As filed with the Securities and Exchange Commission on August 15, 2016
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
☐ |
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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OR |
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☒ |
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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OR |
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☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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☐ |
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Date of event requiring this shell company report……….
For the transition period from to
Commission file number: 001-35884
KABUSHIKI KAISHA FRONTEO |
(Exact name of registrant as specified in its charter) |
FRONTEO, INC. |
(Translation of registrant’s name into English) |
Japan |
(Jurisdiction of incorporation or organization) |
Meisan Takahama Building 2-12-23 Kounan Minato-ku Tokyo 108-0075 Japan |
(Address of principal executive offices) |
Masahiro Morimoto, +81 (3) 5463-6344, +81 (3) 5463-6345 Meisan Takahama Building 2-12-23 Kounan Minato-ku Tokyo 108-0075 Japan |
(Name, telephone, facsimile number and address of company contact person) |
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class: |
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Name of each exchange on which registered: |
American Depositary Shares |
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NASDAQ Global Market |
Common Stock* |
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* Not for trading, but only in connection with the registration of the American Depositary Shares, with each one American Depositary Share representing two shares of Common Stock.
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:
As of March 31, 2016, 35,751,360 shares of Common Stock were outstanding, including shares represented by American Depositary Shares.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐ No ☒
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files):
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ☐ |
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Accelerated filer ☒ |
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Non-accelerated filer ☐ |
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP ☒ |
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International Financial Reporting Standards as issued
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Other ☐ |
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
Item 17 ☐ Item 18 ☐
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
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MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS |
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PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS |
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ii
Unless otherwise noted, all references and discussions of the financial position of FRONTEO, Inc. (formerly known as UBIC, Inc.) and its consolidated subsidiaries (collectively, the Company or FRONTEO), results of operations and cash flows in this annual report are made with reference to FRONTEO’s consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP).
Cautionary Statement with Respect to Forward-Looking Statements
To the extent that any statements made in this annual report 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 heading “Item 3.D. Risk Factors” and elsewhere in this annual report. 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 annual report 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 annual report 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.
iii
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
You should read the U.S. GAAP selected consolidated financial information presented below together with “Operating and Financial Review and Prospects” and FRONTEO’s consolidated financial statements together with the notes included in this annual report.
U.S. GAAP Selected Consolidated Financial Data
The following selected financial data have been derived from FRONTEO’s audited consolidated financial statements. These consolidated financial statements were prepared under U.S. GAAP.
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For the years ended March 31, |
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2012 |
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2014 |
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2015 |
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2016 |
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(thousands of yen, except per share data) |
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Consolidated Statement of Operations Data: |
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Revenue |
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¥ |
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¥ |
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¥ |
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¥ |
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¥ |
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Operating revenue from reimbursed direct costs |
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Total revenue |
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Cost of revenue |
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Reimbursed direct costs |
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Selling, general and administrative expenses |
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Total operating expenses |
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Operating income (loss) |
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Interest income |
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Interest expense |
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Loss on derivatives |
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— |
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— |
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— |
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— |
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Foreign currency exchange gains |
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Dividend income |
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Other—net |
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Income (loss) before income taxes |
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Income taxes (benefit) |
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Net income (loss) |
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Less: Net income (loss) attributable to noncontrolling interests |
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Net income (loss) attributable to FRONTEO, Inc. shareholders |
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¥ |
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¥ |
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¥ |
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¥ |
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¥ |
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1
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For the years ended March 31, |
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2012 |
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2013 |
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2014 |
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2015 |
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2016 |
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Per Share Data: |
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Net income (loss) attributable to FRONTEO, Inc. shareholders per share *(1) |
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Basic |
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¥ |
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¥ |
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¥ |
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¥ |
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Diluted |
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Weighted average shares outstanding *(1) |
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Basic |
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Diluted |
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Cash dividends declared per common share *(1) |
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— |
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— |
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*(1) Share and per share data give effect to a 2-for-1 share split effective on October 1, 2011 and April 1, 2012, and a 10-for-1 share split effected on April 1, 2014, which represented one ADS for two common shares, as if such share split had occurred on April 1, 2011.
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As of March 31, |
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2016 |
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(thousands of yen) |
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Consolidated Balance Sheet Data: |
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Cash and cash equivalents |
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¥ |
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¥ |
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¥ |
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¥ |
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¥ |
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Total current assets |
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Total noncurrent assets |
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Total assets |
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Total current liabilities |
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Working capital |
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Long-term debt (excluding current portion) |
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Total noncurrent liabilities |
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Total liabilities |
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Total FRONTEO, Inc. shareholders’ equity |
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Total equity |
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Operating Data: |
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Capital expenditures |
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Net cash provided by (used in): |
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Operating activities |
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Investing activities |
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Financing activities |
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Financial covenants
There are restrictive covenants related to the borrowings under the credit line including requirements to maintain a minimum level of net assets and ordinary income in the stand-alone and consolidated financial statements of us, measured under accounting principles generally accepted in Japan (“Japanese GAAP”). FRONTEO 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 a stand-alone basis and ¥1,173,145 thousand on a consolidated basis under Japanese GAAP or (b) net assets at the end of the previous year, whichever is higher. The ordinary income covenant states that FRONTEO and the Company shall not record ordinary losses in any two consecutive fiscal years. FRONTEO is in compliance with these restrictive covenants at March 31, 2016.
There are restrictive covenants related to the bank borrowings of ¥3,565,283 thousand as of March 31, 2016, including requirements to maintain a minimum level of net assets and ordinary income in the stand-alone and
2
consolidated financial statements of the Company, measured under Japanese GAAP. FRONTEO is required to maintain net assets at a level which is at least 75% of (a) net assets as of March 31, 2015; ¥5,032,824 thousand on a stand-alone basis and ¥5,220,772 thousand on a consolidated basis under Japanese GAAP or (b) net assets at the end of the previous year, whichever is higher. The ordinary income covenant states that FRONTEO and the Company shall not record ordinary losses in any two consecutive fiscal years. FRONTEO is in compliance with these restrictive covenants at March 31, 2016.
There are restrictive covenants related to the revolving credit facility of ¥1,000,000 thousand as of March 31, 2016, including requirements to maintain a minimum level of net assets and ordinary income in the stand-alone and consolidated financial statements of the Company, measured under Japanese GAAP. FRONTEO 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 a stand-alone basis and ¥2,655,320 thousand on a consolidated basis under Japanese GAAP or (b) net assets at the end of the previous year, whichever is higher. The ordinary income covenant states that FRONTEO and the Company shall not record ordinary losses in any two consecutive fiscal years.
Dividends
The Companies Act of Japan (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 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.
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 generally 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.
On June 22, 2012, our Board of Directors declared a year-end cash dividend of ¥50 per share of common stock to shareholders of record at as of June 25, 2012. On June 25, 2013, our Board of Directors declared a year-end cash dividend of ¥50 per share of common stock to shareholders of record as of June 26, 2013. The aforementioned per share cash dividends do not reflect a 2-for-1 share split effective on October 1, 2011 and April 1, 2012 and a 10-for-1 share split effective on April 1, 2014. We did not declare a cash dividend in 2014. On June 23, 2015, our Board of Directors declared a year-end cash dividend of ¥3 per share of common stock, payable to shareholders of record as of March 31, 2015. On June 29, 2016, our Board of Directors declared a year-end cash dividend of ¥3 per share of common stock, payable to shareholders of record as of March 31, 2016. The dividends declared in June 2012, 2013, 2015 and 2016 totaled ¥145.6 million, ¥159.7 million, ¥106.5 million and ¥107.3 million respectively. The declaration on June 29, 2016 is not recorded on balance sheet as of March 31, 2016.
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.
Exchange Rates
The following table sets forth, for the periods and dates indicated, information concerning the noon buying rate for Japanese yen announced by the Federal Reserve Bank of New York, expressed in Japanese yen per $1.00. The noon buying rate as of July 29, 201 6 was $1.00 = ¥102.32. The Company does not intend to imply that the Japanese yen or
3
U.S. dollar amounts referred to in this annual report 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.
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Average of |
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At end of |
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month-end- |
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Fiscal years ended March 31, |
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rates |
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(¥ per $1.00) |
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2012 |
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2013 |
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2014 |
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2015 |
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2016 |
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2017* |
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Month ended |
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January 2016 |
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February 2016 |
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March 2016 |
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April 2016 |
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May 2016 |
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June 2016 |
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July 2016* |
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* For fiscal years, calculated from the average of the exchange rates on the last day of each month during the period. Average exchange rate of fiscal year ending March 31, 2017, calculated based on the month-end exchange rates of April 1, 2016 through July 29, 2016.
3.B. CAPITALIZATION AND INDEBTEDNESS
Not applicable.
3.C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not applicable.
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 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:
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a decrease in revenues from our core eDiscovery business if more law firms that use our services perform their own manual review of documents we have identified in the eDiscovery process; |
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a decrease in revenue if we fail to successfully differentiate our technical skills from those of our competitors, if the average revenue per project decreases, if there is cancellation or scale-down of large accounts or if the prices we charge for our services fall dramatically; |
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failure to control personnel and outsourcing costs, or if we fail to manage personnel elsewhere; or |
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an increase in selling, general and administrative costs above expected levels, such as personnel expenses, advertising expenses and office rent-related expenses, in conjunction with our planned business expansion. |
4
Our acquisitions may not achieve expected benefits, and may increase our liabilities, disrupt our existing business and harm our operating results.
We completed the acquisition of TechLaw Solutions, Inc. and EvD, Inc. (now “FRONTEO USA”) in order to efficiently develop sales channels in the U.S. and enhance our business competitiveness.
We incurred significant expenses to acquire and integrate business. The benefits we expect to receive from these and other acquisitions depend on our ability to successfully conduct due diligence, negotiate the terms of the acquisition and integrate the acquired business into our systems, procedures and organizational structure. Any inaccuracy in our acquisition assumptions or any failure to uncover liabilities or risks associated with the acquisition, make the acquisition on favorable terms, integrate the acquired business or assets as and when expected or retain key employees of the acquired company may reduce or eliminate the expected benefits of the acquisition to us, increase our costs, disrupt our operations, result in additional liabilities, investigations and litigation, and may also harm our strategy, our business and our operating results. The failure to achieve expected acquisition benefits may also result in impairment charges for goodwill and purchased intangible assets.
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 errors, computer viruses and other similar events. Some of our computer and networking equipment is located 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 the United States or Asian countries, including Japan, 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 the United States and Asia. If U.S. and 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.
We have taken precautions to mitigate the inherent risks of natural disasters such as earthquakes and tsunamis by enhancing our business continuity planning and investing in additional data centers both inside and outside of Japan. However, if an 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 natural disasters, 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.
We could incur asset impairment charges for goodwill, intangible assets or other long-lived assets.
We have a significant amount of goodwill, intangible assets and other long-lived assets. A decline in financial performance, market capitalization or changes in estimates and assumptions used in the impairment analysis, which in many cases requires significant judgment, could result in impairment charges of these assets.
Goodwill is not amortized and is tested annually for impairment of the fiscal year and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value below its carrying amount. In assessing goodwill for impairment, we have the option to first perform a qualitative assessment to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Reporting units are our operating segments or one level below the operating segments. If we determine that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, no additional tests to assess goodwill for impairment are required to be performed. If we conclude
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otherwise or elect not to perform the qualitative assessment, then it is required to perform the first step of a two-step impairment review process. If the carrying amount of a reporting unit exceeds its fair value, we then perform the second step of the goodwill impairment test to measure the amount of impairment loss, if any, and an impairment charge is recorded for the amount.
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 clients’ 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 clients. 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 clients’ 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 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, investments in our technology platform, facilities and other areas of operations, including customer service and sales and marketing, will also increase. 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, 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.
If we fail to keep up with the rapid technological changes in our industry, we may lose clients due to obsolete services.
Our markets are characterized by:
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continually changing customer requirements; and |
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evolving industry standards. |
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Although we believe that the most recent version of Lit i View (version 7.9, released in April 2016), 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 us to display unwavering commitment and a substantial investment in 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 our 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 and other analytical 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. 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 require additional human resources and incur increased costs and administrative workload as a result of being a U.S. public company.
As a public company in the United States, we are subject to a number of regulatory requirements, including the reporting requirements of the Securities Exchange Act of 1934, as amended (Exchange Act), the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley Act), and the regulations promulgated thereunder, and the listing standards of the Nasdaq. Although we are required to comply with Section 404(a) of the Sarbanes-Oxley Act when filing our annual report on Form 20-F for the fiscal year ended March 31, 2016, as an emerging growth company, as defined in Section 2(a) of the Securities Act of 1933, as amended (Securities Act), we have decided to take advantage of the exemption provided by the Jumpstart Our Business Startups Act of 2012 (JOBS Act), which, assuming we continue to be an emerging growth company, allows us to delay complying with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002 until we are required to file our annual report on Form 20-F for the fiscal year ending March 31, 2019. 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.
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We have determined during our reporting process for the fiscal year ending March 31, 2016 that there were material weaknesses in our internal controls over financial reporting as of that date. If we fail to re-establish and maintain the effective system over financial reporting, we may not be able to accurately report our financial results or prevent fraud, and investor confidence and the market price of our ADSs may be adversely impacted.
Our management conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in “Internal Control — Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission.
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.
In connection with the Company’s assessment of internal controls as of March 31, 2016, the Company has determined that it had material weaknesses in internal controls over the business combination accounting for the July 31, 2015 acquisition of EvD, along with internal controls over revenue recognition for that acquired business. In addition, the impact of the material weaknesses relating to EvD had a negative impact on the overall financial statement close process, resulting in a material weakness in internal controls therein at the consolidated level.
Our management fully recognizes the importance of design, implementation, and maintenance of internal controls related to financial reporting. In order to ensure adequate internal controls, we will review the financial close process in detail, strengthen the personnel in the accounting departments of both FRONTEO and EvD and establish measures to prevent the continuation or reoccurrence of such material weaknesses by strengthening the controls related to acquisitions or other major transactions. Our management has been and will continue to be required to devote a substantial amount of time to review and implement remediation of these material weaknesses. However, until this remediation is complete, we cannot assure you that it will be completed in a timely manner.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluations of effectiveness to future periods are subject to the risk controls and may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. However, until this remediation is complete, we cannot assure you that it will be completed in a timely manner.
Undetected programming errors could harm our reputation or decrease market acceptance of our 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.
A substantial portion of our software solutions and systems are proprietary and we 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
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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 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 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.
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, our clients’ demand for our services and solutions tends to be much less extensive. This means that contracts for our eDiscovery 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.
We and our subsidiaries have changed names of entities recently in order to strengthen our corporate identity. If this change impair our brand recognition among existing and new clients, our business would have a material adverse effect.
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
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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.
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 have significant voting power, allowing them to exercise substantial influence over matters subject to shareholder approval.
Our executive officers, directors and principal shareholders holding 5% or more of our outstanding shares and their respective affiliates beneficially own a significant percentage of our issued and outstanding voting shares. Accordingly, these executive officers, directors and principal shareholders 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.
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, South 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
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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 Related to the Ownership of Our American Depositary Shares (ADSs)
We expect that the price of our ADSs will fluctuate substantially.
The market price of our ADSs could be affected by a number of factors, including:
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introduction of new products, services or technologies offered by us or our competitors; |
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any failure to meet or exceed revenue and financial projections we provide to the public; |
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actual or anticipated variations in our quarterly operating results or those of other companies in our industry; |
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our failure to meet or exceed the estimates and projections of the investment community; |
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general market conditions and overall fluctuations in United States or Japanese equity markets; |
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announcements of significant acquisitions, strategic partnerships, joint ventures or capital commitments by us or our competitors; |
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disputes or other developments relating to proprietary rights, including patents and our ability to obtain protection for our intellectual property; |
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additions or departures of our key management personnel; |
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issuances by us of debt or equity securities; |
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litigation involving our company, including: shareholder litigation; investigations or audits by regulators into the operations of our company; or proceedings initiated by our competitors or clients; |
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significant sales of the ADSs or common stock by our shareholders in the future; and |
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the trading volume of the ADS. |
In the past, securities markets have experienced significant price and volume fluctuations not related to the operating performance of particular companies. Future market fluctuations may also materially adversely affect the market price of our 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.
Certain judgments obtained against us by holders of the American Depositary Shares may not be enforceable.
We are a company incorporated under the laws of Japan and our principal assets are located in Tokyo. In addition, all of our directors 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, 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 holder of American Depositary Shares to bring an original action against us or against
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these individuals in a Japanese court in the event that a holder believes that its 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.
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 our ADSs depends 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.
The value of our ADSs may not perfectly track the price of our common stock.
Our common stock currently trades on the Tokyo Stock Exchange (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 our ADSs. In addition, the terms and conditions of our agreement with our depositary may result in less liquidity or lower market value of our ADS than for our common stock. Since the holders of our ADSs may surrender our 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 our ADSs. Therefore, the trading price of our common stock may not be correlated with the price of our ADSs.
The right of holders of ADSs to participate in any future rights offerings may be limited, which may cause dilution to their holdings and holders of ADSs may not receive cash dividends if it is impractical to make them available to them.
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 our 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 ADSs holders 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, ADSs holders may be unable to participate in our rights offerings and may experience dilution.
The depositary has agreed to pay ADSs holders 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, ADSs holders may receive less, on a per share basis with respect to their ADSs than they would if they owned the number of shares or other deposited securities directly. ADSs holders will receive these distributions in proportion to the number of common stock the 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 ADSs holders will not receive such distribution.
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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 our 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.
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, 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. ADSs holders may have more difficulty in asserting rights as a shareholder than they would as a shareholder of a corporation organized in the United States.
ADS holders may not have the same voting rights as the holders of our common stock and must act through the depositary to exercise their rights.
Except as described 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 have the right to instruct the depositary how to vote the amount of common shares represented by their ADSs. However, ADSs holders 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 ADSs holders a shareholder meeting notice which contains, among other things, a statement as to the manner in which 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 ADSs holders 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. We make all reasonable efforts to cause the depositary to extend voting rights to ADSs holders in a timely manner, but holders may not receive the voting materials in time to ensure that they 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, ADSs holders may not be able to exercise the right to vote and may lack recourse if the ADSs are not voted as requested. In addition, ADSs holders are not be able to call a shareholders’ meeting.
ADS holders may be subject to limitations on transfer of your ADSs.
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 our 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.
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This means that we will be exempt from certain of Nasdaq’s corporate governance rules, including those that require:
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a majority of our Board of Directors to be comprised of “independent directors” as defined by Nasdaq rules; and |
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our compensation committee and nominating committee to be comprised solely of “independent directors.” |
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 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.
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.
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, our 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 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 have elected 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 our ADSs less attractive because we rely on these exemptions. If some investors find our ADSs less attractive as a result, there may be a less active trading market for our ADSs and the trading price of our 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 March 31.
ITEM 4. INFORMATION ON THE COMPANY
4.A. HISTORY AND DEVELOPMENT OF THE COMPANY
We were formed in 2003 and commenced our operations under the name Universal Business Incubators, Inc. in Japan under the Commercial Code of Japan, then changed our name to UBIC, Inc. in August 2004 and effective July 1, 2016, changed our name to FRONTEO, Inc. At the time of incorporation, we initially focused on importing and selling computer forensics tools within Japan, including to domestic clients such as the National Police Agency and Japan’s
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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 FRONTEO, 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 our wholly-owned subsidiary UBIC North America, Inc. (subsequently merged with our other wholly-owned subsidiary EvD, Inc. to form FRONTEO USA, Inc. effective in July 2016) 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 had an 80% ownership interest. In 2011, we opened our office in Reston, VA, and also established UBIC Korea, Inc. (now named FRONTEO Korea, Inc.) and UBIC Taiwan, Inc. (now known as FRONTEO 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 had a 100% ownership interest. In 2012, we opened our office in New York City. In July 2013, we relocated our Reston office to Washington D.C. In May 2013, we completed the initial public offering of our American Depositary Shares on the Nasdaq Global Market under the symbol “UBIC” (since July 1, 2016, “FTEO”). In June 2014, we opened our office in Los Angeles, California. In addition, in August 2014, we acquired all shares of TechLaw Solutions, Inc. (“TLS”) (now renamed FRONTEO Government Services, Inc.) which is based mainly in the commonwealth of Virginia, in the United States. In February 2015, we acquired the outstanding capital stock of UBIC Risk Consulting, Inc. not owned by us to make it our wholly owned subsidiary, and subsequently absorbed it through an absorption-type merger. In April 2015, we established UBIC Medical, Inc. (now named FRONTEO Healthcare, Inc.), as our subsidiary in Japan, in which we have a 100% ownership interest. In July 2015, we established a review center in Washington, D.C. in the U.S., and subsequently acquired of the outstanding shares of EvD, Inc. (now named FRONTEO USA, Inc.) with headquarters in San Francisco and have two branches in New York and Phoenix in the U.S., and also has an operation center in Manila in the Philippines. In September 2015, we established Rappa, Inc. (now named FRONTEO Communications, Inc.), as our subsidiary in Japan, in which we have a 100% ownership interest, while, in October 2015, we merged UBIC Patent Partners, Inc. into us through an absorption-type merger. In February 2016, we opened a new flagship Managed Review center in New York in the U.S. On July 1, 2016, EvD, Inc. merged with UBIC North America, Inc., while at the same time we and all of our 100% owned subsidiaries changed their names to FRONTEO, our new worldwide brand.
We apply our capital expenditures chiefly to develop new eDiscovery technologies, to improve the delivery of our services and to expand our global operating capability, as well as AI technologies to promote further expansion of our business in each market we serve. Our capital expenditures were ¥521.0 million, ¥689.3 million and ¥1,125.8 million in fiscal years ended March 31, 2014, 2015 and 2016, respectively .
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 (3) 5463-6344. Our corporate website is http://www.fronteo.com/global/. Our agent for the service of process in the U.S. is FRONTEO USA, Inc., 3 Lagoon Drive, Suite 180, Redwood City, CA 94065, telephone number: +1 (650) 654-7664.
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. While we serve these clients from our offices in Japan, the United States, South Korea, Taiwan and Hong Kong, we have strongly been expanding our resources by mergers and acquisitions in the biggest market, the U.S. Thus our revenue in the U.S. has increased and now constitutes 60% of consolidated group revenue. On the other hand, based on our expertise in the legal business, we have developed our own Artificial Intelligence (AI) engine, KIBIT. It does not only add a competitive edge in our existing business, but also has become a driver in new businesses that we started recently, such as digital marketing, healthcare and business intelligence.
In our eDiscovery solutions business, we assist clients involved in cross-border litigation, administrative proceedings and internal investigations, including those related to antitrust investigations, intellectual property (IP)
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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. 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 Intelligence Cloud formerly known as 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 1,500 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 1,000 corporate investigations in Japan, South Korea, China and Singapore.
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 that can be subject to investigation include texts, email, calendar files, images, databases, video, audio files, web sites, spreadsheets and computer programs. In addition, the form of data storages are not limited to servers, hard disks or other data storage media but can take various forms including smartphones and tablets, and they are diversifying with the advancement of technology. The volume of such electronically stored information (ESI) is continuing to grow at an extraordinary rate. According to an IDC Digital Universe Survey, the total amount of digital information created, captured or replicated worldwide every year is increasing at a rate of 40% annually, and is expected to reach 44 trillion gigabytes by 2020. While email remains the primary application driving eDiscovery growth, it is expected that there will be dramatic growth being driven by explosively increasing data due to social networking and cloud computing.
According to the latest analysis about eDiscovery market by Transparency Market Research (TMR), the global eDiscovery market, in both services and software, is forecast to grow from US$5,563.7 million to US$21,089.1 million by 2022 at a CAGR of 16.2% from 2014 to 2022. TMR’s analysis includes several reasons for the projected growth, including increases in ESI volume, the continued domination of ESI in legal proceedings thanks to reliance on electronic communications and records, regulatory requirements for archiving electronic information for compliance purposes, and the emergence of social media as a source of evidence in civil litigation through its inclusion in eDiscovery.
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. In addition, in recent days, a growing number of corporations introduce mobile terminals and SNS into their operations. 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.
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The various stages of the eDiscovery process are referred to as the electronic discovery reference model (EDRM) and are set forth below:
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Identification Management—Refers to the storage infrastructure and organization of Electronically Stored Information (ESI) prior to litigation or investigation. |
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Identification—Uncovering all potential sources of data that may be relevant to a case. |
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Preservation—The securing of data against spoilage — the inadvertent or intentional deletion or destruction. |
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Collection—Gathering of data from all of the locations in which it has been stored, in the least disruptive method available. A broad or targeted collection process can be implemented. A 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. |
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Processing—Homogenizing, filtering and analyzing all of the collected data into a database structure. The goal of this step is to filter and reduce the amount of data that must move forward to a more costly review step. Data minimization strategies such as de-duplication, file type filtering and known system file removal are typically applied during this process. Additional organization methodologies, such as the clustering of documents with similar concepts or similar content, can be applied during this process to facilitate the early analysis of the data by the subject matter experts and ESI consultants. ESI providers strive to add value during this phase of the process through advanced analytics and high capacity indexing. The end result of the indexing and processing step is a database environment set up for the attorney teams to perform their review. Relevant data is tagged and made available for further review or production. |
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Review—Data is evaluated by attorneys or other legal professionals for relevance, privilege and specific issues. The vendor’s project management team provides workflow support and data organization to assist with an efficient review. Project managers work closely with the attorney team to provide metrics on the status, productivity and accuracy of the review. |
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Analysis—Data is classified depending on key themes, patterns, topics, and people. |
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Production—The delivery of data in appropriate forms to the necessary parties. |
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Presentation—Data is presented before an audience (at deposition, trial, hearing, etc.). |
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.
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 eDiscovery services and solutions tends to be much less extensive. This means that contracts for eDiscovery services tend to be time and subject specific. The fact that we have sold our eDiscovery 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 since we believe that they will need our services to review the Asian-language materials. We believe that this will expand our revenue base.
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The overall market for eDiscovery and forensic services has benefited from the growing volume of ESI and 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. Our financial performance has also benefited from this trend, due mainly to lawsuits filed and investigations commenced in the United States against not only U.S. companies but also Japanese and other Asian multinational corporations. Recently, we have also benefited more from engagements for large and midsize international government investigations. However, our market share and brand awareness in the United States have not sufficiently improved even after the acquisitions of TLS and EvD. 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 building out our sales and marketing presence and increasing our brand awareness and capabilities in the United States.
While the eDiscovery market is forecast to grow at a CAGR of 16.2% from 2014 to 2022, the highest growth is expected in the off-premise, or “cloud,” software market and its CAGR is forecast at 23.3%. We provides a one-stop, cloud-based eDiscovery solution with AI-based software that saves cost and time significantly. As our solutions demonstrate their value in the market place, we anticipate that they will provide a basis for our expanded and durable growth of total revenues and improved operating income and net income in the future.
Challenges in 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 or more for 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.
In recent years, the amount of data created by companies which may be deemed ESI has increased greatly and is expected to continue to even further grow in the future. According to an IDC Digital Universe Survey, the total amount of digital information created, captured or replicated worldwide every year is increasing at a rate of 40% annually, and is expected to reach 44 trillion gigabytes by 2020. 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.
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Our 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:
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Accurate Processing of Asian-language Characters. Our proprietary text mining technology allows us to accurately handle Asian-language (as well as English) characters, encoding schemes and 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. |
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Speed, Efficiency and Cost Effectiveness. Our solutions and services enable a process that permits the automated identification of relevant text and documents in Asian languages, including Japanese, Chinese and Korean, thus reducing the number of steps in the review process and thereby providing significant savings in time and cost of document review; because our solutions more accurately identify Asian characters and documents responsive to the search, we reduce the number of documents that need to be manually handled and reviewed by persons, and we are less likely to fail to identify an important document. These benefits are further amplified by the comprehensive and integrated nature of our solutions. |
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Technology Assisted Review. Technology assisted review (TAR) is the use of software tools, increasingly comprised of artificial intelligence-based predictive coding, to perform mechanical document review. TAR reduces the amount of manual review of data produced in the collection process, which is traditionally the most expensive phase of the eDiscovery process. We believe that our TAR is very effective in Asian-language document review and our product development efforts incorporate all of our experience and know-how with TAR into our main platform, Lit i View. Our TAR applies our proprietary algorithms that progressively predict and refine the automated work flow involved in TAR by accurately increasing the review weight of relevant 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. |
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Seamless Interaction with Numerous Software Applications. Since our inception in 2003, our solutions and services have been continuously expanded, tested, improved and refined as a result of our extensive experience and technical knowledge and skills accumulated in analyzing electronic data of Asian companies. The design of our solutions enables us to work seamlessly with more than 20 software applications, including Microsoft Outlook and several unique email applications to produce documents without garbled text and also capture responsive documents that could be missed by many of our competitors. This is particularly important to existing and prospective Asian clients given the larger range of email and office software programs and protocols in general use in Asia than in the United States. |
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Multiple Convenient Data Processing Sites. We believe we are the only eDiscovery provider with a data processing center in each of Japan, South Korea, Philippines and Taiwan. Thus, we can conduct the entire process of eDiscovery in Asia and avoid sending non-responsive electronic data to law firms or other parties in the United States, thereby potentially making such confidential and proprietary data subject to the jurisdiction of U.S. courts. Additionally, we believe the proximity of our data processing sites to many of our clients enables us to secure and process information more quickly than our competitors. |
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Flexible and Scalable Cloud Hosting Service. While we have been able to host our clients’ data in a traditional cloud environment, we have introduced our Intelligence Cloud solution that features a flexible and scalable cloud data hosting capability, and employs a secure, Internet-enabled storage solution that enables authorized users across the globe to access data and collaborate in connection with an investigation or litigation. Our Intelligence Cloud hosting technology helps to address the problem of rising complexity and cost from the growth and dispersion of electronic data volumes and the extended duration of many investigations and litigations. Our Intelligence 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. |
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Big Data Compatible Cloud Infrastructure. Once a review project is complete, the documents and data collected for the case are usually tossed aside. When a similar case arises at a later time, the same data has to be re-collected, re-processed and re-reviewed. FRONTEO ’s Lit i View BIG DATA CASE MANAGER (BDCM) treats data as “information capital” with the goal that it can be re-used in similar future matters to greatly reduce costs and time associated with e-discovery. The BDCM can consolidate huge volumes of electronic data from past cases into one unified system. This enables parties to effectively access information from past cases for current and future litigation matters. |
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Expanded Electronic Data Forensic Investigations. We have adapted the technology that we developed in the area of electronic data forensic investigations, including the provision of solutions and services to government, police and military agencies, to create powerful eDiscovery solutions and services; in turn, the expertise we have developed in our eDiscovery business, such as how to construct electronic searches that yield the most accurate and complete results, have enabled us to further develop our consulting and audit services and to improve our electronic data forensic investigations, tools and training. |
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The Solution Operated with FRONTEO Artificial Intelligence (AI) System. We developed KIBIT, a powerful AI system to automatically analyze documents and offer deeper insight into ESI. Lit i View EMAIL AUDITOR was released in 2014 as the first solution powered by KIBIT. It is provided to clients both by on-premise and through the cloud. It automatically audits large volumes of emails based on its extensive experience in assisting clients with their compliance issues. |
Business Strategy
As a leading eDiscovery company in Asia, we have developed our own eDiscovery software, Lit i View which supports Asian languages (Japanese, Chinese and Korean), and provides one-stop solutions with the highest levels of technology and know-how to analyze and process ESI for litigation.
With an established foundation for the eDiscovery legal business, we now believe that we are entering a new period of growth. Meanwhile, we are also in the process of launching new business lines using artificial intelligence. We are dedicated to continued growth on a Company-wide basis to achieve our goals with a focus on the following:
Expansion of Existing Legal Business in the United States
We will continue to seek to expand and optimize our existing United States legal business operations after the acquisition of TLS and EvD. The Company will seek to expand its U.S.-based business by streamlining operations of its U.S. subsidiaries and acquiring large-scale projects from Asian and North American companies.
We will also aim to boost sales in the review services using “Lit i View,” eDiscovery support software equipped with predictive coding, powered by the Company’s unique artificial intelligence technology.
Development of the Information Analysis Business Leveraging Artificial Intelligence Technology
We have been expanding the provision of solutions in the fields of healthcare, digital marketing, and business intelligence, utilizing the Company’s unique artificial intelligence technology, “KIBIT.” In each of these three fields, we will continue to advance the development of our products and our suite of services, including continuous analysis support and intensified consulting. We will also proactively recruit talented personnel to help complement our technological developments.
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Enhancements to implement business strategies
We will robustly control regional business activities through our headquarters in Japan, while providing more authority to country managers to strengthen the autonomy and unique qualities of each region. The centralized administrative framework along with the development and implementation of unique business strategies in each country will build global management systems suited for improving and expanding our business operations.
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.
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, servers, mobile devices, website and various types of storage, (ii) search and identify relevant documents and evidence with TAR driven by KIBIT technology, our artificial intelligence (AI) technology, (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. All of our solutions and services can be provided seamlessly in the same secured environment, providing a one-stop shop for our customers.
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.
Lit i View, our online eDiscovery software powered by KIBIT, makes it possible for corporate customers and outside counsel to more efficiently review electronic evidence. Lit i View 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 Lit i View, 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 at many places in the world to ensure the safety and confidentiality of critical data.
We believe that we are the only eDiscovery service provider with data processing centers not only in the United States but also in Japan, South Korea, Philippines 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 other parties abroad and potentially making such confidential and proprietary data subject to the jurisdiction of the courts in other countries.
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 ESI.
Lit i View Solution
Our 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 FRONTEO, 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
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effectively by handling Chinese, Japanese and Korean as well as 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 enables us to reduce the number of documents that need to be handled and reviewed by persons, and reduces the chances 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 KIBIT 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 users 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 our reviewers, clients, and the clients’ law firm or legal team. We believe this facilitates faster and more accurate analysis of the produced data.
Intelligence Cloud Solution
Our customizable Intelligence Cloud solution addresses the problem of rising costs associated with the growth and dispersion of ESI 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. 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. As a result, we are more 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 Intelligence 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.
For large multinational clients, we have started offering Lit i View BIG DATA CASE MANAGER (BDCM), which enables those clients conducting multiple, simultaneous matters to significantly reduce time and costs by allowing them to efficiently manage multiple data environments and eliminate redundancy. This has become a key factor that enhances our superiority over our competitors .
Legal / Compliance Professional Services
Lit i View Software
We developed KIBIT, a powerful AI system to automatically analyze documents and offer deeper insight into ESI. Lit i View EMAIL AUDITOR was released in 2014 as the first solution powered by KIBIT. It is provided to clients both by on-premise and through the cloud and automatically audits large volumes of emails based on its extensive experience in assisting clients with their compliance issues. In the fiscal year ended on March 31, 2016, we also began to
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provide and sell an intellectual property strategy support system for analyzing a large patent-related information “Lit i View PATENT EXPLORER,” as well as a business data analysis system “Lit i View AI Sukedachi Samurai to global financial institutions and manufacturers.
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.
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, Europe and Asia. Since our inception, approximately 600 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 approximately 10% of total revenue during one or more of the last three fiscal years include Samsung Electronics Co., Ltd., 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 Lit i
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View BIG DATA CASE MANAGER solution may provide an opportunity to develop ongoing and more stable client relationships.
Sales and Marketing
Our sales executives market 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 brand awareness and sales and marketing efforts generally.
Sales by Market and Segment
Our operating segments are defined as components of our company that engage in business activities from which we earn revenues and incur expenses and for which separate financial information is available that is evaluated regularly by the chief operation 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 FRONTEO and its domestic subsidiaries for domestic (Japanese) clients, by FRONTEO USA, Inc. (formerly UBIC North America, Inc. and EvD, Inc.) and FRONTEO Government Services, Inc. (formerly TechLaw Solutions, Inc.), our U.S. based wholly-owned subsidiaries, for clients based in the U.S. or represented by U.S. -based attorneys who contracted FRONTEO USA, Inc. and FRONTEO Government Services, Inc., and by other foreign subsidiaries for foreign clients other than those who contracted FRONTEO USA, Inc. and FRONTEO Government Services, Inc. Our operations in Japan, the U.S. and Other (which includes South Korea and Taiwan) have been identified as our three operating segments. 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 which include revenues, operating income or loss and segment assets to assess segment performance and allocate resources to segments.
Each segment recognizes revenue for which the segment has a direct contractual relationships with its clients. Most of our clients are either corporate clients in Asia or U.S.- based law firms representing corporate clients in Asia. If our services are contracted between a law firm in the U.S. and FRONTEO USA, Inc. or FRONTEO Government Services, Inc., revenue is recorded by the U.S. segment, although the end corporate client may be located in other areas than the U.S.
Our reportable segments are the same as our operating segments.
For information related to our total revenues by geographic market for each of the last three financial years, see “Item 5.A — Operating Results — Results of Operations — Operating Segments.”
Seasonality
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 eDiscovery 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.
Research and Development
Our development efforts in AI technology were initially focused on the niche, big-data field of cross-border litigation support, but with the creation of our KIBIT, we now have the capability to analyze various types of big data.
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Our research is focused on addressing two key questions: how to identify information that’s important to our clients from big data, particularly information about people’s intentions and behavior, and how to effectively use the advanced knowledge of experts to analyze vast volumes of information. We are currently working to dramatically improve the quality of human intellectual activity through research that taps the knowledge of experts.
Our basic R&D policies and priorities are as follows:
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To sustain a fast R&D cycle where the knowledge acquired from our research is leveraged to develop products, and then incorporating user feedback to evaluate the product and drive further R&D efforts in order to take the lead in this industry and to benefit society. |
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To use Behavior Informatics to identify human traits and errors in software data containing bugs— a combination of behavioral science and information science. |
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To drive further advances in our KIBIT to help users gain insights from big data analysis and to assist users in stripping away large volumes of information to pinpoint the data they really need. |
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To energize and improve societies by contributing to safe and stable communities and a more equitable global business environment. |
Intellectual Property
We are strong believers in intellectual property, attaching the same level of importance to our intellectual property strategy as the Company does to its technology and business strategies. We believe that a strong intellectual property strategy is vital for achieving our goal of growth and expansion through the data analysis business. We look at ways of developing new types of technology, while simultaneously searching for ways to make those new technologies commercially viable. The goal of our intellectual property strategy is to find ways of protecting and strengthening those technologies, which means securing intellectual property rights so as to be able to apply their versatility to future products. Our intellectual property strategy has focused on protecting our proprietary technologies and on maintaining our competitive advantage over our rivals by building close relationships between our research centers, our clients and the market to accurately identify future business opportunities. Mirroring our business growth, our intellectual assets have expanded rapidly — quantitatively and qualitatively — and we have secured intellectual property rights not only in Japan, but also in the U.S. and other countries.
As of June 1, 2016, in Japan, we have applied for patents for 59 inventions and have been granted patents on 44 of them and in the United States, we have applied for patents for 30 inventions and have been granted patents on five of them. Moreover, many trademarks have been registered in many countries across the world, including “Lit i View,” “Predictive Coding” and “KIBIT” as brands representing the uniqueness of the above technologies.
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 Guidance Software Inc., HP Autonomy Corporation Plc, IBM Corporation, Symantec Corporation, EMC Corporation, Epiq System Inc., Catalyst, Access Data Group, FTI Consulting, Inc., Xerox Corporation, Navigant Consulting, Inc., Hewlett-Packard Development Company. L. P., Integreon, Inc., Merrill Corporation, Transperfect, KPMG, Kroll, Inc., and Consolio.
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.
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.
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We believe the principal competitive factors in the eDiscovery and electronic data forensics solutions and services markets include:
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performance, scalability, functionality, flexibility and reliability of the solution offerings; |
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ease of integration with existing applications and infrastructure; |
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price and the cost efficiency of deployment and ongoing support; |
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quality of professional services, as well as client support and maintenance; and |
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name recognition and reputation. |
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, supported by our artificial intelligence technologies based on tacit knowledge, 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 powered by our AI 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
The eDiscovery industry, 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.
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.
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As of July 1, 2016, FRONTEO has three Japanese subsidiaries and three overseas subsidiaries. The following table sets forth for each of our consolidated subsidiaries, the proportion of ownership and voting interest, the country of incorporation and the principal activities of the subsidiary.
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ownership and |
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voting interest |
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Principal Activities |
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Payment Card Forensics, Inc. (1) |
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Japan |
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Credit card forensic investigation business |
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FRONTEO Healthcare, Inc. (2) |
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Japan |
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Analysis of large volume medical data |
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FRONTEO Communications, Inc. (3) |
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Japan |
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Digital curation service |
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FRONTEO USA, Inc. (4) |
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U.S. |
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eDiscovery product marketing and sales |
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FRONTEO Korea, Inc. (5) |
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South Korea |
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eDiscovery product marketing and sales |
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FRONTEO Taiwan, Inc. (6) |
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Taiwan |
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eDiscovery product marketing and sales |
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The FRONTEO group consists of FRONTEO, Inc. and six consolidated subsidiaries. The group companies are engaged in large volume data analysis business activities as represented by eDiscovery services.
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Payment Card Forensics, Inc. was established in 2010 as a subsidiary of FRONTEO, Inc. (formerly known as UBIC, Inc.) and International Certificate Authority of Management System Co., Ltd. which owns 40%. |
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FRONTEO Healthcare, Inc. (formerly known as UBIC Medical, Inc.) was established in April, 2015 as a wholly-owned subsidiary of FRONTEO, Inc. |
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FRONTEO Communications, Inc. (formerly known as Rappa, Inc.) was established in September, 2015 as a wholly-owned subsidiary of FRONTEO, Inc. |
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EvD, Inc. (now FRONTEO USA, Inc.) was acquired by FRONTEO, Inc. in July, 2015, and absorbed UBIC North America, Inc. in 2016, which was established in 2007 as a wholly-owned subsidiary of FRONTEO, Inc. |
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FRONTEO Korea, Inc. (formerly UBIC Korea, Inc.) was established in 2011 as a wholly-owned subsidiary of FRONTEO, Inc. |
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FRONTEO Taiwan, Inc. (formerly UBIC Taiwan, Inc.) was established in 2011 as a wholly-owned subsidiary of FRONTEO, Inc. |
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FRONTEO Government Services, Inc. (formerly TechLaw Solutions, Inc.) was acquired by FRONTEO, Inc. in 2014, and is currently a wholly-owned subsidiary of FRONTEO USA, Inc. |
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FRONTEO, Inc. acquired the outstanding capital stock of UBIC Risk Consulting, Inc. which were not owned by us and 20% of all to make it our wholly-owned subsidiary in February 2015, and subsequently absorbed it through an absorption-type merger in March 2015. |
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UBIC Patent Partners, Inc. was our wholly-owned subsidiary and was merged with and into FRONTEO, Inc. in October 2015. |
4.D. PROPERTY, PLANT AND EQUIPMENT
Property and equipment and capitalized computer software costs recorded on our consolidated balance sheet as of March 31, 2015 and March 31, 2016 consisted of the following:
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Assets held under capital lease, principally office equipment |
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Capitalized computer software costs |
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Our fixed assets consist mainly of (i) internally developed software used to offer services in legal technology market, (ii) leasehold improvements at leased facilities in Japan and other countries and (iii) computer equipment, such as servers, routers and other network equipment. Other than the above assets recorded on our consolidated balance sheet, we use operating lease assets such as office premises and data centers. There are no known environmental issues that may affect our utilization of our property and equipment.
Our corporate headquarters are located in Tokyo, Japan, where we lease approximately 35,580 square feet of commercial space under a lease that expires in September 2017. We use this space for our principal sales, research and development, client service and administrative purposes.
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, Los Angeles, San Francisco, California; Washington D.C.; Chantilly, Virginia; Golden, Colorado; Phoenix, Arizona; and internationally in London, United Kingdom; Seoul, South Korea; Taipei, Taiwan; Manila, Philippines; and Hong Kong, China.
We believe that our facilities are generally suitable to meet our needs for the foreseeable future and could be replaced with no difficulty at similar cost; however, we will continue to seek additional space as needed to satisfy our growth.
ITEM 4A. UNRESOLVED STAFF COMMENTS
None.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
You should read the following discussion of our financial condition and results of operations together with Item 3.A., Selected Financial Data of the annual report on Form 20-F and our consolidated financial statements and the notes to those financial statements beginning on page F-1 of this annual report. These consolidated financial statements have been prepared in accordance with U.S. GAAP. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of factors including but not limited to those in Item 3.D., Risk Factors of this annual report on Form 20-F.
Overview
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, a variety of other legal support services such as compliance support, or “Legal and Compliance Services (LCPS)”, and software products driven by our AI technology. 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 client’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 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.
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The overall market for eDiscovery and forensic services has benefited from the growing volume of ESI and a continuing 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 our financial performance has also benefited from these trends, but primarily 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.
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 technology assisted review (TAR)). In the future, it is our intent to focus on our TAR solutions where we provide a more direct and differentiated value proposition to our customers. Our TAR solutions are powered by KIBIT, our AI technology, and designed to perform reviews of large volumes of data and are 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 marketplace, they will provide a basis for our expanded and durable growth of total revenues and improved operating income and net income in the future.
Currently, our advantages in the eDiscovery market reside in our technical competencies for dealing with Asian languages and the strong local support capabilities within Asia. As such, many customers are Asian enterprises, including Japanese, South Korean and Taiwanese companies. In past, we were disadvantaged in the vendor selection process because the discovery vendor selection by Asian enterprises is under significant influence of U.S. law firms, despite our distinct competitive advantages based on quality, cost and data security.
Our countermeasures against this situation include the enhancement of sales and marketing personnel in the U.S., joint marketing with U.S. law firms, and increasing our brand awareness in the U.S. market through public relations activities. Our acquisitions of TLS and EvD resulted in a significant, positive impact in the growth and development of our business and revenue. Since TLS joined us in the latter half of 2014, a number of orders from non-Asian clients or their U.S. law firms have been received, and sales in the U.S. have been increasingly a major part of our revenue after the acquisition of EvD in July, 2015.
Of the various components of eDiscovery including evidence identification and retention, data collection and processing, analysis and hosting, hosting has shown steady growth. While historically the review of gathered documents and data was performed manually, significant increases in the volume of information maintained by enterprises has made the manual review procedures difficult, inefficient and costly. Recent technology called predictive coding has been developed, and as the overall industry transforms from manual review processes to technology-assisted review through the use of predictive coding and other technology, many eDiscovery vendors have been downsizing or eliminating their manual review services. We have successfully developed advanced predictive coding technology, powered by our AI technology and tacit knowledge derived from human experiences and reasoning. We believe that our predictive coding technology will enable us to manage the transition away from manual review services better than our competitors.
Currency Fluctuations
We are affected to some extent by fluctuations in foreign currency exchange rates, particularly in the value of the Japanese yen against the U.S. dollar. Our consolidated financial statements, which are presented in Japanese yen, are affected by foreign currency exchange fluctuations through both translation risk and transaction risk.
Translation risk is the risk that our consolidated financial statements for a particular period or for a particular date will be affected by changes in the prevailing exchange rates of the currencies in which our subsidiaries prepare their financial statements against the Japanese yen. Even though the fluctuations of currencies against the Japanese yen can be substantial and, therefore, significantly impact comparisons with prior accounting periods and among the geographic markets in the U.S, South Korea and Taiwan, the translation effect is a reporting consideration and does not affect our underlying results of operations.
Transaction risk is the risk that the currency structure of our costs and liabilities will deviate from the currency structure of sales proceeds and assets. A portion of our receivables is denominated in the U.S. dollar, as such, the effects of foreign currency exchange rate fluctuations against the Japanese yen can be significant.
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Generally, the weakening of the Japanese yen against other foreign currencies, particularly the U.S. dollar, has a positive effect on our revenue, operating income and net income. Likewise the strengthening of the Japanese yen against the U.S. dollar has the opposite effect. For the year ended March 31, 2014, a weak yen trend progressed after April, and a low of approximately ¥105 to the U.S. dollar was recorded at the end of the third quarter, but lifted to approximately ¥103 at the end of the year. For the year ended March 31, 2015, the Japanese yen gradually increased against the U.S. dollar to approximately ¥101 by July, but then generally weakened and, after recording an annual low of ¥122 to the U.S. dollar for the fiscal year, ended at approximately ¥120 to the U.S. dollar on March 31, 2015. For the year ended March 31, 2016, the Japanese yen gradually depreciated against the U.S. dollar to approximately ¥ 126 by June, but then generally strengthened and, after recording an annual high of ¥111 to the U.S. dollar for the fiscal year, ended at approximately ¥ 113 to the U.S. dollar on March 31, 2016.
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 ¥4,192.6 million, ¥6,304.9 million and ¥10,556.2 million in the fiscal years ended March 31, 2014, 2015 and 2016, respectively.
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Reimbursed direct costs |
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Loss on derivatives |
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Income (loss) before income taxes |
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Income taxes (benefit) |
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Net income (loss) |
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Less: Net income attributable to noncontrolling interests |
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* |
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* |
|
Net income (loss) attributable to FRONTEO, Inc. shareholders |
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¥ |
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|
(10.7)% |
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¥ |
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¥ |
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(4.0)% |
|
* Less than 0.1%
Fiscal Year Ended March 31, 2016 Compared to Fiscal Year Ended March 31, 2015
Total revenue
Total revenue for the year ended March 31, 2016, increased by ¥4,251.3 million, or 67.4%, to ¥10,556.2 million compared with the year ended March 31, 2015 of ¥6,304.9 million. The increase in total revenue was due primarily to the acquisition of EvD, the successful acquisition of new large accounts in the United States, and the strengthened pipeline contributed by the acquisitions of TLS and EvD. Revenue from the U.S. segment for outside customers for the year ended March 31, 2016 increased by ¥3,439.2 million, or by 123.5% to ¥6,223.7 million representing 59.0% of consolidated revenue.
30
Revenue from our eDiscovery services increased by ¥4,186.5 million, or 71.4%, to ¥10,046.1 million in the year ended March 31, 2016 from ¥5,859.6 million in the comparable period in the previous year. The increase in revenue from our eDiscovery business was due to the acquisition of EvD, as described above.
Revenue from legal and compliance professional services (LCPS) and other services were ¥510.1 million, which increased 14.5% from the previous fiscal year. The increase was due primarily to increase in revenue from forensic tool and software. The increase was attributable to “Lit i View XAMINER”, “Lit i View EMAIL AUDITOR” and other software driven by KIBIT, our AI technology.
Cost of revenue
Cost of revenue for the year ended March 31, 2016 increased by ¥2,606.0 million, or 83.0%, to ¥5,746.1 million from ¥3,140.1 million for the year ended March 31, 2015. The majority of this increase was primarily due to labor and facility cost caused by our acquisition of TLS and EvD, and related facility consolidation in the U.S. Total of those cost for the year ended March 31, 2016 increased by ¥ 1,474.6 million to ¥ 1,826.6 million. The increase was also attributable to outside labor cost and software license fees to run our review business which increased by ¥ 438.1 million to ¥ 672.1 million.
Selling, general and administrative expenses
Selling, general and administrative expenses increased for the year ended March 31, 2016 by ¥1,989.4 million, or 69.5%, to ¥4,853.5 million from ¥2,864.1 million for the year ended March 31, 2015. This was due primarily to labor and facility costs for TLS and EvD of ¥ 1,145.7 million, increased sales and marketing spending to launch new business in healthcare and digital marketing area, EvD acquisition-related costs of ¥254.9 million, earn-out expenses of ¥198.7 million, and the amortization cost of intangible assets of ¥151.8 million that was expensed during the year ended March 31, 2016.
Operating income (loss)
We incurred an operating loss of ¥70.3 million for the year ended March 31, 2016, which is ¥345.7 million lower than our operating income of ¥275.4 million for the year ended March 31, 2015. This decrease was primarily due to the increase of sales and marketing spending for new business in healthcare and digital marketing area, and EvD acquisition-related expenses and earn-out expenses.
Other
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· |
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Interest income for the year ended March 31, 2016 decreased by 1.6% to ¥1.7 million, from ¥1.7 million for the year ended March 31, 2015, due primarily to decrease in cash and cash equivalent balances during the year. |
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· |
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Interest expense for the year ended March 31, 2016 increased by 94.5% to ¥54.8 million, from ¥28.2 million for the year ended March 31, 2015, due primarily to an increase in debt balances for the acquisition of EvD during the year. |
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· |
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We recorded loss on derivatives for the year ended March 31, 2016 of ¥258.2 million which was resulted primarily from the cross currency interest rate swaps. |
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· |
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Foreign currency exchange gain for the year ended March 31, 2016 was ¥161.7 million, compared to ¥200.4 million for the year ended March 31, 2015. The negative impact due to an increase in U.S dollar denominated long term bank borrowings and the continuing strong Japanese yen. |
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· |
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Dividend income for the year ended March 31, 2016 increased by 25.0% to ¥11.3 million, compared to ¥9.0 million for the year ended March 31, 2015. |
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· |
|
Other loss for the year ended March 31, 2016 increased by ¥20.1 million, compared to ¥0.1 million for the year ended March 31, 2015, due primarily to an increase in loss on disposal of fixed assets related to the facility consolidation in the U.S. |
31
Income taxes (benefit)
Income tax for the year ended March 31, 2016 was ¥183.1 million, compared with an income tax of ¥238.1 million for the year ended March 31, 2015. Our effective tax rates for the years ended March 31, 2015 and 2016 were 52.0% and negative 80.1%, respectively. The increase in our effective tax rate was primarily due to an increase in acquisition-related costs and earn-out expenses which were not deductible for tax purpose and an increase in valuation allowance against deferred tax assets related to net operating loss carryforwards of certain subsidiaries.
Net income (loss) attributable to FRONTEO, Inc. shareholders
Net loss attributable to FRONTEO, Inc. shareholders for the year ended March 31, 2016 was ¥417.6 million compared with net income in the prior year of ¥218.5 million, due to an increases in the selling, general and administrative expenses to launch healthcare and digital marketing business, and costs and earn-out expenses related to acquisition of EvD and loss on derivatives.
Fiscal Year Ended March 31, 2015 Compared to Fiscal Year Ended March 31, 2014
Total revenue
Total revenue for the year ended March 31, 2015, increased by ¥2,112.4 million, or 50.4%, to ¥6,304.9 million compared with the year ended March 31, 2014 of ¥4,192.6 million. The increase in total revenue was due primarily to the acquisition of large cases, including cases related to cartel matters, the successful acquisition of new large accounts in the United States, and the strengthened pipeline contributed by the acquisition of TLS.
Revenue from our eDiscovery services increased by ¥2,089.7 million, or 55.4%, to ¥5,859.6 million in the year ended March 31, 2015 from ¥3,769.9 million in the comparable period in the previous year. The increase in revenue from our eDiscovery business was due to the acquisition of large cases, including cases related to cartel matters, the successful acquisition of new large accounts in the United States, and the acquisition of TLS, as described above.
Revenue from legal and compliance professional services (LCPS) and other services were ¥445.3 million, which increased 5.4% from the previous fiscal year. The increase was due primarily to increase in revenue from investigations to which technology cultivated through the eDiscovery business applied offset by decrease in revenue from forensic tool and training. The increase was attributable to “Lit i View XAMINER” which is the forensic software we released last fiscal year and to newly launched “Lit i View EMAIL AUDITOR” driven by FRONTEO AI technology.
Cost of revenue
Cost of revenue for the year ended March 31, 2015 increased by ¥825.7 million, or 35.7%, to ¥3,140.1 million from ¥2,314.3 million for the year ended March 31, 2014. The majority of this increase was primarily due to our acquisition of TLS, which has facilities including data centers as well as skilled process engineers. The increase was also attributable to our continuing development of Lit i View and other capitalized software products which resulted in amortization expense, to support further growth of the Company.
Selling, general and administrative expenses
Selling, general and administrative expenses increased for the year ended March 31, 2015 by ¥366.8 million, or 14.7%, to ¥2,864.1 million from ¥2,497.3 million for the year ended March 31, 2014. This was due primarily to our acquisition of TLS, and the inclusion of its sales and marketing resources, and the acquisition-related expenses of ¥87.8 million which was expensed during the year ended March 31, 2015.
Operating income (loss)
We had operating income of ¥275.4 million for the year ended March 31, 2015, which is ¥913.4 million higher than our operating loss of ¥638.0 million for the year ended March 31, 2014. This increase was primarily due to the increase in our total revenue.
32
Other
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· |
|
In terest income for the year ended March 31, 2015 increased by 145.9% to ¥1.7 million, from ¥0.7 million for the year ended March 31, 2014, due primarily to increase in cash and cash equivalent balances during the ye ar. |
|
· |
|
I nterest expense for the year ended March 31, 2015 decreased by 8.7% to ¥28.2 million, from ¥30.9 million for the year ended March 31, 2014, due primarily to a decrease in average debt balances during the year . |
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· |
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Foreign currency exchange gains for the year ended March 31, 2015 increased to ¥200.4 million, from ¥120.2 million for the year ended March 31, 2014 due to an increase in foreign currency denominated receivable balances as a result of an increase in U.S. dollar denominated revenue and the continuation of the Japanese yen depreciation. |
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· |
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Dividend income for the year ended March 31, 2015 increased by 33.3% to ¥9.0 million, compared to ¥6.8 million for the year ended March 31, 2014 . |
Income taxes (benefit)
Income tax for the year ended March 31, 2015 was ¥238.1 million, compared with an income tax benefit of ¥132.4 million for the year ended March 31, 2014, due primarily to the operating income achieved for the year ended March 31, 2015 as described above. Our effective tax rates for the years ended March 31, 2014 and 2015 were 19.2% and 51.9%, respectively.
Net income (loss) attributable to FRONTEO, Inc. shareholders
Net income attributable to FRONTEO, Inc. shareholders for the year ended March 31, 2015 was ¥218.5 million compared with the net loss in the prior year of ¥448.4 million, due to an increase in revenue of ¥2,112.4 million, or 50.4%, and increases in the cost of revenue of ¥825.7 million, or 35.7%, and selling, general and administrative expenses of ¥366.8 million, or 14.7%, compared to the year ended March 31, 2014.
Operating Segments
Our operating segments are defined as components of our company that engage in business activities from which we 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. We provide a variety of eDiscovery and forensic services which are provided by FRONTEO, Inc. and its domestic subsidiaries for domestic (Japanese) clients, by FRONTEO USA, Inc. (“FRONTEO USA”), our U.S.- based wholly-owned subsidiary, for clients based in the U.S. or represented by U.S. - based attorneys who contracted FRONTEO USA, and by other foreign subsidiaries for foreign clients other than those who contracted FRONTEO USA. Our operations in Japan, the U.S. and Other (which includes South Korea and Taiwan) have been identified as our three operating segments. 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 those segments.
Revenue is recognized by each segment for which the segment has a direct contractual relationship with its client. Most of our clients are either corporate clients in Asia or U.S.-based law firms representing corporate clients in Asia. If our services are contracted between a law firm in the U.S. and FRONTEO USA revenue is recorded by the U.S. segment, although the end corporate client may be located in areas other than the U.S.
33
Our reportable segments are the same as our operating segments. Segment information for the years ended March 31, 2014, 2015 and 2016 is as follows:
Revenue:
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Thousands of Yen |
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|||||||
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2014 |
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2015 |
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2016 |
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|||
Japan |
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|
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Outside customers |
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
Intersegment *(1) |
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Total |
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U.S. |
|
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Outside customers |
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Intersegment *(1) |
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Total |
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Other |
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Outside customers |
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Intersegment *(1) |
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Total |
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Eliminations |
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Total revenue after eliminations |
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Adjustments *(2) |
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|
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|
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|
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Total consolidated revenue |
|
¥ |
|
|
¥ |
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|
¥ |
|
|
*(1) Intersegment transaction prices and other conditions are determined based on market prices and total costs of transactions.
*(2) These amounts primarily represent the net impact of adjustments arising from the differences in timing of the revenue recognition under U.S. GAAP and Japanese GAAP.
34
Segment Performance Measure:
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Thousands of Yen |
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|||||||
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2014 |
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2015 |
|
2016 |
|
|||
Segment profit (loss) |
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Japan |
|
¥ |
|
|
¥ |
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|
¥ |
|
|
U.S. |
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Other |
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Total segment profit after eliminations |
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Adjustments *(3) |
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Total consolidated operating income (loss) |
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Unallocated amounts: |
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Interest income |
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Interest expense |
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|
|
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|
Loss on derivatives |
|
|
— |
|
|
— |
|
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|
|
Foreign currency exchange gains |
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|
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Dividend income |
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Other-net |
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|
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|
Total consolidated income (loss) before income taxes |
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
*(3) Adjustments primarily relate to differences between U.S. GAAP and Japanese GAAP for revenue recognition, amortization of goodwill, remeasurement of earn-out and vacation allowance expenses for employees.
Segment Assets:
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Thousands of Yen |
|
||||
|
|
2015 |
|
2016 |
|
||
Segment assets |
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|
Japan |
|
¥ |
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|
¥ |
|
|
U.S. |
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|
|
|
|
|
Other *(4) |
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|
Eliminations |
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|
Total segment assets after eliminations |
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Adjustments *(5) |
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|
|
|
Total consolidated assets |
|
¥ |
|
|
¥ |
|
|
*(4) The Company recognized an impairment loss on long-lived assets of ¥5,144 thousand for the year ended March 31, 2016 consisted of property, plant and equipment owned by a subsidiary in Taiwan.
*(5) Adjustments primarily relate to differences between U.S. GAAP and Japanese GAAP for revenue recognition, depreciation and amortization and deferred tax assets.
35
Capital expenditures on long-lived assets:
Capital expenditures relate to property and equipment, capitalized computer software costs and other intangible assets on an accrual basis, other than those disclosed in Note 2.
Other Significant Items:
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|
Thousands of Yen |
|
|||||||
|
|
2014 |
|
2015 |
|
2016 |
|
|||
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
Japan |
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
U.S. |
|
|
|
|
|
|
|
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|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization |
|
|
|
|
|
|
|
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|
|
|
|
|
|
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|
|
|
|
|
|
Adjustments *(6) |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated depreciation and amortization |
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
*(6) Adjustments primarily relate to differences between U.S. GAAP and Japanese GAAP for depreciation and amortization.
Entity-Wide Information:
For the year ended March 31, 2014, revenue from Samsung Electronics Co., Ltd. and TMI Associates amounted to ¥1,639,791 thousand and ¥622,355 thousand, respectively, representing approximately 39.1% and 14.8%, respectively, of the total revenue. For the year ended March 31, 2015, revenue from Samsung Electronics Co., Ltd. and TMI Associates amounted to ¥1,969,335 thousand and ¥641,074 thousand, respectively, representing approximately 31.4% and 10.2%, respectively, of the total revenue. For the year ended March 31, 2016, revenue from Samsung Electronics Co., Ltd. and TMI Associates amounted to ¥1,657,074 thousand and ¥1,022,656 thousand, respectively, representing approximately 15.6% and 9.7%, respectively, of the total revenue. These customers are attributable to Japan except ¥1,639,791 thousand, ¥1,969,335thousand and ¥1,657, 0 74 thousand for Samsung Electronics, Co., Ltd. for the year ended March 31, 2014, 2015 and 2016, respectively, which are reported in the U.S. and Other.
The information concerning revenue by service categories for the years ended March 31, 2014, 2015 and 2016, is presented below:
|
|
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|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
|||||||
|
|
2014 |
|
2015 |
|
2016 |
|
|||
eDiscovery |
|
|
|
|
|
|
|
|
|
|
Review |
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
Other |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
Investigation |
|
|
|
|
|
|
|
|
|
|
Sales of forensic tools |
|
|
|
|
|
|
|
|
|
|
Forensic training |
|
|
|
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|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
36
Long-lived assets held in Japan, the U.S., and Other as of March 31, 2016 were ¥425,484 thousand, ¥631,531 thousand and ¥63,705 thousand, respectively. Long-lived assets include property and equipment.
Application of Critical Accounting Policies and Estimates
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 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 this annual report. For all of these policies, we caution that future events rarely develop exactly as forecast, and even the best estimates may require adjustment.
Revenue recognition
We have agreements with customers pursuant to which it performs various services. A majority of our revenue relates to fees earned for the month-to-month performance of eDiscovery and forensic services. Such services include data collection, data processing, data hosting, data review, and document production 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. 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.
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 customers because FRONTEO 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 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.
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 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.
Useful lives of property and equipment
Property and equipment, net, recorded on our balance sheet was ¥1,120.7 million as of March 31, 2016, representing 8.7% 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.
37
Our depreciation expenses for property and equipment for the years ended March 31, 2014, 2015 and 2016 were ¥197.4 million, ¥280.8 million and ¥341.0 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, 2016, were as follows:
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.
Useful lives of capitalized computer software
Capitalized computer software costs, net recorded on our balance sheet were ¥919.5 million as of March 31, 2016, representing 7.1% 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, 2014, 2015 and 2016 was ¥237.9 million, ¥302.5 million and ¥374.5 million, respectively.
Business Combinations
We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired, including in process research and development (“IPR&D”), if any, based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. We engage independent third-party appraisal firms to assist us in determining the fair values of assets acquired and liabilities assumed. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets.
Critical estimates in valuing certain intangible assets include but are not limited to future expected cash flows and discount rates. Management's estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.
Goodwill and Intangible Assets
Goodwill is not amortized and is tested annually for impairment of each fiscal year and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value below its carrying amount. In assessing goodwill for impairment, we have the option to first perform a qualitative assessment to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Reporting units are our operating segments or one level below the operating segments. If we determine that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, no additional tests to assess goodwill for impairment are required to be performed. If we conclude otherwise or elect not to perform the qualitative assessment, then it is required to perform the first step of a two-step impairment review process. In the fiscal year ended March 31, 2015, we elected to perform the aforementioned
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qualitative assessment of goodwill as of the measurement date of January 1. During the year ended March 31, 2016, we performed qualitative assessment of goodwill and identified no impairment indicators. If the carrying amount of a reporting unit exceeds its fair value, we then perform the second step of the goodwill impairment test to measure the amount of impairment loss, if any. Intangible assets with finite useful lives are amortized on a straight-line basis over the estimated useful life.
Intangible assets primarily consist of customer relationships, licenses and trademarks. We have estimated the weighted average amortization periods for the customer relationship, licenses and trademarks to be 15 years, 3 years and 3 years, respectively.
Valuation of investments
We have investments in securities, and the valuation of 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, 2016, we had available-for-sale securities of ¥639.9 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:
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the duration of the decline in value of the security and the severity of the decline, |
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our intent and ability to hold the equity security until forecasted recovery. |
No losses on impairment of investments in certain marketable equity securities were recognized for the years ended March 31, 2014, 2015 and 2016.
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 an increase of ¥2.3 million, an increase of ¥89.7 million and an increase of ¥78.2 million for the years ended March 31, 2014, 2015 and 2016, respectively.
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.
The Black-Scholes valuation model is used 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.
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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. |
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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. |
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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. |
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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. |
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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. |
We recorded ¥70.8 million, ¥27.2 million and ¥78.4 million as share-based compensation expense for the years ended March 31, 2014, 2015 and 2016, respectively.
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, 2014, 2015 and 2016.
Although we believe that the amount of net deferred tax assets will be realized, this could change in the near term if estimates of future taxable income are revised and the effect on our consolidated financial position and results of operations could be significant.
Reconciliations between the amount of reported income taxes (benefit) and the amount of income taxes (benefit) computed using the normal statutory tax rate for the years ended March 31, 2014, 2015 and 2016 are as follows:
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Amount computed using normal Japanese statutory tax rate |
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Increase (decrease) in taxes resulting from: |
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Change in valuation allowance |
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Share-based compensation expense |
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Earnings of foreign subsidiaries taxed at different rates from the statutory rate in Japan |
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Officers’ remuneration not deductible for tax purpose |
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Research and development tax credit |
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Acquisition costs and earn-out liability adjustment |
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Others-net |
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Income tax expense (benefit) as reported |
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Change in valuation allowance for the year ended March 31, 2014 includes an increase of ¥19,860 thousand in the valuation allowance of the foreign subsidiaries in Korea and Taiwan and a domestic subsidiary as of March 31, 2014 for the deferred tax assets arising from their operating loss carryforwards incurred during the year ended March 31, 2014 and an increase of ¥16,262 thousand in the valuation allowance for the deferred tax assets arising from research and development tax credits.
