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 May 15, 2007
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 2007/05/15 IIJ Announces Full Year and Fourth Quarter Results
for the Fiscal Year Ended March 31, 2007
2 2007/05/15 Information on the Affiliated Company, disclosed in
accordance with the disclosure rules defined by the
Tokyo Stock Exchange
EXHIBIT 1
IIJ Announces Full Year and Fourth Quarter Results for the
Fiscal Year Ended March 31, 2007
TOKYO--(BUSINESS WIRE)--May 15, 2007--Internet Initiative Japan
Inc. (Nasdaq: IIJI, Tokyo Stock Exchange First Section: 3774) ("IIJ"),
one of Japan's leading Internet-access and comprehensive network
solutions providers, today announced its financial results for the
fourth quarter and the full fiscal year ended March 31, 2007
("FY2006").(1)
Highlights of FY2006 Results
-- Revenue totaled JPY 57,055 million ($485.3 million), an
increase of 14.5% from FY2005.
-- Operating income was JPY 3,500 million ($29.8 million), an
increase of 45.2% from FY2005.
-- Net income was JPY 5,410 million ($46.0 million), an increase
of 13.8% from FY2005.
-- IIJ surpassed its annual target for revenues, operating income
and net income that it announced on February 8, 2007.
Highlights of Fourth Quarter FY2006 Results
-- Revenue totaled JPY 17,023 million ($144.8 million), an
increase of 5.5% from 4Q05.
-- Operating income was JPY 1,144 million ($9.7 million), an
increase of 18.4% from 4Q05.
-- Net income was JPY 1,151 million ($9.8 million), a decrease of
40.7% from 4Q05. The decrease is mainly due to an impairment
loss on unlisted equity securities.
Financial Targets for FY2007(2)
-- IIJ targets revenues of JPY 69 billion, operating income of
JPY 4.6 billion, income before income tax expense (benefit)(3)
of JPY 5.1 billion and net income of JPY 5.6 billion for the
fiscal year ending March 31, 2008 ("FY2007").
-- IIJ targets the cash dividend of JPY 1,500 per share of common
stock for FY2007.
Overview of 4th Quarter and Full FY2006 Financial Results and
Business Outlook(2)
"We are pleased to announce that we had another record year in
FY2006," said Koichi Suzuki, President and CEO of IIJ. "We recorded
the highest level of revenue in our history of JPY 57.1 billion, and
an increase in operating income of 45.2% from the previous year, which
amounted to JPY 3.5 billion, surpassing our previously announced
target. We believe that the favorable results show our corporate
customers increased utilization of Internet Protocol in their
business. More corporate customers are shifting to higher speeds for
Internet connectivity services and demand outsourcing services. We
have been involved in larger-scaled systems integration projects and
more network integration projects. In order to take advantage of this
trend, we have developed new outsourcing services such as "IIJ Secure
MX Services" to provide comprehensive e-mail security, and have been
actively involved in new pilot projects, such as the download of high
quality video content to establish a new content distribution
platform."
"We were engaged in many business developments to contribute to
our middle and long-term future growth in FY2006," continued Suzuki.
"We will acquire hi-ho, Inc. from Panasonic Network Services Inc. in
June 2007 to expand our Internet business for personal users. We made
our two consolidated subsidiaries, IIJ Technology Inc. and Net Care,
Inc., 100% owned in order to provide our total solutions effectively.
We also established Net Chart Japan Inc. to provide network
construction and GDX Japan, K.K. to offer a safe e-mail environment."
"As for capital issues, in August 2006, our accumulated deficit in
our non-consolidated financial statements was eliminated by capital
reduction and we plan to pay a dividend of JPY 1,500 per share of
common stock for FY2006. Our listing in Japan was transferred to the
first section of the Tokyo Stock Exchange in December 2006. We believe
the favorable business environment will continue. We have established
target revenues of JPY 69 billion, operating income of JPY 4.6
billion, income before income tax expense (benefit) of JPY 5.1 billion
and net income of JPY 5.6 billion in FY2007."
4th Quarter FY2006 Financial Results
----------------------------------------------------------------------
Operating Results Summary (JPY in millions)
----------------------------------------------------------------------
YoY %
4Q06 4Q05 change
----------------------------------------------------------------------
Total Revenues 17,023 16,133 5.5%
----------------------------------------------------------------------
Total Costs 13,658 13,373 2.1%
----------------------------------------------------------------------
SG&A Expenses and R&D 2,221 1,794 23.8%
----------------------------------------------------------------------
Operating Income 1,144 966 18.4%
----------------------------------------------------------------------
Income before Income Tax Expense 1,301 2,267 (42.6%)
----------------------------------------------------------------------
Net Income 1,151 1,941 (40.7%)
----------------------------------------------------------------------
Revenues
Revenues in 4Q06 totaled JPY 17,023 million, an increase of 5.5%
from JPY 16,133 million in 4Q05.
Revenues (JPY in millions)
YoY %
4Q06 4Q05 change
----------------------------------------------------------------------
Total Revenues: 17,023 16,133 5.5%
----------------------------------------------------------------------
Connectivity and Value-added Services 6,233 5,849 6.6%
----------------------------------------------------------------------
Systems Integration 10,181 9,242 10.2%
----------------------------------------------------------------------
Equipment Sales 609 1,042 (41.5%)
----------------------------------------------------------------------
Connectivity and Value-added Services ("VAS") revenues were JPY
6,233 million in 4Q06, an increase of 6.6% compared to 4Q05. The
increase was mainly due to an increase in revenues from value-added
services related to an increase in demands for outsourcing services
and an increase in revenues from connectivity services related to an
increase in demand for higher speeds for IP Services and contracts for
broadband services.
SI revenues increased 10.2% to JPY 10,181 million in 4Q06 compared
to 4Q05. The increase was due to an increase in monthly recurring
revenues from network operation and maintenance and an increase in
one-time revenues from network design, construction and consultation.
Equipment sales revenues were JPY 609 million in 4Q06, a decrease
of 41.5% compared to 4Q05.
Cost and expense
Cost of revenues was JPY 13,658 million in 4Q06, an increase of
2.1% compared to 4Q05.
Cost of Revenues (JPY in millions)
----------------------------------------------------------------------
YoY %
4Q06 4Q05 change
----------------------------------------------------------------------
Cost of Revenues: 13,658 13,373 2.1%
----------------------------------------------------------------------
Connectivity and Value-added Services 5,148 5,091 1.1%
----------------------------------------------------------------------
Systems Integration 8,016 7,381 8.6%
----------------------------------------------------------------------
Equipment Sales 494 901 (45.2%)
----------------------------------------------------------------------
Cost of Connectivity and VAS revenues was JPY 5,148 million in
4Q06, an increase of 1.1% compared to 4Q05.
Cost of SI revenues was JPY 8,016 million in 4Q06, an increase of
8.6% compared to 4Q05. The increase was mainly due to an increase in
revenues from systems integration projects.
Cost of Equipment Sales revenues was JPY 494 million in 4Q06, a
decrease of 45.2% compared to 4Q05. The decrease was mainly due to a
decrease in revenues from equipment sales.
Sales and marketing expenses were JPY 896 million in 4Q06, an
increase of 18.3% compared to 4Q05. The increase was mainly due to an
increase in personnel expenses and advertising expenses along with
business expansion.
General and administrative expenses were JPY 1,270 million in
4Q06, an increase of 27.6% compared to 4Q05. The increase was mainly
due to a provision for retirement benefits for directors of JPY 200
million, in addition to an increase in personnel expenses resulting
from business expansion.
Operating income
Operating income was JPY 1,144 million in 4Q06, an increase of
18.4% compared to 4Q05. The increase was mainly due to the increase in
revenues from relatively higher-margin value-added services and
systems integration.
Other income and others
Other income in 4Q06 was JPY 157 million, a decrease of 87.9% from
JPY 1,301 million in 4Q05. The decrease is mainly due to an impairment
loss of JPY 1,363 million on unlisted securities, including JPY 1,043
million on the securities of IPMobile Incorporated. The gain from the
sale of available-for-sale securities in 4Q06 was JPY 1,549 million.
Income tax expense in 4Q06 was JPY 63 million, compared to income
tax expense of JPY 148 million in 4Q05. Minority interests in earnings
of subsidiaries in 4Q06 was JPY 38 million. Equity in net loss of
equity method investees in 4Q06 was JPY 49 million.
Net income was JPY 1,151 million in 4Q06, a decrease of 40.7%
compared to 4Q05.
4th Quarter FY2006 Business Review
Analysis by Service
Connectivity and Value-added Services
For dedicated access services, the number of contracts increased
by 3,171 to 17,720 compared to 4Q05. Total contracted bandwidth
increased by 128.6 Gbps to 323.5 Gbps compared to 4Q05.
Dedicated access service revenues were JPY 2,786 million, an
increase of 7.0% compared to 4Q05. Revenues from broadband services
increased by 13.2% compared to 4Q05, mainly due to the expansion of
broadband utilization in the corporate internal network. Revenues from
IP Services, the services mainly used for corporate headquarters and
data centers also increased by 8.0%, mainly due to the shift of IIJ's
corporate customers to higher speeds.
Dial-up access service revenues were JPY 599 million in 4Q06, a
decrease of 7.2% compared to 4Q05, mainly due to a decrease in
revenues from services for individual customers and OEM services.
VAS revenues were JPY 1,907 million in 4Q06, an increase of 8.7%
compared to 4Q05. The increase was mainly due to an increase in
revenues from Internet VPN related services, e-mail related services
and security services.
