Press Releases 2007

Measures to be taken concerning the CLSA Asia-Pacific Markets analyst’s report February 27, 2007 and The Financial Times Limited article March 1, 2007

Mar. 6, 2007

Today, SOFTBANK CORP. (Head Office: Minato-ku, Tokyo; Representative: Masayoshi Son, hereinafter “SOFTBANK”) announced that it was considering legal action, including a claim in damages, in respect of false and misleading statements contained in a CLSA analyst report dated 27 February 2007 (hereinafter the “Report”), and which were subsequently repeated in articles published in the Financial Times on 1 March 2007 (hereinafter the “FT Articles”). The Report was prepared by Mr. Kieran Calder, analyst of CLSA Asia-Pacific Markets (Calyon Capital Markets Asia B.V., Tokyo Branch, hereinafter “CLSA”). The FT Articles were written by FT journalists Ms. Louise Lucas and Mr. David Turner.

The Report and FT Articles both give the false impression that the accounting methods of SOFTBANK are improper, thereby jeopardizing the integrity of SOFTBANK on the market. The main remarks made by CLSA analyst Kieran Calder are as follows:

  • 1. Need for corrections in financial statements due to change of auditors
  • 2. Hidden debt due to change in the consolidation scope
  • 3. Vast difference between net income and free cash flow
  • 4. Frequent changes in accounting methods
  • 5. Items included in “Debt”
  • 6. Vast difference between capital expenditure (cash flow) and capital expenditure by segment
  • 7. Decrease in exposure of the company’s CEO to SOFTBANK, weakening of Goldman Sachs involvement

1. Need for corrections in financial statements due to change of auditors

Content of CLSA analyst Kieran Calder’s report

And given the history of SoftBank’s former auditor, there must certainly be a risk of some level of restatement. Also, in the current regulatory background, it must be increasingly probably that the SESC too would be interested in SoftBank.


Due to ChuoAoyama PwC’s suspension of business, SOFTBANK appointed Deloitte Touche Tohmatsu as “temporary auditor” on July 3, 2006. Tohmatsu audited the consolidated and stand alone interim financial statements for the period ended in September 2006 and issued an unqualified semiannual audit report on them.

If there were any problems with the accounting methods, for the past or for the fiscal year ending March 2007, as the analyst indicates, than this semiannual audit report would not have been issued. Moreover, Deloitte Touche Tohmatsu ran pilot testing before accepting the audit contract, during which the accounting policies adopted till the term ended March 2006 were reviewed. Tohmatsu made no remarks requiring any corrections of the past financial statements during the pilot testing or the interim audit. No such remarks have been received, nor have any revisions of past financial statements been made.

SOFTBANK has not been under any investigation by the Securities and Exchange Surveillance Commission.

2. Hidden debt due to change in the consolidation scope

Content of CLSA analyst Kieran Calder’s report

SoftBank is a holding company that operates five key operating segments, and is comprised of (currently) 115 consolidated subsidiaries, and 71 equity method non-consolidated subsidiaries and affiliates. In addition to this, there are a further 64 subsidiaries that are not consolidated, and 62 non-consolidated subsidiaries and 26 affiliates that are not included under the equity method. Besides the extraordinary number of subsidiaries and affiliates not included in the accounts, it is notable that the criteria by which these are excluded does not explicitly include debt.


Dormant corporations and corporations whose quantitative materiality is extremely low are not included in the scope of consolidation. The effect of the revision of consolidation scope and the application scope of the equity method on the financial statements for the fiscal year ending March 2007 was announced in the press release of August 8, 2006 as follows (aggregation on stand-alone basis):

unit: million yen
  Net Sales Net Income Total Assets Retained Earnings
1st Quarter 952 114 5,545 361

At the end of the 1st quarter, less than 0.4 bn Yen of the non-consolidated subsidiaries’ debt was external, amounting to less than 0.02% of 2,529.5 bn Yen of consolidated interest bearing debt. Moreover, these non-consolidated subsidiaries are operating companies and not funds. The consolidation criteria were of course included in the interim audit scope of Tohmatsu.

3. Vast difference between net income and free cash flow

Content of CLSA analyst Kieran Calder’s report

A simple comparison between reported net profit and free cashflow (Ebitda-capex) shows a difference. In SoftBank’s accounts there has consistently been a significant difference between capex and depreciation. The cashflow statement below shows that depreciation was less than half of capex in the year ended Mar-06.


SOFTBANK is not only an operating company but is also active as an investment company. The return on investments on securities invested in so far was obtained through sell-off after their listing. The gain on sales of these investment securities is included in net income. However, because this is not included in the EBITDA calculation a big difference between the EBITDA-CAPEX and net income occurs.

