FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16 under
the Securities Exchange Act of 1934
For December 5, 2005
Commission File Number: 0-30204
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Internet Initiative Japan Inc.
(Translation of registrant's name into English)
Jinbocho Mitsui Bldg. 1-105 Kanda Jinbo-cho, Chiyoda-ku, Tokyo 101-0051, Japan
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual
reports under cover Form 20-F or Form 40-F:
Form 20-F [ X ] Form 40-F [ ]
Indicate by check mark if the registrant is submitting the Form 6-K in
paper as per-mitted by Regulation S-T Rule 101(b)(1): ____
Note: Regulation S-T Rule 101(b)(1) only permits the submission in paper of
a Form 6-K if submitted solely to provide an attached annual report to security
holders.
Indicate by check mark if the registrant is submitting the Form 6-K in
paper as per-mitted by Regulation S-T Rule 101(b)(7): ____
Note: Regulation S-T Rule 101(b)(7) only permits the submission in paper of
a Form 6-K if submitted to furnish a report or other document that the
registrant foreign private issuer must furnish and make public under the laws of
the jurisdiction in which the reg-istrant is incorporated, domiciled or legally
organized (the registrant's "home country"), or under the rules of the home
country exchange on which the registrant's securities are traded, as long as the
report or other document is not a press release, is not required to be and has
not been distributed to the registrant's security holders, and, if discussing a
mate-rial event, has already been the subject of a Form 6-K submission or other
Commission filing on EDGAR.
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes [ ] No [ X ]
If "Yes" is marked, indicate below the file number assigned to the
registrant in connection with Rule 12g3-2(b): 82-___________
EXHIBIT INDEX
Exhibit Date Description of Exhibit
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1 2005/12/02 IIJ Reports its Financial Information for the Interim
Period Ended September 30, 2005 along with its Listing
on the Mothers Market of the Tokyo Stock Exchange
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Internet Initiative Japan Inc.
Date: December 5, 2005 By: /s/ Koichi Suzuki
----------------------------------
Koichi Suzuki
President, Chief Executive Officer
and Representative Director
EXHIBIT 1
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[English Translation] December 2, 2005
Company name: Internet Initiative Japan Inc.
Representative: Koichi Suzuki, President and Representative
Director
(Code number: 3774 Tokyo Stock Exchange Mothers)
Contact: Akihisa Watai, Director and CFO
Telephone: 03-5259-6500
IIJ Reports its Financial Information for the Interim Period Ended
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September 30, 2005 along with its Listing on the Mothers Market of the
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Tokyo Stock Exchange
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Internet Initiative Japan Inc. ("IIJ") was listed on the Mothers market of the
Tokyo Stock Exchange on December 2, 2005.
Along with the listing, IIJ would like to report its recent financial
information as attached.
1
Consolidated Financial Results for the Interim Period Ended September 30, 2005
[Under accounting principles generally accepted in the United States (U.S. GAAP)]
December 2, 2005
Company name: Internet Initiative Japan Inc. Shares listed: Tokyo Stock Exchange Mothers
Code number: 3774 Location of headquarters: Tokyo
(URL http://www.iij.ad.jp/)
Representative: Title: President and Representative Director Name: Koichi Suzuki
Contact: Title: Director and CFO Name: Akihisa Watai
Tel: (03)5259-6500
Name of a parent company or other related companies*: Nippon Telegraph and
Telephone Corporation (Code: 9432)
Share of voting rights held by a parent company or other related companies:
29.7% (as of December 2, 2005) Adoption of U.S. GAAP: Yes
* As defined in "provisions for the terminology, form, and preparation
methods for interim consolidated financial statements in Japan"
1. Consolidated Financial Results for the Interim Period Ended September 30, 2005
(April 1, 2005 to September 30, 2005)
(1) Consolidated Results of Operations (Amounts less than one million yen are rounded)
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Total revenues Operating income Income before income
tax expense
------------------------------------------------------------------------------------------------------
Millions of Yen % Millions of Yen % Millions of Yen %
Interim period ended
September 30, 2005 21,809 13.7 754 315.0 1,779 -
Interim period ended
September 30, 2004 19,187 - 182 - 21 -
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Fiscal year ended
March 31, 2005 41,703 1,248 3,149
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------------------------------------------------------------------------------------------------------
Net income Basic net income Diluted net income
per share per share
------------------------------------------------------------------------------------------------------
Millions of Yen % Yen Yen
Interim period ended
September 30, 2005 1,623 - 42,380 42,347
Interim period ended
September 30, 2004 (9) - (232) -
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Fiscal year ended
March 31, 2005 2,906 75,858 -
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(Notes) 1) Equity in net income (loss) of equity method investees
Interim period ended September 30, 2005: JPY 32 million
Interim period ended September 30, 2004: JPY 5 million
Fiscal year ended March 31, 2005: JPY (33) million
2) Weighted-average number of shares of common stock outstanding
(consolidated)
Interim period ended September 30, 2005: 38,304 shares
Interim period ended September 30, 2004: 38,312 shares
Fiscal year ended March 31, 2005: 38,312 shares
3) Change in accounting policies: None
4) Income before income tax expense in this document represents
income from operations before income tax expense, minority
interests and equity in net income (loss) of equity method
investees.
5) Diluted net loss per share in the interim period ended September
30, 2004 is not shown since a diluted net loss was recorded.
6) The percentage figures for total revenues and operating income
represent the percentages of change from the same period of the
previous year. The percentage figures for income before income
tax expense and net income are omitted since the change in income
before income tax expense from the same period of the previous
year is over 1,000% and a net loss was recorded in the same
period of the previous year.
2
(2) Consolidated Financial Position (Amounts less than one million yen are rounded)
------------------------------------------------------------------------------------------------------------
Total assets Shareholders' Shareholders' equity Shareholders' equity
equity as a percentage of per share
total assets
------------------------------------------------------------------------------------------------------------
Millions of Yen Millions of Yen % Yen
Interim period ended
September 30, 2005 36,121 11,380 31.5 297,147
Interim period ended
September 30, 2004 43,092 9,057 21.0 236,408
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Fiscal year ended
March 31, 2005 37,116 11,615 31.3 303,171
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(Note) Number of shares of common stock outstanding, end of period (consolidated)
Interim period ended September 30, 2005: 38,298
Interim period ended September 30, 2004: 38,312
Fiscal year ended March 31, 2005: 38,312
(3) Consolidated Cash Flows (Amounts less than one million yen are rounded)
------------------------------------------------------------------------------------------------------------
Net cash provided
Net cash provided by (used in) Cash and cash
by operating investing Net cash used in equivalents, end of
activities activities financing activities period
------------------------------------------------------------------------------------------------------------
Millions of Yen Millions of Yen Millions of Yen Millions of Yen
Interim period ended
September 30, 2005 2,997 846 (2,197) 6,953
Interim period ended
September 30, 2004 2,067 (172) (2,403) 11,802
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Fiscal year ended
March 31, 2005 5,238 1,974 (14,213) 5,286
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(4) Scope of Consolidation and Adoption of Equity Method Accounting
Number of consolidated subsidiaries: 6 companies
Number of equity method unconsolidated subsidiaries: 0 companies
Number of equity method affiliated companies: 3 companies
(5) Changes in Scope of Consolidation and Adoption of Equity Method Accounting
Consolidated: (added) 1 company, (excluded) 0 companies
Equity method: (added) 0 companies, (excluded) 1 company
3
2. Targets for Financial Results for the Fiscal Year Ending March 31, 2006 (From
April 1, 2005 to March 31, 2006)
(Amounts less than one million yen are rounded)
--------------------------------------------------------------------------------------------------
Total revenues Operating income Income before Net income
income tax expense
--------------------------------------------------------------------------------------------------
Millions of Yen Millions of Yen Millions of Yen Millions of Yen
Fiscal year ending
March 31, 2006 46,330 2,320 3,990 3,700
--------------------------------------------------------------------------------------------------
(Reference) Target for net income per share for the fiscal year ending March 31, 2006: JPY 18,111
* The target for net income per share above is calculated with
estimated 204,300 shares outstanding , in consideration of the 1
to 5 stock split conducted in October 2005 and 12,500 new shares
issued in December 2005.
(Note) Statements made in this press document regarding IIJ's or management's
intentions, beliefs, expectations, or predictions for the future are
forward-looking statements that are based on IIJ's and managements'
current expectations, assumptions, estimates and projections about its
business and the industry. These forward-looking statements, such as
statements regarding the revenues and operating and net income for the
fiscal year ending March 31, 2006, are subject to various risks,
uncertainties and other factors that could cause IIJ's actual results to
differ materially from those contained in any forward-looking statement.
For a list of the risks that might affect the target above and other
related items, please see page 14 of the attached document.
4
1. Status of IIJ Group
(1) Overview of IIJ Group
IIJ Group (Internet Initiative Japan Inc. ("IIJ") and its affiliated
companies) consists of IIJ, four consolidated subsidiaries and three equity
method investees as of the date of this document*. The IIJ Group provides "total
solutions" consisting of a broad range of highly reliable and value-added
network-related services (Internet connectivity services, value-added services,
systems integration and equipment sales) based on Internet-related technologies,
mainly to customers using networks in their operations such as companies or
public organizations. As marketing activities, advertising, sales
administration, and other operations are shared by the services, these services
are not each recognized as a separate business segment.
The overview of the business of IIJ Group companies is as follows:
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Company name Business outline
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IIJ Mainly provides Internet connectivity services, value-added
services including security related outsourcing services,
outsourcing services for network and server
operations/management and data center services, design,
consultation, construction and equipment supply and
operation and maintenance of the equipment for
construction of networks. The services which IIJ provides
are classified into Internet connectivity and value-added
services, systems integration, and equipment sales in IIJ's
consolidated financial statements.
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Four consolidated subsidiaries
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IIJ Technology Inc. ("IIJ-Tech") Mainly provides systems design, consultation, development,
implementation, operation and maintenance, and equipment
supply and operation and maintenance of the equipment for
construction of systems. The services which IIJ-Tech
provides are classified into systems integration and
equipment sales in IIJ's consolidated financial statements.
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IIJ Financial Systems, Inc. ("IIJ-FS") Mainly provides development, operation and maintenance of
systems for financial institutions. The services which
IIJ-FS provides are classified into systems integration in
IIJ's consolidated financial statements.
