(Translation) October 31, Notice Regarding MBO and Recommendation of Application

Transcription

1 (Translation) October 31, 2016 To Whom It May Concern: Company Name: Japan Digital Laboratory Co., Ltd. Name of Representative: Kazuo Maezawa, President and Representative Director Code No.: 6935 First Section of the Tokyo Stock Exchange Contact: Yuji Narimatsu, Director in charge of public relations (Tel: ) Notice Regarding MBO and Recommendation of Application Japan Digital Laboratory Co., Ltd. (the Company ) hereby announces that it resolved, at its board of directors meeting held on October 31, 2016, that it will express an opinion in support of a tender offer for its common stock (the Company Shares ) to be conducted by JDL Technical Inc. (the Tender Offeror ) as part of a management buyout (MBO) (Note)(the Tender Offer ), and recommend that the Company s shareholders apply for the Tender Offer, as detailed below. The resolution of the board of directors was adopted, subject to the conditions that the Tender Offeror intends to make the Company its wholly-owned subsidiary through the Tender Offer and a series of subsequent procedures, and that the Company Shares will be delisted. (Note) Management buyout (MBO) generally means a transaction in which management of the target company will acquire shares of the target company by contributing the whole or part of the funds for acquisition, subject to the continuity of the target company s business. 1. Overview of the Tender Offeror (1) Name JDL Technical Inc. (2) Location 2-3, Shinsuna 1-chome, Koto-ku, Tokyo (3) Name and Title of Kazuo Maezawa, Director Representative (4) Business Lines Non-life insurance agency business and asset management

2 business, etc. (5) Capital Stock 300 million yen (6) Date of Incorporation December 24, 1987 (7) Major Shareholders Kazuo Maezawa 100% and Ownership Ratio (8) Relationship between the Company and the Tender Offeror Capital Relationship The Tender Offeror holds 13,099,900 Company Shares (Shareholding Ratio (Note): 38.64%) as of today. Kazuo Maezawa, Director of the Tender Offeror ( Mr. Kazuo Maezawa ), holds 1,000,000 Company Shares (Shareholding Ratio: 2.95%). Personnel Relationship Mr. Kazuo Maezawa, President and Representative Director of the Company, concurrently serves as Director of the Tender Offeror. In addition, the Company has seconded its employees to the Tender Offeror. Business Relationship Not applicable. Whether to fall under the Related Parties The Tender Offeror is an other associated company of the Company, and falls under a related party. (Note) Shareholding Ratio means a ratio to the number of shares (33,905,016 shares) calculated by deducting the number of treasury shares owned by the Company as of September 30, 2016 (47,073 shares), as described in Summary of Financial Statements for the Second Quarter of the Fiscal Year Ending March 2017 [Japanese Standard] (Consolidated) published by the Company on October 31, 2016 (the Summary of the Company s Second Quarter Financial Statements ), from the total number of the issued shares of the Company as of September 30, 2016 (33,952,089 shares), as described in the Summary of the Company s Second Quarter Financial Statements, which ratio is rounded to two decimal places (the same shall apply hereinafter). 2. Tender Offer Price 2,420 yen per share of common stock (the Tender Offer Price ) 3. Details of, and Grounds and Reasons for, the Opinion Concerning the Tender Offer (1) Details of the Opinion The Company resolved, at its board of directors meeting held on October 31, 2016, that it will express an opinion in support of the Tender Offer and recommend that its shareholders apply for

3 the Tender Offer, based on the grounds and reasons as described in (2) Grounds and Reasons for the Opinion below. (2) Grounds and Reasons for the Opinion The descriptions of the Tender Offeror in this (2) Grounds and Reasons for the Opinion are based on the Tender Offeror s explanations. a. Overview of the Tender Offer The Tender Offeror was established as a limited company (yūgen kaisha) on December 24, 1987, whose main business lines are non-life insurance agency business and asset management business, etc. As of today, Mr. Kazuo Maezawa, President and Representative Director of the Company, owns all the issued shares of the Tender Offeror, and Mr. Kazuo Maezawa is the only director of the Tender Offeror. As of today, the Tender Offeror owns 13,099,900 shares (Shareholding Ratio: 38.64%) of the Company, which are listed on the First Section of Tokyo Stock Exchange, Inc. (the TSE ), and the Tender Offeror is the largest shareholder of the Company. The Tender Offeror has recently decided to conduct the Tender Offer as part of the transaction to privatize the Company Shares (the Transaction ) by acquiring all the Company Shares (except for the Company Shares owned by the Tender Offeror and the treasury shares owned by the Company). The Transaction is a management buyout (MBO), in which Mr. Kazuo Maezawa, Director of the Tender Offeror and President and Representative Director of the Company, will be involved as the Tender Offeror, and Mr. Kazuo Maezawa will continue to participate in the management of the Company after the Transaction. Prior to the Tender Offer, the Tender Offeror agreed with Mr. Kazuo Maezawa, the only director of the Tender Offeror, on October 31, 2016 that Mr. Kazuo Maezawa would tender all of the Company Shares owned by him (1,000,000 shares; Shareholding Ratio: 2.95%) in the Tender Offer. No conditions precedent for the tender are provided under such agreement. The Tender Offeror has set 10,902,600 shares (Shareholding Ratio: 32.16%) as the minimum number of shares to be purchased in the Tender Offer. If the total number of shares tendered in the Tender Offer does not reach the minimum number of shares to be purchased (10,902,600 shares), the Tender Offeror will not purchase any tendered shares. The minimum number of shares to be purchased, or 10,902,600 shares, is the number of the Company Shares (which is a majority of minority, or a majority of the total number of the Company Shares owned by the shareholders of the Company who do not have any

