there can be no assurance that we will not be considered a PFIC for any taxable year. Because we have valued our goodwill based on the market value of our equity, a decrease in the price of our ADSs and/or common stock may also result in our becoming a PFIC. The composition of our income and our assets will also be affected by how, and how quickly, we spend the cash raised in this offering. Under circumstances where the cash is not deployed for active purposes, our risk of becoming a PFIC may increase. If we were treated as a PFIC for any taxable year during which a U.S. Holder held ADSs or common stock, as discussed below certain adverse tax consequences could apply to the U.S. Holder.
121
If we were treated as a PFIC for any taxable year during which a U.S. Holder held our ADSs or common stock, gain recognized by a U.S. Holder on a sale or other disposition of such ADSs or common stock would be allocated ratably over the U.S. Holder's holding period for such ADSs or common stock. The amounts allocated to the taxable year of the sale or other disposition and to any year before we became a PFIC would be taxed as ordinary income. The amount allocated to each other taxable year would be subject to tax at the highest rate in effect for individuals or corporations, as appropriate, and an interest charge would be imposed on the resulting tax liability. The same treatment would apply to any distribution in respect of our ADSs or common stock to the extent it exceeds 125% of the average of the annual distributions on such ADSs or common stock received by the U.S. Holder during the preceding three years or the U.S. Holder's holding period, whichever is shorter. Certain elections may be available that would result in alternative treatments (such as mark-to-market treatment) of the ADSs and/or common stock.
In addition, if we were treated as a PFIC in a taxable year in which we pay a dividend or in the prior taxable year, the favorable dividend rate discussed above with respect to dividends paid to certain non-corporate U.S. Holders in taxable years prior to January 1, 2013 would not apply.
Information Reporting and Backup Withholding
Payments of dividends and sales proceeds that are made within the United States or through certain U.S.- related financial intermediaries generally are subject to information reporting and to backup withholding unless the U.S. Holder is a corporation or other exempt recipient or, in the case of backup withholding, the U.S. Holder provides a correct taxpayer identification number and certifies that it is not subject to backup withholding. The amount of any backup withholding from a payment to a U.S. Holder generally will be allowed as a credit against the U.S. Holder's U.S. federal income tax liability and may entitle such U.S. Holder to a refund, provided that the required information is timely furnished to the IRS.
122
Maxim Group LLC and The Benchmark Company, LLC are acting as joint book-running managers of this offering and representatives of the underwriters. Subject to the terms and conditions set forth in an underwriting agreement between us and the underwriters, each of the underwriters named below has severally agreed to purchase from us the following respective number of ADSs:
Underwriter
|
Number of ADSs | |||
---|---|---|---|---|
Maxim Group LLC |
||||
The Benchmark Company, LLC |
||||
Total |
2,400,000 | |||
The underwriting agreement provides that the obligations of the underwriters are subject to certain conditions, including the approval of legal matters by their counsel. The nature of the underwriters' obligations is that they are committed to purchase and pay for all of the above ADSs, other than ADSs covered by the over-allotment option described below, if any are purchased.
Public Offering Price and Dealers Concession
The underwriters propose initially to offer the ADSs offered by this prospectus directly to the public at the public offering price per ADS set forth on the cover page of this prospectus, and to certain dealers at that price less a concession not in excess of $ per ADS. The underwriters may allow, and these dealers may re-allow, a discount not in excess of $ per ADS on sales to certain other dealers. After commencement of this offering, the public offering price, discount price and re-allowance may be changed by the underwriters. No such change will alter the amount of proceeds to be received by us, as set forth on the cover page of this prospectus.
Over-allotment Option
If the underwriters sell more ADSs than the total number set forth in the table above, the underwriters have a 45-day option to purchase up to an additional 360,000 ADSs from us at the public offering price, less the underwriting discounts and commissions, to cover these sales. If any ADSs are purchased under this option, the underwriters will severally purchase ADSs in approximately the same proportion as set forth in the table above.
Underwriting Compensation
The underwriting fee is equal to the public offering price per ADS less the amount paid by the underwriters to us per ADS. The following table summarizes the compensation to be paid to the underwriters by us in connection with this offering, including the per ADS and total underwriting discounts and commissions to be paid to the underwriters by us. These amounts are shown assuming both no exercise and full exercise of the underwriters' option to purchase up to additional ADSs.
|
|
Total | ||||
---|---|---|---|---|---|---|
|
Per
ADS |
No Exercise |
Full
Exercise |
|||
Public offering price |
||||||
Underwriting discount (7%) |
||||||
Proceeds, before expenses, to us |
For a period of 12 months after the closing date of the offering, we have agreed to grant to the representatives a right of first refusal to manage or co-manage any public underwritten or private
123
placement of any debt or equity securities, subject to certain exceptions, as more fully described in the underwriting agreement.
We have paid a retainer of $50,000 to the underwriters, which will be applied against reasonable out-of-pocket expenses incurred by the underwriters in connection with the offering. Such retainer will be returned to us to the extent not actually incurred in accordance with FINRA Rule 5110 (f)(2)(C).
We have agreed to pay the underwriters a corporate finance fee equal to 1% of the aggregate gross proceeds of the sale of the ADSs (excluding ADSs that we may sell to the underwriters to cover over-allotments). We have also agreed to pay various of the underwriters' expenses relating to the offering, including (a) all fees, expenses and disbursements relating to the background checks of the company's officers and directors (at a cost not to exceed $1,500 per person and $5,000 in the aggregate); (b) the $5,000 aggregate cost associated with i-Deal and Net Roadshow; and (c) up to $20,000 of the underwriters' actual accountable road show expenses for the offering.
We have also agreed to issue to each of the representatives a warrant to purchase a number of ADSs equal to an aggregate of 96,000 ADSs (equal to 4% of the ADSs sold in the offering), other than the ADSs covered by the over-allotment option described above. The warrants will be exercisable at any time, and from time to time, in whole or in part, during the four-year period commencing one year from the effective date of the offering, which period shall not extend further than five years from the effective date of the offering in compliance with FINRA Rule 5110(f)(2)(H)(i). The warrants are exercisable at a per ADS price equal to 120% of the public offering price per ADS. The warrants have been deemed compensation by FINRA and are therefore subject to a one-year lock-up pursuant to Rule 5110(g)(1) of FINRA. The representatives (or permitted assignees under Rule 5110(g)(1)) will not sell, transfer, assign, pledge, or hypothecate these warrants or the securities underlying these warrants, nor will they engage in any hedging, short sale, derivative, put, or call transaction that would result in the effective economic disposition of the warrants or the underlying securities for a period of 180 days from the effective date of the offering; provided, however, that the warrants (and underlying ADSs) may be transferred to officers or partners of the underwriters and members of the underwriting syndicate as long as the warrants (and underlying ADSs) remain subject to the lockup. The warrants are not redeemable by us, and allow for "cashless" exercise. In addition, the warrants provide for registration rights upon request, in certain cases. The demand registration right provided will not be greater than five years from the effective date of the offering in compliance with FINRA Rule 5110(f)(2)(H)(iv). The piggyback registration right provided will not be greater than seven years from the effective date of the offering in compliance with FINRA Rule 5110(f)(2)(H)(v). We will bear all fees and expenses attendant to registering the securities issuable on exercise of the warrants other than underwriting commissions incurred and payable by the holders. The exercise price and number of ADSs issuable upon exercise of the warrants may be adjusted in certain circumstances including in the event of a stock dividend or our recapitalization, reorganization, merger or consolidation. However, the warrant exercise price or underlying ADSs will not be adjusted for issuances of ADSs at a price below the warrant exercise price.
Other Offering Expenses, Acceptance and Delivery
We estimate that the total expenses of the offering, excluding underwriting discounts and commissions, payable by us will be approximately $3.7 million. The offering of the ADSs is made for delivery, when, as and if accepted by the underwriters and subject to prior sale and to withdrawal, cancellation or modification of the offering without notice. The underwriters reserve the right to reject an order for the purchase of our ADSs in whole or in part.
124
Indemnification of Underwriters
We have agreed to indemnify the underwriters against certain civil liabilities, including liabilities under the Securities Act, and, where such indemnification is unavailable, contribute to payments the underwriters may be required to make in connection with these liabilities.
Lock-Up Agreements
We and all of our directors, executive officers and statutory auditors have entered into lock-up agreements pursuant to which we and they have agreed, subject to certain limited exceptions, not to, directly or indirectly, issue, sell, agree to sell, grant any option or contract for the sale of, pledge or otherwise dispose of, or, in any manner, transfer all or a portion of any ADSs or shares of our capital stock or securities convertible into or exchangeable for ADSs or shares of our capital stock or any interest therein for a period of 180 days after the date of this prospectus without the prior written consent of the representatives.
If: (1) during the last 17 days of the lock-up period referred to above, we issue an earnings release or material news or a material event relating to us occurs or (2) prior to the expiration of the lock-up period, we announce that we will release earnings results or become aware that material news or a material event will occur during the 16-day period beginning on the last day of the lock-up period, the restrictions described above shall continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the occurrence of the material news or material event, unless the representatives waive this extension in writing; provided, however, that this lock-up period extension shall not apply to the extent that FINRA has amended or repealed NASD Rule 2711(f)(4), or has otherwise provided written interpretive guidance regarding such rule, in each case, so as to eliminate the prohibition of any broker, dealer, or member of a national securities association from publishing or distributing any research report, with respect to the securities of an emerging growth company (as defined in the JOBS Act) prior to or after the expiration of any agreement between the broker, dealer, or member of a national securities association and the emerging growth company or its shareholders that restricts or prohibits the sale of securities held by the emerging growth company or its shareholders after the initial public offering date.
The representatives have advised us that they have no present intention to release any of the ADSs subject to the lock-up agreements prior to the expiration of the lock-up period.
Price Stabilization, Short Positions and Penalty Bids
In connection with this offering, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the market price of our ADSs. These transactions may include stabilization transactions effected in accordance with Rule 104 of Regulation M under the Exchange Act, pursuant to which the underwriters may make any bid for, or purchase, ADSs for the purpose of stabilizing the market price. The underwriters also may create a short position by selling more ADSs in connection with this offering than they are committed to purchase from us, and in such case may purchase ADSs in the open market following completion of this offering to cover all or a portion of such short position. In addition, the underwriters may impose "penalty bids" whereby they may reclaim from a dealer participating in this offering, the selling concession with respect to the ADSs that such dealer distributed in this offering, but which was subsequently purchased for the accounts of the underwriter in the open market. Any of the transactions described in this paragraph may result in the maintenance of the price of the ADSs at a level above that which might otherwise prevail in the open market. None of the transactions described in this paragraph is required and, if they are undertaken, they may be discontinued at any time.
125
Electronic Offer, Sale and Distribution of ADSs
In connection with this offering, certain of the underwriters or securities dealers may distribute prospectuses by electronic means, such as e-mail. In addition, one or more of the underwriters may facilitate Internet distribution for this offering to certain of its Internet subscription customers. One or more of the underwriters may allocate a limited number of ADSs for sale to its online brokerage customers. An electronic prospectus is available on the Internet web site maintained by certain underwriters. Other than the prospectus in electronic format, the information on such underwriters' web sites is not part of this prospectus.
NASDAQ Global Market Listing
We have applied for the listing of the ADSs on the Nasdaq Global Market under the symbol "UBIC."
Pricing of this Offering
Before this offering, there has been no public market for our ADSs. The initial public offering price will be determined through negotiations between us and the underwriters. In addition to prevailing market conditions, the initial public offering price of our ADSs will be based primarily on the prevailing market price of our common stock on the TSE. An active trading market for the ADSs may not develop. It is also possible that after the offering the ADSs will not trade in the public market at or above the initial public offering price.
126
EXPENSES RELATED TO THIS OFFERING
Set forth below is an itemization of the total expenses (including relevant taxes), excluding underwriting discounts, expected to be incurred in connection with the offer and sale of the ADSs by us. With the exception of the SEC registration fee, the Nasdaq listing fee and the Financial Industry Regulatory Authority Inc. filing fee, all amounts are estimates.
SEC registration fee |
$ | 6,275 | ||
Nasdaq listing fee |
125,000 | |||
Financial Industry Regulatory Authority Inc. filing fee |
6,250 | |||
Printing and engraving expenses |
300,000 | |||
Legal fees and expenses |
1,700,000 | |||
Accounting fees and expenses |
1,228,319 | |||
Miscellaneous |
350,000 | |||
Total * |
$ |
3,715,844 |
The validity of the securities offered hereby has been passed upon for us by DLA Piper Tokyo Partnership, Tokyo, Japan. Certain legal matters in connection with this offering will be passed upon for us by DLA Piper LLP (US), Boston, Massachusetts. In addition, legal matters relating to Japan in connection with this offering will be passed upon for us by DLA Piper Tokyo Partnership, Tokyo, Japan. Reed Smith LLP, New York, New York is acting as United States counsel to the underwriters in this offering. Anderson Mori & Tomotsune, Tokyo, Japan, is acting as Japanese counsel to the underwriters in this offering.
The consolidated financial statements of UBIC, Inc. as of March 31, 2010, 2011 and 2012, and for each of the three years in the period ended March 31, 2012, appearing in this prospectus and in the registration statement have been audited by Ernst & Young ShinNihon LLC, independent registered public accounting firm, as set forth in their reports thereon, appearing elsewhere herein, and are included in reliance upon such reports given on the authority of such firm as experts in accounting and auditing.
SERVICE OF PROCESS AND ENFORCEMENT OF JUDGMENTS
We are a limited liability, joint-stock corporation incorporated under the laws of Japan. Most of our directors, executive officers and statutory auditors reside in Japan. All or substantially all of our assets and the assets of these persons are located in Japan and elsewhere outside the United States. It may not be possible, therefore, for U.S. investors to effect service of process within the United States upon us or these persons or to enforce against us or these persons judgments obtained in U.S. courts predicated upon the civil liability provisions of the federal securities laws of the United States. There is a concern as to the enforceability in Japan, in original actions or in actions for enforcement of judgment of U.S. courts, of liabilities predicated solely upon the federal securities laws of the United States.
127
CONVENTIONS APPLICABLE TO THIS PROSPECTUS
Except where the context otherwise requires, and for the purposes of this prospectus only:
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the United States Securities and Exchange Commission, 100 F. Street, N.E., Washington, D.C. 20549, a registration statement on Form F-1 under the Securities Act for the ADSs offered by this prospectus. We have not included in this prospectus all the information contained in the registration statement and you should refer to the registration statement and its exhibits for further information.
The registration statement and other information may be read and copied at the SEC's Public Reference Room at 100 F. Street N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a web site (http://www.sec.gov) that contains the registration statements, reports, proxy and information statements and other information regarding registrants that file electronically with the SEC such as us.
You may also read and copy any reports, statements or other information that we have filed with the SEC at the addresses indicated above and you may also access them electronically at the web site set forth above. These SEC filings are also available to the public from commercial document retrieval services.
128
UBIC, INC. AND SUBSIDIARIES
F-1
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of UBIC, Inc.
We have audited the accompanying consolidated balance sheets of UBIC, Inc. and subsidiaries as of March 31, 2011 and 2012, and the related consolidated statements of income, comprehensive income, equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of UBIC, Inc. and subsidiaries at March 31, 2011 and 2012, and the consolidated results of their operations and their cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.
We have also recomputed the translation of the consolidated financial statements as of and for the year ended March 31, 2012 into United States dollars. In our opinion, the consolidated financial statements expressed in Japanese yen have been translated into United States dollars on the basis described in Note 1.
/s/ Ernst & Young ShinNihon LLC
Tokyo,
Japan
July 27, 2012
F-2
UBIC, Inc. and subsidiaries
Consolidated Balance Sheets
March 31, 2011 and 2012
|
Thousands of Yen |
Thousands of
U.S. Dollars (Note 1) |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2011 | 2012 | 2012 | |||||||
ASSETS |
||||||||||
Current Assets: |
||||||||||
Cash and cash equivalents |
¥ | 675,212 | ¥ | 2,410,304 | $ | 27,820 | ||||
Trade receivables: |
||||||||||
Trade accounts receivable |
910,539 | 984,562 | 11,364 | |||||||
Receivables from related party |
8,038 | 2,833 | 33 | |||||||
Prepaid expenses |
28,593 | 85,691 | 989 | |||||||
Deferred tax assets |
42,903 | 110,105 | 1,271 | |||||||
Other current assets |
10,656 | 49,525 | 572 | |||||||
Total Current Assets |
1,675,941 | 3,643,020 | 42,049 | |||||||
Property and equipmentnet |
114,206 | 376,763 | 4,349 | |||||||
Capitalized computer software costsnet |
252,288 | 481,747 | 5,560 | |||||||
Other intangible assetsnet |
1,896 | 3,900 | 45 | |||||||
Investments in securities |
223,215 | 273,615 | 3,158 | |||||||
Rental deposits |
52,282 | 89,039 | 1,028 | |||||||
Deferred IPO costs |
| 83,639 | 965 | |||||||
Deferred tax assets |
48,251 | 485 | 6 | |||||||
Other assets, net of allowance for doubtful accounts of ¥4,983 thousand ($58 thousand) as of March 31, 2011 and 2012 |
5,517 | 27,468 | 315 | |||||||
TOTAL ASSETS |
¥ | 2,373,596 | ¥ | 4,979,676 | $ | 57,475 | ||||
See notes to the consolidated financial statements.
F-3
UBIC, Inc. and subsidiaries
Consolidated Balance Sheets (Continued)
March 31, 2011 and 2012
See notes to the consolidated financial statements.
F-4
UBIC, Inc. and subsidiaries
Consolidated Statements of Income
Years ended March 31, 2011 and 2012
|
Thousands of Yen |
Thousands of
U.S. Dollars (Note 1) |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2011 | 2012 | 2012 | |||||||
Revenue |
¥ | 2,635,430 | ¥ | 5,095,939 | $ | 58,817 | ||||
Revenue from a related party |
40,764 | 27,862 | 322 | |||||||
Operating revenue from reimbursed direct costs |
9,899 | 12,427 | 143 | |||||||
Total revenue |
2,686,093 | 5,136,228 | 59,282 | |||||||
Cost of revenue |
966,352 | 1,600,425 | 18,472 | |||||||
Reimbursed direct costs |
9,899 | 12,427 | 143 | |||||||
Selling, general and administrative expenses |
669,742 | 1,153,438 | 13,313 | |||||||
Total operating expense |
1,645,993 | 2,766,290 | 31,928 | |||||||
Operating income |
1,040,100 | 2,369,938 | 27,354 | |||||||
Interest income |
3,410 | 2,052 | 24 | |||||||
Interest expense |
(14,262 | ) | (13,360 | ) | (154 | ) | ||||
Foreign currency exchange gains (losses) |
(39,942 | ) | 10,294 | 119 | ||||||
Dividend income |
| 4,500 | 52 | |||||||
Othernet |
1,296 | 655 | 8 | |||||||
Income before income taxes |
990,602 | 2,374,079 | 27,403 | |||||||
Income taxes |
202,827 | 1,003,441 | 11,582 | |||||||
Net income |
787,775 | 1,370,638 | 15,821 | |||||||
Less: Net income (loss) attributable to noncontrolling interests |
(933 | ) | 2,951 | 34 | ||||||
Net income attributable to UBIC, Inc. shareholders |
¥ | 788,708 | ¥ | 1,367,687 | $ | 15,787 | ||||
|
Yen | U.S. Dollars | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2011 | 2012 | 2012 | |||||||
Net income attributable to UBIC, Inc. shareholders per share: |
||||||||||
Basic |
¥ | 334 | ¥ | 515 | $ | 5.94 | ||||
Diluted |
249 | 422 | 4.87 |
See notes to the consolidated financial statements.
F-5
Consolidated Statements of Comprehensive Income
Years ended March 31, 2011 and 2012
|
Thousands of Yen |
Thousands of
U.S. Dollars (Note 1) |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2011 | 2012 | 2012 | |||||||
Net income |
¥ | 787,775 | ¥ | 1,370,638 | $ | 15,821 | ||||
Other comprehensive income, net of tax: |
||||||||||
Foreign currency translation adjustments |
(894 | ) | 6,166 | 70 | ||||||
Unrealized holding gains on securities: |
||||||||||
Amount arising during the period |
68,592 | 29,892 | 345 | |||||||
Adjustments related to retirement and severance benefits: |
||||||||||
Amount arising during the period |
418 | (287 | ) | (3 | ) | |||||
Total other comprehensive income |
68,116 | 35,771 | 412 | |||||||
Total comprehensive income |
855,891 | 1,406,409 | 16,233 | |||||||
Less: Comprehensive income (loss) attributable to noncontrolling interests |
(933 |
) |
2,951 |
34 |
||||||
Total comprehensive income attributable to UBIC, Inc. shareholders |
¥ | 856,824 | ¥ | 1,403,458 | $ | 16,199 | ||||
See notes to the consolidated financial statements.
F-6
Consolidated Statements of Equity
Years ended March 31, 2011 and 2012
|
Thousands of Yen, except share data | ||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
UBIC, Inc. Shareholders |
|
|
||||||||||||||||||||||
|
Shares of
Common Stock Outstanding |
Common
Stock |
Additional
Paid-in Capital |
Retained
Earnings (Accumulated Deficit) |
Accumulated
Other Comprehensive Income (Loss) |
Treasury
Stock |
Non-
controlling Interests |
Total
Equity |
|||||||||||||||||
Balance at April 1, 2010 |
2,324,000 | ¥ | 605,987 | ¥ | 456,043 | ¥ | (807,986 | ) | ¥ | (4,374 | ) | ¥ | (17 | ) | ¥ | ¥ | 249,653 | ||||||||
Comprehensive income: |
|||||||||||||||||||||||||
Net income |
788,708 | (933 | ) | 787,775 | |||||||||||||||||||||
Other comprehensive income, net of tax |
68,116 | 68,116 | |||||||||||||||||||||||
Conversion of convertible notes |
204,472 | 38,000 | 36,808 | 74,808 | |||||||||||||||||||||
Common stock issued under share-based compensation plans |
102,400 | 161,637 | (148,870 | ) | 12,767 | ||||||||||||||||||||
Purchase of treasury stock |
(9 | ) | (9 | ) | |||||||||||||||||||||
Share-based compensation |
1,134 | 1,134 | |||||||||||||||||||||||
Stock issuance by newly established subsidiary |
8,000 | 8,000 | |||||||||||||||||||||||
Balance at March 31, 2011 |
2,630,872 | 805,624 | 345,115 | (19,278 | ) | 63,742 | (26 | ) | 7,067 | 1,202,244 | |||||||||||||||
Comprehensive income: |
|||||||||||||||||||||||||
Net income |
1,367,687 | 2,951 | 1,370,638 | ||||||||||||||||||||||
Other comprehensive income, net of tax |
35,771 | 35,771 | |||||||||||||||||||||||
Conversion of convertible notes |
281,150 | 52,800 | 51,563 | 104,363 | |||||||||||||||||||||
Share-based compensation |
44,268 | 44,268 | |||||||||||||||||||||||
Stock issuance by newly established subsidiary |
2,000 | 2,000 | |||||||||||||||||||||||
Dividends paid |
(19,730 | ) | (19,730 | ) | |||||||||||||||||||||
Balance at March 31, 2012 |
2,912,022 | ¥ | 858,424 | ¥ | 440,946 | ¥ | 1,328,679 | ¥ | 99,513 | ¥ | (26 | ) | ¥ | 12,018 | ¥ | 2,739,554 | |||||||||
See notes to the consolidated financial statements.
F-7
UBIC, Inc. and subsidiaries
Consolidated Statements of Equity (Continued)
Years ended March 31, 2011 and 2012
|
Thousands of U.S. Dollars, except share data | ||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
UBIC, Inc. Shareholders |
|
|
||||||||||||||||||||||
|
Shares of
Common Stock Outstanding |
Common
Stock |
Additional
Paid-in Capital |
Retained
Earnings (Accumulated Deficit) |
Accumulated
Other Comprehensive Income (Loss) |
Treasury Stock |
Non-
controlling Interests |
Total
Equity |
|||||||||||||||||
Balance at April 1, 2011 |
2,630,872 | $ | 9,299 | $ | 3,983 | $ | (224 | ) | $ | 736 | $ | 0 | $ | 82 | $ | 13,876 | |||||||||
Comprehensive income: |
|||||||||||||||||||||||||
Net income |
15,787 | 34 | 15,821 | ||||||||||||||||||||||
Other comprehensive income, net of tax |
412 | 412 | |||||||||||||||||||||||
Conversion of convertible notes |
281,150 | 609 | 595 | 1,204 | |||||||||||||||||||||
Share-based compensation |
511 | 511 | |||||||||||||||||||||||
Stock issuance by newly established subsidiary |
23 | 23 | |||||||||||||||||||||||
Dividends paid |
(228 | ) | (228 | ) | |||||||||||||||||||||
Balance at March 31, 2012 |
2,912,022 | $ | 9,908 | $ | 5,089 | $ | 15,335 | $ | 1,148 | $ | 0 | $ | 139 | $ | 31,619 | ||||||||||
See notes to the consolidated financial statements.
F-8
UBIC, Inc. and subsidiaries
Consolidated Statements of Cash Flows
Years ended March 31, 2011 and 2012
|
Thousands of Yen |
Thousands of
U.S. Dollars (Note 1) |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2011 | 2012 | 2012 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||||
Net income |
¥ | 787,775 | ¥ | 1,370,638 | $ | 15,821 | ||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
||||||||||
Depreciation and amortization |
58,213 | 129,364 | 1,493 | |||||||
Share-based compensation expense |
1,134 | 44,268 | 511 | |||||||
Deferred income taxes |
(136,688 | ) | (7,899 | ) | (91 | ) | ||||
Foreign currency exchange losses (gains) |
20,513 | (6,811 | ) | (79 | ) | |||||
Changes in operating assets and liabilities: |
||||||||||
Increase in trade accounts receivable |
(828,196 | ) | (65,198 | ) | (753 | ) | ||||
Decrease (increase) in receivables from related party |
12,746 | 5,205 | 60 | |||||||
Increase in prepaid expenses |
(6,510 | ) | (54,774 | ) | (632 | ) | ||||
Increase in rental deposits |
(8,778 | ) | (36,440 | ) | (421 | ) | ||||
Increase in trade accounts payable |
118,820 | 36,246 | 418 | |||||||
Increase in payables to related party |
| 5,284 | 61 | |||||||
Increase in accrued consumption taxes |
46,570 | 33,342 | 385 | |||||||
Increase in accrued income taxes |
345,723 | 493,766 | 5,699 | |||||||
Othernet |
41,478 | 96,558 | 1,115 | |||||||
Net cash provided by operating activities |
452,800 | 2,043,549 | 23,587 | |||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||||
Purchase of property and equipment |
(19,623 | ) | (242,607 | ) | (2,800 | ) | ||||
Capitalized computer software costs |
(206,701 | ) | (275,298 | ) | (3,177 | ) | ||||
Othernet |
(1,388 | ) | (2,319 | ) | (27 | ) | ||||
Net cash used in investing activities |
(227,712 | ) | (520,224 | ) | (6,004 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||||
Proceeds from short-term debt |
| 150,000 | 1,731 | |||||||
Repayment of short-term debt |
(30,000 | ) | (87,500 | ) | (1,010 | ) | ||||
Proceeds from long-term bank borrowings |
| 316,667 | 3,655 | |||||||
Repayment of long-term bank borrowings |
(159,260 | ) | (141,700 | ) | (1,635 | ) | ||||
Proceeds from issuance of common stock |
11,575 | | | |||||||
Proceeds from issuance of convertible notes |
285,000 | | | |||||||
Proceeds from issuance of common stock to noncontrolling shareholders by newly established subsidiary |
8,000 | 2,000 | 23 | |||||||
Dividends paid |
| (19,730 | ) | (228 | ) | |||||
Payment of IPO costs |
| (3,819 | ) | (44 | ) | |||||
Othernet |
(1,419 | ) | (2,708 | ) | (31 | ) | ||||
Net cash provided by financing activities |
113,896 | 213,210 | 2,461 | |||||||
EFFECT OF FOREIGN CURRENCY EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS |
(8,922 | ) | (1,443 | ) | (17 | ) | ||||
NET INCREASE IN CASH AND CASH EQUIVALENTS |
330,062 | 1,735,092 | 20,027 | |||||||
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR |
345,150 | 675,212 | 7,793 | |||||||
CASH AND CASH EQUIVALENTS, END OF YEAR |
¥ |
675,212 |
¥ |
2,410,304 |
$ |
27,820 |
||||
ADDITIONAL CASH FLOW INFORMATION: |
||||||||||
Interest paid, net of amounts capitalized |
¥ | 8,489 | ¥ | 7,971 | $ | 92 | ||||
Income taxes paid/(refunds received)net |
(14,197 | ) | 544,560 | 6,285 | ||||||
NONCASH INVESTING AND FINANCING ACTIVITIES: |
||||||||||
Conversion of convertible notes to common stock |
¥ | 74,808 | ¥ | 104,363 | $ | 1,205 | ||||
Outstanding payments for acquisition of property and equipment, and capitalized computer software costs included in trade accounts payable |
53,602 | 154,900 | 1,788 | |||||||
Asset retirement obligation |
| 7,309 | 84 | |||||||
Outstanding payment for deferred IPO costs |
| 79,820 | 921 |
See notes to the consolidated financial statements.
F-9
UBIC, Inc. and subsidiaries
Notes to Consolidated Financial Statements
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations UBIC, Inc. ("UBIC") is a Japanese corporation established on August 8, 2003, whose principal office is located in Japan. UBIC and its subsidiaries (collectively, the "Company") provide solutions, employing advanced technologies, for corporate litigation strategy and crisis management. The Company mainly offers eDiscovery and forensic services, such as data collection, data processing, data review and document production. The Company's customers include leading law firms, corporate legal departments, government agencies and other professional advisors who require innovative technology, responsive service and deep subject-matter expertise.
Basis of Financial Statements The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"). Because the Company maintains its records and prepares its financial statements in accordance with accounting principles prevailing in the respective country of incorporation, certain adjustments have been made to conform to U.S. GAAP. The major adjustments include those relating to depreciation of property and equipment, share-based compensation, valuation of deferred tax assets, appropriation of accumulated deficit and deferred U.S. Initial Public Offering ("IPO") costs.
Translation into U.S. Dollars The accompanying consolidated financial statements are stated in Japanese yen, the currency of the country in which UBIC is incorporated and principally operates. The translation of Japanese yen amounts into U.S. dollar amounts for the year ended March 31, 2012 is included solely for the convenience of readers outside Japan and has been made at the rate of Yen 86.64 = U.S. $1 (the official rate as of December 31, 2012 announced by the Federal Reserve Bank of New York). The translation should not be construed as a representation that the Japanese yen amounts could be converted into U.S. dollars at the above or any other rate.
Principles of Consolidation The consolidated financial statements include the accounts of UBIC and its subsidiaries. Intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions used are primarily in the areas of valuation of investments, valuation of deferred tax assets, determination of fair values of stock options, and estimated useful lives of fixed assets and intangible assets with finite useful lives. Actual results could differ from those estimates.
Foreign Currency Translation The assets and liabilities of foreign subsidiaries with functional currencies other than Japanese yen are translated into Japanese yen at the rate of exchange at the balance sheet date. Income and expense accounts are translated at the average rates of exchange for the respective reporting period. The resulting translation adjustments are included in other comprehensive income.
Cash Equivalents The Company defines cash equivalents as all highly liquid investments with insignificant risk of changes in value which have original maturities of three months or less at the time of purchase.
F-10
UBIC, Inc. and subsidiaries
Notes to Consolidated Financial Statements (Continued)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Doubtful Accounts Allowance for doubtful accounts is established in amounts considered to be appropriate based primarily upon an evaluation of potential losses in the outstanding receivables.
Deferred IPO Costs Incremental costs directly associated with the Company's pending IPO, such as consulting costs and legal fees, are capitalized and recorded as deferred IPO costs in anticipation of the IPO. These costs will be netted against the gross proceeds of the IPO and recorded in additional paid-in capital.
Property and Equipment Property and equipment are stated at cost. Depreciation and amortization of property and equipment, including assets under capital lease, are computed using the straight-line method based on either the estimated useful lives of the assets or the lease period, whichever is shorter.
The useful lives for depreciation by major asset classes are as follows:
Leasehold improvements |
5 to 15 years | |
Furniture and fixtures |
4 to 20 years | |
Computers |
5 years | |
Assets under capital leases, primarily office equipment |
5 years |
Capitalized Computer Software Costs The Company capitalizes costs of computer software developed and purchased for internal use. Costs incurred in the creation of computer software products for internal use are capitalized when the preliminary project phase is completed and when management, with the relevant authority, authorizes and commits funding to the project and it is probable that the project will be completed and the software will be used to perform the function intended. Internal and external costs incurred during the preliminary project stage are expensed as they are incurred. Capitalized costs are amortized, beginning in the period each module or component of the product is ready for its intended use, on a straight-line basis over the estimated useful life of the product, mainly five years.
Leases Capital leases are capitalized at the inception of the lease at the present value of the minimum lease payments. All other leases are accounted for as operating leases. Lease payments for capital leases are apportioned to interest expense and a reduction of the lease obligation so as to achieve a constant rate of interest on the balance of the obligation. Operating lease payments are recognized as an expense on a straight-line basis over the lease term.
Impairment of Long-lived Assets The Company reviews the carrying value of long-lived assets or a related group of assets to be held and used, including intangible assets with finite useful lives, for impairment whenever events or circumstances occur that indicate that the carrying value of the assets may not be recoverable. The assets are considered to be impaired when the estimated undiscounted cash flows expected to result from the use of the assets and their eventual disposition are less than their carrying values. The impairment loss is measured as the amount by which the carrying value of the asset or asset group exceeds its fair value. In determining the fair value, the Company uses available quoted market prices and present value techniques, if appropriate, based on the estimated future cash flows expected to result from the use of the assets and their eventual dispositions.
F-11
UBIC, Inc. and subsidiaries
Notes to Consolidated Financial Statements (Continued)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Investments in Securities The Company classifies investments in equity securities that have readily determinable fair values as available-for-sale securities, which are accounted for at fair value with unrealized gains and losses excluded from earnings and reported in accumulated other comprehensive income (loss) in equity on a net-of-tax basis. The cost of securities sold is determined based on the average cost method.
The Company reviews the fair values of available-for-sale securities on a regular basis to determine if the fair value of any individual security has declined below its cost and if such decline is other than temporary. Fair value is determined based on quoted market prices. If the decline in fair value is judged to be other than temporary, the cost basis of the investment is written down to fair value. Other-than-temporary declines in fair value are determined taking into consideration the duration of the decline in fair value of the security and the severity of the decline, the financial condition and near term prospects of the investee and the intent and ability of the Company to hold the equity security until forecasted recovery. The resulting realized loss is included in the consolidated statements of income in the period in which the decline is deemed to be other than temporary.
Retirement and Severance Benefits The Company has defined benefit severance indemnities plans. The benefit obligation at March 31, the measurement date, is unfunded and recognized in the consolidated balance sheet. The benefit obligation is the projected benefit obligation, which represents the actuarial present value of benefits expected to be paid upon retirement based on employee services already rendered and estimated future compensation levels. Net periodic retirement cost is recorded in the consolidated statement of income and includes service cost and interest cost. Service cost represents the actuarial present value of participant benefits earned in the current year. Interest cost represents the time value of money cost associated with the passage of time. Actuarial gains and losses included in accumulated other comprehensive income (loss) are amortized using the straight-line method over the average remaining service period of active employees if it exceeds the corridor, which is defined as 10 percent of the projected benefit obligation.
Asset Retirement Obligations The Company records asset retirement obligations when the obligation is incurred. The obligation is measured at fair value and included in other liabilities. When the liability is initially recorded, the Company capitalizes the related cost by increasing the carrying amount of the related long-lived asset. The liability is accreted to its present value each period, and the capitalized cost is depreciated over the asset's useful life.
Convertible Notes The Company accounts for convertible notes according to their stated redemption value net of discount. The Company classifies the convertible notes as a liability or equity on the consolidated balance sheet according to the nature of the redemption feature. Discounts on convertible notes are amortized as interest expense over the redemption period.
Derivative Financial Instruments The Company recognizes all derivative financial instruments, such as interest rate swap contracts, in the consolidated balance sheets as either assets or liabilities and they are measured at fair value regardless of the purpose or intent for using them.
The Company does not designate derivative financial instruments as hedging instruments nor apply hedge accounting. Accordingly, changes in fair value of the derivative financial instruments are recognized in earnings immediately.
F-12
UBIC, Inc. and subsidiaries
Notes to Consolidated Financial Statements (Continued)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition The Company has agreements with customers pursuant to which it performs various services. A majority of the Company's revenue relates to fees earned for the month-to-month performance of eDiscovery services including data collection, data processing, data hosting, data review and document production, and forensic services. The fees that the Company earns and bills for these services vary primarily based on the hours of service provided, the volume of documents reviewed or produced, the amount of data processed or stored. While the unit prices for providing the services are agreed in advance, the scope and volume of services to be performed can change depending on customers' requests, which are made on an optional and "as needed" basis, and customers may choose not to request performance of additional services or may obtain similar services from other service providers.
The Company recognizes revenue for eDiscovery and forensic services based on the agreed-upon prices and volume of services performed during the period. For these contractual arrangements, the Company has identified each deliverable service element. Based on management's evaluation of each element, it was determined that each element delivered has standalone value to the customers because the Company or other vendors sell such services separately from any other services/deliverables. Accordingly, each of the service elements in the multiple element case qualifies as a separate unit of accounting. The Company uses the best estimate of sales price based on the price it charges when it sells an element on a standalone basis, which is generally consistent with the stated prices in the arrangements, and allocates revenue to the various units of accounting in the arrangements based on the stated prices. The Company recognizes revenue for each separate unit of accounting when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the fee is fixed or determinable, and collectability is reasonably assured based on evidence of an arrangement.
The Company has revenue related to the reimbursement of certain direct costs by customers, primarily transportation. Reimbursed transportation and other reimbursable direct costs are recorded gross in the consolidated statements of income as "Operating revenue from reimbursed direct costs" and as "Reimbursed direct costs."
Consumption Tax Consumption tax collected and remitted to tax authorities is excluded from revenues, cost of sales and expenses in the consolidated statements of income.
Advertising Advertising costs are expensed as incurred and are recorded in "Selling, general and administration expenses."
Share-Based Compensation The Company measures the cost of employee services received in exchange for an award of equity instruments at the fair value of the award on the grant-date and recognizes the cost over the period which the employee is required to provide services in exchange for the award. Compensation expenses are recognized on a straight-line basis over the requisite service period of the awards which are expected to be vested.
Income Taxes Deferred income taxes reflect the impact of temporary differences between assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes and tax loss carryforwards. These deferred taxes are measured using the currently enacted tax rates in effect for the year in which the temporary differences or tax loss carryforwards are expected to reverse.
F-13
UBIC, Inc. and subsidiaries
Notes to Consolidated Financial Statements (Continued)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Valuation allowances are provided against deferred tax assets when it is more likely than not that a tax benefit will not be realized. The Company recognizes the financial statement effect of uncertain tax positions when they are more likely than not, based on the technical merits, that the tax positions will be sustained upon examination by the tax authorities. Benefits from tax positions that meet more-likely-than-not recognition threshold are measured at the largest amount of benefit that is greater than 50% likely of being realized upon settlement. Accrued interest and penalties related to the unrecognized tax benefits are included in income tax expense in the consolidated statements of income. The Company had no unrecognized tax benefits during the years ended March 31, 2011 and 2012.
Net Income Attributable to UBIC, Inc. Shareholders Per Share Basic net income attributable to UBIC, Inc. shareholders per share is computed using the weighted-average number of shares of common stock outstanding during each year. Diluted net income attributable to UBIC, Inc. shareholders per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company.
Other Comprehensive Income Other comprehensive income consists of translation adjustments resulting from the translation of financial statements of the foreign subsidiary, unrealized holding gains or losses on available-for-sale securities and adjustments related to retirement and severance benefits.
Recently Adopted Accounting Pronouncements
In October 2009, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2009-13, " Revenue Recognition: Multiple-Deliverable Revenue Arrangements ," which amends the criteria for when to evaluate individual delivered items in a multiple-deliverable arrangement and the method of allocating consideration received. This ASU is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 and early adoption is permitted. The Company retrospectively adopted this ASU in the fiscal year beginning April 1, 2009. The adoption of this ASU did not have a material impact on the Company's financial position or results of operations.
In October 2009, the FASB issued ASU No. 2009-14, " Certain Revenue Arrangements That Include Software Elements ." This ASU affects how entities account for revenue arrangements that contain both tangible products and software elements. Previously, arrangements containing both tangible products and software were accounted for based on the provisions regarding revenue recognition included in ASC 985, " Software ," if the software was considered more than incidental to the product or service. This ASU changes revenue recognition for tangible products containing software elements and non-software elements that function together to deliver the tangible product's essential functionality by eliminating them from the scope of ASC 985. This ASU is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 and early adoption is permitted. The Company retrospectively adopted this ASU in the fiscal year beginning April 1, 2009. The adoption of this ASU did not have a material impact on the Company's financial position or results of operations.
In January 2010, the FASB issued ASU No. 2010-06, "F air Value Measurements and Disclosures: Improving Disclosures about Fair Value Measurements ," which adds disclosure requirements about
F-14
UBIC, Inc. and subsidiaries
Notes to Consolidated Financial Statements (Continued)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
transfers in and out of Levels 1 and 2 and separate disclosures about activity relating to Level 3 measurements and clarifies input and valuation techniques. This ASU was effective for the annual reporting period beginning after December 15, 2009 and the Company adopted this ASU in the first quarter of fiscal year beginning April 1, 2010. The adoption of this ASU did not have a material impact on the Company's financial position or results of operations.
In February 2010, the FASB issued ASU 2010-9 " Subsequent Events (Topic 855) Amendments to Certain Recognition and Disclosure Requirements ." This ASU amends disclosure requirements within Subtopic 855-10. An entity that is an SEC filer is not required to disclose the date through which subsequent events have been evaluated. This change alleviates potential conflicts between Subtopic 855-10 and the SEC's requirements. ASU 2010-9 is effective for interim and annual periods ending after June 15, 2010. The Company's disclosure on subsequent events in Note 21 is made in accordance with this ASU.
In July 2010, the FASB issued ASU No. 2010-20, " Receivables: Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses ," which requires new disclosures and enhances existing disclosures about the credit quality of financing receivables and the allowance for credit losses. The disclosures as of the end of a reporting period were effective for interim and annual reporting periods which ended on or after December 15, 2010 and the Company adopted this ASU in the third quarter of the fiscal year beginning April 1, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. The Company adopted this ASU in the fourth quarter of the fiscal year beginning April 1, 2010. The adoption of this ASU did not have a material impact on the Company's financial position or results of operations.
In June 2011, the FASB issued ASU No. 2011-05, " Comprehensive Income: Presentation of Comprehensive Income ," which improves the comparability, consistency, and transparency of financial reporting and increases the prominence of items reported in other comprehensive income. This ASU requires an entity to report comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2011. Early adoption is permitted. The Company adopted this ASU in the fiscal year beginning April 1, 2010, other than the adoption of the presentation of reclassifications of items out of accumulated comprehensive income which has been deferred. The adoption of this ASU did not have a material impact on the Company's financial position or results of operations.
In December 2010, the FASB issued ASU No. 2010-29, " Business Combinations ," which clarifies the acquisition date that should be used for reporting the pro forma financial information disclosures in business combination when comparative financial statements are presented and improves the usefulness of the pro forma revenue and earnings disclosure. This ASU is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The adoption of this ASU did not have a material impact on the Company's financial position or results of operations.
F-15
UBIC, Inc. and subsidiaries
Notes to Consolidated Financial Statements (Continued)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recently Issued Accounting Pronouncements Not Yet Adopted
In May 2011, the FASB issued ASU No. 2011-04, " Fair Value Measurement ," which amends some of the wording used to describe requirements for measuring fair value and for disclosing information about fair value measurements. This ASU is effective for the interim or annual period beginning after December 15, 2011. Early application is prohibited. The application of this ASU is not expected to have a material impact on the Company's financial position or results of operations.
2. INVESTMENTS IN SECURITIES
Available-for-sale securities
Information regarding securities classified as available-for-sale securities as of March 31, 2011 and 2012 is as follows:
|
Thousands of Yen | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
March 31, 2011
|
Cost |
Gross
unrealized gain |
Gross
unrealized loss |
Fair value | |||||||||
Available-for-sale securities: |
|||||||||||||
Equity securities |
¥ | 107,550 | ¥ | 115,650 | ¥ | | ¥ | 223,200 | |||||
March 31, 2012 |
|
|
|
|
|
|
|
|
|
||||
Available-for-sale securities: |
|||||||||||||
Equity securities |
¥ | 107,550 | ¥ | 166,050 | ¥ | | ¥ | 273,600 |
|
Thousands of U.S. Dollars | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
March 31, 2012
|
Cost |
Gross
unrealized gain |
Gross
unrealized loss |
Fair value | |||||||||
Available-for-sale securities: |
|||||||||||||
Equity securities |
$ | 1,241 | $ | 1,917 | $ | | $ | 3,158 |
3. ALLOWANCE FOR DOUBTFUL ACCOUNTS
An analysis of the movement in the allowance for doubtful accounts for the years ended March 31, 2011 and 2012 is as follows:
|
Thousands of Yen |
Thousands of
U.S. Dollars |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2011 | 2012 | 2012 | |||||||
Balance at the beginning of the year |
¥ | 4,983 | ¥ | 4,983 | $ | 58 | ||||
Balance at the end of the year |
¥ | 4,983 | ¥ | 4,983 | $ | 58 | ||||
F-16
UBIC, Inc. and subsidiaries
Notes to Consolidated Financial Statements (Continued)
4. PROPERTY AND EQUIPMENT
Property and equipment recorded on the Company's consolidated balance sheets as of March 31, 2011 and 2012, consists of the following:
|
Thousands of Yen |
Thousands of
U.S. Dollars |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2011 | 2012 | 2012 | |||||||
Leasehold improvements |
¥ | 55,327 | ¥ | 109,141 | $ | 1,260 | ||||
Furniture and fixtures |
94,576 | 95,476 | 1,102 | |||||||
Computers |
63,427 | 336,338 | 3,882 | |||||||
Assets under capital lease, primarily office equipment |
5,153 | 5,153 | 60 | |||||||
Total |
218,483 | 546,108 | 6,304 | |||||||
Accumulated depreciation |
(104,277 | ) | (169,345 | ) | (1,955 | ) | ||||
Property and equipmentnet |
¥ | 114,206 | ¥ | 376,763 | $ | 4,349 | ||||
5. LEASES
The Company enters into various leases for data center facilities, office premises and office equipment in the normal course of business.
Capital Leases The Company uses office equipment leased under capital lease arrangements. The amount of leased assets at cost under capital leases and accumulated depreciation amounted to ¥5,153 thousand and ¥1,934 thousand, respectively, at March 31, 2011 and ¥5,153 thousand ($59 thousand) and ¥3,402 thousand ($39 thousand), respectively, at March 31, 2012.
Operating Leases UBIC leases its data center facilities and office premises under cancellable operating lease arrangements with mainly two-year lease period, for which refundable lease deposits are recorded as rental deposits. The U.S. based subsidiary leases office premises under noncancellable operating lease arrangements.
Expenses related to operating leases for the years ended March 31, 2011 and 2012, were ¥127,709 thousand and ¥174,503 thousand ($2,014 thousand), respectively, and are included in "Cost of revenue" and "Selling, general and administrative expenses."
F-17
UBIC, Inc. and subsidiaries
Notes to Consolidated Financial Statements (Continued)
5. LEASES (Continued)
Future Minimum Lease Payments As of March 31, 2012, the future minimum lease payments under noncancellable operating leases and capital leases are as follows:
|
Thousands of Yen |
Thousands of
U.S. Dollars |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Years ending March 31
|
Operating
Leases |
Capital
Leases |
Operating
Leases |
Capital
Leases |
|||||||||
2013 |
¥ | 11,391 | ¥ | 1,483 | $ | 131 | $ | 16 | |||||
2014 |
11,096 | 412 | 128 | 5 | |||||||||
2015 and thereafter |
10,482 | | 121 | | |||||||||
Total minimum lease payments |
¥ | 32,969 | 1,895 | $ | 380 | 21 | |||||||
Less amounts representing interest |
55 | 1 | |||||||||||
Present value of minimum lease payments |
1,840 | 20 | |||||||||||
Less current portion |
1,437 | 16 | |||||||||||
Noncurrent portion |
¥ | 403 | $ | 4 | |||||||||
6. CAPITALIZED COMPUTER SOFTWARE COSTS
The Company capitalizes the cost of computer software developed or purchased for internal use.
The following is a summary of capitalized computer software costs:
|
Thousands of Yen |
Thousands of
U.S. Dollars |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2011 | 2012 | 2012 | |||||||
Balance at the beginning of the year |
¥ | 295,385 | ¥ | 505,160 | $ | 5,831 | ||||
Costs capitalized during the year |
209,888 | 302,106 | 3,487 | |||||||
Foreign currency translation |
(113 | ) | 104 | 1 | ||||||
Balance at the end of the year |
505,160 | 807,370 | 9,319 | |||||||
Accumulated amortization, end of the year |
(252,872 | ) | (325,623 | ) | (3,759 | ) | ||||
Capitalized computer software costsnet |
¥ | 252,288 | ¥ | 481,747 | $ | 5,560 | ||||
Included in the above are capitalized software costs for projects in progress of ¥115,203 thousand and ¥7,997 thousand ($92 thousand) at March 31, 2011 and 2012, respectively. For the years ended March 31, 2011 and 2012, the Company recognized amortization expenses related to capitalized software development costs of ¥30,364 thousand and ¥72,751 thousand ($840 thousand), respectively.
F-18
UBIC, Inc. and subsidiaries
Notes to Consolidated Financial Statements (Continued)
6. CAPITALIZED COMPUTER SOFTWARE COSTS (Continued)
The following table shows the estimated amortization of capitalized computer software costs for the next five years:
Years ending March 31
|
Thousands of
Yen |
Thousands of
U.S. Dollars |
|||||
---|---|---|---|---|---|---|---|
2013 |
¥ | 115,864 | $ | 1,337 | |||
2014 |
112,706 | 1,301 | |||||
2015 |
111,342 | 1,285 | |||||
2016 |
88,388 | 1,020 | |||||
2017 |
45,450 | 525 |
Research and development costs, which are included in "Selling, general and administrative expenses" relate primarily to costs incurred in the research and development of new internal use software products and enhancements to existing internal use software products, which do not meet the criteria for capitalization. Such costs are expensed as incurred. Research and development costs were not incurred during the year ended March 31, 2011. Research and development costs incurred during the year ended March 31, 2012 amounted to ¥12,288 thousand ($142 thousand).
7. SHORT-TERM AND LONG-TERM DEBT
Short-term debt of ¥62,500 thousand ($721 thousand) as of March 31, 2012, consists of bank borrowings with a weighted-average interest rate of 0.7 percent.
The components of long-term debt as of March 31, 2011 and 2012, are summarized as follows:
|
Thousands of Yen |
|
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Thousands of
U.S. Dollars |
|||||||||||||||
|
2011
Weighted average interest rate |
|
2012
Weighted average interest rate |
|
||||||||||||
|
2011
Balance |
2012
Balance |
2012
Balance |
|||||||||||||
Unsecured convertible notes due 2015, zero coupon, net of unamortized discount of ¥8,800 thousand and ¥3,300 thousand ($41 thousand) at March 31, 2011 and 2012, respectively |
1.0 | % | ¥ | 211,200 | 1.0 | % | ¥ | 106,700 | $ | 1,232 | ||||||
Bank borrowings: |
||||||||||||||||
Secured by equity securities, various rates and various maturities through
|
2.5 | % | 230,000 | 2.0 | % | 247,143 | 2,853 | |||||||||
Unsecured, various rates and various maturities through 2016 |
2.2 | % | 21,700 | 1.6 | % | 182,857 | 2,111 | |||||||||
Capital lease obligations |
4.1 | % | 3,311 | 4.1 | % | 1,840 | 20 | |||||||||
|
466,211 | 538,540 | 6,216 | |||||||||||||
Less: current portion |
143,171 | 138,520 | 1,599 | |||||||||||||
|
¥ | 323,040 | ¥ | 400,020 | $ | 4,617 | ||||||||||
F-19
UBIC, Inc. and subsidiaries
Notes to Consolidated Financial Statements (Continued)
7. SHORT-TERM AND LONG-TERM DEBT (Continued)
The aggregate annual maturities of long-term debt after March 31, 2012 are as follows:
Years ending March 31
|
Thousands of
Yen |
Thousands of
U.S. Dollars |
|||||
---|---|---|---|---|---|---|---|
2013 |
¥ | 138,520 | $ | 1,599 | |||
2014 |
91,237 | 1,053 | |||||
2015 |
80,833 | 933 | |||||
2016 |
187,533 | 2,165 | |||||
2017 |
40,417 | 466 | |||||
|
¥ | 538,540 | $ | 6,216 | |||
The Company pledged available-for-sale securities with carrying value of ¥223,200 thousand and ¥273,600 thousand ($3,158 thousand) as security for bank borrowings of ¥230,000 thousand and ¥247,143 thousand ($2,853 thousand) as of March 31, 2011 and 2012, respectively. As is customary in Japan, both short-term and long-term bank borrowings are made under general agreements that provide that securities and guarantees for present and future indebtedness will be given upon request of the bank, and that the bank shall have the right, as the obligations become due, or in the event of their default, to offset cash deposits against such obligations.
Credit Line
The Company entered into an overdraft arrangement with a Japanese bank for which the unutilized balance as of March 31, 2012 was ¥50,000 thousand ($577 thousand). Under a ¥700,000 thousand five year syndicated loan arrangement entered into with a consortium of banks on September 27, 2011, the Company borrowed ¥350,000 thousand ($4,040 thousand) during the year ended March 31, 2012. The remaining ¥350,000 thousand ($4,040 thousand) available under this syndicated loan can be drawn through September 26, 2012.
Convertible Notes
In April 2010, the Company issued zero coupon convertible notes due April 2015 in the aggregate face amount of ¥300,000 thousand for ¥285,000 thousand. The notes were convertible to equity shares at the option of the holders at a price of ¥391 per share at any time on or after April 13, 2010. The Company was not required to bifurcate any of embedded features contained in the notes for accounting purposes. On March 14, 2011, prior to the maturity date, convertible notes with a face amount of ¥80,000 thousand were converted into 204,472 equity shares of the Company at a conversion price of ¥391 per share. UBIC recorded an increase of ¥38,000 thousand in "Common stock" and ¥36,808 thousand, net of issuance cost of ¥1,192 thousand in "Additional paid-in capital." On February 28, 2012, prior to the maturity date, convertible notes with a face amount of ¥110,000 thousand ($1,270 thousand) were converted into 281,150 equity shares of the Company at a conversion price of ¥391 ($5) per share. UBIC recorded an increase of ¥52,800 thousand ($609 thousand) in "Common stock" and ¥51,563 thousand ($595 thousand), net of issuance cost of ¥1,237 thousand ($15 thousand) in "Additional paid-in capital." The carrying amount of these notes, with the accretion of discounts, is included in "Long-term debt" in the Company's consolidated balance sheets. For the years ended March 31, 2011 and 2012, the Company recognized debt discount amortization of ¥2,200 thousand and ¥1,100 thousand ($13 thousand), respectively.
F-20
UBIC, Inc. and subsidiaries
Notes to Consolidated Financial Statements (Continued)
7. SHORT-TERM AND LONG-TERM DEBT (Continued)
Financial Covenants
There are restrictive covenants related to the borrowings of ¥350,000 thousand ($4,040 thousand) as of March 31, 2012 including requirements to maintain a minimum level of net assets and ordinary income in the stand-alone and consolidated financial statements of UBIC, measured under accounting principles generally accepted in Japan. UBIC is required to maintain net assets at a level which is at least 75% of (a) net assets as of March 31, 2011 or (b) net assets at the end of previous year, whichever is higher. The ordinary income covenant states that UBIC shall not record ordinary losses in any two consecutive fiscal years. UBIC is in compliance with these restrictive covenants at March 31, 2012.
8. RETIREMENT AND SEVERANCE BENEFITS
The Company has unfunded defined benefits severance indemnities plans to provide retirement benefits to substantially all employees. Under the severance indemnities plans, employees are entitled to severance payments based on their earnings and the length of service until retirement or termination of employment for reasons other than dismissal for cause.
Reconciliations of the beginning and ending balances of the benefit obligation for the years ended March 31, 2011 and 2012, are as follows:
|
Thousands of Yen |
Thousands of
U.S. Dollars |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2011 | 2012 | 2012 | |||||||
Change in benefit obligation: |
||||||||||
Benefit obligation at the beginning of the year |
¥ | 6,485 | ¥ | 8,027 | $ | 92 | ||||
Service cost |
2,626 | 3,604 | 42 | |||||||
Interest cost |
46 | 57 | 1 | |||||||
Actuarial (gain) loss |
(434 | ) | 484 | 6 | ||||||
Benefits paid |
(687 | ) | (273 | ) | (4 | ) | ||||
Foreign currency exchange rate changes |
(9 | ) | (43 | ) | (0 | ) | ||||
Benefit obligation at the end of the year |
¥ | 8,027 | ¥ | 11,856 | $ | 137 | ||||
The accumulated benefit obligations as of March 31, 2011 and 2012 are ¥7,418 thousand and ¥10,653 thousand ($123 thousand), respectively.
Amounts recognized in the consolidated balance sheets as of March 31, 2011 and 2012 are as follows:
|
Thousands of Yen |
Thousands of
U.S. Dollars |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2011 | 2012 | 2012 | |||||||
Accrued retirement costcurrent |
¥ | 813 | ¥ | 1,441 | $ | 17 | ||||
Accrued retirement costnoncurrent |
7,214 | 10,415 | 120 | |||||||
Amount recognized |
¥ | 8,027 | ¥ | 11,856 | $ | 137 | ||||
F-21
UBIC, Inc. and subsidiaries
Notes to Consolidated Financial Statements (Continued)
8. RETIREMENT AND SEVERANCE BENEFITS (Continued)
Net periodic retirement cost for the years ended March 31, 2011 and 2012 consists of the following components:
|
Thousands of Yen |
Thousands of
U.S. Dollars |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2011 | 2012 | 2012 | |||||||
Service cost |
¥ | 2,626 | ¥ | 3,604 | $ | 42 | ||||
Interest cost |
46 | 57 | 1 | |||||||
Net periodic retirement cost |
¥ | 2,672 | ¥ | 3,661 | $ | 43 | ||||
Amounts recognized in other comprehensive income (loss) for the years ended March 31, 2011 and 2012 are as follows:
|
Thousands of Yen |
Thousands of
U.S. Dollars |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2011 | 2012 | 2012 | |||||||
Actuarial gain (loss) |
¥ | 418 | ¥ | (287 | ) | $ | (3 | ) |
Amounts recognized in accumulated other comprehensive income (loss) as of March 31, 2011 and 2012 are as follows:
|
Thousands of Yen |
Thousands of
U.S. Dollars |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2011 | 2012 | 2012 | |||||||
Accumulated actuarial gain (loss) |
¥ | 24 | ¥ | (263 | ) | $ | (3 | ) |
The Company uses its year-end as the measurement date for the benefit obligation. Weighted-average assumptions used to determine the year-end benefit obligations are as follows:
|
2011 | 2012 | |||||
---|---|---|---|---|---|---|---|
Discount rate |
0.75 | % | 0.70 | % | |||
Rate of compensation increase |
1.50 | % | 2.77 | % |
Weighted-average assumptions used to determine the net periodic retirement cost for the years ended March 31, 2011 and 2012, are as follows:
|
2011 | 2012 | |||||
---|---|---|---|---|---|---|---|
Discount rate |
0.75 | % | 0.75 | % | |||
Rate of compensation increase |
1.50 | % | 1.50 | % |
F-22
UBIC, Inc. and subsidiaries
Notes to Consolidated Financial Statements (Continued)
8. RETIREMENT AND SEVERANCE BENEFITS (Continued)
The expected future benefit payments, which reflect expected future service, are as follows:
Years ending March 31
|
Thousands of
Yen |
Thousands of
U.S. Dollars |
|||||
---|---|---|---|---|---|---|---|
2013 |
¥ | 1,441 | $ | 17 | |||
2014 |
1,684 | 19 | |||||
2015 |
1,837 | 21 | |||||
2016 |
2,496 | 29 | |||||
2017 |
2,451 | 28 | |||||
2018-20 |
10,562 | 122 |
9. ASSET RETIREMENT OBLIGATIONS
The Company's asset retirement obligations, which are included in "Other liabilities" in the Company's consolidated balance sheets, are related to leasehold office premises which the Company is contractually obligated to restore at the end of the lease to their original conditions. The movements in asset retirement obligations for the years ended March 31, 2011 and 2012 are as follows:
|
Thousands of Yen |
Thousands of
U.S. Dollars |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2011 | 2012 | 2012 | |||||||
Balance at the beginning of the year |
¥ | 9,919 | ¥ | 10,101 | $ | 117 | ||||
Liabilities incurred during the year |
| 7,309 | 84 | |||||||
Accretion expense |
182 | 193 | 2 | |||||||
Balance at the end of the year |
¥ | 10,101 | ¥ | 17,603 | $ | 203 | ||||
10. FINANCIAL INSTRUMENTS
Fair value estimates and information about valuation methodologies regarding financial instruments are as follows:
Quoted market prices, where available, are used to estimate the fair values of financial instruments. In the absence of quoted market prices, fair values for such financial instruments are estimated using an income approach, based on discounted cash flows, or other valuation techniques.
Cash and cash equivalents, Trade receivables, Trade payables and Short-term debt
The carrying amount approximates the fair value because of the short maturity of these instruments.
Long-term debt
The fair value of bank borrowings is estimated based on the present value of future cash flows using the Company's borrowing rate for the same contractual terms.
F-23
UBIC, Inc. and subsidiaries
Notes to Consolidated Financial Statements (Continued)
10. FINANCIAL INSTRUMENTS (Continued)
The fair value of the convertible notes is estimated based on the quoted market price of the Company's equity shares multiplied by the number of equity shares issued if converted on the balance sheet date as the Company's share price was higher than the conversion price.
|
Thousands of Yen |
Thousands of
U.S. Dollars |
|||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2011 | 2012 | 2012 | ||||||||||||||||
|
Carrying
Amount |
Fair
Value |
Carrying
Amount |
Fair
Value |
Carrying
Amount |
Fair
Value |
|||||||||||||
Assets: |
|||||||||||||||||||
Cash and cash equivalents |
¥ | 675,212 | ¥ | 675,212 | ¥ | 2,410,304 | ¥ | 2,410,304 | $ | 27,820 | $ | 27,820 | |||||||
Trade receivables: |
|||||||||||||||||||
Trade accounts receivable |
910,539 | 910,539 | 984,562 | 984,562 | 11,364 | 11,364 | |||||||||||||
Receivables from related party |
8,038 | 8,038 | 2,833 | 2,833 | 33 | 33 | |||||||||||||
Liabilities: |
|||||||||||||||||||
Trade payables: |
|||||||||||||||||||
Trade accounts payable |
220,114 | 220,114 | 436,852 | 436,852 | 5,042 | 5,042 | |||||||||||||
Payables to related party |
| | 5,284 | 5,284 | 61 | 61 | |||||||||||||
Short-term debt |
| | 62,500 | 62,500 | 721 | 721 | |||||||||||||
Long-term debt: |
|||||||||||||||||||
Bank borrowings |
251,700 | 252,011 | 430,000 | 432,214 | 4,964 | 4,989 | |||||||||||||
Convertible notes |
211,200 | 1,372,012 | 106,700 | 2,558,465 | 1,232 | 29,530 |
Refer to Note 12 for fair values of equity securities and derivative financial instruments.
