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 August 10, 2006
Commission File Number: 0-30204
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 permitted 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 permitted 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 registrant 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
material 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
1 2006/08/09 IIJ Announces First Quarter Results
for the Year Ending March 31, 2007
2 2006/08/09 Overview of Financial Results for the
Three Months Ended June 30, 2006
(Consolidated) - English
Translation of the Results in the
form defined by 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: August 10, 2006 By: /s/ Koichi Suzuki
---------------------------------------------
Koichi Suzuki
President, Chief Executive Officer and
Representative Director
EXHIBIT 1
---------
IIJ Announces First Quarter Results for the Year Ending March 31, 2007;
Year-over-Year Increase in Revenues and Profits, Affected by Favorable Trends
TOKYO--(BUSINESS WIRE)--Aug. 9, 2006--Internet Initiative Japan
Inc. (NASDAQ: IIJI, Tokyo Stock Exchange Mothers: 3774) ("IIJ"), one
of Japan's leading Internet-access and comprehensive network solutions
providers, today announced its financial results for the first quarter
of the fiscal year ending March 31, 2007 ("FY2006").(1)
Highlights of First Quarter FY2006 Results
-- Revenue totaled JPY 12,437 million ($108.6 million), an
increase of 25.9% from 1Q05.
-- Operating income was JPY 559 million ($4.9 million), an
increase of 126.6% from 1Q05.
-- Net income was JPY 734 million ($6.4 million), an increase of
17.8% from 1Q05.
Target for FY2006(2)
-- We maintain our initial target for full FY2006 that we
announced on May 10, 2006.
Overview of 1st Quarter of FY2006 Financial Results and Business
Outlook(2)
"FY2006 started strongly as revenues from both outsourcing
services and systems integration grew substantially," said Koichi
Suzuki, President and CEO of IIJ. "Overall revenues increased 25.9%
and operating income jumped 126.6% in 1Q06 compared to 1Q05, although
our first quarter is historically weakest due to seasonal fluctuations
in Japanese corporate spending. The Japanese economy continues to
recover and, as a result, we see a greater willingness for Japanese
companies to invest in information systems. At the same time, our
corporate customers are increasingly recognizing the importance of
Internet technology in helping them increase business efficiency and
competitiveness. Internet technology became one of the key components
of their business operations and consequently they need and demand
highly reliable and safe Internet-related services. IIJ has
accumulated extensive Internet technological expertise more than a
decade, and it is now being validated that IIJ is correctly positioned
to meet the growing demand from corporate customers. We are working
hard to continue our expansion by developing additional services,
particularly in the fields of outsourcing, Internet VPN and Internet
security along with favorable business environment."
"In 1Q06, we had an improvement in our financial results", said
Akihisa Watai, CFO of IIJ. "At the Ordinary General Shareholders'
Meeting held on June 28, 2006, the reductions of the Company's
additional paid-in capital and common stock in the non-consolidated
financial statements under generally accepted accounting principles in
Japan were resolved and became effective on August 4, 2006. The
reductions did not result in any changes to the number of shares of
common stock outstanding, total shareholders' equity or our earning
per share targets for FY2006. The reductions have not affected our
consolidated financial statements under accounting principles
generally accepted in the United States ("U.S. GAAP") due to the
difference in accounting principles between Japan and the United
States."
1st Quarter FY2006 Financial Results
------------------------------------
Operating Result Summary (JPY in millions)
----------------------------------------------------------------------
1Q06 1Q05 YoY % change
----------------------------------------------------------------------
Total Revenues 12,437 9,880 25.9%
----------------------------------------------------------------------
Total Costs 10,134 8,118 24.8%
----------------------------------------------------------------------
SG&A Expenses and R&D 1,744 1,516 15.1%
----------------------------------------------------------------------
Operating Income 559 247 126.6%
----------------------------------------------------------------------
Income before Income Tax Expense 999 682 46.5%
----------------------------------------------------------------------
Net Income 734 623 17.8%
----------------------------------------------------------------------
Revenues
Revenues in 1Q06 totaled JPY 12,437 million, an increase of 25.9%
from JPY 9,880 million in 1Q05.
Revenues (JPY in millions)
----------------------------------------------------------------------
1Q06 1Q05 YoY % change
----------------------------------------------------------------------
Total Revenues: 12,437 9,880 25.9%
----------------------------------------------------------------------
Connectivity and Value-added Services 5,864 5,767 1.7%
----------------------------------------------------------------------
Systems Integration 6,032 3,840 57.1%
----------------------------------------------------------------------
Equipment Sales 541 273 98.1%
----------------------------------------------------------------------
Connectivity and Value-added Services ("VAS") revenues were JPY
5,864 million in 1Q06, an increase of 1.7 % compared to 1Q05. The
increase is mainly due to an increase in revenues from various types
of value-added services, which was caused by an increase in demand for
outsourcing services.
SI revenues increased 57.1% to JPY 6,032 million in 1Q06 compared
to 1Q05. The increase was mainly due to an increase in one-time
revenues from the design, construction and consultation of networks,
as well as a continuous increase in monthly recurring revenues from
network operation and maintenance.
Equipment sales revenues were JPY 541 million in 1Q06, an increase
of 98.1% compared to 1Q05.
Cost and expense
Cost of revenues was JPY 10,134 million in 1Q06, an increase of
24.8% compared to 1Q05.
Cost of Revenues (JPY in millions)
----------------------------------------------------------------------
1Q06 1Q05 YoY % change
----------------------------------------------------------------------
Cost of Revenues: 10,134 8,118 24.8%
----------------------------------------------------------------------
Connectivity and Value-added Services 5,070 4,964 2.1%
----------------------------------------------------------------------
Systems Integration 4,581 2,910 57.4%
----------------------------------------------------------------------
Equipment Sales 483 244 98.2%
----------------------------------------------------------------------
Cost of Connectivity and VAS revenues was JPY 5,070 million in
1Q06, an increase of 2.1% compared to 1Q05.
Cost of SI revenues was JPY 4,581 million in 1Q06, an increase of
57.4% compared to 1Q05. The increase was mainly due to an increase in
systems integration projects.
Cost of Equipment Sales revenues was JPY 483 million in 1Q06, an
increase of 98.2% compared to 1Q05. The increase was mainly due to an
increase in equipment sales.
Sales and marketing expenses were JPY 790 million in 1Q06, an
increase of 2.9% compared to 1Q05. The increase was mainly due to an
increase in expenses along with the business expansion.
General and administrative expenses were JPY 915 million in 1Q06,
an increase of 28.1% compared to 1Q05. The increase was mainly due to
an increase in personnel expenses principally related to recruitment
of new graduates, an increase of recruiting expenses and expenses
related to changes in office layouts.
Operating income
Operating income was JPY 559 million in 1Q06, an increase of
126.6% compared to 1Q05. The increase was mainly due to the increase
of revenues from higher-margin value-added services and systems
integration.
Other income and others
Other income in 1Q06 was JPY 440 million, an increase of 1.1% from
JPY 435 million in 1Q05. The increase included a gain from sale of
available-for-sale securities of JPY 478 million.
Net income was JPY 734 million in 1Q06, an increase of 17.8%
compared to 1Q05. The increase was mainly due to an increase in
operating income. The income tax expense in 1Q06 increased to JPY 149
million compared to 1Q05, mainly due to income tax payable related to
taxable income of our consolidated subsidiaries. The equity in net
loss of equity method investees increased compared to 1Q05 mainly due
to an increase of equity method loss from the newly established equity
method investee.
1st Quarter FY2006 Business Review
Analysis by Service
Connectivity and Value-added Services
For dedicated access services, customers continued to shift to
higher speed and the number of contracts for broadband services
increased as customers connected their branch offices and shops over
Internet VPN.
The number of contracts for dedicated access services increased by
3,080 to 15,354 compared to 1Q05. The contracted bandwidth increased
by 84.5Gbps to 225.4Gbps compared to 1Q05.
Dedicated access service revenues were JPY 2,616 million, a
decrease of 4.8% compared to 1Q05. The decrease is mainly related to a
decrease by JPY 234 million in interconnection revenues between IIJ's
network and Asia Internet Holding Co., Ltd. ("AIH"), our former equity
method investee, because AIH was merged into IIJ in October 2005.
Dial-up access service revenues were JPY 607 million in 1Q06, a
decrease of 13.1% compared to 1Q05, mainly due to the decrease in
revenues from services for individual customers, such as IIJ4U, as
well as the discontinuance of services of certain large customer to
which we provided our services as OEM.
VAS revenues were JPY 1,741 million in 1Q06, an increase of 25.5%
compared to 1Q05. The increase was due to an increase in revenues from
various types of services. We recorded an increase in revenues from
network-related outsourcing services such as the rental service of
SEIL, our in-house developed routers and SEIL Management Framework
("SMF"), the central management system of SEIL, server-related
outsourcing services such as outsourcing of e-mail systems and data
center related services. The increase in revenues from SEIL rental
service and SMF reflects an increase of multi-site connection projects
with Internet-VPN.
Other revenues were JPY 900 million in 1Q06, a decrease of 3.6%
compared to 1Q05.
As a result, revenues from Internet connectivity and value-added
services in 1Q06 were JPY 5,864 million, an increase of 1.7% compared
to 1Q05. The gross margin for Internet connectivity and value-added
services in 1Q06 was JPY 794 million, a decrease of 1.1% compared to
1Q05. The gross margin ratio of Internet connectivity and value-added
services was 13.5% in 1Q06.
Number of Contracts for Connectivity Services
1Q06 1Q05 YoY Change
----------------------------------------------------------------------
Dedicated Access Service Contracts 15,354 12,274 3,080
----------------------------------------------------------------------
IP Service (Low Bandwidth: 64kbps-
768kbps)(3) 74 65 9
----------------------------------------------------------------------
IP Service (Medium Bandwidth: 1Mbps-
99Mbps)(3) 673 637 36
----------------------------------------------------------------------
IP Service (High Bandwidth: 100Mbps-) 182 131 51
----------------------------------------------------------------------
IIJ T1 Standard and IIJ Economy 76 208 (132)
----------------------------------------------------------------------
IIJ Data Center Connectivity Service 264 234 30
----------------------------------------------------------------------
IIJ FiberAccess/F and IIJ DSL/F
(Broadband Services) 14,085 10,999 3,086
----------------------------------------------------------------------
Dial-up Access Service Contracts 596,628 677,207 (80,579)
----------------------------------------------------------------------
Dial-up Access Services, under IIJ
Brand 61,222 66,125 (4,903)
----------------------------------------------------------------------
Dial-up Access Services, OEM(4) 535,406 611,082 (75,676)
----------------------------------------------------------------------
Total Contracted Bandwidth 225.4Gbps 140.9Gbps 84.5Gbps
----------------------------------------------------------------------
Connectivity and VAS Revenue Breakdown and Cost (JPY in millions)
1Q06 1Q05 YoY %Change
----------------------------------------------------------------------
Connectivity Service Revenues 3,223 3,446 (6.5%)
----------------------------------------------------------------------
Dedicated Access Service Revenues 2,616 2,747 (4.8%)
----------------------------------------------------------------------
IP Service (5) 2,046 2,166 (5.5%)
----------------------------------------------------------------------
IIJ T1 Standard and IIJ Economy 62 134 (53.7%)
----------------------------------------------------------------------
IIJ FiberAccess/F and IIJ DSL/F
(Broadband Services) 508 447 13.7%
----------------------------------------------------------------------
Dial-up Access Service Revenues 607 699 (13.1%)
----------------------------------------------------------------------
Under IIJ Brand 420 466 (9.8%)
----------------------------------------------------------------------
OEM 187 233 (19.8%)
----------------------------------------------------------------------
VAS Revenues 1,741 1,388 25.5%
----------------------------------------------------------------------
Other Revenues 900 933 (3.6%)
----------------------------------------------------------------------
Total Connectivity and VAS Revenues 5,864 5,767 1.7%
----------------------------------------------------------------------
Cost of Connectivity and VAS 5,070 4,964 2.1%
----------------------------------------------------------------------
Backbone Cost (included in the cost
of Connectivity and VAS) 872 864 0.9%
----------------------------------------------------------------------
Connectivity and VAS Gross Margin Ratio 13.5% 13.9% --
----------------------------------------------------------------------
Systems Integration
Revenue from systems integration was JPY 6,032 million in 1Q06, an
increase of 57.1% compared to 1Q05. The increase was mainly due to
consistent increases in monthly recurring revenues from outsourced
operations, and an increase in revenues from one-time systems
integration. The revenues from outsourced operations increased by
22.9% compared to 1Q05. The revenues from one-time systems integration
increased significantly by 132.9% compared to 1Q05, partly due to
projects carrying over from the previous quarter. The gross margin for
SI in 1Q06 was 24.0%.