Other revenues were JPY 941 million in 4Q06, an increase of 11.2%
compared to 4Q05.
As a result, revenues from Internet connectivity and value-added
services in 4Q06 were JPY 6,233 million, an increase of 6.6% compared
to 4Q05. The gross margin for Internet connectivity and value-added
services in 4Q06 was JPY 1,085 million, an increase of 43.1% compared
to 4Q05. The gross margin ratio in 4Q06 was 17.4%, compared to 13.0%
in 4Q05.
Number of Contracts for Connectivity Services
----------------------------------------------------------------------
YoY
4Q06 4Q05 Change
----------------------------------------------------------------------
Dedicated Access Service Contracts 17,720 14,549 3,171
----------------------------------------------------------------------
IP Service (Low Bandwidth: 64kbps-768kbps) 64 85 (21)
----------------------------------------------------------------------
IP Service (Medium Bandwidth: 1Mbps-
99Mbps) 687 654 33
----------------------------------------------------------------------
IP Service (High Bandwidth: 100Mbps-) 224 157 67
----------------------------------------------------------------------
IIJ T1 Standard and IIJ Economy 45 109 (64)
----------------------------------------------------------------------
IIJ Data Center Connectivity Service 282 247 35
----------------------------------------------------------------------
IIJ FiberAccess/F and IIJ DSL/F
(Broadband Services) 16,418 13,297 3,121
----------------------------------------------------------------------
Dial-up Access Service Contracts 533,963 630,483 (96,520)
----------------------------------------------------------------------
Dial-up Access Services, under IIJ Brand 57,480 62,176 (4,696)
----------------------------------------------------------------------
Dial-up Access Services, OEM(4) 476,483 568,307 (91,824)
----------------------------------------------------------------------
Total Contracted Bandwidth 323.5Gbps194.9Gbps128.6Gbps
----------------------------------------------------------------------
Connectivity and VAS Revenue Breakdown and Cost (JPY in millions)
----------------------------------------------------------------------
YoY %
4Q06 4Q05 Change
----------------------------------------------------------------------
Connectivity Service Revenues 3,385 3,248 4.2%
----------------------------------------------------------------------
Dedicated Access Service Revenues 2,786 2,603 7.0%
----------------------------------------------------------------------
IP Service (5) 2,176 2,016 8.0%
----------------------------------------------------------------------
IIJ T1 Standard and IIJ Economy 38 82 (53.6%)
----------------------------------------------------------------------
IIJ FiberAccess/F and IIJ DSL/F
(Broadband Services) 572 505 13.2%
----------------------------------------------------------------------
Dial-up Access Service Revenues 599 645 (7.2%)
----------------------------------------------------------------------
Under IIJ Brand 397 413 (3.9%)
----------------------------------------------------------------------
OEM 202 232 (12.9%)
----------------------------------------------------------------------
VAS Revenues 1,907 1,755 8.7%
----------------------------------------------------------------------
Other Revenues 941 846 11.2%
----------------------------------------------------------------------
Total Connectivity and VAS Revenues 6,233 5,849 6.6%
----------------------------------------------------------------------
Cost of Connectivity and VAS 5,148 5,091 1.1%
----------------------------------------------------------------------
Backbone Cost (included in the cost
of Connectivity and VAS) 880 923 (4.6%)
----------------------------------------------------------------------
Connectivity and VAS Gross Margin Ratio 17.4% 13.0% --
----------------------------------------------------------------------
Systems Integration
Revenue from systems integration was JPY 10,181 million in 4Q06,
an increase of 10.2% compared to 4Q05. The increase was mainly due to
an increase of 26.5% in monthly recurring revenues from outsourced
operations compared to 4Q05 and an increase of 2.4% in one-time
revenues from systems integration. The gross margin for systems
integration in 4Q06 was JPY 2,165 million and the gross margin ratio
in 4Q06 was 21.3%, compared to 20.1% in 4Q05.
Systems Integration Revenue Breakdown and Cost (JPY in millions)
----------------------------------------------------------------------
YoY %
4Q06 4Q05 Change
----------------------------------------------------------------------
Systems Integration Revenues 10,181 9,242 10.2%
----------------------------------------------------------------------
Systems Integration 6,406 6,258 2.4%
----------------------------------------------------------------------
Outsourced Operation 3,775 2,984 26.5%
----------------------------------------------------------------------
Cost of Systems Integration 8,016 7,381 8.6%
----------------------------------------------------------------------
Systems Integration Gross Margin Ratio 21.3% 20.1% --
----------------------------------------------------------------------
Equipment Sales
Revenue from equipment sales was JPY 609 million in 4Q06. The
gross margin ratio for equipment sales in 4Q06 was 18.9%, compared to
13.5% in 4Q05.
Equipment Sales Revenue and Cost (JPY in millions)
----------------------------------------------------------------------
YoY %
4Q06 4Q05 Change
----------------------------------------------------------------------
Equipment Sales Revenues 609 1,042 (41.5%)
----------------------------------------------------------------------
Cost of Equipment Sales 494 901 (45.2%)
----------------------------------------------------------------------
Equipment Sales Gross Margin Ratio 18.9% 13.5% --
----------------------------------------------------------------------
Other Financial Statistics
Other Financial Statistics (JPY in millions)
----------------------------------------------------------------------
YoY %
4Q06 4Q05 change
----------------------------------------------------------------------
Adjusted EBITDA(6) 2,137 2,091 2.2%
----------------------------------------------------------------------
CAPEX, including capital leases(7) 1,224 1,737 (29.5%)
----------------------------------------------------------------------
Depreciation and amortization 993 1,125 (11.7%)
----------------------------------------------------------------------
Reconciliation of Non-GAAP Financial Measures
The following table summarizes the reconciliation of adjusted
EBITDA to net income in IIJ's consolidated statements of income that
are prepared in accordance with U.S. GAAP and presented in Appendix 2:
Adjusted EBITDA (JPY in millions)
4Q06 4Q05
----------------------------------------------------------------------
Adjusted EBITDA 2,137 2,091
----------------------------------------------------------------------
Depreciation and Amortization (993) (1,125)
----------------------------------------------------------------------
Operating Income 1,144 966
----------------------------------------------------------------------
Other Income 157 1,301
----------------------------------------------------------------------
Income Tax Expense 63 148
----------------------------------------------------------------------
Minority Interests in Earnings of Subsidiaries (38) (111)
----------------------------------------------------------------------
Equity in Net Loss of Equity Method Investees (49) (67)
----------------------------------------------------------------------
Net Income 1,151 1,941
----------------------------------------------------------------------
The following table summarizes the reconciliation of capital
expenditures to purchase of property and equipment in IIJ's
consolidated statements of cash flows that are prepared and presented
in accordance with U.S. GAAP and presented in Appendix 3:
CAPEX (JPY in millions)
----------------------------------------------------------------------
4Q06 4Q05
----------------------------------------------------------------------
CAPEX, including capital leases 1,224 1,737
----------------------------------------------------------------------
Acquisition of Assets by Entering into
Capital Leases 923 1,534
----------------------------------------------------------------------
Purchase of Property and Equipment 301 203
----------------------------------------------------------------------
Target
IIJ's target for the financial results for the fiscal year ending
March 31, 2008 is as follows:
(JPY in millions)
----------------------------------------------------------------------
Income before
Revenues Operating Income Income Tax Net Income
Expense (Benefit)
----------------------------------------------------------------------
69,000 4,600 5,100 5,600
----------------------------------------------------------------------
IIJ targets a cash dividend of JPY 1,500 per share of common stock
for the fiscal year ending March 31, 2008.
Presentation
On May 16, 2007, IIJ will post a presentation of its results on
its website. 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 First Section: 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 FY2007 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 4Q06 and
full FY2006 results, translations of Japanese yen amounts into U.S.
dollars are solely for the convenience of readers outside of Japan and
have been made at the rate of JPY 117.56 = US$1.00.
(2) This Overview and Business Outlook contains forward-looking
statements and projections such as statements regarding FY2007
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 1Q07 earnings release,
presently scheduled for release in August 2007.
(3) In this document, income before income tax expense (benefit)
represents income from operations before income tax expense (benefit),
minority interests and equity in net income (loss) of equity method
investees in IIJ's consolidated financial statements.