Significant Customers and Concentration of Credit Risk Trade accounts receivable from three largest customers accounted for approximately 78.6% of the Company's trade accounts receivable as of March 31, 2012.
The Company conducts business based on periodic evaluations of the customers' financial conditions and generally does not require collateral to secure their obligations to the Company. The Company does not believe a significant risk of loss exists from a concentration of credit.
11. DERIVATIVE FINANCIAL INSTRUMENTS
Interest Rate Swaps
The Company's exposure to interest rate risk is related to underlying long-term bank borrowings. In order to minimize the variability caused by interest rate risk, the Company enters into interest rate swaps to manage fluctuations in cash flows. The interest rate swaps entered into are receive-variable, pay-fixed interest rate swaps. Under the interest rate swaps, the Company receives variable interest rate payments on long-term bank borrowings in the amount of ¥230,000 thousand and ¥110,000 thousand ($1,270 thousand) as of March 31, 2011 and 2012, respectively, and makes fixed interest rate payments, thereby effectively creating fixed interest rate long-term bank borrowings.
The Company does not designate the interest rate swap contracts as hedging instruments for the purpose of applying hedge accounting. Accordingly, all interest rate swap contracts are measured at fair
F-24
UBIC, Inc. and subsidiaries
Notes to Consolidated Financial Statements (Continued)
11. DERIVATIVE FINANCIAL INSTRUMENTS (Continued)
value as either assets or liabilities and changes in their fair value are immediately recognized in earnings.
As of March 31, 2011 and 2012, the fair values of interest rate swaps were ¥2,954 thousand and ¥815 thousand ($9 thousand), respectively and are included in "Other liabilities" in the consolidated balance sheets. Changes in the fair value of interest rate swaps resulted in the recognition of a gain of ¥3,100 thousand and a gain of ¥2,139 thousand ($25 thousand) for the years ended March 31, 2011 and 2012, respectively and are included in "Othernet" in the consolidated statements of income. During the years ended March 31, 2011 and 2012, interest paid on the interest rate swap contracts was ¥4,322 thousand and ¥2,652 thousand ($31 thousand), respectively, and is included in "Interest expense" in the consolidated statements of income.
12. FAIR VALUE MEASUREMENTS
ASC Topic 820, " Fair Value Measurements " establishes a fair value hierarchy that prioritizes the use of observable inputs in markets over the use of unobservable inputs when measuring fair value as follows:
Level 1Unadjusted quoted prices in active markets for identical assets or liabilities
Level 2Directly or indirectly observable inputs other than those included in Level 1, such as quoted market prices for similar assets and liabilities in active markets, quoted prices for identical assets in inactive markets, or inputs derived principally from or corroborated by observable market data
Level 3Unobservable inputs for which there is little or no market data, which require the Company to develop its own assumptions and best estimate of what inputs market participants would use in pricing an asset or liability
Investments in equity securities
The Company has investments in certain equity securities for which quoted market prices are available to determine their fair value and are included in Level 1.
Derivative financial instruments
Derivative financial instruments consist of interest rate swaps. The fair value of interest rate swaps is based on the present value of expected future cash flows using zero coupon rates, which is derived principally from observable market data. These interest rate swaps are included in Level 2.
F-25
UBIC, Inc. and subsidiaries
Notes to Consolidated Financial Statements (Continued)
12. FAIR VALUE MEASUREMENTS (Continued)
Assets and liabilities measured at fair value on a recurring basis
Assets and liabilities measured at fair value on a recurring basis as of March 31, 2011 and 2012, are as follows:
|
Thousands of Yen | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
|
Fair Value Hierarchy
Classification |
|||||||||||||
|
Carrying
Value |
Total Fair
Value |
||||||||||||||
Items Measured at Fair Value on a Recurring Basis
|
Level 1 | Level 2 | Level 3 | |||||||||||||
March 31, 2011: |
||||||||||||||||
Assets: |
||||||||||||||||
Available-for-sale securities: |
||||||||||||||||
Equity securities |
¥ | 223,200 | ¥ | 223,200 | ¥ | 223,200 | ¥ | | ¥ | |||||||
Liabilities: |
||||||||||||||||
DerivativesInterest rate swaps |
2,954 | 2,954 | | 2,954 | | |||||||||||
March 31, 2012: |
||||||||||||||||
Assets: |
||||||||||||||||
Available-for-sale securities: |
||||||||||||||||
Equity securities |
273,600 | 273,600 | 273,600 | | | |||||||||||
Liabilities: |
||||||||||||||||
DerivativesInterest rate swaps |
815 | 815 | | 815 | |
|
Thousands of U.S. Dollars | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
|
Fair Value Hierarchy
Classification |
|||||||||||||
|
Carrying
Value |
Total Fair
Value |
||||||||||||||
Items Measured at Fair Value on a Recurring Basis
|
Level 1 | Level 2 | Level 3 | |||||||||||||
March 31, 2012: |
||||||||||||||||
Assets: |
||||||||||||||||
Available-for-sale securities |
||||||||||||||||
Equity securities |
$ | 3,158 | $ | 3,158 | $ | 3,158 | $ | | $ | | ||||||
Liabilities: |
||||||||||||||||
DerivativesInterest rate swaps |
9 | 9 | | 9 | |
F-26
UBIC, Inc. and subsidiaries
Notes to Consolidated Financial Statements (Continued)
13. INCOME TAXES
Income (loss) from operations before income taxes and income taxes for the years ended March 31, 2011 and 2012 consist of the following components:
|
Thousands of Yen | Thousands of U.S. Dollars | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2011 | 2012 | 2012 | |||||||
Income (loss) from operations before income taxes: |
||||||||||
Domestic |
¥ | 996,687 | ¥ | 2,312,763 | $ | 26,695 | ||||
Foreign |
(6,085 | ) | 61,316 | 708 | ||||||
Total |
¥ | 990,602 | ¥ | 2,374,079 | $ | 27,403 | ||||
Income taxes-current |
||||||||||
Domestic |
¥ | 339,470 | ¥ | 996,521 | $ | 11,502 | ||||
Foreign |
45 | 14,819 | 171 | |||||||
Total |
¥ | 339,515 | ¥ | 1,011,340 | $ | 11,673 | ||||
Income taxes-deferred |
||||||||||
Domestic |
¥ | (137,411 | ) | ¥ | (6,609 | ) | $ | (76 | ) | |
Foreign |
723 | (1,290 | ) | (15 | ) | |||||
Total |
¥ | (136,688 | ) | ¥ | (7,899 | ) | $ | (91 | ) | |
For the years ended March 31, 2011 and 2012, ¥202,827 thousand and ¥1,003,441 thousand ($11,582 thousand) were recorded as income tax expenses attributable to operations and ¥47,074 thousand and ¥20,656 thousand ($238 thousand) were recognized as income tax expenses attributable to other comprehensive income.
F-27
UBIC, Inc. and subsidiaries
Notes to Consolidated Financial Statements (Continued)
13. INCOME TAXES (Continued)
The tax effects of temporary differences and operating loss carryforwards giving rise to deferred tax balances at March 31, 2011 and 2012 are as follows:
|
Thousands of Yen | Thousands of U.S. Dollars | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2011 | 2012 | 2012 | ||||||||||||||||
|
Deferred Tax
Asset |
Deferred Tax
Liability |
Deferred Tax
Asset |
Deferred Tax
Liability |
Deferred Tax
Asset |
Deferred Tax
Liability |
|||||||||||||
Impairment loss on investments in securities |
¥ | 50,669 | ¥ | | ¥ | 44,381 | ¥ | | $ | 512 | $ | | |||||||
Depreciation and amortization |
31,279 | 815 | 10,856 | 8,893 | 125 | 103 | |||||||||||||
Accrued municipal governments tax |
27,432 | | 59,057 | | 682 | | |||||||||||||
Research and development cost for internal use software |
6,502 | | 3,053 | | 35 | | |||||||||||||
Deferred revenue |
11,021 | | 13,537 | | 156 | | |||||||||||||
Accrued bonus |
6,240 | | 25,657 | | 296 | | |||||||||||||
Accrued vacation |
5,191 | | 5,196 | | 60 | | |||||||||||||
Asset retirement obligations |
4,110 | | 6,274 | | 72 | | |||||||||||||
Operating loss carryforwards |
9,235 | | 2,701 | | 31 | | |||||||||||||
Unrealized gain on available-for-sale securities |
| 47,058 | | 59,180 | | 683 | |||||||||||||
IPO Costs |
| | | 30,340 | | 350 | |||||||||||||
Others |
15,521 | 6,057 | 13,509 | 6,576 | 157 | 75 | |||||||||||||
Total |
167,200 | 53,930 | 184,221 | 104,989 | 2,126 | 1,211 | |||||||||||||
Valuation allowance |
(22,931 | ) | | (801 | ) | | (9 | ) | | ||||||||||
Total |
¥ | 144,269 | ¥ | 53,930 | ¥ | 183,420 | ¥ | 104,989 | $ | 2,117 | $ | 1,211 | |||||||
In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in specific tax jurisdictions during the period in which these deductible differences become deductible. Based on these factors, management believes it is more likely than not the Company will realize the benefits of these deductible differences, net of the existing valuation allowance as of March 31, 2011 and 2012.
For the year ended March 31, 2011, UBIC utilized operating loss carryforwards of ¥216,152 thousand to offset current taxable income. In addition, during the year ended March 31, 2011, the U.S. subsidiary filed a carryback claim and received a tax refund of ¥26,066 thousand related to operating losses.
As of March 31, 2011, the valuation allowance for deferred tax assets related primarily to operating loss carryforwards of the U.S. subsidiary, and was provided at the amounts which were considered not more likely than not to be realized.
F-28
UBIC, Inc. and subsidiaries
Notes to Consolidated Financial Statements (Continued)
13. INCOME TAXES (Continued)
Realization of the remaining deferred tax assets at UBIC was determined to be more likely than not and the valuation allowance related to UBIC's net deferred tax assets was eliminated during the year ended March 31, 2011.
For the year ended March 31, 2012, the U.S. subsidiary utilized operating loss carryforwards of ¥18,705 thousand ($216 thousand) to offset current taxable income.
As of March 31, 2012, the valuation allowance for deferred tax assets related primarily to operating loss carryforwards of the subsidiary in Japan, and was provided at the amounts which are considered not more likely than not to be realized.
An analysis of the movement in the valuation allowance for deferred tax assets for the years ended March 31, 2011 and 2012 is as follows:
|
Thousands of Yen |
Thousands of
U.S. Dollars |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2011 | 2012 | 2012 | |||||||
Balance at the beginning of the year |
¥ | 229,176 | ¥ | 22,931 | $ | 265 | ||||
Additions |
14,608 | 25 | 0 | |||||||
Deductions |
(220,853 | ) | (22,155 | ) | (256 | ) | ||||
Balance at the end of the year |
¥ | 22,931 | ¥ | 801 | $ | 9 | ||||
As of March 31, 2012, the U.S. subsidiary and a domestic subsidiary had operating loss carryforwards of ¥35,926 thousand ($415 thousand) and ¥2,091 thousand ($24 thousand), respectively. These operating loss carryforwards are available to offset future taxable income and will expire in March 31, 2020 for U.S. state taxes and March 31, 2019 for Japanese income tax, respectively.
Income taxes imposed by the national, prefectural and municipal governments of Japan resulted in a statutory tax rate of approximately 40.69 percent for the years ended March 31, 2011 and 2012.
F-29
UBIC, Inc. and subsidiaries
Notes to Consolidated Financial Statements (Continued)
13. INCOME TAXES (Continued)
Reconciliations between the amount of reported income taxes and the amount of income taxes computed using the normal statutory tax rate for the years ended March 31, 2011 and 2012 are as follows:
|
Thousands of Yen |
Thousands of
U.S. Dollars |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2011 | 2012 | 2012 | |||||||
Amount computed by using normal Japanese statutory tax rate |
¥ | 403,076 | ¥ | 966,013 | $ | 11,150 | ||||
Increase (decrease) in taxes resulting from: |
||||||||||
Change in valuation allowance* |
(206,069 | ) | (22,130 | ) | (255 | ) | ||||
Share-based compensation expense |
| 17,459 | 202 | |||||||
Officers' remuneration not deductible for tax purpose |
2,736 | 25,460 | 294 | |||||||
Others-net |
3,084 | 16,639 | 191 | |||||||
Income tax expense as reported |
¥ | 202,827 | ¥ | 1,003,441 | $ | 11,582 | ||||
Change
in valuation allowance for the year ended March 31, 2012 includes a decrease of ¥6,227 thousand ($72 thousand) in the valuation allowance of the
U.S. subsidiary as of March 31, 2011 for the deferred tax assets arising from the U.S. subsidiary operating loss carryforwards that were utilized during the year.
Amendments to the Japanese tax regulations were enacted on December 2, 2011. As a result of these amendments, the corporate income tax rate decreased by 4.5 percent from 30 percent to 25.5 percent starting from the fiscal year beginning April 1, 2012. In addition, the combined statutory tax rate increased by a 10 percent surtax effective for the three years from April 1, 2012 to March 31, 2015. Consequently, the combined statutory tax rate was 38.01 percent for the three years from April 1, 2012 to March 31, 2015 and 35.64 percent for the years beginning on or after April 1, 2015. The effect of these changes did not have material effects on the consolidated statement of income for the year ended March 31, 2012.
14. SHARE-BASED COMPENSATION
In January 2006, the Company granted stock options to purchase a total of 112,000 equity shares to three employee/directors and two employees ("2 nd series Stock Option Grant"). Options to purchase 112,000 shares were vested on January 27, 2008 and were exercisable for three years from that date.
In March 2006, the Company granted stock options to purchase a total of 16,000 equity shares to one employee/director and five employees ("3 rd series Stock Option Grant"). Options to purchase 14,400 shares were vested on March 16, 2008 and were exercisable for three years from that date. The remaining options were forfeited.
F-30
UBIC, Inc. and subsidiaries
Notes to Consolidated Financial Statements (Continued)
14. SHARE-BASED COMPENSATION (Continued)
In June 2010, the Company granted stock options to purchase a total of 68,000 equity shares to one employee/director and one employee ("4 th series Stock Option Grant"). Options are vested three years after the grant date and will be exercisable for three years from the vesting date.
In April 2011, the Company granted stock options to purchase a total of 80,000 equity shares to one employee/director and five employees ("5 th series Stock Option Grant"). Options are vested three years after the grant date and will be exercisable for three years from the vesting date.
The Company issues new shares upon the exercise of stock options.
Share-based compensation is measured at the grant date, based on the fair value of the award, and the compensation expense is recognized on a straight-line basis over the vesting period. The following table presents total share-based compensation expense for the 4 th and 5 th series Stock Option Grants, which are noncash charges, and included in the consolidated statements of income for the years ended March 31, 2011 and 2012:
|
Thousands of Yen |
Thousands of
U.S. Dollars |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2011 | 2012 | 2012 | |||||||
Cost of revenue |
¥ | | ¥ | 9,654 | $ | 111 | ||||
Selling, general and administrative expenses |
1,134 | 34,614 | 400 | |||||||
Pre-tax share-based compensation expense |
1,134 | 44,268 | 511 | |||||||
Income tax benefit |
(461 | ) | (485 | ) | (6 | ) | ||||
Total share-based compensation expense, net of tax |
¥ | 673 | ¥ | 43,783 | $ | 505 | ||||
The Company estimates the number of forfeitures prior to vesting at the grant date to be zero. The effect of a subsequent change in estimated forfeitures is recognized through a cumulative adjustment in the period which the forfeitures occur. As of March 31, 2011 and 2012, the total unrecognized compensation expenses related to the unvested portion of the 4 th and 5 th series Stock Option Grants were ¥2,948 thousand and ¥87,400 thousand ($1,009 thousand), respectively. As of March 31, 2011 and 2012, the expense will be recognized over weighted-average periods of 2.2 years and 2.0 years, respectively.
The estimated fair value of stock options is determined using the Black-Scholes valuation model. Key inputs and assumptions to estimate the fair value of stock options include the exercise price of the award, the expected option term, the volatility of the Company's share price, the risk-free interest rate and the Company's dividend yield. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by individuals who receive equity awards, and subsequent events are not indicative of the reasonableness of the original estimates of fair value made by the Company.
F-31
UBIC, Inc. and subsidiaries
Notes to Consolidated Financial Statements (Continued)
14. SHARE-BASED COMPENSATION (Continued)
The following table presents the weighted-average assumptions used in estimating the fair value of options granted during the year ended March 31, 2011 and 2012.
|
2011 | 2012 | |||||
---|---|---|---|---|---|---|---|
Expected life of stock option (years) |
4.5 | 4.5 | |||||
Expected volatility |
83.5 | % | 120.8 | % | |||
Risk-free interest rate |
0.5 | % | 0.5 | % | |||
Expected dividend yield |
0 | % | 1.9 | % |
|
Thousands of Yen |
Thousands of
U.S. Dollars |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2011 | 2012 | 2012 | |||||||
Weighted-average grant-date fair value per option to purchase one share |
¥ | 204 | ¥ | 1,609 | $ | 19 |
The Company has estimated the expected term of its stock options as the middle of the exercise period of the stock options. The expected volatility is estimated based upon on the historical volatility of the Company's share price for the last three years adjusted for the effect of changes expected in the future. The expected risk-free interest rate is based on the Japanese government bond interest rate for the expected term. The expected dividend yield is based on the actual dividends paid and expected payment in the future.
A summary of stock option activity during the year ended March 31, 2012, is presented below:
|
Shares |
Weighted-
average exercise price |
Weighted-average
remaining contractual term (in years) |
Aggregate
intrinsic value (Thousands of Yen) |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
OutstandingMarch 31, 2011 |
20,000 | ¥ | 391 | 5.2 | ¥ | 40,980 | |||||||
Granted |
80,000 | 2,203 | |||||||||||
Exercised |
| | |||||||||||
Forfeited |
| | |||||||||||
Expired |
| | |||||||||||
OutstandingMarch 31, 2012 |
100,000 | ¥1,840 | 4.9 | 725,980 | |||||||||
Options vested and expected to vestMarch 31, 2012 |
100,000 | ¥ | 1,840 | 4.9 | 725,980 | ||||||||
Options exercisableMarch 31, 2012 |
| | | | |||||||||
F-32
UBIC, Inc. and subsidiaries
Notes to Consolidated Financial Statements (Continued)
14. SHARE-BASED COMPENSATION (Continued)
|
Shares |
Weighted-
average exercise price |
Weighted-average
remaining contractual term (in years) |
Aggregate
intrinsic value (Thousands of U.S. Dollars) |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
OutstandingMarch 31, 2011 |
20,000 | $ | 5 | 5.2 | $ | 473 | |||||||
Granted |
80,000 | 25 | |||||||||||
Exercised |
| | |||||||||||
Forfeited |
| | |||||||||||
Expired |
| | |||||||||||
OutstandingMarch 31, 2012 |
100,000 | $ | 21 | 4.9 | 8,379 | ||||||||
Options vested and expected to vestMarch 31, 2012 |
100,000 | $ | 21 | 4.9 | $ | 8,379 | |||||||
Options exercisableMarch 31, 2012 |
| | | | |||||||||
The aggregate intrinsic value was calculated using the difference between the market price and the exercise price as of March 31, 2011 and 2012 for only those awards that have an exercise price that is less than the market price.
Exercises of Stock Options
The total intrinsic value of stock options exercised during the year ended March 31, 2011 was ¥25,668 thousand. During the year ended March 31, 2011, the Company received cash of ¥12,800 thousand, being the exercise price for the exercised stock options. The cash received for payment of the exercise price is included as a component of cash flows from financing activities. No stock options were exercised during the year ended March 31, 2012.
Nonvested Stock Options
A summary of the status of the Company's nonvested stock options at March 31, 2012 is as follows:
|
Shares |
Weighted-
Average Grant Date Fair Value |
|||||
---|---|---|---|---|---|---|---|
NonvestedApril 1, 2011 |
20,000 | ¥ | 204 | ||||
Granted |
80,000 | 1,609 | |||||
Vested |
| | |||||
Forfeited |
| | |||||
Expired |
| | |||||
OutstandingMarch 31, 2012 |
100,000 | ¥ | 1,328 | ||||
F-33
UBIC, Inc. and subsidiaries
Notes to Consolidated Financial Statements (Continued)
15. EQUITY
Japanese companies are subject to the Companies Act of Japan (the "Companies Act"). The significant provisions in the Companies Act that affect financial and accounting matters are summarized below:
Dividends
Under the Companies Act, companies can pay dividends at any time during the fiscal year in addition to the year-end dividend upon resolution at the shareholders meeting. For companies that meet certain criteria such as; (1) having a Board of Directors, (2) having independent auditors, (3) having a Board of Statutory Auditors, and (4) the term of service of the directors is prescribed as one year rather than two years of normal term by its articles of incorporation, the Board of Directors may declare dividends (except for dividends in kind) at any time during the fiscal year if the company has prescribed so in its articles of incorporation. However, the Company cannot do so because it does not meet criteria (4) above. The Companies Act permits companies to distribute dividends-in-kind (non-cash assets) to shareholders subject to certain limitations and additional requirements. Semiannual interim dividends may also be paid once a year upon resolution by the Board of Directors if the articles of incorporation of the company so stipulate. The Companies Act provides certain limitations on the amounts available for dividends or the purchase of treasury stock. The limitation is defined as the amount available for distribution to the shareholders, but the amount of net assets after dividends must be maintained at no less than ¥3 million.
Increases / decreases and transfer of common stock, reserve and surplus
The Companies Act requires that an amount equal to 10% of dividends must be appropriated as legal reserve (a component of retained earnings) or as additional paid-in capital (a component of capital surplus) depending on the equity account charged upon the payment of such dividends until the total of the aggregate amount of legal reserve and additional paid-in capital equals 25% of common stock. Under the Companies Act, the total amount of additional paid-in capital and legal reserve may be reversed without limitation. The Companies Act also provides that common stock, legal reserve, additional paid-in capital, and other capital surplus and retained earnings can be transferred among the accounts under certain conditions upon resolution of the shareholders.
The amount of retained earnings available for dividends under the Companies Act is based on the amount of retained earnings recorded in the Company's general books of account prepared using accepted Japanese accounting practices. The adjustments included in the accompanying consolidated financial statements for U.S. GAAP purposes but not recorded in the general books of account have no effect on the determination of retained earnings available for dividends under the Companies Act. Retained earnings shown in UBIC's general books of account, as determined under accounting principles generally accepted in Japan ("J GAAP"), amounted to ¥1,525,441 thousand ($17,607 thousand) at March 31, 2012.
Stock Splits
On September 12, 2011, the Company's Board of Directors declared a two-for-one split of its shares of common stock. The split was effective from October 1, 2011, for all shareholders of record on September 30, 2011.
F-34
UBIC, Inc. and subsidiaries
Notes to Consolidated Financial Statements (Continued)
15. EQUITY (Continued)
On March 15, 2012, the Company's Board of Directors declared a two-for-one split of its shares of common stock. The stock split is effective from April 1, 2012, for all shareholders of record on March 31, 2012.
As a result of the stock split, all amounts related to shares, share prices and earnings per share have been retroactively restated throughout these consolidated financial statements.
16. OTHER COMPREHENSIVE INCOME
The changes in each component of other comprehensive income (loss) for the years ended March 31, 2011 and 2012 were as follows:
|
Thousands of Yen | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Foreign
currency translation adjustments |
Unrealized
holding gain on securities |
Adjustments
related to retirement and severance benefits |
Accumulated
other comprehensive income (loss) |
|||||||||
Balance at April 1, 2010 |
¥ | (3,980 | ) | ¥ | | ¥ | (394 | ) | ¥ | (4,374 | ) | ||
Period change |
(894 | ) | 68,592 | 418 | 68,116 | ||||||||
Balance at March 31, 2011 |
(4,874 | ) | 68,592 | 24 | 63,742 | ||||||||
Period change |
6,166 | 29,892 | (287 | ) | 35,771 | ||||||||
Balance at March 31, 2012 |
¥ | 1,292 | ¥ | 98,484 | ¥ | (263 | ) | ¥ | 99,513 | ||||
|
Thousands of U.S. Dollars | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Foreign
currency translation adjustments |
Unrealized
holding gain on securities |
Adjustments
related to retirement and severance benefits |
Accumulated
other comprehensive income |
|||||||||
Balance at April 1, 2011 |
$ | (56 | ) | $ | 792 | $ | 0 | $ | 736 | ||||
Period change |
70 | 345 | (3 | ) | 412 | ||||||||
Balance at March 31, 2012 |
$ | 14 | $ | 1,137 | $ | (3 | ) | $ | 1,148 | ||||
F-35
UBIC, Inc. and subsidiaries
Notes to Consolidated Financial Statements (Continued)
16. OTHER COMPREHENSIVE INCOME (Continued)
The tax effects allocated to each component of other comprehensive income (loss) for the years ended March 31, 2011 and 2012 were as follows:
|
Thousands of Yen | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2011 | |||||||||
|
Before Tax
Amount |
Tax Expense |
Net of Tax
Amount |
|||||||
Foreign currency translation adjustments |
¥ | (894 | ) | ¥ | | ¥ | (894 | ) | ||
Unrealized holding gain on securities: |
||||||||||
Amount arising during the period |
115,650 | (47,058 | ) | 68,592 | ||||||
Net unrealized holding gain during the period |
115,650 | (47,058 | ) | 68,592 | ||||||
Adjustments related to retirement and severance benefits: |
||||||||||
Amount arising during the period |
434 | (16 | ) | 418 | ||||||
Net adjustments related to retirement and severance benefits |
434 | (16 | ) | 418 | ||||||
Other comprehensive income |
¥ | 115,190 | ¥ | (47,074 | ) | ¥ | 68,116 | |||
|
Thousands of Yen | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2012 | |||||||||
|
Before Tax
Amount |
Tax Expense |
Net of Tax
Amount |
|||||||
Foreign currency translation adjustments |
¥ | 6,511 | ¥ | (345 | ) | ¥ | 6,166 | |||
Unrealized holding gain on securities: |
||||||||||
Amount arising during the period |
50,400 | (20,508 | ) | 29,892 | ||||||
Net unrealized holding gain during the period |
50,400 | (20,508 | ) | 29,892 | ||||||
Adjustments related to retirement and severance benefits: |
||||||||||
Amount arising during the period |
(484 | ) | 197 | (287 | ) | |||||
Net adjustments related to retirement and severance benefits |
(484 | ) | 197 | (287 | ) | |||||
Other comprehensive income |
¥ | 56,427 | ¥ | (20,656 | ) | ¥ | 35,771 | |||
F-36
UBIC, Inc. and subsidiaries
Notes to Consolidated Financial Statements (Continued)
16. OTHER COMPREHENSIVE INCOME (Continued)
|
Thousands of U.S. Dollars | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2012 | |||||||||
|
Before Tax
Amount |
Tax Expense |
Net of Tax
Amount |
|||||||
Foreign currency translation adjustments |
$ | 74 | $ | (4 | ) | $ | 70 | |||
Unrealized holding gain on securities: |
||||||||||
Amount arising during the period |
582 | (237 | ) | 345 | ||||||
Net unrealized holding gain during the period |
582 | (237 | ) | 345 | ||||||
Adjustments related to retirement and severance benefits: |
||||||||||
Amount arising during the period |
(6 | ) | 3 | (3 | ) | |||||
Net adjustments related to retirement and severance benefits |
(6 | ) | 3 | (3 | ) | |||||
Other comprehensive income |
$ | 650 | $ | (238 | ) | $ | 412 | |||
17. NET INCOME PER SHARE
Basic net income per share is computed on the basis of weighted-average outstanding common shares. Diluted net income per share is computed on the basis of basic weighted-average outstanding common shares adjusted for the dilutive effect of stock options and convertible notes, if dilutive. Potentially dilutive common shares from series of stock option plans are determined by applying the treasury stock method to the assumed exercise of outstanding stock options. Potentially dilutive common shares are determined by applying the if-converted method for the convertible notes. The numerator of the diluted net income per share calculation is increased by the amount of interest expense, net of tax, related to outstanding convertible notes if the net impact is dilutive.
The computation of basic and diluted net income (loss) per share for the years ended March 31, 2011 and 2012 was as follows:
|
2011 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
(Thousands of Yen)
Net Income (Numerator) |
Weighted-Average
Common Shares Outstanding (Denominator) |
Per Share
Amount |
|||||||
Basic net income attributable to UBIC, Inc. shareholders |
¥ | 788,708 | 2,359,465 | ¥ | 334 | |||||
Effect of dilutive securities: |
||||||||||
Stock options |
57,965 | |||||||||
Convertible notes |
753,328 | |||||||||
Plus: interest on convertible notes |
1,305 | |||||||||
Diluted net income attributable to UBIC, Inc. shareholders |
¥ | 790,013 | 3,170,758 | ¥ | 249 | |||||
F-37
UBIC, Inc. and subsidiaries
Notes to Consolidated Financial Statements (Continued)
17. NET INCOME PER SHARE (Continued)
|
2012 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
(Thousands of Yen)
Net Income (Numerator) |
Weighted-Average
Common Shares Outstanding (Denominator) |
Per Share
Amount |
|||||||
Basic net income attributable to UBIC, Inc. shareholders |
¥ | 1,367,687 | 2,656,165 | ¥ | 515 | |||||
Effect of dilutive securities: |
||||||||||
Stock options |
48,543 | |||||||||
Convertible notes |
536,881 | |||||||||
Plus: interest on convertible notes |
652 | |||||||||
Diluted net income attributable to UBIC, Inc. shareholders |
¥ | 1,368,339 | 3,241,589 | ¥ | 422 | |||||
|
2012 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
(Thousands of
U.S. Dollars) Net Income (Numerator) |
Weighted-Average
Common Shares Outstanding (Denominator) |
Per Share
Amount |
|||||||
Basic net income attributable to UBIC, Inc. shareholders |
$ | 17,137 | 2,656,165 | $ | 5.94 | |||||
Effect of dilutive securities: |
||||||||||
Stock options |
48,543 | |||||||||
Convertible notes |
536,881 | |||||||||
Plus: interest on convertible notes |
8 | |||||||||
Diluted net income attributable to UBIC, Inc. shareholders |
$ | 17,145 | 3,241,589 | $ | 4.87 | |||||
18. SEGMENT REPORTING
Operating segments are defined as components of an enterprise that engage in business activities from which it may earn revenues and incur expenses and for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company provides a variety of eDiscovery and forensic services which are provided by UBIC and its domestic subsidiaries for domestic (Japanese) clients, by UNA for clients represented by U.S.-based attorneys who contracted UNA, and by other foreign subsidiaries for foreign clients other than those who contracted UNA. The Company's operations in Japan, the U.S. and others have been identified as the three operating segments of the Company. Others include South Korea and Taiwan. The Company's chief executive officer, who is also the Company's chief operating decision maker, regularly reviews the performance of the three operating segments and makes decisions regarding allocation of resources. The Company's chief operating decision maker utilizes various measurements prepared based on J GAAP which include revenues, operating income or loss and segment assets to assess segment performance and allocate resources to segments.
During the year ended March 31, 2012, the Company established subsidiaries in countries other than Japan and the U.S. Management reevaluated the structure of its business and devised a new
F-38
UBIC, Inc. and subsidiaries
Notes to Consolidated Financial Statements (Continued)
18. SEGMENT REPORTING (Continued)
reportable segment structure. All periods presented have been revised to report segment results under the new reportable segment structure.
The Company's reportable segments are the same as its operating segments.
Segment information for the years ended March 31, 2011 and 2012 is presented below:
Revenues:
|
Thousands of Yen |
Thousands of
U.S. Dollars |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2011 | 2012 | 2012 | |||||||
Japan |
||||||||||
Outside customers |
¥ | 1,937,434 | ¥ | 4,245,265 | $ | 48,999 | ||||
Intersegment |
450,210 | 543,999 | 6,279 | |||||||
Total |
2,387,644 | 4,789,264 | 55,278 | |||||||
U.S. |
||||||||||
Outside customers |
804,494 | 882,389 | 10,185 | |||||||
Intersegment |
49,668 | 30,005 | 346 | |||||||
Total |
854,162 | 912,394 | 10,531 | |||||||
Other |
||||||||||
Outside customers |
| 381 | 4 | |||||||
Intersegment |
| 40,631 | 469 | |||||||
Total |
41,012 | 473 | ||||||||
Elimination |
(499,878 |
) |
(614,635 |
) |
(7,094 |
) |
||||
Total revenue after eliminations |
2,741,928 | 5,128,035 | 59,188 | |||||||
Adjustments*(1) |
(55,835 |
) |
8,193 |
94 |
||||||
Total consolidated revenue |
¥ | 2,686,093 | ¥ | 5,136,228 | $ | 59,282 | ||||
F-39
UBIC, Inc. and subsidiaries
Notes to Consolidated Financial Statements (Continued)
18. SEGMENT REPORTING (Continued)
Segment Performance Measure:
|
Thousands of Yen |
Thousands of
U.S. Dollars |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2011 | 2012 | 2012 | |||||||
Segment profit (loss) |
||||||||||
Japan |
¥1,019,194 | ¥2,312,670 | $ | 26,693 | ||||||
U.S. |
77,946 | 70,218 | 810 | |||||||
Other |
| (16,304 | ) | (188 | ) | |||||
Total segment profit after eliminations |
1,097,140 | 2,366,584 | 27,315 | |||||||
Adjustments*(2) |
(57,040 |
) |
3,354 |
39 |
||||||
Total consolidated operating income |
1,040,100 | 2,369,938 | 27,354 | |||||||
Unallocated amounts: |
||||||||||
Interest income |
3,410 | 2,052 | 24 | |||||||
Interest expense |
(14,262 | ) | (13,360 | ) | (154 | ) | ||||
Foreign currency exchange gains (losses) |
(39,942 | ) | 10,294 | 119 | ||||||
Dividend income |
| 4,500 | 52 | |||||||
Other-net |
1,296 | 655 | 8 | |||||||
Total consolidated income before income taxes |
¥ | 990,602 | ¥ | 2,374,079 | $ | 27,403 | ||||
Segment Assets:
|
Thousands of Yen |
Thousands of
U.S. Dollars |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2011 | 2012 | 2012 | |||||||
Segment assets |
||||||||||
Japan |
¥ | 2,300,299 | ¥ | 4,830,227 | $ | 55,751 | ||||
U.S. |
451,012 | 895,284 | 10,333 | |||||||
Others |
| 134,294 | 1,550 | |||||||
Elimination |
(434,500 |
) |
(976,279 |
) |
(11,268 |
) |
||||
Total segment assets after eliminations |
2,316,811 | 4,883,526 | 56,366 | |||||||
Adjustments*(3) |
56,785 |
96,150 |
1,109 |
|||||||
Total consolidated assets |
¥ | 2,373,596 | ¥ | 4,979,676 | $ | 57,475 | ||||
F-40
UBIC, Inc. and subsidiaries
Notes to Consolidated Financial Statements (Continued)
18. SEGMENT REPORTING (Continued)
Capital expenditures on long-lived assets:
|
Thousands of Yen |
Thousands of
U.S. Dollars |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2011 | 2012 | 2012 | |||||||
Capital expenditures |
||||||||||
Japan |
¥ | 249,406 | ¥ | 589,247 | $ | 6,801 | ||||
U.S. |
917 | 34,900 | 403 | |||||||
Others |
| 22,605 | 261 | |||||||
Adjustments |
(1,986 | ) | (25,230 | ) | (291 | ) | ||||
Total consolidated capital expenditures |
¥ | 248,337 | ¥ | 621,522 | $ | 7,174 | ||||
Capital expenditures relate to property and equipment, capitalized computer software costs and other intangible assets on an accrual basis.
Other Significant Items:
|
Thousands of Yen |
Thousands of
U.S. Dollars |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2011 | 2012 | 2012 | |||||||
Depreciation and amortization |
||||||||||
Japan |
¥ | 51,986 | ¥ | 130,139 | $ | 1,502 | ||||
U.S. |
955 | 3,332 | 38 | |||||||
Others |
| 2,336 | 27 | |||||||
Total depreciation and amortization |
¥ | 52,941 | ¥ | 135,807 | $ | 1,567 | ||||
Adjustments |
5,272 | (6,443 | ) | (74 | ) | |||||
Total consolidated depreciation and amortization |
¥ | 58,213 | ¥ | 129,364 | $ | 1,493 | ||||
Entity-Wide Information:
For the year ended March 31, 2011, revenue from Panasonic Corporation, Aisin Seiki, Yazaki Corporation, and TMI Associates amounted to ¥594,130 thousand, ¥379,832 thousand, ¥372,064 thousand, and ¥311,325 thousand, respectively, representing approximately 22.1 percent, 14.1 percent, 13.9 percent, and 11.6 percent, respectively, of the total revenue. For the year ended March 31, 2012, revenue from Yazaki Corporation, Panasonic Corporation, two customers represented by Quinn Emanuel Urquhart & Sullivan, LLP, and Sanyo Electric Co., Ltd. amounted to ¥950,893 thousand ($10,975 thousand), ¥628,112 thousand ($7,250 thousand), ¥608,558 thousand ($7,024 thousand) and ¥595,998 thousand ($6,879 thousand), respectively, representing approximately 18.5 percent, 12.2 percent, 11.8 percent, and 11.6 percent, respectively, of the total revenue. These customers are attributable to Japan except ¥379,832 thousand for Aisin Seiki for the year ended March 31, 2011, and ¥608,558 thousand ($7,024 thousand) for Quinn Emanuel Urquhart & Sullivan, LLP for the year ended March 31, 2012, which are reported in the U.S.
F-41
UBIC, Inc. and subsidiaries
Notes to Consolidated Financial Statements (Continued)
18. SEGMENT REPORTING (Continued)
The information concerning revenue by service categories for the years ended March 31, 2011 and 2012 is presented below:
|
Thousands of Yen |
Thousands of
U.S. Dollars |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2011 | 2012 | 2012 | |||||||
eDiscovery |
¥ | 2,529,778 | ¥ | 4,910,584 | $ | 56,678 | ||||
Investigation |
44,061 | 144,072 | 1,663 | |||||||
Sales of forensic tools |
49,208 | 38,082 | 440 | |||||||
Forensic training |
38,252 | 30,882 | 356 | |||||||
Other |
24,794 | 12,608 | 145 | |||||||
Total revenue |
¥ | 2,686,093 | ¥ | 5,136,228 | $ | 59,282 | ||||
Long-lived assets held in Japan and in the U.S. as of March 31, 2011 were ¥112,013 thousand and ¥2,193 thousand, respectively. Long-lived assets held in Japan, in the U.S., and in Other as of March 31, 2012 were ¥330,964 thousand ($3,820 thousand), ¥27,962 thousand ($323 thousand) and ¥17,837 thousand ($206 thousand), respectively. There were no long-lived assets in Other as of March 31, 2011. Long-lived assets include property and equipment.
19. RELATED PARTY TRANSACTIONS
As of March 31, 2011 and 2012, Focus Systems Corporation ("Focus Systems") owned approximately 15.8% and 11.5% of UBIC's outstanding common shares and UBIC's voting shares, respectively. The Company has a continuing agency agreement with Focus Systems effective from January 1, 2006 related to the sale of UBIC's eDiscovery services and forensic tools and services. Focus Systems also entered into an agreement with UBIC on February 1, 2010 to design and develop a software system used by UBIC. Furthermore, on April 1, 2010, UBIC issued unsecured convertible notes with a face amount of ¥80,000 thousand to Focus Systems for ¥76,000 thousand. Focus Systems converted the notes into 204,472 common shares of UBIC on March 14, 2011.
F-42
UBIC, Inc. and subsidiaries
Notes to Consolidated Financial Statements (Continued)
19. RELATED PARTY TRANSACTIONS (Continued)
The balances as of March 31, 2011 and 2012, and transactions of the Company with Focus Systems for years ended March 31, 2011 and 2012, are summarized as follows:
|
Thousands of Yen |
Thousands of
U.S. Dollars |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2011 | 2012 | 2012 | |||||||
Account Balances: |
||||||||||
Trade receivables |
¥ | 8,038 | ¥ | 2,833 | $ | 33 | ||||
Advance received |
10,141 | 15,720 | 181 | |||||||
Other accounts payable |
| 5,284 | 61 | |||||||
Accrued expense |
| 323 | 4 | |||||||
Transactions: |
||||||||||
Revenue |
¥ | 40,764 | ¥ | 27,862 | $ | 322 | ||||
Cost of revenue (maintenance costs) |
| 323 | 4 | |||||||
Selling, general and administrative expenses (outsourcing costs, storage fee, etc.) |
19,537 | | | |||||||
Dividends received |
| 4,500 | 52 | |||||||
Capitalized computer software |
| 5,544 | 64 |
Price and condition of transactions with Focus Systems are determined in the same manner as in the ordinary course of business.
Under a separate arrangement, the Chairman of Focus Systems rendered certain advisory services to UBIC and UBIC paid ¥6,000 thousand ($69 thousand) during the years ended March 31, 2011 and 2012.
A UBIC board member owns 10.3% of UBIC's outstanding common shares and UBIC's voting shares as of March 31, 2011. In January 2011, he exercised stock options granted in January 2006 and March 2006 and paid ¥11,500 thousand to UBIC as exercise price.
20. ADVERTISING COSTS
Advertising costs, which are included in "Selling, general and administrative expenses" incurred during the years ended March 31, 2011 and 2012 relate primarily to advertisements in magazines and journals and amounted to ¥16,230 thousand and ¥30,670 thousand ($354 thousand), respectively.
21. SUBSEQUENT EVENTS
Incorporation of Subsidiaries
On June 15, 2012, UBIC established UBIC Patent Partners Inc, for the purpose of promptly and precisely supporting resolution of patent issues for companies globally expanding their business and organizing the service system focusing on intellectual properties. UBIC invested ¥20,000 thousand ($231 thousand) and wholly owns UBIC Patent Partners.
F-43
UBIC, Inc. and subsidiaries
Notes to Consolidated Financial Statements (Continued)
21. SUBSEQUENT EVENTS (Continued)
Convertible notes
On May 15, 2012, an investor converted convertible notes with a face amount of ¥110,000 thousand ($1,270 thousand) into 281,114 common shares of the Company. To account for the conversion, UBIC recorded an increase of ¥53,350 thousand ($616 thousand) both in "Common stock" and "Additional paid-in capital."
Stock options
On June 21, 2012, the Company granted stock options to purchase a total of 16,000 equity shares with exercise price per share of ¥8,096 ($93) to two employee/directors, two statutory auditors, thirteen employees and five external advisors ("6 th series Stock Option Grant"). Options are vested three years after the grant date and will be exercisable for three years from the vesting date.
Dividends
On June 22, 2012, UBIC's shareholders approved the payment of a year-end cash dividend of ¥50 per share of common stock in the aggregate amount of ¥145,598 thousand ($1,680 thousand) to shareholders of record at March 31, 2012.
* * * * * *
F-44
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of UBIC, Inc.
We have audited the accompanying consolidated balance sheets of UBIC, Inc. and subsidiaries as of March 31, 2010 and 2011, and the related consolidated statements of operations, comprehensive income, equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of UBIC, Inc. and subsidiaries at March 31, 2010 and 2011, and the consolidated results of their operations and their cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young ShinNihon LLC
Tokyo,
Japan
May 24, 2012
F-45
UBIC, Inc. and subsidiaries
Consolidated Balance Sheets
March 31, 2010 and 2011
|
Thousands of Yen | ||||||
---|---|---|---|---|---|---|---|
|
2010 | 2011 | |||||
ASSETS |
|||||||
Current Assets: |
|||||||
Cash and cash equivalents |
¥ | 345,150 | ¥ | 675,212 | |||
Trade receivables: |
|||||||
Trade accounts receivable |
96,975 | 910,539 | |||||
Receivables from related party |
20,784 | 8,038 | |||||
Prepaid expenses |
22,220 | 28,593 | |||||
Income tax receivable |
10,327 | | |||||
Deferred tax assets |
| 42,903 | |||||
Other current assets |
14,557 | 10,656 | |||||
Total Current Assets |
510,013 | 1,675,941 | |||||
Property and equipmentnet |
105,330 | 114,206 | |||||
Capitalized computer software costsnet |
72,877 | 252,288 | |||||
Other intangible assetsnet |
508 | 1,896 | |||||
Investments in securities |
107,565 | 223,215 | |||||
Rental deposits |
43,846 | 52,282 | |||||
Deferred tax assets |
| 48,251 | |||||
Other assets, net of allowance for doubtful accounts of ¥4,983 thousand as of March 31, 2010 and 2011 |
9,117 | 5,517 | |||||
TOTAL ASSETS |
¥ | 849,256 | ¥ | 2,373,596 | |||
See notes to the consolidated financial statements.
F-46
UBIC, Inc. and subsidiaries
Consolidated Balance Sheets (Continued)
March 31, 2010 and 2011
See notes to the consolidated financial statements.
F-47
UBIC, Inc. and subsidiaries
Consolidated Statements of Operations
Years ended March 31, 2010 and 2011
|
Thousands of Yen | ||||||
---|---|---|---|---|---|---|---|
|
2010 | 2011 | |||||
Revenue |
¥ | 1,013,490 | ¥ | 2,635,430 | |||
Revenue from a related party |
80,072 | 40,764 | |||||
Operating revenue from reimbursed direct costs |
4,605 | 9,899 | |||||
Total revenue |
1,098,167 | 2,686,093 | |||||
Cost of revenue |
703,010 | 966,352 | |||||
Reimbursed direct costs |
4,605 | 9,899 | |||||
Selling, general and administrative expenses |
574,001 | 669,742 | |||||
Total operating expense |
1,281,616 | 1,645,993 | |||||
Operating income (loss) |
(183,449 | ) | 1,040,100 | ||||
Interest income |
3,441 |
3,410 |
|||||
Interest expense |
(13,247 | ) | (14,262 | ) | |||
Foreign currency exchange losses |
(14,384 | ) | (39,942 | ) | |||
Impairment losses on investments in securities |
(108,540 | ) | | ||||
Othernet |
94 | 1,296 | |||||
Income (loss) before income taxes |
(316,085 | ) | 990,602 | ||||
Income taxes |
102,213 |
202,827 |
|||||
Net income (loss) |
(418,298 | ) | 787,775 | ||||
Less: Net loss attributable to noncontrolling interests |
|
933 |
|||||
Net income (loss) attributable to UBIC, Inc. shareholders |
¥ | (418,298 | ) | ¥ | 788,708 | ||
|
Yen | ||||||
---|---|---|---|---|---|---|---|
|
2010 | 2011 | |||||
Net income (loss) attributable to UBIC, Inc. shareholders per share: |
|||||||
Basic |
¥ | (182 | ) | ¥ | 334 | ||
Diluted |
(182 | ) | 249 |
See notes to the consolidated financial statements.
F-48
Consolidated Statements of Comprehensive Income
Years ended March 31, 2010 and 2011
|
Thousands of Yen | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2011 | |||||||||||
Net income (loss) |
¥(418,298 | ) | ¥787,775 | ||||||||||
Other comprehensive income, net of tax: |
|||||||||||||
Foreign currency translation adjustments |
704 | (894 | ) | ||||||||||
Unrealized holding gains (losses) on securities: |
|||||||||||||
Amount arising during the period |
¥(57,650 | ) | ¥68,592 | ||||||||||
Less: Reclassification adjustments for losses included in net income |
64,375 | 6,725 | | 68,592 | |||||||||
Adjustments related to retirement and severance benefits: |
|||||||||||||
Amount arising during the period |
(394 | ) | 418 | ||||||||||
Total other comprehensive income |
7,035 | 68,116 | |||||||||||
Total comprehensive income (loss) |
(411,263 | ) | 855,891 | ||||||||||
Less: Comprehensive loss attributable to noncontrolling interests |
| 933 | |||||||||||
Total comprehensive income (loss) attributable to UBIC, Inc. shareholders |
¥(411,263 | ) | ¥856,824 | ||||||||||
See notes to the consolidated financial statements.
F-49
Consolidated Statements of Equity
Years ended March 31, 2010 and 2011
|
Thousands of Yen, except share data | ||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
UBIC, Inc. Shareholders |
|
|
||||||||||||||||||||||
|
Shares of
Common Stock Outstanding |
Common
Stock |
Additional
Paid-in Capital |
Accumulated
Deficit |
Accumulated
Other Comprehensive Income (Loss) |
Treasury
Stock |
Non-
controlling Interests |
Total
Equity |
|||||||||||||||||
Balance at April 1, 2009 |
2,276,000 | ¥ | 539,153 | ¥ | 516,912 | ¥ | (389,688 | ) | ¥ | (11,409 | ) | ¥ | (17 | ) | ¥ | ¥ | 654,951 | ||||||||
Comprehensive income (loss): |
|||||||||||||||||||||||||
Net loss |
(418,298 | ) | (418,298 | ) | |||||||||||||||||||||
Other comprehensive income, net of tax |
7,035 | 7,035 | |||||||||||||||||||||||
Common stock issued under share-based compensation plans |
48,000 | 66,834 | (60,869 | ) | 5,965 | ||||||||||||||||||||
Balance at March 31, 2010 |
2,324,000 | 605,987 | 456,043 | (807,986 | ) | (4,374 | ) | (17 | ) | 249,653 | |||||||||||||||
Comprehensive income: |
|||||||||||||||||||||||||
Net income |
788,708 | (933 | ) | 787,775 | |||||||||||||||||||||
Other comprehensive income, net of tax |
68,116 | 68,116 | |||||||||||||||||||||||
Conversion of convertible notes |
204,472 | 38,000 | 36,808 | 74,808 | |||||||||||||||||||||
Common stock issued under share-based compensation plans |
102,400 | 161,637 | (148,870 | ) | 12,767 | ||||||||||||||||||||
Purchase of treasury stock |
(9 | ) | (9 | ) | |||||||||||||||||||||
Shared-based compensation |
1,134 | 1,134 | |||||||||||||||||||||||
Stock issuance by newly established subsidiary |
8,000 | 8,000 | |||||||||||||||||||||||
Balance at March 31, 2011 |
2,630,872 | ¥ | 805,624 | ¥ | 345,115 | ¥ | (19,278 | ) | ¥ | 63,742 | ¥ | (26 | ) | ¥ | 7,067 | ¥ | 1,202,244 | ||||||||
See notes to the consolidated financial statements.
F-50
UBIC, Inc. and subsidiaries
Consolidated Statements of Cash Flows
Years ended March 31, 2010 and 2011
|
Thousands of Yen | ||||||
---|---|---|---|---|---|---|---|
|
2010 | 2011 | |||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|||||||
Net income (loss) |
¥ | (418,298 | ) | ¥ | 787,775 | ||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
|||||||
Depreciation and amortization |
213,784 | 58,213 | |||||
Deferred income taxes |
112,247 | (136,688 | ) | ||||
Impairment losses on investments in securities |
108,540 | | |||||
Foreign currency exchange losses |
25,877 | 20,513 | |||||
Changes in operating assets and liabilities: |
|||||||
Decrease (increase) in trade accounts receivable |
25,490 | (828,196 | ) | ||||
Decrease (increase) in receivables from related party |
(16,210 | ) | 12,746 | ||||
Decrease (increase) in prepaid expenses |
5,080 | (6,510 | ) | ||||
Decrease (increase) in rental deposits |
4,303 | (8,778 | ) | ||||
Increase (decrease) in trade accounts payable |
(55,267 | ) | 118,820 | ||||
Increase in accrued consumption taxes |
| 46,570 | |||||
Increase (decrease) in accrued income taxes |
(335 | ) | 345,723 | ||||
Othernet |
(6,144 | ) | 42,612 | ||||
Net cash provided by (used in) operating activities |
(933 | ) | 452,800 | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
|||||||
Purchase of property and equipment |
(800 | ) | (19,623 | ) | |||
Capitalized computer software costs |
(68,414 | ) | (206,701 | ) | |||
Othernet |
| (1,388 | ) | ||||
Net cash used in investing activities |
(69,214 | ) | (227,712 | ) | |||
CASH FLOWS FROM FINANCING ACTIVITIES: |
|||||||
Proceeds from short-term debt |
30,000 | | |||||
Repayment of short-term debt |
| (30,000 | ) | ||||
Proceeds from long-term bank borrowings |
180,000 | | |||||
Repayment of long-term bank borrowings |
(135,260 | ) | (159,260 | ) | |||
Proceeds from issuance of common stock |
5,965 | 11,575 | |||||
Proceeds from issuance of convertible notes |
| 285,000 | |||||
Proceeds from issuance of common stock to noncontrolling shareholders by newly established subsidiary |
| 8,000 | |||||
Othernet |
(432 | ) | (1,419 | ) | |||
Net cash provided by financing activities |
80,273 | 113,896 | |||||
EFFECT OF FOREIGN CURRENCY EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS |
(12,633 | ) | (8,922 | ) | |||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
(2,507 | ) | 330,062 | ||||
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR |
347,657 |
345,150 |
|||||
CASH AND CASH EQUIVALENTS, END OF YEAR |
¥ | 345,150 | ¥ | 675,212 | |||
ADDITIONAL CASH FLOW INFORMATION: |
|||||||
Interest paid |
¥ | 10,004 | ¥ | 8,489 | |||
Income taxes paid/(refunds received)net |
560 | (14,197 | ) | ||||
NONCASH INVESTING AND FINANCING ACTIVITIES: |
|||||||
Acquisition of assets under capital lease arrangements |
¥ | 5,153 | ¥ | | |||
Conversion of convertible notes to common stock |
| 74,808 | |||||
Outstanding payments for acquisition of property and equipment, and capitalized computer software costs included in trade accounts payable |
33,044 | 53,602 |
See notes to the consolidated financial statements.
F-51
UBIC, Inc. and subsidiaries
Notes to Consolidated Financial Statements
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations UBIC, Inc. ("UBIC") is a Japanese corporation established on August 8, 2003, whose principal office is located in Japan. UBIC and its subsidiaries (collectively, the "Company") provide solutions, employing advanced technologies, for corporate litigation strategy and crisis management. The Company mainly offers eDiscovery and forensic services, such as data collection, data processing, data review and document production. The Company's customers include leading law firms, corporate legal departments, government agencies and other professional advisors who require innovative technology, responsive service and deep subject-matter expertise.
Basis of Financial Statements The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"). Because the Company maintains its records and prepares its financial statements in accordance with accounting principles prevailing in the respective country of incorporation, certain adjustments have been made to conform to U.S. GAAP. The major adjustments include those relating to depreciation of property and equipment, share-based compensation, valuation of deferred tax assets and appropriation of accumulated deficit.
Currency The accompanying consolidated financial statements are stated in Japanese yen, the currency of the country in which UBIC is incorporated and principally operates.
Principles of Consolidation The consolidated financial statements include the accounts of UBIC and its subsidiaries. Intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions used are primarily in the areas of valuation of investments, valuation of deferred tax assets, determination of fair values of stock options, and estimated useful lives of fixed assets and intangible assets with finite useful lives. Actual results could differ from those estimates.
Foreign Currency Translation The assets and liabilities of the foreign subsidiary with functional currency other than Japanese yen are translated into Japanese yen at the rate of exchange at the balance sheet date. Income and expense accounts are translated at the average rates of exchange for the respective reporting period. The resulting translation adjustments are included in other comprehensive income.
Cash Equivalents The Company defines cash equivalents as all highly liquid investments with insignificant risk of changes in value which have original maturities of three months or less at the time of purchase.
Allowance for Doubtful Accounts Allowance for doubtful accounts is established in amounts considered to be appropriate based primarily upon an evaluation of potential losses in the outstanding receivables.
Property and Equipment Property and equipment are stated at cost. Depreciation and amortization of property and equipment, including assets under capital lease, are computed using the straight-line
F-52
UBIC, Inc. and subsidiaries
Notes to Consolidated Financial Statements (Continued)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
method based on either the estimated useful lives of the assets or the lease period, whichever is shorter.
The useful lives for depreciation by major asset classes are as follows:
Leasehold improvements |
5 to 15 years | |
Furniture and fixtures |
4 to 20 years | |
Computers |
5 years | |
Assets under capital leases, primarily office equipment |
5 years |
Capitalized Computer Software Costs The Company capitalizes costs of computer software developed and purchased for internal use. Costs incurred in the creation of computer software products for internal use are capitalized when the preliminary project phase is completed and when management, with the relevant authority, authorizes and commits funding to the project and it is probable that the project will be completed and the software will be used to perform the function intended. Internal and external costs incurred during the preliminary project stage are expensed as they are incurred. Capitalized costs are amortized, beginning in the period each module or component of the product is ready for its intended use, on a straight-line basis over the estimated useful life of the product, mainly five years.
Leases Capital leases are capitalized at the inception of the lease at the present value of the minimum lease payments. All other leases are accounted for as operating leases. Lease payments for capital leases are apportioned to interest expense and a reduction of the lease obligation so as to achieve a constant rate of interest on the balance of the obligation. Operating lease payments are recognized as an expense on a straight-line basis over the lease term.
Impairment of Long-lived Assets The Company reviews the carrying value of long-lived assets or a related group of assets to be held and used, including intangible assets with finite useful lives, for impairment whenever events or circumstances occur that indicate that the carrying value of the assets may not be recoverable. The assets are considered to be impaired when the estimated undiscounted cash flows expected to result from the use of the assets and their eventual disposition are less than their carrying values. The impairment loss is measured as the amount by which the carrying value of the asset or asset group exceeds its fair value. In determining the fair value, the Company uses available quoted market prices and present value techniques, if appropriate, based on the estimated future cash flows expected to result from the use of the assets and its eventual disposition.
Investments in Securities The Company classifies investments in equity securities that have readily determinable fair values as available-for-sale securities, which are accounted for at fair value with unrealized gains and losses excluded from earnings and reported in accumulated other comprehensive income (loss) in equity on a net-of-tax basis. The cost of securities sold is determined based on the average cost method.
The Company reviews the fair values of available-for-sale securities on a regular basis to determine if the fair value of any individual security has declined below its cost and if such decline is other than temporary. Fair value is determined based on quoted market prices. If the decline in fair value is judged to be other than temporary, the cost basis of the investment is written down to fair value.
F-53
UBIC, Inc. and subsidiaries
Notes to Consolidated Financial Statements (Continued)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Other-than-temporary declines in fair value are determined taking into consideration the duration of the decline in fair value of the security and the severity of the decline, the financial condition and near term prospects of the investee and the intent and ability of the Company to hold the equity security until forecasted recovery. The resulting realized loss is included in the consolidated statements of operations in the period in which the decline is deemed to be other than temporary.
Equity securities that do not have readily determinable fair values are carried at cost. For certain cost-method investments for which it is not practicable to estimate the fair value, if an event or change in circumstances occurs that may have a significant adverse effect on the fair value of the investment, the Company estimates the fair value of such investments. If the fair value of a security is estimated to have declined and such decline is judged to be other than temporary, the security is written down to the fair value. Other-than-temporary declines in fair value are determined taking into consideration the duration of the decline in fair value of the security and the severity of the decline, the financial condition and near term prospects of the investee and the intent and ability of the Company to hold the equity security until forecasted recovery.
Retirement and Severance Benefits The Company has defined benefit severance indemnities plans. The benefit obligation at March 31, the measurement date, is unfunded and recognized in the consolidated balance sheet. The benefit obligation is the projected benefit obligation, which represents the actuarial present value of benefits expected to be paid upon retirement based on employee services already rendered and estimated future compensation levels. Net periodic retirement cost is recorded in the consolidated statement of operations and includes service cost and interest cost. Service cost represents the actuarial present value of participant benefits earned in the current year. Interest cost represents the time value of money cost associated with the passage of time. Actuarial gains and losses included in accumulated other comprehensive income (loss) are amortized using the straight-line method over the average remaining service period of active employees if it exceeds the corridor, which is defined as 10 percent of the projected benefit obligation.
Asset Retirement Obligations The Company records asset retirement obligations when the obligation is incurred. The obligation is measured at fair value and included in other liabilities. When the liability is initially recorded, the Company capitalizes the related cost by increasing the carrying amount of the related long-lived asset. The liability is accreted to its present value each period, and the capitalized cost is depreciated over the asset's useful life.
Convertible Notes The Company accounts for convertible notes according to their stated redemption value net of discount. The Company classifies the convertible notes as liability or equity on the consolidated balance sheet according to the nature of the redemption feature. Discounts on convertible notes are amortized as interest expense over the redemption period.
Derivative Financial Instruments The Company recognizes all derivative financial instruments, such as interest rate swap contracts, in the consolidated balance sheets as either assets or liabilities and they are measured at fair value regardless of the purpose or intent for using them.
The Company does not designate derivative financial instruments as hedging instruments nor apply hedge accounting. Accordingly, changes in fair value of the derivative financial instruments are recognized in earnings immediately.
F-54
UBIC, Inc. and subsidiaries
Notes to Consolidated Financial Statements (Continued)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition The Company has agreements with customers pursuant to which it performs various services. A majority of the Company's revenue relates to fees earned for the month-to-month performance of eDiscovery services including data collection, data processing, data hosting, data review and document production, and forensic services. The fees that the Company earns and bills for these services vary primarily based on the hours of service provided, the volume of documents reviewed or produced, the amount of data processed or stored. While the unit prices for providing the services are agreed in advance, the scope and volume of services to be performed can change depending on customers' requests, which are made on an optional and "as needed" basis, and customers may choose not to request performance of additional services or may obtain similar services from other service providers.
The Company recognizes revenue for eDiscovery and forensic services based on the agreed-upon prices and volume of services performed during the period. For these contractual arrangements, the Company has identified each deliverable service element. Based on management's evaluation of each element, it was determined that each element delivered has standalone value to the customers because the Company or other vendors sell such services separately from any other services/deliverables. Accordingly, each of the service elements in the multiple element case qualifies as a separate unit of accounting. The Company uses the best estimate of sales price based on the price it charges when it sells an element on a standalone basis, which is generally consistent with the stated prices in the arrangements, and allocates revenue to the various units of accounting in the arrangements based on the stated prices. The Company recognizes revenue for each separate unit of accounting when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the fee is fixed or determinable, and collectability is reasonably assured based on evidence of an arrangement.
The Company has revenue related to the reimbursement of certain direct costs by customers, primarily transportation. Reimbursed transportation and other reimbursable direct costs are recorded gross in the consolidated statements of operations as "Operating revenue from reimbursed direct costs" and as "Reimbursed direct costs."
Consumption Tax Consumption tax collected and remitted to tax authorities is excluded from revenues, cost of sales and expenses in the consolidated statements of operations.
Advertising Advertising costs are expensed as incurred and are recorded in "Selling, general and administration expenses."
Share-Based Compensation The Company measures the cost of employee services received in exchange for an award of equity instruments at the fair value of the award on the grant-date and recognizes the cost over the period which the employee is required to provide services in exchange for the award. Compensation expenses are recognized on a straight-line basis over the requisite service period of the awards which are expected to be vested.
Income Taxes Deferred income taxes reflect the impact of temporary differences between assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes and tax loss carryforwards. These deferred taxes are measured using the currently enacted tax rates in effect for the year in which the temporary differences or tax loss carryforwards are expected to reverse.
