Top Management Message February 9, 2010

Discovery of Fraudulent Activities Conducted by Two Directors of LAWSON ENTERMEDIA

LAWSON, INC. (LAWSON) has discovered through its internal investigation that the senior managing and representative director ("SMD" hereafter) and a director in charge of accounting ("Director" hereafter) at LAWSON ENTERMEDIA INC. (LEM), a consolidated subsidiary of LAWSON, strayed beyond the confines of their authority and misappropriated a large sum of money, without following internal requisite procedures.

  • The amount of damage is estimated to be 15.0 billion at most, although it depends on how much of the debts we can recover. This is a very large sum but will not shake the foundation of our financial stability. Its impact on LAWSON's earnings should be temporary. In addition, our forecast of 50.5 billion yen in consolidated operating profit, which is the core earnings of the Company, for this fiscal year is expected to be achieved.
  • An investigating committee comprising third parties has been set up. I will promptly report to you on the outcome of the investigation and proposals to prevent any recurrence of such an incident. At the same time, I am determined to do whatever I can do immediately in my capacity. I am also personally committed to drastically reviewing our administrative system.
  • Regarding the payment of dividends for this fiscal year, we will at least maintain the planned dividend per share of 160 yen. In terms of the share price in the near term, this incident may cause some inconvenience to our shareholders but we will strive hard to reward shareholders who keep holding our shares.
  • LAWSON has extended a credit line of 8.5 billion yen to LEM and is determined to support LEM fully. We are also proceeding to make payments to planning companies for concerts and other events.
  • I am sorry that this case has turned out to be the greatest inconvenience to our shareholders since I was appointed as President & CEO of LAWSON. We at LAWSON will revisit our corporate philosophy of creating "Happiness and Harmony in Our Community" and aim at improving sales and earnings in the coming years. By doing this, we sincerely hope to win back the trust of our stakeholders.

Stated below are the background to the discovery, a summary of what we have discovered through our investigation so far, and measures to be taken. We offer our sincerest apologies to our shareholders, customers, business partners, franchisees, and other stakeholders for any inconvenience and concern this case may cause.

1. Background to discovery of fraudulent activities

On January 24, 2010, LAWSON and LEM were informed by LEM's SMD and Director that Plaisir Co., Ltd., an intermediary company engaged in the payment of LEM's ticket proceeds to companies planning concerts and other events ("concert planning companies" hereafter) had faced financial difficulties due to the diversion of funds and had been unable to make payment to the concert planning companies. The two companies were also informed that the two directors had assumed repayment to some planning companies on behalf of Plaisir without receiving approval from the Board of Directors and provided direct financial support to Plaisir.
Promptly after receiving this report, LAWSON interviewed both individuals in the presence of its corporate lawyer and verified the diversion of a large sum of money. An internal investigating committee was then set up, with me, Takeshi Niinami, as its chairman and with cooperation provided by Anderson Mori & Tomotsune and KPMG FAS Co., Ltd. The committee, which comprises 21 members, investigated extensively and discovered the following.

2. Summary of fraudulent activities

LEM was usually commissioned directly by concert planning companies to sell tickets for concerts and other events. From November 2007, however, LEM entered into a three-party contract with planning companies and Plaisir covering part of the commissioned ticket sales business. According to the new scheme, the money that LEM receives from customers for tickets is to be paid to planning companies through Plaisir.
This three-party scheme was drafted and brought to LEM by the SMD, who was the virtual second highest-ranking person within LEM. In the ticket sales industry, ticket sales companies sometimes pay cooperation fees to concert planning companies in order to be commissioned to sell tickets. The SMD explained that LEM entered into this contract with the prospect of reducing payment of cooperation fees by having Plaisir act as an intermediary and pay a part or all of these fees to concert planning companies.
However, Plaisir held the proceeds of tickets paid by LEM for about two to six months before making payment to the planning companies. Plaisir used this time lag from the receipt of the money to payment to divert capital to its group company.
From around October 2008, LEM's SMD began to receive complaints from the planning companies about delayed payment by Plaisir. After the SMD consulted with the Director, the two directors began to misappropriate money. Specifically, they assumed repayment for the sale of tickets to the planning companies on behalf of Plaisir, without receiving any formal internal clearance and despite being fully aware that Plaisir was diverting money. In addition, from around October 2009, they also misappropriated money by making an advance payment for concert tickets to Plaisir prior to the sale of the tickets.
As of this juncture, LEM's estimated total losses are approximately 15.0 billion yen. The amount which LEM paid directly to the CPC's on behalf of Plaisir, the amount which LEM paid in advance to Plaisir, and the amount owed to LEM and uncollected from Plaisir, total about 10.0 billion yen. The amount which LEM will have to pay in the future directly to the CPC's on behalf of Plaisir will be about 5.0 billion yen.
We also learned that LEM entered into the three-party contract that involved Plaisir from November 2007, while LEM's SMD and Director misappropriated money for 16 months, from November 2008 to January 2010.

3. Measures taken in relation to concerned parties

LAWSON held an extraordinary board meeting and resolved to extend an emergency credit line of 8.5 billion yen to LEM. The companies are making their best efforts to avoid causing any trouble to the concert planning companies, by having LEM assume repayments to these planning companies for the payment of ticket proceeds that were in arrears. At the same time, we have ensured our business rights.

4. Treatment and disciplinary actions in relation to the two directors

  • (1)LEM's SMD and director in charge of accounting resigned as of today. LAWSON and LME have begun to consult with the authorities regarding this case, with the intention of filing civil and, if possible, criminal charges against fraudulent activities of both individuals.
  • (2)LAWSON and LEM will take appropriate measures to recover the amount of damage.

5. Urgent actions and future measures

As urgent actions, LAWSON has reviewed the accounting conditions of LEM and other affiliated companies of LAWSON. We will make it compulsory for these companies to report the flow of capital to LAWSON on a regular basis.
An investigating committee comprising the third parties was set up as of today to come up with proposals on financial administration and an internal control system.

The third-party investigating committee is comprised of the following members:

  • Chairman: Toshio Takano (Attorney; Head of Takano Law Firm; Former Superintendent Public Prosecutor of Nagoya High Public Prosecutors' Office)
  • Michio Masaki (Attorney; Partner of City-Yuwa Partners)
  • Toshifumi Takaoka (Certified public accountant; Executive Director and Partner of KPMG FAS Co., Ltd.)

The outcome of the investigation by the committee is scheduled to be compiled and announced when completed. Moreover, any new findings, whenever discovered, will also be announced. Regarding the impact on our earnings in this fiscal year, details are not available as of this moment, as the amount of debts to be recovered has yet to be determined. However, the amount of transactions that involved Plaisir represented about one-fifth of the total transactions of LAWSON ENTERMEDIA. Without recognizing such risks to other transactions of LAWSON ENTERMEDIA, the amount of damage is expected to be approximately 15.0 billion yen at most. While this is a large sum, I believe that LAWSON's financial stability will remain unshaken thanks to our financial strength, which is supported by cash and deposits of over 70 billion yen, virtually no debt, and shareholders' equity of over 200 billion yen on a consolidated-basis. I would like to emphasize once again that this case will result in a one-time loss and its impact on our earnings will be only temporary.

I would like to ask for your continued support of LAWSON.

February 9, 2010

Takeshi Niinami
President & CEO

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