4 interest in the Tender Offeror) calculated as follows: (i) the number of treasury shares owned by the Company as of September 30, 2016 (47,073 shares), as described in the Summary of the Company s Second Quarter Financial Statements, the number of the Company Shares owned by the Tender Offeror (13,099,900 shares), and the number of the Company Shares owned by Mr. Kazuo Maezawa, who has agreed to apply for the Tender Offer (1,000,000 shares) were deducted from the total number of the issued shares of the Company as of September 30, 2016 (33,952,089 shares), as described in the Summary of the Company s Second Quarter Financial Statements; (ii) the number of shares calculated above (19,805,116 shares) was divided by two (2); (iii) the quotient was rounded up to a multiple of a whole unit (100 shares)(9,902,600 shares); and (iv) such multiple was added by the number of the Company Shares owned by Mr. Kazuo Maezawa, who has agreed to apply for the Tender Offer (1,000,000 shares). The total of the minimum number of shares to be purchased in the Tender Offer and the number of the Company Shares owned by the Tender Offeror (13,099,900 shares) is 24,002,500 shares (Shareholding Ratio: 70.79%). Meanwhile, as the Tender Offeror intends to privatize the Company Shares by acquiring all of the Company Shares (except for the Company Shares owned by the Tender Offeror and the treasury shares owned by the Company), the Tender Offeror has not set the maximum number of shares to be purchased in the Tender Offer. If the total number of shares tendered in the Tender Offer is not less than 10,902,600 shares, or the minimum number of shares to be purchased, the Tender Offeror will purchase all tendered shares. If the Tender Offeror fails to acquire all the Company Shares (except for the Company Shares owned by the Tender Offeror and the treasury shares owned by the Company) through the Tender Offer, the Tender Offeror will carry out a series of procedures after the completion of the Tender Offer so that the Tender Offeror will be the only shareholder of the Company (the Procedures to Make the Company a Wholly-owned Subsidiary ), as described in (5) Policy on Reorganization after the Tender Offer (Matters Concerning the Two-stage Acquisition ) below. b. Background Leading to the Decision to Conduct the Tender Offer, Purpose and Decision-making Process, and Management Policy after the Tender Offer The Tender Offeror was established as a limited company (yūgen kaisha) on December 24, 1987, whose main business lines are non-life insurance agency business and asset management business, etc., and it is the largest shareholder of the Company. As of today, Mr. Kazuo Maezawa, President and Representative Director of the Company, owns all issued shares of the Tender Offeror, and is the only director of the Tender Offeror.

5 Since its founding in 1968, the Company has been developing, manufacturing and selling professional computer systems that use a wealth of knowledge of the accounting field it has accumulated in nearly 50 years business. The Company specializes in and focuses on the business efficiency of certified public accountant firms, certified tax accountant offices and corporate accounting divisions, positioning the computer system business aimed at providing financial accounting solutions for accounting firms as its core business. In February 1991, the Company was listed on the Second Section of the TSE, and then transferred to the First Section of the TSE in September Besides the professional computer systems mentioned above, the Company has offered a wide product lineup in recent years as a manufacturer with high technological capabilities, such as personal computer systems that improve the usability of general-purpose computers and add new value to business operations, with the objective of becoming the top brand of accounting systems catering to all accounting needs. The Company continues to provide its self-developed products by thoroughly researching the accounting practice and system technology of certified public accountant firms and certified tax accountant offices ( accounting firms, etc. ) over many years, and developing hardware, software and web services as its integrated system using the technology accumulated through the research. Based on such self-developed system, the Company drew up its Cyber Accounting Firm Plan, a comprehensive management vision that makes full use of information technology in the business operation and management of accounting firms, etc., in October 2004, and since then has been promoting its implementation on a company-wide basis. Specifically, the plan proposes to provide high-value-added services and acquire new customers using time created by (i) employing the connected processing based on Net Accounting, which uses the Internet for accounting firms, etc. to receive and store data from their customers, and prepare and confirm the information on financial statements afterward, and (ii) improving the overall efficiency of the office workflow through the use of information technology and the cloud in the accounting practice. In addition to presenting the above-mentioned plan to realize higher productivity and smaller management costs of accounting firms, etc., the Company offers products and services in line with such plan. Meanwhile, with the increasing number of consolidations of accounting firms, etc., which are the Company s customer base, and the aging of experts at small and medium-sized accounting firms, etc., which are the Company s main customers, the number of accounting firms and certified tax accountant offices, which was 32,664 in 2006, was decreased to 31,556 in 2014 (source: Economic Census published by the Ministry of