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Net Care, Inc. ("NC") Mainly provides network monitoring and operation, customer
support, and outsourced call centers. The services which NC
provides are classified into Internet connectivity and
value-added services, and systems integration in IIJ's
consolidated financial statements.
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IIJ America Inc. ("IIJ America") Mainly provides Internet connectivity services in the
United States and constructs and operates Internet backbone
between Japan and the United States and in the United States as
IIJ Group's network location in the United States. The services
which IIJ America provides are classified into Internet
connectivity and value-added services.
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Three equity method affiliates
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Internet Multifeed Co. ("Multifeed") Established as a joint venture with Nippon Telegraph and
Telephone Corporation Group that mainly operates Internet
exchange, distributes high-volume Internet content, and
provides housing services.
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atom Co., Ltd ("atom") Mainly provides content design and production.
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i-Heart Inc. ("i-Heart") Established as a joint venture with Samsung Corporation in
South Korea and provides data center services in South
Korea
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* In August 2005, IIJ Media Communications Inc. ("IIJ-MC"), IIJ's former
consolidated subsidiary, became IIJ's wholly-owned subsidiary and the systems
integration business of IIJ-MC was spun off to IIJ-Tech in October 2005.
IIJ-MC was merged into IIJ in October 2005 with IIJ as the surviving
company. In September 2005, Asia Internet Holding Co., Ltd. ("AIH"), IIJ's
former equity method investee became IIJ's wholly-owned subsidiary and was
merged with IIJ in October 2005, with IIJ as the surviving company.
5
In addition to the above, Nippon Telegraph and Telephone ("NTT") is IIJ's
"other affiliated company"*, since in case a listed company (IIJ) is an equity
method affiliate of another company (NTT), the company (NTT) should be
categorized as the listed company's other affiliated company.
* As defined in "provisions for the terminology, form, and preparation methods
for interim consolidated financial statements in Japan".
(2) Business Diagram
The overview of IIJ Group's business can be illustrated as follows:
6
[SEE SUPPLEMENTAL PDF]
2. Management Policy
(1) Basic Management Policy
The managing concept of IIJ Group is to promote the development of an
information-based society in Japan using Internet technology, create new
markets, and contribute to a growth and development of industries. By realizing
the concept through its business activities, IIJ Group aims to continually
increase its enterprise value and fulfill its corporate responsibility in
society.
7
(2) Basic Policy on the Distribution of Profits
IIJ regards the payment of dividends to shareholders as an important
management issue. However, at the current time, IIJ's policy is to give priority
to securing funds to strengthen its financial position and to use funds for
operational development. Therefore, there is a possibility that IIJ will not pay
dividends in the near future. IIJ has an intention to return its profit to
shareholders, but does not have any concrete plans at this moment.
(3) Ideas and Policies Concerning Reduction in the Size of the Investment Unit
IIJ believes that reducing the size of the investment unit is one of the
effective ways to expand its investor base and increase the liquidity of its
shares. IIJ intends to consider this option taking into account such things as
the stock price level, number of shareholders, the effectiveness of expenditures
and the stock market environment.
(4) Business Indicators as Targets
IIJ Group is conducting its business activities in consideration of the
breakdown of total revenues, profitability, financial position, and other
factors. IIJ Group is making efforts to enhance its profitability by increasing
revenues, controlling costs, and suppressing selling, general and administrative
expenditures in consideration of its gross margin ratio, operating margin ratio
and other figures.
(5) Medium and Long-term Business Strategies
IIJ Group anticipates that the requirements for usage of network systems by
customers will be more advanced and complex, due to the expansion of broadband
in Japan and increased usage of the Internet by companies and governmental
organizations. IIJ Group also expects that the need for availability of network
systems and outsourcing for network systems will increase in IIJ Group's
principal customers, companies and public organizations, and continues to regard
the current market environment as having opportunities for growth. On the other
hand, IIJ Group expects that competition with other companies will also increase
in the Internet connectivity and value-added services and systems integration
areas. For Internet connectivity services, price competition is severe, however,
IIJ Group believes that it can differentiate its services from the competitors
by providing customers with value-added services and systems integration. IIJ
Group recognizes that it is important for business development of IIJ Group for
it to actively promote research and development on Internet related technologies
and continue to provide highly reliable, high value-added and competitive
solutions.
(6) Issues that IIJ should address
Issues that IIJ should address and the current status is as follows:
1) Strengthening platforms for providing total solutions
IIJ Group believes that it is important to further associate the services
and marketing activities by each company in IIJ Group to each other, to meet
diversifying customer needs promptly. As a result of IIJ-Tech's enhancement of
capital by its private placement to third parties in April 2004, the transfer of
systems integration business of IIJ-MC to IIJ-Tech in October 2005 and others,
IIJ's ownership in IIJ-Tech increased to 72.1%. Also, IIJ strengthened its link
with NC to meet customer requirements for outsourced operations and maintenance.
Also, to strengthen its ability to provide solutions to customers by further
linking the engineering expertise of the IIJ Group and customer requirements,
IIJ established the Solution Department and is providing solutions necessary to
build and operate customers' network systems.
2) Increasing earnings capabilities
IIJ Group believes that it is necessary to continue to increase revenues
from Internet connectivity and value-added services, as well as to make efforts
to decrease costs in order to increase profitability and create a stable
earnings base, and it is important to promote provision of total solutions,
increase the scale of revenues per customer and increase the number of such
customers by enclosing customers' network systems with multi-site connectivity
cases, or housing customers' systems in IIJ Group's data centers.
To promote that, IIJ is strengthening the organizations to support sales
activities by establishing the sales engineering organization and strengthening
management and administrative organization continuously by increasing personnel
in the Administrative Department.
3) Maintaining an engineering advantage
IIJ Group recognizes that its engineering advantage is a source of its
competitiveness. IIJ Group believes that it is very important to maintain this
engineering advantage, and is actively working on research and development on
new technologies on Internet. It is necessary for IIJ Group to utilize this
research and development for its medium and long term business expansion as a
source for future revenues, and IIJ Group is and will continue to make efforts
in actively coordinating between engineering research and service development in
the IIJ Research Laboratory, Technology Department and Solution Department.
8
4) Retaining and training human resources
To achieve continuous growth, IIJ Group believes that it is important for
it to continuously retain and train qualified personnel to enhance its
management, maintain its engineering level and strengthen its marketing
capabilities. IIJ Group is conducting, and will continue to conduct, mid-career
recruiting including management level and regular recruiting of new graduates.
(7) Corporate Governance
1) Basic corporate governance philosophy
IIJ Group recognizes that it is very important to enhance its corporate
governance in order to achieve the IIJ Group mission to support and operate
Internet, that has become a material part of the social infrastructure.
2) Status on corporate governance
a. Status of managing and administrative organizations and other corporate
governance systems on IIJ's decision making, execution and supervision on
business
As of the date of this release, the board of directors is composed of
twelve members, including four outside directors. Of the twelve members, eight
directors are in charge of the execution of business. Outside directors and
directors monitor each other on the execution of business, by having monthly
scheduled or extraordinary meetings of the board of directors or meetings among
directors on necessity.
IIJ has a board of statutory auditors consisting of four members, including
two outside statutory auditors. One of the outside statutory auditors is a
Japanese-certified lawyer and the other is a certified public accountant.
b. Status on internal control systems
In IIJ Group, control in accordance with internal rules such as the Code of
Ethics, confirmation by administrative organizations such as the legal
department, internal audits by internal auditing office and other procedures are
conducted on the business activities by its directors and employees.
Regarding internal audits, an internal auditing office is being operated as
an organization to report directly to the President and Chief Executive Officer
and consists of two members including a general manager to enhance the functions
of internal audits. The internal auditing office conducts audits on IIJ and
IIJ's consolidated subsidiaries in accordance with annual auditing plans and
provides concrete advice to improve business activities. The internal auditing
office is implementing its task widely, by cooperating closely with the board of
statutory auditors or being helped by the organizations audited.
In addition, the board of statutory auditors is an important factor to
organize IIJ's internal control system, and auditing procedures are conducted in
accordance with the Commercial Code of Japan. The standing statutory auditor is
conducting regular auditing activities and the statutory auditors attend
meetings of the board of directors and have regular meetings of statutory
auditors.
The board of statutory auditors is also playing a role as an audit
committee in accordance with the Sarbanes-Oxley Act* that is applied to IIJ,
since IIJ is listed on the securities exchange in the United States. To the
board of statutory auditors as the audit committee, a right to establish a
procedure for confidential and anonymous notification of improper facts related
to an internal control and accounting audits, a right to make surveillance and
admission on the services provided to IIJ by an independent registered public
accounting firm are granted. Moreover, IIJ is required to have an financial
expert in the member of the board of statutory auditors to enable the board of
statutory auditors to conduct these activities effectively and properly. One of
IIJ's outside statutory auditors meets the requirement.
Accounting audits in accordance with the Commercial Code of Japan and the
Securities and Exchange Law in Japan is conducted by Deloitte Touche Tomatsu. In
addition, Deloitte Touche Tomatsu is conducting accounting audits under U.S.
GAAP on the annual report on Form 20-F that IIJ files with the United States
Securities and Exchange Commission. Since the Sarbanes-Oxley Act is applied to
IIJ, IIJ Group is required to be audited on its status of introduction and
operation of internal control system on financial statements including and after
the fiscal year ending March 2007.
The names of certified public accountants who conducted audit activities
and assistants on the activities in accordance with Securities and Exchange Law
in Japan in the interim period ending September 30, 2005 consisted are the
follows:
The name and other information of the certified public accountants who
conducted audit activities:
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Engagement Partners: Shuko Shimoe, Takashi Yamaguchi
Assistants on the audit activities: one certified public accountant, two
assistant accountants and two other staff members
* The Sarbanes-Oxley Act is a law established in July 2002 in the United
States mainly to enhance corporate governance.
3) Overview of interests of outside directors and outside statutory auditors,
including personal, capital, business and other relationships
Of the four outside directors, Takashi Hiroi is an employee of NTT, an
other affiliated company of IIJ, however, he does not have any personal
relationships such as family relationships with IIJ's other directors and
auditors. He did not acquire any interests such as a capital or business
relationships upon becoming IIJ's outside director either. The other outside
directors and outside statutory auditors had neither any personal relationships
such as family relationships with other directors or auditors of IIJ, nor other
interests such as capital or business relationships upon becoming outside
directors or outside statutory auditors of IIJ.