F-55
UBIC, Inc. and subsidiaries
Notes to Consolidated Financial Statements (Continued)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Valuation allowances are provided against deferred tax assets when it is more likely than not that a tax benefit will not be realized. The Company recognizes the financial statement effect of uncertain tax positions when they are more likely than not, based on the technical merits, that the tax positions will be sustained upon examination by the tax authorities. Benefits from tax positions that meet more-likely-than-not recognition threshold are measured at the largest amount of benefit that is greater than 50% likely of being realized upon settlement. Accrued interest and penalties related to the unrecognized tax benefits are included in income tax expense in the consolidated statements of operations. The Company had no unrecognized tax benefits during the years ended March 31, 2010 and 2011.
Net Income Attributable to UBIC, Inc. Shareholders Per Share Basic net income attributable to UBIC, Inc. shareholders per share is computed using the weighted-average number of shares of common stock outstanding during each year. Diluted net income attributable to UBIC, Inc. shareholders per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company.
Other Comprehensive Income Other comprehensive income consists of translation adjustments resulting from the translation of financial statements of the foreign subsidiary, unrealized holding gains or losses on available-for-sale securities and adjustments related to retirement and severance benefits.
Recently Adopted Accounting Pronouncements
In October 2009, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2009-13, " Revenue Recognition: Multiple-Deliverable Revenue Arrangements ," which amends the criteria for when to evaluate individual delivered items in a multiple-deliverable arrangement and the method of allocating consideration received. This ASU is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 and early adoption is permitted. The Company retrospectively adopted this ASU in the fiscal year beginning April 1, 2009. The adoption of this ASU did not have a material impact on the Company's financial position or results of operations.
In October 2009, the FASB issued ASU No. 2009-14, " Certain Revenue Arrangements That Include Software Elements ." This ASU affects how entities account for revenue arrangements that contain both tangible products and software elements. Currently, arrangements containing both tangible products and software are accounted for based on the provisions regarding revenue recognition included in ASC 985, " Software ," if the software is considered more than incidental to the product or service. This ASU changes revenue recognition for tangible products containing software elements and non-software elements that function together to deliver the tangible product's essential functionality by eliminating them from the scope of ASC 985. This ASU is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 and early adoption is permitted. The Company retrospectively adopted this ASU in the fiscal year beginning April 1, 2009. The adoption of this ASU did not have a material impact on the Company's financial position or results of operations.
F-56
UBIC, Inc. and subsidiaries
Notes to Consolidated Financial Statements (Continued)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In January 2010, the FASB issued ASU No. 2010-06, "F air Value Measurements and Disclosures: Improving Disclosures about Fair Value Measurements ," which adds disclosure requirements about transfers in and out of Levels 1 and 2 and separate disclosures about activity relating to Level 3 measurements and clarifies input and valuation techniques. This ASU was effective for the annual reporting period beginning after December 15, 2009 and the Company adopted this ASU in the first quarter of fiscal year beginning April 1, 2010. The adoption of this ASU did not have a material impact on the Company's financial position or results of operations.
In February 2010, the FASB issued ASU 2010-9 " Subsequent Events (Topic 855) Amendments to Certain Recognition and Disclosure Requirements ." This ASU amends disclosure requirements within Subtopic 855-10. An entity that is an SEC filer is not required to disclose the date through which subsequent events have been evaluated. This change alleviates potential conflicts between Subtopic 855-10 and the SEC's requirements. ASU 2010-9 is effective for interim and annual periods ending after June 15, 2010. The Company's disclosure on subsequent events in Note 21 is made in accordance with this ASU.
In July 2010, the FASB issued ASU No. 2010-20, " Receivables: Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses ," which requires new disclosures and enhances existing disclosures about the credit quality of financing receivables and the allowance for credit losses. The disclosures as of the end of a reporting period were effective for interim and annual reporting periods which ended on or after December 15, 2010 and the Company adopted this ASU in the third quarter of the fiscal year beginning April 1, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December15, 2010. The Company adopted this ASU in the fourth quarter of the fiscal year beginning April 1, 2010. The adoption of this ASU did not have a material impact on the Company's financial position or results of operations.
In June 2011, the FASB issued ASU No. 2011-05, " Comprehensive Income: Presentation of Comprehensive Income ," which improves the comparability, consistency, and transparency of financial reporting and increases the prominence of items reported in other comprehensive income. This ASU requires an entity to report comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2011. Early adoption is permitted. The Company adopted this ASU in the fiscal year beginning April 1, 2010, other than the adoption of the presentation of reclassifications of items out of accumulated comprehensive income which has been deferred. The adoption of this ASU did not have a material impact on the Company's financial position or results of operations.
Recently Issued Accounting Pronouncements Not Yet Adopted
In December 2010, the FASB issued ASU No. 2010-29, " Business Combinations ," which clarifies the acquisition date that should be used for reporting the pro forma financial information disclosures in business combination when comparative financial statements are presented and improves the usefulness of the pro forma revenue and earnings disclosure. This ASU is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting
F-57
UBIC, Inc. and subsidiaries
Notes to Consolidated Financial Statements (Continued)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
period beginning on or after December 15, 2010. The adoption of this ASU is not expected to have a material impact on the Company's financial position or results of operations.
In May 2011, the FASB issued ASU No. 2011-04, " Fair Value Measurement ," which amends some of the wording used to describe requirements for measuring fair value and for disclosing information about fair value measurements. This ASU is effective for the interim or annual period beginning after December 15, 2011. Early application is prohibited. The application of this ASU is not expected to have a material impact on the Company's financial position or results of operations.
2. INVESTMENTS IN SECURITIES
Available-for-sale securities
Information regarding securities classified as available-for-sale securities as of March 31, 2010 and 2011 is as follows:
|
Thousands of Yen | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Cost |
Gross
unrealized gain |
Gross
unrealized loss |
Fair value | |||||||||
March 31, 2010 |
|||||||||||||
Available-for-sale securities: |
|||||||||||||
Equity securities |
¥ | 107,550 | ¥ | | ¥ | | ¥ | 107,550 | |||||
March 31, 2011 |
|||||||||||||
Available-for-sale securities: |
|||||||||||||
Equity securities |
¥ | 107,550 | ¥ | 115,650 | ¥ | | ¥ | 223,200 |
For the year ended March 31, 2010, the Company recorded other-than-temporary impairment losses of ¥108,540 thousand for the available-for-sale securities, which are included in "Impairment losses on investments in securities" in the consolidated statements of operations.
Cost-method investments
The carrying amount of cost-method investments as of March 31, 2010 and 2011, was ¥15 thousand and is recorded in investments in securities in the consolidated balance sheets. On consideration of the carrying amount of these investments and cost-benefit factors, the Company determined that it is not practicable to estimate fair value of these investments.
3. ALLOWANCE FOR DOUBTFUL ACCOUNTS
An analysis of the movement in the allowance for doubtful accounts for the years ended March 31, 2010 and 2011 is as follows:
|
Thousands of Yen | ||||||
---|---|---|---|---|---|---|---|
|
2010 | 2011 | |||||
Balance at the beginning of the year |
¥ | 4,983 | ¥ | 4,983 | |||
Balance at the end of the year |
¥ | 4,983 | ¥ | 4,983 | |||
F-58
UBIC, Inc. and subsidiaries
Notes to Consolidated Financial Statements (Continued)
4. PROPERTY AND EQUIPMENT
Property and equipment recorded on the Company's consolidated balance sheets as of March 31, 2010 and 2011, consists of the following:
|
Thousands of Yen | ||||||
---|---|---|---|---|---|---|---|
|
2010 | 2011 | |||||
Leasehold improvements |
¥ | 53,350 | ¥ | 55,327 | |||
Furniture and fixtures |
61,606 | 94,576 | |||||
Computers |
61,794 | 63,427 | |||||
Assets under capital lease, primarily office equipment |
5,153 | 5,153 | |||||
Total |
181,903 | 218,483 | |||||
Accumulated depreciation |
(76,573 | ) | (104,277 | ) | |||
Property and equipmentnet |
¥ | 105,330 | ¥ | 114,206 | |||
5. LEASES
The Company enters into various leases for data center facilities, office premises and office equipment in the normal course of business.
Capital Leases The Company uses office equipment leased under capital lease arrangements. The amount of leased assets at cost under capital leases and accumulated depreciation amounted to ¥5,153 thousand and ¥466 thousand, respectively, at March 31, 2010 and ¥5,153 thousand and ¥1,934 thousand, respectively, at March 31, 2011.
Operating Leases UBIC leases its data center facilities and office premises under cancellable operating lease arrangements with mainly two-year lease period, for which refundable lease deposits are recorded as rental deposits. The U.S. based subsidiary leases office premises under noncancellable operating lease arrangements.
Expenses related to operating leases for the years ended March 31, 2010 and 2011, were approximately ¥107,187 thousand and ¥127,709 thousand, respectively, and are included in "Selling, general and administrative expenses."
Future Minimum Lease Payments As of March 31, 2011, the future minimum lease payments under noncancelable operating leases and capital leases are as follows:
|
Thousands of Yen | ||||||
---|---|---|---|---|---|---|---|
Years ending March 31
|
Operating
Leases |
Capital
Leases |
|||||
2012 |
¥ | 549 | ¥ | 1,580 | |||
2013 |
| 1,483 | |||||
2014 |
| 412 | |||||
Total minimum lease payments |
¥ | 549 | 3,475 | ||||
Less amounts representing interest |
164 | ||||||
Present value of minimum lease payments |
3,311 | ||||||
Less current portion |
1,471 | ||||||
Noncurrent portion |
¥ | 1,840 | |||||
F-59
UBIC, Inc. and subsidiaries
Notes to Consolidated Financial Statements (Continued)
6. CAPITALIZED COMPUTER SOFTWARE COSTS
The Company capitalizes the cost of computer software developed or purchased for internal use.
The following is a summary of capitalized computer software costs:
|
Thousands of Yen | ||||||
---|---|---|---|---|---|---|---|
|
2010 | 2011 | |||||
Balance at the beginning of the year |
¥ | 195,166 | ¥ | 295,385 | |||
Costs capitalized during the year |
100,303 | 209,888 | |||||
Foreign currency translation |
(84 | ) | (113 | ) | |||
Balance at the end of the year |
295,385 | 505,160 | |||||
Accumulated amortization, end of the year |
(222,508 | ) | (252,872 | ) | |||
Capitalized computer software costsnet |
¥ | 72,877 | ¥ | 252,288 | |||
Included in the above are capitalized software costs for projects in progress of ¥15,855 thousand and ¥115,203 thousand at March 31, 2010 and 2011, respectively. For the years ended March 31, 2010 and 2011, the Company recognized amortization expenses related to capitalized software development costs of ¥183,612 thousand and ¥30,364 thousand, respectively.
In September 2009, the Company decided to develop new software and to cease using their old software by March, 2010. The original amortization period on the old software was five years from May 2008, when the old software was initially ready for use. From September 2009, the Company amortized the old software over the remaining useful life of six months ending March 2010. The balance of the net capitalized software cost for the old software amounted to zero as of March 31, 2010 and 2011. Additional amortization of ¥137,283 thousand was recorded during the year ended March 31, 2010. The impact of the additional amortization for the year ended March 31, 2010 was as follows:
|
Thousands of Yen, except per share data | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
Before Change
in Estimate |
Effect of
Change |
As Reported | |||||||
Cost of revenue |
¥ | 565,727 | ¥ | 137,283 | ¥ | 703,010 | ||||
Operating loss |
46,166 | 137,283 | 183,449 | |||||||
Net loss |
281,015 | 137,283 | 418,298 | |||||||
Net loss attributable to UBIC, Inc. shareholders per share: |
||||||||||
Basic |
(122 | ) | (60 | ) | (182 | ) | ||||
Diluted |
(122 | ) | (60 | ) | (182 | ) |
The following table shows the estimated amortization of capitalized computer software costs for the next five years:
Years ending March 31
|
Thousands of
Yen |
|||
---|---|---|---|---|
2012 |
¥ | 59,872 | ||
2013 |
55,091 | |||
2014 |
50,311 | |||
2015 |
45,530 | |||
2016 |
40,749 |
F-60
UBIC, Inc. and subsidiaries
Notes to Consolidated Financial Statements (Continued)
6. CAPITALIZED COMPUTER SOFTWARE COSTS (Continued)
Research and development costs, which are included in "Selling, general and administrative expense" relate primarily to costs incurred in the research and development of new internal use software products and enhancements to existing internal use software products, which do not meet the criteria for capitalization. Such costs are expensed as incurred. Research and development costs incurred during the year ended March 31, 2010 amounted to ¥8,397 thousand. Research and development costs were not incurred during the year ended March 31, 2011.
7. SHORT-TERM AND LONG-TERM DEBT
Short-term debt of ¥30,000 thousand as of March 31, 2010, consists of bank borrowings with a weighted-average interest rate of 3.5 percent.
The components of long-term debt as of March 31, 2010 and 2011, are summarized as follows:
|
Thousands of Yen | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2010
Weighted average interest rate |
2010
Balance |
2011
Weighted average interest rate |
2011
Balance |
|||||||||
Unsecured convertible notes due 2015, zero
|
| ¥ | | 1.0 | % | ¥ | 211,200 | ||||||
Bank borrowings: |
|||||||||||||
Secured by equity securities, various rates
|
2.5 | % | 350,000 | 2.5 | % | 230,000 | |||||||
Unsecured, various rates and various
|
2.3 | % | 60,960 | 2.2 | % | 21,700 | |||||||
Capital lease obligations |
4.1 | % | 4,721 | 4.1 | % | 3,311 | |||||||
|
415,681 | 466,211 | |||||||||||
Less: current portion |
160,670 | 143,171 | |||||||||||
|
¥ | 255,011 | ¥ | 323,040 | |||||||||
The aggregate annual maturities of long-term debt after March 31, 2011 are as follows:
Years ending March 31
|
Thousands of
Yen |
|||
---|---|---|---|---|
2012 |
¥ | 143,171 | ||
2013 |
101,437 | |||
2014 |
10,403 | |||
2015 |
| |||
2016 |
211,200 | |||
|
¥ | 466,211 | ||
The Company pledged available-for-sale securities with carrying value of ¥107,550 thousand and ¥223,200 thousand as security for bank borrowings of ¥350,000 thousand and ¥230,000 thousand as of March 31, 2010 and 2011, respectively. As is customary in Japan, both short-term and long-term bank
F-61
UBIC, Inc. and subsidiaries
Notes to Consolidated Financial Statements (Continued)
7. SHORT-TERM AND LONG-TERM DEBT (Continued)
borrowings are made under general agreements that provide that securities and guarantees for present and future indebtedness will be given upon request of the bank, and that the bank shall have the right, as the obligations become due, or in the event of their default, to offset cash deposits against such obligations.
Credit Line
The Company entered into an overdraft arrangement with a Japanese bank for which the unutilized balance as of March 31, 2011 was ¥50,000 thousand.
Convertible Notes
In April 2010, the Company issued zero coupon convertible notes due April 2015 in the aggregate face amount of ¥300,000 thousand for ¥285,000 thousand. The notes were convertible to equity shares at the option of the holders at a price of ¥391 per share at any time on or after April 13, 2010. The Company was not required to bifurcate any of embedded features contained in the notes for accounting purposes. On March 14, 2011, prior to the maturity date, convertible notes with a face amount of ¥80,000 thousand were converted into 204,472 equity shares of the Company at a conversion price of ¥391 per share. UBIC recorded an increase of ¥38,000 thousand in "Common stock" and ¥36,808 thousand, net of issuance cost of ¥1,192 thousand in "Additional paid-in capital." The carrying amount of these notes, with the accretion of discounts, is included in "Long-term debt" in the Company's consolidated balance sheets. For the year ended March 31, 2011, the Company recognized debt discount amortization of ¥2,200 thousand.
8. RETIREMENT AND SEVERANCE BENEFITS
The Company has unfunded defined benefits severance indemnities plans to provide retirement benefits to substantially all employees. Under the severance indemnities plans, employees are entitled to severance payments based on their earnings and the length of service till retirement or termination of employment for reasons other than dismissal for cause.
Reconciliations of the beginning and ending balances of the benefit obligation for the years ended March 31, 2010 and 2011, are as follows:
|
Thousands of Yen | ||||||
---|---|---|---|---|---|---|---|
|
2010 | 2011 | |||||
Change in benefit obligation: |
|||||||
Benefit obligation at the beginning of the year |
¥ | 4,131 | ¥ | 6,485 | |||
Service cost |
2,224 | 2,626 | |||||
Interest cost |
49 | 46 | |||||
Actuarial loss (gain) |
394 | (434 | ) | ||||
Benefits paid |
(322 | ) | (687 | ) | |||
Foreign currency exchange rate changes |
9 | (9 | ) | ||||
Benefit obligation at the end of the year |
¥ | 6,485 | ¥ | 8,027 | |||
F-62
UBIC, Inc. and subsidiaries
Notes to Consolidated Financial Statements (Continued)
8. RETIREMENT AND SEVERANCE BENEFITS (Continued)
The accumulated benefit obligations as of March 31, 2010 and 2011 are ¥5,949 thousand and ¥7,418 thousand, respectively.
Amounts recognized in the consolidated balance sheets as of March 31, 2010 and 2011 are as follows:
|
Thousands of Yen | ||||||
---|---|---|---|---|---|---|---|
|
2010 | 2011 | |||||
Accrued retirement costcurrent |
¥ | 496 | ¥ | 813 | |||
Accrued retirement costnoncurrent |
5,989 | 7,214 | |||||
Amount recognized |
¥ | 6,485 | ¥ | 8,027 | |||
Net periodic retirement cost for the years ended March 31, 2010 and 2011 consists of the following components:
|
Thousands of Yen | ||||||
---|---|---|---|---|---|---|---|
|
2010 | 2011 | |||||
Service cost |
¥ | 2,224 | ¥ | 2,626 | |||
Interest cost |
49 | 46 | |||||
Net periodic retirement cost |
¥ | 2,273 | ¥ | 2,672 | |||
Amounts recognized in other comprehensive income (loss) for the years ended March 31, 2010 and 2011 are as follows:
|
Thousands of Yen | ||||||
---|---|---|---|---|---|---|---|
|
2010 | 2011 | |||||
Actuarial (loss) gain |
¥ | (394 | ) | ¥ | 418 |
Amounts recognized in accumulated other comprehensive income (loss) as of March 31, 2010 and 2011 are as follows:
|
Thousands of Yen | ||||||
---|---|---|---|---|---|---|---|
|
2010 | 2011 | |||||
Accumulated actuarial (loss) gain |
¥ | (394 | ) | ¥ | 24 |
The Company uses its year-end as the measurement date for the benefit obligation. Weighted-average assumptions used to determine the year-end benefit obligations are as follows:
|
2010 | 2011 | |||||
---|---|---|---|---|---|---|---|
Discount rate |
0.75 | % | 0.75 | % | |||
Rate of compensation increase |
1.50 | % | 1.50 | % |
F-63
UBIC, Inc. and subsidiaries
Notes to Consolidated Financial Statements (Continued)
8. RETIREMENT AND SEVERANCE BENEFITS (Continued)
Weighted-average assumptions used to determine the net periodic retirement cost for the years ended March 31, 2010 and 2011, are as follows:
|
2010 | 2011 | |||||
---|---|---|---|---|---|---|---|
Discount rate |
1.25 | % | 0.75 | % | |||
Rate of compensation increase |
1.50 | % | 1.50 | % |
The expected future benefit payments, which reflect expected future service, are as follows:
Years ending March 31
|
Thousands of
Yen |
|||
---|---|---|---|---|
2012 |
¥ | 813 | ||
2013 |
1,077 | |||
2014 |
1,323 | |||
2015 |
1,598 | |||
2016 |
1,621 | |||
2017 - 2021 |
7,632 |
9. ASSET RETIREMENT OBLIGATIONS
The Company's asset retirement obligations, which are included in "Other liabilities" in the Company's consolidated balance sheets, are related to leasehold office premises which the Company is contractually obligated to restore at the end of the lease to its original condition. The movements in asset retirement obligations for the years ended March 31, 2010 and 2011 are as follows:
|
Thousands of Yen | ||||||
---|---|---|---|---|---|---|---|
|
2010 | 2011 | |||||
Balance at the beginning of the year |
¥ | 9,740 | ¥ | 9,919 | |||
Accretion expense |
179 | 182 | |||||
Balance at the end of the year |
¥ | 9,919 | ¥ | 10,101 | |||
10. FINANCIAL INSTRUMENTS
Fair value estimates and information about valuation methodologies regarding financial instruments are as follows:
Quoted market prices, where available, are used to estimate the fair values of financial instruments. In the absence of quoted market prices, fair values for such financial instruments are estimated using an income approach, based on discounted cash flows, or other valuation techniques.
Cash and cash equivalents, Trade receivables, Trade accounts payable and Short-term debt
The carrying amount approximates the fair value because of the short maturity of these instruments.
F-64
UBIC, Inc. and subsidiaries
Notes to Consolidated Financial Statements (Continued)
10. FINANCIAL INSTRUMENTS (Continued)
Long-term debt
The fair value of bank borrowings is estimated based on the present value of future cash flows using the Company's borrowing rate for the same contractual terms.
The fair value of the convertible notes is estimated based on the quoted market price of the Company's equity shares multiplied by the number of equity shares issued if converted on the balance sheet date as the Company's share price was higher than the conversion price.
|
Thousands of Yen | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2011 | |||||||||||
|
Carrying
Amount |
Fair Value |
Carrying
Amount |
Fair Value | |||||||||
Assets: |
|||||||||||||
Cash and cash equivalents |
¥ | 345,150 | ¥ | 345,150 | ¥ | 675,212 | ¥ | 675,212 | |||||
Trade receivables: |
|||||||||||||
Trade accounts receivable |
96,975 | 96,975 | 910,539 | 910,539 | |||||||||
Receivables from related party |
20,784 | 20,784 | 8,038 | 8,038 | |||||||||
Liabilities: |
|||||||||||||
Trade accounts payable |
83,446 | 83,446 | 220,114 | 220,114 | |||||||||
Short-term debt |
30,000 | 30,000 | | | |||||||||
Long-term debt: |
|||||||||||||
Bank borrowings |
410,960 | 411,202 | 251,700 | 252,011 | |||||||||
Convertible notes |
| | 211,200 | 1,372,012 |
Refer to Note 12 for fair values of equity securities and derivative financial instruments.
Significant Customers and Concentration of Credit Risk Trade accounts receivable from three largest customers accounted for approximately 52.8% of the Company's trade accounts receivable as of March 31, 2011.
The Company conducts business based on periodic evaluations of the customers' financial conditions and generally does not require collateral to secure their obligations to the Company. The Company does not believe a significant risk of loss exists from a concentration of credit.
11. DERIVATIVE FINANCIAL INSTRUMENTS
Interest Rate Swaps
The Company's exposure to interest rate risk is related to underlying long-term bank borrowings. In order to minimize the variability caused by interest rate risk, the Company enters into interest rate swaps to manage fluctuations in cash flows. The interest rate swaps entered into are receive-variable, pay-fixed interest rate swaps. Under the interest rate swaps, the Company receives variable interest rate payments on long-term bank borrowings in the amount of ¥350,000 thousand and ¥230,000 thousand as of March 31, 2010 and 2011, respectively, and makes fixed interest rate payments, thereby effectively creating fixed interest rate long-term bank borrowings.
The Company does not designate the interest rate swap contracts as hedging instruments for the purpose of applying hedge accounting. Accordingly, all interest rate swap contracts are measured at fair
F-65
UBIC, Inc. and subsidiaries
Notes to Consolidated Financial Statements (Continued)
11. DERIVATIVE FINANCIAL INSTRUMENTS (Continued)
value as either assets or liabilities and changes in their fair value are immediately recognized in earnings.
As of March 31, 2010 and 2011, the fair values of interest rate swaps were ¥6,054 thousand and ¥2,954 thousand, respectively and are included in "Other liabilities" in the consolidated balance sheets. Changes in the fair value of interest rate swaps resulted in the recognition of a loss of ¥170 thousand and a gain of ¥3,100 thousand for the years ended March 31, 2010 and 2011, respectively and are included in "Othernet" in the consolidated statements of operations. During the years ended March 31, 2010 and 2011, interest paid on the interest rate swap contracts was ¥4,057 thousand and ¥4,322 thousand, respectively, and is included in "Interest expense" in the consolidated statements of operations.
12. FAIR VALUE MEASUREMENTS
ASC Topic 820, " Fair Value Measurements " establishes a fair value hierarchy that prioritizes the use of observable inputs in markets over the use of unobservable inputs when measuring fair value as follows:
Level 1Unadjusted quoted prices in active markets for identical assets or liabilities
Level 2Directly or indirectly observable inputs other than those included in Level 1, such as quoted market prices for similar assets and liabilities in active markets, quoted prices for identical assets in inactive markets, or inputs derived principally from or corroborated by observable market data
Level 3Unobservable inputs for which there is little or no market data, which require the Company to develop its own assumptions and best estimate of what inputs market participants would use in pricing an asset or liability
Investments in equity securities
The Company has investments in certain equity securities for which quoted market prices are available to determine their fair value and are included in Level 1.
Derivative financial instruments
Derivative financial instruments consist of interest rate swaps. The fair value of interest rate swaps is based on the present value of expected future cash flows using zero coupon rates, which is derived principally from observable market data. These interest rate swaps are included in Level 2.
F-66
UBIC, Inc. and subsidiaries
Notes to Consolidated Financial Statements (Continued)
12. FAIR VALUE MEASUREMENTS (Continued)
Assets and liabilities measured at fair value on a recurring basis
Assets and liabilities measured at fair value on a recurring basis as of March 31, 2010 and 2011, are as follows:
|
Thousands of Yen | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
|
Fair Value Hierarchy
Classification |
|||||||||||||
|
Carrying
Value |
Total Fair
Value |
||||||||||||||
Items Measured at Fair Value on a Recurring Basis
|
Level 1 | Level 2 | Level 3 | |||||||||||||
March 31, 2010: |
||||||||||||||||
Assets: |
||||||||||||||||
Available-for-sale securities: |
||||||||||||||||
Equity securities |
¥ | 107,550 | ¥ | 107,550 | ¥ | 107,550 | ¥ | | ¥ | | ||||||
Liabilities: |
||||||||||||||||
DerivativesInterest rate swaps |
6,054 | 6,054 | | 6,054 | | |||||||||||
March 31, 2011: |
||||||||||||||||
Assets: |
||||||||||||||||
Available-for-sale securities: |
||||||||||||||||
Equity securities |
223,200 | 223,200 | 223,200 | | | |||||||||||
Liabilities: |
||||||||||||||||
DerivativesInterest rate swaps |
2,954 | 2,954 | | 2,954 | |
13. INCOME TAXES
Income (loss) from operations before income taxes and income taxes for the years ended March 31, 2010 and 2011 consist of the following components:
|
Thousands of Yen | ||||||
---|---|---|---|---|---|---|---|
|
2010 | 2011 | |||||
Income (loss) from operations before income taxes: |
|||||||
Domestic |
¥ | (402,700 | ) | ¥ | 996,687 | ||
Foreign |
86,615 | (6,085 | ) | ||||
Total |
¥ | (316,085 | ) | ¥ | 990,602 | ||
Income taxes-current |
|||||||
Domestic |
¥ | 554 | ¥ | 339,470 | |||
Foreign |
(10,588 | ) | 45 | ||||
Total |
¥ | (10,034 | ) | ¥ | 339,515 | ||
Income taxes-deferred |
|||||||
Domestic |
¥ | 50,846 | ¥ | (137,411 | ) | ||
Foreign |
61,401 | 723 | |||||
Total |
¥ | 112,247 | ¥ | (136,688 | ) | ||
For the years ended March 31, 2010 and 2011, ¥102,213 thousand and ¥202,827 thousand were recorded as income tax expenses attributable to operations and ¥4,615 thousand and ¥47,074 thousand were recognized as income tax expenses attributable to other comprehensive income.
F-67
UBIC, Inc. and subsidiaries
Notes to Consolidated Financial Statements (Continued)
13. INCOME TAXES (Continued)
The tax effects of temporary differences and operating loss carryforwards giving rise to deferred tax balances at March 31, 2010 and 2011 are as follows:
|
Thousands of Yen | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2011 | |||||||||||
|
Deferred Tax
Asset |
Deferred Tax
Liability |
Deferred Tax
Asset |
Deferred Tax
Liability |
|||||||||
Impairment loss on investments in securities |
¥ | 50,669 | ¥ | | ¥ | 50,669 | ¥ | | |||||
Depreciation and amortization |
46,814 | 130 | 31,279 | 815 | |||||||||
Accrued municipal governments tax |
711 | | 27,432 | | |||||||||
Research and development cost for internal use software |
9,736 | | 6,502 | | |||||||||
Deferred revenue |
| | 11,021 | | |||||||||
Accrued bonus |
4,123 | | 6,240 | | |||||||||
Accrued vacation |
4,213 | | 5,191 | | |||||||||
Asset retirement obligations |
4,036 | | 4,110 | | |||||||||
Operating loss carryforwards |
102,838 | | 9,235 | | |||||||||
Unrealized gain on available-for-sale securities |
| | | 47,058 | |||||||||
Others |
14,401 | 8,365 | 15,521 | 6,057 | |||||||||
Total |
237,541 | 8,495 | 167,200 | 53,930 | |||||||||
Valuation allowance |
(229,176 | ) | | (22,931 | ) | | |||||||
Total |
¥ | 8,365 | ¥ | 8,495 | ¥ | 144,269 | ¥ | 53,930 | |||||
In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in specific tax jurisdictions during the period in which these deductible differences become deductible. Based on these factors, management believes it is more likely than not the Company will realize the benefits of these deductible differences, net of the existing valuation allowance as of March 31, 2010 and 2011.
As of March 31, 2010, the valuation allowance for deferred tax assets related primarily to operating loss carryforwards, impairment loss on available-for-sale securities and depreciation and amortization, was provided at the amounts which considered not more likely than not to be realized.
For the year ended March 31, 2011, UBIC utilized operating loss carryforwards of ¥216,152 thousand to offset current taxable income. In addition, during the year ended March 31, 2011, the U.S. subsidiary filed a carryback claim and received a tax refund of ¥26,066 thousand related to operating losses.
As of March 31, 2011, the valuation allowance for deferred tax assets related primarily to operating loss carryforwards of the U.S. subsidiary, and was provided at the amounts which are considered not more likely than not to be realized.
Realization of the remaining deferred tax assets at UBIC was determined to be more likely than not and the valuation allowance related to UBIC's net deferred tax assets was eliminated during the year ended March 31, 2011.
F-68
UBIC, Inc. and subsidiaries
Notes to Consolidated Financial Statements (Continued)
13. INCOME TAXES (Continued)
An analysis of the movement in the valuation allowance for deferred tax assets for the years ended March 31, 2010 and 2011 is as follows:
|
Thousands of Yen | ||||||
---|---|---|---|---|---|---|---|
|
2010 | 2011 | |||||
Balance at the beginning of the year |
¥ | | ¥ | 229,176 | |||
Additions |
229,176 | 14,608 | |||||
Deductions |
| (220,853 | ) | ||||
Balance at the end of the year |
¥ | 229,176 | ¥ | 22,931 | |||
As of March 31, 2011, the U.S. subsidiary had operating loss carryforwards of ¥20,945 thousand. These operating loss carryforwards are available to offset future taxable income and will expire in March 31, 2020 for the U.S. state taxes and in March 31, 2030 for the U.S. federal taxes.
Income taxes imposed by the national, prefectural and municipal governments of Japan resulted in a statutory tax rate of approximately 40.69 percent for the years ended March 31, 2010 and 2011.
Reconciliations between the amount of reported income taxes and the amount of income taxes computed using the normal statutory tax rate for the years ended March 31, 2010 and 2011 are as follows:
|
Thousands of Yen | ||||||
---|---|---|---|---|---|---|---|
|
2010 | 2011 | |||||
Amount computed by using normal Japanese statutory tax rate |
¥ | (128,615 | ) | ¥ | 403,076 | ||
Increase (decrease) in taxes resulting from: |
|||||||
Entertainment expenses not deductible for tax purpose |
1,923 | 3,353 | |||||
Change in valuation allowance* |
229,015 | (206,069 | ) | ||||
Others-net |
(110 | ) | 2,467 | ||||
Income tax expense as reported |
¥ | 102,213 | ¥ | 202,827 | |||
14. SHARE-BASED COMPENSATION
In February 2005, the Company granted stock options to purchase a total of 100,000 equity shares to two employee/directors ("1 st series Stock Option Grant"). Options to purchase 100,000 shares held by two employee/directors were vested on February 10, 2007 and were exercisable for three years from that date.
In January 2006, the Company granted stock options to purchase a total of 112,000 equity shares to three employee/directors and two employees ("2 nd series Stock Option Grant"). Options to purchase 112,000 shares were vested on January 27, 2008 and were exercisable for three years from that date.
F-69
UBIC, Inc. and subsidiaries
Notes to Consolidated Financial Statements (Continued)
14. SHARE-BASED COMPENSATION (Continued)
In March 2006, the Company granted stock options to purchase a total of 16,000 equity shares to one employee/director and five employees ("3 rd series Stock Option Grant"). Options to purchase 14,400 shares were vested on March 16, 2008 and were exercisable for three years from that date. The remaining options were forfeited.
In June 2010, the Company granted stock options to purchase a total of 68,000 equity shares to one employee/director and one employee ("4 th series Stock Option Grant"). Options are vested three years after the grant date and will be exercisable for three years from the vesting date.
The Company issues new shares upon the exercise of stock options.
Share-based compensation is measured at the grant date, based on the fair value of the award, and the compensation expense is recognized on a straight-line basis over the vesting period. The following table presents total share-based compensation expense for the 4 th series Stock Option Grant, which is a noncash charge, and included in the consolidated statements of operations for the years ended March 31, 2010 and 2011:
The Company estimates the number of forfeitures prior to vesting at the grant date to be zero. The effect of a subsequent change in estimated forfeitures is recognized through a cumulative adjustment in the period which the forfeitures occur. As of March 31, 2011, the total unrecognized compensation expense related to the unvested portion of the 4 th series Stock Option Grant was ¥2,948 thousands. The expense will be recognized over a weighted-average period of 2.2 years.
The estimated fair value of stock options is determined using the Black-Scholes valuation model. Key inputs and assumptions to estimate the fair value of stock options include the exercise price of the award, the expected option term, the volatility of the Company's share price, the risk-free interest rate and the Company's dividend yield. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by individuals who receive equity awards, and subsequent events are not indicative of the reasonableness of the original estimates of fair value made by the Company.
The following table presents the weighted-average assumptions used in estimating the fair value of options granted under the 4 th series Stock Option Grant during the year ended March 31, 2011.
Expected life of stock option (years) |
4.5 | |||
Expected volatility |
83.5 | % | ||
Risk-free interest rate |
0.5 | % | ||
Expected dividend yield |
0 | % | ||
Weighted-average grant-date fair value per option to purchase one share |
¥ | 204 |
F-70
UBIC, Inc. and subsidiaries
Notes to Consolidated Financial Statements (Continued)
14. SHARE-BASED COMPENSATION (Continued)
The Company has estimated the expected term of its stock options as the middle of the exercise period of the stock options. The expected volatility is estimated based upon on the historical volatility of the Company's share price for the last three years adjusted for the effect of changes expected in the future. The expected risk-free interest rate is based on the Japanese government bond interest rate for the expected term. The expected dividend yield is based on the actual dividends paid and the expected payment in the future.
A summary of stock option activity during the year ended March 31, 2011, is presented below:
|
Shares |
Weighted-
average exercise price |
Weighted-average
remaining contractual term (in years) |
Aggregate
intrinsic value (Thousands of Yen) |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
OutstandingMarch 31, 2010 |
110,400 | ¥ | 125 | 1 | |||||||||
Granted |
68,000 | 391 | |||||||||||
Exercised |
(102,400 | ) | 125 | ||||||||||
Forfeited |
(56,000 | ) | 353 | ||||||||||
Expired |
| | |||||||||||
OutstandingMarch 31, 2011 |
20,000 | ¥ | 391 | 5.2 | 40,980 | ||||||||
Options vested and expected to vestMarch 31, 2011 |
20,000 | ¥ | 391 | 5.2 | 40,980 | ||||||||
Options exercisableMarch 31, 2011 |
| | | | |||||||||
The aggregate intrinsic value was calculated using the difference between the market price and the exercise price as of March 31, 2011 for only those awards that have an exercise price that is less than the market price.
Exercises of Stock Options
The total intrinsic value of stock options exercised during the years ended March 31, 2010 and 2011, was ¥17,660 thousand and ¥25,668 thousand, respectively. During the years ended March 31, 2010 and 2011, the Company received cash of ¥6,000 thousand and ¥12,800 thousand, respectively, being the exercise price for the exercised stock options. The cash received for payment of the exercise price is included as a component of cash flows from financing activities.
Nonvested Stock Options
A summary of the status of the Company's nonvested stock options at March 31, 2011 is as follows:
|
Shares |
Weighted-
Average Grant Date Fair Value |
|||||
---|---|---|---|---|---|---|---|
NonvestedApril 1, 2010 |
|||||||
Granted |
68,000 | ¥ | 204 | ||||
Vested |
| | |||||
Forfeited |
(48,000 | ) | 204 | ||||
Expired |
| | |||||
OutstandingMarch 31, 2011 |
20,000 | ¥ | 204 | ||||
F-71
UBIC, Inc. and subsidiaries
Notes to Consolidated Financial Statements (Continued)
15. EQUITY
Japanese companies are subject to the Companies Act of Japan (the "Companies Act"). The significant provisions in the Companies Act that affect financial and accounting matters are summarized below:
Dividend
Under the Companies Act, companies can pay dividends at any time during the fiscal year in addition to the year-end dividend upon resolution at the shareholders meeting. For companies that meet certain criteria such as; (1) having a Board of Directors, (2) having independent auditors, (3) having a Board of Statutory Auditors, and (4) the term of service of the directors is prescribed as one year rather than two years of normal term by its articles of incorporation, the Board of Directors may declare dividends (except for dividends in kind) at any time during the fiscal year if the company has prescribed so in its articles of incorporation. However, the Company cannot do so because it does not meet criteria (4) above. The Companies Act permits companies to distribute dividends-in-kind (non-cash assets) to shareholders subject to certain limitations and additional requirements. Semiannual interim dividends may also be paid once a year upon resolution by the Board of Directors if the articles of incorporation of the company so stipulate. The Companies Act provides certain limitations on the amounts available for dividends or the purchase of treasury stock. The limitation is defined as the amount available for distribution to the shareholders, but the amount of net assets after dividends must be maintained at no less than ¥3 million.
At the Special Shareholders Meeting held on August 20, 2009, UBIC's shareholders approved a reduction of additional paid-in capital of ¥70,000 thousand to eliminate the accumulated deficit. This transaction is reflected only in the stand-alone financial statements of UBIC prepared for the purpose of reporting under the Companies Act and not reflected in these U.S. GAAP financial statements.
Increases / decreases and transfer of common stock, reserve and surplus
The Companies Act requires that an amount equal to 10% of dividends must be appropriated as legal reserve (a component of retained earnings) or as additional paid-in capital (a component of capital surplus) depending on the equity account charged upon the payment of such dividends until the total of the aggregate amount of legal reserve and additional paid-in capital equals 25% of common stock. Under the Companies Act, the total amount of additional paid-in capital and legal reserve may be reversed without limitation. The Companies Act also provides that common stock, legal reserve, additional paid-in capital, and other capital surplus and retained earnings can be transferred among the accounts under certain conditions upon resolution of the shareholders.
The amount of retained earnings available for dividends under the Companies Act is based on the amount of retained earnings recorded in the Company's general books of account prepared using accepted Japanese accounting practices. The adjustments included in the accompanying consolidated financial statements for U.S. GAAP purposes but not recorded in the general books of account have no effect on the determination of retained earnings available for dividends under the Companies Act. Retained earnings shown in UBIC's general books of account, as determined under accounting principles generally accepted in Japan ("J GAAP"), amounted to ¥273,002 thousand at March 31, 2011.
F-72
UBIC, Inc. and subsidiaries
Notes to Consolidated Financial Statements (Continued)
16. OTHER COMPREHENSIVE INCOME
The changes in each component of other comprehensive income (loss) for the years ended March 31, 2010 and 2011 were as follows:
|
Thousands of Yen | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Foreign
currency translation adjustments |
Unrealized
holding gain on securities |
Adjustments
related to retirement and severance benefits |
Accumulated
other comprehensive income (loss) |
|||||||||
Balance at April 1, 2009 |
¥ | (4,684 | ) | ¥ | (6,725 | ) | ¥ | | ¥ | (11,409 | ) | ||
Period change |
704 | 6,725 | (394 | ) | 7,035 | ||||||||
Balance at March 31, 2010 |
(3,980 | ) | | (394 | ) | (4,374 | ) | ||||||
Period change |
(894 | ) | 68,592 | 418 | 68,116 | ||||||||
Balance at March 31, 2011 |
¥ | (4,874 | ) | ¥ | 68,592 | ¥ | 24 | ¥ | 63,742 | ||||
The tax effects allocated to each component of other comprehensive income (loss) for the years ended March 31, 2010 and 2011 were as follows:
|
Thousands of Yen | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2010 | |||||||||
|
Before Tax
Amount |
Tax (Expense) or
Benefit |
Net of Tax
Amount |
|||||||
Foreign currency translation adjustments |
¥ | 704 | ¥ | | ¥ | 704 | ||||
Unrealized holding gain (loss) on securities: |
||||||||||
Amount arising during the period |
(97,200 | ) | 39,550 | (57,650 | ) | |||||
Less: Reclassification adjustments for losses included in net income |
108,540 | (44,165 | ) | 64,375 | ||||||
Net unrealized holding gain during the period |
11,340 | (4,615 | ) | 6,725 | ||||||
Adjustments related to retirement and severance benefits: |
||||||||||
Amount arising during the period |
(394 | ) | | (394 | ) | |||||
Net adjustments related to retirement and severance benefits |
(394 | ) | | (394 | ) | |||||
Other comprehensive income |
¥ | 11,650 | ¥ | (4,615 | ) | ¥ | 7,035 | |||
F-73
UBIC, Inc. and subsidiaries
Notes to Consolidated Financial Statements (Continued)
16. OTHER COMPREHENSIVE INCOME (Continued)
|
Thousands of Yen | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2011 | |||||||||
|
Before Tax
Amount |
Tax Expense |
Net of Tax
Amount |
|||||||
Foreign currency translation adjustments |
¥ | (894 | ) | ¥ | | ¥ | (894 | ) | ||
Unrealized holding gain on securities: |
||||||||||
Amount arising during the period |
115,650 | (47,058 | ) | 68,592 | ||||||
Net unrealized holding gain during the period |
115,650 | (47,058 | ) | 68,592 | ||||||
Adjustments related to retirement and severance benefits: |
||||||||||
Amount arising during the period |
434 | (16 | ) | 418 | ||||||
Net adjustments related to retirement and severance benefits |
434 | (16 | ) | 418 | ||||||
Other comprehensive income |
¥ | 115,190 | ¥ | (47,074 | ) | ¥ | 68,116 | |||
17. NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed on the basis of weighted-average outstanding common shares. Diluted net income per share is computed on the basis of basic weighted-average outstanding common shares adjusted for the dilutive effect of stock options and convertible notes, if dilutive. Potentially dilutive common shares from series of stock option plans are determined by applying the treasury stock method to the assumed exercise of outstanding stock options. Potentially dilutive common shares are determined by applying the if-converted method for the convertible notes. The numerator of the diluted net income per share calculation is increased by the amount of interest expense, net of tax, related to outstanding convertible note if the net impact is dilutive.
The computation of basic and diluted net income (loss) per share for the years ended March 31, 2010 and 2011 was as follows:
|
2010 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
(Thousands of Yen)
Net Loss (Numerator) |
Weighted-Average
Common Shares Outstanding (Denominator) |
Per Share
Amount |
|||||||
Basic net loss attributable to UBIC, Inc. shareholders |
¥ | (418,298 | ) | 2,294,820 | ¥ | (182 | ) | |||
F-74
UBIC, Inc. and subsidiaries
Notes to Consolidated Financial Statements (Continued)
17. NET INCOME (LOSS) PER SHARE (Continued)
|
2011 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
(Thousands of Yen)
Net Income (Numerator) |
Weighted-Average
Common Shares Outstanding (Denominator) |
Per Share
Amount |
|||||||
Basic net income attributable to UBIC, Inc. shareholders |
¥ | 788,708 | 2,359,465 | ¥ | 334 | |||||
Effect of dilutive securities: |
||||||||||
Stock options |
57,965 | |||||||||
Convertible notes |
753,328 | |||||||||
Plus: interest on convertible notes |
1,305 | |||||||||
Diluted net income attributable to UBIC, Inc. shareholders |
¥ | 790,013 | 3,170,758 | ¥ | 249 | |||||
Basic and diluted loss per share are identical for the year ended March 31, 2010 as potentially dilutive securities have been excluded from the calculation of the diluted net loss per common share because the inclusion of such securities would be antidilutive.
18. SEGMENT REPORTING
Operating segments are defined as components of an enterprise that engage in business activities from which it may earn revenues and incur expenses and for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company provides a variety of eDiscovery and forensic services which are provided by UBIC and its domestic subsidiaries for domestic (Japanese) clients, by UNA for clients represented by U.S.-based attorneys who contracted UNA, and by other foreign subsidiaries for foreign clients other than those who contracted UNA. The Company's operations in Japan and the U.S. have been identified as the two operating segments of the Company. The Company's chief executive officer, who is also the Company's chief operating decision maker, regularly reviews the performance of the two operating segments and makes decisions regarding allocation of resources. The Company's chief operating decision maker utilizes various measurements prepared based on J GAAP which include revenues, operating income or loss and segment assets to assess segment performance and allocate resources to segments.
The Company's reportable segments are the same as its operating segments.
F-75
UBIC, Inc. and subsidiaries
Notes to Consolidated Financial Statements (Continued)
18. SEGMENT REPORTING (Continued)
Segment information for the years ended March 31, 2010 and 2011 is presented below:
Revenues:
|
Thousands of Yen | ||||||
---|---|---|---|---|---|---|---|
|
2010 | 2011 | |||||
Japan |
|||||||
Outside customers |
¥ | 507,201 | ¥ | 1,937,434 | |||
Intersegment |
258,355 | 450,210 | |||||
Total |
765,556 | 2,387,644 | |||||
U.S. |
|||||||
Outside customers |
438,253 | 804,494 | |||||
Intersegment |
25,605 | 49,668 | |||||
Total |
463,858 | 854,162 | |||||
Elimination |
(283,960 | ) | (499,878 | ) | |||
Total revenue after eliminations |
945,454 | 2,741,928 | |||||
Adjustments*(1) |
152,713 | (55,835 | ) | ||||
Total consolidated revenue |
¥ | 1,098,167 | ¥ | 2,686,093 | |||
Segment Performance Measure:
|
Thousands of Yen | ||||||
---|---|---|---|---|---|---|---|
|
2010 | 2011 | |||||
Segment profit (loss) |
|||||||
Japan |
¥ | (125,573 | ) | ¥ | 1,019,194 | ||
U.S. |
(57,214 | ) | 77,946 | ||||
Total segment profit (loss) after eliminations |
(182,787 | ) | 1,097,140 | ||||
Adjustments*(2) |
(662 | ) | (57,040 | ) | |||
Total consolidated operating income (loss) |
(183,449 | ) | 1,040,100 | ||||
Unallocated amounts: |
|||||||
Interest income |
3,441 | 3,410 | |||||
Interest expense |
(13,247 | ) | (14,262 | ) | |||
Foreign currency exchange losses |
(14,384 | ) | (39,942 | ) | |||
Impairment losses on investments in securities |
(108,540 | ) | | ||||
Other-net |
94 | 1,296 | |||||
Total consolidated income (loss) before income taxes |
¥ | (316,085 | ) | ¥ | 990,602 | ||
F-76
UBIC, Inc. and subsidiaries
Notes to Consolidated Financial Statements (Continued)
18. SEGMENT REPORTING (Continued)
Segment Assets:
|
Thousands of Yen | ||||||
---|---|---|---|---|---|---|---|
|
2010 | 2011 | |||||
Segment assets |
|||||||
Japan |
¥ | 789,239 | ¥ | 2,300,299 | |||
U.S. |
145,399 | 451,012 | |||||
Elimination |
(131,465 | ) | (434,500 | ) | |||
Total segment assets after eliminations |
803,173 | 2,316,811 | |||||
Adjustments*(3) |
46,083 | 56,785 | |||||
Total consolidated assets |
¥ | 849,256 | ¥ | 2,373,596 | |||
Capital expenditures on long-lived assets:
|
Thousands of Yen | ||||||
---|---|---|---|---|---|---|---|
|
2010 | 2011 | |||||
Capital expenditures |
|||||||
Japan |
¥ | 100,795 | ¥ | 249,406 | |||
U.S. |
1,153 | 917 | |||||
Adjustments |
310 | (1,986 | ) | ||||
Total consolidated capital expenditures |
¥ | 102,258 | ¥ | 248,337 | |||
Capital expenditures relate to property and equipment, capitalized computer software costs and other intangible assets on an accrual basis.
Other Significant Items:
|
Thousands of Yen | ||||||
---|---|---|---|---|---|---|---|
|
2010 | 2011 | |||||
Depreciation and amortization |
|||||||
Japan |
¥ | 74,298 | ¥ | 51,986 | |||
U.S. |
881 | 955 | |||||
Total depreciation and amortization |
¥ | 75,179 | ¥ | 52,941 | |||
Adjustments |
138,605 | 5,272 | |||||
Total consolidated depreciation and amortization |
¥ | 213,784 | ¥ | 58,213 | |||
Entity-Wide Information:
For the year ended March 31, 2010, revenue from Sanyo Electric Co., Ltd. amounted to ¥342,970 thousand, representing approximately 31.2 percent of the total revenue. For the year ended March 31, 2011, revenue from Panasonic Corporation, Aisin Seiki, Yazaki Corporation, and TMI Associates amounted to ¥594,130 thousand, ¥379,832 thousand, ¥372,064 thousand, and ¥
F-77
UBIC, Inc. and subsidiaries
Notes to Consolidated Financial Statements (Continued)
18. SEGMENT REPORTING (Continued)
311,325 thousand, respectively, representing approximately 22.1 percent, 14.1 percent, 13.9 percent, and 11.6 percent, respectively, of the total revenue. These customers are attributable to Japan except ¥342,970 thousand for Sanyo Electric Co., Ltd. for the year ended March 31, 2010 and ¥379,832 thousand for Aisin Seiki for the year ended March 31, 2011, which are reported in the U.S.
The information concerning revenue by service categories for the years ended March 31, 2010 and 2011 is presented below:
|
Thousands of Yen | ||||||
---|---|---|---|---|---|---|---|
|
2010 | 2011 | |||||
eDiscovery |
¥ | 835,608 | ¥ | 2,529,778 | |||
Investigation |
122,102 | 44,061 | |||||
Sales of forensic tools |
79,795 | 49,208 | |||||
Forensic training |
46,913 | 38,252 | |||||
Other |
13,749 | 24,794 | |||||
Total revenue |
¥ | 1,098,167 | ¥ | 2,686,093 | |||
Long-lived assets held in Japan and in the U.S. as of March 31, 2010 were ¥103,108 thousand and ¥2,222 thousand, respectively. Long-lived assets held in Japan and in the U.S. as of March 31, 2011 were ¥112,013 thousand and ¥2,193 thousand, respectively. Long-lived assets include property and equipment.
19. RELATED PARTY TRANSACTIONS
As of March 31, 2011, Focus Systems Corporation ("Focus Systems") owned approximately 15.8% of UBIC's outstanding common shares and UBIC's voting shares. The Company has a continuing agency agreement with Focus Systems effective from January 1, 2006 related to the sale of UBIC's eDiscovery services and forensic tools and services. Focus Systems also entered into an agreement with UBIC on February 1, 2010 to design and develop a software system used by UBIC. Furthermore, on April 1, 2010, UBIC issued unsecured convertible notes with a face amount of ¥80,000 thousand to Focus Systems for ¥76,000 thousand. Focus Systems converted the notes into 204,472 common shares of UBIC on March 14, 2011.
The balances as of March 31, 2010 and 2011, and transactions of the Company with Focus Systems for years ended March 31, 2010 and 2011, are summarized as follows:
|
Thousands of Yen | ||||||
---|---|---|---|---|---|---|---|
|
2010 | 2011 | |||||
Account Balances: |
|||||||
Trade receivables |
¥ | 20,784 | ¥ | 8,038 | |||
Prepaid expense |
1,159 | | |||||
Other accounts receivable |
3 | | |||||
Advance received |
9,384 | 10,141 | |||||
Other accounts payable |
2,779 | |
F-78
UBIC, Inc. and subsidiaries
Notes to Consolidated Financial Statements (Continued)
19. RELATED PARTY TRANSACTIONS (Continued)
|
Thousands of Yen | ||||||
---|---|---|---|---|---|---|---|
|
2010 | 2011 | |||||
Transactions: |
|||||||
Revenue |
¥ | 80,072 | ¥ | 40,764 | |||
Cost of revenue (maintenance costs) |
14,648 | | |||||
Selling, general and administrative expenses (outsourcing costs, storage fee, etc.) |
40,753 | 19,537 | |||||
Capitalized computer software |
42,192 | |
Price and condition of transactions with Focus Systems are determined in the same manner as in the ordinary course of business.
Under a separate arrangement, a Chairman of Focus Systems rendered certain advisory services to UBIC and UBIC paid ¥6,000 thousand during the years ended March 31, 2010 and 2011.
A UBIC board member owns 10.3% of UBIC's outstanding common shares and UBIC's voting shares as of March 31, 2011. In January 2011, he exercised stock options granted in January 2006 and March 2006 and paid ¥11,500 thousand to UBIC as exercise price.
20. ADVERTISING COSTS
Advertising costs, which are included in "Selling, general and administrative expenses" incurred during the years ended March 31, 2010 and 2011 relate primarily to advertisements in magazines and journals and amounted to ¥13,772 thousand and ¥16,230 thousand, respectively.
21. SUBSEQUENT EVENTS
Incorporation of Subsidiaries
On April 12, 2011, UBIC established UBIC Risk Consulting with JP Research and Consulting, for the purpose of providing high-quality data collection services using computer forensic technologies and analogue investigations. UBIC invested ¥8,000 thousand and holds an 80% interest in UBIC Risk Consulting.
On October 27, 2011, UBIC established UBIC Taiwan, Inc., for the purpose of obtaining new customers and providing innovative technology solutions for customers located in Taiwan. UBIC invested ¥50,000 thousand and wholly owns UBIC Taiwan, Inc.
On December 15, 2011, UBIC established UBIC Korea, Inc., for the purpose of obtaining new customers and providing innovative technology solutions for customers located in South Korea. UBIC invested approximately ¥50,000 thousand (700,000 thousand in Korean Won) and wholly owns UBIC Korea, Inc.
Loans
On September 27, 2011, UBIC entered into a five-year syndicated loan arrangement for ¥700,000 thousand with a consortium of banks. The new loan facility will primarily support UBIC's capital investment for business development during the year ending March 31, 2012.
F-79
UBIC, Inc. and subsidiaries
Notes to Consolidated Financial Statements (Continued)
21. SUBSEQUENT EVENTS (Continued)
Convertible notes
On February 28, 2012, an investor converted convertible notes with a face amount of ¥110,000 thousand into 281,150 common shares of the Company. To account for the conversion, UBIC recorded an increase of ¥52,800 thousand both in "Common stock" and "Additional paid-in capital."
On May 15, 2012, an investor converted convertible notes with a face amount of ¥110,000 thousand into 281,114 common shares of the Company. To account for the conversion, UBIC recorded an increase of ¥53,350 thousand both in "Common stock" and "Additional paid-in capital."
Stock options
On June 23, 2010, the 5 th series Stock Option Grant was approved at UBIC's ordinary general meeting of shareholders. On April 28, 2011, UBIC's board of directors resolved and approved the issuance of stock options under the 5 th series Stock Option Grant.
The key terms and conditions for the 5 th series Stock Option Grant are as follows:
Grant date |
April 28, 2011 | |
Number of shares to be issued |
80,000 shares | |
Exercise price per share |
¥2,203 | |
Exercise period of the stock options |
April 29, 2014 to April 28, 2017 | |
Total number of recipientsDirectors and employees of the Company |
6 | |
Conditions for the stock options to be vested |
Enrolled as director or employee of UBIC |
Stock Splits
On September 12, 2011, the Company's Board of Directors declared a two-for-one split of its shares of common stock. The split was effective from October 1, 2011, for all shareholders of record on September 30, 2011.
On March 15, 2012, the Company's Board of Directors declared a two-for-one split of its shares of common stock. The stock split will be effective from April 1, 2012, for all shareholders of record on March 31, 2012.
As a result of the stock split, all amounts related to shares, share prices and earnings per share have been retroactively restated throughout these consolidated financial statements.
Dividends
On June 24, 2011, UBIC's shareholders approved the payment of year-end cash dividend of ¥7.5 per share of common stock in the aggregate amount of ¥19,730 thousand to shareholders of record at June 27, 2011.
* * * * * *
F-80
Condensed Consolidated Balance Sheets (Unaudited)
March 31 and December 31, 2012
|
Thousands of Yen |
Thousands of
U.S. Dollars (Note 1) |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
March 31,
2012 |
December 31,
2012 |
December 31,
2012 |
|||||||
ASSETS |
||||||||||
Current Assets: |
||||||||||
Cash and cash equivalents |
¥ | 2,410,304 | ¥ | 1,301,486 | $ | 15,022 | ||||
Trade receivables |
987,395 | 1,116,233 | 12,884 | |||||||
Prepaid expenses |
85,691 | 116,969 | 1,350 | |||||||
Deferred tax assets |
110,105 | 64,952 | 750 | |||||||
Other current assets |
49,525 | 96,677 | 1,116 | |||||||
Total Current Assets |
3,643,020 | 2,696,317 | 31,122 | |||||||
Property and equipmentnet |
376,763 | 652,357 | 7,530 | |||||||
Capitalized computer software costsnet |
481,747 | 772,286 | 8,914 | |||||||
Other intangible assetsnet |
3,900 | 5,235 | 60 | |||||||
Investments in securities |
273,615 | 283,065 | 3,267 | |||||||
Rental deposits |
89,039 | 84,518 | 976 | |||||||
Deferred IPO costs |
83,639 | 209,656 | 2,420 | |||||||
Deferred tax assets |
485 | 1,150 | 13 | |||||||
Other assets, net of allowance for doubtful accounts of ¥4,983 thousand ($58 thousand) as of March 31 and December 31, 2012 |
27,468 | 50,151 | 579 | |||||||
TOTAL ASSETS |
¥ | 4,979,676 | ¥ | 4,754,735 | $ | 54,881 | ||||
See notes to condensed consolidated financial statements.
F-81
UBIC, Inc. and subsidiaries
Condensed Consolidated Balance Sheets (Unaudited) (Continued)
March 31 and December 31, 2012
See notes to condensed consolidated financial statements.
F-82
UBIC, Inc. and subsidiaries
Condensed Consolidated Statements of Income (Unaudited)
Nine Months ended December 31, 2011 and 2012
|
Thousands of Yen |
Thousands of
U.S. Dollars (Note 1) |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
December 31,
2011 |
December 31,
2012 |
December 31,
2012 |
|||||||
Revenue |
¥ | 3,754,013 | ¥ | 3,516,633 | $ | 40,589 | ||||
Revenue from a related party |
22,002 | 14,783 | 171 | |||||||
Operating revenue from reimbursed direct costs |
7,943 | 10,921 | 126 | |||||||
Total revenue |
3,783,958 | 3,542,337 | 40,886 | |||||||
Cost of revenue |
1,205,360 | 1,314,078 | 15,167 | |||||||
Reimbursed direct costs |
7,943 | 10,921 | 126 | |||||||
Selling, general and administrative expenses |
676,192 | 1,365,845 | 15,765 | |||||||
Total operating expense |
1,889,495 | 2,690,844 | 31,058 | |||||||
Operating income |
1,894,463 | 851,493 | 9,828 | |||||||
Interest income |
1,638 |
990 |
11 |
|||||||
Interest expense |
(8,264 | ) | (14,421 | ) | (166 | ) | ||||
Foreign currency exchange gains (losses) |
(35,590 | ) | 78,971 | 911 | ||||||
Dividend income |
| 4,500 | 52 | |||||||
Othernet |
5,211 | (2,027 | ) | (23 | ) | |||||
Income before income taxes |
1,857,458 | 919,506 | 10,613 | |||||||
Income taxes |
800,115 |
378,929 |
4,374 |
|||||||
Net income |
1,057,343 | 540,577 | 6,239 | |||||||
Less: Net income attributable to noncontrolling interests |
2,613 |
4,578 |
53 |
|||||||
Net income attributable to UBIC, Inc. shareholders |
¥ | 1,054,730 | ¥ | 535,999 | $ | 6,186 | ||||
|
Yen | U.S. Dollars | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
December 31,
2011 |
December 31,
2012 |
December 31,
2012 |
|||||||
Net income attributable to UBIC, Inc. shareholders per share: |
||||||||||
Basic |
¥ | 401 | ¥ | 170 | $ | 1.97 | ||||
Diluted |
327 | 165 | 1.90 | |||||||
Cash dividends declared per common share |
7.5 |
50 |
0.58 |
See notes to condensed consolidated financial statements.
F-83
UBIC, Inc. and subsidiaries
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
Nine Months ended December 31, 2011 and 2012
|
|
|
|
|
Thousands of
U.S. Dollars (Note 1) |
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Thousands of Yen | ||||||||||||||||||
|
December 31, 2012 | ||||||||||||||||||
|
December 31, 2011 | December 31, 2012 | |||||||||||||||||
Net income |
¥ | 1,057,343 | ¥ | 540,577 | $ | 6,239 | |||||||||||||
Other comprehensive income, net of tax: |
|||||||||||||||||||
Foreign currency translation adjustments |
1,702 | 18,009 | 208 | ||||||||||||||||
Unrealized holding gains on securities: |
|||||||||||||||||||
Amount arising during the period |
¥ | 22,050 | ¥ | 6,082 | $ | 70 | |||||||||||||
Less: Reclassification adjustments for losses included in net income |
(7,500 | ) | 14,550 | | 6,082 | | 70 | ||||||||||||
Total other comprehensive income |
16,252 | 24,091 | 278 | ||||||||||||||||
Total comprehensive income |
1,073,595 | 564,668 | 6,517 | ||||||||||||||||
Less: Comprehensive income attributable to noncontrolling interests |
2,613 |
4,578 |
53 |
||||||||||||||||
Total comprehensive income attributable to UBIC, Inc. shareholders |
¥ | 1,070,982 | ¥ | 560,090 | $ | 6,464 | |||||||||||||
See notes to condensed consolidated financial statements.