6 Internal Affairs and Communications). In this market environment, the Company has employed a strategy putting emphasis on securing profits rather than increasing sales, and maintained a high profit ratio by focusing on the sale of high-value-added products. However, market competition is becoming more and more intense because of the shrinkage of the personal computer and other hardware market, and the market entry of emerging companies operating relatively inexpensive cloud-based service business in recent years. Under these circumstances, the Tender Offeror considers that the Company needs to be a step ahead in expanding its customer base from rival companies which have customer base of, and which offer accounting systems to, accounting firms, etc. as the Company does in order for the Company to maintain and increase sales and stabilize income and, to achieve that, it is vital to take new measures in terms of both the product mix and the personnel structure for services and development. Specifically, the Tender Offeror believes that it is urgently necessary to (i) further expand its product lineup and improve product functions for greater satisfaction (in the relationship with the Company s existing customers), (ii) strengthen the competitiveness of the functions of its products as moderately priced models, while keeping in mind a future transition to high-value-added products (in the relationship with new customers), and (iii) enhance its ability to deal with the widespread use of the cloud, among other things. To implement these measures efficiently, the Tender Offeror understands that it is necessary to promote the establishment and expansion of sales and service office networks, cultivation of new customers by increasing sales and support staff members, improvement of systems to tailor them to the needs of customers, and provision of advanced personnel training necessary to develop and create high-value-added products, and recognizes that it is vital to make a bold new investment for that purpose. As of today, the Company group is comprised of the Company and its consolidated subsidiary IBEX Airlines Co., Ltd. ( IBEX ), and IBEX operates its scheduled air transport business independently. In 1999, the Company took equity stake in IBEX (then The Fair Incorporated.), which was established to engage in the scheduled air transport business, and made IBEX its subsidiary in December Under the philosophy of Safety is always secured by people, IBEX concentrates on the scheduled air transport business operating small jets exclusively on regional routes where middle and large aircraft are unprofitable. In the fiscal year ended March 2016, IBEX recorded approximately 13.3 billion yen in sales and approximately 0.4 billion yen in operating

7 profit, accounting for around 40% of the sales and around 10% of the operating profit of the Company group. In recent years, competition in the air transport market has intensified due in part to the expansion of flight routes by major airlines and the new entry of low-cost carriers (LCCs). Under these market conditions, since April 2002, IBEX, as an alliance partner of All Nippon Airways Co., Ltd., which is one of the major airlines, has contributed to the development of the regional economy and the air transport industry as a whole, by accepting to operate part of the regular flight service on regional routes, and differentiating its air routes through the introduction of aircraft that match the needs of the regional economy that could head toward a downturn as a result of the flight route changes and withdrawal by existing airlines. IBEX has also endeavored to enhance its public nature and safety through the training of its pilots, mechanics and other staff members. The Tender Offeror considers that although the demand for IBEX s scheduled air transport business has been stable because there is definitely a certain level of demand on regional routes that is mainly backed by the central government s regional revitalization policy, its profitability has consistently remained at low levels, and improving profitability is a task for IBEX. In order to achieve the growth of the scheduled air transport business and increase its profitability, it is essential to cut costs by expanding its scale, and it is necessary to expand the business to a certain level suitable for efficient management, while ensuring safety. However, to increase the number of aircraft through large capital expenditures (leases), it is necessary to establish a business base that can absorb a certain amount of risk caused by short-term performance fluctuations mainly due to changes in oil prices and passenger demand, and to have the perspective of enhancing a mid to long-term corporate value that will not be affected by short-term performance fluctuations. In addition, to expand the scale of the air transport business, it is essential to increase the number of pilots and mechanics, as well as aircraft, and a large prior investment will be necessary to train them. However, a shortage of pilots and mechanics has been a common issue in the air transport industry in recent years, and it takes a large amount of money to secure and train them. In order for IBEX to consolidate its business base as a regional airline company giving priority to its safety and public nature, and shift to the next growth phase, as described above, the Tender Offeror considers it essential to make a prior investment to improve a physical infrastructure by increasing the number of aircraft and build a human infrastructure, including pilots and mechanics.

8 If the Company group implements these measures to maintain the future growth of the computer system business and the scheduled air transport business, it will need a large prior investment using its own funds or external borrowing, and in the short run, it may be difficult to maintain high profitability, which is a characteristic of the Company s computer system business, and the profitability of IBEX s scheduled air transport business may become even weaker. Specifically, in the computer system business, it is anticipated that sales will decrease tentatively due to a change in the sales mix, and that profitability will fall in the short term because of research and development costs, advertising and publicity expenses, and educational and other costs for the increase of personnel resources and advanced personnel training. However, in light of the market environment surrounding the Company group and its present challenges, the Company considers that implementing the measures described above cannot be avoided to increase the corporate value of the Company group on a mid to long-term basis. Consequently, if the Company implements such measures, while maintaining its listing, it is anticipated that they will lower its profit levels and adversely affect its stock price tentatively. In addition, short-term performance fluctuations may not necessarily be highly evaluated on capital markets, and it may be impossible to meet the expectations of the Company s shareholders. From the examination above, the Tender Offeror judged that in order for the Company to carry out a thorough management reform based on its consistent management vision to survive a changing business environment and win an intensifying competition, it is essential that the shareholders, management and employees of the Company group work in unison to concentrate on the management reform of the Company and establish a management structure that will make it possible to make quick and bold decisions for the maximization of the corporate value of the Company group from a mid to long-term perspective, and the Tender Offeror began examining measures in detail to build such a management structure in early July Then, following a further examination of the measures, the Tender Offeror came to a conclusion that in order to avoid a situation where the Company s shareholders will bear the risk that will inevitably arise from the implementation of the Company s mid to long-term strategy, it is best to privatize the Company Shares through a management buyout (MBO), which will enable flexible and rapid implementation of the management strategy, for the benefit of the Company s shareholders, and that the privatization will contribute to a further improvement of the Company s corporate value.