4) Status of IIJ's measurement to enhance its corporate governance in the
interim period ending September 30, 2005
To enhance IIJ Group's internal control system as well as meet the
requirements by the Sarbanes-Oxley Act above, IIJ established a Code of Ethics
and a procedure for confidential and anonymous notification. In addition, IIJ is
making clarification of targets for internal control and preparing internal
control documents mainly from the view of securing accuracy of financial
figures.
(8) Parent Company or Other Related Companies and Related Matters
1) Parent company or other related companies trade name and related matters (as of September 30, 2005)
-----------------------------------------------------------------------------------------
Parent company Type Its Securities Exchanges where
or other voting rights its shares are listed
related company allocation
-----------------------------------------------------------------------------------------
Tokyo Stock Exchange, Inc.
Other affiliated company* (First Section)
(since in case that a Osaka Securities Exchange,
listed company (IIJ) is Co., Ltd. (First Section)
an affiliated company of 31.6% Nagoya Stock Exchange, Inc.
NTT another company (NTT), (5.3) (First Section)
the company (NTT) should Fukuoka Stock Exchange
be categorized as the Sapporo Stock Exchange
listed company's other New York Stock Exchange
affiliated company) London Stock Exchange plc.
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(Note) 1. The percentage in parentheses is the indirect ownership by NTT and
included in the figure above.
2. Share of voting rights held by a parent company or other related
company is 29.7%, including the indirect ownership as of the date
of the release of this document.
* As defined in "provisions for the terminology, form, and preparation
methods for interim consolidated financial statements in Japan"
2) Position of the listed company (IIJ) in the group of the parent company
NTT is the leading shareholder in IIJ. Its voting rights, including rights
through indirect ownership, were 31.6% as of September 30, 2005, as noted in the
table above. However, IIJ is maintaining management independence.
3) Business relationship with NTT Group
IIJ uses services provided by Nippon Telegraph and Telephone East
Corporation ("NTT East") and Nippon Telegraph and Telephone West Corporation
("NTT West") for a significant portion of its access circuits, and services
provided by NTT Communications for a significant portion of its domestic and
international backbone circuits. In the interim period ending September 30,
2005, the payment for the circuits to NTT East and West totaled JPY 346,756
thousand and JPY 2,584,075 thousand to NTT Communications.
Business transactions with the NTT Group are within the scope of normal
business practices.
(9) Transactions with Special Interest Group
10
IIJ provides Internet connectivity services to Applied Research Institute,
Inc., which is wholly owned by Koichi Suzuki, the President and Chief Executive
Officer of IIJ. The cost of these services was JPY 351 thousand in the interim
period ended September 30, 2005, and the transaction is within the scope of
normal business practices.
11
3. Results of Operations and Financial Conditions
(1) Consolidated Results of Operations in the Interim Period Ending September
30, 2005 (from April 1, 2005 to September 30, 2005)
In the interim period ending September 30, 2005, Japan's economy showed
signs of a gentle recovery, such as increased capital investments in the private
sector, recovered personal spending and the Nikkei Stock Average (Nikkei 225)
recording the highest price in the calendar year towards the end of the interim
period ending September 30, 2005 reflecting improved corporate revenues, though
crude oil price increased rapidly.
In this environment, utilization of Internet-related technologies in
corporate internal networks and business systems is expanding in our primary
customer segment, large-sized enterprises and public organizations. In these
companies, the demand for outsourcing is further expanding, due to increased
traffic in business, networks that are becoming more complex and an increase in
various security-related issues. In the interim period ending September 30,
2005, IIJ Group continued to promote its network solution business by providing
a total integration package such as network design and construction and
consulting on security and outsourcing services such as operation of network to
meet these outsourcing demands from customers.
As a result, for IIJ Group's consolidated results of operation for the
interim period ended September 30, 2005, total revenues amounted to JPY 21,809
million (an increase of 13.7% compared to the interim period ended September 30,
2004), operating income amounted to JPY 754 million (JPY 182 million in the
interim period ended September 30, 2004), income before income tax expense (for
income from operations before income tax expense, minority interests and equity
in net income of equity method investees) amounted to JPY 1,779 million (JPY 21
million in the interim period ended September 30, 2004) and net income amounted
to JPY 1,623 million (net loss of JPY 9 million in the interim period ended
September 30, 2004).
Results of operations by service were as follows:
1) Internet connectivity and value-added services
For dedicated access services, while the number of contracts steadily
increased, resulting in an expanded customer base, revenues amounted to JPY
5,442 million in the interim period ended September 30, 2005 (a decrease of 5.4%
compared to the interim period ended September 30, 2004), mainly because
customers shifted to the packaged type of broadband services with local access
circuits of NTT East and West's Flet's network with lower unit prices.
For dial-up access services, revenues amounted to JPY 1,381 million in the
interim period ended September 30, 2005 (a decrease of 7.4% compared to the
interim period ended September 30, 2004), mainly due to a decrease in the number
of contracts.
For value-added services, revenues amounted to JPY 2,846 million (an
increase of 18.3% compared to the interim period ended September 30, 2004) due
to a steady increase in security, server outsourcing such as e-mails and network
outsourcing services.
For other services, revenues amounted to JPY 1,863 million (an increase of
42.5% compared to the interim period ended September 30, 2004), due to an
increase in revenues from Wide-area Ethernet Services along with increased
multi-site connectivity cases.
As a result of the above, revenues from Internet connectivity and
value-added services in the interim period ended September 30, 2005 amounted to
JPY 11,533 million (an increase of 5.3% compared to the interim period ended
September 30, 2004). The gross margin for Internet connectivity and value-added
services in the interim period ended September 30, 2005 amounted to JPY 1,581
million (an increase of 15.8% compared to the interim period ended September 30,
2004) and the gross margin ratio was 13.7% (the gross margin ratio for Internet
connectivity and value-added services in the interim period ended September 30,
2004 was 12.5%), since the cost of revenues remained steady due to a decrease in
backbone costs despite an increase in personnel expenses and maintenance costs.
2) Systems integration
In the interim period ended September 30, 2005, revenues from systems
integration amounted to JPY 9,002 million (an increase of 37.8% compared to the
interim period ended September 30, 2004), due to an increase in one-time systems
integration developments and an increase in outsourced operations projects
caused by an increase in the one-time developments. The gross margin from
systems integration amounted to JPY 2,173 million (an increase of 56.0% compared
to the interim period ended September 30, 2004), and the gross margin ratio was
24.1% (the gross margin ratio for systems integration in the interim period
ended September 30, 2004 was 21.3%).
3) Equipment sales
12
Revenues from equipment sales in the interim period ended September 30,
2005 amounted to JPY 1,274 million (a decrease of 24.9% compared to the interim
period ended September 30, 2004), due to continuous purchase and sale of network
equipment to customers and sale of SEIL, the routers that IIJ originally
developed. The gross margin amounted to JPY 64 million (a decrease of 50.8%
compared to the interim period ended September 30, 2005), and the gross margin
ratio was 5.1% (the gross margin ratio for equipment sales in the interim period
ended September 30, 2004 was 7.7%).
(2) Consolidated Financial Position
Cash and cash equivalents, at the end of the interim period ended September
30, 2005 was JPY 6,953 million (a decrease of JPY 4,849 million compared to the
interim period ended September 30, 3004).
(Net cash provided by operating activities)
Net cash provided by operating activities was JPY 2,997 million in the
interim period ended September 30, 2005 (an increase of JPY 930 million compared
to the interim period ended September 30, 2004), mainly due to the operating
income in the trend of decreasing cost for Internet connectivity and value-added
services and increased profitability in systems integration, and adjustment to
net cash provided by operating activities by depreciation and amortization.
(Net cash provided by investing activities)
Net cash provided by investing activities was JPY 846 million in the
interim period ended September 30, 2005 (an increase of JPY 1,018 million
compared to the interim period ended September 30, 2004), mainly due to purchase
of property and equipment of JPY 328 million and purchase of short-term and
other investments of JPY 300 million and acquisition of shares of consolidated
subsidiaries of JPY 192 million offset proceeds from sales of short-term
investments and other investments such as available-for-sale securities of JPY
1,496 million.
(Net cash used in financing activities)
Net cash used in financing activities was JPY 2,197 million in the interim
period ended September 30, 2005 (a decrease of JPY 206 million compared to the
interim period ended September 30, 2004), mainly due to repayments of long-term
borrowings and securities loan agreement of JPY 3,613 million and principal
payments under capital leases of JPY 1,516 million despite proceeds from
long-term borrowings and securities loan agreement of JPY 2,735 million.
(3) Targets for the Fiscal Year Ending March 31, 2006
Targets for consolidated financial results for the fiscal year ending March
31, 2006 of IIJ Group is as follows:
Total revenues: JPY 46,330 million (an increase of 11.1% compared to the
fiscal year ended March 31, 2005)
Operating income: JPY 2,320 million (an increase of 85.9% compared to the
fiscal year ended March 31, 2005)
Income before income tax expense: JPY 3,990 million (an increase of 26.7%
compared to the fiscal year ended March 31, 2005)
Net income: JPY 3,700 million (an increase of 27.3% compared to the fiscal
year ended March 31, 2005)
Statements made in this press release regarding IIJ's or management's
intentions, beliefs, expectations, or predictions for the future are
forward-looking statements that are based on IIJ's and managements' current
expectations, assumptions, estimates and projections about its business and the
industry. These forward-looking statements, such as statements regarding
revenues and operating and net profitability in the fiscal year ending March 31,
2006, are subject to various risks, uncertainties and other factors that could
cause IIJ's actual results to differ materially from those contained in any
forward-looking statement. These risks, uncertainties and other factors include:
IIJ's ability to maintain and increase revenues from higher margin services such
as system integration and value-added services; the possibility that revenues
from connectivity services may decline substantially as a result of competition
and other factors; the ability to compete in a rapidly evolving and competitive
marketplace; the impact on IIJ's profits of fluctuations in costs such as
backbone costs and subcontractor costs; the impact on IIJ's profits of
fluctuations in the price of available-for-sale securities; the impact of
technological changes in its industry; IIJ's ability to raise additional capital
to cover its indebtedness; the possibility that NTT, IIJ's largest shareholder,
may decide to exercise substantial influence over IIJ; and other risks referred
to from time to time in IIJ's annual report on Form 20-F and other filings with
the United States Securities and Exchange Commission.