F-84
UBIC, Inc. and subsidiaries
Condensed Consolidated Statements of Equity (Unaudited)
Nine Months ended December 31, 2011 and 2012
|
Thousands of Yen, except share data | ||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
UBIC, Inc. Shareholders |
|
|
||||||||||||||||||||||
|
Shares of
Common Stock Outstanding |
Common
Stock |
Additional
Paid-in Capital |
Retained
Earnings (Accumulated Deficit) |
Accumulated
Other Comprehensive Income |
Treasury
Stock |
Non-
controlling Interests |
Total
Equity |
|||||||||||||||||
Balance at April 1, 2011 |
2,630,872 | ¥ | 805,624 | ¥ | 345,115 | ¥ | (19,278 | ) | ¥ | 63,742 | ¥ | (26 | ) | ¥ | 7,067 | ¥ | 1,202,244 | ||||||||
Comprehensive income: |
|||||||||||||||||||||||||
Net income |
1,054,730 | 2,613 | 1,057,343 | ||||||||||||||||||||||
Other comprehensive income, net of tax |
16,252 | 16,252 | |||||||||||||||||||||||
Share-based compensation |
36,320 | 36,320 | |||||||||||||||||||||||
Stock issuance by newly established subsidiary |
2,000 | 2,000 | |||||||||||||||||||||||
Dividends paid |
(19,730 | ) | (19,730 | ) | |||||||||||||||||||||
Balance at December 31, 2011 |
2,630,872 | ¥ | 805,624 | ¥ | 381,435 | ¥ | 1,015,722 | ¥ | 79,994 | ¥ | (26 | ) | ¥ | 11,680 | ¥ | 2,294,429 | |||||||||
Balance at April 1, 2012 |
2,912,022 | ¥ | 858,424 | ¥ | 440,946 | ¥ | 1,328,679 | ¥ | 99,513 | ¥ | (26 | ) | ¥ | 12,018 | ¥ | 2,739,554 | |||||||||
Comprehensive income: |
|||||||||||||||||||||||||
Net income |
535,999 | 4,578 | 540,577 | ||||||||||||||||||||||
Other comprehensive income, net of tax |
24,091 | 24,091 | |||||||||||||||||||||||
Conversion of convertible notes |
281,114 | 53,350 | 52,007 | 105,357 | |||||||||||||||||||||
Share-based compensation |
48,454 | 48,454 | |||||||||||||||||||||||
Dividends paid |
(145,598 | ) | (145,598 | ) | |||||||||||||||||||||
Balance at December 31, 2012 |
3,193,136 | ¥ | 911,774 | ¥ | 541,407 | ¥ | 1,719,080 | ¥ | 123,604 | ¥ | (26 | ) | ¥ | 16,596 | ¥ | 3,312,435 | |||||||||
See notes to condensed consolidated financial statements.
F-85
UBIC, Inc. and subsidiaries
Condensed Consolidated Statements of Equity (Unaudited) (Continued)
Nine Months ended December 31, 2011 and 2012
|
Thousands of U.S. Dollars, except share data | ||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
UBIC, Inc. Shareholders |
|
|
||||||||||||||||||||||
|
Shares of
Common Stock Outstanding |
Common
Stock |
Additional
Paid-in Capital |
Retained
Earnings |
Accumulated
Other Comprehensive Income |
Treasury
Stock |
Non-
controlling Interest |
Total
Equity |
|||||||||||||||||
Balance at April 1, 2012 |
2,912,022 | $ | 9,908 | $ | 5,089 | $ | 15,336 | $ | 1,149 | $ | (0 | ) | $ | 139 | $ | 31,621 | |||||||||
Comprehensive income: |
|||||||||||||||||||||||||
Net income |
6,186 | 53 | 6,239 | ||||||||||||||||||||||
Other comprehensive income, net of tax |
278 | 278 | |||||||||||||||||||||||
Conversion of convertible notes |
281,114 | 616 | 601 | 1,217 | |||||||||||||||||||||
Share-based compensation |
559 | 559 | |||||||||||||||||||||||
Dividends paid |
(1,680 | ) | (1,680 | ) | |||||||||||||||||||||
Balance at December 31, 2012 |
3,193,136 | $ | 10,524 | $ | 6,249 | $ | 19,842 | $ | 1,427 | $ | (0 | ) | $ | 192 | $ | 38,234 | |||||||||
See notes to condensed consolidated financial statements.
F-86
UBIC, Inc. and subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine Months ended December 31, 2011 and 2012
|
Thousands of Yen |
Thousands of
U.S. Dollars (Note 1) |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
December 31,
2011 |
December 31,
2012 |
December 31,
2012 |
|||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||||
Net income |
¥ | 1,057,343 | ¥ | 540,577 | $ | 6,239 | ||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
||||||||||
Depreciation and amortization |
87,544 | 209,104 | 2,413 | |||||||
Share-based compensation expense |
36,320 | 48,454 | 559 | |||||||
Deferred income taxes |
4,517 | 121,873 | 1,407 | |||||||
Foreign currency exchange losses (gains) |
22,904 | (105,880 | ) | (1,222 | ) | |||||
Changes in operating assets and liabilities: |
||||||||||
Decrease (increase) in trade receivables |
339,104 | (95,219 | ) | (1,099 | ) | |||||
Increase in prepaid expenses |
(17,845 | ) | (16,208 | ) | (187 | ) | ||||
Decrease (increase) in other current assets |
(47,173 | ) | (44,528 | ) | (514 | ) | ||||
Decrease (increase) in rental deposits |
(6,490 | ) | 5,652 | 65 | ||||||
Decrease in trade payables |
(17,167 | ) | (27,131 | ) | (313 | ) | ||||
Increase (decrease) in accrued consumption taxes |
35,915 | (72,649 | ) | (839 | ) | |||||
Increase (decrease) in accrued income taxes |
285,348 | (738,088 | ) | (8,519 | ) | |||||
Othernet |
16,167 | (35,846 | ) | (414 | ) | |||||
Net cash provided by (used in) operating activities |
1,796,487 | (209,889 | ) | (2,424 | ) | |||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||||
Purchase of property and equipment |
(228,805 | ) | (372,029 | ) | (4,294 | ) | ||||
Capitalized computer software costs |
(171,454 | ) | (404,994 | ) | (4,674 | ) | ||||
Othernet |
(1,252 | ) | (1,792 | ) | (21 | ) | ||||
Net cash used in investing activities |
(401,511 | ) | (778,815 | ) | (8,989 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||||
Proceeds from short-term debt |
150,000 | 950,000 | 10,965 | |||||||
Repayment of short-term debt |
(12,500 | ) | (1,012,500 | ) | (11,686 | ) | ||||
Proceeds from long-term bank borrowings |
350,000 | 350,000 | 4,040 | |||||||
Repayment of long-term bank borrowings |
(111,700 | ) | (128,750 | ) | (1,486 | ) | ||||
Proceeds from issuance of common stock to noncontrolling shareholders by newly established subsidiary |
2,000 | | | |||||||
Dividends paid |
(19,730 | ) | (145,598 | ) | (1,680 | ) | ||||
Payment of IPO costs |
| (165,061 | ) | (1,905 | ) | |||||
Othernet |
(1,144 | ) | (17,487 | ) | (202 | ) | ||||
Net cash provided by (used in) financing activities |
356,926 | (169,396 | ) | (1,954 | ) | |||||
EFFECT OF FOREIGN CURRENCY EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS |
(4,250 | ) | 49,282 | 569 | ||||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
1,747,652 | (1,108,818 | ) | (12,798 | ) | |||||
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR |
675,212 |
2,410,304 |
27,820 |
|||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD |
¥2,422,864 | ¥1,301,486 | $ | 15,022 | ||||||
NONCASH INVESTING AND FINANCING ACTIVITIES: |
||||||||||
Conversion of convertible notes to common stock |
¥ | | ¥ | 105,466 | $ | 1,217 | ||||
Outstanding payments for acquisition of property and equipment, and capitalized computer software costs included in trade payables |
| 126,550 | 1,461 | |||||||
Outstanding payments for deferred IPO costs |
| 44,910 | 518 |
See notes to condensed consolidated financial statements.
F-87
UBIC, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations UBIC, Inc. ("UBIC") is a Japanese corporation established on August 8, 2003, whose principal office is located in Japan. UBIC and its subsidiaries (collectively, the "Company") provide solutions, employing advanced technologies, for corporate litigation strategy and crisis management. The Company mainly offers eDiscovery services, such as data collection, data processing, data review and document production, and forensic services. The Company's customers include leading law firms, corporate legal departments, government agencies and other professional advisors who require innovative technology, responsive services and deep subject-matter expertise.
Basis of Financial Statements The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"). Because the Company maintains its records and prepares its financial statements in accordance with accounting principles prevailing in the respective country of incorporation, certain adjustments have been made to conform to U.S. GAAP. The major adjustments include those relating to depreciation of property and equipment, share-based compensation, valuation of deferred tax assets, appropriation of accumulated deficit and deferred U.S. Initial Public Offering ("IPO") costs.
These unaudited condensed consolidated financial statements were prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information related to the Company's organization, significant accounting policies and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP has been condensed or omitted. In the opinion of management, these financial statements include all adjustments that, unless otherwise disclosed, are of a normal recurring nature and necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented. Operating results for interim periods are not necessarily indicative of the results that can be expected for a full year. These interim financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the years ended March 31, 2011 and 2012.
Translation into U.S. Dollars The accompanying condensed consolidated financial statements are stated in Japanese yen, the currency of the country in which UBIC is incorporated and principally operates. The translation of Japanese yen amounts into U.S. dollar amounts for the nine months ended December 31, 2012 is included solely for the convenience of readers outside Japan and has been made at the rate of Yen 86.64= U.S.$1 (the official rate as of December 31, 2012 announced by the Federal Reserve Bank of New York). The translation should not be construed as a representation that the Japanese yen amounts could be converted into U.S. dollars at the above or any other rate.
Principles of Consolidation The condensed consolidated financial statements include the accounts of UBIC and its subsidiaries. Intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions used are primarily in the areas of valuation of investments, valuation of deferred tax assets, determination of fair values of stock options, and
F-88
UBIC, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
estimated useful lives of fixed assets and intangible assets with finite useful lives. Actual results could differ from those estimates.
Foreign Currency Translation The assets and liabilities of foreign subsidiaries with functional currencies other than Japanese yen are translated into Japanese yen at the rate of exchange at the balance sheet date. Income and expense accounts are translated at the average rates of exchange for the respective reporting period. The resulting translation adjustments are included in other comprehensive income.
Cash Equivalents The Company defines cash equivalents as all highly liquid investments with insignificant risk of changes in value which have original maturities of three months or less at the time of purchase.
Allowance for Doubtful Accounts Allowance for doubtful accounts is established in amounts considered to be appropriate based primarily upon an evaluation of potential losses in the outstanding receivables.
Deferred IPO Costs Incremental costs directly associated with the Company's pending IPO, such as consulting costs and legal fees, are capitalized and recorded as deferred IPO costs in anticipation of the IPO. These costs will be netted against the gross proceeds of the IPO and recorded in additional paid-in capital.
Property and Equipment Property and equipment are stated at cost. Depreciation and amortization of property and equipment, including assets under capital lease, are computed using the straight-line method based on either the estimated useful lives of the assets or the lease period, whichever is shorter.
The useful lives for depreciation by major asset classes are as follows:
Leasehold improvements |
5 to 15 years | |
Furniture and fixtures |
4 to 20 years | |
Computers |
5 years | |
Assets under capital leases, primarily office equipment |
5 years |
Capitalized Computer Software Costs The Company capitalizes costs of computer software developed and purchased for internal use. Costs incurred in the creation of computer software products for internal use are capitalized when the preliminary project phase is completed and when management, with the relevant authority, authorizes and commits funding to the project and it is probable that the project will be completed and the software will be used to perform the function intended. Internal and external costs incurred during the preliminary project stage are expensed as they are incurred. Capitalized costs are amortized, beginning in the period each module or component of the product is ready for its intended use, on a straight-line basis over the estimated useful life of the product, mainly five years.
Leases Capital leases are capitalized at the inception of the lease at the present value of the minimum lease payments. All other leases are accounted for as operating leases. Lease payments for capital leases are apportioned to interest expense and a reduction of the lease obligation so as to
F-89
UBIC, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
achieve a constant rate of interest on the balance of the obligation. Operating lease payments are recognized as an expense on a straight-line basis over the lease term.
Impairment of Long-lived Assets The Company reviews the carrying value of long-lived assets or a related group of assets to be held and used, including intangible assets with finite useful lives, for impairment whenever events or circumstances occur that indicate that the carrying value of the assets may not be recoverable. The assets are considered to be impaired when the estimated undiscounted cash flows expected to result from the use of the assets and their eventual disposition are less than their carrying values. The impairment loss is measured as the amount by which the carrying value of the asset or asset group exceeds its fair value. In determining the fair value, the Company uses available quoted market prices and present value techniques, if appropriate, based on the estimated future cash flows expected to result from the use of the assets and their eventual dispositions.
Investments in Securities The Company classifies investments in equity securities that have readily determinable fair values as available-for-sale securities, which are accounted for at fair values with unrealized gains and losses excluded from earnings and reported in accumulated other comprehensive income in equity on a net-of-tax basis. The cost of securities sold is determined based on the average cost method.
The Company reviews the fair value of available-for-sale securities on a regular basis to determine if the fair value of any individual security has declined below its cost and if such decline is other than temporary. Fair value is determined based on quoted market prices. If the decline in fair value is judged to be other than temporary, the cost basis of the investment is written down to fair value. Other-than-temporary declines in fair value are determined taking into consideration the duration of the decline in fair value of the security and the severity of the decline, the financial condition and near term prospects of the investee and the intent and ability of the Company to hold the equity security until forecasted recovery. The resulting recognized loss is included in the condensed consolidated statements of income in the period in which the decline is deemed to be other than temporary.
Retirement and Severance Benefits The Company has defined benefit severance indemnities plans. The benefit obligation is the projected benefit obligation, which represents the actuarial present value of benefits expected to be paid upon retirement based on employee services already rendered and estimated future compensation levels. Net periodic retirement cost is recorded in the condensed consolidated statement of income and includes service cost and interest cost. Service cost represents the actuarial present value of participant benefits earned in the current year. Interest cost represents the time value of money cost associated with the passage of time. Actuarial gains and losses included in accumulated other comprehensive income are amortized using the straight-line method over the average remaining service period of active employees if it exceeds the corridor, which is defined as 10 percent of the projected benefit obligation.
Asset Retirement Obligations The Company records asset retirement obligations when the obligation is incurred. The obligation is measured at fair value and included in other liabilities. When the liability is initially recorded, the Company capitalizes the related cost by increasing the carrying amount of the related long-lived asset. The liability is accreted to its present value each period, and the capitalized cost is depreciated over the asset's useful life.
F-90
UBIC, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Convertible Notes The Company accounts for convertible notes according to their stated redemption value net of discount. The Company classifies the convertible notes as a liability or equity on the condensed consolidated balance sheet according to the nature of the redemption feature. Discounts on convertible notes are amortized as interest expense over the redemption period.
Derivative Financial Instruments The Company recognizes all derivative financial instruments, such as interest rate swap contracts, in the condensed consolidated balance sheets as either assets or liabilities and they are measured at fair value regardless of the purpose or intent for using them.
The Company does not designate derivative financial instruments as hedging instruments nor apply hedge accounting. Accordingly, changes in fair value of the derivative financial instruments are recognized in earnings immediately.
Revenue Recognition The Company has agreements with customers pursuant to which it performs various services. A majority of the Company's revenue relates to fees earned for the month-to-month performance of eDiscovery services including data collection, data processing, data hosting, data review and document production, and forensic services. The fees that the Company earns and bills for these services vary primarily based on the hours of service provided, the volume of documents reviewed or produced, the amount of data processed or stored. While the unit prices for providing the services are agreed in advance, the scope and volume of services to be performed can change depending on customers' requests, which are made on an optional and "as needed" basis, and customers may choose not to request performance of additional services or may obtain similar services from other service providers.
The Company recognizes revenue for eDiscovery and forensic services based on the agreed-upon prices and volume of services performed during the period. For these contractual arrangements, the Company has identified each deliverable service element. Based on management's evaluation of each element, it was determined that each element delivered has standalone value to the customers because the Company or other vendors sell such services separately from any other services/deliverables. Accordingly, each of the service elements in the multiple element case qualifies as a separate unit of accounting. The Company uses the best estimate of sales price based on the price it charges when it sells an element on a standalone basis, which is generally consistent with the stated prices in the arrangements, and allocates revenue to the various units of accounting in the arrangements based on the stated prices. The Company recognizes revenue for each separate unit of accounting when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the fee is fixed or determinable, and collectability is reasonably assured based on evidence of an arrangement.
The Company has revenue related to the reimbursement of certain direct costs by customers, primarily transportation. Reimbursed transportation and other reimbursable direct costs are recorded gross in the condensed consolidated statements of income as "Operating revenue from reimbursed direct costs" and as "Reimbursed direct costs."
Consumption Tax Consumption tax collected and remitted to tax authorities is excluded from revenues, cost of sales and expenses in the condensed consolidated statements of income.
F-91
UBIC, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Advertising Advertising costs are expensed as incurred and are recorded in "Selling, general and administrative expenses."
Share-Based Compensation The Company measures the cost of employee services received in exchange for an award of equity instruments at the fair value of the award on the grant-date and recognizes the cost over the period which the employee is required to provide services in exchange for the award. Compensation expenses are recognized on a straight-line basis over the requisite service period of the awards which are expected to be vested. The Company measures the cost of non-employee services received in exchange for an award of equity instruments at the fair value. The fair value of awards granted to non-employees is measured using the stock price and other measurement assumptions as of the earlier of either (1) the date at which a commitment for performance by the counterparty to earn the equity instruments is reached, or (2) the date at which the counterparty's performance is complete. The Company recognizes the cost on a straight-line basis over the vesting period, which is generally the service contract term during which services are rendered by the non-employees.
Income Taxes Deferred income taxes reflect the impact of temporary differences between assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes and tax loss carryforwards. These deferred taxes are measured using the currently enacted tax rates in effect for the year in which the temporary differences or tax loss carryforwards are expected to reverse. Valuation allowances are provided against deferred tax assets when it is more likely than not that a tax benefit will not be realized. The Company recognizes the financial statement effect of uncertain tax positions when they are more likely than not, based on the technical merits, that the tax positions will be sustained upon examination by the tax authorities. Benefits from tax positions that meet the more-likely-than-not recognition threshold are measured at the largest amount of benefit that is greater than 50% likely of being realized upon settlement. Accrued interest and penalties related to the unrecognized tax benefits are included in income tax expense in the condensed consolidated statement of income. The Company had no unrecognized tax benefits during the nine months ended December 31, 2011 and 2012.
Net Income Attributable to UBIC, Inc. Shareholders Per Share Basic net income attributable to UBIC, Inc. shareholders per share is computed using the weighted-average number of shares of common stock outstanding during each period. Diluted net income attributable to UBIC, Inc. shareholders per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company.
Other Comprehensive Income Other comprehensive income consists of translation adjustments resulting from the translation of financial statements of the foreign subsidiaries, unrealized holding gains or losses on available-for-sale securities and adjustments related to retirement and severance benefits.
Recently Adopted Accounting Pronouncements
In October 2009, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2009-13, " Revenue Recognition:Multiple-Deliverable Revenue
F-92
UBIC, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Arrangements ," which amends the criteria for when to evaluate individual delivered items in a multiple-deliverable arrangement and the method of allocating consideration received. This ASU is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 and early adoption is permitted. The Company retrospectively adopted this ASU in the fiscal year beginning April 1, 2009. The adoption of this ASU did not have a material impact on the Company's financial position or results of operations.
In October 2009, the FASB issued ASU No. 2009-14, " Certain Revenue Arrangements That Include Software Elements ." This ASU affects how entities account for revenue arrangements that contain both tangible products and software elements. Previously, arrangements containing both tangible products and software were accounted for based on the provisions regarding revenue recognition included in ASC 985, " Software ," if the software was considered more than incidental to the product or service. This ASU changes revenue recognition for tangible products containing software elements and non-software elements that function together to deliver the tangible product's essential functionality by eliminating them from the scope of ASC 985. This ASU is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 and early adoption is permitted. The Company retrospectively adopted this ASU in the fiscal year beginning April 1, 2009. The adoption of this ASU did not have a material impact on the Company's financial position or results of operations.
In July 2010, the FASB issued ASU No. 2010-20, " Receivables: Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses ," which requires new disclosures and enhances existing disclosures about the credit quality of financing receivables and the allowance for credit losses. The disclosures as of the end of a reporting period were effective for interim and annual reporting periods which ended on or after December 15, 2010 and the Company adopted this ASU in the third quarter of the fiscal year beginning April 1, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December15, 2010. The Company adopted this ASU in the fourth quarter of the fiscal year beginning April 1, 2010. The adoption of this ASU did not have a material impact on the Company's financial position or results of operations.
In December 2010, the FASB issued ASU No. 2010-29, " Business Combinations ," which clarifies the acquisition date that should be used for reporting the pro forma financial information disclosures for business combinations when comparative financial statements are presented and improves the usefulness of the pro forma revenue and earnings disclosure. This ASU is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The adoption of this ASU, effective Apri 1, 2011, did not have a material impact on the Company's financial position or results of operations.
In May 2011, the FASB issued ASU No. 2011-04, " Fair Value Measurement ," which amends some of the wording used to describe requirements for measuring fair value and for disclosing information about fair value measurements. This ASU is effective for the interim or annual period beginning after December 15, 2011. Early application is prohibited. The application of this ASU, effective January 1, 2012, did not have a material impact on the Company's financial position or results of operations.
In June 2011, the FASB issued ASU No. 2011-05, " Comprehensive Income: Presentation of Comprehensive Income ," which improves the comparability, consistency, and transparency of financial
F-93
UBIC, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
reporting and increases the prominence of items reported in other comprehensive income. This ASU requires an entity to report comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2011. Early adoption is permitted. The Company adopted this ASU in the fiscal year beginning April 1, 2010, other than the adoption of the presentation of reclassifications of items out of accumulated comprehensive income which has been deferred. The adoption of this ASU did not have a material impact on the Company's financial position or results of operations.
Recently Issued Accounting Pronouncements Not Yet Adopted
In July 2012, the FASB issued ASU No. 2012-02, " IntangiblesGoodwill and Other: Testing Indefinite-Lived Intangible Assets for Impairment, " which permits an entity the option to first assess qualitative factors to determine whether it is more-likely-than-not that an indefinite-lived intangible asset is impaired and thereby reduce the cost and complexity of performing impairment tests for indefinite-lived intangible assets other than goodwill, and improve consistency in impairment testing among long-lived asset categories. This ASU is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The application of this ASU is not expected to have a material impact on the Company's financial position or results of operations.
2. INVESTMENTS IN SECURITIES
Available-for-sale securities
Information regarding securities classified as available-for-sale securities as of March 31 and December 31, 2012 is as follows:
|
Thousands of Yen | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Cost |
Gross
unrealized gain |
Gross
unrealized loss |
Fair value | |||||||||
March 31, 2012 |
|||||||||||||
Available-for-sale securities: |
|||||||||||||
Equity securities |
¥ | 107,550 | ¥ | 166,050 | ¥ | | ¥ | 273,600 | |||||
December 31, 2012 |
|||||||||||||
Available-for-sale securities: |
|||||||||||||
Equity securities |
¥ | 107,550 | ¥ | 175,500 | ¥ | | ¥ | 283,050 |
|
Thousands of U.S. Dollars | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Cost |
Gross
unrealized gain |
Gross
unrealized loss |
Fair value | |||||||||
December 31, 2012 |
|||||||||||||
Available-for-sale securities: |
|||||||||||||
Equity securities |
$ | 1,241 | $ | 2,026 | $ | | $ | 3,267 |
F-94
UBIC, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
3. CAPITALIZED COMPUTER SOFTWARE COSTS
The Company capitalizes the cost of computer software developed or purchased for internal use.
The following is a summary of capitalized computer software costs:
|
Thousands of Yen |
Thousands of
U.S. Dollars |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
March 31,
2012 |
December 31,
2012 |
December 31,
2012 |
|||||||
Balance at the beginning of the period |
¥ | 505,160 | ¥ | 807,370 | $ | 9,319 | ||||
Costs capitalized during the period |
302,106 | 400,574 | 4,623 | |||||||
Foreign currency translation |
104 | 936 | 11 | |||||||
Balance at the end of the period |
807,370 | 1,208,880 | 13,953 | |||||||
Accumulated amortization |
(325,623 | ) | (436,594 | ) | (5,039 | ) | ||||
Capitalized computer software costsnet |
¥ | 481,747 | ¥ | 772,286 | $ | 8,914 | ||||
Included in the above are capitalized software costs for projects in progress of ¥7,997 thousand and ¥58,535 thousand ($676 thousand) at March 31 and December 31, 2012, respectively. For the nine months ended December 31, 2011 and 2012, the Company recognized amortization expenses related to capitalized software development costs of ¥44,992 thousand and ¥110,971 thousand ($1,281 thousand), respectively.
The following table shows the estimated amortization of capitalized computer software costs for the next five years:
Years ending December 31
|
Thousands of
Yen |
Thousands of
U.S. Dollars |
|||||
---|---|---|---|---|---|---|---|
2013 |
¥ | 185,659 | $ | 2,143 | |||
2014 |
180,973 | 2,089 | |||||
2015 |
164,013 | 1,893 | |||||
2016 |
130,258 | 1,503 | |||||
2017 |
52,848 | 610 |
4. SHORT-TERM AND LONG-TERM DEBT
Short-term debt of ¥62,500 thousand as of March 31, 2012 consists of bank borrowings with a weighted-average interest rate of 0.68 percent.
F-95
UBIC, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
4. SHORT-TERM AND LONG-TERM DEBT (Continued)
The components of long-term debt as of March 31 and December 31, 2012, are summarized as follows:
|
Thousands of Yen |
Thousands of
U.S. Dollars |
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Weighted-
average interest rate |
March 31,
2012 Balance |
Weighted-
average interest rate |
December 31,
2012 Balance |
December 31,
2012 Balance |
|||||||||||
Unsecured convertible notes due 2015, zero coupon, net of unamortized discount of ¥3,300 thousand at March 31, 2012 |
1.0 | % | ¥ | 106,700 | | ¥ | | $ | | |||||||
Bank borrowings: |
||||||||||||||||
Secured by equity securities, various rates and various maturities through 2016 |
2.0 | % | 247,143 | 2.2 | % | 306,250 | 3,535 | |||||||||
Unsecured, various rates and various maturities through 2016 |
1.6 | % | 182,857 | 2.1 | % | 375,000 | 4,328 | |||||||||
Capital lease obligations |
4.1 | % | 1,840 | 4.1 | % | 695 | 8 | |||||||||
|
538,540 | 681,945 | 7,871 | |||||||||||||
Less: current portion |
138,520 | 200,593 | 2,315 | |||||||||||||
|
¥ | 400,020 | ¥ | 481,352 | $ | 5,556 | ||||||||||
The Company pledged available-for-sale securities with a carrying value of ¥273,600 thousand and ¥283,050 thousand ($3,267 thousand) as security for bank borrowings of ¥247,143 thousand and ¥306,250 thousand ($3,535 thousand) as of March 31 and December 31, 2012, respectively. As is customary in Japan, both short-term and long-term bank borrowings are made under general agreements that provide that securities and guarantees for present and future indebtedness will be given upon request of the bank, and that the bank shall have the right, as the obligations become due, or in the event of their default, to offset cash deposits against such obligations.
Credit Line
The Company entered into an overdraft arrangement with a Japanese bank for which the unutilized balance as of March 31 and December 31, 2012 was ¥50,000 thousand ($577 thousand). Under a ¥700,000 thousand five year syndicated loan arrangement entered into with a consortium of banks on September 27, 2011, the Company borrowed ¥350,000 thousand when the arrangement was signed and additional ¥350,000 thousand ($4,040 thousand) in May 2012. There was no unused balance under this arrangement as of December 31, 2012.
On December 28, 2012, the Company entered into a short-term revolving credit facility agreement with a consortium of Japanese banks in an aggregate principal amount of ¥1,000,000 thousand ($11,542 thousand) that matures on December 27, 2013. The extension of maturity date of the credit facility is subject to the consortium's approval. There were no borrowings as of December 31, 2012.
F-96
UBIC, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
4. SHORT-TERM AND LONG-TERM DEBT (Continued)
Convertible Notes
In April 2010, the Company issued zero coupon convertible notes due in April 2015 in the aggregate face amount of ¥300,000 thousand for ¥285,000 thousand. The notes were convertible to equity shares at the option of the holders at a price of ¥391 per share at any time on or after April 13, 2010. The Company was not required to bifurcate any of embedded features contained in the notes for accounting purposes. On March 14, 2011, and February 28 and May 15, 2012, convertible notes were converted into 204,472, 281,150 and 281,114 equity shares of the Company, respectively. The carrying amount of convertible notes, including any unamortized discount, was credited to the capital account (net of issuance costs) upon conversion, and no gain or loss is recognized. None of the convertible notes remained outstanding as of December 31, 2012.
Financial Covenants
There are restrictive covenants related to the borrowings of ¥700,000 thousand ($8,079 thousand) as of December 31, 2012 including requirements to maintain a minimum level of net assets and ordinary income in the stand-alone and consolidated financial statements of UBIC, measured under accounting principles generally accepted in Japan. UBIC is required to maintain net assets at a level which is at least 75% of (a) net assets as of March 31, 2011; ¥1,168,013 thousand on stand-alone basis and ¥1,173,145 thousand on consolidated basis under Japanese GAAP or (b) net assets at the end of previous year, whichever is higher. The ordinary income covenant states that UBIC shall not record ordinary losses in any two consecutive fiscal years. UBIC is in compliance with these restrictive covenants at December 31, 2012.
There are restrictive covenants related to the revolving credit facility of ¥1,000,000 thousand ($11,542 thousand) as of December 31, 2012 including requirements to maintain a minimum level of net assets and ordinary income in the stand-alone and consolidated financial statements of UBIC, measured under accounting principles generally accepted in Japan. UBIC is required to maintain net assets at a level which is at least 75% of (a) net assets as of March 31, 2012; ¥2,607,338 thousand on stand-alone basis and ¥2,655,320 thousand on consolidated basis under Japanese GAAP or (b) net assets at the end of previous year, whichever is higher. The ordinary income covenant states that UBIC shall not record ordinary losses in any two consecutive fiscal years. UBIC is in compliance with these restrictive covenants at December 31, 2012.
5. RETIREMENT AND SEVERANCE BENEFITS
The Company has unfunded defined benefits severance indemnities plans to provide retirement benefits to substantially all employees. Under the severance indemnities plans, employees are entitled to severance payments based on their earnings and the length of service until retirement or termination of employment for reasons other than dismissal for cause.
F-97
UBIC, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
5. RETIREMENT AND SEVERANCE BENEFITS (Continued)
Net periodic retirement cost for the nine months ended December 31, 2011 and 2012 consists of the following components:
|
Thousands of Yen |
Thousands of
U.S. Dollars |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
December 31,
2011 |
December 31,
2012 |
December 31,
2012 |
|||||||
Service cost |
¥ | 1,977 | ¥ | 5,329 | $ | 62 | ||||
Interest cost |
43 | 55 | 1 | |||||||
Net periodic retirement cost |
¥ | 2,020 | ¥ | 5,384 | $ | 63 | ||||
6. FINANCIAL INSTRUMENTS
Fair value estimates and information about valuation methodologies regarding financial instruments are as follows:
Quoted market prices, where available, are used to estimate the fair values of financial instruments. In the absence of quoted market prices, fair values for such financial instruments are estimated using an income approach, based on discounted cash flows, or other valuation techniques.
Cash and cash equivalents, Trade receivables, Trade payables and Short-term debt
The carrying amount approximates the fair value because of the short maturity of these instruments.
Long-term debt
The fair value of bank borrowings is estimated based on the present value of future cash flows using the Company's borrowing rate for the same contractual terms.
F-98
UBIC, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
6. FINANCIAL INSTRUMENTS (Continued)
The fair value of the convertible notes is estimated based on the quoted market price of the Company's equity share multiplied by the number of equity shares issued if converted on the balance sheet date as the Company's share price was higher than the conversion price.
|
Thousands of Yen |
Thousands of
U.S. Dollars |
|||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
March 31, 2012 | December 31, 2012 | December 31, 2012 | ||||||||||||||||
|
Carrying
Amount |
Fair Value |
Carrying
Amount |
Fair Value |
Carrying
Amount |
Fair Value | |||||||||||||
Assets: |
|||||||||||||||||||
Cash and cash equivalents |
¥ | 2,410,304 | ¥ | 2,410,304 | ¥ | 1,301,486 | ¥ | 1,301,486 | $ | 15,022 | $ | 15,022 | |||||||
Trade receivables |
987,395 | 987,395 | 1,116,233 | 1,116,233 | 12,884 | 12,884 | |||||||||||||
Liabilities: |
|||||||||||||||||||
Trade payables |
442,136 | 442,136 | 310,657 | 310,657 | 3,586 | 3,586 | |||||||||||||
Short-term debt |
62,500 | 62,500 | | | | | |||||||||||||
Long-term debt: |
|||||||||||||||||||
Bank borrowings |
430,000 | 432,214 | 681,250 | 710,831 | 7,863 | 8,204 | |||||||||||||
Convertible notes |
106,700 | 2,558,465 | | | | |
Refer to Note 8 for fair values of equity securities and derivative financial instruments.
7. DERIVATIVE FINANCIAL INSTRUMENTS
Interest Rate Swaps
The Company's exposure to interest rate risk is related to underlying long-term bank borrowings. In order to minimize the variability caused by interest rate risk, the Company enters into interest rate swaps to manage fluctuations in cash flows. The interest rate swaps entered into are receive-variable, pay-fixed interest rate swaps. Under the interest rate swaps, the Company receives variable interest rate payments on long-term bank borrowings in the amount of ¥110,000 thousand and ¥25,000 thousand ($289 thousand) as of March 31 and December 31, 2012, respectively, and makes fixed interest rate payments, thereby effectively creating fixed interest rate long-term bank borrowings.
The Company does not designate the interest rate swap contracts as hedging instruments for the purpose of applying hedge accounting. Accordingly, all interest rate swap contracts are measured at fair value as either assets or liabilities and changes in their fair value are immediately recognized in earnings.
As of March 31 and December 31, 2012, the fair values of interest rate swaps were ¥815 thousand and ¥113 thousand ($1 thousand), respectively and are included in "Other current liabilities" in the condensed consolidated balance sheets. Changes in the fair value of interest rate swaps resulted in the recognition of gains of ¥1,726 thousand and ¥702 thousand ($8 thousand) for the nine months ended December 31, 2011 and 2012, respectively, and are included in "Othernet" in the condensed consolidated statements of income for the nine months ended December 31, 2011 and 2012, respectively. During the nine months ended December 31, 2011 and 2012, interest paid on the interest rate swap contracts was ¥2,337 thousand and ¥840 thousand ($10 thousand), respectively, and is included in "Interest expense" in the condensed consolidated statements of income.
F-99
UBIC, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
8. FAIR VALUE MEASUREMENTS
ASC Topic 820, " Fair Value Measurements " establishes a fair value hierarchy that prioritizes the use of observable inputs in markets over the use of unobservable inputs when measuring fair value as follows:
Level 1Unadjusted quoted prices in active markets for identical assets or liabilities
Level 2Directly or indirectly observable inputs other than those included in Level 1, such as quoted market prices for similar assets and liabilities in active markets, quoted prices for identical assets in inactive markets, or inputs derived principally from or corroborated by observable market data
Level 3Unobservable inputs for which there is little or no market data, which require the Company to develop its own assumptions and best estimate of what inputs market participants would use in pricing an asset or liability
Investments in equity securities
The Company has investments in certain equity securities for which quoted market prices are available to determine their fair value and are included in Level 1.
Derivative financial instruments
Derivative financial instruments consist of interest rate swaps. The fair value of interest rate swaps is based on the present value of expected future cash flows using zero coupon rates, which is derived principally from observable market data. These interest rate swaps are included in Level 2.
Assets and liabilities measured at fair value on a recurring basis
Assets and liabilities measured at fair value on a recurring basis as of March 31 and December 31, 2012, are as follows:
|
Thousands of Yen | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
|
Fair Value Hierarchy Classification | |||||||||||||
|
Carrying
Value |
Total Fair
Value |
||||||||||||||
Items Measured at Fair Value on a Recurring Basis
|
Level 1 | Level 2 | Level 3 | |||||||||||||
March 31, 2012: |
||||||||||||||||
Assets: |
||||||||||||||||
Available-for-sale securities: |
||||||||||||||||
Equity securities |
¥ | 273,600 | ¥ | 273,600 | ¥ | 273,600 | ¥ | | ¥ | | ||||||
Liabilities: |
||||||||||||||||
DerivativesInterest rate swaps |
815 | 815 | | 815 | | |||||||||||
December 31, 2012: |
||||||||||||||||
Assets: |
||||||||||||||||
Available-for-sale securities |
||||||||||||||||
Equity securities |
283,050 | 283,050 | 283,050 | | | |||||||||||
Liabilities: |
||||||||||||||||
DerivativesInterest rate swaps |
113 | 113 | | 113 | |
F-100
UBIC, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
8. FAIR VALUE MEASUREMENTS (Continued)
|
Thousands of U.S. Dollars | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
|
Fair Value Hierarchy Classification | |||||||||||||
|
Carrying
Value |
Total Fair
Value |
||||||||||||||
Items Measured at Fair Value on a Recurring Basis
|
Level 1 | Level 2 | Level 3 | |||||||||||||
December 31, 2012: |
||||||||||||||||
Assets: |
||||||||||||||||
Available-for-sale securities |
||||||||||||||||
Equity securities |
$ | 3,267 | $ | 3,267 | $ | 3,267 | $ | | $ | | ||||||
Liabilities: |
||||||||||||||||
DerivativesInterest rate swaps |
1 | 1 | | 1 | |
9. INCOME TAXES
Income taxes imposed by the national, prefectural and municipal governments of Japan resulted in a statutory tax rate of approximately 40.69 percent and 38.01 percent for the nine months ended December 31, 2011 and 2012, respectively.
Reconciliations between the amounts of reported income taxes and the amount of income taxes computed using the normal statutory tax rate for the nine months ended December 31, 2011 and 2012 are as follows:
|
Thousands of Yen |
Thousands of
U.S. Dollars |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
December 31,
2011 |
December 31,
2012 |
December 31,
2012 |
|||||||
Amount computed by using normal Japanese statutory tax rate |
¥ | 755,800 | ¥ | 349,504 | $ | 4,034 | ||||
Increase in taxes resulting from: |
||||||||||
Share-based compensation expense |
13,094 | 15,400 | 178 | |||||||
Others-net |
31,221 | 14,025 | 162 | |||||||
Income tax expense as reported |
¥ | 800,115 | ¥ | 378,929 | $ | 4,374 | ||||
Amendments to the Japanese tax regulations were enacted on December 2, 2011. As a result of these amendments, the corporate income tax rate decreased by 4.5 percent from 30 percent to 25.5 percent starting from the fiscal year beginning April 1, 2012. In addition, the combined statutory tax rate increased by a 10 percent surtax effective for the three years from April 1, 2012 to March 31, 2015. Consequently, the combined statutory tax rate was 38.01 percent for the three years from April 1, 2012 to March 31, 2015 and 35.64 percent for the years beginning on or after April 1, 2015. The effect of these changes did not have material effects on the condensed consolidated statement of income for the nine month period ended December 31, 2011.
10. SHARE-BASED COMPENSATION
Share-based compensation is measured at the grant date, based on the fair value of the award. Share-based compensation for non-employees is measured as of the earlier of either (1) the date at which a commitment for performance by the counterparty to earn the equity instruments is reached, or (2) the date at which the counterparty's performance is complete, based on the fair value of the award.
F-101
UBIC, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
10. SHARE-BASED COMPENSATION (Continued)
Under the Company's stock option plan granted to non-employees, the share-based payments are measured at their current fair values at each interim and year end financial reporting date, with an offsetting entry to additional paid-in capital, because (1) the quantity and terms of the equity instruments are known up front and prior to the measurement date, (2) the date at which the counterparty's performance is complete is earlier than the date at which a commitment for performance by the counterparty to earn the equity instruments is reached because of no sufficiently large disincentives for nonperformance, and (3) the counterparty's performance is required over a period of time. The compensation expense is recognized on a straight-line basis over the vesting period.
The following table presents total share-based compensation expense, which is a noncash charge, included in the condensed consolidated statements of income for the nine months ended December 31, 2011 and 2012:
|
Thousands of Yen |
Thousands of
U.S. Dollars |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
December 31,
2011 |
December 31,
2012 |
December 31,
2012 |
|||||||
Cost of revenue |
¥ | 7,070 | ¥ | 8,713 | $ | 100 | ||||
Selling, general and administrative expenses |
29,250 | 39,741 | 459 | |||||||
Pre-tax share-based compensation expense |
36,320 | 48,454 | 559 | |||||||
Income tax benefit |
(306 | ) | (3,017 | ) | (35 | ) | ||||
Total share-based compensation expense, net of tax |
¥ | 36,014 | ¥ | 45,437 | $ | 524 | ||||
The pre-tax share-based compensation expense includes those granted for non-employees amounting to ¥4,867 thousand ($56 thousand) for the nine months ended December 31 2012.
Based on historical forfeiture information, the Company estimates the number of forfeitures prior to vesting at the grant date to be zero. The effect of a subsequent change in estimated forfeitures is recognized through a cumulative adjustment in the period in which the forfeitures occur. As of December 31, 2012, the total unrecognized compensation expense related to the unvested portion of stock options was ¥99,047 thousands ($1,143 thousand). The expense will be recognized over a weighted-average period of 1.5 years.
The estimated fair value of stock options is determined using the Black-Scholes valuation model. Key inputs and assumptions to estimate the fair value of stock options include the exercise price of the award, the expected option term (contractual term for non-employees), the volatility of the Company's share price, the risk-free interest rate and the Company's dividend yield. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by individuals who receive equity awards, and subsequent events are not indicative of the reasonableness of the original estimates of fair value made by the Company.
F-102
UBIC, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
10. SHARE-BASED COMPENSATION (Continued)
The following table presents the weighted-average assumptions used in estimating the fair value of options granted to employees during the nine months ended December 31, 2011 and 2012.
|
December 31,
2011 |
December 31,
2012 |
|
|||||||
---|---|---|---|---|---|---|---|---|---|---|
Expected life of stock option (years) |
4.5 | 4.3 | ||||||||
Expected volatility |
120.8 | % | 112.0 | % | ||||||
Risk-free interest rate |
0.5 | % | 0.2 | % | ||||||
Expected dividend yield |
1.9 | % | 4.7 | % |
|
December 31,
2011 |
December 31,
2012 |
December 31,
2012 |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
Weighted-average grant-date fair value per option to purchase one share |
¥ | 1,609 | ¥ | 3,789 | $ | 44 |
The weighted-average assumptions used in estimating the fair value of options granted to non-employees during the nine months ended December 31, 2012 are 6 years for contractual term, 107.3% for expected volatility, 0.2% for risk-free interest rate and 4.7% for expected dividend yield. The weighted-average fair value per option to purchase one share as of December 31, 2012 is ¥3,515 ($41). No stock options were granted to non-employees during the nine months ended December 31, 2011.
11. EQUITY
Japanese companies are subject to the Companies Act of Japan (the "Companies Act"). The significant provisions in the Companies Act that affect financial and accounting matters are summarized below:
Dividends
Under the Companies Act, companies can pay dividends at any time during the fiscal year in addition to the year-end dividend upon resolution at the shareholders meeting. For companies that meet certain criteria such as; (1) having a Board of Directors, (2) having independent auditors, (3) having a Board of Statutory Auditors, and (4) the term of service of the directors is prescribed as one year rather than two years of normal term by its articles of incorporation, the Board of Directors may declare dividends (except for dividends in kind) at any time during the fiscal year if the company has prescribed so in its articles of incorporation. However, the Company cannot do so because it does not meet criteria (4) above. The Companies Act permits companies to distribute dividends-in-kind (non-cash assets) to shareholders subject to certain limitations and additional requirements. Semiannual interim dividends may also be paid once a year upon resolution by the Board of Directors if the articles of incorporation of the company so stipulate. The Companies Act provides certain limitations on the amounts available for dividends or the purchase of treasury stock. The limitation is defined as the amount available for distribution to the shareholders, but the amount of net assets after dividends must be maintained at no less than ¥3 million.
F-103
UBIC, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
11. EQUITY (Continued)
Increases / decreases and transfer of common stock, reserve and surplus
The Companies Act requires that an amount equal to 10% of dividends must be appropriated as legal reserve (a component of retained earnings) or as additional paid-in capital (a component of capital surplus) depending on the equity account charged upon the payment of such dividends until the total of the aggregate amount of legal reserve and additional paid-in capital equals 25% of common stock. Under the Companies Act, the total amount of additional paid-in capital and legal reserve may be reversed without limitation. The Companies Act also provides that common stock, legal reserve, additional paid-in capital, and other capital surplus and retained earnings can be transferred among the accounts under certain conditions upon resolution of the shareholders.
The amount of retained earnings available for dividends under the Companies Act is based on the amount of retained earnings recorded in the Company's general books of account prepared using accepted Japanese accounting practices. The adjustments included in the accompanying condensed consolidated financial statements for U.S. GAAP purposes but not recorded in the general books of account have no effect on the determination of retained earnings available for dividends under the Companies Act. Retained earnings shown in UBIC's general books of account, as determined under accounting principles generally accepted in Japan ("J GAAP"), amounted to ¥1,800,444 thousand ($20,781 thousand) at December 31, 2012.
Stock Splits
On September 12, 2011, the Company's Board of Directors declared a two-for-one split of its shares of common stock. The split was effective from October 1, 2011, for all shareholders of record on September 30, 2011.
On March 15, 2012, the Company's Board of Directors declared a two-for-one split of its shares of common stock. The stock split is effective from April 1, 2012, for all shareholders of record on March 31, 2012.
As a result of the stock split, all amounts related to shares, share prices and earnings per share have been retroactively restated throughout these condensed consolidated financial statements.
F-104
UBIC, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
12. OTHER COMPREHENSIVE INCOME
The changes in each component of accumulated other comprehensive income for the nine months ended December 31, 2011 and 2012 were as follows:
|
Thousands of Yen | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Foreign
currency translation adjustments |
Unrealized
holding gain on securities |
Adjustments
related to retirement and severance benefits |
Accumulated
other comprehensive income |
|||||||||
Balance at April 1, 2011 |
¥ | (4,874 | ) | ¥ | 68,592 | ¥ | 24 | ¥ | 63,742 | ||||
Period change |
1,702 | 14,550 | | 16,252 | |||||||||
Balance at December 31, 2011 |
¥ | (3,172 | ) | ¥ | 83,142 | ¥ | 24 | ¥ | 79,994 | ||||
Balance at April 1, 2012 |
¥ | 1,292 | ¥ | 98,484 | ¥ | (263 | ) | ¥ | 99,513 | ||||
Period change |
18,009 | 6,082 | | 24,091 | |||||||||
Balance at December 31, 2012 |
¥ | 19,301 | ¥ | 104,566 | ¥ | (263 | ) | ¥ | 123,604 | ||||
|
Thousands of U.S. Dollars | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Foreign
currency translation adjustments |
Unrealized
holding gain on securities |
Adjustments
related to retirement and severance benefits |
Accumulated
other comprehensive income |
|||||||||
Balance at April 1, 2012 |
$ | 15 | $ | 1,137 | $ | (3 | ) | $ | 1,149 | ||||
Period change |
208 | 70 | | 278 | |||||||||
Balance at December 31, 2012 |
$ | 223 | $ | 1,207 | $ | (3 | ) | $ | 1,427 | ||||
The tax effects allocated to each component of other comprehensive income (loss) for the nine months ended December 31, 2011 and 2012 were as follows:
F-105
UBIC, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
12. OTHER COMPREHENSIVE INCOME (Continued)
|
December 31, 2012 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
Before
Tax Amount |
Tax Effect |
Net of
Tax Amount |
|||||||
Foreign currency translation adjustments |
¥ | 20,249 | ¥ | (2,240 | ) | ¥ | 18,009 | |||
Unrealized holding gain on securities: |
||||||||||
Amount arising during the period |
9,450 | (3,368 | ) | 6,082 | ||||||
Net unrealized holding gain during the period |
9,450 | (3,368 | ) | 6,082 | ||||||
Other comprehensive income |
¥ | 29,699 | ¥ | (5,608 | ) | ¥ | 24,091 | |||
|
Thousands of U.S. Dollars | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
December 31, 2012 | |||||||||
|
Before
Tax Amount |
Tax Effect |
Net of
Tax Amount |
|||||||
Foreign currency translation adjustments |
$ | 234 | $ | (26 | ) | $ | 208 | |||
Unrealized holding gain on securities: |
||||||||||
Amount arising during the period |
109 | (39 | ) | 70 | ||||||
Net unrealized holding gain during the period |
109 | (39 | ) | 70 | ||||||
Other comprehensive income |
$ | 343 | $ | (65 | ) | $ | 278 | |||
13. NET INCOME PER SHARE
Basic net income per share is computed on the basis of weighted-average outstanding common shares. Diluted net income per share is computed on the basis of basic weighted-average outstanding common shares adjusted for the dilutive effect of stock options and convertible notes, if dilutive. Potentially dilutive common shares from series of stock option plans are determined by applying the treasury stock method to the assumed exercise of outstanding stock options. Potentially dilutive common shares are determined by applying the if-converted method for the convertible notes. The numerator of the diluted net income per share calculation is increased by the amount of interest expense, net of tax, related to outstanding convertible notes if the net impact is dilutive.
F-106
UBIC, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
13. NET INCOME PER SHARE (Continued)
The computation of basic and diluted net income per share for the nine months ended December 31, 2011 and 2012 was as follows:
|
December 31, 2011 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
(Thousands of Yen)
Net Income (Numerator) |
Weighted-Average
Common Shares Outstanding (Denominator) |
Per Share
Amount |
|||||||
Basic net income attributable to UBIC, Inc. shareholders |
¥ | 1,054,730 | 2,630,816 | ¥ | 401 | |||||
Effect of dilutive securities: |
||||||||||
Stock options |
39,913 | |||||||||
Convertible notes |
562,300 | |||||||||
Plus: interest on convertible notes |
979 | |||||||||
Diluted net income attributable to UBIC, Inc. shareholders |
¥ | 1,055,709 | 3,233,029 | ¥ | 327 | |||||
|
December 31, 2012 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
(Thousands of Yen)
Net Income (Numerator) |
Weighted-Average
Common Shares Outstanding (Denominator) |
Per Share
Amount |
|||||||
Basic net income attributable to UBIC, Inc. shareholders |
¥ | 535,999 | 3,147,079 | ¥ | 170 | |||||
Effect of dilutive securities: |
||||||||||
Stock options |
64,335 | |||||||||
Convertible notes |
46,000 | |||||||||
Plus: interest on convertible notes |
| |||||||||
Diluted net income attributable to UBIC, Inc. shareholders |
¥ | 535,999 | 3,257,414 | ¥ | 165 | |||||
F-107
UBIC, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
13. NET INCOME PER SHARE (Continued)
|
December 31, 2012 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
(Thousands of
U.S. Dollars) Net Income (Numerator) |
Weighted-Average
Common Shares Outstanding (Denominator) |
Per Share
Amount |
|||||||
Basic net income attributable to UBIC, Inc. shareholders |
$ | 6,186 | 3,147,079 | $ | 1.97 | |||||
Effect of dilutive securities: |
||||||||||
Stock options |
64,335 | |||||||||
Convertible notes |
46,000 | |||||||||
Plus: interest on convertible notes |
| |||||||||
Diluted net income attributable to UBIC, Inc. shareholders |
$ | 6,186 | 3,257,414 | $ | 1.90 | |||||
Options to purchase 15,800 equity shares at ¥8,096 ($93) per share were outstanding for the nine months ended December 31, 2012, but were not included in the computation of diluted EPS because the inclusion of such securities would be antidilutive.
14. SEGMENT REPORTING
Operating segments are defined as components of an enterprise that engage in business activities from which it may earn revenues and incur expenses and for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company provides a variety of eDiscovery and forensic services which are provided by UBIC and its domestic subsidiaries for domestic (Japanese) clients, by UNA for clients represented by U.S.-based attorneys who contracted UNA, and by other foreign subsidiaries for foreign clients other than those who contracted UNA. The Company's operations in Japan, the U.S. and others have been identified as the three operating segments of the Company. Others include Korea and Taiwan. The Company's chief executive officer, who is also the Company's chief operating decision maker, regularly reviews the performance of the three operating segments and makes decisions regarding allocation of resources. The Company's chief operating decision maker utilizes various measurements prepared based on J GAAP which include revenue, operating income or loss and segment assets to assess segment performance and allocate resources to segments.
During the year ended March 31, 2012, the Company established subsidiaries in countries other than Japan and the U.S. Management reevaluated the structure of its business and devised a new reportable segment structure. All periods presented have been revised to report segment results under the new reportable segment structure.
The Company's reportable segments are the same as its operating segments.
F-108
UBIC, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
14. SEGMENT REPORTING (Continued)
Segment information for the nine months ended December 31, 2011 and 2012 or as of March 31 and December 31, 2012 is presented below:
Revenue:
|
Thousands of Yen |
Thousands of
U.S. Dollars |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
December 31,
2011 |
December 31,
2012 |
December 31,
2012 |
|||||||
Japan |
||||||||||
Outside customers |
¥ | 3,348,652 | ¥ | 2,500,124 | $ | 28,856 | ||||
Intersegment |
195,696 | 478,187 | 5,519 | |||||||
Total |
3,544,348 | 2,978,311 | 34,375 | |||||||
U.S. |
||||||||||
Outside customers |
289,885 | 902,050 | 10,411 | |||||||
Intersegment |
29,453 | 23,671 | 273 | |||||||
Total |
319,338 | 925,721 | 10,684 | |||||||
Other |
||||||||||
Outside customers |
| 141,916 | 1,638 | |||||||
Intersegment |
| | | |||||||
Total |
| 141,916 | 1,638 | |||||||
Elimination |
(225,149 |
) |
(501,858 |
) |
(5,792 |
) |
||||
Total revenue after eliminations |
3,638,537 | 3,544,090 | 40,905 | |||||||
Adjustments*(1) |
145,421 |
(1,753 |
) |
(19 |
) |
|||||
Total consolidated revenue |
¥ | 3,783,958 | ¥ | 3,542,337 | $ | 40,886 | ||||
F-109
UBIC, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
14. SEGMENT REPORTING (Continued)
Segment Performance Measure:
|
Thousands of Yen |
Thousands of
U.S. Dollars |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
December 31,
2011 |
December 31,
2012 |
December 31,
2012 |
|||||||
Segment profit |
||||||||||
Japan |
¥ | 1,853,804 | ¥ | 774,596 | $ | 8,940 | ||||
U.S. |
(67,691 | ) | 139,976 | 1,616 | ||||||
Other |
| (31,173 | ) | (360 | ) | |||||
Total segment profit after eliminations |
1,786,113 | 883,399 | 10,196 | |||||||
Adjustments*(2) |
108,350 |
(31,906 |
) |
(368 |
) |
|||||
Total consolidated operating income |
1,894,463 | 851,493 | 9,828 | |||||||
Unallocated amounts: |
||||||||||
Interest income |
1,638 | 990 | 11 | |||||||
Interest expense |
(8,264 | ) | (14,421 | ) | (166 | ) | ||||
Foreign currency exchange gains (losses) |
(35,590 | ) | 78,971 | 911 | ||||||
Dividend income |
| 4,500 | 52 | |||||||
Other-net |
5,211 | (2,027 | ) | (23 | ) | |||||
Total consolidated income before income taxes |
¥ | 1,857,458 | ¥ | 919,506 | $ | 10,613 | ||||
Segment Assets:
|
Thousands of Yen |
Thousands of
U.S. Dollars |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
March 31,
2012 |
December 31,
2012 |
December 31,
2012 |
|||||||
Segment assets |
||||||||||
Japan |
¥ | 4,830,227 | ¥ | 4,265,616 | $ | 49,234 | ||||
U.S. |
895,284 | 1,081,038 | 12,477 | |||||||
Other |
134,294 | 323,382 | 3,732 | |||||||
Elimination |
(976,279 |
) |
(1,141,390 |
) |
(13,174 |
) |
||||
Total segment assets after eliminations |
4,883,526 | 4,528,646 | 52,269 | |||||||
Adjustments*(3) |
96,150 |
226,089 |
2,612 |
|||||||
Total consolidated assets |
¥ | 4,979,676 | ¥ | 4,754,735 | $ | 54,881 | ||||
F-110
UBIC, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
14. SEGMENT REPORTING (Continued)
Entity-Wide Information:
The information concerning revenue by service categories for the nine months ended December 31, 2011 and 2012 is presented below:
|
Thousands of Yen |
Thousands of
U.S. Dollars |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2011 | 2012 | 2012 | |||||||
eDiscovery |
||||||||||
Review |
¥ | 1,897,786 | ¥ | 706,995 | $ | 8,160 | ||||
Other |
1,716,651 | 2,604,061 | 30,056 | |||||||
Total |
3,614,437 | 3,311,056 | 38,216 | |||||||
Investigation |
114,785 | 176,716 | 2,040 | |||||||
Sales of forensic tools |
28,646 | 18,692 | 216 | |||||||
Forensic training |
24,990 | 31,552 | 364 | |||||||
Other |
1,100 | 4,321 | 50 | |||||||
Total revenue |
¥ | 3,783,958 | ¥ | 3,542,337 | $ | 40,886 | ||||
Other revenue under eDiscovery includes collection, processing and analysis, hosting and production services.
15. SUBSEQUENT EVENTS
In March 2013, the Company entered into a settlement agreement with a former employee in order to resolve all claims related to such employee. Under the agreement, the Company is required to pay the former employee an amount equal to $750,000, of which $300,000 (¥25,974 thousands) was recorded in the quarter ended December 31, 2012 to reflect management's estimate of settlement costs at such time. The remainder of the settlement will be recorded in the quarter ending March 31, 2013.
* * * * * *
F-111
Until , 2013 (25 days after commencement of the offering), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer's obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions.
2,400,000 American Depositary Shares
Representing 480,000 Shares
of
Common Stock
UBIC, Inc.
Prospectus
, 2013
Maxim Group LLC |
The Benchmark Company
|
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 6. Indemnification of Directors and Officers
Article 330 and Article 402, Paragraph 3 of the Companies Act of Japan, or the "Companies Act", make the provisions of Part III, Chapter 2, Section 10 of the Civil Code of Japan, or the "Civil Code", applicable to the relationship between the Registrant and its directors, executive officers and statutory auditors. Section 10 of the Civil Code, among other things, provides in effect that:
(1) Any director, executive officer or statutory auditor of a company may demand advance payment of expenses which are considered necessary for the management of the affairs of such company entrusted to him;
(2) If a director, executive officer or statutory auditor of a company has defrayed any expenses which are considered necessary for the management of the affairs of such company entrusted to him, they may demand reimbursement therefor and interest thereon after the date of payment from such company;
(3) If a director, executive officer or statutory auditor has assumed an obligation necessary for the management of the affairs of a company entrusted to them, they may require such company to perform it in his place or, if it is not due, to furnish adequate security; and
(4) If a director, executive officer or statutory auditor, without any fault on their part, sustains damage through the management of the affairs of a company entrusted to them, they may demand compensation therefor from such company.
Item 7. Recent Sales of Unregistered Securities
Within the past three years, we have sold our securities in transactions that have not been registered under the Securities Act of 1933, as described below. All of the securities described below were offered and issued outside the United States in transactions not required to be registered under the Securities Act pursuant to Regulation S thereunder.
II-1
Item 8. Exhibits and Financial Statement Schedules
Exhibit No. | Description | ||
---|---|---|---|
1.1 | Form of Underwriting Agreement | ||
|
3.1 |
|
Articles of Incorporation |
|
4.1 |
|
Specimen certificate evidencing American Depositary Receipt (included in Exhibit 4.2) |
|
4.2 |
|
Form of Deposit Agreement among the Registrant, the depositary and all registered holders and beneficial owners of the American Depositary Shares |
|
4.3 |
|
Form of Underwriters' Warrant Aggrement |
|
5.1 |
|
Opinion of DLA Piper Tokyo Partnership |
|
10.1 |
|
Employment Agreement, dated as of August 29, 2011, between UBIC Inc. and Akihiro Okumura |
|
10.2 |
|
Reserved |
|
10.3 |
|
Basic Distribution Agreement, dated as of December 26, 2005, between UBIC Inc. and Focus Systems |
|
10.4 |
|
Fourth Stock Option Agreement, dated as of June 17, 2010 |
|
10.5 |
|
Fifth Stock Option Agreement, dated as of April 28, 2011 |
|
10.6 |
|
Sixth Stock Option Agreement, dated as of June 21, 2012 |
|
10.7 |
|
Basic Agreement on Bank Transaction, dated as of November 15, 2005, between UBIC Inc. and the Bank of Tokyo-Mitsubishi UFJ, Ltd. |
|
10.8 |
|
Basic Agreement on Mutual Payment, dated as of May 27, 2008, between UBIC Inc. and the Bank of Tokyo-Mitsubishi UFJ, Ltd. |
|
10.9 |
|
Deed of Bank Loan Agreement, dated as of May 30, 2008, between UBIC Inc. and the Bank of Tokyo-Mitsubishi UFJ, Ltd. |
|
10.10 |
|
Deed of Bank Loan Agreement, dated as of November 30, 2009, between UBIC Inc. and the Bank of Tokyo-Mitsubishi UFJ, Ltd. |
|
10.11 |
|
Basic Agreement on Bank Transaction, dated as of December 17, 2008, between UBIC Inc. and the Bank of Yokohama, Ltd. |
|
10.12 |
|
Amendment Letter to the Basic Agreement on Bank Transaction, dated as of November 30, 2011, between UBIC Inc. and the Bank of Yokohama, Ltd. |
|
10.13 |
|
Basic Agreement on Bank Transaction, dated as of March 31, 2005, between UBIC Inc. and Sumitomo Mitsui Banking Corporation |
|
10.14 |
|
Syndicated Term Loan Agreement, dated as of September 27, 2011, among UBIC Inc., the Bank of Tokyo-Mitsubishi UFJ, Ltd, the Bank of Yokohama, Ltd, Sumitomo Mitsui Banking Corporation and Resona Bank, Ltd |
|
10.15 |
|
Syndicated Revolving Line of Credit Facility Agreement, dated December 28, 2012, among UBIC, Inc. and Bank of Tokyo-Mitsubishi UFJ, Bank of Yokohama, Ltd., Sumitomo Mitsui Banking Corporation, Mizuho Bank, and Resona Bank, Ltd. |
|
21.1 |
|
Subsidiaries of the Registrant |
II-2
Exhibit No. | Description | ||
---|---|---|---|
23.1 | Consent of Ernst & Young ShinNihon LLC | ||
|
23.2 |
|
Consent of DLA Piper Toyko Partnership (included in Exhibit 5.1) |
|
24.1 |
|
Power of Attorney |
|
99.1 |
|
Confidential Draft Registration Statement on Form F-1 submitted to the Securities and Exchange Commission on May 24, 2012 |
|
99.2 |
|
Amendment No. 1 to Confidential Draft Registration Statement on Form F-1 submitted to the Securities and Exchange Commission on July 27, 2012 |
|
99.3 |
|
Amendment No. 2 to Confidential Draft Registration Statement on Form F-1 submitted to the Securities and Exchange Commission on September 25, 2012 |
None.
The undersigned registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes:
(1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b) (1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
II-3
In accordance with the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Japan, on April 10, 2013.