(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 March 31, 2007 and March 31, 2006)
----------------------------------------------------------------------
As of March 31, 2007 As of March 31, 2006
----------------------------------------------------------------------
Thousands
of U.S. Thousands of Thousands of
Dollars Yen % Yen %
----------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash 115,299 13,554,544 13,727,021
Accounts
receivable, net
of allowance for
doubtful
accounts of JPY
32,489 thousand
and JPY 23,411
thousand at
March 31, 2007
and March 31,
2006,
respectively 82,305 9,675,725 11,962,304
Short-term -
investment 103 12,093
Inventories 9,451 1,111,086 851,857
Prepaid expenses 8,959 1,053,270 1,031,325
Other current
assets, net of
allowance for
doubtful
accounts of JPY
4,570 thousand
and JPY 33,250
thousand at
March 31, 2007
and March 31,
2006,
respectively 7,916 930,571 214,121
---------------------- ------------
Total current
assets 224,033 26,337,289 55.2 27,786,628 54.8
INVESTMENTS IN AND
ADVANCES TO
EQUITY METHOD
INVESTEES, net of
loan loss
valuation
allowance of JPY
16,701 thousand
at March 31, 2007
and March 31,
2006,
respectively 7,302 858,490 1.8 1,162,971 2.3
OTHER INVESTMENTS 24,173 2,841,741 6.0 8,020,705 15.8
PROPERTY AND
EQUIPMENT--Net 83,637 9,832,396 20.6 10,299,496 20.3
INTANGIBLE
ASSETS--Net 24,472 2,876,894 6.0 632,594 1.2
GUARANTEE DEPOSITS 14,343 1,686,141 3.5 1,549,653 3.1
OTHER ASSETS, net
of allowance for
doubtful accounts
of JPY 69,050
thousand and JPY
40,980 thousand
at March 31, 2007
and March 31,
2006,
respectively 27,731 3,260,053 6.9 1,252,942 2.5
---------------------- ------------
TOTAL 405,691 47,693,004 100.0 50,704,989 100.0
---------------------- ------------
LIABILITIES AND
SHAREHOLDERS'
EQUITY
CURRENT
LIABILITIES:
Short-term
borrowings 51,463 6,050,000 4,555,000
Long-term
borrowings--
current portion 2,467 290,000 1,989,963
Payable under - -
securities loan
agreement 999,600
Capital lease
obligations--
current portion 25,121 2,953,173 3,003,914
Accounts payable 72,004 8,464,835 10,107,942
Accrued expenses 7,633 897,355 540,027
Accrued -
retirement and
pension costs 72 8,428
Other current
liabilities 21,004 2,469,058 1,702,208
---------------------- ------------
Total current
liabilities 179,762 21,132,849 44.3 22,898,654 45.2
LONG-TERM - - -
BORROWINGS 290,000 0.6
CAPITAL LEASE
OBLIGATIONS--
Noncurrent 36,733 4,318,309 9.1 4,980,659 9.8
ACCRUED RETIREMENT
AND PENSION COSTS 6,380 750,042 1.5 223,332 0.4
OTHER NONCURRENT
LIABILITIES 4,803 564,618 1.2 827,086 1.6
---------------------- ------------
Total
Liabilities 227,678 26,765,818 56.1 29,219,731 57.6
---------------------- ------------
MINORITY INTEREST 6,934 815,182 1.7 1,263,320 2.5
---------------------- ------------
COMMITMENTS AND - -
CONTINGENCIES -- -- --
SHAREHOLDERS'
EQUITY:
Common-stock
--authorized,
377,600 shares;
issued and
outstanding,
204,300 shares at
March 31, 2007
and March 31,
2006 143,194 16,833,847 35.3 16,833,847 33.2
Additional paid-
in capital 226,261 26,599,217 55.8 26,599,217 52.5
Accumulated
deficit (206,454) (24,270,769) (50.9) (29,680,482) (58.5)
Accumulated other
comprehensive
income 8,078 949,709 2.0 6,553,594 12.9
Treasury stock-- - - -
777 shares held
by an equity
method investee
at March 31,
2006 (84,238) (0.2)
---------------------- ------------
Total
shareholders'
equity 171,079 20,112,004 42.2 20,221,938 39.9
---------------------- ------------
TOTAL 405,691 47,693,004 100.0 50,704,989 100.0
---------------------- ------------
----------------------------------------------------------------------
(Note)
The U.S. dollar amounts represent translations of yen amounts at the
rate of JPY 117.56, 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
March 30, 2007.
Appendix 2
Internet Initiative Japan Inc.
----------------------------------------------------------------------
Quarterly Consolidated Statements of Income (Unaudited)
----------------------------------------------------------------------
(For the three months ended March 31, 2007 and March 31, 2006)
----------------------------------------------------------------------
Three Months Ended Three Months Ended
March 31, 2007 March 31, 2006
------------------------------------------------------
Thousands % of
of U.S. Thousands total Thousands % of total
Dollars of Yen revenues of Yen revenues
----------------------------------------------------------------------
REVENUES:
Connectivity and
value-added
services:
Dedicated
access 23,701 2,786,285 2,603,384
Dial-up access 5,095 598,933 645,103
Value-added
services 16,223 1,907,196 1,754,548
Other 8,004 940,932 846,130
--------------------- -----------
Total 53,023 6,233,346 5,849,165
Systems
integration 86,601 10,180,819 9,241,995
Equipment sales 5,182 609,277 1,042,275
--------------------- -----------
Total
revenues 144,806 17,023,442 100.0 16,133,435 100.0
--------------------- -----------
COST AND
EXPENSES:
Cost of
connectivity
and value-
added services 43,795 5,148,513 5,091,179
Cost of systems
integration 68,183 8,015,544 7,381,061
Cost of
equipment
sales 4,203 494,168 901,212
--------------------- -----------
Total cost 116,181 13,658,225 80.2 13,373,452 82.9
Sales and
marketing 7,621 895,910 5.3 757,245 4.7
General and
administrative 10,802 1,269,946 7.5 995,301 6.2
Research and
development 470 55,296 0.3 40,973 0.2
--------------------- -----------
Total cost
and expenses 135,074 15,879,377 93.3 15,166,971 94.0
--------------------- -----------
OPERATING INCOME 9,732 1,144,065 6.7 966,464 6.0
--------------------- -----------
OTHER INCOME:
Interest income 101 11,855 3,430
Interest
expense (792) (93,078) (113,199)
Foreign
exchange gains
(losses) (0) (43) 157
Gain on other
investments--
net 1,592 187,154 1,312,682
Other--net 435 51,228 97,697
--------------------- -----------
Other income--
net 1,336 157,116 0.9 1,300,767 8.0
--------------------- -----------
INCOME FROM
OPERATIONS
BEFORE INCOME
TAX EXPENSE,
MINORITY
INTERESTS AND
EQUITY IN NET
LOSS OF EQUITY
METHOD
INVESTEES 11,068 1,301,181 7.6 2,267,231 14.0
INCOME TAX
EXPENSE 538 63,244 0.4 147,900 0.9
MINORITY
INTERESTS IN
EARNINGS OF
SUBSIDIARIES (320) (37,684) (0.2) (111,084) (0.7)
EQUITY IN NET
LOSS OF EQUITY
METHOD
INVESTEES (420) (49,389) (0.3) (66,842) (0.4)
--------------------- -----------
NET INCOME 9,790 1,150,864 6.7 1,941,405 12.0
----------------------------------------------------------------------
----------------------------------------------------------------------
BASIC WEIGHTED-
AVERAGE NUMBER
OF SHARES 204,000 203,989
DILUTED
WEIGHTED-
AVERAGE NUMBER
OF
SHARES 204,419 204,490
BASIC WEIGHTED-
AVERAGE NUMBER
OF ADS
EQUIVALENTS 81,600,000 81,595,702
DILUTED
WEIGHTED-
AVERAGE NUMBER
OF ADS
EQUIVALENTS 81,767,600 81,796,102
BASIC NET INCOME
PER SHARE 47.98 5,641 9,517
DILUTED NET
INCOME PER
SHARE 47.89 5,630 9,494
BASIC NET INCOME
PER ADS
EQUIVALENT 0.12 14.10 23.8
DILUTED NET
INCOME PER ADS
EQUIVALENT 0.12 14.07 23.7
----------------------------------------------------------------------
(Note)
1) The U.S. dollar amounts represent translations of yen amounts at
the rate of JPY 117.56, 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 March 30, 2007.
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 March 31, 2007 and March 31, 2006)
----------------------------------------------------------------------
Three
Months
Ended
Three Months Ended March 31,
March 31, 2007 2006
---------------------------------
Thousands Thousands Thousands
of U.S. of Yen of Yen
Dollars
----------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income 9,790 1,150,864 1,941,405
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 8,450 993,433 1,125,294
Provision for doubtful accounts and
advances 104 12,207 11,183
Gains on other investments--net (1,592) (187,155) (1,312,682)
Foreign exchange losses 2 291 6,079
Equity in net loss of equity method
investees 420 49,389 66,842
Minority interests in earnings of
subsidiaries 321 37,684 111,084
Deferred income tax benefit (2,309) (271,410) (249,767)
Others 2,010 236,317 169,582
Changes in operating assets and
liabilities:
Increase in accounts receivable (12,664) (1,488,766) (5,257,241)
Increase in inventories, prepaid
expenses and other current and
noncurrent assets (5,313) (624,654) (98,462)
Increase in accounts payable 19,178 2,254,522 5,791,434
Increase in accrued expenses, other
current and noncurrent liabilities 5,639 662,913 306,163
----------------------------------------------------------------------
Net cash provided by operating
activities 24,036 2,825,635 2,610,914
----------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchase of property and equipment (2,565) (301,539) (202,665)
Purchase of short-term and other
investments (4,413) (518,796) (93,233)
Proceeds from sales of other
investments 16,054 1,887,339 1,361,578
Investment in an equity method - -
investee (750,000)
Proceeds from sales of investment in -
an equity method investee 1,581 185,900
Purchase of subsidiary stock from -
minoirty shareholders (25,946) (3,050,205)
Refund (payment) of guarantee
deposits--net (859) (101,015) 550,606
Other (155) (18,277) (32,204)
----------------------------------------------------------------------
Net cash provided by (used in)
investing activities (16,303) (1,916,593) 834,082
----------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from issuance of short-term -
borrowings with initial maturities
over three months 14,461 1,700,000
Repayments of short-term borrowings
with initial maturities over three
months and long-term borrowings (17,101) (2,010,363) (1,109,377)
Proceeds from securities loan - -
agreement 999,600
Repayments of securities loan
agreement (4,777) (561,600) (1,128,960)
Principal payments under capital
leases (5,837) (686,262) (792,558)
Net increase in short-term
borrowings 425 50,000 (615,216)
Proceed from issuance of subsidiary -
stock 1,656 194,679
----------------------------------------------------------------------
Net cash used in financing
activities (11,173) (1,313,546) (2,646,511)
----------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON
CASH 33 3,938 8,044
NET INCREASE (DECREASE) IN CASH (3,407) (400,566) 806,529
CASH, BEGINNING OF EACH PERIOD 118,706 13,955,110 12,920,492
----------------------------------------------------------------------
CASH, END OF EACH PERIOD 115,299 13,554,544 13,727,021
----------------------------------------------------------------------
(Note)
The U.S. dollar amounts represent translations of yen amounts at the
rate of JPY 117.56, 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
March 30, 2007.