Change in valuation allowance for the year ended March 31, 2015 includes an increase of ¥20,536 thousand in the valuation allowance of the foreign subsidiaries in Taiwan and a domestic subsidiary as of March 31, 2015 for the deferred tax assets arising from their operating loss carryforwards incurred during the year ended March 31, 2015 and an increase of ¥28,395 thousand in the valuation allowance for the deferred tax assets arising from acquisition-related costs,
40
and a decrease of ¥16,262 thousand in the valuation allowance for the deferred tax assets arising from research and development tax credits.
Change in valuation allowance for the year ended March 31, 2016 includes an increase of ¥61,670 thousand in the valuation allowance of foreign subsidiaries in Taiwan and U.S. and domestic subsidiaries as of March 31, 2016 for the deferred tax assets arising from their operating loss carryforwards incurred during the year ended March 31, 2016 and a decrease of ¥17,666 thousand in the valuation allowance for the deferred tax assets of the foreign subsidiary in Korea.
Amendments to the Japanese tax regulations were promulgated on March 29, 2016. As a result of those amendments, the corporate income tax rate decreased from 23.9 % to 23.4% for the two years from April 1, 2016 to March 31, 2018 and from 23.4% to 23.2% from the fiscal year beginning April 2018. As a result, the combined Japanese statutory rate will be reduced from 32.34 % to 30.90 % for the two years from April 1, 2016 to March 31, 2018 and from 32.34 % to 30.60 % from the fiscal year beginning April 1, 2018. The impact of the tax law changes was a net deferred income taxes benefit of ¥18,074 thousand for the year ended March 31, 2016.
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 March 31.
Recent Accounting Pronouncements
See note 1 to our consolidated financial statements included elsewhere in this annual report.
5.B. LIQUIDITY AND CAPITAL RESOURCES
Capital Resources
Our principal sources of liquidity are cash and cash equivalents, cash flows from operating activities, and issuances of short-term and long-term bank borrowings and equity securities. As of March 31, 2016, we had cash and cash equivalents of ¥1,796.0 million.
Short-term and long-term bank borrowing
Short-term and long-term bank borrowings provide us with important sources of funds for an acquisition of EvD, maintaining an adequate level of working capital, acquisition of equipment to provide services and development of software.
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As of March 31, 2016, our short-term bank borrowings stood at ¥52.0 million, while our long-term bank borrowings amounted to ¥4,341.0 million with a weighted average interest rate of 1.2%. Their maturities are at various dates through 2020.
Under a ¥700.0 million five-year syndicated loan arrangement entered into with a consortium of banks on September 27, 2011, we borrowed ¥350,000 thousand when the arrangement was signed and an additional ¥350,000 thousand in May 2012. As of March 31, 2015 and 2016, the balance of such borrowings was ¥262.5 million and ¥87.5 million, respectively. The unused balance under this arrangement was ¥612.5 million as of March 31, 2016. There are restrictive covenants related to the five-year syndicated loan 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 (“Japanese GAAP”). 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 March 31, 2016.
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 that originally matured on December 27, 2013. During the fiscal year ended March, 31, 2016, we renewed the agreement to extend the maturity to December 26, 2016. Any further extension of the maturity date of the credit facility is subject to the consortium’s approval. There were no borrowings under this credit facility as of March 31, 2015 and 2016. The unused balance under this agreement was ¥1,000 million as of March 31, 2016. There are restrictive covenants related to the revolving credit facility of ¥1,000 million as of March 31, 2015, including requirements to maintain a minimum level of net assets and ordinary income in our stand-alone and consolidated financial statements, measured under Japanese GAAP. 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 ¥2,655.3 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 fiscal years ending on or after March 31, 2016. We are in compliance with these restrictive covenants at March 31, 2016.
Bank of Tokyo Mitsubishi UFJ has been our main financing bank since our founding. Bank of Tokyo Mitsubishi UFJ arranged our syndicated loan and short-term revolving credit facility.
On July 28, 2015, we entered into a short-term loan agreements with the Bank of Tokyo-Mitsubishi UFJ, Ltd. (“MUFJ”) and Sumitomo Mitsui Banking Corporation (“SMBC”) of a principal of ¥1,800 million for a each institution, to meet the financial requirements arising from the acquisition of EvD. The maturity date was January 29, 2016 for MUFJ and October 28, 2015 for SMBC. We refinanced twice for the borrowing from SMBC in the same institute which had the maturity dates of November 27, 2015 and 24 December 24, 2015 respectively. The borrowing rates for MUFJ and SMBC were TIBOR plus 0.2% per annum and the institution’s procurement interest rate in short-run market plus 0.3% per annum, respectively. After the acquisition of EvD, our management decided to implement a refinancing with long-term loans as part of a loan program through the Japan Bank for International Cooperation (“JBIC”) that supports the investments of Japanese companies in foreign countries. On November 30, 2015, we entered into a long-term loan agreements (the “JBIC-loan”) with MUFJ and SMBC in an aggregated principal of $20,440 thousand and ¥1,706 million from each institution utilizing the program of JBIC, and one of two tranches was executed on December 24, 2015. The borrowing is provided in twice, and the borrowing rates vary by currency and tranche. For MUFJ the borrowing rates are LIBOR plus 0.5% per annum for U.S.dollar-dominated borrowings and TIBOR plus 0.2% per annum for Japanese yen-dominated borrowings. For SMBC, LIBOR plus 0.3% per annum for US dollar-dominated borrowings and 0.5% or TIBOR plus 0.3% per annum for Japanese yen-dominated borrowings. The maturity date for both loans is December 24, 2020. As of March 31, 2016, the balance of such borrowings was ¥3,565.3 million. There are restrictive covenants related to the JBIC-loan including requirements to maintain a minimum level of net assets and ordinary income in our stand-alone and consolidated financial statements, measured under Japanese GAAP. We are required to maintain net assets at a level which is at least 75% of (a) net assets as of March 31, 2015; ¥5,032,824 thousand on a stand-alone basis and ¥5,220,772 thousand on a consolidated basis under Japanese GAAP or (b) net assets at the end of the previous year, whichever is higher. The ordinary income covenant states that FRONTEO and the Company shall not record ordinary losses in any two consecutive fiscal years. We are in compliance with these restrictive covenants at March 31, 2016.
On May 16, 2013, we listed on the Nasdaq Global Market in the U.S. (NASDAQ). On May 21, 2013, we made a U.S. initial public offering of 11,000,000 ADSs, representing 2,200,000 shares of common stock at an initial
42
offering price of $0.838 per ADS. On June 7, 2013, we sold an additional 1,400,000 ADSs representing 280,000 shares of common stock, pursuant to the partial exercise of the over-allotment option granted to the underwriters in connection with the U.S. initial public offering. The remaining over-allotment option expired on July 9, 2013. Total gross proceeds and proceeds net of costs from the initial public offering and the exercise of the over-allotment option amounted to ¥984.7 million and ¥614.5 million, respectively, which net amount was credited to equity. Tax effects associated with costs from the initial public offering of ¥149.7 million was credited to equity. In addition, we entered into a six-year syndicated loan arrangement with a consortium of Japanese banks in an aggregate principal amount of ¥1,000 million on July 26, 2016.
Cash flows from operating activities
We generated (used) ¥(2.4) million, ¥1,014.0 million and ¥616.2 million from operating activities for the years ended March 31, 2014, 2015 and 2016, respectively. The following table sets out information on our cash flows for the years indicated:
Cash flows from operating activities
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Net cash provided by (used in) operating activities |
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Net cash provided by (used in) financing activities |
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Effect of foreign currency exchange rate changes on cash and cash equivalents |
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Net increase (decrease) in cash and cash equivalents |
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Cash and cash equivalents, beginning of year |
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Year ended March 31, 2016 as compared to the year ended March 31, 2015
Net cash used in operating activities was ¥616.2 million in the year ended March 31, 2016, a decrease of ¥397.7 million compared to net cash used in operating activities of ¥1,014.0 million in the year ended March 31, 2015. This was primarily due to a decrease in net income. Net income in the year ended March 31, 2016 decreased by ¥632.1 million due to our acquisition of EVD, and the inclusion of its sales and marketing resources, and the acquisition-related expenses and earn-out liability-related expenses of ¥438 million that was expensed during the year ended March 31, 2016. We paid ¥515.6 million of income taxes during the year ended March 31, 2016 and ¥36.7 million during the year ended March 31, 2015. Our days of sales outstanding in trade accounts receivable as of March 31, 2015 and 2016 were approximately 81 days and 82 days, respectively.
Net cash used in investing activities increased to ¥4,710.4 million in the year ended March 31, 2016 from ¥1,413.2 million in the year ended March 31, 2015, an increase of ¥3,927.2 million. This increase was primarily attributable to our acquisition of EvD, the cost of which was amounted to ¥3,433.1 million. Our investment in the acquisition of property and equipment, mainly leasehold improvements of our new review center in New York, additional data storage servers to support the expansion of our business amounted to ¥673.7 million for the year ended March 31, 2016, an increase of ¥471.2 million from the year ended March 31, 2015 of ¥202.5 million. Further, our investments in development and upgrade of internal-use software to improve increased by ¥19.5 million during the year ended March 31, 2016 to ¥382.0 million, compared to ¥362.5 million in the year ended March 31, 2015.
Net cash provided by financing activities in the year ended March 31, 2016 was ¥3,212.9 million, an increase of ¥1,528.6 million from ¥1,684.3 million in the year ended March 31, 2015. Net cash provided by financing activities in the year ended March 31, 2016 primarily consisted of the proceeds from the ¥3,800.0 million of short-term borrowing and the proceeds from ¥3,761.5 million of long-term bank borrowing, while net cash provided by financing activities in the year ended March 31, 2015 primarily consisted of the proceeds from the ¥1,157.1 million issuance of our common stock. On the other hand, net cash used by financing activities in the year ended March 31, 2016 primarily consisted of the ¥ 3,784.0 million of repayment of short-term debt.
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Year ended March 31, 2015 as compared to the year ended March 31, 2014
Net cash provided by operating activities was ¥1,014.0 million in the year ended March 31, 2015, an increase of ¥1,016.4 million compared to net cash used in operating activities of ¥2.4 million in the year ended March 31, 2014. This was primarily due to an increase in net income. Net income in the year ended March 31, 2015 increased by ¥663.8 million compared to the previous year, primarily due to an increase in revenue growth in the U. S. segment and acquisition of large scale cases in Japan and the United States. We paid ¥36.7 million of income taxes during the year ended March 31, 2015 and ¥171 million during the year ended March 31, 2014. Our days of sales outstanding in trade accounts receivable as of March 31, 2014 and 2015 were approximately 85 days and 81 days, respectively.
Net cash used in investing activities increased to ¥1,413.2 million in the year ended March 31, 2015 from ¥630.2 million in the year ended March 31, 2014, an increase of ¥783.0 million. This increase was primarily attributable to our acquisition of T, the cost of which was amounted to ¥891.6 million. Our investment in the acquisition of property and equipment, mainly additional data storage servers to support the expansion of our business amounted to ¥202.5 million for the year ended March 31, 2015, an increase of ¥27.4 million from the year ended March 31, 2014 of ¥175.2 million. Further, our investments in development and upgrade of internal-use software to improve increased by ¥30.0 million during the year ended March 31, 2015 to ¥362.5 million, compared to ¥332.6 million in the year ended March 31, 2014.
Net cash provided by financing activities in the year ended March 31, 2015 was ¥1,684.3 million, an increase of ¥921.4 million from ¥762.9 million in the year ended March 31, 2014. Net cash provided by financing activities in the year ended March 31, 2015 primarily consisted of the proceeds from the ¥1,157.1 million issuance of our common stock pursuant to a one-time share issuance program that was terminated in December 2015, and also including stock option exercises and the proceeds from ¥800.0 million of long-term bank borrowing, while net cash provided by financing activities in the year ended March 31, 2014 primarily consisted of the proceeds from the ¥984.7 million issuance of our common stock.
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.
Our capital expenditures relate primarily to the facility improvement including but not limited to our offices and review centers, the amounts paid for development of internal-use software for providing eDiscovery services and purchases of property and equipment for the development and expansion of data server storage. For the years ended March 31, 2014, 2015 and 2016, our capital expenditures were as follows:
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Our capital expenditures for the year ended March 31, 2014 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 lower than the amounts for the year ended March 31, 2013. Our capital expenditures for the year ended March 31, 2015 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 were higher than the amounts for the year ended March 31, 2013. Our capital expenditures for the year ended March 31, 2016 relate to the leasehold improvement in a new review center in New York, the acquisition of data storage servers, the development and upgrade of our Lit i View software and the acquisition of third-party software for internal use, which were higher than the amounts for the year ended March 31, 2015. Higher capital expenditure is expected in future years as we grow our business and expand our network of offices in the United States, South Korea and Taiwan.
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Short-term and long-term bank borrowing
As of March 31, 2016, our short-term bank borrowings stood at ¥52.0 million with a weighted average interest rate of 0.5%. As of March 31, 2016, our long-term bank borrowings amounted to ¥4,335.4 million with a weighted average interest rate of 1.2%. Their maturities are at various dates through 2020.
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.
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. FRONTEO USA leases office premises under non-cancellable operating lease arrangements. Lease expenses related to operating leases for the years ended March 31, 2014, 2015 and 2016, were approximately ¥357.9 million, ¥380.0 million and ¥823.8 million, respectively. Higher levels of working capital needs are expected in future years as we grow our business and expand our network of offices in the United States, South Korea and Taiwan.
As noted in multiple parts of this annual report, 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 from the initial public offering and the exercise of the over-allotment option. 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 March 31, 2015 and 2016:
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5.C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES
Research and Development and Product Enhancement
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.
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Our development efforts in AI technology were initially focused on the niche, big-data field of cross-border litigation support, but with the creation of our KIBIT, we now have the capability to analyze various types of big data. Our research is focused on addressing two key questions: how to identify information that’s important to our clients from big data, particularly information about people’s intentions and behavior, and how to effectively use the advanced knowledge of experts to analyze vast volumes of information. We are currently working to dramatically improve the quality of human intellectual activity through research that taps the knowledge of experts.
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
Our intellectual property strategy has focused on protecting our proprietary technologies and on maintaining our competitive advantage over our rivals by building close relationships between our research centers, our clients and the market to accurately identify future business opportunities. Mirroring our business growth, our intellectual assets have expanded rapidly — quantitatively and qualitatively — and we have secured intellectual property rights not only in Japan, but also in the U.S. and other countries.
As of June 1, 2016 in Japan, we have applied for patents for 59 inventions and have been granted patents on 44 of them, and in the United States, we have applied for patents for 30 inventions and have been granted patents on five of them. FRONTEO, Lit i View, Lit i View EMAIL AUDITOR, Lit i View ANALYZER, Lit i View XAMINER, Lit i View BIG DATA CASE MANAGER, KIBIT, and Predictive Coding are registered trademarks or trademarks of FRONTEO, Inc. in the United States and/or other countries.
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 Factors — 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.”
For a discussion of the trends that affect FRONTEO’s business and financial condition and results of operations, see “Information on the Company—Business Overview,” “Operating and Financial Review and Prospects — Operating Results” and “Analysis of Operating Results” and “Liquidity and Capital Resources.”
5.E. 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 ‘‘Tabular Disclosure of Contractual Obligations’’ and also in Note 7 to our consolidated financial statements, beginning on page F-1.
46
5.F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
The following table sets forth a summary of our contractual obligations and commitments as of March 31, 2016.
Payments due by period (thousands of yen)
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|
|
|
|
|
|
|
|
|
|
|
|
Contractual Obligation |
|
2017 |
|
2018 |
|
2019 |
|
2020 |
|
2021 |
|
Thereafter |
|
Total |
|
|||||||
Long-term bank borrowings |
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
¥ |
— |
|
¥ |
|
|
Capital lease obligations |
|
|
|
|
|
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
Operating lease obligations |
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
— |
|
|
|
|
Retirement and severance benefits |
|
|
|
|
|
|
|
|
|
|
|
|
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Total |
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¥ |
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|
¥ |
|
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
All information that is not historical in nature disclosed under “Item 5. Operating and Financial Review and Prospects—Off-Balance Sheet Arrangements” and “—Tabular Disclosure of Contractual Obligations” is deemed to be a forward-looking statement. See “Cautionary Statement with Respect to Forward-Looking Statements.”
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
6.A. DIRECTORS AND SENIOR MANAGEMENT
Directors, statutory auditors and executive officers of the Company as of June 30, 2016, and their respective business experience are listed below. None of the persons listed below was selected as director, statutory auditor or executive officer pursuant to an arrangement or understanding with our major shareholders, customers, suppliers or others. There are no family relationships between any of the persons listed below.
Directors and Executive Officers
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|
|
|
|
|
|||||||
Directors and Executive Officers |
|
Born |
|
Position/Title |
|
|||||||
Masahiro Morimoto |
|
1966 |
|
Chief Executive Officer and Chairman of the Board |
|
|||||||
Naritomo Ikeue |
|
1972 |
|
Executive Vice-President, Chief Operating Officer and Director |
|
|||||||
Hideki Takeda |
|
1973 |
|
Director, CTO, Director, Behavior Informatics Laboratories |
|
|||||||
Makoto Funahashi |
|
1945 |
|
Director |
|
|||||||
Hirooki Kirisawa |
|
1966 |
|
Director |
|
|||||||
Shuichi Seo |
|
1959 |
|
CFO and General Manager of CEO Office |
|
|||||||
Yoshikatsu Shirai |
|
1965 |
|
Corporate Officer, CCTO, Director, Client Technology Department |
|
|||||||
Syusaku Nozaki |
|
1975 |
|
Corporate Officer, General Manager, Regional Operations Japan |
|
|||||||
Yongmin Cho |
|
1973 |
|
Corporate Officer |
|
|||||||
Andrew F. Jimenez |
|
1970 |
|
Corporate Officer |
|
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, FRONTEO USA (formerly known as 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., a wholly-owned subsidiary of Applied Materials, Inc. (Nasdaq: AMAT), a provider of manufacturing equipment, services and software in the semiconductor equipment industry 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.
47
Naritomo Ikeue: Mr. Naritomo Ikeue has served as our Executive Vice President, Chief Operating Officer since November 2007 and has been a director of FRONTEO since December, 2003. In addition, Mr. Ikeue has served as President of our principal subsidiary, FRONTEO USA (formerly known as 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 FRONTEO, 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.
Hideki Takeda : Mr. Takeda has served as our Corporate Officer and Chief Technology Officer since January 2013 and has been instrumental in development of Lit i View. He has been in the leadership role as a director of technology for the behavior informatics laboratories since July 2014. Mr. Takeda joined FRONTEO in July 2009 as assistant manager of software development department and has worked in key roles for FRONTEO. Prior to joining FRONTEO, he has held various management positions at software development companies for 13 years.
Makoto Funahashi: Mr. Funahashi has served as our independent director since June 2008. Prior to joining FRONTEO, Inc. (formerly known as 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 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.
Shuichi Seo: Mr. Seo is CFO and General Manager of CEO Office with FRONTEO, Inc. since he joined the company in June 2016. He started his career as a research analyst with Nomura Research Institute in 1984. He then moved on to a number of different positions that began with credit analysis of Asian semi-sovereign issuers, research of Australian equities (Sydney), the formulation of investment strategies at Nomura Asset Management Co. and to research of European equities (London). Following Nomura, he moved on to Mitsubishi Asset Brains Co. to conduct fund research in 2002. He then furthered his research with Nikko Asset Management from 2005. He was then involved in corporate finance advisory services at IBS Securities from 2007. After IBS, he joined T&D Asset Management Co. in 2011 and was engaged in research & planning and institutional business development. He is a CFA charter holder and served as President of CFA Society Japan from 2013 to 2015. He has BA in Law from the University of Tokyo and MBA from the New York University.
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 FRONTEO, Mr. Shirai served in various management positions at Applied Materials Japan, Inc., including as an engineering manager and a product manager from 1996 through December 2007.
Syusaku Nozaki: Mr. Nozaki joined FRONTEO in August 2004. Mr. Nozaki has served as our Corporate Officer since December 2008 and has been a director of FRONTEO, Inc. since December 2008. As our director of Legal Tech Operation, Mr. Nozaki is responsible for managing e-discovery operation group. In addition, Mr. Nozaki has served as President of our subsidiary, Payment Card Forensics, Inc. since August 2010. Prior to joining FRONTEO, Mr. Nozaki served in various capacities at Applied Materials Japan, Inc. including as a service engineer from April 1997 to July 2004.
Yongmin Cho: Mr. Cho has served as our Corporate Officer since December 2013 and as Korea CEO since May 2012. He joined FRONTEO (formerly known as UBIC) in October 2011 as a sales manager. Prior to joining FRONTEO, he worked for Samsung Electronics for 6 years as a new business development manager and also worked
48
for Diapad Communications, a successful Silicon Valley start-up company as a marketing and IR manager during the early stage of the company.
Andrew F. Jimenez: Mr. Jimenez has begun to serve as President and Chief Executive Officer of FRONTEO USA in July 2016, after being named as Chief Executive Officer of all FRONTEO’s U.S. subsidiaries, formerly UBIC North America, Inc., TechLaw Solutions, Inc. and EvD, Inc. and its subsidiaries in September 2015. Mr. Jimenez was President and Chief Executive Officer of EvD, Inc. prior to FRONTEO’s acquisition of the company he founded in 1997. Mr. Jimenez has over 16 years of litigation support experience, including management and coordination of eDiscovery projects for intellectual property, anti-trust, SEC investigation and numerous Joint Defense matters. He is responsible for the operations, sales, marketing, business development and administration of the U.S. organization. Over the last decade, Mr. Jimenez has been successful in strategically partnering with Tier 1 eDiscovery software platforms. He employs a hands-on approach as he continues his consultant role regarding the various software tools, processes, and procedures required to manage electronic data and discovery project management services.
Masami Yaguchi: Mr. Yaguchi, who had served as our Chief Financial Officer and Chief Administrative Officer since December 2013, left the Company on June 30, 2016 to pursue other interests.
Statutory Auditors
|
|
|
|
|
|
Name |
|
Born |
|
Title |
|
Kunihiro Sudo |
|
1945 |
|
Standing Statutory Auditor |
|
Takaharu Yasumoto |
|
1954 |
|
Statutory Auditor |
|
Kei Okubo |
|
1976 |
|
Statutory Auditor |
|
Kunihiro Sudo: Mr. Sudo has served as one of our corporate 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 corporate 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.
Kei Okubo: Mr. Okubo has begun to serve as one of our corporate statutory auditors since June 2016. Mr. Okubo joined Nagashima Ohno & Tsunematsu as a registered attorney in 2000 and has been a partner there since 2008.
Executive Compensation
For the fiscal year ended March 31, 2016, the aggregate cash compensation that we paid to our directors and statutory auditors was ¥ 13 0.0 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 directors or statutory auditors.
The compensation for directors and statutory auditors was authorized by resolutions of the general meeting of shareholders on June 22, 2012 and to the extent compensation is within the authorized range, further authorization is not required.
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. 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
49
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 terminates 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 2017. 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.
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:
|
· |
|
convening shareholders’ annual general meetings and reporting on its work and our operations to shareholders at such meetings; |
|
· |
|
declaring interim dividends and distributions; |
|
· |
|
appointing and determining the term of office of officers; and |
|
· |
|
borrowing money and mortgaging our property. |
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.
50
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.
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. 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:
|
· |
|
reviews and approves the total compensation package for our five most senior executives; |
|
· |
|
reviews and determines the compensation of each director’s compensation within the upper limit approved by our shareholders; and |
|
· |
|
periodically reviews and approves any long-term incentive compensation or equity plans, programs or similar arrangements, annual bonuses, employee pension and welfare benefit plans. |
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:
|
· |
|
identifies and nominates qualified candidates as directors for election by the shareholders to the Board of Directors; |
|
· |
|
reviews the current composition of the Board of Directors with regard to characteristics such as independence, age, skills, experience and availability of service to us; |
|
· |
|
considers significant developments in the law and practice of corporate governance as well as our compliance with applicable laws and regulations on all matters of corporate governance and determines any remedial actions to be taken; and |
51
|
· |
|
monitors compliance with our code of business conduct and ethics, including reviewing the adequacy and effectiveness of our procedures to ensure proper compliance. |
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 FRONTEO, 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, 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.
Set forth below is a table listing the total number of full-time employees and a breakdown of persons employed by geographic location as of March 31, 2014, 2015 and 2016. Virtually all employees serve in the legal technology service line. The increase in our number of employees as of March 31, 2014 was primarily due to expanding our operations to support current and future business growth. The increase in our number of employees as of March 31, 2015 and 2016 was primarily due to acquisitions.
|
|
|
|
|
|
|
|
|
|
(Number of employees) |
|
||||
|
|
2014 |
|
2015 |
|
2016 |
|
For the fiscal year ended March 31, |
|
|
|
|
|
|
|
Full-Time Employees |
|
|
|
|
|
|
|
By Geographic Location: |
|
|
|
|
|
|
|
Japan |
|
|
|
|
|
|
|
U.S. |
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
We consider our labor relations to be good, and to our knowledge, none of our employees is a member of any union. During the fiscal years ended March 31, 2014, 2015 and 2016, we had an annual average of four, three and three temporary employees, respectively.
The following table sets forth certain information regarding the beneficial ownership of our common stock as of June 30, 2016 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 annual report, for each of our directors, statutory auditors and executive officers. Any director, statutory auditor or executive officer who is not listed on the following table does not beneficially own any of our common stock. 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
52
security. Percentage of shares owned is based upon 35, 869,360 shares of our common stock outstanding as of June 30, 2016.
|
|
|
|
|
|
|
|
Number of Shares Owned (2) |
|
||
Name and Address of Beneficial Owners (1) |
|
Number |
|
Percent |
|
Executive Officers and Directors |
|
|
|
|
|
Masahiro Morimoto |
|
|
|
|
|
Naritomo Ikeue |
|
|
|
|
|
Hideki Takeda |
|
|
|
* |
|
Makoto Funahashi |
|
|
|
* |
|
Hirooki Kirisawa |
|
|
|
* |
|
Shuichi Seo |
|
— |
|
— |
|
Yoshikatsu Shirai |
|
— |
|
— |
|
Syusaku Nozaki |
|
|
|
* |
|
Yongmin Cho |
|
— |
|
— |
|
Andrew F. Jimenez |
|
— |
|
— |
|
All directors and executive officers as a group (6 persons) |
|
|
|
|
|
* Less than 1%
|
(1) |
|
Unless otherwise noted, the address for each of the named beneficial owners is: Meisan Takahama Building 7th Floor, 2-12-23 Kounan, Minato-ku, Tokyo 108-0075, Japan. |
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.
As of March 31, 2016, there were no exercisable stock options owned by the Company’s directors, statutory auditors and executive officers.
Stock Option Plan
At the general ordinary meetings of shareholders or meeting of Board of Directors held in April 2011, June 2012, June 2013, June 2014 and June 2015, the shareholders or the Board Directors of the Company approved stock option plans for selected directors, statutory auditors, executive officers and employees of the Company. The following table shows selected information related to these stock options, as of June 30, 2016.
April 2011
Date of grant: April 28, 2011
Number of shares to be issued/ delivered: 640,000
Exercise price per share: ¥221
Beginning of exercise period: April 29, 2014
End of exercise period: April 28, 2017
Number of directors, statutory auditors and executive officers: 2
Number of other employees: 2
June 2012
Date of grant: June 21, 2012
Number of shares to be issued/ delivered: 99,000
Exercise price per share: ¥810
Beginning of exercise period: June 22, 2015
End of exercise period: June 21, 2018
Number of directors, statutory auditors and executive officers: 6
Number of other employees: 5
53
June 2013
Date of grant: May 31, 2013
Number of shares to be issued/ delivered: 199,000
Exercise price per share: ¥469
Beginning of exercise period: June 1, 2016
End of exercise period: May 31, 2019
Number of directors, statutory auditors and executive officers: 5
Number of other employees: 20
June 2013
Date of grant: May 16, 2013
Number of shares to be issued/ delivered: 88,000
Exercise price per share: $5.03
Beginning of exercise period: May 16, 2014
End of exercise period: May 17, 2018
Number of directors, statutory auditors and executive officers: 0
Number of other employees: 0
Number of non-employees: 2
June 2014
Date of grant: May 22, 2014
Number of shares to be issued/ delivered: 200,000
Exercise price per share: ¥489
Beginning of exercise period: May 23, 2017
End of exercise period: May 22, 2020
Number of directors, statutory auditors and executive officers: 4
Number of other employees: 17
June 2015
Date of grant: May 28, 2015
Number of shares to be issued/ delivered: 200,000
Exercise price per share: ¥1,029
Beginning of exercise period: May 29, 2018
End of exercise period: May 28, 2021
Number of directors, statutory auditors and executive officers: 6
Number of other employees: 37
August 2015
Date of grant: August 1, 2015
Number of shares to be issued/ delivered: 60,000
Exercise price per share: ¥930
Beginning of exercise period: August 1, 2018
End of exercise period: August 1, 2021
Number of other employees: 12
June 201 6
Date of grant: June 22, 2016
Number of shares to be issued/ delivered: 140,000
Exercise price per share: ¥1,181
Beginning of exercise period: June 23, 2019
End of exercise period: June 22, 2022
Number of other employees: 45
54
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
The following table sets forth certain information regarding the beneficial ownership of our common stock as of June 30, 2016 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 annual report, for each stockholder known to be the beneficial owner of 5% or more of our outstanding common stock. 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. Percentage of shares owned is based upon 35,869,360 shares of our common stock outstanding as of June 30, 2016.
Beneficial ownership of the Company’s common stock in the table below was prepared from publicly available records of the filings made by the Company’s shareholders regarding their ownership of the Company’s common stock under the Financial Instruments and Exchange Law of Japan. Under the Financial Instruments and Exchange Law of Japan, any person who becomes, beneficially and solely or jointly, a holder, including, but not limited to, a deemed holder who manages shares for another holder pursuant to a discretionary investment agreement, of more than 5% of the shares with voting rights of a company listed on a Japanese stock exchange (including ADSs representing such shares) must file a report concerning the shareholding with the Director of the relevant local finance bureau. A similar report must be filed, with certain exceptions, if the percentage of shares held by a holder, solely or jointly, of more than 5% of the total issued shares of a company increases or decreases by 1% or more, or if any change to a material matter set forth in any previously filed reports occurs.
Based on publicly available information, the following table sets forth the beneficial ownership of holders of more than 5% of the Company’s common stock as of the dates indicated in the reports described below.
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Percentage of |
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Name of Beneficial Owner |
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Number of Shares |
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Outstanding Shares |
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Masahiro Morimoto |
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Focus Systems Corporation |
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Naritomo Ikeue |
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Japan Trustee Services Bank, Ltd. |
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According to our register of shareholders, as of March 31, 2016, there were 16,219 holders of common stock of record worldwide. As of June 30, 2016, The Bank of New York Mellon, depositary for our ADSs, held 0.46% of the outstanding common stock on that date. Of the 35,869,360 shares of our common stock outstanding as of June 30, 2016, 163,382 shares were held in the form of 81,691 ADSs. As of June 30, 2016, the Company held 630 shares of the Company as treasury stock.
7.B. RELATED PARTY TRANSACTIONS
Business Relationships
During the years ended March 31, 2014, 2015 and 2016, the Company entered into transactions with Shirasaka & Patent Partners (“SPP”) which was managed by president of UBIC Patent Partners Inc. (“UPP”), a subsidiary of FRONTEO. SPP provides patent filing services to the Company. During the year ended March 31, 2016, UPP was absorbed into FRONTEO.
The amounts of balances as of March 31, 2014, 2015 and 2016 and transactions of the Company with SPP for the years ended March 31, 2014, 2015 and 2016, are summarized as follows:
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During the year ended March 31, 2016, the Company entered into transactions with Consultoris, Inc. (“CI”) and IIOSS, Inc. (“IIOSS”) which are managed by management of foreign subsidiaries. CI provides consulting services and IIOSS provides outsourcing support services to the Company.
The amounts of balances as of March 31, 2016 was nil, and transactions of the Company with CI and IIOSS for the year ended March 31, 2016 were ¥40,363 thousands.
7.C. INTERESTS OF EXPERTS AND COUNSEL
Not applicable.
8.A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
FRONTEO’s audited consolidated financial statements are included under “Item 18—Financial Statements.” Except for FRONTEO’s consolidated financial statements included under Item 18, no other information in this annual report has been audited by FRONTEO ’s independent registered public accounting firm.
Except as otherwise disclosed in this annual report on Form 20-F, there have been no significant changes in our financial condition since March 31, 2016, the date of our last audited financial statements.
56
9.A. OFFER AND LISTING DETAILS
The following table sets forth for the period shown the reported high and low sales prices of our common stock on the Tokyo Stock Exchange and the ADSs on the Nasdaq Global Select Market. The current ADS/share ratio is one (1) ADS per two (2) shares of our common stock.
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TSE (1) (2) (3) |
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NASDAQ (1) (3) |
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(per share of common stock) |
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(per ADS) |
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High |
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For the year ended March 31, |
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2009 |
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$ |
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$ |
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2010 |
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2011 |
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2012 |
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2013 |
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2014 |
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2015 |
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2016 |
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Financial quarter ended |
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June 30, 2011 |
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$ |
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$ |
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September 30, 2011 |
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December 31, 2011 |
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March 31, 2012 |
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June 30, 2012 |
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September 30, 2012 |
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December 31, 2012 |
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March 31, 2013 |
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June 30, 2013 |
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September 30, 2013 |
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December 31, 2013 |
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March 31, 2014 |
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June 30, 2014 |
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September 30, 2014 |
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December 31, 2014 |
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March 31, 2015 |
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June 30, 2015 |
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September 30, 2015 |
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December 31, 2015 |
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March 31, 2016 |
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June 30, 2016 |
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Month ended/ending |
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January 2016 |
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February 2016 |
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March 2016 |
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April 2016 |
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May 2016 |
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June 2016 |
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July 2016 (4) |
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(1) |
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Price data are based on prices throughout the sessions for each corresponding period at each stock exchange. |
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(2) |
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Our shares of common stock have been quoted on Mothers of the TSE since June 26, 2007. |
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Our ADSs have been listed on the Nasdaq Global Market since May 16, 2013 and Global Select Market since January 2, 2014 through a sponsored ADSs facility operated by the Bank of New York Mellon. |
57
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The high and low prices of our ADSs and shares of common stock were the prices quoted during the period from July 1, 2016 to July 29, 2016. |
Not applicable.
Our shares of common stock have been quoted on the Mothers market of the TSE since June 26, 2007 under the stock code number “2158” in the First Section of the TSE.
Our ADSs have been listed and traded on the Nasdaq Global Market since May 16, 2013 under the symbol “FRONTEO” through a sponsored ADR facility operated by the Bank of New York Mellon, the depository. Each ADS represents two shares of the Company’s common stock.
Not applicable.
Not applicable.
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
Not applicable.
10.B. MEMORANDUM AND ARTICLES OF ASSOCIATION
Set forth below is information relating to the Company’s common stock, including brief summaries of the relevant provisions of the Company’s articles of incorporation and share handling regulations and of the Companies Act and related legislation, all as currently in effect.
Description of Our Common Stock
As of June 30, 2016, our authorized capital stock consists of 72,000,000 shares of common stock, and there are 35,869,360 shares of common stock outstanding. All outstanding shares of common stock are 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. 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.
58
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.
Articles of Incorporation
Organization
FRONTEO, 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:
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To sell, export and import forensic products; |
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To develop, manufacture, sell, export and import products with forensic technology; |
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To undertake forensic investigations; |
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To invest, research, educate, train, guide, advise and consult regarding forensic investigations; |
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To support information asset management; |
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To support strategic, preventive legal management; and |
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To conduct any other activities relating to the above items. |
59
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:
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the right to receive dividends when the payment of dividends has been approved at a shareholders’ meeting, with this right lapsing three full years after the due date for payment according to a provision in our articles of incorporation; |
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the right to receive interim dividends as provided for in our articles of incorporation, with this right lapsing three full years after the due date for payment according to a provision in our articles of incorporation; |
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the right to vote at a shareholders’ meeting (cumulative voting for the election of directors is not allowed under our articles of incorporation); |
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the right to receive surplus in the event of liquidation; |
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the right to require us to purchase shares subject to certain requirements under the Companies Act when a shareholder opposes certain resolutions including (i) the transfer of all or material part of the business, (ii) an amendment of the articles of incorporation to establish a restriction on share transfer, (iii) a share exchange or share transfer to establish a holding company, (iv) company split or (v) merger, all of which must in principle, be approved by a special resolution of a shareholders’ meeting; and |
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the right to require our company to purchase shares less than one unit’s worth of our common shares. |
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
60
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:
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a reduction of the stated capital, (except when a company reduces the stated capital within certain amount provided for under the Companies Act); |
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amendment of our articles of incorporation; |
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establishment of a 100% parent-subsidiary relationship through a share exchange or share transfer requiring shareholders’ approval; |
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a dissolution, merger or consolidation requiring shareholders’ approval; |
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a company split requiring shareholders’ approval; |
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a transfer of the whole or an important part of our business; |
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the taking over of the whole of the business of any other corporation requiring shareholders’ approval; |
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issuance of new shares at a specially favorable price, or issuance of stock acquisition rights or bonds with stock acquisition rights with specially favorable conditions to persons other than shareholders; and |
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other material corporate actions provided in the Companies Act (except for the termination of our directors). |
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:
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apply to a competent court for removal of a director or a statutory auditor; and |
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apply to a competent court for removal of a liquidator. |
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.
61
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:
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examine our accounting books and documents and make copies of them; and |
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apply to a competent court for appointment of an inspector to inspect our operation or financial condition. |
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:
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the institution of an action to enforce the liability of one of our directors or statutory auditors; |
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the institution of an action to recover from a recipient the benefit of a proprietary nature given in relation to the exercise of the right of a shareholder; and |
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a director on our behalf for the cessation of an illegal or ultra vires action. |
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 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:
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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); |
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from a specific shareholder other than any of our subsidiaries (pursuant to a special resolution of a general meeting of shareholders); or |
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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
62
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 discussion of rights of holders of ADSs, please see the “Description of American Depositary Shares” section of our Form F-1 Registration Statement (Reg. No. 333-184691), declared effective on May 14, 2013, as amended, hereby incorporated by reference.
The Company has not entered into any material contracts during the preceding two years which were outside the ordinary course of business.
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:
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individuals who are Non-Residents of Japan; |
63
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corporations which are organized under the laws of foreign countries or whose principal offices are located outside of Japan; and |
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corporations (i) of which 50% or more of their voting rights are held by individuals who are Non-Residents of Japan and/or corporations which are organized under the laws of foreign countries or whose principal offices are located outside of Japan or (ii) a majority of whose officers, or officers having the power of representation, are individuals who are Non-Residents of Japan. |
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.
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 annual report, 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:
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the overall tax consequences of the acquisition, ownership and disposition of ADSs or common stock, including specifically the tax consequences under Japanese law; |
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the laws of the jurisdiction of which they are a resident; and |
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any tax treaty between Japan and their respective countries of residence, by consulting their own tax advisors. |
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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 annual report, 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 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 FRONTEO, Inc. must submit the required form in advance through FRONTEO, 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 tax 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.
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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 FRONTEO, 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:
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an individual citizen or resident of the United States; |
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a corporation (or other entity treated as a corporation) that is created or organized (or treated as created or organized) in or under the laws of the United States, any state thereof or the District of Columbia; |
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an estate whose income is includible in gross income for U.S. federal income tax purposes regardless of its source; or |
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a trust if (i) a U.S. court can exercise primary supervision over the trust’s administration and one or more U.S. persons are authorized to control all substantial decisions of the trust, or (ii) it has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person. |
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:
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financial institutions or financial services entities; |
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broker-dealers; |
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taxpayers that are subject to the mark-to-market accounting rules under Section 475 of the Code; |
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tax-exempt entities; |
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governments or agencies or instrumentalities thereof; |
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insurance companies; |
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regulated investment companies; |
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real estate investment trusts; |
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certain expatriates or former long-term residents of the United States; |
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persons that actually or constructively own 5 percent or more of our voting stock; |
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persons that acquired our ADSs or common stock pursuant to an exercise of employee stock options, in connection with employee stock incentive plans or otherwise as compensation; |
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persons that hold our ADSs or common stock as part of a straddle, constructive sale, hedging, conversion or other integrated transaction; or |
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persons whose functional currency is not the U.S. dollar. |
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persons who are not a U.S. Holder. |
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. 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
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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 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.
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
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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.
10.F. DIVIDENDS AND PAYING AGENTS
Not applicable.
Not applicable.
We file periodic reports and other information with the SEC. The SEC maintains a web site at www.sec.gov that contains reports and other information regarding us and other registrants that file electronically with the SEC. You may read and copy any document we file with the SEC at the SEC’s public reference room at 100 F Street, N.E., Washington, D.C. 20549. Please call SEC at 1-800-SEC-0330 for further information on the operation of its public reference room. Copies of the Company’s annual report on Form 20-F and other periodic reports on Form 6-K are also available on our website at http://www.fronteo.com/global/ir/financial/sec-filings.html . In addition, you may also inspect reports filed with the SEC and other information at our Tokyo headquarters, located at a 7F Meisan Takahama Building, 2-12-23, Konan, Minato-ku, Tokyo 108-0075, Japan.
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 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
As of March 31, 2016, outstanding balance of the loan is ¥4,335.3 million.
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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 2016, our analysis indicated that such a movement would have increased our interest expense by approximately ¥0.2 million.
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, 2016, the fair value of such investments was ¥539.1 million. The potential loss in fair value resulting from a 10% adverse change in equity market prices would be approximately ¥53.9 million as of March 31, 2016. See Note 3 to our consolidated financial statements.
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 increase. When the Japanese yen strengthens, the opposite situation occurs.
We performed a sensitivity analysis assuming a hypothetical 100 basis point increase in foreign currency exchange rates applied to our historical fiscal 2015 results of operations. For the year ended March 31, 2016, the analysis indicated that such a movement would have decreased our revenues by approximately ¥71.8 million and would not have had a material effect on our operating income or net income.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
Not applicable.
Not applicable.
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12.D. AMERICAN DEPOSITARY SHARES
Fees and charges payable by ADS holders
The Bank of New York Mellon (Depositary), as depositary of our ADSs, collects the following fees from holders of ADRs or intermediaries acting in their behalf. The Depositary may sell (by public or private sale) sufficient securities and property received prior to such deposit to pay such fees.
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Services |
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Fees (USD) |
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Taxes and other governmental charges |
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As applicable |
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Such registration fees as may from time to time be in effect for the registration of transfers of shares generally on our shareholders’ register and applicable to transfers of shares to the name of the Depositary or its nominee or the custodian or its nominee on the making of deposits or withdrawals hereunder |
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As applicable |
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Such cable, telex and facsimile transmission expenses as are expressly provided in the deposit agreement |
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As applicable |
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Such expenses as are incurred by the Depositary in the conversion of foreign currency |
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As applicable |
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The execution and delivery of Receipts and the surrender of Receipts |
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$5.00 or less per 100 ADR |
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Any cash distribution made pursuant to the Deposit Agreement |
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$.05 or less per ADR |
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D Annual fee for depositary services |
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$.05 or less per ADR |
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The distribution of securities, 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 results of the deposit of such securities, but which securities are instead distributed by the Depositary to Owners |
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As applicable |
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Fees and other payments made by the Depositary
The Depositary has agreed to reimburse us for certain reasonable expenses related to our ADR program and incurred by us in connection with the ADR program. The Depositary will reimburse us for up to $50,000 for expenses related to the establishment of our ADR program and up to $30,000 annually for expenses related to the administration and maintenance of the our ADR program. As of March 31, 2016, our ADR program had been established. However, no reimbursements from the Depositary had been received.
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ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
None.
ITEM 15. CONTROLS AND PROCEDURES
Internal Control
(a) Disclosure Controls and Procedures
As of the end of the fiscal year ended March 31, 2016, our management performed an evaluation of disclosure controls and procedures, with the participation of Masahiro Morimoto, the chief executive officer, Masami Yaguchi, the chief financial officer.
Under Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, disclosure controls and procedures mean controls and other procedures that are designed to ensure that information required to be disclosed in the reports that file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to management, including the chief executive officer and chief financial officer as appropriate, to allow timely decisions regarding required disclosures.
Based on that evaluation, the chief executive officer and chief financial officer concluded that disclosure controls and procedures were not effective as of March 31, 2016.
(b) Management’s Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting for our company.
Under Rules 13a-15(f) of the Securities Exchange Act of 1934, internal control over financial reporting means a process designed by, or under the supervision of, our chief executive officer and chief financial officer and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP and includes those policies and procedures that:
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pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; |
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pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; and |
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provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have material effect on our financial statements. |
Our management with the participation of the chief executive officer and the chief financial officer conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in “Internal Control — Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission.
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Based on this evaluation, our management concluded that as of March 31, 2016 we had material weaknesses in internal control over financial reporting.
Internal Control
In connection with the Company’s assessment of internal controls as of March 31, 2016, the Company has determined that it had material weaknesses in internal controls over the business combination accounting for the July 31, 2015 acquisition of EvD, along with internal controls over revenue recognition for that acquired business. In addition, the impact of the material weaknesses relating to EvD had a negative impact on the overall financial statement close process, resulting in a material weakness in internal controls therein at the consolidated level.
Business Combination Accounting for EvD
The Company determined that, at March 31, 2016, it had a material weakness in internal control over the business combination accounting related to its acquisition of EvD. Specifically, the Company failed to appropriately review in detail and adjust the non-intangible assets and liabilities acquired, including establishing appropriate cut-off and close procedures at the acquisition date. Additionally, although the Company used external specialists to aid in their valuation of the acquired intangible assets, the Company failed to design and implement effective internal controls required to review such valuations.
Revenue Recognition at EvD
The Company determined that, at March 31, 2016, it had a material weakness in internal control over revenue recognition for the acquired EvD business. Specifically, the Company failed to design and implement effective internal controls to ensure that all criteria of revenue recognition were met prior to revenue being recognized in the Company’s accounting records.
Financial Statement Close Process
The Company determined that, at March 31, 2016, it had a material weakness in internal control over the consolidated financial statement close process. Specifically, the material weaknesses relating to EvD above, resulted in insufficient resource being available in the finance and accounting department of FRONTEO to close the consolidated accounting records and prepare the Company’s consolidated financial statements on a timely basis.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluations of effectiveness to future periods are subject to the risk controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
(c) Changes in Internal Controls
Other than as disclosed above, there were no changes to our internal control over financial reporting that occurred during the year that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Our Board of Statutory Auditors has determined that Mr. Sudo is an “audit committee financial expert” as defined by Item 16.A. of Form 20-F. Mr. Sudo met the independence requirements, as the term is defined under the Nasdaq Global Select Market listing standards. For details regarding Mr. Sudo’s business experiences, see “Item 6.A. Directors and Senior Management.”
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We have adopted a code of ethics that applies to our directors and executive officers, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. A copy of our code of ethics is attached as an exhibit to this annual report for reference.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Ernst & Young ShinNihon LLC (“EYSN”) has served as our independent registered public accounting firm since the years ended March 31, 2012.
The chart below sets forth the aggregate fees for professional services rendered by EYSN and other Ernst & Young member firms for the years ended March 31, 2015 and 2016.
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For the year ended March 31, |
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2015 |
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2016 |
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(in millions) |
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Audit Fees *(1) |
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¥ |
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¥ |
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Tax Fees |
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— |
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Other Service Fees *(2) |
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— |
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Total |
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¥ |
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¥ |
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(1) Audit Fees consist of fees billed for the annual audit services engagement and other audit services, which are those services that only the external auditor reasonably can provide, and include the group audit and statutory audits.
(2) Other service fees consist primarily of fees billed for due diligence related services.
Board of Company Auditors Pre-Approval Policies and Procedures
Our Board of Statutory Auditors has adopted policies and procedures for pre-approving all audit and permissible non-audit work performed by our independent registered public accounting firm in accordance with Rule 2-01 (c)(7)(i)(B) under Regulation S-X. Under those policies and procedures, our Board of Statutory Auditors must pre-approve individual audit and non-audit services to be provided to us by our independent registered accounting firm and its affiliates. Those policies and procedures also describe prohibited non-audit services that may never be provided by an independent registered public accounting firm.
All of the services provided by our independent registered public accounting firm from March 22, 2012, when our pre-approval policies went into effect, through the end of the fiscal year ended March 31, 2016 were pre-approved by our Board of Statutory Auditors pursuant to the pre-approval policies described above, and none of such services were approved pursuant to the procedures described in Rule 2-01 (c) (7)(i)(C) of Regulation S-X, which waives the general requirement for pre-approval in certain circumstances.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
With respect to the requirements of Rule 10A-3 under the Securities Exchange Act of 1934 relating to listed company audit committees, which apply to us through Rules 5605(c) of the NASDAQ Listing Rules, we rely on an exemption provided by paragraph (c)(3) of that Rule available to foreign private issuers with Boards of Statutory Auditors meeting certain requirements. For a NASDAQ-listed Japanese company with a Board of Statutory Auditors, the requirements for relying on paragraph (c)(3) of Rule 10A-3 are as follows:
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The Board of Statutory Auditors must be established, and its members must be selected, pursuant to Japanese law expressly requiring such a board for Japanese companies that elect to have a corporate governance system with statutory auditors, |
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Japanese law must and does require the Board of Statutory Auditors to be separate from the Board of Directors, |
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None of the members of the Board of Statutory Auditors may be elected by management, and none of the listed company’s executive officers may be a member of the Board of Statutory Auditors, |
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Japanese law must and does set forth standards for the independence of the members of the Board of Statutory Auditors from the listed company or its management, and |
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The Board of Statutory Auditors, in accordance with Japanese law or the registrant’s governing documents, must be responsible, to the extent permitted by Japanese law, for the appointment, retention and oversight of the work of any registered public accounting firm engaged (including, to the extent permitted by Japanese law, the resolution of disagreements between management and the auditor regarding financial reporting) for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for the listed company, including its principal accountant which audits its consolidated financial statements included in its annual reports on Form 20-F. |
To the extent permitted by Japanese law:
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The Board of Statutory Auditors must establish procedures for (i) the receipt, retention and treatment of complaints received by us regarding accounting, internal accounting controls, or auditing matters, and (ii) the confidential, anonymous submission by our employees of concerns regarding questionable accounting or auditing matters, |
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The Board of Statutory Auditors must have the authority to engage independent counsel and other advisers, as it determines necessary to carry out its duties, and |
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The listed company must provide for appropriate funding, as determined by its Board of Statutory Auditors, for payment of (i) compensation to any registered public accounting firm engaged for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for us, (ii) compensation to any advisers employed by the Board of Statutory Auditors, and (iii) ordinary administrative expenses of the Board of Statutory Auditors that are necessary or appropriate in carrying out its duties. |
In our assessment, our Board of Statutory Auditors, which meets the requirements for reliance on the exemption in paragraph (c)(3) of Rule 10A-3 described above, is not materially less effective than an audit committee meeting all the requirements of paragraph (b) of Rule 10A-3 (without relying on any exemption provided by that Rule) at acting independently of management and performing the functions of an audit committee as contemplated therein.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
None
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
Not applicable.
ITEM 16G. CORPORATE GOVERNANCE
Nasdaq Listing Rule 5615 provides that a foreign private issuer may follow its home country practice in lieu of the requirements of Rule 5600, provided that such foreign private issuer discloses in its annual reports filed with the Securities and Exchange Commission or on its website each requirement of Rule 5600 that it does not follow and describes the home country practice followed by the issuer in lieu of such requirements.
Nasdaq Listing Rule 5605(b), Rule 5605(d) and Rule 5605(e) require that (i) a majority of our Board of Directors be independent directors as defined in Rule 5605(a)(2), (ii) independent directors have regularly scheduled meetings at which only they are present, (iii) compensation of the chief executive officer and other executive officers be
75
determined, or recommended to the Board of Directors for determination, either by a majority of the independent directors or by a compensation committee comprised solely of independent directors, and (iv) director nominees be selected, or recommended for selection by our Board of Directors, either by a majority of the independent directors or by a nominations committee comprised solely of independent directors, in accordance with the nominations process set forth in a formal written charter or board resolution. For large Japanese companies under the Companies Act of Japan, including us, there is no independence requirement with respect to directors. The task of overseeing management and accounting firms is assigned to our board of statutory auditors, who are separate and independent from the company’s management. 50% or more of our statutory auditors are required to be “outside” statutory auditors who must meet additional independence requirements under the Companies Act of Japan. An “outside” statutory auditor is defined in the Companies Act of Japan as a company auditor who had not served as a director, manager or any other employee of the company or any of its subsidiaries at any time prior to the appointment.
Nasdaq Listing Rule 5605(c) requires that (i) each issuer have adopted a formal written audit committee charter meeting the requirements of Rule 5605(c)(1) and (ii) the issuer have an audit committee of at least three members who are independent as defined under Rule 5605(a)(2), meet the independence criteria set forth in Rule 10A-3(b)(1) under the U.S. Securities Exchange Act of 1934 and satisfy certain other criteria. We employ a board of statutory auditors as described above. With respect to the requirements of Rule 10A-3 under the U.S. Securities Exchange Act of 1934 relating to listed company audit committees, we rely on an exemption under paragraph (c)(3) of that rule which is available to foreign private issuers with boards of company auditors meeting certain criteria.
Nasdaq Listing Rule 5620(c) provides that each issuer provide for a quorum as specified in its by-laws for any meeting of holders of common stock, which shall be at least 33 1/3% of the outstanding shares of the issuer’s voting common stock. We provide for a quorum as specified in our articles of incorporation for a special resolution for resolution of material corporate actions, which shall be at least one-third of our outstanding shares of voting common stock. Also, the Companies Act of Japan requires a quorum for the election or removal of directors or statutory auditors.
Nasdaq Listing Rule 5620(b) provides that each issuer solicit proxies and provide proxy statements for all meetings of shareholders and provide copies of such proxy solicitation to Nasdaq. As a Japanese company whose shares are listed on the securities exchanges defined in the Financial Instrument and Exchange Act of Japan, we may, but are not required to, solicit proxies for meetings of shareholders. If we solicit proxies for a meeting of shareholders, we are required to provide proxy statements and documents for reference as provided for in the Financial Instrument and Exchange Act of Japan and provide copies of such proxy statements and documents for reference to the Kanto Local Finance Bureau.
Nasdaq Listing Rule 5630(a) provides that each issuer conduct appropriate review and oversight of all related party transactions for potential conflict of interest situations on an ongoing basis by the issuer’s audit committee or another independent body of the Board of Directors. Following the requirements of the Companies Act of Japan, we require a director to obtain the approval of the Board of Directors in order for such director to accept a transfer of one of our products or any of our other assets, to transfer a product or any other asset of such director to us, to receive a loan from us, or to effect any other transaction with us, for himself or a third-party.
Nasdaq Listing Rule 5635 provides that shareholder approval be obtained prior to the issuance of designated securities under subparagraphs (a), (b), (c) or (d) of Rule 5635. Where a Japanese joint stock company (kabushiki kaisha) like us issues common shares under the Companies Act of Japan, it is necessary for the Board of Directors to determine the conditions of issuance; provided, however, that this shall not apply if the articles of incorporation provide that such conditions shall be determined by the shareholders’ meeting. Currently, our articles of incorporation do not provide for any such exception. Additionally, if we issue common stock to persons other than shareholders at an especially favorable issue price, even when there are provisions related thereto in the articles of incorporation, some matters related to such issuance shall be resolved by special resolution of the shareholders’ meeting.
ITEM 16H. MINE SAFETY DISCLOSURE
Not applicable.
76
Not applicable.
The following financial statements are filed as part of this annual report on Form 20-F.
Index to Exhibits
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* |
Articles of Incorporation of the Registrant (English translation), dated July 1, 2016 |
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Specimen certificate evidencing American Depositary Receipt (included in Exhibit 2.2) (incorporated by reference to Exhibit 4.2 to Amendment No. 3 to the Company’s registration statement on Form F-1 (Reg. No. 333-184691) filed on April 10, 2013) |
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Form of Deposit Agreement among the Registrant, the depositary and all registered holders and beneficial owners of the American Depositary Shares (incorporated by reference to Exhibit 4.2 to Amendment No. 3 to the Company’s registration statement on Form F-1 (Reg. No. 333-184691) filed on April 10, 2013) |
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Form of Underwriters’ Warrant Agreement (incorporated by reference to Exhibit 4.3 to Amendment No. 3 to the Company’s registration statement on Form F-1 (Reg. No. 333-184691) filed on April 10, 2013) |
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Basic Distribution Agreement, dated as of December 26, 2005, between UBIC, Inc. and Focus Systems (incorporated by reference to Exhibit 10.3 to the Company’s registration statement on Form F-1 (Reg. No. 333-184691) filed on November 1, 2012) |
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Fifth Stock Option Agreement, dated as of April 28, 2011 (incorporated by reference to Exhibit 10.5 to the Company’s registration statement on Form F-1 (Reg. No. 333-184691) filed on November 1, 2012) |
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Sixth Stock Option Agreement, dated as of June 21, 2012 (incorporated by reference to Exhibit 10.6 to the Company’s registration statement on Form F-1 (Reg. No. 333-184691) filed on November 1, 2012) |
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Seventh Stock Option Agreement, dated as of May 31, 2013 (incorporated by reference to Exhibit 4.5 to the Company’s annual report on Form 20-F (File No. 001-35884) filed on July 31, 2013) |
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Ninth Stock Option Agreement, dated as of May 22, 2014 (incorporated by reference to Exhibit 4.6 to the Company’s annual report on Form 20-F (File No, 001-35884) filed on July 31, 2014) |
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Eleventh Stock Option Agreement, dated as of May 28, 2015 (incorporated by reference to Exhibit 4.7 to the Company’s annual report on Form 20-F (File No, 001-35884) filed on July 30, 2015) |
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* |
Twelfth Stock Option Agreement, dated as of August 1, 2015 |
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* |
Thirteenth Stock Option Agreement, dated as of June 22, 2016 |
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77
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Basic Agreement on Bank Transaction, dated as of November 15, 2005, between UBIC Inc. and the Bank of Tokyo-Mitsubishi UFJ, Ltd. (incorporated by reference to Exhibit 10.7 to the Company’s registration statement on Form F-1 (Reg. No. 333-184691) filed on November 1, 2012) |
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Basic Agreement on Mutual Payment, dated as of May 27, 2008, between UBIC Inc. and the Bank of Tokyo-Mitsubishi UFJ, Ltd. (incorporated by reference to Exhibit 10.8 to the Company’s registration statement on Form F-1 (Reg. No. 333-184691) filed on November 1, 2012) |
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Deed of Bank Loan Agreement, dated as of May 30, 2008, between UBIC Inc. and the Bank of Tokyo-Mitsubishi UFJ, Ltd. (incorporated by reference to Exhibit 10.9 to the Company’s registration statement on Form F-1 (Reg. No. 333-184691) filed on November 1, 2012) |
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Deed of Bank Loan Agreement, dated as of November 30, 2009, between UBIC Inc. and the Bank of Tokyo-Mitsubishi UFJ, Ltd. (incorporated by reference to Exhibit 10.10 to the Company’s registration statement on Form F-1 (Reg. No. 333-184691) filed on November 1, 2012) |
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Basic Agreement on Bank Transaction, dated as of December 17, 2008, between UBIC Inc. and the Bank of Yokohama, Ltd. (incorporated by reference to Exhibit 10.11 to the Company’s registration statement on Form F-1 (Reg. No. 333-184691) filed on November 1, 2012) |
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Amendment Letter to the Basic Agreement on Bank Transaction, dated as of November 30, 2011, between UBIC Inc. and the Bank of Yokohama, Ltd. (incorporated by reference to Exhibit 10.12 to the Company’s registration statement on Form F-1 (Reg. No. 333-184691) filed on November 1, 2012) |
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Basic Agreement on Bank Transaction, dated as of March 31, 2005, between UBIC Inc. and Sumitomo Mitsui Banking Corporation (incorporated by reference to Exhibit 10.13 to the Company’s registration statement on Form F-1 (Reg. No. 333-184691) filed on November 1, 2012) |
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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 (incorporated by reference to Exhibit 10.14 to the Company’s registration statement on Form F-1 (Reg. No. 333-184691) filed on November 1, 2012) |
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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. (incorporated by reference to Exhibit 10.15 to Amendment No. 2 to the Company’s registration statement on Form F-1 (Reg. No. 333-184691) filed on April 2, 2013) |
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Extension of Syndicated Revolving Line of Credit Facility Agreement, dated as of December 12, 2013, among UBIC, Inc. and Bank of Tokyo-Mitsubishi UFJ, Bank of Yokohama, Ltd., Sumitomo Mitsui Banking Corporation, Mizuho Bank, and Resona Bank, Ltd. (incorporated by reference to Exhibit 4.16 to the Company’s annual report on Form 20-F (File No, 001-35884) filed on July 31, 2014) |
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Loan Agreement, dated October 15, 2013, by and between UBIC, Inc. and Nippon Life Insurance Company (incorporated by reference to Exhibit 4.17 to the Company’s annual report on Form 20-F (File No, 001-35884) filed on July 31, 2014) |
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Stock Purchase Agreement, dated as of August 28, 2014, by and among UBIC, Inc., TechLaw Holdings, Inc. and TechLaw Solutions, Inc. (incorporated by reference to Exhibit 99.1 to the Company’s report on Form 6-K (File No. 001-35884) filed on August 28, 2014) |
78
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Loan Agreement, dated February 5, 2015, by and between UBIC, Inc. and the Bank of Tokyo-Mitsubishi UFJ, Ltd. (incorporated by reference to Exhibit 4.20 to the Company’s annual report on Form 20-F (File No, 001-35884) filed on July 30, 2015) |
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Loan Agreement, dated February 2, 2015, by and between UBIC, Inc. and Sumitomo Mitsui Banking Corporation (incorporated by reference to Exhibit 4.21 to the Company’s annual report on Form 20-F (File No, 001-35884) filed on July 30, 2015). |
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Stock Purchase Agreement, dated as of July 31, 2015, by and among UBIC, EVD and Andatha International, Inc., a California Corporation, Evolve Discovery PA, LLC, a California limited liability company, Evolve Discovery LA, LLC, a California limited liability company, Evolve Discovery Portland, LLC, an Oregon limited liability company, and Evolve Discovery Seattle, LLC, a Washington limited liability company. (incorporated by reference to Exhibit 99.1 to the Company’s report on Form 6-K (File No. 001-35884) filed on August 3, 2015) |
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* |
Bridge Loan Agreement, dated as of July 28, 2015, by and between UBIC, Inc. and the Bank of Tokyo-Mitsubishi UFJ, Ltd. (original Japanese version and English summary translation provided). |
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* |
Bridge Loan Agreement, dated as of July 27, 2015, by and between UBIC, Inc. and Sumitomo Mitsui Banking Corporation (original Japanese version and English summary translation provided). |
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* |
Bridge Loan Agreement, dated as of October 26, 2015, by and between UBIC, Inc. and Sumitomo Mitsui Banking Corporation (original Japanese version and English summary translation provided). |
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* |
Bridge Loan Agreement, dated as of November 20, 2015, by and between UBIC, Inc. and Sumitomo Mitsui Banking Corporation (original Japanese version and English summary translation provided). |
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* |
Pledge Agreement dated as of December 24, 2015, by and between UBIC, Inc. and Sumitomo Mitsui Banking Corporation |
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* |
Loan Agreement, dated November 30, 2015, by and between UBIC, Inc. and the Bank of Tokyo-Mitsubishi UFJ, Ltd. (original Japanese version and full English translation provided). |
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* |
Loan Agreement, dated November 30, 2015, by and between UBIC, Inc. and Sumitomo Mitsui Banking Corporation (original Japanese version and full English translation provided). |
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* |
Syndicated Term Loan Agreement, dated as of July xx, 2016, among UBIC Inc., the Bank of Tokyo-Mitsubishi UFJ, Ltd, the Bank of Yokohama, Ltd, Sumitomo Mitsui Banking Corporation and Resona Bank, Ltd |
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* |
Subsidiaries of the Registrant |
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* |
Code of Ethics of the Registrant applicable to its directors and executive officers, including its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions (English translation) , dated February 26, 2015 |
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Certification of the Registrant’s Chief Executive Officer and Chairman of the Board pursuant to Section 302 of the Sarbanes-Oxley Act |
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* |
Certification of the Registrant’s Chief Financial and Administrative Officer pursuant to Section 302 of the Sarbanes-Oxley Act |
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* |
Certifications of the Registrant’s Chief Executive Officer and Chairman of the Board, and Chief Financial and Administrative Officer pursuant to Section 906 of the Sarbanes-Oxley Act |
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101.INS |
* |
Instance Document |
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101.SCH |
* |
Schema Document |
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101.CAL |
* |
Calculation Linkbase Document |
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101.DEF |
* |
Definition Linkbase Document |
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101.LAB |
* |
Label Linkbase Document |
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101.PRE |
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Presentation Linkbase Document |
* Filed herewith
80
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
Date: August 15, 2016
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FRONTEO, INC. |
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By: |
/s/ Masahiro Morimoto |
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Name: |
Masahiro Morimoto |
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Title: |
Chief Executive Officer and Chairman of the Board |
81
F- 1
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of FRONTEO, Inc.
We have audited the accompanying consolidated balance sheets of FRONTEO, Inc. and Subsidiaries as of March 31, 2015 and 2016, and the related consolidated statements of operations, comprehensive income (loss), equity and cash flows for each of the three years in the period ended March 31, 2016. 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 FRONTEO, Inc. and Subsidiaries at March 31, 2015 and 2016, and the consolidated results of their operations and their cash flows for each of the three years in the period ended March 31, 2016, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young ShinNihon LLC
Tokyo, Japan
August 15, 2016
F- 2
FRONTEO, Inc. and Subsidiaries
March 31, 2015 and 2016
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Thousands of Yen |
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2015 |
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2016 |
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ASSETS |
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Current Assets: |
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Cash and cash equivalents |
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¥ |
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¥ |
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Current portion of investments |
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Trade accounts receivable, net of allowance for doubtful accounts of ¥25,374 thousand and ¥75,269 thousand as of March 31, 2015 and 2016 |
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Prepaid expenses |
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Deferred tax assets |
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Other current assets |
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Total Current Assets |
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Property and equipment—net |
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Capitalized computer software costs—net |
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Goodwill |
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Customer relationships—net |
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Other intangible assets—net |
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Investments in securities |
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Investments |
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— |
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Rental deposits |
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Deferred tax assets |
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Other assets |
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TOTAL ASSETS |
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¥ |
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¥ |
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See notes to the consolidated financial statements.
F- 3
FRONTEO, Inc. and Subsidiaries
Consolidated Balance Sheets
March 31, 2015 and 2016
See notes to the consolidated financial statements.
F- 4
FRONTEO, Inc. and Subsidiaries
Consolidated Statements of Operations
For the Year Ended March 31
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Thousands of Yen |
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2014 |
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2015 |
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2016 |
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Revenue |
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¥ |
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¥ |
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¥ |
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Operating revenue from reimbursed direct costs |
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Total revenue |
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Cost of revenue |
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Reimbursed direct costs |
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Selling, general and administrative expenses |
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Total operating expenses |
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Operating income (loss) |
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Interest income |
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Interest expense |
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Loss on derivatives |
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— |
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— |
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Foreign currency exchange gains |
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Dividend income |
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Other—net |
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Income (loss) before income taxes |
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Income taxes (benefit) |
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Net income (loss) |
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Less: Net income attributable to noncontrolling interests |
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Net income (loss) attributable to FRONTEO, Inc. shareholders |
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¥ |
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¥ |
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¥ |
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Yen |
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2014 |
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2015 |
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2016 |
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Net income (loss) attributable to FRONTEO, Inc. shareholders per share: |
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|
|
Basic |
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
Diluted |
|
|
|
|
|
|
|
|
|
|
See notes to the consolidated financial statements.