9 The Tender Offeror also expects the following effects after the Company goes private: the Company has not raised any funds from capital markets for 25 years since its shares were listed on the Second Section of the TSE in February 1991, and it was not essential for the Company to rely on capital markets. The Tender Offeror believes that the privatization will make it possible to cut costs necessary to maintain the stock listing (such as expenses to manage general meetings of shareholders, subcontract certain administrative work to the shareholder registry administrator, and make continuous disclosure of annual securities reports and other documents under the Financial Instruments and Exchange Act), which will, in turn, enable the Company to use money for proactive strategic investments and human resources training with the aim of improving its corporate value. Based on the judgments and views described above, the Tender Offeror carried out an examination in more detail as to whether to conduct the Transaction, including the Tender Offer, conditions of the Transaction if it is conducted, the management policy and capital structure of the Company after the Transaction, and other matters in connection with the privatization of the Company Shares. Further, in parallel with the examination, the Tender Offeror began discussions and negotiations with the Company as to whether to conduct the Transaction, since Mr. Kazuo Maezawa, Director of the Tender Offeror, informed some of the Company s directors of the significance and possibility of carrying out the Transaction through a management buyout (MBO) in late July And the Tender Offeror conducted due diligence on the Company from mid-august to mid-september 2016 after obtaining its approval, in order to investigate the feasibility of the Transaction after mid-august Then, taking into consideration such factors as the status of the discussions and negotiations with the Company and the results of the due diligence, the Tender Offeror formally proposed the Transaction to the Company on October 5, After several discussions and negotiations with the Company as to whether to conduct the Transaction, the Tender Offeror shared a common view with the Company in late October 2016 that conducting the Transaction and making the Company go private will contribute to the improvement of the corporate value of the Company group because, although in light of the market environment surrounding the Company group and the challenges of the Company group, (i)(a)(in the Company s computer system business) it is necessary to promote measures to maintain its market, such as expanding its product lineup and improving product functions, strengthening the competitiveness of the functions of its products, and enhancing its ability to deal with the widespread use of the cloud, and measures to expand its customer base, such as acquiring new customers through relatively affordable cloud-based services, establishing and expanding sales and service office networks, cultivating new customers by increasing sales and support staff members,

10 and providing advanced personnel training, and it is important to make a new investment for that purpose, and (b)(in the scheduled air transport business of the Company group) it is important to make a prior investment in connection with building its human infrastructure, including pilots and mechanics, for the future improvement of its physical infrastructure by increasing the number of aircraft in order to expand the business base to increase its profitability from a mid to long-term perspective, both with the goal of achieving a further increase in the corporate value of the Company group, (ii)(a) it may be impossible to meet the expectations of the Company s shareholders if the Company maintains its listing, because such measures will require a large prior investment, and in the short run, it may be difficult to maintain high profitability, which is a characteristic of the Company s computer system business, and the profitability of IBEX s scheduled air transport business may become even weaker (which are anticipated to lower the Company s profit levels and adversely affect the Company s stock price tentatively), and, (b) it is essential to establish a management structure that will make it possible to make quick and bold decisions, in order to carry out a management reform that includes the measures above, and (c) the Company will be able to use money equal to the costs to maintain its listing, which can be reduced through privatization, for strategic and other investments, considering that the Company has not raised any funds from capital markets for 25 years since its stock listing, and it is not essential for the Company to rely on capital markets. Through the process described above, the Tender Offeror further held discussions and negotiations with the Company about the conditions of the Transaction, and came to a conclusion that conducting the Transaction and making the Company go private is the best way to increase the corporate value of the Company group. Then, the Tender Offeror finally determined on October 31, 2016 to conduct the Tender Offer as part of the Transaction, setting the Tender Offer Price at 2,420 yen per share of the Company based on a decision made by Mr. Kazuo Maezawa, the only director of the Tender Offeror, by referring to the results of calculation through each analysis stated in a share valuation report dated October 28, 2016 obtained from Mitsubishi UFJ Morgan Stanley Securities Co., Ltd. ( Mitsubishi UFJ Morgan Stanley Securities ), and taking into account such factors as (i) the results of the due diligence on the Company, (ii) the prior cases of the premiums added to the purchase prices of tender offers conducted by parties other than issuers, (iii) the market prices of the Company Shares for the past six (6) months, (iv) the results of discussions and negotiations with the Company, (v) whether the Company s board of directors will support the Tender Offer, and (vi) the prospects of the shareholders applications for the Tender Offer.