UBIC, INC. | ||||||
|
|
By: |
|
/s/ MASAHIRO MORIMOTO |
||
Name: | Masahiro Morimoto | |||||
Title: |
Chief Executive Officer and
Chairman of the Board |
Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
Name and Title
|
Date
|
|
---|---|---|
/s/ MASAHIRO MORIMOTO Masahiro Morimoto Chief Executive Officer and Chairman of the Board (principal executive officer) |
|
April 10, 2013 |
/s/ SEITARO ISHII Seitaro Ishii Chief Financial Officer and Chief Administrative Officer (principal financial and accounting officer) |
|
April 10, 2013 |
* Naritomo Ikeue Executive Vice-President, Chief Operating Officer and Director |
|
April 10, 2013 |
* Makoto Funahashi Director |
|
April 10, 2013 |
* Hirooki Kirisawa Director |
|
April 10, 2013 |
*By: |
|
/s/ MASAHIRO MORIMOTO Masahiro Morimoto Attorney-in-Fact |
|
|
II-4
SIGNATURE OF AUTHORIZED REPRESENTATIVE IN THE UNITED STATES
Pursuant to the United States Securities Act of 1933, as amended, the undersigned, the duly authorized representative in the United States for UBIC, Inc., has signed this Registration Statement and any amendment thereto in the City of New York, State of New York, on the 10 th day of April, 2013.
|
|
/s/ NARITOMO IKEUE |
||
Name: | Naritomo Ikeue | |||
Title: | Executive Vice-President, Chief Operating Officer, and Director |
II-5
Exhibit No. | Description | ||
---|---|---|---|
1.1 | Form of Underwriting Agreement | ||
|
3.1 |
|
Articles of Incorporation |
|
4.1 |
|
Specimen certificate evidencing American Depositary Receipt (included in Exhibit 4.2) |
|
4.2 |
|
Form of Deposit Agreement among the Registrant, the depositary and all registered holders and beneficial owners of the American Depositary Shares |
|
4.3 |
|
Form of Underwriters' Warrant Aggrement |
|
5.1 |
|
Opinion of DLA Piper Tokyo Partnership |
|
10.1 |
|
Employment Agreement, dated as of August 29, 2011, between UBIC Inc. and Akihiro Okumura |
|
10.2 |
|
Reserved |
|
10.3 |
|
Basic Distribution Agreement, dated as of December 26, 2005, between UBIC Inc. and Focus Systems |
|
10.4 |
|
Fourth Stock Option Agreement, dated as of June 17, 2010 |
|
10.5 |
|
Fifth Stock Option Agreement, dated as of April 28, 2011 |
|
10.6 |
|
Sixth Stock Option Agreement, dated as of June 21, 2012 |
|
10.7 |
|
Basic Agreement on Bank Transaction, dated as of November 15, 2005, between UBIC Inc. and the Bank of Tokyo-Mitsubishi UFJ, Ltd. |
|
10.8 |
|
Basic Agreement on Mutual Payment, dated as of May 27, 2008, between UBIC Inc. and the Bank of Tokyo-Mitsubishi UFJ, Ltd. |
|
10.9 |
|
Deed of Bank Loan Agreement, dated as of May 30, 2008, between UBIC Inc. and the Bank of Tokyo-Mitsubishi UFJ, Ltd. |
|
10.10 |
|
Deed of Bank Loan Agreement, dated as of November 30, 2009, between UBIC Inc. and the Bank of Tokyo-Mitsubishi UFJ, Ltd. |
|
10.11 |
|
Basic Agreement on Bank Transaction, dated as of December 17, 2008, between UBIC Inc. and the Bank of Yokohama, Ltd. |
|
10.12 |
|
Amendment Letter to the Basic Agreement on Bank Transaction, dated as of November 30, 2011, between UBIC Inc. and the Bank of Yokohama, Ltd. |
|
10.13 |
|
Basic Agreement on Bank Transaction, dated as of March 31, 2005, between UBIC Inc. and Sumitomo Mitsui Banking Corporation |
|
10.14 |
|
Syndicated Term Loan Agreement, dated as of September 27, 2011, among UBIC Inc., the Bank of Tokyo-Mitsubishi UFJ, Ltd, the Bank of Yokohama, Ltd, Sumitomo Mitsui Banking Corporation and Resona Bank, Ltd |
|
10.15 |
|
Syndicated Revolving Line of Credit Facility Agreement, dated December 28, 2012, among UBIC, Inc. and Bank of Tokyo-Mitsubishi UFJ, Bank of Yokohama, Ltd., Sumitomo Mitsui Banking Corporation, Mizuho Bank, and Resona Bank, Ltd. |
|
21.1 |
|
Subsidiaries of the Registrant |
|
23.1 |
|
Consent of Ernst & Young ShinNihon LLC |
|
23.2 |
|
Consent of DLA Piper Toyko Partnership (included in Exhibit 5.1) |
|
24.1 |
|
Power of Attorney |
Exhibit No. | Description | ||
---|---|---|---|
99.1 | | Confidential Draft Registration Statement on Form F-1 submitted to the Securities and Exchange Commission on May 24, 2012 | |
|
99.2 |
|
Amendment No. 1 to Confidential Draft Registration Statement on Form F-1 submitted to the Securities and Exchange Commission on July 27, 2012 |
|
99.3 |
|
Amendment No. 2 to Confidential Draft Registration Statement on Form F-1 submitted to the Securities and Exchange Commission on September 25, 2012 |
Exhibit 1.1
UBIC, INC.
[ · ] American Depositary Shares
Representing
[ · ] Shares of Common Stock
UNDERWRITING AGREEMENT
[ · ], 2013
[ · ], 2013
MAXIM GROUP LLC
405 Lexington Avenue, 2 nd Floor
New York, New York 10174
THE BENCHMARK COMPANY, LLC
40 Fulton Street, 19 th Floor
New York, New York 10038
As Representatives of the Several Underwriters
Identified in Schedule I Annexed Hereto
Ladies and Gentlemen:
UBIC, Inc., a limited liability, joint-stock corporation incorporated under the laws of Japan (the Company ), proposes to sell to the several Underwriters named in Schedule I hereto (the Underwriters ) an aggregate of [ · ] American Depositary Shares (the Firm ADSs ) representing [ · ] shares of common stock of the Company (the Common Stock ). Maxim Group LLC ( Maxim ) and The Benchmark Company, LLC ( Benchmark and, together with Maxim, the Managers ) are acting as managers of the offering.
The Company also proposes to sell to the several Underwriters an aggregate of up to an additional [ · ] American Depositary Shares (the Additional ADSs ) representing [ · ] shares of Common Stock, if and to the extent that Maxim shall have determined to exercise, on behalf of the Underwriters, the right to purchase such ADSs granted to the Underwriters in Section 3 hereof. The Firm ADSs and the Additional ADSs are herein collectively referred to as the Public ADSs . The shares of Common Stock represented by the Firm ADSs are hereinafter called the Firm Shares ; the shares of Common Stock represented by the Additional ADSs are hereinafter referred to as the Additional Shares ; and the Firm Shares and Additional Shares are hereinafter collectively referred to as the Public Shares . Each reference to the Firm ADSs, the Additional ADSs or the Public ADSs herein, unless the context otherwise requires, also includes the Firm Shares, the Additional Shares, or the Public Shares, respectively.
The Company also hereby agrees to issue and sell to the Managers (and/or its designees) on the Closing Date (as defined herein) purchase warrants (the Managers Warrants ) for the purchase of an aggregate of [ · ] American Depositary Shares (which amount is equal to 4% of the Firm ADSs, the Manager ADSs ) representing [ · ] shares of Common Stock (the Manager Shares ). The Managers Warrants, each in the form attached hereto as Exhibit A , shall be exercisable, in whole or in part, commencing on a date which is one (1) year after the effective date of the Registration Statement (as defined below)
and expiring on the five-year anniversary of such effective date at an initial exercise price per Manager ADS of $[ · ], which is equal to 120% of the initial public offering price per Firm ADS. The Managers understand and agree that there are significant restrictions pursuant to FINRA Rule 5110 against transferring the Managers Warrants and the underlying Managers ADSs during the one hundred eighty (180) days after the effective date of the Registration Statement and by their acceptance thereof shall each agree that it will not sell, transfer, assign, pledge or hypothecate the Managers Warrants, or any portion thereof, or be the subject of any hedging, short sale, derivative, put or call transaction that would result in the effective economic disposition of such securities for a period of one hundred eighty (180) days following the effective date of the Registration Statement to anyone other than (i) an Underwriter or a selected dealer in connection with the offering of Public ADSs contemplated hereby, or (ii) a bona fide officer or partner of the Managers or of any such Underwriter or selected dealer; and only if any such transferee agrees to the foregoing lock-up restrictions.
The Manager ADSs, together with the Public ADSs, are hereinafter referred to as the ADSs . The Manager Shares represented by the Manager ADSs, together with the Public Shares, are hereinafter referred to as the Shares .
The ADSs are to be issued pursuant to a deposit agreement (the Deposit Agreement ), dated as of [ · ], 2013, among the Company, The Bank of New York Mellon, as depositary (the Depositary ), and holders from time to time of the American Depositary Receipts (the ADRs ) issued by the Depositary and evidencing the ADSs. Each five (5) ADSs will initially represent one (1) share of Common Stock deposited pursuant to the Deposit Agreement, subject to adjustment in accordance with the terms thereof.
The Company has prepared and filed, in accordance with the Securities Act of 1933, as amended (the Securities Act ), and the rules and regulations thereunder, with the Securities and Exchange Commission (the Commission ) a registration statement on Form F-1 (Registration No. 333-184691), including a form of prospectus, relating to the ADSs, the Shares and the Managers Warrants. The registration statement, as of any time, including the exhibits and documents filed as part thereof and information contained in the prospectus filed as part of the registration statement pursuant to Rule 424 or otherwise deemed to be part of the registration statement pursuant to Rule 430A or 430C under the Securities Act, is hereinafter referred to as the Registration Statement as of such time. The Registration Statement without reference to a time means the Registration Statement as of the time it is declared effective by the Commission. If the Company files an abbreviated registration statement to register additional shares of Common Stock pursuant to Rule 462(b) under the Securities Act (the Rule 462 Registration Statement ), then any reference herein to the term Registration Statement shall be deemed to include such Rule 462 Registration Statement. The Company has also filed with, or transmitted for filing to, or shall promptly after the date of this underwriting agreement (this Agreement ) file
with or transmit for filing to, the Commission pursuant to Rule 424(b) under the Securities Act a final prospectus (in the form first used to confirm sales of the ADSs (or in the form first made available to the Underwriters by the Company to meet requests of purchasers pursuant to Rule 173 under the Securities Act), the Prospectus ) that meets the requirements of Section 10(a) of the Securities Act. The term Preliminary Prospectus, as of any time, means any preliminary form of prospectus included in the Registration Statement immediately prior to such time or filed with the Commission pursuant to Rule 424(a) under the Securities Act at such time that omits certain information as permitted by Rule 430A. The Preliminary Prospectus without reference to a time means the Preliminary Prospectus included in the Registration Statement or deemed a part of the Registration Statement pursuant to Rule 430A under the Securities Act immediately prior to the Time of Sale (as defined below).
For purposes of this Agreement, free writing prospectus has the meaning set forth in Rule 405 under the Securities Act; Time of Sale Prospectus means the Preliminary Prospectus, together with the free writing prospectuses, if any, each identified in Schedule II hereto (each, a Permitted Free Writing Prospectus ), and other information conveyed to purchasers of the ADSs at or prior to the Time of Sale as set forth in Schedule II hereto; Time of Sale means [ · ] p.m. (New York City time) on the date of this Agreement; road show has the meaning set forth in Rule 433(h)(4) under the Securities Act, and bona fide electronic road show has the meaning set forth in Rule 433(h)(5) under the Securities Act.
A registration statement on Form F-6 (Registration No. 333-187520) with respect to the ADSs has (i) been prepared by the Depositary in conformity with the requirements of the Securities Act and the rules and regulations thereunder and (ii) been filed by the Company with the Commission under the Securities Act. The term F-6 Registration Statement means such registration statement, as amended at the time it became effective under the Securities Act, including all exhibits thereto. Copies of such registration statement have been delivered by the Company to the Managers.
The Company has also prepared and filed, in accordance with Section 12 of the Securities Exchange Act of 1934, as amended (the Exchange Act ), a registration statement on Form 8-A (File No. [ · ]) to register the ADSs and the Shares under Section 12(b) or 12(g) of the Exchange Act, as applicable.
1. Representations and Warranties of the Company . The Company represents and warrants to, and agrees with, each of the Underwriters on the date hereof, as of the Time of Sale, on the Closing Date and on each Option Closing Date (as defined herein), if any, that:
(a) Each of the Registration Statement and the F-6 Registration Statement has become effective under the Securities Act; no stop order suspending the effectiveness of either the Registration Statement or the F-6
Registration Statement or preventing or suspending the use of the Preliminary Prospectus or the Prospectus is in effect, and no proceedings for such purpose are pending before or, to the Companys knowledge, threatened by the Commission.
(b) The Preliminary Prospectus filed as part of the Registration Statement or pursuant to Rule 424 under the Securities Act, when so filed, complied in all material respects with the Securities Act and the rules and regulations thereunder (including, without limitation, Rule 424, 430A or 430C).
(c) (i) Each of the Registration Statement and the F-6 Registration Statement, at the time on which it was declared effective by the Commission, did not contain and, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; (ii) each of the Registration Statement and the F-6 Registration Statement, at the time on which it was declared effective by the Commission, complies and, as amended or supplemented, if applicable, will comply in all material respects with the Securities Act and the rules and regulations thereunder; (iii) at no time during the period that begins on the date of the Preliminary Prospectus and the date on which the Preliminary Prospectus was filed with the Commission and ends immediately prior to the execution of this Agreement did the Preliminary Prospectus contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; (iv) the Preliminary Prospectus furnished to the Underwriters for delivery to prospective investors complied in all material respects with the Securities Act (including without limitation the requirements of Section 10 of the Securities Act); (v) the Time of Sale Prospectus does not, and at the Time of Sale, at the Closing Date and, if applicable, each Option Closing Date, the Time of Sale Prospectus, as then amended or supplemented, if applicable, will not, contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; (vi) each Permitted Free Writing Prospectus does not conflict with the information contained in the Registration Statement, any Preliminary Prospectus, the Time of Sale Prospectus or the Prospectus and was accompanied or preceded by the then-most recent Preliminary Prospectus, to the extent required by Rule 433; and (vii) each road show, when considered together with the Time of Sale Prospectus, does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; (viii) the Prospectus, as of the date it is filed with the Commission pursuant to Rule 424(b), at the Closing Date and at each Option Closing Date, if any, will comply in all material respects with the Securities Act (including without limitation Section 10(a) of the Securities Act) and will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however,
that the representations and warranties set forth in this Section 1(c) do not apply to statements or omissions in the Registration Statement, the Time of Sale Prospectus, any Preliminary Prospectus, any Permitted Free Writing Prospectus, any road show or the Prospectus or any amendments or supplements thereto based upon information relating to any Underwriter furnished to the Company in writing by such Underwriter through the Managers expressly for use therein, it being agreed that the only information furnished by the Underwriters to the Company expressly for use therein are the following statements contained in Underwriting section of the Prospectus: (i) the first, second and third sentences of the third paragraph, (ii) the fourteenth paragraph, (iii) the fifteenth paragraph and (iv) the sixteenth paragraph (collectively, the Underwriters Information ).
(d) Prior to the execution of this Agreement, the Company has not, directly or indirectly, offered or sold any ADSs or Shares by means of any prospectus (within the meaning of the Securities Act) or used any prospectus (within the meaning of the Securities Act) in connection with the offer or sale of the ADSs or Shares, in each case other than the Preliminary Prospectus and/or the Permitted Free Writing Prospectuses; the Company has not, directly or indirectly, prepared, used or referred to any free writing prospectuses, without the prior written consent of the Managers, other than the Permitted Free Writing Prospectuses and road shows furnished or presented to the Managers before first use. Each Permitted Free Writing Prospectus has been prepared, used or referred to in compliance with Rules 164 and 433 under the Securities Act; assuming that such Permitted Free Writing Prospectus is so sent or given after the Registration Statement was filed with the Commission (and after such Permitted Free Writing Prospectus was, if required pursuant to Rule 433(d) under the Securities Act, filed with the Commission), the sending or giving, by any Underwriter, of any Permitted Free Writing Prospectus will satisfy the provisions of Rule 164 and Rule 433 (without reliance on subsections (b), (c) and (d) of Rule 164); the conditions set forth in Rule 433(b)(2) under the Securities Act are satisfied, and the Registration Statement relating to the offering of the ADSs contemplated hereby, as initially filed with the Commission, includes a prospectus that, other than by reason of Rule 433 or Rule 431 under the Securities Act, satisfies the requirements of Section 10 of the Securities Act, excluding a price range unless required by rule; neither the Company nor the Underwriters are disqualified, by reason of subsection (f) or (g) of Rule 164 under the Securities Act, from using, in connection with the offer and sale of the ADSs, free writing prospectuses pursuant to Rules 164 and 433 under the Securities Act; each Permitted Free Writing Prospectus that the Company has filed, or is required to file, pursuant to Rule 433(d) under the Securities Act or that was prepared by or behalf of or used or referred to by the Company complies or will comply in all material respects with the requirements of the Securities Act; in the case of any bona fide electronic road shows by the Company, the Company has complied with the requirements of Rule 433(d)(8)(ii) under the Securities Act; and, to the Companys knowledge, no free writing prospectus prepared by or on behalf of or used by any Underwriter
contains any issuer information within the meaning of Rule 433(h)(2) under the Securities Act.
(e) The Company and the transactions contemplated by this Agreement meet the requirements and comply with the conditions for the use of Form F-1. The Company was not an ineligible issuer (as defined in Rule 405 under the Securities Act) as of the eligibility determination date for purposes of Rules 164 and 433 under the Securities Act with respect to the offering of the ADSs contemplated by the Registration Statement.
(f) The ADSs are approved for listing on the NASDAQ Global Market ( NASDAQ ), subject to notice of issuance. The Common Stock currently is listed on the Mothers Marketplace of the Tokyo Stock Exchange (the TSE ) under stock code number 2158. To the Companys knowledge, there are no affiliations or associations between (i) any member of the Financial Industry Regulatory Authority ( FINRA ) and (ii) the Company or any of the Companys officers, directors, statutory auditors or 5% or greater security holders or any beneficial owner of the Companys unregistered equity securities that were acquired at any time on or after the 180th day immediately preceding the date the Registration Statement was initially filed with the Commission, except as disclosed in the Registration Statement (excluding the exhibits thereto), the Time of Sale Prospectus and the Prospectus.
(g) The Company has been duly incorporated, is validly existing as a corporation in good standing (or similar applicable status) under the laws of Japan, has the corporate power and authority to own its property and to conduct its business as described in the Registration Statement, the Time of Sale Prospectus and the Prospectus and is duly qualified to transact business and is in good standing (or similar applicable status) in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or be in good standing (or similar applicable status) would not (i) have a material adverse effect on the assets, business, condition (financial or otherwise), results of operation or prospects of Company and its subsidiaries, taken as a whole, or (ii) prevent or materially interfere with consummation of the transactions contemplated hereby (the occurrence of any such effect, prevention, interference or result described in the foregoing clauses (i) or (ii) being herein referred to as a material adverse effect ).
(h) Each subsidiary of the Company has been duly organized, is validly existing as a corporation in good standing (or similar applicable status) under the laws of the jurisdiction of its organization, has the corporate power and authority to own its property and to conduct its business as described in the Registration Statement, the Time of Sale Prospectus and the Prospectus and is duly qualified to transact business and is in good standing (or similar applicable status) in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such qualification, except to the extent that the failure
to be so qualified or be in good standing (or similar applicable status) would not have a material adverse effect; all of the issued shares of capital stock of each subsidiary of the Company have been duly and validly authorized and issued, are fully paid and non-assessable and are owned directly by the Company, free and clear of all liens, encumbrances, equities or claims.
(i) This Agreement has been duly authorized, executed and delivered by the Company.
(j) The Deposit Agreement has been duly and validly authorized, executed and delivered by the Company and, assuming due and valid authorization, execution and delivery thereof by the Depositary, constitutes a valid and legally binding obligation of the Company enforceable against the Company in accordance with its terms, subject to (i) the effects of bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting creditors rights generally; (ii) general equitable principles (whether considered in a proceeding in equity or at law); and (iii) an implied covenant of good faith and fair dealing, and except that rights to indemnification and contribution thereunder may be limited by U.S. federal or U.S. state securities laws or public policy relating thereto. The Deposit Agreement conforms in all material respects to the description thereof contained in the Registration Statement, the Time of Sale Prospectus and the Prospectus.
(k) The Managers Warrants have been duly and validly authorized by the Company and, when executed and delivered, will constitute the valid and legally binding obligations of the Company, enforceable against the Company in accordance with their terms, subject to (i) the effects of bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting creditors rights generally; (ii) general equitable principles (whether considered in a proceeding in equity or at law); and (iii) an implied covenant of good faith and fair dealing, and except that rights to indemnification and contribution thereunder may be limited by U.S. federal or U.S. state securities laws or public policy relating thereto. The Managers Warrants conform in all material respects to the description thereof contained in the Registration Statement, the Time of Sale Prospectus and the Prospectus.
(l) The authorized and outstanding capitalization of the Company is as set forth in the Registration Statement, the Time of Sale Prospectus and the Prospectus, subject, in each case, to the issuance of shares of Common Stock upon exercise of stock options and warrants disclosed as outstanding in the Registration Statement, the Time of Sale Prospectus and the Prospectus, as the case may be, and the grant of options under existing stock option plans described in the Registration Statement, the Time of Sale Prospectus and the Prospectus. The authorized capital stock of the Company conforms and will conform as to legal matters to the description thereof contained in the Registration Statement, the Time of Sale Prospectus and the Prospectus.
(m) The shares of Common Stock outstanding immediately prior to the issuance of the Shares and the sale of ADSs by the Company pursuant to this Agreement have been duly authorized, are validly issued, fully paid and non-assessable, have been issued in compliance with U.S. federal and state securities laws and all applicable foreign securities laws and are free of statutory and contractual preemptive rights, rights of first refusal and similar rights.
(n) The Public Shares (represented by the Public ADSs) to be issued and sold by the Company have been duly authorized and, upon deposit thereof with the Depositary in accordance with the provisions of the Deposit Agreement and upon payment and delivery of the Public ADSs representing such Public Shares in accordance with the provisions of this Agreement, such Public Shares will be validly issued, fully paid and nonassessable, will be issued in compliance with U.S. federal and state securities laws and all applicable foreign securities laws and will be free of statutory and contractual preemptive rights, rights of first refusal and similar rights. The Public Shares conform and will conform in all material respects to the descriptions thereof contained in the Registration Statement, the Time of Sale Prospectus and the Prospectus.
(o) All corporate action required to be taken for the authorization, issuance and sale of the Managers Warrants has been duly and validly taken by the Company; the Manager Shares (represented by the Managers ADSs) issuable upon exercise of the Managers Warrants have been duly authorized and reserved for issuance by all necessary corporate action on the part of the Company and, upon deposit thereof with the Depositary in accordance with the provisions of the Deposit Agreement, and when the Manager ADSs representing such Manager Shares have been paid for and issued in accordance with the Managers Warrants, such Manager Shares will be validly issued, fully paid and nonassessable, will be issued in compliance with U.S. federal and state securities laws and all applicable foreign securities laws and will be free of statutory and contractual preemptive rights, rights of first refusal and similar rights. The Manager Shares conform and will conform in all material respects to the descriptions thereof contained in the Registration Statement, the Time of Sale Prospectus and the Prospectus.
(p) The Public ADSs to be issued and sold by the Company have been duly authorized and, upon execution and delivery by the Depositary of the ADRs evidencing the Public ADSs against deposit of the Public Shares in respect thereof in accordance with the provisions of the Deposit Agreement, and upon payment by the Underwriters for the Public ADSs evidenced thereby in accordance with the provisions of this Agreement, such Public ADSs evidenced by such ADRs will be duly and validly issued, will be issued in compliance with U.S. federal and state securities laws and all applicable foreign securities laws and will be free of statutory and contractual preemptive rights, rights of first refusal and similar rights. The persons in whose names the ADRs are registered will be entitled to the rights specified therein and in the Deposit Agreement. Each of the Public ADSs and the applicable ADRs conform and will conform in all material respects
to the descriptions thereof contained in the Registration Statement, the Time of Sale Prospectus and the Prospectus.
(q) The Manager ADSs issuable upon exercise of the Managers Warrants have been duly authorized and reserved for issuance by all necessary corporate action on the part of the Company and, upon execution and delivery by the Depositary of the ADRs evidencing the Manager ADSs against deposit of the Manager Shares in respect thereof in accordance with the provisions of the Deposit Agreement, and when paid for and issued in accordance with the Managers Warrants, such Manager ADSs evidenced by such ADRs will be duly and validly issued, will be issued in compliance with U.S. federal and state securities laws and all applicable foreign securities laws and will be free of statutory and contractual preemptive rights, rights of first refusal and similar rights. The persons in whose names the ADRs are registered will be entitled to the rights specified therein and in the Deposit Agreement. Each of the Manager ADSs and the applicable ADRs conform and will conform in all material respects to the descriptions thereof contained in the Registration Statement, the Time of Sale Prospectus and the Prospectus.
(r) No holder of shares of Common Stock (including the Shares) or the ADSs after the consummation of the transactions contemplated by this Agreement, the Deposit Agreement or the Managers Warrants is or will be subject to any personal liability in respect of any liability of the Company by virtue only of its holding of any such Common Stock or ADSs. Except as described in the Registration Statement, the Time of Sale Prospectus and the Prospectus, there will be no limitations on the rights of holders of Shares, ADSs or ADRs evidencing the ADSs to hold or vote or transfer their respective securities.
(s) Except as disclosed in the Registration Statement, the Time of Sale Prospectus and the Prospectus, the sale of the ADSs by the Company, the issuance of the Shares represented by the ADSs being sold by the Company, and the deposit of the Shares with the Depositary and the issuance of the ADRs evidencing the ADSs as contemplated by this Agreement, the Deposit Agreement and the Managers Warrants will not trigger any anti-dilution rights of any holder of any shares of capital stock, securities convertible into or exchangeable or exercisable for capital stock or options, warrants or other rights to purchase capital stock or any other securities of the Company.
(t) Neither the execution and delivery by the Company of, nor the performance by the Company of its obligations under, this Agreement, the Deposit Agreement or the Managers Warrants will conflict with, contravene, result in a breach or violation of, or imposition of any lien, charge or encumbrance upon any assets of the Company or any of its subsidiaries pursuant to, or constitute a default under (i) any statute, law, rule, regulation, judgment, order or decree of any governmental body, regulatory or administrative agency or court having jurisdiction over the Company or any subsidiary; (ii) the articles of
incorporation or bylaws or similar organizational documents of the Company or any of its subsidiaries; or (iii) any contract, agreement, obligation, covenant or instrument to which the Company or any of its subsidiaries (or any of their respective assets) is subject or bound.
(u) No approval, authorization, consent or order of or filing with any federal, state, local or foreign governmental or regulatory commission, board, body, authority or agency, or of or with any self-regulatory organization or other non-governmental regulatory authority, or approval of the Companys stockholders, is required in connection with the issuance of the Shares, the issuance and sale of the Managers Warrants and the sale of the ADSs or the consummation of the transactions contemplated hereby, by the Deposit Agreement or by the Managers Warrants, other than (i) registration of the ADSs, the Shares and the Managers Warrants under the Securities Act, which has been effected (or, with respect to any Rule 462 Registration Statement, will be effected in accordance with Rule 462(b) under the Securities Act); (ii) any necessary qualification under the securities or blue sky laws of any jurisdiction in which the ADSs are being offered by the Underwriters; (iii) as may be required under the rules of FINRA; (iv) any applications or filings required under relevant regulations of, and the Companys listing agreement with, each of NASDAQ and the TSE ; (v) any related filings required under the Financial Instruments and Exchange Act of Japan (the FIEA ); or (vi) any reporting required under the Foreign Exchange and Foreign Trade Act of Japan .
(v) There are no actions, suits, claims, investigations or proceedings pending or, to the Companys knowledge, threatened or contemplated to which the Company or any of its subsidiaries or, to the Companys knowledge, any of their respective directors, statutory auditors or officers is a party or of which any of their respective properties is subject at law or in equity, before or by any federal, state, local or foreign governmental or regulatory commission, board, body, authority or agency, or before or by any self-regulatory organization or other non-governmental regulatory authority (including, without limitation, NASDAQ and the TSE) (i) other than any such action, suit, claim, investigation or proceeding that, if resolved adversely to the Company or any of its subsidiaries, would not, individually or in the aggregate, have a material adverse effect or (ii) that are required to be described in the Registration Statement, the Time of Sale Prospectus and the Prospectus and are not so described.
(w) The Company is not, and after giving effect to the issuance of the Shares, the offering and sale of the ADSs and the Managers Warrants and the application of the proceeds thereof as described in the Registration Statement, the Time of Sale Prospectus and the Prospectus will not be, required to register as an investment company as such term is defined in the Investment Company Act of 1940, as amended.
(x) The Companys securities are not rated by any nationally recognized statistical rating organization, as such term is defined for purposes of Rule 436(g)(2) under the Securities Act.
(y) The accountants who certified the financial statements and supporting schedules included in the Registration Statement, the Time of Sale Prospectus and the Prospectus are an independent registered public accounting firm as required by the Securities Act and related regulations.
(z) The financial statements included in the Registration Statement, the Time of Sale Prospectus and the Prospectus, together with the related notes and schedules, present fairly the consolidated financial position of the Company and its subsidiaries as of the dates indicated and the consolidated results of operations, cash flows and changes in stockholders equity of the Company for the periods specified and have been prepared in compliance with the requirements of the Securities Act and in conformity with U.S. generally accepted accounting principles applied on a consistent basis during the periods involved; all pro forma financial statements or data included in the Registration Statement, the Time of Sale Prospectus and the Prospectus, if any, comply with the requirements of the Securities Act, and the assumptions used in the preparation of such pro forma financial statements and data are reasonable, the pro forma adjustments used therein are appropriate to give effect to the transactions or circumstances described therein and the pro forma adjustments have been properly applied to the historical amounts in the compilation of those statements and data; the other financial and statistical data contained in the Registration Statement, the Time of Sale Prospectus and the Prospectus are accurately and fairly presented on a basis consistent with the financial statements and books and records of the Company; there are no financial statements (historical or pro forma) that are required to be included in the Registration Statement, the Time of Sale Prospectus or the Prospectus that are not included as required; the Company and its subsidiaries do not have any material liabilities or obligations, direct or contingent (including any off-balance sheet obligations), not described in the Registration Statement, the Time of Sale Prospectus and the Prospectus; and all disclosures contained in the Registration Statement, the Time of Sale Prospectus and the Prospectus regarding non-GAAP financial measures (as such term is defined by the rules and regulations of the Commission) comply with Item 10 of Regulation S-K under the Securities Act.
(aa) All statistical or market-related data included in the Registration Statement, the Time of Sale Prospectus, the Prospectus and the Permitted Free Writing Prospectuses are based on or derived from sources that the Company believes to be reliable and accurate, and the Company has obtained the written consent to the use of such data from such sources to the extent required. Each forward-looking statement (within the meaning of Section 27A of the Securities Act or Section 21E of the Exchange Act) contained in the Registration Statement, the Time of Sale Prospectus, the Prospectus and the Permitted Free Writing
Prospectuses has been made or reaffirmed with a reasonable basis and in good faith.
(bb) The Company and its subsidiaries (i) are in compliance with any and all applicable foreign, federal, state and local laws and regulations relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ( Environmental Laws ), (ii) have received all permits, licenses or other approvals required of them under applicable Environmental Laws to conduct their respective businesses and (iii) are in compliance with all terms and conditions of any such permit, license or approval, except where such noncompliance with Environmental Laws, failure to receive required permits, licenses or other approvals or failure to comply with the terms and conditions of such permits, licenses or approvals would not have a material adverse effect. There are no costs or liabilities associated with Environmental Laws (including, without limitation, any capital or operating expenditures required for clean-up, closure of properties or compliance with Environmental Laws or any permit, license or approval, any related constraints on operating activities and any potential liabilities to third parties) which would have a material adverse effect.
(cc) Except as disclosed in the Registration Statement, the Time of Sale Prospectus and the Prospectus, there are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Securities Act with respect to any securities of the Company or to require the Company to include such securities with the offer and sale of the Shares, the ADSs and the Managers Warrants registered pursuant to the Registration Statement and the F-6 Registration Statement, respectively.
(dd) There are no statutes, regulations, contracts or other documents which are required to be described in the Registration Statement, the Time of Sale Prospectus and the Prospectus or to be filed as exhibits to the Registration Statement which have not been so described or filed as required.
(ee) Subsequent to the respective dates as of which information is given in each of the Registration Statement, the Time of Sale Prospectus and the Prospectus, (i) there has not occurred any material adverse change, or any development involving a prospective material adverse change, in the assets, business, condition (financial or otherwise), management, operations, business prospects or earnings of the Company and its subsidiaries, taken as a whole; (ii) the Company and its subsidiaries have not incurred any material liability or obligation, direct or contingent, nor entered into any material transaction; (iii) the Company has not purchased any of its outstanding capital stock, nor declared, paid or otherwise made any dividend or distribution of any kind on its capital stock other than ordinary and customary dividends; and (iv) there has not been any material change in the capital stock, short-term debt or long-term debt of the Company and its subsidiaries, except in each case as described in each of the
Registration Statement, the Time of Sale Prospectus and the Prospectus, respectively.
(ff) The Company and its subsidiaries have good and marketable title in fee simple to all real property and good and marketable title to all personal property owned by them which is material to the business of the Company and its subsidiaries, in each case free and clear of all liens, encumbrances and defects except such as are described in the Registration Statement, the Time of Sale Prospectus and the Prospectus or such as do not materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company and its subsidiaries; and any real property and buildings held under lease by the Company and its subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company and its subsidiaries, in each case except as described in the Registration Statement, the Time of Sale Prospectus and the Prospectus.
(gg) The Company and its subsidiaries own, or have obtained valid and enforceable licenses for, or other rights to use, the inventions, patent applications, patents, trademarks (both registered and unregistered), trade names, service names, copyrights, trade secrets and other proprietary information described in the Registration Statement, the Time of Sale Prospectus and the Prospectus, as being owned by or licensed to them or which are necessary for the conduct of their respective businesses as currently conducted or as proposed to be conducted (including the commercialization of products or services described in the Registration Statement, the Time of Sale Prospectus and the Prospectus that are under development), except where the failure to own, license or have such rights would not, individually or in the aggregate, have a material adverse effect (collectively, Intellectual Property ); (i) there are no third parties who have or, to the Companys knowledge, will be able to establish rights to any Intellectual Property, except for, and to the extent of, the ownership rights of the owners of the Intellectual Property which the Registration Statement, the Time of Sale Prospectus and the Prospectus disclose is licensed to the Company; (ii) there is no infringement by third parties of any Intellectual Property; (iii) there is no pending or, to the Companys knowledge, threatened action, suit, proceeding or claim by others challenging the Companys rights in or to any Intellectual Property, and the Company is unaware of any facts which could form a reasonable basis for any such action, suit, proceeding or claim; (iv) there is no pending or, to the Companys knowledge, threatened action, suit, proceeding or claim by others challenging the validity, enforceability or scope of any Intellectual Property, and the Company is unaware of any facts which could form a reasonable basis for any such action, suit, proceeding or claim; (v) there is no pending or, to the Companys knowledge, threatened action, suit, proceeding or claim by others that the Company or any of its subsidiaries infringes or otherwise violates (or would, upon the commercialization of any product or service described in the
Registration Statement, the Time of Sale Prospectus and the Prospectus that is under development, infringe or violate) any patent, trademark, trade name, service name, copyright, trade secret or other proprietary rights of others, and the Company is unaware of any facts which could form a reasonable basis for any such action, suit, proceeding or claim; (vi) the Company and its subsidiaries have complied with the terms of each agreement pursuant to which Intellectual Property has been licensed to the Company or any of its subsidiaries, and all such agreements are in full force and effect; (vii) there is no patent or, to the Companys knowledge, patent application that contains claims that interfere with the issued or pending claims of any of the Intellectual Property or that challenges the validity, enforceability or scope of any of the Intellectual Property; and (viii) there is no prior art that may render any patent application within the Intellectual Property unpatentable that has not been disclosed to the U.S. Patent and Trademark Office and/or the Japan Patent Office, as applicable.
(hh) No material labor dispute with the employees of the Company or any of its subsidiaries exists, except as described in the Registration Statement, the Time of Sale Prospectus and the Prospectus, or, to the knowledge of the Company, is imminent; and the Company is not aware of any existing, threatened or imminent labor disturbance by the employees of any of its principal suppliers, manufacturers or contractors that would have a material adverse effect on the Company and its subsidiaries, taken as a whole. Neither the Company nor any of its subsidiaries is in violation of any provision of the Employee Retirement Income Security Act of 1974, as amended, or the rules and regulations promulgated thereunder, except for such violations as would not have a material adverse effect.
(ii) The Company and each of its subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the businesses in which they are engaged; neither the Company nor any of its subsidiaries has been refused any insurance coverage sought or applied for; and neither the Company nor any of its subsidiaries has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not have a material adverse effect.
(jj) The Company and its subsidiaries possess all certificates, authorizations and permits issued by the appropriate federal, state or foreign regulatory authorities necessary to conduct their respective businesses, and neither the Company nor any of its subsidiaries has received any notice of proceedings relating to the revocation or modification of any such certificate, authorization or permit which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would have a material adverse effect.
(kk) Except as otherwise would not have a material adverse effect, no subsidiary of the Company is subject to any material direct or indirect prohibition
on paying any dividends to the Company, on making any other distribution on such subsidiarys capital stock, on repaying to the Company any loans or advances to such subsidiary from the Company or on transferring any of such subsidiarys property or assets to the Company or any other subsidiary of the Company, except as described in the Registration Statement, the Time of Sale Prospectus and the Prospectus.
(ll) All dividends and other distributions declared and payable on the share capital of the Company may under the current laws and regulations of Japan be paid to the Depositary, and all such dividends and other distributions will not be subject to withholding or other taxes under the laws and regulations of Japan and are otherwise free and clear of any other tax, withholding or deduction in Japan and without the necessity of obtaining any consents, approvals, authorizations, orders, registrations, clearances or qualifications of or with any governmental agency having jurisdiction over the Company or any of its subsidiaries or any of their respective properties in Japan.
(mm) The Company maintains internal control over financial reporting (as defined in Rules 13a-15 and 15d-15 under the Exchange Act) in compliance with the applicable requirements of the Exchange Act. The Companys internal control over financial reporting has been designed by the Companys principal executive officer and principal financial officer, or under their supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and, except as set forth in the Registration Statement, the Time of Sale Prospectus and the Prospectus, is effective in performing the functions for which it was established. Except as described in the Registration Statement, the Time of Sale Prospectus and the Prospectus, since the end of the Companys most recent audited fiscal year, there has been (i) no significant deficiency or material weakness in the design or operation of the Companys internal control over financial reporting (whether or not remediated) which is reasonably likely to adversely affect the Companys ability to record, process, summarize and report financial information, and (ii) no change in the Companys internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.
(nn) The Company maintains disclosure controls and procedures (as such term is defined in Rules 13a-15 and 15d-15 under the Exchange Act); such disclosure controls and procedures are designed to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to the Companys Chief Executive Officer and Chief Financial Officer by others within those entities, and, except as set forth in the Registration Statement, the Time of Sale Prospectus and the Prospectus, such disclosure controls and procedures are effective in performing the functions for which they were established.
(oo) The Company has taken all necessary steps to ensure that, upon the effectiveness of the Registration Statement, it will be in compliance in all respects with all applicable provisions of the Sarbanes-Oxley Act of 2002, as amended ( Sarbanes-Oxley ), and all applicable rules and regulations promulgated thereunder or implementing the provisions thereof that are then in effect and with which the Company is required to comply as of the effectiveness of the Registration Statement. The Company is actively taking steps to ensure that it will be in compliance in all respects with provisions of Sarbanes-Oxley that will become applicable to the Company after the effectiveness of the Registration Statement.
(pp) Neither the Company nor any of its subsidiaries has sent or received any communication regarding termination of, or intent not to renew, any of the contracts or agreements referred to or described in the Time of Sale Prospectus or the Prospectus, or referred to or described in, or filed as an exhibit to, the Registration Statement, and no such termination or non-renewal has been threatened by the Company or any of its subsidiaries or, to the Companys knowledge, any other party to any such contract or agreement.
(qq) There are no business relationships or related-party transactions involving the Company or any subsidiary or any other person required to be described in the Registration Statement, the Time of Sale Prospectus and the Prospectus which have not been described as required.
(rr) All tax returns required to be filed by the Company or any of its subsidiaries have been timely filed, and all taxes and other assessments of a similar nature (whether imposed directly or through withholding) including any interest, additions to tax or penalties applicable thereto due or claimed to be due from such entities have been timely paid, other than those being contested in good faith and for which adequate reserves have been provided.
(ss) Neither the Company nor any of its subsidiaries nor, to the knowledge of the Company, any director, statutory auditor, officer, agent, employee or affiliate of the Company or any of its subsidiaries is aware of or has taken any action, directly or indirectly, that would result in a violation by such persons of the Foreign Corrupt Practices Act of 1977, as amended, and the rules and regulations thereunder (or any similar statute arising under Japanese law); and the Company and its subsidiaries have instituted and maintain policies and procedures designed to ensure continued compliance therewith, including without limitation a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with managements general or specific authorization, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets, (iii) access to assets is permitted only in accordance with managements general or specific authorization, and (iv) the recorded accountability for assets is compared with the
existing assets at reasonable intervals and appropriate action is taken with respect to any differences.
(tt) The operations of the Company and its subsidiaries are and have been conducted at all times in compliance with all applicable financial recordkeeping and reporting requirements, money laundering statutes and all rules, regulations and guidelines issued, administered or enforced by any governmental agency thereunder (collectively, the Money Laundering Laws ), and no action, suit or proceeding by or before any court or governmental agency or any arbitrator involving the Company or any of its subsidiaries with respect to the Money Laundering Laws is pending or, to the best knowledge of the Company, threatened.
(uu) None of the Company, any of its subsidiaries or, to the knowledge of the Company, any director, statutory auditor, officer or affiliate of the Company or any of its subsidiaries is currently subject to any sanctions administered by the Office of Foreign Assets Control of the U.S. Department of the Treasury ( OFAC ); and the Company will not directly or indirectly use the proceeds of the sale of the ADSs, or lend, contribute or otherwise make available such proceeds to any subsidiary, joint venture partner or other individual or entity, for the purpose of financing the activities of any person currently subject to any U.S. sanctions administered by OFAC.
(vv) Except as described in the Registration Statement, the Time of Sale Prospectus and the Prospectus, the Company has not sold, issued or distributed any shares of Common Stock or ADSs during the six-month period preceding the date hereof, including any sales pursuant to Rule 144A under, or Regulation D or Regulation S of, the Securities Act, other than shares issued pursuant to employee benefit plans, qualified stock option plans or other employee compensation plans or pursuant to outstanding convertible securities, options, rights or warrants.
(ww) Neither the Company nor any of its subsidiaries nor any of their respective directors, statutory auditors, officers, affiliates or controlling persons has taken, directly or indirectly, any action designed, or which has constituted or might reasonably be expected to cause or result in the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the ADSs.
(xx) Neither the Company nor any of its subsidiaries is, and upon the sale of the ADSs contemplated by this Agreement will not become, a passive foreign investment company (as defined in Section 1297 of the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder).
(yy) No transaction, stamp, capital or other issuance, registration, transaction, transfer or withholding tax or duty is payable in Japan by or on behalf of the Underwriters to any Japanese tax authority in connection with (i) the issuance, sale and delivery of the Public Shares by the Company, the issuance by
the Depositary of the Public ADSs representing such Public, and the delivery of such Public ADSs to or for the account of the Underwriters; (ii) the issuance, sale and delivery of the Manager Shares by the Company, the issuance by the Depositary of the Manager ADSs representing such Manager Shares, and the delivery of such Manager ADSs to or for the account of the Managers in accordance with the Managers Warrants; (iii) the purchase from the Company and the initial sale and delivery by the Underwriters of such Public ADSs to purchasers thereof; (iv) the holding or transfer of such ADSs outside of Japan; (v) the deposit of the Shares represented by such ADSs with the Depositary and the issuance and delivery of the ADRs evidencing such ADSs; or (vi) the execution and delivery of this Agreement, the Deposit Agreement, the Managers Warrants or any other documents to be furnished hereunder or thereunder.
(zz) The Company is a foreign private issuer within the meaning of Rule 405 under the Securities Act.
(aaa) From the time of the initial confidential submission of the Registration Statement to the Commission (or, if earlier, the first date on which the Company engaged, directly or through any Person authorized to act on its behalf, in any Testing-the Waters Communication) through the date hereof, the Company has been and is an emerging growth company, as defined in Section 2(a) of the Securities Act (an Emerging Growth Company ). Testing-the-Waters Communication means any oral or written communication with potential investors undertaken in reliance on Section 5(d) of the Securities Act.
(bbb) The Company has not (i) alone engaged in any Testing-the-Waters Communications, other than Testing-the-Waters Communications with the written consent of the Managers and with entities that are qualified institutional buyers within the meaning of Rule 144A under the Securities Act or institutions that are accredited investors within the meaning of Rule 501 under the Securities Act and (ii) authorized anyone other than the Managers to engage in Testing-the-Waters Communications. The Company confirms that the Managers have been authorized to act on its behalf in undertaking Testing-the-Waters Communications. The Company has not distributed any Written Testing-the-Waters Communications other than those listed on Schedule II hereto. Written Testing-the-Waters Communication means any Testing-the-Waters Communication that is a written communication within the meaning of Rule 405 under the Securities Act.
(ccc) The choice of laws of the State of New York as the governing law of this Agreement, the Deposit Agreement and the Managers Warrants, in each case, is a valid choice of law under the laws of Japan and will be honored by courts in Japan. The Company has the power to submit, and pursuant to Section 15(b) of this Agreement, has legally, validly, effectively and irrevocably submitted, to the personal jurisdiction of the New York Supreme Court, County of New York, or in the United States District Court for the Southern District of New York (each, a New York Court ), and the Company has the power to designate,
appoint and authorize, and pursuant to Section 15(b) of this Agreement, has legally, validly, effectively and irrevocably designated, appointed an authorized agent for service of process in any action arising out of or relating to this Agreement, the Deposit Agreement, the Managers Warrants or the ADSs in any New York Court, and service of process effected on such authorized agent will be effective to confer valid personal jurisdiction over the Company as provided in Section 15(b) hereof.
(ddd) None of the Company or any of its subsidiaries nor any of their respective properties, assets or revenues has any right of immunity under any applicable laws in the jurisdiction in which any of the Company or any of its subsidiaries is incorporated, from any legal action, suit or proceeding, from the giving of any relief in any such legal action, suit or proceeding, from set-off or counterclaim, from the jurisdiction of any court, from service of process, attachment upon or prior to judgment, or attachment in aid of execution of judgment, or from execution of a judgment, or other legal process or proceeding for the giving of any relief or for the enforcement of a judgment, in any such court, with respect to its obligations, liabilities or any other matter under or arising out of or in connection with this Agreement, the Deposit Agreement or the Managers Warrants; and, to the extent that the Company or any of its respective properties, assets or revenues may have or may hereafter become entitled to any such right of immunity in any such court in which proceedings may at any time be commenced, the Company waives or will waive such right to the extent permitted by law and has consented to such relief and enforcement as provided in Section 15(b) of this Agreement.
(eee) Each of this Agreement, the Deposit Agreement and the Managers Warrants is in proper form to be enforceable against the Company in Japan in accordance with its terms; to ensure the legality, validity, enforceability or admissibility into evidence in Japan of this Agreement, the Deposit Agreement or the Managers Warrants, it is not necessary that this Agreement, the Deposit Agreement or the Managers Warrants be filed or recorded with any court or other authority in Japan.
(fff) The continuous disclosure documents that the Company has filed with the Director of Kanto Local Finance Bureau were prepared in accordance with the FIEA and did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading as required under the FIEA.
(ggg) Since its incorporation, the Company has complied with the Corporations Act of Japan in all material respects in connection with (i) the Companys incorporation process; (ii) the Companys issuance of shares of Common Stock or any other securities; (iii) election of directors, statutory auditors and officers; (iv) creation of the Companys financial statements; (v) board meetings and stockholders meetings; (vi) corporate governance and other
organization matters; and (vii) conducting corporate and other major transactions to which the Company is a party.
(hhh) The Company has complied in all material respects with all regulations of the TSE applicable to the Company and the terms of the Companys the listing agreement with the TSE.
(iii) Neither the Company, nor, to the Companys knowledge, any of its affiliates, nor any person acting on its behalf has, directly or indirectly, made any offers or sales of any security or solicited any offers to buy any security, under circumstances that would cause the offering, issuance and sale of the ADSs to be integrated with prior offerings by the Company for purposes of the Securities Act, which would require the registration of the sales of any such securities under the Securities Act .
2. [Reserved.]
3. Agreements to Sell and Purchase . The Company hereby agrees to sell an aggregate of [ · ] Firm ADSs to the several Underwriters at a price of $[ · ] per ADS (the Purchase Price ), and each Underwriter, upon the basis of the representations and warranties herein contained, but subject to the conditions herein set forth, agrees, severally and not jointly, to purchase from the Company at the Purchase Price the number of Firm ADSs (subject to such adjustments to eliminate fractional ADSs as the Managers may determine) set forth opposite the name of such Underwriter set forth in Schedule I hereto.
Moreover, the Company hereby agrees to sell an aggregate of up to [ · ] Additional ADSs to the Underwriters at the Purchase Price, and the Underwriters, upon the basis of the representations and warranties contained herein, but subject to the terms and conditions herein set forth, shall have the right (but not the obligation) to purchase, severally and not jointly, up to the aggregate amount of Additional ADSs at the Purchase Price. Maxim may exercise this right on behalf of the Underwriters in whole or from time to time in part by giving written notice not later than 45 days after the date of this Agreement. Any exercise notice shall specify the number of Additional ADSs to be purchased by the Underwriters and the date on which such shares are to be purchased. Each purchase date must be at least two (2) business days after the written notice is given and may not be earlier than the closing date for the Firm ADSs or later than ten business days after the date of such notice. Additional ADSs may be purchased by the Underwriters solely for the purpose of covering over-allotments made in connection with the offering of the Firm ADSs. On each day, if any, that Additional ADSs are to be purchased (an Option Closing Date ), each Underwriter agrees, severally and not jointly, to purchase the number of Additional ADSs (subject to such adjustments to eliminate fractional ADSs as Maxim may determine) that bears the same proportion to the total number of Additional ADSs to be purchased on such Option Closing Date as the number of Firm ADSs set forth in Schedule I hereto opposite the name of such Underwriter bears to the total number of Firm ADSs.
The Company also hereby agrees to issue and sell to each of the Managers (and/or its designees) on the Closing Date the Managers Warrants for the purchase of an aggregate of [ · ] Manager ADSs (which amount is equal to 4% of the Firm ADSs) for an aggregate purchase price of $100.00. Each five (5) Manager ADSs will initially represent one (1) share of Common Stock deposited pursuant to the Deposit Agreement, subject to adjustment in accordance with the terms thereof.
4. Terms of Public Offering . The Company is advised by the Managers that the Underwriters propose to make a public offering of their respective portions of the ADSs as soon after this Agreement has become effective as in the Managers judgment is advisable. The Company is further advised by the Managers that the ADSs are to be offered to the public initially at $[ · ] per ADS (the Public Offering Price ) and to certain dealers selected by the Managers at a price that represents a concession not in excess of $[ · ] per ADS under the Public Offering Price, and that any Underwriter may allow, and such dealers may re-allow, a concession not in excess of $[ · ] per ADS, to any Underwriter or to certain other dealers.
5. Payment and Delivery . Payment for the Firm ADSs shall be made to the Company in U.S. Federal or other funds immediately available in New York, New York against delivery of such Firm ADSs for the respective accounts of the several Underwriters at 11:00 a.m. (New York City time) on [ · ], 2013, or at such other time or on such other date, not later than [ · ], 2013, as shall be designated in writing by the Managers. The time and date of such payment are hereinafter referred to as the Closing Date .
Payment for any Additional ADSs shall be made to the Company in U.S. Federal or other funds immediately available in New York, New York against delivery of such Additional ADSs for the respective accounts of the several Underwriters at 11:00 a.m. (New York City time) on the date specified in the corresponding notice described in Section 3 or at such other time or on such other date, in any event not later than [ · ], 2013, as shall be designated in writing by the Managers.
The Firm ADSs and Additional ADSs shall be registered in such names and in such denominations as the Managers shall request in writing not later than two (2) full business days prior to the Closing Date or the applicable Option Closing Date, as the case may be. The Firm ADSs and Additional ADSs shall be delivered to the Managers on the Closing Date or an Option Closing Date, as the case may be, for the respective accounts of the several Underwriters, with any transfer taxes payable in connection with both the transfer of the Public ADSs to the Underwriters and deposit of the Public Shares with the Depositary duly paid, against payment of the Purchase Price therefor.
Delivery of the Managers Warrants shall be made on the Closing Date and shall be issued in the name or names and in such authorized denominations as
the Managers may request. Payment for the Managers Warrants shall be made to the Company in U.S. Federal or other funds immediately available in New York City against delivery of the Managers Warrants with any transfer taxes payable in connection therewith duly paid.
6. Conditions to the Underwriters Obligations . The several obligations of the Underwriters are subject to the condition that all representations and warranties on the part of the Company contained in this Agreement are, on the date hereof, at the Time of Sale, on the Closing Date and on each Option Closing Date, if any, true and correct, the condition that the Company has performed its obligations required to be performed prior to the Closing Date or Option Closing Date, as the case may be, and the following further conditions:
(a) Subsequent to the execution and delivery of this Agreement and prior to the Closing Date and each Option Closing Date, if any, there shall not have occurred any change, or any development involving a prospective change, in the assets, business, condition (financial or otherwise), management, operations, earnings or business prospects of the Company and its subsidiaries, taken as a whole, from that set forth in the Registration Statement, the Time of Sale Prospectus and the Prospectus that makes it, in the Managers judgment, impracticable or inadvisable to offer or sell the Public ADSs on the terms and in the manner contemplated in the Registration Statement, the Time of Sale Prospectus and the Prospectus.
(b) The Underwriters shall have received on the Closing Date and each Option Closing Date, if any, a certificate, dated the Closing Date or such Option Closing Date, as the case may be, and signed by the Chief Executive Officer and Chief Financial Officer of the Company, to the effect that the representations and warranties of the Company contained in this Agreement are true and correct as of the Closing Date or such Option Closing Date, as the case may be, and that the Company has complied with all of the agreements and satisfied all of the conditions on its part to be performed or satisfied hereunder on or before the Closing Date or such Option Closing Date, as the case may be, and as to such other matters as the Managers may reasonably request. The delivery of the certificate provided for in this Section 6(b) shall constitute a representation and warranty of the Company as to the statements made in such certificate.
(c) [Reserved.]
(d) The Underwriters shall have received on the Closing Date and each Option Closing Date, if any, an opinion of DLA Piper LLP (US), special United States counsel for the Company, dated the Closing Date or such Option Closing Date, as the case may be, in form and substance reasonably satisfactory to counsel for the Underwriters to the effect set forth in Exhibit B-1 hereto. In rendering such opinion, DLA Piper LLP (US), may rely as to matters of fact (but not as to legal conclusions), to the extent it deems proper, on representations or certificates of responsible officers of the Company and its subsidiaries and on certificates of
public officials or bodies. The opinion of DLA Piper LLP (US) shall be rendered to the Underwriters at the request of the Company and shall so state therein.
(e) The Underwriters shall have received on the Closing Date and each Option Closing Date, if any, an opinion of DLA Piper Tokyo Partnership, special Japanese counsel for the Company, dated the Closing Date or such Option Closing Date, as the case may be, in form and substance reasonably satisfactory to counsel for the Underwriters to the effect set forth in Exhibit B-2 hereto. In rendering such opinion, DLA Piper Tokyo Partnership, may rely as to matters of fact (but not as to legal conclusions), to the extent it deems proper, on representations or certificates of responsible officers of the Company and its subsidiaries and on certificates of public officials or bodies. The opinion of DLA Piper Tokyo Partnership shall be rendered to the Underwriters at the request of the Company and shall so state therein.
(f) [Reserved.]
(g) The Underwriters shall have received on the Closing Date and each Option Closing Date, if any, an opinion of Emmet, Marvin & Martin, LLP, counsel for the Depositary, dated the Closing Date or such Option Closing Date, as the case may be, in form and substance reasonably satisfactory to counsel for the Underwriters to the effect set forth in Exhibit C hereto.
(h) The Underwriters shall have received on the Closing Date and each Option Closing Date, if any, an opinion of Reed Smith LLP, United States counsel for the Underwriters, dated the Closing Date or such Option Closing Date, as the case may be, in form and substance satisfactory to the Underwriters. In rendering such opinion, Reed Smith LLP, may rely as to matters of fact (but not as to legal conclusions), to the extent it deems proper, on representations or certificates of responsible officers of the Company and its subsidiaries and on certificates of public officials or bodies.
(i) The Underwriters shall have received on the Closing Date and each Option Closing Date, if any, an opinion of Anderson Mori & Tomotsune, Japanese counsel for the Underwriters, dated the Closing Date or such Option Closing Date, as the case may be, in form and substance satisfactory to the Underwriters. In rendering such opinion, Anderson Mori & Tomotsune, may rely as to matters of fact (but not as to legal conclusions), to the extent it deems proper, on representations or certificates of responsible officers of the Company and its subsidiaries and on certificates of public officials or bodies.
(j) The Underwriters shall have received, on each of the date hereof, the Closing Date and each Option Closing Date, if any, a letter dated the date hereof, the Closing Date or the Option Closing Date, as the case may be, in form and substance satisfactory to the Underwriters, from Ernst & Young ShinNihon LLC, independent public accountants, containing statements and information of the type ordinarily included in accountants comfort letters to underwriters with
respect to the financial statements and certain financial information contained in the Registration Statement, the Time of Sale Prospectus and the Prospectus; provided that the letter delivered on the Closing Date or the Option Closing Date, as the case may be, shall use a cut-off date not more than three (3) business days prior to the Closing Date or the Option Closing Date, as applicable.
(k) No stop order suspending the effectiveness of either of the Registration Statement or the F-6 Registration Statement or preventing or suspending the use of any Preliminary Prospectus, the Time of Sale Prospectus or the Prospectus shall have been issued, and no proceedings for such purpose shall have been instituted or threatened by the Commission; no notice of objection of the Commission to the use of the Registration Statement shall have been received; and all requests for additional information on the part of the Commission shall have been complied with to the Managers satisfaction.
(l) The Lock-Up Agreements, each substantially in the form of Exhibit D hereto, between the Managers, on the one hand, and each of the stockholders, executive officers, directors and statutory auditors of the Company identified on Schedule III to this Agreement, on the other hand, relating to sales and certain other dispositions of ADSs, shares of Common Stock and certain other securities, delivered to the Managers on or before the date hereof, shall be in full force and effect on the Closing Date.
(m) The ADSs shall have been approved for listing on NASDAQ.
(n) The Company shall not have received any order or notice from the TSE as to the delisting of the Common Stock (including the Shares) from the TSE.
(o) FINRA shall not have raised any objection with respect to the fairness or reasonableness of the underwriting, or other arrangements of the transactions, contemplated hereby.
(p) The Company and the Depositary shall have executed and delivered the Deposit Agreement, conforming in form and substance to the form thereof filed as an exhibit to the Registration Statement, and the Deposit Agreement shall be in full force and effect.
(q) [Reserved.]
(r) The Depositary or its custodian shall have delivered to the Company at such Closing Date or Option Closing Date, as the case may be, a receipt satisfactory to the Underwriters evidencing the deposit with the Depositary or its nominee of the Shares being so deposited against issuance of ADRs evidencing the ADSs to be delivered by the Company at such Closing Date or Option Closing Date, as the case may be.
(s) The Company shall not have received an order or notice from the Financial Supervisory Agency of Japan requiring the Company to make any amendments to its continuous disclosure documents in any material respect.
(t) On the Closing Date, the Company shall have delivered to the Managers executed copies of the Managers Warrants.
The several obligations of the Underwriters to purchase Additional ADSs hereunder are subject to the delivery to the Managers on the applicable Option Closing Date of such documents as the Managers may reasonably request, including certificates of officers of the Company, legal opinions and an accountants comfort letter, and other matters related to the issuance of such Additional ADSs.
7. Covenants of the Company . The Company covenants with each Underwriter as follows:
(a) To furnish to the Managers, without charge, three signed copies of the Registration Statement (including exhibits thereto) and for delivery to each other Underwriter a conformed copy of the Registration Statement and the F-6 Registration Statement (in each case, without exhibits thereto) and to furnish to the Managers in New York, New York, without charge, prior to 10:00 a.m. (New York City time) on the business day next succeeding the date of this Agreement and during the period mentioned in Sections 7(f) or 7(g) below, as many copies of the Time of Sale Prospectus, the Prospectus and any supplements and amendments thereto or to the Registration Statement or the F-6 Registration Statement as the Managers may request.
(b) Before amending or supplementing the Registration Statement, the F-6 Registration Statement, the Time of Sale Prospectus or the Prospectus, to furnish to the Managers a copy of each such proposed amendment or supplement and not to file any such proposed amendment or supplement to which the Managers object, and to file with the Commission within the applicable period specified in Rule 424(b) under the Securities Act any prospectus required to be filed pursuant to such Rule.
(c) To furnish to the Managers a copy of each proposed free writing prospectus and each Written Testing-the-Waters Communication to be prepared by or on behalf of, used by, or referred to by the Company and not to use or refer to any proposed free writing prospectus or Written Testing-the-Waters Communication to which the Managers object.
(d) Not to take any action that would result in an Underwriter or the Company being required to file with the Commission pursuant to Rule 433(d) under the Securities Act a free writing prospectus prepared by or on behalf of the Underwriter that the Underwriter otherwise would not have been required to file thereunder.
(e) To advise the Managers promptly of any request by the Commission for amendments or supplements to the Registration Statement, the F-6 Registration Statement, any Preliminary Prospectus or Prospectus or for additional information with respect thereto, or of notice of institution of proceedings for, or the entry of a stop order, suspending the effectiveness of the Registration Statement or the F-6 Registration Statement or preventing or suspending the use of any Preliminary Prospectus, the Time of Sale Prospectus or the Prospectus; and if the Commission should enter such a stop order, to use its best efforts to obtain the lifting or removal of such order as soon as possible.
(f) If the Time of Sale Prospectus is being used to solicit offers to buy the Public ADSs at a time when the Prospectus is not yet available to prospective purchasers and any event shall occur or condition exist as a result of which it is necessary to amend or supplement the Time of Sale Prospectus in order to make the statements therein, in the light of the circumstances, not misleading, or if any event shall occur or condition exist as a result of which the Time of Sale Prospectus conflicts with the information contained in the Registration Statement or the F-6 Registration Statement then on file, or if, in the opinion of counsel for the Underwriters, it is necessary to amend or supplement the Time of Sale Prospectus to comply with applicable law, forthwith to prepare, file with the Commission and furnish, at its own expense, to the Underwriters and to any dealer upon request, either amendments or supplements to the Time of Sale Prospectus so that the statements in the Time of Sale Prospectus as so amended or supplemented will not, in the light of the circumstances when delivered to a prospective purchaser, be misleading or so that the Time of Sale Prospectus, as amended or supplemented, will no longer conflict with the Registration Statement or the F-6 Registration Statement, or so that the Time of Sale Prospectus, as amended or supplemented, will comply with applicable law.