Systems Integration Revenue Breakdown and Cost (JPY in millions)
1Q06 1Q05 YoY % Change
----------------------------------------------------------------------
Systems Integration Revenues 6,032 3,840 57.1%
----------------------------------------------------------------------
Systems Integration 2,778 1,193 132.9%
----------------------------------------------------------------------
Outsourced Operation 3,254 2,647 22.9%
----------------------------------------------------------------------
Cost of Systems Integration 4,581 2,910 57.4%
----------------------------------------------------------------------
Systems Integration Gross Margin Ratio 24.0% 24.2% --
----------------------------------------------------------------------
Equipment Sales
Revenue from equipment sales was JPY 541 million in 1Q06. The
gross margin ratio for equipment sales in 1Q06 was 10.8%.
Equipment Sales Revenue and Cost (JPY in millions)
1Q06 1Q05 YoY % Change
----------------------------------------------------------------------
Equipment Sales Revenues 541 273 98.1%
----------------------------------------------------------------------
Cost of Equipment Sales 483 244 98.2%
----------------------------------------------------------------------
Equipment Sales Gross Margin Ratio 10.8% 10.9% --
----------------------------------------------------------------------
Other Financial Statistics
Other Financial Statistics (JPY in millions)
1Q06 1Q05 YoY % change
----------------------------------------------------------------------
Adjusted EBITDA(6) 1,666 1,261 32.2%
----------------------------------------------------------------------
CAPEX, including capital leases(7) 842 533 57.9%
----------------------------------------------------------------------
Depreciation and amortization 1,107 1,014 9.2%
----------------------------------------------------------------------
Reconciliation of Non-GAAP Financial Measures
The following table summarizes the reconciliation of adjusted
EBITDA to net income according to the consolidated statements of
income that are prepared in accordance with U.S. GAAP and presented in
Appendix 1:
Adjusted EBITDA (JPY in millions)
----------------------------------------------------------------------
1Q06 1Q05
----------------------------------------------------------------------
Adjusted EBITDA 1,666 1,261
----------------------------------------------------------------------
Depreciation and Amortization (1,107) (1,014)
----------------------------------------------------------------------
Operating Income 559 247
----------------------------------------------------------------------
Other Income 440 435
----------------------------------------------------------------------
Income Tax Expense 149 38
----------------------------------------------------------------------
Minority Interests in Earnings of Subsidiaries (43) (24)
----------------------------------------------------------------------
Equity in Net Income (Loss) of Equity Method Investees (73) 3
----------------------------------------------------------------------
Net Income 734 623
----------------------------------------------------------------------
The following table summarizes the reconciliation of capital
expenditures to the purchase of property and equipment according to
the consolidated statements of cash flows that are prepared and
presented in accordance with U.S. GAAP in Appendix 3:
CAPEX (JPY in millions)
----------------------------------------------------------------------
1Q06 1Q05
----------------------------------------------------------------------
Capital Expenditures 842 533
----------------------------------------------------------------------
Acquisition of Assets by Entering into Capital Leases 406 320
----------------------------------------------------------------------
Purchase of Property and Equipment 436 213
----------------------------------------------------------------------
Target
We maintain our initial target that we announced on May 10, 2006
for the annual fiscal year as follows:
(JPY in millions)
----------------------------------------------------------------------
Income from Operations
before Income Tax
Expense, Minority
Interests and Equity in
Net Income (Loss) of
Revenues Operating Income Equity Method Investees Net Income
----------------------------------------------------------------------
55,000 3,200 6,300 5,000
----------------------------------------------------------------------
Presentation
On August 10, 2006, IIJ will post a presentation of its results on
its Web site. For details, please access the following URL:
http://www.iij.ad.jp/en/IR/
About Internet Initiative Japan Inc.
Founded in 1992, Internet Initiative Japan Inc. (IIJ, NASDAQ:
IIJI, Tokyo Stock Exchange Mothers: 3774) is one of Japan's leading
Internet-access and comprehensive network solutions providers. The
company has built one of the largest Internet backbone networks in
Japan, and between Japan and the United States. IIJ and its group of
companies provide total network solutions that mainly cater to
high-end corporate customers. The company's services include
high-quality systems integration and security services, Internet
access, hosting/housing, and content design.
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 FY2006 revenues and operating
and net profitability, 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
systems 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 filings on Form 20-F of its annual report and other filings with
the United States Securities and Exchange Commission.
(1) Unless otherwise stated, all financial figures discussed in this
announcement are prepared in accordance with U.S. GAAP. All
financial figures are unaudited and consolidated. For all 1Q06
results, translations of Japanese yen amounts into US dollars are
solely for the convenience of readers outside of Japan and have
been made at the rate of JPY 114.51 = US$1.00.
(2) This Overview and Business Outlook contains forward-looking
statements and projections such as statements regarding FY2006
revenues and operating and net income that are subject to known
and unknown risks and uncertainties that could cause actual
results to differ materially from those expressed or implied by
these statements. These risks and uncertainties include, but are
not limited to, the factors noted at the end of this release and
to the risk factors and other information included in IIJ's annual
report on Form 20-F, filed with the SEC on July 11, 2006, as well
as other filings and documents furnished to the Securities and
Exchange Commission. IIJ plans to keep this press release publicly
available on its Web site (www.iij.ad.jp), but may discontinue
this practice at any time. IIJ intends to publish its next
Overview and Business Outlook in its 2Q06 earnings release,
presently scheduled for release in November 2006.
(3) Including IPv6 Services.
(4) OEM services provided to other service providers.
(5) IP Service revenues includes revenues from Data Center
Connectivity Service.
(6) Please refer to the Reconciliation of Non-GAAP Financial Measures
below.
(7) Please refer to the Reconciliation of Non-GAAP Financial Measures
below.
Appendix 1
Internet Initiative Japan Inc.
Quarterly Consolidated Balance Sheets (Unaudited)
(As of June 30, 2006 and March 31, 2006)
As of June 30, 2006 As of March 31, 2006
----------------------------------------------------------------------
Thousands
of U.S. Thousands Thousands
Dollars of Yen % of Yen %
----------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents 114,322 13,091,020 13,727,021
Accounts receivable, net
of allowance for
doubtful accounts of JPY
29,084 thousand and JPY
23,411 thousand at June
30, 2006 and March 31,
2006, respectively 53,649 6,143,361 11,962,304
Inventories 6,192 709,047 851,857
Prepaid expenses 16,033 1,835,908 1,031,325
Other current assets, net
of allowance for
doubtful accounts of JPY
30,850 thousand and JPY
33,250 thousand at June
30, 2006 and March 31,
2006, respectively 1,548 177,320 214,121
--------------------- ------------
Total current assets 191,744 21,956,656 52.3 27,786,628 54.8
INVESTMENTS IN AND
ADVANCES TO EQUITY
METHOD INVESTEES, net of
loan loss valuation
allowance of JPY 16,701
thousand and JPY 16,701
thousand at June 30,
2006 and March 31, 2006,
respectively 9,563 1,095,058 2.6 1,162,971 2.3
OTHER INVESTMENTS 50,747 5,811,019 13.8 8,020,705 15.8
PROPERTY AND EQUIPMENT--
Net 85,330 9,771,187 23.3 10,299,496 20.3
INTANGIBLE ASSETS--Net 5,547 635,152 1.5 632,594 1.2
GUARANTEE DEPOSITS 13,576 1,554,601 3.7 1,549,653 3.1
OTHER ASSETS, net of
allowance for doubtful
accounts of JPY 39,657
thousand and JPY 40,980
thousand at June 30,
2006 and March 31, 2006,
respectively 10,285 1,177,744 2.8 1,252,942 2.5
--------------------- ------------
TOTAL 366,792 42,001,417 100.0 50,704,989 100.0
--------------------- ------------
As of June 30, 2006 As of March 31, 2006
----------------------------------------------------------------------
Thousands
of U.S. Thousands Thousands
Dollars of Yen % of Yen %
----------------------------------------------------------------------
LIABILITIES AND
SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings 46,721 5,350,000 4,555,000
Long-term borrowings--
current portion 11,801 1,351,342 1,989,963
Payable under securities
loan agreement 4,332 496,080 999,600
Capital lease
obligations--current
portion 30,192 3,457,253 3,003,914
Accounts payable 33,070 3,786,846 10,107,942
Accrued expenses 4,644 531,849 540,027
Other current liabilities 17,919 2,051,859 1,702,208
--------------------- ------------
Total current liabilities 148,679 17,025,229 40.5 22,898,654 45.2
LONG-TERM BORROWINGS 2,349 269,000 0.6 290,000 0.6
CAPITAL LEASE OBLIGATIONS
--Noncurrent 35,132 4,022,923 9.6 4,980,659 9.8
ACCRUED RETIREMENT AND
PENSION COSTS 2,138 244,823 0.6 223,332 0.4
OTHER NONCURRENT
LIABILITIES 5,958 682,291 1.6 827,086 1.6
--------------------- ------------
Total Liabilities 194,256 22,244,266 52.9 29,219,731 57.6
--------------------- ------------
MINORITY INTEREST 11,194 1,281,860 3.1 1,263,320 2.5
COMMITMENTS AND
CONTINGENCIES -- -- -- -- --
SHAREHOLDERS' EQUITY:
Common-stock--authorized,
377,600 shares; issued
and outstanding, 204,300
shares at June 30, 2006
and authorized, 377,600
shares; issued and
outstanding, 204,300
shares at March 31, 2006 147,008 16,833,847 40.1 16,833,847 33.2
Additional paid-in
capital 232,287 26,599,217 63.3 26,599,217 52.5
Accumulated deficit (252,788)(28,946,811)(68.9)(29,680,482)(58.5)
Accumulated other
comprehensive income 35,571 4,073,276 9.7 6,553,594 12.9
Treasury stock--777
shares held by an equity
method investee at June
30, 2006 and March 31,
2006, respectively (736) (84,238) (0.2) (84,238) (0.2)
--------------------- ------------
Total shareholders'
equity 161,342 18,475,291 44.0 20,221,938 39.9
--------------------- ------------
TOTAL 366,792 42,001,417 100.0 50,704,989 100.0
--------------------- ------------
(Note)
(1) The U.S. dollar amounts represent translations of yen amounts at
the rate of JPY 114.51 which was the noon buying rate in New York
City for cable transfers in foreign currencies as certified for
customs purposes by the Federal Reserve Bank of New York
prevailing as of June 30, 2006.
(2) IIJ conducted a 1 for 5 stock split effective on October 11, 2005.
The numbers of shares of common stock authorized, and issued and
outstanding, and shares held by an equity method investee in this
table are calculated with the assumption that the stock split was
made at the beginning of FY2005. IIJ issued 12,500 new shares of
common stock for public offering when it listed on the Mothers
market of TSE in December 2005.
Appendix 2
Internet Initiative Japan Inc.