F- 5
FRONTEO, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
For the Year Ended March 31
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
|||||||
|
|
2014 |
|
2015 |
|
2016 |
|
|||
Net income (loss) |
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income, net of tax: |
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains on securities: |
|
|
|
|
|
|
|
|
|
|
Amount arising during the period |
|
|
|
|
|
|
|
|
|
|
Adjustments related to retirement and severance benefits: |
|
|
|
|
|
|
|
|
|
|
Amount arising during the period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Comprehensive income attributable to noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss) attributable to FRONTEO, Inc. shareholders |
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
See notes to the consolidated financial statements.
F- 6
FRONTEO, Inc. and Subsidiaries
Consolidated Statements of Equity
For the Year Ended March 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen, except share data |
|
|||||||||||||||||||||
|
|
FRONTEO, Inc. Shareholders |
|
|
|
|
|
|
|
|||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of |
|
|
|
|
Additional |
|
|
|
|
Other |
|
|
|
|
Non- |
|
|
|
|
|||
|
|
Common Stock |
|
Common |
|
Paid-in |
|
Retained |
|
Comprehensive |
|
Treasury |
|
controlling |
|
Total |
|
|||||||
|
|
Outstanding |
|
Stock |
|
Capital |
|
Earnings |
|
Income |
|
Stock |
|
Interests |
|
Equity |
|
|||||||
Balance at March 31, 2013 |
|
|
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock and warrants issuance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2014 |
|
|
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
F- 7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen, except share data |
|
|||||||||||||||||||||
|
|
FRONTEO, Inc. Shareholders |
|
|
|
|
|
|
|
|||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of |
|
|
|
|
Additional |
|
|
|
|
Other |
|
|
|
|
Non- |
|
|
|
|
|||
|
|
Common Stock |
|
Common |
|
Paid-in |
|
Retained |
|
Comprehensive |
|
Treasury |
|
controlling |
|
Total |
|
|||||||
|
|
Outstanding |
|
Stock |
|
Capital |
|
Earnings |
|
Income |
|
Stock |
|
Interests |
|
Equity |
|
|||||||
Balance at March 31, 2014 |
|
|
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issuance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of noncontrolling interests in a consolidated subsidiary |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2015 |
|
|
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
See notes to the consolidated financial statements.
F- 8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen, except share data |
|
|||||||||||||||||||||
|
|
FRONTEO, Inc. Shareholders |
|
|
|
|
|
|
|
|||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of |
|
|
|
|
Additional |
|
|
|
|
Other |
|
|
|
|
Non- |
|
|
|
|
|||
|
|
Common Stock |
|
Common |
|
Paid-in |
|
Retained |
|
Comprehensive |
|
Treasury |
|
controlling |
|
Total |
|
|||||||
|
|
Outstanding |
|
Stock |
|
Capital |
|
Earnings |
|
Income (Loss) |
|
Stock |
|
Interests |
|
Equity |
|
|||||||
Balance at March 31, 2015 |
|
|
|
¥ |
1,997,214 |
|
¥ |
1,487,429 |
|
¥ |
1,389,551 |
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2016 |
|
|
|
¥ |
2,014,712 |
|
¥ |
1,569,539 |
|
¥ |
865,610 |
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
See notes to the consolidated financial statements.
F- 9
FRONTEO, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Year Ended March 31
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
|||||||
|
|
2014 |
|
2015 |
|
2016 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
Adjustment to earn-out liability |
|
|
— |
|
|
— |
|
|
|
|
Share-based compensation expense |
|
|
|
|
|
|
|
|
|
|
Impairment of property and equipment |
|
|
|
|
|
— |
|
|
|
|
Deferred income taxes (benefit) |
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange gains |
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities, net of effects from acquisition of a subsidiary: |
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in trade accounts receivable |
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in prepaid expenses |
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in other current assets |
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in rental deposits |
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in trade accounts payable |
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in accrued income taxes |
|
|
|
|
|
|
|
|
|
|
Increase in accrued expense and other current liabilities |
|
|
|
|
|
|
|
|
|
|
Other—net |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
Acquisitions, net of cash acquired |
|
|
— |
|
|
|
|
|
|
|
Purchase of investment |
|
|
|
|
|
— |
|
|
|
|
Proceeds from sales of investment |
|
|
|
|
|
|
|
|
|
|
Purchase of available-for-sale securities |
|
|
|
|
|
— |
|
|
— |
|
Purchase of property and equipment |
|
|
|
|
|
|
|
|
|
|
Payment for capitalized computer software costs |
|
|
|
|
|
|
|
|
|
|
Other—net |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
|
|
|
|
|
|
|
|
F- 10
FRONTEO, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Year Ended March 31
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
|||||||
|
|
2014 |
|
2015 |
|
2016 |
|
|||
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
Proceeds from short-term debt |
|
|
— |
|
|
|
|
|
|
|
Repayment of short-term debt |
|
|
— |
|
|
|
|
|
|
|
Proceeds from long-term bank borrowings |
|
|
|
|
|
|
|
|
|
|
Repayment of long-term bank borrowings |
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock, including stock option exercises |
|
|
|
|
|
|
|
|
|
|
Payment of IPO costs |
|
|
|
|
|
— |
|
|
— |
|
Acquisition of noncontrolling interests in a consolidated subsidiary |
|
|
— |
|
|
|
|
|
— |
|
Dividends paid |
|
|
|
|
|
— |
|
|
|
|
Other—net |
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EFFECT OF FOREIGN CURRENCY EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS |
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF YEAR |
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
|
|
|
|
|
|
|
|
|
|
|
ADDITIONAL CASH FLOW INFORMATION: |
|
|
|
|
|
|
|
|
|
|
Interest paid, net of amounts capitalized |
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
Income taxes paid—net of refunds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NONCASH INVESTING AND FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
Outstanding payments for acquisition of property and equipment, and capitalized computer software costs included in trade accounts payable |
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
Asset retirement obligations |
|
|
|
|
|
|
|
|
— |
|
See notes to the consolidated financial statements.
F- 11
FRONTEO, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations — FRONTEO, Inc. (“FRONTEO”) is a Japanese corporation established on August 8, 2003 under the name of UBIC, Inc. (“UBIC”), whose principal office is located in Japan. On July 1, 2016, UBIC changed its name to FRONTEO, Inc. FRONTEO 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 goodwill, depreciation of property and equipment, share-based compensation, valuation of deferred tax assets, appropriation of accumulated deficit, stock issuance cost and fair value measurements of certain derivatives.
Principles of Consolidation — The consolidated financial statements include the accounts of FRONTEO 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 evaluation of investments, valuation of deferred tax assets, determination of fair values of stock options, fair value measurement of assets acquired and liabilities assumed in a business combination, impairment of goodwill, useful lives of fixed assets and intangible assets with finite useful lives and evaluation of those assets and allowance for doubtful accounts. Actual results could differ from those estimates.
Business combinations — For business combinations, the assets acquired, the liabilities assumed, and any non-controlling interest are recognized at the acquisition date, measured at their fair values as of that date. The Company accounts for business combinations using the acquisition method of accounting in accordance with ASC Topic 805, “Business Combinations.” Identifiable assets acquired and liabilities assumed are recorded at their acquisition date fair values. Goodwill represents the excess of the purchase price over the fair value of identifiable assets acquired and liabilities assumed as a result of the business combination. Acquisition-related costs, which includes advisory, legal, accounting, valuation and other costs, are expensed in the periods in which the costs are incurred.
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 (loss).
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.
Investments — Investments consist of time deposits with an original maturity of more than three months.
F- 12
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 method based on either the estimated useful lives of the assets or the lease period, whichever is shorter.
The useful lives for depreciation and amortization by major asset classes are as follows :
|
|
|
|
Leasehold improvements |
|
6 to 15 years |
|
Furniture and fixtures |
|
4 to 20 years |
|
Computers |
|
5 years |
|
Assets under capital leases, primarily office equipment |
|
5 to 7 years |
|
Capitalized Computer Software Costs — The Company capitalizes costs of computer software developed and purchased for internal use. The 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. In addition, the Company develops certain computer software to be sold where related costs are capitalized after establishment of technological feasibility in accordance with ASC 985, “Software.” The annual amortization of such capitalized costs is the greater of the amount computed using the ratio of each software’s current year gross revenues to the total of current and anticipated future gross revenues or the straight-line method over the remaining estimated economic life of each software product.
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.
Goodwill and Intangible Assets — Goodwill is not amortized and is tested annually for impairment of each fiscal year and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value below its carrying amount. In assessing goodwill for impairment, the Company has the option to first perform a qualitative assessment to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Reporting units are the Company’s operating segments or one level below the operating segments. If the Company determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, no additional tests to assess goodwill for impairment are required to be performed. If the Company concludes otherwise or elects not to perform the qualitative assessment, then it is required to perform the first step of a two-step impairment review process. The measurement date for goodwill impairment testing is January 1, annually. In the fiscal year ended March 31, 2015, the Company elected to perform the aforementioned qualitative assessment of goodwill as of the measurement date of January 1. During the year ended March 31, 2016, the Company
F- 13
performed quantitative assessment of goodwill and confirmed that the carrying amount of a reporting unit exceeded its fair value. Intangible assets with finite useful lives are amortized using straight-line method over the estimated useful life.
The useful lives for amortization by major asset classes are as follows:
|
|
|
|
Customer relationships |
|
15 years |
|
Noncompete agreement |
|
3 years |
|
Favorable lease |
|
3 years |
|
License |
|
3 years |
|
Trademarks |
|
2 to 10 years |
|
I nvestments in Securities — The Company classifies investments in equity securities that have readily determinable fair values and debt securities 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. 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 operations 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 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.
Derivative Financial Instruments — The Company recognizes all derivative financial instruments, such as cross currency interest rate swaps and 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 values of 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
F- 14
eDiscovery and forensic services. Such services include data collection, data processing, data hosting, data review, and document production 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. 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.
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.”
Research and Development Expenditures — Costs related to the research, design and development of products are charged to research and development expenses as incurred.
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 and tax credit 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 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.
Net Income (Loss) Attributable to FRONTEO, Inc. Shareholders Per Share — B asic net income (loss) attributable to FRONTEO, Inc. shareholders per share is computed using the weighted-average number of shares of common stock outstanding during each year. Diluted net income (loss) attributable to FRONTEO, Inc. shareholders
F- 15
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 (Loss) — Other comprehensive income (loss) 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 April 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-08 that changes the requirements for reporting discontinued operations and requires additional disclosures about discontinued operations. Under this ASU, only disposals representing a strategic shift in operations that has, or will have, a major effect on the entity’s operations and financial results should be presented as discontinued operations. Additionally, the guidance requires additional disclosures for discontinued operations as well as for disposals of significant components of an entity that do not qualify for discontinued operations presentation. The adoption of this guidance did not have a material impact on the Company’s financial position or results of operations.
Recently Issued Accounting Pronouncements Not Yet Adopted
In May 2014, the FASB issued ASU 2014-09, “
Revenue from Contracts with Customers
(Topic 606)
.
”
This ASU requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also requires an entity to disclose sufficient information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Qualitative and quantitative information is required about:
|
1. |
|
Contracts with customers—including revenue and impairments recognized, disaggregation of revenue, and information about contract balances and performance obligations (including the transaction price allocated to the remaining performance obligations) |
|
2. |
|
Significant judgments and changes in judgments—determining the timing of satisfaction of performance obligations (over time or at a point in time), and determining the transaction price and amounts allocated to performance obligations |
|
3. |
|
Assets recognized from the costs to obtain or fulfill a contract. |
The effective date of this ASU was revised to annual reporting periods beginning after December 15, 2017 including interim periods within that reporting period, by ASU 2015-14, “ Revenue from Contracts with Customers: Deferral of the Effective Date, ” which was issued in August 2015. Early application is permitted, but not earlier than the original effective date of annual and interim periods beginning after December 15, 2016. The Company is currently evaluating the impact of adopting this ASU.
In April 2015, the FASB issued ASU 2015-03 for the presentation of debt issuance costs. Under the new guidance, debt issuance costs related to a recognized debt liability are to be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the new guidance. This guidance will be effective for the Company as of April 1, 2016. The adoption of this guidance is not expected to have a material impact on the Company’s results of operations and financial position.
In April 2015, the FASB issued ASU 2015-05 for fees paid in a cloud computing arrangement. The guidance requires entities to account for a cloud computing arrangement that includes a software license element in a manner consistent with the acquisition of other software licenses. Cloud computing arrangements without a software license element are to be accounted for as service contracts. This guidance does not affect the accounting for service
F- 16
contracts by a customer. This guidance will be effective for the Company as of April 1, 2016. The Company is currently evaluating the impact of adopting this guidance.
In September 2015, the FASB issued ASU 2015-16 for measurement-period adjustments in business combinations. The guidance eliminates the requirement for acquirers in a business combination to account for measurement-period adjustments retrospectively. Instead, acquirers must recognize measurement-period adjustments in the period in which they determine the amounts, including the effect on earnings of any amounts they would have recorded in previous periods if the accounting had been completed at the acquisition date. This guidance will be effective for the Company as of April 1, 2016. The Company is currently evaluating the impact of adopting this guidance.
In November 2015, the FASB issued ASU 2015-17 for balance sheet classification of deferred taxes. The guidance requires entities to classify all deferred tax assets and liabilities as noncurrent on the balance sheet instead of separating deferred taxes into current and noncurrent amounts. This guidance will be effective for the Company as of April 1, 2017. The Company is currently evaluating the impact of adopting this guidance.
In January 2016, the FASB issued ASU 2016-01 for the classification and measurement of financial instruments. The guidance requires entities to carry all investments in equity securities at fair value through net income, except for investments that qualify for the equity method of accounting or those that result in consolidation of the investee or for which the entity has elected the practicability exception to fair value measurement. In addition, for investments whose fair value are measured with the practicability exception, the guidance requires entities to qualitatively consider indicators which were added by the guidance to determine whether the investment is impaired and eliminated the requirement in the current U.S. GAAP to assess whether an impairment of such an investment is other than temporary. Furthermore, the guidance establishes an incremental recognition and disclosure requirement related to the presentation of fair value changes of financial liabilities for which the fair value option has been elected. This guidance will be effective for the Company as of April 1, 2018. The Company is currently evaluating the impact of adopting this guidance.
In February 2016, the FASB issued ASU 2016-02 for lease accounting. The guidance requires a lessee to recognize assets and liabilities for leases with lease terms of more than twelve months and provides that recognition, presentation and measurement in the financial statements depend on its classification as a finance or operating lease. In addition, the guidance requires disclosures to help investors and other financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases. This guidance will be effective for the Company as of April 1, 2019. The Company is currently evaluating the impact of adopting this guidance.
In March 2016, the FASB issued ASU 2016-08 to amend new revenue recognition standard on assessing whether an entity is a principal or agent in a revenue transaction. This amendment will be effective for the Company as of April 1, 2018. The Company is currently evaluating the impact of adopting this amendment.
In March 2016, the FASB issued ASU 2016-09 for employee share-based payment accounting. The guidance requires entities to recognize all income tax effects of awards in the income statement when the awards vest or are settled. It also will allow an employer to repurchase more of an employee's shares than it currently can for tax withholding purposes without triggering liability accounting and to make a policy election to account for forfeitures as they occur. This guidance will be effective for the Company as of April 1, 2017. The Company is currently evaluating the impact of adopting this guidance.
In April 2016, the FASB issued ASU 2016-10 to amend certain aspects of the new revenue recognition standard including amending the guidance on identifying performance obligations and the implementation guidance on licensing. The amendments clarify how an entity should evaluate the nature of its promise in granting a license of IP, which will determine whether the entity recognizes revenue over time or at a point in time. In addition, the amendments clarify how entities will determine whether promised goods or services are separately identifiable, which is an important step in determining whether goods and services should be accounted for as separate performance obligations. This guidance will be effective for the Company as of April 1, 2018. The Company is currently evaluating the impact of adopting this guidance.
F- 17
In May 2016, the FASB issued ASU 2016-12 to amend the new revenue recognition standard to reduce the potential for diversity in practice upon the initial application and the cost and complexity of applying the new revenue recognition standards both upon transition and on an ongoing basis. This guidance will be effective for the Company as of April 1, 2018. The Company is currently evaluating the impact of adopting this guidance.
2. BUSINESS COMBINATION
TechLaw Solutions, Inc.
On August 28, 2014, the Company acquired TechLaw Solutions, Inc. (“TLS”), which conducts eDiscovery business in the United States of America (the “U.S.”), from TechLaw Holdings, Inc. This acquisition was completed by acquiring all issued and outstanding shares of TLS for ¥891,575 thousand in cash. There are no future contingent payments. This business combination was accounted for using the acquisition method.
The Company allocates the fair value of purchase consideration to assets acquired and liabilities assumed based on their fair value. The Company engaged an independent third-party appraisal firm to assist in determining the fair values of assets acquired and liabilities assumed. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recognized as goodwill.
The Company believes that the ties between the Company, having advanced technology and innovative products and services, and TLS with its strong reputation and sales channel in the U.S., will result in a more efficient expansion of the Company’s business, especially in the U.S. The Company will also be able to more easily understand the needs of customers in the U.S. market, which will enable the Company to optimize its investment in research and development to develop new products and services. Further, the Company believes that it will be able to improve its corporate value as a whole by positively promoting the sharing and use of management resources such as connecting TLS' customers and know-how to the Company’s technology, products and/or services. Goodwill is mainly attributable to the synergies expected to arise from this acquisition . The total amount of goodwill expected to be deductible for tax purpose is approximately ¥166 million.
The following table summarizes the final allocation of the purchase price based on the fair values of the assets acquired and liabilities assumed from TLS on August 28, 2014.
|
|
|
|
|
|
|
Thousands of Yen |
|
|
Trade accounts receivable |
|
¥ |
|
|
Prepaid expense |
|
|
|
|
Property and equipment |
|
|
|
|
Other intangible assets |
|
|
|
|
Other |
|
|
|
|
Total assets acquired |
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
Total liabilities assumed |
|
|
|
|
|
|
|
|
|
Total identified net assets |
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
|
|
Purchase price |
|
¥ |
|
|
Acquisition-related costs incurred and expensed during the year ended March 31, 2015 were ¥87,803 thousand.
The following table provides revenues and net loss of TLS that were included in the Company's consolidated statement of income for the year ended March 31, 2015.
F- 18
|
|
|
|
|
|
|
Thousands of Yen |
|
|
Revenues |
|
¥ |
|
|
Loss before income taxes |
|
|
|
|
EvD, Inc.
On July 31, 2015, the Company acquired all of the outstanding shares of EvD, Inc. (“EvD” and conducting business as “Evolve Discovery”), pursuant to the terms of a stock purchase agreement (the “Agreement”), by and between UBIC, EvD and Andatha International, Inc. (“Andatha”), Evolve Discovery PA, LLC, (“EvD PA”), Evolve Discovery LA, LLC, (“EvD LA”), Evolve Discovery Portland, LLC, (“EvD PDX”), Evolve Discovery Seattle, LLC, (“EvD SEA”, and together with Andatha, EvD PA, EvD LA, and EvD PDX, the “Sellers”). EvD is an e-Discovery corporation, founded in 1997, that provides electronic discovery services, litigation consulting and project management to corporations and law firms. This business combination was accounted for using the acquisition method. The Company has completed its initial measurements of the fair values of the assets acquired, including customer relationships, and liabilities assumed as of the acquisition date.
Under the terms of the Agreement, the Company acquired the shares for aggregate cash consideration of ¥4,381,175 thousand, including the acquisition date fair value of the earn-out payment of ¥ 135,948 thousand, which the sellers are entitled to receive subject to the achievement of certain EBITDA targets of Evolve Discovery during the 2015 calendar year. In July 2016, the Company and the sellers reached an agreement of the final earn-out amount, and the payment in cash of ¥ 334,837 thousand was made to the sellers. The change in the earn-out liability from the acquisition date was included in selling, general and administrative expenses in the consolidated statement of operations for the year ended March 31, 2016. The liability related to the earn-out payment was recorded in Accrued expense in the consolidated balance sheet as of March 31, 2016.
The acquisition of TLS in the prior fiscal year and TLS’s promotion of the Company’s services have resulted in an extension of the Company’s market in the eastern part of the U.S. The combination of the acquisitions of TLS and EvD, based on the west coast of the U.S., will increase the Company’s presence all over the U.S., and “Lit i View” will be able to reach a broader base of customers more speedily. The Company has decided that this is the approach to increase the Company’s market share in eDiscovery services in the U.S., where there is a trend of industry reorganization. Therefore the board of directors of FRONTEO resolved to obtain all the outstanding shares of EvD, Inc. Goodwill is mainly attributable to the synergies expected to arise from this acquisition .
The Company allocates the fair value of purchase consideration to assets acquired and liabilities assumed based on their fair value. The Company engaged an independent third-party appraisal firm to assist in determining the fair values of assets acquired and liabilities assumed. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recognized as goodwill. The goodwill is not deductible for tax purposes.
F- 19
The following table summarizes the allocation of the purchase price based on the fair values of the assets acquired and liabilities assumed from EvD on July 31, 2015.
|
|
|
|
|
|
|
Thousands of Yen |
|
|
Cash and cash equivalent |
|
¥ |
|
|
Trade accounts receivable |
|
|
|
|
Prepaid expense |
|
|
|
|
Other current assets |
|
|
|
|
Other intangible assets |
|
|
|
|
Other |
|
|
|
|
Total assets acquired |
|
|
|
|
|
|
|
|
|
Trade accounts payable |
|
|
|
|
Deferred tax liabilities |
|
|
|
|
Income tax payable |
|
|
|
|
Other current liabilities |
|
|
|
|
Other |
|
|
|
|
Total liabilities assumed |
|
|
|
|
|
|
|
|
|
Total identified net assets |
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
|
|
Purchase price |
|
¥ |
|
|
Acquisition-related costs incurred and expensed during the year ended March 31, 2016 were ¥254,884 thousand and are recorded as a component of selling, general and administrative expenses on the consolidated statement of operations.
The following table provides revenues and net income of EvD included in the Company's consolidated statement of operations for the year ended March 31, 2016.
|
|
|
|
|
|||||
|
|
Thousands of Yen |
|
||||||
Revenues |
|
¥ |
|
|
|||||
Net income |
|
|
|
|
Unaudited pro forma information
The following table provides unaudited pro forma revenues and net income attributable to FRONTEO, Inc. for the years ended March 31, 2015 and 2016, as if EvD had been acquired on April 1, 2014. Such pro forma amounts are not necessarily indicative of the results that actually would have occurred had the acquisition been completed on the dates indicated, nor are they indicative of the future operating results of the acquired company.
|
|
|
|
|
|
|
|
||||||||
|
|
Thousands of Yen |
|
||||||||||||
|
|
2015 |
|
2016 |
|
||||||||||
Revenues |
|
¥ |
|
|
¥ |
|
|
||||||||
Income before income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
||||
|
|
2015 |
|
2016 |
||
|
|
|
|
|
|
|
Pro forma basic net income per share |
|
¥ |
|
|
¥ |
|
Pro forma diluted net income per share |
|
|
|
|
|
|
F- 20
3. INVESTMENTS IN SECURITIES
Available-for-sale securities
Information regarding securities classified as available-for-sale securities as of March 31, 2015 and 2016, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
|
|
Thousands of Yen |
|
|||||||||||||||||||||||||
|
|
|
|
|
Gross |
|
Gross |
|
|
|
|
|||||||||||||||||
|
|
|
|
|
unrealized |
|
unrealized |
|
|
|
|
|||||||||||||||||
March 31, 2015 |
|
Cost |
|
gain |
|
loss |
|
Fair value |
|
|||||||||||||||||||
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Equity securities |
|
¥ |
|
|
¥ |
|
|
¥ |
— |
|
¥ |
|
|
|||||||||||||||
Debt securities |
|
|
|
|
|
— |
|
|
|
|
|
|
|
|||||||||||||||
Total |
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
¥ |
|
|
¥ |
|
|
¥ |
— |
|
¥ |
|
|
Debt securities |
|
|
|
|
|
— |
|
|
|
|
|
|
|
Total |
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
Debt securities classified as available-for-sale securities mature as follows.
|
|
|
|
|
|
|
|
||||||||
|
|
Thousands of Yen |
|
||||||||||||
Contractual maturities |
|
Cost |
|
Fair value |
|
||||||||||
Within 1 year |
|
¥ |
— |
|
¥ |
— |
|
||||||||
After 1 year through 5 years |
|
|
— |
|
|
— |
|
||||||||
After 5 years through 10 years |
|
|
|
|
|
|
|
||||||||
Total |
|
¥ |
|
|
¥ |
|
|
The following table provides the fair value and gross unrealized losses of the Company’s investments that were deemed to be temporarily impaired as of March 31, 2015 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
||||||||||
|
|
Less than 12 months |
|
More than 12 months |
|
||||||||
|
|
|
|
|
Gross unrealized |
|
|
|
|
Gross unrealized loss |
|
||
March 31, 2015 |
|
Fair value |
|
loss |
|
Fair value |
|
loss |
|
||||
Debt securities |
|
¥ |
— |
|
¥ |
— |
|
¥ |
|
|
¥ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities |
|
¥ |
— |
|
¥ |
— |
|
¥ |
|
|
¥ |
|
|
The Company’s investments in available-for-sale securities in an unrealized holding loss position consisted of a corporate bond of a Japanese banking company. The severity of decline in fair value less than cost was approximately 2%, and the duration of the impairment was 27 months. The Company evaluated the near-term prospects of the issuer in relation to the severity and duration of impairment. Based on that evaluation and the Company’s ability and intent to hold this investment for a reasonable period of time sufficient for a forecasted recovery of fair value, the Company did not consider these investments to be other-than-temporarily impaired at March 31, 2016. The Company does not intend to sell the bond, and it is not more likely than not the Company will be required to sell the bond before recovery of its amortized cost basis.
F- 21
4. ALLOWANCE FOR DOUBTFUL ACCOUNTS
An analysis of the movement in the allowance for doubtful accounts for the years ended March 31, 2014, 2015 and 2016, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
|||||||
|
|
2014 |
|
2015 |
|
2016 |
|
|||
Balance at beginning of year |
|
¥ |
— |
|
¥ |
— |
|
¥ |
|
|
Provision for doubtful accounts |
|
|
— |
|
|
|
|
|
|
|
Translation adjustment |
|
|
— |
|
|
|
|
|
|
|
Balance at end of year |
|
¥ |
— |
|
¥ |
|
|
¥ |
|
|
5. PROPERTY AND EQUIPMENT
Property and equipment recorded on the Company’s consolidated balance sheets as of March 31, 2015 and 2016, consists of the following:
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
||||
|
|
2015 |
|
2016 |
|
||
Leasehold improvements |
|
¥ |
|
|
¥ |
|
|
Furniture and fixtures |
|
|
|
|
|
|
|
Computers |
|
|
|
|
|
|
|
Assets held under capital lease, principally office equipment |
|
|
|
|
|
|
|
Motor vehicles and transport equipment |
|
|
— |
|
|
|
|
Total |
|
|
|
|
|
|
|
Accumulated depreciation |
|
|
|
|
|
|
|
Property and equipment —net |
|
¥ |
|
|
¥ |
|
|
For the years ended March 31, 2014, 2015 and 2016, the Company recognized depreciation expenses of ¥ 168,314 thousand, ¥ 246,028 thousand and ¥ 341,018 thousand, respectively.
The Company recognized no impairment loss on long-lived assets for the year ended March 31, 2015.
The Company recognized an impairment loss on certain long-lived assets of ¥5,144 thousand for the year ended March 31, 2016, which is included in “Selling, general and administrative expenses.” The impairment loss on long-lived assets for the year ended March 31, 2016 consisted of leasehold improvements and computers, which were owned by a subsidiary in Taiwan. The amount of impairment was determined based on projected future cash flows. The impairment mainly resulted from a delay in the start-up of business in Taiwan.
6. GOODWILL AND OTHER INTANGIBLE ASSETS
Intangible assets subject to amortization acquired during the year ended March 31, 2015 except for capitalized computer software costs, including ¥384,626 thousand recorded from the acquisition of TLS, totaled ¥401,055 thousand, which primarily consist of customer relationship, license and trademark of ¥334,970 thousand, ¥36,320 thousand and ¥10,273 thousand, respectively.
Intangible assets subject to amortization acquired during the year ended March 31, 2016 except for capitalized computer software costs, including ¥2,136,610 thousand recorded from the acquisition of EvD, totaled ¥ 2,1 67,070 thousand, which primarily consist of customer relationship, noncompete agreement, favorable lease and trademark of ¥1,876,725 thousand, ¥51,601 thousand, ¥163,382 thousand and ¥44,902 thousand, respectively.
F- 22
The components of intangible assets subject to amortization except for capitalized computer software costs as of March 31, 2015 and 2016 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
||||||||||
|
|
2015 |
|
2016 |
|
||||||||
|
|
Gross |
|
|
|
|
Gross |
|
|
|
|
||
|
|
carrying |
|
Accumulated |
|
carrying |
|
Accumulated |
|
||||
|
|
amount |
|
amortization |
|
amount |
|
amortization |
|
||||
Customer relationships |
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
Licenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks |
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncompete agreements |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
Favorable leases |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
There were no intangible assets not subject to amortization at March 31, 2015 and 2016.
The weighted average amortization periods for intangible assets except for capitalized computer software costs acquired during the year ended March 31, 2015 are approximately 10 years. The weighted average amortization periods for customer relationship, license and trademark acquired during the year ended March 31, 2015 are 15 years, 3 years and 2 years, respectively.
The weighted average amortization periods for intangible assets except for capitalized computer software costs acquired during the year ended March 31, 2016 are approximately 10 years. The weighted average amortization periods for customer relationship, trademark, noncompete agreement and favorable lease acquired during the year ended March 31, 2016 are 15 years, 4 years, 3 years and 3 years, respectively.
The amortization expenses for the years ended March 31, 2015 and 2016 were ¥28,491 thousand and ¥180,297 thousand, respectively. The estimated aggregate amortization expense of intangible assets except for capitalized computer software costs for each of the next five years is as follows:
|
|
|
|
|
Year Ending March 31, |
|
Thousands of Yen |
|
|
2017 |
|
¥ |
|
|
2018 |
|
|
|
|
2019 |
|
|
|
|
2020 |
|
|
|
|
2021 |
|
|
|
|
F- 23
The following table shows changes in the carrying amount of goodwill for the years ended March 31, 2015 and 2016, by operating segme nt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
||||||||||
|
|
Japan |
|
U.S. |
|
Other |
|
Total |
|
||||
Fiscal year ended March 31, 2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
¥ |
— |
|
¥ |
— |
|
¥ |
— |
|
¥ |
— |
|
Accumulated impairment losses |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
Balance at March 31, 2014 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition |
|
|
— |
|
|
|
|
|
— |
|
|
|
|
Translation adjustments |
|
|
— |
|
|
|
|
|
— |
|
|
|
|
Goodwill |
|
|
— |
|
|
|
|
|
— |
|
|
|
|
Accumulated impairment losses |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
Balance at March 31, 2015 |
|
|
— |
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition |
|
|
— |
|
|
|
|
|
— |
|
|
|
|
Translation adjustments |
|
|
— |
|
|
|
|
|
— |
|
|
|
|
Goodwill |
|
|
— |
|
|
|
|
|
— |
|
|
|
|
Accumulated impairment losses |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
Balance at March 31, 2016 |
|
¥ |
— |
|
¥ |
|
|
¥ |
— |
|
¥ |
|
|
7. 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
¥19,402 thousand and ¥10,143 thousand, respectively, at March 31, 2015 and
¥17,471 thousand and ¥12,510 thousand, respectively, at March 31, 2016.
Operating Leases
— The Company leases its data center facilities and office premises under cancellable operating lease arrangements with mainly two-year lease periods, 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, 2014, 2015 and 2016 were ¥ 357,884 thousand, ¥379,972 thousand and ¥823,790 thousand , respectively, and are included in “Cost of revenue” and “ Selling, general and administrative expenses.”
Future Minimum Lease Payments — As of March 31, 2016, the future minimum lease payments under
F- 24
noncancellable operating leases and capital leases are as follows:
|
|
|
|
|
|
|
|
||||||||
|
|
Thousands of Yen |
|
||||||||||||
|
|
Operating |
|
|
|
|
|||||||||
Years ending March 31, |
|
Leases |
|
Capital Leases |
|
||||||||||
2017 |
|
¥ |
|
|
¥ |
|
|
||||||||
2018 |
|
|
|
|
|
|
|
||||||||
2019 |
|
|
|
|
|
— |
|
||||||||
2020 |
|
|
|
|
|
— |
|
||||||||
2021 |
|
|
|
|
|
— |
|
||||||||
Total minimum lease payments |
|
¥ |
|
|
|
|
|
||||||||
|
|
|
|
|
|
|
|
||||||||
Less amounts representing interest |
|
|
|
|
|
|
|
||||||||
Present value of minimum lease payments |
|
|
|
|
|
|
|
||||||||
Less current portion |
|
|
|
|
|
|
|
||||||||
Noncurrent portion |
|
|
|
|
¥ |
|
|
8. CAPITALIZED COMPUTER SOFTWARE COSTS
The Company capitalizes the cost of computer software developed or purchased for internal use or to be sold.
The following is a summary of capitalized computer software costs as of March 31, 2015 and 2016:
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
||||
|
|
2015 |
|
2016 |
|
||
Balance at beginning of year |
|
¥ |
|
|
¥ |
|
|
Costs capitalized during year |
|
|
|
|
|
|
|
Acquisition of TechLaw Solutions |
|
|
|
|
|
— |
|
Foreign currency translation adjustments |
|
|
|
|
|
|
|
Other |
|
|
— |
|
|
|
|
Balance at end of year |
|
|
|
|
|
|
|
Accumulated amortization, end of year |
|
|
|
|
|
|
|
Capitalized computer software costs—net |
|
¥ |
|
|
¥ |
|
|
Included in the above are capitalized software costs for projects in progress of ¥91,089 thousand and ¥59,895 thousand at March 31, 2015 and 2016, respectively. For the years ended March 31, 2014, 2015 and 2016, the Company recognized amortization expenses related to capitalized software development costs of ¥237,886 thousand, ¥302,809 thousand and ¥374,510 thousand, respectively.
The following table shows the estimated amortization of capitalized computer software costs for each of the next five years:
|
|
|
|
|
|
|
Thousands of |
|
|
Years ending March 31, |
|
Yen |
|
|
2017 |
|
¥ |
|
|
2018 |
|
|
|
|
2019 |
|
|
|
|
2020 |
|
|
|
|
2021 |
|
|
|
|
F- 25
9. LONG-TERM DEBT
Short-term debt of ¥36,000 thousand and ¥52,000 thousand as of March 31, 2015 and 2016 consists of bank borrowings with a weighted average interest rate of 0.5%.
The components of long-term debt as of March 31, 2015 and 2016, are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
||||||||
|
|
2015 |
|
|
|
|
2016 |
|
|
|
|
|
|
Weighted |
|
|
|
|
Weighted |
|
|
|
|
|
|
average |
|
|
|
|
average |
|
|
|
|
|
|
interest |
|
2015 |
|
interest |
|
2016 |
|
||
|
|
rate |
|
Balance |
|
rate |
|
Balance |
|
||
Bank borrowings: |
|
|
|
|
|
|
|
|
|
|
|
Secured by equity securities, various rates |
|
— |
|
¥ |
— |
|
|
|
¥ |
|
|
Unsecured, various rates and various maturities through 2021 |
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: current portion |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
¥ |
|
|
|
|
¥ |
|
|
The aggregate annual maturities of long-term debt after March 31, 2016, are as follows:
|
|
|
|
|
Years ending |
|
|
|
|
March 31, |
|
Thousands of Yen |
|
|
2017 |
|
¥ |
|
|
2018 |
|
|
|
|
2019 |
|
|
|
|
2020 |
|
|
|
|
2021 |
|
|
|
|
|
|
¥ |
|
|
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.
In the year ended March 31, 2015 and 2016, the Company borrowed ¥800,000 thousand and ¥3,761,546 thousand from two banks, respectively. The balance including such borrowings as of March 31, 2015 and 2016 was ¥962,168 thousand and ¥4,247,860 thousand, respectively.
Credit Line
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 an additional ¥350,000 thousand in May 2012. As of March 31, 2015 and 2016, the balance of such borrowings was ¥262,500 thousand and ¥87,500 thousand, respectively. The unused balance under this arrangement was ¥612,500 thousand as of March 31, 2016.
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 that originally matured on December 27, 2013. The Company renewed the agreement to extend the maturity to December 22, 2016. Any further extension of the maturity date of the credit facility is subject to the consortium’s approval. There were no
F- 26
borrowings under this credit facility as of March 31, 2015 and 2016. The unused balance under this agreement was ¥1,000,000 thousand as of March 31, 2016.
Financial Covenants
There are restrictive covenants related to the borrowings under the credit line including requirements to maintain a minimum level of net assets and ordinary income in the stand-alone and consolidated financial statements of the Company, measured under accounting principles generally accepted in Japan (“Japanese GAAP”). FRONTEO 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 a stand-alone basis and ¥1,173,145 thousand on a consolidated basis under Japanese GAAP or (b) net assets at the end of the previous year, whichever is higher. The ordinary income covenant states that FRONTEO and the Company shall not record ordinary losses in any two consecutive fiscal years. FRONTEO is in compliance with these restrictive covenants at March 31, 2016.
There are restrictive covenants related to the bank borrowings of ¥3,565,283 thousand as of March 31, 2016, including requirements to maintain a minimum level of net assets and ordinary income in the stand-alone and consolidated financial statements of the Company, measured under Japanese GAAP. FRONTEO is required to maintain net assets at a level which is at least 75% of (a) net assets as of March 31, 2015; ¥5,032,824 thousand on a stand-alone basis and ¥5,220,772 thousand on a consolidated basis under Japanese GAAP or (b) net assets at the end of the previous year, whichever is higher. The ordinary income covenant states that FRONTEO and the Company shall not record ordinary losses in any two consecutive fiscal years. FRONTEO is in compliance with these restrictive covenants at March 31, 2016.
There are restrictive covenants related to the revolving credit facility of ¥1,000,000 thousand as of March 31, 2016, including requirements to maintain a minimum level of net assets and ordinary income in the stand-alone and consolidated financial statements of the Company, measured under Japanese GAAP. FRONTEO 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 a stand-alone basis and ¥2,655,320 thousand on a consolidated basis under Japanese GAAP or (b) net assets at the end of the previous year, whichever is higher. The ordinary income covenant states that FRONTEO and the Company shall not record ordinary losses in any two consecutive fiscal years.
As of March 31, 2016, the Company pledged EvD securities with carrying value of ¥3,873,347 thousand as security for borrowing from bank of ¥755,000 thousand and $9,120 thousand.
10. RETIREMENT AND SEVERANCE BENEFITS
The Company has defined benefit plans which consist primarily of the defined benefit indemnities plan covering substantially all employees in Japan. 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- 27
Reconciliations of the beginning and ending balances of the benefit obligation and the fair value of plan assets for the years ended March 31, 2015 and 2016, are as follows:
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
||||
|
|
2015 |
|
2016 |
|
||
Change in benefit obligation: |
|
|
|
|
|
|
|
Benefit obligation at beginning of year |
|
¥ |
|
|
¥ |
|
|
Service cost |
|
|
|
|
|
|
|
Interest cost |
|
|
|
|
|
|
|
Actuarial loss |
|
|
|
|
|
|
|
Benefits paid |
|
|
|
|
|
|
|
Foreign currency exchange rate changes |
|
|
|
|
|
|
|
Benefit obligation at end of year |
|
¥ |
|
|
¥ |
|
|
|
|
|
|
|
|
|
|
Change in plan assets: |
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year |
|
¥ |
|
|
¥ |
|
|
Employer contribution |
|
|
|
|
|
|
|
Benefits paid |
|
|
|
|
|
|
|
Foreign currency exchange rate changes |
|
|
|
|
|
|
|
Fair value of plan assets at end of year |
|
¥ |
|
|
¥ |
|
|
|
|
|
|
|
|
|
|
Funded status at end of year |
|
¥ |
|
|
¥ |
|
|
The accumulated benefit obligations as of March 31, 2015 and 2016 are ¥28,079 thousand and ¥62,390 thousand, respectively.
Amounts recognized in the consolidated balance sheets as of March 31, 2015 and 2016, are as follows:
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
||||
|
|
2015 |
|
2016 |
|
||
Other current liabilities |
|
¥ |
|
|
¥ |
|
|
Accrued retirement cost—noncurrent |
|
|
|
|
|
|
|
Amount recognized |
|
¥ |
|
|
¥ |
|
|
Net periodic retirement cost for the years ended March 31, 2013, 2015 and 2016, consists of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
|||||||
|
|
2014 |
|
2015 |
|
2016 |
|
|||
Service cost |
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
Interest cost |
|
|
|
|
|
|
|
|
|
|
Amortization of net gain (loss) |
|
|
|
|
|
|
|
|
|
|
Net periodic retirement cost |
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
Amounts recognized in other comprehensive income, net of tax, for the years ended March 31, 2014, 2015 and 2016, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
|||||||
|
|
2014 |
|
2015 |
|
2016 |
|
|||
Actuarial loss |
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
F- 28
Amounts recognized in accumulated other comprehensive income, net of tax, as of March 31, 2015 and 2016, are as follows:
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
||||
|
|
2015 |
|
2016 |
|
||
Accumulated actuarial loss |
|
¥ |
|
|
¥ |
|
|
The estimated net actuarial loss that will be amortized from accumulated other comprehensive income into net periodic retirement cost in the fiscal year ending March 31, 2017 is ¥4,313 thousand.
The Company uses its year-end as the measurement date for the benefit obligation. Weighted-average assumptions used to determine the year-end benefit obligation are as follows:
|
|
|
|
|
|
|
|
2015 |
|
2016 |
|
Discount rate |
|
|
|
|
|
Rate of compensation increase |
|
|
|
|
|
Weighted-average assumptions used to determine the net periodic retirement cost for the years ended March 31, 2014, 2015 and 2016, are as follows:
|
|
|
|
|
|
|
|
|
|
2014 |
|
2015 |
|
2016 |
|
Discount rate |
|
|
|
|
|
|
|
Rate of compensation increase |
|
|
|
|
|
|
|
The expected future benefit payments, which reflect expected future service, are as follows:
|
|
|
|
|
Years ending March 31, |
|
Thousands of Yen |
|
|
2017 |
|
¥ |
|
|
2018 |
|
|
|
|
2019 |
|
|
|
|
2020 |
|
|
|
|
2021 |
|
|
|
|
2022 through 2025 |
|
|
|
|
The Company expects to contribute ¥3,201 thousand to its defined benefit pension plan in the year ending March 31, 2017.
Plan assets cover the defined benefit plan for employees of a certain subsidiary. The Company’s funding policy with respect to the plan is to contribute annually its employees’ monthly salary to the plan. Plan assets are life insurance pooled investment portfolios, which are managed by an insurance company and guarantee a rate of return. The life insurance pooled investment portfolios are valued at conversion value and are classified as Level 2 in the fair value hierarchy.
11. 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
F- 29
to restore at the end of the lease to their original condition. The movements in asset retirement obligations for the years ended March 31, 2015 and 2016, are as follows:
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
||||
|
|
2015 |
|
2016 |
|
||
Balance at beginning of year |
|
¥ |
|
|
¥ |
|
|
Liabilities incurred during the year |
|
|
|
|
|
— |
|
Accretion expense |
|
|
|
|
|
|
|
Balance at end of year |
|
¥ |
|
|
¥ |
|
|
12. 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, Current portion of investments, Trade accounts receivables and Trade accounts payables
The carrying amount approximates fair value because of the short maturity of these instruments.
Investments
Investments consisted of time deposits with fixed interest rate of which contract was entered into in March 2016. Due to no significant changes in credit environment, the carrying amount approximates fair value. The fair value of time deposits with stated maturities was based on the discounted value of contractual cash flows. The discount rate was estimated using rates currently available in the local market.
Short-term and 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
||||||||||
|
|
2015 |
|
2016 |
|
||||||||
|
|
Carrying |
|
|
|
|
Carrying |
|
Fair |
|
|||
|
|
Amount |
|
Fair Value |
|
Amount |
|
Value |
|
||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term bank borrowing |
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
Long-term debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank borrowings |
|
|
|
|
|
|
|
|
|
|
|
|
|
Refer to Note 10 for fair value of plan assets which are comprised of the life insurance pooled investment portfolios, Note 14 for fair values of equity and debt securities and Note 13 for derivative financial instruments.
The level of the fair value hierarchy within the fair value measurement of cash equivalents is Level 1 and that of current portion of investments, investments, short-term debt and long-term debt is Level 2.
Significant Customers and Concentration of Credit Risk — Trade accounts receivable from the Company’s three largest customers accounted for approximately 48.4% and 33.6% of the Company’s trade accounts receivable as of March 31, 2015 and 2016, respectively.
F- 30
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 risk.
13. DERIVATIVE FINANCIAL INSTRUMENTS
The Company’s exposure to risks arising from fluctuations in foreign currencies and interest rates related to underlying long-term bank borrowings and forecasted borrowing transactions. In order to minimize the variability caused by those risks, the Company enters into interest rate swaps, cross currency interest rate swaps and forward currency exchange contracts to manage fluctuations in cash flows. The interest rate swaps entered into are receive-variable, pay-fixed interest rate swaps, and expired during the year ended March 31, 2014. The cross currency interest rate swaps entered into during the year ended March 31, 2016 are converting U.S. dollar basis borrowings with variable interest rate into Japanese yen basis borrowings with fixed interest rate. The forward currency exchange contracts entered into during the year ended March 31, 2016 are to receive Japanese yen amount from forecasted borrowing transaction on U.S. dollar basis.
The Company does not designate the interest rate swap and cross currency interest rate swap contracts as hedging instruments for the purpose of applying hedge accounting. Accordingly, those contracts are measured at fair value as either assets or liabilities and changes in their fair value are immediately recognized in earnings.
Volume of Derivative Activities
Notional amounts of cross currency interest rate swaps and forward currency exchange as of March 31, 2016 are summarized as follows:
|
|
|
|
|
|||||
|
|
|
Thousands of |
|
|||||
|
|
|
Yen |
|
|||||
Cross currency interest rate swaps |
|
¥ |
|
|
|||||
Forward currency exchange |
|
|
|
|
Impacts on the Consolidated Financial Statements
The fair values of derivatives in the consolidated balance sheets as of March 31, 2016 are summarized as follows:
|
|
|
|
|
|
|
||||||||
|
|
|
|
|
Thousands of Yen |
|
||||||||
|
|
|
Balance sheet |
|
Fair value |
|
||||||||
Derivative liabilities |
|
|
|
|
|
|
||||||||
Derivatives designated as hedging instruments |
|
|
|
|
|
|
||||||||
Forward currency exchange |
|
|
Derivative liabilities |
|
|
|
||||||||
Cross currency interest rate swaps |
|
|
Derivative liabilities |
|
|
|
Gains and losses related to derivatives recorded in the consolidated statements of operations for the year ended March 31, 2016 are summarized as follows:
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
|
|
|
|
|
|
Losses recognized |
|
|
|
|
|
Statement of |
|
in Statements of Operations |
|
|
|
|
|
operations |
|
on derivatives |
|
|
Forward currency exchange |
|
|
Loss on derivatives |
|
|
|
|
Cross currency interest rate swap |
|
|
Loss on derivatives |
|
|
|
|
F- 31
14. 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 1 — Unadjusted quoted prices in active markets for identical assets or liabilities
Level 2 — Directly 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 3 — Unobservable 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 and debt securities
Investments in certain equity securities for which quoted market prices are available to determine their fair value are included in Level 1. The fair value of debt securities presented in Level 2 is estimated based on quotes from financial institutions.
Derivative instruments
The fair value of derivative instruments presented in Level 2 is estimated based on quotes from financial institutions.
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, 2015 and 2016, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
||||||||||||||
Items Measured at Fair Value on a |
|
Carrying |
|
Total Fair |
|
Fair Value Hierarchy Classification |
|
||||||||||
Recurring Basis |
|
Value |
|
Value |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
||||||
March 31, 2015: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
¥ |
— |
|
¥ |
— |
|
|
Debt securities |
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
¥ |
— |
|
¥ |
— |
|
|
Debt securities |
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
— |
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities |
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
— |
|
F- 32
Assets and liabilities measured at fair value on a non-recurring basis
Assets and liabilities measured at fair value on a non-recurring basis as of March 31, 2016, are as follows :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
|||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
losses for |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
the year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ended |
|
|
Items Measured at Fair Value on a |
|
Carrying |
|
Total Fair |
|
Fair Value Hierarchy Classification |
|
March 31, |
|
|||||
Non-recurring Basis |
|
Value |
|
Value |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
2016 |
|
|
March 31, 2016: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment |
|
— |
|
— |
|
— |
|
— |
|
— |
|
¥ |
|
|
There are no assets and liabilities measured at fair value on a non-recurring basis as of March 31, 2015. See Note 5 for additional information.
15. INCOME TAXES (BENEFIT)
Income (loss) from operations before income taxes and income taxes (benefit) for the years ended March 31, 2014, 2015 and 2016, consist of the following components:
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
|
Thousands of Yen |
|
|||||||||||||||||||
|
|
2014 |
|
2015 |
|
2016 |
|
|||||||||||||||
Income (loss) from operations before income taxes: |
|
|
|
|
|
|
|
|
|
|
||||||||||||
Domestic |
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
||||||||||||
Foreign |
|
|
|
|
|
|
|
|
|
|
||||||||||||
Total |
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
||||||||||||
Income taxes (benefit)-current |
|
|
|
|
|
|
|
|
|
|
||||||||||||
Domestic |
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
||||||||||||
Foreign |
|
|
|
|
|
|
|
|
|
|
||||||||||||
Total |
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
||||||||||||
Income taxes (benefit)-deferred |
|
|
|
|
|
|
|
|
|
|
||||||||||||
Domestic |
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
||||||||||||
Foreign |
|
|
|
|
|
|
|
|
|
|
||||||||||||
Total |
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
For the years ended March 31, 2014, 2015 and 2016, ¥(105,651) thousand, ¥238,094 thousand and ¥183,125 thousand were recorded as income tax expenses (benefit) attributable to operations and ¥753 thousand, ¥50,902 thousand and ¥32,779 thousand were recognized as income tax expenses attributable to other comprehensive income, respectively.
F- 33
The tax effects of temporary differences and operating loss carryforwards and tax credits giving rise to deferred tax balances at March 31, 2015 and 2016 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
||||||||||
|
|
2015 |
|
2016 |
|
||||||||
|
|
Deferred Tax |
|
Deferred Tax |
|
Deferred Tax |
|
Deferred Tax |
|
||||
|
|
Asset |
|
Liability |
|
Asset |
|
Liability |
|
||||
Impairment loss on investments in securities |
|
¥ |
|
|
¥ |
— |
|
¥ |
|
|
¥ |
— |
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued municipal governments tax |
|
|
|
|
|
— |
|
|
|
|
|
— |
|
Allowance for doubtful accounts |
|
|
— |
|
|
— |
|
|
|
|
|
— |
|
Deferred revenue |
|
|
|
|
|
— |
|
|
— |
|
|
— |
|
Accrued bonus |
|
|
|
|
|
— |
|
|
|
|
|
— |
|
Accrued vacation |
|
|
|
|
|
— |
|
|
|
|
|
— |
|
Asset retirement obligations |
|
|
|
|
|
— |
|
|
|
|
|
— |
|
Operating loss carryforwards |
|
|
|
|
|
— |
|
|
|
|
|
— |
|
Derivatives |
|
|
— |
|
|
— |
|
|
|
|
|
— |
|
Accounts payable |
|
|
— |
|
|
— |
|
|
|
|
|
— |
|
Prepaid expenses |
|
|
— |
|
|
|
|
|
— |
|
|
|
|
Unrealized gain on available-for-sale securities |
|
|
— |
|
|
|
|
|
— |
|
|
|
|
Acquisition related costs |
|
|
|
|
|
— |
|
|
|
|
|
— |
|
Share-based compensation expense |
|
|
|
|
|
— |
|
|
|
|
|
— |
|
Intangible assets |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
Others |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowances |
|
|
|
|
|
— |
|
|
|
|
|
— |
|
Total |
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
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 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 allowances as of March 31, 2015 and 2016.
As of March 31, 2015, the valuation allowance for deferred tax assets related primarily to operating loss carryforwards of the Korean, Taiwanese and a certain domestic subsidiaries. As of March 31, 2016, the valuation allowance for deferred tax assets related primarily to operating loss carryforwards of the U.S., Taiwanese and certain domestic subsidiaries. The valuation allowance 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, 2014, 2015 and 2016 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
|||||||
|
|
2014 |
|
2015 |
|
2016 |
|
|||
Balance at beginning of year |
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
Additions |
|
|
|
|
|
|
|
|
|
|
Deductions |
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
As of March 31, 2016, the Taiwan subsidiary, the U.S. subsidiaries and domestic subsidiaries had operating loss carryforwards of ¥55,837 thousand, ¥35,247 thousand and ¥18,329 thousand, respectively. These operating loss
F- 34
carryforwards are available to offset future taxable income and will expire in March 2026 for Taiwanese taxes and March 2025 for Japanese income tax, respectively and will not expire for U.S. taxes.
Income taxes imposed by the national, prefectural and municipal governments of Japan resulted in a statutory tax rate of approximately 38.01 percent, 35.64 percent and 33.06 percent for the years ended March 31, 2014, 2015 and 2016, respectively.
Reconciliations between the amount of reported income taxes (benefit) and the amount of income taxes (benefit) computed using the normal statutory tax rate for the years ended March 31, 2014, 2015 and 2016 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
|||||||
|
|
2014 |
|
2015 |
|
2016 |
|
|||
Amount computed using normal Japanese statutory tax rate |
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
Increase (decrease) in taxes resulting from: |
|
|
|
|
|
|
|
|
|
|
Change in valuation allowance |
|
|
|
|
|
|
|
|
|
|
Change in statutory tax rate |
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense |
|
|
|
|
|
|
|
|
|
|
Earnings of foreign subsidiaries taxed at different rates from the statutory rate in Japan |
|
|
|
|
|
|
|
|
|
|
Officers’ remuneration not deductible for tax purpose |
|
|
|
|
|
|
|
|
— |
|
Research and development tax credit |
|
|
— |
|
|
|
|
|
— |
|
Non-deductible acquisition costs and earn-out liability adjustment |
|
|
— |
|
|
— |
|
|
|
|
Others-net |
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) as reported |
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
Change in valuation allowance for the year ended March 31, 2014 includes an increase of ¥19,860 thousand in the valuation allowance of the foreign subsidiaries in Korea and Taiwan and a domestic subsidiary as of March 31, 2014 for the deferred tax assets arising from their operating loss carryforwards incurred during the year ended March 31, 2014 and an increase of ¥16,262 thousand in the valuation allowance for the deferred tax assets arising from research and development tax credits.
Change in valuation allowance for the year ended March 31, 2015 includes an increase of ¥20,536 thousand in the valuation allowance of the foreign subsidiaries in Taiwan and a domestic subsidiary as of March 31, 2015 for the deferred tax assets arising from their operating loss carryforwards incurred during the year ended March 31, 2015 and an increase of ¥28,395 thousand in the valuation allowance for the deferred tax assets arising from acquisition-related costs, and a decrease of ¥16,262 thousand in the valuation allowance for the deferred tax assets arising from research and development tax credits.
Change in valuation allowance for the year ended March 31, 2016 includes an increase of ¥61,670 thousand in the valuation allowance of foreign subsidiaries in Taiwan and U.S. and domestic subsidiaries as of March 31, 2016 for the deferred tax assets arising from their operating loss carryforwards incurred during the year ended March 31, 2016 and a decrease of ¥17,666 thousand in the valuation allowance for the deferred tax assets of the foreign subsidiary in Korea.
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. Further, amendments to Japanese tax regulations were enacted into law on March 20, 2014. As a result, the 10 percent surtax was eliminated for the year from April 1, 2014 to March 31, 2015 and the combined statutory tax rate was reduced from 38.01 percent to 35.64 percent from the fiscal year beginning April 1, 2014. The effect of the change in tax rate was insignificant for the years ended March 31, 2014 and 2015.
F- 35
On March 31, 2015, amendments to Japanese tax regulations were enacted into law. As a result, the combined Japanese statutory rate was reduced from 35.64 percent to 33.10 percent from the fiscal year beginning April 1, 2015 and from 33.10 percent to 32.34 percent from the fiscal year beginning April 1, 2016. The impact of the tax law changes was a net deferred income taxes benefit of ¥15,798 thousand for the year ended March 31, 2015.
On March 29, 2016, amendments to Japanese tax regulations were enacted into law. As a result, the combined Japanese statutory rate will be reduced from 32.34 percent to 30.86 percent for the two years from April 1, 2016 to March 31, 2018 and from 32.34 percent to 30.62 percent from the fiscal year beginning April 1, 2018. The impact of the tax law changes was a net deferred income taxes benefit of ¥18,074 thousand for the year ended March 31, 2016.
16. SHARE-BASED COMPENSATION
In April 2011, the Company granted options to purchase a total of 800,000 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.
On June 21, 2012, the Company granted options to purchase a total of 160,000 equity shares with an exercise price per share of ¥810 to two employee/directors, two statutory auditors, twelve employees and six 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.
On May 31, 2013, the Company granted options to purchase a total of 300,000 equity shares with an exercise price per share of ¥469 to five employee/directors, seventeen employees and twenty five employees of subsidiaries (“7 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.
On May 15, 2013, the Company granted options to purchase a total of 88,000 equity shares with an exercise price per share of $5.03 to underwriters (“8 th series Stock Option Grant”). Options are immediately vested and are exercisable from May 16, 2013 to May 17, 2017.
On May 22, 2014, the Company granted options to purchase a total of 200,000 equity shares with an exercise price per share of ¥ 489 to five employee/directors and 19 employees (“9 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.
On May 28, 2015, the Company granted options to purchase a total of 200,000 equity shares with an exercise price per share of ¥1,029 to six employee/directors and 38 employees (“11th series Stock Option Grant”). Options are vested three years after the grant date and will be exercisable for three years from the vesting date.
On August 1, 2015, the Company granted options to purchase a total of 60,000 equity shares with an exercise price per share of ¥930 to 12 employees (“12th series Stock Option Grant”). Options are vested three years after the grant date and will be exercisable for three years from the vesting date.
On June 22, 2016, the Company granted options to purchase a total of 140,000 equity shares with an exercise price per share of ¥1,181 to 3 employees/directors and 42 employees (“13th 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. 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. For options granted to non-employees, the share-based payments are measured at their current fair values at each interim and year-end financial reporting date, and the change in fair value is recorded with an offsetting entry to additional paid-in capital, because (1) the quantity and
F- 36
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 consolidated statements of operations for the years ended March 31, 2014, 2015 and 2016:
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|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
|||||||
|
|
2014 |
|
2015 |
|
2016 |
|
|||
Cost of revenue |
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
Selling, general and administrative expenses |
|
|
|
|
|
|
|
|
|
|
Pre-tax share-based compensation expense |
|
|
|
|
|
|
|
|
|
|
Income tax benefit |
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|
|
|
|
|
|
|
|
|
Total share-based compensation expense, net of tax |
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
Cash received from stock options exercised during the year ended March 31, 2015 and 2016 was ¥17,642 thousand and ¥21,197 thousand, respectively. The tax deductions related to stock options exercised during the year ended March 31, 2015 and 2016 were ¥4,586 thousand and ¥1,349 thousand, respectively .
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. The Company estimates the number of forfeitures prior to vesting at the grant date. The effect of a subsequent change in estimated forfeitures is recognized through a cumulative adjustment when the actual forfeitures exceed the Company’s estimate. As of March 31, 2016, the total unrecognized compensation expense related to the unvested portion of the 7th, 9th, 11th, and 12th series Stock Option Grants was ¥98,548 thousand. As of March 31, 2016, the expense will be recognized over weighted-average periods of approximately 1.4 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 to employees during the years ended March 31, 2014, 2015 and 2016.
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2014 |
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2015 |
|
2016 |
|
Expected life of stock option (years) |
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|
Expected volatility |
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|
Risk-free interest rate |
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Expected dividend yield |
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Thousands of Yen |
|
|||||||
|
|
2014 |
|
2015 |
|
2016 |
|
|||
Weighted-average grant-date fair value per option to purchase one share |
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
The expected volatility is estimated based upon on the historical volatility of the Company ’ s share price for the last two and half years adjusted for the effect of changes expected in the future. The expected risk-free interest rate is
F- 37
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.
The weighted-average assumptions used in estimating the fair value of options granted to non-employees during the year ended March 31, 2014 are 5 years for contractual term, 106.9% for expected volatility, 0.4% for risk-free interest rate, and 1.3% for expected dividend yield, respectively. The weighted-average fair value per option to purchase one share as of March 31, 2014 is ¥270. No stock options granted to non-employees were outstanding as of March 31, 2016.
A summary of stock option activity except for 8th series Stock Option Grant during the year ended March 31, 2016, is presented below:
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|||||||
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Weighted-average |
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Aggregate |
|
||||||||
|
|
|
|
|
|
remaining |
|
intrinsic value |
|
|||||||||
|
|
|
|
Weighted-average |
|
contractual term |
|
(Thousands of |
|
|||||||||
|
|
Shares |
|
exercise price |
|
(in years) |
|
Yen) |
|
|||||||||
Outstanding—March 31, 2015 |
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|
|
¥ |
|
|
|
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|
|
|
|||||||
Granted |
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|
|||||||
Exercised |
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|
|||||||
Forfeited |
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|
|||||||
Outstanding—March 31, 2016 |
|
|
|
¥ |
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|
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|
¥ |
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|
|||||||
Vested and expected to vest —March 31, 2016 |
|
|
|
¥ |
|
|
|
|
¥ |
|
|
|||||||
Exercisable—March 31, 2016 |
|
|
|
¥ |
|
|
|
|
¥ |
|
|
Exercises of Stock Options
No stock options were exercised during the years ended March 31, 2014. The total intrinsic value of options exercised during the year ended March 31, 2015 and 2016 was ¥66,560 thousand and ¥191,100 thousand, respectively. The amount of cash received from exercise of stock options for the year ended March 31, 2015 and 2016 were ¥17,642 thousand and ¥21,197 thousand, respectively.
Nonvested Stock Options
A summary of the status of the Company ’ s nonvested stock options and their weighted-average grant date fair value at March 31, 2016, is as follows:
|
|
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|
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
Grant Date Fair |
|
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|
|
Shares |
|
Value |
|
|
Nonvested—April 1, 2015 |
|
|
|
|
|
|
Granted |
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|
|
Vested |
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|
|
Forfeited |
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|
|
|
Nonvested—March 31, 2016 |
|
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|
|
|
|
F- 38
17. 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 generally 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 available for dividends shown in FRONTEO’s general books of account, as determined under Japanese GAAP, amounted to ¥1,420,827 thousand at March 31, 2016.
Net income attributable to FRONTEO’s shareholders and transfers from noncontrolling interest
The following schedule represents the effects of changes in FRONTEO’s ownership interest in its subsidiaries in the Company’s shareholder’s equity for the year ended March 31, 2015.
|
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|
|
|
Thousands of Yen |
|
|
|
|
2015 |
|
|
Net income attributable to FRONTEO, Inc. shareholders |
|
¥ |
|
|
Transfers from noncontrolling interest |
|
|
|
|
Increase in additional paid-in capital for |
|
|
|
|
acquisition of noncontrolling interest of a subsidiary |
|
|
|
|
Net transfers from noncontrolling interest |
|
|
|
|
Change from net income attributable to FRONTEO, Inc. shareholders and transfers from noncontrolling interest |
|
¥ |
|
|
F- 39
18. OTHER COMPREHENSIVE INCOME
The changes in each component of other comprehensive income for the years ended March 31, 2014, 2015 and 2016, are as follows:
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|
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|
|
|
|
Thousands of Yen |
|
||||||||||
|
|
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|
|
|
|
Adjustments |
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|
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|
|
|
|
Foreign |
|
|
|
|
related to |
|
Accumulated |
|
|||
|
|
currency |
|
Unrealized |
|
retirement and |
|
other |
|
||||
|
|
translation |
|
holding gain on |
|
severance |
|
comprehensive |
|
||||
|
|
adjustments |
|
securities |
|
benefits |
|
income (loss) |
|
||||
Balance at April 1, 2013 |
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
Period change |
|
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|
|
Balance at April 1, 2014 |
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|
|
Period change |
|
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|
|
Balance at March 31, 2015 |
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|
|
|
Period change |
|
|
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|
|
|
|
|
Balance at March 31, 2016 |
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
The tax effects allocated to each component of other comprehensive income for the years ended March 31, 2014, 2015 and 2016 were as follows:
|
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|
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|
|
|
|
|
|
Thousands of Yen |
|
|||||||
|
|
2014 |
|
|||||||
|
|
Before Tax |
|
Tax Benefit |
|
Net of Tax |
|
|||
|
|
Amount |
|
(Expense) |
|
Amount |
|
|||
Foreign currency translation adjustments |
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
Unrealized holding gain on securities: |
|
|
|
|
|
|
|
|
|
|
Amount arising during the period |
|
|
|
|
|
|
|
|
|
|
Net unrealized holding gain during the period |
|
|
|
|
|
|
|
|
|
|
Adjustments related to retirement and severance benefits: |
|
|
|
|
|
|
|
|
|
|
Amount arising during the period |
|
|
|
|
|
|
|
|
|
|
Net adjustments related to retirement and severance benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income |
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015 |
|
|||||||
|
|
Before Tax |
|
Tax Benefit |
|
Net of Tax |
|
|||
|
|
Amount |
|
(Expense) |
|
Amount |
|
|||
Foreign currency translation adjustments |
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
Unrealized holding gain on securities: |
|
|
|
|
|
|
|
|
|
|
Amount arising during the period |
|
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|
|
|
|
|
|
|
|
Net unrealized holding gain during the period |
|
|
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|
|
|
|
|
|
|
Adjustments related to retirement and severance benefits: |
|
|
|
|
|
|
|
|
|
|
Amount arising during the period |
|
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|
|
|
|
|
|
|
Net adjustments related to retirement and severance benefits |
|
|
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|
|
|
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|
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|
|
|
|
|
|
Other comprehensive income |
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
F- 40
|
|
|
|
|
|
|
|
|
|
|
|
|
2016 |
|
|||||||
|
|
Before Tax |
|
Tax Benefit |
|
Net of Tax |
|
|||
|
|
Amount |
|
(Expense) |
|
Amount |
|
|||
Foreign currency translation adjustments |
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
Unrealized holding gain on securities: |
|
|
|
|
|
|
|
|
|
|
Amount arising during the period |
|
|
|
|
|
|
|
|
|
|
Net unrealized holding gain during the period |
|
|
|
|
|
|
|
|
|
|
Adjustments related to retirement and severance benefits: |
|
|
|
|
|
|
|
|
|
|
Amount arising during the period |
|
|
|
|
|
|
|
|
|
|
Net adjustments related to retirement and severance benefits |
|
|
|
|
|
|
|
|
|
|
Other comprehensive income |
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
The changes in accumulated other comprehensive income (loss) by component for the years ended March 31, 2014, 2015 and 2016 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
||||||||||
|
|
|
|
|
|
|
|
Adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
related to |
|
|
|
|
|
|
|
Foreign currency |
|
Unrealized |
|
retirement and |
|
|
|
|
|||
|
|
translation |
|
holding gain |
|
severance |
|
|
|
|
|||
|
|
adjustments |
|
on securities |
|
benefits |
|
Total |
|
||||
Balance at March 31, 2013 |
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
Other comprehensive income (loss) before reclassifications |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts reclassified from accumulated other comprehensive income (loss) |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
Net current-year other comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2014 |
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
Other comprehensive income (loss) before reclassifications |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts reclassified from accumulated other comprehensive income |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
Net current-year other comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2015 |
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
Other comprehensive income (loss) before reclassifications |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts reclassified from accumulated other comprehensive income (loss) |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
Net current-year other comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2016 |
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
F- 41
The amounts reclassified out of accumulated other comprehensive income (loss) into the consolidated statements of operations, with affected line items, for the years ended March 31, 2014, 2015 and 2016 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||
|
|
|
|
|
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|
|
|
|
|
Affected line items in the |
|
||||||||||||||
Details about accumulated other comprehensive |
|
Thousands of Yen |
|
consolidated statements of |
|
|||||||||||||||||||||
income components |
|
2014 |
|
2015 |
|
2016 |
|
operations |
|
|||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||
Adjustments related to retirement and severance benefits |
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
*(1) |
|
||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
Income taxes (benefit) |
|
||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
||||||||||||||
Total reclassifications for the year |
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
|
|
*(1) These are included in the computation of net periodic pension cost (See Note 10).