(g) If, during such period after the first date of the public offering of the Public ADSs as in the opinion of counsel for the Underwriters the Prospectus (or in lieu thereof the notice referred to in Rule 173(a) under the Securities Act) is required by law to be delivered in connection with sales by an Underwriter or dealer, any event shall occur or condition exist as a result of which it is necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances when the Prospectus (or in lieu thereof the notice referred to in Rule 173(a) under the Securities Act) is delivered to a purchaser, not misleading, or if, in the opinion of counsel for the Underwriters, it is necessary to amend or supplement the Prospectus to comply with applicable law, forthwith to prepare, file with the Commission and furnish, at its own expense, to the Underwriters and to the dealers (whose names and addresses the Managers will furnish to the Company) to which the Public ADSs may have been sold by the Managers on behalf of the Underwriters and to any other dealers upon request, either amendments or supplements to the Prospectus so that the statements in the Prospectus as so amended or supplemented will not, in the light of the circumstances when the Prospectus (or in lieu thereof the notice referred to in
Rule 173(a) under the Securities Act) is delivered to a purchaser, be misleading or so that the Prospectus, as amended or supplemented, will comply with applicable law.
(h) If, at or after the time this Agreement is executed and delivered, it is necessary or appropriate for a post-effective amendment to the Registration Statement or the F-6 Registration Statement, or a Rule 462 Registration Statement, to be filed with the Commission and become effective before the Public ADSs may be sold, the Company shall use its best efforts to cause such post-effective amendment or such Registration Statement or F-6 Registration Statement to be filed and become effective, and will pay any applicable fees in accordance with the Securities Act, as soon as possible; and the Company will advise the Managers promptly and, if requested by the Managers, will confirm such advice in writing, (i) when such post-effective amendment or such Registration Statement or F-6 Registration Statement has become effective, and (ii) if Rule 430A or 430C under the Securities Act is used, when the Prospectus is filed with the Commission pursuant to Rule 424(b) under the Securities Act (which the Company agrees to file in a timely manner in accordance with such Rules).
(i) To file promptly all reports and any definitive proxy or information statements required to be filed by the Company with the Commission pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of the Prospectus and for so long as the delivery of a prospectus (or, in lieu thereof, the notice referred to in Rule 173(a) under the Securities Act) is required in connection with the offering or sale of the Public ADSs.
(j) Promptly to furnish such information or to take such action as the Managers may reasonably request and otherwise to qualify the Public ADSs for offer and sale under the securities or blue sky laws of such jurisdictions as the Managers shall reasonably request, and to comply with such laws so as to permit the continuance of sales and dealings therein in such jurisdictions for as long as may be necessary to complete the distribution of the Public ADSs; provided, however, that the Company shall not be required to qualify as a foreign corporation or to file a consent to service of process in any jurisdiction (excluding service of process with respect to the offer and sale of the Public ADSs); and to promptly advise the Managers of the receipt by the Company of any notification with respect to the suspension of the qualification of the Public ADSs for offer or sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose.
(k) To make generally available to the Companys security holders and to the Managers as soon as practicable an earnings statement covering a period of at least twelve months beginning after the effective date of the Registration Statement (as defined in Rule 158(c) under the Securities Act), which shall satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder.
(l) To use its best efforts to cause the ADSs and the Common Stock (including the Shares) to be listed on NASDAQ and the TSE, respectively, and to maintain such listings for a period of three (3) years from the Closing Date.
(m) During the period beginning on the date of this Agreement and continuing to and including 180 days after the date of the Prospectus (the Lock-Up Period ), and without the prior written consent of the Managers on behalf of the Underwriters, not to (i) to issue, offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any ADSs, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock, (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the ADSs or the Common Stock, whether such transaction described in clause (i) or (ii) above is to be settled by delivery of ADSs, Common Stock or such other securities, in cash or otherwise, (iii) file any registration statement with the Commission relating to the offering of any ADSs, shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock, or (iv) publicly announce an intention to effect any transaction specified in clause (i), (ii) or (iii) above. The restrictions contained in the preceding sentence shall not apply to (i) the Shares to be issued and the ADSs to be sold hereunder; (ii) the grant of options to purchase shares of Common Stock pursuant to the Companys stock option plans under the terms of such plans in effect on the date hereof, provided such options are granted at fair market value and in amounts and with exercise terms consistent with the Companys past practice; or (iii) the issuance by the Company of shares of Common Stock upon the exercise of an option or warrant or the conversion of a security outstanding on the date of this Agreement of which the Managers have been advised in writing. Notwithstanding the foregoing, if (1) during the last 17 days of the Lock-Up Period the Company issues an earnings release or material news or a material event relating to the Company occurs; or (2) prior to the expiration of the Lock-Up Period, the Company announces that it will release earnings results during the 16-day period beginning on the last day of the Lock-Up Period, the restrictions imposed by this agreement shall continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the occurrence of the material news or material event; provided, however, that this extension of the Lock-Up Period shall not apply to the extent that FINRA has amended or repealed NASD Rule 2711(f)(4), or has otherwise provided written interpretive guidance regarding such rule, in each case, so as to eliminate the prohibition of any broker, dealer, or member of a national securities association from publishing or distributing any research report, with respect to the securities of an Emerging Growth Company prior to or after the expiration of any agreement between the broker, dealer, or member of a national securities association and the Emerging Growth Company or its stockholders that restricts or prohibits the sale of securities held by the Emerging Growth Company or its stockholders after the initial public offering date. The Company shall promptly notify the Managers of any
earnings release, news or event that may give rise to an extension of the Lock-Up Period.
(n) To prepare, if the Managers so request, a final term sheet relating to the offering of the ADSs, containing only information that describes the final terms of the ADSs or the offering in a form consented to by the Managers, and to file such final term sheet within the period required by Rule 433(d)(5)(ii) under the Securities Act following the date the final terms have been established for the offering of the ADSs.
(o) To comply with Rule 433(d) under the Securities Act (without reliance on Rule 164(b) under the Securities Act) and with Rule 433(g) under the Securities Act.
(p) Not to take, directly or indirectly, any action designed, or which will constitute, or has constituted, or might reasonably be expected to cause or result in the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the ADSs.
(q) Not, at any time at or after the execution of this Agreement, to offer or sell any ADSs (or Shares) by means of any prospectus (within the meaning of the Securities Act) or use any prospectus (within the meaning of the Securities Act) in connection with the offer or sale of the ADSs (or Shares), except in each case other than the Prospectus.
(r) For a period of two (2) years following the Closing Date, to maintain a transfer agent and a registrar (if necessary under Japanese law) for the Common Stock reasonably acceptable to the Managers. Mitsubishi UFJ Trust is acceptable to the Managers to act as transfer agent and registrar for the Common Stock.
(s) For a period of two (2) years following the Closing Date, to maintain a depositary for the ADSs reasonably acceptable to the Managers. The Bank of New York Mellon is acceptable to the Managers to act as depositary for the ADSs.
(t) To apply the net proceeds to the Company from the sale of the ADSs in the manner set forth under the caption Use of Proceeds in the Prospectus.
(u) To promptly notify the Managers if the Company ceases to be an Emerging Growth Company at any time prior to the later of (i) completion of the distribution of the ADSs within the meaning of the Securities Act and (ii) fifteen (15) days following the completion of the Lock-Up Period referred to in Section 7(m) hereof.
(v) If at any time following the distribution of any Written Testing-the-Waters Communication there occurred or occurs an event or development as a result of which such Written Testing-the-Waters Communication included or would include an untrue statement of a material fact or omitted or would omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances existing at that subsequent time, not misleading, the Company shall promptly notify the Managers and shall promptly amend or supplement, at its own expense, such Written Testing-the-Waters Communication to eliminate or correct such untrue statement or omission.
(w) To comply with all regulations under the FIEA applicable to the Company .
(x) To comply with (i) all regulations of the TSE applicable to the Company and (ii) the terms of the Companys the listing agreement with the TSE .
(y) For a period of one (1) year following the Closing Date, to retain a financial public relations firm reasonably acceptable to the Managers, which shall initially be Integrated Corporate Relations Inc., which firm shall be experienced in assisting issuers in public offerings of securities and in their relations with their security holders.
(z) The Company shall not issue press releases or engage in any other publicity, without the Managers prior written consent, for a period ending at 5:00 p.m., Eastern time, on the first (1st) Business Day following the forty-fifth (45th) day after the Closing Date, other than normal and customary releases issued in the ordinary course of the Companys business.
(aa) For a period of twelve (12) months following the Closing Date, the Company shall grant the Managers the right of first refusal to manage or co-manage any public underwriting or private placement of debt or equity securities (excluding (i) sales to employees under any compensation or stock option plan approved by the stockholders of the Company; (ii) Common Stock or ADSs issued in payment of the consideration for an acquisition or as part of a joint venture or other bona fide strategic relationship (the primary purpose of which is not financing); and (iii) conventional banking arrangements and commercial debt financing) of the Company or any of its subsidiaries or successors of the Company in the United States. If the Managers fail to accept in writing any such proposal for such public or private sale within twenty (20) calendar days after receipt of a written notice thereof from the Company, then the Managers shall have no claim or right with respect to any such sale contained in any such notice. If, thereafter, such proposal is modified in any material respect, the Company shall adopt the same procedure as with respect to the original proposed public or private sale and the Managers shall have the aforementioned right of first refusal with respect to such revised proposal.
8. Expenses . Whether or not the transactions contemplated in this Agreement are consummated or this Agreement is terminated, the Company agrees to pay or cause to be paid all expenses incident to the performance of its obligations under this Agreement, including: (i) all fees and expenses in connection with the preparation and filing of the Registration Statement, the F-6 Registration Statement, any Preliminary Prospectus, the Time of Sale Prospectus, the Prospectus, any free writing prospectus or Written Testing-the-Waters Communications prepared by or on behalf of, used by, or referred to by the Company and amendments and supplements to any of the foregoing, including all printing costs associated therewith, and the mailing and delivering of copies thereof as the Underwriters reasonably may deem necessary; (ii) all costs and expenses related to the transfer and delivery of the ADSs to the Underwriters, including any stamp duties or transfer or other taxes payable thereon; (iii) all fees, expenses and disbursements relating to the registration or qualification of such ADSs under the blue sky securities laws of such states and other jurisdictions as the Underwriters may reasonably designate (including, without limitation, all filing and registration fees, and the fees and disbursements of counsel to the Underwriters related thereto), it being agreed that if the offering of the Public ADSs contemplated by this Agreement is not commenced on NASDAQ, The NASDAQ Global Select Market, The NASDAQ Capital Market, the New York Stock Exchange or the NYSE MKT, the Company shall be responsible for an initial payment of $5,000 for filing fees upon the commencement of blue sky work by counsel to the Underwriters, with the balance of such counsel fees and expenses (up to a maximum of $500 per state) to be due on the Closing Date; (iv) all filing fees incurred in connection with the review and qualification of the offering of the ADSs by FINRA; (v) all fees and expenses in connection with the preparation and filing of the registration statement on Form 8-A relating to the ADSs and all costs and expenses incident to listing the ADSs on NASDAQ (or such other stock exchange as determined by the Company and the Underwriters) and to listing the Common Stock (including the Shares) on the TSE; (vi) the cost of printing certificates representing the ADSs or Shares and/or the cost of printing ADRs representing the ADSs; (vii) the fees and expenses of any transfer agent, registrar, custodian, depositary or financial public relations firm; (viii) the costs and expenses of the Company relating to investor presentations on any road show undertaken in connection with the marketing of the offering of the ADSs, including, without limitation, expenses associated with the preparation or dissemination of any road show, expenses associated with the production of road show slides and graphics, fees and expenses of any consultants engaged in connection with the road show presentations with the prior written approval of the Company, travel and lodging expenses of the representatives and officers of the Company, any such consultants and the Underwriters (up to a maximum of $20,000 for the Underwriters actual accountable roadshow expenses; provided that travel and lodging expenses of the Underwriters in excess of $5,000 shall be subject to prior written approval by the Company; and provided, further , that the Underwriters may require that the Company pre-pay any travel and lodging expenses of the Underwriters); (ix) the document production charges and
expenses associated with printing this Agreement, the Deposit Agreement and/or the Managers Warrants; (x) all costs and expenses in connection with the deposit of the Shares with the Depositary and the issuance of ADSs and ADRs thereby; (xi) all fees, expenses and disbursements relating to background checks of the Companys officers, directors and statutory auditors (at a cost not to exceed $1,500 per person and $5,000 in the aggregate); (xii) a maximum of $5,000 for the costs associated with i-Deal and Net Roadshow; (xiii) the fees, disbursements and expenses of the Companys counsel and the Companys accountants in connection with the transactions contemplated in this Agreement; and (xiv) and all other costs and expenses incident to the performance of the obligations of the Company hereunder for which provision is not otherwise made in this Section.
The Company further agrees that, in addition to the expenses payable pursuant to the foregoing paragraph, on the Closing Date it shall pay to the Managers, by deduction from the net proceeds of the sale of the Firm ADSs contemplated herein, a corporate finance fee equal to one percent (1%) of the gross proceeds received by the Company from the sale of the Firm ADSs, less the Advance (as defined below).
The Underwriters will pay all of their costs and expenses, including fees and disbursements of their counsel (except as set forth in the immediately preceding paragraph, subject to the rule of FINRA), stock transfer taxes payable on resale of any of the ADSs by them and any advertising expenses connected with any offers they may make. Notwithstanding the above, if the sale of the ADSs provided for herein is not consummated because any condition to the obligations of the Underwriters set forth in Section 6 is not satisfied, because of any termination of this Agreement by the Underwriters pursuant to Section 10 hereof or because of any refusal, inability or failure on the part of the Company to perform any obligation or covenant hereunder or comply with any provision hereof other than by reason of a default by any of the Underwriters, the Company shall reimburse the Underwriters or such Underwriters as have so terminated this Agreement with respect to themselves, severally, through the Managers on demand for all documented out-of-pocket expenses (including, but not limited to, all fees and disbursements of Underwriters counsel, travel, lodging and other road show expenses, mailing, printing and reproduction expenses, and any expenses incurred by Underwriters in conducting their due diligence, including background checks of the Companys officers, directors and statutory auditors) incurred by such Underwriters in connection with this Agreement or the transactions contemplated hereby up to a maximum of $150,000, inclusive of the $50,000 advance for non-accountable expenses previously paid by the Company to the Managers (the Advance ); provided, however , that such expense cap in no way limits or impairs the indemnification and contribution provisions contained in Section 9 of this Agreement. Notwithstanding the foregoing, the Advance received by the Managers shall be reimbursed to the Company to the extent not actually incurred in compliance with FINRA Rule 5110(f)(2)(C).
9. Indemnity and Contribution . (a) The Company agrees to indemnify and hold harmless each Underwriter, each person, if any, who controls any Underwriter within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act, and each affiliate of any Underwriter within the meaning of Rule 405 under the Securities Act from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) caused by, arising out of or based upon (i) any untrue statement or alleged untrue statement of a material fact contained in either the Registration Statement or the F-6 Registration Statement or any amendment thereof, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or (i) any untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus, the Time of Sale Prospectus, any issuer free writing prospectus as defined in Rule 433(h) under the Securities Act, any issuer information that the Company has filed, or is required to file, pursuant to Rule 433(d) of the Securities Act, any road show not constituting a free writing prospectus, any Written Testing-the-Waters Communications, or the Prospectus or any amendment or supplement thereto, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which there were made, not misleading; provided, however, that the Company shall not be liable under this Section 9(a) to the extent that such losses, claims, damages or liabilities are caused by, arise out of or are based upon any such untrue statement or omission or alleged untrue statement or omission made therein in reliance upon and in conformity with information relating to such Underwriter furnished to the Company in writing by such Underwriter through the Managers expressly for use therein, it being agreed that the only information furnished by the Underwriters to the Company expressly for use therein is the Underwriters Information. With respect to any untrue statement or omission or alleged untrue statement or omission made in the Time of Sale Prospectus, the indemnity agreement contained in this Section 9(a) shall not inure to the benefit of any Underwriter to the extent that any loss, liability, claim, damage or expense of such Underwriter results from the fact that a copy of the Prospectus was not given or sent to the person asserting any such loss, liability, claim or damage at or prior to the written confirmation of sale of the Public ADSs to such person as required by the Securities Act and the rules and regulations thereunder, and if the untrue statement or omission has been corrected in the Prospectus, unless such failure to deliver the Prospectus was a result of non-compliance by the Company.
(b) [Reserved.]
(c) Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, the directors and statutory auditors of the Company, the officers of the Company who sign the Registration Statement and each person, if any, who controls the Company within the meaning of either
Section 15 of the Securities Act or Section 20 of the Exchange Act from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) caused by, arising from or based upon (i) any untrue statement or alleged untrue statement of a material fact contained in either the Registration Statement or the F-6 Registration Statement or any amendment thereof or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or (ii) any untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus, the Time of Sale Prospectus, any issuer free writing prospectus as defined in Rule 433(h) under the Securities Act, any issuer information that the Company has filed, or is required to file, pursuant to Rule 433(d) of the Securities Act, any road show not constituting a free writing prospectus, any Written Testing-the-Waters Communications, or the Prospectus or any amendment or supplement thereto, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which there were made, not misleading, in each case to the extent, but only to the extent, that such untrue statement or omission or alleged untrue statement or omission was made therein in reliance upon and in conformity with information relating to such Underwriter furnished to the Company in writing by such Underwriter through the Managers expressly for use therein, it being agreed that the only information furnished by the Underwriters to the Company expressly for use therein is the Underwriters Information.
(d) In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to Section 9(a), 9(b) or 9(c) such person (the indemnified party ) shall promptly notify the person against whom such indemnity may be sought (the indemnifying party ) in writing and the indemnifying party, upon request of the indemnified party, shall retain counsel reasonably satisfactory to the indemnified party to represent the indemnified party and any others the indemnifying party may designate in such proceeding and shall pay the fees and disbursements of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. It is understood that the indemnifying party shall not, in respect of the legal expenses of any indemnified party in connection with any proceeding or related proceedings in the same jurisdiction, be liable for (i) the fees and expenses of more than one separate firm (in addition to any local counsel) for all Underwriters and all persons, if any, who control any Underwriter
within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act or who are affiliates of any Underwriter within the meaning of Rule 405 under the Securities Act; and (ii) the fees and expenses of more than one separate firm (in addition to any local counsel) for the Company, its directors and statutory auditors, its officers who sign the Registration Statement and each person, if any, who controls the Company within the meaning of either such Section; and in each case, that all such fees and expenses shall be reimbursed as they are incurred. In the case of any such separate firm for the Underwriters and such control persons and affiliates of any Underwriters, such firm shall be designated in writing by the Managers. In the case of any such separate firm for the Company, and such directors and statutory auditors, officers and control persons of the Company, such firm shall be designated in writing by the Company. The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. Notwithstanding the foregoing sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel as contemplated by the second and third sentences of this paragraph, the indemnifying party agrees that it shall be liable for any settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than 45 days after receipt by such indemnifying party of the aforesaid request, (ii) such indemnifying party shall have received notice of the terms of such settlement at least 30 days prior to such settlement being entered into and (iii) such indemnifying party shall not have reimbursed such indemnified party in accordance with such request prior to the date of such settlement, unless such failure to reimburse the indemnified party is based on a dispute with a good faith basis as to either the obligation of such indemnifying party arising under this Section 9 to indemnify the indemnified party or the amount of such obligation and such indemnifying party shall have notified the indemnified party in writing of the existence and nature of such good faith dispute prior to the date of such settlement. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such proceeding.
(e) To the extent the indemnification provided for in 9(a), 9(b) or 9(c) is unavailable to an indemnified party or insufficient in respect of any losses, claims, damages or liabilities referred to therein, then each indemnifying party under such paragraph, in lieu of indemnifying such indemnified party thereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the indemnifying party or
parties on the one hand and the indemnified party or parties on the other hand from the offering of the ADSs or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the indemnifying party or parties on the one hand and of the indemnified party or parties on the other hand in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other hand in connection with the offering of the ADSs shall be deemed to be in the same respective proportions as the net proceeds from the offering of the ADSs (before deducting expenses) received by the Company and the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover of the Prospectus, bear to the aggregate Public Offering Price of the ADSs. The relative fault of the Company, on the one hand, and the Underwriters, on the other hand, shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or by the Underwriters and the parties relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Underwriters respective obligations to contribute pursuant to this Section 9 are several in proportion to the respective number of ADSs they have purchased hereunder, and not joint.
(f) The Company and the Underwriters agree that it would not be just or equitable if contribution pursuant to this Section 9 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in Section 9(e). The amount paid or payable by an indemnified party as a result of the losses, claims, damages and liabilities referred to in Section 9(e) shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 9, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the ADSs underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages that such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The remedies provided for in this Section 9 are not exclusive and shall not limit any rights or remedies which may otherwise be available to any indemnified party at law or in equity.
(g) The indemnity and contribution provisions contained in this Section 9 and the representations, warranties and other statements of the Company contained in this Agreement shall remain operative and in full force and effect regardless of (i) any termination of this Agreement, (ii) any investigation made by or on behalf of any Underwriter, any person controlling any Underwriter or any affiliate of any Underwriter, or the Company, its officers, directors or statutory auditors or any person controlling the Company and (iii) acceptance of and payment for any of the ADSs.
10. Termination . The Underwriters may terminate this Agreement by notice given by the Managers to the Company, if after the execution and delivery of this Agreement and prior to the Closing Date (a) trading generally shall have been suspended or materially limited or minimum prices shall have been established on, or by, as the case may be, any of the New York Stock Exchange, the NYSE MKT, NASDAQ or the TSE; (b) trading of any securities of the Company shall have been suspended or materially limited on any exchange or in any over-the-counter market; (c) a material disruption in securities settlement, payment or clearance services in the United States or Japan shall have occurred; (d) any moratorium or material limitation on commercial banking activities shall have been declared by Japanese, U.S. Federal or New York state authorities; (e) there shall have occurred any outbreak or escalation of hostilities, act of terrorism involving the United States or Japan or declaration by the United States or Japan of a national emergency or war, or (f) any other calamity or crisis or any change in financial, political or economic conditions in the United States, Japan or elsewhere, if the effect of any such event specified in clause (e) or (f), makes it, in the Managers judgment, impracticable or inadvisable to proceed with the offer, sale or delivery of the ADSs on the terms and in the manner contemplated in the Registration Statement, the Time of Sale Prospectus or the Prospectus (exclusive of any supplement thereto).
11. Effectiveness; Defaulting Underwriters . This Agreement shall become effective upon the execution and delivery hereof by the parties hereto.
If, on the Closing Date or an Option Closing Date, as the case may be, any one or more of the Underwriters shall fail or refuse to purchase ADSs that it has or they have agreed to purchase hereunder on such date, and the aggregate number of ADSs which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase is not more than one-tenth of the aggregate number of the ADSs to be purchased on such date, the other Underwriters shall be obligated severally in the proportions that the number of Firm ADSs set forth opposite their respective names in Schedule I bears to the aggregate number of Firm ADSs set forth opposite the names of all such non-defaulting Underwriters, or in such other proportions as the Managers may specify, to purchase the ADSs which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase on such date; provided that in no event shall the number of ADSs that any Underwriter has agreed to purchase pursuant to this Agreement be increased
pursuant to this Section 11 by an amount in excess of one-ninth of such number of ADSs without the written consent of such Underwriter. If, on the Closing Date, any Underwriter or Underwriters shall fail or refuse to purchase Firm ADSs and the aggregate number of Firm ADSs with respect to which such default occurs is more than one-tenth of the aggregate number of Firm ADSs to be purchased on such date, and arrangements satisfactory to the Managers and the Company for the purchase of such Firm ADSs are not made within 36 hours after such default, this Agreement shall terminate without liability on the part of any non-defaulting Underwriter or the Company. In the event of any such default which does not result in a termination of this Agreement, either the Managers or the Company shall have the right to postpone the Closing Date, but in no event for longer than seven days, in order that the required changes, if any, in the Registration Statement, in the Time of Sale Prospectus, in the Prospectus or in any other documents or arrangements may be effected. If, on an Option Closing Date, any Underwriter or Underwriters shall fail or refuse to purchase Additional ADSs and the aggregate number of Additional ADSs with respect to which such default occurs is more than one-tenth of the aggregate number of Additional ADSs to be purchased on such Option Closing Date, the non-defaulting Underwriters shall have the option to (i) terminate their obligation hereunder to purchase the Additional ADSs to be sold on such Option Closing Date or (ii) purchase not less than the number of Additional ADSs that such non-defaulting Underwriters would have been obligated to purchase in the absence of such default. Any action taken under this paragraph shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement.
12. Representations and Indemnities to Survive . The respective agreements, representations, warranties, indemnities and other statements of the Company and the Underwriters set forth or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation made by or on behalf of any Underwriter, or the Company or any of the officers, directors, statutory auditors, employees, agents or controlling persons referred to in Section 9 hereof, and will survive delivery of and payment for the ADSs. The provisions of Sections 8 and 9 hereof shall survive the termination or cancellation of this Agreement.
13. Entire Agreement . (a) This Agreement, together with any contemporaneous written agreements and any prior written agreements (to the extent not superseded by this Agreement) that relate to the offering of the ADSs, represents the entire agreement between the Company, on the one hand, and the Underwriters, on the other, with respect to the preparation of any Preliminary Prospectus, the Time of Sale Prospectus, the Prospectus, the conduct of the offering, and the purchase and sale of the ADSs. The Underwriters understand and acknowledge that in the event the offering of the ADSs is terminated, the Underwriters will reimbursed only for their actual accountable out-of-pocket expenses in compliance with FINRA Rule 5110(f)(2)(C).
(b) The Company acknowledges that in connection with the offering of the ADSs: (i) the Underwriters have acted at arms length with the Company; (ii) the Underwriters are not agents of, and owe no fiduciary duties to, the Company or any other person; (iii) the Underwriters owe the Company only those duties and obligations set forth in this Agreement and prior written agreements (to the extent not superseded by this Agreement), if any; and (iv) the Underwriters may have interests that differ from those of the Company. The Company waives to the full extent permitted by applicable law any claims it may have against the Underwriters arising from an alleged breach of fiduciary duty in connection with the offering of the ADSs.
14. Counterparts . This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument.
15. Applicable Law; Waiver of Trial By Jury . (a) This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York, without giving effect to conflict of laws principles thereof.
(b) The Company hereby submits to the non-exclusive jurisdiction of any New York Court, in any suit or proceeding arising out of or relating to this Agreement or the transactions contemplated hereby. The Company irrevocably and unconditionally waives any objection to the laying of venue of any suit or proceeding arising out of or relating to this Agreement or the transactions contemplated hereby in any New York Court and irrevocably and unconditionally waives and agrees not to plead or claim in any such court that any such suit or proceeding in any such court has been brought in an inconvenient forum. The Company irrevocably appoints Naritomo Ikeue, President, UBIC North America, Inc., 590 Fifth Avenue, 19th Floor New York, NY 10036, United States, as its authorized agent in the City of New York, New York upon which process may be served in any such suit or proceeding, and agrees that service of process upon such agent, and written notice of said service to the Company, at the address included in Section 18 hereof by the person serving the same, shall be deemed in every respect effective service of process upon the Company in any such suit or proceeding. The Company further agrees to take any and all action as may be necessary to maintain such designation and appointment of such agent in full force and effect for a period of seven years from the date of this Agreement.
(c) The Underwriters, on the one hand, and the Company, on the other hand, waive any right to trial by jury in any action, claim, suit or proceeding with respect to your engagement as underwriter or your role in connection herewith.
16. Miscellaneous. (a) The obligations of the Company pursuant to this Agreement in respect of any sum due to any Underwriter shall, notwithstanding any judgment in a currency other than United States dollars, not be discharged until the first business day, following receipt by such Underwriter of any sum adjudged to be so due in such other currency, on which (and only to
the extent that) such Underwriter may in accordance with normal banking procedures purchase United States dollars with such other currency; if the United States dollars so purchased are less than the sum originally due to such Underwriter hereunder, the Company agrees, as a separate obligation and notwithstanding any such judgment, to indemnify such Underwriter against such loss. If the United States dollars so purchased are greater than the sum originally due to such Underwriter hereunder, such Underwriter agrees to pay to the Company an amount equal to the excess of the United States dollars so purchased over the sum originally due to such Underwriter hereunder.
(b) All payments made by the Company under this Agreement, if any, will be made without withholding or deduction for or on account of any present or future taxes, duties, assessments or governmental charges of whatever nature imposed or levied by or on behalf of Japan or any political subdivision or any taxing authority thereof or therein unless the Company is or becomes required by law to withhold or deduct such taxes, duties, assessments or other governmental charges. In such event, the Company will pay such additional amounts as will result, after such withholding or deduction, in the receipt by each Underwriter and each person controlling any Underwriter, as the case may be, of the amounts that would otherwise have been receivable in respect thereof, except to the extent such taxes, duties, assessments or other governmental charges are imposed or levied by reason of such Underwriters or controlling persons being connected with Japan other than by reason of its being an Underwriter or a person controlling any Underwriter under this Agreement.
17. Headings . The headings of the sections of this Agreement have been inserted for convenience of reference only and shall not be deemed a part of this Agreement.
18. Notices. All communications hereunder shall be in writing and effective only upon receipt shall be delivered, mailed or sent to the parties as follows:
(a) If to the Underwriters, to:
Maxim Group LLC
405 Lexington Avenue
New York, NY 10174
Attention: James Siegel, Esq.
Telephone: (212) 895-3508
Facsimile: (212) 895-3888
with a copy to:
Attention: Clifford Teller
Executive Managing Director
Telephone: (212) 895-3773
Facsimile: (212) 895-3783
and
The Benchmark Company, LLC
40 Fulton Street, 19th Floor,
New York, NY 10038
Attention: John J. Borer III
Telephone: (212) 312-6705
Facsimile: (212) 312-6761
(with a copy, which shall not constitute notice, to)
Yvan-Claude Pierre, Esq.
Reed Smith LLP
599 Lexington Avenue
New York, New York 10022
Fax: (212) 521-5450
(b) If to the Company, to:
UBIC, Inc.
Meisan Takahama Building, 2-12-23
Kounan, Minato-ku, Tokyo, Japan
Fax: +81-3-54636345
Attention: Masahiro Morimoto
Chairman, Chief Executive Officer and President
(with a copy, which shall not constitute notice, to)
Michael S. Turner, Esq.
DLA Piper LLP (US)
33 Arch Street, 26 th Floor
Boston, Massachusetts 02110
Fax: (617) 406-6114
[ Signature Page Follows ]
If the foregoing letter is in accordance with your understanding of our agreement, please sign and return to us the enclosed duplicates hereof, whereupon it will become a binding agreement among the Company and the several Underwriters in accordance with its terms.
|
Very truly yours, |
|
|
|
|
|
UBIC, INC. |
|
|
|
|
|
|
|
|
By: |
|
|
|
Name: |
|
|
Title: |
Accepted as of the date hereof
MAXIM GROUP LLC
THE BENCHMARK COMPANY, LLC
Acting severally on behalf of themselves and
the several Underwriters named in
Schedule I
hereto
By: |
MAXIM GROUP LLC |
|
|
|
|
By: |
|
|
|
Name: |
|
|
Title: |
|
|
|
|
By: |
THE BENCHMARK COMPANY, LLC |
|
|
|
|
By: |
|
|
|
Name: |
|
|
Title: |
|
[SIGNATURE PAGE]
UBIC, INC. UNDERWRITING AGREEMENT
SCHEDULE I
Underwriter |
|
Number of Firm ADSs
|
|
Number of Additional ADSs
|
|
MAXIM GROUP LLC |
|
|
|
|
|
THE BENCHMARK COMPANY, LLC. |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
SCHEDULE II
Time of Sale Prospectus
1. Preliminary Prospectus dated [ · ], 2013
2. Identify all free writing prospectuses filed by the Company under Rule 433(d) of the Securities Act: [ · ]
3. Bona fide electronic road show: [ · ]
4. Written Testing-the-Waters Communications: [ · ]
5. Orally communicated pricing information:
Number of Firm ADSs: [ · ]
Number of Additional ADSs: [ · ]
Aggregate Offering size: $[ · ]
Price per ADS: $[ · ]
Number of Managers Warrants: [ · ]
Initial exercise price of Managers Warrants per Manager ADS: $[ · ]
Underwriting discount and commissions per ADS: $[ · ]
Number of shares of Common Stock represented by each ADS: one (1) share of Common Stock per five (5) ADSs
Estimated net proceeds to the Company (after underwriting discounts and commissions but before offering expenses): $[ · ]
Pricing Date: [ · ], 2013
Trade date: [
·
], 2013
Closing date: [
·
], 2013
Exhibit 4.2
|
UBIC, INC.
AND
THE BANK OF NEW YORK MELLON
As Depositary
AND
OWNERS AND HOLDERS OF AMERICAN DEPOSITARY SHARES
Deposit Agreement
Dated as of , 2013
|
TABLE OF CONTENTS
ARTICLE 1. |
DEFINITIONS |
1 |
|
SECTION 1.01 |
American Depositary Shares |
1 |
|
SECTION 1.02 |
Commission |
2 |
|
SECTION 1.03 |
Company |
2 |
|
SECTION 1.04 |
Custodian |
2 |
|
SECTION 1.05 |
Deliver; Surrender |
2 |
|
SECTION 1.06 |
Deposit Agreement |
3 |
|
SECTION 1.07 |
Depositary; Corporate Trust Office |
3 |
|
SECTION 1.08 |
Deposited Securities |
3 |
|
SECTION 1.09 |
Dollars |
3 |
|
SECTION 1.10 |
DTC |
3 |
|
SECTION 1.11 |
Foreign Registrar |
3 |
|
SECTION 1.12 |
Holder |
3 |
|
SECTION 1.13 |
Owner |
4 |
|
SECTION 1.14 |
Receipts |
4 |
|
SECTION 1.15 |
Registrar |
4 |
|
SECTION 1.16 |
Restricted Securities |
4 |
|
SECTION 1.17 |
Securities Act of 1933 |
4 |
|
SECTION 1.18 |
Shares |
4 |
|
|
|
|
|
ARTICLE 2. |
FORM OF RECEIPTS, DEPOSIT OF SHARES, DELIVERY, TRANSFER AND SURRENDER OF AMERICAN DEPOSITARY SHARES |
5 |
|
SECTION 2.01 |
Form of Receipts; Registration and Transferability of American Depositary Shares |
5 |
|
SECTION 2.02 |
Deposit of Shares |
6 |
|
SECTION 2.03 |
Delivery of American Depositary Shares |
6 |
|
SECTION 2.04 |
Registration of Transfer of American Depositary Shares; Combination and Split-up of Receipts; Interchange of Certificated and Uncertificated American Depositary Shares |
7 |
|
SECTION 2.05 |
Surrender of American Depositary Shares and Withdrawal of Deposited Securities |
8 |
|
SECTION 2.06 |
Limitations on Delivery, Transfer and Surrender of American Depositary Shares |
9 |
|
SECTION 2.07 |
Lost Receipts, etc. |
10 |
|
SECTION 2.08 |
Cancellation and Destruction of Surrendered Receipts |
10 |
|
SECTION 2.09 |
Pre-Release of American Depositary Shares |
10 |
|
SECTION 2.10 |
DTC Direct Registration System and Profile Modification System |
11 |
|
|
|
|
|
ARTICLE 3. |
CERTAIN OBLIGATIONS OF OWNERS AND HOLDERS OF AMERICAN DEPOSITARY SHARES |
12 |
|
SECTION 3.01 |
Filing Proofs, Certificates and Other Information |
12 |
|
SECTION 3.02 |
Liability of Owner for Taxes |
12 |
|
SECTION 3.03 |
Warranties on Deposit of Shares |
12 |
|
|
|
|
|
ARTICLE 4. |
THE DEPOSITED SECURITIES |
13 |
|
SECTION 4.01 |
Cash Distributions |
13 |
|
SECTION 4.02 |
Distributions Other Than Cash, Shares or Rights |
13 |
|
SECTION 4.03 |
Distributions in Shares |
14 |
|
SECTION 4.04 |
Rights |
15 |
|
SECTION 4.05 |
Conversion of Foreign Currency |
17 |
|
SECTION 4.06 |
Fixing of Record Date |
17 |
|
SECTION 4.07 |
Voting of Deposited Securities |
18 |
|
SECTION 4.08 |
Changes Affecting Deposited Securities |
19 |
|
SECTION 4.09 |
Reports |
19 |
|
SECTION 4.10 |
Lists of Owners |
20 |
|
SECTION 4.11 |
Withholding |
20 |
|
|
|
|
|
ARTICLE 5. |
THE DEPOSITARY, THE CUSTODIANS AND THE COMPANY |
20 |
|
SECTION 5.01 |
Maintenance of Office and Transfer Books by the Depositary |
20 |
|
SECTION 5.02 |
Prevention or Delay in Performance by the Depositary or the Company |
21 |
|
SECTION 5.03 |
Obligations of the Depositary, the Custodian and the Company |
22 |
|
SECTION 5.04 |
Resignation and Removal of the Depositary |
23 |
|
SECTION 5.05 |
The Custodians |
24 |
|
SECTION 5.06 |
Notices and Reports |
24 |
|
SECTION 5.07 |
Distribution of Additional Shares, Rights, etc. |
25 |
|
SECTION 5.08 |
Indemnification |
26 |
|
SECTION 5.09 |
Charges of Depositary |
27 |
|
SECTION 5.10 |
Retention of Depositary Documents |
28 |
|
SECTION 5.11 |
Exclusivity |
28 |
|
SECTION 5.12 |
List of Restricted Securities Owners |
28 |
|
|
|
|
|
ARTICLE 6. |
AMENDMENT AND TERMINATION |
28 |
|
SECTION 6.01 |
Amendment |
28 |
|
SECTION 6.02 |
Termination |
29 |
|
|
|
|
|
ARTICLE 7. |
MISCELLANEOUS |
30 |
|
SECTION 7.01 |
Counterparts |
30 |
|
SECTION 7.02 |
No Third Party Beneficiaries |
30 |
|
SECTION 7.03 |
Severability |
30 |
|
SECTION 7.04 |
Owners and Holders as Parties; Binding Effect |
30 |
|
SECTION 7.05 |
Notices |
30 |
|
SECTION 7.06 |
Submission to Jurisdiction; Appointment of Agent for Service of Process; Jury Trial Waiver |
31 |
|
SECTION 7.07 |
Waiver of Immunities |
32 |
|
SECTION 7.08 |
Governing Law |
32 |
|
DEPOSIT AGREEMENT
DEPOSIT AGREEMENT dated as of , 2013 among UBIC, INC., a joint stock corporation incorporated under the laws of Japan (herein called the Company), THE BANK OF NEW YORK MELLON, a New York banking corporation (herein called the Depositary), and all Owners and Holders (each as hereinafter defined) from time to time of American Depositary Shares issued hereunder.
W I T N E S S E T H:
WHEREAS, the Company desires to provide, as hereinafter set forth in this Deposit Agreement, for the deposit of Shares (as hereinafter defined) of the Company from time to time with the Depositary or with the Custodian (as hereinafter defined) as agent of the Depositary for the purposes set forth in this Deposit Agreement, for the creation of American Depositary Shares representing the Shares so deposited and for the execution and delivery of American Depositary Receipts evidencing the American Depositary Shares; and
WHEREAS, the American Depositary Receipts are to be substantially in the form of Exhibit A annexed hereto, with appropriate insertions, modifications and omissions, as hereinafter provided in this Deposit Agreement;
NOW, THEREFORE, in consideration of the premises, it is agreed by and between the parties hereto as follows:
ARTICLE 1. DEFINITIONS
The following definitions shall for all purposes, unless otherwise clearly indicated, apply to the respective terms used in this Deposit Agreement:
SECTION 1.01 American Depositary Shares.
The term American Depositary Shares shall mean the securities created under this Deposit Agreement representing rights with respect to the Deposited Securities. American Depositary Shares may be certificated securities evidenced by Receipts or uncertificated securities. The form of Receipt annexed as Exhibit A to this Deposit Agreement shall be the prospectus required under the Securities Act of 1933 for sales of both certificated and uncertificated American Depositary Shares. Except for those provisions of this Deposit Agreement that refer specifically to Receipts, all the provisions of this Deposit Agreement shall apply to both certificated and uncertificated American Depositary Shares. Each American Depositary Share shall represent the number of Shares specified in Exhibit A to this Deposit Agreement, until there shall occur a distribution upon Deposited Securities covered by Section 4.03 or a change in Deposited Securities covered by Section 4.08 with respect to which additional American
Depositary Shares are not delivered, and thereafter American Depositary Shares shall represent the amount of Shares or Deposited Securities specified in such Sections.
SECTION 1.02 Commission.
The term Commission shall mean the Securities and Exchange Commission of the United States or any successor governmental agency in the United States.
SECTION 1.03 Company.
The term Company shall mean UBIC, Inc., a joint stock corporation incorporated under the laws of Japan, and its successors.
SECTION 1.04 Custodian.
The term Custodian shall mean the Tokyo, Japan offices of Mizuho Corporate Bank and The Bank of Tokyo-Mitsubishi UFJ, Ltd., as agents of the Depositary for the purposes of this Deposit Agreement, and any other firm or corporation which may hereafter be appointed by the Depositary pursuant to the terms of Section 5.05, as substitute or additional custodian or custodians hereunder, as the context shall require and shall also mean all of them collectively.
SECTION 1.05 Deliver; Surrender.
(a) The term deliver, or its noun form, when used with respect to Shares or other Deposited Securities, shall mean book-entry transfer of those Shares or other Deposited Securities to an account maintained by an institution authorized under applicable law to effect transfers of such securities designated by the person entitled to that delivery.
(b) The term deliver, or its noun form, when used with respect to American Depositary Shares, shall mean (i) book-entry transfer of American Depositary Shares to an account at DTC designated by the person entitled to such delivery, evidencing American Depositary Shares registered in the name requested by that person, (ii) registration of American Depositary Shares not evidenced by a Receipt on the books of the Depositary in the name requested by the person entitled to such delivery and mailing to that person of a statement confirming that registration or (iii) if requested by the person entitled to such delivery, delivery at the Corporate Trust Office of the Depositary to the person entitled to such delivery of one or more Receipts.
(c) The term surrender, when used with respect to American Depositary Shares, shall mean (i) one or more book-entry transfers of American Depositary Shares to the DTC account of the Depositary, (ii) delivery to the Depositary at its Corporate Trust Office of an instruction to surrender American Depositary Shares not
evidenced by a Receipt or (iii) surrender to the Depositary at its Corporate Trust Office of one or more Receipts evidencing American Depositary Shares.
SECTION 1.06 Deposit Agreement.
The term Deposit Agreement shall mean this Deposit Agreement, as the same may be amended from time to time in accordance with the provisions hereof.
SECTION 1.07 Depositary; Corporate Trust Office.
The term Depositary shall mean The Bank of New York Mellon, a New York banking corporation, and any successor as depositary hereunder. The term Corporate Trust Office, when used with respect to the Depositary, shall mean the office of the Depositary which at the date of this Deposit Agreement is 101 Barclay Street, New York, New York 10286.
SECTION 1.08 Deposited Securities.
The term Deposited Securities as of any time shall mean Shares at such time deposited or deemed to be deposited under this Deposit Agreement, including without limitation Shares that have not been successfully delivered upon surrender of American Depositary Shares, and any and all other securities, property and cash received by the Depositary or the Custodian in respect thereof and at such time held under this Deposit Agreement, subject as to cash to the provisions of Section 4.05.
SECTION 1.09 Dollars.
The term Dollars shall mean United States dollars.
SECTION 1.10 DTC.
The term DTC shall mean The Depository Trust Company or its successor.
SECTION 1.11 Foreign Registrar.
The term Foreign Registrar shall mean the entity that presently carries out the duties of registrar for the Shares or any successor as registrar for the Shares and any other agent of the Company for the transfer and registration of Shares, including without limitation any securities depository for the Shares.
SECTION 1.12 Holder.
The term Holder shall mean any person holding a Receipt or a security entitlement or other interest in American Depositary Shares, whether for its own account
or for the account of another person, but that is not the Owner of that Receipt or those American Depositary Shares.
SECTION 1.13 Owner.
The term Owner shall mean the person in whose name American Depositary Shares are registered on the books of the Depositary maintained for such purpose.
SECTION 1.14 Receipts.
The term Receipts shall mean the American Depositary Receipts issued hereunder evidencing certificated American Depositary Shares, as the same may be amended from time to time in accordance with the provisions hereof.
SECTION 1.15 Registrar.
The term Registrar shall mean any bank or trust company having an office in the Borough of Manhattan, The City of New York, that is appointed by the Depositary to register American Depositary Shares and transfers of American Depositary Shares as herein provided.
SECTION 1.16 Restricted Securities.
The term Restricted Securities shall mean Shares, or American Depositary Shares representing Shares, that are acquired directly or indirectly from the Company or its affiliates (as defined in Rule 144 under the Securities Act of 1933) in a transaction or chain of transactions not involving any public offering, or that are subject to resale limitations under Regulation D under the Securities Act of 1933 or both, or which are held by an officer, director (or persons performing similar functions) or other affiliate of the Company, or that would require registration under the Securities Act of 1933 in connection with the offer and sale thereof in the United States, or that are subject to other restrictions on sale or deposit under the laws of the United States or Japan, or under a shareholder agreement or the articles of incorporation or similar document of the Company.
SECTION 1.17 Securities Act of 1933.
The term Securities Act of 1933 shall mean the United States Securities Act of 1933, as from time to time amended.
SECTION 1.18 Shares.
The term Shares shall mean common shares of the Company that are validly issued and outstanding and fully paid, nonassessable and that were not issued in
violation of any pre-emptive or similar rights of the holders of outstanding securities of the Company; provided , however , that, if there shall occur any change in nominal value, a split-up or consolidation or any other reclassification or, upon the occurrence of an event described in Section 4.08, an exchange or conversion in respect of the Shares of the Company, the term Shares shall thereafter also mean the successor securities resulting from such change in nominal value, split-up or consolidation or such other reclassification or such exchange or conversion.
ARTICLE 2. FORM OF RECEIPTS, DEPOSIT OF SHARES, DELIVERY, TRANSFER AND SURRENDER OF AMERICAN DEPOSITARY SHARES
SECTION 2.01 Form of Receipts; Registration and Transferability of American Depositary Shares.
Definitive Receipts shall be substantially in the form set forth in Exhibit A annexed to this Deposit Agreement, with appropriate insertions, modifications and omissions, as hereinafter provided. No Receipt shall be entitled to any benefits under this Deposit Agreement or be valid or obligatory for any purpose, unless such Receipt shall have been (i) executed by the Depositary by the manual signature of a duly authorized officer of the Depositary or (ii) executed by the facsimile signature of a duly authorized officer of the Depositary and countersigned by the manual signature of a duly authorized signatory of the Depositary or a Registrar. The Depositary shall maintain books on which (x) each Receipt so executed and delivered as hereinafter provided and the transfer of each such Receipt shall be registered and (y) all American Depositary Shares delivered as hereinafter provided and all registrations of transfer of American Depositary Shares shall be registered. A Receipt bearing the facsimile signature of a person that was at any time a proper officer of the Depositary shall, subject to the other provisions of this paragraph, bind the Depositary, notwithstanding that such person was not a proper officer of the Depositary on the date of issuance of that Receipt.
The Receipts, with the Companys consent (which shall not be reasonably withheld), may be endorsed with or have incorporated in the text thereof such legends or recitals or modifications not inconsistent with the provisions of this Deposit Agreement as may be required by the Depositary or the Company or required to comply with any applicable law or regulations thereunder or with the rules and regulations of any securities exchange upon which American Depositary Shares may be listed or to conform with any usage with respect thereto, or to indicate any special limitations or restrictions to which any particular Receipts are subject by reason of the date of issuance of the underlying Deposited Securities or otherwise.
American Depositary Shares evidenced by a Receipt, when properly endorsed or accompanied by proper instruments of transfer, shall be transferable as certificated registered securities under the laws of the State of New York. American Depositary Shares not evidenced by Receipts shall be transferable as uncertificated
registered securities under the laws of the State of New York. The Depositary, notwithstanding any notice to the contrary, may treat the Owner of American Depositary Shares as the absolute owner thereof for the purpose of determining the person entitled to distribution of dividends or other distributions or to any notice provided for in this Deposit Agreement and for all other purposes, and neither the Depositary nor the Company shall have any obligation or be subject to any liability under this Deposit Agreement to any Holder of American Depositary Shares (but only to the Owner of those American Depositary Shares).
SECTION 2.02 Deposit of Shares.
Subject to the terms and conditions of this Deposit Agreement, Shares or evidence of rights to receive Shares may be deposited by delivery thereof to any Custodian hereunder, accompanied by any appropriate instruments or instructions for transfer, or endorsement, in form satisfactory to the Custodian, together with all such certifications as may be required by the Depositary or the Custodian in accordance with the provisions of this Deposit Agreement, and, if the Depositary requires, together with a written order directing the Depositary to deliver to, or upon the written order of, the person or persons stated in such order, the number of American Depositary Shares representing such deposit.
No Share shall be accepted for deposit unless accompanied by evidence satisfactory to the Depositary that any necessary approval has been granted by any governmental body in Japan that is then performing the function of the regulation of currency exchange. If required by the Depositary, Shares presented for deposit at any time, whether or not the transfer books of the Company or the Foreign Registrar, if applicable, are closed, shall also be accompanied by an agreement or assignment, or other instrument satisfactory to the Depositary, which will provide for the prompt transfer to the Custodian of any dividend, or right to subscribe for additional Shares or to receive other property which any person in whose name the Shares are or have been recorded may thereafter receive upon or in respect of such deposited Shares, or in lieu thereof, such agreement of indemnity or other agreement as shall be satisfactory to the Depositary.
Deposited Securities shall be held by the Depositary or by a Custodian for the account and to the order of the Depositary or at such other place or places as the Depositary shall determine.
SECTION 2.03 Delivery of American Depositary Shares.
Upon receipt by any Custodian of any deposit pursuant to Section 2.02 hereunder, together with the other documents required as specified above, such Custodian shall notify the Depositary of such deposit and the person or persons to whom or upon whose written order American Depositary Shares are deliverable in respect thereof and the number of American Depositary Shares to be so delivered. Such notification shall be
made by letter or, at the request, risk and expense of the person making the deposit, by cable, telex or facsimile transmission (and in addition, if the transfer books of the Company or the Foreign Registrar, if applicable, are open, the Depositary may in its sole discretion require a proper acknowledgment or other evidence from the Company or the Foreign Registrar that any Deposited Securities have been recorded upon the books of the Company or the Foreign Registrar, if applicable, in the name of the Depositary or its nominee or such Custodian or its nominee). Upon receiving such notice from such Custodian, or upon the receipt of Shares or evidence of the right to receive Shares by the Depositary, the Depositary, subject to the terms and conditions of this Deposit Agreement, shall deliver to or upon the order of the person or persons entitled thereto, the number of American Depositary Shares issuable in respect of that deposit, but only upon payment to the Depositary of the fees and expenses of the Depositary for the delivery of such American Depositary Shares as provided in Section 5.09, and of all taxes and governmental charges and fees payable in connection with such deposit and the transfer of the Deposited Securities.
SECTION 2.04 Registration of Transfer of American Depositary Shares; Combination and Split-up of Receipts; Interchange of Certificated and Uncertificated American Depositary Shares.
The Depositary, subject to the terms and conditions of this Deposit Agreement, shall register transfers of American Depositary Shares on its transfer books from time to time, upon (i) in the case of certificated American Depositary Shares, surrender of the Receipt evidencing those American Depositary Shares, by the Owner in person or by a duly authorized attorney, properly endorsed or accompanied by proper instruments of transfer or (ii) in the case of uncertificated American Depositary Shares, receipt from the Owner of a proper instruction (including, for the avoidance of doubt, instructions through DRS and Profile as provided in Section 2.10), and, in either case, duly stamped as may be required by the laws of the State of New York and of the United States of America. Thereupon the Depositary shall deliver those American Depositary Shares to or upon the order of the person entitled thereto.
The Depositary, subject to the terms and conditions of this Deposit Agreement, shall, upon surrender of a Receipt or Receipts for the purpose of effecting a split-up or combination of such Receipt or Receipts, execute and deliver a new Receipt or Receipts for any authorized number of American Depositary Shares requested, evidencing the same aggregate number of American Depositary Shares as the Receipt or Receipts surrendered.
The Depositary, upon surrender of certificated American Depositary Shares for the purpose of exchanging for uncertificated American Depositary Shares, shall cancel those certificated American Depositary Shares and send the Owner a statement confirming that the Owner is the owner of the same number of uncertificated American Depositary Shares. The Depositary, upon receipt of a proper instruction
(including, for the avoidance of doubt, instructions through DRS and Profile as provided in Section 2.10) from the Owner of uncertificated American Depositary Shares for the purpose of exchanging for certificated American Depositary Shares, shall cancel those uncertificated American Depositary Shares and deliver to the Owner the same number of certificated American Depositary Shares.
The Depositary may, upon written notice to the Company, appoint one or more co-transfer agents for the purpose of effecting registration of transfers of American Depositary Shares and combinations and split-ups of Receipts at designated transfer offices on behalf of the Depositary. In carrying out its functions, a co-transfer agent may require evidence of authority and compliance with applicable laws and other requirements by Owners or persons entitled to American Depositary Shares and will be entitled to protection and indemnity to the same extent as the Depositary.
SECTION 2.05 Surrender of American Depositary Shares and Withdrawal of Deposited Securities.
Upon surrender at the Corporate Trust Office of the Depositary of American Depositary Shares for the purpose of withdrawal of the Deposited Securities represented thereby, and upon payment of the fee of the Depositary for the surrender of American Depositary Shares as provided in Section 5.09 and payment of all taxes and governmental charges payable in connection with such surrender and withdrawal of the Deposited Securities, and subject to the terms and conditions of this Deposit Agreement, the Owner of those American Depositary Shares shall be entitled to delivery, to him or as instructed, of the amount of Deposited Securities at the time represented by those American Depositary Shares. Such delivery shall be made, as hereinafter provided, without unreasonable delay.
A Receipt surrendered for such purposes may be required by the Depositary to be properly endorsed in blank or accompanied by proper instruments of transfer in blank. The Depositary may require the surrendering Owner to execute and deliver to the Depositary a written order directing the Depositary to cause the Deposited Securities being withdrawn to be delivered to or upon the written order of a person or persons designated in such order. Thereupon the Depositary shall direct the Custodian to deliver at the office of such Custodian, subject to Sections 2.06, 3.01 and 3.02 and to the other terms and conditions of this Deposit Agreement, to or upon the written order of the person or persons designated in the order delivered to the Depositary as above provided, the amount of Deposited Securities represented by the surrendered American Depositary Shares, except that the Depositary may make delivery to such person or persons at the Corporate Trust Office of the Depositary of any dividends or distributions with respect to the Deposited Securities represented by those American Depositary Shares, or of any proceeds of sale of any dividends, distributions or rights, which may at the time be held by the Depositary.
At the request, risk and expense of any Owner so surrendering American Depositary Shares, and for the account of such Owner, the Depositary shall direct the Custodian to forward any cash or other property (other than rights) comprising, and forward a certificate or certificates, if applicable, and other proper documents of title for, the Deposited Securities represented by the surrendered American Depositary Shares to the Depositary for delivery at the Corporate Trust Office of the Depositary. Such direction shall be given by letter or, at the request, risk and expense of such Owner, by cable, telex or facsimile transmission.
SECTION 2.06 Limitations on Delivery, Transfer and Surrender of American Depositary Shares.
As a condition precedent to the delivery, registration of transfer or surrender of any American Depositary Shares or split-up or combination of any Receipt or withdrawal of any Deposited Securities, the Depositary, Custodian or Registrar may require payment from the depositor of Shares or the presenter of the Receipt or instruction for registration of transfer or surrender of American Depositary Shares not evidenced by a Receipt of a sum sufficient to reimburse it for any tax or other governmental charge and any stock transfer or registration fee with respect thereto (including any such tax or charge and fee with respect to Shares being deposited or withdrawn) and payment of any applicable fees as herein provided, may require the production of proof satisfactory to it as to the identity and genuineness of any signature and may also require compliance with any regulations the Depositary may establish consistent with the provisions of this Deposit Agreement, including, without limitation, this Section 2.06.
The delivery of American Depositary Shares against deposit of Shares generally or against deposit of particular Shares may be suspended, or the transfer of American Depositary Shares in particular instances may be refused, or the registration of transfer of outstanding American Depositary Shares generally may be suspended, during any period when the transfer books of the Depositary are closed, or if any such action is deemed necessary or advisable by the Depositary or the Company at any time or from time to time because of any requirement of law or of any government or governmental body or commission, or under any provision of this Deposit Agreement, or for any other reason, subject to the provisions of the following sentence. Notwithstanding anything to the contrary in this Deposit Agreement, the surrender of outstanding American Depositary Shares and withdrawal of Deposited Securities may not be suspended subject only to (i) temporary delays caused by closing the transfer books of the Depositary or the Company or the Foreign Registrar, if applicable, or the deposit of Shares in connection with voting at a shareholders meeting, or the payment of dividends, (ii) the payment of fees, taxes and similar charges, and (iii) compliance with any U.S. or foreign laws or governmental regulations relating to the American Depositary Shares or to the withdrawal of the Deposited Securities. Without limitation of the foregoing, the Depositary shall not knowingly accept for deposit under this Deposit Agreement any
Shares which would be required to be registered under the provisions of the Securities Act of 1933 for public offer and sale in the United States unless a registration statement is in effect as to such Shares for such offer and sale or such Shares may be offered and sold to the public in the United States without registration thereunder.
The Depositary will use reasonable efforts to comply with the written instructions of the Company not to knowingly accept for deposit under the Deposit Agreement any Shares identified in such instructions at such times and under such circumstances as may reasonably be specified in such instructions in order to facilitate the Companys compliance with applicable securities laws of the United States and Japan.
SECTION 2.07 Lost Receipts, etc.
In case any Receipt shall be mutilated, destroyed, lost or stolen, the Depositary shall deliver to the Owner the American Depositary Shares evidenced by that Receipt in uncertificated form or, if requested by the Owner, execute and deliver a new Receipt of like tenor in exchange and substitution for such mutilated Receipt, upon cancellation thereof, or in lieu of and in substitution for such destroyed, lost or stolen Receipt. Before the Depositary shall deliver American Depositary Shares in uncertificated form or execute and deliver a new Receipt, in substitution for a destroyed, lost or stolen Receipt, the Owner thereof shall have (a) filed with the Depositary (i) a request for such execution and delivery before the Depositary has notice that the Receipt has been acquired by a bona fide purchaser and (ii) a sufficient indemnity bond and (b) satisfied any other reasonable requirements imposed by the Depositary.
SECTION 2.08 Cancellation and Destruction of Surrendered Receipts.
All Receipts surrendered to the Depositary shall be cancelled by the Depositary. The Depositary is authorized to destroy Receipts so cancelled.
SECTION 2.09 Pre-Release of American Depositary Shares.
Unless requested in writing by the Company to cease doing so, in which case the Depositary shall promptly cease from doing so, the Depositary may, notwithstanding Section 2.03 hereof, deliver American Depositary Shares prior to the receipt of Shares pursuant to Section 2.02 (a Pre-Release). The Depositary may, pursuant to Section 2.05, deliver Shares upon the surrender of American Depositary Shares that have been Pre-Released, whether or not such cancellation is prior to the termination of such Pre-Release or the Depositary knows that such American Depositary Shares have been Pre-Released. The Depositary may receive American Depositary Shares in lieu of Shares in satisfaction of a Pre-Release. Each Pre-Release will be (a) preceded or accompanied by a written representation from the person to whom American Depositary Shares or Shares are to be delivered, that such person, or its customer, owns the Shares or American Depositary Shares to be remitted, as the case may be, (b) at all
times fully collateralized with cash or such other collateral as the Depositary deems appropriate, (c) terminable by the Depositary on not more than five (5) business days notice, and (d) subject to such further indemnities and credit regulations as the Depositary deems appropriate. The number of Shares represented by American Depositary Shares that are outstanding at any time as a result of Pre-Release will not normally exceed thirty percent (30%) of the Shares deposited hereunder; provided , however , that the Depositary reserves the right to change or disregard such limit from time to time as it deems appropriate.
The Depositary may retain for its own account any compensation received by it in connection with the foregoing.
SECTION 2.10 DTC Direct Registration System and Profile Modification System.
(a) Notwithstanding the provisions of Section 2.04, the parties acknowledge that the Direct Registration System (DRS) and Profile Modification System (Profile) shall apply to uncertificated American Depositary Shares upon acceptance thereof to DRS by DTC. DRS is the system administered by DTC pursuant to which the Depositary may register the ownership of uncertificated American Depositary Shares, which ownership shall be evidenced by periodic statements issued by the Depositary to the Owners entitled thereto. Profile is a required feature of DRS which allows a DTC participant, claiming to act on behalf of an Owner of American Depositary Shares, to direct the Depositary to register a transfer of those American Depositary Shares to DTC or its nominee and to deliver those American Depositary Shares to the DTC account of that DTC participant without receipt by the Depositary of prior authorization from the Owner to register such transfer.
(b) In connection with and in accordance with the arrangements and procedures relating to DRS/Profile, the parties understand that the Depositary will not verify, determine or otherwise ascertain that the DTC participant which is claiming to be acting on behalf of an Owner in requesting a registration of transfer and delivery as described in subsection (a) has the actual authority to act on behalf of the Owner (notwithstanding any requirements under the Uniform Commercial Code). For the avoidance of doubt, the provisions of Sections 5.03 and 5.08 shall apply to the matters arising from the use of the DRS. The parties agree that the Depositarys reliance on and compliance with instructions received by the Depositary through the DRS/Profile System and in accordance with this Deposit Agreement shall not constitute negligence or bad faith on the part of the Depositary.
ARTICLE 3. CERTAIN OBLIGATIONS OF OWNERS AND HOLDERS OF AMERICAN DEPOSITARY SHARES
SECTION 3.01 Filing Proofs, Certificates and Other Information.
Any person presenting Shares for deposit or any Owner or Holder may be required from time to time to file with the Depositary or the Custodian such proof of citizenship or residence, exchange control approval, or such information relating to the registration on the books of the Company or the Foreign Registrar, if applicable, to execute such certificates and to make such representations and warranties, as the Depositary may deem reasonably necessary or proper. The Depositary may withhold the delivery or registration of transfer of American Depositary Shares or the distribution of any dividend or sale or distribution of rights or of the proceeds thereof or the delivery of any Deposited Securities until such proof or other information is filed or such certificates are executed or such representations and warranties made. Upon written request and at the expense of the Company, the Depositary shall deliver to the Company copies of the documents or instruments delivered to the Depositary pursuant to this Section, to the extent that disclosure is permitted under applicable law.
SECTION 3.02 Liability of Owner for Taxes.
If any tax or other governmental charge shall become payable by the Custodian or the Depositary with respect to any American Depositary Shares or any Deposited Securities represented by any American Depositary Shares, such tax or other governmental charge shall be payable by the Owner of such American Depositary Shares to the Depositary. The Depositary may refuse to register any transfer of those American Depositary Shares or any withdrawal of Deposited Securities represented by those American Depositary Shares until such payment is made, and may withhold any dividends or other distributions, or may sell for the account of the Owner thereof any part or all of the Deposited Securities represented by those American Depositary Shares, and may apply such dividends or other distributions or the proceeds of any such sale in payment of such tax or other governmental charge and the Owner of such American Depositary Shares shall remain liable for any deficiency.