Note: The following information is to disclose IIJ's consolidated
financial results (unaudited) for the fiscal year ended March 31, 2007
in the form defined by the Tokyo Stock Exchange.
Consolidated Financial Results for the Fiscal Year Ended March 31,
2007
(Under accounting principles generally accepted in the United States
("U.S. GAAP"))
May 15, 2007
Company name: Internet Initiative Exchange listed: Tokyo Stock
Japan Inc. Exchange-First Section
Stock code number: 3774 URL: http://www.iij.ad.jp/
Representative: Koichi Suzuki, President and Representative Director
Contact: Akihisa Watai, Director TEL: (+81-3) 5259-6500
and CFO
General shareholder's meeting: Payment of dividend: scheduled on
scheduled on June 26, 2007 June 27, 2007
Filing of an annual report (Yuka-shoken-hokokusho) to the regulatory
organization in Japan: scheduled on June 27, 2007
(Amounts less than one million yen are rounded)
1. Consolidated Financial Results for the Fiscal Year Ended March 31,
2007
(April 1, 2006 through March 31, 2007)
(1) Consolidated Results of Operations (% shown are YoY change)
Income before
Total Operating Income Tax Net Income
Revenues Income Expense
(Benefit)
----------------------------------------------------------------------
Millions Millions Millions Millions
of Yen % of Yen % of Yen % of Yen %
Fiscal Year Ended
March 31, 2007 57,055 14.5 3,500 45.2 5,049 (6.1) 5,410 13.8
Fiscal Year Ended
March 31, 2006 49,813 19.4 2,411 93.3 5,379 70.8 4,754 63.6
----------------------------------------------------------------------
Income
before
Income
Basic Diluted Tax
Net Net Net Income to Expense
Income Income Total to Operating
per per Shareholders' Total Margin
Share Share Equity Assets Ratio
----------------------------------------------------------------------
Yen Yen % % %
Fiscal Year Ended
March 31, 2007 26,519 26,487 26.8 10.3 6.1
Fiscal Year Ended
March 31, 2006 24,301 24,258 29.9 12.2 4.8
----------------------------------------------------------------------
(Reference) Equity in net loss of equity method investee for the
fiscal year ended March 31, 2007 and 2006 was JPY 210 million and JPY
14 million, respectively.
(Note) The figures used in this document for "Income before Income Tax
Expense (Benefit)" are of "Income from operations before income tax
expense (benefit), minority interests and equity in net income (loss)
of equity method investees".
(2) Consolidated Financial Position
----------------------------------------------------------------------
Total Equity- Total
Total Shareholders' to- Shareholders'
Assets Equity Assets Equity per
Ratio Share
----------------------------------------------------------------------
Millions Millions Yen
of Yen of Yen %
Fiscal Year Ended March 31,
2007 47,693 20,112 42.2 98,592
Fiscal Year Ended March 31,
2006 50,705 20,222 39.9 99,132
----------------------------------------------------------------------
(Note) Total shareholders' equity, equity-to-assets ratio and total
shareholders' equity per share are calculated and presented in
accordance with US GAAP.
(3) Consolidated Cash Flows
----------------------------------------------------------------------
Net Cash Net Cash
Net Cash Provided Provided Cash and
Provided by (Used by (Used Cash
by in) in) Equivalents
Operating Investing Financing at End of
Activities Activities Activities Period
----------------------------------------------------------------------
Millions of Millions of Millions of Millions of
Yen Yen Yen Yen
Fiscal Year Ended
March 31, 2007 7,402 (3,014) (4,560) 13,555
Fiscal Year Ended
March 31, 2006 6,559 1,805 39 13,727
----------------------------------------------------------------------
2. Dividends
----------------------------------------------------------------------
Dividend per Share
---------------------------
Interim Year-end Total
----------------------------------------------------------------------
Yen Yen Yen
Fiscal Year Ended March 31, 2006 - - 0.00
Fiscal Year Ended March 31, 2007 - 1,500.00 1,500.00
----------------------------------------------------------------------
Fiscal Year Ended March 31, 2008 (Target) 750.00 750.00 1,500.00
----------------------------------------------------------------------
2. Dividends
----------------------------------------------------------------------
Ratio of
Total cash Dividends to
dividends Shareholder's
for the Payout Ratio Equity
year (consolidated) (consolidated)
----------------------------------------------------------------------
Millions
of Yen % %
Fiscal Year Ended March 31,
2006 - - -
Fiscal Year Ended March 31,
2007 306 5.7 1.5
----------------------------------------------------------------------
Fiscal Year Ended March 31,
2008 (Target) 5.5
----------------------------------------------------------------------
3. Target of Consolidated Financial Results for the Fiscal Year Ending
March 31, 2008
(April 1, 2007 through March 31, 2008)
(% shown is YoY change for Fiscal Year and Interim Period,
respectively)
Basic
Net
Income before Income
Total Operating Income Tax per
Revenues Income Expense Net Income Share
----------------------------------------------------------------------
Millions Millions Millions Millions Yen
of Yen % of Yen % of Yen % of Yen %
Interim
Period
Ending
Sept.
30, 2007 30,200 14.2 1,800 31.3 1,800 (16.1) 1,400 (50.9) 6,780
Year
Ending
March
31, 2008 69,000 20.9 4,600 31.4 5,100 1.0 5,600 3.5 27,122
----------------------------------------------------------------------
(Note) Basic net income per share is calculated using the number of
shares of common stock of IIJ as of May 15, 2007. IIJ has issued
2,178 shares of common stock of IIJ, effective May 11, 2007 to make
the two consolidated subsidiaries, IIJ Technology Inc. and Net Care,
Inc. a 100% owned subsidiary through share exchanges. After this
exchange, the number of shares of common stock of IIJ as of May 15,
2007 is 206,478 shares.
4. Others
(1) Change of Condition in Consolidated Subsidiaries during the Fiscal
Year Ended March 31, 2007: None
(Change of Condition in Specific Consolidated Subsidiarieswith the
Change of Scope of Consolidation)
(2) Changes of Significant Accounting and Reporting Policies for
Consolidated Financial Statements
1) Changes caused by revision Yes
of accounting standards:
2) Others: None
(3) The Number of Shares Outstanding (Shares of Common Stock)
1) The number of shares For the fiscal
outstanding: year ended
March 31, 2007 204,300 shares
(inclusive of treasury For the fiscal
stock) year ended
March 31, 2006 204,300 shares
2) The number of treasury For the fiscal
stock: year ended
March 31, 2007 0 shares
For the fiscal
year ended
March 31, 2006 777 shares
3) The weighted average number For the fiscal
of shares outstanding: year ended
March 31, 2007 195,613 shares
For the fiscal
year ended
March 31, 2006 203,992 shares
(Note) The numbers of treasury stock for the fiscal year ended
March 31, 2006 are the number of shares owned by IIJ's equity method
investee multiplied by IIJ's ownership in the equity method investee.
Forward-looking statements for the target of operation and other
notes
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 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.
1. Business Overview
(1) Analysis for Operational Results
a. Overview of Consolidated Results for the fiscal year ended March 31, 2007
The Japanese economy for the fiscal year ended March 31, 2007 in overall is
in a continuous recovery trend reflecting improvements in corporate earnings,
followed by the increase of corporate capital investments. However fluctuation
in crude oil prices must be watched carefully.
For the data communication market which IIJ Group belongs to, usage of
network is increasing with the introduction of broadband networks. While
corporate investment in main-frame computers is decreasing, investment for IP
based open system such as network servers is projected to increase and the
adoption of IP based network systems including the usage of Internet for mission
critical business network is gradually spreading. For IIJ Group, the business
environments for the fiscal year ended March 31, 2007 remained favorable with
the increase in network integration and outsource services, such as the
construction of networks with virtual private network ("VPN") technology,
datacenter hosting for network servers and outsource of server operation such as
Mail Servers.
Under such business environment, IIJ Group continues to actively develop and
provide value-added, highly reliable network related services along with
solutions and systems integration mainly for large to medium scale enterprise
and governmental organization use. For Internet connectivity, there has been
notable increase in the usage of bandwidth along with the increase in high speed
broadband Internet. For value-added services, data center services continue to
see strong demand while the need for security solutions and outsource operation
for email is also very strong. For systems integrations, construction and
maintenance of corporate local area networks and the construction of Internet
related Web systems are very strong.
As for service development, services that meet corporate need for outsourcing
such as "IIJ Secure MX service", an ASP type service that provides an array of
email security functions necessary for the corporate email system have been
released. Also, a pilot project for content delivery architecture has been
conducted using Peer-to-Peer (P2P) technology in cooperation with a broadcasting
company.
For the consolidated operational results for the fiscal year ended March 31,
2007, revenue totaled JPY 57,055 million (up 14.5% year-on-year), operating
income was JPY 3,500 million (up 45.2% year-on-year), income before income tax
benefit was JPY 5,049 million (down 6.1% year-on-year), and net income was JPY
5,410 million (up 13.8% year-on-year). Revenue, operating income, and net income
all surpassed its aimed target for the consolidated financial results for the
fiscal year ending March 31, 2007.
b. Results of Operation
1) Operating Revenues
Revenues for the fiscal year ended March 31, 2007 were JPY 57,055 million
(up 14.5% year-on-year).