Quarterly Consolidated Statements of Income (Unaudited)
(For the three months ended June 30, 2006 and June 30, 2005)
Three Months Ended Three Months Ended
June 30, 2006 June 30, 2005
-------------------------------------------------
Thousands % of % of
of U.S. Thousands total Thousands total
Dollars of Yen revenues of Yen revenues
----------------------------------------------------------------------
REVENUES:
Connectivity and
value-added
services:
Dedicated access 22,844 2,615,890 2,746,900
Dial-up access 5,301 606,995 698,670
Value-added services 15,207 1,741,318 1,387,893
Other 7,857 899,726 933,120
-------------------- -----------
Total 51,209 5,863,929 5,766,583
Systems integration 52,676 6,031,963 3,840,075
Equipment sales 4,729 541,545 273,438
-------------------- -----------
Total revenues 108,614 12,437,437 100.0 9,880,096 100.0
-------------------- -----------
COST AND EXPENSES:
Cost of connectivity
and value-added
services 44,273 5,069,730 4,963,835
Cost of systems
integration 40,008 4,581,313 2,910,262
Cost of equipment
sales 4,218 483,015 243,699
-------------------- -----------
Total cost 88,499 10,134,058 81.5 8,117,796 82.2
Sales and marketing 6,898 789,932 6.3 767,801 7.8
General and
administrative 7,988 914,711 7.4 713,917 7.2
Research and
development 347 39,684 0.3 33,904 0.3
-------------------- -----------
Total cost and
expenses 103,732 11,878,385 95.5 9,633,418 97.5
-------------------- -----------
OPERATING INCOME 4,882 559,052 4.5 246,678 2.5
-------------------- -----------
OTHER INCOME:
Interest income 27 3,049 2,101
Interest expense (935) (107,002) (109,377)
Foreign exchange
gains 6 690 8,030
Gain on other
investments--net 4,176 478,186 488,758
Other--net 569 65,181 45,721
-------------------- -----------
Other income-- net 3,843 440,104 3.5 435,233 4.4
-------------------- -----------
INCOME FROM
OPERATIONS BEFORE
INCOME TAX EXPENSE,
MINORITY INTERESTS
AND EQUITY IN NET
INCOME (LOSS) OF
EQUITY METHOD
INVESTEES 8,725 999,156 8.0 681,911 6.9
-------------------- -----------
INCOME TAX EXPENSE 1,300 148,874 1.2 38,111 0.4
MINORITY INTERESTS IN
EARNINGS OF
SUBSIDIARIES (380) (43,574) (0.3) (23,855) (0.2)
-------------------- -----------
EQUITY IN NET INCOME
(LOSS) OF EQUITY
METHOD INVESTEES (638) (73,037) (0.6) 2,729 0.0
-------------------- -----------
NET INCOME 6,407 733,671 5.9 622,674 6.3
----------------------------------------------------------------------
Three Months Ended Three Months Ended
June 30, 2006 June 30, 2005
-------------------------------------------------
Thousands
of U.S. Thousands Thousands
Dollars of Yen of Yen
----------------------------------------------------------------------
BASIC WEIGHTED-
AVERAGE NUMBER
OF SHARES 203,989 191,547
DILUTED WEIGHTED-
AVERAGE NUMBER OF
SHARES 204,230 191,547
BASIC WEIGHTED-
AVERAGE NUMBER
OF ADS EQUIVALENTS 81,595,702 76,618,779
DILUTED WEIGHTED-
AVERAGE NUMBER OF ADS
EQUIVALENTS 81,692,077 76,618,779
BASIC NET INCOME PER
SHARE 31 3,597 3,251
DILUTED NET INCOME
PER SHARE 31 3,592 3,251
BASIC NET INCOME PER
ADS EQUIVALENT 8.99 8.13
DILUTED NET INCOME
PER ADS EQUIVALENT 8.98 8.13
(Note)
(1) The U.S. dollar amounts represent translations of yen amounts at
the rate of JPY 114.51 which was the noon buying rate in New York
City for cable transfers in foreign currencies as certified for
customs purposes by the Federal Reserve Bank of New York
prevailing as of June 30, 2006.
(2) IIJ conducted a 1 for 5 stock split effective on October 11, 2005.
The numbers of shares of common stock authorized, and issued and
outstanding, and shares held by an equity method investee in this
table are calculated with the assumption that the stock split was
made at the beginning of FY2005. IIJ issued 12,500 new shares of
common stock for public offering when it listed on the Mothers
market of TSE in December 2005.
Appendix 3
Internet Initiative Japan Inc.
Quarterly Condensed Consolidated Statements of Cash Flows (Unaudited)
(For the three months ended June 30, 2006 and June 30, 2005)
Three Months Ended Three Months Ended
June 30, 2006 June 30, 2005
----------------------------------------
Thousands
of U.S. Thousands
Dollars of Yen Thousands of Yen
----------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income 6,407 733,671 622,674
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 9,669 1,107,155 1,013,745
Provision for (reversal of)
doubtful accounts and
advances 30 3,413 (5,339)
Gains on other investments--
net (4,176) (478,186) (488,758)
Foreign exchange losses
(gains) 29 3,284 (6,278)
Equity in net loss (income) of
equity method investees 638 73,037 (2,729)
Minority interests in earnings
of subsidiaries 381 43,574 23,855
Deferred income tax 184 21,054 18,343
Others 300 34,300 51,618
Changes in operating assets
and liabilities:
Decrease in accounts
receivable 50,719 5,807,822 1,621,419
Increase in inventories,
prepaid expenses and other
current and noncurrent assets (5,549) (635,408) (738,757)
Decrease in accounts payable (53,019)(6,071,242) (1,132,992)
Increase in accrued expenses,
other current and noncurrent
liabilities 2,290 262,210 50,697
----------------------------------------------------------------------
Net cash provided by operating
activities 7,900 904,684 1,027,498
----------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchase of property and
equipment (3,810) (436,264) (213,485)
Purchase of short-term and
other investments (2,438) (279,230) (299,311)
Purchase of subsidiary stock
from minority shareholders (241) (27,559) -
Proceeds from sales and
redemption of other
investments 4,212 482,348 514,460
Payment of guarantee
deposits--net (49) (5,562) (39,210)
Other (6) (726) (5,450)
----------------------------------------------------------------------
Net cash used in investing
activities (2,332) (266,993) (42,996)
----------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from issuance of
short-term borrowings with
initial maturities over three
months 37,988 4,350,000 -
Repayments of long-term
borrowings (5,760) (659,621) (208,654)
Proceeds from securities loan
agreement 4,332 496,080 -
Repayments of securities loan
agreement (8,729) (999,600) (199,120)
Principal payments under
capital leases (7,859) (899,879) (766,807)
Net decrease in short-term
borrowings with initial
maturities less than three
months (31,045)(3,555,000) (1,246)
----------------------------------------------------------------------
Net cash used in financing
activities (11,073)(1,268,020) (1,175,827)
----------------------------------------------------------------------
EFFECT OF EXCHANGE RATE
CHANGES ON CASH (50) (5,672) 11,236
NET INCREASE (DECREASE) IN CASH (5,554) (636,001) (180,089)
CASH, BEGINNING OF EACH PERIOD 119,876 13,727,021 5,286,477
----------------------------------------------------------------------
CASH, END OF EACH PERIOD 114,322 13,091,020 5,106,388
----------------------------------------------------------------------
----------------------------------------------------------------------
ADDITIONAL CASH FLOW
INFORMATION:
Interest paid 795 91,001 95,390
Income taxes paid 1,970 225,563 128,764
NONCASH INVESTING AND
FINANCING ACTIVITIES:
Acquisition of assets by
entering into capital leases 3,542 405,621 319,828
(Note)
(1) The U.S. dollar amounts represent translations of yen amounts at
the rate of JPY 114.51 which was the noon buying rate in New York
City for cable transfers in foreign currencies as certified for
customs purposes by the Federal Reserve Bank of New York
prevailing as of June 30, 2006.
CONTACT: IIJ Corporate Communications
Taisuke ONO, +81-3-5259-6500
ir@iij.ad.jp
http://www.iij.ad.jp/
EXHIBIT 2
---------
(English Translation)
Overview of Financial Results for the Three Months Ended June 30, 2006
(Consolidated)
(Prepared in accordance with Generally Accepted Accounting Principles
in the United States of America ("U.S. GAAP"))
August 9, 2006
Company name Internet Initiative Japan Inc.
("IIJ", stock code number: 3774, the Mothers Market of the Tokyo Stock
Exchange ("TSE")) (URL http://www.iij.ad.jp/)
---------------------
Contacts Company representative: Koichi Suzuki, President and
Representative Director
Person-in-charge: Akihisa Watai, Director and CFO
TEL: (03)-5259-6500
1. Items regarding Preparation of Quarterly Consolidated Financial Results
(1) Standard used for preparation of the quarterly consolidated financial
statements: Standard for Preparation of Interim Consolidated Financial
Statements
(2) Changes in accounting method from the most recent fiscal year: No
(3) Changes in scope of consolidation and equity method: No
2. Overview of Financial Results for the Three Months Ended June 30, 2006
(April 1, 2006 through June 30, 2006)
(1) Consolidated Results of Operations
--------------------------------------------------------------------------------------------------------------------------------
(Amounts less than one million yen are rounded)
Income before
Operating Income Tax
Total Revenues Income Expense Net Income
--------------------------------------------------------------------------------------------------------------------------------
Millions of Yen Millions of Yen Millions of Yen Millions of Yen
% % % %
Three months ended June 30, 2006 12,437 25.9 559 126.6 999 46.5 734 17.8
Three months ended June 30, 2005 9,880 -- 247 -- 682 -- 623 --
--------------------------------------------------------------------------------------------------------------------------------
(For reference) Year ended March 31, 2006 49,813 2,411 5,379 4,754
--------------------------------------------------------------------------------------------------------------------------------
Basic Net Income Diluted Net Income
per Share per Share
------------------------------------------------------------------------------------------------
Yen Yen
Three months ended June 30, 2006 3,597 3,592
Three months ended June 30, 2005 3,251 3,251
------------------------------------------------------------------------------------------------
(For reference) Year ended March 31, 2006 24,301 24,258
------------------------------------------------------------------------------------------------
(Notes)
1) Equity in net income (loss) of equity method investees was equity in net
loss of JPY 73 million, equity in net income of JPY 3 million and equity in
net loss of JPY 14 million for the three months ended June 30, 2006, the
three months ended June 30, 2005 and the year ended March 31, 2006,
respectively.
2) The weighted-average number of shares of common stock outstanding
(consolidated) was 203,989, 191,547 and 195,613 for the three months ended
June 30, 2006, the three months ended June 30, 2005 and the year ended
March 31, 2006, respectively. IIJ conducted a 1 for 5 stock split effective
on October 11, 2005. The numbers are calculated with the assumption that
the stock spilt was made at the beginning of the year ended March 31, 2006.
The numbers are calculated with the number of IIJ shares of common stock
outstanding deducted by the number of IIJ's shares owned by IIJ's equity
method investee multiplied by IIJ's ownership in the equity method
investee.
3) The percentage figures for the total revenues, operating income and others
for the three months ended June 30, 2006 show an increase or decrease
compared to the same quarter in the last fiscal year. As IIJ began to
prepare the financial statements for three months ended June 30 as required
by TSE for the three months ended June 30, 2005, IIJ does not show the
percentage figures for the total revenues, operating income and others for
the three months ended June 30, 2005.
4) The potential shares did not have a dilutive effect for the three months
ended June 30, 2006.
5) In this document, income before income tax expense represents income from
operations before income tax expense, minority interests and equity in net
income (loss) of equity method investees in IIJ's consolidated financial
statements.
(Consolidated Results of Operations for the three months ended June 30, 2006
(from April 1, 2006 to June 30, 2006))
a. Overview of Financial Results
IIJ had a favorable start to the year ending March 31, 2007. Despite the
fact that our first quarter is historically weakest due to seasonal fluctuations
in Japanese corporate spending, both revenues and profits increased
significantly for the three months ended June 30, 2006 compared to the three
months ended June 30, 2005 due to the significant increase in systems
integration and outsourcing services.
In general, with the recovering trend of the Japanese economy, corporate
investments on network have continued to rise. Under this business environment,
revenues from systems integration, such as network design, construction,
operation and maintenance, and value-added services ("VAS") such as
security-related services, and outsourcing of email-related system and data
center services, are steadily increasing.
As a result, for the IIJ Group's consolidated results of operation for the
three months ended June 30, 2006, total revenues amounted to JPY 12,437 million,
an increase of 25.9% compared to the three months ended June 30, 2005. Operating
income amounted to JPY 559 million, an increase of 126.6% compared to the three
months ended June 30, 2005. Income before income tax expense amounted to JPY 999
million, an increase of 46.5% compared to the three months ended June 30, 2005
and net income amounted to JPY 734 million, an increase of 17.8% compared to the
three months ended June 30, 2005.
b. Analysis of the Results of Operations
1) Revenues
Revenues for the three months ended June 30, 2006 totaled JPY 12,437
million, an increase of 25.9% compared to the three months ended June 30, 2005.