13
4. Risk Factors
The results of operations and financial position of IIJ or IIJ Group may be
adversely and materially impacted by the following and other factors. The
follows show the principal factors listed in the Yuka-shoken-todokedesho (a
registration statement submitted to the regulatory public organization in Japan)
that IIJ submitted on November 9, 2005.
- Risk from effects on IIJ Group's business developments by a lack of
improvement of Japan's economy, or a change in economic conditions
- Risk from IIJ Group's dependence on other companies for telecommunication
circuits
- Risk from IIJ Group's failure to sustain its service quality and operate
its services properly
- Risk from the possibility of interruption of services of IIJ Group
- Risk of IIJ Group's failure to protect its private customer information,
such as personal information
- Risk due to IIJ Group's failure to keep up with technological developments
- Risk associated with IIJ Group's international business
- Risk from effects on IIJ Group's results of operations and financial
position by increased price competition
- Risk due to fluctuation of backbone costs
- Risk due to IIJ Group's failure to manage outsourcing costs
- Risk of less achievement in business developments than expected, due to IIJ
Group's failure to differentiate itself from its competitors
- Risk due to IIJ Group's dependence on its executive officers, particularly
Mr. Koichi Suzuki
- Risk of IIJ Group's failure to attract and retain qualified personnel
- Risk of IIJ Group's failure to have synergy effects in IIJ Group overall
- Risk associated with IIJ Group's relationships with NTT Group
- Risk of IIJ Group's failure to achieve growth of results of operations
- Risk from IIJ Group's results of operations and financial position being
affected by seasonal fluctuations
- Risk from impacts on IIJ Group's results of operations and financial
position by fluctuations in the stock prices of companies in which it has
invested
- Large amount of accumulated deficit
- Risk associated with regulatory matters and new legislation related to the
telecommunications law
- Risk associated with legal regulation of the Internet
- Risk of IIJ Group's violation of intellectual properties
- Risk of IIJ Group's involvement in legal proceedings
- Risk of not being able to utilize acquired proceeds to develop IIJ Group's
business
- Risk of IIJ Group's being unable to acquire sufficient future financing
- Adverse effect on IIJ's stock price by the possibility of non-payment of
dividends by IIJ
- Adverse effect of dilution in case new shares of common stock are issued in
relation to stock options
- Risk associated with the possibility of execution of rights of NTT to
prevent dilution of ownership by NTT
- Difference between the documents disclosed in Japan and the United States
For details of risk regarding IIJ Group's business, please refer to IIJ and IIJ
Group's financial related documents disclosed in accordance to the laws,
disclosure rules and others in Japan, and on IIJ's annual reports on Form 20-F
and other documents that IIJ files with the United States Securities and
Exchange Commission.
14
5. Interim Consolidated Financial Statements
(1) Interim Consolidated Financial Statements
1) Interim consolidated balance sheets
-------------------------------------------------------------------------
At the end of the At the end of the Consolidated balance
interim period ended interim period ended sheets at the end of
September 30, 2004 September 30, 2005 fiscal year ended
March 31, 2005
--------------------------------------------------------------------------------------------------------
Thousands of % of Thousands of % of Thousands of % of
Yen total Yen total Yen total
--------------------------------------------------------------------------------------------------------
ASSETS
------
Current Assets:
Cash and cash equivalents (Y) 11,802,165 (Y) 6,953,496 (Y) 5,286,477
Accounts receivable, net of
allowance for doubtful
accounts of JPY 31,541
thousand, JPY 33,537
thousand and JPY 41,400
thousand at September 30,
2004, September 30, 2005 and
March 31, 2005 respectively 6,770,303 6,684,910 7,407,439
Inventories 262,180 286,367 140,096
Prepaid expenses 652,061 989,785 604,935
Other current assets 106,364 145,243 108,228
--------------- --------------- ---------------
Total current assets 19,593,073 45.5 15,059,801 41.7 13,547,175 36.5
Investments in and Advances to
Equity Method Investees, net
of loan loss valuation
allowance of JPY 31,303
thousand, JPY 31,378 thousand
and JPY 31,378 thousand at
September 30, 2004, September
30, 2005 and March 31, 2005
respectively 752,630 1.7 452,702 1.3 713,607 1.9
--------------- --------------- ---------------
Other Investments 10,657,082 24.7 8,048,512 22.3 9,930,781 26.8
--------------- --------------- ---------------
Property and Equipment, net 9,045,349 21.0 9,142,951 25.3 9,722,366 26.2
Intangible Assets, net 244,151 0.6 628,361 1.7 561,211 1.5
Guarantee Deposits 2,080,345 4.8 2,100,008 5.8 2,050,665 5.5
Other Assets, net of allowance
for doubtful accounts of JPY
340,107 thousand, JPY 26,272
thousand and JPY 376,092
thousand at September 30,
2004, September 30, 2005 and
March 31, 2005, respectively 719,744 1.7 688,200 1.9 590,666 1.6
--------------- --------------- ---------------
Total assets (Y) 43,092,374 100.0 (Y) 36,120,535 100.0 (Y) 37,116,471 100.0
--------------- --------------- ---------------
--------------------------------------------------------------------------------------------------------
15
-------------------------------------------------------------------------
At the end of the At the end of the Consolidated balance
interim period ended interim period ended sheets at the end of
September 30, 2004 September 30, 2005 fiscal year ended
March 31, 2005
--------------------------------------------------------------------------------------------------------
Thousands of % of Thousands of % of Thousands of % of
Yen total Yen total Yen total
--------------------------------------------------------------------------------------------------------
LIABILITIES AND
---------------
SHAREHOLDERS' EQUITY
--------------------
Current Liabilities:
Short-term borrowings (Y) 5,732,204 (Y) 4,922,177 (Y) 4,724,633
Payable under securities
loan agreement 816,800 1,518,400 1,729,520
Long-term borrowings --
current portion 1,650,139 2,537,997 2,736,056
Convertible notes 11,088,000 - -
Capital lease obligations --
current portion 2,491,070 2,716,030 2,774,974
Accounts payable 4,502,356 5,205,982 4,860,733
Accrued expenses 448,585 515,976 541,118
Other current liabilities 604,868 790,194 817,517
--------------- --------------- ---------------
Total current liabilities 27,334,022 63.4 18,206,756 50.4 18,184,551 49.0
Long-Term Borrowings 1,732,473 4.0 1,060,476 2.9 1,529,963 4.1
Capital Lease Obligations --
Noncurrent 3,620,613 8.4 3,896,848 10.8 4,339,028 11.7
Accrued Retirement and Pension
Costs 102,224 0.3 181,289 0.5 143,346 0.4
Other Noncurrent Liabilities 300,190 0.7 387,259 1.1 275,533 0.7
--------------- --------------- ---------------
Total Liabilities 33,089,522 76.8 23,732,628 65.7 24,472,421 65.9
--------------- --------------- ---------------
MINORITY INTEREST 945,572 2.2 1,007,787 2.8 1,028,977 2.8
--------------- --------------- ---------------
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' EQUITY
Common-stock --authorized,
75,520 shares; issued and
outstanding, 38,360 shares
at September 30, 2004,
September 30, 2005 and March
31, 2005 13,765,372 31.9 13,765,372 38.1 13,765,372 37.1
Additional paid-in capital 23,637,628 54.9 23,637,628 65.4 23,637,628 63.7
Accumulated deficit (37,349,204) (86.7) (32,810,738) (90.8) (34,434,052) (92.8)
Accumulated other
comprehensive income 9,047,484 21.0 6,872,096 19.0 8,690,125 23.4
16
Treasury stock -- 120 shares,
155 shares and 120 shares
held by an equity method
investee at September 30,
2004, September 30, 2005 and
March 31, 2005 respectively (44,000) (0.1) (84,238) (0.2) (44,000) (0.1)
--------------- --------------- ---------------
Total Shareholders' Equity 9,057,280 21.0 11,380,120 31.5 11,615,073 31.3
--------------- --------------- ---------------
Total liabilities and
shareholders' equity (Y) 43,092,374 100.0 (Y) 36,120,535 100.0 (Y) 37,116,471 100.0
--------------- --------------- ---------------
--------------------------------------------------------------------------------------------------------
17
(2) Interim Consolidated Statements of Operations
--------------------------------------------------------------------------------------------------------
Consolidated statements
Interim period ended Interim period ended of operations of the
September 30, 2004 September 30, 2005 fiscal year ended
(from April 1, 2004 to (from April 1, 2005 to March 31, 2005
September 30, 2004) September 30, 2005) (from April 1, 2004 to
March 31, 2005)
--------------------------------------------------------------------------------------------------------
Thousands of % of Thousands of % of Thousands of % of
Yen total Yen total Yen total
revenues revenues revenues
--------------------------------------------------------------------------------------------------------
Revenues:
Connectivity and value-
added services:
Dedicated access (Y) 5,750,843 (Y) 5,442,225 (Y) 11,372,701
Dial-up access 1,491,890 1,381,109 2,936,973
Value-added services 2,406,956 2,846,450 5,004,730
Other 1,308,007 1,863,325 3,169,413
--------------- --------------- ---------------
Total 10,957,696 11,533,109 22,483,817
Systems integration 6,532,349 9,001,675 15,853,824
Equipment sales 1,697,190 1,274,139 3,364,926
--------------- --------------- ---------------
Total revenues 19,187,235 100.0 21,808,923 100.0 41,702,567 100.0
--------------- --------------- ---------------
Cost and Expenses:
Cost of connectivity and
value-added services 9,591,609 9,951,821 19,483,890
Cost of systems integration 5,139,197 6,829,036 12,200,137
Cost of equipment sales 1,566,336 1,209,794 3,111,369
--------------- --------------- ---------------
Total cost 16,297,142 85.0 17,990,651 82.5 34,795,396 83.4
Sales and marketing 1,374,611 7.2 1,567,363 7.2 2,794,561 6.7
General and administrative 1,233,177 6.4 1,413,083 6.5 2,665,980 6.4
Research and development 100,605 0.5 83,851 0.4 198,979 0.5
--------------- --------------- ---------------
Total cost and expenses 19,005,535 99.1 21,054,948 96.6 40,454,916 97.0
--------------- --------------- ---------------
Operating Income 181,700 0.9 753,975 3.4 1,247,651 3.0
--------------- --------------- ---------------
Other Income (Expenses):
Interest income 6,713 7,874 12,877
Interest expense (313,145) (215,913) (685,857)
Foreign exchange gains 11,295 4,963 5,958
Gain on other investments 69,445 1,148,797 2,439,330
Gain arising from issuance of
equity method investee's share 25,933 - 25,933
Other - net 38,871 79,129 102,616
--------------------------------------------------------------------------------------------------------
18
--------------------------------------------------------------------------------------------------------
Consolidated statements
Interim period ended Interim period ended of operations of the
September 30, 2004 September 30, 2005 fiscal year ended
(from April 1, 2004 to (from April 1, 2005 to March 31, 2005
September 30, 2004) September 30, 2005) (from April 1, 2004 to
March 31, 2005)
--------------------------------------------------------------------------------------------------------
Thousands of % of Thousands of % of Thousands of % of
Yen total Yen total Yen total