SECTION 3.03 Warranties on Deposit of Shares.
Every person depositing Shares under this Deposit Agreement shall be deemed thereby to represent and warrant that such Shares and each certificate therefor, if applicable, are validly issued, fully paid, nonassessable and free of any preemptive rights of the holders of outstanding Shares and that the person making such deposit is duly authorized so to do. Every such person shall also be deemed to represent that the deposit of such Shares and the sale of American Depositary Shares representing such Shares by that person are not restricted under the Securities Act of 1933. Such representations and warranties shall survive the deposit of Shares and delivery of American Depositary Shares.
SECTION 3.04 Disclosure of Interests
The Company may from time to time request through the Depositary that Owners provide information as to the capacity in which such Owners own or owned American Depositary Shares and regarding the identity of any other persons then or previously interested in such American Depositary Shares and the nature of such interest and various other matters.
Each Owner agrees to provide any information reasonably requested by the Company or the Depositary pursuant to this Section 3.04. The Depositary agrees to comply with reasonable written instructions from the Company requesting that the Depositary forward any requests to the Owners and to forward to the Company, as promptly as practicable, any responses to such requests the Depositary receives.
ARTICLE 4. THE DEPOSITED SECURITIES
SECTION 4.01 Cash Distributions.
Whenever the Depositary shall receive any cash dividend or other cash distribution on any Deposited Securities, the Depositary shall, subject to the provisions of Section 4.05, convert such dividend or distribution into Dollars and shall distribute the amount thus received (net of the fees and expenses of the Depositary as provided in Section 5.09) to the Owners entitled thereto, in proportion to the number of American Depositary Shares representing such Deposited Securities held by them respectively; provided , however , that in the event that the Custodian or the Depositary shall be required to withhold and does withhold from such cash dividend or such other cash distribution an amount on account of taxes or other governmental charges, the amount distributed to the Owner of the American Depositary Shares representing such Deposited Securities shall be reduced accordingly. The Depositary shall distribute only such amount, however, as can be distributed without attributing to any Owner a fraction of one cent. Any such fractional amounts shall be rounded to the nearest whole cent and so distributed to Owners entitled thereto. The Company or its agent will remit to the appropriate governmental agency in Japan all amounts withheld and owing to such agency. The Depositary will forward to the Company or its agent such information from its records as the Company may reasonably request to enable the Company or its agent to file necessary reports with governmental agencies, and the Depositary or the Company or its agent may file any such reports necessary to obtain benefits under the applicable tax treaties for the Owners.
SECTION 4.02 Distributions Other Than Cash, Shares or Rights.
Subject to the provisions of Sections 4.11 and 5.09, whenever the Depositary shall receive any distribution other than a distribution described in Section 4.01, 4.03 or 4.04, the Depositary shall cause the securities or property received by it to be distributed to the Owners entitled thereto, after deduction or upon payment of any fees
and expenses of the Depositary or any taxes or other governmental charges, in proportion to the number of American Depositary Shares representing such Deposited Securities held by them respectively, in any manner that the Depositary may reasonably deem equitable and practicable for accomplishing such distribution; provided, however, that if in the opinion of the Depositary, after consultation with the Company to the extent practicable, such distribution cannot be made proportionately among the Owners entitled thereto, or if for any other reason (including, but not limited to, any requirement that the Company or the Depositary withhold an amount on account of taxes or other governmental charges or that such securities must be registered under the Securities Act of 1933 in order to be distributed to Owners or Holders) the Depositary deems such distribution not to be feasible, the Depositary may adopt such method as it may deem equitable and practicable for the purpose of effecting such distribution, including, but not limited to, the public or private sale of the securities or property thus received, or any part thereof, and the net proceeds of any such sale (net of the fees and expenses of the Depositary as provided in Section 5.09) shall be distributed by the Depositary to the Owners entitled thereto, all in the manner and subject to the conditions described in Section 4.01. The Depositary may withhold any distribution of securities under this Section 4.02 if it has not received satisfactory assurances from the Company that the distribution does not require registration under the Securities Act of 1933. The Depositary may sell, by public or private sale, an amount of securities or other property it would otherwise distribute under this Section 4.02 that is sufficient to pay its fees and expenses in respect of that distribution.
SECTION 4.03 Distributions in Shares.
If any distribution upon any Deposited Securities consists of a dividend in, or free distribution of, Shares, the Depositary may deliver to the Owners entitled thereto, in proportion to the number of American Depositary Shares representing such Deposited Securities held by them respectively, an aggregate number of American Depositary Shares representing the amount of Shares received as such dividend or free distribution, subject to the terms and conditions of the Deposit Agreement with respect to the deposit of Shares and issuance of American Depositary Shares, including withholding of any tax or governmental charge as provided in Section 4.11 and payment of the fees and expenses of the Depositary as provided in Section 5.09 (and the Depositary may sell, by public or private sale, an amount of the Shares received sufficient to pay its fees and expenses in respect of that distribution). The Depositary may withhold any such delivery of American Depositary Shares if it has not received satisfactory assurances from the Company that such distribution does not require registration under the Securities Act of 1933. In lieu of delivering fractional American Depositary Shares in any such case, the Depositary may sell the amount of Shares represented by the aggregate of such fractions by public or private sale in accordance with the applicable provisions of the articles of incorporation, other similar documents of the Company, Japanese Company Law and any other Japanese law and distribute the net proceeds, all in the manner and subject to the conditions described in Section 4.01. If additional American Depositary Shares are not
so delivered, each American Depositary Share shall thenceforth also represent the additional Shares distributed upon the Deposited Securities represented thereby.
If the Company declares a distribution in which holders of Deposited Securities have a right to elect whether to receive cash or fully-paid Shares or a combination of both or a right to elect to have a distribution sold on their behalf, the Depositary may, after consultation with the Company, make that right of election available for exercise by Owners any manner the Depositary considers to be lawful and practical. As a condition of making a distribution election right available to Owners, the Depositary may require satisfactory assurances from the Company that doing so does not require registration of any securities under the Securities Act of 1933.
SECTION 4.04 Rights.
In the event that the Company shall offer or cause to be offered to the holders of any Deposited Securities any rights to subscribe for additional Shares or any rights of any other nature, the Depositary shall have discretion, after consultation with the Company, as to the procedure to be followed in making such rights available to any Owners or in disposing of such rights on behalf of any Owners and making the net proceeds available to such Owners or, if by the terms of such rights offering or for any other reason, the Depositary may not either make such rights available to any Owners or dispose of such rights and make the net proceeds available to such Owners, then the Depositary shall allow the rights to lapse. If at the time of the offering of any rights the Depositary determines in its discretion, and after consultation with the Company, that it is lawful and feasible to make such rights available to all or certain Owners but not to other Owners, the Depositary may distribute to any Owner to whom it determines the distribution to be lawful and feasible, in proportion to the number of American Depositary Shares held by such Owner, warrants or other instruments therefor in such form as it deems appropriate.
In circumstances in which rights would otherwise not be distributed, if an Owner requests the distribution of warrants or other instruments in order to exercise the rights allocable to the American Depositary Shares of such Owner hereunder, the Depositary will make such rights available to such Owner upon written notice from the Company to the Depositary that (a) the Company has elected in its sole discretion to permit such rights to be exercised and (b) such Owner has executed such documents as the Company has determined in its sole discretion are reasonably required under applicable law.
If the Depositary has distributed warrants or other instruments for rights to all or certain Owners, then upon instruction from such an Owner pursuant to such warrants or other instruments to the Depositary from such Owner to exercise such rights, upon payment by such Owner to the Depositary for the account of such Owner of an amount equal to the purchase price of the Shares to be received upon the exercise of the rights, and upon payment of the fees and expenses of the Depositary and any other
charges as set forth in such warrants or other instruments, the Depositary shall, on behalf of such Owner, exercise the rights and purchase the Shares, and the Company shall cause the Shares so purchased to be delivered to the Depositary on behalf of such Owner. As agent for such Owner, the Depositary will cause the Shares so purchased to be deposited pursuant to Section 2.02, and shall, pursuant to Section 2.03, deliver American Depositary Shares to such Owner. In the case of a distribution pursuant to the second paragraph of this Section, such deposit shall be made, and depositary shares shall be delivered, under depositary arrangements which provide for issuance of depositary shares subject to the appropriate restrictions on sale, deposit, cancellation, and transfer under applicable United States laws.
If the Depositary determines in its reasonable discretion, after consultation with the Company to the extent practicable, that it is not lawful and feasible to make such rights available to all or certain Owners, it may sell the rights, warrants or other instruments in proportion to the number of American Depositary Shares held by the Owners to whom it has determined it may not lawfully or feasibly make such rights available, and allocate the net proceeds of such sales (net of the fees and expenses of the Depositary as provided in Section 5.09 and all taxes and governmental charges payable in connection with such rights and subject to the terms and conditions of this Deposit Agreement) for the account of such Owners otherwise entitled to such rights, warrants or other instruments, upon an averaged or other practical basis without regard to any distinctions among such Owners because of exchange restrictions or the date of delivery of any American Depositary Shares or otherwise.
The Depositary will not offer rights to Owners unless both the rights and the securities to which such rights relate are either exempt from registration under the Securities Act of 1933 with respect to a distribution to all Owners or are registered under the provisions of such Act; provided , that nothing in this Deposit Agreement shall create any obligation on the part of the Company to file a registration statement with respect to such rights or underlying securities or to endeavor to have such a registration statement declared effective. If an Owner requests the distribution of warrants or other instruments, notwithstanding that there has been no such registration under the Securities Act of 1933, the Depositary shall not effect such distribution unless it has received an opinion from recognized counsel in the United States for the Company upon which the Depositary may rely that such distribution to such Owner is exempt from such registration.
Neither the Depositary nor the Company shall be responsible for any failure to determine that it may be lawful or feasible to make such rights available to Owners in general or any Owner in particular.
Nothing in this Deposit Agreement shall create any obligation on the part of the Company to alter the terms or conditions of any offering or distribution of rights.
SECTION 4.05 Conversion of Foreign Currency.
Whenever the Depositary or the Custodian shall receive foreign currency, by way of dividends or other distributions or the net proceeds from the sale of securities, property or rights, and if at the time of the receipt thereof the foreign currency so received can in the judgment of the Depositary be converted on a reasonable basis into Dollars and the resulting Dollars transferred to the United States, the Depositary shall convert or cause to be converted by sale or in any other manner that it may determine such foreign currency into Dollars, and such Dollars shall be distributed to the Owners entitled thereto or, if the Depositary shall have distributed any warrants or other instruments which entitle the holders thereof to such Dollars, then to the holders of such warrants and/or instruments upon surrender thereof for cancellation. Such distribution may be made upon an averaged or other practicable basis without regard to any distinctions among Owners on account of exchange restrictions, the date of delivery of any American Depositary Shares or otherwise and shall be net of any expenses of conversion into Dollars incurred by the Depositary as provided in Section 5.09.
If such conversion or distribution can be effected only with the approval or license of any government or agency thereof, the Depositary shall file such application for approval or license, if any, as it may deem desirable.
If at any time the Depositary shall determine that in its judgment any foreign currency received by the Depositary or the Custodian is not convertible on a reasonable basis into Dollars transferable to the United States, or if any approval or license of any government or agency thereof which is required for such conversion is denied or in the opinion of the Depositary is not obtainable, or if any such approval or license is not obtained within a reasonable period as determined by the Depositary, the Depositary may distribute the foreign currency (or an appropriate document evidencing the right to receive such foreign currency) received by the Depositary to, or in its discretion may hold such foreign currency uninvested and without liability for interest thereon for the respective accounts of, the Owners entitled to receive the same.
If any such conversion of foreign currency, in whole or in part, cannot be effected for distribution to some of the Owners entitled thereto, the Depositary may in its discretion make such conversion and distribution in Dollars to the extent permissible to the Owners entitled thereto and may distribute the balance of the foreign currency received by the Depositary to, or hold such balance uninvested and without liability for interest thereon for the respective accounts of, the Owners entitled thereto.
SECTION 4.06 Fixing of Record Date.
Whenever any cash dividend or other cash distribution shall become payable or any distribution other than cash shall be made, or whenever rights shall be issued with respect to the Deposited Securities, or whenever the Depositary shall receive notice of any meeting of holders of Shares or other Deposited Securities, or whenever for
any reason the Depositary causes a change in the number of Shares that are represented by each American Depositary Share, or whenever the Depositary shall find it necessary or convenient, the Depositary shall fix a record date, which shall be the same date as the record date, if any, applicable to the deposited Shares, or as close thereto as practicable, (a) for the determination of the Owners who shall be (i) entitled to receive such dividend, distribution or rights or the net proceeds of the sale thereof, (ii) entitled to give instructions for the exercise of voting rights at any such meeting or (iii) responsible for any fee or charge assessed by the Depositary pursuant to this Deposit Agreement, or (b) on or after which each American Depositary Share will represent the changed number of Shares. Subject to the provisions of Sections 4.01 through 4.05 and to the other terms and conditions of this Deposit Agreement, the Owners on such record date shall be entitled, as the case may be, to receive the amount distributable by the Depositary with respect to such dividend or other distribution or such rights or the net proceeds of sale thereof in proportion to the number of American Depositary Shares held by them respectively and to give voting instructions and to act in respect of any other such matter.
SECTION 4.07 Voting of Deposited Securities.
Upon receipt of notice of any meeting of holders of Shares or other Deposited Securities, if requested in writing by the Company, the Depositary shall, as soon as practicable thereafter, mail to the Owners a notice, the form of which notice shall be in the sole discretion of the Depositary, which shall contain (a) such information as is contained in such notice of meeting received by the Depositary from the Company, (b) a statement that the Owners as of the close of business on a specified record date will be entitled, subject to any applicable provision of Japanese law and of the articles of incorporation or similar documents of the Company, to instruct the Depositary as to the exercise of the voting rights, if any, pertaining to the amount of Shares or other Deposited Securities represented by their respective American Depositary Shares and (c) a statement as to the manner in which such instructions may be given. Upon the written request of an Owner of American Depositary Shares on such record date, received on or before the date established by the Depositary for such purpose, the Depositary shall endeavor, in so far as practicable, to vote or cause to be voted the amount of Shares or other Deposited Securities represented by those American Depositary Shares in accordance with the instructions set forth in such request. The Depositary shall not vote or attempt to exercise the right to vote that attaches to the Shares or other Deposited Securities, other than in accordance with such instructions. If (i) the Company has requested the Depositary to send a notice under this paragraph and has provided the Depositary at least 30 days prior notice of any such meeting and the details of the matters to be voted upon and (ii) no instructions are received by the Depositary from an Owner with respect to American Depositary Shares of that Owner on or before the date established by the Depositary for such purpose, the Depositary shall deem such Owner to have instructed the Depositary to give a discretionary proxy to a person designated by the Company with respect to the amount of Deposited Securities represented by those American Depositary Shares and the Depositary shall give a discretionary proxy to a
person designated by the Company to vote that amount of Deposited Securities, provided , that no such instruction shall be given with respect to any matter as to which the Company informs the Depositary (and the Company agrees to provide such information as promptly as practicable in writing, if applicable) that (x) the Company does not wish such proxy given, (y) substantial opposition exists or (z) such matter materially and adversely affects the rights of holders of Shares.
There can be no assurance that Owners generally or any Owner in particular will receive the notice described in the preceding paragraph sufficiently prior to the instruction cutoff date to ensure that the Depositary will vote the Shares or Deposited Securities in accordance with the provisions set forth in the preceding paragraph.
In order to give Owners a reasonable opportunity to instruct the Depositary as to the exercise of voting rights relating to Deposited Securities, if the Company will request the Depositary to act under this Section 4.07, the Company shall make reasonable efforts give the Depositary notice of any such meeting and details concerning the matters to be voted upon not less than 30 days prior to the meeting date, unless such advance notice is not possible because less than 30 days notice of the meeting has been given in accordance with the Companys articles of incorporation and local law, in which case, Company will provide to the Depositary as much advance notice of the meeting as is possible under the circumstances.
SECTION 4.08 Changes Affecting Deposited Securities.
Upon any change in nominal value, change in par value, split-up, consolidation or any other reclassification of Deposited Securities, or upon any recapitalization, reorganization, merger or consolidation or sale of assets affecting the Company or to which it is a party, or upon the redemption or cancellation by the Company of the Deposited Securities, any securities, cash or property which shall be received by the Depositary or a Custodian in exchange for, in conversion of, in lieu of or in respect of Deposited Securities, shall be treated as new Deposited Securities under this Deposit Agreement, and American Depositary Shares shall thenceforth represent, in addition to the existing Deposited Securities, the right to receive the new Deposited Securities so received, unless additional American Depositary Shares are delivered pursuant to the following sentence. In any such case the Depositary may, and shall if the Company so requests in writing, deliver additional American Depositary Shares as in the case of a dividend in Shares, or call for the surrender of outstanding Receipts to be exchanged for new Receipts specifically describing such new Deposited Securities.
SECTION 4.09 Reports.
The Depositary shall make available for inspection by Owners at its Corporate Trust Office any reports and communications, including any proxy solicitation material, received from the Company which are both (a) received by the Depositary as the holder of the Deposited Securities and (b) made generally available to the holders of
such Deposited Securities by the Company. The Depositary shall also, upon written request by the Company, send to the Owners copies of such reports when furnished by the Company pursuant to Section 5.06. Any such reports and communications, including any such proxy soliciting material, furnished to the Depositary by the Company shall be furnished in English, to the extent such materials are required to be translated into English pursuant to any regulations of the Commission.
SECTION 4.10 Lists of Owners.
Promptly upon request by the Company, the Depositary shall, at the expense of the Company, furnish to it a list, as of a recent date, of the names, addresses and holdings of American Depositary Shares by all persons in whose names American Depositary Shares are registered on the books of the Depositary.
SECTION 4.11 Withholding.
In the event that the Depositary determines that any distribution in property (including Shares and rights to subscribe therefor) is subject to any tax or other governmental charge which the Depositary is obligated to withhold, the Depositary may by public or private sale dispose of all or a portion of such property (including Shares and rights to subscribe therefor) in such amounts and in such manner as the Depositary deems necessary and practicable to pay such taxes or charges and the Depositary shall distribute the net proceeds of any such sale after deduction of such taxes or charges to the Owners entitled thereto in proportion to the number of American Depositary Shares held by them respectively.
The Depositary may take administrative actions to obtain or assist the Owners in obtaining tax benefits under applicable tax treaties with respect to dividends and other distributions on the Deposited Securities. The Depositary shall have no obligation or liability to any person, if any Owner fails to provide evidence required to obtain, or if such evidence does not reach relevant tax authorities in time for any Owner to obtain, the benefit of any tax treaty.
The Depositary will forward to the Company or its agents such information from its records as the Company may reasonably request to enable the Company or its agents to file necessary reports with governmental agencies.
ARTICLE 5. THE DEPOSITARY, THE CUSTODIANS AND THE COMPANY
SECTION 5.01 Maintenance of Office and Transfer Books by the Depositary.
Until termination of this Deposit Agreement in accordance with its terms, the Depositary shall maintain in the Borough of Manhattan, The City of New York, facilities for the execution and delivery, registration, registration of transfers and
surrender of American Depositary Shares in accordance with the provisions of this Deposit Agreement.
The Depositary shall keep books, at its Corporate Trust Office, for the registration of American Depositary Shares and transfers of American Depositary Shares which at all reasonable times shall be open for inspection by the Owners and the Company, provided that such inspection shall not be for the purpose of communicating with Owners in the interest of a business or object other than the business of the Company or a matter related to this Deposit Agreement or the American Depositary Shares.
The Depositary may close the transfer books, at any time or from time to time, when deemed expedient by it in connection with the performance of its duties hereunder or at the Companys written request to the extent permitted by law.
If any American Depositary Shares are listed on one or more stock exchanges in the United States, the Depositary shall act as Registrar or appoint a Registrar or one or more co-registrars for registry of such American Depositary Shares in accordance with any requirements of such exchange or exchanges.
The Company shall have the right, at all reasonable times, at its own expense, to inspect transfer and registration records of the Depositary with respect to the American Depositary Shares, to take copies thereof and to require the Depositary, the Registrar and any co-transfer agents or co-registrars to supply copies of such portions of those records as the Company may request.
SECTION 5.02 Prevention or Delay in Performance by the Depositary or the Company.
Neither the Depositary nor the Company nor any of their respective directors, employees, agents or affiliates shall incur any liability to any Owner or Holder (i) if by reason of any provision of any present or future law or regulation of the United States or any other country, or of any governmental or regulatory authority or stock exchange, or by reason of any provision, present or future, of the articles of incorporation or similar document of the Company, or by reason of any provision of any securities issued or distributed by the Company, or any offering or distribution thereof, or by reason of any act of God or war or terrorism or other circumstances beyond its control, the Depositary or the Company shall be prevented, delayed or forbidden from, or be subject to any civil or criminal penalty on account of, doing or performing any act or thing which by the terms of this Deposit Agreement or the Deposited Securities it is provided shall be done or performed, (ii) by reason of any non-performance or delay, caused as aforesaid, in the performance of any act or thing which by the terms of this Deposit Agreement it is provided shall or may be done or performed, (iii) by reason of any exercise of, or failure to exercise, any discretion provided for in this Deposit Agreement, (iv) for the inability of any Owner or Holder to benefit from any distribution, offering, right or other benefit
which is made available to holders of Deposited Securities but is not, under the terms of this Deposit Agreement, made available to Owners or Holders, or (v) for any special, consequential or punitive damages for any breach of the terms of this Deposit Agreement. Where, by the terms of a distribution pursuant to Section 4.01, 4.02 or 4.03, or an offering or distribution pursuant to Section 4.04, or for any other reason, such distribution or offering may not be made available to Owners, and the Depositary may not dispose of such distribution or offering on behalf of such Owners and make the net proceeds available to such Owners, then the Depositary shall not make such distribution or offering, and shall allow any rights, if applicable, to lapse.
SECTION 5.03 Obligations of the Depositary, the Custodian and the Company.
The Company assumes no obligation nor shall it be subject to any liability under this Deposit Agreement to any Owner or Holder, except that the Company agrees to perform its obligations specifically set forth in this Deposit Agreement without negligence or bad faith.
The Depositary assumes no obligation nor shall it be subject to any liability under this Deposit Agreement to any Owner or Holder (including, without limitation, liability with respect to the validity or worth of the Deposited Securities), except that the Depositary agrees to perform its obligations specifically set forth in this Deposit Agreement without negligence or bad faith.
Neither the Depositary nor the Company shall be under any obligation to appear in, prosecute or defend any action, suit or other proceeding in respect of any Deposited Securities or in respect of the American Depositary Shares on behalf of any Owner or Holder or any other person.
Neither the Depositary nor the Company shall be liable for any action or nonaction by it in reliance upon the advice of or information from legal counsel, accountants, any person presenting Shares for deposit, any Owner, Holder or any other person believed by it in good faith to be competent to give such advice or information.
The Depositary shall not be liable for any acts or omissions made by a successor depositary whether in connection with a previous act or omission of the Depositary or in connection with any matter arising wholly after the removal or resignation of the Depositary, provided that in connection with the issue out of which such potential liability arises the Depositary performed its obligations without negligence or bad faith while it acted as Depositary.
The Depositary shall not be liable for the acts or omissions of any securities depository, clearing agency or settlement system in connection with or arising out of book-entry settlement of Deposited Securities or otherwise.
The Depositary shall not be responsible for any failure to carry out any instructions to vote any of the Deposited Securities, or for the manner in which any such vote is cast or the effect of any such vote, provided that any such action or nonaction is in good faith.
With respect to any Pre-Release (as defined in Section 2.09), the Company shall not be responsible to Owners or Holders for any liabilities or expenses (a) which may be imposed under any United States Federal, state or local income tax laws or (b) which may arise out of the failure of the Depositary to deliver Deposited Securities when required under the terms of Section 2.05 hereof. The preceding sentence shall not apply to any liability or expense which may arise out of any misstatement or alleged misstatement or omission or alleged omission in any registration statement, proxy statement, prospectus (placement memorandum) or preliminary prospectus (or preliminary placement memorandum) relating to an offer of sale of American Depositary Shares, except to the extent any such liability or expense arises out of (i) information relating to the Depositary or any Custodian, as applicable, furnished in writing and not materially changed or altered by the Company expressly for use in any of the foregoing documents, or, (ii) if such information is provided, the failure to state a material fact necessary to make the information provided not misleading.
No disclaimer of liability under the Securities Act of 1933 is intended by any provision of this Deposit Agreement.
SECTION 5.04 Resignation and Removal of the Depositary.
The Depositary may at any time resign as Depositary hereunder by written notice of its election so to do delivered to the Company, such resignation to take effect upon the appointment of a successor depositary and its acceptance of such appointment as hereinafter provided.
The Depositary may at any time be removed by the Company by 90 days prior written notice of such removal, to become effective upon the later of (i) the 90th day after delivery of the notice to the Depositary and (ii) the appointment of a successor depositary and its acceptance of such appointment as hereinafter provided.
In case at any time the Depositary acting hereunder shall resign or be removed, the Company shall use its best efforts to appoint a successor depositary, which shall be a bank or trust company having an office in the Borough of Manhattan, The City of New York. Every successor depositary shall execute and deliver to its predecessor and to the Company an instrument in writing accepting its appointment hereunder, and thereupon such successor depositary, without any further act or deed, shall become fully vested with all the rights, powers, duties and obligations of its predecessor; but such predecessor, nevertheless, upon payment of all sums due it and on the written request of the Company shall execute and deliver an instrument transferring to such successor all rights and powers of such predecessor hereunder, shall duly assign, transfer and deliver
all right, title and interest in the Deposited Securities to such successor and shall deliver to such successor a list of the Owners of all outstanding American Depositary Shares. Any such successor depositary shall promptly mail notice of its appointment to the Owners.
Any corporation into or with which the Depositary may be merged or consolidated shall be the successor of the Depositary without the execution or filing of any document or any further act. The Depositary agrees to provide written notice of any such merger or consolidation to the Company.
SECTION 5.05 The Custodians.
The Custodian shall be subject at all times and in all respects to the directions of the Depositary and shall be responsible solely to it. Any Custodian may resign and be discharged from its duties hereunder by notice of such resignation delivered to the Depositary at least 30 days prior to the date on which such resignation is to become effective. If upon such resignation there shall be no Custodian acting hereunder, the Depositary shall, promptly after receiving such notice, appoint a substitute custodian or custodians, each of which shall thereafter be a Custodian hereunder. The Depositary in its discretion may appoint a substitute or additional custodian or custodians, each of which shall thereafter be one of the Custodians hereunder. Upon demand of the Depositary any Custodian shall deliver such of the Deposited Securities held by it as are requested of it to any other Custodian or such substitute or additional custodian or custodians. Each such substitute or additional custodian shall deliver to the Depositary, forthwith upon its appointment, an acceptance of such appointment satisfactory in form and substance to the Depositary.
Upon the appointment of any successor depositary hereunder, each Custodian then acting hereunder shall forthwith become, without any further act or writing, the agent hereunder of such successor depositary and the appointment of such successor depositary shall in no way impair the authority of each Custodian hereunder; but the successor depositary so appointed shall, nevertheless, on the written request of any Custodian, execute and deliver to such Custodian all such instruments as may be proper to give to such Custodian full and complete power and authority as agent hereunder of such successor depositary.
SECTION 5.06 Notices and Reports.
On or before the first date on which the Company gives notice, by publication or otherwise, of any meeting of holders of Shares or other Deposited Securities, or of any adjourned meeting of such holders, or of the taking of any action in respect of any cash or other distributions or the offering of any rights, the Company agrees to transmit to the Depositary and the Custodian a copy of the notice thereof in the form given or to be given to holders of Shares or other Deposited Securities.
The Company will arrange for the translation into English, if not already in English, to the extent required pursuant to any regulations of the Commission, and the prompt transmittal by the Company to the Depositary and the Custodian of such notices and any other reports and communications which are made generally available by the Company to holders of its Shares. If requested in writing by the Company, the Depositary will arrange for the mailing, at the Companys expense, of copies of such notices, reports and communications to all Owners. The Company will timely provide the Depositary with the quantity of such notices, reports, and communications, as requested by the Depositary from time to time, in order for the Depositary to effect such mailings.
SECTION 5.07 Distribution of Additional Shares, Rights, etc.
If the Company or, to the Companys knowledge, any affiliate of the Company determines to make any issuance or distribution of (1) additional Shares, (2) rights to subscribe for Shares, (3) securities convertible into Shares, or (4) rights to subscribe for such securities (each a Distribution), the Company shall notify the Depositary in writing in English as promptly as practicable and in any event before the Distribution starts and, if requested in writing by the Depositary, the Company shall promptly furnish to the Depositary a written opinion from U.S. counsel for the Company that is reasonably satisfactory to the Depositary, stating whether or not the Distribution requires, or, if made in the United States, would require, registration under the Securities Act of 1933. If, in the opinion of that counsel, the Distribution requires, or, if made in the United States, would require, registration under the Securities Act of 1933, that counsel shall furnish to the Depositary a written opinion as to whether or not there is a registration statement under the Securities Act of 1933 in effect that will cover that Distribution.
In the event that registration under the Securities Act of 1933 would be required in connection with any such Distribution, the Company shall have no obligation to effect such registration and, in the absence of such registration, the Depositary shall (where applicable) pursuant to Section 4.02, 4.03 or 4.04 dispose of such additional securities.
To the extent the Company in its discretion deems it necessary or advisable in order to avoid any requirement to register such securities under the Securities Act of 1933, the Company may instruct the Depositary in writing not to accept any Shares or rights for deposit reasonably identified in such instructions for such period of time following such distribution and to adopt such other specific measures as the Company and the Depositary may agree to facilitate the Companys compliance with the securities laws in the United States or any other jurisdiction.
The Company agrees with the Depositary that neither the Company nor any company controlled by, controlling or under common control with the Company will at any time deposit any Shares, either originally issued or previously issued and
reacquired by the Company or any such affiliate, unless a Registration Statement is in effect as to such Shares under the Securities Act of 1933 or the Company delivers to the Depositary an opinion of United States counsel, satisfactory to the Depositary, to the effect that, upon deposit, those Shares will be eligible for public resale without restriction in the United States without further registration under the Securities Act of 1933.
SECTION 5.08 Indemnification.
The Company agrees to indemnify the Depositary, its directors, employees, agents and affiliates and any Custodian against, and hold each of them harmless from, any liability or expense (including, but not limited to any fees and expenses incurred in seeking, enforcing or collecting such indemnity and the fees and expenses of counsel) which may arise out of or in connection with (a) any registration with the Commission of American Depositary Shares or Deposited Securities or the offer or sale thereof in the United States or (b) acts performed or omitted, pursuant to the provisions of or in connection with this Deposit Agreement and the Receipts, as the same may be amended, modified or supplemented from time to time, (i) by either the Depositary or a Custodian or their respective directors, employees, agents and affiliates, except for any liability or expense arising out of the negligence or bad faith of either of them, or (ii) by the Company or any of its directors, employees, agents and affiliates.
The indemnities contained in the preceding paragraph shall not extend to any liability or expense which arises solely and exclusively out of a Pre-Release (as defined in Section 2.09) of a Receipt or Receipts in accordance with Section 2.09 and which would not otherwise have arisen had such Receipt or Receipts not been the subject of a Pre-Release pursuant to Section 2.09; provided, however, that the indemnities provided in the preceding paragraph shall apply to any such liability or expense to the extent that such liability or expense would have arisen had a Receipt or Receipts not been the subject of a Pre-Release, or which may arise out of any misstatement or alleged misstatement or omission or alleged omission in any registration statement, proxy statement, prospectus (placement memorandum) or preliminary prospectus (or preliminary placement memorandum) relating to an offer of sale of American Depositary Shares, except to the extent any such liability or expense arises out of information relating to the Depositary or any Custodian (other than the Company), as applicable, furnished in writing and not materially changed or altered by the Company expressly for use in any of the foregoing documents, or, if such information is provided, the failure to state a material fact necessary to make the information provided not misleading.
The Depositary agrees to indemnify the Company, its directors, employees, agents and affiliates and hold them harmless from any liability or expense which may arise out of acts performed or omitted by the Depositary or its Custodian or their respective directors, employees, agents and affiliates due to their negligence or bad faith.
SECTION 5.09 Charges of Depositary.
The Company agrees to pay the fees and out-of-pocket expenses of the Depositary and those of any Registrar only in accordance with agreements in writing entered into between the Depositary and the Company from time to time.
The following charges shall be incurred by any party depositing or withdrawing Shares or by any party surrendering American Depositary Shares or to whom American Depositary Shares are issued (including, without limitation, issuance pursuant to a stock dividend or stock split declared by the Company or an exchange of stock regarding the American Depositary Shares or Deposited Securities or a delivery of American Depositary Shares pursuant to Section 4.03), or by Owners, as applicable: (1) taxes and other governmental charges, (2) such registration fees as may from time to time be in effect for the registration of transfers of Shares generally on the Share register of the Company or Foreign Registrar and applicable to transfers of Shares to or from the name of the Depositary or its nominee or the Custodian or its nominee on the making of deposits or withdrawals hereunder, (3) such cable, telex and facsimile transmission expenses as are expressly provided in this Deposit Agreement, (4) such expenses as are incurred by the Depositary in the conversion of foreign currency pursuant to Section 4.05, (5) a fee of $5.00 or less per 100 American Depositary Shares (or portion thereof) for the delivery of American Depositary Shares pursuant to Section 2.03, 4.03 or 4.04 and the surrender of American Depositary Shares pursuant to Section 2.05 or 6.02, (6) a fee of $.05 or less per American Depositary Share (or portion thereof) for any cash distribution made pursuant to this Deposit Agreement, including, but not limited to Sections 4.01 through 4.04 hereof, (7) a fee for the distribution of securities pursuant to Section 4.02, such fee being in an amount equal to the fee for the execution and delivery of American Depositary Shares referred to above which would have been charged as a result of the deposit of such securities (for purposes of this clause 7 treating all such securities as if they were Shares) but which securities are instead distributed by the Depositary to Owners, (8) in addition to any fee charged under clause 6, a fee of $.05 or less per American Depositary Share (or portion thereof) per annum for depositary services, which will be payable as provided in clause 9 below, and (9) any other charges payable by the Depositary, any of the Depositarys agents, including the Custodian, or the agents of the Depositarys agents in connection with the servicing of Shares or other Deposited Securities (which charge shall be assessed against Owners as of the date or dates set by the Depositary in accordance with Section 4.06 and shall be payable at the sole discretion of the Depositary by billing such Owners for such charge or by deducting such charge from one or more cash dividends or other cash distributions).
The Depositary, subject to Section 2.09 hereof, may own and deal in any class of securities of the Company and its affiliates and in American Depositary Shares.
SECTION 5.10 Retention of Depositary Documents.
The Depositary is authorized to destroy those documents, records, bills and other data compiled during the term of this Deposit Agreement at the times permitted by the laws or regulations governing the Depositary unless the Company requests that such papers be retained for a longer period or turned over to the Company or to a successor depositary.
SECTION 5.11 Exclusivity.
The Company agrees not to appoint any other depositary for issuance of American or global depositary shares or receipts so long as The Bank of New York Mellon is acting as Depositary hereunder.
SECTION 5.12 List of Restricted Securities Owners.
From time to time, the Company shall provide to the Depositary a list setting forth, to the actual knowledge of the Company, those persons or entities who beneficially own Restricted Securities and the Company shall update that list on a regular basis. The Company agrees to advise in writing each of the persons or entities so listed that such Restricted Securities are ineligible for deposit hereunder. The Depositary may rely on such a list or update but shall not be liable for any action or omission made in reliance thereon.
ARTICLE 6. AMENDMENT AND TERMINATION
SECTION 6.01 Amendment.
The form of the Receipts and any provisions of this Deposit Agreement may at any time and from time to time be amended by agreement between the Company and the Depositary without the consent of Owners or Holders in any respect which they may deem necessary or desirable. Any amendment which shall impose or increase any fees or charges (other than taxes and other governmental charges, registration fees, cable, telex or facsimile transmission costs, delivery costs or other such expenses), or which shall otherwise prejudice any substantial existing right of Owners, shall, however, not become effective as to outstanding American Depositary Shares until the expiration of 30 days after notice of such amendment shall have been given to the Owners of outstanding American Depositary Shares. Every Owner and Holder, at the time any amendment so becomes effective, shall be deemed, by continuing to hold American Depositary Shares or any interest therein, to consent and agree to such amendment and to be bound by the Deposit Agreement as amended thereby. In no event shall any amendment impair the right of the Owner to surrender American Depositary Shares and receive therefor the Deposited Securities represented thereby, except in order to comply with mandatory provisions of applicable law.
SECTION 6.02 Termination.
The Company may at any time terminate this Deposit Agreement by instructing the Depositary to mail a notice of termination to the Owners of all American Depositary Shares then outstanding at least 30 days prior to the termination date included in such notice. The Depositary may likewise terminate this Deposit Agreement if at any time 60 days shall have expired after the Depositary delivered to the Company a written resignation notice and if a successor depositary shall not have been appointed and accepted its appointment as provided in Section 5.04; in such case the Depositary shall mail a notice of termination to the Owners of all American Depositary Shares then outstanding at least 30 days prior to the termination date. On and after the date of termination, the Owner of American Depositary Shares will, upon (a) surrender of such American Depositary Shares, (b) payment of the fee of the Depositary for the surrender of American Depositary Shares referred to in Section 2.05, and (c) payment of any applicable taxes or governmental charges, be entitled to delivery, to him or upon his order, of the amount of Deposited Securities represented by those American Depositary Shares. If any American Depositary Shares shall remain outstanding after the date of termination, the Depositary thereafter shall discontinue the registration of transfers of American Depositary Shares, shall suspend the distribution of dividends to the Owners thereof, and shall not give any further notices or perform any further acts under this Deposit Agreement, except that the Depositary shall continue to collect dividends and other distributions pertaining to Deposited Securities, shall sell rights and other property as provided in this Deposit Agreement, and shall continue to deliver Deposited Securities, together with any dividends or other distributions received with respect thereto and the net proceeds of the sale of any rights or other property, upon surrender of American Depositary Shares (after deducting, in each case, the fee of the Depositary for the surrender of American Depositary Shares, any expenses for the account of the Owner of such American Depositary Shares in accordance with the terms and conditions of this Deposit Agreement, and any applicable taxes or governmental charges).
At any time after the expiration of four months from the date of termination, the Depositary may sell the Deposited Securities then held under this Deposit Agreement and may thereafter hold uninvested the net proceeds of any such sale, together with any other cash then held by it hereunder, unsegregated and without liability for interest, for the pro rata benefit of the Owners of American Depositary Shares that have not theretofore been surrendered, such Owners thereupon becoming general creditors of the Depositary with respect to such net proceeds. After making such sale, the Depositary shall be discharged from all obligations under this Deposit Agreement, except to account for such net proceeds and other cash (after deducting, in each case, the fee of the Depositary for the surrender of American Depositary Shares, any expenses for the account of the Owner of such American Depositary Shares in accordance with the terms and conditions of this Deposit Agreement, and any applicable taxes or governmental charges. Upon the termination of this Deposit Agreement, the Company shall be
discharged from all obligations under this Deposit Agreement except for its obligations to the Depositary under Sections 5.08 and 5.09.
ARTICLE 7. MISCELLANEOUS
SECTION 7.01 Counterparts.
This Deposit Agreement may be executed in any number of counterparts, each of which shall be deemed an original and all of such counterparts shall constitute one and the same instrument. Copies of this Deposit Agreement shall be filed with the Depositary and the Custodians and shall be open to inspection by any Owner or Holder during business hours.
SECTION 7.02 No Third Party Beneficiaries.
This Deposit Agreement is for the exclusive benefit of the parties hereto and shall not be deemed to give any legal or equitable right, remedy or claim whatsoever to any other person.
SECTION 7.03 Severability.
In case any one or more of the provisions contained in this Deposit Agreement or in the Receipts should be or become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein or therein shall in no way be affected, prejudiced or disturbed thereby.
SECTION 7.04 Owners and Holders as Parties; Binding Effect.
The Owners and Holders from time to time shall be parties to this Deposit Agreement and shall be bound by all of the terms and conditions hereof and of the Receipts by acceptance of American Depositary Shares or any interest therein.
SECTION 7.05 Notices.
Any and all notices to be given to the Company shall be deemed to have been duly given if personally delivered or sent by mail or cable, telex or facsimile transmission confirmed by letter, addressed to UBIC, Inc. Meisan Takahama Building, 2-12-23 Kounan, Minato-ku, Tokyo 108-0075, Japan, Attention: Naritomo Ikeue, or any other place to which the Company may have transferred its principal office with notice to the Depositary.
Any and all notices to be given to the Depositary shall be deemed to have been duly given if in English and personally delivered or sent by mail or cable, telex or facsimile transmission confirmed by letter, addressed to The Bank of New York Mellon, 101 Barclay Street, New York, New York 10286, Attention: American Depositary
Receipt Administration, or any other place to which the Depositary may have transferred its Corporate Trust Office with notice to the Company.
Any and all notices to be given to any Owner shall be deemed to have been duly given if personally delivered or sent by mail or cable, telex or facsimile transmission confirmed by letter, addressed to such Owner at the address of such Owner as it appears on the transfer books for American Depositary Shares of the Depositary, or, if such Owner shall have filed with the Depositary a written request that notices intended for such Owner be mailed to some other address, at the address designated in such request.
Delivery of a notice sent by mail or cable, telex or facsimile transmission shall be deemed to be effected at the time when a duly addressed letter containing the same (or a confirmation thereof in the case of a cable, telex or facsimile transmission) is deposited, postage prepaid, in a post-office letter box. The Depositary or the Company may, however, act upon any cable, telex or facsimile transmission received by it, notwithstanding that such cable, telex or facsimile transmission shall not subsequently be confirmed by letter as aforesaid.
SECTION 7.06 Submission to Jurisdiction; Appointment of Agent for Service of Process; Jury Trial Waiver.
The Company hereby (i) irrevocably designates and appoints Naritomo Ikeue, 590 Fifth Avenue, 19th Floor New York, New York 10036, in the State of New York, as the Companys authorized agent upon which process may be served in any suit or proceeding arising out of or relating to the Shares or Deposited Securities, the American Depositary Shares, the Receipts or this Deposit Agreement, (ii) consents and submits to the jurisdiction of any state or federal court in the State of New York in which any such suit or proceeding may be instituted and (iii) agrees that service of process upon said authorized agent shall be deemed in every respect effective service of process upon the Company in any such suit or proceeding. The Company agrees to deliver, upon the execution and delivery of this Deposit Agreement, a written acceptance by such agent of its appointment as such agent. The Company further agrees to take any and all action, including the filing of any and all such documents and instruments, as may be necessary to continue such designation and appointment in full force and effect for so long as any American Depositary Shares or Receipts remain outstanding or this Deposit Agreement remains in force. In the event the Company fails to continue such designation and appointment in full force and effect, the Company hereby waives personal service of process upon it and consents that any such service of process may be made by certified or registered mail, return receipt requested, directed to the Company at its address last specified for notices hereunder, and service so made shall be deemed completed five (5) days after the same shall have been so mailed.
EACH PARTY TO THIS DEPOSIT AGREEMENT (INCLUDING, FOR AVOIDANCE OF DOUBT, EACH OWNER AND HOLDER) HEREBY
IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY SUIT, ACTION OR PROCEEDING AGAINST THE COMPANY AND/OR THE DEPOSITARY DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THE SHARES OR OTHER DEPOSITED SECURITIES, THE AMERICAN DEPOSITARY SHARES OR THE RECEIPTS, THIS DEPOSIT AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREIN OR THEREIN, OR THE BREACH HEREOF OR THEREOF, INCLUDING, WITHOUT LIMITATION, ANY QUESTION REGARDING EXISTENCE, VALIDITY OR TERMINATION (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY).
SECTION 7.07 Waiver of Immunities.
To the extent that the Company or any of its properties, assets or revenues may have or may hereafter become entitled to, or have attributed to it, any right of immunity, on the grounds of sovereignty or otherwise, from any legal action, suit or proceeding, from the giving of any relief in any respect thereof, from setoff or counterclaim, from the jurisdiction of any court, from service of process, from attachment upon or prior to judgment, from attachment in aid of execution or judgment, or from execution of judgment, or other legal process or proceeding for the giving of any relief or for the enforcement of any judgment, in any jurisdiction in which proceedings may at any time be commenced, with respect to its obligations, liabilities or any other matter under or arising out of or in connection with the Shares or Deposited Securities, the American Depositary Shares, the Receipts or this Deposit Agreement, the Company, to the fullest extent permitted by law, hereby irrevocably and unconditionally waives, and agrees not to plead or claim, any such immunity and consents to such relief and enforcement.
SECTION 7.08 Governing Law.
This Deposit Agreement and the Receipts shall be interpreted and all rights hereunder and thereunder and provisions hereof and thereof shall be governed by the laws of the State of New York, except with respect to its authorization and execution by the Company, which shall be governed by the laws of Japan.
IN WITNESS WHEREOF, UBIC, INC. and THE BANK OF NEW YORK MELLON have duly executed this Deposit Agreement as of the day and year first set forth above and all Owners and Holders shall become parties hereto upon acceptance by them of American Depositary Shares or any interest therein.
|
UBIC, INC. |
|
|
|
|
|
|
|
|
By: |
|
|
|
Name: |
|
|
Title: |
|
|
|
|
|
|
|
THE BANK OF NEW YORK MELLON, |
|
|
as Depositary |
|
|
|
|
|
|
|
|
By: |
|
|
|
Name: |
|
|
Title: |
EXHIBIT A
|
AMERICAN DEPOSITARY SHARES |
|
(Each American Depositary Share represents |
|
one-fifth (1/5) of one deposited Share) |
THE BANK OF NEW YORK MELLON
AMERICAN DEPOSITARY RECEIPT
FOR COMMON SHARES
OF
UBIC, INC.
(INCORPORATED UNDER THE LAWS OF JAPAN)
The Bank of New York Mellon, as depositary (hereinafter called the Depositary), hereby certifies that , or registered assigns IS THE OWNER OF
AMERICAN DEPOSITARY SHARES
representing deposited common shares (herein called Shares) of UBIC, Inc., a company incorporated under the laws of Japan (herein called the Company). At the date hereof, each American Depositary Share represents one-fifth (1/5) of one Share deposited or subject to deposit under the Deposit Agreement (as such term is hereinafter defined) at the Tokyo, Japan offices of Mizuho Corporate Bank and The Bank of Tokyo-Mitsubishi UFJ, Ltd., (herein called the Custodian). The Depositarys Corporate Trust Office is located at a different address than its principal executive office. Its Corporate Trust Office is located at 101 Barclay Street, New York, N.Y. 10286, and its principal executive office is located at One Wall Street, New York, N.Y. 10286.
THE DEPOSITARYS CORPORATE TRUST OFFICE ADDRESS IS
101 BARCLAY STREET, NEW YORK, N.Y. 10286
1. THE DEPOSIT AGREEMENT .
This American Depositary Receipt is one of an issue (herein called Receipts), all issued and to be issued upon the terms and conditions set forth in the deposit agreement dated as of , 2013 (herein called the Deposit Agreement) among the Company, the Depositary and all Owners and Holders from time to time of American Depositary Shares issued thereunder, each of whom by accepting American Depositary Shares agrees to become a party thereto and become bound by all the terms and conditions thereof. The Deposit Agreement sets forth the rights of Owners and Holders and the rights and duties of the Depositary in respect of the Shares deposited thereunder and any and all other securities, property and cash from time to time received in respect of such Shares and held thereunder (such Shares, securities, property, and cash are herein called Deposited Securities). Copies of the Deposit Agreement are on file at the Depositarys Corporate Trust Office in New York City and at the office of the Custodian.
The statements made on the face and reverse of this Receipt are summaries of certain provisions of the Deposit Agreement and are qualified by and subject to the detailed provisions of the Deposit Agreement, to which reference is hereby made. Capitalized terms defined in the Deposit Agreement and not defined herein shall have the meanings set forth in the Deposit Agreement.
2. SURRENDER OF RECEIPTS AND WITHDRAWAL OF DEPOSITED SHARES .
Upon surrender at the Corporate Trust Office of the Depositary of American Depositary Shares, and upon payment of the fee of the Depositary provided in this Receipt, and subject to the terms and conditions of the Deposit Agreement, the Owner of those American Depositary Shares is entitled to delivery, to him or as instructed, of the amount of Deposited Securities at the time represented by those American Depositary Shares. Delivery of such Deposited Securities may be made by the delivery of (a) certificates or account transfer in the name of the Owner hereof or as ordered by him, with proper endorsement or accompanied by proper instruments or instructions of transfer and (b) any other securities, property and cash to which such Owner is then entitled in respect of this Receipt. Such delivery will be made at the option of the Owner hereof, either at the office of the Custodian or at the Corporate Trust Office of the Depositary, provided that the forwarding of certificates for Shares or other Deposited Securities for such delivery at the Corporate Trust Office of the Depositary shall be at the risk and expense of the Owner hereof.
3. TRANSFERS, SPLIT-UPS, AND COMBINATIONS OF RECEIPTS .
Transfers of American Depositary Shares may be registered on the books of the Depositary by the Owner in person or by a duly authorized attorney, upon surrender of those American Depositary Shares properly endorsed for transfer or accompanied by proper instruments of transfer, in the case of a Receipt, or pursuant to a proper instruction
(including, for the avoidance of doubt, instructions through DRS and Profile as provided in Section 2.10 of the Deposit Agreement), in the case of uncertificated American Depositary Shares, and funds sufficient to pay any applicable transfer taxes and the expenses of the Depositary and upon compliance with such regulations, if any, as the Depositary may establish for such purpose. This Receipt may be split into other such Receipts, or may be combined with other such Receipts into one Receipt, evidencing the same aggregate number of American Depositary Shares as the Receipt or Receipts surrendered. The Depositary, upon surrender of certificated American Depositary Shares for the purpose of exchanging for uncertificated American Depositary Shares, shall cancel those certificated American Depositary Shares and send the Owner a statement confirming that the Owner is the Owner of uncertificated American Depositary Shares. The Depositary, upon receipt of a proper instruction (including, for the avoidance of doubt, instructions through DRS and Profile as provided in Section 2.10 of the Deposit Agreement) from the Owner of uncertificated American Depositary Shares for the purpose of exchanging for certificated American Depositary Shares, shall cancel those uncertificated American Depositary Shares and deliver to the Owner the same number of certificated American Depositary Shares. As a condition precedent to the delivery, registration of transfer, or surrender of any American Depositary Shares or split-up or combination of any Receipt or withdrawal of any Deposited Securities, the Depositary, the Custodian, or Registrar may require payment from the depositor of the Shares or the presenter of the Receipt or instruction for registration of transfer or surrender of American Depositary Shares not evidenced by a Receipt of a sum sufficient to reimburse it for any tax or other governmental charge and any stock transfer or registration fee with respect thereto (including any such tax or charge and fee with respect to Shares being deposited or withdrawn) and payment of any applicable fees as provided in the Deposit Agreement, may require the production of proof satisfactory to it as to the identity and genuineness of any signature and may also require compliance with any regulations the Depositary may establish consistent with the provisions of the Deposit Agreement.
The delivery of American Depositary Shares against deposit of Shares generally or against deposit of particular Shares may be suspended, or the transfer of American Depositary Shares in particular instances may be refused, or the registration of transfer of outstanding American Depositary Shares generally may be suspended, during any period when the transfer books of the Depositary are closed, or if any such action is deemed necessary or advisable by the Depositary or the Company at any time or from time to time because of any requirement of law or of any government or governmental body or commission, or under any provision of the Deposit Agreement, or for any other reason, subject to the provisions of the following sentence. Notwithstanding anything to the contrary in the Deposit Agreement or this Receipt, the surrender of outstanding American Depositary Shares and withdrawal of Deposited Securities may not be suspended subject only to (i) temporary delays caused by closing the transfer books of the Depositary or the Company or the Foreign Registrar, if applicable, or the deposit of Shares in connection with voting at a shareholders meeting, or the payment of dividends, (ii) the payment of fees, taxes and similar charges, and (iii) compliance with any U.S. or foreign laws or
governmental regulations relating to the American Depositary Shares or to the withdrawal of the Deposited Securities. Without limitation of the foregoing, the Depositary shall not knowingly accept for deposit under the Deposit Agreement any Shares which would be required to be registered under the provisions of the Securities Act of 1933, unless a registration statement is in effect as to such Shares for such offer and sale or such Shares may be offered and sold to the public in the United States without registration thereunder.
The Depositary will use reasonable efforts to comply with the written instructions of the Company not to knowingly accept for deposit under the Deposit Agreement any Shares identified in such instructions at such times and under such circumstances as may reasonably be specified in such instructions in order to facilitate the Companys compliance with applicable securities laws of applicable jurisdictions.
4. LIABILITY OF OWNER FOR TAXES .
If any tax or other governmental charge shall become payable with respect to any American Depositary Shares or any Deposited Securities represented by any American Depositary Shares, such tax or other governmental charge shall be payable by the Owner to the Depositary. The Depositary may refuse to register any transfer of those American Depositary Shares or any withdrawal of Deposited Securities represented by those American Depositary Shares until such payment is made, and may withhold any dividends or other distributions, or may sell for the account of the Owner any part or all of the Deposited Securities represented by those American Depositary Shares, and may apply such dividends or other distributions or the proceeds of any such sale in payment of such tax or other governmental charge and the Owner shall remain liable for any deficiency.
5. WARRANTIES ON DEPOSIT OF SHARES .
Every person depositing Shares under the Deposit Agreement shall be deemed thereby to represent and warrant, that such Shares and each certificate therefor, if applicable, are validly issued, fully paid, nonassessable and free of any preemptive rights of the holders of outstanding Shares and that the person making such deposit is duly authorized so to do. Every such person shall also be deemed to represent that the deposit of such Shares and the sale of American Depositary Shares representing such Shares by that person are not restricted under the Securities Act of 1933. Such representations and warranties shall survive the deposit of Shares and delivery of American Depositary Shares.
6. FILING PROOFS, CERTIFICATES, AND OTHER INFORMATION .
Any person presenting Shares for deposit or any Owner or Holder may be required from time to time to file with the Depositary or the Custodian such proof of citizenship or residence, exchange control approval, or such information relating to the
registration on the books of the Company or the Foreign Registrar, if applicable, to execute such certificates and to make such representations and warranties, as the Depositary may deem necessary or proper. The Depositary may withhold the delivery or registration of transfer of any American Depositary Shares or the distribution of any dividend or sale or distribution of rights or of the proceeds thereof or the delivery of any Deposited Securities until such proof or other information is filed or such certificates are executed or such representations and warranties made. Upon written request and at the expense of the Company, the Depositary shall deliver to the Company copies of the documents or instruments delivered to the Depositary pursuant to Section 3.01 of the Deposit Agreement, to the extent that disclosure is permitted under applicable law. No Share shall be accepted for deposit unless accompanied by evidence satisfactory to the Depositary that any necessary approval has been granted by any governmental body in Japan that is then performing the function of the regulation of currency exchange.
7. CHARGES OF DEPOSITARY .
The following charges shall be incurred by any party depositing or withdrawing Shares or by any party surrendering American Depositary Shares or to whom American Depositary Shares are issued (including, without limitation, issuance pursuant to a stock dividend or stock split declared by the Company or an exchange of stock regarding the American Depositary Shares or Deposited Securities or a delivery of American Depositary Shares pursuant to Section 4.03 of the Deposit Agreement), or by Owners, as applicable: (1) taxes and other governmental charges, (2) such registration fees as may from time to time be in effect for the registration of transfers of Shares generally on the Share register of the Company or Foreign Registrar and applicable to transfers of Shares to or from the name of the Depositary or its nominee or the Custodian or its nominee on the making of deposits or withdrawals under the terms of the Deposit Agreement, (3) such cable, telex and facsimile transmission expenses as are expressly provided in the Deposit Agreement, (4) such expenses as are incurred by the Depositary in the conversion of foreign currency pursuant to Section 4.05 of the Deposit Agreement, (5) a fee of $5.00 or less per 100 American Depositary Shares (or portion thereof) for the delivery of American Depositary Shares pursuant to Section 2.03, 4.03 or 4.04 of the Deposit Agreement and the surrender of American Depositary Shares pursuant to Section 2.05 or 6.02 of the Deposit Agreement, (6) a fee of $.05 or less per American Depositary Share (or portion thereof) for any cash distribution made pursuant to the Deposit Agreement, including, but not limited to Sections 4.01 through 4.04 of the Deposit Agreement, (7) a fee for the distribution of securities pursuant to Section 4.02 of the Deposit Agreement, such fee being in an amount equal to the fee for the execution and delivery of American Depositary Shares referred to above which would have been charged as a result of the deposit of such securities (for purposes of this clause 7 treating all such securities as if they were Shares) but which securities are instead distributed by the Depositary to Owners, (8) in addition to any fee charged under clause 6, a fee of $.05 or less per American Depositary Share (or portion thereof) per annum for depositary services, which will be payable as provided in clause 9 below, and (9) any other charges
payable by the Depositary, any of the Depositarys agents, including the Custodian, or the agents of the Depositarys agents in connection with the servicing of Shares or other Deposited Securities (which charge shall be assessed against Owners as of the date or dates set by the Depositary in accordance with Section 4.06 of the Deposit Agreement and shall be payable at the sole discretion of the Depositary by billing such Owners for such charge or by deducting such charge from one or more cash dividends or other cash distributions).
The Depositary, subject to Article 9 hereof, may own and deal in any class of securities of the Company and its affiliates and in American Depositary Shares.
From time to time, the Depositary may make payments to the Company to reimburse and / or share revenue from the fees collected from Owners or Holders, or waive fees and expenses for services provided, generally relating to costs and expenses arising out of establishment and maintenance of the American Depositary Shares program. In performing its duties under the Deposit Agreement, the Depositary may use brokers, dealers or other service providers that are affiliates of the Depositary and that may earn or share fees or commissions.
8. PRE-RELEASE OF RECEIPTS .
Unless requested in writing by the Company to cease doing so, in which case the Depositary shall promptly cease from doing so, the Depositary may, notwithstanding Section 2.03 of the Deposit Agreement, deliver American Depositary Shares prior to the receipt of Shares pursuant to Section 2.02 of the Deposit Agreement (a Pre-Release). The Depositary may, pursuant to Section 2.05 of the Deposit Agreement, deliver Shares upon the surrender of American Depositary Shares that have been Pre-Released, whether or not such cancellation is prior to the termination of such Pre-Release or the Depositary knows that such American Depositary Shares have been Pre-Released. The Depositary may receive American Depositary Shares in lieu of Shares in satisfaction of a Pre-Release. Each Pre-Release will be (a) preceded or accompanied by a written representation from the person to whom American Depositary Shares or Shares are to be delivered, that such person, or its customer, owns the Shares or American Depositary Shares to be remitted, as the case may be, (b) at all times fully collateralized with cash or such other collateral as the Depositary deems appropriate, (c) terminable by the Depositary on not more than five (5) business days notice, and (d) subject to such further indemnities and credit regulations as the Depositary deems appropriate. The number of American Depositary Shares that are outstanding at any time as a result of Pre-Release will not normally exceed thirty percent (30%) of the Shares deposited under the Deposit Agreement; provided , however , that the Depositary reserves the right to change or disregard such limit from time to time as it deems appropriate.
The Depositary may retain for its own account any compensation received by it in connection with the foregoing.
9. TITLE TO RECEIPTS .
It is a condition of this Receipt and every successive Owner and Holder of this Receipt by accepting or holding the same consents and agrees that when properly endorsed or accompanied by proper instruments of transfer, shall be transferable as certificated registered securities under the laws of the State of New York. American Depositary Shares not evidenced by Receipts shall be transferable as uncertificated registered securities under the laws of the State of New York. The Depositary, notwithstanding any notice to the contrary, may treat the Owner of American Depositary Shares as the absolute owner thereof for the purpose of determining the person entitled to distribution of dividends or other distributions or to any notice provided for in the Deposit Agreement and for all other purposes, and neither the Depositary nor the Company shall have any obligation or be subject to any liability under the Deposit Agreement to any Holder of American Depositary Shares unless that Holder is the Owner of those American Depositary Shares.
10. VALIDITY OF RECEIPT .
This Receipt shall not be entitled to any benefits under the Deposit Agreement or be valid or obligatory for any purpose, unless this Receipt shall have been executed by the Depositary by the manual signature of a duly authorized signatory of the Depositary; provided , however that such signature may be a facsimile if a Registrar for the Receipts shall have been appointed and such Receipts are countersigned by the manual signature of a duly authorized officer of the Registrar.
11. REPORTS; INSPECTION OF TRANSFER BOOKS .
The Company is subject to the periodic reporting requirements of the Securities Exchange Act of 1934 and, accordingly, files reports with the Commission. Those reports will be available for inspection and copying through the Commissions EDGAR system on the Internet at www.sec.gov or at public reference facilities maintained by the Commission located at 100 F Street, N.E., Washington, D.C. 20549.
The Depositary will make available for inspection by Owners at its Corporate Trust Office any reports, notices and other communications, including any proxy soliciting material, received from the Company which are both (a) received by the Depositary as the holder of the Deposited Securities and (b) made generally available to the holders of such Deposited Securities by the Company. The Depositary will also, upon written request by the Company, send to Owners copies of such reports when furnished by the Company pursuant to the Deposit Agreement. Any such reports and communications, including any such proxy soliciting material, furnished to the Depositary by the Company shall be furnished in English to the extent such materials are required to be translated into English pursuant to any regulations of the Commission.
The Depositary will keep books, at its Corporate Trust Office, for the registration of American Depositary Shares and transfers of American Depositary Shares which at all reasonable times shall be open for inspection by the Owners and the Company, and such information relating to DTC participant positions as the Depositary may reasonably obtain from DTC,, provided that such inspection shall not be for the purpose of communicating with Owners in the interest of a business or object other than the business of the Company or a matter related to the Deposit Agreement or the American Depositary Shares.
The Depositary may close the transfer books, at any time or from time to time, when deemed expedient by it in connection with the performance of its duties under the Deposit Agreement or at the Companys written request to the extent permitted by law.
12. DIVIDENDS AND DISTRIBUTIONS .
Whenever the Depositary receives any cash dividend or other cash distribution on any Deposited Securities, the Depositary will, if at the time of receipt thereof any amounts received in a foreign currency can in the judgment of the Depositary be converted on a reasonable basis into United States dollars transferable to the United States, and subject to the Deposit Agreement, convert such dividend or distribution into dollars and will distribute the amount thus received (net of the fees and expenses of the Depositary as provided in Article 8 hereof and Section 5.09 of the Deposit Agreement) to the Owners entitled thereto; provided , however , that in the event that the Custodian or the Depositary is required to withhold and does withhold from any cash dividend or other cash distribution in respect of any Deposited Securities an amount on account of taxes or other governmental charges, the amount distributed to the Owners of the American Depositary Shares representing such Deposited Securities shall be reduced accordingly.