----------------------------------------------------------------------------------------------------------------------------
Three Months ended June 30, Three Months ended June YoY %
2006 30, 2005 Change
----------------------------------------------------------------------------------------------------------------------------
Millions of Yen Millions of Yen %
Connectivity and VAS 5,864 5,767 1.7
----------------------------------------------------------------------------------------------------------------------------
Systems Integration 6,032 3,840 57.1
----------------------------------------------------------------------------------------------------------------------------
Equipment Sales 541 273 98.1
----------------------------------------------------------------------------------------------------------------------------
Total Revenues 12,437 9,880 25.9
----------------------------------------------------------------------------------------------------------------------------
Connectivity and VAS revenues were JPY 5,864 million for the three months
ended June 30, 2006, an increase of 1.7% compared to the three months ended June
30, 2005. Although revenues from Internet connectivity services decreased,
revenues from various types of VAS increased due to an increase in demand for
outsourcing services.
SI revenues increased by 57.1% from the three months ended June 30, 2005 to
JPY 6,032 million for the three months ended June 30, 2006. The increase was
mainly due to an increase in revenues from network system outsourcing and
maintenance which generated recurring revenues and increase in one-time revenues
from network design, construction and consultation.
Equipment sales revenues were JPY 541 million for the three months ended
June 30, 2006, an increase of 98.1% compared to the three months ended June 30,
2005.
2) Cost of Revenues
The cost of revenues was JPY 10,134 million for the three months ended June
30, 2006, an increase of 24.8% compared to the three months ended June 30, 2005.
----------------------------------------------------------------------------------------------------------------------------
Three Months ended June 30, Three Months ended June YoY %
2006 30, 2005 Change
----------------------------------------------------------------------------------------------------------------------------
Millions of Yen Millions of Yen %
Connectivity and VAS 5,070 4,964 2.1
----------------------------------------------------------------------------------------------------------------------------
Systems Integration 4,581 2,910 57.4
----------------------------------------------------------------------------------------------------------------------------
Equipment Sales 483 244 98.2
----------------------------------------------------------------------------------------------------------------------------
Total Cost of Revenues 10,134 8,118 24.8
----------------------------------------------------------------------------------------------------------------------------
The cost of connectivity and VAS revenues was JPY 5,070 million for the
three months ended June 30, 2006, an increase of 2.1% compared to the three
months ended June 30, 2005.
The cost of SI revenues increased by 57.4% to JPY 4,581 million for the
three months ended June 30, 2006 from the three months ended June 30, 2005,
mainly due to an increase in revenues from systems integration.
The cost of equipment sales revenues was JPY 483 million for the three
months ended June 30, 2006, an increase of 98.2% compared to the three months
ended June 30, 2005.
3) Sales and Marketing Expenses
Sales and marketing expenses were JPY 790 million for the three months
ended June 30, 2006, an increase of 2.9% compared to the three months ended June
30, 2005. The increase was mainly due to an increase in expenses from the
business expansion.
4) General and Administrative Expenses
General and administrative expenses were JPY 915 million for the three
months ended June 30, 2006, an increase of 28.1% compared to the three months
ended June 30, 2005. The increase was mainly due to an increase in personnel
expenses principally related to the recruitment of new graduates, an increase of
recruiting expenses and expenses related to changes in office layouts.
5) Operating Income
Operating income was JPY 559 million for the three months ended June 30,
2006, an increase of 126.6% compared to the three months ended June 30, 2005.
The increase was mainly due to the increase in gross margin, which was caused by
the increase in revenues from value-added services and systems integration.
6) Other Income and Others
Other income for three months ended June 30, 2006 was JPY 440 million, an
increase of 1.1% compared to the three months ended June 30, 2005. The increase
included a gain from sale of available-for-sale securities of JPY 478 million.
7) Net Income
Net income for the three months ended June 30, 2006 was JPY 734 million, an
increase of 17.8% compared to the three months ended June 30, 2005. The income
tax expense for the three months ended June 30, 2006 increased to JPY 149
million compared to the three months ended June 30, 2005, mainly due to an
increase of income tax payable related to taxable income of our consolidated
subsidiaries. The equity in net loss of equity method investees totaled JPY 73
million for the three months ended June 30, 2006 due to an increase of equity
method loss from the newly established equity method investee.
c. Analysis by Service
1) Internet Connectivity and Value-added Services ("VAS")
For dedicated access services, a number of corporate customers have
increased their bandwidth and the number of contracts of broadband services
increased with an increase of multi-site connection projects. However, the
revenue from dedicated access services decreased by 4.8% to JPY 2,616 million
mainly related to a decrease by JPY 234 million in interconnection revenues
between IIJ's network and Asia Internet Holding Co., Ltd. ("AIH"), our former
equity method investee, because AIH merged into IIJ.
Dial-up access service revenues were JPY 607 million for the three months
ended June 30, 2006, a decrease of 13.1% compared to the three months ended June
30, 2005. The decrease was mainly due to the decrease in revenues from services
for individual customers, such as IIJ4U, as well as the discontinuance of
services of a large customer to which we provided our services as OEM.
VAS revenues were JPY 1,741 million for the three months ended June 30,
2006, an increase of 25.5% compared to the three months ended June 30, 2005 due
to an increase in revenues from various types of services. We recorded an
increase in revenues from network-related outsourcing services such as the
rental service of SEIL, our in-house developed routers and SEIL Management
Framework ("SMF"), the central management system of SEIL, server-related
outsourcing services such as outsourcing of e-mail systems and data center
related services. The increase in revenues from the SEIL rental service and SMF
reflects an increase of multi-site connection projects.
Other revenues were JPY 900 million for the three months ended June 30,
2006, a decrease of 3.6% compared to the three months ended June 30, 2005.
As a result, revenues from Internet connectivity and VAS for the three
months ended June 30, 2006 were JPY 5,864 million, an increase of 1.7% compared
to the three months ended June 30, 2005. The gross margin of Internet
connectivity and VAS was JPY 794 million, a decrease of 1.1% compared to the
three months ended June 30, 2005 and the gross margin ratio was 13.5%.
[Connectivity and VAS Revenue Breakdown and Cost]
----------------------------------------------------------------------------------------------------------------------------
Three Months Ended Three Months Ended YoY %
June 30, 2006 June 30, 2005 Change
----------------------------------------------------------------------------------------------------------------------------
Millions of Yen Millions of Yen %
----------------------------------------------------------------------------------------------------------------------------
Connectivity and VAS Revenues 5,864 5,767 1.7
----------------------------------------------------------------------------------------------------------------------------
Dedicated Access Service Revenues 2,616 2,747 (4.8)
----------------------------------------------------------------------------------------------------------------------------
Dial-up Access Service Revenues 607 699 (13.1)
----------------------------------------------------------------------------------------------------------------------------
VAS Revenues 1,741 1,388 25.5
----------------------------------------------------------------------------------------------------------------------------
Other Revenues 900 933 (3.6)
----------------------------------------------------------------------------------------------------------------------------
Cost of Connectivity and VAS 5,070 4,964 2.1
----------------------------------------------------------------------------------------------------------------------------
Backbone Cost (included in the cost 872 864 0.9
of Connectivity and VAS)
----------------------------------------------------------------------------------------------------------------------------
Connectivity and VAS Gross Margin Ratio 13.5% 13.9% --
----------------------------------------------------------------------------------------------------------------------------
2) Systems integration ("SI")
Systems integration revenues for the three months ended June 30, 2006 were
JPY 6,032 million, an increase of 57.1% compared to the three months ended June
30, 2005. The increase was mainly due to an increase of 22.9% in revenues from
network system outsourcing and maintenance, which will generate recurring
revenues, and a significant increase of 132.9% in revenues from one-time systems
integration projects, partly due to projects carrying over from the previous
quarter. The gross margin ratio for SI was 24.0%.
[Systems Integration Revenue Breakdown and Cost]
---------------------------------------------------------------------------------------------------------------------------
Three Months Ended Three Months Ended YoY %
June 30, 2006 June 30, 2005 Change
---------------------------------------------------------------------------------------------------------------------------
Millions of Yen Millions of Yen %
---------------------------------------------------------------------------------------------------------------------------
SI Revenues 6,032 3,840 57.1
---------------------------------------------------------------------------------------------------------------------------
Systems Integration 2,778 1,193 132.9
---------------------------------------------------------------------------------------------------------------------------
Outsourced Operation 3,254 2,647 22.9
---------------------------------------------------------------------------------------------------------------------------
Cost of SI 4,581 2,910 57.4
---------------------------------------------------------------------------------------------------------------------------
SI Gross Margin Ratio 24.0% 24.2% --
---------------------------------------------------------------------------------------------------------------------------
3) Equipment sales
Equipment sales revenues for the three months ended June 30, 2006 were JPY
541 million. The gross margin of equipment sales was JPY 59 million and the
gross margin ratio was 10.8%.
[Equipment Sales Revenue and Cost]
---------------------------------------------------------------------------------------------------------------------------
Three Months Ended Three Months Ended YoY %
June 30, 2006 June 30, 2005 Change
---------------------------------------------------------------------------------------------------------------------------
Millions of Yen Millions of Yen %
---------------------------------------------------------------------------------------------------------------------------
Equipment Sales Revenues 541 273 98.1
---------------------------------------------------------------------------------------------------------------------------
Cost of Equipment Sales 483 244 98.2
---------------------------------------------------------------------------------------------------------------------------
Equipment Sales Gross Margin Ratio 10.8% 10.9% --
---------------------------------------------------------------------------------------------------------------------------
(2) Changes in Consolidated Financial Position (Amounts less than one million yen are rounded)
------------------------------- ---------------------- ---------------------- ---------------------- -----------------------
Total Assets Shareholders' Equity Equity-to-Assets Shareholders' Equity
Ratio per Share
------------------------------- ---------------------- ---------------------- ---------------------- -----------------------
Millions of Yen Millions of Yen % Yen
As of June 30, 2006 42,001 18,475 44.0 90,570
As of June 30, 2005 33,744 10,187 30.2 53,199
------------------------------- --------------------- ---------------------- ---------------------- -----------------------
(For reference) As of
March 31, 2006 50,705 20,222 39.9 99,132
------------------------------- ---------------------- ---------------------- ---------------------- -----------------------
(Note)
The number of shares of common stock outstanding (consolidated) was 203,989,
191,489 and 203,989 as of June 30, 2006, June 30, 2005 and March 31, 2006,
respectively. IIJ conducted a 1 for 5 stock split effective on October 11,
2005. The numbers are calculated with the assumption that the stock spilt had
been made at the beginning of the year ended March 31, 2006. The numbers are
calculated with the number of IIJ shares of common stock outstanding reduced
by the number of IIJ's shares owned by IIJ's equity method investee multiplied
by IIJ's percentage ownership in the equity method investee.
(3) Consolidated Cash Flows
(Amounts less than one million yen are rounded)
------------------------------- ---------------------- ---------------------- ---------------------- -----------------------
Net cash provided Net cash provided Net cash provided Cash and cash
by operating by (used in) by (used in) equivalents at end
activities investing activities financing activities of period
------------------------------- ---------------------- ---------------------- ---------------------- -----------------------
Millions of Yen Millions of Yen Millions of Yen Millions of Yen
Three months ended
June 30, 2006 905 (267) (1,268) 13,091
Three months ended
June 30, 2005 1,027 (43) (1,176) 5,106
------------------------------- ---------------------- ---------------------- ---------------------- -----------------------
(For reference) Year ended 6,559 1,805 39 13,727
March 31, 2006
------------------------------- ---------------------- ---------------------- ---------------------- -----------------------
(Note)
As for the cash flows, the effect of exchange rate changes on cash was JPY (6)
million, JPY 11 million and JPY 38 million for the three months ended June 30,
2006, the three months ended June 30, 2005 and the year ended March 31, 2006,
respectively.
(Qualitative Information Regarding Changes in Consolidated Financial Position)
The balance of cash as of June 30, 2006 was JPY 13,091 million (the balance
of cash as of June 30, 2005 was JPY 5,106 million).
(Net cash used in operating activities)
Net cash provided by operating activities was JPY 905 million for the three
months ended June 30, 2006 (the net cash provided by operating activities was
JPY 1,027 million for the three months ended June 30, 2005). An increase or
decrease of accounts receivable and accounts payable offset an increase in
operating income due to an increase in revenues from value-added services and
systems integration.
(Net cash used in investing activities)
Net cash used in investing activities was JPY 267 million for the three
months ended June 30, 2006 (the net cash used in financing activities was JPY 43
million for the three months ended June 30, 2005). Purchases of short-term and
other investments of JPY 279 million and property and equipment of JPY 436
million offset proceeds of JPY 482 million from sales and redemption of
short-term and other investments.