19. 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 (loss) 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 (loss) 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 per share for the years ended March 31, 2014, 2015 and 2016 is as follows :
|
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
||||||
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
(Thousands of Yen) |
|
Common |
|
|
|
|
|
|
|
Net Income |
|
Shares Outstanding |
|
Per Share |
|
||
|
|
|
|
(Denominator) |
|
Amount |
|
||
Basic net income attributable to FRONTEO, Inc. shareholders |
|
¥ |
|
|
|
|
¥ |
|
|
Effect of dilutive securities: Stock options *(1) |
|
|
|
|
— |
|
|
|
|
Diluted net income attributable to FRONTEO, Inc. shareholders |
|
¥ |
|
|
|
|
¥ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015 |
|
||||||
|
|
(Thousands of |
|
Weighted-Average |
|
|
|
|
|
|
|
Yen) |
|
Common |
|
|
|
|
|
|
|
Net Income |
|
Shares Outstanding |
|
Per Share |
|
||
|
|
(Numerator) |
|
(Denominator) |
|
Amount |
|
||
Basic net income attributable to FRONTEO, Inc. shareholders |
|
¥ |
|
|
|
|
¥ |
|
|
Effect of dilutive securities: Stock options |
|
|
|
|
|
|
|
|
|
Diluted net income attributable to FRONTEO, Inc. shareholders |
|
¥ |
|
|
|
|
¥ |
|
|
F- 42
|
|
|
|
|
|
|
|
|
|
|
|
2016 |
|
||||||
|
|
(Thousands of |
|
Weighted-Average |
|
|
|
|
|
|
|
Yen) |
|
Common |
|
|
|
|
|
|
|
Net Loss |
|
Shares Outstanding |
|
Per Share |
|
||
|
|
(Numerator) |
|
(Denominator) |
|
Amount |
|
||
Basic net income attributable to FRONTEO, Inc. shareholders |
|
¥ |
|
|
|
|
¥ |
|
|
Effect of dilutive securities: Stock options *(1) |
|
|
|
|
— |
|
|
|
|
Diluted net income attributable to FRONTEO, Inc. shareholders |
|
¥ |
|
|
|
|
¥ |
|
|
*(1) The calculation of diluted net loss per share for the years ended March 31, 2014 and 2016 does not include potentially dilutive securities because their inclusion would be anti-dilutive (i.e., reduce the net loss per share).
20. SEGMENT REPORTING
Our operating segments are defined as components of our company that engage in business activities from which we earn revenues and incur expenses and for which separate financial information is available that is evaluated regularly by the chief operation decision maker in deciding how to allocate resources and in assessing performance. Our operations in Japan, the U.S. and Other (which includes South Korea and Taiwan) have been identified as our three operating segments. 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 which include revenues, operating income or loss and segment assets to assess segment performance and allocate resources to segments.
Each segment recognize revenue for which the segment has a direct contractual relationships with its clients. Most of our clients are either corporate clients in Asia or U.S.- based law firms representing corporate clients in Asia. If our services are contracted between a law firm in the U.S. and FRONTEO USA, Inc. or FRONTEO Government Services, Inc., revenue is recorded by the U.S. segment, although the end corporate client may be located in other areas than the U.S.
The Company’s reportable segments are the same as its operating segments.
Segment information for the years ended March 31, 2014, 2015 and 2016 is presented below:
F- 43
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
|||||||
|
|
2014 |
|
2015 |
|
2016 |
|
|||
Japan |
|
|
|
|
|
|
|
|
|
|
Outside customers |
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
Intersegment *(1) |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
|
|
|
|
|
|
|
|
|
Outside customers |
|
|
|
|
|
|
|
|
|
|
Intersegment *(1) |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
Outside customers |
|
|
|
|
|
|
|
|
|
|
Intersegment *(1) |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eliminations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue after eliminations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments *(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated revenue |
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
*(1) Intersegment transaction prices and other conditions are determined based on market prices and total costs of transactions
*(2) These amounts primarily represent the net impact of adjustments arising from differences in the timing of the revenue recognition under U.S. GAAP and Japanese GAAP.
F- 44
Segment Performance Measure:
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
|||||||
|
|
2014 |
|
2015 |
|
2016 |
|
|||
Segment profit (loss) |
|
|
|
|
|
|
|
|
|
|
Japan |
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
U.S. |
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment profit after eliminations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments *(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated operating income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated amounts: |
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
Loss on derivatives |
|
|
— |
|
|
— |
|
|
|
|
Foreign currency exchange gains |
|
|
|
|
|
|
|
|
|
|
Dividend income |
|
|
|
|
|
|
|
|
|
|
Other-net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated income (loss) before income taxes |
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
*(3) Adjustments primarily relate to differences between U.S. GAAP and Japanese GAAP for revenue recognition, amortization of goodwill, remeasurement of earn-out and vacation allowance expenses for employees.
Segment Assets:
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
||||
|
|
2015 |
|
2016 |
|
||
Segment assets |
|
|
|
|
|
|
|
Japan |
|
¥ |
|
|
¥ |
|
|
U.S. |
|
|
|
|
|
|
|
Other *(4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eliminations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment assets after eliminations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments *(5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated assets |
|
¥ |
|
|
¥ |
|
|
*(4) The Company recognized an impairment loss on long-lived assets of ¥5,144 thousand for the year ended March 31, 2016 consisted of property, plant and equipment owned by a subsidiary in Taiwan.
*(5) Adjustments primarily relate to differences between U.S. GAAP and Japanese GAAP for revenue recognition, depreciation and amortization and deferred tax assets.
F- 45
Capital expenditures on long-lived assets:
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 |
|
|||||||
|
|
2014 |
|
2015 |
|
2016 |
|
|||
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
Japan |
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
U.S. |
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments*(6) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated depreciation and amortization |
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
Entity-Wide Information:
For the year ended March 31, 2014, revenue from Samsung Electronics Co., Ltd. and TMI Associates amounted to ¥1,639,791 thousand and ¥622,355 thousand, respectively, representing approximately 39.1 percent and 14.8 percent, respectively, of the total revenue. For the year ended March 31, 2015, revenue from Samsung Electronics Co., Ltd. and TMI Associates amounted to ¥1,969,335 thousand and ¥641,074 thousand, respectively, representing approximately 31.4 percent and 10.2 percent, respectively, of the total revenue. For the year ended March 31, 2016, revenue from Samsung Electronics Co., Ltd. and TMI Associates amounted to ¥1,657,074 thousand and ¥1,022,656 thousand, respectively, representing approximately 15.6 percent and 9.7 percent, respectively, of the total revenue. These customers are attributable to Japan except revenues of ¥1,639,791 thousand, ¥1,969,335 thousand and ¥1,657,074 thousand for Samsung Electronics Co., Ltd. for the years ended March 31, 2014, 2015 and 2016, respectively, which are reported in the U.S. and Other.
F- 46
The information concerning revenue by service categories for the years ended March 31, 2014, 2015 and 2016, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
|||||||
|
|
2014 |
|
2015 |
|
2016 |
|
|||
eDiscovery |
|
|
|
|
|
|
|
|
|
|
Review |
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
Other |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
Investigation |
|
|
|
|
|
|
|
|
|
|
Sales of forensic tools |
|
|
|
|
|
|
|
|
|
|
Forensic training |
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
¥ |
|
|
¥ |
|
|
¥ |
|
|
Long-lived assets held in Japan, the U.S. and Other as of March 31, 2016 were ¥425,485 thousand, ¥631,532 thousand and ¥63,703 thousand, respectively. Long-lived assets include property and equipment.
21. ADVERTISING COSTS
Advertising costs, which are included in “Selling, general and administrative expenses” incurred during the years ended March 31, 2014, 2015 and 2016, relate primarily to advertisements in magazines and journals and amounted to ¥194,157 thousand, ¥179,064 thousand and ¥151,214 thousand, respectively.
22. RESEARCH AND DEVELOPMENT COSTS
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 incurred during the years ended March 31, 2014, 2015 and 2016 amounted to ¥122,940 thousand, ¥89,451 thousand and ¥91,600 thousand respectively.
23. RELATED PARTY TRANSACTIONS
During the years ended March 31, 2014, 2015 and 2016, the Company entered into transactions with Shirasaka & Patent Partners (“SPP”) which was managed by president of UBIC Patent Partners Inc. (“UPP”), a subsidiary of FRONTEO. SPP provides patent filing services to the Company. During the year ended March 31, 2016, UPP was absorbed into FRONTEO.
The amounts of balances as of March 31, 2014, 2015 and 2016 and transactions of the Company with SPP for the years ended March 31, 2014, 2015 and 2016, are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
|||||||
|
|
2014 |
|
2015 |
|
2016 |
|
|||
Advance payment |
|
¥ |
— |
|
¥ |
|
|
¥ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|||||||
|
|
2014 |
|
2015 |
|
2016 |
|||
Expenses |
|
¥ |
|
|
¥ |
|
|
¥ |
|
F- 47
During the year ended March 31, 2016, the Company entered into transactions with Consultoris, Inc. (“CI”) and IIOSS, Inc. (“IIOSS”) which are managed by management of foreign subsidiaries. CI provides consulting services and IIOSS provides outsourcing support services to the Company.
The amounts of balances as of March 31, 2016 was nil, and transactions of the Company with CI and IIOSS for the year ended March 31, 2016 were ¥ 40,363 thousand.
24. SUBSEQUENT EVENTS
Stock Options
On June 23, 2016, the 13th series Stock Option Grant was approved at FRONTEO’s ordinary general meeting of shareholders. On June 21, 2016, FRONTEO’s board of directors resolved and approved the issuance of stock options under the 13th series Stock Option Grant.
The key terms and conditions for the 13th series Stock Option Grant are as follows:
|
|
|
Grant date |
|
June 22, 2016 |
Number of shares to be issued |
|
140,000 shares |
Exercise price per share |
|
¥1,181 |
Vesting period |
|
3 years |
Exercise period of the stock options |
|
June 23, 2019 to |
|
|
June 22, 2022 |
Total number of recipients – employee/directors and employees of the Company |
|
45 |
Conditions for the stock options to be vested |
|
Enrolled as director or employee of the Company |
Conclusion and execution of a syndicated loan agreement
At the board of directors meeting held on May 26, 2016, the directors resolved to enter into a syndicated loan agreement with the Bank of Tokyo-Mitsubishi UFJ, Ltd., an arranger, aiming for steadily financing funds for the
F- 48
Company’s working capital. The Company concluded the syndicated loan agreement and took out the loan on July 26, 2016, as follows:
|
|
|
Amount of the loan |
|
¥1,000,000 thousand |
Agreement date |
|
July 26, 2016 |
Agreement Form |
|
Term loan with an executable time limit |
Agreement Term |
|
6 years |
Borrowing rate |
|
Floating rate (basic rate of interest + spread) |
Collateral |
|
Without collateral |
Financial covenant |
|
1. The Company shall maintain its total net assets both in the non-consolidated and consolidated balance sheets at least 75% of the greater of the total net assets as of March 31, 2016, or the total net assets as of March 31, 2015, at every fiscal year end. |
|
|
2. The Company shall not report ordinary loss in two consecutive periods in the non-consolidated and consolidated statements of income for every fiscal year. |
Arranger and agent |
|
The Bank of Tokyo-Mitsubishi UFJ, Ltd |
Participating financial institutions |
|
The Bank of Tokyo-Mitsubishi UFJ, Ltd |
|
|
Sumitomo Mitsui Banking Corporation |
|
|
The Bank of Yokohama |
|
|
Mizuho Bank, Ltd. |
|
|
Resona Bank, Limited |
* * * * * *
F- 49
Articles of Incorporation of
FRONTEO, Inc.
Effective Date
August 8, 2003
Amendment
August 3, 2004
April 20, 2005
June 29, 2006
February 6, 2007
June 25, 2008
June 23, 2009
January 6, 2010
June 25, 2010
September 26, 2011
April 1, 2012
June 24, 2014
June 23, 2015
July 1, 2016
CHAPTER I
GENERAL PROVISIONS
Article 1 Company Name
The name of the Company is KABUSHIKI KAISHA FRONTEO. The Company shall be styled “FRONTEO, Inc.” in English.
Article 2 Purposes
The purposes of the Company are to engage in the following business activities:
|
1. |
|
to sell, maintain, export and import forensic products; |
|
2. |
|
to develop, manufacture, sell, maintain, export and import products with forensic technology; |
|
3. |
|
to undertake forensic investigation; |
|
4. |
|
to invest, research, educate, train, guide, advise and consult regarding forensic investigation; |
|
5. |
|
to develop, manufacture, sell, maintain, export and import products related to discovery and other international litigation support; |
|
6. |
|
to provide discovery and other international litigation support services; |
|
7. |
|
to support information asset management; |
|
8. |
|
to support strategic preventive law management; and |
|
9. |
|
to develop, manufacture, sell, maintain, export and import, and provide services as to, products with information analysis technology; |
|
10. |
|
to plan, plot, develop, support and provide technology through computer system and software, and manufacture, sell, maintain, export and import related products; |
|
11. |
|
to conduct any other businesses that are related to or incidental to those matters described above. |
Article 3 Location of Head Office
The head office of the Company shall be located in Minato-ku, Tokyo.
Article 4 Establishment of Organs
In addition to its General Meeting of Shareholders and appointment of Directors, the Company shall have:
|
1. |
|
Board of Directors |
|
2. |
|
Statutory Auditor(s) |
|
3. |
|
Board of Statutory Auditors; and |
|
4. |
|
Accounting Auditor |
Article 5 Method of Making Public Notices
Public notices of the Company shall be carried in electronic public notice; provided, however, when it is unable to make a public notice by electronic public notice due to an accident or any other inevitable reasons, public notices of the Company shall be published in Japan Economic Newspaper (Nihon Keizai Shinbun) .
2
CHAPTER II
SHARES
Article 6 Number of Shares Authorized to be Issued
The total number of shares authorized to be issued by the Company shall be seven million and two hundred thousand (72,000,000) shares.
Article 7 Acquisition of Treasury Shares
Subject to Article 165 Paragraph 2 of the Company Act, the Company may acquire treasury shares through market transactions by a resolution of the board of directors.
Article 8 Unit of Share
One (1) unit of the share of the Company shall be composed of ten (100) shares of the Company.
Article 9 Restriction on Rights in relation to Shareholdings less than One Unit
A shareholder who holds shares less than one unit is not entitled to exercise any rights except for those as follows:
|
1. |
|
The rights provided in any of Article 189 Paragraph 2 of the Company Act |
|
2. |
|
The right to receive dividends of surplus |
|
3. |
|
The right to demand for acquisition of shares with put option |
|
4. |
|
The rights to be allotted to shares for subscription or share options for subscription |
Article 10 Administrator of the Shareholder Registry
|
1. |
|
The Company shall appoint the administrator of the shareholder registry. |
|
2. |
|
The administrator of the shareholder registry and its business office shall be determined by a resolution of the board of directors. |
|
3. |
|
The shareholder registry and the share option registry of the Company shall be kept at the business office of the administrator of shareholder registry. Stating, recording to the shareholder registry or the share option registry, or any other work with respect to the share or the share option of the Company shall not be dealt with by the Company but by the administrator of the shareholder registry. |
Article 11 Share Handling Regulations
Matters of stating or recording to the shareholder registry or the share option registry, any handlings with regard to procedure for exercise of rights by shareholders or any matters with respect to shares and share options, and fees shall be governed by the share handling regulations established by the board of directors, except as otherwise provided for in relevant laws or regulations or in these Articles of Incorporation.
Article 12 Record Date
|
1. |
|
The Company shall treat the shareholders with voting rights appearing in the shareholder registry as of the last day of each business year as the shareholders entitled to exercise their rights at the ordinary general meeting of shareholders for such business year. |
|
2. |
|
In addition to the preceding paragraph, when it is necessary to do so in order to determine who shall be entitled to |
3
exercise their rights as shareholders or pledgees, the Company, by a resolution of the board of directors, may fix a special record date, after giving a prior public notice thereof. |
4
CHAPTER III
GENERAL MEETING OF SHAREHOLDERS
Article 13 Convening General Meeting
An ordinary general meeting of shareholders ( teiji kabunushi sokai ) of the Company shall be convened within three (3) months after the following day of the close of each business year, and an extraordinary general meeting of shareholders ( rinji kabunushi sokai ) shall be convened whenever necessary.
Article 14 Convener and Chairperson
|
1. |
|
Unless otherwise provided by laws or regulations, a general meeting of shareholders shall be convened by a president-director and he/she shall preside over the conduct of it as a chairperson in accordance with a decision by a resolution of the board of directors. |
|
2. |
|
In the event that a president-director is not available, one of the other directors shall convene a general meeting of shareholders and act as a chairperson in accordance with the procedures previously established by the board of directors. |
Article 15 Internet Disclosure and Deemed Provision of Reference Documents
Upon convocation of a general meeting of shareholders, internet disclosure of any information that should be stated or presented in reference documents for a general meeting of shareholders, business reports, financial statements and consolidated financial statements in accordance with the Ordinance of the Ministry of Justice may deemed as provision of such information to shareholders.
Article 16 Proxy Vote
|
1. |
|
Shareholders may exercise their votes by proxy who is a shareholder of the Company. |
|
2. |
|
In such case set forth in the preceding paragraph, the shareholder or the proxy holder must present to the Company at each general meeting of shareholders a document evidencing his or her proxy authority. |
Article 17 Requirements of Resolution
|
1. |
|
Unless otherwise provided by laws or regulations or these Articles of Incorporation, resolutions of a general meeting of shareholders shall be adopted by a majority vote of shareholders present with voting rights exercisable at such meeting. |
|
2. |
|
Resolutions of a general meeting of shareholders set forth in Article 309 paragraph 2 of the Company Act shall be adopted by a majority of two thirds or more of shareholders with voting rights exercisable at such meeting and in attendance at a meeting which is attended by shareholders representing one third or more of the voting rights. |
Article 18 Minutes of General Meeting of Shareholders
The minutes of a shareholders meeting, which describe or record such as its proceedings, results and any other matters provided in laws or regulations, shall be prepared.
5
CHAPTER IV
DIRECTORS AND BOARD OF DIRECTORS
Article 19 Disposition of Board of Directors
The board of directors shall be settled at the Company.
Article 20 Number of Directors
The Company shall install no more than ten (10) directors.
Article 21 Appointment and Removal of Directors
|
1. |
|
The directors of the Company shall be appointed at a general meeting of shareholders. |
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2. |
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The directors of the Company shall be appointed by a resolution of the majority votes in a general meeting of shareholders, at which shareholders representing one-third or more of the voting rights of the shareholders entitled to exercise their voting rights shall be present. |
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3. |
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The appointment of directors shall not be made by cumulative voting. |
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4. |
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The directors of the Company shall be removed by two-thirds or more of votes of shareholders with voting rights exercisable and in attendance at a general meeting of shareholders which is attended by shareholders representing more than one half of the voting rights. |
Article 22 Term of Office of Directors
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1. |
|
The term of office of a director shall be until the termination of the ordinary general meeting of shareholders for the last business term which ends within two (2) years as from his/her assumption of office. |
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2. |
|
The term of office of a director appointed as a substitute of another director or appointed due to the increase in the number of directors shall be the same as the remaining period of the other remaining directors. |
Article 23 Representative Director and Titled Director
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1. |
|
A representative director shall be appointed by a resolution of the board of directors. |
|
(1) |
|
One (1) president-director ( torishimariyaku-shacho ) shall be appointed by a resolution of the board of directors, and one (1) chairperson of the board, one or more vice-presidents, senior managing directors ( senmu torishimari-yaku ) and ordinary managing directors ( jomu torishimari-yaku ) may be respectively appointed by a resolution of the board of directors, when deemed necessary. |
Article 24 Convener and Chair Person of Board of Directors
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1. |
|
Unless otherwise provided by laws or regulations, a meeting of the board of directors shall be convened by a president-director and he/she shall preside over the conduct of it as a chairperson. |
|
2. |
|
In the event that the a president-director is not available, one of the other directors shall convene a meeting of the board of directors and act as a chairperson in accordance with the procedures previously established by the board of directors. |
6
Article 25 Notice to Convene Meeting of Board of Directors
|
1. |
|
In convening a meeting of the board of directors, a notice to that effect shall be given to each director and statutory auditor by no later than three (3) days prior to the day of such meeting. However, such period may be shortened in time of an emergency. |
|
2. |
|
A meeting of the board of directors may be held without any such convening procedures if all of the directors and the statutory auditors consent to the omission. |
Article 26 Requirements of Resolution of Board of Directors
Resolutions of the board of directors of the Company shall be adopted by a majority vote of directors present, where a majority of the directors with voting rights exercisable are present at the meeting.
Article 27 Omission of resolution of meeting of the board of directors
In cases where directors submit a proposal with respect to a matter which is the purpose of the resolution of meeting of the board of directors, if all directors (limited to those who are entitled to participate in votes with respect to such matter) manifest their intention to agree to such proposal in writing or by means of electromagnetic records, it shall be deemed that the resolution to approve such proposal at the board of directors meeting has been made, unless a statutory auditor raises an objection with respect to the same.
Article 28 Minutes of Board of Directors
The minutes of a meeting of the board of directors, which describe or record such as its proceedings, results and any other matters provided in laws or regulations, shall be prepared and directors and statutory auditors who attended the meeting shall place their signature, or place their names and seals or electronic signature thereto.
Article 29 Board of Directors Regulations
Matters with regard to the board of directors shall be governed by the board of directors regulations established by the board of directors of the Company, except as otherwise provided for in relevant laws or regulations or in these Articles of Incorporation.
Article 30 Reward for Directors
The reward, bonus, and any other financial benefit that directors receive as compensation for its execution of duty (“ Reward ”) shall be determined by a resolution of the general meeting of shareholders.
Article 31 Limitation of Liability for Directors
|
1. |
|
Liability for damages of directors (including former directors) to the Company due to their failures in duty may be exempted by a resolution of the board of directors in accordance with Article 426 Paragraph 1 of the Company Act only to the extent laws or regulations allow. |
|
2. |
|
The Company may enter into contracts with directors (excluding Executive Members of the Board of Directors, etc.) to exempt the outside directors from liability for damages that arises from their failures in duty in accordance with Article 427 Paragraph 1 of the Company Act only to the extent laws or regulations allow. |
7
CHAPTER V
STATUTORY AUDITORS AND BOARD OF STATUTORY AUDITORS
Article 32 Disposition of Statutory Auditors and Board of Statutory Auditors
Statutory auditors and board of statutory auditors shall be settled at the Company.
Article 33 Number of Statutory Auditors
The Company shall install no more than five (5) statutory auditors.
Article 34 Appointment of Statutory Auditors
|
1. |
|
The statutory auditors shall be appointed at a general meeting of shareholders. |
|
2. |
|
The statutory auditors shall be appointed by a resolution of the majority votes in a general meeting of shareholders, at which shareholders representing one-third or more of the voting rights of the shareholders entitled to exercise their voting rights shall be present. |
Article 35 Term of Office of Statutory Auditors
|
1. |
|
The term of office of a statutory auditor shall be until the termination of the ordinary general meeting of shareholders for the last business term which ends within four (4) years as from his/her assumption of office. |
|
2. |
|
The term of office of a statutory auditor appointed as a substitute of another statutory auditor resigned prior to expiry of his/her term of office shall be the same as the remaining term of office of its predecessor. |
Article 36 Full-Time Statutory Auditors
Full-time statutory auditor(s) shall be determined by a resolution of the board of statutory auditors.
Article 37 Notice to Convene Meeting of Board of Statutory Auditors
|
1. |
|
In convening a meeting of the board of statutory auditors, a notice to that effect shall be given to each statutory auditor by no later than three (3) days prior to the day of such meeting. However, such period may be shortened in time of an emergency. |
|
2. |
|
A meeting of the board of statutory auditors may be held without any such convening procedures if all of the statutory auditors consent to the omission. |
Article 38 Requirements of Resolution of Board of Statutory Auditors
Unless otherwise provided by laws or regulations, resolutions of the board of statutory auditors shall be adopted by a majority vote of the statutory auditors.
Article 39 Minutes of Board of Statutory Auditors
8
The minutes of a meeting of the board of statutory auditors, which describe or record such as its proceedings, results and any other matters provided in laws or regulations, shall be prepared and statutory auditors who attended the meeting shall place their signature, or place their names and seals or electronic signature thereto.
Article 40 Reward for Statutory Auditors
Reward for statutory auditors shall be determined by a resolution of the general meeting of shareholders.
Article 41 Limitation of Liability for Statutory Auditors
|
1. |
|
Liability for damages of statutory auditors (including former statutory auditors) to the Company due to their failures in duty may be exempted by a resolution of the board of directors in accordance with Article 426 Paragraph 1 of the Company Act only to the extent laws or regulations allow. |
|
2. |
|
The Company may enter into contracts with statutory auditors to exempt the outside statutory auditors from liability for damages that arises from their failures in duty in accordance with Article 427 Paragraph 1 of the Company Act only to the extent laws or regulations allow. |
9
CHAPTER VI ACCOUNTING AUDITOR
Article 42 Appointment of Accounting Auditor
The accounting auditors shall be appointed at a general meeting of shareholders.
Article 43 Term of Office of Accounting Auditors
|
1. |
|
The term of office of an accounting auditor shall be until the termination of the ordinary general meeting of shareholders for the last business term that ends within one (1) year as from his/her assumption of office. |
|
2. |
|
The accounting auditors shall be reappointed at the ordinary general meeting of shareholders set forth in the immediately preceding paragraph, unless otherwise resolved at such ordinary general meeting of shareholders. |
Article 44 Reward for Accounting Auditors
Reward for accounting auditors shall be determined by a representative director upon obtaining consent of the board of statutory directors.
Article 45 Limitation of Liability for Accounting Auditors
|
1. |
|
Liability for damages of accounting auditors (including former accounting auditors) to the Company due to their failures in duty may be exempted by a resolution of the board of directors in accordance with Article 426 Paragraph 1 of the Company Act only to the extent laws or regulations allow. |
|
2. |
|
The Company may enter into contracts with accounting auditors to exempt the accounting auditors from liability for damages that arises from their failures in duty in accordance with Article 427 Paragraph 1 of the Company Act only to the extent laws or regulations allow. |
10
CHAPTER VII ACCOUNT
Article 46 Business Term
The business term of the Company shall be one (1) term per year from the first day of April every year through the last day of March of the following year.
Article 47 Final Dividend
Final dividend limited to money shall be distributed to those shareholders or registered pledgees listed in the final shareholder registry as of the last day of March every year by a resolution of the general meeting of shareholders.
Article 48 Interim Dividend
An interim dividend may be distributed to those shareholders or registered pledgees listed in the final shareholder registry as of the last day of September every year in accordance with Article 454 Paragraph 5 of the Company Act.
Article 49 Limitations
|
1. |
|
When the final dividend or the interim dividend is not received even after a lapse of three (3) years as from the day offered for the payment thereof, the Company shall be relieved of the obligation to pay such dividend. |
|
2. |
|
Any dividend shall not yield interest. |
11
Summary Translation of
Bridge Loan Agreement for Acquisition of EvD, Inc.
Lender: The Bank of Tokyo-Mitsubishi UFJ, Ltd.
Borrower: UBIC, Inc.
1. Purpose of loan agreement .
The purpose to meet the financial requirement arise from the acquisition of EvD, Inc.
2. Amount of loan and term.
Withdrawal |
Amount of Loan |
Loan Period |
Loan Withdrawal |
JPY 1,800,000,000 |
July 28, 2015 to January 29, 2016 |
3. Interest rate and method of payment.
Interest shall be paid on the 20 th day of every month. The interest rate is fixed during the term, and the annual borrowing interest rate formula is as below.
Withdrawal |
Amount of Loan |
Annual Borrowing Interest Rate Formula |
Loan Withdrawal |
JPY 1,800,000,000 |
TIBOR + 0.2% |
4. Repayment Date.
The Borrower shall repay all loan proceeds in a lump sum on the maturity date.
5. Prepayment.
The Borrower must obtain the Lender’s written consent if it desires to prepay the loan in advance of its maturity date. There is no prepayment penalty if the Lender accepts the Borrower’s prepayment request.
6. Liability of breach of contract.
If there is a breach of the terms of the agreement, the Lender has the right, among other actions, to: 1) accelerate the loan (including all fees, costs and interest); 2) unilaterally terminate the agreement; and 3) deduct from the Borrower’s bank accounts opened at the Lender without judicial process, to pay principal, interest and other expenses due pursuant to the agreement.
7. Loan recall and cross default.
The Lender has the right to recall the loan and implement cross default provisions if the Borrower:
|
· |
|
provides false documents or fails to disclose material facts; and |
|
· |
|
alters the purpose of the loan without Lender consent. |
8. Non-material terms.
The loan agreement contains terms concerning the following non-material matters, which have been omitted from this summary:
|
· |
|
Precondition for withdrawal; |
|
· |
|
Account supervision and payment of loan; |
|
· |
|
Repayment of capital and interest; |
|
· |
|
Notice provisions; |
|
· |
|
Law application and jurisdiction; |
|
· |
|
Notarization; |
|
· |
|
Obligations and promises; and |
|
· |
|
Obligation to reveal major transactions. |
Summary Translation of
Bridge Loan Agreement for Acquisition of EvD, Inc.
Lender: Sumitomo Mitsui Banking Corporation.
Borrower: UBIC, Inc.
1. Purpose of loan agreement .
The purpose to meet the financial requirement arise from the acquisition of EvD, Inc.
2. Amount of loan and term.
Withdrawal |
Amount of Loan |
Loan Period |
Loan Withdrawal |
JPY 1,800,000,000 |
July 28, 2015 to October 28, 2015 |
3. Interest rate and method of payment.
Interest shall be paid on the 20 th day of every month. The interest rate is fixed during the term, and the annual borrowing interest rate formula is as below.
Withdrawal |
Amount of Loan |
Annual Borrowing Interest Rate Formula |
Loan Withdrawal |
JPY 1,800,000,000 |
The institution’s procurement interest rate in short-run market + 0.3% |
4. Repayment Date.
The Borrower shall repay all loan proceeds in a lump sum on the maturity date.
5. Prepayment.
The Borrower must obtain the Lender’s written consent if it desires to prepay the loan in advance of its maturity date. There is no prepayment penalty if the Lender accepts the Borrower’s prepayment request.
6. Liability of breach of contract.
If there is a breach of the terms of the agreement, the Lender has the right, among other actions, to: 1) accelerate the loan (including all fees, costs and interest); 2) unilaterally terminate the agreement; and 3) deduct from the Borrower’s bank accounts opened at the Lender without judicial process, to pay principal, interest and other expenses due pursuant to the agreement.
7. Loan recall and cross default.
The Lender has the right to recall the loan and implement cross default provisions if the Borrower:
|
· |
|
provides false documents or fails to disclose material facts; and |
|
· |
|
alters the purpose of the loan without Lender consent. |
8. Non-material terms.
The loan agreement contains terms concerning the following non-material matters, which have been omitted from this summary:
|
· |
|
Precondition for withdrawal; |
|
· |
|
Account supervision and payment of loan; |
|
· |
|
Repayment of capital and interest; |
|
· |
|
Notice provisions; |
|
· |
|
Law application and jurisdiction; |
|
· |
|
Notarization; |
|
· |
|
Obligations and promises; and |
|
· |
|
Obligation to reveal major transactions. |
Summary Translation of
Bridge Loan Agreement for Acquisition of EvD, Inc.
Lender: Sumitomo Mitsui Banking Corporation.
Borrower: UBIC, Inc.
1. Purpose of loan agreement .
The purpose to meet the financial requirement arise from the acquisition of EvD, Inc.
2. Amount of loan and term.
Withdrawal |
Amount of Loan |
Loan Period |
Loan Withdrawal |
JPY 1,800,000,000 |
October 28, 2015 to November 27, 2015 |
3. Interest rate and method of payment.
Interest shall be paid on the 20 th day of every month. The interest rate is fixed during the term, and the annual borrowing interest rate formula is as below.
Withdrawal |
Amount of Loan |
Annual Borrowing Interest Rate Formula |
Loan Withdrawal |
JPY 1,800,000,000 |
The institution’s procurement interest rate in short-run market + 0.3% |
4. Repayment Date.
The Borrower shall repay all loan proceeds in a lump sum on the maturity date.
5. Prepayment.
The Borrower must obtain the Lender’s written consent if it desires to prepay the loan in advance of its maturity date. There is no prepayment penalty if the Lender accepts the Borrower’s prepayment request.
6. Liability of breach of contract.
If there is a breach of the terms of the agreement, the Lender has the right, among other actions, to: 1) accelerate the loan (including all fees, costs and interest); 2) unilaterally terminate the agreement; and 3) deduct from the Borrower’s bank accounts opened at the Lender without judicial process, to pay principal, interest and other expenses due pursuant to the agreement.
7. Loan recall and cross default.
The Lender has the right to recall the loan and implement cross default provisions if the Borrower:
|
· |
|
provides false documents or fails to disclose material facts; and |
|
· |
|
alters the purpose of the loan without Lender consent. |
8. Non-material terms.
The loan agreement contains terms concerning the following non-material matters, which have been omitted from this summary:
|
· |
|
Precondition for withdrawal; |
|
· |
|
Account supervision and payment of loan; |
|
· |
|
Repayment of capital and interest; |
|
· |
|
Notice provisions; |
|
· |
|
Law application and jurisdiction; |
|
· |
|
Notarization; |
|
· |
|
Obligations and promises; and |
|
· |
|
Obligation to reveal major transactions. |
Summary Translation of
Bridge Loan Agreement for Acquisition of EvD, Inc.
Lender: Sumitomo Mitsui Banking Corporation.
Borrower: UBIC, Inc.
1. Purpose of loan agreement .
The purpose to meet the financial requirement arise from the acquisition of EvD, Inc.
2. Amount of loan and term.
Withdrawal |
Amount of Loan |
Loan Period |
Loan Withdrawal |
JPY 1,800,000,000 |
November27, 2015 to December 24, 2015 |
3. Interest rate and method of payment.
Interest shall be paid on the 20 th day of every month. The interest rate is fixed during the term, and the annual borrowing interest rate formula is as below.
Withdrawal |
Amount of Loan |
Annual Borrowing Interest Rate Formula |
Loan Withdrawal |
JPY 1,800,000,000 |
The institution’s procurement interest rate in short-run market + 0.3% |
4. Repayment Date.
The Borrower shall repay all loan proceeds in a lump sum on the maturity date.
5. Prepayment.
The Borrower must obtain the Lender’s written consent if it desires to prepay the loan in advance of its maturity date. There is no prepayment penalty if the Lender accepts the Borrower’s prepayment request.
6. Liability of breach of contract.
If there is a breach of the terms of the agreement, the Lender has the right, among other actions, to: 1) accelerate the loan (including all fees, costs and interest); 2) unilaterally terminate the agreement; and 3) deduct from the Borrower’s bank accounts opened at the Lender without judicial process, to pay principal, interest and other expenses due pursuant to the agreement.
7. Loan recall and cross default.
The Lender has the right to recall the loan and implement cross default provisions if the Borrower:
|
· |
|
provides false documents or fails to disclose material facts; and |
|
· |
|
alters the purpose of the loan without Lender consent. |
8. Non-material terms.
The loan agreement contains terms concerning the following non-material matters, which have been omitted from this summary:
|
· |
|
Precondition for withdrawal; |
|
· |
|
Account supervision and payment of loan; |
|
· |
|
Repayment of capital and interest; |
|
· |
|
Notice provisions; |
|
· |
|
Law application and jurisdiction; |
|
· |
|
Notarization; |
|
· |
|
Obligations and promises; and |
|
· |
|
Obligation to reveal major transactions. |
Execution Version
PLEDGE AGREEMENT
Dated as of
December 24, 2015
among
THE PLEDGORS FROM TIME TO TIME
PARTY HERETO
and
Sumitomo Mitsui Banking Corporation
,
as Lender
TABLE OF CONTENTS
Page
Section 1. Definitions 4
Section 2. Pledge 7
Section 3. Representations and Warranties 8
Section 4. Covenants 10
Section 5. Voting Rights and Certain Payments 10
Section 6. All Payments in Trust 11
Section 7. Remedies 11
Section 8. Suretyship Waivers by Pledgor; Obligations Absolute 14
Section 9. Marshalling 15
Section 10. Proceeds of Dispositions 15
Section 11. Overdue Amounts 15
Section 12. Reinstatement 15
Section 13. Termination 15
Section 14. Miscellaneous 16
TABLE OF CONTENTS
(continued)
Schedule 1 — Information Regarding Pledgors and Pledged Securities
Exhibit A — Accession Supplement
Exhibit B — Consent of Issuer of Uncertificated Securities
Exhibit C — Form of Stock Power
PLEDGE AGREEMENT (this " Pledge Agreement "), dated as of December 24, 2015, among UBIC, Inc., a corporation organized under the laws of Japan ( the " Original Pledgor ", together with each Additional Pledgor which becomes a party to this Pledge Agreement, each, a " Pledgor ") and Sumitomo Mitsui Banking Corporation , as lender (the " Lender ").
WHEREAS, UBIC, Inc. (the " Borrower ") has entered into a term loan agreement ( taamu roon keiyakusho ) dated November 30, 2015 with the Lender (as amended, supplemented or otherwise modified from time to time, the " Loan Agreement "), pursuant to which the Lender ha s agreed to make loans or otherwise to extend credit to the Borrower upon the terms and subject to the conditions specified in the Loan Agreement;
WHEREAS, one or more additional S ubsidiaries of the Borrower (each, an " Additional Pledgor ") may hereafter become party to the this Pledge Agreement, to grant Liens to secure the Secured Obligations; and
WHEREAS, in order to secure all Secured Obligations and as required under the Loan Agreement, each Pledgor has agreed to execute and deliver to the Lender a pledge agreement in substantially the form hereof;
NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
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1.01. Definition of Terms Used Herein Generally . All terms used herein and defined in the NYUCC shall have the same definitions herein as specified therein; provided , however , that if a term is defined in Article 9 of the NYUCC differently than in another Article of the NYUCC, the term has the meaning specified in Article 9 of the NYUCC. |
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1.02. Definition of Certain Terms Used Herein . As used herein, the following terms shall have the following meanings: |
" Accession Supplement " means a supplement to this Pledge Agreement, executed by an Additional Pledgor and accepted by the Lender, substantially in the form of Exhibit A hereto.
" Affiliate " means, with respect to any Person, another Person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the Person specified.
" Business Day " means any day other than a Saturday, Sunday or other day which commercial banks in Tokyo and New York are authorized to close.
" Code " means the United States Internal Revenue Code of 1986.
" Control " means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ability to exercise voting power, by contract or otherwise. " Controlling " and " Controlled " have meanings correlative thereto.
" Debtor Relief Laws " means the Bankruptcy Code of the United States, and all other liquidation, conservatorship, bankruptcy, assignment for the benefit of creditors, moratorium, rearrangement, receivership, insolvency, reorganization, or similar debtor relief Laws of the United States or other applicable jurisdictions from time to time in effect and affecting the rights of creditors generally (including the Civil Rehabilitation Act of Japan ( minji saisei hou ) (Act No. 225 of 1999), the Corporate Reorganisation Act of Japan ( kaisha kousei hou ) (Act No. 154 of 2002), the Bankruptcy Act of Japan ( hasan hou ) (Act No. 75 of 2004), the Companies Act of Japan ( kaisha hou ) (Act No. 86 of 2005) in relation to special liquidation ( tokubetsu seisan ) and the Special Mediation Act of Japan ( tokutei saimu tou no chousei no sokushin no tame no tokutei choutei ni kansuru houritsu ) (Act No. 158 of 1999)) .
" Default Rate " means the default interest rate calculated pursuant to the Loan Agreement.
" Equity Interests " means shares of capital stock, partnership interests, membership interests, beneficial interests or other equity interests in any Person, and any option, warrant or other right entitling the holder thereof to purchase or otherwise acquire any of the foregoing.
" Event of Default " means an event of default ( kigenno rieki soushitsu jiyu ) as defined under the Loan Agreement.
" Events " has the meaning specified in Section 7.03(a) .
" Finance Documents " means the Loan Agreement and this Pledge Agreement.
" Governmental Authority " means the government of the United States or any other nation, or of any political subdivision thereof, whether state or local, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government (including any supra-national bodies such as the European Union or the European Central Bank).
" Laws " means, collectively, all international, foreign, federal, state and local statutes, treaties, rules, guidelines, regulations, ordinances, codes and administrative or judicial precedents or authorities, including the interpretation or administration thereof by any Governmental Authority charged with the enforcement, interpretation or administration thereof, and all applicable administrative orders, directed duties, requests, licenses, authorizations and permits of, and agreements with, any Governmental Authority, in each case whether or not having the force of law.
" Lien " means any mortgage, deed of trust, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), charge, or preference, priority or other security interest or preferential arrangement in the nature of a security interest of any kind or nature whatsoever (including any conditional sale or other title retention agreement, any easement, right of way or other encumbrance on title to real property, any financing lease having substantially the same economic effect as any of the foregoing and, in the case of securities, any purchase option, call or similar right of a third party with respect to such securities).
" NYUCC " means the Uniform Commercial Code as in effect in the State of New York from time to time.
" Obligor " means the Borrower and any Pledgor.
" Person " means any natural person, corporation, limited liability company, trust, joint venture, association, company, partnership, Governmental Authority or other entity.
" Pledged Collateral " has the meaning specified in Section 2.01 .
" Pledged Interests " has the meaning specified in Section 2.02( b ) .
" Pledged Securities " means Pledged Stock and Pledged Interests.
" Pledged Securities Schedule " means, collectively, Schedule 1 hereto and any similar schedules delivered by Additional Pledgors together with Accession Supplements, in each case as the same may be updated or modified from time to time by the Pledgors in accordance with the terms hereof.
" Pledged Stock " has the meaning specified in Section 2.02( a ) .
" Secured Obligations " means all advances to, and debts, liabilities, obligations, covenants and duties of, any Obligor arising under any Finance Document or otherwise with respect to any u tilisation of any loan under the Loan Agreement, whether direct or indirect (including those acquired by assumption), absolute or contingent, due or to become
due, now existing or hereafter arising and including interest and fees that accrue after the commencement by or against any Obligor or any Affiliate thereof of any proceeding under any Debtor Relief Laws naming such Person as the debtor in such proceeding, regardless of whether such interest and fees are allowed claims in such proceeding.
" Securities Act " has the meaning specified in Section 7.01( d ) .
" Security Interest " means any security interest granted by a Pledgor pursuant to Section 2.01 , as well as all other security interests created or assigned as additional security for the Secured Obligations pursuant to the provisions of this Pledge Agreement.
" Subsidiary " of a Person means a corporation, partnership, joint venture, limited liability company or other business entity of which a majority of the shares of securities or other interests having ordinary voting power for the election of directors or other governing body (other than securities or interests having such power only by reason of the happening of a contingency) are at the time beneficially owned, or the management of which is otherwise controlled, directly, or indirectly through one or more intermediaries, or both, by such Person.
" Target " means EVD, Inc.
" UCC " means the Uniform Commercial Code as in effect in any jurisdiction.
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1.03. Rules of Interpretation . With reference to this Pledge Agreement, unless otherwise specified herein: |
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(a) The definitions of terms herein shall apply equally to the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words " include ," " includes " and " including " shall be deemed to be followed by the phrase "without limitation." The word " will " shall be construed to have the same meaning and effect as the word " shall ." Unless the context requires otherwise, (i) any definition of or reference to any agreement, instrument or other document shall be construed as referring to such agreement, instrument or other document as from time to time amended, supplemented or otherwise modified (subject to any restrictions on such amendments, supplements or modifications set forth herein or in any Finance Document), (ii) any reference herein to any Person shall be construed to include such Person's successors and assigns, (iii) the words " herein ," " hereof " and " hereunder ," and words of similar import when used herein, shall be construed to refer to this Pledge Agreement in its entirety and not to any particular provision hereof, (iv) all references herein to Articles, Sections, Exhibits and Schedules shall be construed to refer to Articles and Sections of, and Exhibits and Schedules to, this Pledge Agreement, (v) any reference to any Law shall include all statutory and regulatory provisions consolidating, amending, replacing or interpreting such Law and any reference to any Law or regulation shall, unless otherwise specified, refer to such Law or regulation as amended, modified or supplemented from time to time and (vi) the words " asset " and " property " shall be construed to have the same meaning and effect and to refer to any and all tangible and intangible assets and properties, including cash, securities, accounts and contract rights. |
|
(b) In the computation of periods of time from a specified date to a later specified date, the word " from " means " from and including "; the words " to " and " until " each mean " to but excluding "; and the word " through " means " to and including ." |
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(c) Article, section and subsection headings herein are included for convenience of reference only and shall not affect the interpretation of this Pledge Agreement. |
|
2.01. Grant of Security Interest . Each Pledgor hereby pledges to the Lender, and grants to the Lender, in each case for the benefit of the Lender, a first priority security interest in the collateral described in Section 2.02 (collectively, the " Pledged Collateral ") to secure the payment or performance, as the case may be, in full of the Secured |
Obligations, whether at stated maturity, by acceleration or otherwise. |
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2.02. Description of Pledged Collateral . The Pledged Collateral with respect to each Pledgor is described as follows and on any separate schedules at any time furnished by such Pledgor to the Lender (which schedules are hereby deemed part of this Pledge Agreement): |
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(a) all right, title and interest of such Pledgor as a holder in and to (i) all Equity Interests including the Equity Interests described under such Pledgor's name on the Pledged Securities Schedule and all depositary shares and other rights in respect of such Equity Interests, and (ii) all shares of stock, certificates (if any), instruments or other documents evidencing or representing the same in each case whether now owned or hereafter acquired and whether certificated or uncertificated (collectively, the " Pledged Stock "); |
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(b) all right, title and interest of such Pledgor in and to all membership, partnership and similar Equity Interests issued to such Pledgor by any limited liability company, limited partnership or similar entity including those described under such Pledgor's name on the Pledged Securities Schedule, whether certificated or uncertificated, together with all capital and other accounts maintained by such Pledgor with respect to such Equity Interests and all income, gain, loss, deductions and credits allocated or allocable to such accounts, in each case whether now owned or hereafter acquired (collectively, the " Pledged Interests "); |
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(c) all right, title and interest of such Pledgor in and to all present and future payments, proceeds, dividends, distributions, instruments, compensation, property, assets, interests and rights in connection with or related to the collateral listed in clauses (a) and (b) above, and all monies due or to become due and payable to such Pledgor in connection with or related to such collateral or otherwise paid, issued or distributed from time to time in respect of or in exchange therefor, and any certificate (if any), instrument or other document evidencing or representing the same (including, without limitation, all proceeds of dissolution or liquidation); and |
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(d) all proceeds of all of the foregoing, of every kind, and all proceeds of such proceeds. |
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2.03. Lien Priorities; Distinct Liens . Notwithstanding anything to the contrary herein or in any other Finance Document, the Security Interests granted pursuant to this Pledge Agreement to the Lender for the benefit of the Lender and securing the Secured Obligations shall be a first priority Security Interest in the Pledged Collateral, junior to no other Security Interests. |
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2.04. Delivery of Certificates, Instruments, Etc. |
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(a) Each Pledgor shall deliver to the Lender the original shares of stock, certificates, instruments or other documents evidencing or representing Pledged Collateral of such Pledgor received after the date hereof (other than Pledged Collateral that this Pledge Agreement specifically permits such Pledgor to retain) within 5 Business Days after such Pledgor's receipt thereof. |
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(b) All Pledged Securities delivered to the Lender shall be accompanied by (i) duly signed but undated stock transfer forms substantially in the form of Exhibit C hereto , (ii) a certified copy of the constitutional documents of the issuer of the relevant Pledged Securities, (iii) (in the case of the Original Pledgor) a certified copy of a resolution of the board of directors of the Original Pledgor approving the terms of, and the transactions contemplated by, this Pledge Agreement and it executes this Pledge Agreement, (iv) (in the case of the Additional Pledgor) a certified copy of a resolution of the board of directors of such Additional Pledgor approving the terms of, and the transactions contemplated by, this Pledge Agreement and an Accession Supplement and it executes this Pledge Agreement and such Accession Supplement, (v) a specimen of the signature of a person authorized to execute this Pledge Agreement and/or such Accession Supplement and (vi) a legal opinion of Clifford Chance US LLP, legal advisors to the Lender in form and substance reasonably satisfactory to the Lender . |
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2.05. Registration . At any time following the occurrence and during the continuance of an Event |
of Default, the Lender may cause all or any of the Pledged Securities to be transferred to or registered in its name or the name of its nominee or nominees. |
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2.06. Authorization to File Financing Statements . Each Pledgor hereby irrevocably authorizes the Lender at any time and from time to time to file in any jurisdiction in which the UCC has been adopted any initial financing statements and amendments thereto that (a) describe the Pledged Collateral, and (b) contain any other information required by part 5 of Article 9 of the UCC for the sufficiency or filing office acceptance of any initial financing statement or amendment, including whether such Pledgor is an organization, the type of organization and any organization identification number issued to such Pledgor. Each Pledgor agrees to furnish any such information to the Lender promptly upon request. Each Pledgor also ratifies its authorization for the Lender to have filed in any UCC jurisdiction any like initial financing statements or amendments thereto if filed prior to the date hereof. |
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2.07. Control of Uncertificated Securities . Each Pledgor shall ensure at all times that the Lender has "control" for purposes of Section 8 ‑106 of the NYUCC of all uncertificated Equity Interests included within the Pledged Collateral. Each Pledgor pledging uncertificated Equity Interests deemed to be a security under Article 8 of the UCC shall cause the issuer of such Equity Interests to execute and deliver to the Lender as soon as practica ble, and in any event in no more than 5 Business Days , after the date that such Pledgor enters into this Pledge Agreement (by execution of this Pledge Agreement as of the date hereof or by execution and delivery of an Accession Supplement, as the case may be), a consent in the form attached hereto as Exhibit B . |
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3.01. Pledgor's Legal Status . (a) Such Pledgor is an organization of the type, and is organized in the jurisdiction, set forth under such Pledgor's name on Schedule 1 hereto or Section 4(b) of its Accession Supplement and (b) Schedule 1 hereto or Section 4(c) of its Accession Supplement sets forth such Pledgor's organizational identification number or states that such Pledgor has none. |
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3.02. Pledgor's Legal Name . Such Pledgor's exact legal name is that set forth under such Pledgor's name on Schedule 1 hereto or pursuant to Section 4(a) of its Accession Supplement and on the signature page hereof or thereof. |
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3.03. Pledgor's Locations . Schedule 1 hereto or Section 4(d) of its Accession Supplement sets forth such Pledgor's place of business or (if it has more than one place of business) its chief executive office, as well as its mailing address if different. Such Pledgor's place of business or (if it has more than one place of business) its chief executive office is located in a jurisdiction that has adopted the UCC or whose Laws generally require that information concerning the existence of non-possessory security interests be made generally available in a filing, recording or registration system as a condition or result of a security interest obtaining priority over the rights of a lien creditor with respect to the collateral; provided , however , that each Pledgor that becomes party hereto after the date hereof pursuant to the execution of an Accession Supplement shall represent to the Lender in Section 5 of its Accession Supplement whether or not the foregoing sentence is correct with respect to such Pledgor. |
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3.04. Title to Collateral . The Pledged Collateral is owned by such Pledgor free and clear of any Lien, except for Liens expressly permitted pursuant to the Loan Agreement. |
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3.05. Pledged Collateral . A complete and accurate list and description of all Pledged Securities of such Pledgor is set forth on the Pledged Securities Schedule. |
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3.06. Percentage Ownership . The Pledged Securities of each issuer specifically identified on the Pledged Securities Schedule constitute, and until the final payment and satisfaction in full of all of the Secured |
Obligations and the termination of all commitments under the Loan Agreement and the making of any payments required by Sections 9-608(a)(1)(C) or 9-615(a)(3) of the NYUCC, shall continue to constitute, the percentage of the outstanding equity of each such issuer as indicated on the Pledged Securities Schedule. |
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3.07. All of Pledgor's Interests . As of the date hereof or the date of such Pledgor's Accession Supplement, as the case may be, the Pledged Collateral of such Pledgor set forth on the Pledged Securities Schedule constitutes all of the Equity Interests of such Pledgor. |
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3.08. Due Authorization, Etc. The Pledged Securities listed on the Pledged Securities Schedule hereto have been duly authorized and validly issued and are fully paid and non-assessable, to the extent such concepts are applicable, and are not subject to any options to purchase or similar rights of any Person. |
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3.09. Nature of Security Interest . Upon the delivery of all certificated Pledged Securities of such Pledgor to the Lender and satisfaction of the other perfection requirements specified herein , the pledge of the Pledged Collateral of such Pledgor pursuant to this Pledge Agreement creates a valid and perfected first priority security interest in such Pledged Collateral, securing the prompt and complete payment, performance and observance of the Secured Obligations. |
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3.10. Solvency and No Insolvency Proceedings |
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(a) The amount of the "present fair saleable value" of the assets of the Target will, as of the date hereof, exceed the amount of all "liabilities of the Target, contingent or otherwise," at a fair valuation, as such quoted terms are determined in accordance with applicable federal and state laws governing determination of the insolvency of debtors; |
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(b) The "present fair saleable value" of the assets of the Target will, as of the date hereof, be greater than the amount that will be required to pay the liability of the Target on its debts as such debts become absolute and matured; |
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(c) The Target will not have an unreasonably small amount of capital with which to conduct its business; |
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(d) The Target will be able to pay its debts as they mature; and |
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(e) Neither the Target nor any of its Subsidiaries has instituted or consented to the institution of any proceeding under any Debtor Relief Law, or made an assignment for the benefit of creditors; or applied for or consented to the appointment of any receiver, trustee, custodian, conservator, liquidator, rehabilitator or similar officer for it or for all or any material part of its property; nor has any receiver, trustee, custodian, conservator, liquidator, rehabilitator or similar officer been appointed without the application or consent of such Person and the appointment continues undischarged or unstayed for 60 calendar days; nor has any proceeding under any Debtor Relief Law relating to any such Person or to all or any material part of its property been instituted without the consent of such Person and continues undismissed or unstayed for 60 calendar days, nor has an order for relief been entered in any such proceeding. |
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4.01. Pledgor's Legal Status . Such Pledgor shall not change its type of organization, jurisdiction of organization or other legal structure. |
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4.02. Pledgor's Name . Without providing at least 30 days' prior written notice to the Lender, such Pledgor shall not change its name. |
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4.03. Pledgor's Organizational Number . Without providing at least 30 days' prior written notice to the Lender, such Pledgor shall not change its organizational identification number if it has one. If such Pledgor does not have an organizational identification number and later obtains one, such Pledgor shall forthwith notify the Lender of such organizational identification number. |
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4.04. Locations . Without providing at least 30 days' prior written notice to the Lender, such Pledgor shall not change its principal residence, its place of business or (if it has more than one place of business) its chief executive office or its mailing address. |
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4.05. Further Assurances . Such Pledgor will, from time to time, at its expense, promptly execute and deliver all further instruments and documents and take all further action that may be necessary, or that the Lender may reasonably request, in order to perfect and protect any Security Interest granted or purported to be granted hereby or to enable the Lender to exercise and enforce its rights and remedies hereunder with respect to any Pledged Collateral of such Pledgor. |
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5.01. Voting Rights and Payments Prior to an Event of Default . So long as no Event of Default shall have occurred and be continuing, each Pledgor shall be entitled: |
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(a) to exercise, as it shall think fit, but in a manner not inconsistent with the terms hereof and/or the terms of the other Finance Documents, the voting power with respect to the Pledged Collateral of such Pledgor, and for that purpose the Lender shall (if any Pledged Securities of such Pledgor shall be registered in the name of the Lender or its nominee) execute or cause to be executed from time to time, at the expense of such Pledgor, such proxies or other instruments in favor of such Pledgor or its nominee, in such form and for such purposes as shall be reasonably required by such Pledgor and shall be specified in a written request therefor, to enable it to exercise such voting power with respect to the Pledged Securities of such Pledgor; and |
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(b) except as otherwise provided in Section 5.02 , to receive and retain for its own account any and all payments, proceeds, dividends, distributions, monies, compensation, property, assets, instruments or rights to the extent such are permitted pursuant to the terms of the Loan Agreement. |
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5.02. Voting Rights and Ordinary Payments After an Event of Default . Upon the occurrence and during the continuance of any Event of Default, all rights of such Pledgor to exercise or refrain from exercising the voting and other consensual rights that it would otherwise be entitled to exercise pursuant to Section 5.01( a ) and to receive the payments, proceeds, dividends, distributions, monies, compensation, property, assets, instruments or rights that such Pledgor would otherwise be authorized to receive and retain pursuant to Section 5.01( b ) shall cease, and thereupon the Lender shall be entitled to exercise all voting power with respect to the Pledged Securities of such Pledgor and to receive and retain, as additional collateral hereunder, any and all payments, proceeds, dividends, distributions, monies, compensation, property, assets, instruments or rights at any time declared or paid upon any of the Pledged Collateral of such Pledgor during such an Event of Default and otherwise to act with respect to the Pledged Collateral of such Pledgor as outright owner thereof. |
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7.01. Disposition Upon Default and Related Provisions . |
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(a) Upon the occurrence and during the continuance of any Event of Default, the Lender may exercise in respect of the Pledged Collateral, in addition to other rights and remedies provided for herein or otherwise available to it, all rights of voting, exercise and conversion with respect to the Pledged Collateral and all of the rights and remedies of a secured party upon default under the NYUCC at that time (whether or not applicable to the affected Pledged Collateral) and may also, without obligation to resort to other security, at any time and from time to time sell, resell, assign and deliver, in its sole discretion, all or any of the Pledged Collateral, in one or more parcels at the same or different times, and all right, title and interest, claim and demand therein and right of redemption thereof, on any securities exchange on which any Pledged Collateral may be listed, or at public or private sale, for cash, upon credit or for future delivery, and in connection therewith the Lender may grant options. |
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(b) If any of the Pledged Collateral is sold by the Lender upon credit or for future delivery, the Lender shall not be liable for the failure of the purchaser to purchase or pay for the same and, in the event of any such failure, the Lender may resell such Pledged Collateral. In no event shall any Pledgor be credited with any part of the proceeds of sale of any Pledged Collateral until cash payment therefor has actually been received by the Lender. |
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(c) The Lender may purchase any Pledged Collateral at any public sale and, if any Pledged Collateral is of a type customarily sold in a recognized market or is of the type that is the subject of widely distributed standard price quotations, the Lender may purchase such Pledged Collateral at private sale, and in each case may make payment therefor by any means, including, without limitation, by release or discharge of Secured Obligations in lieu of cash payment. |
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(d) Each Pledgor recognizes that the Lender may be unable to effect a public sale of all or part of the Pledged Collateral consisting of securities by reason of certain prohibitions contained in the Securities Act of 1933, as amended (the " Securities Act "), or in applicable "blue sky" or other state securities Laws, as now or hereafter in effect, but may be compelled to resort to one or more private sales to a restricted group of purchasers who will be obliged to agree, among other things, to acquire such securities for their own account, for investment and not with a view to the distribution or resale thereof. Each Pledgor agrees that any such Pledged Collateral sold at any such private sale may be sold at a price and upon other terms less favorable to the seller than if sold at public sale and that each such private sale shall be deemed to have been made in a commercially reasonable manner. The Lender shall have no obligation to delay the sale of any such securities for the period of time necessary to permit the issuer of such securities, even if such issuer would agree, to register such securities for public sale under the Securities Act. Each Pledgor agrees that private sales made under the foregoing circumstances shall be deemed to have been made in a commercially reasonable manner. |
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(e) No demand, advertisement or notice, all of which are hereby expressly waived, shall be required in connection with any sale or other disposition of any part of the Pledged Collateral that threatens to decline speedily in value or that is of a type customarily sold on a recognized market; otherwise the Lender shall give each applicable Pledgor at least 10 days' prior notice of the time and place of any public sale and of the time after which any private sale or other disposition is to be made, which notice each Pledgor agrees is commercially reasonable. |
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(f) The Lender shall not be obligated to make any sale of Pledged Collateral if it shall determine not to do so, regardless of the fact that notice of sale may have been given. The Lender may, without notice or publication, adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for sale, and such sale may, without further notice, be made at the time and place to which the same was so adjourned. |
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(g) The remedies provided herein in favor of the Lender shall not be deemed exclusive, but shall be cumulative, and shall be in addition to all other remedies in favor of the Lender existing at Law or in equity. |
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(h) To the extent that applicable Law imposes duties on the Lender to exercise remedies in a commercially reasonable manner, each Pledgor acknowledges and agrees that it is not commercially unreasonable |
for the Lender (i) to advertise dispositions of Pledged Collateral through publications or media of general circulation; (ii) to contact other Persons, whether or not in the same business as the applicable Pledgor, for expressions of interest in acquiring all or any portion of the Pledged Collateral of such Pledgor; (iii) to hire one or more professional auctioneers to assist in the disposition of Pledged Collateral; (iv) to dispose of Pledged Collateral by utilizing Internet sites that provide for the auction of assets of the types included in the Pledged Collateral or that have the reasonable capability of doing so, or that match buyers and sellers of assets; (v) to disclaim disposition warranties or (vi) to the extent deemed appropriate by the Lender, to obtain the services of brokers, investment bankers, consultants and other professionals to assist the Lender in the disposition of any of the Pledged Collateral. Each Pledgor acknowledges that the purpose of this clause (h) is to provide non-exhaustive indications of what actions or omissions by the Lender would not be commercially unreasonable in the Lender's exercise of remedies against the Pledged Collateral and that other actions or omissions by the Lender shall not be deemed commercially unreasonable solely on account of not being indicated in this clause (h). Without limiting the foregoing, nothing contained in this clause (h) shall be construed to grant any rights to any Pledgor or to impose any duties on the Lender that would not have been granted or imposed by this Pledge Agreement or by applicable Law in the absence of this clause (h). |
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7.02. Lender Appointed Attorney-in-Fact . |
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(a) To effectuate the terms and provisions hereof, each Pledgor hereby appoints the Lender as such Pledgor's attorney ‑in ‑fact for the purpose, from and after the occurrence and during the continuance of an Event of Default, of carrying out the provisions of this Pledge Agreement and taking any action and executing any instrument that the Lender from time to time in the Lender's reasonable discretion may deem necessary or advisable to accomplish the purposes of this Pledge Agreement. Without limiting the generality of the foregoing, the Lender shall, from and after the occurrence and during the continuance of an Event of Default, have the right and power to: |
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(i) receive, endorse and collect all checks and other orders for the payment of money made payable to each Pledgor representing any interest or dividend or other distribution or amount payable in respect of the Pledged Collateral of such Pledgor or any part thereof and to give full discharge for the same; |
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(ii) execute endorsements, assignments or other instruments of conveyance or transfer with respect to all or any of the Pledged Collateral; |
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(iii) exercise all rights of each Pledgor as owner of the Pledged Collateral of such Pledgor including, without limitation, the right to sign any and all amendments, instruments, certificates, proxies, and other writings necessary or advisable to exercise all rights and privileges of (or on behalf of) the owner of the Pledged Collateral, including, without limitation, all voting rights with respect to the Pledged Securities; |
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(iv) ask, demand, collect, sue for, recover, compound, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Pledged Collateral; |
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(v) file any claims or take any action or institute any proceedings that the Lender may deem necessary or desirable for the collection of any of the Pledged Collateral or otherwise to enforce the rights of the Lender with respect to any of the Pledged Collateral; and |
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(vi) generally to sell, transfer, pledge, make any agreement with respect to or otherwise deal with any of the Pledged Collateral as fully and completely as though the Lender were the absolute owner thereof for all purposes, and to do, at the Lender's option and the Pledgors' expense, at any time or from time to time, all acts and things that the Lender deems reasonably necessary to protect, preserve or realize upon the Pledged Collateral. |
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(b) Each Pledgor hereby ratifies and approves all acts of the Lender made or taken pursuant to this Section 7.02 ( provided that no Pledgor, by virtue of such ratification, releases any claim that such Pledgor may otherwise have against the Lender for any such acts made or taken by the Lender through gross negligence or willful misconduct). Neither the Lender nor any Person designated by the Lender shall be liable for any acts or omissions or for |
any error of judgment or mistake of fact or Law, except such as may result from the Lender's gross negligence or willful misconduct as determined by a court of competent jurisdiction in a final and nonappealable judgment. This power, being coupled with an interest, is irrevocable so long as this Pledge Agreement shall remain in force. |
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7.03. Lender's Duties of Reasonable Care . |
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(a) The Lender shall have the duty to exercise reasonable care in the custody and preservation of any Pledged Collateral in its possession, which duty shall be fully satisfied if such Pledged Collateral is accorded treatment substantially equal to that which the Lender accords its own property and, with respect to any calls, conversions, exchanges, redemptions, offers, tenders or similar matters relating to any such Pledged Collateral (herein called " Events "), |
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(i) the Lender gives the Pledgor of such Pledged Collateral reasonable notice of the occurrence of any Events of which the Lender has received actual knowledge, which Events are applicable to any securities that are in bearer form or are not registered and held in the name of the Lender or its nominee (each Pledgor agreeing to give the Lender reasonable notice of the occurrence of any Events of which such Pledgor has knowledge, which Events are applicable to any securities in the possession of the Lender); and |
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(ii) the Lender endeavors to take such action with respect to any of the Events as any Pledgor may reasonably and specifically request in writing in sufficient time for such action to be evaluated and taken or, if the Lender reasonably believes that the action requested would adversely affect the value of the Pledged Collateral of such Pledgor as collateral or the collection of the Secured Obligations, or would otherwise prejudice the interests of the Lender, the Lender gives reasonable notice to such Pledgor that any such requested action will not be taken and, if the Lender makes such determination or if such Pledgor fails to make such timely request, the Lender takes such other action as it deems advisable in the circumstances. |
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(b) Except as hereinabove specifically set forth, the Lender shall have no further obligation to ascertain the occurrence of, or to notify any Pledgor with respect to, any Events and shall not be deemed to assume any such further obligation as a result of the establishment by the Lender of any internal procedures with respect to any securities in its possession, nor shall the Lender be deemed to assume any other responsibility for, or obligation or duty with respect to, any Pledged Collateral or its use of any nature or kind, or any matter or proceedings arising out of or relating thereto, including, without limitation, any obligation or duty to take any action to collect, preserve or protect its or any Pledgor's rights in the Pledged Collateral or against any prior parties thereto, but the same shall be at each Pledgor's sole risk and responsibility at all times. |
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(c) Each Pledgor waives any restriction or obligation imposed on the Lender under Sections 9-207(c)(1) and 9-207(c)(2) of the NYUCC. |
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7.04. Lender May Perform . If any Pledgor fails to perform any agreement contained herein, the Lender may (but shall have no obligation to) itself perform or cause performance of such agreement, and the expenses of the Lender incurred in connection therewith shall be payable by such Pledgor upon demand and added to the Secured Obligations. |
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(a) Each Pledgor waives demand, notice, protest, notice of acceptance of this Pledge Agreement, notice of loans made, credit extended, collateral received or delivered or other action taken in reliance hereon and all other demands and notices of any description. thereof, all in such manner and at such time or times as the Lender may deem advisable. The Lender shall have no duty as to the collection or protection of the Pledged Collateral or any income thereon, nor as to the preservation of rights against prior parties, nor as to the preservation of any rights pertaining thereto beyond the safe custody thereof as set forth in Section 7.03 . |
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(b) All rights of the Lender hereunder, the Security Interest and all obligations of the Pledgors hereunder shall be absolute and unconditional irrespective of (i) any lack of validity or enforceability of the Loan Agreement or any other Finance Document any agreement with respect to any of the Secured Obligations or any other agreement or instrument relating to any of the foregoing, (ii) any change in the time, manner or place of payment of, or in any other term of, all or any of the Secured Obligations, or any other amendment or waiver of or any consent to any departure from the Loan Agreement or any other Finance Document or any other agreement or instrument, (iii) any taking, exchange, release or non-perfection of any Lien on other collateral, or any release or amendment or waiver of or consent under or departure from or any acceptance of partial payment thereon and or settlement, compromise or adjustment of any Secured Obligation or of any guarantee, securing or guaranteeing all or any of the Secured Obligations, (iv) any manner of sale or other disposition of any Pledged Collateral or any other collateral for all or any of the Secured Obligations or any other Obligations of any other Pledgor under or in respect of the Loan Agreement, (v) any change, restructuring or termination of the corporate structure or existence of any Pledgor or any of its Subsidiaries or any other assets of any Pledgor or any of its Subsidiaries, (vi) any failure of the Lender to disclose to any Pledgor any information relating to the business, condition (financial or otherwise), operations, performance, assets, nature of assets, liabilities or prospects of any other Pledgor now or hereafter known to the Lender (each Pledgor waiving any duty on the part of the Lender to disclose such information), (vii) the failure of any other person to execute this Pledge Agreement or any other Finance Document, guaranty or agreement or the release or reduction of liability of any Pledgor or other pledgor or surety with respect to the Secured Obligations or (viii) any other circumstance that might otherwise constitute a defense available to, or a discharge of, any Pledgor in respect of the Secured Obligations or this Pledge Agreement. |
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(c) Until such time this Pledge Agreement shall terminate in accordance with Section 13 , no Pledgor will exercise any rights which it may have by reason of performance by it of its obligations under this Pledge Agreement: (i) to be indemnified by any Pledgor or any other obligor under the Finance Documents; (ii) to claim any contribution from any guarantor of any Pledgor's or other obligor's obligations under any Finance Document; and/or (iii) to take the benefit (in whole or in part and whether by way of subrogation or otherwise) of any rights of the Lender under the Finance Documents or of any other guarantee or security taken pursuant to, or in connection with, any Finance Document by the Lender. |
whether before or after judgment, shall bear interest until paid at a rate per annum equal to the Default Rate. |
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(a) This Pledge Agreement and the security interests created hereby shall terminate when the Secured Obligations have been irrevocably and unconditionally paid in full, no Secured Obligations remain outstanding and the Lender shall not have any obligation (whether actual or contingent) to make available any further advance or financial accommodation under any Finance Document. |
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(b) In connection with any termination or release pursuant to paragraph (a), the Lender shall return all Pledged Collateral in its possession to the applicable Pledgor(s) and shall execute and deliver to any Pledgor, at such Pledgor's expense, all documents that such Pledgor shall reasonably request to evidence such termination or release. Any execution and delivery of documents pursuant to this Section 13 shall be without recourse to or warranty by the Lender. |
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(c) Upon any sale, transfer or other disposition of any Pledged Collateral of any Pledgor in accordance with the terms of the Finance Documents, the Lender shall, at such Pledgor's expense, execute and deliver to such Pledgor such documents as such Pledgor shall reasonably request to evidence the release of such Pledged Collateral from the assignment and security interest granted hereby; provided that (i) such Pledgor shall have delivered to the Lender, at least five Business Days prior to the date of the proposed release, a written request for release, a form of release for execution by the Lender (which form must be satisfactory to the Lender) and a certificate of such Pledgor to the effect that the transaction is in compliance with the Finance Documents; and (ii) the proceeds of any such sale, transfer or other disposition required to be applied, or any payment to be made in connection therewith, in accordance with the Loan Agreement shall, to the extent so required, be paid or made to, or in accordance with the instructions of, the Lender when and as required under the Loan Agreement. |
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14.01. Notices . All communications and notices hereunder shall be in writing and given as provided in the Loan Agreement. |
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14.02. Counterparts; Effectiveness . This Pledge Agreement may be executed in counterparts (and by different parties hereto in different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract. This Pledge Agreement shall become effective when it shall have been executed by the Lender and the Lender shall have received counterparts hereof that, when taken together, bear the signatures of each of the other parties hereto. Delivery of an executed counterpart of a signature page of this Pledge Agreement by electronic transmission shall be effective as delivery of a manually executed counterpart of this Pledge Agreement. |
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14.03. Headings . Section and subsection headings in this Pledge Agreement and any Accession Supplement are included for convenience of reference only and shall not affect the interpretation of this Pledge Agreement or any Accession Supplement. |
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14.04. No Strict Construction . The parties hereto have participated jointly in the negotiation and drafting of this Pledge Agreement. In the event an ambiguity or question of intent or interpretation arises, this Pledge Agreement shall be construed as if drafted jointly by the parties hereto and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any provisions of this Pledge Agreement. |
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14.05. Severability . If any provision of this Pledge Agreement is held to be illegal, invalid or unenforceable, (a) the legality, validity and enforceability of the remaining provisions of this Pledge Agreement shall not be affected or impaired thereby and (b) the parties shall endeavor in good faith negotiations to replace the illegal, invalid or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the illegal, invalid or unenforceable provisions. The invalidity of a provision in a particular jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. |
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14.06. Survival of Agreement . All covenants, agreements, representations and warranties made by any Pledgor herein and in the certificates or other instruments prepared or delivered in connection with or pursuant to this Pledge Agreement shall be considered to have been relied upon by the Lender and shall survive the execution and delivery of the Loan Agreement and the other Finance Documents and the advance of all extensions of credit contemplated thereby, regardless of any investigation made by the Lender or on their behalf and notwithstanding that the Lender may have had notice or knowledge of any Default at the time of any extension of credit , and shall continue in full force and effect until this Pledge Agreement shall terminate (or thereafter to the extent provided herein). |
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14.07. Binding Effect . This Pledge Agreement is binding upon the Pledgors and the Lender and their respective successors and assigns, and shall inure to the benefit of the Pledgors and the Lender and their respective successors and assigns, except that no Pledgor shall have any right to assign or transfer its rights or obligations hereunder or any interest herein (and any such assignment or transfer shall be void) except as expressly contemplated by this Pledge Agreement or the Loan Agreement. |
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14.08. Waivers; Amendments . |
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(a) No failure or delay of the Lender in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Lender hereunder and under the Loan Agreement and other Finance Documents are cumulative and are not exclusive of any rights or remedies that any of them would otherwise have. No waiver of any provisions of this Pledge Agreement or consent to any departure by any Pledgor therefrom shall in any event be effective unless the same shall be permitted by paragraph (b) below, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice to or demand on any Pledgor in any case shall entitle any Pledgor to any other or further notice or demand in similar or other circumstances. |
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(b) Neither this Pledge Agreement nor any provision hereof may be waived, amended or modified except pursuant to an agreement or agreements in writing entered into by the Lender and each Pledgor, subject to any consent required in accordance with the Loan Agreement. |
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14.09. Additional Pledgors . If any Subsidiary of the Borrower acquires any Equity Interests issued by the Target , the Original Pledgor shall cause such Subsidiary to enter into this Pledge Agreement as a n Additional Pledgor. Upon execution and delivery by the Lender and an Additional Pledgor of an Accession Supplement, together with a completed list and description of the Pledged Securities of such Additional Pledgor in the form of Schedule 1 to such Accession Supplement and delivery of any certificated Pledged Collateral as specified in Section 2.0 3 , such Additional Pledgor shall become a Pledgor hereunder with the same force and effect as if originally named as a Pledgor herein. The execution and delivery of any such instrument shall not require the consent of any Pledgor hereunder. The rights and obligations of each Pledgor hereunder shall remain in full force and effect notwithstanding the addition of any new Pledgor as a party to this Pledge Agreement. |
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14.10. Governing Law; Jurisdiction; Etc. |
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(a) GOVERNING LAW . THIS PLEDGE AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. |
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(b) Submission to Jurisdiction . Each Pledgor irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of the courts of the State of New York sitting in New York County and of the United States District Court of the Southern District of New York, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Pledge Agreement or any other document executed in connection herewith or for recognition or enforcement of any judgment, and each of the parties hereto irrevocably and unconditionally agrees, to the fullest extent permitted by applicable Law, that all claims in respect of any such action or proceeding may be heard and determined in such New York state court or in such federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by Law. Nothing in this Pledge Agreement or in any other document executed in connection herewith shall affect any right that the Lender may otherwise have to bring any action or proceeding relating to this Pledge Agreement or any other document executed in connection herewith against a Pledgor or its properties in the courts of any jurisdiction. |
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(c) Waiver of Venue . Each Pledgor irrevocably and unconditionally waives, to the fullest extent permitted by applicable Law, any objection that it may now or hereafter have to the laying of venue of any action or proceeding arising out of or relating to this Pledge Agreement or any other document executed in connection herewith in any court referred to in paragraph (b) of this Section. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by applicable Law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. |
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(d) Service of Process . Each party hereto irrevocably consents to service of process in the manner provided for notices in Section 14.01 . Each Pledgor irrevocably appoints UBIC North America, Inc., at 3 Lagoon Drive, Suite 180, Redwood City, CA94065 USA as its authorized agent on which legal process may be served in any action, suit or proceeding brought in any in any court referred to in paragraph (b) of this Section. Each Pledgor agrees that service of process in respect of it upon such agent, together with written notice of such service given to such Pledgor in the manner provided for notices in Section 14.01, shall be deemed to be effective service of process upon such Pledgor in any such action, suit or proceeding. Each Pledgor agrees that the failure of such agent to give notice to it of any such service shall not impair or affect the validity of such service or any judgment rendered in any such action, suit or proceeding based thereon. If for any reason such agent shall cease to be available to act as such, each Pledgor agrees to irrevocably appoint another such agent in New York City, as its authorized agent for service of process, on the terms and for the purposes specified in this paragraph (d). Nothing in this Pledge Agreement or any other document executed in connection herewith will affect the right of any party hereto to serve process in any other manner permitted by applicable Law or to obtain jurisdiction over any party or bring actions, suits or proceedings against any party in such other jurisdictions, and in such matter, as may be permitted by applicable Law. |
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14.11. Waiver o f Jury Trial . E ach party hereto hereby irrevocably waives, to the fullest extent permitted by applicable law, any right it may have to a trial by jury in any legal proceeding directly or indirectly arising out of or relating to this pledge agreement or any other document executed in connection herewith or the transactions contemplated hereby or thereby (whether based on contract, tort or any other theory). each party hereto (a) certifies that no representative, agent or attorney of any other person has represented, expressly or otherwise, that such other person would not, in the event of litigation, seek to enforce the foregoing waiver and (b) acknowledges that it and the other parties hereto have been induced to enter into this pledge agreement and any other documents executed in connection herewith by, among other things, the mutual waivers and certifications in this section. |
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14.12. Judgment Currency . If, for the purposes of obtaining judgment in any court, it is necessary to convert a sum due under this Pledge Agreement or any other Finance Document in one currency into another currency, the rate of exchange used shall be that at which in accordance with normal banking procedures the Lender could purchase the first currency with such other currency on the Business Day preceding that on which final judgment is given. The obligation of each Pledgor in respect of any such sum due from it to the Lender shall, notwithstanding any judgment in a currency (the " Judgment Currency ") other than that in which such sum is denominated (the " Agreement Currency "), be discharged only to the extent that on the Business Day following receipt by the Lender of any sum adjudged to be so due in the Judgment Currency, the Lender may in accordance with normal banking procedures purchase the Agreement Currency with the Judgment Currency. If the amount of the Agreement Currency so purchased is less than the sum originally due to the Lender from any Pledgor in the Agreement Currency, such Pledgor agrees, as a separate obligation and notwithstanding any such judgment, to indemnify the Lender or other Person to whom such obligation was owing against such loss. If the amount of the Agreement Currency so purchased is greater than the sum originally due to the Lender in such currency, the Lender agrees to return the amount of any excess to such Pledgor (or to any other Person who may be entitled thereto under applicable law). |
[ Remainder of page left blank intentionally; signatures follow. ]
IN WITNESS WHEREOF, intending to be legally bound, each party hereto has caused this Pledge Agreement to be duly executed as of the date first above written.