For a company that is in a stable growth period, the investments will be stable too, and made within the limits of the cash flow. Therefore the values of depreciation and CAPEX will be close. We have however expanded our business in rapid succession with the Broadband Infrastructure Business, the Fixed-Line Telecommunications Business and the Mobile Communications Business. Therefore the investments have continued to exceed the depreciation expenses.

4. Frequent changes in accounting methods

Content of CLSA analyst Kieran Calder’s report

There is no dispute that SoftBank uses frequent accounting changes which always improve the treatment of earnings, as these are disclosed. It cannot be assumed however that SoftBank’s retail investor base makes the effort to read the details in the notes to the financial statement, and understand how much earnings growth is attributable to changes in accounting method. Consider that in the year ended Mar-06, 30% of operating profit came from accounting changes made to treatment of:

  • (1) Change in estimated useful life of fixed line assets - from 6 to 10 years for some fixed line assets;

  • (2) Change in method of depreciation - from declining balance to straight line, for property assets;

  • (3) Capitalisation of expenses - network line construction expenses moved from SG&A.


To begin with, changes in accounting policies can only be made when there are valid reasons such as a change in environment or facts. SOFTBANK has made the changes in question due to valid reasons indicated below. The changes were considered appropriate from an audit perspective.

  • (1) After a buy-out or other event, usually integration of the accounting methods is required. It is SOFTBANK Group’s principle to adjust the accounting methods of the acquired company to the acquiring company. The changes made in July 2004 pointed out by the analyst were also made in order to adjust the estimated useful life of JAPAN TELECOM CO., LTD (currently SOFTBANK TELECOM Corp.)’s fixed assets to the estimated useful life used in the SOFTBANK Group.

  • (2) The “buildings & construction” mainly consists of the annex facilities of the corporate headquarter building. Along with the relocation of the head office the straight line method was adopted, this is the common method used for annexed structure depreciation.

  • (3) Expenses related to activation of the corporate Otoku Line. These expenses are the construction costs that occur during several months before the lines are activated. These costs can be individually calculated. This accounting method was adopted at the time when full-fledged corporate sales of Otoku Line were started.

5. Items included in “Debt”

Content of CLSA analyst Kieran Calder’s report

Certainly this is a very high level of indebtedness, but the actual figure should be closer to 3 trn yen, based on some simple adjustments, which we will describe here.

Major items that should be added to net debt are:

Figures inserted by SOFTBANK
Cash receipts as collateral 150 bn Yen
Allowance for point mileage 44.7 bn Yen
Capital lease 204.4 bn Yen
Off balance sheet debt
(Straight bonds for which debt assumptions were made by SOFTBANK MOBILE Corp.)
100 bn Yen
Value of preferred shares held by Yahoo! Japan 120 bn Yen
Value of preferred shares held by Vodafone 300 bn Yen


It is at the discretion of the analyst what calculation rational he shall use for net interest-bearing debt, however, SOFTBANK perceives net interest-bearing debt to be the remaining of interest-bearing debt after the deduction of cash and deposits and marketable securities.

SOFTBANK includes short-term borrowings, long-term borrowings, CP and bonds in interest-bearing debt. Any off balance debt as a result of debt assumption should not be added back since trusted cash and deposits are also off balance. Allowance for point mileage is trade liability and is not interest-bearing debt. Under J-GAAP, preferred stock is to be recorded in shareholders’ equity, not in liabilities.

6. Vast difference between capital expenditure (cash flow) and capital expenditure by segment

Content of CLSA analyst Kieran Calder’s report

Consolidated capex in the cashflow statement is 70% higher than the sum of segment capex


Difference of capital expenditure on the cash flow statement and capital expenditure by segment is mainly due to the difference of the timing of payment. Our payment on capital expenditure is mainly 6 months after completion.

7. Decrease in exposure of the company’s CEO to SOFTBANK, weakening of Goldman Sachs involvement

Content of CLSA report

Print media has focused on documented evidence that SoftBank founder, chairman and CEO Masayoshi Son has been reducing his exposure to Softbank, although not by selling directly into the market. A regulatory filing with the TSE last year showed that Son-san had pledged up to one-third of his 332m shares (31.5% stake) partly as collateral against loans. Against this background, was it a further red flag that long-time banker Goldman Sachs backed out of the final financing deal for the Vodafone KK acquisition? What caused Goldman Sachs to reach their tipping point?


A part of the shares held by the company’s CEO Masayoshi Son is pledged for his personal borrowings as stated in the substantial shareholding report, which he submitted. This collateral is not in anyway related to SOFTBANK’s financing. As a company, SOFTBANK is not in a position to comment on the CEO’s personal collateral.

Although GS had committed to SOFTBANK during the structuring phase of the WBS (Whole Business Securitization) scheme, ultimately their additional conditions were not agreed upon by SOFTBANK and other financial institutions, therefore GS was asked to disengage. No change occurred in the total WBS procurement amount, as the amount initially planned to be taken on by GS was taken by other financial institutions.

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