revenues revenues revenues
--------------------------------------------------------------------------------------------------------
--------------- --------------- ---------------
Other income (Expense) -
net (160,888) (0.8) 1,024,850 4.7 1,900,857 4.6
--------------- --------------- ---------------
Income from operations
before Income Tax
Expense, Minority
Interests and Equity in
Net Income (Loss) of
Equity Method Investees 20,812 0.1 1,778,825 8.1 3,148,508 7.6
Income Tax Expense 30,595 0.1 82,011 0.3 99,870 0.2
Minority Interests in Earnings
of Subsidiaries (3,653) (0.0) (105,632) (0.5) (109,161) (0.3)
Equity in Net Income (Loss)
of Equity Method Investees: 4,553 0.0 32,132 0.1 (33,208) (0.1)
--------------- --------------- ---------------
Net Income (Y) (8,883) 0.0 (Y) 1,623,314 7.4 (Y) 2,906,269 7.0
--------------- --------------- ---------------
--------------------------------------------------------------------------------------------------------
19
--------------------------------------------------------------------------------------------------------
Consolidated statements
Interim period ended Interim period ended of operations of the
September 30, 2004 September 30, 2005 fiscal year ended
(from April 1, 2004 to (from April 1, 2005 to March 31, 2005
September 30, 2004) September 30, 2005) (from April 1, 2004 to
March 31, 2005)
--------------------------------------------------------------------------------------------------------
Basic Weighted-Average Number
of Common Shares Outstanding 38,312 38,304 38,312
Diluted Weighted-Average Number
of Common Shares Outstanding 38,312 38,334 38,312
Basic Net Income per Common
Share (232) 42,380 75,858
Diluted Net Income per
Common Share (232) 42,347 75,858
--------------------------------------------------------------------------------------------------------
20
(3) Consolidated Statements of Shareholders' Equity
Consolidated statements of shareholders' equity for the interim period ended September 30, 2004
(Unit: Thousands of yen)
----------------------------------------------------------------------------------------------------------------------------------
Shares of
common
stock
outstanding
(including Accumulated
treasury other
stock) Additional Accumulated comprehensive Treasury
(shares) Common stock paid-in capital deficit income stock Total
----------------------------------------------------------------------------------------------------------------------------------
Balance, April 1, 2004 38,360 (Y) 13,765,372 (Y) 23,637,628 (Y)(37,340,321) (Y) 6,195,449 (Y)(44,000) (Y) 6,214,128
Net loss for the interim
period ended
September 30, 2004 (8,883) (8,883)
Other comprehensive
income, net of tax 2,852,035 2,852,035
--------------
Total comprehensive income 2,843,152
------------------------------------------------------------------------------------------------------
Balance, September 30, 2004 38,360 (Y) 13,765,372 (Y) 23,637,628 (Y)(37,349,204) (Y) 9,047,484 (Y)(44,000) (Y) 9,057,280
------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------------
Consolidated statements of shareholders' equity for the interim period ended September 30, 2005
(Unit: Thousands of yen)
----------------------------------------------------------------------------------------------------------------------------------
Shares of
common
stock
outstanding
(including Accumulated
treasury other
stock) Additional Accumulated comprehensive Treasury
(shares) Common stock paid-in capital deficit income stock Total
----------------------------------------------------------------------------------------------------------------------------------
Balance, April 1, 2005 38,360 (Y) 13,765,372 (Y) 23,637,628 (Y)(34,434,052) (Y) 8,690,125 (Y) (44,000) (Y)11,615,073
Net income for the interim
period ended
September 30, 2005 1,623,314 1,623,314
Other comprehensive
loss, net of tax (1,818,029) (1,818,029)
--------------
Total comprehensive loss (194,715)
Purchase of common stock by
an equity method investee (40,238) (40,238)
------------------------------------------------------------------------------------------------------
Balance, September 30, 2005 38,360 (Y) 13,765,372 (Y) 23,637,628 (Y)(32,810,738) (Y) 6,872,096 (Y)(84,238) (Y)11,380,120
------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------------
21
Consolidated statements of shareholders' equity for the fiscal year ended March 31, 2005
(Unit: Thousands of yen)
----------------------------------------------------------------------------------------------------------------------------------
Shares of
common
stock
outstanding
(including Accumulated
treasury other
stock) Additional Accumulated comprehensive Treasury
(shares) Common stock paid-in capital deficit income stock Total
----------------------------------------------------------------------------------------------------------------------------------
Balance, April 1, 2004 38,360 (Y) 13,765,372 (Y) 23,637,628 (Y)(37,340,321) (Y) 6,195,449 (Y)(44,000) (Y) 6,214,128
Net income for the
fiscal year ended
March 31, 2005 2,906,269 2,906,269
Other comprehensive
income, net of tax 2,494,676 2,494,676
--------------
Total comprehensive income 5,400,945
------------------------------------------------------------------------------------------------------
Balance, March 31, 2005 38,360 (Y) 13,765,372 (Y) 23,637,628 (Y)(34,434,052) (Y) 8,690,125 (Y)(44,000) (Y)11,615,073
------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------------
22
(4) Interim Consolidated Statements of Cash Flows
----------------------------------------------------------------------------------------------------------
Consolidated statements
Interim period ended Interim period ended of operations of the
September 30, 2004 September 30, 2005 fiscal year ended
(from April 1, 2004 to (from April 1, 2005 to March 31, 2005
September 30, 2004) September 30, 2005) (from April 1, 2004
to March 31, 2005)
------------------------------------------------------------------------
Thousands of yen Thousands of yen Thousands of yen
----------------------------------------------------------------------------------------------------------
Operating Activities:
Net income (loss) (Y) (8,883) (Y) 1,623,314 (Y) 2,906,269
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and
amortization 2,015,702 2,023,884 4,193,093
Provision for doubtful
accounts and advances 7,032 (7,012) 24,781
Gains on other investments (69,445) (1,148,797) (2,439,330)
Foreign exchange gains (21,737) (10,409) (15,466)
Loss on retirement of
convertible notes 5,195 - 5,195
Equity method net loss
(income) (4,553) (32,132) 33,208
Minority interests in
earnings of subsidiaries 3,653 105,632 109,161
Deferred income tax
expense (benefit) - 7,662 (11,023)
Others 85,769 45,762 366,935
Changes in operating assets
and liabilities:
Decrease in accounts
receivable 2,230,893 824,634 1,607,692
Decrease (increase) in
inventories 174,927 (146,271) 286,751
Increase (decrease) in
accounts payable (2,527,935) 139,046 (2,307,729)
Other 176,239 (428,368) 478,960
------------------------------------------------------------------------
Net cash provided by
operating activities (Y) 2,066,857 (Y) 2,996,945 (Y) 5,238,497
------------------------------------------------------------------------
Investing Activities:
Purchases of property and
equipment (374,645) (327,693) (577,133)
23
Purchase of short-term
and other investments (5,373) (300,155) (12,566)
Purchase of subsidiary
stock from minority
shareholders - (192,142) (61,680)
Proceeds from sales of
short-term and other
investments 216,567 1,496,078 2,976,017
Acquisition of a newly
controlled company, net
of cash acquired - 229,457 -
Refund (payment) of
guarantee deposits - net (4,665) (46,466) 23,167
Acquisition of business - - (375,123)
Other (3,947) (13,303) 1,321
------------------------------------------------------------------------
Net cash provided by
(used in) investing
activities (Y) (172,063) (Y) 845,776 (Y) 1,974,003
------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------
24
----------------------------------------------------------------------------------------------------------
Consolidated statements
Interim period ended Interim period ended of cash flows of the
September 30, 2004 September 30, 2005 fiscal year ended
(from April 1, 2004 to (from April 1, 2005 to March 31, 2005
September 30, 2004) September 30, 2005) (from April 1, 2004
to March 31, 2005)
------------------------------------------------------------------------
Thousands of yen Thousands of yen Thousands of yen
----------------------------------------------------------------------------------------------------------
Financing Activities:
Proceeds from issuance of
long-term borrowings 1,000,000 1,000,000 2,250,000
Repayments of long-term
borrowings (1,473,653) (1,667,546) (1,840,246)
Proceeds from securities
loan agreement 816,800 1,734,800 2,546,320
Repayments of securities
loan agreement - (1,945,920) (816,800)
Principal payments under
capital leases (1,357,465) (1,515,569) (2,867,625)
Net increase (decrease) in
short-term borrowings (831,890) 197,544 (1,839,460)
Repurchase of convertible
notes (745,488) - (745,488)
Redemption of convertible
notes - - (11,088,000)
Proceeds from issuance of
subsidiary stock to
minority shareholders 188,632 - 188,632
------------------------------------------------------------------------
Net cash used in
financing activities (Y)(2,403,064) (Y)(2,196,691) (Y)(14,212,667)
------------------------------------------------------------------------
Effect of Exchange Rate
Changes on Cash 26,196 20,989 2,405
Net Increase (Decrease) in
Cash and Cash Equivalents (482,074) 1,667,019 (6,997,762)
Cash and Cash Equivalents,
Beginning of each period 12,284,239 5,286,477 12,284,239
------------------------------------------------------------------------
Cash and Cash Equivalents, End
of each period 11,802,165 6,953,496 5,286,477
------------------------------------------------------------------------
Additional Cash Flow
Information:
Interest paid 278,612 216,012 613,817
26
Income taxes paid 23,209 112,252 29,227
Noncash Investing and
Financing Activities:
Acquisition of assets by 2,270,983 1,000,719 4,433,906
entering into capital leases
Exchange of common stock
investment due to merger:
Market value of common 37,950 - 37,950
shares acquired
Cost of investment 2,500 - 2,500
Acquisition of business:
Assets acquired - 843,485 1,202,007
Cash paid - (733,589) (375,123)
Liabilities assumed - 109,896 826,884
----------------------------------------------------------------------------------------------------------
25
Basis of Presenting Consolidated Financial Statements for the Interim Period
----------------------------------------------------------------------------
Ended September 30, 2005
------------------------
1. The Terminology, Form, and Preparation Methods for Consolidated Financial
Statements for the Interim Period Ended September 30, 2005
The financial statements for the interim period ended September 30, 2005
have been prepared in accordance with the provisions of article 81 "provisions
for the terminology, form, and preparation methods for interim consolidated
financial statements" (Ministry of Finance, ordinance No. 24, 1999), and based
on the accounting treatment principles and procedures and disclosure methods
required in relation to the issuance of American Depository Receipts ("ADRs")
(U.S. GAAP including Accounting Research Bulletins ("ARB"), Accounting
Principles Board ("APB") Opinions, Statement of Financial Accounting Standards
("SFAS") and related interpretation guidelines).