(Net cash used in financing activities)
Net cash used in financing activities was JPY 1,268 million for the three
months ended June 30, 2006 (the net cash used in financing activities was JPY
1,176 million for the three months ended June 30, 2005). Repayments of
securities loan agreement of JPY 1,000 million, principal payments under capital
leases of JPY 900 million, and repayments of long-term borrowings of JPY 660
million offset proceeds of JPY 795 million from issuance of short-term
borrowings and proceeds of JPY 496 million from securities loan agreement.
3. Target of Consolidated Financial Results for the Year Ending March 31, 2007
(April 1, 2006 through March 31, 2007)
(Amounts less than one million yen are rounded)
-----------------------------------------------------------------------------------------------------------------------------
Total Revenues Operating Income Income before Income Net Income
Tax Expense
-----------------------------------------------------------------------------------------------------------------------------
Millions of Yen Millions of Yen Millions of Yen Millions of Yen
Interim period ending 25,000 1,000 2,600 2,000
September 30, 2006
Year ending March 31, 2007 55,000 3,200 6,300 5,000
------------------------------ ------------------------ ---------------------- ---------------------- -----------------------
(Reference) Net income per share for the year ending March 31, 2007, based on
the target above: JPY 24,511
(Notes)
1) 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 of the year ending
March 31, 2007, 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 systems 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 filings on Form 20-F of
its annual report and other filings with the United States Securities and
Exchange Commission.
(Qualitative Information regarding Targets for Consolidated Financial Results)
IIJ maintains its target for consolidated and non-consolidated financial
results for the year ending March 31, 2007 that we announced on May 10, 2006.
4. Reference Information
At the Ordinary General Shareholders' Meeting held on June 28, 2006, the
reductions of additional paid-in capital of JPY 21,980,395 thousand and common
stock of JPY 2,539,222 thousand were resolved to eliminate the accumulated
deficit in the non-consolidated financial statements under generally accepted
accounting principles in Japan. The resolution became effective on August 4,
2006. As a result, the common stock was reduced to JPY 14,294,625,054, the
additional paid-in capital was reduced to JPY 0 and the accumulated deficit was
eliminated in the non-consolidated financial statements. However, due to the
difference in accounting principles between Japan and the United States, the
accumulated deficit has not been eliminated and the common stock and additional
paid-in capital have not been reduced in our consolidated financial statements
under U.S. GAAP.
5. Quarterly Consolidated Financial Statements
(From April 1, 2006 through June 30, 2006)
(1) Quarterly Consolidated Balance Sheets
------------------------------------------------------------------------------------------------------------------------
As of June 30, 2006 As of June 30, 2005 As of March 31,
2006
------------------------------------------------------------------------------------------------------------------------
Thousands Thousands of Thousands of Thousands of
of U.S. Yen Yen Yen
Notes Dollars % % %
------------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash 114,322 13,091,020 5,106,388 13,727,021
Short-term investments -- -- 304,628 --
Accounts receivable, net of allowance for doubtful
accounts of JPY 29,054 thousand, JPY 35,482
thousand and JPY 23,411 thousand at June 30, 2006,
June 30, 2005 and March 31, 2006,
respectively 3 53,649 6,143,361 5,792,808 11,962,304
Inventories 6,192 709,047 265,286 851,857
Prepaid expenses 16,033 1,835,908 1,263,409 1,031,325
Other current assets, net of allowance for doubtful
accounts of JPY 30,850 thousand, JPY 19,000
thousand and JPY 33,250 thousand at June 30,
2006, June 30, 2005 and
March 31, 2006, respectively 1,548 177,320 80,797 214,121
--------------------- ------------ ------------
Total current assets 191,744 21,956,656 52.3 12,813,316 38.0 27,786,628 54.8
INVESTMENTS IN AND ADVANCES TO EQUITY METHOD
INVESTEES,
net of loan loss valuation allowance of JPY 16,701
thousand, JPY 31,378 thousand and JPY 16,701
thousand at June 30, 2006, June 30, 2005 and
March 31, 2006, respectively 3 ,563 1,095,058 2.6 677,035 2.0 1,162,971 2.3
OTHER INVESTMENTS 2,5 50,747 5,811,019 13.8 7,882,229 23.3 8,020,705 15.8
PROPERTY AND EQUIPMENT--Net 4 85,330 9,771,187 23.3 9,155,981 27.1 10,299,496 20.3
INTANGIBLE ASSETS--Net 5,547 635,152 1.5 560,288 1.7 632,594 1.2
GUARANTEE DEPOSITS 4,5 13,576 1,554,601 3.7 2,091,237 6.2 1,549,653 3.1
OTHER ASSETS, net of allowance for doubtful
accounts of JPY 39,657 thousand, JPY 375,989
thousand and JPY 40,980 thousand at June 30,
2006, June 30, 2005 and
March 31, 2006, respectively 10,285 1,177,744 2.8 564,153 1.7 1,252,942 2.5
--------------------- ------------ ------------
TOTAL 366,792 42,001,417 100.0 33,744,239 100.0 50,704,989 100.0
--------------------- ------------ ------------
------------------------------------------------------------------------------------------------------------------------
As of June 30, 2006 As of June 30, 2005 As of March 31,
2006
------------------------------------------------------------------------------------------------------------------------
Thousands Thousands of Thousands of Thousands of
of U.S. Yen Yen Yen
Notes Dollars % % %
------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings 5 46,721 5,350,000 4,723,387 4,555,000
Long-term borrowings--current portion 5 11,801 1,351,342 3,187,023 1,989,963
Payable under securities loan agreement 5 4,332 496,080 1,530,400 999,600
Capital lease obligations--current portion 4 30,192 3,457,253 2,718,759 3,003,914
Accounts payable 3 33,070 3,786,846 3,665,233 10,107,942
Accrued expenses 4,644 531,849 523,478 540,027
Other current liabilities 17,919 2,051,859 918,829 1,702,208
--------------------- ------------ ------------
Total current liabilities 148,679 17,025,229 40.5 17,267,109 51.2 22,898,654 45.2
LONG-TERM BORROWINGS 5 2,349 269,000 0.6 870,342 2.6 290,000 0.6
CAPITAL LEASE OBLIGATIONS --Noncurrent 4 35,132 4,022,923 9.6 3,950,359 11.7 4,980,659 9.8
ACCRUED RETIREMENT AND PENSION COSTS 2,138 244,823 0.6 169,460 0.5 223,332 0.4
OTHER NONCURRENT LIABILITIES 5,958 682,291 1.6 246,818 0.7 827,086 1.6
--------------------- ------------ ------------
Total Liabilities 194,256 22,244,266 52.9 22,504,088 66.7 29,219,731 57.6
--------------------- ------------ ------------
MINORITY INTEREST 11,194 1,281,860 3.1 1,053,212 3.1 1,263,320 2.5
COMMITMENTS AND CONTINGENCIES 6 -- -- -- -- -- -- --
SHAREHOLDERS' EQUITY:
Common-stock--authorized, 377,600 shares;
issued and outstanding, 204,300 shares at
June 30, 2006, authorized, 377,600 shares;
issued and outstanding, 191,800 shares at
June 30, 2005 and authorized, 377,600
shares; issued and outstanding, 204, 300
shares at March 31, 2006 147,008 16,833,847 40.1 13,765,372 40.8 16,833,847 33.2
Additional paid-in capital 232,287 26,599,217 63.3 23,637,628 70.0 26,599,217 52.5
Accumulated deficit (252,788)(28,946,811)(68.9)(33,811,378)(100.2)(29,680,482)(58.5)
Accumulated other comprehensive income 35,571 4,073,276 9.7 6,679,555 19.8 6,553,594 12.9
Treasury stock--777 shares held by an equity
method investee at June 30, 2006, June 30, 2005
and March 31, 2006, respectively (736) (84,238) (0.2) (84,238) (0.2) (84,238) (0.2)
--------------------- ------------ ------------
Total shareholders' equity 161,342 18,475,291 44.0 10,186,939 30.2 20,221,938 39.9
--------------------- ------------ ------------
TOTAL 366,792 42,001,417 100.0 33,744,239 100.0 50,704,989 100.0
--------------------- ------------ ------------
------------------------------------------------------------------------------------------------------------------------
(Note)
1) The U.S. dollar amounts represent translations of yen amounts at the rate
of JPY 114.51 which was the noon buying rate in New York City for cable
transfers in foreign currencies as certified for customs purposes by the
Federal Reserve Bank of New York prevailing as of June 30, 2006.
2) IIJ conducted a 1 for 5 stock split effective on October 11, 2005. The
numbers of shares of common stock authorized, and issued and outstanding,
and shares held by an equity method investee in this table are calculated
with the assumption that the stock split was made at the beginning of the
year ended March 31, 2006. IIJ issued 12,500 new shares of common stock for
public offering when it listed on the Mothers market of TSE in December
2005.
(2) Quarterly Consolidated Statements of Income
-------------------------------------------------------------------------------------------------------------------------
Three Months Ended June 30, Three Months Ended Fiscal Year Ended
2006 June 30, 2005 March 31, 2006
----------------------------------------------------------------------
Thousands % of % of % of
of U.S. Thousands total Thousands total Thousands total
Notes Dollars of Yen revenues of Yen revenues of Yen revenues
-------------------------------------------------------------------------------------------------------------------------
REVENUES: 3
Connectivity and value-added services:
Dedicated access 22,844 2,615,890 2,746,900 10,625,268
Dial-up access 5,301 606,995 698,670 2,673,808
Value-added services 15,207 1,741,318 1,387,893 6,249,891
Other 7,857 899,726 933,120 3,673,872
-------------------- ----------- -----------
Total 51,209 5,863,929 5,766,583 23,222,839
Systems integration 52,676 6,031,963 3,840,075 23,504,537
Equipment sales 4,729 541,545 273,438 3,085,208
-------------------- ----------- -----------
Total revenues 108,614 12,437,437 100.0 9,880,096 100.0 49,812,584 100.0
-------------------- ----------- -----------
COST AND EXPENSES: 3,4
Cost of connectivity and value-added services 44,273 5,069,730 4,963,835 20,077,990
Cost of systems integration 40,008 4,581,313 2,910,262 18,120,418
Cost of equipment sales 4,218 483,015 243,699 2,818,036
-------------------- ----------- -----------
Total cost 88,499 10,134,058 81.5 8,117,796 82.2 41,016,444 82.4
Sales and marketing 6,898 789,932 6.3 767,801 7.8 3,079,526 6.2
General and administrative 7,988 914,711 7.4 713,917 7.2 3,147,315 6.3
Research and development 347 39,684 0.3 33,904 0.3 158,155 0.3
-------------------- ----------- -----------
Total cost and expenses 103,732 11,878,385 95.5 9,633,418 97.5 47,401,440 95.2
-------------------- ----------- -----------
OPERATING INCOME 4,882 559,052 4.5 246,678 2.5 2,411,144 4.8
-------------------- ----------- -----------
OTHER INCOME:
Interest income 27 3,049 2,101 13,099
Interest expense (935) (107,002) (109,377) (437,364)
Foreign exchange gains 6 690 8,030 3,470
Gain on other investments--net 2 4,176 478,186 488,758 3,197,690
Other--net 569 65,181 45,721 190,520
-------------------- ----------- -----------
Other income-- net 3,843 440,104 3.5 435,233 4.4 2,967,415 6.0
-------------------- ----------- -----------
INCOME FROM OPERATIONS BEFORE INCOME TAX
EXPENSE, MINORITY INTERESTS AND EQUITY IN NET
INCOME (LOSS) OF EQUITY METHOD INVESTEES 8,725 999,156 8.0 681,911 6.9 5,378,559 10.8
-------------------- ----------- -----------
INCOME TAX EXPENSE 1,300 148,874 1.2 38,111 0.4 257,360 0.5
MINORITY INTERESTS IN EARNINGS OF SUBSIDIARIES (380) (43,574) (0.3) (23,855) (0.2) (353,883) (0.7)
-------------------- ----------- -----------
EQUITY IN NET INCOME (LOSS) OF EQUITY METHOD 3
INVESTEES (638) (73,037) (0.6) 2,729 0.0 (13,746) (0.1)
-------------------- ----------- -----------
NET INCOME 6,407 733,671 5.9 622,674 6.3 4,753,570 9.5
------------------------------------------------------------------------------------------------------------------------
Three Months Ended June 30, Three Months Ended Fiscal Year Ended
2006 June 30, 2005 March 31, 2006
---------------------------------------------------------------------
Thousands
of U.S.