--------------------------------------------------------------------------
Fiscal Year ended Fiscal Year ended YoY %
March 31, 2007 March 31, 2006 Change
--------------------------------------------------------------------------
Millions of Yen Millions of Yen %
Connectivity and VAS 24,353 23,223 4.9
--------------------------------------------------------------------------
Systems Integration 30,527 23,505 29.9
--------------------------------------------------------------------------
Equipment Sales 2,174 3,085 (29.5)
--------------------------------------------------------------------------
Total Revenues 57,055 49,813 14.5
--------------------------------------------------------------------------
Revenues of connectivity and value-added services ("VAS") were JPY 24,353
(up 4.9% year-on-year) as revenues from dedicated access services and the
increase in recurring revenues from VAS grew respectively.
SI revenues increased to JPY 30,527 million (up 29.9% year-on-year), as
one-time revenues from network design, construction and consultation increased
along with the steady increase in recurring revenues from network operation and
maintenance accordingly with the growth in customer's demands for network
investment.
Equipment sales revenue was JPY 2,174 million (down 29.5% year-on-year).
2) Cost of Revenues
Cost of revenues was JPY 45,968 million (up 12.1% year-on-year).
--------------------------------------------------------------------------
Fiscal Year ended Fiscal Year ended YoY %
March 31, 2007 March 31, 2006 Change
--------------------------------------------------------------------------
Millions of Yen Millions of Yen %
Connectivity and VAS 20,545 20,078 2.3
--------------------------------------------------------------------------
Systems Integration 23,529 18,120 29.8
--------------------------------------------------------------------------
Equipment Sales 1,893 2,818 (32.8)
--------------------------------------------------------------------------
Total Cost of Revenues 45,968 41,016 12.1
--------------------------------------------------------------------------
The cost of connectivity and VAS revenues which are mostly fixed cost such
as cost for backbone, network related equipment, network operation for network
operation center and personnel expenses, was JPY 20,545 million (up 2.3%
year-on-year).
The cost of SI revenues which are mostly variable cost such as personnel
expenses, outsourcing expenses and cost of equipment purchased increased to JPY
23,529 million (up 29.8% year-on-year) associated with a significant increase in
revenues from systems integration.
The cost of equipment sales revenues was JPY 1,893 million (down 32.8%
year-on-year) as revenues from equipment sales declined.
3) Sales and Marketing Expenses
Sales and marketing expenses were JPY 3,439 million (up 11.7%
year-on-year). The increase mainly resulted from an increase in advertising
expenses and personnel expenses due to business expansion.
4) General and Administrative Expenses
General and administrative expenses were JPY 3,971 million (up 26.2%
year-on-year) as personnel expenses arising from business expansion increased.
There was also a transitory expenditure of allowance for retirement benefits for
directors of JPY 200 million.
5) Operating Income
Operating income was JPY 3,500 million (up 45.2% year-on-year). The main
reason of increase was the increase in gross margin due to the increase in
revenue of VAS and systems integration, despite the increase in both sales and
marketing expenses and general and administrative expenses caused by the
expansion in business.
6) Other Income and Others (Loss)
Other income was JPY 1,548 million, down 47.8% from the prior year due to
an impairment loss of JPY 1,363 million on unlisted securities including JPY
1,043 million on the securities of IPMobile Incorporated, despite of the gain
from the sale of available-for-sale securities of JPY 3,230 million.
7) Income before Income Tax Benefit
Income before income tax benefit was JPY 5,049 million (down 6.1%
year-on-year) due to the decrease of other income and others.
8) Income Tax Benefit, Minority Interests and Equity in Net Loss of Equity
Method Investees
Income tax benefit was JPY 804 million. The benefit was mainly because of
differed tax benefit of JPY 1,495 million resulting from a release of valuation
allowance against differed income tax assets related to tax operating loss
carryforwards and others. Minority interests in earnings of subsidiaries was JPY
233 million and equity in net loss of equity method investees was JPY 210
million.
9) Net Income
Net income was JPY 5,410 million (up 13.8% year-on-year).
c. Analysis by Service
1) Internet connectivity and Value-added services
Dedicated access service revenues were JPY 10,792 million (up 1.6%
year-on-year) due to increase in the number of contracts of IP service and
broadband services used for Internet VPN connection, despite of a decrease in
revenues of JPY 468 million caused by the merger of AIH, our former equity
method investee into IIJ and its interconnection revenue offset.
Dial-up access service revenues were JPY 2,416 million (down 9.6%
year-on-year) as revenues from individual customers such as IIJ4U has declined.
Service termination of one of the major OEM partner has also affected the
decline.
VAS revenues were JPY 7,416 million (up 18.7% year-on-year) as sales of
network related outsource services such as email, security and internet VPN grew
steadily.
Other revenues were JPY 3,730 million (up 1.5% year-on-year).
As a result, revenues from Internet connectivity services and VAS totaled
JPY 24,353 million (up 4.9% year-on-year). The gross margin was JPY 3,808
million (up 21.1% year-on-year) and the gross margin ratio was up to 15.6% from
13.5% of the prior year.
(Connectivity and VAS Revenues, Cost of Revenues and Gross Margin Ratio)
------------------------------------------------------------------------------------------------
Fiscal Year ended Fiscal Year ended YoY %
March 31, 2007 March 31, 2006 Change
------------------------------------------------------------------------------------------------
Millions of Yen Millions of Yen %
Connectivity and VAS Revenues 24,353 23,223 4.9
------------------------------------------------------------------------------------------------
Dedicated Access Service Revenues 10,792 10,625 1.6
------------------------------------------------------------------------------------------------
Dial-up Access Service Revenues 2,416 2,674 (9.6)
------------------------------------------------------------------------------------------------
VAS Revenues 7,416 6,250 18.7
------------------------------------------------------------------------------------------------
Other Revenues 3,730 3,674 1.5
------------------------------------------------------------------------------------------------
Cost of Connectivity and VAS 20,545 20,078 2.3
------------------------------------------------------------------------------------------------
Backbone Cost (included in the cost
of Connectivity and VAS) 3,516 3,516 0.0
------------------------------------------------------------------------------------------------
Connectivity and VAS Gross Margin Ratio 15.6% 13.5% --
------------------------------------------------------------------------------------------------
(Numbers of Internet Connectivity Contracts and Total Contracted Bandwidth)(Numbers of contracts)
-------------------------------------------------------------------------------------------------
Fiscal Year ended Fiscal Year ended
March 31, 2007 March 31, 2006 Change
-------------------------------------------------------------------------------------------------
Dedicated Access Service Revenues 17,720 14,549 3,171
-------------------------------------------------------------------------------------------------
IP Service (narrow band: 64kbps-768kbps) 64 85 (21)
-------------------------------------------------------------------------------------------------
IP Service (mid band: 1Mbps-100Mbps) 687 654 33
-------------------------------------------------------------------------------------------------
IP Service (broad band: above 100Mbps) 224 157 67
-------------------------------------------------------------------------------------------------
IIJ T1 Standard and IIJ Economy 45 109 (64)
-------------------------------------------------------------------------------------------------
IIJ Datacenter Connectivity 282 247 35
-------------------------------------------------------------------------------------------------
IIJ FiberAccess/F and IIJ DSL/F
(Broadband Services) 16,418 13,297 3,121
-------------------------------------------------------------------------------------------------
Dial-up Access Service Revenues 533,963 630,483 (96,520)
-------------------------------------------------------------------------------------------------
Under IIJ Brand 57,480 62,176 (4,696)
-------------------------------------------------------------------------------------------------
OEN 476,483 568,307 (91,824)
-------------------------------------------------------------------------------------------------
323.5 Gbps 194.9 Gbps 128.6 Gbps
-------------------------------------------------------------------------------------------------
2) Systems integration
Systems integration revenue was JPY 30,527 million (up 29.9% year-on-year).
One-time revenue from the design and construction of network systems was JPY
16,660 million (up 35.5% year-on-year). Recurring revenue from network operation
and maintenance steadily increased to JPY 13,867 million (up 23.7%
year-on-year). The gross margin from systems integration was JPY 6,998 million
(up 30.0% year-on-year) and the gross margin ration was 22.9%.
(Systems Integration Revenues, Cost of Revenues and Gross Margin Ratio)
-------------------------------------------------------------------------------------------------
Fiscal Year ended Fiscal Year ended YoY %
March 31, 2007 March 31, 2006 Change
-------------------------------------------------------------------------------------------------
Millions of Yen Millions of Yen %
SI Revenues 30,527 23,505 29.9
-------------------------------------------------------------------------------------------------
Systems Integration 16,660 12,296 35.5
-------------------------------------------------------------------------------------------------
Outsourced Operation 13,867 11,209 23.7
-------------------------------------------------------------------------------------------------
Cost of SI 23,529 18,120 29.8
-------------------------------------------------------------------------------------------------
SI Gross Margin Ratio 22.9% 22.9% --
-------------------------------------------------------------------------------------------------
3) Equipment sales
Revenue from equipment sales was JPY 2,174 million. The gross margin for
equipment sales was JPY 281 million and the gross margin ratio was up to 12.9%
from 8.7% of the prior year.