IIJ registered the sale of ADRs with the Securities and Exchange Commission
("SEC") of the United States of America under the Securities and Exchange Act of
1933, as amended and registered the quotation of the ADRs on the NASDAQ National
Market of the United States of America in August 1999. Further, in accordance
with Rule 13 of the U.S. Securities Exchange Act of 1934, as amended, IIJ
regularly files with the SEC an annual report on Form 20-F which includes
consolidated financial statements prepared in accordance with U.S. GAAP.
2. Main Differences from Preparation in Accordance with Provisions and
Principles for Consolidated Financial Statements for the Interim period
The main differences between consolidated financial statements for the
interim period ended September 30, 2005 prepared in accordance with U.S
accounting standards and those prepared in accordance with Japan's provisions
and principles for consolidated financial statements for the interim period
ended September 30, 2005 and the effect by important monetary items on income
from operations before income tax expense, minority interests and equity in net
income of equity method investees in the interim period ended September 30, 2005
are given below.
(1) Differences Regarding the Composition of Interim Consolidated Financial
Statements
Interim consolidated financial statements have been prepared based on U.S.
GAAP comprise interim consolidated balance sheets, interim consolidated
statements of operations, interim consolidated statements of shareholders'
equity, interim consolidated statements of cash flows, and notes to interim
consolidated financial statements.
(2) Differences Regarding Disclosure in Interim Consolidated Financial
Statements
In interim consolidated statements of operations, equity in net income of
equity method investees is shown as a separate item after income from operations
before income tax expense.
(3) Differences Regarding Accounting Treatment Standards
1) Income taxes
Income taxes are accounted for in accordance with SFAS No. 109. Changes in
the deferred income tax asset valuation allowance that relate to the tax effect
of unrealized gains and losses on available-for-sale securities have been
recorded as a separate component of other comprehensive income.
2) Accounting treatment of lease transactions
The Company accounts for significant lease transaction agreements that
fulfill the requirements for capitalized leases as stipulated by SFAS No. 13, in
accordance with SFAS. As a result, finance lease transactions, other than those
that recognize transfer of ownership to the lessee, are treated as purchases. In
the period ended September 30, 2005, this accounting treatment of lease
transactions resulted in a JPY 11,591 thousand reduction in income from
operations before income tax expense.
3) Stock issuance cost
Stock issuance cost is accounted for as expenses related to capital
transactions and deducted from additional paid-in capital. In the period ended
September 30, 2005, this accounting treatment resulted in a JPY 18,961 thousand
increase in income from operations before income tax expense.
4) Retirement benefit accounting
Unfunded retirement benefits and noncontributory defined benefit pension
plans are accounted for in accordance with SFAS No. 87. In the period ended
September 30, 2005, this accounting treatment resulted in a JPY 1,530 thousand
increase in income from operations before income tax expense.
5) Comprehensive income
Comprehensive income is accounted for in accordance with SFAS No. 130
"reporting comprehensive income." SFAS requires additional disclosure of
information in consolidated financial statements. In the period ended September
30, 2005, this accounting treatment did not result in any change in income from
operations before income tax expense.
27
(4) Difference in the Way of Calculation of Diluted Net Income per Share in the
Interim Consolidated Financial Statements
Diluted net income per share is accounted for in accordance with SFAS No.
128. In accordance with SFAS, the test if the potential common shares have
dilutive effects should be conducted quarterly even in the interim period. In
the Japan's provisions and principles for consolidated financial statements for
the interim period, the test should be conducted considering the interim period
as one period. In accordance, there might be difference in the result of the
test depending on the average of share price in the period.
In the interim period ended September 30, 2005, there is a difference
mentioned above. In accordance with Japan's provisions and principles for
consolidated financial statements for the interim period, there is no dilutive
effects and the basic net income per share and diluted net income per share
should be the same.
28
Notes to Interim Consolidated Financial Statements for the period ended
-----------------------------------------------------------------------
September 30, 2005
------------------
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
-------------------------------------------------------------------------
Internet Initiative Japan Inc. ("IIJ"), a Japanese corporation, was founded
in December 1992 to develop and operate Internet access services and other
Internet-related services in Japan and is 31.6 percent owned by Nippon Telegraph
and Telephone Corporation ("NTT") and its subsidiary, NTT Communications, Inc.
as of September 30, 2005 (at the end of the interim period ended September 30,
2005). IIJ and consolidated subsidiaries (collectively, the "Company") provide
Internet access services throughout Japan, into the United States of America and
into the rest of Asia, and value-added services. The Company also provides
systems integration, which mainly comprise consultation, design, development,
construction, operation and maintenance for Internet-related systems; equipment
sales in relation to equipment procurement for the construction of systems; and
other Internet-related services.
The Company manages its business and measures results based on a single
Internet-related services industry segment including revenues from systems
integration. Substantially all revenues are from customers operating in Japan.
The accompanying interim consolidated financial statements for the period
ended September 30, 2005 have been prepared on a going-concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. Although the Company recorded operating income in
the period ended September 30, 2005, the Company has incurred operating losses
and net losses in each of the past seven fiscal years ended March 31, 2005, with
the exception of operating income for the fiscal year ended March 31, 2002 and
the fiscal year ended March 31, 2005 and net income for the fiscal year ended
March 31, 2005.
At September 30, 2005, the Company had indebtedness of JPY 16,651,928
thousand. For the fiscal year ended March 31, 2005, the Company recorded
operating income of JPY 1,247,651 thousand and net income of JPY 2,906,269
thousand respectively. For the period ended September 30, 2005, the company
recorded operating income of JPY 753,975 thousand and net income of JPY
1,623,314 thousand, respectively. Although the Company had negative working
capital of JPY 3,146,955 thousand as of September 30, 2005, the management
considered various alternatives to increase working capital such as increasing
operating income and liquidating certain available-for-sale securities of JPY
7,094,319 thousand as of September 30, 2005.
Certain Significant Risks and Uncertainties
The Company has available-for-sale securities of JPY 7,094,319 thousand at
September 30, 2005, and believes that the fluctuations in stock price of
available-for-sale securities could have a material adverse effect on the
Company's future financial position, results of operations or cash flows.
The Company relies on telecommunications carriers for a significant portion
of network backbone, and NTT East, NTT West, electric power companies and their
affiliates for local connections to customers. The Company believes that its use
of multiple carriers and suppliers significantly mitigates concentrations of
credit risk. However, any disruption of telecommunication services could have an
adverse effect on operating results.
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash investments, accounts
receivable and guarantee deposits. The Company's management believes that the
risks associated with accounts receivable is mitigated by the large number of
customers comprising its customer base. Summary of Significant Accounting
Policies
Basis of Presentation
IIJ maintains its records in accordance with generally accepted accounting
principles in Japan. Certain adjustment and reclassifications have been
incorporated in the accompanying consolidated financial statements to conform to
U.S. GAAP. These adjustments were not recorded in the statutory accounts.
Consolidation
The consolidated financial statements for the period ended September 30,
2005 include the accounts of IIJ and all of its subsidiaries, NC, IIJ-Tech,
IIJ-MC, IIJ-FS, AIH and IIJ America, which have first halves ending September
30, except for IIJ America. IIJ America's first half end is June 30 and such
date was used for purposes of preparing the consolidated financial statements as
it is not practicable for the subsidiary to report its financial results as of
September 30. There were no significant events that occurred during the
intervening period that would require adjustment to or disclosure in the
accompanying consolidated financial statements. Significant intercompany
transactions and balances have been eliminated in consolidation. Investments in
companies over which IIJ has significant influence but not control are accounted
for by the equity method. For other than a temporary decline in the value of
investments in equity method investees below the carrying amount, the investment
is reduced to fair value and an impairment loss is recognized.
29
A subsidiary or equity method investee may issue its shares to third
parties at amounts per share in excess of or less than the Company's average per
share carrying value. With respect to such transactions, the resulting gains or
losses arising from the change in ownership are recorded in income for the year
in which such shares are issued.
Use of Estimates
The preparation of 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 financial statements and reported amounts of
revenues and expenses during the reporting period. Significant estimates and
assumptions used are primarily in the areas of impairment loss on investment in
and advances to equity method investees, valuation allowances for deferred tax
assets, allowance for doubtful accounts, and estimated lives of fixed assets.
Actual results could differ from those estimates.
Revenue Recognition
Revenues from customer connectivity services consist principally of
dedicated Internet access services and dial-up Internet access services.
Dedicated Internet access services represent full-line IP services and
standard-level IP services (T1 Standard and IIJ FiberAccess/F Service). Dial-up
Internet access services are provided to both enterprises and individuals
(IIJ4U). The term of these contracts is one year for dedicated Internet access
services and generally one month for dial-up Internet access services. All these
services are billed and recognized monthly on a straight-line basis.
Value-added service revenues consist principally of sales of various
Internet access-related services such as firewall services. Value-added services
also include monthly fees from data center services such as housing, monitoring,
and security services. Other revenues under connectivity and value-added
services consist principally of call-center customer support and Wide-area
Ethernet services, which offer connectivity services for the construction of
networks connecting a customer's multiple operational sites. The terms of these
services are generally for one year and revenues are recognized on a
straight-line basis during the service period.
Initial set up fees received in connection with connectivity services and
value-added services are deferred and recognized over the contract period.