11 After the Transaction, the Company will consider (i)(a)(in the Company s computer system business) the promotion of measures to maintain its market, such as expanding its product lineup and improving product functions, strengthening the competitiveness of the functions of its products, and enhancing its ability to deal with the widespread use of the cloud, and measures to expand its customer base, such as acquiring new customers through relatively affordable cloud-based services, establishing and expanding sales and service office networks, cultivating new customers by increasing sales and support staff members, and providing advanced personnel training, and (b)(in the scheduled air transport business of the Company group) the promotion of the improvement of a physical infrastructure by increasing the number of aircraft, and the building of a human infrastructure, including pilots and mechanics, in order to expand the business base to increase its profitability from a mid to long-term perspective. Mr. Kazuo Maezawa, Director of the Tender Offeror concurrently serving as President and Representative Director of the Company, will continue to participate in the management of the Company after the completion of the Tender Offer. In addition, although the Tender Offeror does not intend to change the management structure of the Company after the completion of the Tender Offer and the Transaction, it will determine the details thereof through discussion with the Company after the completion of the Tender Offer. c. Process of, and Reasons for, the Decision-making Leading to the Support of the Tender Offer As described in Background Leading to the Decision to Conduct the Tender Offer, Purpose and Decision-making Process, and Management Policy after the Tender Offer above, after being advised by Mr. Kazuo Maezawa, Director of the Tender Offeror, of the significance and possibility of carrying out the Transaction in late July 2016, the Company has appointed Deloitte Tohmatsu Financial Advisory LLC ( Deloitte Tohmatsu ) as a third-party appraiser, and TMI Associates as its legal advisor, and established a third-party committee to examine the proposal for the Transaction (the Committee ; for the composition of the members of the Committee, matters specifically entrusted and other conditions, please refer to c. Establishing a Third-party Committee in the Company of (3) Measures to Ensure the Fairness of the Tender Offer, Including Those to Ensure the Fairness of the Tender Offer Price and to Avoid Conflicts of Interest below), and developed a system to examine the proposal for the Transaction to ensure the fairness of the Tender Offer Price and the fairness of the Transaction, including the Tender Offer. Then, obtaining advice from Deloitte Tohmatsu and TMI Associates, the Company held discussions and negotiations with the Tender Offeror several times as to whether to carry out the Transaction, and its board of

12 directors carefully discussed and examined various terms of the Transaction, based on the share valuation report on the Company Shares obtained from Deloitte Tohmatsu on October 28, 2016, legal advice from TMI Associates, the report submitted by the Committee on October 28, 2016, and other relevant materials. Then, first, in light of the market environment surrounding the Company group and the challenges of the Company group, (i)(in the Company s computer system business) it is necessary to promote measures to maintain its market, such as expanding its product lineup and improving product functions, strengthening the competitiveness of the functions of its products, and enhancing its ability to deal with the widespread use of the cloud, and measures to expand its customer base, such as acquiring new customers through relatively affordable cloud-based services, establishing and expanding sales and service office networks, cultivating new customers by increasing sales and support staff members, and providing advanced personnel training, and it is important to make a new investment for that purpose, and (ii)(in the scheduled air transport business of the Company group) it is important to make a prior investment in connection with building its human infrastructure, including pilots and mechanics, for the future improvement of its physical infrastructure by increasing the number of aircraft to expand the business base from a mid to long-term perspective in order to increase profitability both with the goal of achieving a further increase in the corporate value of the Company group. However, the Company judged that the privatization of the Company Shares through the Transaction, including the Tender Offer, will contribute to the improvement of the corporate value of the Company group, because (i) it will require a large prior investment to implement these measures, and in the short run, it may be difficult to maintain high profitability, which is a characteristic of the Company s computer system business, and the profitability of IBEX s scheduled air transport business may become even weaker (which are anticipated to lower the Company s profit levels and adversely affect the Company s stock price tentatively), and it may be impossible to meet the expectations of the Company s shareholders if the Company maintains its listing, (ii) it is essential to establish a management structure that will make it possible to make quick and bold decisions, in order to carry out a management reform that includes the measures above, and (iii) the Company will be able to use money equal to the costs to maintain its listing, which can be reduced through privatization, for strategic and other investments, because the Company has not raised any funds from capital markets for 25 years since its stock listing, and it is not essential for the Company to rely on capital markets,