UBIC, Inc.
as a Pledgor
By:
Name:
Title:
Sumitomo Mitsui Banking Corporation,
as Lender
By:
Name:
Title:
Schedule 1 to Pledge Agreement
Attached to and forming part of that certain
Pledge Agreement dated as of December 24 , 2015 between
UBIC, Inc. as Original Pledgor and Sumitomo Mitsui Banking Corporation , as Lender
Pledged Securities
UBIC, Inc.
Description of Pledged Securities:
Issuer of
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Class of Equity Interests |
Certificate Numbers |
Number of Equity Interests |
Percentage of total Equity Interests of such Issuer |
EVD, Inc. |
Ordinary |
--- |
50,000 Shares |
100% |
Exact Name of the Pledgor: KABUSHIKI KAISHA UBIC (English Name : UBIC, Inc .)
The Pledgor is a company ( kabushiki kaisha ) .
The Pledgor is organized under the laws of Japan.
The Pledgor's organizational identification number is: _________________________________ .
Address of the Pledgor:
Meisan Takahama Building
2-12-23 Kounan
Minato-ku
Tokyo
108-0075
Japan
Exhibit A
to Pledge Agreement
ACCESSION SUPPLEMENT
ACCESSION SUPPLEMENT dated as of [ ], 20[ ] (this " Supplement ") to the Pledge Agreement dated as of December 24, 2015 (as amended, supplemented or otherwise modified from time to time, the " Pledge Agreement ") between UBIC, Inc. (the " Original Pledgor ") ( together with the Additional Pledgors, the " Pledgors ") and Sumitomo Mitsui Banking Corporation (the " Lender ," which term shall include its successors, assigns and transferees).
A. Reference is made to a term loan agreement ( taamu roon keiyakusho ) dated November 30, 2015 (as amended, supplemented or otherwise modified from time to time, the " Loan Agreement ") between UBIC, Inc. as borrower (the " Borrower ") and the Lender .
B. Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the Pledge Agreement.
C. The Pledgors have entered into the Pledge Agreement in order to induce the Lenders to make extensions of credit to the Borrower . Section 14.09 of the Pledge Agreement provides that each such Subsidiary shall become a Pledgor under the Pledge Agreement by execution and delivery of an instrument in the form of this Supplement. Such Subsidiary (the " New Pledgor " ) will execute this Supplement in accordance with such requirements to become a Pledgor under the Pledge Agreement.
Accordingly, the Lender and the New Pledgor agrees as follows:
SECTION 1. In accordance with Section 14.09 of the Pledge Agreement, the New Pledgor by its signature below becomes a Pledgor under the Pledge Agreement with the same force and effect as if originally named therein as a Pledgor and the New Pledgor hereby (a) agrees to all the terms and provisions of the Pledge Agreement applicable to it as a Pledgor thereunder and (b) represents and warrants that the representations and warranties made by it as a Pledgor thereunder are true and correct on and as of the date hereof. In furtherance of the foregoing, the New Pledgor, as security for the payment and performance in full of the Secured Obligations, does hereby create and grant to the Lender, and its successors and assigns, a security interest in and lien on all of the New Pledgor's right, title and interest in and to the Pledged Collateral of the New Pledgor. Each reference to a "Pledgor" and an "Additional Pledgor" in the Pledge Agreement shall be deemed to include the New Pledgor. The Pledge Agreement is hereby incorporated herein by reference.
SECTION 2. The New Pledgor represents and warrants to the Lender that this Supplement has been duly authorized, executed and delivered by it and constitutes its legal, valid and binding obligation, enforceable against it in accordance with its terms.
SECTION 3. This Supplement may be executed in counterparts (and by different parties hereto in different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract. This Supplement shall become effective when the Lender shall have received a counterpart hereof executed by the New Pledgor and the Lender, in acceptance thereof shall have executed a counterpart of this Supplement. Delivery of an executed counterpart of a signature page of this Supplement by electronic transmission shall be effective as delivery of a manually executed counterpart of this Supplement.
SECTION 4. The New Pledgor hereby represents and warrants that (a) its exact legal name is set forth on the signature page hereto, (b) the jurisdiction of its organization is ____________________, (c) its organizational number is ______________________ and (d) set forth under its signature hereto, is the true and correct location of its place of business or (if it has more than one place of business) its chief executive office.
SECTION 5. The New Pledgor hereby represents and warrants that the statement in the second sentence of
Section 3.03 of the Pledge Agreement [is/is not] true and correct with respect to the New Pledgor.
SECTION 6. A complete and accurate list and description of all Pledged Securities of the New Pledgor is set forth on Schedule 1 to this Supplement.
SECTION 7. Except as expressly supplemented hereby, the Pledge Agreement shall remain in full force and effect.
SECTION 8. THIS SUPPLEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
SECTION 9. In the event any one or more of the provisions contained in this Pledge Agreement should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby (it being understood that the invalidity of a particular provision in a particular jurisdiction shall not in and of itself affect the validity of such provision in any other jurisdiction).
SECTION 10. All communications and notices hereunder shall be in writing and given as provided in Section 14.01 of the Pledge Agreement. All communications and notices hereunder to the New Pledgor shall be given to it at the address set forth under its signature below.
SECTION 11. The New Pledgor agrees to reimburse the Lender for its reasonable out-of-pocket expenses in connection with this Supplement, including the reasonable fees, other charges and disbursements of counsel for the Lender.
[ Remainder of page left blank intentionally; signatures follow. ]
IN WITNESS WHEREOF, intending to be legally bound, the New Pledgor has caused this Supplement to the Pledge Agreement to be duly executed as of date first above written.
[
NEW PLEDGOR
],
as New Pledgor
By: ______________________________
Name:
Title:
Address: ______________________________
Attention: ______________________________
Facsimile: ______________________________
Email Address: ___________________________
Accepted: ______________________________,
as Lender
By: ______________________________
Name
Title:
Schedule 1 to Accession Supplement
Attached to and forming part of that certain
Supplement No. ___ dated as of __________________, 20__ to Pledge Agreement
delivered by [
NEW PLEDGOR
] and accepted by
___________________________________
, as Lender
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Issuer of
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Class of Equity Interests |
Certificate Numbers |
Number of Equity Interests |
Percentage of total Equity Interests of such Issuer |
_________ |
_________ |
_________ |
_________ |
_________ |
Exhibit B
to Pledge Agreement
CONSENT OF ISSUER OF UNCERTIFICATED SECURITIES
The undersigned, [ name of issuer of uncertificated Equity Interests deemed to be a security subject to Article 8 of the UCC ] (the " Issuer "), hereby (a) acknowledges receipt of that certain Pledge Agreement dated as of December 24 , 2015 (as amended, supplemented, restated or otherwise modified and in effect from time to time, the " Pledge Agreement ") between UBIC, Inc. as Original Pledgor and Sumitomo Mitsui Banking Corporation as Lender, (b) acknowledges and consents to the grant of a lien upon, and the creation of a security interest in, the Pledged Securities identified in Schedule 1 hereto, (c) consents to any transfer of such Pledged Securities issued by the Issuer pursuant to any exercise of remedies under the Pledge Agreement and (d) irrevocably agrees to comply with any instructions originated by the Lender with respect to such Pledged Securities without further consent by [ name of holder of such Equity Interests ], or any other Pledgor or Person. Capitalized terms used but not defined in this Consent shall have the meanings specified in the Pledge Agreement.
[ name of Issuer ]
By:
Name:
Title:
Exhibit B
to Pledge Agreement
Schedule 1
Pledged Securities
[ number of shares ] uncertificated [ share type ] shares (the " Shares ") issued by [ name of issuer of uncertificated Equity Interests deemed to be a security subject to Article 8 of the UCC ], together with all right, title and interest in and to all present and future payments, proceeds, dividends, distributions, instruments, compensation, property, assets, interests and rights in connection with or related to the Shares and all monies due or to become due and payable in connection with or related to such Shares or otherwise paid, issued or distributed from time to time in respect of or in exchange therefor, and any certificate (if any), instrument or other document evidencing or representing the same (including, without limitation, all proceeds of dissolution or liquidation) and all proceeds of all of the foregoing, of every kind, and all proceeds of such proceeds.
Exhibit C
to Pledge Agreement
FORM OF STOCK POWER
IRREVOCABLE STOCK POWER
FOR VALUE RECEIVED, the undersigned, on behalf of [Name of Stockholder], a[n] [entity type] organized under the laws of the [jurisdiction of organization] (the " Assignor "), does hereby assign and transfer unto ______________________________________ (the " Assignee "), [____] shares of [no] [$_.__] par value common stock of [Name of Issuer], a [Delaware] corporation (the " Corporation "), represented by certificate no(s). [___] standing in the name of Assignor on the books of said Corporation.
The undersigned, on behalf of Assignor, does hereby irrevocably constitute and appoint ___________________ as the attorney in fact to transfer said stock on the books of the Corporation, with full power of substitution in the premises.
Dated: As of _______, 20__
[NAME OF ASSIGNOR]
By
Name:
Title:
(Translation)
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Stamp
200 yen |
Special Agreement on Loans
November 30, 2015
To: The Bank of Tokyo-Mitsubishi UFJ, Ltd.
Borrower
Address: Meisan Takahama Building,
2-12-23 Konan, Minato-ku, Tokyo, 108-0075
UBIC, Inc.
Name: Masahiro Morimoto, (Seal)
CEO and Chairman of the Board
UBIC, Inc., (hereinafter the “Borrower”) shall comply with the provisions of this Special Agreement on Loans (this “Special Agreement) when the Borrower receives loans of money (the tranche A individual loan under the loan agreement certificate set forth in the attached Annex 1 (Individual Loan Schedule) is hereinafter referred to as the “Tranche A Loan, and the tranche B individual loan, as the Tranche B Loan; the Tranche A Loan and the Tranche B Loan are referred to individually as an “Individual Loan” and collectively as “Individual Loans”) from The Bank of Tokyo-Mitsubishi UFJ, Ltd. (hereinafter the “Loaner”) under the loan agreement certificate dated November 30, 2015, (hereinafter the “Loan Agreement” or the “Original Agreement”; if there is any special contract outside this Special Agreement that relates to the Original Agreement, the agreement providing for the special contract shall be included in the Original Agreement; the Original Agreement and the bank transaction agreement that is delivered by the Borrower to the Loaner separately or is executed between the parties (hereinafter the “Transaction Agreement”) are referred to individually or collectively as the “Original Agreement, Etc.”), in addition to the obligation to comply with the provisions of the Original Agreement.
Article 1 (Purpose of Loan)
Regarding the money raised through Individual Loans, the Borrower shall comply with the provisions of the Original Agreement providing for the purpose of the loan (including but not limited to Article 2, paragraph 3, of the Loan Agreement), and shall use it only as funds for the following items:
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(1) |
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Funds for the purchase (hereinafter the “Stock Acquisition”) of all outstanding shares (hereinafter the “Stock”) of EVD, INC., (a California corporation) (location: 160 Greentree Drive, Suite 101, Dover, DE 19904, County of Kent; hereinafter the “Object Company”) owned by each corporation of the following items (hereinafter individually or collectively the “Seller”): |
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(i) |
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ANDATHA INTERNATIONAL, INC. (a California corporation); |
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(ii) |
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EVOLVE DISCOVERY PA, LLC (a [Pennsylvania] limited liability company); |
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(iii) |
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EVOLVE DISCOVERY LA, LLC (a [California] limited liability company); |
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(iv) |
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EVOLVE DISCOVERY PORTLAND, LLC (an Oregon limited liability company); and |
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(v) |
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EVOLVE DISCOVERY SEATTLE, LLC (a Washington limited liability company). |
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(2) |
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Funds for the payment of taxes and other public charges and expenses required for the acquisition of the Stock |
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(3) |
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Funds for the repayment of outstanding debts and other liabilities incurred by the Object Company, as well as investment funds and loans to the Object Company to be allotted to such repayment |
Section Used by Bank
Confirmation of preconditions fulfillment |
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Inspection |
Verification of a seal impression |
Implementation |
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Inspection |
Implementation |
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Article 2 (Preconditions for Execution of Individual Loans)
1. The Loaner shall execute the Tranche A Loan on condition of the fulfillment of all conditions set forth in the following items as of the execution date of the Tranche A Loan. The fulfillment of the conditions shall be determined by the Loaner; provided, however, that even if all or part of the conditions in the following items are not fulfilled, the Loaner may at its discretion execute the Tranche A Loan, and even if all of the conditions in the following items are fulfilled, the Loaner may at its discretion choose not to execute the Tranche A Loan.
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(1) |
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All facts represented and warranted by the Borrower under items of Article 7 are true and accurate. |
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(2) |
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There is not any cause, or prospects therefor, falling under the provisions of item 1 or 2 of Article 13 hereof, Article 5 of the Loan Agreement, Article 3 of the special stipulations of the Loan Agreement, or Article 5, paragraph 1 or 2, of the Transaction Agreement. |
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(3) |
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The Borrower does not violate any provision of the Original Agreement, Etc., this Special Agreement, or any other agreement entered into between it and the Loaner, and is not likely to violate any of them after the execution date of the Tranche A Loan. |
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(4) |
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All of the conditions for the execution of the Tranche A Loan set forth in the Original Agreement are fulfilled (including but not limited to the proviso of Article 2, paragraph 4, of the Loan |
Agreement, and Article 4, paragraph 3, of the Loan Agreement). |
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(5) |
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The Borrower submits to the Loaner materials for the confirmation of the loan purpose of the Tranche A Loan (including but not limited to written claims and estimates). |
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(6) |
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There is not the occurrence of natural disasters or other events, wars, riots, acts of terrorism, arson or other man-made events, an interruption or failure of electricity, communications or any kind of payment settlement system, any event arising in the Tokyo interbank market for which yen funds loan transactions are unable to be executed, or any incident due to reasons not attributable to the Loaner that makes the Loaner’s execution of the Tranche A Loan impossible or significantly difficult. |
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(7) |
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The Loaner receives from the Borrower the following documents, whose contents satisfy the Loaner: |
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(i) |
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Copies of all documents required by the Loaner (hereinafter the “Documents Related to Stock Transaction Agreement”) in relation to the stock transaction agreement entered into between the parties and the Object Company concerning the Stock (hereinafter the “Stock Transaction Agreement”); and |
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(ii) |
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Other relevant documents related to the acquisition of the Stock. |
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(8) |
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The Loaner receives other documents and information designated by the Loaner as necessary materials for the execution of the Tranche A Loan. |
2. The Loaner shall execute the Tranche B Loan on condition of the fulfillment of all conditions set forth in the following items as of the execution date of the Tranche B Loan. The fulfillment of the conditions shall be determined by the Loaner; provided, however, that even if all or part of the conditions in the following items are not fulfilled, the Loaner may at its own discretion execute the Tranche B Loan, and even if all of the conditions in the following items are fulfilled, the Loaner may at its discretion choose not to execute the Tranche B Loan.
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(1) |
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All facts represented and warranted by the Borrower under items of Article 7 are true and accurate. |
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(2) |
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There is not any cause, or prospects therefor, falling under the provisions of item 1 or 2 of Article 13 hereof, Article 5 of the Loan Agreement, Article 3 of the special stipulations of the Loan Agreement, or Article 5, paragraph 1 or 2, of the Transaction Agreement. |
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(3) |
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The Borrower does not violate any provision of the Original Agreement, Etc., this Special Agreement, or any other agreement entered into between it and the Loaner, and is not likely to violate any of them after the execution date of the Tranche B Loan. |
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(4) |
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All of the conditions for the execution of the Tranche B Loan set forth in the Original Agreement are fulfilled (including but not limited to the proviso of Article 2, paragraph 4, of the Loan Agreement, and Article 4, paragraph 3, of the Loan Agreement). |
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(5) |
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The Borrower submits to the Loaner materials for the confirmation of the loan purpose of the Tranche B Loan (including but not limited to written claims and estimates). |
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(6) |
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There is not the occurrence of natural disasters or other events, wars, riots, acts of terrorism, arson or other man-made events, an interruption or failure of electricity, communications or any kind of payment settlement system, any event arising in the Tokyo interbank market for which yen funds loan transactions are unable to be executed, or any incident due to reasons not attributable to the Loaner that makes the Loaner’s execution of the Tranche B Loan impossible or significantly difficult. |
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(7) |
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The Loaner receives from the Borrower all of the following documents, whose contents satisfy the Loaner: |
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(i) |
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Copies of the Documents Related to Stock Transaction Agreement; and |
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(ii) |
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Other relevant agreements related to the acquisition of the Stock. |
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(8) |
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The Loaner is submitted or provided other documents and information designated by the Loaner as necessary materials for the execution of the Tranche B Loan. |
Article 3 (Agreement on Bank Account for Repayment)
1. The Borrower shall use, as the bank account for repayment of the principal and interest of Individual Loans (hereinafter the “Repayment Account”), the yen savings account (account number: 2034628;
account holder: UBIC, Inc.) and the foreign currency savings account (account number: 0093092; account holder: UBIC, Inc.) held at The Bank of Tokyo-Mitsubishi UFJ, Ltd. Shinagawa-Ekimae Branch, and shall maintain them at its own expense until it completes the performance of all liabilities owed to the Loaner under the Original Agreement, Etc., and this Special Agreement.
2. The Borrower shall pay money related to the loan purpose through the Repayment Account.
3. The Borrower shall receive dividends of surplus paid by the Object Company, refunds of withholding taxes on the said dividends of surplus, and other money paid by the Object Company to the Borrower for the status as a shareholder of the Object Company (hereinafter collectively “Dividends of Surplus”) by the method of transfer to the Repayment Account. If the Borrower receives the money by any other method, it shall deposit the money to the Repayment Account immediately after the receipt.
4. If any cause for forfeiture of the benefit of time occurs on the part of the Borrower, notwithstanding any deposit regulations related to the Repayment Account, the Borrower shall authorize the Loaner to withdraw any amount at its discretion from the Repayment Account. The Loaner may, at its discretion, appropriate funds withdrawn under the said authority to any repayment of Individual Loans or other liabilities owed by the Borrower to the Loaner.
Article 4 (Principal Repayment)
The Borrower shall pay the principal on the Individual Loans under the provisions of the Original Agreement.
Article 5 (Interest)
The Borrower shall pay the interest on the Individual Loans under the provisions of the Original Agreement.
Article 6 (Prepayment)
1. Regarding prepayment of an Individual Loan, the Borrower shall comply with the provisions of this Special Agreement, as well as of the Original Agreement (including but not limited to Article 2, paragraph 7, of the Loan Agreement, Article 2 of the special stipulations of the Loan Agreement, and Article 4, paragraph 4, of the special stipulations of the Loan Agreement).
2. If the Borrower, with the advance consent of the Loaner under the provision of item (4) of Article 10, transfers or sells to a third party, or otherwise disposes of all or part of the Stock, the Borrower shall pay, on the same day as the date of disposition (hereinafter the “Date of Forced Repayment before Due Date”), by the method prescribed by the Loaner, the sum of the full amount of the principal of all Individual Loans, the amount of interest accrued on the said principal amount during the period until (and including) the Date of Forced Repayment before the Due Date, and the settlement money prescribed in the Original Agreement (hereinafter “Settlement Money”).
Article 7 (Representation and Warranty by Borrower)
In addition to the representations and warranties under the provisions of the Original Agreement (including but not limited to Article 5, paragraph 1(a) and paragraph 2, of the special stipulations of the Loan Agreement), the Borrower represents and warrants to the Loaner that all of the following items are true and accurate as of the date of the conclusion hereof and the execution date of each Individual Loan, and shall compensate for any damage, loss, or expense incurred by the Loaner if any item is found to be untrue or inaccurate:
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(1) |
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The conclusion or performance of the Original Agreement, Etc., or this Special Agreement by the Borrower, or transactions thereunder do not violate (a) any legislation binding on the Borrower (meaning treaties, laws, governmental and ministerial ordinances, regulations, rules, notifications, rulings, decisions, arbitration awards, communications, administrative guidelines, and policies of the authorities concerned; the same applies hereinafter), (b) the articles of incorporation or other internal rules of the Borrower, or (c) any contract or agreement with a third party to which the Borrower is a party, or which binds on the Borrower or its property. |
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(2) |
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The Original Agreement, Etc., and this Special Agreement have a binding force on the Borrower lawfully and effectively, and are enforceable under the provisions thereof. |
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(3) |
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Any Financial Statements prepared by the Borrower (they shall be audited Financial Statements, where legislation requires that the Financial Statements be audited, or they have been audited otherwise; and they shall include any securities reports, and semi-annual, quarterly, extraordinary, and reissued reports (hereinafter “Reports”) when such are prepared by the Borrower; the same applies hereinafter) are prepared accurately and lawfully in light of the accounting standards generally deemed as fair and reasonable in Japan. “Financial Statements” herein shall be as defined in the following items (i) through (iv): |
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(i) |
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Financial statements and business reports and their supplementary schedules for each business year set forth in Article 435, paragraph 2, of the Companies Act; |
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(ii) |
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Temporary financial statements set forth in Article 441, paragraph 1, of the Companies Act that have been prepared; |
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(iii) |
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Consolidated financial statements for each business year set forth in Article 444, paragraph 1, of the Companies Act (meaning a consolidated balance sheet, consolidated income statements, and statements of changes in net assets, and notes to consolidated financial statements set forth in Article 61 of the Rules for Corporate Computation; the same applies in this item (iii)) where the party is required to prepare them under the provisions of the said article, paragraph 3, as well as other consolidated financial statements for each business year set forth in Article 444, paragraph 1, of the Companies Act that have been prepared; and |
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(iv) |
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Consolidated and non-consolidated balance sheets, income statements, statements of changes in net assets, and notes to financial statements that have been prepared. |
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(4) |
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After the end of fiscal year (meaning a period from the commencement date (including the day) to the termination date (including the day) of each business year; the same applies hereinafter) of the Borrower in March 2015, there is no occurrence of a fact that will or may cause an important adverse effect to the performance of Borrower’s obligations under the Original Agreement, Etc., or this Special Agreement, including facts that deteriorate or decrease the business, assets, or financial conditions of the Borrower, its subsidiary or affiliate companies (meaning “subsidiary companies” and “affiliate companies” as defined in Article 8 of the Ordinance on the Terminology, Forms, and Preparation Methods of Financial Statements, etc.; the same applies hereinafter), which show on Financial Statements prepared by the Borrower for the said fiscal year or on other accounting documents. |
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(5) |
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There is not, or is not likely to be, the commencement of any lawsuit, procedures for securance or compulsory execution, mediation, arbitration, administrative procedures, or any other dispute with respect to the Borrower, that will or may cause an important adverse effect to the performance of obligations under the Original Agreement, Etc., or this Special Agreement. |
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(6) |
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The Borrower does not assume any debt that will or may cause an important adverse effect to the performance of obligations under the Original Agreement, Etc., or this Special Agreement. |
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(7) |
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All information written in any document submitted by the Borrower to the Loaner are true and accurate in material respects, do not include any description that gives rise to misunderstandings, and do not lack disclosure of any matter necessary for the Loaner to avoid misunderstandings in entering into the Original Agreement, Etc., and this Special Agreement, and in deciding on matters to be performed in relation to Individual Loans. And, matters contained in the said documents that are forecasts on the future are forecasted by reasonable methods, and after the date of submission thereof, there is no occurrence of a fact that will or may cause an important adverse effect to the forecasts. |
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(8) |
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The Borrower maintains permits and licenses necessary to conduct principal businesses, and continues business in compliance with all legislation. |
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(9) |
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There are no prospects for any problem in terms of law, accounting, or tax affairs with respect to the transfer of the Stock. |
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(10) |
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The Stock Transaction Agreement and other agreements entered into between any parties, including the Seller and the Borrower for the acquisition of the Stock (including but not limited to an Escrow Agreement (meaning the Escrow Agreement defined in the Stock Transaction Agreement; hereinafter the “Escrow Agreement”), entered into under the provisions of the Stock Transaction Agreement) are concluded lawfully and effectively and are legally binding. |
Article 8 (Matters Observed by Borrower)
In addition to the commitments under the provisions of the Original Agreement (including but not limited to Article 4, paragraphs 2 and 3, of the special stipulations of the Loan Agreement, and Article 5, paragraphs 1 and 2, of the special stipulations of the Loan Agreement), the Borrower shall comply with the following items until it completes the performance of all liabilities to the Loaner under the Original Agreement, Etc., and this Special Agreement:
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(1) |
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The Borrower shall not change its principal businesses. |
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(2) |
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The Borrower shall prepare Financial Statements accurately and lawfully under the accounting standards generally deemed as fair and reasonable in Japan. |
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(3) |
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The Borrower shall maintain the percentage of its stake in the Object Company at 100%. |
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(4) |
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The Borrower shall maintain the Stock Transaction Agreement and the trust account agreement to be legal and effective, and legally binding. |
Article 9 (Matters Reported by Borrower)
In addition to the reports under the provisions of the Original Agreement (including but not limited to Article 4, paragraph 1, of the special stipulations of the Loan Agreement, and Article 6 of the special stipulations of the Loan Agreement), the Borrower shall give the following reports to the Loaner at its own expense until it completes the performance of all liabilities owed to the Loaner under the Original Agreement, Etc., and this Special Agreement:
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(1) |
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The Borrower shall immediately give a written report to the Loaner if a cause for forfeiture of the benefit of time arises or is likely to arise with respect to the Borrower. |
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(2) |
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Within three (3) months from the last day of each fiscal year of the Borrower, beginning from that in March 2016, the Borrower shall submit to the Loaner, in relation to the provisions of the Original Agreement, Etc., and this Special Agreement, a report on the situation of compliance with “matters observed, etc.” in the form of the attached Annex 2 (Report on the Situation of Compliance with “Matters Observed, Etc.”). |
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(3) |
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Within three (3) months from the last day of each fiscal year of the Borrower, beginning from that |
in March 2016, the Borrower shall submit to the Loaner a copy of Financial Statements or Reports. If there is or is likely to be any change to the information in Financial Statements or Reports submitted to the Loaner under this item, the Borrower shall immediately give a written report to the Loaner. When the Borrower discloses Reports electronically by EDINET, the foregoing copy shall be deemed to have been submitted at the time of the disclosure. |
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(4) |
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By the last day of September every year, the Borrower shall submit to the Loaner the shareholder registry of the Object Company (with standard preparation date being the last day of August, beginning from August 31, 2016), in writing in a form that satisfies the Loaner. |
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(5) |
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When it is decided that the Object Company will distribute Dividends of Surplus, the Borrower shall promptly submit to the Loaner, in a form that satisfies the Loaner, materials with which the amount of the Dividends of Surplus and the time of payment may be confirmed. |
Article 10 (Borrower’s Obligation to Obtain Advance Consent)
Until the Borrower completes the performance of all liabilities owed to the Loaner under the Original Agreement, Etc., and this Special Agreement, the Borrower shall obtain the advance consent of the Loaner when it implements any of the following items:
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(1) |
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If the articles of incorporation of the Borrower, or the articles of incorporation or the bylaws of the Object Company is modified materially; |
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(2) |
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If the Borrower or the Object Company implements a merger, corporate split-up, share exchange, stock transfer, organizational change under the Companies Act, transfer (or acceptance) of all or part of business or important assets, lease or management entrustment of all or part of business to a third party, or a decrease in capital fund or reserve fund (including similar acts outside Japan) that will or may cause an important adverse effect to the performance of obligations under the Original Agreement, Etc., or this Special Agreement; |
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(3) |
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If there is conclusion, modification, or cancellation of an agreement that will or may cause an important adverse effect to the performance of obligations under the Original Agreement, Etc., or this Special Agreement; or |
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(4) |
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If the Borrower transfers or sells to a third party, or otherwise disposes of, all or part of the Stock. |
Article 11 (Restrictive Financial Covenants)
Until the Borrower completes the performance of all liabilities owed to the Loaner under the Original Agreement, Etc., and this Special Agreement, the Borrower shall comply with and maintain the following restrictive financial covenants:
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(1) |
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The sum of the net asset in the Borrower’s non-consolidated balance sheet as of the last day of each fiscal year, beginning from the fiscal year ended in March 2016, shall be maintained at not less than 75% of either the sum of the net asset as of the last day of the fiscal year ended in March 2015 or the sum of the net asset as of the last day of the previous fiscal year, whichever is higher. |
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(2) |
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The sum of the net asset in the Borrower’s consolidated balance sheet as of the last day of each fiscal year, beginning from the fiscal year ended in March 2016, shall be maintained at not less than 75% of either the sum of the net asset as of the last day of the fiscal year ended in March 2015 or the sum of the net asset as of the last day of the previous fiscal year, whichever is higher. |
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(3) |
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Ordinary loss shall not be recorded for two consecutive years in unconsolidated income statements of the Borrower as of the last day of each fiscal year, beginning from the fiscal year ended in March 2016. |
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(4) |
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Ordinary loss shall not be recorded for two consecutive years in consolidated income statements of the Borrower as of the last day of each fiscal year, beginning from the fiscal year ended in March 2016. |
Article 12 (Effect of Infringement of Restrictive Financial Covenants)
If the Borrower infringes one or more of items (1) through (4) of Article 11, the Borrower shall, at the request of the Loaner, lose the benefit of time with respect to all liabilities owed by the Borrower to the Loaner under the Original Agreement, Etc., and this Special Agreement and shall immediately repay the full amount of the liabilities to the Loaner.
Article 13 (Causes for Forfeiture of Benefit of Time)
1. If there is the occurrence of any cause set forth in Article 5, paragraph 1, of the Transaction Agreement, the Borrower shall, without any notification or demand of the Loaner, naturally lose the benefit of time with respect to all liabilities owed by the Borrower to the Loaner under the Original Agreement, Etc., and this Special Agreement, and shall immediately pay, by the method designated by the Loaner, the principal and interest of all Individual Loans, and Settlement Money, as well as any other money payable by the Borrower to the Loaner under the Original Agreement, Etc., and this Special Agreement.
2. If there is the occurrence of a cause set forth in Article 5, paragraph 2, of the Transaction Agreement, or a cause set forth in Article 5 of the Loan Agreement or Article 3 of the special stipulations of the Loan Agreement, or a cause set forth in the following items, the Borrower shall, at the request of the Loaner, lose the benefit of time with respect to all liabilities owed by the Borrower to the Loaner under the Original Agreement, Etc., and this Special Agreement and shall immediately pay, by the method designated by the Loaner, the principal and interest of all Individual Loans, and Settlement Money, as well as any other money payable by the Borrower to the Loaner under the Original Agreement, Etc., and this Special Agreement:
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(1) |
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If it is discovered that any of the facts represented and warranted by the Borrower under items of Article 7 is untrue or inaccurate as of the time of the representation and warranty; |
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(2) |
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If the Borrower violates any provision of the Original Agreement, Etc., and this Special Agreement; |
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(3) |
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If an order or notice of provisional seizure, preservative seizure, seizure, provisional disposition, or attachment for delinquent tax is dispatched with respect to a security provided by the Borrower to the Loaner (including similar procedures outside Japan), or procedures for a public auction or sale are commenced; |
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(4) |
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If the Borrower defaults on any monetary liabilities (including warranty obligations) other than liabilities under the Original Agreement, Etc., and this Special Agreement or loses the benefit of time; |
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(5) |
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If the Borrower bounces a check for the first time, or if densai.net Co., Ltd. registers insolvency with respect to an electronically recorded monetary claim to the Borrower, or any other electronic monetary claim recording institution takes measures equivalent thereto: |
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(6) |
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If the Borrower violates legislation, suspends its business, or has its business suspended or prohibited by disposition of the competent governmental institutions, or if the Loaner reasonably deems any of the foregoing is possible; |
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(7) |
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If the Borrower adopts a resolution for dissolution, or receives a winding-up order (excluding dissolution of the Borrower incidental to an absorption-type or consolidation-type merger); |
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(8) |
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If Article 12 applies; or |
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(9) |
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Except as set forth in the preceding items, if the condition of the Borrower’s business or assets is or is likely to be deteriorated, which necessitates the measure in order to preserve claims. |
3. In the case of the preceding paragraph, if notice or any other document dispatched by the Loaner arrives late or fails to reach for reasons attributable to the Borrower, including the omission of the
notice of a change of address, and the refusal to receive notice from the Loaner, it shall be deemed to have reached when it had reached usually, and the benefit of time shall be forfeited.
4. Even when the Borrower loses the benefit of time under paragraph 1, 2, or 3, Settlement Money may accrue, and the Borrower shall pay to the Loaner any Settlement Money accrued. In the event of forfeiture of the benefit of time on the part of the Borrower, the Borrower shall immediately pay, by the method designated by the Loaner, the principal and interest of all Individual Loans, and Settlement Money, as well as any other money payable by the Borrower to the Loaner under this Special Agreement.
Article 14 (Burden of Structuring Fee and Various Expenses)
1. On the execution date of the first Individual Loan, the Borrower shall, by the method designated by the Loaner, pay to the Loaner 21,600,000 yen (including the consumption tax and local consumption tax) as the fee for the structuring of loan under the Original Agreement, Etc., and this Special Agreement (hereinafter the “Structuring Fee”).
2. The Loaner shall not be required to return to the Borrower the Structuring Fee received by it; provided, however, that if the Loaner deems it necessary, it may return all or part of the Structuring Fee.
3. In addition to the provisions in the preceding paragraphs, the Borrower shall bear all expenses incurred in relation to the preparation, change and modification of this Special Agreement, and to the execution of Individual Loans under the Original Agreement, Etc., and this Special Agreement (including but not limited to the stamp duty and other taxes and public charges, and attorney fees), as well as reasonable expenses required for the Loaner to preserve and secure, and exercise rights under the Original Agreement, Etc., and this Special Agreement (including but not limited to attorney fees), and if the Loaner bears any of them on behalf of the Borrower, the Borrower shall repay it to the Loaner as soon as the Loaner requests it.
Article 15 (Modification to Agreement)
Neither the Original Agreement nor this Special Agreement may be modified unless the Borrower and the Loaner agree in writing.
Article 16 (Preparation of Notarial Deeds)
The Borrower shall, at the request of the Loaner, cooperate in procedures necessary for the preparation of notarial deeds, including statements of the acceptance of liabilities and the consent to compulsory execution under the Original Agreement, Etc., and this Special Agreement. Expenses for such procedures shall be borne by the Borrower.
Article 17 (Precedence Relationship of Special Agreement and Original Agreement, Etc.)
The following items apply to the relationship between the provisions of this Special Agreement and the Original Agreement, Etc., in applying them:
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(1) |
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If a provision of this Special Agreement is in conflict or inconsistent with that of the Original Agreement, Etc., the provision of this Special Agreement shall apply preferentially. |
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(2) |
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Any matter not stipulated herein shall be governed by the Original Agreement, Etc. |
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(3) |
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Any matter not stipulated in either this Special Agreement or the Original Agreement, Etc. shall be determined in consultation between the Borrower and the Loaner. |
Article 18 (Consultation)
If there is any matter not stipulated in either the Original Agreement, Etc., or this Special Agreement, or any question arising between the parties as to the interpretation of the Original Agreement, Etc., or this Special Agreement, the parties shall consult with each other in good faith and shall determine measures for it.
IN WITNESS WHEREOF, an original of this Special Agreement has been executed, the representative of the Borrower or proxy thereof has signed it or affixed his name and seal thereon, and the Loaner shall keep it. The Borrower shall accept a counterpart thereof from the Loaner.
Annex 1 (Individual Loan Schedule)
Individual Loan Schedule
1. Tranche A Individual Loan
Date of the first execution of loan: December 24, 2015
The first amount advanced: USD 9,120,000.00
Date of the second execution of loan: August 30, 2016
The second amount advanced: USD 1,100,000.00
2. Tranche B Individual Loan
Date of the first execution of loan: December 24, 2015
The first amount advanced: JPY 755,000,000
Date of the second execution of loan: August 30, 2016
The second amount advanced: JPY 98,000,000
Annex 2 (Report on the Situation of Compliance with “Matters Observed, Etc.”)
******** **, 20**
Report on the Situation of Compliance
with “Matters Observed, Etc.”
To: The Bank of Tokyo-Mitsubishi UFJ, Ltd.
Borrower
Address:
Name:
The Borrower reports under Article 9, item (2) of the Special Agreement on Loan dated November 30, 2015, (the “Special Agreement”) delivered by the Borrower to The Bank of Tokyo-Mitsubishi UFJ, Ltd. (hereinafter the “Bank”) or executed between it and the Bank that the Borrower is in compliance with the provisions of the Original Agreement, Etc., and the Special Agreement; provided, however, that this does not apply to the provisions infringed (on condition that the infringement has been determined at the Bank’s discretion, or the fact thereof has been reported by the Borrower to the Bank).
Section Used by Bank
Inspection |
Confirmation of Matters Observed |
Verification of a seal impression |
Implementation |
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Execution Version
-- The Borrower --
UBIC, Inc.
-- The Loaner --
Sumitomo Mitsui Banking Corporation
Term Loan Agreement
36
Table of Contents
Items
Provisions with respect to the Loan 35
Principal terms of the Loan 35
Conditions precedent to the Loan Obligations 35
Provisions with respect to the provision of the Loan 35
Exemption of Loaner from its obligations 35
Representations and Warranties by the Borrower 35
Representations and warranties by the Borrower 35
Obligations of the Borrower 35
Obligations of the Borrower 35
Obligations of the Borrower (Considerations to Society and the Environment) 35
Incidents Causing Acceleration 35
Incidents Causing Acceleration 35
Termination of the Loan Obligations 35
Termination of the Loan Obligations 35
Provisions Governing the Repayment of Debts 35
Performance of obligations by the Borrower 35
Articles for the Repayment before Due 35
Articles for the voluntary repayment before due 35
Articles for the mandatory repayment before due 35
Collections, etc., from third parties 35
Assignment after the provision of the Loan 35
Annex 1 Contact Address of the Parties and Methods of Notification
Annex 2 Table of Repayment Schedule of the Principal, Table of Interest Payment Schedule
37
This Term Loan Agreement (the "Agreement") is made and entered into on November 30, 2015, by and between UBIC, Inc. (the "Borrower"), a Japanese corporation having its place of business at Meisan Takahama Building, 2-12-23, Konan, Minato-ku, Tokyo, Japan, and Sumitomo Mitsui Banking Corporation (the "Loaner"), a Japanese corporation having its place of business at 1-1-2, Marunouchi, Chiyoda-ku, Tokyo, Japan. The Borrower and Loaner may each be referred to as the "Party" and collectively the "Parties". The Parties agree as follows:
Chapter One Definition of Terms
Article 1-1 Definition of Terms
Except as otherwise evident in light of the context, the following terms in this agreement shall have the meaning as set forth below. Where certain article of law or government regulation is quoted herein, the quotation shall be deemed to include such article as changed or amended.
1. "Seller" means, collectively, ANDATHA INTERNATIONAL, INC., EVOLVE DISCOVERY PA, LLC, EVOLVE DISCOVERY LA, LLC, EVOLVE DISCOVERY PORTLAND, LLC, and EVOLVE DISCOVERY SEATTLE, LLC.
2. "Business Day" means any day except for the days designated as bank holidays in Japan, New York, or London.
3. "Loan Obligations" mean the Loaner's obligations to provide the Loan to the Borrower on the Loan Drawdown Date, in accordance with the terms and conditions set forth herein.
4. "Loan Drawdown Date" means the date as stipulated in Article 2-1(1) on which the Loan is provided.
5. "Loan Disabling Incident" means any the following incidents that cause the inability of the Loaner to raise funds, thus making it incapable of providing the Loan: i) outbreak of a natural disaster, war, or terrorist attack, ii) stoppage, disconnection, or disruption of an electric power supply, telecommunication, or various clearance systems, each of which makes it impossible to lend or borrow United States Dollars, iii) any incidents that make it impossible for banks to engage in loan financing transactions for the Loan currencies in general in the relevant money markets, such as inter-bank market, and iv) any other incidents not attributable to Loaner. Judgments as to the occurrence and cessation thereof shall be in the reasonable judgment of the Loaner.
6. "Considerations to Society and the Environment" means considerations not only to the natural environment but also to human society, such as to involuntary resettlement and respecting human rights of indigenous people.
7. "Taxes and Government Duties, etc., " means all taxes and duties that may be imposed in Japan, including income tax, corporation tax, and other taxes.
8. "Payment Due Time" means 12:00 noon of the day on which any payment becomes due and payable pursuant to this Agreement.
38
9. "Settlement Money" means, where the repayment or set-off of the principal of the Loan is done on any day other than the Interest Payment Date, the money for settling the difference in amount arising from the Reinvestment Interest Rate being lower than the Applicable Interest rate. This Settlement Money is calculated through multiplying said amount of the principal of the Loan repaid or set off as above by the difference in percentage between the Reinvestment Interest Rate and the Applicable Interest rate, and by the actual number of days in the Remaining Period. "Remaining Period" means the period from (and including) the date on which said repayment or set-off is done to (and including) the immediately succeeding Interest Payment Date. "Reinvestment Interest Rate" is the interest rate as reasonably determined by the Loaner assuming that the amount of the principal of the Loan repaid or set off were reinvested to the relevant inter-bank market, etc., for the Remaining Period. In the calculation of the Settlement Money, the interest rate will be pro-rated by the number of days elapsed (including the first day of the period but excluding the last), the division will be done finally, and the amount less than one (1) yen or 0.01 U.S. dollars will be rounded down.
10. "Increased Expenses" means the amount of expenses as reasonably calculated by the Loaner and which represents the significant increase in the expenses incurred by the Loaner (excluding an increase caused by the change in the tax rate applicable to the taxable income of the Loaner) for providing or maintaining the Loan, maintaining the fulfillment of the Loan Obligations, or securing its rights caused by i) enactment, amendment, or change in the interpretation or operation of the Laws, etc., ii) an establishment of, or addition to any reserve fund, or iii) change, etc., in the accounting regulations or its operation.
11. "Subject Company" means EvD, Inc.
12. "Shares of the Subject Company" means the shares issued by the Subject Company.
13. "Subject Business" means the business operated by the Subject Company with respect to the collection and analysis of electronic data in connection with such matters as a preservation of evidence in legal disputes and litigation.
14 "Tranche" means, collectively, the Tranche A and Tranche B; or, separately, Tranche A or Tranche B
15 "Tranche A" means, collectively, the Tranche A-1 and Tranche A-2; or, separately, Tranche A-1 or Tranche A-2.
16 "Loan Balance of Tranche A" means the total amount of principals of Unpaid Loan Dues in connection with Tranche A
17 "Tranche B" means, collectively, the Tranche B-1 and Tranche B-2; or, separately, Tranche B-1 or Tranche B-2.
18 "Loan Balance of Tranche B" means the total amount of principals of Unpaid Loan Dues in connection with Tranche B
19 "Japan Business Day" means any day except for the days designated as bank holidays in Japan.
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20. "Antisocial Acts" means any acts of i) making any demands with violent behavior, ii) making unreasonable demands beyond one's legal responsibility, iii) using intimidating behaviors or violence in connection with a business, iv) impairing the credibility of, or interfering with the business of the Loaner through disseminating groundless rumors or using fraudulent means or force, or v) doing anything similar to any of the items i) through iv) above.
21 "Antisocial Forces" mean any of the following person or entity: i) an organized crime group (of which members (including the members of the group belonging to that organized crime group) are likely to encourage doing, collectively or habitually, violent and illegal acts, etc.; the same shall apply hereafter; ii) a member of a crime syndicate, including a person who was a member of an organized crime group at any time during the past five (5) years; iii) a semi-member of an organized crime group, which means either any person or entity who is not a member of a crime group but is associated with any crime group and is likely to do violent and illegal acts backed by the powers of the crime group, or ii) any person or entity who cooperates with or is involved in the maintenance or operation of a crime group (including the members thereof) through such acts as providing funds, weapons, etc.; the same shall apply hereafter; iv) an entity associated with an organized crime group, which means an entity of which management has a substantial involvement of a member of an organized crime group, an entity managed by semi-members or former members of an organized crime group and which proactively cooperates with or involved in the maintenance or operation of an organized crime group through such acts as providing funds, or an entity which proactively utilizes an organized crime group in its operation of business, etc., and cooperates with or involved in the maintenance or operation of a crime syndicate; v) "Sokaiya" or the like, who is a corporate extortionist or a person who is likely to engage in violent and illegal activities seeking to obtain unlawful benefits, and who is a threat to the safety of civil life; vi) a group which is likely to engage in violent and criminal activities under the pretext or false pretense of conducting social or political campaigns seeking to obtain unlawful benefits, and who is a threat to the safety of civil life, vii) special intellectual violence group, etc., which mean crime groups or persons, other than the groups categorized under items i) through vi), which utilize the power of an organized crime group with which they are associated, or have financial relationship with an organized crime group, and which act as the core of the structural illegal activities, or viii) any person or entity which is similar to items i) through vii).
22. “Person Associated with Antisocial Forces” means a person or entity which has a relationship in which; i) the Antisocial Forces are considered to have the control over its management; ii) the Antisocial Forces are, in effect, involved in its management; iii) it is considered to wrongfully utilize the Antisocial Forces in such a way as to obtain illegal benefits for itself or third parties or to cause damages to third parties; iv) it is associated with Antisocial Forces by providing funds or convenience; or v) its officer or any person who is involved in its management has such a relationship with Antisocial Forces as to be socially criticized.
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23. “Bridge Loan Agreement” means the application form for a loan on bill executed by the Loaner and Borrower as of July 27, 2015, pursuant to which a loan was provided to the Borrower for the purpose of providing funds for the acquisition of shares in connection with the Acquisition and the payment of expenses incidental thereto.
24. “Repayment Date” means the specified date on which the principal, interest, and other money relating to the Loan shall become due and payable pursuant to this Agreement.
25. “Laws, etc.” mean any treaties, laws, ordinances of regional government, cabinet ordinances, ministerial ordinances, regulations, public notices, court rulings, court decisions, arbitration judgments, government notices, and policies of relevant government authorities, each of which is applicable to the Financing Agreements, any transactions pursuant thereto, or the parties to the Financing Agreements.
26. “Loan” means the loan of money provided by the Loaner pursuant to this Agreement.
27. “Loan Proceeds” mean the money provided by the Loaner as the Loan to the Borrower with respect to each Tranche. The amount of Loan Proceeds shall be referred to as the “Amount of Loan Proceeds.”
28. “Unpaid Loan Dues” mean all the money that the Borrower has the obligation to pay to the Loaner pursuant to this Agreement and with respect to each Tranche, including the principal, interest, delay charges, Settlement Money in relation to the Loan. The amount of Unpaid Loan Dues shall be referred to as the “Amount of Unpaid Loan Dues.”
29. “Security Agreement” means the security interests agreement with respect to the Shares of the Subject Company to be entered into among the Loaner, the Subject Company, and the Borrower.
30. "The Acquisition" means the acquisition by the Borrower of one hundred percent (100%) of the total number of shares issued by the Subject Company in accordance with the Agreements Relevant to the Acquisition.
31 "Agreements Relevant to the Acquisition" mean the Acquisition Agreement, and the Transaction Documents (including its amendments and changes) defined in the Acquisition Agreement.
32 "Acquisition Agreement" means the Stock Purchase Agreement dated July 31, 2015, (including its subsequent amendments and changes) entered into among the Seller, Borrower, and the Subject Company.
33. "Promissory Note" shall have the same meaning as the definition of the "Promissory Note" in the Acquisition Agreement.
34. "Financing Agreements" mean, collectively, this Agreement and the Security Agreement.
35. "London Business Day" means any day except for the days designated as bank holidays in London.
36. "USD" or "U.S. Dollars" mean the legal tender of the United States of America.
41
Chapter Two Provisions with respect to the Loan
Article 2-1 Principal terms of the Loan
(1) Loan Obligations
The Loaner shall have the Loan Obligations as set forth below to the Borrower in accordance with the provisions herein.
(2) The Loan
The Loaner shall provide the Loan of which the particulars are set forth below to the Borrower in accordance with the provisions herein.
42
43
Applicable Interest Rate |
Tranche A-1: the rate obtained by adding the Spread to the Base Interest Rate
Tranche A-2: 0.46% per annum
Tranche B-1: the rate obtained by adding the Spread to the Base Interest Rate
Tranche B-2: the rate obtained by adding the Spread to the Base Interest Rate |
Base Interest Rate |
This Base Interest Rate for each Interest Period shall be t he six-month interbank offered rate as stipulated below, published by ICE Benchmark Administration Limited (or its successor) for U.S. dollars LIBOR or by TIBOR operating body of Japanese Bankers Association (or its successor) for Japanese yen TIBOR, each at 11:00 a.m. or any nearest possible time after 11:00 a.m. of the day which is two (2) London Business Days (or two (2) Japan Business Days, in case of Tranche B-2) before the Interest Payment Date (or the Loan Drawdown Date, in case of the first Interest Period) (such day shall be referred to as the “Interest Decision Day”) applicable to the Interest Period immediately preceding the Interest Period to which th is Base Interest Rate is applied. In the event that the aforementioned interest rate is not published for a certain reason, the Base Interest Rate shall be the interest rate (expressed as per annum) representing, in the reasonable judgment of the Loaner, the offered rate for the applicable Loan Currency for the period that corresponds to the Interest Period, in the relevant inter-bank market on the applicable Interest Decision Day. For the avoidance of doubt, the above provision shall apply to the first Interest Period of Tranche B as well.
Tranche A-1: U.S. dollars LIBOR
Tranche B-1: U.S. dollars LIBOR
Tranche B-2: Japanese yen TIBOR
|
Spread |
Tranche A-1: 0.3125 % per annum
Tranche B-1: 0.3125 % per annum
Tranche B-2: 0.30 % per annum |
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Interest Payment Date |
The date designated as the “Interest Payment Date” in the Interest Payment Schedule of the Loan in Annex 2, as determined for each of the Tranches. |
Method of Interest Payment |
The interest amount for each Interest Period shall be calculated through multiplying the amount of the principal in the Unpaid Loan Dues in the respective Interest Period of the Loaner by the Applicable Interest Rate and pro-rated based on the actual number of days during the Interest Period (including the first day of the period but excluding the last), with the division done finally, and the amount less than one (1) yen or 0.01 U.S. dollar rounded down. The payment of the aforementioned interest shall be paid in arrear after the end of the respective Interest Period and on the Interest Payment Date for the Interest Period. |
Treatment of holidays |
In the event that the repayment due date for the principal and the interest falls on any day other than the Business Day, the repayment day in this case shall be the next Business Day. If this Business Day is in the succeeding month, then the repayment due date shall be the immediately preceding Business Day. |
(3) Others
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Applicable Foreign Exchange Rate |
Unless otherwise provided for in this Agreement, any conversion of foreign currencies into Japanese yen (or conversion of Japanese yen to foreign currencies) shall use an exchange rate of 124.08 Japanese yen to one U.S. dollar at a foreign exchange market. Unless otherwise provided for in this Agreement, any aggregate calculation using U.S. dollars and Japanese yen shall use this Applicable Foreign Exchange Rate and be converted into Japanese yen. |
Article 2-2 Conditions precedent to the Loan Obligations
(1) The Loan Obligations of the Loaner with respect to Tranche A shall be subject to the following conditions precedent:
(i) Loan Obligations of the Loaner is not relieved pursuant to the provisions on Article 2-4.
(ii) The Borrower submits to the Loaner all of the documents as stipulated below, no later than three (3) Business Days prior to the Loan Drawdown Date:
(a) The certificate of a seal impression less than three (3) months old as at the date of receipt and valid as of the Loan Drawdown Date, for the representative of Borrower whose name is stated and whose seal of approval is given in this Agreement as a signatory;
(b) The certified copy of commercial registration less than three (3) months old as at the date of receipt and valid as of the Loan Drawdown Date;
(c) The certified copy of the articles of incorporation;
(d) Registration of the impression of the seal of approval or signature in a format designated by Loaner; and
(e) A copy of the Acquisition Agreement;
provided, however, any document mentioned above that has already been submitted pursuant to Article 4-1 (1) and has no further changes after the submission need not be submitted again.
(iii) All of the Settlement Accounts of the Borrower are established and available.
(iv) No Incidents Causing All Debts Become Due And Payable have occurred or been continuing.
(v) All of the Borrower's representations and warranties are true and correct.
(vi) The Acquisition pursuant to the Agreements Relevant to the Acquisition has been completed and is not the subject of cancellation or invalidity.
(vii) The Agreements Relevant to the Acquisition has neither been terminated (except for the termination by virtue of the completion of the Acquisition) without the approval of the Loaner (which shall not be unreasonably withheld or delayed) nor been materially changed or amended.
(viii) No incidents have occurred in relation to the Bridge Loan Agreement whereby all debts of the Borrower thereunder would immediately become due and payable pursuant thereto.
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(ix) It is conclusive that all debts of the Borrower to the Loaner pursuant to the Bridge Loan Agreement will be repaid promptly after the Loan Drawdown Date of Tranche A.
(x) The Security Agreement is executed as of the Loan Drawdown Date of Tranche A (New York time zone shall also apply for the purpose of this item) and it is conclusive that valid and first-priority security interests will be created and perfected over the Shares of the Subject Company pursuant to the Security Agreement, with the Loaner being the security holder.
(2) The Loan Obligations of the Loaner with respect to Tranche B shall be subject to the following conditions precedent:
(i) Loan Obligations of the Loaner is not relieved pursuant to the provision of Article 2-4.
(ii) The Borrower submits all of the documents as stipulated below to the Loaner, no later than three (3) Business Days prior to the Loan Drawdown Date of the Tranche B:
(a) The certificate of a seal impression less than three (3) months old as at the date of receipt and valid as of the Loan Drawdown Date, for the representative of Borrower whose name is stated and whose seal of approval is given in this Agreement as a signatory;
(b) The certified copy of commercial registration less than three (3) months old as at the date of receipt and valid as of the Loan Drawdown Date;
(c) The certified copy of the articles of incorporation;
(d) Registration of the impression of the seal of approval or signature in a format designated by Loaner;
(e) A copy of the Acquisition Agreement; and
(f) A document evidencing the completion of the Borrower's payment against the Promissory Note in accordance with the Acquisition Agreement;
provided, however, any document mentioned above that has already been submitted pursuant to Article 2-2 (1) or Article 4-1 (1) and has no further changes after the submission need not be submitted again.
(iii) All of the Settlement Accounts of the Borrower are maintained.
(iv) No Incidents Causing All Debts Become Due And Payable have occurred or been continuing.
(v) All of the Borrower's representations and warranties are true and correct.
(vi) The Acquisition pursuant to the Agreements Relevant to the Acquisition has been completed and is not the subject of cancellation or invalidity.
(vii) The Agreements Relevant to the Acquisition has neither been terminated (except for the termination by virtue of the completion of the Acquisition) without the approval of the Loaner (which shall not be unreasonably withheld or delayed) nor been materially changed or amended.
(viii) The Borrower’s payment against the Promissory Note has been completed in accordance with the Acquisition Agreement.
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Article 2-3 Provisions with respect to the provision of the Loan
(1) The Loaner shall make a remittance to the Settlement Account of Borrower for each Loan Currency if the Loaner does not provide the notice pursuant to Article 2-3(2) and all of the conditions precedent to the Loan Obligations are satisfied in accordance with Article 2-2. The Loan shall be deemed to have been provided when the remittance is made to the Settlement Account of Borrower for each Loan Currency. The Loaner shall make its best efforts to complete the procedures for the aforementioned remittance by 11:00 a.m. of the Loan Drawdown Date.
(2) In the event that the Loaner decides not to provide the Loan for the reason that the conditions precedent to the Loan Obligations are, in whole or in part, not satisfied, the Loaner may notify the Borrower of the decision. However, the Loaner shall not be relieved from its liability arising from its failure to provide the Loan despite that all of the conditions precedent to the Loan Obligations are satisfied.