Systems integration revenues consist principally of consultation, design,
development, construction and related maintenance, monitoring and other
operating services of Internet network systems. The period for the development
of the systems or designs is less than one year and revenues are recognized when
network systems and equipment are delivered and accepted by the customer under
the completed contract method. The development of the Internet network systems
or design includes multiple element arrangements such as consultation, systems
design, planning, development and construction services, and equipment and
software purchased from third parties. When the equipment or system is delivered
prior to other elements of the arrangement, revenue is deferred until other
service elements are completed and accepted by the customer. Maintenance,
monitoring, and operating service revenues are recognized ratably over the
separate contract period, which is generally for one year.
Systems integration service is subject to the Emerging Issues Task Force
("EITF") of the Financial Accounting Standards Board ("FASB") Issue No. 00-21,
"Revenue Arrangements with Multiple Deliverables" which was adopted as of April
1, 2004.
Equipment sales represent revenues earned in which the Company acts as
principal in the transaction, takes title to the equipment and has risks and
rewards of ownership while in inventory and are reported gross as the indicators
outlined in the provisions of the EITF Issue No. 99-19 "Reporting Revenue Gross
as a Principal versus Net as an Agent" are met.
Cash and Cash Equivalents
Cash and cash equivalents include time deposits and readily marketable
securities with original maturities of three months or less.
Allowance for Doubtful Accounts
An allowance for doubtful accounts is established in amounts considered to
be appropriate based primarily upon the Company's past credit loss experience
and an evaluation of potential losses in the receivables outstanding.
Other Investments
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
115, "Accounting for Certain Investments in Debt and Equity Securities," all
marketable equity securities are classified 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. The cost
of securities sold is determined based on average cost.
30
The Company reviews the fair value of available-for-sale investments on a
regular basis to determine if the fair value of any individual investment has
declined below its cost and if such decline is other than temporary. If the
decline in 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 value
are determined taking into consideration the extent of decline in fair value,
the length of time that the decline in fair value below cost has existed and
events that might accelerate the recognition of impairment. The resulting
realized loss is included in the consolidated statements of operations in the
period in which the decline was deemed to be other than temporary.
Non-marketable equity securities are carried at cost. If the value of a
security is estimated to have declined and such decline is judged to be other
than temporary, the security is written down to the fair value. Determination of
impairment is based on the consideration of such factors as operating results,
business plans and change in the regulatory, economic or technological
environment of the investees.
Inventories
Inventories consist mainly of network equipment purchased for resale and
work-in-process for development of Internet network systems. Network equipment
purchased for resale is stated at the lower of cost, which is determined by the
average-cost method, or market. Work-in-process for development of network
systems is stated at the lower of actual production costs, including overhead
cost, or market. Inventories are reviewed periodically and items considered to
be slow-moving or obsolete are written down to their estimated net realizable
value.
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization
of property and equipment, including purchased software and capitalized leases,
are computed principally using the straight-line method based on either the
estimated useful lives of assets or the lease period, whichever is shorter. The
useful lives for depreciation and amortization by major asset classes are as
follows:
--------------------------------------------------------------------------------
Range of useful lives
--------------------------------------------------------------------------------
Data communications, office and other equipment 2 to 15 years
Leasehold improvements 3 to 15 years
Purchased software 5 years
Capitalized leases 4 to 7 years
--------------------------------------------------------------------------------
Impairment of Long-Lived Assets
Long-lived assets consist principally of property and equipment, including
those items leased under capital leases. Under SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," the Company evaluates the
impairment of long-lived assets whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. There was
no impairment loss for long-lived assets in the period ended September 30, 2005
and the period ended September 30, 2004.
Goodwill and Intangible Assets
Under SFAS No. 142, "Goodwill and Other Intangible Assets," goodwill
(including equity method goodwill) and intangible assets that are deemed to have
indefinite useful lives are not amortized, but are subject to impairment
testing. Impairment testing is required to be performed at adoption and annually
or more frequently if events or changes in circumstances indicate that the asset
might be impaired. The Company selected March 31 as its annual impairment
testing date.
Income Taxes
The provision for income taxes is based on earnings before income taxes and
includes the effects of temporary differences between assets and liabilities
recognized for financial reporting purposes and income tax purposes and
operating loss carryforwards. Valuation allowances are provided against assets
that are not likely to be realized.
Foreign Currency Transactions
Foreign currency assets and liabilities, which consist substantially of
cash and accounts payable for connectivity leases to international carriers
denominated in U.S. dollars, are stated at the amount as computed by using
exchange rates at the end of the period ended September 30, 2005 and the
resulting transaction gain or loss is recognized in earnings.
31
Derivative Financial Instruments
All derivatives are recorded at fair value as either assets or liabilities
in the balance sheet in accordance with SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS No. 138 and No. 149
(collectively, "SFAS No. 133"). In accordance with SFAS No. 133, the Company
designated interest swap contracts as a hedge of the variability of cash flows
to be paid related to interest on floating rate borrowings (cash flow hedge) and
an effective portion of the derivative's gain or loss is initially reported as a
component of other comprehensive income and subsequently reclassified into
earnings when the underlying transaction affects earnings. An ineffective
portion of the gain or loss is reported in earnings immediately.
The Company enters into contracts to hedge interest rate risks and does not
enter into contracts or utilize derivatives for trading purposes.
Stock-Based Compensation
The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" and related interpretations. Accordingly, the Company
recognizes compensation expense in an amount equal to the excess of the quoted
market price over the exercise price of the option at the grant date. For
options with a vesting period, the compensation expense is charged to operations
ratably over the vesting period. The Company has not recognized any stock-based
compensation expense for the period ended September 30, 2005.
Research and Development and Advertising
Research and development and advertising costs are expensed as incurred.
Basic and Diluted Net Income per Share
Basic net income per share are computed using the weighted-average number
of shares of common stock outstanding during the period ended September 30,
2005. The Company's potential common shares are issuable upon exercise of stock
options or conversion of convertible notes. Diluted net income per share are
computed in consideration of the dilutive effects of the potential common
shares. (See note 5 - Net income per share)
Other Comprehensive Income (Loss)
Other comprehensive income (loss) consists of translation adjustments
resulting from the translation of financial statements of a foreign subsidiary,
unrealized gains or losses on available-for-sale securities and gains or losses
on cash flow hedging derivative instruments.
Segment Reporting
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," establishes standards for reporting information about operating
segments. Operating segments are defined as components of an enterprise that
engages in business activities from which it may earn revenues and incur expense
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.
The Company provides a comprehensive range of network solutions to meet its
customers' needs by cross-selling a variety of services, including Internet
connectivity services, value-added services, systems integration and sales of
network-related equipment. The Company's chief operating decision maker, who is
the Company's Chief Executive Officer, regularly reviews the revenue and cost of
sales on a consolidated basis and makes decisions regarding how to allocate
resources and assess performance based on a single operating unit.
2. OTHER INVESTMENTS
--------------------
Pursuant to SFAS No. 115, all of the Company's marketable equity
securities, principally marketable shares of common stock of Japanese companies,
were classified as available-for-sale securities. Information regarding the
securities classified as available-for-sale at September 30, 2004, September 30,
2005 and March 31, 2005, is as follows:
(Unit: Thousands of yen)
--------------------------------------------------------------------------------
At the end of the period ended
September 30, 2004
-------------------------------------------
Unrealized Unrealized Fair
Cost gains losses value
--------------------------------------------------------------------------------
Available-for-sale--
Equity securities 337,698 9,083,251 6,383 9,414,566
--------------------------------------------------------------------------------
32
--------------------------------------------------------------------------------
At the end of the period ended
September 30, 2005
-------------------------------------------
Unrealized Unrealized Fair
Cost gains losses value
--------------------------------------------------------------------------------
Available-for-sale--
Equity securities 207,783 6,886,536 - 7,094,319
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
At the end of the fiscal year ended
March 31, 2005
-------------------------------------------
Unrealized Unrealized Fair
Cost gains losses value
--------------------------------------------------------------------------------
Available-for-sale--
Equity securities 215,258 8,738,792 5,882 8,948,168
--------------------------------------------------------------------------------
The following table provides the fair value and gross unrealized losses of
the Company's investments, which have been deemed to be temporarily impaired,
aggregated by investment category and length of time that individual securities
have been in a continuous unrealized loss position, at September 30, 2004,
September 30, 2005 and March 31, 2005:
(Unit: Thousands of yen)
----------------------------------------------------------------------------
At the end of the period ended September 30, 2004
-----------------------------------------------------------
Less than 12 months
12 months or more Total
-----------------------------------------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
value losses value losses value losses
----------------------------------------------------------------------------
Marketable
equity
securities 36,372 1,578 9,190 4,805 45,562 6,383
----------------------------------------------------------------------------
----------------------------------------------------------------------------
At the end of the period ended September 30, 2005
-----------------------------------------------------------
Less than 12 months
12 months or more Total
-----------------------------------------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
value losses value losses value losses
----------------------------------------------------------------------------
Marketable
equity
securities - - - - - -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
At the end of the fiscal year ended March 31, 2005
-----------------------------------------------------------
Less than 12 months
12 months or more Total
-----------------------------------------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
value losses value losses value losses
----------------------------------------------------------------------------
Marketable
equity
securities 68,742 5,882 - - 68,742 5,882
----------------------------------------------------------------------------
The Company regularly reviews all of the Company's investments to determine
if any are other-than-temporarily impaired. The analysis includes reviewing
industry analyst reports, sector credit ratings and volatility of the security's
market price.
Proceeds from the sale of available-for-sale securities were JPY 74,993
thousand, JPY 1,178,935 thousand and JPY 2,614,768 thousand for the period ended
September 30, 2004, the period ended September 30, 2005 and the fiscal year
ended March 31, 2005, respectively. Gross realized gain of JPY 56,576 thousand,
JPY 1,171,460 thousand and JPY 2,477,607 thousand were included in other income
(expense) for the period ended September 30, 2004, the period ended September
30, 2005 and the fiscal year ended March 31, 2005, respectively.
33
The aggregate cost of the Company's cost method investments totaled JPY
1,242,516 thousand, JPY 954,193 thousand and JPY 982,613 thousand at the end of
period ended September 30, 2004, period ended September 30, 2005 and the fiscal
year ended March 31, 2005, respectively.