(Equipment Sales Revenue and Cost)
-------------------------------------------------------------------------------------------------
Fiscal Year ended Fiscal Year ended YoY %
March 31, 2007 March 31, 2006 Change
-------------------------------------------------------------------------------------------------
Millions of Yen Millions of Yen %
Equipment Sales Revenues 2,174 3,085 (29.5)
-------------------------------------------------------------------------------------------------
Cost of Equipment Sales 1,893 2,818 (32.8)
-------------------------------------------------------------------------------------------------
Equipment Sales Gross Margin Ratio 12.9% 8.7% --
-------------------------------------------------------------------------------------------------
d. Target for the fiscal year ended March 31, 2008
For the fiscal year ending March 31, 2008, we are targeting revenues of JPY
69,000 million (up 20.9% year-on-year), operating income of JPY 4,600 million
(up 31.4% year-on-year), income before income tax expense (benefit) of 5,100
million (up 1.0% year-on-year) and net income of 5,600 million (up 3.5%
year-on-year).
The revenue is projected by the estimation of growth in recurring revenue
from Internet connectivity service, VAS and operation and maintenance of network
system from systems integration, growth in one-time revenue from systems
integration and equipment sales, and the sales from hi-ho Inc. ("hi-ho") that is
scheduled to be added to the consolidated subsidiary. The operating income is
projected by adding up the cost of revenues estimated by the revenue target and
the expenses from sales and marketing. Income before income tax expense
(benefit) is projected by subtracting the estimated loss of other income and
others and adding the gain from sale of available-for-sale securities from the
estimated operating income. Net income is projected by adding the differed tax
benefit resulting from a release of valuation allowance against differed income
tax assets related to tax operating loss carryforwards and others to the income
before income tax expense (benefit).
IIJ, as announced on March 29, 2007, will acquire 100% of the equity of hi-ho
and take over the Internet service business and the solution business from
Panasonic Network Services Inc. ("PNS") on June 1, 2007. Revenue of JPY 4,500
million and operating income of JPY 200 million is estimated from this
acquisition.
On April 5, 2007, IIJ's board of directors resolved that IIJ make its two
consolidated subsidiaries, IIJ Technology Inc. ("IIJ-Tech") and Net Care, Inc.
("Net Care") 100% owned through share exchanges. The share exchange became
effective on May 11, 2007 and on the same date the two consolidated subsidiaries
became 100% owned. As IIJ-Tech became 100% owned, IIJ Financial Systems
("IIJ-FS") which is fully owned by IIJ-Tech is now fully owned by IIJ through
indirect ownership. IIJ America, Inc. has also become fully owned by IIJ by
including the number of shares of indirect ownership by IIJ-Tech. The minority
interests in those four consolidated subsidiaries will be cleared as the two
have become fully owned consolidated subsidiaries of IIJ. Minority interest in
earnings of subsidiaries for the fiscal year ending 2007 was JPY 233 Million.
For the target for the interim period ending September 30, 2007, income
before income tax expense (benefit) is estimated to decline from the same
interim period of the prior year although the revenue is estimated to grow. This
is because income before income tax expense (benefit) of the interim period is
projected to decline as gain from sale of available-for-sale securities is
estimated to decline compared to the interim period of the prior year. Net
income for the interim period is also projected to decline as deferred tax
benefits, which occurred in the first half for the fiscal year ended March 31,
2007 are expected to be recognized in the latter half of the fiscal year ending
March 31, 2008.
(2) Analysis for Financial Condition
a. Assets, Liabilities and Total Shareholders' Equity
Total asset at the end of the fiscal year ended March 31, 2007 was JPY 47,693
million, a decrease of JPY 3,012 million compared to the end of the fiscal year
ended March 31, 2006. The reason for decrease was mainly due to the decrease in
accounts receivable by JPY 2,287 million and decrease in other investments by
JPY 5,179 million due to acquisition of securities, sale of available-for-sale
securities and recognition of an impairment loss on part of securities, although
other asset and intangible asset increased by JPY 2,007 million and JPY 2,244
million respectively. Other investments for the fiscal year ended March 31, 2007
was JPY 2,842 million and of which JPY 1,310 million are of available-for-sale
securities. Other asset increased due to an increase in deferred tax assets and
an increase in intangible assets due to the increase in goodwill by the
additional acquisition of securities of consolidated subsidiaries.
Indebtedness at the end of the fiscal year ended March 31, 2007 decreased to
JPY 13,611 million, a decrease of JPY 2,208 million compared to the end of the
fiscal year ended March 31, 2006 mainly due to the repayment of long term
borrowings, payable under securities loan agreement and capital lease
obligations.
Total shareholders' equity at the end of the fiscal year ended March 31, 2007
decreased by JPY 110 million to JPY 20,112 million compared to the year ended
March 31, 2006. Equity to asset ratio was 42.2%, up by 2.3% compared to the year
end the prior fiscal year as total asset declined to JPY 47,693 million.
b. Cash Flows
We had cash of JPY 13,555 million at the end of the fiscal year ended March
31, 2007, a decrease of JPY 172 million compared to the fiscal year ended March
31, 2006. The decrease is mainly due to the purchase of subsidiary stock from
minority shareholders, purchase of short-term and other investments, purchase of
property and equipment and repayment of borrowings although there were proceeds
from net cash provided by operating activities and the sale of
available-for-sale equities.
(Net cash provided by operating activities)
Net cash provided by operating activities was JPY 7,402 million for the
fiscal year ended March 31, 2007, an increase of JPY 843 million compared to the
fiscal year ended March 31, 2006. The reason was mainly due to the increase in
operating income followed by an increase in revenues from VAS and systems
integration.
(Net cash used in investing activities)
Net cash used in investing activities was JPY 3,014 million for the fiscal
year ended March 31, 2007 compared to the net cash provided by investing
activities of JPY 1,805 million of the fiscal year ended March 31, 2006. There
were proceeds of JPY 3,994 million from sales and redemption of short-term and
other investments, however, JPY 3,078 million, JPY 2,597 million and JPY 1,288
million was used for the purchase of subsidiary stock from minority
shareholders, purchase of short-term and other investments, purchase of property
and equipment, respectively.
(Net cash used in financing activities)
Net cash used in financing activities was JPY 4,560 million for the fiscal
year ended March 31, 2007 compared to the net cash provided by financing
activities of JPY 39 million of the fiscal year ended March 31, 2006. Net cash
used in financing activities consisted of proceeds from issuance of short-term
borrowings with initial maturities over three months and long-term borrowings of
JPY 10,500 million, proceeds from securities loan agreement of JPY 1,058
million, repayments of short-term borrowings with initial maturities over three
months and long-term borrowings of JPY 7,640 million, principal payments under
capital leases of JPY 3,260 million, net decrease in short-term borrowings of
JPY 3,355 million and repayments of securities loan agreement of JPY 2,057
million.
(3) Basic Policy for the Distribution of Profits
IIJ, while giving full consideration to securing its funds to strengthen its
financial position and to prepare for its operation development, seeks to
achieve continuous and steady dividends to shareholders.
IIJ plans to pay its dividend twice a year, at interim and fiscal year-end
period based on the Company's article of incorporation. The dividends for
interim and fiscal year-end period will be decided at the Company's board of
directors and the general meeting of stockholders, respectively.
The total dividend for the fiscal year ended March 31, 2007, as announced on
February 8, 2007 is planned to be JPY 1,500 per share of common stock (year-end)
in consideration to the financial results of the fiscal year ended March 31,
2007. For the fiscal year ending March 31, 2008, IIJ targets to pay dividend of
JPY 1,500 per share (JPY 750 per share for the interim period and JPY 750 per
share for the fiscal year end).
(4) Risk Factors
The results of operations and financial position of IIJ or the IIJ Group may
be adversely and materially impacted by the following and other factors.
- Risk from effects on the IIJ Group's financial results by a lack of
improvement of Japan's economy, or a change in economic conditions
- Risk from the IIJ Group's dependence on other companies for
telecommunication circuits
- Risk from the IIJ Group's failure to differentiate itself from its
competitors due to a decline in its quality of service or risk from an
increase of costs to maintain its quality of service
- Risk from the possibility of an interruption of services by the IIJ Group
due to natural disasters and/or human errors
- Risk of the IIJ Group's failure to keep and manage its private customer
information, such as personal information
- Risk due to the IIJ Group's failure to keep up with technological
developments or the necessity of vast financial resources
- Risk associated with our international business
- Risk from the effects on the IIJ Group's results of operations and
financial position by increased price competition in Internet connectivity
and value-added services and systems integration
- Risk associated from the change in backbone circuit costs
- Risk affected by the failure to manage and control outsourcing costs
- Risk of less achievement in business developments than expected, due to the
IIJ Group's failure to differentiate itself from its competitors
- Risk due to the IIJ Group's dependence on its executive officers
- Risk of the IIJ Group's failure to attract and control its human resources
properly
- Risk associated with a reduction of value of investments into the IIJ Group
companies or requirement of additional financial resources
- Risk arising from NTT, our largest shareholder
- Risk of failing to achieve expected revenues and profits in the future
- Risk from the IIJ Group's results of operations and financial position
being affected by seasonal fluctuations in systems integration and
equipment sales (revenues and income tend to increase in the fourth quarter
of each fiscal year)
- Risk from the impact on the IIJ Group's results of operations and financial
position by fluctuations in the stock prices of companies in which it has
invested
- Risk of substantial loss on the IIJ Group's results of operations and
financial position
- Risk associated with regulatory matters and new legislation related to the
telecommunications
- Risk associated with legal regulations regarding the internet
- Risk of the IIJ Group's violation of intellectual property rights of other
parties
- Risk of being named as defendants in litigation
- Risk of failing to achieve growth in the group business with the money
newly collected
- Risk of not being able to secure enough funds for the future
- Risk of incurring substantial dilution for shareholders by the sales of
additional share of our common stock or securities convertible into our
common stock.