(3) The Borrower shall indemnify the Loaner against any damages, losses, and expenses suffered by the Loaner (including, but not limited to, the expenses incurred to avoid any damages or losses, the expenses incurred to recover from damages or losses and attorney's expenses) caused by the Loaner's inability to provide the Loan; provided, however, the Borrower shall have no obligation to indemnify the Loaner if such inability of the Loaner is the Loaner's breach of the Loan Obligations.
Article 2-4 Exemption of Loaner from its obligations
(1) The Loaner shall immediately notify in writing the Borrower of any Loan Disabling Incident that the Loaner determines to have occurred.
(2) The Loaner shall also notify the Borrower of any cessation, to the Loaner's judgment, of the aforementioned Loan Disabling Incident, occurring after the Loaner's notice of its occurrence to the Borrower pursuant to Article 2-4(1).
(3) The Loaner shall be exempted from the Loan Obligations for the period from (and including) the date of Borrower's receipt of the notice in accordance with Article 2-4(1) to (and including) the date of Borrower's receipt of the notice in accordance with Article 2-4(2). Such period shall be hereinafter referred to as the "Loan Disabled Period.”
Article 2-5 Increased Expenses
(1) In the event that the Increased Expenses occur, the Loaner may, by provide the written notice explaining the reasonable reasons for the occurrence of the Increased Expenses, demand the Borrower to choose either to (i) bear the Increased Expenses, or (ii) (a) to extinguish the Loaner’s Loan Obligations or (b) to terminate this Agreement, with the Loaner identifying (a) or (b) to the Borrower. The Borrower shall reply the aforementioned notice of demand by giving the Loaner the written notice, within fifteen (15) Japan Business Days of the date of receiving the aforementioned notice.
(2) Where the Borrower chooses to (i) bear the Increased Expenses in its reply to the Loaner's demand in Article 2-5(1), the Borrower shall pay the amount equivalent to the Increased Expenses in accordance with the provisions hereof on the fifth Japan Business Day from the date on which the Borrower gives its reply to the Loaner pursuant to the Article 2-5(1).
(3) Where the Borrower chooses (ii) to extinguish the Loaner's Loan Obligations or to terminate this Agreement to the demand under Article 2-5(1), the Borrower shall notify in writing the Loaner thereof.
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(4) Where the notice under Article 2-5(3) is given in reply to the Loaner identifying (ii) (a) to extinguish the Loaner's Loan Obligations in its demand pursuant to Article 2-5(1), the Loaner's Loan Obligations shall be extinguished effective upon the delivery date of the aforementioned notice is delivered to the Loaner (the "Date of Extinguishment of the Loan Obligations" in this article).
(5) Where the notice under Article 2-5(3) is given in reply to the Loaner identifying (ii) (b) to terminate this Agreement in its demand pursuant to Article 2-5(1), this Agreement shall be terminated effective on the date on which the aforementioned notice is delivered to the Loaner (the "Date of Termination of the Agreement" in this article). In this case, the Borrower shall perform all of its obligations hereunder to the Loaner in accordance with this Agreement on the fifth Japan Business Day from the Date of Termination of the Agreement. All provisions herein relevant to the performance by Borrower of its obligations to the Loaner shall remain in full force and effect, until and to the extent of the completion by the Borrower of its performance of its obligations.
Chapter Three Representations and Warranties by the Borrower
Article 3-1 Representations and warranties by the Borrower
The Borrower hereby represents and warrants that all matters stipulated in the following paragraphs are nothing but the truth as of the date of execution of this Agreement and each of the Loan Drawdown Dates (except for the matters with respect to the Security Agreement as of the date of execution of this Agreement). In the event that such representations or warranties are found to be untrue at a later date, the Borrower shall immediately notify in writing the Loaner thereof and indemnify and hold harmless the Loaner against all of its losses, expenses, and other damages arising therefrom.
(i) The Borrower is a stock corporation duly incorporated and validly existing under Japanese laws.
(ii) The Borrower has full legal rights and capabilities to execute and perform under the Financing Agreements; Borrower's execution and performance under the Financing Agreements as well as its transactions thereunder are all within the scope of purpose for the incorporation of the Borrower; and the Borrower has completed all procedures required by the Laws, etc., its articles of incorporation, and other internal rules of the Borrower for the execution and performance.
(iii) Borrower's execution and performance under the Financing Agreements as well as its transactions thereunder do not (i) violate any Laws, etc., binding upon the Borrower, (ii) contravene its articles of incorporation, and other internal rules of the Borrower, or (iii) contravene any agreements or contracts with any third parties to which the Borrower is a party or which are binding upon the Borrower or its property.
(iv) Any person who gives one's signature to, or whose name is stated and whose seal of approval is given in the Financing Agreements has been duly granted, through all procedures required by the Laws, etc., its articles of incorporation, and other internal rules of the Borrower, the full power and authority to represent the Borrower and give one's signature to, or whose name is stated and whose seal of approval is given in the Financing Agreements.
(v) The Financing Agreements are lawful, valid, and binding upon the Borrower and is enforceable in accordance with each of their provisions.
(vi) The financial statements and business reports, and their supplementary schedules prescribed by Article 435, paragraph 2 of the Companies Act (Law number 86 of 2005, as amended), the provisional financial statements prescribed by Article 441, paragraph 1 of the Companies Act, and consolidated financial statements prescribed by
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Article 441, paragraph 1 of the Companies Act, each prepared by the Borrower (hereinafter referred to as the "Financial Statements, etc.," are accurate by the standards of the generally accepted accounting principles of Japan, are lawfully prepared, appropriately represent the state of assets and liabilities, and the state of financial conditions and the profits of the Borrower as of the date of preparation, and were audited by the auditing firm, which gave its opinion endorsing the appropriateness of such statements and reports.
(vii) Since the closing of the accounts for the Borrower's business year that ended in March, 2015, there have been no changes in the circumstances surrounding the Borrower which represent specific possibilities of an incident that would significantly deteriorate the Borrower's business, property or financial conditions as stated in its Financial Statements, etc., and cause material adverse effects on the Borrower's performance of obligations under the Financing Agreements,
(viii) No litigations, arbitrations, administrative proceedings, or any other disputes that would cause, or pose threats of, the material adverse effects on the performance by the Borrower or the Subject Company of their obligations pursuant to the Financing Agreement have been commenced in relation to the Borrower or the Subject Company and there are no plausible threats of the same.
(ix) No Incidents Causing All Debts Become Due And Payable (as prescribed in this Agreement) or its plausible threats exist.
(x) All information provided by the Borrower to the Loaner is accurate in its material respects, has nothing omitted in its material respects, and does not cause any material misunderstandings.
(xi) There is no Borrower's breach of its obligations under any of the Agreements Relevant to the Acquisition or plausible threats thereof occurring after the Loan Drawdown Date.
(xii) The Borrower's obligations to make payments to the Loaner pursuant to the Financing Agreements rank at least pari passu to all other unsecured debts of the Borrower at present and future in terms of the creditor's rank or right to receive payments, except for prioritized debts based on the general application of law.
(xiii) Neither the Borrower nor the Subject Company is Antisocial Forces or a Person Associated with Antisocial Forces; nor do they engage in or utilize third parties to indirectly engage in the Antisocial Acts.
(xiv) The Subject Company is a wholly owned subsidiary of the Borrower, with all of its voting rights owned by the Borrower
(xv) The Borrower and the Subject Company maintains all permissions, etc., necessary for their operation of the business and comply with all Laws, etc., in their material respects.
Chapter Four Obligations of the Borrower
Article 4-1 Obligations of the Borrower
(1) The Borrower shall, on the date of executing this Agreement, submit all of the following documents to the Loaner at its costs and responsibility:
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(i) The certificate of a seal impression less than three (3) months old as at the date of receipt and valid as of the date of executing this Agreement, for the representative of Borrower whose name is stated and whose seal of approval is given in this Agreement as a signatory;
(ii) The certified copy of commercial registration less than three (3) months old as at the date of issue and valid as of the date of executing this Agreement;
(iii) The certified copy of the articles of incorporation;
(iv) Registration of the seal of approval or signature in a format designated by Loaner; and
(v) A copy of the Acquisition Agreement.
(2) Unless the Borrower obtains a prior written approval of the Loaner, the Borrower shall not provide security for any debts (except for the debts pursuant to the Financing Agreements) owed by itself or any third party, for the period from the date of executing this Agreement until the Borrower performs all of its obligations to Loaner arising from the Financing Agreements; except that either of the following applies and that the Borrower provides a prior written notice to the Loaner that it will provide the security:
(i) The Borrower provides security over the assets it acquires, the funds for which are raised through a loan (including a loan for its refinancing); or
(ii) The Borrower newly acquires an asset over which security interests are created, including the cases where the Borrower acquires the assets over which security interests have already been created in connection with a corporate merger, company split, or sale of business.
To "provide security" means, in this article, to create or reserve the security interests over the assets of the Borrower, excluding statutory lien, retention rights, or other security interests that are naturally established pursuant to the Laws, etc.
(3) The Borrower hereby covenants that, for the period from the date of executing this Agreement until this Agreement is terminated and the Borrower performs to the Loaner all of its obligations arising from the Financing Agreements, it will perform all of the following obligations at its expense and responsibility:
(i) The Borrower will immediately report to the Loaner any Incidents Causing All Debts Become Due And Payable or its plausible threats.
(ii) Where the Borrower prepares its Financial Statements, etc., the Borrower shall submit the copy thereof to the Loaner within three (3) months from the last day of each business year. Such Financial Statements, etc., will be accurate by the standards of the generally accepted accounting principles of Japan, be lawfully prepared, appropriately represent the state of assets and liabilities, financial conditions, and the state of profits of the Borrower as of the date of preparation, and be audited by the auditing firm, which will give its opinion endorsing the appropriateness of such statements.
Where the Borrower discloses its reports, etc., electrically by using the EDINET, an electronic disclosure system for disclosure of such documents as Annual Securities Report pursuant to Financial Instruments and Exchange Act, such disclosure shall be deemed to be the submission stipulated in the previous sentence; provided that the Borrower shall nevertheless submit the copy stipulated in the previous sentence upon request by the Loaner.
(iii) Upon reasonable request by the Loaner, the Borrower will immediately report the status of the property, management or business of the Borrower and its subsidiaries (the meaning of which is given in the regulation
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applied to the definition of terms, form and the method of preparation used for financial statements, etc., regardless of whether the Financial Statements, etc., of the Borrower is actually prepared pursuant to such regulation; the same shall apply hereinafter), and provide reasonably necessary convenience to the Loaner.
(iv) The Borrower will immediately report to the Loaner any occurrence of i) an incident which would cause material adverse effects on the property, management, or business of the Borrower or the Subject Company, ii) an incident which specifically threatens to cause such adverse effects by the lapse of time, or iii) commencement, or specific likelihood of the commencement of a litigation, arbitration, administrative proceeding, or any other disputes which would cause or specifically threatens to cause material adverse effects on performance by the Borrower or the Subject Company of their obligations pursuant to the Financing Agreements.
(v) The Borrower will immediately report to the Loaner its discovery that any of its representations or warranties in the Financing Agreements is found to be untrue, or any occurrence of an incident that contravenes such representation or warranty.
(4) The Borrower hereby covenants that, for the period from the date of executing this Agreement until this Agreement is terminated and the Borrower performs all of its obligations to the Loaner arising from the Financing Agreements, it will comply with all of the following items:
(i) The Borrower will not make material changes to its principal business. Nor will it cause the Subject Company to do the same.
(ii) The Borrower will maintain all permissions, etc., necessary for its operation of the business and comply with all Laws, etc., and shall cause the Subject Company to do the same for the operation of its business.
(iii) The Borrower will maintain the percentage of the principal of the Unpaid Loan Dues for the Tranche A-1 and Tranche B-1 in the loan balances of Tranche A and Tranche B at or below sixty percent (60%) respectively;
(iv) The Borrower will ensure that its direct or indirect equity ownership in the Subject Company shall not become less than 100%;
(v) Except as otherwise provided for by the Law, etc., Borrower's repayment of any debt pursuant to the Financing Agreements will rank at least pari passu and in no way subordinate to all other unsecured debts (including the unrecovered portion of secured debts after converting the collateral into cash) of the Borrower;
(vi) There shall be no reorganization, merger, company split, exchange or transfer of shares of the Borrower, or sales of all or substantial part of the Borrower's business or assets to third parties (including the sale thereof for the purpose a sale and leaseback transaction, but excluding the same which is within the scope of the Borrower's ordinary course of business), each of which causes material adverse effects on the Borrower's ability to repay its debts pursuant to the Financing Agreements;
(vii) The Borrower will maintain all of the Settlement Accounts of the Borrower.
(viii) Neither the Borrower nor the Subject Company will become Antisocial Forces or a Person Associated with Antisocial Forces; nor will they engage in or utilize third parties to indirectly engage in the Antisocial Acts, nor will they make the Subject Company to engage in the Antisocial Acts.
(ix) The Borrower will retain its accounting books pertaining to its business, liabilities, and assets, its Financial Statements, and all documents that are considered reasonably necessary for the purpose of generally accepted accounting procedures.
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(x) The Borrower shall enter into the Security Agreement as of the Loan Drawdown Date of Tranche A (New York time zone shall also apply for the purpose of this item) and create and perfect the valid and first-priority security interests over the Shares of the Subject Company with the Loaner being the security holder.
(5) The Borrower hereby covenants that, for the period from the date of executing this Agreement until this Agreement is terminated and the Borrower performs all of its obligations to Loaner arising from the Financing Agreements, it will comply with all of the following items:
(i) The Borrower will not record an ordinary loss in its financial statements as at the end of any two (2) consecutive business years, either on a consolidated or nonconsolidated basis.
(ii) The total amount for the section of net assets in the Borrower's consolidated balance sheets for the successive business years after March 31st, 2016 will be no less than the higher of i) seventy-five percent (75%) of the total amount for the section of net assets in the Borrower's consolidated balance sheet as at the end of the Borrower's business year that ended in March 2015, or ii) seventy-five percent (75%) of the total amount for the section of net assets in the Borrower's consolidated balance sheet as at the end of the immediately preceding business year.
(6) The Borrower shall notify in writing the Loaner of any order of provisional attachment, preservative attachment, or attachment imposed on the loan claim in connection with the Loan, immediately after the same is served upon the Borrower, together with the copy thereof. In such notification, the Borrower must also make a phone call to Loaner to confirm the notification has been actually delivered to the Loaner.
(7) The Borrower shall not claim any damages from Loaner for the Borrower's damages, losses, or expenses arising from (a) the fact that Borrower's representation and warranty pursuant to Article 3-1(xiii) is found to be untrue, or (b) the application of Article 5-1 based on the Borrower's breach of Article 4-1(4)(xiii). The Borrower shall indemnify and hold harmless the Loaner from any of the Loaner's damages, losses, or expenses arising from (a) or (b) in the foregoing sentence.
Article 4-2 Obligations of the Borrower (Considerations to Society and the Environment)
(1) The Borrower must, by following the instructions given by the Loaner, report to the Loaner the Borrower's measures and the outcome of the Borrower's monitoring activities for the Considerations to Society and the Environment in connection with the operation of the Subject Business. The Borrower shall report to Loaner any of the Borrower's threatened inability, as it comes to the Borrower's knowledge, to comply with any environmental law, regulation, or standards, etc., implemented by the national or local government of the region in which the Subject Business is operated.
(2) In the event that any issue with respect to the Considerations of Society and the Environment arises, the Borrower shall engage in, or shall cause the Subject Company to engage in, a consultation in good faith with the stakeholders of the Subject Business including local residents and regional NGOs.
(3) Where the national or local government of the region in which the Subject Business is operated plays an important role in terms of the Considerations to Society and the Environment, the Borrower shall endeavor to involve such government in concluding arrangements, etc., with respect to Considerations to Society and the Environment.
(4) If it is revealed that the Borrower's failure to provide the Loaner with correct information in connection with the Borrower's report on the Considerations to Society and the Environment causes unfavorable impact to the
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environment, the Borrower shall, upon demand by the Loaner, repay all of the Unpaid Loan Dues to the Loaner by the date specified by the Loaner.
(5) The Borrower shall retain certificates etc. and other materials for prima facie proof in connection with this Agreement requested by the Loaner (including copies of the agreement, etc., and proof of remittance in connection with the capital contribution, etc.) and, upon request by the Loaner, submit the copy of the same or ensure that the Loaner is able to confirm the certificates etc. and other materials for prima facie proof requested by the Loaner.
(6) The Borrower shall render its cooperation in connection with the investigation about the Borrower which the Loaner or Japan Bank for International Corporation deems necessary.
Chapter Five Incidents Causing A cceleration
Article 5-1 Incidents Causing Acceleration
(1) In the event that any single item out of (i) through (v) below occurs upon the Borrower, all debts of the Borrower under the Financing Agreements shall naturally and immediately become due and payable, and the Borrower shall, immediately and in accordance with the provisions of the Financing Agreements, repay all amounts of the principal and interests of the Loan, the Settlement Money and any other money which the Borrower has the obligation to pay pursuant to the Financing Agreements, with or without notice or demand from the Loaner. The term "Incidents Causing Acceleration" in this Agreement means each of the items in this Article 5-1(1) and Article 5-1(2).
(i) The payment by the Borrower is suspended, or a petition for the commencement of bankruptcy proceedings, commencement of civil rehabilitation proceedings, commencement of corporate reorganization proceedings, commencement of special liquidation proceedings, or any other legal insolvency proceedings is filed by or against the Borrower (including such petition filed in countries outside Japan).
(ii) The Borrower passes a resolution for dissolution; a court renders the judgment to dissolve the Borrower; or a court issues an order to dissolve the Borrower.
(iii) The Borrower terminates its business.
(iv) A clearinghouse or densai.net Co., Ltd. imposes the penalty of suspending transactions upon the Borrower, or any other entity that records monetary claims electronically imposes a similar sanction upon the Borrower.
(v) An order or notice of provisional attachment, preservative attachment, or attachment upon the Borrower's deposit claims or other monetary claims to the Loaner (including a similar proceeding in countries outside Japan) is served upon the Borrower.
(2) In the event that any single item out of (i) through (viii) below occurs upon the Borrower or the Subject Company, all debts of the Borrower under the Financing Agreements shall immediately become due and payable with a notice from the Loaner, and the Borrower shall, immediately and in accordance with the provisions in the Financing Agreements, repay all amounts of the principal and interests of the Loan, the Settlement Money and any other money which the Borrower has the obligation to pay pursuant to the Financing Agreements.
(i) The Borrower's performance of the obligations under the Financing Agreements is delayed, in whole or in part.
(ii) The Borrower's representation or warranty under the Financing Agreements is found to be untrue.
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(iii) The Borrower commits a material breach of other obligations than items (i) or (ii) above under the Financing Agreements.
(iv) The Borrower's monetary debt other than those pursuant to the Financing Agreements and of which aggregate amount exceeds fifty million Japanese yen (JPY 50,000,000) becomes immediately due and payable, or the Borrower fails to perform its obligation as it becomes due.
(v) A litigation, mediation, arbitration, or administrative proceeding is commenced, a decision of which is reasonably likely to be unfavorable to the Borrower or the Subject Company, and, once such unfavorable decision is given, it is reasonably likely that the decision will cause material adverse effects on the Borrower or the Subject Company.
(vi) Special mediation proceedings are commenced for the Borrower.
(vii) The rank of the security interests created upon the Shares of the Subject Company pursuant to the Security Agreement is not the first priority; the Loaner's rights to such security interests do not satisfy the requirements for being perfected or becomes not perfected; or such security interests become invalid or not effective.
(viii) Except as set forth in items (i) through (vii) above, the state of Borrower's business or property suffers material deterioration so that there is a reasonable need to preserve the Loaner's claims.
(3) In the event of delay attributable to the Borrower in giving the notice of any of the items in Article 5-1(2) above or Borrower's failure to give the same, all debts of the Borrower under the Financing Agreements shall immediately become due and payable, the Borrower shall immediately repay all amounts of the principal and interests of the Loan, the Settlement Money and any other money which the Borrower has the obligation to pay pursuant to the Financing Agreements, and the Loaner's Loan Obligations (if any) shall be extinguished, each of which taking effect on the date on which the Borrower's notice should have normally been delivered to the Loaner.
Chapter Six Termination of the Loan Obligations
Article 6-1 Termination of the Loan Obligations
(1) In the event of any of the following incidents, all of the Loaner's Loan Obligations with respect to the relevant Tranche shall be extinguished. The Borrower, in this case shall nevertheless have the obligation to repay, on the Repayment Date (unless the Borrower's debts pursuant to the Financing Agreements become due and immediately payable), the portion of the principal and the interests of the Loan of which Repayment Date is after the date of the said extinguishment. All relevant provisions herein shall survive such extinguishment and be in full force and effect until and to the extent of the Borrower's completion of all of its performance of obligations under the Financing Agreements.
(i) The Loan Drawdown Date has elapsed.
(ii) The Loaner has provided the Loan.
(2) In the event that the execution of and the performance under this Agreement as well as the transactions hereunder violate any Laws, etc., binding upon the Lender, the Lender shall consult with the Borrower and determine necessary courses of actions. In this case, the Borrower may not unreasonably reject the extinguishment of the Loaner's Loan Obligations or the termination of this Agreement.
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Chapter Seven Provisions Governing the Repayment of Debts
Article 7-1 Performance of obligations by the Borrower
(1) The Borrower shall, for the purpose of repaying its debts hereunder, make the remittance to the Settlement Account of Borrower for each Loan Currency applicable to respective Tranche, (a) no later than the Payment Due Time, for such debts that have the Repayment Date hereunder, or (b) immediately upon demand by the Loaner given to the Borrower, for such debts that do not have the Repayment Date hereunder. In this case, the Borrower's performance of its obligation to the Loaner shall be deemed to have been completed upon the Loaner's withdrawal of the repayment from the Settlement Account of Borrower. The Lender shall do the aforementioned withdrawal (a) by the end of the Payment Due Date, for such debts that have the Repayment Date hereunder, or (b) without undue delay on or after the date of remittance, for such debts that do not have the Repayment Date hereunder.
(2) The Borrower shall grant to the Loaner, and waive its rights to revoke such grant of, the right to withdraw the money from the Settlement Account of Borrower pursuant to Article 7-1(1). The aforementioned withdrawal shall not require any cheque or application for withdrawal issued by the Borrower.
(3) All repayments of the Borrower pursuant to this article shall be applied to, and in the order of, the following items (such order shall be referred to as the "Order of Application"). However, in the event that the Borrower's debts under the Financing Agreements become immediately due and payable, the application and the order shall be separately determined by other provisions herein.
(i) The portion that is required to be paid to third parties in the expenses to be borne by the Borrower pursuant to the Financing Agreements.
(ii) The portion that is incurred by the Loaner on behalf of the Borrower, in the expenses to be borne by the Borrower pursuant to the Financing Agreements.
(iii) the delay charges and Settlement Money
(iv) Interests on Loan
(v) The principal of Loan
(4) If the applied repayment is insufficient for any item in Article 7-1(3) (the first of such item in the order in Article 7-1(3) shall be referred to as "Insufficient Item"), the balance of the repayment amount remaining after its application to the immediately preceding item to the Insufficient Item shall be applied in proportion to the amount of each of payable debts of the Borrower within the Insufficient Item (this method of application shall be hereinafter referred to as "Application Method for the Insufficient Item").
(5) Except as otherwise required by the Laws, etc., the Borrower shall not deduct the Taxes and Government Duties, etc., from the repayment of its debts pursuant to the Financing Agreements. If the Borrower is required to deduct the Taxes and Government Duties, etc., from the repayment of its debts, the Borrower shall add an amount to the repayment so that the amount received by the Loaner net of the Taxes and Government Duties, etc., will be equal to the amount had it not been for such Taxes and Government Duties, etc. In this case, the Borrower shall send the certificate of tax payment issued by the tax authorities of Japan in charge of withholding taxes or any other government authorities directly to the Loaner within thirty (30) days of the date on which the Borrower makes the repayment.
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(1) When the Borrower is required to perform its obligations for the Loaner for such reasons as its debt becoming due, its debt becoming immediately due and payable or otherwise, the Loaner may (a) set off its deposit liability and other liabilities to the Borrower (regardless of its due date) against its receivables from the Borrower pursuant to the Financing Agreements, and (b) may, without any prior notice to the Borrower or any prescribed procedures, receive on behalf of the Borrower a repayment of deposits made by the Borrower and then apply such receipt to the unpaid debts owed by the Borrower. The method of manifesting the Loaner's intentions shall be in accordance with the Laws, etc. Interests on the receivables and liabilities, the Settlement Money, and the delay charges for the foregoing set-off or application to the debts shall be calculated for the period ending the date on which such calculation is performed. The interest rates and the rate of charges in such calculation shall be in accordance with the provisions of applicable agreements, or, in the absence of such provisions, be reasonably determined by the Loaner. The exchange rates for foreign currencies shall be reasonably determined by the Loaner based on the market rates on the date of the calculation. In the event that the foregoing set-off or application to the debts is insufficient to extinguish the total amount of debts owed by the Borrower, the Loaner may apply in the order and method as it thinks fit and the Borrower may not object to that application.
(2) The Borrower may set off its receivables from the Loaner against its liabilities to the Loaner hereunder, only if the Repayment Date of the Loan becomes due and it is necessary to preserve such receivables of the Borrower as its deposit claims or other monetary claims with the Loaner become due. In this case, the Borrower shall notify in writing the Loaner of the set-off and promptly submit to the Loaner the certificate or passbook of its deposit claims or other monetary claims by which the set-off is made. Interests on the receivables and liabilities and the amount of delay charges for the foregoing set-off shall be calculated for on the period ending the date on which the notice of set-off is delivered. The interest rates and the rate of charges in such calculation shall be in accordance with the provisions of applicable agreements, or, in the absence of such provisions, be reasonably determined by the Loaner. The exchange rates for foreign currencies shall be reasonably determined by the Loaner based on the market rates on the date of the calculation. In the event that the foregoing set-offs are insufficient to extinguish the total amount of debts owed by the Borrower, the Borrower may apply in the order and method as it thinks fit. However, if the Borrower fails to designate such order or method, the Loaner may apply in the order and method as it thinks fit and the Borrower may not object to that application.
(3) In the event that the set-off herein is performed, the Party performing it shall promptly notify in writing the other party of the details of such set-off. The notifying party shall indemnify the other party against the other party's damages, losses, or expenses caused by the undue delay in giving such notice.
Chapter Eight Articles for the Repayment before Due
Article 8-1 Articles for the voluntary repayment before due
(1) The Borrower, when it plans to repay all or part of the principal of the Loan before the Maturity Date (such repayment shall be hereinafter referred to as the "Repayment before Due"), shall do so in accordance with the procedures set forth in the following paragraphs.
(2) When the Borrower plans the Repayment before Due, it shall, no later than forty-five (45) days before the date of the planned Repayment before Due (such date shall be the Business Day and be referred to as the "Planned Date of
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Repayment before Due" in this chapter), notify in writing the Loaner of (a) the Tranche and its amount of principal for the planned Repayment before Due (provided that such amount of the principal shall be fifty million yen (JPY 50,000,000) and above, and be in units of fifty million yen (JPY 50,000,000), for the Loan in Japanese yen; or five hundred thousand U.S. dollars (USD 500,000) and above, and be in units of five hundred thousand U.S. dollars (USD 500,000), for the Loan in U.S. dollars; or the entire amount of the Unpaid Loan Dues in the Loan for which the Repayment before Due is planned), (b) the Borrower's intention to pay the full amount of interest which will accrue on the amount of principal for which the Repayment before Due is planned in the period from (and including) the Drawdown Date of the Loan to (and including) the Planned Date of Repayment before Due (such amount of interest shall be referred to as the "Transitional Interest" in this chapter and the calculation method of the Transitional Interest shall be in accordance with the method of calculating the amount of ordinary interest as provided herein), and (c) the Planned Date of Repayment before Due.
(3) In performing the Repayment before Due for Tranche A or Tranche B pursuant to Article 8-1(2), the Borrower will maintain the percentage of the balance of the principal of the Unpaid Loan Dues after the Repayment before Due with respect to the Tranche A-1 and Tranche B-1 in the loan balance of Tranche A and Tranche B at or below sixty percent (60%) respectively.
(4) The Loaner shall make its judgment as to whether or not it accepts the Repayment before Due and notify the Borrower of such judgment no later than thirty (30) days before the requested Date of Repayment before Due.
(5) If the Repayment before Due is accepted in accordance with Article 8-1(4), the Lender shall notify the Borrower of the Settlement Money no later than two (2) Business Days before the Planned Date of Repayment before Due. The Borrower shall pay the principal of the Loan, and the aggregate amount of the Transitional Interest and the Settlement Money subject to the Repayment before Due on the Planned Date of Repayment before Due.
(6) In the event that any Repayment before Due made pursuant to this article represents a portion of the principal of the Loan, such repayment shall be applied first to the principal of the applicable Loan that falls due the latest of all others.
Article 8-2 Articles for the mandatory repayment before due
(1) In the event that any of the incidents described in the following items occurs after the Loan Drawdown Date (such incident shall be referred to as the "Incident Causing the Mandatory Repayment before Due"), the Borrower must repay all or part of the principal of the Loan before its due date, in an amount and by the date stipulated below (such repayment shall be referred to as the “Mandatory Repayment before Due” and such date shall be hereinafter referred to as the "Due Date for Mandatory Repayment before Due"). All amounts in item (i) below and all pro-rated amounts in items (ii) and (iii) below shall be adjusted so that each of them will be in units of one hundred thousand yen (JPY 100,000) or one thousand U.S. dollars (USD 1,000).
(i) In the event that the percentage of the principal of the Unpaid Loan Dues with respect to the Tranche A-1 or Tranche B-1 in the loan balance of Tranche A or Tranche B becomes, respectively, more than sixty percent (60%), the Borrower shall, immediately (but in any event within ten (10) days of the date on which such incident occurs) and before the due date, repay to the Loaner the principal, the Transitional Interest and the Settlement Money of the Loan with respect to the excess amount in the applicable Tranche.
(ii) In the event that Borrower issues its shares (only when its considerations are paid in money; for the avoidance of doubt, this issuance excludes the share subscription warrants) and only upon request by the Loaner, the Borrower
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shall, immediately after the receipt of the proceeds from the issue (but in any event within ten (10) days of the date on which such incident occurs), remit, as the Repayment before Due, fifty percent (50%) (or such percentage above fifty percent (50%) as agreed upon by the Borrower and the Loaner as the result of a negotiation in good faith) of the amount of the proceeds net of the reasonable expenses and Taxes and Government Duties in connection with the proceeds, to the Settlement Account of Borrower with respect to the relevant Tranche. The amount of the Repayment before Due for each of the Tranches shall be calculated in proportion to the amount of principal in the respective Unpaid Loan Dues.
(iii) In the event that Subject Company transfers all or substantially all of the Subject Business to third parties (except for the Borrower or its subsidiaries) by means of sale or other disposals, the Borrower shall, on the date of the receipt of the proceeds from the transfer, remit, as the Repayment before Due, one hundred percent (100%) of the amount of the proceeds from the transfer net of reasonable expenses and Taxes and Government Duties in connection with said transfer, to the Settlement Account of Borrower for the applicable currency with respect to the relevant Tranche. The amount of Repayment before Due for each of the Tranches shall be calculated in proportion to the amount of principal in the respective Unpaid Loan Dues.
(2) In the event of the Mandatory Repayment before Due in accordance with Article 8-2(1), the Borrower shall, no later than five (5) Business Days before the date on which the Mandatory Repayment before Due is made (hereinafter referred to as the "Planned Date of Mandatory Repayment before Due"), notify in writing the Loaner of (a) its intention to make the Mandatory Repayment before Due, (b) the amount of the principal of the Loan for which the Mandatory Repayment before Due is planned, (c) the Borrower's intention to repay the aggregate of the full amount of the interest accruing for the period until (and including) the Planned Date of Mandatory Repayment before Due and the Settlement Money, each with respect to the principal for the Mandatory Repayment before Due, and (d) the Planned Date of Repayment before Due.
(3) In the event that any Repayment before Due made pursuant to this article represents a portion of the principal of the Loan, such repayment shall be applied first to the principal of the Loan that falls due the latest of all others.
Article 9-1 Collections, etc., from third parties
(1) Unless the Loaner gives its prior written acceptance, no repayments by any third parties other than the Borrower shall be accepted with respect to the Borrower's debts under the Financing Agreements.
(2) Unless the Loaner gives its prior written acceptance,
the Borrower shall not, after the date of execution of this Agreement, engage any third party to provide its guarantee (including a real guarantee) over the Borrower's debts pursuant to the Financing Agreements, or assign any debts pursuant to the Financing Agreements to any third party.
(3) Where the Loaner enters into a guarantee agreement (including a real guarantee) or a debt assumption agreement with a third party not commissioned by the Borrower with respect to the Borrower's debts pursuant to the Financing Agreements, the Loaner shall be required to obtain the prior written consent of the third party that;
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(i) the third party will assume the same obligations as the Loaner has towards the Borrower pursuant to the right of indemnification or Financing Agreements, in connection with the third party's exercise of (a) the rights of the third party to demand performance by the Borrower acquired through the third party's performance of obligations under the aforementioned debt assumption agreement, and (b) its claim rights under the Financing Agreements;
(ii) the third party will be bound by each provision of this Agreement;
(iii) the third party is a corporation having its place of business in Japan (i.e. it has its head office, branch office or sales office having registered itself in Japan pursuant to the laws of Japan) and not a subsidiary, etc., of the Borrower, and the Borrower is not a subsidiary of such third party;
(iv) the amount of claim rights regarding the Loan that the third party may acquire through subrogation shall be one hundred million yen (JPY 100,000,000) and above, or one million U.S. dollars (USD 1,000,000) and above; and
(v) no withholding tax, etc., which will increase the amount of interest to be paid by the Borrower to such third party shall be imposed on the aforementioned subrogation.
Where the subrogation of the loan claims to a third party under the Financing Agreements takes place pursuant to item (i) above, all expenses incurred for such subrogation shall be borne by such third party.
(1) Unless the Loaner gives its prior written acceptance, the Borrower may not assign its status, rights, or obligations under this Agreement to any third parties.
(2) Subject to the Borrower's prior written acceptance and the satisfaction of all of the requirements set forth in the following items, and except for the assignment of the loan claims as separately set forth herein, the Loaner may, until its provision of the Loan, assign its status and its associated rights or obligations under this Agreement, in whole or in part, to any third parties , provided, however, that this shall not apply when special provisions exist in this agreement pertaining to the assignment of the loan claims. The Loaner assigning as such shall be hereinafter referred to as the "Assignor" and the person to whom the Assignor assigns shall be hereinafter referred to as the "Assignee.”
(i) In the case of a partial assignment of this Agreement, the Assignor and the Assignee shall jointly be the Loaner hereunder and be bound by the provisions of this Agreement on and after the date of such assignment, and the Amount of Loan Proceeds provided by the Assignor before the assignment (referred to as "Amount of Loan Proceeds before Assignment" in this paragraph) shall be reduced by the amount separately agreed by the Assignor and the Assignee (referred to as the "Reduction Amount" in this paragraph).
(ii) The Assignee is a corporation having its place of business in Japan (i.e. it has its head office, branch office or sales office having registered itself in Japan pursuant to the laws of Japan).
(iii) In case of a partial assignment of this Agreement, (a) the Reduction Amount and (b) the amount calculated by deducting the Reduction Amount from the Amount of Loan Proceeds before Assignment will one hundred million yen (JPY 100,000,000) and above, or one million U.S. dollars (USD 1,000,000) and above.
(iv) No withholding tax, etc., which will increase the amount of interest to be paid by the Borrower to the Assignee shall be imposed on the aforementioned assignment.
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(3) All expenses, etc., incurred for the assignment pursuant to Article 9-2(2) above shall be borne by the Assignor or Assignee; provided that the Increased Expenses occurring upon the Assignee after the assignment shall be governed by the provisions herein with respect to the Increased Expenses.
Article 9-3 Assignment after the provision of the Loan
(1) Except as otherwise provided for herein and subject to the satisfaction of all of the requirements set forth in the following items, the Loaner may assign its loan claims. The Assignor and the Assignee shall, immediately following the date of such assignment, satisfy all requirements for perfecting such assignment against third parties and debtors. Upon assignment of the loan claims pursuant to this paragraph, all rights associated with the assigned loan claims of the Assignor hereunder shall be transferred to the Assignee; and the Assignee shall have undertaken all obligations associated with the assigned loan claims of the Assignor. The Borrower shall accept in advance such transfer of rights to the Assignee and such undertaking of obligations by the Assignee. The Assignee shall be deemed to be the Loaner in this case, in terms of the application of the provisions herein relevant to such loan claims.
(i) The Assignee will be bound by each of the provisions herein relevant to the loan claims which are assigned to the Assignee (the Assignee shall not have the Loan Obligations).
(ii) The Assignee is a corporation having its place of business in Japan (i.e. it has its head office, branch office or sales office having registered itself in Japan pursuant to the laws of Japan).
(iii) If the loan claims are split as they are assigned, the amount of each loan claims after the split will be one hundred million yen (JPY 100,000,000) and above, or one million U.S. dollars (USD 1,000,000) and above.
(iv) no withholding tax, etc., which will increase the amount of interest to be paid by the Borrower to the assignee shall be imposed on the aforementioned assignment.
(2) All expenses, etc., incurred for the assignment pursuant to Article 9-3(1) above shall be borne by the Assignor or Assignee. The Increased Expenses occurring after the assignment shall be governed by the provisions herein with respect to the Increased Expenses.
Article 9-4 General provisions
(1) Disclosure of Information
(i) Neither the Loaner nor the Borrower shall, before and after the complete repayment of all debts hereunder, disclose or divulge to third parties the contents of the Financing Agreements or other Party's confidential information that it learned in connection with the transactions contemplated by the Financing Agreements. Nor shall the Parties use the aforementioned contents or confidential information for any purposes except for the purpose in connection with the Financing Agreements or of the credit examination or credit administration by the Loaner. The obligations stipulated in the preceding sentences in this paragraph shall not apply to any information (i) which has become publicly known, (ii) lawfully obtained from third parties without confidentiality obligations, (iii) disclosed pursuant to the requirement by law, government agencies, or self-regulatory bodies (including the financial instruments exchange and Japan Securities Dealers' Association), (iv) disclosed to attorneys at law, judicial scriveners, certified public accountants, licensed tax accountants, et al., (v) disclosed by the Loaner or Borrower to its respective affiliated companies, (vi) disclosed by the Borrower to the Seller, (vii) disclosed for the
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purpose of performing under, or incidental to or in connection with, the agreement with Japan Bank for International Corporation, or (viii) disclosed to the extent reasonably necessary for the transactions contemplated by the Financing Agreements and the Agreement Relevant to the Acquisition. The permitted disclosures of personal information shall nevertheless be limited to the extent permitted for disclosure by law.
(ii) The Borrower shall not object to the Loaner disclosing any information relating to the Financing Agreements to the assigns (including the Assignee), guarantors, persons assuming debts, purchasers of a participation benefit, or any persons who are considering the an assignment, guarantee, assumption of debts, or purchase of participation benefit (including the persons acting as a broker with respect to such transactions), each in connection with (a) the assignment of contractual status or of loan claims pursuant to the Financing Agreements, (b) the execution of a guarantee agreement (including a real guarantee) or a debt assumption agreement not commissioned by the Borrower with respect to the Borrower's debts pursuant to the Financing Agreements, or (c) the sale of a participation benefit in connection with the loan claims hereunder (including, but not limited to, the loan participation and self-settled trust); provided that the Loaner shall impose confidentiality obligations on the person(s) receiving the information. If the Loaner elects to disclose the information relating to the Financing Agreements in accordance with this item, the Loaner shall inform the Borrower of such fact, promptly after it imposes the confidentiality obligations on such person. The "information relating to the Financing Agreements" in this paragraph means any information about the credit worthiness of the Borrower obtained in connection with the Financing Agreements, information about the contents of the Financing Agreements and any other accompanying information, and contents of the loan claims which is the subject of transaction and any other accompanying information, but excluding any information about the creditworthiness of the Borrower obtained in connection with agreements other than the Financing Agreements.
(2) Delay charges
In the event that the Borrower delays its performance of obligations to the Loaner hereunder, the Borrower shall pay the delay charges immediately after the demand therefor from the Loaner pursuant to this Agreement. The aforementioned delay charges shall be calculated by multiplying the amount corresponding to the delayed performance of obligation (such delayed performance shall be referred to as the "Delayed Performance") by the interest rate of fourteen percent (14%) per annum as applied to the period from (and including) the date on which the Delayed Performance should have been performed to (and including) the date on which all of the Delayed Performance are performed, based on the pro-rated calculation by the number of days elapsed (including the first day of the period but excluding the last), with the division being done finally, and the amount less than one (1) yen or 0.01 U.S. dollars being rounded down.
(3) Expenses, and Taxes and Government Duties, etc.
(i) All reasonable expenses (including the reasonable extent of attorney fees) incurred for the Financing Agreements, and the preparation, modification, and amendment of the term sheet with respect to the Financing Agreements shall be borne by the Borrower. Immediately after the demand for payment by the Loaner and subject to the consummation of the Acquisition, the Borrower shall pay the aforementioned expenses to the Loaner pursuant to this Agreement.
(ii) All expenses (including attorney fees) incurred by the Loaner for its retention and exercise of its rights or performance of its obligation pursuant to the Financing Agreements shall be borne by the Borrower. The Loaner shall promptly notify the Borrower of such expenses as it incurs. Where the Loaner bears such expenses on behalf of the Borrower, the Borrower shall reimburse such expenses to the Loaner pursuant to this Agreement, immediately after the Loaner demands such reimbursement.
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(iii) All stamp duties and other similar Taxes and Government Duties, etc., incurred for the preparation, modification, and enforcement, etc., of the Financing Agreements and other relevant documents shall be borne by the Borrower. Where the Loaner bares such expenses on behalf of the Borrower, the Borrower shall reimburse such expenses to the Loaner pursuant to this Agreement, immediately after the Loaner demands such reimbursement.
(4) Amendments to this Agreement
No amendments to this Agreement may be made except by the written agreement by the Loaner and the Borrower.
(5) Assumption of risk, disclaimer, compensation, and indemnification
(i) In the event that any documents submitted by the Borrower to the Loaner is lost, destroyed, or damaged due to such uncontrollable incidents as social uprising or natural disaster, the Borrower shall, after consultation with the Loaner, perform its obligations hereunder based on the accounting books, vouchers, and other records retained by the Loaner. Upon request by the Loaner, the Borrower shall promptly prepare and submit the replacing documents to the LoanerLoaner.
(ii) The Borrower shall indemnify the Loaner against damages, losses, or expenses etc. incurred by the Loaner caused by an incident of the forged, altered, or stolen seal of the Borrower's approval occurring in the course of the Loaner's transactions pursuant to this Agreement where the Loaner used its due care in verifying and authenticating the impression of the seal of approval by the Borrower's representative and its agent against another impression of the seal of approval which the Borrower had previously registered with the Loaner.
(iii) The Borrower shall indemnify the damages, losses, or expenses, etc., incurred by the Loaner caused by the Borrower's breach of the provisions herein. The Loaner shall promptly notify the Borrower of such damages, losses, or expenses, etc.
(iv) In addition to Article 9-4(5)(iii) above, the Borrower shall indemnify the Loaner and its affiliated companies as well as their directors, officers, employees and agents (hereinafter referred to as the "Indemnified Party") against their expenses and liabilities (including attorney's fees) arising from or in connection with the demand, litigation, or other proceedings (regardless of whether the Indemnified Party is a party thereto; or any third party, the Borrower or its related parties initiated such demand, litigation, or other proceedings) relevant to the transactions contemplated by the Financing Agreements; except for such expenses and liabilities caused by or based on the willful misconduct, gross negligence, or material breach of this Agreement by the Indemnified Party.
(6) Severability
If any part of the provisions of this Agreement is held to be invalid, illegal, or unenforceable, the validity, legality, and enforceability of other provisions of this Agreement shall in no way be impaired or affected thereby.
(7) Calculations
Except as otherwise expressly stipulated herein, all calculations in this Agreement shall use a pro-rated calculation based on a number of days that includes the first day of the applicable period but excluding the last, with the division being done finally, and the amount less than one (1) yen or 0.01 U.S. dollars being rounded down.
(8) Preparation of a notarized deed
Upon request by the Loaner at any time, the Borrower shall follow necessary procedures to commission a notary public to issue a notarized deed authenticating the obligations contained herein and acknowledging the enforceability of a compulsory execution.
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(9) Non-waiver of rights
No failure or delay by the Loaner in exercising its rights, in whole or in part, prescribed in this Agreement shall, under any circumstances, be construed as a waiver of such rights by the Loaner or a release or reduction of the Borrower's obligation, or give any effects to the rights or obligations of the Loaner.
(10) A bank transaction agreement, etc., not applicable
A bank transaction agreement, if any, separately submitted by the Borrower to the Loaner or separately entered into between the Borrower and the Loaner shall not apply to this Agreement or any transactions hereunder.
(11) Governing law and jurisdiction
This Agreement shall be governed by the laws of Japan. Any disputes arising from this Agreement shall be subject to the exclusive jurisdiction of the Tokyo District Court.
(12) Language
This Agreement shall be executed in Japanese, which shall constitute the only authentic agreement.
(13) Mutual consultation
In the event of any matter not provided for herein, or questions or doubts about the interpretation of this Agreement, the Borrower and the Loaner shall mutually consult and determine the course of action.
[The remainder of this page is intentionally left blank.]
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IN WITNESS WHEREOF, the parties hereto have prepared one original document of this Agreement to be executed by their representative or his/her agent by affixing their names in print and their seals of approval, the executed original document of which shall be retained by the Loaner for itself and for the Borrower.
November 30, 2015
The Borrower: UBIC, Inc.
UBIC, Inc.
Meisan Takahama Building, 2-12-23, Konan, Minato-ku, Tokyo,
108-0075 Japan
Representative Director Masahiro Morimoto [Seal of Approval]
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The Loaner: Sumitomo Mitsui Banking Corporation
1-14-10, Higashi Gotanda, Shinagawa-ku, Tokyo, Japan
Gotanda Corporate Banking Department, Sumitomo Mitsui Banking Corporation
General Manager Yoshio Hagita [Seal of Approval]
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Annex 1
Contact Address of the Parties and Methods of Notification
1. The Borrower
The Borrower and its name of department |
Address |
Telephone number / Fa csimile number |
UBIC, Inc. Treasury Division
|
(Postal Code: 108-0075) 7th Floor, Meisan Takahama Building, 2-12-23, Konan, Minato-ku, Tokyo, Japan |
+81-3-5463-6344
+81-3-5463-6345
|
2. The Loaner
The Loaner and its name of department |
Address |
Telephone number / Fa csimile number |
Sumitomo Mitsui Banking Corporation Gotanda Corporate Banking Department |
(Postal Code: 141-0022)
1-14-10, Higashi Gotanda, Shinagawa-ku, Tokyo, Japan |
+81-3-3442- 7914
+81-3-3443-6617 |
3. Methods of notification
(1) All notices hereunder shall be in writing, expressly state such notice is given pursuant to this Agreement, be delivered to the address which the other Party being the receiving Party specifies herein, and use one of the methods specified as follows:
(i) by a delivery by hand and in person
(ii) by a registered postal mail or courier service
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(iii) by a facsimile transmission; provided that notice of any of the following sent by a facsimile transmission must accompany its authenticated copy delivered to the receiving Party using the method of (i) or (ii) above after each transmission:
(a) notice by the Borrower of the Planned Repayment before Due;
(b) notice given by the Borrower to the Loaner hereunder that an order of provisional attachment, preservative attachment, or attachment imposed on the loan claim is served upon the Borrower;
(c) registration of the impression of the seal of approval or authorized signature in a format specified by the Loaner; or
(d) any other notices, a delivery of the authenticated copy of which is reasonably requested by the receiving Party.
Each Party hereto may change its contact address by giving the notice of the change of the contact address to the other Party.
(2) Each notice stipulated in the above paragraph (3) shall be deemed to have been effectively delivered at a time when (i) the receipt is confirmed, for the facsimile transmission, and (ii) the applicable document is actually received, for the other methods.
4. Changes to the matters having been submitted
(1) The Borrower shall give prompt written notice to the Loaner of any changes to its trade name, the name of its representative, its agents, its authorized signature, the impression of its seal of approval, its address, and any other matters it has submitted to the Loaner. The Loaner shall give prompt written notice to the Borrower of any of the aforementioned matters.
(2) In the event of a failure or delay of the notification set forth above, such notice shall be deemed to have been delivered at a time when it would normally be delivered.
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Annex 2
Table of Repayment Schedule of the Principal , Table of Interest Payment Schedule
The following shall apply to each Tranche.
1. Repayment Schedule of the Principal of the Loan
(1) Tranche A
|
Repayment Date of the Principal |
A mount of P rincipal due for R epayment |
The first repayment |
June 24, 2016 |
Five percent (5%) of the total amount of principal in the Unpaid Loan Dues as at the Loan Drawdown Date |
The second repayment |
December 24, 2016 |
Five percent (5%) of the total amount of principal in the Unpaid Loan Dues as at the Loan Drawdown Date |
The third repayment |
June 24, 2017 |
Five percent (5%) of the total amount of principal in the Unpaid Loan Dues as at the Loan Drawdown Date |
The fourth repayment |
December 24, 2017 |
Five percent (5%) of the total amount of principal in the Unpaid Loan Dues as at the Loan Drawdown Date |
The fifth repayment |
June 24, 2018 |
Five percent (5%) of the total amount of principal in the Unpaid Loan Dues as at the Loan Drawdown Date |
The sixth repayment |
December 24, 2018 |
Five percent (5%) of the total amount of principal in the Unpaid Loan Dues as at the Loan Drawdown Date |
The seventh repayment |
June 24, 2019 |
Five percent (5%) of the total amount of principal in the Unpaid Loan Dues as at the Loan Drawdown Date |
The eighth repayment |
December 24, 2019 |
Five percent (5%) of the total amount of principal in the Unpaid Loan Dues as at the Loan Drawdown Date |
The ninth repayment |
June 24, 2020 |
Five percent (5%) of the total amount of principal in the Unpaid Loan Dues as at the Loan Drawdown Date |
The tenth and the final repayment (Maturity Date) |
December 24, 2020 |
The entire amount of the principal in the Unpaid Loan Dues in connection with Tranche A |
(2) Tranche B
|
Repayment Date of the Principal |
A mount of P rincipal due for R epayment |
The first repayment |
December 24, 2016 |
Five percent (5%) of the total amount of principal in the Unpaid Loan Dues as at the Loan Drawdown Date |
69
The second repayment |
June 24, 2017 |
Five percent (5%) of the total amount of principal in the Unpaid Loan Dues as at the Loan Drawdown Date |
The third repayment |
December 24 , 2017 |
Five percent (5%) of the total amount of principal in the Unpaid Loan Dues as at the Loan Drawdown Date |
The fourth repayment |
June 24 , 2018 |
Five percent (5%) of the total amount of principal in the Unpaid Loan Dues as at the Loan Drawdown Date |
The fifth repayment |
December 24 , 2018 |
Five percent (5%) of the total amount of principal in the Unpaid Loan Dues as at the Loan Drawdown Date |
The sixth repayment |
June 24 , 2019 |
Five percent (5%) of the total amount of principal in the Unpaid Loan Dues as at the Loan Drawdown Date |
The seventh repayment |
December 24 , 2019 |
Five percent (5%) of the total amount of principal in the Unpaid Loan Dues as at the Loan Drawdown Date |
The eighth repayment |
June 24 , 2020 |
Five percent (5%) of the total amount of principal in the Unpaid Loan Dues as at the Loan Drawdown Date |
The ninth and the final repayment (Maturity Date) |
December 24 , 2020 |
The entire amount of the principal in the Unpaid Loan Dues in connection with Tranche B |
2. Interest Payment Schedule of the Loan
(1) Tranche A
|
Interest Payment Date |
The first payment |
June 24, 2016 |
From the second payment to the payment immediately preceding the final payment |
The same day of the month (before applying the treatment of holidays) as the immediately preceding Interest Payment Date, in the month which is six months from (and including) the month that includes the immediately preceding Interest Payment Date. |
The final payment |
The Maturity Date for Tranche A |
(2) Tranche B
|
Interest Payment Date |
The first payment |
December 24, 2016 |
70
From the second payment to the payment immediately preceding the final payment |
The same day of the month (before applying the treatment of holidays) as the immediately preceding Interest Payment Date, in the month which is six months from (and including) the month that includes the immediately preceding Interest Payment Date. |
The final payment |
The Maturity Date for Tranche B |
71
(Translation)
Commitment Term Loan Agreement
(One Billion Japanese Yen)
By and among
FRONTEO, Inc.
As Borrower
The Bank of Tokyo-Mitsubishi UFJ, Ltd.,
As Arranger and Agent
For and on behalf of Five Banks:
And
The Bank of Tokyo-Mitsubishi UFJ, Ltd
Sumitomo Mitsui Banking Corporation
The Bank of Yokohama, Ltd.
Mizuho Bank, Ltd.
Resona Bank, Limited
As Lenders
Date as of July 26, 2016
TABLE OF CONTENTS
|
|
|
Article1 |
Definitions |
1 |
Article2 |
Lenders’ Rights and Obligations |
6 |
Article3 |
Use of Proceeds |
7 |
Article4 |
Application for Several Loan |
7 |
Article5 |
Conditions Precedent to Disbursement |
7 |
Article6 |
Disbursement |
8 |
Article7 |
Non-Disbursement Disbursement |
8 |
Article8 |
Indemnification of Lender |
9 |
Article9 |
Additional Costs and Illegality |
9 |
Article10 |
Payment of Principal |
10 |
Article11 |
Interest |
10 |
Article12 |
Prepayment |
10 |
Article13 |
Late Payment Charges |
11 |
Article14 |
Commitment Fee |
11 |
Article15 |
Agent Fee |
12 |
Article16 |
Costs and Expenses, and Taxes and Public Duties |
12 |
Article17 |
Performance of Obligations by Borrowers |
12 |
Article18 |
Distribution to Lenders |
13 |
Article19 |
Rep and Warranty by Borrowers |
16 |
Article20 |
Affirmation by Borrowers |
17 |
Article21 |
Events of Defaults |
19 |
Article22 |
Offset, Exercise of Security Interest and Voluntary Sale |
21 |
Article23 |
Coordination between Lenders and Agent |
22 |
Article24 |
Agent’s Rights and Obligations |
23 |
Article25 |
Resignation or Dismissal of Agent |
24 |
Article26 |
Integration of Intention by Majority Lenders |
25 |
Article27 |
Changes in Provisions of Agreement |
26 |
Article28 |
Assignment of Status |
26 |
Article29 |
Transfer of Lending Claims etc. |
27 |
Commitment Term Loan Agreement
This Specific Term Loan Agreement (hereinafter referred to as the “Agreement”) is made and entered into this 26th day of July, 2016 by and among FRONTEO INC. (hereinafter referred to as “Borrower”), the financial Institutions described in the column of Lenders in Annexed Table 1 attached hereto (hereinafter referred to as “Lenders”), and the Bank of Tokyo-Mitsubishi UFJ, Ltd. as Agent (hereinafter referred to as “Agent”), and the Parties hereto hereby agree as follows:
Article1 Definitions
1.1 In this Agreement, the following terms have the following meanings, except where the context otherwise expressly requires.
1.1.1 “Business Days” means days other than those days which fall under holidays of the bank provided by the laws and regulations of Japan.
1.1.2 “Agent service” means all services provided for in the provisions of this Agreement which are engaged to the Agent by all Lenders and performed on behalf thereof.
1.1.3 “Agent Account” means the checking account which the Agent holds in the Operation Department in Tokyo of the Bank of Tokyo-Mitsubishi UFJ, Ltd. (hereinafter referred to as “UFJ”) (Account number: 0041097, Type of the Account: UFJ Syndicate Loan Account,) or any other account which Agent indicates from time to time and informs to Borrower or Lenders.
1.1.4 “Agent Fee” means the charges which shall be paid by Borrower to Agent after being separately agreed between Borrower and Agent.
1.1.5 “Parent Company”, “Subsidiary Company” and “Affiliates” mean the meanings defined in Article 8 of the Rules relating to the terms of the Financial Statements and forms and making-ways thereof.
1.1.6 “Each Lending” means the meaning defined in Article10, 1.1 hereof.
1.1.7 “Unpaid Each Lending Amount” means all kinds of money which shall be borne by Borrower including principals, interests, late payment charges, liquidation amount relating thereto, and all other money, the obligations of which shall be borne by Borrower based on the Agreement.
1.1.8 “Each Several Lending” means Lending disbursed by each Lender based on one and the same Application form for Borrow.
1.1.9 “Each Several Lending Disbursement” means the money to be lent by Lender as Each Several Lending to Borrower, and “Each Several Lending Amounts” means the amount of the Each Several Lending Disbursement (such amount shall be the amount obtained by multiplying the Amount of Several Lending relating to the application form by the participation rate of such Lender, provided, however, in case the amount of the Several Lending relating to the Application Form for Lending is equivalent to the total amount of Unused Lending Limits of all Lenders, the amount of such Lending shall be the amount equivalent to the amount of the Unused Lending Limit of such Lender).
1.1.10 “Unpaid Each Several Lending Amount” means all the money which shall be liable for payment by borrower including principals relating to the Each Several Lending, interests, late payment charges, liquidation amounts, and any and all obligations based on this Agreement.
1.1.11 “Lending Obligations” means Lenders’ obligations to lend the money to Borrower as provided for in Article2.2.1 of this Agreement.
1.1.12 “Amount of Lending Limit” means the amount described in such Lender’s column of the “Amount of Lending Limit” in Annexed Table1 attached hereto (provided, however, in case the Amount of Lending Limit is revised in accordance with the provisions of Article2.5, the revised provisions shall apply).
1.1.13 “Lending Claim” means credit relating to the Each Several Lending (provided, however, in case of the Several Lending Integrating Date and thereafter, Each Lending shall apply).
1.1.14 “Term Impossible for Lending” means the term from the day on which Borrower has received the
notice provided in Article8.1 (inclusive) to the other day on which Borrower receives the notice provided in Article 8.2 (inclusive).
1.1.15 “Event Impossible for Lending” means events which shall be determined by the majority of Lenders as the event Impossible for Lending (in case the majority of Lenders cannot integrate the intention thereof, Agent shall apply) within the following events:
(1) Outbreak of natural disaster ・ war ・ terrorist attack
(2) Stoppage and trouble in electrical ・ communicating and other kinds of settlement system
(3) Event of Tokyo interbank market where debt-credit transaction in Japanese currency can’t be traded, and
(4) Other events which shall not be liable to Lenders
1.1.16 “Application form for Borrowing” means the application documents in the form described in Exhibit1 attached hereto.
1.1.17 “Base Period” means one month in case interest calculation period starts on the interest payment day and ends also on the other payment day, with respect to the other interest calculation period, in case such interest calculation period is one month, one month shall apply, in case such interest calculation period is more than one week and less than one month, period of one week or one month corresponding to higher rate of the Japanese TIBOR (on the page of 17097 of Telerate or succeeding page thereof) disclosed by the operational institute of the ZENJINKYO Tokyo Inter Bank Offered Rate at 11:00 a.m. or at the time closest to the 11:00 a.m. after thereof as much as possible on the day 2 days before the starting day of such interest rate calculation period, the period with such higher rate shall apply, and in case such interest rate calculation period is less than one week, one week shall apply.
1.1.18 “Base Rate” means the rate corresponding to the base period relating to such interest rate calculation period within Japanese Currency TIBOR (on the page of 17097 of Telerate or succeeding page thereof) displayed by the operational institute of the ZENJINKYO Tokyo Inter Bank Offered Rate at 11:00 a.m. or at the time closest to the 11:00 a.m. after thereof as much as possible on the day 2 days before the starting day of such interest rate calculation period. Provided, however, in case such rate cannot be disclosed due to some unknown causes, the rate that the Agent determines reasonably as the offered rate of debt-credit transaction in Japanese currency of the period corresponding to the Base Period relating to such interest rate calculation period (expressed as annual rate) in the Tokyo Interbank Market at 11:00 a.m. or at the time closest to 11:00 a.m. and prior thereto on the day two (2) business days before the starting day of such interest rate calculation period. In case there is no period corresponding to such interest rate calculation period within the period of Japanese Currency TIBOR (on the page of 17097 of Telerate or succeeding page thereof) displayed by the operational institute of the ZENJINKYO Tokyo Inter Bank Offered Rate, the rate reasonably determined by the Agent (expressed as annual rate) shall apply. In addition, in case the rate provided for in this Item is less than 0%, 0% shall apply.
1.1.19 “Date of Repayment before Maturity” means the date described in the column of “Date of Repayment” in Annexed Table 2 Repayment Schedule attached hereto (provided, however, except for the Maturity Date, and in case such repayment day does not fall under any business day, the immediately next business day shall apply, if such next business day falls under the day which belongs to the next month, the business day prior to such repayment day shall apply.
1.1.20 “Financial Statement” means the meaning provided in any one of items (1) to (4) below:
(1) Financial Statements relating to each fiscal year provided for in Paragraph2 of the Company Law, Article435 (including balance sheet and profit and loss statement provided for in the same Paragraph, and statement of shareholders’ equity and notes to specification provided for in Paragraph 1of Company Accounting Rules,) and Business reports;
(2) Actually prepared provisional financial statements provided for in Paragraph1 of the Company Law, Article441(i.e. profit-and-loss statement relating to the period from the starting day to provisional closing day of fiscal year in which balance sheet and such closing date belong as defined in the same paragraph);
(3) In case consolidated financial statements relating to each fiscal year provided for in the Company law, Article444, Paragraph3 pursuant to the same Law, Paragraph1 (consolidated balance sheet, consolidated
profit-and-loss statement, consolidated statement of shareholders’ equities and consolidated notes to specific items provided for in Company Accounting Rules, Article 66, the same shall apply hereafter) are obligated to prepare, such consolidated financial statement and actually prepared consolidated financial statement relating to each fiscal year provided for in Paragraph1 of the Company Law, article 444; and
(4) Actually prepared consolidated and single balance sheet, profit-and loss statement, statement of shareholders’ equities and notes to specific items.
1.1.21 “Taxes and Other Public Duties” means all taxes and other public duties imposed in Japan such as, income taxes, corporation taxes, and other taxes etc.
1.1.22 “Several Lending Integration Day” means the first arriving interest payment day after the Due Date.
1.1.23 “Starting Day of Commitment” means July 29th, 2016.
1.1.24 “Period of Commitment” means the period from the starting day (inclusive) to ending day (inclusive) of such Commitment.
1.1.25 “Due Date” means July 28th, 2017 (in case such day falls under those other than business day, the immediately preceding business day shall apply).
1.1.26 “Commitment Fee” means charges paid by Borrower to Lender as the consideration of Lending obligations.
1.1.27 “Calculation period of Commitment Fee” means the period from the Commitment starting day (inclusive) until the Commitment ending day (inclusive) of the Commitment. Provided, however, in case any Lender’s obligation relating to such Lender terminates prior to the ending day of the Commitment Period, the Commitment Fee Calculation Period relating to such Lender shall terminates on such termination day.
1.1.28 “Rate of Commitment Fee” means annual rate of 0.2%.
1.1.29 “Participation Rate” means the rate of the principal balance of such each Lender’s each Lending amount to the amount of the Principal Balance of such Lending (provided, in case of the day prior to the Several Lending Integration Day, the total amounts of Each Several Lending shall apply). Provided, however, until the day on which all Lenders’ Lending obligations shall have been terminated, the said Rate means the rate of such Lender’s amount of Lending Limit to the total amounts of Lending Limit.
1.1.30 “Wishing Disbursement Day” means the business day described by Borrower in the application form for Borrowing as the wishing day on which Borrower wishes the disbursement of the Several Lending within the Commitment Period.
1.1.31 “Disbursement Day” shall be the day on which such Several Lending has been performed.
1.1.32 “Due Date for Repayment” means, in case the due date is provided for in the Agreement, 10:30 a.m. of such due date.
1.1.33 “Syndicate Account” means the ordinary deposit Account held by Borrower in Shinagawa Ekimae Branch of UFJ (Account No: 2034628, Name of the holder of the Account: FRONTEO Inc.), or the Account in UFJ head office or branch thereof, opened by Borrower and approved by the Agent.
1.1,34 “Spread” means an annual rate of 0.45%.
1.1.35 “Liquidation Amount” means, in case the repayment or offset of the Principal of Each Several Lending is performed on the day which does not fall under any of Interest Payment Day and such repayment or offset rate is less than the applied rate of the Interest Calculating Period to which such repayment or offset day belongs, the amount obtained by multiplying the amount of Principal by the balance of the applied rates in such Interest calculation period and such rates to be applied again, and also by actual number of days of the remaining period. Provided, however, such Amount must be within legality. The “Remaining Period” shall be the period from the day on which such repayment or offset is performed to the next interest payment date. The “Rate to be applied again” shall be the Rate designated by the Agent reasonably for the hypothetical purpose of investment again in the Tokyo interbank market during the Remaining Period. The amount of Liquidation shall be calculated per diem basis a year being 365 days and division thereof shall be performed in the last rounding off the amount less than one (1) yen. In addition, the calculation of number of days of a certain period shall include the first day of such period, but exclude the last day thereof.
1.1.36 “All Lenders” shall be referred to as all Lenders collectively at the time prior to the first disbursement, and as all Lenders collectively but having claim right for unpaid amount of Each Several Lending (provided, after the Several Lending Integration day (inclusive), unpaid amount of Each Lending shall apply) at the time after the first Disbursement of Several Lending.
1.1.37 “Total Amount of Lending Limit” means the total amount of Lending Limits of all Lenders.
1.1.38 “Additional Costs” means the increased amount of Lending Costs (reasonably calculated by such Lender), in case of (1) enactment, abolition or revision of Laws and Regulations, or change of Interpretation thereof or the Operation, (2) preparation or increased amount of Reserved Money, or (3) increased amount of Lending Costs due to the change of Accounting Regulations or Operation thereof, (provided, however, except for the case of increase due to the change of tax rates of such Lender).
1.1.39 “Lenders with increased Lending Costs” means Lenders whose Lending Costs have increased.
1.1.40 “Total Amount of Unused Lending Limits” means the Total Amounts of Unused Lending Limit of all Lenders.
1.1.41 “Damages etc.” means damages, loss, and cost and expenses (including attorney’s fee).
1.1.42 “Majority of Lenders” means singular or plural Lender or Lenders whose Participation Rates account for not less than 66.7% at the Standard time for the Integration of Intentions. For the purpose of clarification, “Standard Time for the Integration of Intentions” shall be the time when the Agent has received the notice based on Paragraph1, Item 1 of Article26, in case a certain Lender determines the event has occurred in which the Majority of Lenders’ Designation is necessary, or the time the Agent has sent the notice based on Paragraph2 of Article 26 in case the Agent determines the event has occurred in which the Majority of Lenders’ Designation is necessary.
1.1.43 “Advance Cost” means the amount obtained by multiplying the amount paid in advance for someone by interest rate for fund-raising and the actual number of days during which such amount paid in advance remains un-repaid in case of the Advance Costs incurred by the Agent. For the purpose of clarification, the “Period of Advance Costs” shall be the period from the day on which the Agent has paid in advance for someone to the day on which the Agent receives such amount relating to the amount paid by Agent in advance, and the “Interest Rate for fund-raising” shall be the interest rate reasonable decided by the Agent for the fund raising through the Period of Advance Costs. The amount of Advance Cost shall be calculated per diem basis a year being 365 days and division thereof shall be performed in the last and rounded off the amount less than one (1) yen. In addition, the calculation of number of days of a certain period shall include the first day of such period, but exclude the last day thereof.
1.1.44 “Advance Payment for Someone” means the act with respect to the repayment by Borrower on the Repayment Day, of the disbursement of amount by the Agent equivalent to the amount to be distributed to Lenders in accordance with Article 18, Paragraph1~5 prior to the completion of repayment by Borrower. Provided, however, Borrower and Lender shall not raise an objection at all.