Notes Dollars Thousands of Yen Thousands of Yen Thousands of Yen
------------------------------------------------------------------------------------------------------------------------
NET INCOME PER SHARE 8
BASIC WEIGHTED-AVERAGE NUMBER OF SHARES 203,989 191,547 195,613
DILUTED WEIGHTED-AVERAGE NUMBER OF SHARES 204,230 191,547 195,955
BASIC WEIGHTED-AVERAGE NUMBER OF ADS
EQUIVALENTS 81,595,702 76,618,779 81,595,702
DILUTED WEIGHTED-AVERAGE NUMBER OF ADS
EQUIVALENTS 81,692,077 76,618,779 81,796,102
BASIC NET INCOME PER SHARE 31 3,597 3,251 24,301
DILUTED NET INCOME PER SHARE 31 3,592 3,251 24,258
BASIC NET INCOME PER ADS EQUIVALENT 8.99 8.13 58.26
DILUTED NET INCOME PER ADS EQUIVALENT 8.98 8.13 58.11
------------------------------------------------------------------------------------------------------------------------
(Note)
1) The U.S. dollar amounts represent translations of yen amounts at the rate
of JPY 114.51 which was the noon buying rate in New York City for cable
transfers in foreign currencies as certified for customs purposes by the
Federal Reserve Bank of New York prevailing as of June 30, 2006.
2) IIJ conducted a 1 for 5 stock split effective on October 11, 2005. The
numbers of shares of common stock authorized, and issued and outstanding,
and shares held by an equity method investee in this table are calculated
with the assumption that the stock split was made at the beginning of the
year ended March 31, 2006. IIJ issued 12,500 new shares of common stock for
public offering when it listed on the Mothers market of TSE in December
2005.
(3) Consolidated Statements of Shareholders' Equity
Consolidated statements of shareholders' equity for three months ended June 30, 2006 (Unit: Thousands of Yen)
------------------------------------------------------------------------------------------------------------------------
Shares of Common Additional Accumulated Accumulated Treasury Total
Common Stock Paid-in Deficit Other Stock
Stock Capital Comprehensive
Outstanding Income
(Including
Treasury
Stock)
(Shares)
------------------------------------------------------------------------------------------------------------------------
BALANCE, APRIL 1, 2006 204,300 16,833,847 26,599,217 (29,680,482) 6,553,594 (84,238)20,221,938
Net income 733,671 733,671
Other comprehensive loss, net of tax (2,480,318) (2,480,318)
-----------
Total comprehensive income (1,746,647)
-------------------------------------------------------------------------------
BALANCE, JUNE 30, 2006 204,300 16,833,847 26,599,217 (28,946,811) 4,073,276 (84,238)18,475,291
-------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
Consolidated statements of shareholders' equity for three months ended June 30, 2006 (Unit: Thousands of U.S. Dollars)
------------------------------------------------------------------------------------------------------------------------
Shares of Common Additional Accumulated Accumulated Treasury Total
Common Stock Paid-in Deficit Other Stock
Stock Capital Comprehensive
Outstanding Income
(Including
Treasury
Stock)
(Shares)
------------------------------------------------------------------------------------------------------------------------
BALANCE, APRIL 1, 2006 204,300 147,008 232,287 (259,196) 57,232 (736) 176,595
Net income 6,407 6,407
Other comprehensive loss, net of tax (21,660) (21,660)
-----------
Total comprehensive income (15,253)
-------------------------------------------------------------------------------
BALANCE, JUNE 30, 2006 204,300 147,008 232,287 (252,788) 35,571 (736) 161,342
-------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
(Note)
1) The U.S. dollar amounts represent translations of yen amounts at the rate
of JPY 114.51 which was the noon buying rate in New York City for cable
transfers in foreign currencies as certified for customs purposes by the
Federal Reserve Bank of New York prevailing as of June 30, 2006.
Consolidated statements of shareholders' equity for three months ended June 30, 2005 (Unit: Thousands of Yen)
------------------------------------------------------------------------------------------------------------------------
Shares of Common Additional Accumulated Accumulated Treasury Total
Common Stock Paid-in Deficit Other Stock
Stock Capital Comprehensive
Outstanding Income
(Including
Treasury
Stock)
(Shares)
------------------------------------------------------------------------------------------------------------------------
BALANCE, APRIL 1, 2005 191,800 13,765,372 23,637,628 (34,434,052) 8,690,125 (44,000)11,615,073
Net income 622,674 622,674
Other comprehensive income, net of tax (2,010,570) (2,010,570)
-----------
Total comprehensive income (1,387,896)
Purchase of common stock by an equity method investee (40,238) (40,238)
------------------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 2005 191,800 13,765,372 23,637,628 (33,811,378) 6,679,555 (84,238)10,186,939
-------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
Consolidated statements of shareholders' equity for the fiscal year ended March 31, 2006 (Unit: Thousands of Yen)
------------------------------------------------------------------------------------------------------------------------
Shares of Common Additional Accumulated Accumulated Treasury Total
Common Stock Paid-in Deficit Other Stock
Stock Capital Comprehensive
Outstanding Income
(Including
Treasury
Stock)
(Shares)
------------------------------------------------------------------------------------------------------------------------
BALANCE, APRIL 1, 2005 191,800 13,765,372 23,637,628 (34,434,052) 8,690,125 (44,000)11,615,073
Net income 4,753,570 4,753,570
Other comprehensive loss, net of tax (2,136,531) (2,136,531)
-----------
Total comprehensive income 2,617,039
Issuance of common stock, net of issuance
cost 12,500 3,068,475 2,961,589 6,030,064
Purchase of common stock by an equity method investee (40,238) (40,238)
------------------------------------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 2006 204,300 16,833,847 26,599,217 (29,680,482) 6,553,594 (84,238)20,221,938
-------------------------------------------------------------------------------
(4) Quarterly Condensed Consolidated Statements of Cash Flows
----------------------------------------------------------------------------------------------------------------------------
Three Months Ended Three Months Fiscal Year
June 30, 2006 Ended June 30, Ended
2005 March 31, 2006
----------------------------------------------
Thousands Thousands Thousands Thousands
of U.S. of of of
Dollars Yen Yen Yen
----------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income 6,407 733,671 622,674 4,753,570
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 9,669 1,107,155 1,013,745 4,209,037
Provision for (reversal of) doubtful accounts and advances 30 3,413 (5,339) (12,009)
Gains on other investments--net (4,176) (478,186) (488,758)(3,197,690)
Foreign exchange losses (gains) 29 3,284 (6,278) (7,825)
Equity in net loss (income) of equity method investees 638 73,037 (2,729) 13,746
Minority interests in earnings of subsidiaries 381 43,574 23,855 353,883
Deferred income tax expense (benefit) 184 21,054 18,343 (230,841)
Others 298 34,300 51,618 215,480
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 50,719 5,807,822 1,621,419 (4,460,173)
Increase in inventories, prepaid expenses and other current and noncurrent
assets (5,549) (635,408) (738,757)(1,390,398)
Increase (decrease) in accounts payable (53,019)(6,071,242)(1,132,992) 4,975,623
Increase in accrued expenses, other current and noncurrent liabilities 2,289 262,210 50,697 1,336,421
------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 7,900 904,684 1,027,498 6,558,824
------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchase of property and equipment (3,810) (436,264) (213,485) (919,366)
Purchase of short-term and other investments (2,438) (279,230) (299,311) (674,569)
Investment in an equity method investee -- -- -- (750,000)
Purchase of subsidiary stock from minority shareholders (241) (27,559) -- (192,142)
Proceeds from sales and redemption of other investments 4,212 482,348 514,460 3,613,239
Acquisition of a newly controlled company, net of cash acquired -- -- -- 229,457
Refund (payment) of guarantee deposits--net (49) (5,562) (39,210) 506,795
Other (6) (726) (5,450) (8,564)
------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (2,332) (266,993) (42,996) 1,804,850
------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from issuance of short-term borrowings with initial maturities over
three months and long-term borrowings 37,988 4,350,000 -- 1,000,000
Repayments of long-term borrowings (5,760) (659,621) (208,654)(2,986,056)
Proceeds from securities loan agreement 4,332 496,080 -- 4,897,040
Repayments of securities loan agreement (8,729) (999,600) (199,120)(5,626,960)
Principal payments under capital leases (7,859) (899,879) (766,807)(3,105,519)
Net decrease in short-term borrowings with initial maturities less than three
months (31,045)(3,555,000) (1,246) (169,633)
Proceeds from issuance of common stock, net of issuance cost -- -- -- 6,030,064
------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (11,073)(1,268,020)(1,175,827) 38,936
------------------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (49) (5,672) 11,236 37,934
NET INCREASE (DECREASE) IN CASH (5,554) (636,001) (180,089) 8,440,544
CASH, BEGINNING OF EACH PERIOD 119,876 13,727,021 5,286,477 5,286,477
------------------------------------------------------------------------------------------------------------------------
CASH, END OF EACH PERIOD 114,322 13,091,020 5,106,388 13,727,021
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
ADDITIONAL CASH FLOW INFORMATION:
Interest paid 795 91,001 95,390 426,692
Income taxes paid 1,970 225,563 128,764 148,101
NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of assets by entering into capital leases 3,542 405,621 319,828 3,842,952
Exchange of common stock investment due to merger:
Market value of common shares acquired -- 7,390
Cost of investment -- 2,584
Acquisition of business and a company:
Assets acquired -- 843,485
Cash paid -- (733,589)
Liabilities assumed -- 109,896
------------------------------------------------------------------------------------------------------------------------
(Note)
1) The U.S. dollar amounts represent translations of yen amounts at the rate
of JPY 114.51 which was the noon buying rate in New York City for cable
transfers in foreign currencies as certified for customs purposes by the
Federal Reserve Bank of New York prevailing as of June 30, 2006.
Standard for Preparation of Consolidated Financial Statements for the three
months ended June 30, 2006
1. The Terminology, Form, and Preparation Methods for the Consolidated
Financial Statements for the three months ended June 30, 2006
The consolidated financial statements for the three months ended June 30,
2006 have been prepared under the accounting principles, procedures
and ways of presentations requested for the issuance of American
Depository Receipts ("ADRs") and others (generally accepted accounting
principles in the United States of America ("U.S. GAAP"), including
Accounting Research Bulletins ("ARB"), Accounting Principles Board
("APB") Opinions, Statement of Financial Accounting Standards ("SFAS")
and related interpretation guidelines) 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).
IIJ registered issuance of ADRs under the United States Securities and
Exchange Commission ("the United States SEC") and list IIJ's ADRs on NASDAQ
market in August 1999. Accordingly, IIJ regularly files its annual report
on Form 20-F in English with the United States SEC, including consolidated
financial statements in English prepared under U.S. GAAP, in accordance
with Rule 13 of the U.S. Securities Exchange Act of 1934, as amended.
2. Main Differences in Preparation of Financial Statements in Accordance with
Japan's Provisions and Principles for Interim Consolidated Financial
Statements
The main differences between the consolidated financial statements for the
three months ended June 30, 2006 prepared under U.S. GAAP and the
consolidated financial statements for the three months ended June 30,
2006 prepared in accordance with the Japan's provisions and principles
for interim consolidated financial statements and the impact of the
financially material items on income from operations before income tax
expense, minority interests and equity in net income (loss) of equity
method investees ("income before income tax expense") (the impact by
an amendment to the financial statements prepared under U.S. GAAP) are
as follows:
(1) Differences in the Composition of the Quarterly Consolidated Financial
Statements
The quarterly consolidated financial statements under U.S. GAAP are
composed of quarterly consolidated balance sheets, quarterly
consolidated statements of income, quarterly consolidated statements
of shareholders' equity and quarterly consolidated statements of cash
flows and notes to the financial statements.
(2) Differences in the Presentation of the Quarterly Consolidated Financial
Statements
Equity in net income (loss) of equity method investees is shown as an
independent item in the quarterly consolidated financial statements
after income before income tax expense.