13 In addition, considering that (i) the Tender Offer Price (2,420 yen) exceeds the range of the results of calculation through the market price method (1,443 yen to 1,639 yen) described in the share valuation report obtained by the Company from Deloitte Tohmatsu on October 28, 2016, and it is within the range of the results of calculation through the discounted cash flow method (the DCF method )(2,248 yen to 2,478 yen), (ii) the Tender Offer Price is the price calculated by adding (a) a 47.65% premium (rounding to two decimal places; the same shall apply hereinafter in the calculation of premium rates) to the closing price of the Company Shares on the First Section of the TSE on October 28, 2016 (1,639 yen), which is the business day immediately preceding the announcement date of the Tender Offer, (b) a 55.83% premium to the simple average of the closing price of the Company Shares on the First Section of the TSE for the past one (1) month up to that day (1,553 yen) (rounding to the nearest whole number; the same shall apply hereinafter in the calculation of the simple average of the closing price and the simple average closing price), (c) a 63.51% premium to the simple average of the closing price of the Company Shares on the First Section of the TSE for the past three (3) months up to that day (1,480 yen), and (d) a 67.71% premium to the simple average of the closing price of the Company Shares on the First Section of the TSE for the past six (6) months up to that day (1,443 yen), and it can be said to be a price with a considerable premium as compared to the cases of other companies in the same business conducted as part of a management buyout (MBO), the board of directors of the Company judged that the Tender Offer Price and other terms of the Tender Offer are reasonable for the shareholders of the Company, and that the Tender Offer will provide the shareholders of the Company an opportunity to sell their shares of the Company at a reasonable price. Finally, the Company resolved, at its board of directors meeting held on October 31, 2016, that it would express an opinion in support of the Tender Offer and recommend that its shareholders apply for the Tender Offeror with the unanimous approval by its directors who participated in the deliberation and resolution (10 directors except for Mr. Kazuo Maezawa, President and Representative Director of the Company). Further, all statutory auditors of the Company, including three (3) outside statutory auditors of the Company, participated in the deliberation at the above board of directors meeting of the Company, and all the statutory auditors stated that they had no objection to the above resolution by the board of directors of the Company.

14 Because he is Director of the Tender Offeror, Mr. Kazuo Maezawa, President and Representative Director of the Company, never participated in the deliberation and resolution at the above board of directors meeting of the Company, or participated in the discussions and negotiations with the Tender Offeror regarding the Transaction in his capacity as the Company from the standpoint of avoiding the suspicion of conflicts of interest. (3) Matters Concerning Calculation In expressing its opinion on the Tender Offer, the Company requested Deloitte Tohmatsu, which is a third-party appraiser independent of the Tender Offeror and the Company, to calculate the value of the Company Shares, and obtained a share valuation report on October 28, Deloitte Tohmatsu is not a related party of the Tender Offeror or the Company, and does not have any material interest which should be noted regarding the Transaction, including the Tender Offer. In addition, the Company has not obtained any opinion on the fairness of the Tender Offer Price (a fairness opinion) from Deloitte Tohmatsu. As a result of the consideration of the calculation methods in the Tender Offer, Deloitte Tohmatsu has made the calculation using (a) the market price method, because the Company Shares are listed on the First Section of the TSE, and (b) the DCF method to reflect the Company s future business activities in the calculation. The ranges of the per-share value of the Company Shares, as calculated by Deloitte Tohmatsu based on the above methods, are as follows: Market price method: 1,443 yen to 1,639 yen DCF method: 2,248 yen to 2,478 yen Under the market price method, by setting the base date for the valuation as of October 28, 2016, which is the business day immediately preceding the announcement date of the Tender Offer, the range of the per-share value of the Company Shares was analyzed to be 1,443 yen to 1,639 yen, based on the closing price of the Company Shares on the First Section of the TSE on the base date (1,639 yen), the simple average closing price of the Company Shares on the First Section of the TSE for the past one (1) month (from September 29 to October 28, 2016)(1,553 yen), the simple average closing price of the Company Shares on the First Section of the TSE for the past three (3) months (from July 29 to October 28, 2016)(1,480 yen), and the simple average closing price of the Company Shares on the First Section of the TSE for the past six (6) months (from May 2 to October 28, 2016)(1,443 yen).

15 Under the DCF method, Deloitte Tohmatsu evaluated the corporate value of the Company on a non-consolidate basis by discounting the free cash flows that the Company will generate in and after the second quarter of the fiscal year ending March 2017 to the present value using certain discount rates according to the business risk, taking into consideration reasonable assumptions such as earnings predictions and investment projections based on the business plans of the Company on a non-consolidated basis from the fiscal year ending March 2017 to the fiscal year ending March 2019 prepared by the Company. The discount rates used are 9.0% to 11.0%. The terminal value was calculated using the perpetual growth rate model, with the perpetual growth rate set between -1.0% and 1.0%. In calculating the terminal value, the free cash flows calculated based on the net sales and operating profit ratio which have smoothed out performance fluctuations due to the product life cycle were used to appropriately reflect the regular income levels of the Company in the future. As for the consolidated subsidiary operating the scheduled air transport business, the corporate value of the Company on a consolidated basis has been evaluated by analyzing the shares of the consolidated subsidiary as of the end of the first quarter of the fiscal year ending March 2017, and adding the value of the Company s shareholdings, taking into account the difference in business lines from those of the Company and its significance. The financial forecasts based on the business plans of the Company on a non-consolidated basis used for the calculation under the DCF method are as follows. In the following financial forecasts, no significant increases or decreases in sales and profits are anticipated in any fiscal year. The following financial forecasts are not conditional on the implementation of the Transaction. (In millions of yen) Fiscal year ending March 2017(9 months) Fiscal year ending March 2018 Fiscal year ending March 2019 Net sales 15,652 20,800 21,400 Operating profit 2,726 3,558 3,533 EBITDA 3,450 4,445 4,420 Free cash flows 1,765 2,515 2,538 (4) Prospects of Delisting and Reasons therefor As of today, the Company Shares are listed on the First Section of the TSE. As the Tender Offeror has not set the maximum number of shares to be purchased in the Tender Offer, the Company Shares may be delisted through the prescribed procedures in accordance with the delisting criteria of the TSE, depending on the result of the Tender Offer. In addition, even if the