1.1.45 “Qualified Assignees” means being Lenders on the day on which this Agreement is executed, Bankers with license under the Banking Act of Japan and the Long-term Credit Bank Law, Lifetime Underwriter or Non-life Underwriter with License based on the Insurance Business Act, Shinkin Bank, Shinkin Central Bank, Rokin Bank, Federation of Rokin Banks, Federation of prefectural Shinnokyo, Norin Central Bank, Shinkyo Cooperation, National Federation of Shinkyo Cooperation, National Federation of Kyosai-Nokyo Cooperation, Shokokumiai central Bank, Trust Company based on the Trust Business Act and Money Lending Company registered based on Paragraph1 of Article 3 of Money Lending Business Act.
1.1.46 “Applied Interest Rate” means the interest rate obtained by adding the spread to the Base Interest Rate.
1.1.47 “Due Date” means the Repayment Date during the term and the Maturity Date with respect to the Principal relating to the Lending, Each Payment Date as the Ending day of the Each Interest Calculation Period with respect to the Interest, and the Date designated as the date on which any amount shall be paid in accordance with the Agreement with respect to any other Money.
1.1.48 “Reporting Documents” means reporting documents such as Annual Securities Reports, Semi-annual Securities Reports, Quarterly Securities Reports, Extraordinary Reports, and Amendment Reports, etc.
1.1.49 “Laws and Regulations” means Treaties, Laws, Regulations, Cabinet Orders, Ministerial Decrees, Rules, Judgment, Decisions, Arbitral Awards, Notification, and Policies of the relevant Authorities.
1.1.50 “Lending” means the Whole of Each Lending.
1.1.51 “Several Lending” means the Whole of Each Several Lending that shall be disbursed on the same Disbursement Day.
1.1.52 “Maturity Date” means July 29th, 2022 (Provided, in case such day falls under the day other than the Business day, the next succeeding business day unless such day would fall in the next calendar month, in which case, such due date shall be the immediately preceding business day).
1.1.53 “Unused Amount of Lending Limit” means the amount obtained by reducing the total amount of the Each Several Lending Amount disbursed from such Lender’s amount of Lending Limit with respect to Each Lender (including the amount prepaid).
1.1.54 “Assignee” means an assignee who shall be assigned the Lending Claim in accordance with Paragraph1 of Article 29.
1.1.55 “Assignor” means an assignor who shall transfer the Lending Claim in accordance with Paragraph1 of Article 29.
1.1.56 “Interest Calculation Period” means the first period shall be the period from the Disbursement Day of such Several Lending to the first Interest Payment Day. After the second period (inclusive) such Calculation Period shall be the period from the precedent Interest Payment Day to the immediately next Period with respect to Each Several Lending (provided, after Several Lending Integration Day (inclusive), Each Lending shall apply).
1.1.57 “Interest Payment Day” means the payment day of the interest, which shall be the ending day of each month and Maturity Day during the period from the next day of the First Disbursement Day to the Maturity Day (Provided, in case such day falls under the day other than the Business day, the next succeeding business day unless such day would fall in the next calendar month, in which case, such due date shall be the immediately preceding business day).
1.2 For the purpose of this Agreement, One-Month Period shall be the Period in which the calculation starting day is the Starting Day (inclusive) and the day corresponding to the starting day of the next calendar month of the month to which such Starting Day belongs is the Ending Day (inclusive), in case of integral multiple months such period shall be calculated by the way mentioned above, in mutatis mutandis (provided, in case such corresponding day falls under the day other than the Business day, the next succeeding business day shall apply unless such day would fall in the next calendar month, in which case, such due date shall be the immediately preceding business day). Provided, however, in case the calculation starting day is the last business day of the month, the ending day of such period shall be the last business day of the month in which such corresponding day belongs, and the corresponding day of the calculation starting day does not exist in the calendar month in which such period should be terminated, the last business day in such month shall be the ending day of such month.
1.3 In this Agreement the period of one week shall be the period in which calculation starting day is the Starting Day (inclusive) and the ending day of the period is the corresponding week day of the next week (inclusive) (provided, in case the corresponding week day falls under any day other than the business day, the next business day shall be the ending day whether such business day is in the next month whatsoever.
Article2 Rights and Obligations of Lender
2.1 Unless otherwise specifically provided, Lender may severally and independently execute the rights under the Agreement.
2.2 Lender shall lend the money within the amount of Lending limit.
2.3 Except for the case otherwise is separately provided in the Agreement, Lenders’ obligations hereunder shall be several and independent and Lender cannot be relieved from the performance of its obligations hereunder due to the cause that the other Lender does not perform the obligation thereof. In addition, the Lender shall not be completely liable for the fact that other Lender doesn’t perform any obligations hereunder.
2.4 In case Lender violates the Lending Obligations and doesn’t perform the Disbursement of Each Several Lending relating to such wishing disbursement day on any Wishing Disbursement Day, such Lender shall immediately compensate for damages incurred by Borrower upon the request of such Borrower. Provided, however, such compensation amount incurred by Borrower shall be obtained by reducing the amount of interests and other costs which such Borrower has expensed during the period from such Wishing Disbursement day (inclusive) to the First Interest Payment Day (exclusive) in case such Each Several Lending is disbursed on such Wishing Disbursement Day from amount of interest and other costs which Borrower has expensed or would be needed during the period from such Wishing Disbursement day (inclusive) to the First Interest Payment Day (exclusive) in case such Borrower has borrowed separately due to the cause such Lending is not disbursed on such Wishing Disbursement Day, and such compensation amount shall be limited to maximum amount of such obtained amount.
2.5 Borrower may make Lender terminate any and all Lending Obligations or reduce the part of the amount of Lending Limit within the unused total amount of Lending Limit by giving ten business days Notice to the Agent during the Period of Commitment. In case of reducing part of the total amount of Whole Lending Limit, the amount to be reduced shall be not less than 50 million yen (\50,000,000) and integral multiple thereof, and shall be the amount less than that of Whole Unused Lending Limit. In case the part of the amount of Whole Lending Limit is reduced, the amount to be reduced of Lenders’ Lending Limit shall be reduced the amounts of Each Several Lending Limit in proportion to the Participation Rate. In case the Agent receives such notice from Borrower, it shall notify Lender thereof without delay. Borrower cannot cancel such notice and the termination of the whole Lending Obligations or reducing the part of the amount of whole Lending Limit and which become effective on the day on which Borrower wishes thereof in such notice.
Article3 Use of Proceeds
Borrower shall use the money which has been raised through the Several Lending only for operating funds.
For the purpose of clarification, The Agent and Each Lender shall not be liable to supervise or review
Borrower with respect to the actual use of proceeds
Article4 Application of Several Lending
4.1 In case Borrower wishes the disbursement of the Several Lending, it is necessary for Borrower to express its intention of application for the Several Lending to all Lenders by submitting the Application form for Borrowing to the Agent by the noon of three business days before the Wishing Day of Disbursement. The submission of the application form shall be performed by sending Facsimile and confirming the receipt thereof through the telephone.
4.2 The amount of the Several Lending described in the Borrowing Forms shall be not less than 50 million yen with one unit of 10 million or the total amount of Unused Lending Limit, and the amounts of Each Several Disbursement which may be obtained from the amount of such Several Lending shall not exceed the amount
of unused Lending Limit of Lender on the Wishing Disbursement Day described in the Application Form for Borrowing.
4.3 The number of Disbursement of the Several Lending on the same Wishing Disbursement Day shall be not more than one.
4.4 Expressing Intention of Application Form for the Several Lending based on Paragraph1 of this Article has become effective with having relations with all Lenders at the time when the Agent has received the Application Form. For the purpose of clarification, after the receipt of the Application Form for Borrowing by the Agent, Borrower cannot cancel or change the Application Form based on Paragraph1 of this Article in the relation with any Lender whatever the reason, if any. In case the Agent has received the Application Form for Borrowing, such Agent shall notify all lenders of the fact of Application for the Several Lending by Borrower and contents thereof by sending the copy of the Application Form for Borrowing at least 3 business days before the Wishing Disbursement Day.
Article5 Conditions Precedent of Each Several Lending
Each Lender shall perform the Disbursement relating to the Wishing Disbursement Day subject to the satisfaction of the conditions precedent set forth in the following Items on each Wishing Disbursement Day (provided, however, regardless the notice based on Paragraph1 of Article7). For the purpose of clarification, the satisfaction of the Conditions Precedent shall be performed with each Lender, and other Lenders and the Agent shall not be liable for the other Lenders’ satisfaction:
|
1) |
|
The Application for the Several Lending meets the conditions set forth in Paragraph1~3 of the precedent Article. |
|
2) |
|
The Lending Obligations of all Lenders shall not be indemnified pursuant to Paragraph3 of Article8. |
|
3) |
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All matters described in each Items of Article19 are true and correct. |
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4) |
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Borrower doesn’t violate any provision of this Agreement and there are no possibility that Borrower violate any provision hereof after such Wishing Disbursement Day. |
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5) |
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Borrower submits all of the following documents to the Agent on the day on which this agreement is executed, and the Agent and all Lenders are satisfied with the contents thereof. |
|
(i) |
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The certificate of registered seal impression of the representative of Borrower who will af fix and sign on the Agreement (provided, such certificate is issued within three (3) months prior to the execution of this Agreement). |
|
(ii) |
|
The copy of register of commerce or the certified copy of whole superseded & current entries of registration of Borrower (provided, such certificate is issued within three (3) months prior to the execution of this Agreement). |
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(iii) |
|
Notification of Borrower’s seal impression and its signature by the prescribed Form by the Agent. |
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(iv) |
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The Confirmation documents by the form set forth in Exhibit2 attached hereto (Documents which certificates the completion of all procedures necessary for the Borrowing based on the execution of this Agreement, in accordance with laws and regulations and company rules of Borrower, shall be attested by the authorized executive. |
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6) |
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The Lending Obligations of such Lender are not terminated by any provision of this Agreement. |
Article6 Disbursement of Several lending
6.1 In case Lender accept the Application for the Several Lending in accordance with Article4, doesn’t give any notice based on Paragraph1 of Article7, and the conditions provided for in each Item of the Precedent Article is satisfied on each Wishing Disbursement Day, Lender shall remit the amount of Each Several Lending as Disbursement relating to the Wishing Disbursement Day to the syndicate account on such Wishing Disbursement Day (provided, however, Lender shall have completed the Bank-transfer procedures to the syndicate account by 11:00 a.m. on such Wishing Disbursement Day). At the time when Lender has
completed the remittance of the amount of Each Several Lending to the syndicate account, Each Several Lending relating to the Wishing Disbursement Day with respect to such Lender shall be deemed to be disbursed.
6.2 In case the Disbursement of Several Lending is performed based on the precedent Paragraph, Borrower shall promptly send to Lender which has performed the disbursement of Each Several Lending, the receipt in the form prescribed in Exhibit3 attached hereto stating the amount of Several Lending and the details of Each Several Lending in the form prescribed in Exhibie3 attached hereto. In addition the Agent shall hold the original receipts for such Lenders until such Agents are repaid all of the un-repaid amount of Each Several Lending relating to such Each Several Lending (provided, on the Integration Day and thereafter, Un-repaid Each Lending Amount).
Article7 Non-disbursement of Each Several Lending
7.1 Lender which has decided to refrain from disbursement of Each Several Lending (hereinafter referred to as “Lender of Non-disbursement) due to the cause that all or part of conditions set forth in Article5 is not satisfied, such Lender of Non-disbursement may notify the Agent, Borrower and all of other Lenders to that effect by 17:00 p.m. on the precedent business day of Wishing Disbursement Day relating to such Each Several Lending. Provided, however, even though all conditions set forth in Article5 is satisfied, if such notice is given and such Each Several Lending is not disbursed, such Lender of Non-disbursement shall not be relieved from the responsibility for Violation of Lending Obligations.
7.2 In case the Agent or Lender of Non-disbursement is incurred damages due to the cause that Each Several Lending couldn’t been disbursed by Lender of Non-disbursement, Borrower shall bear such damages; provided, however, unless non-disbursement of such Each Several Lending falls under the violation of Lending Obligations by such Non-disbursement Lender.
Article8. Indemnification of Lender
8.1 In case of occurrence of lending-impossible event, the Agent shall promptly give the notice in writing to that effect to Borrower and all Lenders.
8.2 In case Majority of Lenders (if it is difficult for Majority of Lenders concentrate their intentions, the Agent shall apply) determine that such Lending-impossible Event is resolved after giving notice set forth in precedent Paragraph, the Agent shall promptly inform to the effect that such Lending-impossible Event is resolved to Borrower and all Lenders.
8.3 During such Lending-impossible Term, the Lending Obligations of all Lenders shall be relieved.
Article9 Additional Costs and Illegality
9.1 Lenders with Additional Costs occurred may request Borrowers the burden of Additional Costs by giving notice in writing to Borrower through the Agent, in case of such request, Borrower shall pay such Additional Costs to such Lender with Additional costs occurred.
9.2 In case of request set forth in the precedent Paragraph, Borrower, by giving notice to the Agent and all Lenders, make such Lender with additional costs occurred terminate such Lending Obligation if such
Lending Obligations of the same Lender does not terminate thereof, and may make Prepayment of all amount of such Principal Balance if any Principal Balance of the Each Several Lending (provided, Several Lending Integration Day and thereafter Each Lending shall apply) of such Lender with Additional Costs occurred exists, on the day described in the notice given by Borrower (provided, however, such day shall be the day not less than 10days after such notice, and hereinafter referred to as “Terminating Lending Obligation and Additional Costs Prepayment Wishing Day”). In this case, if the Lending obligation of such Lender with Additional Costs occurred is not terminated and the Principal Balance of Each Several Lending of such Lender with Additional Costs occurred exists, it is not approved that Borrower wishes only one option from 2) Termination of Lending Obligations of such Lender with Additional Cost occurred or 2) Prepayment of Each Several Lending of Lender with Additional Costs occurred.
9.3 In case the notice set forth in Paragraph 1 is given by Borrower, the Lending Obligations of such Lender with Additional Costs occurred will be cancelled on the Terminating Lending Obligation and Additional Costs Prepayment Wishing Day. In such case Borrower shall pay Lender with Additional Costs occurred all amount of Principal Balance of all debts owed by Borrower to Lender with Additional Costs occurred based on the Agreement (all Each Several Lending the Repayment Due Date of which arrives after the next day of such Terminating Lending Obligation and Additional Costs Prepayment Wishing Day (provided, after Several Lending Integration Day, Each Lending shall apply), interests occurred until the Terminating Lending Obligations and Additional Costs Prepayment Wishing Day (inclusive) and the liquidation money notified by Lender with Additional Costs occurred (if any), and including requested burden of Additional Costs), on the Terminating Lending Obligation and Additional Costs Prepayment Wishing Day in accordance with the provisions of Article17.
9.4 In case the execution and performance and succeeding transaction of this Agreement violates any of the laws and regulations which binds any Lender, such Lender, by giving notice to that effect to Borrower through the Agent, 1) may terminate the Lending Obligations on the immediately precedent day on which such performance is deemed illegal if the fund raising for keeping of the Lending Obligations or Disbursement of Each Several Lending or planning thereof is deemed illegal, and 2) may request Borrower the repayment of all amount of Unpaid Each Several Lending (provided, Several Lending Integration Day and thereafter, such Each Lending) of Each Several Lending (provided, Several Lending Integration Day and thereafter, such Each Lending) by deeming that the Repayment Due Date of such Each Several Lending (provided, Several Lending Integration Day and thereafter, such Each Lending) has arrived on the immediately precedent day of the day on which Borrower’s performance is deemed illegal (provided, in case Repayment due date is provided by the laws and regulations, the day provided by the laws and regulations) if keeping of already disbursed Each Several Lending (provided, Several Lending Integration Day and thereafter, such Each Lending) is deemed illegal on Repayment Due Date or before relating to Each Several Lending (provided, Several Lending Integration Day and thereafter, such Each Lending).
Article10 Repayment of Principal
10.1 With respect to Each Lender, all of Each Several Lending shall become one single Lending (hereinafter referred to as “Each Lending”) on the Each Several Lending Integration Day.
10.2 Borrower shall repay the amount obtained by dividing the amount of Principal at the time of Several Lending Integration Day equally by 60 (in case there are any fraction, such fractions shall be rounded off less than one yen, and the Repayment amount of Principal on the Maturity Date shall be the amount obtained by reducing the total amount repaid on every Repayment Day from the total Repayment Amount of the Principal) to all Lenders relating to the Lending on the Repayment Day during the term and the Maturity day in accordance with the Repayment Schedule described in Annexed Table2 attached hereto based on the provision of Article17. The amount to be repaid to each Lender on each Repayment Day shall be the Amount
obtained by dividing the amount of Principal in proportion to the Participation Rate on the Several Lending Integration Day with respect to all Lenders, and The amount repaid to each Lender on the Maturity date shall be each amount of Principal Balance of each Lender on the Maturity Date.
Article11 Interest
11.1 Borrower shall pay each Lender each total amount of Interest obtained by multiplying the un-repaid amount of Principal of Each Several Lending (Several Lending Integration Day and thereafter, Each Lending) by the Applied Interest rate during the Interest Calculation Period and actual number of days of the Interest Calculation Period on the Interest Payment day of the last day of the Interest Calculation Period in accordance with the provisions of Article17.
11.2 The Calculation Method of Interest shall be on a per diem basis in which the Fast day of any period will be included, but the Last Day thereof excluded being 365days per year. And dividing shall be the last calculation rounding off fractions less than one yen.
Article12 Prepayment
12.1 Borrower must not repay all or part of the amount of the Principal of the Lending (provided, in case of before the Several Lending Integration Day, Several Lending) which shall be repaid on any of Principal Repayment Day or the Maturity Day before such day (hereinafter referred to as “Prepayment”), unless Borrower obtained the approval in writing of the Agent and all Lenders in advance in case of being based on Article9 or in accordance with the following procedures.
12.2 In case of wishing of Prepayment, Borrower shall notify the following matters mentioned below in writing to the Agent at least 15 business days before the day on which Borrower wishes as the Prepayment Day (hereinafter referred to as the “Wishing Prepayment Day”):
(i) The amount of Principal (such amount must be all amount of Principal Balance of such Several Lending (provided, Several Lending Integration Day and thereafter, Lending) or not less than 50 million yen and unit of 10 million yen. In case the amount of Principal of such Several Lending (provided, Several Lending Integration Day and thereafter, Lending ) is not the all amount of Principal Balance, such amount shall be prepaid to such Lender in proportion to each rate of Principal Balance of the Several Lending (provided, Several Lending Integration Day and thereafter, Lending) relating to such Several Lending) of the Several Lending (provided, Several Lending Integration Day and thereafter, Lending), (ii) to the effect that Borrower will prepay all of the interest accrued until the Wishing Prepayment Day (inclusive) (hereinafter referred to as “Accrued Interest”) with respect to Principal amount which Borrower wishes Prepayment, and (iii) the Wishing Prepayment Day. The Agent shall promptly notify the matters described in this Paragraph (i)~(iii) to all Lenders and such Lenders shall notify consent or refusal of the Prepayment to the Agent at least 10 business days before the Wishing Prepayment Day. For the purpose of clarification if such consent or refusal notice is not delivered to the Agent at least 10 days before the Wishing Prepayment Day, such Lender shall be deemed as refusal thereof. The Agent shall determine consent or refusal of Prepayment at least 8 business days before the Wishing Prepayment Day and notify thereof to Borrower and all Lenders.
12.3 In case the Prepayment is approved in accordance with the precedent Paragraph, and if the Wishing Prepayment Day is the day other than Interest Payment Day, all Lenders shall notify the amount of Liquidation Money to Borrower and the Agent at least 2 business days before the Wishing Prepayment Day. Borrower shall pay the total amount of the Principal and Interest of the Several Lending (provided, on the
Several Lending Integration Day and thereafter, Lending), and Liquidation Money (if any) on the Wishing Prepayment Day in accordance with the provision of Article17. For the purpose of Clarification, even if such Prepayment is performed, each Lenders’ Lending obligations relating to Each Several Lending the Disbursement Day of which arrives thereafter are not affected at all.
12.4 In case Part of Principal of the Lending is prepaid based on the provisions of this Article, the Principal with later Prepayment Day is applied with priority.
Article 13 Late Payment Charges
13.1 In case Borrower delays in performing the debt to Lender or Agent under the Agreement, Borrower shall promptly pay the amount of Late Payment Charges obtained by multiplying the amount of debts of late performance by annual rate of 14% (so long as observing laws and regulations) with respect to the period from the day on which Borrower shall perform the debt (inclusive) to the day on which such late performance of debt (hereinafter referred to as the “Debt of Late Performance”) is completely performed (inclusive), in accordance with the provisions of Article17, upon the request of Agent.
13.2 Calculation Method of Late Payment Charges shall be per diem basis and including the First and the last day of a certain period being 365 days per year, and Dividing the number is performed in the Last, rounding off fractions less than one yen.
Article14 Commitment Fee
14.1 Borrower shall pay Lender as the amount of Commitment Fee obtained by multiplying the average balance of unused amount of Lending Limit of such Lender by the Rate for Commitment Fee with respect to the Commitment Fee Calculation Period on the day designated by the Agent within 5 business days from the ending day of the Commitment to Borrower and all Lenders. In case of the performance of Each Several Lending or the change of the amount of Lending limit in accordance with the provisions of Paragraph 5 of Article 2, each unused amount of Lending Limit of such Lender on the day on which such Lending or change is performed shall be each Unused Amount of Lending Limit changed due to such performance or changes. The calculation of the Commitment Fee by the Agent shall be definite and binding as far as there are no clear mistakes.
14.2 Notwithstanding the provision of the precedent Paragraph, in case Lending Obligations of all Lenders in accordance with the provisions of Paragraph 1 of this Article, Borrower shall not be liable to all Lenders for Payment of Commitment Fee corresponding to the Lending Impossible Period.
14.3 Notwithstanding the provisions of Paragraph1 of this Article, in case any Non-bank Lender’s (hereinafter referred to as “Non-bank Lender” registered based on the Money Lending Business Act, Article3, Paragraph1, the same shall apply hereafter) interest rates (expressed by percentage point) that can be obtained by the following formula exceeds as annual rate of 15% on the ending day of the Commitment Fee Calculation Period, Borrower shall not be liable to pay the amount of the Interest corresponding to the part which exceeds 15% of the annual rate obtained by the said formula and the amount of Commitment Fee to such Non-bank Lender. For the purpose of clarification, the Agent shall not be liable to confirm whether such percentage point obtained by such formula exceeds 15% or not.
The Formula: (A+B) ÷ (C) × 365 ÷(D) (%)
A: Total amount of Commitment Fees which should be paid to such Non-bank Lender
B: Total amount of Interest relating to all Each Several Lending with respect to such Non-bank Lender
C: Total Amount of Average Principal Balance of all of Each Several Lending
D: Actual Number of Commitment Fee Calculation Period
14.4 The calculation method of Commitment Fee Based on this Article, Paragraph1 shall be on a per diem basis of being 365 days per year including the fast and the last days of a certain period, and dividing procedure shall be in the past rounding off fractions less than one (1) yen.
Article15. Agent Fee
Borrower must pay the Agent fee to the Agent for the Agent Services agreed separately between Borrower and the Agent as provided for in the Agreement.
Article 16 (Expenses, Taxes and Public Charges)
16.1 The Borrower shall bear all costs incurred in relation to the preparation, modification or amendment of this Agreement and relevant documents hereof (including attorneys’ fees) and all costs incurred in the maintenance or enforcement of the rights or the performance of the obligations by the Lender or the Agent hereunder and relevant documents hereof (including attorney fees) unless it contradicts the Laws. If the Lender or the Agent paid such costs in the place of the Borrower, the Borrower shall pay the same in accordance with the provisions of Article 17 immediately upon the request from the Agent.
16.2 The Borrower shall bear all costs of stamp duties and other similar Taxes and Public Charges incurred in relation to the preparation, modification or execution of this Agreement and relevant documents hereof. If the Lender or the Agent paid such costs in the place of the Borrower, the Borrower shall pay the same in accordance with the provisions of Article 17 immediately upon the request from the Agent.
Article 17 (Performance of Obligations by Borrower)
17.1 The Borrower shall deposit money to the account of the Agent to the extent that it does not contradict the Laws in order to perform its obligations hereunder by the Due Time if the Due Date is specified hereunder, or immediately upon the request from the Agent if no Due Date is specified hereunder. In such a case, the Borrower is deemed to have performed its obligations to the Agent or the Lender at the time of deposit to the account of the Agent.
17.2 Unless otherwise provided in this Agreement, the Borrower may not pay its obligations hereunder directly to any Lender other than the Agen t contrary to the preceding paragraph. The Lender who received such payment shall immediately pay the money received to the Agent, and the obligation for such money is deemed to have been performed by receipt of such money by the Agent. The Borrower may not perform its obligations hereunder by substitute performance unless the Agent and All Lenders give their prior written approval.
17.3 The payment by the Borrower hereunder shall be appropriated in the following order:
(i) Money pai d by the Agent in the place of the Borrower, the Agent Fee and delay damages thereof among the costs to be borne by the Borrower hereunder;
(ii) Money payable to third parties among the costs to be borne by the Borrower hereunder;
(iii) Money paid by the Lender in the place of the Borrower and delay damages thereof among the costs to be borne by the Borrower hereunder;
(iv) Delay damages (excluding delay damages stipulated in the items 1 and 3 of this paragraph) and
Settlement Money;
(v) Commitment Fee;
(vi) Interest on the Individual Loan (or the Aggregate Loan on or after the Consolidation Date of Individual Loans); and
(vii) Principal of the Individual Loan (or the Aggregate Loan on or after the Consolidation Date of Individual Loans).
17.4 In the appropriation in the preceding paragraph, if the appropriation amount is less than the amount of any of the items, the first item that is not fully appropriated (hereinafter referred to as “Unappropriated Item”) shall be appropriated by dividing the remainder of amount appropriated to the higher priority items in proportion to the amount of each payment obligation of the Borrower becoming due for such Unappropriated Item.
17.5 The Borrower shall not deduct the Taxes and Public Charges from the payment of obligations hereunder unless required by Laws. If any Taxes and Public Charges need to be deducted from the amount payable by the Borrower, the Borrower shall pay by adding the necessary amount so that the Lender or the Agent may receive the amount if the Taxes and Public Charges are not imposed. In such a case, the Borrower shall directly send to such Lender or the Agent the certificate of tax payment related to withholding taxes issued by the tax authority or other supervisory authority in Japan within 30 days from the date of payment.
Article 18 (Distribution to Lenders)
18.1 If there still exists any remainder after deducting the amount corresponding to those described the items 1 and 2 of the paragraph 3 of the preceding Article from the amount paid by the Borrower pursuant to the preceding Article, the Agent shall immediately distribute such remainder to the Lenders in accordance with the provisions of this Article.
18.2 If, prior to the distribution to the Lenders by the Agent in accordance with this Article, (a) an order of provisional attachment, preservative attachment or attachment in relation to the Loan Claim was served on the Borrower, (b) an assignment was made with respect to the Loan Claim, or (c) the obligations were performed by third parties, the rights and obligations of the Borrower, the Agent and the Lenders shall be regulated in accordance with the following provisions:
(a)
(i) In the case that the Agent completed the distribution to the Lenders under this Article prior to the receipt of a notice from the Borrower pursuant to the paragraph 5 of Article 20 that an order of provisional attachment, preservative attachment or attachment for the Loan Claim was served on the Borrower.
In this case, even if any Damages are incurred by the creditors having an order of provisional attachment, preservative attachment or attachment, the Borrower, the Lenders or other third parties due to such distribution by the Agent, the Agent will not be liable for such Damages and the Borrower shall deal with such Damages at its own costs and responsibilities. If the Agent suffers any Damages caused by such distribution, the Borrower shall compensate for such Damages.
(ii) In the case that the Agent received a notice from the Borrower pursuant to the paragraph 5 of Article 20 that an order of provisional attachment, preservative attachment or attachment for the Loan Claim related to such distribution was served on the Borrower after the performance of obligations by the Borrower in accordance with the provisions of paragraphs 1 and 2 of the preceding Article and prior to the completion of distribution to the Lenders under this Article.
In this case, (i) the Agent may withhold the distribution of money related to such notice under this Article, and may proceed in such other manner as the Agent deems reasonable, and (ii) the Agent shall distribute money received from the Borrower other than the money related to such notice pursuant to the appropriation method stipulated in the paragraphs 3 and 4 of the preceding Article. If any Damages are incurred by the creditors having an order of provisional attachment, preservative attachment or attachment,
the Borrower, the Lenders or other third parties due to the actions taken by the Agent pursuant to the provisions of this item (i) or the distribution by the Agent under this item (ii), the Agent will not be liable for such Damages and the Borrower shall deal with such Damages at its own costs and responsibilities. If the Agent suffers any Damages caused by such actions against distribution or such distribution, the Borrower shall compensate for such Damages.
(iii) In the case that the Agent received a notice from the Borrower pursuant to the paragraph 5 of Article 20 that an order of provisional attachment, preservative attachment or attachment was served on the Borrower prior to the performance of obligations by the Borrower in accordance with the provisions of paragraphs 1 and 2 of the preceding Article.
In this case, the Agent shall distribute money pursuant to the appropriation method stipulated in the paragraphs 3 and 4 of the preceding Article, considering there is no claim related to such notice. Even if any Damages are incurred by the creditors having an order of provisional attachment, preservative attachment or attachment, the Borrower, the Lenders or other third parties due to the distribution by the Agent, the Agent will not be liable for such Damages and the Borrower shall deal with such Damages at its own costs and responsibilities. If the Agent suffers any Damages caused by such distribution, the Borrower shall compensate for such Damages;
(b) In the case that the Assignor and the Assignee in their joint names notified the Agent of the fact of assignment of the Loan Claim pursuant to the paragraph1 of Article 29. For the avoidance of doubt, if the Loan Claim is assigned pursuant to the provisions of Article 28, this item is applied with the Assignor replaced with the assigning Lender, and the Assignee with the assigned Lender.
In this case, the Agent shall commence all administrative procedures necessary to treat such Assignee as the creditor of such Loan Claim immediately after the receipt of such notice, and the Agent will not be held liable if the Agent treats the previous Lender as the effective Lender until the Agent notifies the Borrower, the Assignor and the Assignee that such administrative procedures have been completed. If any Damages are incurred by the Assignee or other third parties due to such treatment by the Agent, the Agent will not be liable for such Damages and the Borrower and the Assignor of such Loan Claim shall deal with such Damages at their own costs and responsibilities. If the Agent suffers any Damages resulting from this item, the Borrower and the Assignor of such Loan Claim shall jointly compensate for such Damages; or
(c) In the case that the third part y who repaid pursuant to the provisions of paragraph 2 of Article 30 and the Lender who received such repayment in their joint names, or the Borrower in its own name, notified the Agent of the fact of repayment by third party under the paragraph 2 of Article 30.
In this case, the A gent shall commence all administrative procedures necessary to treat a right to indemnity obtained by such third party and a claim obtained by subrogation in the same manner as the Loan Claim related to such repayment immediately after the receipt of either of such notices, and the Agent will not be held liable if the Agent treats such repayment by the third party as not having been made until the Agent notifies the Borrower, such third party and the Lender who received such repayment by the third party that such administrative procedures have been completed. If any Damages are incurred by such third party or other third party due to such treatment by the Agent, the Agent will not be liable for such Damages the Borrower and the Lender who received such repayment by the third party shall deal with such Damages at their own costs and responsibilities. If the Agent suffers any Damages resulting from this item, the Borrower and the Lender who received such repayment by the third party shall jointly compensate for such Damages.
18.3 The distribution by the Agent to the Lenders shall be made in the order from the items (iii) to (vii) of paragraph 3 of the preceding Article. If an Unappropriated Item arises for the amount to be distributed, the appropriation and distribution for such Unappropriated Item shall be made in accordance with the provisions of paragraph 4 of the preceding Article. In this case, each Lender may, at its discretion, determine the order and method of appropriation for the repayment of obligations to such Lender by the Borrower with respect to the amount so distributed regardless of the provisions of paragraphs 3 and 4 of the preceding Article, and the Borrower will not object to such determination, provided, however, even if any of the Lenders appropriated
the repayment in an order different from the order stipulated in the provisions of paragraphs 3 and 4 of the preceding Article, the Agent may deem that the Lender appropriated the repayment pursuant to the provisions of paragraphs 3 and 4 of the preceding Article, and the Agent may thereafter make such distribution to each Lender on the basis that All Lenders has made appropriation pursuant to the provisions of paragraphs 3 and 4 of the preceding Article. The Agent will not be liable as long as the Agent makes such distribution even if the distributed amount is different from the amount appropriated by each Lender.
18.4 If the Borrower makes the remittance stipulated in the paragraph 1 of the preceding Article later than the Due Time, the Agent will not assume an obligation to make the distribution stipulated in the paragraph 1 of this Article within the same day. In this case, the Agent shall make the distribution immediately after the receipt of remittance from the Borrower, and any Damages incurred by the Lender or the Agent due to such distribution shall be borne by the Borrower.
18.5 Upon request from the Agent and if such request is based on a reasonable cause, the Lender who received such request shall immediately notify the Agent of the amount of loan it holds against the Borrower hereunder (including breakdown). In this case, the obligation of the Agent to make the distributions stipulated in the paragraph 1 of this Article arises at the time all such notices reach the Agent. If any Damages are incurred by the Lenders or the Agent due to delay in delivery of such notice without reasonable cause, the Lender causing such delay shall be liable for such Damages.
18.6 The Agent may make a distribution to the Lender by Advance Payment (accompanying no obligation). The Advance Payment does not mean the performance of obligations by the Borrower. If Advance Payment is made and if the Borrower does not perform the obligations in relation to such Advance Payment by the Due Time, the Lender who received the distribution by Advance Payment under this paragraph shall reimburse to the Agent the amount of such Advance Payment immediately upon request from the Agent. The Lender shall pay to the Agent, immediately upon request from the Agent, the Advance Payment Cost required for such Advance Payment in proportion to the amount of Advance Payment that it received. If the Lender paid such Advance Payment Cost to the Agent, the Borrower shall compensate such Lender for such Advance Payment Cost. If the Agent completed the procedures for Advance Payment of the distribution to the Lender prior to the receipt of notice from the Borrower pursuant to the paragraph 5 of Article 20 that an order of provisional attachment, preservative attachment or attachment was served on the Borrower, and even if any Damages are incurred by the creditors having an order of provisional attachment, preservative attachment or attachment, the Borrower, the Lenders or other third parties due to such Advance Payment of the distribution by the Agent , the Agent will not be liable for such Damages and the Borrower shall deal with such Damages at its own costs and responsibilities. If the Agent suffers any Damages (including, but not limited to, the money not reimbursed or not paid in the case of non-reimbursement or non-payment of the money to be reimbursed or to be paid to the Agent by the Lender stipulated in the third and fourth sentences of this paragraph) caused by such Advance Payment of the distribution , the Borrower shall compensate for such Damages.
Article 19 (Representations and Warranties by Borrower)
The Borrower represents and warrants to the Lenders and the Agent that each of the following items is true and correct as of the execution date of this Agreement, the Commitment Start Date and each Drawdown Date:
(i) The Borrower is a joint-stock company duly incorporated and currently validly existing under the laws of Japan;
(ii) The execution and performance of this Agreement and transactions hereunder by the Borrower are the actions within the purposes of the Borrower’s company, and the Borrower has completed all the procedures thereof necessary under the Laws, the articles of incorporation and other internal company rules of the Borrower;
(iii) The execution and performance of this Agreement and transactions hereunder by the Borrower do not
(a) contradict the Laws that are binding on the Borrower, (b) contradict the articles of incorporation and other internal company rules of the Borrower, and (c) contradict any contract with a third party to which the Borrower is a party or which binds the Borrower or its assets;
(iv) The person, representing the Borrower, who signs or affixes his/her name and seal on this Agreement is authorized to sign or affix his/her name and seal hereon by representing the Borrower in accordance with all the procedures necessary under the Laws, the articles of incorporation or other internal company rules of the Borrower;
(v) This Agreement is legally and validly binding on, and enforceable in accordance with each provision hereof against, the Borrower;
(vi) The Financial Statements (the audited Financial Statements if the Borrower is obligated to conduct an audit on such Financial Statements in accordance with the Laws and if it has otherwise conducted an audit) (or the Reports if the Borrower has prepared the Reports) prepared by the Borrower are accurate and duly prepared in light of the accounting standards that are generally accepted as fair and appropriate ones in Japan. If the Borrower is obligated to receive an audit on such Financial Statements in accordance with the Laws, the Borrower has received a necessary audit;
(vii) No material change has occurred, which may materially affect the performance of obligations by the Borrower hereunder with respect to the information provided by the Borrower to the Agent or the Lender in relation to this Agreement, or which may, after the conclusion of accounting period ending in March 2016, deteriorate the business, properties, or financial condition of the Borrower described in the Financial Statements (the audited Financial Statements if the Borrower is obligated to conduct an audit on such Financial Statements in accordance with the Laws and if it has otherwise conducted an audit) (or the Reports if the Borrower has prepared the Reports) prepared by the Borrower for such accounting period and other accounting documents, and may materially affect the performance of obligations by the Borrower hereunder;
(viii) No lawsuit, arbitration, administrative procedure, or any other dispute has commenced and will possibly commence against the Borrower, which will or may cause significant adverse effect on the performance of obligations by the Borrower hereunder;
(ix) No event stipulated in each item of paragraph 1 or each item of paragraph 2 of Article 21, nor event constituting such event by notice or passage of time or by both, has occurred and will possibly occur; and
(x) The Borrower does not fall under any of the following subitems (a) through (n):
(a) An organized crime group (meaning a group the members (including the members of the member group of such group) of which may foment violent and unlawful acts and the like collectively or habitually; the same applies hereinafter in this item);
(b) An organized crime group member (meaning a member constituting an organized crime group; the same applies hereinafter in this item);
(c) A person for whom five years have not elapsed from the date the person ceased to be an organized crime group member;
(d) A quasi member of an organized crime group (meaning a person who has a relation with organized crime groups other than a member of an organized crime group and may conduct violent and unlawful acts and the like backed by the force of an organized crime group, or a person who cooperates in or is involved in the maintenance or operation of an organized crime group by providing funds, weapons and the like to the organized crime group or the members thereof; the same applies hereinafter in this item);
(e) An affiliated company of an organized crime group (meaning a company in which an organized crime group member is substantially involved in its management, or a company managed by a quasi member of an organized crime group or a former organized crime group member which actively cooperates in or is involved in the maintenance or operation of the organized crime group by providing funds to the organized crime group, or a company which actively utilizes an organized crime group in the company in which it is involved or in the execution of its business and cooperates in the maintenance or operation of the organized crime group);
(f) A corporate racketeer and the like (meaning a corporate racketeer, a corporate extortionist and the like who may conduct violent and unlawful acts in pursuit of illegal interest targeting companies and poses a threat
to the safety of civil life);
(g) A group engaging in criminal activities under the pretext of conducing social campaigns (meaning a person who conducts false social campaigns or political activities, or professes to be engaging in such campaigns and activities, and may conduct violent and unlawful acts and the like in pursuit of illegal interest, and poses a threat to the safety of civil life);
(h) A crime group specialized in intellectual crimes and the like (meaning a group or an individual other than those listed in the above subitems (a) through (g), who uses the force of an organized crime group backed by a relation with the organized crime group, or has a financial relation with an organized crime group and is a core of structural unlawful acts);
(i) A person equivalent to those listed in the above subitems (a) through (h);
(j) A person having a relation where those who fall under any of the above subitems (a) through (i) (hereinafter referred to as the “ organized crime group members ” in this item) are deemed to control management of such person;
(k) A person having a relation where the organized crime group members are deemed to be substantially involved in the management of such person;
(l) A person having a relation where the person is deemed to unduly utilize the organized crime group members for the purpose of acquiring illicit benefit for itself, its company or third parties, or of causing damage to third parties;
(m) A person having a relation where the person is deemed to be involved in providing funds or convenience to the organized crime group members; or
(n) A person whose officers or staff who are substantially involved in its management have a socially condemnable relation with the organized crime group members.
Article 20 (Covenants of Borrower)
20.1 The Borrower covenants that it performs, at its expense, the matters described in each of the following items on and after the execution date of this Agreement until the Borrower completes the performance of all of its obligations hereunder to the Lenders and the Agent:
(i) If any event stipulated in each item of paragraph 1 or each item of paragraph 2 of Article 21, or any event constituting such event by notice or passage of time or by both has occurred or will possibly occur, the Borrower shall immediately notify the Agent and All Lenders of such event;
(ii) If the Borrower prepares the Financial Statements, the Borrower shall promptly submit to the Agent and All Lenders a copy of such Financial Statements, provided, however, if the Borrower prepares the Reports, the Borrower shall, promptly upon the submission of the same to the Director General of the competent Finance Bureau, submit a copy of such Reports to the Agent and All Lenders in place of a copy of the Financial Statements. For the avoidance of doubt, if the Borrower discloses the Reports electronically by the Electronic Disclosure System related to the disclosure documents such as the annual securities reports under the Financial Instruments and Exchange Act (the Electronic Data Processing System for Disclosure stipulated in Article 27-30-2 of the Financial Instruments and Exchange Act) (EDINET), such copy is deemed to have been submitted at the time of such disclosure. If the Agent or any of the Lenders requests the Borrower to submit a copy of the Reports, the Borrower shall promptly submit such copy to the Agent or the Lender. Such Financial Statements (or the Reports if the Borrower has prepared the Reports), if prepared, shall be accurate and duly prepared in light of the accounting standards that are generally accepted as fair and appropriate ones in Japan. If the Borrower is obligated to receive an audit on such Financial Statements in accordance with the Laws, the Borrower shall receive a necessary audit;
(iii) If the Borrower has prepared the Financial Statements or the Reports for the accounting periods ending on or after the execution date of this Agreement, the Borrower shall promptly submit to the Agent and All Lenders the documents in the form of Exhibit 4 attached hereto in which the compliance of matters stipulated in the paragraph 1 of Article 30 may be confirmed;
(iv) Upon request from the Agent or the Lender through the Agent, the Borrower shall immediately report
to the Agent and All Lenders the status of properties, management or business of the Borrower, its Subsidiaries and Affiliates, and shall provide benefit necessary to facilitate the investigations thereof;
(v) If any material change has occurred, or will possibly occur by passage of time, to the status of properties, management or businesses of the Borrower, its Subsidiaries or Affiliates, or if any lawsuit, arbitration, administrative procedure, or any other dispute has commenced or will possibly commence against the Borrower, which will or may cause significant effect on the performance of obligations by the Borrower hereunder, the Borrower shall immediately report to the Agent and All Lenders such fact; and
(vi) If any of the items of the preceding Article is found untrue, the Borrower shall immediately report to the Agent and All Lenders of such fact.
20.2 If the Majority Lenders determine that it is necessary to preserve the claims against the Borrower hereunder and request the Borrower through the Agent in writing to preserve such claims, the Borrower covenants that it would immediately offer security interest with the same priority for each Lender and the Agent on the Borrower’s assets designated by the Majority Lenders and the Agent by making such claims of All Lenders and the Agent against the Borrower hereunder the secured claims with the contents and in the form satisfactory to the Majority Lenders and the Agent.
20.3 The Borrower covenants that it complies with each of the following items on and after the execution date of this Agreement until the Borrower completes the performance of all of its obligations hereunder to the Lenders and the Agent:
(i) The Borrower maintains licenses and permits necessary to conduct its principal business, and continue the business in compliance with all Laws;
(ii) The Borrower will not change its principal business;
(iii) Unless otherwise specified in the Laws, the Borrower will not subordinate the payment of all of its debts hereunder to the payment of any unsecured and non-subordinate debts (including any debts that will not be fully collected after the foreclosure sale of the security among the secured loans) or at least treat it with the same priority;
(iv) The Borrower will not, without approval of the Agent and All Lenders, execute reorganization (having the meaning as defined in the item 26 of Article 2 of the Companies Act), merger, company split, share exchange, share transfer, assignment of a whole or a part of its business or assets to third parties (including the assignment for a sale and leaseback transaction), capital reduction, succession to a whole or a part of material business or assets of third parties with respect to the Borrower, its Subsidiaries and Affiliates, which will or may cause significant adverse effect on the performance of obligations by the Borrower hereunder;
(v) The Borrower will not fall under any of the items 10 (a) through (n) of Article 19; and
(vi) The Borrower will not conduct any act falling under any of the following subitems (a) through (e) by itself or by utilizing third parties:
(a) Violent demands;
(b) Unlawful demands beyond legal liability;
(c) Any act using threatening words or violence in relation to a transaction;
(d) Any act that is detrimental to the credibility of the Lenders or the Agent by spreading rumors or using fraudulent means or force, or any act that interferes with the business of the Lenders or the Agent; or
(e) Other acts equivalent to the above subitems (a) through (d).
20.4 (i) The Borrower covenants that it will maintain the amount of net assets in its nonconsolidated balance sheet as of the last day of accounting period of its each fiscal year ending on or after the execution date of this Agreement respectively at 75% or more of the amount of net assets in its nonconsolidated balance sheet as of either the last day of previous accounting period thereof or the last day of accounting period ending in March 2016, whichever the greater.
(ii) The Borrower covenants that it will maintain the amount of net assets in its consolidated balance sheet as
of the last day of accounting period of its each fiscal year ending on or after the execution date of this Agreement respectively at 75% or more of the amount of net assets in its consolidated balance sheet as of either the last day of previous accounting period thereof or the last day of accounting period ending in March 2016, whichever the greater.
(iii) The Borrower covenants that it will not post an ordinary loss for two consecutive fiscal years with respect to the ordinary profit and loss in its nonconsolidated profit and loss statement for the accounting period of its each fiscal year ending on or after the execution date of this Agreement.
(iv) The Borrower covenants that it will not post an ordinary loss for two consecutive fiscal years with respect to the ordinary profit and loss in its consolidated profit and loss statement for the accounting period of its each fiscal year ending on or after the execution date of this Agreement.
18.5 If the Borrower receives service of an order of provisional attachment, preservative attachment or attachment in relation to the Loan Claim, it shall immediately notify All Lenders through the Agent in writing of such service together with a copy of such order.
Article 21 (Event of Acceleration)
21.1 If any of the events described in the items below has occurred, all obligations of the Borrower to All Lenders and the Agent hereunder will become due and payable as a natural consequence without any notice or demand from the Lender or the Agent, and the Borrower shall immediately pay the principal of Individual Loan (or the Aggregate Loan on or after the Consolidation Date of Individual Loans), interest, Settlement Money, and all other money owed by the Borrower hereunder in accordance with the provisions of Article 17, whereby the Lending Obligations of All Lenders will be extinguished:
(i) If any payment by the Borrower has been suspended, or if a petition of commencement of bankruptcy procedures, commencement of civil rehabilitation procedures, commencement of corporate reorganization procedures, commencement of special liquidation, or commencement of any other similar legal arrangement procedures (including similar petition filed outside Japan) against the Borrower is submitted;
(ii) If the Borrower adopts the resolution for dissolution or receives an order of dissolution (excluding the dissolution of the Borrower resulting from an absorption-type merger or an consolidation-type merger);
(iii) If the Borrower abolishes its business;
(iv) If the Borrower receives a disposition to suspend transactions with a clearinghouse or a disposition to suspend transactions from densai.net Co., Ltd., or receives similar measures from other electronic credits recording institution; or
(v) If any order or notice of provisional attachment, preservative attachment or attachment (including any similar procedures outside Japan) has been sent out, or if any lawsuit that orders an enforcement of preservative attachment or attachment has been filed, with respect to the deposit claims or other claims held by the Borrower against the Lender.
21.2 If any of the events described in the items below has occurred, all obligations of the Borrower to All Lenders and the Agent hereunder will become due and payable upon notice from the Agent to the Borrower under the request of the Majority Lenders, and the Borrower shall immediately pay the principal of Individual Loan (or the Aggregate Loan on or after the Consolidation Date of Individual Loans), interest, Settlement Money, and all other money owed by the Borrower hereunder in accordance with the provisions of Article 17, whereby the Lending Obligations of All Lenders will be extinguished:
(i) If the Borrower has delayed the performance of a whole or a part of its monetary obligations to the Lender or the Agent whether under this Agreement or not;
(ii) If any matter described in each of the items of Article 19 has been found untrue;
(iii) Except for the case described in the item (i) of this paragraph, if the Borrower has breached any of its
obligations hereunder (provided, however, if the breach has not been remedied for ten or more Business Days after the occurrence thereof in the case of breach that could be remedied);
(iv) If any order or notice of attachment, provisional attachment, preservative attachment or provisional disposition (including any similar procedures outside Japan) has been sent out, or if auction procedures have commenced, with respect to the subject of security offered by the Borrower to the Lender;
(v) If any of the outstanding corporate bonds issued by the Borrower have become due and payable before the original due date;
(vi) If the Borrower has delayed the performance of a whole or a part of its monetary obligations other than those hereunder or if such monetary obligations have become due and payable before the original due date, or if the Borrower has delayed the performance of a whole or a part of its guarantee obligations on debts owed by third parties though the performance obligations thereof has occurred;
(vii) If the Borrower has suspended its business or received dispositions such as suspension of business from the competent government authorities;
(viii) If a petition for special conciliation is filed; or
(ix) Except for each of the preceding items, if the status of business or assets of the Borrower deteriorates or may deteriorate and thereby it is deemed necessary to preserve the claims.
21.3 If the notice dispatched pursuant to the preceding paragraph was delayed or not delivered due to the fault of the Borrower, all obligations of the Borrower hereunder will become due and payable at the time such notice should have been delivered, and the Borrower shall immediately pay the principal of Individual Loan (or the Aggregate Loan on or after the Consolidation Date of Individual Loans), interest, Settlement Money, and all other money owed by the Borrower hereunder in accordance with the provisions of Article 17, whereby the Lending Obligations of All Lenders will be extinguished.
21.4 If the Lender has become aware of the occurrence of any event described in the items (i) through (iv) of the paragraph 1 of this Article or each item of the paragraph 2 of this Article, the Lender shall immediately notify the Agent of such occurrence, and the Agent shall notify all other Lenders of the occurrence of such event. In the event described in the item (v) of the paragraph 1 of this Article, if the Lender, who is the debtor of the claim in such event, has become aware of the occurrence of such event, the Lender shall notify the Borrower, all other Lenders and the Agent of such occurrence thereof.
Article 22 (Offset, Exercise of Security Interest, and Sale by Private Contract)
22.1 If the Borrower is required to perform its obligations to the Agent or the Lender upon due date, acceleration or otherwise, the Agent or the Lender may (a) offset its claims against the Borrower hereunder with the deposit obligations, obligations under an insurance contact or other obligations of the Agent or the Lender to the Borrower, whether or not such obligations are due and payable, regardless of the provisions of the paragraph 2 of Article 17, and (b) omit prior notice and prescribed procedures, receive reimbursement of the deposited amount on behalf of the Borrower, and appropriate this amount to the payment of obligations. The interest, Settlement Money and delay damages for claims and obligations in the case of such offset or appropriation to payment shall be calculated assuming that such claims and obligations will be extinguished on the date of such calculation, and the interest rate or the rate of delay damages shall be in accordance with the provisions of agreement thereon, and the foreign exchange rate at the time of calculation reasonably determined by the Agent or the Lender shall be applied.
22.2 The Borrower may offset its deposit claims, claims under an insurance contract or other claims against the Agent or the Lender that have become due with its obligations hereunder owed to the Agent or the Lender that have become due regardless of the provisions of the paragraph 2 of Article 17 only if the Borrower necessarily preserve such claims . In this case, the Borrower shall give written offset notice and promptly
submit to the Agent or the Lender the certificates of deposit claims, claims under an insurance contract or other claims being offset and the passbook affixed with the registered seal. The interest and delay damages for claims and obligations in the case of such offset shall be calculated assuming that such claims and obligations will be extinguished on the delivery date of such offset notice, and the interest rate or the rate of delay damages shall be in accordance with the provisions of agreement thereon, and the foreign exchange rate at the time of calculation reasonably determined by the Agent or the Lender shall be applied.
22.3 If the Borrower is required to perform its obligations to the Agent or the Lender upon due date, acceleration or otherwise, the Agent or the Lender may exercise its security interest (including the collection through real subrogation, receipt of substitute performance of assets on which security interest is established, or private disposition of such assets; hereinafter referred to as “Exercise of Security Interest”) regardless of the provisions of the paragraph 2 of Article 17.
22.4 If the Borrower is required to perform its obligations to the Agent or the Lender upon due date, acceleration or otherwise regardless of the provisions of the paragraph 2 of Article 17, the Borrower may, with prior written notice to the Agent, sell by private contract the assets subject to the security interest granted in favor of the Agent or the Lender, pay the money received directly to the Agent or the Lender as the performance of obligations hereunder, or make payment in substitution with the assets subject to the security interest granted in favor of the Agent or the Lender as the performance of obligations hereunder. Such payment may be deemed to be the performance of obligations hereunder.
22.5 If the principal of each Individual Loan (or each Loan on or after the Consolidation Date of Individual Loans) of the Lender is repaid or offset on the date other than the Interest Payment Date for reasons not attributable to the Lender (including, but not limited to, the case where the principal of each Individual Loan (or each Loan on or after the Consolidation Date of Individual Loans) ceases to exist by offset pursuant to the paragraph 1 of this Article), and in the case that the reinvestment interest rate of each Individual Loan (or each Loan on or after the Consolidation Date of Individual Loans) being repaid or offset is lower than the interest rate applied for the Interest Rate Calculation Period that includes the date of such repayment or offset of each Individual Loan (or such each Loan on or after the Consolidation Date of Individual Loans), the Borrower shall pay to the Lender the Settlement Money in relation to such repayment or offset on the same day as the date of such repayment or offset in accordance with the provisions of Article 17 unless otherwise provided herein.
22.6 If an offset or appropriation to repayment is made pursuant to the paragraph 1 or 2 of this Article, or if the security interest is exercised pursuant to the paragraph 3 of this Article, or if the assets subject to the security interest are sold by private contract or accepted as substitute performance pursuant to the paragraph 4 of this Article, the Lender shall, for the paragraphs 1 and 3 of this Article, and the Borrower, for the paragraphs 2 and 4 of this Article, shall promptly notify the Agent in writing of the details thereof. If any Damages are incurred by the Lender or the Agent due to delay of such notice without any reasonable cause, either the Lender who has failed to give such notice or the Borrower who has failed to give such notice shall bear such damages.
Article 23 (Arrangement among Lenders and Agent)
23.1 If the obligations of the Borrower against any of the Lenders hereunder has been extinguished without following the provisions of Articles 17 and 18 (excluding the cases of offset or appropriation to repayment under the paragraph 1 or 2 of the preceding Article) (hereinafter such Lender is referred to as the “Obligation Ceasing Lender” in this paragraph), unless otherwise provided hereunder, All Lenders and the Agent shall make an arrangement among the Lenders and the Agent by assigning claims or receiving claims pursuant to the provisions of each of the following items or through other reasonable measures so as to obtain the same
results as the cases where the repayment is made pursuant to the provisions of Articles 17 and 18 and the obligations to the Agent and the Lenders are extinguished. If agreement of All Lender and the Agent to such assignment of claims, receipt of claims or other reasonable measures, All Lenders shall follow the measures determined by the Agent at its discretion, provided, however, if the claim is to be assigned as the matter of arrangement among the Lenders and the Agent stipulated in this paragraph (including, but not limited to, the cases stipulated in the item 2 of this paragraph), the Lender who will be the Assignor of such claim may refuse such assignment:
(i) When assuming that the amount in relation to extinguishment of the obligations has been paid to the Agent at the time of the extinguishment of obligations pursuant to the provisions of the paragraph 1 of Article 17, the Agent shall specify the claim the payment of which other Lenders and the Agent (hereinafter referred to as the “Other Lenders” in this paragraph) would have received pursuant to the provisions of Articles 17 and 18, and calculate the amount thereof;
(ii) The Obligation Ceasing Lender shall purchase from such Other Lenders at the face value the part of claims equivalent to the amount calculated by the Agent pursuant to the preceding item among the claims of Other Lenders specified by the Agent pursuant to the preceding item; and
(iii) If the purchase of claim stipulated in the preceding item is made, Other Lenders who sold such claim shall, at their own expense, notify the Borrower with an instrument bearing a certified date specified in Article 467 of the Civil Code promptly after the sale of such claim.
23.2 Notwithstanding the preceding paragraph, in the case of the following items, the arrangement among the Lenders and the Agent stipulated in the preceding paragraph will not be made and only the relevant Lenders shall receive the repayment:
(i) If the security interest is exercised by the Lender;
(ii) If the Lender receives any repayment of claims it has against the Borrower hereunder with respect to its security interest as a result of compulsory execution or auction for Exercise of Security Interest by a third party;
(iii) If the obligations hereunder are extinguished as a result of offset or appropriation to repayment pursuant to the provisions of the paragraph 1 or 2 of the preceding Article; and
(iv) If a sale by private contract of the assets subject to the security interest granted in favor of the Lender is made pursuant to the provisions of the paragraph 4 of the preceding Article and the money received is paid directly to the Lender for the performance of obligations hereunder, or if repayment is made by substitute performance with the assets on which security interest is established in favor of the Lender and the obligations hereunder to the Lender are extinguished.
ARTICLE24 RIGHTS AND OBLIGATIONS OF THE Agent
24.1. The Agent shall conduct its Agent service on behalf of all Lenders and exercise its powers under the entrustment of all Lenders, and exercise its powers admitted by the Agent as commonly required and appropriate in conducting its Agent service. The Agent shall not have any obligations other than explicitly provided in each article hereunder, or shall not be liable for the failure of the Lenders to perform its obligations hereunder. Furthermore, the Agent is the agent of the Lenders so that the Agent shall not act as an agent of the Borrower unless otherwise provided.
24.2. The Agent may rely on the correspondence, documents and papers (including the Application Form for Borrowing received by facsimile from the Borrower in accordance with the Section4.1.) which are considered as true and correct and signed or placed signatures and seals by an appropriate person, and may perform relying on the statements or instructions submitted by the experts reasonably appointed by the Agent to the extent required with respect to this Agreement.
24.3. The Agent shall fulfill its obligations and exercise its powers hereunder with the due care of a prudent manager.
24.4. The Agent or its officers, employees or agents shall not be liable to the Lenders for any acts or omissions in connection with this Agreement, unless caused intentionally or by gross negligence hereunder. The Lenders shall jointly and severally indemnify Agent for any liability and damage assumed and incurred by the Agent to fulfill its obligations hereunder, including but not limited to the costs and expenses incurred to avoid and recover the loss or damage (including attorney’s fee) as long as not reimbursed by the Borrower. Provided, however, that if the Agent concurrently serves as the Lenders, the Lenders excluding the Agent shall jointly and severally indemnify Agent for the balance after deducting the amount shared pro rata in accordance with the participating proportion of such Lenders concurrently serving as the Agent (in case the Lenders who is not able to indemnify is included, the proportion after divided by the total of the participating proportion of the Lenders excluding such Lenders from the participation proportion of the Lenders concurrently serving as the Agent) from aforementioned costs and expenses.
24.5. With the written instruction of the Lenders, the Agent may perform an act pursuant to such instruction which is lawful. In this case, the Agent shall not be liable to the Borrower or the Lenders for any consequences of the act.
24.6. Unless notified of the events in Section21.1 or Section21.2, or the events constituting such events by notification and/or time passage, the Agent shall be deemed not to have known the existence of such events.
24.7. The Agent makes no warranty with the validity of this Agreement and any representations herein. The Lenders shall execute this Agreement on its own decision after reviewing the credit of the Borrower or other necessary matters based on the documents and information it deemed as appropriate, and shall conduct the transaction intended herein.
24.8. If the Agent concurrently serves as the Lenders, its rights and obligations of the Lenders shall be equivalent to those of the other Lenders irrespective of its obligations of the Agent hereunder. And, the Agent may conduct generally admitted banking transactions with the Borrower outside of this Agreement. Meanwhile, the Agent shall be under no obligation to disclose to the other Lenders the information of the Borrower obtained in the course of the transaction outside this Agreement (the information received from the Borrower shall be deemed as the information obtained in the course of the transactions outside this Agreement), or no obligation to distribute to the other Lenders the amount paid by the Borrower in the transaction with the Borrower outside this Agreement.
24.9. In calculating the amount of each Several Lending Disbursement and the distribution amount to the Lenders pursuant to Article18, any fractions less than one (1) yen of the distribution amount to the Lenders other than the Lenders appointed by the Agent(hereunder, “Calculating Fractions Lenders” in this Section, provided that the Lenders concurrently serving as the Agent shall be the Calculating Fractions Lenders if the Agent concurrently serves as the Lenders) shall be rounded off, and the distribution amount to the Calculating Fractions Lenders shall be the amount deducted the distribution amount to the other Lenders from the total distribution amount. The necessary calculation of any fractions less than one (1) yen hereunder shall be subject to the manner the Agent deems as appropriate. As for fractions, the amounts and the number of shares are rounded down, whereas ratios and other values are rounded off.
24.10. The decision on the interest, Interest Calculation Period and due date included in the notification from the Agent to the Borrower or the Lenders, and other decisions and the amount paid based on this Agreement shall bind the Borrower and the Lenders as fixed and firm terms, unless any explicit errors.
24.11. If the Agent receives the notification from the Borrower to be notified to the Lenders hereunder, the Agent shall promptly notify its contents to all Lenders. And if the Agent receives the notification from the Lenders to be notified to the Borrower or the other Lenders, the Agent shall promptly notify its contents to each of the Borrower and all Lenders. The Agent shall make available for inspection by the Lenders the documents received from the Borrower and kept by itself during the standard business hours of the Agent.
ARTICLE25 RISIGNATION AND DISMISSAL OF THE Agent
25.1 The procedure to resign the Agent shall be as follows.
(i) The Agent may resign by written notification to all Lenders and the Borrower. Provided, however, that such resignation shall not be effective until the successor Agent is appointed and accepts such appointment.
(ii) If the notification in Section 25.1(i) is made, Majority of Lenders shall appoint the successor Agent after obtaining approval of the Borrower.
(iii) If the successor is not appointed within thirty (30) days from the date of notification in above Section25.1(i), or the person appointed by Majority of Lenders does not accept such appointment, the incumbent Agent may the successor Agent on behalf of the Majority of Lenders.
25.2 The procedure to dismiss the Agent shall be as follows.
(i) Majority of Lenders may dismiss the Agent by written notification to all of the Lenders, the Borrower and the Agent. Provided, however, that such dismissal shall not be effective until the successor Agent is appointed and accepts such appointment.
(ii) If the notification is Section 25.2(i) is made, Majority of Lenders shall appoint the successor Agent after obtaining approval of the Borrower.
25.3 If the person appointed as the successor Agent under Section25.1 or 25.2 accepts the appointment, the former Agent shall deliver all documents filed by such person as an Agent to the successor Agent and provide all cooperation necessary for the successor Agent to fulfil its obligations hereunder as the Agent.
25.4 The successor Agent shall assume the rights and obligations of the former Agent and the former Agent shall be released from all obligations of the Agent at the same time as assuming the post of the Agent. Provided, however, that the provisions hereunder shall continue to affect effectively to the performance (including omission) the former Agent conducted during its tenure.
25.5 Notwithstanding above Section25.1 to Section25.4, the Agent may resign by forming a consensus with the Majority of Lenders if falling under either of the following subsections. If the Agent has resigned pursuant to this Section25.5, such Agent who resigned shall promptly notify to the Borrower and the Borrower shall not make any objections against such resignation. Even if the Agent has resigned pursuant to this Section25.5, the Borrower shall not be released from the payment obligations of the agent fee already incurred.
(i)In the event that any petitions for the commencement of bankruptcy proceedings, civil rehabilitation proceedings, corporate reorganization proceedings, special liquidation proceedings or other similar legal insolvency proceedings (including any similar petitions overseas) are filed.
(ii) In the event that the Borrower fails to pay the agent fee and despite of reasonable day of notice, the Borrower still fails to pay within such period.
ARTICLE26 GATHERING Majority of Lenders’ DECISIONS
26.1 The procedure of gathering Majority of Lenders’ decisions shall be as follows;
(i) The Lenders may notify the Agent to require gathering Majority of Lenders’ decisions if it deems the event requiring the instructions by the Majority of Lenders set forth herein occurs.
(ii) The Agent notified above (i) shall promptly all Lenders to gather many Lenders’ decisions.
(iii) The Lenders notified above (ii) shall make its decision on such event and shall notify its contents to the Agent within five (5) business days.
(iv) In case where the Majority of Lenders’ decisions are gathered in accordance with above (i) (ii) (iii), the Agent shall promptly notify all Lenders of its contents as instructions by the Majority of Lenders.
26.2 The Agent may notify all Lenders to gather Majority of Lenders’ decisions if it deems the event other than those in Section26.1 which require the gathering Majority of Lenders’ decisions occurs. The procedure after such notification shall be subject to above 26.1(iii) and (iv).
ARTICLE27 MODIFICATION OF THIS AGREEMENT
27.1. This Agreement shall not be modified or altered without any written consent of the Borrower, all Lenders and the Agent.
27.2 Notwithstanding the foregoing, if the successor Agent is not immediately appointed by the mutual consent of the Majority of Lenders pursuant to Section25.5, this Agreement may be modified or altered with the written consent of the Majority of Lenders and the Agent (the Majority of Lenders if the Agent has already resigned) to the extent reasonably required to enable each Lenders to exercise its rights respectively. The party who modified or altered this Agreement pursuant hereto, shall notify its contents of the modification or alteration in writing to the other parties hereto without any delay.
ARTICLE28 TRANSFER OF ITS CONTRACTUAL STATUS
28.1 The Borrower shall not transfer its contractual status or rights and obligations hereunder to any third party without prior written consent of all Lenders and the Agent.
28.2 The Lenders may transfer its contractual status and all of the rights and obligations accompanied to the third party (transfer of any part of its contractual status and rights and obligations accompanied shall not be allowed), only with the consents of all of the other Lenders, the Borrower and the Agent, and meeting all requirements in each of the following subsections, prior to termination of the Lending Obligations (hereinafter the Lenders having transferred shall refer to “Status Transferor” and the person transferred shall refer to “Status Transferee”). Provided, however, that, transfer of the Lending Claim set forth in Article23 or Article29 shall not require above consents. In this case, Status Transferor and Status Transferee shall deliver in the joint names the notification of status transferring with a copy of written consent of all of the other Lenders, the Borrower and the Agent. All of the other Lenders, the Borrower and the Agent shall not unreasonably withhold the consents and the Agent shall notify to all Lenders pursuant to Section32.5 if such
transfer is completed.
(i) If Lending Claim or the othe r rights of the Status Transferor against the Borrower hereunder are transferred to Status Transferee through such tran sfer, the consent of the Borrower shall include the consent for such rights (if any), and the date of transfer shall be certified for such consent.
(ii) Status Transferee shall be the Qualified Assignee.
(iii) Such Transfer shall not cause any withholding tax or any increase of the Borrower’s interest against such Status Transferee pursuant to Section17.5 (unless the Lenders transfers its contractual status to its subsidiaries or affiliate companies overseas because the Lenders abolishes its loan service in Japan).
28.3 All costs and expenses resulting from the transfer under above Section28.2 shall be borne by the Status Transferee. Furthermore, the Status Transferor shall pay five hundred thousand (500,000) JPY with consumption tax and local tax to the Agent in consideration of administrative procedure relating to such transfer by the date of transfer.
ARTICLE29 ASSIGNMENT OF Lending Claim ETC.
29.1 Unless otherwise provided herein, the Lenders may assign all Lending Claim (assignment of any part of Lending Claim shall not be allowed) of either Each Several Lending (or Each Lending on and after the Several Lending Integrating Date) , all relevant rights and obligations and other contractual status only if the Lending Obligations has been fulfilled and all requirement in the following (i) to (iii) are applicable. Assignor and Assignee shall meet requirements for opposition to any third party and to debtors, and Assignor and Assignor shall immediately notify the Agent of the fact of such assignment. Such notification shall be conducted by delivering a letter of assignment of rights. All of the other Lenders, the Borrower and the Agent hereby agree to such assignment. In this case, in applying each provision hereunder concerning such Lending Claim and all relevant rights and obligations and other contractual status, Assignee shall be treated as Lenders.