Losses on write-down of investments in certain marketable and nonmarketable
equity securities, included in other income (expense), were recognized to
reflect the decline in value considered to be other than temporary, totaled JPY
30,456 thousand and JPY 70,627 thousand for the period ended September 30, 2004,
none and JPY 22,663 thousand for the period ended September 30, 2005 and JPY
34,151 thousand and JPY 118,076 thousand for the fiscal year ended March 31,
2005, respectively. Gain on exchange of securities of JPY 35,450 thousand,
included in other income (expense) for the fiscal year ended March 31, 2005,
represented a non-monetary gain upon the exchange of marketable common shares in
a merger transaction.
3. LEASES
---------
The Company enters into, in the normal course of business, various leases
for domestic and international backbone services, office premises, network
operation centers and data communications and other equipment. Certain leases
that meet one or more of the criteria set forth in the provision of SFAS No. 13,
"Accounting for leases" have been classified as capital leases and the others
have been classified as operating leases.
Operating Leases
The Company has operating lease agreements with telecommunications carriers
and others for the use of connectivity lines, including local access lines that
customers use to connect to IIJ's network. The leases for domestic backbone
connectivity as of September 30, 2005 are generally either non-cancelable for a
minimum one-year lease period or cancelable during a lease period of three
years, with a significant penalty for cancellation (35% of the aggregate lease
expenses). The leases for international backbone connectivity as of September
30, 2005 are entered into with carriers for a lease period of one year and are
substantially non-cancelable. The Company also leases its office premises, for
which refundable lease deposits are capitalized as guarantee deposits, and
certain office equipment under non-cancelable operating leases which expire on
various dates through the year 2007 and also leases its network operation
centers under non-cancelable operating leases.
Refundable guarantee deposits as of September 30, 2004, September 30, 2005
and March 31, 2005 consist of as follows:
(Unit: Thousands of yen)
--------------------------------------------------------------------------------
At the end of At the end of At the end of the
the period ended the period ended fiscal year ended
September 30, September 30, March 31,
2004 2005 2005
--------------------------------------------------------------------------------
Head office 1,705,036 1,744,949 1,705,036
Sales and subsidiaries
offices 328,745 304,789 296,971
Others 46,564 50,270 48,658
--------------------------------------------------------------------------------
Total refundable guarantee
deposits 2,080,345 2,100,008 2,050,665
--------------------------------------------------------------------------------
Lease expenses related to backbone lines for the period ended September 30,
2004, the period ended September 30, 2005 and the fiscal year ended March 31,
2005 amounted to JPY 1,861,654 thousand, JPY 1,710,099 thousand and JPY
3,550,885 thousand, respectively. Lease expenses for local access lines for the
period ended September 30, 2004, the period ended September 30, 2005 and the
fiscal year ended March 31, 2005, which are only attributable to dedicated
access revenues, amounted to JPY 1,801,452 thousand, JPY 2,260,249 thousand and
JPY 4,040,192 thousand, respectively. Other lease expenses for the period ended
September 30, 2004, the period ended September 30, 2005 and the fiscal year
ended March 31, 2005 amounted to JPY 1,677,003 thousand, JPY 1,729,862 thousand
and JPY 3,303,717 thousand, respectively.
The Company has subleased a part of its office premises. Lease expenses
mentioned above have been reduced by sublease revenues totaling JPY 206,215
thousand, JPY 222,041 thousand and JPY 406,451 thousand for the period ended
September 30, 2004, the period ended September 30, 2005 and the fiscal year
ended March 31, 2005, respectively.
34
Capital Leases
The Company conducts its connectivity and other Internet-related services by
using data communications and other equipment leased under capital lease
arrangements. The fair values of the assets upon execution of the capital lease
agreements and accumulated depreciation amounted to JPY 11,287,636 thousand and
JPY 5,350,482 thousand at September 30, 2004, JPY 13,011,378 thousand and JPY
6,598,551 thousand at September 30, 2005 and JPY 13,251,657 thousand and JPY
6,336,386 thousand at March 31, 2005, respectively.
As of September 30, 2005, future lease payments under non-cancelable
operating leases, including the aforementioned non-cancelable connectivity lease
agreements (but excluding dedicated access lines which the Company charges
outright to customers), and capital leases were as follows:
(Unit: Thousands of yen)
-----------------------------------------------------------------------------------------------------------------
At the end of the period ended September 30, 2005
-----------------------------------------------------------------------------------------------------------------
Connectivity lines
operating leases Other operating leases Capital leases
-----------------------------------------------------------------------------------------------------------------
Through September 30, 2006 51,192 1,164,110 2,716,030
October 1, 2006 and thereafter - 575,801 3,896,848
-----------------------------------------------------------------------------------------------------------------
4. DERIVATIVE AND OTHER FINANCIAL INSTRUMENTS
Interest Rate Swap Agreement
The Company is exposed to changes in interest rates that are associated with
long-term bank borrowings. The Company's policy on managing the interest rate
risk is to hedge the exposure to variability in future cash flows of floating
rate interest payments on the long-term bank borrowings. In order to reduce cash
flow risk exposures on floating rate borrowings, the Company utilizes interest
rate swap agreements to convert a floating rate borrowing to a fixed rate
borrowing.
The Company is also exposed to credit-related losses in the event of
non-performance by counterparties to interest rate swaps, but it is not expected
that any counterparties will fail to meet their obligations, because
counterparties are internationally recognized financial institution.
Changes in fair value of interest rate swaps designated as hedging
instruments are reported in accumulated other comprehensive income during the
period ended September 30, 2005, the period ended September 30, 2004 and the
fiscal year ended March 31, 2005. These amounts subsequently are reclassified
into interest expense as a yield adjustment in the same period in which the
hedged bank borrowings affect earnings. The term, notional amount, and repricing
date of interest rate swaps exactly match those of the long-term borrowings. The
swap terms are "at the market," so they have zero value at inception. Thus,
there was no ineffectiveness recognized in earning for the period ended
September 30, 2005, the period ended September 30, 2004 and the fiscal year
ended March 31, 2005.
For the period ended September 30, 2004 and the period ended September 30,
2005, net derivative loss of JPY 7,372 thousand and JPY 5,537 thousand were
reclassified to interest expense, respectively. And for the fiscal year ended
March 31, 2005, net derivative loss of JPY 13,010 thousand was reclassified to
interest expense.
35
5. NET INCOME PER SHARE
Basic net income per share and its adjustment to diluted net income per share in
the period ended September 30, 2005 were as follows
---------------------------------------------------------------------------------------------------------
For the period ended September 30, 2005
(from April 1, 2005 to September 30, 2005)
---------------------------------------------------------------------------------------------------------
Net income Number of Net income per share
shares
---------------------------------------------------------------------------------------------------------
(Thousands of Yen) (Shares) (Yen)
Basic net income per share
---------------------------------------------------------------------------------------------------------
Net income 1,623,314 38,304 42,380
---------------------------------------------------------------------------------------------------------
Effect by dilutive shares
---------------------------------------------------------------------------------------------------------
Stock option - 30
---------------------------------------------------------------------------------------------------------
Diluted net income per share
---------------------------------------------------------------------------------------------------------
Net income 1,623,314 38,334 42,347
---------------------------------------------------------------------------------------------------------
In the period ended September 30, 2004 and the fiscal year ended March 31, 2005,
shares issuable upon conversion of convertible notes have been excluded from the
computation of diluted net income per share because the effect would be
antidilutive. The number of potential common shares excluded from the
computation was 558 at the end of the period ended September 30, 2004.
In the period ended September 30, 2004, the period ended September 30, 2005 and
the fiscal year ended March 31, 2005, the number of potential common shares
excluded from the computation of diluted net income per share because the
exercise prices of the options were greater than the average market price of the
common shares and the effect would be antidilutive were 570 shares, 195 shares
and 545 shares at the end of each period.
36
6. STATUS OF PRODUCTION, RECEIPT OF ORDER AND SALES ACTIVITIES
(1) Results of Production
Results of production for the period ended September 30, 2005 is as follows.
----------------------------------------------------------------------------------------------------
For the period ended September 30,
2005 (from April 1, 2005 to
September 30, 2005)
----------------------------------------------------------------------------------------------------
Thousands of Yen Year over Year (%)
change
----------------------------------------------------------------------------------------------------
Systems Integration 6,956,403 40.4
----------------------------------------------------------------------------------------------------
Total 6,956,403 40.4
----------------------------------------------------------------------------------------------------
*1 Consumption tax is not included.
*2 Results of production for Internet connectivity services, value-added
services and equipment sales are not included, since the Company does not
produce for.
(2) Results of Receiving Orders
Result of receiving orders for the period ended September 30, 2005 is as
follows.
-----------------------------------------------------------------------------------------------------------
For the period ended September 30, 2005
(from April 1, 2005 to September 30, 2005)
-------------------------------------------------------------------------------
Order received Year over Year Order backlog Yew over Year
(Thousands of Yen) Change (%) (Thousands of Yen) Change (%)
------------------------------------------------------------------------------------------------------------
Systems Integration and
Equipment sales 12,812,199 20.7 7,269,439 88.6
------------------------------------------------------------------------------------------------------------
Total 12,812,199 20.7 7,269,439 88.6
------------------------------------------------------------------------------------------------------------
*1 Consumption tax is not included.
*2 Results of receiving orders and order backlog for Internet connectivity
services and value-added services are not included, since the Company does
not produce for.
*3 Systems integration and equipment sales are totaled, as they cannot be
classified properly at the stage of receiving orders.
(3) Results of Sales Activities
Results of sales activities for the period ended September 30, 2005 is as
follows.
----------------------------------------------------------------------------------------------------
For the period ended September 30, 2005
(from April 1, 2005 to September 30, 2005)
----------------------------------------------------------------------------------------------------
Thousands of Yen Year over Year
Change (%)
----------------------------------------------------------------------------------------------------
Connectivity and value-added services: 11,533,109 5.3
Dedicated access 5,442,225 (5.4)
Dial-up access 1,381,109 (7.4)
Value-added services 2,846,450 18.3
Other 1,863,325 42.5
----------------------------------------------------------------------------------------------------
Systems Integration 9,001,675 37.8
----------------------------------------------------------------------------------------------------
Equipment Sales 1,274,139 (24.9)
----------------------------------------------------------------------------------------------------
Total 21,808,923 13.7
----------------------------------------------------------------------------------------------------
*1 Consumption tax is not included.
*2 Sales to each customer and its ratio to aggregate sales for the period
ended September 30, 2005 are omitted as the ratios are less than 0.1.
# # #
The above represents a translation of the original version
in the Japanese language.
37