IIJ is planning to disclose a Yuka-shoken-hokokusho, an annual report
submitted to the regulatory public organization in Japan in accordance with the
laws and regulations in Japan, and an annual report on Form 20-F submitted to
United States Securities and Exchange Commission after late in June this year.
Please refer to these documents for details of risk regarding IIJ Group's
business.
2. Current Status of IIJ Group
(1) Overview of the IIJ Group
IIJ, which has five consolidated subsidiaries and three equity method
investments as of the end of fiscal year ended March 31, 2007, provides mainly
enterprises and public organizations that use networks for their business with
various reliable and highly value-added network services (Internet connectivity
services, value-added services ("VAS"), systems integration ("SI") and equipment
sales) based on its Internet technologies comprehensively.
An overview of the businesses of IIJ and its group companies is as follows:
Company Name Overview of Business
--------------------------------------------------------------------------------------------------
IIJ mainly provides Internet connectivity services, value-added
services such as security related outsourcing services,
outsourcing services of network and servers and data center
services. IIJ also provides design, consultation and
IIJ construction of networks and provides equipment for the
construction of networks and its operation and maintenance.
IIJ provides services classified into connectivity and VAS,
SI, and equipment sales in its consolidated financial
statements.
--------------------------------------------------------------------------------------------------
Five Consolidated Subsidiaries
--------------------------------------------------------------------------------------------------
IIJ-Tech mainly provides systems design, consultation,
development, construction, operation and maintenance, and
IIJ Technology Inc. ("IIJ-Tech") supply of equipment and its operation and maintenance for the
construction of systems. IIJ-Tech provides services classified
into SI and equipment sales in IIJ's consolidated financial
statements.
--------------------------------------------------------------------------------------------------
IIJ-FS mainly provides the development, operation and
IIJ Financial Systems, Inc. maintenance of systems for financial institutions. IIJ-FS
("IIJ-FS") provides services classified into SI in IIJ's consolidated
financial statements.
--------------------------------------------------------------------------------------------------
Net Care mainly provides the monitoring and operation of
Net Care, Inc. ("Net Care") networks and outsourced customer support and call centers. Net
Care provides services classified connectivity and VAS and SI
in IIJ's consolidated financial statements.
--------------------------------------------------------------------------------------------------
Net Chart mainly provides network construction services, primarily
Net Chart Japan Inc. ("Net Chart") for LANs, such as network installation wiring, installation
and set-up of equipment, installation of applications, and
operational support.
--------------------------------------------------------------------------------------------------
IIJ America mainly provides Internet connectivity services in
the United States and constructs and operates an Internet
IIJ America Inc. ("IIJ America") backbone in the United States as the IIJ Group's presence in
the United States. IIJ America provides services classified
into connectivity and VAS in IIJ's consolidated financial
statements.
--------------------------------------------------------------------------------------------------
Three Equity Method Investees
--------------------------------------------------------------------------------------------------
Internet Multifeed Co. Multifeed was established as a joint venture with NTT Group and
("Multifeed") mainly operates Internet exchange, distributes high-volume
Internet content, and provides housing services.
--------------------------------------------------------------------------------------------------
Internet Revolution Inc. i-revo was established as a joint venture with Konami
("i-revo") Corporation and mainly operates Internet portals.
--------------------------------------------------------------------------------------------------
i-Heart was established as a joint venture with Samsung
i-Heart Inc. ("i-Heart") Corporation in South Korea and provides data center services
in South Korea.
--------------------------------------------------------------------------------------------------
(Notes)
1. In March 2007, IIJ has sold all share of atom Co., Ltd. ("atom") a
former equity method investee to atom's director and CEO and is no
longer an equity method investee as of the end of March 2007.
2. On March 29, 2007, IIJ announced to acquire 100% of the equity of
hi-ho, inc. and take over the internet service business and the
solution business from Panasonic Network Services Inc. ("PNS") on June
1, 2007 for JPY 1,200 million.
3. As of April 5, 2007, IIJ's ownership in IIJ-Tech and Net Care
increased to 95.2% and 92.5% respectively, as IIJ had purchased the
shares of the companies from their minority shareholders since the end
of the interim period ended September 2006.
4. On April 5, 2007, IIJ's board of directors resolved that IIJ make the
two consolidated subsidiaries, IIJ-Tech and Net Care 100% owned
through share exchanges. The share exchanges became effective on May
11, 2007 and on the same date the two consolidated subsidiaries became
100% owned. As IIJ-Tech became 100% owned, IIJ Financial Systems
("IIJ-FS") which is fully owned by IIJ-Tech is now fully owned by IIJ
through indirect ownership. IIJ America, Inc. has also become fully
owned by IIJ by including the number of shares of indirect ownership
by IIJ-Tech.
5. In April 2007, IIJ has entered a joint venture agreement with US-based
GDX Network, Inc., a 100% owned subsidiary of US-based MX Logic, Inc.,
to form GDX Japan, K.K., which will provide a new-generation message
exchange network service. IIJ holds 51% of the shares of GDX Japan,
K.K.
6. In April 2007, IIJ and Hirata Corporation ("Hirata") have agreed to
partner with Taihei Computer Co., Ltd. ("TCC"), a second-tier
subsidiary of Hirata, on the management of customer loyalty reward
program systems. IIJ will make an investment of JPY 235 million in TCC
by a third-party stock allocation and add TCC to its equity method
investee, a 45% participation. After this investment, IIJ and Hirata
Corporation will jointly manage TCC.
In addition to the above, NTT is IIJ's affiliated company.
(2) Business Diagram
The overview of IIJ Group's business illustrated as followed:
-----------------------------------------------------------------------------------------------------------
| ----------------------------------------------------------------------------------------------------- |
| | Customers | |
| ----------------------------------------------------------------------------------------------------- |
| ^ |
| | Connectivity and VAS, SI and equipment sales |
| ------------------------------------------------------------------------------------------------------- |
| | -------------------------------------------------------------------------------------------------- | |
| | | IIJ | | |
| | -------------------------------------------------------------------------------------------------- | |
| | | ^ ^ | | |
| | Consolidated | . . | Equity Method | |
| | Subsidiaries Purchase | . . | Investees | |
| | ------------ Outsourcing | . . | Selling services ------------- | |
| | ----------------------- ....................... ......................-------------------------- | |
| | | IIJ-Tech | <------------------| . | | Multifeed | | |
| | | | | . |----------------> | | | |
| | ----------------------- Selling services | . | Selling services -------------------------- | |
| | Outsourcing | . | | |
| | | . | | |
| | ----------------------- | . | -------------------------- | |
| | | IIJ-FS | <------------------| . | | i-revo | | |
| | | | | . |----------------> | | | |
| | ----------------------- Selling services | . | Selling services -------------------------- | |
| | | . | Outsourcing | |
| | Outsourcing | . | | |
| | ----------------------- ....................... | | |
| | | Net Care | | . | | |
| | | | <------------------| . | ------------------------- | |
| | ----------------------- Selling services | . | | i-Heart | | |
| | Outsourcing | . | ---------------> | | | |
| | | . Advance ------------------------- | |
| | Outsourcing | . | |
| | Network costruction | . | |
| | ----------------------- ....................... | |
| | | Net Chart | | . | |
| | | | <------------------| . | |
| | ----------------------- Selling services | . | |
| | | . | |
| | | . | |
| | Selling services | . | |
| | Outsourcing | . | |
| | ----------------------- ....................... | |
| | | IIJ America | | | |
| | | | <------------------| | |
| | ----------------------- Selling services | |
| | | |
| | ------------------------------------------------------------------------------------------------ | |
| --| IIJ Group |---- |
| ------------------------------------------------------------------------------------------------ |
| ^ ^ ^ |
| | Purchase of | Outsourcing | Equipment sales, |
| | telecommunications lines | | purchase and lease |
| --------------------------------- ---------------------- ------------------------------- |
| | Telecommunication | | Outside Suppliers | | Telecommunication Equipment | |
| | Carriers and Others | | | | Manufacturers, Vendors and | |
| | | | | | Leasing Companies | |
| --------------------------------- ---------------------- ------------------------------- |
| |
| (Notes) |
| 1. The diagram above illustrates the overview of principal transactions between IIJ and IIJ's |
| affiliated companies. |
| 2. <--- shows transactions from IIJ to each of the IIJ Group companies. <... shows transactions from |
| each of the IIJ Group companies to IIJ. |
| 3. Telecommunications carriers include Nippon Telegraph and Telephone East Corporation ("NTT East"), |
| Nippon Telegraph and Telephone West Corporation ("NTT West") and NTT Communications, Inc. ("NTT |
| Communications"), that are the subsidiaries of IIJ's other related company as defined in the |
| disclosure rules of the Tokyo Stock Exchange, NTT. |
-----------------------------------------------------------------------------------------------------------
3. Management Policies
(1) Basic Management Policies
IIJ aims to contribute in creating a new market and in innovating industries
by leading the information society of Japan with internet technology. By
practicing its management philosophy, it also continuously seeks to maximize its
corporate value and to fulfill its social responsibility.
(2) Target Management Indicators
In conducting its business activities, the IIJ Group closely considers the
composition of total revenues, profitability, financial position, and other
factors. The IIJ Group is making efforts to enhance its profitability by
increasing revenues and controlling costs and general and administrative
expenditures, while closely watching its revenue growth ratio, gross margin
ratio, operating margin ratio and other figures.