16 delisting criteria are not applied at the time of the completion of the Tender Offer, the Company Shares will be delisted through the prescribed procedures, as the Procedures to Make the Company a Wholly-owned Subsidiary, as described in (5) Policy on Reorganization after the Tender Offer (Matters Concerning the Two-stage Acquisition ) below, will be carried out after the completion of the Tender Offer. The Company Shares may not be traded on the First Section of the TSE after the delisting. (5) Policy on Reorganization after the Tender Offer (Matters Concerning the Two-stage Acquisition ) If the Tender Offeror fails to acquire all the Company Shares (except for the Company Shares owned by the Tender Offeror and the treasury shares owned by the Company) through the Tender Offer, the Tender Offeror will carry out the Procedures to Make the Company a Wholly-owned Subsidiary after the completion of the Tender Offer in order to acquire all the Company Shares (except for the Company Shares owned by the Tender Offeror and the treasury shares owned by the Company) in the following manner: Specifically, if the total of the Company s voting rights owned by the Tender Offeror becomes ninety (90)% or more as a result of the completion of the Tender Offer, the Tender Offeror will request all shareholders (except for the Tender Offeror and the Company) of the Company (the Selling Shareholders ) to sell all of their shares of the Company (the Request to Sell Shares ) pursuant to Article 179 of the Companies Act (Act No. 86 of 2005, as amended; the same shall apply hereinafter) promptly after the completion of the settlement of the Tender Offer. The Request to Sell Shares will include the language that the money equal to the Tender Offer Price will be paid to the Selling Shareholders as the consideration per share of the Company. Before making a Request to Sell Shares, the Tender Offeror will inform the Company of such payment, and request the Company to approve the Request to Sell Shares. If the Company approves the Request to Sell Shares by resolution at its board of directors meeting, the Tender Offeror will, without obtaining approval from each shareholder of the Company, acquire from all the Selling Shareholders all of their shares of the Company on the date of acquisition designated in the Request to Sell Shares in accordance with the procedures prescribed in the relevant laws and regulations. In that case, as the consideration of the Company Shares owned by each of the Selling Shareholders, the Tender Offeror will pay each such shareholder the money equal to the Tender Offer Price per shares of the Company. Upon the Tender Offeror s Request to Sell Shares, the board of directors of the Company will approve such Request to Sell Shares. However, if the total of the Company s voting rights owned by the Tender Offeror is less than ninety (90)% after the completion of the Tender Offer, the Tender Offeror will request the Company to hold an extraordinary general meeting of shareholders in order to discuss the

17 proposals to consolidate the Company Shares (the Consolidation of Shares ) and to partially amend the articles of incorporation to abolish the provision of the number of shares constituting a whole unit, subject to the Consolidation of Shares becoming effective (the Extraordinary General Meeting of Shareholders ). The Tender Offeror will approve the proposals above at the Extraordinary General Meeting of Shareholders. If the proposal for the Consolidation of Shares is approved at the Extraordinary General Meeting of Shareholders, the shareholders of the Company will own such number of the Company Shares as is in proportion to the ratio of the Consolidation of Shares approved at the Extraordinary General Meeting of Shareholders on the date the Consolidation of Shares will become effective. If there is a fraction of less than one (1) share as a result of the Consolidation of Shares, the shareholders who have such a fraction will be paid the money obtained by selling to the Company or the Tender Offeror such number of the Company Shares as is equal to the total of such fractions (if there is a fraction of less than one (1) share in the total, the fraction will be rounded down; the same shall apply hereinafter) in accordance with the procedures prescribed in Article 235 and Paragraphs 2 to 5 of Article 234 of the Companies Act and other relevant laws and regulations. The Tender Offeror will request the Company to (i) calculate the selling price of the Company Shares equal to the total of such fractions so that the amount of money to be paid to each shareholder (except for the Tender Offeror and the Company) of the Company who has not applied for the Tender Offer will be the same as the price obtained by multiplying the Tender Offer Price by the number of the Company Shares owned by each such shareholder as a result of such sale, and (ii) apply to a court for permission of voluntary sales. In addition, although the ratio of the consolidation of the Company Shares has not yet been decided as of today, the Tender Offeror will request the Company to determine the ratio so that (i) the Tender Offeror will own all the issued shares of the Company (except for the treasury shares owned by the Company), and (ii) the number of the Company Shares owned by the shareholders (except for the Tender Offeror and the Company) of the Company who have not applied for the Tender Offer will be a fraction of less than one (1) share. If the Tender Offer is completed, the Company will meet these requests from the Tender Offeror. As a provision of the Companies Act to protect the rights of minority shareholders in connection with the procedures described above, it is stipulated that upon Request to Sell Shares, Selling Shareholders may apply to a court to determine the sales price of their shares of the Company pursuant to Article of the Companies Act and other relevant laws and regulations. On the other hand, it is stipulated that if there is a fraction of less than one (1) share as a result of the Consolidation of Shares, shareholders of the Company may (i) request the Company to purchase all of their shares of less than one (1) share at a fair price, and (ii) apply to a court to