(i) For assigned Lending Claim and all relevant rights and obligations and other contractual status, Assignee shall be bound to each provisions concerning assigned Lending Claim and all relevant rights and obligations and other contractual status hereof.
(ii) Assignee shall be the Qualified Assignee.
(iii) Such assignment shall not cause any withholding tax or any increase of the Borrower’s interest against such Assignee pursuant to Section17.5 (unless the Lenders assigns to its subsidiaries or affiliate companies overseas because the Lenders abolishes its loan service in Japan).
29.2 All costs and expenses resulting from the assignment under above Section29.1 shall be borne by Assignee. Furthermore, Assignee shall pay five hundred thousand (500,000) JPY with consumption tax and local tax to the Agent in consideration of administrative procedure relating to such assignment by the date of assignment.
ARTICLE30 COLLECTION FROM THIRD PARTY
30.1 Unless any prior written consent of the Agent and all Lenders, the Borrower shall not appoint any third party as a guarantor for the liabilities hereunder (including real guarantee but excluding the real guarantee as revolving guarantee or revolving collateral), or shall not allow any third party to assume any liabilities hereunder or its fulfillment after and including the execution date of this Agreement.
30.2 As for the repayment of any liabilities hereunder by any third party, the Lenders may receive such repayment from the third party only if such repayment meets all of the following requirements (provided that only the requirement provided in this Section30.2(i) shall be met in case of exercise of any security interest created by a third-party pledger, repayment by the amount received from any private sale of the property for which a third-party pledger creates a security interest, or repayment by substitute performances using the property for which a third-party pledger creates a security interest.) If the Lenders receives the repayment from any third party pursuant to this Section, such Lenders shall immediately notify the Agent of such repayment in the joint names of the Lenders and such third party, and in the sole name of the Borrower. Section17.2 shall not apply to the repayment pursuant to this Section30.2, and the adjustment between the Lenders and the Agent provided in Section23.1 shall not be conducted.
(i) If the third party exercise its rights to reimbursement obtained as a result of such repayment, or rights obtained by subrogation of the Lenders, such rights to reimbursement and rights obtained by subrogation shall be treated equivalently as rights regarding such repayments, and such third party shall accept by written form that the third party is bound to each provisions hereof to the extent, and provide such form to the Agent for the Lenders and the Agent.
(ii) The third party shall be the Qualified Assignee and shall not be the subsidiary or the affiliate company of the Borrower, or the Borrower shall not be the subsidiary or the affiliate company of such third party.
(iii) If the repayment is the repayment of either of obligations concerning any loan of Each Several Lending (but the Each Lending on and after Several Lending Integrating Date), total amount of such Lending Claim shall be repaid.
(iv) Such repayment shall not result in any withholding tax, or any increase of the interest amount pursuant to Section17.5.
If any third party exercise its rights to reimbursement or obtain the Lending Claimby subrogation, such acquisition of the rights to reimbursement or acquisition by subrogation shall be deemed as an assignment of the Lending Claim under above Article29 so that Section29.2 shall apply mutatis mutandis.
ARTICLE31 TERMINATION OF Lending Obligations
If either of the following events occurs, Lending Obligations of all Lenders shall be extinguished. If the event set forth in (ii) of the following events occurs, the Borrower shall immediately pay its debt hereunder in accordance with Article17. The relevant provisions of this Agreement shall remain in force until the Borrower completes its obligations hereunder.
(i) if the Due Date has passed;
(ii) if the Borrower loses the benefit of time pursuant to Article21;
(iii) if the Borrower terminate its Lending Obligations pursuant to Section2.5; or
(iv) if the total of the Unused Amount of Lending Limit has reduced to zero (0).
ARTICLE32 GENERAL CONDITIONS
32.1 Confidentiality
The Borrower shall not make any objections to the disclosure with respect to the following;
(i) if any failure of each Several Lending is notified under Section7.1, or any events set forth in each subsection in Section21.1 or Section21.2 or any events constituting such events by notification and/or time passage are occurred, or it is necessary to gather Majority of Lenders’ decisions under Article26, the Agent and the Lenders mutually disclose the information regarding the Borrower and the
transactions with the Borrower obtained in connection with this Agreement or any agreements other than this Agreement to the extent reasonably required;
(ii) In transferring the contractual status under Article28 or in assigning the Lending Claim under Article29, the Lenders discloses the information concerning this Agreement to the Assignee (including the transferee in Article28) and any person who is considering to be assigned or transferred (including the person who conducts agency business for such assignment or transfer), provided that the Lenders shall impose confidential information to those who disclosed. For the avoidance of doubt, the information concerning this Agreement means the information with respect to the Borrower’s credit obtained in connection with this Agreement, the contents of this Agreement and its supplementary information, and the contents of the Lending Claim subject to assignment and its supplementary information, excluding the information with respect to Borrower’s credit obtained in connection with any agreement other than this Agreement.
(iii) The Lenders or the Agent discloses the information concerning this Agreement to the extent reasonably required in accordance with any applicable laws, or any order, direction, request by any administrative authorities, judiciary authorities or other authorities concerned, central bank, self-censorship organizations, or discloses such information only to attorneys, judicial scriveners, certified public accountants, audit corporations, tax accountants, rating agencies or other experts who need to be disclosed such confidential information in the performance of their duty. Furthermore, the Lenders or the Agent discloses the information concerning this Agreement to its parent company, subsidiaries and affiliate companies for the purpose of internal control, and to the necessary and appropriate extent.
32.2 Risk of loss, Disclaimer and Remedy and Indemnification
(i) If the documents submitted by the Borrower to the Agent or the Lenders should be lost, extinguished or damaged due to circumstances beyond its control such as incidents and disasters, the Borrower shall discuss with the Agent and shall perform its obligations hereunder on the basis of the records such as books and slips of the Agent or the Lenders. And, the Borrower shall promptly prepare substitute documents and submit them to the Agent or the Lenders through the Lenders, as required by the Agent or the Lenders through the Agent.
(ii) If any accidents such as counterfeiting, falsification or plagiarism of a seal occur in the transactions in which the Lenders or the Agent has checked the signature or seal of Borrower’s representative or agent for use in the transaction hereunder against the signature or seal previously the Borrower notified, and such accidents result in any loss or damage, the Borrower shall bear such loss or damage.
(iii) Even if the Borrower should bear any loss or damages by any actions of the Lenders or the Agent allowed hereunder (including making decision not to perform each Several Lending, notifying the Borrower pursuant to Section21.2 or disclosing the information under Section32.1(i)) for the reason that the Borrower breaches any provisions hereof or that any of the Subsections in Article19 is untrue (including that the matters stipulated in Section19(x) (a) to (n) are not true or that the Borrower breaches Section20.3(v) or (vi), and hereinafter the “Borrower’s Breach”), the Borrower shall not claim against the Lenders or the Agent whatsoever. Any loss or damage incurred by the Lenders or the Agent due to the Borrower’s Breach or the failure of the Lenders to indemnify under Section24.4 shall be borne by the Borrower.
32.3 Severability of this Agreement
If any part of the provisions of this Agreement should be or become illegal or unenforceable, the validity, legality and enforceability of the remaining conditions shall not be impaired or affected.
32.4 Priority over Transaction Agreements”
If there should be any conflicts between the provisions in this Agreement and any banking agreement submitted by the Borrower to the Lenders separately, or executed between the Borrower and the Lenders separately or other general agreement on financial transactions (hereinafter, “Transaction Agreements” for the purpose of this Section), the
provision shall control and prevail such Transaction Agreements. And if any matters not stipulated herein shall be provided in such Transaction Agreements, the Transaction Agreements shall apply with respect to the matter.
32.5 Notices
(i) All notices hereunder shall be by written form and specify that the notice is based on this Agreement, and shall be made to the contact address listed in the Appendix1 attached hereto by either way of the following (a) to (d);
(a) direct delivery;
(b) registered mail or courier service;
(c) facsimile communication; or
(d) exchange mail service(only limited to the notices between the Lenders and the Agent).
(ii) All notices sent, or to be sent, in accordance with above 32.5(i), shall be considered as delivered when the receipt of the notice is confirmed on sender’s facsimile where sent by facsimile and when the notice is actually received where sent by other ways.
32.6 Changes of the matters to be notified
(i) The Lenders and the Borrower shall promptly notify the Agent in written form if they change their trade name or corporate name, representative, agent, signature, seal, address or other matters to be notified to the Agent.
(ii) If the notice is delayed or not reached due to failure of the notification of above (i), the notice shall be deemed reached when it should have been reached generally.
32.7 Fund Settlement
Any fee and expenses of any payments from any of the parties hereto to the other party/parties hereunder shall be borne by the party who pays.
32.8 Computation of Interest
Unless otherwise clearly provided herein, interest hereunder shall be computed on the basis of a year of 365 days and paid for the actual number of days elapsed (including the first day but excluding the last day), and disregarding amounts of less than one (1) JPY. Division shall be carried out in the last.
32.9 Preparation of Notary Deed
The Borrower shall take the required measure to draft a notarial deed clearly states acceptance of the obligations hereunder and their enforceability whenever required by the Agent or the Majority of Lenders.
32.10 Governing Law and Jurisdiction
This Agreement shall be governed by and construed in accordance with Japanese law and the court of non-excluding jurisdiction for all disputes arising with regards to this Agreement shall be the Tokyo District Court.
32.11 Language
This Agreement shall be made in Japanese and only such Japanese version shall be the official governing version.
32.12 Consultation
Matters not stipulated in this Agreement and matters of doubt arising in the interpretation or application of this Agreement shall be settled in good faith between the Borrower and the Lenders through the Agent.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed or to be placed their signatures and seals thereon by their representatives or the agents of their representatives in one (1) original. The original shall be kept by the Agent and the Lenders and the Borrower shall receive a copy thereof from the Agent.
July 26, 2016
Borrower (address, signature and seal)
|
|
FRONTEO, Inc. |
Lenders concurrently serving as Agent (address, signature and seal)
|
|
The Bank of Tokyo-Mitsubishi UFJ, Ltd. |
Lenders (address, signature and seal)
|
Sumitomo Mitsui Banking Corporation |
Lenders (address, signature and seal)
|
The Bank of Yokohama, Ltd. |
Lenders (address, signature and seal)
|
Mizuho Bank, Ltd. |
Lenders (address, signature and seal)
|
Risona Bank, Limited. |
Appendix1 (List of Parties)
List of Parties
1. Borrower
trade name/ name |
FRONTEO, Inc. |
address |
2-12-23, Kounan, Minato-ku, Tokyo |
Contact address |
7F Meisan Takahama building, 2-12-23, Kounan, Minato-ku, Tokyo 108-0075 TEL:03-5463-6344 FAX:03-5463-6345 |
2. Agent
3. Lenders
(i)
(ii)
(iii)
(iv)
(v)
trade name/ name |
Resona Bank, Limited. |
address |
2-2-1, Bingo-cho, Chuo-ku, Osaka-city, Osaka |
loan office |
Shinagawa Branch Office |
contact address |
5-6-6 Minami-Shinagawa, Shinagawa-ku, Tokyo 140-0004 Loan Division, Sihagawa Branch Office TEL:03-3492-2706 FAX:03-3490-1526 |
credit |
\100 million JPY |
Appendix2 (repayment schedule)
Repayment Schedule
Principal Repayment Date |
The last day of August, 2017 |
The last day of September, 2017 |
The last day of October, 2017 |
The last day of November, 2017 |
The last day of December, 2017 |
The last day of January, 2018 |
The last day of February, 2018 |
The last day of March, 2018 |
The last day of April, 2018 |
The last day of May, 2018 |
The last day of June, 2018 |
The last day of July, 2018 |
The last day of August, 2018 |
The last day of September, 2018 |
The last day of October, 2018 |
The last day of November, 2018 |
The last day of December, 2018 |
The last day of January, 2019 |
The last day of February, 2019 |
The last day of March, 2019 |
The last day of April, 2019 |
The last day of May, 2019 |
The last day of June, 2019 |
The last day of July, 2019 |
The last day of August, 2019 |
The last day of September, 2019 |
The last day of October, 2019 |
The last day of November, 2019 |
The last day of December, 2019 |
The last day of January, 2020 |
The last day of February, 2020 |
The last day of March, 2020 |
The last day of April, 2020 |
The last day of May, 2020 |
The last day of June, 2020 |
The last day of July, 2020 |
The last day of August, 2020 |
The last day of September, 2020 |
The last day of October, 2020 |
The last day of November, 2020 |
The last day of December, 2020 |
The last day of January, 2021 |
The last day of February, 2021 |
The last day of March, 2021 |
The last day of April, 2021 |
The last day of May, 2021 |
The last day of June, 2021 |
The last day of July, 2021 |
The last day of August, 2021 |
The last day of September, 2021 |
The last day of October, 2021 |
The last day of November, 2021 |
The last day of December, 2021 |
The last day of January, 2022 |
The last day of February, 2022 |
The last day of March, 2022 |
The last day of April, 2022 |
The last day of May, 2022 |
The last day of June, 2022 |
The last day of July, 2022 |
Exhibit 1 (Application for Loan)
Application for Loan
Date:
Dear Lenders
(Here “Lenders” mean the Lenders set forth herein at the time of submitting this letter. The same applies hereinafter.)
Attention: Agent Administration Office, Financial Solution Division
The Bank of Tokyo-Mitsubishi UFJ, Ltd
(Signature and Seal)
(Borrower)
FRONTEO, Inc. Term Loan Agreement with Commitment Perion for one (1) billion JPY
In accordance with Article4 of the Term Loan Agreement with Commitment Period, dated July 26, 2016 for FRONTEO, Inc. (hereinafter the “Borrower”) through The Bank of Tokyo-Mitsubishi UFJ, Ltd as an Agent (hereinafter “this Agreement”), we, as a Borrower, hereby require execution of this Several Lending to be executed on the following date and for the amount of this Several Lending.
Desired Execution Date:
Amount of the this Several Lending: JPY
The Borrower shall represent and warrant that, as of the Desired Execution Date of the this Several Lending, (i) events stipulated in each subsection in Section19 are true and correct, and (ii) any events stipulated in each subsection of Section21.1 or Section21.2 hereof, or any events constituting such events by notification and/or time passage do not occur or execution of the this Several Lending do not cause such events.
Any term in this letter has same meaning as the terms define in this Agreement except otherwise defined in this letter.
Exhibit 2 (Confirmation Letter)
Confirmation Letter
Date:
Dear Lenders
(Here “Lenders” mean the Lenders set forth herein at the time of submitting this letter.)
Attention: Agent Administration Office, Financial Solution Division
The Bank of Tokyo-Mitsubishi UFJ, Ltd
(Signature and Seal)
(Borrower)
FRONTEO, Inc. Term Loan Agreement with Commitment Perion for one (1) billion JPY
With respect to execution of Term Loan Agreement with Commitment Period, dated July 26, 2016 for FRONTEO, Inc.(hereinafter the “Borrower”) through The Bank of Tokyo-Mitsubishi UFJ, Ltd as an Agent(hereinafter “this Agreement”), and loan hereunder, the Borrower, hereby confirm that all necessary procedures are completed in accordance with any laws or ordinances and any company rules of the Borrower.
Any term in this letter has same meaning as the terms define in this Agreement except otherwise defined in this letter.
Exhibit 3 (Receipt)
Receipt
Date:
Dear Lenders
(Here “Lenders” mean the Lenders listed below. The same applies hereinafter.)
Attention: Agent Administration Office, Financial Solution Division
The Bank of Tokyo-Mitsubishi UFJ, Ltd
(Signature and Seal)
(Borrower)
FRONTEO, Inc. Term Loan Agreement with Commitment Perion for one (1) billion JPY
/ Receipt of Loan
We, borrowed from each Lenders as follows and confirmed the loan today.
Total Loan Amount JPY
Lenders |
Loan Amount |
The Bank of Tokyo-Mitsubishi UFJ, Ltd Sumitomo Mitsui Banking Corporation The Bank of Yokohama,Ltd. Mizuho Bank,Ltd. Resona Bank, Limited. |
JPY JPY JPY JPY JPY |
Exhibit 4
(Report on Compliance Status regarding the provision of Collection from the Third Party)
Report on Compliance Status regarding the provision of Collection from the Third Party
Date:
Dear Lenders
(Here “Lenders” mean the Lenders set forth herein at the time of submitting this report. The same applies hereinafter.)
Attention: Agent Administration Office, Financial Solution Division
The Bank of Tokyo-Mitsubishi UFJ, Ltd
(Signature and Seal)
(Borrower)
FRONTEO, Inc. Term Loan Agreement with Commitment Perion for one (1) billion JPY
In accordance with Section20.1(iii) of Term Loan Agreement with Commitment Period, dated July 26, 2016 for FRONTEO, Inc.(hereinafter the “Borrower”) through The Bank of Tokyo-Mitsubishi UFJ, Ltd (hereinafter the “Agent”) as an Agent(hereinafter “this Agreement”), we, report as follows the compliance status on the matters provided in Section30.1 for a period from and including [the execution date of this Agreement / starting date of the applicable fiscal period in Section1 below] [*Select the execution date of this Agreement for the first report] up to and including the submission date of this report (hereinafter the “Report Period”).
Any term in this letter has same meaning as the terms define in this Agreement except otherwise defined in this letter.
|
1. |
|
Applicable Fiscal Period: The fiscal period ending in Month/ Year. |
|
2. |
|
Report regarding the provision of Collection from the Third Party in Section30.1 for the Report Period. |
|
¡ |
|
We do not appoint any third party as a guarantor for the liabilities hereunder (including real guarantee but excluding the real guarantee as revolving guarantee or revolving collateral), or we do not allow any third party to assume any liabilities hereunder or its fulfillment. |
|
¡ |
|
We appointed a third party as a guarantor for the liabilities hereunder (including real guarantee but excluding the real guarantee as revolving guarantee or revolving collateral), or we allowed a third party to assume the liabilities hereunder or its fulfillment, but we obtained prior written consents of the Agent and all Lenders. |
Agreement for Subscription for the Twelfth Share Option Offering
This Agreement is made and entered into by and between UBIC, Inc. (hereinafter referred to as the “Company”) and ************** (hereinafter referred to as the “Subscriber”) with respect to the subscription for the eleventh share option offering.
Article 1 (Subscription for Share Options)
In accordance with the resolution of the eleventh annual shareholders’ meeting held on June 23, 2015 and the resolution of the board meeting held on July 31, 2015, the Company has determined the following requirements for the eleventh share option offering (hereinafter referred to as the “Share Options”), of which the Subscriber subscribes for **** options. Since this Agreement shall be made integrally at the same time with other subscribers in accordance with Article 244 of the Companies Act of Japan, the Subscriber shall subscribe for the Share Options simultaneously with the other subscribers collectively for the total number of Share Options.
Description
Requirements for the offering of Share Options
|
(1) |
|
Class and number of shares covered by the Share Options |
60,000 Class A common shares, which, in case of adjustment set forth below, shall be revised to the number of granted shares after adjustment multiplied by the total number of Share Options.
Number of shares covered by one (1) Share Option (hereinafter referred to as the “Number of Granted Shares”) shall be 100 class A common shares. In the event of a stock split (including a gratis allotment of common stock and this being applicable hereinafter, as well) or a reverse split by the Company after the day when the Share Options are allotted (hereinafter referred to as the “Date of Allotment”), the following formula shall be used to adjust the Number of Granted Shares covered by the Share Options that have not been exercised at the time of adjustment. Fractional share resulting from adjustment shall be discarded.
Number of Granted Shares after adjustment = Number of Granted Shares before adjustment × ratio of split or reverse split
Any adjustment of the Number of Granted Shares which may be required in other situations shall be made to a reasonable extent.
|
(2) |
|
Total number of Share Options |
600
|
(3) |
|
Amount payable in exchange of the Share Options |
No payment is required in exchange of the Share Options
|
(4) |
|
Manner of calculating the value of assets contributed in exercising the Share Options |
93,000 yen for one (1) Share Option
Value of assets contributed in exercising one (1) Share Option shall be obtained by multiplying the amount paid per share for the shares delivered upon exercise of the Share Option (hereinafter referred to as the “Exercise Price”) by the Number of Granted Shares.
The Exercise Price shall be 930 yen
If any of the following events occurs on or after the Date of Allotment, the Exercise Price shall be adjusted as follows.
|
(i) |
|
For the share split or reverse split by the Company, the Exercise Price shall be adjusted in accordance with the formula stated below and fractional yen resulting from the adjustment shall be rounded up to the nearest yen. |
Exercise Price after adjustment |
= |
Exercise Price before adjustment |
× |
1 |
ratio of share split or reverse split |
(ii) If the Company issues new shares at a price below the market price or dispose of the treasury stock, the Exercise Price shall be adjusted in accordance with the formula stated below and fractional yen resulting from the adjustment shall be rounded up to the nearest yen.
In the above formula, the “number of issued shares” means the total number of shares issued by the Company less the number of treasury stock in the possession of the Company. In case of the disposition of treasury stock, the “number of newly issued shares” shall read “number of treasury stock disposed of.”
(iii) In case of other inevitable situations which require the adjustment of the Exercise Price, the adjustment shall be made to a reasonable extent taking into account the conditions .
|
(5) |
|
Period during which the Share Options can be exercised |
From August 2, 2018 to August 1, 2021
|
(6) |
|
Conditions to exercise the Share Options |
|
(i) |
|
Person to whom the Share Options are allotted (hereinafter referred to as the “Share Option Holder”) must be either a director, statutory auditor, executive officer or employee of the Company or its subsidiary at the time of exercising the option, except if such person resigns due to expiry of term of office, retires by age limit or terminates employment due to a company’s reason or if otherwise justified by the board of directors. |
|
(ii) |
|
No Share Option shall be inherited. |
|
(iii) |
|
No fractional Share Option shall be exercised. |
|
(iv) |
|
All other conditions shall be as set forth in the “Agreement for Share Options Allotment” to be entered into between the Company and the Share Option Holder pursuant to the relevant resolution of the board meeting. |
|
(7) |
|
Reason and conditions for acquisition of the Share Options |
In the event that a proposal to approve a merger agreement where the Company is to be extinguished is approved at the shareholders’ meeting of the Company or that a proposal to approve either a stock swap agreement or a stock transfer plan where the Company is to be wholly owned is approved at the shareholders’ meeting of the Company (or, if a resolution of the shareholders’ meeting is not required, is resolved by the board meeting of the Company), the Company may acquire the Share Options at free on the day separately designated by the board of directors.
|
(8) |
|
Restriction on acquisition of the Share Options by assignment |
Acquisition of the Share Options by assignment shall require an approval of the board of directors of the Company.
|
(9) |
|
Conditions for the capital and capital reserve increase by issuance of shares upon exercise of the Share Options |
|
(i) |
|
Amount of capital increase when the shares are issued upon exercise of the Share Options shall be one half of the maximum capital increase calculated in accordance with paragraph 1, Article 17 of the Ordinance on Company Accounting and fractional yen resulting from the calculation shall be rounded up to the nearest yen. |
|
(ii) |
|
Amount of capital reserve increase when the shares are issued upon exercise of the Share Options shall be the |
maximum capital increase referred to in the item (i) above less the amount of capital increase obtained under the item (i) above. |
|
(10) |
|
Handling of the Share Options in case of corporate reorganization |
In the event of a merger (limited to the cases where the Company is to be extinguished), absorption-type company split or incorporation-type company split (limited to the cases where the Company is to be split), or stock swap or stock transfer (limited to the cases where the Company is to be a wholly-owned subsidiary) (hereinafter collectively referred to as the “Corporate Reorganization”), the Company shall deliver the share options of a stock company prescribed in Section 236.1.8 (a) to (e) of the Companies Act of Japan (hereinafter referred to as the “Reorganized Company”) to the Share Option Holder who has the Share Options remaining (hereinafter referred to as the “Remaining Share Options”) immediately prior to the day when the Corporate Reorganization comes into effect (that is, for a absorption-type merger, the day when the absorption-type merger comes into effect; for a consolidation-type merger, the day when a stock company is incorporated through consolidation; for an absorption-type company split, the day when the absorption-type company split comes into effect; for an incorporation-type company split, a stock company is incorporated from the incorporation-type company split; for a stock swap, the day when the stock swap comes into effect; and for a stock transfer, the day when a wholly owning parent company incorporated through stock transfer, and these being applicable hereinafter, as well). In this case, the Remaining Share Options shall be extinguished and the Reorganized Company shall newly issue the share options, provided that the absorption-type merger agreement, consolidation-type merger agreement, absorption-type company split agreement, incorporation-type company split plan, stock swap agreement or stock transfer plan shall contain the statement that the Reorganized Company will deliver the share options in accordance with the following provisions.
|
(i) |
|
Number of share options of the Reorganized Company to be delivered
|
|
(ii) |
|
Type of stock of the Reorganized Company covered by the share options
|
|
(iii) |
|
Number of shares of the Reorganized Company covered by the share options
|
|
(iv) |
|
Manner of calculation of the value of assets contributed to exercise the share options
|
|
(v) |
|
Period during which the share options can be exercised
|
|
(vi) |
|
Conditions for the capital and capital reserve increase by issuance of shares upon exercise of the share options
|
|
(vii) |
|
Restriction on acquisition of the share options by assignment
|
|
(viii) |
|
Reason and conditions for acquisition of the share options
|
|
(11) |
|
Fractional share delivered upon exercise of the Share Options
|
|
(12) |
|
Date of Allotment |
August 1, 2015 (Saturday)
Article 2 (Special Provisions for Exercise of Option)
|
1. |
|
Notwithstanding the provisions of paragraph (8) of Article 1, the Subscriber shall not assign, or place the security right on, the Share Options. |
|
2. |
|
If the Subscriber falls under any of the situations stated below, the Subscriber and its successor shall not exercise the Share Options and loses them. |
|
(1) |
|
A petition is filed by third party against the Subscriber for the attachment, provisional attachment, provisional disposition or auction or the commencement of procedures of bankruptcy or civil rehabilitation. |
|
(2) |
|
A petition is filed by the Subscriber itself for the commencement of procedures of bankruptcy or civil rehabilitation. |
|
(3) |
|
There are other reasons that objectively show a significant worsening financial status of the Subscriber. |
|
(4) |
|
The Subscriber is sentenced to imprisonment without work or a heavier punishment. |
|
(5) |
|
The Subscriber who is an employee of the Company or its subsidiary is punished under the office rules of the Company or its subsidiary as disciplinary dismissal or retirement under instruction. |
|
3. |
|
The Company shall deliver the shares against exercise of option by the Subscriber, including issuing new shares or transferring or assigning existing shares, without violation of the requirements for offering of the Share Options. |
Article 3 (Manner of Exercising the Option)
|
1. |
|
In exercising the Share Options, the Subscriber shall transfer the amount paid to the bank account designated by the Company and shall provide the Company with the application (claim) for exercise of the share options in a given form. |
|
2. |
|
To exercise the options in a manner set forth in the preceding paragraph, the Subscriber shall open an account in his name with the Financial Instruments Business Operator in a manner prescribed by the Company. |
|
3. |
|
Immediately after completion of the procedures for the Subscriber to exercise the Share Options, the Company shall take measures required for the entrustment of the entry or registration of the shares acquired by the Subscriber by exercising the Share Options in the account in name of the Subscriber opened with the Financial Instruments Business Operator under the preceding paragraph and the storage at a branch or an office of the Financial Instruments Business Operator or required for the Management Trust. |
|
4. |
|
If the tax exemption measures under Article 29-2 of the Act on Special Measures concerning Taxation are not applied to the exercise of the Share Options, the Subscriber shall pay the amount equal to the withholding income tax imposed on the economic profit from the acquisition of shares by exercising the Share Options together with the amount paid under the paragraph 1. |
Article 4 (Manner of Expressing Intention and Giving a Notice)
|
1. |
|
The Company shall express its intention or give a notice to the Subscriber by sending documents either by mail to the address of the Subscriber recorded in the Share Option Registry or by sending an e-mail to the address preliminarily notified by the Subscriber to the Company. |
|
2. |
|
Any change in any one of the following items must be notified by the Subscriber to the Company. |
|
(1) |
|
Name of the Subscriber |
|
(2) |
|
Address of the Subscriber |
|
(3) |
|
E-mail address for the purpose of the preceding paragraph |
|
3. |
|
If the Subscriber fails to notify as set forth in the preceding paragraph, the address recorded in the Share Option Registry shall be considered as the current address of the Share Option Holder. |
|
4. |
|
The notice set forth in the paragraph 1 shall be deemed to have arrived at the time when it would have ordinarily arrived. |
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5. |
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Provisions of the preceding paragraphs shall be applied to the resignation due to expiry of term of office, retirement by age limit or termination of employment by a company’s reason as provided in Article 1(6)(i) and other cases justified by the board of directors. |
Article 5 (Abandonment of Claim for Damages)
The Subscriber shall not hold the Company, its director or any other parties to whom the Company entrusted the business transactions liable for covering losses, adding profits, compensating damages, nor claim or pursue any responsibilities against the parties above in connection with this Agreement irrespective of reasons.
Article 6 (Right to Establish Bylaws)
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1. |
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The Company may establish, amend or abolish the “Bylaws to Agreement for Share Options Allotment” (hereinafter referred to as the “Bylaws”) to provide for the rules regarding the enforcement of this Agreement. |
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2. |
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The Company must promptly notify the Subscriber of the Bylaws which may be established, amended or abolished under the preceding paragraph. |
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3. |
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The Subscriber may request the Company to allow access to the Bylaws during its business hours and may copy the same at the Subscriber’s cost. |
Article 7 (Amendment to Agreement)
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1. |
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If any provision hereof proves to be incompliant with any provision of the Income Tax Act, Corporation Tax Act or other tax laws or becomes incompliant with the same due to revisions after execution of this Agreement, the Company may amend or abolish such provision by giving a notice to the Subscriber. This rule shall be applied if any provision hereof proves to be or becomes incompliant with the Companies Act, Financial Instruments and Exchange Act or other relevant laws. |
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2. |
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In addition to the preceding paragraph, the Company may make a proposal to the Subscriber to amend this Agreement if deemed necessary. |
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3. |
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If the Subscriber does not lodge any objection with the Company in writing stating due reasons within three (3) weeks after the proposal under the preceding paragraph, this Agreement shall be deemed to have been automatically amended as proposed by the Company. |
Article 8 (Taxation Process)
The Subscriber shall pay at his cost and responsibility the income tax and any other taxes and dues imposed as a result of the subscription and exercise of the Share Options and the sale of the Company’s shares acquired upon exercise thereof.
Article 9 (Handling of Issues Not Specified)
Handling of issues not specified in this Agreement or the Bylaws shall be faithfully negotiated by the Company and the Subscriber and, if the Subscriber does not agree to negotiate or no agreement is reached between both parties after negotiation, shall be determined by the Company.
Article 10 (Governing and Jurisdiction)
The Company and the Subscriber agree that the Japanese law shall govern this Agreement and any dispute hereunder shall
be submitted to the Tokyo District Court which has the exclusive jurisdiction for the first trial.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in two (2) copies with their respective names and seals and the Company and the Subscriber shall retain the original copies, respectively.
August 2, 2015 |
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Company: |
UBIC, Inc. |
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Masahiro Morimoto, CEO and Representative Director |
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2-12-23, Kounan, Minato Ward, Tokyo |
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Subscriber: |
(Address) |
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(Name) |
Exhibit 4.8
Agreement for Subscription for the Thirteenth Share Option Offering
This Agreement is made and entered into by and between UBIC, Inc. (hereinafter referred to as the “Company”) and ****** (hereinafter referred to as the “Subscriber”) with respect to the subscription for the eleventh share option offering.
Article 1 (Subscription for Share Options)
In accordance with the resolution of the twelfth annual shareholders’ meeting held on June 23, 2015 and the resolution of the board meeting held on June 21, 2016, the Company has determined the following requirements for the eleventh share option offering (hereinafter referred to as the “Share Options”), of which the Subscriber subscribes for *** options. Since this Agreement shall be made integrally at the same time with other subscribers in accordance with Article 244 of the Companies Act of Japan, the Subscriber shall subscribe for the Share Options simultaneously with the other subscribers collectively for the total number of Share Options.
Description
Requirements for the offering of Share Options
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(1) |
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Class and number of shares covered by the Share Options |
140,000 Class A common shares, which, in case of adjustment set forth below, shall be revised to the number of granted shares after adjustment multiplied by the total number of Share Options.
Number of shares covered by one (1) Share Option (hereinafter referred to as the “Number of Granted Shares”) shall be 100 class A common shares. In the event of a stock split (including a gratis allotment of common stock and this being applicable hereinafter, as well) or a reverse split by the Company after the day when the Share Options are allotted (hereinafter referred to as the “Date of Allotment”), the following formula shall be used to adjust the Number of Granted Shares covered by the Share Options that have not been exercised at the time of adjustment. Fractional share resulting from adjustment shall be discarded.
Number of Granted Shares after adjustment = Number of Granted Shares before adjustment × ratio of split or reverse split
Any adjustment of the Number of Granted Shares which may be required in other situations shall be made to a reasonable extent.
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(2) |
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Total number of Share Options |
1,400
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(3) |
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Amount payable in exchange of the Share Options |
No payment is required in exchange of the Share Options
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(4) |
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Manner of calculating the value of assets contributed in exercising the Share Options |
118,100 yen for one (1) Share Option
Value of assets contributed in exercising one (1) Share Option shall be obtained by multiplying the amount paid per share for the shares delivered upon exercise of the Share Option (hereinafter referred to as the “Exercise Price”) by the Number of Granted Shares.
The Exercise Price shall be 1,181 yen
If any of the following events occurs on or after the Date of Allotment, the Exercise Price shall be adjusted as follows.
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(i) |
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For the share split or reverse split by the Company, the Exercise Price shall be adjusted in accordance with the formula stated below and fractional yen resulting from the adjustment shall be rounded up to the nearest yen. |
Exercise Price after adjustment |
= |
Exercise Price before adjustment |
× |
1 |
ratio of share split or reverse split |
(ii) If the Company issues new shares at a price below the market price or dispose of the treasury stock, the Exercise Price shall be adjusted in accordance with the formula stated below and fractional yen resulting from the adjustment shall be rounded up to the nearest yen.
In the above formula, the “number of issued shares” means the total number of shares issued by the Company less the number of treasury stock in the possession of the Company. In case of the disposition of treasury stock, the “number of newly issued shares” shall read “number of treasury stock disposed of.”
(iii) In case of other inevitable situations which require the adjustment of the Exercise Price, the adjustment shall be made to a reasonable extent taking into account the conditions.
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(5) |
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Period during which the Share Options can be exercised |
From June 23, 2019 to June 22, 2022
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(6) |
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Conditions to exercise the Share Options |
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(i) |
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Person to whom the Share Options are allotted (hereinafter referred to as the “Share Option Holder”) must be either a director, statutory auditor, executive officer or employee of the Company or its subsidiary at the time of exercising the option, except if such person resigns due to expiry of term of office, retires by age limit or terminates employment due to a company’s reason or if otherwise justified by the board of directors. |
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(ii) |
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No Share Option shall be inherited. |
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(iii) |
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No fractional Share Option shall be exercised. |
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(iv) |
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All other conditions shall be as set forth in the “Agreement for Share Options Allotment” to be entered into between the Company and the Share Option Holder pursuant to the relevant resolution of the board meeting. |
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(7) |
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Reason and conditions for acquisition of the Share Options |
In the event that a proposal to approve a merger agreement where the Company is to be extinguished is approved at the shareholders’ meeting of the Company or that a proposal to approve either a stock swap agreement or a stock transfer plan where the Company is to be wholly owned is approved at the shareholders’ meeting of the Company (or, if a resolution of the shareholders’ meeting is not required, is resolved by the board meeting of the Company), the Company may acquire the Share Options at free on the day separately designated by the board of directors.
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(8) |
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Restriction on acquisition of the Share Options by assignment |
Acquisition of the Share Options by assignment shall require an approval of the board of directors of the Company.
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(9) |
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Conditions for the capital and capital reserve increase by issuance of shares upon exercise of the Share Options |
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(i) |
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Amount of capital increase when the shares are issued upon exercise of the Share Options shall be one half of the maximum capital increase calculated in accordance with paragraph 1, Article 17 of the Ordinance on Company Accounting and fractional yen resulting from the calculation shall be rounded up to the nearest yen. |
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(ii) |
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Amount of capital reserve increase when the shares are issued upon exercise of the Share Options shall be the maximum capital increase referred to in the item (i) above less the amount of capital increase obtained under the item (i) above. |
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(10) |
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Handling of the Share Options in case of corporate reorganization |
In the event of a merger (limited to the cases where the Company is to be extinguished), absorption-type company split or incorporation-type company split (limited to the cases where the Company is to be split), or stock swap or stock transfer (limited to the cases where the Company is to be a wholly-owned subsidiary) (hereinafter collectively referred to as the “Corporate Reorganization”), the Company shall deliver the share options of a stock company prescribed in Section 236.1.8 (a) to (e) of the Companies Act of Japan (hereinafter referred to as the “Reorganized Company”) to the Share Option Holder who has the Share Options remaining (hereinafter referred to as the “Remaining Share Options”) immediately prior to the day when the Corporate Reorganization comes into effect (that is, for a absorption-type merger, the day when the absorption-type merger comes into effect; for a consolidation-type merger, the day when a stock company is incorporated through consolidation; for an absorption-type company split, the day when the absorption-type company split comes into effect; for an incorporation-type company split, a stock company is incorporated from the incorporation-type company split; for a stock swap, the day when the stock swap comes into effect; and for a stock transfer, the day when a wholly owning parent company incorporated through stock transfer, and these being applicable hereinafter, as well). In this case, the Remaining Share Options shall be extinguished and the Reorganized Company shall newly issue the share options, provided that the absorption-type merger agreement, consolidation-type merger agreement, absorption-type company split agreement, incorporation-type company split plan, stock swap agreement or stock transfer plan shall contain the statement that the Reorganized Company will deliver the share options in accordance with the following provisions.
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(i) |
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Number of share options of the Reorganized Company to be delivered
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(ii) |
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Type of stock of the Reorganized Company covered by the share options
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(iii) |
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Number of shares of the Reorganized Company covered by the share options
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(iv) |
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Manner of calculation of the value of assets contributed to exercise the share options
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(v) |
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Period during which the share options can be exercised
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(vi) |
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Conditions for the capital and capital reserve increase by issuance of shares upon exercise of the share options
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(vii) |
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Restriction on acquisition of the share options by assignment
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(viii) |
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Reason and conditions for acquisition of the share options
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(11) |
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Fractional share delivered upon exercise of the Share Options
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(12) |
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Date of Allotment |
June 22, 2016
Article 2 (Special Provisions for Exercise of Option)
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1. |
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Notwithstanding the provisions of paragraph (8) of Article 1, the Subscriber shall not assign, or place the security right on, the Share Options. |
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2. |
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If the Subscriber falls under any of the situations stated below, the Subscriber and its successor shall not exercise the Share Options and loses them. |
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(1) |
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A petition is filed by third party against the Subscriber for the attachment, provisional attachment, provisional disposition or auction or the commencement of procedures of bankruptcy or civil rehabilitation. |
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(2) |
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A petition is filed by the Subscriber itself for the commencement of procedures of bankruptcy or civil rehabilitation. |
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(3) |
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There are other reasons that objectively show a significant worsening financial status of the Subscriber. |
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(4) |
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The Subscriber is sentenced to imprisonment without work or a heavier punishment. |
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(5) |
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The Subscriber who is an employee of the Company or its subsidiary is punished under the office rules of the Company or its subsidiary as disciplinary dismissal or retirement under instruction. |
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3. |
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The Company shall deliver the shares against exercise of option by the Subscriber, including issuing new shares or transferring or assigning existing shares, without violation of the requirements for offering of the Share Options. |
Article 3 (Manner of Exercising the Option)
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1. |
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In exercising the Share Options, the Subscriber shall transfer the amount paid to the bank account designated by the Company and shall provide the Company with the application (claim) for exercise of the share options in a given form. |
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2. |
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To exercise the options in a manner set forth in the preceding paragraph, the Subscriber shall open an account in his name with the Financial Instruments Business Operator in a manner prescribed by the Company. |
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3. |
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Immediately after completion of the procedures for the Subscriber to exercise the Share Options, the Company shall take measures required for the entrustment of the entry or registration of the shares acquired by the Subscriber by exercising the Share Options in the account in name of the Subscriber opened with the Financial Instruments Business Operator under the preceding paragraph and the storage at a branch or an office of the Financial Instruments Business Operator or required for the Management Trust. |
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4. |
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If the tax exemption measures under Article 29-2 of the Act on Special Measures concerning Taxation are not applied to the exercise of the Share Options, the Subscriber shall pay the amount equal to the withholding income tax imposed on the economic profit from the acquisition of shares by exercising the Share Options together with the amount paid under the paragraph 1. |
Article 4 (Manner of Expressing Intention and Giving a Notice)
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1. |
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The Company shall express its intention or give a notice to the Subscriber by sending documents either by mail to the address of the Subscriber recorded in the Share Option Registry or by sending an e-mail to the address preliminarily notified by the Subscriber to the Company. |
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2. |
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Any change in any one of the following items must be notified by the Subscriber to the Company. |
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(1) |
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Name of the Subscriber |
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(2) |
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Address of the Subscriber |
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(3) |
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E-mail address for the purpose of the preceding paragraph |
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3. |
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If the Subscriber fails to notify as set forth in the preceding paragraph, the address recorded in the Share Option Registry shall be considered as the current address of the Share Option Holder. |
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4. |
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The notice set forth in the paragraph 1 shall be deemed to have arrived at the time when it would have ordinarily arrived. |
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5. |
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Provisions of the preceding paragraphs shall be applied to the resignation due to expiry of term of office, retirement by age limit or termination of employment by a company’s reason as provided in Article 1(6)(i) and other cases justified by the board of directors. |
Article 5 (Abandonment of Claim for Damages)
The Subscriber shall not hold the Company, its director or any other parties to whom the Company entrusted the business transactions liable for covering losses, adding profits, compensating damages, nor claim or pursue any responsibilities against the parties above in connection with this Agreement irrespective of reasons.
Article 6 (Right to Establish Bylaws)
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1. |
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The Company may establish, amend or abolish the “Bylaws to Agreement for Share Options Allotment” (hereinafter referred to as the “Bylaws”) to provide for the rules regarding the enforcement of this Agreement. |
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2. |
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The Company must promptly notify the Subscriber of the Bylaws which may be established, amended or abolished under the preceding paragraph. |
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3. |
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The Subscriber may request the Company to allow access to the Bylaws during its business hours and may copy the same at the Subscriber’s cost. |
Article 7 (Amendment to Agreement)
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1. |
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If any provision hereof proves to be incompliant with any provision of the Income Tax Act, Corporation Tax Act or other tax laws or becomes incompliant with the same due to revisions after execution of this Agreement, the Company may amend or abolish such provision by giving a notice to the Subscriber. This rule shall be applied if any provision hereof proves to be or becomes incompliant with the Companies Act, Financial Instruments and Exchange Act or other relevant laws. |
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2. |
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In addition to the preceding paragraph, the Company may make a proposal to the Subscriber to amend this Agreement if deemed necessary. |
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3. |
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If the Subscriber does not lodge any objection with the Company in writing stating due reasons within three (3) weeks after the proposal under the preceding paragraph, this Agreement shall be deemed to have been automatically amended as proposed by the Company. |
Article 8 (Taxation Process)
The Subscriber shall pay at his cost and responsibility the income tax and any other taxes and dues imposed as a result of the subscription and exercise of the Share Options and the sale of the Company’s shares acquired upon exercise thereof.
Article 9 (Handling of Issues Not Specified)
Handling of issues not specified in this Agreement or the Bylaws shall be faithfully negotiated by the Company and the Subscriber and, if the Subscriber does not agree to negotiate or no agreement is reached between both parties after negotiation, shall be determined by the Company.
Article 10 (Governing and Jurisdiction)
The Company and the Subscriber agree that the Japanese law shall govern this Agreement and any dispute hereunder shall be submitted to the Tokyo District Court which has the exclusive jurisdiction for the first trial.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in two (2) copies with their respective names and seals and the Company and the Subscriber shall retain the original copies, respectively.
June 22, 2016
Company: UBIC, Inc.
Masahiro Morimoto, CEO and Representative Director
2-12-23, Kounan, Minato Ward, Tokyo
Subscriber: (Address)
(Name)
Subsidiaries of FRONTEO, Inc.
Payment Card Forensics, Inc.
FRONTEO Healthcare, Inc.
FRONTEO Communications, Inc.
FRONTEO USA, Inc.
FRONTEO Korea, Inc.
FRONTEO Taiwan, Inc.
COMPLIANCE MANUAL
Compliance Manual
Version 1.4
Came in to force on August 1, 2008
First revision on March 26, 2009
Second revision on July 23, 2009
Third revision on February 26, 2015
UBIC, Inc.
Contents
Introduction ---------------------------- (2)
I. Purpose and basic stance ---------------------------- (4)
(1) Positioning of compliance manual and our frame of mind
(2) Conscience-based ethical decisions
(3) Our mission
(4) Management system pertaining to compliance
1. Communication system
2. Procedure at the time of occurrence of problem
II. Fundamental Principles ---------------------------- (7)
III. Compliance Provisions ---------------------------- (8)
(1) Our code of conduct towards clients ---------------------------- (8)
1. Confidentiality obligation
2. Obligation of explanation and principle of suitability
3. Prohibition of providing a conclusive judgment
4. Sincere attitude
5. Exclusion of relationship with client
6. Elimination of business transactions based on personal considerations
(2) Our code of conduct towards business partners or institutions other than the client ---------------------------- (9)
1. Fair selection of business partners
2. Prohibition of requests for making rebates
3. Prohibition of excessive gifts and business entertainment
4. Follow-up actions
5. Handling the offers of other facilities
6. Healthy relationship with government officials
(3) Our code of conduct towards ---------------------------- (10)
1. Disclosure
2. Accurate records
3. Emphasis on internal audit
4. Communication with investors
(4) Our code of conduct towards society ---------------------------- (10)
1. Compliance with related laws
2. Compliance with Antitrust Law
3. Compliance with insider trading regulations
4. Compliance with tax law
5. Respect for intellectual property rights
6. Confronting antisocial forces
7. Reporting to the concerned authorities and cooperation for investigations
(5) Our code of conduct for better corporate culture ---------------------------- (11)
1. Prohibition of discrimination
2
2. Prohibition of sexual harassment
3. Protection of personal information
4. Elimination of non-transparent practices
5. Prohibition of power harassment
(6) Code of conduct as a part of organization ---------------------------- (12)
1. Adherence to internal rules
2. Prohibition of acts conflicting with interests
3. Respect for company’s property
4. Precautions concerning use of information systems
5. Fair treatment of expenses
6. Handling non-public information
7. Awareness about daily management of information
8. Participation in political campaigns
9. External affairs
IV. Pledge ---------------------------- (14)
3
Introduction
Compliance Manual released herewith describes the basic principles that must be followed by all corporate executives and employees of UBIC Inc. and its operating subsidiaries (hereinafter called “UBIC Group”) without any exceptions. Our aim is to establish a fair and appropriate management and fulfill social responsibilities entrusted on to this business.
Hereby, along with the preparation and publication of UBIC Group's compliance manual, we take an oath that we will strive to create more enriched ethical organization culture and we will sincerely and wholeheartedly abide by this manual and laws and rules relevant to our business, irrespective of whether it is a management executive or ordinary employee and irrespective of one's position or job content.
In addition, with the prior approval of the headquarters of UBIC Inc., operating subsidiaries of UBIC Inc. can make partial changes to this compliance manual to accommodate and comply with local laws, rules and regulations and business practices of various countries and regions. However, under no circumstances they can lay down details contrary to this compliance manual.
Masahiro Morimoto, President
UBIC, Inc.
4
I. Purpose and basic stance
(1) Positioning of compliance manual and our frame of mind
This compliance manual summarizes the matters requiring attention regarding the issues which are especially considered important during the course of executing the business of UBIC Group. However, this does not encompass everything. It only represents the basic thought process.
Important thing is that incase of any doubts about business customs or procedures, we must voice them out. For example, whenever we encounter any problem, we must not turn a blind eye on it. We get carried away in our daily busy routines and tend to forget to take up the question itself. However, it is important to always give a second thought to what we are doing, what we have done so far and what we are going to do now onwards from the compliance point of view.
Attitude of leaving things on others such as “I have nothing to do with this, perhaps someone else will resolve it”, or irresponsible attitude such as “Since business is not a mere lip service, it is OK to do the way everyone is doing” may harm the company, but they will certainly not help the company. Does not creating a workplace which we all value and where we can work with pride essentially means that we gather courage and strive to abide by ethics and laws?
We emphasis that the criterion of judgment of compliance with ethics; finally lies in our own conscience and noble character. No matter how much detailed compliance manual we prepare or how many legal documents we distribute, it is not possible to encompass everything or understand everything.
In this age of internationalization and computerization where rules and regulations are increasingly getting relaxed, and where business needs to be speedy, the most important thing is courage and compliance, and attitude of each person based on the spirit of compliance manual. Therefore, it is important to set conscience-based ethical decisions as the foundation of business.
(2) Conscience-based ethical decisions
"Conscience-based ethical decisions" refers to detaching one's personal interests, or company or business interests and question the appropriateness of the act performed by oneself from a standpoint of a fair third party. If that particular act is approved without criticisms from anybody's standards, there may not be any issues in performing that act.
However, when the situation is extremely complex and it is difficult to make decision, make sure to discuss with immediate superior personnel or concerned division without hesitation. Moreover, when the particular action as a company is deviating or appears to be deviating from law, articles of incorporation, compliance manual etc., immediately report the situation. Since privacy of everyone will be protected, please use this without any worries.
If some kind of retaliation is likely against such consultation or reporting, we will investigate the situation and promptly correct it. Therefore, in case of any problem, please gather courage and voice it out. This is the best method for creating friendly workplace and winning the trust of society and markets.
(3) Our mission
Our mission is only. Contribute to the development of society through our work by creating fair workplace and health business relationships. Our mission is to enrich the society on the basis of fair business.
5
(4) Management system pertaining to compliance
(1) Responsibility
1. The management divisions of UBIC Japan is responsible for the compliance at UBIC group.
And head of the management divisions of UBIC Japan is in charge of the compliance.
(2) Communication system
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1. |
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Although the reporting and consultation regarding compliance will be disclosed, details of the person reporting the same will be kept strictly confidential. However, reporting to external point of contact can be done anonymously. |
Company ensures that the person reporting will not be treated with prejudice or in adverse manner based on the reason that he performed an act of reporting or consultation.
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2. |
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Apart from reporting and consulting through hierarchy, we call also report and consult through internal and external point of contacts, internal audit division of UBIC group or Administration division (hereafter called Internal Audit Division or Administration Division). |
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3. |
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Internal Audit Division and Administration Division will feedback the treatment of matters reported or consulted to the personnel who had reported the same. |
(3) Procedure at the time of occurrence of problems
Following steps shall be taken when compliance related problems have occurred.
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1. When we come to know about a situation which is questionable from compliance point of view, we will immediately report it through our superior or directly to the Internal Audit Division or Administration Division . |
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2. Based on the nature of the problem, Internal Audit Division or Administration Division shall ask the concerned division to investigate and resolve the problem as appropriate. |
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3. Internal Audit Division or Administration Division will report about the problem to President. |
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4. Regarding the problem that needs to be resolved from company wide standpoint, attempts to shed light on the truth shall be made by promptly forming an investigation committee under Internal Audit Division or Administration Division shall make recommendations to the management committee for stipulating the measures including measures to prevent reoccurrence of the problem. Also, important matters shall be reported to the board meeting for the approval of board. |
Based on decision making authority and employment regulations, measures including punitive dismissal will be taken for violating acts.
Apart from the above, as per the internal reporting regulations, we can also report to or consult with the following external point of contact or compliance desk.
- External point of contact and consult - Idesawa & Partners
Kakimi Kojimachi Building Annex 5F,
3-2-5 Kojimachi, Chiyoda-ku, Tokyo 102-0083, Japan.
TEL: 03-5215-2293
6
E-mail: hl-ubic@idesawalaw.gr.jp
-Point of contact of UBIC Group (Compliance desk) - Internal Audit Division,UBIC Inc.
Meisan Takahama Building 7F,
2-12-23 Kounan, Minato-ku, Tokyo 108-0075, Japan.
TEL: 03-5463-6390
E-mail : ubiccomp@ubic.co.jp
7
II. Basic principles
(1) We will recognize the social responsibility and public mission of this business, and carry out robust business operations.
(2) Not only the provisions of law, we will also abide by the spirit of law.
(3) We will conduct fair and transparent business based on the principle of self-responsibility.
(4) We will place top most priority on safety and satisfaction of clients, and sincerely provide products and services at fair prices.
(5) We will respect the individuality of all the persons concerned, and contribute to robust development of social economy.
(6) In this age of globalization, we will respect different culturual tradiations and customs.
(7) In case of conflict between profits and ethics, we will select ethics without question.
(8) We will take a firm stance against antisocial forces.
(9) We will strive to leave behind an abudant and a fair sociefy for future generations.
(10) When we have encountered a difficult ethical issue, we will aggressively implement resolution measures that will satisfy everyone.
III. Compliance provisions
(1) Our code of conduct towards clients
“Profits of the company” is not meant to rationalize the act of increasing profits by unfair means. We shall adhere to laws and their spirits, and conduct fair and transparent business with all the clients based on the principle of self-responsibility. This is because we firmly believe that this finally leads to the profits of the company.
1. (Confidentiality obligations)
Our most fundamental rule is to preserve the confidentiality of clients. We must not leak the information obtained through our dealings with the clients to other parties without the consent of the concerned person or without valid reasons such as when the disclosure is required by the law.
2. (Obligation of explanation and principle of suitability)
UBIC Group has in its possession a lot of information concerning products and services. This means that in business dealing, we are in a favorable position than the client. Therefore, when offering the products or services, we must explain the outline of such products or services and risks in such a way that the other party can understand. Moreover, we must not recommend such products or services when they are found unsuitable for the client based on the status of knowledge, experience, assets etc of the client. Although it is needless to say, it is necessary to avoid misrepresentation and excessive advertising that may leave misleading impression on the client.
3. (Prohibition of providing a conclusive judgment)
When selling products and services with inherent risks, we must not persuade by make conclusive judgments. Regarding persuasion, explanation should be based on logical material to the extent possible, and adequate care should be taken to ensure that it does not lead client to misunderstanding.
4. (Sincere attitude)
As a part of our work, we consult our clients on various matters; however, we shall not give irresponsible replies to any form of consultation whatsoever. In case of a complaint from client, we shall investigate the situation faithfully and handle is sincerely from client’s position.
5. (Exclusion of relationship with client)
Whatever may be the act, we shall not comply with the requests that will create ambiguity between the differences related to the position of the client and the company. Client focus does not mean that we will accommodate any request from a specific client.
6. (Elimination of business transactions based on personal considerations)
When entering into a client relationship with a friend or someone known to us, or someone who is personally related to us in some way or the other, we shall report to direct superior or Head of Administration Division for necessary instructions. Reason is, our target is to become a company which “always conducts fair business” from everyone’s point of view.
8
(2) Our code of conduct towards business partners or institutions other than the clients
In order to conduct fair business transactions, we shall maintain fair and transparent relationship with vendors, audit agencies, other work related organizations and personnel.
1. (Fair selection of business partners)
We shall select the business partners based on comprehensive evaluation including quality, service contents, price, past performance, trustworthiness etc. Therefore, we shall not receive money, goods or business entertainment from direct business partners such as vendors. Reason is, this may distort our appropriate business decisions. Even if it does not distort, it may make a third party suspicious about non-transparent and unfair relationship.
2. (Prohibition of making requests for rebate)
Using our position, we shall not ask our business partners directly or even indirectly for money, goods or business entertainment. Such acts are in violation of law and they also damage trust-based business relationship. Also, even acts which might be considered within the permissible range may be unnatural from the viewpoint of a third party, and therefore we shall refrain from such acts. Whenever, we feel that our act may create misunderstanding, we shall refrain from it.
3. (Prohibition of excessive gifts and business entertainment)
We shall avoid gifts and business entertainment that may beyond a reasonable range, even in the cases where there is no direct business relationship. Reason is, it may adversely affect our decision making in some way or the other in future. When we have run into a situation which is problematic or which may be considered problematic, we shall report such situation to our superior or Head of Administration Division for further instructions.
4. (Follow-up actions)
In an inevitable situation, where we have received gifts or business entertainment that conflict with regulations of the company, we shall inform and discuss with our superior or Head of Administration Division and take appropriate measures. Appropriate measures could be, returning such gifts along with a polite refusal letter at the company’s expense, returning items of equivalent amount at the company’s expense, detaching the personnel who have received such gifts etc. from the dealings with that business partner for a certain period of time.
5. (Handling the offers of other facilities)
During the relationship with business partners, not only money, goods and business entertainment, offers of other facilities may also come up. For example, the other party may discuss about changing jobs or employment after retirement, offer to employ friends or relatives, or offer real estate at favorable prices. When confronted with this kind of situation, we shall promptly report the situation to immediate superior for further instructions.
6. (Healthy relationship with government officials)
We shall ensure that we maintain healthy relationship with government officials and deemed government officials. For example, payment for business entertainment can be made at the responsibility of Section Manager as long as it is within reasonable range, however, if expenses exceed it, approval of the Division Head is required. Also, even for common business entertainment, if it may appear to be unnatural from the standpoint of position
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or title of the concerned government official, then we shall refrain from it.
(3) Our code of conduct towards investors
We conduct business using precious capital received from shareholders and creditors. Therefore, we are responsible to conduct the business safely and efficiently and we are also responsible for accurately explaining the details of business to investors. In order to fulfill these responsibilities, we take measures such as accurate financial reporting, thoroughly conducting internal audits and active disclosures.
1. (Disclosure)
We shall accurately inform the details of business and important information required for the judgment by investors. It is necessary to disclose most of this information in a form, which can be easily understood by the investors. For example, in case of several extraordinary losses, it is necessary to clearly mention segments under each item.
2. (Accurate records)
Precondition to disclosure is accurate records. Every piece of information related to the business shall be recorded correctly as per laws and rules. We shall pay sufficient attention to ensure that there are no false records or mistakes in every price of internal document, and such documents are preserved for stipulated time period.
3. (Emphasis on internal audit)
In order to protect the interests of investors, UBIC Group has prepared an internal audit system that checks the desirable state of business from a neutral standpoint. When this audit system appears to be losing its substance, immediately report to the concerned division.
4. (Communication with investors)
We shall convey to the investors that “We will select ethics in case of conflict between profits and ethics" as it finally results in profit for the company. We will actually be able to create compliance system only after obtaining the understanding of investors.
(4) Our code of conduct towards the society
Apart from clients and business partners, we have legal, social and ethical responsibilities towards numerous interested parties. In that, our minimum responsibility towards society is to abide by laws and rules based on social agreement.
1. (Compliance with related laws)
We shall correctly understand the laws and guidelines related to our business and abide by them.
2. (Compliance with antitrust law)
During the course of business, we shall not interact with and conclude and arrangement with our competitors. Moreover, we shall also refrain from language and behavior that may create such suspicions. Also, acts that may lead to misuse of dominant bargaining position or excessive interference in appointment of executive officers shall not be allowed. There is a high possibility that such acts may be in violation of Antitrust Law.
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3. (Compliance with insider trading regulations)
With reading to handling of important information, we will thoroughly understand the provisions of insider trading regulations and strictly abide by them with reference to “Insider Trading Prevention Rules” stipulated separately. When the company personnel have learnt about important non-public matters of other company during the course of work, irrespective of the position of the personnel, he shall not purchase or sell the shares of that company. Moreover, when he has learnt about important matters of the company, he shall not sell or purchase the shares of the company or its competitors. In addition, giving a tip to other person based on such information will also become a problem.
4. (Compliance with tax law)
We will fulfill our legal obligation to pay taxes in accordance with the relevant laws. Corporate executives and employees concerned with this shall perform the necessary office work for fulfilling this obligation sincerely. We shall not perform any act whatsoever that might be called tax evasion.
5. (Respect for intellectual property rights)
We shall respect the intellectual property rights such as copyrights etc. of other persons. Especially, we shall not illegally copy computer software or published items. It is necessary to check copyright related provisions when downloading the information available on the internet.
6. (Confronting antisocial forces)
We shall take a firm stance against anti-social forces. Moreover, it is necessary to eliminate all the relationships that may be suspected as non-transparent ties or alliance. If we have unintentionally entered into any sort of relationship with such groups or personnel, we shall promptly report the situation to concerned division for further instructions.
7. (Reporting to the concerned authorities and cooperation for investigations)
If socially-prohibited issues such as acts of violation of law have been originated at UBIC Group or in case of such suspicions, UBIC Group shall report to concerned authorities and fully cooperate with investigations. Each one of us shall be careful to act responsibly in accordance with the basic stance of UBIC Group.
( 5) Our code of conduct for better corporate culture
Maintenance of compliance is precondition for fine corporate culture. Let each one of us strive to create better corporate culture.
1. (Non-discrimination)
Regarding recruitment or appraisal, we shall conduct fair evaluation based on the job content or performance of each person. Moreover, whatever the case may be, we shall not discriminate based on gender, ethnicity, nationality, religion, beliefs, physical identity or any other personal characteristics. Even when it does not clearly fall under discrimination, we shall refrain from language and behavior that may put someone at discomfort. Tongue-in-cheek using physical peculiarities of a person conflicts with UBIC Group’s purpose of creating a motivating workplace.
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2. (Prohibition of sexual harassment)
UBIC Group strives to create appropriate workplace in accordance with Labor Law and other related laws. Therefore, whatever the case may be, insisting on sexual relationship using one’s status or position shall not be permissible. Moreover, repetitive tongue-in-cheek that may be disliked by the opposite sex, and other acts that adversely affect the environment of workplace are prohibited.
3. (Protection of personal information)
Personal information of our clients (including a corporation) that is in possession of the company shall be strictly managed in accordance with “Personal Information Protection Policy of Detailed Regulations Concerned Management of Information Assets”, and shall not be used except intended purpose. Moreover, such information shall not be disclosed to outside without the consent of the person or unless there are valid reasons such as court order etc.
4. (Elimination of non-transparent practices)
UBIC Group does not allow giving of money or goods including mid-year and year-end gifts from a subordinate to his superior. Reason is, this may shake up the trust towards fairness in decision making for promotion or transfers. However, gifts within reasonable range are permissible on ceremonial occasions for the coming of age, marriage, funeral and ancestral worship.
5. (Prohibition of power harassment)
Whatever may be the case, language and behavior that damages the character and dignity of a person, or makes him suffer mental anguish or feel employment insecurity based on hierarchical relationship such as official authority are not permissible. Acts such as excessive follow-ups for mistakes of subordinate staff while suggesting dismissal or reallocation, excessive reprehensions in front of other employees, using offensive language denying someone's integrity as a human being are prohibited. Managerial staff shall assess the personality of subordinate staff and instruct appropriately.
(6) Code of conduct as a part of organization
We are responsible to act from the standpoint of “Profits of the Company”. Therefore, we must refrain from putting the company at a disadvantage for profits of oneself or third party and using the tangible and intangible properties of company for personal purpose.
1. (Adherence to internal rules)
We will abide by the provisions stipulated in company rules, and execute our duties in fair manner in accordance with internal rules and regulations. Activities of business decisions and implementing such decisions must not conflict with the internal rules, and whether they correspond to benefit of the company must also be considered.
2. (Prohibition of acts of conflicts of interests)
We will act in such a way that it does not conflict with our interests or company’s interests. For example, pursuing personal interests using the business opportunities, personnel network, client list, credit information of client etc. acquired during the course of work is not allowed.
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3. (Respect for company’s property)
We shall clearly separate public and private matters and respect company's property. All the company property is loaned or provided to us for carrying out official duties. Needless to say about carrying home the fixtures and consumables of the company, we shall refrain from using the internet or email for nonofficial purpose.
4. (Precautions concerning use of information systems)
Regarding the use of internet, we must not leak any information that may be inappropriate, offensive or contempt other person, and access to such sites is also not allowed. UBIC Group becoming a source of spreading virus may results in loss of trust for UBIC Group, therefore it is essential to always keep anti-virus software on the computer updated as per the instructions of Information Systems/Information Security Division of the headquarters of UBIC Group.
5. (Fair treatment of expenses)
We shall accurately report travel expenses or entertainment expenses, total work hours, paid holidays etc. Moreover, in case of amount paid by the company for settlement of accounts is more or less than the correct amount, or in case of any questions, inquire with your immediate superior or concerned division.
6. (Handling non-public information)
We must keep the confidentiality of non-public information obtained during the course of work. Moreover, we must take adequate precautions so that this information is not leaked to outside due to negligence. For example, since is unsafe to send the confidential information through fax, in principle, please refrain from such acts.
7. (Awareness about daily management of information)
We shall strictly maintain confidentiality of client information, trade secrets and any other confidential whatsoever obtained during execution of official duties and must not leak it to outside. Especially, talking about personal or company matters with friends or colleagues, or at public places such as restaurant or in a car or train may result in leakage of information to outside. Moreover, even after retirement, confidential information obtained during tenure of office shall not be discussed with or disclosed to other person.
8. (Participation in political campaigns)
We shall participate in political campaigns etc. only as an individual. Participating in political campaigns using company name may cause misunderstanding that such opinions and activities are of the company.
9. (External affairs)
Disclosure of company information shall be made officially through public relations officer. In case of requests from external media organizations or analysts, if personal opinion is conveyed, it may be interpreted as the opinion of the company. Moreover, there is a possibility that the information that must be not conveyed is also disclosed. Therefore, whenever we encounter such situation, we shall contact our immediate superior staff member or public relations officer for further instructions.
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IV. Pledge
Society expects us to conduct business in a responsible manner. Instead of meeting this expectation, if we move in a wrong direction, not only UBIC Group, it will ruin the credibility of the entire industry. Therefore, as a part of UBIC Group and as a part of the industry, and also as a part of the society, we have double or even triple responsibility of conducting fair business.
We deeply recognize this and take an oath that we will practice the compliance and strive for robust development of the company’s business for creating motivating workplace.
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CERTIFICATION
I, Masahiro Morimoto, certify that:
1. I have reviewed this annual report on Form 20-F of FRONTEO, Inc. (the “registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
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(a) |
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Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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(b) |
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Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our 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; |
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(c) |
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Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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(d) |
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Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (and persons performing the equivalent function):
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(a) |
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All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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(b) |
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Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: August 15, 2016
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FRONTEO, INC. |
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By: |
/s/ Masahiro Morimoto |
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Name: |
Masahiro Morimoto |
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Title: |
Chief Executive Officer and Chairman of the Board |
CERTIFICATION
I, Shuichi Seo, certify that:
1. I have reviewed this annual report on Form 20-F of FRONTEO, Inc. (the “registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
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(a) |
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Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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(b) |
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Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our 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; |
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(c) |
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Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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(d) |
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Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (and persons performing the equivalent function):
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(a) |
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All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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(b) |
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Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: August 15, 2016
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FRONTEO, Inc. |
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By: |
/s/ Shuichi Seo |
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Name: |
Shuichi Seo |
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Title: |
Corporate Officer, Chief Financial Officer |
CERTIFICATION
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned officers of FRONTEO, Inc., a Japanese corporation (the “Company”), does hereby certify that, to such officer’s knowledge:
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1. |
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The accompanying Annual Report of the Company on Form 20-F for the period ended March 31, 2016 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
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2. |
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The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: August 15, 2016
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By: |
/S/ Masahiro Morimoto |
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Name: |
Masahiro Morimoto |
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Title: |
Chief Executive Officer and Chairman of the Board |
Date: August 15, 2016
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By: |
/S/ Shuichi Seo |
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Name: |
Shuichi SEo |
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Title: |
Corporate Officer, Chief Financial Officer |