(3) Differences in Accounting Standards
a. Income tax expense
Income tax expenses 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.
b. 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 purchased. In the three months ended June 30, 2006, this accounting
treatment of lease transactions resulted in a JPY 6,452 thousand reduction
in income before income tax expense.
c. Cost of issuance of common stock
The cost of issuing of common stock is accounted for as an expense related
to capital transactions and is deducted from additional paid-in capital. In
the three months ended June 30, 2006, this accounting treatment resulted in
a JPY 8,906 thousand increase in income before income tax expense.
d. Retirement benefit accounting
Unfunded retirement benefits and noncontributory defined benefit pension
plans are accounted for in accordance with SFAS No. 87. In the three months
ended June 30, 2006, this accounting treatment resulted in a JPY 130
thousand decrease in income before income tax expense.
e. 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 three months ended
June 30, 2006, this accounting treatment did not result in any change in
income before income tax expense.
(4) Difference in the Way Diluted Net Income per Common Share is accounted for
in the Quarterly Consolidated Financial Statements
Diluted net income per common share is accounted for in accordance with
SFAS No. 128. In accordance with SFAS, the test of potential common shares
that have dilutive effects should be conducted over three months. In the
accounting principles in Japan regarding calculation of net income, the
test should consider the period from the beginning of a fiscal year to the
end of the quarter as one period. As a result, there might be a difference
in the result of the test depending on the average of the share price
during the period.
In the three months ended June 30, 2006, there was no difference mentioned
above.
Notes to Quarterly Consolidated Financial Statements
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
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 29.7 percent owned by Nippon Telegraph
and Telephone Corporation ("NTT") and its subsidiary, NTT Communications
Corporation as of June 30, 2006. IIJ and consolidated subsidiaries
(collectively, the "Company") provide Internet access services throughout Japan
and into the United States of America and into the rest of Asia. The Company
provides Internet-related systems integration, such as systems consultation,
design, development, construction and operations and maintenance. The Company
also provides systems integrations or sell equipment to supply equipment to
construct systems, and provide other miscellaneous Internet access-related
services.
The Company manages its business and measures results based on a single
Internet-related services industry segment. Substantially all revenues are from
customers operating in Japan.
Certain Significant Risks and Uncertainties
The Company has available-for-sale securities of JPY 4,288,015 thousand at
June 30, 2006, 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 significant portion
of network backbone, and Nippon Telegraph and Telephone East Corporation ("NTT
East"), Nippon Telegraph and Telephone West Corporation ("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 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 record 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 quarterly consolidated financial statements include the accounts of IIJ
and all of its subsidiaries, Net Care, Inc. ("Net Care"), IIJ Technology Inc.
("IIJ Technology"), IIJ Financial Systems Inc. ("IIJ FS") and IIJ America, Inc.
("IIJ America"), which have first quarters ending June 30, except for IIJ
America. IIJ America's first quarter end is March 31 and such date was used for
purposes of preparing the quarterly consolidated financial statements as it is
not practicable for the subsidiary to report its financial results as of June
30. There were no significant events that occurred during the intervening period
that would require adjustment to or disclosure in the accompanying quarterly
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.
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 generally
accepted accounting principles 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 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 to construct networks that connect multiple operational sites
for customers. 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 the consultation of
Internet network systems, design, development or construction and related
maintenance, monitoring and other operating services. 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, planning, systems design, 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 are reported on a gross or net basis in accordance with
EITF Issue No. 99-19 "Reporting Revenue Gross as a Principal versus Net as an
Agent". Revenues are recognized when equipments are delivered and accepted by
the customer.
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 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 (loss). The cost of securities sold is determined
based on average cost.
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 as fair value is not
readily determinable. 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. Fair
value is determined as the Company's interest in the net assets of 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.
Leases
Capital leases, which meet specific criteria noted in SFAS No. 13,
"Accounting for Leases", are capitalized at the inception of the lease at
present value of the minimum lease payments. All other leases are accounted for
as operating leases. Lease payments for capital leases are apportioned to
interest expense and a reduction of the lease liability so as to achieve a
constant rate of interest on the remaining balance of the liability. Operating
lease payments are recognized as an expense on a straight-line basis over the
lease term.
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. 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 in accordance with SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets". There
were no impairment loss for long-lived assets for the three months ended June
30, 2006, the three months ended June 30, 2005 and the year ended March 31,
2006.
Goodwill and Intangible Assets
In accordance with 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 performed annually or more frequently
if events or changes in circumstances indicate that the asset might be impaired.
The Company performs annual impairment tests on March 31.
Pension and severance indemnities plans
The Company has pension plans and /or severance indemnities plans. The cost
of the pension plans and severance indemnities plans are accrued based on
amounts determined using actuarial methods, in accordance with SFAS No. 87,
"Employers' Accounting for Pensions".
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
quarter-end exchange rates and the resulting transaction gain or loss is
recognized in earnings.
Derivative Financial Instruments
All derivatives are recorded at fair value as either asset 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
the 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. The 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 Sprits
On August 4, 2005, IIJ's board of directors approved a five-for-one split
of IIJ's common stock. Shareholders of record on August 31, 2005 received an
additional common share. The stock split was effective on October 11, 2005. In
order to reflect this split, information pertaining to the number of shares of
common stock and net income per share has been restated in the accompanying
financial statements and related notes.
Stock-based Compensation
The Company accounts for stock-based compensation in accordance with SFAS
No. 123R, "Accounting for Stock-Based Compensation" from this quarter. SFAS No.
123R requires compensation expense for stock options and other share-based
payment to be measured and recorded based on the instruments' fair value. The
Company adopted SFAS No. 123R and the related FASB Staff Positions on April 1,
2006 by using modified prospective application, which requires recognizing
expenses for options granted prior to the adoption date equal to the fair value
of unvested amounts over the remaining vesting period. The portion of these
options' fair value attributable to vested awards prior to the adoption of SFAS
No. 123R is never recognized.
As all existing granted stock-based awards of the Company have vested, the
adoption of SFAS No. 123R did not have any impact on the Company's consolidated
financial position or results of operations.
Research and Development and Advertising
Research and development and advertising costs are expensed as incurred.
Advertising
Advertising costs are expensed as incurred.
Basic and Diluted Net Income per Share
Basic net income per share is computed by dividing net income by the
weighted-average number of shares of common stock outstanding during the
quarter. Diluted net income per share reflects the potential dilutive effect of
stock options. (See note 8 - Basic and Diluted 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
IIJ's President and Representative Director, 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.
New Accounting Standards
In June 2006, the FASB issued FASB Interpretation ("FIN") No. 48,
"Accounting for Uncertainty in Income Taxes," which clarifies the accounting for
uncertainty in income taxes recognized in an enterprise's financial statements
in accordance with SFAS No. 109, "Accounting for Income Taxes." This
interpretation prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. This interpretation also provides guidance
on derecognition, classification, interest and penalties, accounting in
quarterly financial statements, disclosure, and transition. FIN No. 48 is
effective for fiscal years beginning after December 15, 2006. The Company is
currently evaluating the impact of adopting this interpretation.
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 June 30, 2006, June 30, 2005 and
March 31, 2006, is as follows:
(Unit: Thousands of Yen)
As of June 30, 2006
---------------------------------------------------------------------
Cost Unrealized gains Unrealized losses Fair value
--------------------------------------------------------------------------------------------
Available-for-sale--
Equity securities 220,184 4,067,848 17 4,288,015
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
As of June 30, 2005
---------------------------------------------------------------------
Cost Unrealized gains Unrealized losses Fair value
--------------------------------------------------------------------------------------------
Available-for-sale--
Equity securities 212,219 6,711,169 2,530 6,920,858
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
As of March 31, 2006
---------------------------------------------------------------------
Cost Unrealized gains Unrealized losses Fair value
--------------------------------------------------------------------------------------------
Available-for-sale--
Equity securities 222,807 6,552,623 42 6,775,388
--------------------------------------------------------------------------------------------
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 June 30, 2006, June 30,
2005 and March 31, 2006:
(Unit: Thousands of Yen)
As of June 30, 2006
---------------------------------------------------------------------
Less than 12 months 12 months more Total
---------------------------------------------------------------------
Fair value Unrealized Fair value Unrealized Fair Unrealized
losses losses value losses
-------------------------------------------------------------------------------------------
Marketable equity
securities 1,363 17 -- -- 1,363 17
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
As of June 30, 2005
---------------------------------------------------------------------
Less than 12 months 12 months more Total
---------------------------------------------------------------------
Fair value Unrealized Fair value Unrealized Fair Unrealized
losses losses value losses
-------------------------------------------------------------------------------------------
Marketable equity
securities 47,200 2,530 -- -- 47,200 2,530
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
As of March 31, 2006
---------------------------------------------------------------------
Less than 12 months 12 months more Total
---------------------------------------------------------------------
Fair value Unrealized Fair value Unrealized Fair Unrealized
losses losses value losses
-------------------------------------------------------------------------------------------
Marketable equity
securities 1,338 42 -- -- 1,338 42
-------------------------------------------------------------------------------------------
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 480,806
thousand, JPY 514,460 thousand and JPY 3,240,805 thousand for the three months
ended June 30, 2006, the three months ended June 30, 2005 and the year ended
March 31, 2006, respectively. Gross realized gain of JPY 478,186 thousand, JPY
511,421 thousand and JPY 3,222,397 thousand were included in other income
(expense) for the three months ended June 30, 2006, the three months ended June
30, 2005 and the year ended March 31, 2006, respectively.
The aggregate cost of the Company's cost method investments totaled JPY
1,523,004 thousand, JPY 961,371 thousand and JPY 1,245,317 thousand at June 30,
2006, June 30, 2005 and March 31, 2006, 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
22,663 thousand and JPY 29,513 thousand for the three months ended June 30, 2005
and for the year ended March 31, 2006, respectively. Gain on exchange of
securities of JPY 35,450 thousand and JPY 4,806 thousand, included in other
income (expense), in the three months ended June 30, 2005 and the year ended
March 31, 2006, respectively, represented a non-monetary gain upon the exchange
of marketable common shares in a merger transaction.
In Japan, there is a market in which participants lend and borrow debt and
equity securities without collateral from financial institutions under agreement
known as lending and borrowing debt and equity securities contracts. Under the
agreement, the Company loans equity securities without collateral. The Company
has loaned JPY 216,000 thousand and JPY 324,000 thousand of available-for-sale
securities to the financial institution as of June 30, 2006 and March 31, 2006,
respectively.
3. INVESTMENTS IN AND ADVANCES TO EQUITY METHOD INVESTEEES
IIJ utilizes various companies in Japan and neighboring countries to form
and operate its Internet business. Businesses operated by its equity method
investees include connectivity services in Asian countries (Asia Internet
Holding Co., Ltd. ("AIH" through September 2005), multifeed technology services
and location facilities for connecting high-speed Internet backbones (Internet
Multifeed Co., "Multifeed"), Web page design services (atom Co., Ltd., "atom"),
and data center services in Asian countries (i-Heart Inc., "i-Heart").
The aggregate amounts of balances and transactions of the Company with
these equity method investees as of June 30, 2006, June 30, 2005 and March 31,
2006 and for each of the three months ended June 30, 2006, the three months
ended June 30, 2005 and the year ended March 31, 2006 were summarized as
follows:
As of June 30, 2006 As of June 30, 2005 As of March 31, 2006
-------------------------------------------------------------------------------------------
Accounts
receivable 46,559 110,435 253,208
Accounts payable 13,039 94,810 17,804
-------------------------------------------------------------------------------------------
From April 1, 2006 From April 1, 2005 From April 1, 2005
to June 30, 2006 to June 30, 2005 to March 31, 2006
-------------------------------------------------------------------------------------------
Revenues 123,503 308,627 1,286,275
Cost and
expenses 36,075 283,200 656,184
-------------------------------------------------------------------------------------------
During each of the three months ended June 30, 2006, and June 30, 2005 and
the year ended March 31, 2006, the Company did not receive any dividends from
its equity method investees.