18 determine the price of the Company Shares pursuant to Article and of the Companies Act and other relevant laws and regulations. If such application is made, the court will make a final judgment on the sales price or purchase price of the Company Shares. The method and time to carry out the procedures described above may be changed as a result of or depending on the revision, enforcement or authorities interpretation of any relevant law or regulation, the Tender Offeror s ownership percentage of shares after the Tender Offer, or the ownership of the Company Shares by the shareholders of the Company other than the Tender Offeror. Even in such case, however, a method will be adopted to finally pay money to each shareholder (except for the Tender Offeror and the Company) of the Company who has not applied for the Tender Offer, and in that case, the amount of money to be paid to each such shareholder will be calculated to be the same as the one calculated by multiplying the Tender Offer Price by the number of their shares of the Company. The Extraordinary General Meeting of Shareholders is scheduled to be held around February The Company will promptly announce the specific procedures, timing and other matters thereof as soon as they are decided through negotiations between the Tender Offeror and the Company. The Tender Offer never solicits support from the shareholders of the Company at the Extraordinary General Meeting of Shareholders. Shareholders of the Company should confirm with their certified tax accountants and other exports the tax treatment of the application for the Tender Offer and the procedures referred to above on their own responsibility. (6) Measures to Ensure the Fairness of the Tender Offer, Including Those to Ensure the Fairness of the Tender Offer Price and to Avoid Conflicts of Interest Considering that the Transaction, including the Tender Offer, will be conducted as part of a management buyout (MBO) and involves a structural issue of conflicts of interest, the Tender Offeror and the Company have mainly taken the following measures to ensure the fairness of the Transaction, including the Tender Offer, from the standpoint of ensuring the fairness of the Tender Offer Price, eliminating arbitrariness in the decision-making process leading to the decision to conduct the Transaction, including the Tender Offer, and avoiding conflicts of interest. The descriptions of the measures taken by the Tender Offeror in (6) Measures to Ensure the Fairness of the Tender Offer, Including Those to Ensure the Fairness of the Tender Offer Price and to Avoid Conflicts of Interest are based on the Tender Offeror s explanations. a. Obtaining a Share Valuation Report from the Independent Third-party Appraiser of the Tender Offeror

19 In determining the Tender Offer Price, the Tender Offeror requested Mitsubishi UFJ Morgan Stanley Securities, which is a third-party appraiser independent of the Tender Offeror and the Company, to analyze the valuation of the shares of the Company. Mitsubishi UFJ Morgan Stanley Securities is not a related party of the Tender Offeror or the Company, and does not have any material interest which should be noted regarding the Transaction, including the Tender Offer. After considering the valuation methods to be adopted for the valuation of the shares of the Company from a number of share valuation methods, and based on the assumption that the Company is a going concern and the idea that it is appropriate to value the shares of the Company from various perspectives, Mitsubishi UFJ Morgan Stanley Securities analyzed the valuation of the Company Shares using the (a) market price analysis, (b) comparable company analysis, and (c) discounted cash flow analysis (the DCF analysis ), and the Tender Offeror obtained the share valuation report dated October 28, 2016 from Mitsubishi UFJ Morgan Stanley Securities. The Tender Offeror has not obtained any opinion on the fairness of the Tender Offer Price (a fairness opinion). The ranges of the per-share value of the Company Shares, as calculated in the above methods, are as follows: Market price analysis: 1,443 yen to 1,553 yen Comparable company analysis: 1,198 yen to 2,165 yen DCF analysis: 2,244 yen to 2,595 yen Under the market price analysis, by setting the base date for the valuation as October 28, 2016, the range of the per-share value of the Company Shares was analyzed to be 1,443 yen to 1,553 yen, based on the simple average of the regular transaction closing price of the Company Shares on the First Section of the TSE for the most recent one (1) month (from September 29, 2016 to October 28, 2016)(1,553 yen), the simple average of the regular transaction closing price of the Company Shares on the First Section of the TSE for the most recent three (3) months (from July 29, 2016 to October 28, 2016)(1,480 yen), and the simple average of the regular transaction closing price of the Company Shares on the First Section of the TSE for the most recent six (6) months (from May 2, 2016 to October 28, 2016)(1,443 yen). Under the comparable company analysis, Mitsubishi UFJ Morgan Stanley Securities analyzed the share value of the Company through comparison with the market prices and financial metrics (indicating elements such as profitability) of listed companies engaged in businesses relatively similar to those of the Company, and analyzed the