Subject to the provisions of Sections 4.11 and 5.09 of the Deposit Agreement, whenever the Depositary receives any distribution other than a distribution described in Section 4.01, 4.03 or 4.04 of the Deposit Agreement, the Depositary will cause the securities or property received by it to be distributed to the Owners entitled thereto, in any manner that the Depositary may deem equitable and practicable for accomplishing such distribution; provided , however , that if in the opinion of the Depositary, after consultation with the Company to the extent practicable, such distribution cannot be made proportionately among the Owners of Receipts entitled thereto, or if for any other reason the Depositary deems such distribution not to be feasible, the Depositary may adopt such method as it may deem equitable and practicable for the purpose of effecting such distribution, including, but not limited to, the public or private sale of the securities or property thus received, or any part thereof, and the net proceeds of any such sale (net of the fees and expenses of the Depositary as provided in Article 8 hereof and Section 5.09 of the Deposit Agreement) will be distributed by the Depositary to the Owners of Receipts entitled thereto all in the manner and subject to the conditions described in Section 4.01 of the Deposit Agreement. The Depositary may withhold any
distribution of securities under Section 4.02 of the Deposit Agreement if it has not received satisfactory assurances from the Company that the distribution does not require registration under the Securities Act of 1933. The Depositary may sell, by public or private sale, an amount of securities or other property it would otherwise distribute under this Article that is sufficient to pay its fees and expenses in respect of that distribution.
If any distribution consists of a dividend in, or free distribution of, Shares, the Depositary may deliver to the Owners entitled thereto, an aggregate number of American Depositary Shares representing the amount of Shares received as such dividend or free distribution, subject to the terms and conditions of the Deposit Agreement with respect to the deposit of Shares and issuance of American Depositary Shares, including withholding of any tax or governmental charge as provided in Section 4.11 of the Deposit Agreement and payment of the fees and expenses of the Depositary as provided in Article 8 hereof and Section 5.09 of the Deposit Agreement (and the Depositary may sell, by public or private sale, an amount of Shares received sufficient to pay its fees and expenses in respect of that distribution). The Depositary may withhold any such delivery of American Depositary Shares if it has not received satisfactory assurances from the Company that such distribution does not require registration under the Securities Act of 1933. In lieu of delivering fractional American Depositary Shares in any such case, the Depositary may sell the amount of Shares represented by the aggregate of such fractions by public or private sale in accordance with the applicable provisions of the articles of incorporation, other similar documents of the Company, Japanese Company Law and any other Japanese law and distribute the net proceeds, all in the manner and subject to the conditions described in Section 4.01 of the Deposit Agreement. If additional American Depositary Shares are not so delivered, each American Depositary Share shall thenceforth also represent the additional Shares distributed upon the Deposited Securities represented thereby.
If the Company declares a distribution in which holders of Deposited Securities have a right to elect whether to receive cash or fully-paid Shares or a combination of both or a right to elect to have a distribution sold on their behalf, the Depositary may, after consultation with the Company, make that right of election available for exercise by Owners any manner the Depositary considers to be lawful and practical. As a condition of making a distribution election right available to Owners, the Depositary may require satisfactory assurances from the Company that doing so does not require registration of any securities under the Securities Act of 1933.
In the event that the Depositary determines that any distribution in property (including Shares and rights to subscribe therefor) is subject to any tax or other governmental charge which the Depositary is obligated to withhold, the Depositary may by public or private sale dispose of all or a portion of such property (including Shares and rights to subscribe therefor) in such amounts and in such manner as the Depositary deems necessary and practicable to pay any such taxes or charges, and the Depositary shall
distribute the net proceeds of any such sale after deduction of such taxes or charges to the Owners of Receipts entitled thereto.
In accordance with instructions from the Company and to the extent practicable, the Depositary or the Custodian will take reasonable administrative actions to obtain or assist the Owners in obtaining tax benefits under applicable tax treaties with respect to dividends and other distributions on the Deposited Securities. Owners of Receipts may be required from time to time to file such proof of taxpayer status, residence or beneficial ownership, to execute such certificates and to make such representations or warranties, or to provide any other information or documents as the Depositary may deem necessary or proper to fulfill the Depositarys obligations hereunder or under applicable law. Owners of Receipts shall provide the Depositary, in a timely manner, with copies, or originals if necessary and appropriate, of any such proofs of residence, status or beneficial ownership and any other information or documents which the Depositary may reasonably request. As and to the extent provided in Section 5.03 of the Deposit Agreement, the Depositary shall have no obligation or liability to any person, if any Owner fails to provide such evidence requested by the Depositary or if such evidence does not reach relevant tax authorities in time for any Owner to obtain the benefit of any tax treaty.
13. RIGHTS .
In the event that the Company shall offer or cause to be offered to the holders of any Deposited Securities any rights to subscribe for additional Shares or any rights of any other nature, the Depositary shall have discretion, after consultation with the Company, as to the procedure to be followed in making such rights available to any Owners or in disposing of such rights on behalf of any Owners and making the net proceeds available to such Owners or, if by the terms of such rights offering or for any other reason, the Depositary may not either make such rights available to any Owners or dispose of such rights and make the net proceeds available to such Owners, then the Depositary shall allow the rights to lapse. If at the time of the offering of any rights the Depositary determines in its discretion, after consultation with the Company, that it is lawful and feasible to make such rights available to all or certain Owners but not to other Owners, the Depositary may distribute to any Owner to whom it determines the distribution to be lawful and feasible, in proportion to the number of American Depositary Shares held by such Owner, warrants or other instruments therefor in such form as it deems appropriate.
In circumstances in which rights would otherwise not be distributed, if an Owner requests the distribution of warrants or other instruments in order to exercise the rights allocable to the American Depositary Shares of such Owner under the Deposit Agreement, the Depositary will make such rights available to such Owner upon written notice from the Company to the Depositary that (a) the Company has elected in its sole discretion to permit such rights to be exercised and (b) such Owner has executed such documents as the Company has determined in its sole discretion are reasonably required under applicable law.
If the Depositary has distributed warrants or other instruments for rights to all or certain Owners, then upon instruction from such an Owner pursuant to such warrants or other instruments to the Depositary from such Owner to exercise such rights, upon payment by such Owner to the Depositary for the account of such Owner of an amount equal to the purchase price of the Shares to be received upon the exercise of the rights, and upon payment of the fees and expenses of the Depositary and any other charges as set forth in such warrants or other instruments, the Depositary shall, on behalf of such Owner, exercise the rights and purchase the Shares, and the Company shall cause the Shares so purchased to be delivered to the Depositary on behalf of such Owner. As agent for such Owner, the Depositary will cause the Shares so purchased to be deposited pursuant to Section 2.02 of the Deposit Agreement, and shall, pursuant to Section 2.03 of the Deposit Agreement, deliver American Depositary Shares to such Owner. In the case of a distribution pursuant to the second paragraph of this Article 14, such deposit shall be made, and depositary shares shall be delivered, under depositary arrangements which provide for issuance of depositary shares subject to the appropriate restrictions on sale, deposit, cancellation, and transfer under applicable United States laws.
If the Depositary determines in its reasonable discretion, after consultation with the Company to the extent practicable, that it is not lawful and feasible to make such rights available to all or certain Owners, it may sell the rights, warrants or other instruments in proportion to the number of American Depositary Shares held by the Owners to whom it has determined it may not lawfully or feasibly make such rights available, and allocate the net proceeds of such sales (net of the fees and expenses of the Depositary as provided in Section 5.09 of the Deposit Agreement and all taxes and governmental charges payable in connection with such rights and subject to the terms and conditions of the Deposit Agreement) for the account of such Owners otherwise entitled to such rights, warrants or other instruments, upon an averaged or other practical basis without regard to any distinctions among such Owners because of exchange restrictions or the date of delivery of any American Depositary Shares or otherwise.
The Depositary will not offer rights to Owners unless both the rights and the securities to which such rights relate are either exempt from registration under the Securities Act of 1933 with respect to a distribution to all Owners or are registered under the provisions of such Act; provided, that nothing in the Deposit Agreement shall create any obligation on the part of the Company to file a registration statement with respect to such rights or underlying securities or to endeavor to have such a registration statement declared effective. If an Owner requests the distribution of warrants or other instruments, notwithstanding that there has been no such registration under the Securities Act of 1933, the Depositary shall not effect such distribution unless it has received an opinion from recognized counsel in the United States for the Company upon which the Depositary may rely that such distribution to such Owner is exempt from such registration.
Neither the Depositary nor the Company shall be responsible for any failure to determine that it may be lawful or feasible to make such rights available to Owners in general or any Owner in particular.
Nothing in this Deposit Agreement shall create any obligation on the part of the Company to alter the terms or conditions of any offering or distribution of rights.
14. CONVERSION OF FOREIGN CURRENCY .
Whenever the Depositary or the Custodian shall receive foreign currency, by way of dividends or other distributions or the net proceeds from the sale of securities, property or rights, and if at the time of the receipt thereof the foreign currency so received can in the judgment of the Depositary be converted on a reasonable basis into Dollars and the resulting Dollars transferred to the United States, the Depositary shall convert or cause to be converted by sale or in any other manner that it may determine, such foreign currency into Dollars, and such Dollars shall be distributed to the Owners entitled thereto or, if the Depositary shall have distributed any warrants or other instruments which entitle the holders thereof to such Dollars, then to the holders of such warrants and/or instruments upon surrender thereof for cancellation. Such distribution may be made upon an averaged or other practicable basis without regard to any distinctions among Owners on account of exchange restrictions, the date of delivery of any American Depositary Shares or otherwise and shall be net of any expenses of conversion into Dollars incurred by the Depositary as provided in Section 5.09 of the Deposit Agreement.
If such conversion or distribution can be effected only with the approval or license of any government or agency thereof, the Depositary shall file such application for approval or license, if any, as it may deem desirable.
If at any time the Depositary shall determine that in its judgment any foreign currency received by the Depositary or the Custodian is not convertible on a reasonable basis into Dollars transferable to the United States, or if any approval or license of any government or agency thereof which is required for such conversion is denied or in the opinion of the Depositary is not obtainable, or if any such approval or license is not obtained within a reasonable period as determined by the Depositary, the Depositary may distribute the foreign currency (or an appropriate document evidencing the right to receive such foreign currency) received by the Depositary to, or in its discretion may hold such foreign currency uninvested and without liability for interest thereon for the respective accounts of, the Owners entitled to receive the same.
If any such conversion of foreign currency, in whole or in part, cannot be effected for distribution to some of the Owners entitled thereto, the Depositary may in its discretion make such conversion and distribution in Dollars to the extent permissible to the Owners entitled thereto and may distribute the balance of the foreign currency received by the Depositary to, or hold such balance uninvested and without liability for interest thereon for the respective accounts of, the Owners entitled thereto.
15. RECORD DATES .
Whenever any cash dividend or other cash distribution shall become payable or any distribution other than cash shall be made, or whenever rights shall be issued with respect to the Deposited Securities, or whenever the Depositary shall receive notice of any meeting of holders of Shares or other Deposited Securities, or whenever for any reason the Depositary causes a change in the number of Shares that are represented by each American Depositary Share, or whenever the Depositary shall find it necessary or convenient, the Depositary shall fix a record date, which shall be the same date as the record date, if any, applicable to the deposited Shares, or as close thereto as practicable, (a) for the determination of the Owners who shall be (i) entitled to receive such dividend, distribution or rights or the net proceeds of the sale thereof, (ii) entitled to give instructions for the exercise of voting rights at any such meeting or (iii) responsible for any fee assessed by the Depositary pursuant to the Deposit Agreement, or (b) on or after which each American Depositary Share will represent the changed number of Shares, subject to the provisions of the Deposit Agreement.
16. VOTING OF DEPOSITED SECURITIES .
Upon receipt of notice of any meeting of holders of Shares or other Deposited Securities, if requested in writing by the Company, the Depositary shall, as soon as practicable thereafter, mail to the Owners of Receipts a notice, the form of which notice shall be in the sole discretion of the Depositary, which shall contain (a) such information as is contained in such notice of meeting received by the Depositary from the Company, (b) a statement that the Owners as of the close of business on a specified record date will be entitled, subject to any applicable provision of Japanese law and of the articles of incorporation or similar documents of the Company, to instruct the Depositary as to the exercise of the voting rights, if any, pertaining to the amount of Shares or other Deposited Securities represented by their respective American Depositary Shares and (c) a statement as to the manner in which such instructions may be given. Upon the written request of an Owner of American Depositary Shares on such record date, received on or before the date established by the Depositary for such purpose, the Depositary shall endeavor, insofar as practicable, to vote or cause to be voted the amount of Shares or other Deposited Securities represented by those American Depositary Shares in accordance with the instructions set forth in such request. The Depositary shall not vote or attempt to exercise the right to vote that attaches to the Shares or other Deposited Securities, other than in accordance with such instructions. If (i) the Company has requested the Depositary to send a notice under this paragraph and has provided the Depositary at least 30 days prior notice of any such meeting and the details of the matters to be voted upon and (ii) no instructions are received by the Depositary from an Owner with respect to American Depositary Shares of that Owner on or before the date established by the Depositary for such purpose, the Depositary shall deem such Owner to have instructed the Depositary to give a discretionary proxy to a person designated by the Company with respect to the amount of Deposited Securities represented by those
American Depositary Shares and the Depositary shall give a discretionary proxy to a person designated by the Company to vote that amount of Deposited Securities, provided , that no such instruction shall be given with respect to any matter as to which the Company informs the Depositary (and the Company agrees to provide such information as promptly as practicable in writing, if applicable) that (x) the Company does not wish such proxy given, (y) substantial opposition exists or (z) such matter materially and adversely affects the rights of holders of Shares.
There can be no assurance that Owners generally or any Owner in particular will receive the notice described in the preceding paragraph sufficiently prior to the instruction date to ensure that the Depositary will vote the Shares or Deposited Securities in accordance with the provisions set forth in the preceding paragraph.
In order to give Owners a reasonable opportunity to instruct the Depositary as to the exercise of voting rights relating to Deposited Securities, if the Company will request the Depositary to act under Section 4.07 of the Deposit Agreement, the Company shall make reasonable efforts give the Depositary notice of any such meeting and details concerning the matters to be voted upon not less than 30 days prior to the meeting date, unless such advance notice is not possible because less than 30 days notice of the meeting has been given in accordance with the Companys articles of incorporation and local law, in which case, Company will provide to the Depositary as much advance notice of the meeting as is possible under the circumstances.
17. CHANGES AFFECTING DEPOSITED SECURITIES .
Upon any change in nominal value, split-up, consolidation, or any other reclassification of Deposited Securities, or upon any recapitalization, reorganization, merger or consolidation, or sale of assets affecting the Company or to which it is a party, or upon the redemption or cancellation by the Company of the Deposited Securities, any securities, cash or property which shall be received by the Depositary or a Custodian in exchange for, in conversion of, in lieu of or in respect of Deposited Securities shall be treated as new Deposited Securities under the Deposit Agreement, and American Depositary Shares shall thenceforth represent, in addition to the existing Deposited Securities, the right to receive the new Deposited Securities so received, unless additional Receipts are delivered pursuant to the following sentence. In any such case the Depositary may deliver additional American Depositary Shares as in the case of a dividend in Shares, or call for the surrender of outstanding Receipts to be exchanged for new Receipts specifically describing such new Deposited Securities.
18. LIABILITY OF THE COMPANY AND DEPOSITARY .
Neither the Depositary nor the Company nor any of their respective directors, employees, agents or affiliates shall incur any liability to any Owner or Holder, (i) if by reason of any provision of any present or future law or regulation of the United States or any other country, or of any governmental or regulatory authority, or by reason
of any provision, present or future, of the articles of incorporation or any similar document of the Company, or by reason of any provision of any securities issued or distributed by the Company, or any offering or distribution thereof, or by reason of any act of God or war or terrorism or other circumstances beyond its control, the Depositary or the Company shall be prevented, delayed or forbidden from or be subject to any civil or criminal penalty on account of doing or performing any act or thing which by the terms of the Deposit Agreement or Deposited Securities it is provided shall be done or performed, (ii) by reason of any non-performance or delay, caused as aforesaid, in the performance of any act or thing which by the terms of the Deposit Agreement it is provided shall or may be done or performed, (iii) by reason of any exercise of, or failure to exercise, any discretion provided for in the Deposit Agreement, (iv) for the inability of any Owner or Holder to benefit from any distribution, offering, right or other benefit which is made available to holders of Deposited Securities but is not, under the terms of the Deposit Agreement, made available to Owners or Holders, or (v) for any special, consequential or punitive damages for any breach of the terms of the Deposit Agreement. Where, by the terms of a distribution pursuant to Section 4.01, 4.02 or 4.03 of the Deposit Agreement, or an offering or distribution pursuant to Section 4.04 of the Deposit Agreement, or for any other reason, such distribution or offering may not be made available to Owners of Receipts, and the Depositary may not dispose of such distribution or offering on behalf of such Owners and make the net proceeds available to such Owners, then the Depositary shall not make such distribution or offering, and shall allow any rights, if applicable, to lapse. Neither the Company nor the Depositary assumes any obligation or shall be subject to any liability under the Deposit Agreement to Owners or Holders, except that they agree to perform their obligations specifically set forth in the Deposit Agreement without negligence or bad faith. The Depositary shall not be subject to any liability with respect to the validity or worth of the Deposited Securities. Neither the Depositary nor the Company shall be under any obligation to appear in, prosecute or defend any action, suit, or other proceeding in respect of any Deposited Securities or in respect of the American Depositary Shares, on behalf of any Owner or Holder or other person. Neither the Depositary nor the Company shall be liable for any action or nonaction by it in reliance upon the advice of or information from legal counsel, accountants, any person presenting Shares for deposit, any Owner or Holder, or any other person believed by it in good faith to be competent to give such advice or information. The Depositary shall not be liable for any acts or omissions made by a successor depositary whether in connection with a previous act or omission of the Depositary or in connection with a matter arising wholly after the removal or resignation of the Depositary, provided that in connection with the issue out of which such potential liability arises, the Depositary performed its obligations without negligence or bad faith while it acted as Depositary. The Depositary shall not be liable for the acts or omissions of any securities depository, clearing agency or settlement system in connection with or arising out of book-entry settlement of Deposited Securities or otherwise. The Depositary shall not be responsible for any failure to carry out any instructions to vote any of the Deposited Securities or for the manner in which any such vote is cast or the effect of any such vote, provided that any such action or nonaction is in good faith.
With respect to any Pre-Release (as defined in Section 2.09 of the Deposit Agreement), the Company shall not be responsible to Owners or Holders for any liabilities or expenses (a) which may be imposed under any United States Federal, state or local income tax laws or (b) which may arise out of the failure of the Depositary to deliver Deposited Securities when required under the terms of Section 2.05 of the Deposit Agreement. The preceding sentence shall not apply to any liability or expense which may arise out of any misstatement or alleged misstatement or omission or alleged omission in any registration statement, or proxy statement, prospectus (or placement memorandum) or preliminary prospectus (or preliminary placement memorandum) relating to an offer of sale of American Depositary Shares, except to the extent any such liability or expense arises out of (i) information relating to the Depositary or any Custodian, as applicable, furnished in writing and not materially changed or altered by the Company expressly for use in any of the foregoing documents, or, (ii) if such information is provided, the failure to state a material fact necessary to make the information provided not misleading.
No disclaimer of liability under the Securities Act of 1933 is intended by any provision of the Deposit Agreement.
19. RESIGNATION AND REMOVAL OF THE DEPOSITARY; APPOINTMENT OF SUCCESSOR CUSTODIAN .
The Depositary may at any time resign as Depositary under the Deposit Agreement by written notice of its election so to do delivered to the Company, such resignation to take effect upon the appointment of a successor depositary and its acceptance of such appointment as provided in the Deposit Agreement. The Depositary may at any time be removed by the Company by 90 days prior written notice of such removal, to become effective upon the later of (i) the 90th day after delivery of the notice to the Depositary and (ii) the appointment of a successor depositary and its acceptance of such appointment as provided in the Deposit Agreement. The Depositary in its discretion may appoint a substitute or additional custodian or custodians.
20. AMENDMENT .
The form of the Receipts and any provisions of the Deposit Agreement may at any time and from time to time be amended by agreement between the Company and the Depositary without the consent of Owners or Holders in any respect which they may deem necessary or desirable. Any amendment which shall impose or increase any fees or charges (other than taxes and other governmental charges, registration fees, cable, telex or facsimile transmission costs, delivery costs or other such expenses), or which shall otherwise prejudice any substantial existing right of Owners, shall, however, not become effective as to outstanding American Depositary Shares until the expiration of 30 days after notice of such amendment shall have been given to the Owners of outstanding American Depositary Shares. Every Owner and Holder of American Depositary Shares, at the time any amendment so becomes effective, shall be deemed, by continuing to hold
such American Depositary Shares or any interest therein, to consent and agree to such amendment and to be bound by the Deposit Agreement as amended thereby. In no event shall any amendment impair the right of the Owner to surrender American Depositary Shares and receive therefor the Deposited Securities represented thereby, except in order to comply with mandatory provisions of applicable law.
21. TERMINATION OF DEPOSIT AGREEMENT .
The Company may terminate the Deposit Agreement by instructing the Depositary to mail notice of termination to the Owners of all American Depositary Shares then outstanding at least 30 days prior to the termination date included in such notice. The Depositary may likewise terminate the Deposit Agreement, if at any time 60 days shall have expired after the Depositary delivered to the Company a written resignation notice and if a successor depositary shall not have been appointed and accepted its appointment as provided in the Deposit Agreement; in such case the Depositary shall mail a notice of termination to the Owners of all American Depositary Shares then outstanding at least 30 days prior to the termination date. If the definition of Unit applies and the Japanese Company Law or any other applicable Japanese law restricts delivery of Shares other than in a Unit, then a notice of termination sent to Owners shall state that (i) the right of an Owner to surrender American Depositary Shares and receive delivery of the underlying Shares will be subject to those restrictions and (ii) as a consequence of those restrictions and the fact that transfers of American Depositary Shares may not be registered after the termination date, Owners may wish to dispose of American Depositary Shares that do not represent integral Units of Shares prior to the termination date. On and after the date of termination, the Owner of American Depositary Shares will, upon (a) surrender of such American Depositary Shares, (b) payment of the fee of the Depositary for the surrender of American Depositary Shares referred to in Section 2.05, and (c) payment of any applicable taxes or governmental charges, be entitled to delivery, to him or upon his order, of the amount of Deposited Securities represented by those American Depositary Shares. If any American Depositary Shares shall remain outstanding after the date of termination, the Depositary thereafter shall discontinue the registration of transfers of American Depositary Shares, shall suspend the distribution of dividends to the Owners thereof, and shall not give any further notices or perform any further acts under the Deposit Agreement, except that the Depositary shall continue to collect dividends and other distributions pertaining to Deposited Securities, shall sell rights and other property as provided in the Deposit Agreement, and shall continue to deliver Deposited Securities, together with any dividends or other distributions received with respect thereto and the net proceeds of the sale of any rights or other property, upon surrender of American Depositary Shares (after deducting, in each case, the fee of the Depositary for the surrender of American Depositary Shares, any expenses for the account of the Owner of such American Depositary Shares in accordance with the terms and conditions of the Deposit Agreement, and any applicable taxes or governmental charges). At any time after the expiration of four months from the date of termination, the Depositary may sell the
Deposited Securities then held under the Deposit Agreement and may thereafter hold uninvested the net proceeds of any such sale, together with any other cash then held by it thereunder, unsegregated and without liability for interest, for the pro rata benefit of the Owners of American Depositary Shares that have not theretofore been surrendered, such Owners thereupon becoming general creditors of the Depositary with respect to such net proceeds. After making such sale, the Depositary shall be discharged from all obligations under the Deposit Agreement, except to account for such net proceeds and other cash (after deducting, in each case, the fee of the Depositary for the surrender of American Depositary Shares, any expenses for the account of the Owner of such American Depositary Shares in accordance with the terms and conditions of the Deposit Agreement, and any applicable taxes or governmental charges). Upon the termination of the Deposit Agreement, the Company shall be discharged from all obligations under the Deposit Agreement except for its obligations to the Depositary with respect to indemnification, charges, and expenses.
22. DTC DIRECT REGISTRATION SYSTEM AND PROFILE MODIFICATION SYSTEM .
(a) Notwithstanding the provisions of Section 2.04 of the Deposit Agreement, the parties acknowledge that the Direct Registration System (DRS) and Profile Modification System (Profile) shall apply to uncertificated American Depositary Shares upon acceptance thereof to DRS by DTC. DRS is the system administered by DTC pursuant to which the Depositary may register the ownership of uncertificated American Depositary Shares, which ownership shall be evidenced by periodic statements issued by the Depositary to the Owners entitled thereto. Profile is a required feature of DRS which allows a DTC participant, claiming to act on behalf of an Owner, to direct the Depositary to register a transfer of those American Depositary Shares to DTC or its nominee and to deliver those American Depositary Shares to the DTC account of that DTC participant without receipt by the Depositary of prior authorization from the Owner to register such transfer.
(b) In connection with and in accordance with the arrangements and procedures relating to DRS/Profile, the parties understand that the Depositary will not verify, determine or otherwise ascertain that the DTC participant which is claiming to be acting on behalf of an Owner in requesting registration of transfer and delivery described in subsection (a) has the actual authority to act on behalf of the Owner (notwithstanding any requirements under the Uniform Commercial Code). For the avoidance of doubt, the provisions of Sections 5.03 and 5.08 of the Deposit Agreement shall apply to the matters arising from the use of the DRS. The parties agree that the Depositarys reliance on and compliance with instructions received by the Depositary through the DRS/Profile System and in accordance with the Deposit Agreement, shall not constitute negligence or bad faith on the part of the Depositary.
23. SUBMISSION TO JURISDICTION; JURY TRIAL WAIVER; WAIVER OF IMMUNITIES .
In the Deposit Agreement, the Company has (i) appointed Naritomo Ikeue, 590 Fifth Avenue, 19th Floor New York, New York 10036, in the State of New York, as the Companys authorized agent upon which process may be served in any suit or proceeding arising out of or relating to the Shares or Deposited Securities, the American Depositary Shares, the Receipts or this Agreement, (ii) consented and submitted to the jurisdiction of any state or federal court in the State of New York in which any such suit or proceeding may be instituted and (iii) agreed that service of process upon said authorized agent shall be deemed in every respect effective service of process upon the Company in any such suit or proceeding.
EACH PARTY TO THE DEPOSIT AGREEMENT (INCLUDING, FOR AVOIDANCE OF DOUBT, EACH OWNER AND HOLDER) THEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY SUIT, ACTION OR PROCEEDING AGAINST THE COMPANY AND/OR THE DEPOSITARY DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THE SHARES OR OTHER DEPOSITED SECURITIES, THE AMERICAN DEPOSITARY SHARES OR THE RECEIPTS, THE DEPOSIT AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREIN OR THEREIN, OR THE BREACH HEREOF OR THEREOF, INCLUDING, WITHOUT LIMITATION, ANY QUESTION REGARDING EXISTENCE, VALIDITY OR TERMINATION (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY).
To the extent that the Company or any of its properties, assets or revenues may have or hereafter become entitled to, or have attributed to it, any right of immunity, on the grounds of sovereignty or otherwise, from any legal action, suit or proceeding, from the giving of any relief in any respect thereof, from setoff or counterclaim, from the jurisdiction of any court, from service of process, from attachment upon or prior to judgment, from attachment in aid of execution or judgment, or other legal process or proceeding for the giving of any relief or for the enforcement of any judgment, in any jurisdiction in which proceedings may at any time be commenced, with respect to its obligations, liabilities or any other matter under or arising out of or in connection with the Shares or Deposited Securities, the American Depositary Shares, the Receipts or the Deposit Agreement, the Company, to the fullest extent permitted by law, hereby irrevocably and unconditionally waives, and agrees not to plead or claim, any such immunity and consents to such relief and enforcement.
24. DISCLOSURE OF INTERESTS
The Company may from time to time request Owners to provide information as to the capacity in which such Owners own or owned Receipts and
regarding the identity of any other persons then or previously interested in such Receipts and the nature of such interest and various other matters.
Each Owner agrees to provide any information reasonably requested by the Company or the Depositary pursuant to Section 3.04 of the Deposit Agreement. The Depositary agrees to comply with reasonable written instructions received from the Company requesting that the Depositary forward any such requests to the Owners and to forward to the Company, as promptly as practicable, any responses to such requests the Depositary receives.
Exhibit 4.3
FORM OF MANAGERS WARRANTS
THE REGISTERED HOLDER OF THIS PURCHASE WARRANT BY ITS ACCEPTANCE HEREOF, AGREES THAT IT WILL NOT SELL, TRANSFER OR ASSIGN THIS PURCHASE WARRANT EXCEPT AS HEREIN PROVIDED AND THE REGISTERED HOLDER OF THIS PURCHASE WARRANT AGREES THAT IT WILL NOT SELL, TRANSFER, ASSIGN, PLEDGE OR HYPOTHECATE THIS PURCHASE WARRANT FOR A PERIOD OF ONE HUNDRED EIGHTY (180) DAYS FOLLOWING THE EFFECTIVE DATE (DEFINED BELOW) TO ANYONE OTHER THAN (I) MAXIM GROUP LLC, THE BENCHMARK COMPANY, LLC OR AN UNDERWRITER OR A SELECTED DEALER IN CONNECTION WITH THE OFFERING (DEFINED BELOW, OR (II) A BONA FIDE OFFICER OR PARTNER OF MAXIM GROUP LLC, BENCHMARK COMPANY, LLC OR ANY SUCH UNDERWRITER OR SELECTED DEALER.
THIS PURCHASE WARRANT IS NOT EXERCISABLE PRIOR TO [ ] [ DATE THAT IS ONE YEAR FROM THE EFFECTIVE DATE OF THE OFFERING ]. VOID AFTER 5:00 P.M., EASTERN TIME, [ ] [ DATE THAT IS FIVE YEARS FROM THE EFFECTIVE DATE OF THE OFFERING ].
AMERICAN DEPOSITARY SHARE PURCHASE WARRANT
For the Purchase of [ ] American Depositary Shares
Representing [ ] Shares of Common Stock
of
UBIC, INC.
1. Purchase Warrant . THIS CERTIFIES THAT, in consideration of funds duly paid by or on behalf of [Maxim Group LLC] [The Benchmark Company, LLC] ( Holder ), as registered owner of this Purchase Warrant, to UBIC, Inc., a limited liability, joint-stock corporation incorporated under the laws of Japan (the Company ), Holder is entitled, at any time or from time to time from [ ] [ DATE THAT IS ONE YEAR FROM THE EFFECTIVE DATE OF THE OFFERING ] (the Commencement Date ), and at or before 5:00 p.m., Eastern time, [ ] [ DATE THAT IS FIVE YEARS FROM THE EFFECTIVE DATE OF THE OFFERING ] (the Expiration Date ), but not thereafter, to subscribe for, purchase and receive, in whole or in part, up to [ · ] American Depositary Shares (the ADSs ) of the Company, subject to adjustment as provided in Section 6 hereof. If the
Expiration Date is a day on which banking institutions are authorized by law to close, then this Purchase Warrant may be exercised on the next succeeding day which is not such a day in accordance with the terms herein. During the period ending on the Expiration Date, the Company agrees not to take any action that would terminate this Purchase Warrant. This Purchase Warrant is initially exercisable at $[ ] per ADS [ 120% of the price per ADS sold in the Offering ]; provided , however , that upon the occurrence of any of the events specified in Section 6 hereof, the rights granted by this Purchase Warrant, including the exercise price per ADS and the number of ADSs to be received upon such exercise, shall be adjusted as therein specified. The term Exercise Price shall mean the initial exercise price or the adjusted exercise price, depending on the context.
The ADSs underlying this Purchase Warrant are to be issued pursuant to a deposit agreement (the Deposit Agreement ), dated as of [ · ], 2013, among the Company, The Bank of New York Mellon, as depositary (the Depositary ), and holders from time to time of the American Depositary Receipts issued by the Depositary and evidencing the ADSs. Each five (5) ADSs will initially represent one (1) share of common stock of the Company (the Common Stock ) deposited pursuant to the Deposit Agreement, subject to adjustment in accordance with the terms thereof.
2. Exercise .
2.1 Exercise Form . In order to exercise this Purchase Warrant, the exercise form attached hereto must be duly executed and completed and delivered to the Company, together with this Purchase Warrant and payment of the Exercise Price for the ADSs being purchased payable in cash by wire transfer of immediately available funds to an account designated by the Company or by certified check or official bank check. If the subscription rights represented hereby shall not be exercised at or before 5:00 p.m., Eastern time, on the Expiration Date, this Purchase Warrant shall become null and be void without further force or effect, and all rights represented hereby shall cease and expire.
2.2 Legend . Each certificate for the securities purchased under this Purchase Warrant shall bear a legend as follows unless such securities have been registered under the Securities Act of 1933, as amended (the Act ):
The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended (the Act ), or applicable state law. Neither the securities nor any interest therein may be offered for sale, sold or otherwise transferred except pursuant to an effective registration statement under the Securities Act, or pursuant to an exemption from registration under the Securities Act and applicable state law which, in the opinion of counsel to the Company, is available.
3. Transfer .
3.1 General Restrictions . The registered Holder of this Purchase Warrant agrees by his, her or its acceptance hereof, that such Holder will not: (a) sell, transfer, assign, pledge or hypothecate this Purchase Warrant for a period of 180 days following the Effective Date to anyone other than: (i) Maxim Group LLC or The Benchmark Company, LLC (together, the Managers ) or an underwriter or a selected dealer participating in the offering (the Offering ) contemplated by the Underwriting Agreement, dated [ ], 2013, between the Company and the Managers, as representatives of the several underwriters named therein (the Underwriting Agreement ), or (ii) a bona fide officer or partner of either of the Managers or of any such underwriter or selected dealer, in each case in accordance with FINRA Conduct Rule 5110(g)(1), or (b) cause this Purchase Warrant or the securities issuable hereunder to be the subject of any hedging, short sale, derivative, put or call transaction that would result in the effective economic disposition of this Purchase Warrant or the securities hereunder, except as provided for in FINRA Rule 5110(g)(2). On and after 180 days after the Effective Date, transfers to others may be made subject to compliance with or exemptions from applicable securities laws. In order to make any permitted assignment, the Holder must deliver to the Company the assignment form attached hereto duly executed and completed, together with the Purchase Warrant and payment of all transfer taxes, if any, payable in connection therewith. The Company shall, within five (5) Business Days, transfer this Purchase Warrant on the books of the Company and shall execute and deliver a new Purchase Warrant or Purchase Warrants of like tenor to the appropriate assignee(s) expressly evidencing the right to purchase the aggregate number of ADSs purchasable hereunder or such portion of such number as shall be contemplated by any such assignment.
3.2 Restrictions Imposed by the Securities Act . The securities evidenced by this Purchase Warrant shall not be transferred unless and until: (i) the Company has received the opinion of counsel for the Holder that the securities may be transferred pursuant to an exemption from registration under the Securities Act and applicable state securities laws, the availability of which is established to the reasonable satisfaction of the Company (the Company hereby agreeing that the opinion of Reed Smith LLP shall be deemed satisfactory evidence of the availability of an exemption), or (ii) a registration statement or a post-effective amendment to the Registration Statement relating to the offer and sale of such securities has been filed by the Company and declared effective by the U.S. Securities and Exchange Commission (the Commission ) and compliance with applicable state securities law has been established.
4. Registration Rights .
4.1 Demand Registration .
4.1.1 Grant of Right . The Company, upon written demand (a Demand Notice ) of the Holder(s) of at least 51% of the Purchase Warrants and/or the underlying ADSs ( Majority Holders ), agrees to register, on one
occasion, all or any portion of the ADSs (and the shares of Common Stock represented by such ADSs) underlying the Purchase Warrants (collectively, the Registrable Securities ). On such occasion, the Company will file a registration statement with the Commission covering the Registrable Securities within sixty (60) days after receipt of a Demand Notice and use its reasonable best efforts to have the registration statement declared effective promptly thereafter, subject to compliance with review by the Commission; provided , however , that the Company shall not be required to comply with a Demand Notice if the Company has filed a registration statement with respect to which the Holder is entitled to piggyback registration rights pursuant to Section 4.2 hereof and either: (i) the Holder has elected to participate in the offering covered by such registration statement or (ii) if such registration statement relates to an underwritten primary offering of securities of the Company, until the offering covered by such registration statement has been withdrawn or until thirty (30) days after such offering is consummated. The demand for registration may be made at any time during a period of four (4) years beginning on the Commencement Date. The Company covenants and agrees to give written notice of its receipt of any Demand Notice by any Holder(s) to all other registered Holders of the Purchase Warrants and/or the Registrable Securities within ten (10) days after the date of the receipt of any such Demand Notice.
4.1.2 Terms . The Company shall bear all fees and expenses attendant to the registration of the Registrable Securities pursuant to Section 4.1.1, but the Holders shall pay any and all underwriting commissions and the expenses of any legal counsel selected by the Holders to represent them in connection with the sale of the Registrable Securities. The Company agrees to use its reasonable best efforts to cause the filing required herein to become effective promptly and to qualify or register the Registrable Securities in such States as are reasonably requested by the Holder(s); provided , however , that in no event shall the Company be required to register the Registrable Securities in a State in which such registration would cause: (i) the Company to be obligated to register or license to do business in such State or submit to general service of process in such State, or (ii) the principal stockholders of the Company to be obligated to escrow their shares of capital stock of the Company. The Company shall cause any registration statement filed pursuant to the demand right granted under Section 4.1.1 to remain effective for a period of at least twelve (12) consecutive months after the date that the Holders of the Registrable Securities covered by such registration statement are first given the opportunity to sell all of such securities. The Holders shall only use the prospectuses provided by the Company to sell the ADSs covered by such registration statement, and will immediately cease to use any prospectus furnished by the Company if the Company advises the Holder that such prospectus may no longer be used due to a material misstatement or omission. Notwithstanding the provisions of this Section 4.1.2, the Holder shall be entitled to a demand registration under this Section 4.1.2 on only one (1) occasion and such demand registration right shall terminate on the fifth anniversary of the effectiveness of the registration statement in accordance with FINRA Rule 5110(f)(2)(H)(iv).
4.2 Piggy-Back Registration .
4.2.1 Grant of Right . In addition to the demand right of registration described in Section 4.1 hereof, the Holder shall have the right, for a period of no more than seven (7) years from the date of effectiveness of the registration statement in accordance with FINRA Rule 5110(f)(2)(H)(v), to include the Registrable Securities as part of any other registration of securities filed by the Company (other than in connection with a transaction contemplated by Rule 145(a) promulgated under the Securities Act or pursuant to Form S-8 or any equivalent form); provided , however , that if, solely in connection with any primary underwritten public offering for the account of the Company, the managing underwriter(s) thereof shall, in its reasonable discretion, impose a limitation on the number of ADSs (and the shares of Common Stock represented by such ADSs) which may be included in the Registration Statement because, in such underwriter(s) judgment, marketing or other factors dictate such limitation is necessary to facilitate public distribution, then the Company shall be obligated to include in such Registration Statement only such limited portion of the Registrable Securities with respect to which the Holder requested inclusion hereunder as the underwriter shall reasonably permit. Any exclusion of Registrable Securities shall be made pro rata among the Holders seeking to include Registrable Securities in proportion to the number of Registrable Securities sought to be included by such Holders; provided , however , that the Company shall not exclude any Registrable Securities unless the Company has first excluded all outstanding securities, the holders of which are not entitled to inclusion of such securities in such Registration Statement or are not entitled to pro rata inclusion with the Registrable Securities.
4.2.2 Terms . The Company shall bear all fees and expenses attendant to registering the Registrable Securities pursuant to Section 4.2.1 hereof, but the Holders shall pay any and all underwriting commissions and the expenses of any legal counsel selected by the Holders to represent them in connection with the sale of the Registrable Securities. In the event of such a proposed registration, the Company shall furnish the then Holders of outstanding Registrable Securities with not less than thirty (30) days written notice prior to the proposed date of filing of such registration statement. Such notice to the Holders shall continue to be given for each registration statement filed by the Company until such time as all of the Registrable Securities have been sold by the Holder. The holders of the Registrable Securities shall exercise the piggy-back rights provided for herein by giving written notice within ten (10) days of the receipt of the Companys notice of its intention to file a registration statement. Except as otherwise provided in this Purchase Warrant, there shall be no limit on the number of times the Holder may request registration under this Section 4.2.2; provided , however , that such registration rights shall terminate on the sixth anniversary of the Commencement Date.
4.3 General Terms .
4.3.1 Indemnification . The Company shall indemnify the Holder(s) of the Registrable Securities to be sold pursuant to any registration statement hereunder and each person, if any, who controls such Holders within
the meaning of Section 15 of the Securities Act or Section 20 (a) of the Securities Exchange Act of 1934, as amended ( Exchange Act ), against all loss, claim, damage, expense or liability (including all reasonable attorneys fees and other expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which any of them may become subject under the Securities Act, the Exchange Act or otherwise, arising from such registration statement but only to the same extent and with the same effect as the provisions pursuant to which the Company has agreed to indemnify the underwriters contained in Section 9(a) of the Underwriting Agreement. The Holder(s) of the Registrable Securities to be sold pursuant to such registration statement, and their successors and assigns, shall severally, and not jointly, indemnify the Company, against all loss, claim, damage, expense or liability (including all reasonable attorneys fees and other expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which they may become subject under the Securities Act, the Exchange Act or otherwise, arising from information furnished by or on behalf of such Holders, or their successors or assigns, in writing, for specific inclusion in such registration statement to the same extent and with the same effect as the provisions contained in Section 9(c) of the Underwriting Agreement pursuant to which the underwriters have agreed to indemnify the Company.
4.3.2 Exercise of Purchase Warrants . Nothing contained in this Purchase Warrant shall be construed as requiring the Holder(s) to exercise their Purchase Warrants prior to or after the initial filing of any registration statement or the effectiveness thereof.
4.3.3 Documents Delivered to Underwriters . If such registration includes an underwritten public offering, the Company shall furnish to each underwriter of any such offering, a signed counterpart, addressed to such underwriter, of: (i) an opinion of counsel to the Company, dated the effective date of such registration statement (and an opinion dated the date of the closing under any underwriting agreement related thereto), and (ii) a comfort letter dated the effective date of such registration statement (and a letter dated the date of the closing under the underwriting agreement) signed by the independent registered public accounting firm which has issued a report on the Companys financial statements included in such registration statement, in each case covering substantially the same matters with respect to such registration statement (and the prospectus included therein) and, in the case of such accountants letter, with respect to events subsequent to the date of such financial statements, as are customarily covered in opinions of issuers counsel and in accountants letters delivered to underwriters in underwritten public offerings of securities. If such registration includes an underwritten public offering, the Company shall also deliver promptly to the managing underwriter, copies of all correspondence between the Commission and the Company, its counsel or auditors and all memoranda relating to discussions with the Commission or its staff with respect to the registration statement and permit each underwriter to do such investigation, upon reasonable advance notice, with respect to information contained in or omitted from the registration statement as it deems reasonably necessary to comply with applicable securities laws or rules of FINRA. Such investigation
shall include access to books, records and properties and opportunities to discuss the business of the Company with its officers and independent auditors, all to such reasonable extent and at such reasonable times as any such underwriter shall reasonably request.
4.3.4 Underwriting Agreement . The Company shall enter into an underwriting agreement with the managing underwriter(s), if any, selected by any Holders whose Registrable Securities are being registered pursuant to this Section 4, which managing underwriter shall be reasonably satisfactory to the Company. Such agreement shall be reasonably satisfactory in form and substance to the Company, each Holder and such managing underwriters, and shall contain such representations, warranties and covenants by the Company and such other terms as are customarily contained in agreements of that type used by the managing underwriter. The Holders shall be parties to any underwriting agreement relating to an underwritten sale of their Registrable Securities and may, at their option, require that any or all the representations, warranties and covenants of the Company to or for the benefit of such underwriters shall also be made to and for the benefit of such Holders. Such Holders shall not be required to make any representations or warranties to or agreements with the Company or the underwriters except as they may relate to such Holders, their Shares and their intended methods of distribution.
4.3.5 Documents to be Delivered by Holder(s) . Each of the Holder(s) participating in any of the foregoing offerings shall furnish to the Company a completed and executed questionnaire provided by the Company requesting information customarily sought of selling security holders.
4.3.6 Damages . Should the registration or the effectiveness thereof required by Sections 4.1 and 4.2 hereof be delayed by the Company or the Company otherwise fails to comply with such provisions, the Holder(s) shall, in addition to any other legal or other relief available to the Holder(s), be entitled to obtain specific performance or other equitable (including injunctive) relief against the threatened breach of such provisions or the continuation of any such breach, without the necessity of proving actual damages and without the necessity of posting bond or other security.
5. New Purchase Warrants to be Issued .
5.1 Partial Exercise or Transfer . Subject to the restrictions in Section 3 hereof, this Purchase Warrant may be exercised or assigned in whole or in part. In the event of the exercise or assignment hereof in part only, upon surrender of this Purchase Warrant for cancellation, together with the duly executed exercise or assignment form and funds sufficient to pay any Exercise Price and/or transfer tax if exercised pursuant to Section 2.1 hereto, the Company shall cause to be delivered to the Holder without charge a new Purchase Warrant of like tenor to this Purchase Warrant in the name of the Holder evidencing the right of the Holder to purchase the number of Shares purchasable hereunder as to which this Purchase Warrant has not been exercised or assigned.
5.2 Lost Certificate . Upon receipt by the Company of evidence satisfactory to it of the loss, theft, destruction or mutilation of this Purchase Warrant and of reasonably satisfactory indemnification or the posting of a bond, the Company shall execute and deliver a new Purchase Warrant of like tenor and date. Any such new Purchase Warrant executed and delivered as a result of such loss, theft, mutilation or destruction shall constitute a substitute contractual obligation on the part of the Company.
6. Adjustments .
6.1 Adjustments to Exercise Price and Number of Underlying ADSs . The Exercise Price and the number of ADSs underlying the Purchase Warrant shall be subject to adjustment from time to time as hereinafter set forth:
6.1.1 Share Dividends; Split Ups . If, after the date hereof, and subject to the provisions of Section 6.3 below, the number of outstanding ADSs is increased by a stock dividend payable in ADSs or by a split up of ADSs or other similar event, then, on the effective day thereof, the number of ADSs purchasable hereunder shall be increased in proportion to such increase in outstanding ADSs, and the Exercise Price shall be proportionately decreased.
6.1.2 Aggregation of ADSs . If, after the date hereof, and subject to the provisions of Section 6.3 below, the number of outstanding ADSs is decreased by a consolidation, combination or reclassification of ADSs or other similar event, then, on the effective date thereof, the number of ADSs purchasable hereunder shall be decreased in proportion to such decrease in outstanding ADSs, and the Exercise Price shall be proportionately increased.
6.1.3 Replacement of Securities upon Reorganization, etc . In case of any reclassification or reorganization of the outstanding ADSs other than a change covered by Section 6.1.1 or 6.1.2 hereof or that solely affects the number of shares of Common Stock represented by such ADSs, or in the case of any share reconstruction or amalgamation or consolidation of the Company with or into another corporation (other than a consolidation or share reconstruction or amalgamation in which the Company is the continuing corporation and that does not result in any reclassification or reorganization of the outstanding ADSs), or in the case of any sale or conveyance to another corporation or entity of the property of the Company as an entirety or substantially as an entirety in connection with which the Company is dissolved, the Holder of this Purchase Warrant shall have the right thereafter (until the expiration of the right of exercise of this Purchase Warrant) to receive upon the exercise hereof, for the same aggregate Exercise Price payable hereunder immediately prior to such event, the kind and amount of shares of stock or other securities or property (including cash) receivable upon such reclassification, reorganization, share reconstruction or amalgamation, or consolidation, or upon a dissolution following any such sale or transfer, by a Holder of the number of ADSs of the Company obtainable upon exercise of this Purchase Warrant immediately prior to such event; and if any reclassification also results in a change in ADSs covered by Section 6.1.1 or 6.1.2, then such
adjustment shall be made pursuant to Sections 6.1.1, 6.1.2 and this Section 6.1.3. The provisions of this Section 6.1.3 shall similarly apply to successive reclassifications, reorganizations, share reconstructions or amalgamations, or consolidations, sales or other transfers.
6.1.4 Changes in Form of Purchase Warrant . This form of Purchase Warrant need not be changed because of any change pursuant to this Section 6.1, and Purchase Warrants issued after such change may state the same Exercise Price and the same number of ADSs as are stated in the Purchase Warrants initially issued pursuant to this Agreement. The acceptance by any Holder of the issuance of new Purchase Warrants reflecting a required or permissive change shall not be deemed to waive any rights to an adjustment occurring after the Commencement Date or the computation thereof.
6.2 Substitute Purchase Warrant . In case of any consolidation of the Company with, or share reconstruction or amalgamation of the Company with or into, another corporation (other than a consolidation or share reconstruction or amalgamation which does not result in any reclassification or change of the outstanding ADSs), the corporation formed by such consolidation or share reconstruction or amalgamation shall execute and deliver to the Holder a supplemental Purchase Warrant providing that the holder of each Purchase Warrant then outstanding or to be outstanding shall have the right thereafter (until the stated expiration of such Purchase Warrant) to receive, upon exercise of such Purchase Warrant, the kind and amount of shares of stock and other securities and property receivable upon such consolidation or share reconstruction or amalgamation, by a holder of the number of ADSs of the Company for which such Purchase Warrant might have been exercised immediately prior to such consolidation, share reconstruction or amalgamation, sale or transfer. Such supplemental Purchase Warrant shall provide for adjustments which shall be identical to the adjustments provided for in this Section 6. The above provision of this Section shall similarly apply to successive consolidations or share reconstructions or amalgamations.
6.3 Elimination of Fractional Interests . The Company shall not be required to issue certificates representing fractions of ADSs upon the exercise of the Purchase Warrant, nor shall it be required to issue scrip or pay cash in lieu of any fractional interests, it being the intent of the parties that all fractional interests shall be eliminated by rounding any fraction up or down, as the case may be, to the nearest whole number of Shares or other securities, properties or rights.
7. Reservation and Listing . The Company shall at all times reserve and keep available out of its authorized ADSs and shares of Common Stock, solely for the purpose of issuance upon exercise of the Purchase Warrants, such number of ADSs (and the shares of Common Stock represented by such ADSs) or other securities, properties or rights as shall be issuable upon the exercise thereof. The Company covenants and agrees that, upon exercise of the Purchase Warrants and payment of the Exercise Price therefor, in accordance with the terms hereby, all ADSs (and the shares of Common Stock represented by such ADSs) and other securities issuable upon such exercise shall be duly and validly issued, fully paid
and non-assessable and not subject to preemptive rights of any stockholder. As long as the Purchase Warrants shall be outstanding, the Company shall use its reasonable best efforts to cause the ADSs and the Common Stock (including the shares of Common Stock represented by such ADSs) to be listed on The NASDAQ Global Market and the Mothers Marketplace of the Tokyo Stock Exchange, respectively, and to maintain such listings.
8. Certain Notice Requirements .
8.1 Holders Right to Receive Notice . Nothing herein shall be construed as conferring upon the Holders the right to vote or consent or to receive notice as a stockholder for the election of directors or any other matter, or as having any rights whatsoever as a stockholder of the Company. If, however, at any time prior to the expiration of the Purchase Warrants and their exercise, any of the events described in Section 8.2 shall occur, then, in one or more of said events, the Company shall give written notice of such event at least 15 days prior to the date fixed as a record date or the date of closing the transfer books for the determination of the holders of ADSs entitled to such dividend, distribution, conversion or exchange of securities or subscription rights, or entitled to vote on such proposed dissolution, liquidation, winding up or sale. Such notice shall specify such record date or the date of the closing of the transfer books, as the case may be. Notwithstanding the foregoing, the Company shall deliver to each Holder a copy of each notice given to the other holders of ADSs of the Company at the same time and in the same manner that such notice is given to such other holders of ADSs.
8.2 Events Requiring Notice . The Company shall be required to give the notice described in this Section 8 upon one or more of the following events: (i) if the Company shall take a record of the holders of its ADSs or shares of Common Stock for the purpose of entitling them to receive a dividend or distribution payable otherwise than in cash, or a cash dividend or distribution payable otherwise than out of retained earnings, as indicated by the accounting treatment of such dividend or distribution on the books of the Company, (ii) the Company shall offer to all the holders of its ADSs any additional ADSs or shares of capital stock of the Company or securities convertible into or exchangeable for shares of capital stock of the Company, or any option, right or warrant to subscribe therefor, or (iii) a dissolution, liquidation or winding up of the Company (other than in connection with a consolidation or share reconstruction or amalgamation) or a sale of all or substantially all of its property, assets and business shall be proposed.
8.3 Notice of Change in Exercise Price . The Company shall, promptly after an event requiring a change in the Exercise Price pursuant to Section 6 hereof, send notice to the Holders of such event and change ( Price Notice ). The Price Notice shall describe the event causing the change and the method of calculating same and shall be certified as being true and accurate by the Companys Chief Financial Officer.
8.4 Transmittal of Notices . All notices, requests, consents and other
communications under this Purchase Warrant shall be in writing and shall be deemed to have been duly made when hand delivered, or mailed by express mail or private courier service: (i) if to the registered Holder of the Purchase Warrant, to the address of such Holder as shown on the books of the Company, or (ii) if to the Company, to following address or to such other address as the Company may designate by notice to the Holders:
If to the Holder:
[Maxim Group LLC
405 Lexington Avenue
New York, NY 10174
Attention: James Siegel, Esq.
Telephone: (212) 895-3508
Facsimile: (212) 895-3888
with a copy to:
Attention: Clifford Teller
Executive Managing Director
Telephone: (212) 895-3773
Facsimile: (212) 895-3783]
[The Benchmark Company, LLC
40 Fulton Street, 19th Floor,
New York, NY 10038
Attention: John J. Borer III
Telephone: (212) 312-6705
Facsimile: (212) 312-6761]
with a copy (which shall not constitute notice) to:
Reed Smith LLP
599 Lexington Avenue
New York, NY 10022
Attn: Yvan-Claude Pierre, Esq.
Fax: 212-521-5450
If to the Company:
UBIC, Inc.
Meisan Takahama Building, 2-12-23
Kounan, Minato-ku, Tokyo, Japan
Fax: +81-3-54636345
Attention: Masahiro Morimoto
Chairman, Chief Executive Officer and President
with a copy (which shall not constitute notice) to:
Michael S. Turner, Esq.
DLA Piper LLP (US)
33 Arch Street, 26 th Floor
Boston, Massachusetts 02110
Fax: (617) 406-6114
9. Miscellaneous .
9.1 Amendments . The Company and the Managers may from time to time supplement or amend this Purchase Warrant without the approval of any of the Holders in order to cure any ambiguity, to correct or supplement any provision contained herein that may be defective or inconsistent with any other provisions herein, or to make any other provisions in regard to matters or questions arising hereunder that the Company and the Managers may deem necessary or desirable and that the Company and the Managers deem shall not adversely affect the interest of the Holders. All other modifications or amendments shall require the written consent of and be signed by the party against whom enforcement of the modification or amendment is sought.
9.2 Headings . The headings contained herein are for the sole purpose of convenience of reference, and shall not in any way limit or affect the meaning or interpretation of any of the terms or provisions of this Purchase Warrant.
9.3. Entire Agreement . This Purchase Warrant (together with the other agreements and documents being delivered pursuant to or in connection with this Purchase Warrant) constitutes the entire agreement of the parties hereto with respect to the subject matter hereof, and supersedes all prior agreements and understandings of the parties, oral and written, with respect to the subject matter hereof.
9.4 Binding Effect . This Purchase Warrant shall inure solely to the benefit of and shall be binding upon, the Holder and the Company and their permitted assignees, respective successors, legal representative and assigns, and no other person shall have or be construed to have any legal or equitable right, remedy or claim under or in respect of or by virtue of this Purchase Warrant or any provisions herein contained.
9.5 Governing Law; Submission to Jurisdiction; Waiver of Trial by Jury . This Purchase Warrant shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without giving effect to conflict of laws principles thereof. The Company hereby agrees that any action, proceeding or claim against it arising out of, or relating in any way to this Purchase Warrant shall be brought and enforced in the New York Supreme Court, County of New York, or in the United States District Court for the Southern District of New York, and irrevocably submits to such jurisdiction, which jurisdiction shall be exclusive. The Company hereby waives any objection to such exclusive jurisdiction and that such courts represent an inconvenient forum. The Company irrevocably appoints Naritomo Ikeue, President, UBIC North America,
Inc., 590 Fifth Avenue, 19th Floor New York, NY 10036, United States, as its authorized agent in the City of New York, New York upon which process may be served in any such suit or proceeding, and agrees that service of process upon such agent, and written notice of said service to the Company at the address included in Section 8 hereof by the person serving the same, shall be deemed in every respect effective service of process upon the Company in any such suit or proceeding. The Company further agrees to take any and all action as may be necessary to maintain such designation and appointment of such agent in full force and effect until one year following the Expiration Date. The Company (on its behalf and, to the extent permitted by applicable law, on behalf of its stockholders and affiliates) and the Holder hereby irrevocably waive, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Purchase Warrant or the transactions contemplated hereby.
9.6 Waiver, etc . The failure of the Company or the Holder to at any time enforce any of the provisions of this Purchase Warrant shall not be deemed or construed to be a waiver of any such provision, nor to in any way affect the validity of this Purchase Warrant or any provision hereof or the right of the Company or any Holder to thereafter enforce each and every provision of this Purchase Warrant. No waiver of any breach, non-compliance or non-fulfillment of any of the provisions of this Purchase Warrant shall be effective unless set forth in a written instrument executed by the party or parties against whom or which enforcement of such waiver is sought; and no waiver of any such breach, non-compliance or non-fulfillment shall be construed or deemed to be a waiver of any other or subsequent breach, non-compliance or non-fulfillment.
9.7 Execution in Counterparts . This Purchase Warrant may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which shall be deemed to be an original, but all of which taken together shall constitute one and the same agreement, and shall become effective when one or more counterparts has been signed by each of the parties hereto and delivered to each of the other parties hereto. Such counterparts may be delivered by facsimile transmission or other electronic transmission.
9.8 Exchange Agreement . As a condition of the Holders receipt and acceptance of this Purchase Warrant, Holder agrees that, at any time prior to the complete exercise of this Purchase Warrant by Holder, if the Company and the Managers enter into an agreement ( Exchange Agreement ) pursuant to which they agree that all outstanding Purchase Warrants will be exchanged for securities or cash or a combination of both, then Holder shall agree to such exchange and become a party to the Exchange Agreement.
[ Signature Page Follows ]
IN WITNESS WHEREOF, the Company has caused this Purchase Warrant to be signed by its duly authorized officer as of the day of , 2013.
UBIC, INC. |
|
|
|
|
|
|
|
|
By: |
|
|
|
Name: |
|
|
Title: |
|
[ Form to be used to exercise Purchase Warrant ]
Date: , 20
The undersigned hereby elects irrevocably to exercise the Purchase Warrant for American Depositary Shares (the ADSs ) of UBIC, Inc., a limited liability, joint-stock corporation incorporated under the laws of Japan (the Company ), and hereby makes payment of $ (at the rate of $ per ADS) in payment of the Exercise Price pursuant thereto. Please issue the ADSs as to which this Purchase Warrant is exercised in accordance with the instructions given below and, if applicable, a new Purchase Warrant representing the number of ADSs for which this Purchase Warrant has not been exercised.
Please issue the ADSs as to which this Purchase Warrant is exercised in accordance with the instructions given below and, if applicable, a new Purchase Warrant representing the number of ADSs for which this Purchase Warrant has not been converted.
Signature |
|
|
|
|
|
|
|
|
Signature Guaranteed |
|
|
INSTRUCTIONS FOR REGISTRATION OF SECURITIES
Name: |
|
|
|
(Print in Block Letters) |
|
|
|
|
Address: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTICE: The signature to this form must correspond with the name as written upon the face of the Purchase Warrant without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank, other than a savings bank, or by a trust company or by a firm having membership on a registered national securities exchange.
[ Form to be used to assign Purchase Warrant ]
ASSIGNMENT
(To be executed by the registered Holder to effect a transfer of the within Purchase Warrant):
FOR VALUE RECEIVED, does hereby sell, assign and transfer unto the right to purchase American Depositary Shares (the ADSs ) of UBIC, Inc., a limited liability, joint-stock corporation incorporated under the laws of Japan (the Company ), evidenced by the Purchase Warrant and does hereby authorize the Company to transfer such right on the books of the Company.
Dated: , 20
Signature |
|
|
|
|
|
|
|
|
Signature Guaranteed |
|
|
NOTICE: The signature to this form must correspond with the name as written upon the face of the within Purchase Warrant without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank, other than a savings bank, or by a trust company or by a firm having membership on a registered national securities exchange.
Exhibit 5.1
|
DLA Piper Tokyo Partnership |
|
Meiji Seimei Kan 7F |
|
2-1-1 Marunouchi |
|
Chiyoda-ku Tokyo 100-0005 |
|
Japan |
|
T +81 3 4550 2800 |
|
F +81 3 4550 2801 |
|
W www.dlapiper.com |
April 10, 2013
UBIC, Inc.
Meisan Takahama Building
2-12-23 Kounan
Minato-ku, Tokyo 108-0075
Japan
Ladies and Gentlemen:
Re: Registration Statement (No. 333-184691) on Form F-1
We have acted as special Japanese counsel to UBIC, Inc. (the Company ), a joint stock corporation ( kabushiki kaisha ) with 7,200,000 authorized shares organized under the laws of Japan, in connection with the preparation and filing by the Company with the United States Securities and Exchange Commission (the SEC ), under the United States Securities Act of 1933, as amended, of a Registration Statement on Form F-1 (File No. 333-184691) (as amended as of the date hereof, the Registration Statement ) and the initial public offering by the Company of 2,856,000 American Depositary Shares ( ADSs ). Each five ADSs represent one common share of the Company (the Underlying Shares ).
We have relied upon information and documentation provided to us by the Company and in doing so, we have reviewed the Companys articles of incorporation, records of proceedings of the Companys board of directors relating to the issuance of the Underlying Shares and such other documents, instruments and matters of law as we have deemed necessary to the rendering of this opinion. In such review, we have assumed the genuineness of all signatures, the legal capacity of all natural persons, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as copies and the authenticity of the originals of such latter documents. In addition, we have relied on certificates of public officials and, as to matters of fact, statements and certificates of officers of the Company.
We are of the opinion that the Underlying Shares have been duly and validly authorized, and after the payment to the Company for the Underlying Shares as contemplated in the Registration Statement, will be validly issued and subscribed, fully paid and non-assessable.
This opinion is given solely in respect of the laws of Japan as they exist and are interpreted as of the date of this opinion. We assume no obligation to supplement this opinion in the event of any changes to the laws of Japan or in the facts upon which any of the opinions herein are based. We have made no inquiry into the laws and regulations of any other jurisdiction or jurisdictions or as to laws relating to choice of law or conflicts of law principles. We express no opinion as to the laws of any other jurisdiction and none is to be implied.
This opinion is rendered only with respect to the due authorization and validity of the Underlying Shares as stated herein and may not be used or relied upon for any other purpose.
Yours faithfully,
/s/ DLA Piper Tokyo Partnership
DLA Piper Tokyo Partnership
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the reference to our firm under the caption "Experts" and to the use of our reports dated July 27, 2012 and May 24, 2012, in this Registration Statement (Form F-1) and related Prospectus of UBIC, Inc. for the registration of its American Depositary Shares.
/s/ Ernst & Young ShinNihon LLC
Tokyo, Japan
April 10, 2013