The Company's investments in and advances to these equity method investees
and respective ownership percentage at June 30, 2006, June 30, 2005 and March
31, 2006 consisted of the following:
As of June 30, 2006 As of June 30, 2005 As of March 31, 2006
-------------------------------------------------------------------
Ownership Thousands Ownership Thousands Ownership Thousands
(%) of Yen (%) of Yen (%) of Yen
-----------------------------------------------------------------------------------------
AIH -- -- 26.69 265,460 -- --
Multifeed 29.44 352,648 28.58 264,219 29.44 317,144
atom 40.00 99,675 40.00 106,521 40.00 116,974
Internet Revolution
Inc. 30.00 585,291 -- -- 30.00 676,795
Other 57,444 40,835 52,058
-----------------------------------------------------------------------------------------
Total 1,095,058 677,035 1,162,971
-----------------------------------------------------------------------------------------
Advances of JPY 34,545 thousand, JPY 19,868 thousand and JPY 34,545 thousand to
an equity method investees, net of loan loss valuation allowance was included in
the balances, as of June 30, 2006, June 30, 2005 and March 31, 2006,
respectively.
4. 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 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%). The leases for international backbone
connectivity during one-year lease period 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
2008 and also leases its network operation centers under non-cancelable
operating leases.
Refundable guarantee deposits as of June 30, 2006, June 30, 2005 and March
31, 2006 consist of as follows:
As of June 30, 2006 As of June 30, 2005 As of March 31, 2006
-----------------------------------------------------------------------------------------
Head Office 1,185,307 1,744,949 1,185,307
Sales and subsidiaries
offices 314,253 298,457 308,494
Other 55,041 47,831 55,852
-----------------------------------------------------------------------------------------
Total refundable
guarantee deposits 1,554,601 2,091,237 1,549,653
-----------------------------------------------------------------------------------------
Lease expenses related to backbone lines for the three months ended June
30, 2006, the three months ended June 30, 2005 and the year ended March 31, 2006
amounted to JPY 871,856 thousand, JPY 863,705 thousand and JPY 3,516,322
thousand, respectively. Lease expenses for local access lines for the three
months ended June 30, 2006, the three months ended June 30, 2005 and the year
ended March 31, 2006, which are only attributable to dedicated access revenues,
amounted to JPY 1,143,812 thousand, JPY 1,131,358 thousand and JPY 4,558,382
thousand, respectively. Other lease expenses for the three months ended June 30,
2006, the three months ended June 30, 2005 and the year ended March 31, 2006
amounted to JPY 1,040,676 thousand, JPY 871,848 thousand and JPY 3,653,766
thousand, respectively.
The Company has subleased a part of its office premises. Lease expenses
mentioned above have been reduced by sublease revenues totaling JPY 111,021
thousand and JPY 435,224 thousand for the three months ended June 30, 2005 and
the year ended March 31, 2006, respectively.
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 14,529,403 thousand and
JPY 7,338,962 thousand at June 30, 2006, JPY 12,740,593 thousand and JPY
6,265,906 thousand at June 30, 2005 and JPY 14,458,667 thousand and JPY
6,819,503 thousand at March 31, 2006, respectively.
As of June 30, 2006, 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:
As of June 30, 2006
------------------------------------------------------------------
Connectivity lines Other operating leases Capital leases
operating leases
-------------------------------------------------------------------------------------------
Through June 30, 2007 12,798 1,345,745 3,457,253
July 1, 2007 and
thereafter 0 1,115,777 4,022,923
-------------------------------------------------------------------------------------------
5. BORROWINGS AND CONVERTIBLE NOTES
Short-term borrowings at June 30, 2006, June 30, 2005 and March 31, 2006
consist of bank overdrafts. Short-term borrowings bear fixed-rate interest and
their weighted average rates at June 30, 2006, June 30, 2005 and March 31, 2006
were 1.050 percent, 1.375 percent, and 1.375 percent, respectively.
Long term borrowings as of June 30, 2006, June 30, 2005 and March 31, 2006
consisted of the following:
(Unit: Thousands of Yen)
As of As of As of
June 30, 2006 June 30, 2005 March 31, 2006
------------------------------------------------------------------------------------------
Unsecured long-term loans payable to
banks, maturing at various dates
through calendar 2007. Interest is
payable at a variable rate. Weighted
average interest rates were 2.169
percent, 1.946 percent and 2.206
percent at June 30, 2006, June 30,
2005 and March 31, 2006,
respectively. 353,000 937,000 374,000
Unsecured long-term loans payable to
banks (secured in 2005), maturing in
calendar 2006. Weighted average
interest rates were 1.857 percent
and 1.710 percent at June 30, 2005
and March 31, 2006, respectively. -- 1,450,000 600,000
Unsecured long-term loans payable to
banks (secured in 2005), maturing at
various dates through calendar 2007.
Interest is payable at a variable
rate based on TIBOR. All of interest
is converted to a fixed interest
rate through interest rate swap
contracts. Weighted average interest
rates were 1.174 percent, 1.132
percent and 1.130 percent at June
30, 2006, June 30, 2005 and March
31, 2006, respectively. 1,150,000 1,400,000 1,150,000
Long-term installment loans payable
at various dates through calendar
2007. Interest rates were 2.55
percent at June 30, 2006, June 30,
2005 and March 31, 2006. 117,342 270,365 155,963
------------------------------------------------------------------------------------------
Total 1,620,342 4,057,365 2,279,963
------------------------------------------------------------------------------------------
Less current portion (1,351,342) (3,187,023) (1,989,963)
------------------------------------------------------------------------------------------
Long-term borrowings less current
portion 269,000 870,342 290,000
------------------------------------------------------------------------------------------
The Company entered into interest rate swap contracts to manage its
interest rate exposure resulting in a fixed interest rate for a portion of its
long-term debt.
On March 14, 2003, the Company entered into a long-term installment loan
agreement with a leasing company to finance the payment for rental deposits
given to other lessor for its new head office. The principal of the loan is JPY
117,342 thousand, JPY 270,365 thousand and JPY 155,963 thousand at June 30,
2006, June 30, 2005 and March 31, 2006 and the loan is secured by a first
priority pledge against a claim for the guarantee deposits of JPY 1,146,039
thousand at June 30, 2006.
The Company entered into bank overdraft agreements with certain Japanese
banks for which the unused balance outstanding as of June 30, 2006, June 30,
2005 and March 31, 2006 was JPY 5,620,000 thousand, JPY 1,891,613 thousand and
JPY 3,210,000 thousand.
Since August 2004, the Company has been a party to a securities loan
agreement with a certain Japanese financial institution. The available-for-sale
securities loaned to the financial institution were JPY 632,700 thousand, JPY
1,910,200 thousand and JPY 1,230,000 thousand, and the cash received in return
was JPY 496,080 thousand, 1,530,400 thousand and 999,600 thousand at June 30,
2006, June 30, 2005 and March 31, 2006, respectively. These transactions were
accounted for as secured borrowings and the cash received was recorded as
payable under the securities loan agreement and securities lent were recorded as
other investments. The agreement requires the Company to provide certain
marketable securities as collateral at the commencement of the transaction. The
Company is required to make a partial repayment or receive additional borrowings
depending on the market value of securities pledged. The Company paid the
interest on the payables at a variable rate, which was 0.37 percent, 0.6349
percent and 0.37 percent as of June 30, 2006, June 30, 2005 and March 31, 2006,
respectively.
6. COMITMENTS AND CONTINGENT LIABILITIES
In December 2001, a class action complaint alleging violations of the
federal securities laws was filed against the Company, naming IIJ, certain of
its officers and directors as defendants, and underwriters of IIJ's initial
public offering. Similar complaints have been filed against over 300 other
issuers that have had initial public offerings since 1998 and such actions have
been included in a single coordinate proceeding in the Southern District of New
York. An amended complaint was filed on April 24, 2002 alleging, among other
things, that the underwriters of IIJ's initial public offering violated the
securities laws (i) by failing to disclose in the offering's registration
statement certain alleged compensation arrangements entered into with the
underwriters' clients, such as undisclosed commissions or tie-in agreements to
purchase stock in the after-market, and (ii) by engaging in manipulative
practices to artificially inflate the price of IIJ's stock in the after-market
subsequent to the initial public offering. On July 15, 2002, the Company joined
in an 'omnibus' motion to dismiss the amended complaint filed by the issuers and
individuals named in the various coordinated cases. In June 2003, the Company
approved a settlement with the plaintiffs in this matter. IIJ, along with the
settling issuer defendants, filed a motion seeking the court's preliminary
approval of the settlement. The court granted preliminary approval of the
settlement on February 15, 2005, subject to certain modifications. On August 31,
2005, the court issued a preliminary order further approving the modifications
to the settlement and certifying the settlement classes. The court also
appointed the Notice Administrator for the settlement and ordered that notice of
the settlement be distributed to all settlement class members beginning on
November 15, 2005, The settlement fairness hearing took place on April 24, 2006.
If the court determines that the settlement is fair to the class members, the
settlement will be approved. The settlement releases IIJ and the individual
defendants for liability for the conduct alleged in the action. Under the
settlement, the Company agreed to assign away, not assert, or release certain
potential claims the Company may have against IIJ's underwriters. Approximately
260 defendant issuers participated in this settlement. As to financial impact on
the Company, the settlement provides that the class members will be guaranteed
$1 billion in recoveries by the insurers of the issuers. In addition to IIJ's
portion of the proposed settlement, some of the continuing legal expenses
incurred in connection with the partial settlement would be borne by IIJ's
insurer based on the settlement agreement and an individual agreement between
IIJ and IIJ's insurer. Consequently, the Company believes that there will be no
significant financial impact on the Company as a result of this matter.
In addition to the foregoing, the Company is a party to other suits and
claims that arise in the normal course of business. The negative adverse outcome
of such suits and claims would not have a significant impact on the financial
statements.
In January 19, 2006, IIJ entered into a joint venture agreement regarding
the establishment and management of Internet Revolution Inc. ("i-revo") with
Konami corporation. In the agreement, IIJ committed an additional contribution
for capital investment or working capital to i-revo of up to JPY 90,000 thousand
for the period from November 2006 to April 2007.
7. 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 institutions.
Changes in fair value of interest rate swaps designated as hedging
instruments are reported in accumulated other comprehensive income during the
three months ended June 30, 2006, the three months ended June 30, 2005 and the
year ended March 31, 2006. 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 three months ended June 30,
2006, the three months ended June 30, 2005 and the year ended March 31, 2006.
For the three months ended June 30, 2006, the three months ended June 30, 2005
and the year ended March 31, 2006, net derivative loss of JPY 751 thousand, JPY
752 thousand and JPY 10,008 thousand were reclassified to interest expense,
respectively.
Approximately JPY 6,988 thousand of accumulated other comprehensive loss
related to the interest rate swaps are expected to be reclassified as an
adjustment to interest expense as a yield adjustment of the hedged bank
borrowings within the next 12 months.
8. BASIC AND DILUTED NET INCOME PER SHARE
The basic and diluted net income per share in the three months ended June
30, 2006, the three months ended June 30, 2005 and the year ended March 31, 2006
is as follows:
From April 1, 2006 From April 1, 2005 From April 1, 2005
to June 30, 2006 to June 30, 2005 to March 31, 2006
------------------------------------------------------------------------------------------
Numerator:
Net income (JPY thousand) 733,671 622,674 4,753,570
Dilutive effect (JPY
thousand) -- -- --
------------------------------------------------------------------------------------------
Diluted net income (JPY
thousand) 733,671 622,674 4,753,570
------------------------------------------------------------------------------------------
Denominator:
Basic weighted average number
of shares of common stock
outstanding 203,989 191,547 195,613
Effect by stock option 241 -- 342
------------------------------------------------------------------------------------------
Diluted weighted average
number of shares of common
stock outstanding 204,230 191,547 195,955
------------------------------------------------------------------------------------------
Basic net income per share 3,597 3,251 24,301
------------------------------------------------------------------------------------------
Diluted net income per share 3,592 3,251 24,258
------------------------------------------------------------------------------------------
For the three months ended June 30, 2006, the three months ended June 30,
2005 and the year ended March 31, 2006, the number of the 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 was 975, 2,700 and 975 at June 30, 2006, June 30, 2005 and March
31, 2006, respectively.
9. SUBSEQUENT EVENTS
The reductions of additional paid-in capital of JPY 21,980,395 thousand and
common stock of JPY 2,539,222 thousand to eliminate accumulated deficit for
purposes of reporting under the Corporation Law in its non-consolidated
financial statements, approved by IIJ's shareholders at the 14th Ordinary
General Shareholders' Meeting held on June 28, 2006 became effective on August
4, 2006.
(5) Others No applicable item.