(3) Medium and Long-term Business Strategies
The IIJ Group recognizes that customer needs and demands for the use of
network system will become more advanced and diverse as internet use in business
and public organizations are increasing due to the expand in broadband network.
We foresee a favorable business environment to continue as higher reliability
and outsourcing needs for network system will continue to increase affected by
the needs for security solutions. On the contrary, we see that the competition
with competitors for internet connectivity, value-added services and systems
integration will further deepen. While price competitions for Internet
connectivity services are still severe, we believe we can be competitive by
providing solutions together with value-added services and systems integration.
We believe that it is important to promote its research and development for
Internet, to continuously provide our customers with reliable and value-added
solutions for the enhancement of the IIJ Group business.
(4) Issues that should be addressed
Although the environment surrounding the IIJ Group is very favorable, it is
important for the IIJ Group to continue to provide reliable and highly
value-added services at the right timing to capture the needs for network system
of enterprises and public organizations. It is also important for the medium and
long term business to investigate the opportunity of business enhancement by M&A
and creating new business, to promote partnerships with business partners. We
believe it is very important to enhance its corporate governance as a group to
promote an effective business.
In the fiscal year ended March 31, 2007, the IIJ Group will continue its
efforts to increase revenues and profits, promote its research and development,
introduce new services, investigate business partnerships including investments
and enhance its corporate governance.
It is also important for the IIJ Group to attract and educate excellent
engineers and sales personnel to maintain its growth in the future, and the IIJ
Group is especially focusing on educating recent graduates. The IIJ Group
recruited 82 recent graduates in the fiscal year ended March 31, 2007 and 83
recent graduates joined the IIJ Group in April 2007.
(5) Other Issues to be addressed
IIJ provides Internet connectivity services for the amount of JPY 702
thousand, to Applied Research Institute, Inc. which Koichi Suzuki, president and
CEO of IIJ has 100% voting right. It is conducted under normal business
relationship.
Consolidated Financial Statements (Unaudited)
(From April 1, 2006 through March 31, 2007)
(1) Consolidated Balance Sheets
----------------------------------------------------------------------
As of March 31,
As of March 31, 2007 2006 Change
----------------------------------------------------------------------
Thousands
of U.S. Thousands Thousands Thousands
Dollars of Yen % of Yen % of Yen
----------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash 115,299 13,554,544 13,727,021 (172,477)
Accounts
receivable,
net of
allowance
for doubtful
accounts of
JPY 32,489
thousand and
JPY 23,411
thousand at
March 31,
2007 and
March 31,
2006,
respectively 82,305 9,675,725 11,962,304 (2,286,579)
Short term
investment 103 12,093 - 12,093
Inventories 9,451 1,111,086 851,857 259,229
Prepaid
expenses 8,959 1,053,270 1,031,325 21,945
Other current
assets, net
of allowance
for doubtful
accounts of
JPY 4,570
thousand and
JPY 33,250
thousand at
March 31,
2007 and
March 31,
2006,
respectively 7,916 930,571 214,121 716,450
--------------------- ----------- -----------
Total
current
assets 224,033 26,337,289 55.2 27,786,628 54.8 (1,449,339)
INVESTMENTS IN
AND ADVANCES
TO EQUITY
METHOD
INVESTEES, net
of loan loss
valuation
allowance of
JPY 16,701
thousand at
March 31, 2007
and March 31,
2006. 7,302 858,490 1.8 1,162,971 2.3 (304,481)
OTHER
INVESTMENTS 24,173 2,841,741 6.0 8,020,705 15.8 (5,178,964)
PROPERTY AND
EQUIPMENT--Net 83,637 9,832,396 20.6 10,299,496 20.3 (467,100)
INTANGIBLE
ASSETS--Net 24,472 2,876,894 6.0 632,594 1.2 2,244,300
GUARANTEE
DEPOSITS 14,343 1,686,141 3.5 1,549,653 3.1 136,488
OTHER ASSETS,
net of
allowance for
doubtful
accounts of
JPY 69,050
thousand and
JPY 40,980
thousand at
March 31, 2007
and March 31,
2006,
respectively 27,731 3,260,053 6.9 1,252,942 2.5 2,007,111
--------------------- ----------- -----------
TOTAL 405,691 47,693,004 100.0 50,704,989 100.0 (3,011,985)
--------------------- ----------- -----------
As of March 31, As of March 31,
2007 2006 Change
----------------------------------------------------------------------
Thousands
of U.S. Thousands of Thousands of Thousands
Dollars Yen % Yen % of Yen
----------------------------------------------------------------------
LIABILITIES
AND
SHAREHOLDERS'
EQUITY
CURRENT
LIABILITIES:
Short-term
borrowings 51,463 6,050,000 4,555,000 1,495,000
Long-term
borrowings-
current
portion 2,467 290,000 1,989,963 (1,699,963)
Payable under
securities
loan
agreement - - 999,600 (999,600)
Capital lease
obligations-
current
portion 25,121 2,953,173 3,003,914 (50,741)
Accounts
payable 72,004 8,464,835 10,107,942 (1,643,107)
Accrued
expenses 7,633 897,355 540,027 357,328
Accrued
retirement
and pension
costs 72 8,428 - 8,428
Other current
liabilities 21,003 2,469,058 1,702,208 766,850
--------------------- ------------ -----------
Total
current
liabilities 179,762 21,132,849 44.3 22,898,654 45.2 (1,765,805)
LONG-TERM
BORROWINGS - - - 290,000 0.6 (290,000)
CAPITAL LEASE
OBLIGATIONS--
Noncurrent 36,733 4,318,309 9.1 4,980,659 9.8 (662,350)
ACCRUED
RETIREMENT
AND PENSION
COSTS 6,380 750,042 1.5 223,332 0.4 526,710
OTHER
NONCURRENT
LIABILITIES 4,803 564,618 1.2 827,086 1.6 (262,468)
--------------------- ------------ -----------
Total
Liabilities 227,678 26,765,818 56.1 29,219,731 57.6 (2,453,913)
--------------------- ------------ -----------
MINORITY
INTEREST 6,934 815,182 1.7 1,263,320 2.5 (448,138)
--------------------- ------------ -----------
COMMITMENTS
AND
CONTINGENCIES - - - - - -
SHAREHOLDERS'
EQUITY:
Common-stock
-authorized,
377,600
shares;
issued and
outstanding,
204,300
shares at
March 31,
2007 and
March 31,
2006 143,194 16,833,847 35.3 16,833,847 33.2 0
Additional
paid-in
capital 226,261 26,599,217 55.8 26,599,217 52.5 0
Accumulated
deficit (206,454)(24,270,769)(50.9)(29,680,482)(58.5) 5,409,713
Accumulated
other
comprehensive
income 8,078 949,709 2.0 6,553,594 12.9 (5,603,885)
Treasury
stock--777
shares held
by an equity
method
investee at
March 31,
2006 - - - (84,238) (0.2) 84,238
--------------------- ------------ -----------
Total
shareholders'
equity 171,079 20,112,004 42.2 20,221,938 39.9 (109,934)
--------------------- ------------ -----------
TOTAL 405,691 47,693,004 100.0 50,704,989 100.0 (3,011,985)
--------------------- ------------ -----------
----------------------------------------------------------------------
(Note)
The U.S. dollar amounts represent translations of yen amounts at the
rate of JPY 117.56, 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
March 30, 2007.
(2) Consolidated Statements of Income
----------------------------------------------------------------------
Fiscal Year Ended March 31,
2007
--------------------------------
Thousands % of
of U.S. Thousands total
Dollars of Yen revenues
----------------------------------------------------------------------
REVENUES:
Connectivity and value-added
services:
Dedicated access 91,797 10,791,703
Dial-up access 20,554 2,416,307
Value-added services 63,079 7,415,533
Other 31,725 3,729,633
---------------------
Total 207,155 24,353,176
Systems integration 259,672 30,527,081
Equipment sales 18,496 2,174,324
---------------------
Total revenues 485,323 57,054,581 100.0
---------------------
COST AND EXPENSES:
Cost of connectivity and value-added
services 174,765 20,545,358
Cost of systems integration 200,145 23,529,045
Cost of equipment sales 16,104 1,893,216
---------------------
Total cost 391,014 45,967,619 80.6
Sales and marketing 29,251 3,438,725 6.0
General and administrative 33,776 3,970,692 7.0
Research and development 1,508 177,273 0.3
---------------------
Total cost and expenses 455,549 53,554,309 93.9
---------------------
OPERATING INCOME 29,774 3,500,272 6.1
---------------------
OTHER INCOME:
Interest income 196 23,037
Interest expense (3,381) (397,439)
Foreign exchange gains (losses) (3) (297)
Gain on other investments--net 15,877 1,866,510
Other--net 482 56,605
---------------------
Other income--net 13,171 1,548,416 2.7
---------------------
INCOME FROM
OPERATIONS BEFORE
INCOME TAX EXPENSE
(BENEFIT), MINORITY
INTERESTS AND EQUITY
IN NET LOSS OF EQUITY
METHOD INVESTEES 42,945 5,048,688 8.8
---------------------
INCOME TAX EXPENSE
(BENEFIT) (6,839) (803,943) (1.4)
MINORITY INTERESTS IN
EARNINGS OF
SUBSIDIARIES (1,979) (232,719) (0.4)
EQUITY IN NET LOSS OF
EQUITY METHOD
INVESTEES (1,788) (210,199) (0.3)
---------------------
NET INCOME 46,017 5,409,713 9.5
----------------------------------------------------------------------
(2) Consolidated Statements of Income
----------------------------------------------------------------------
Fiscal Year Ended
March 31, 2006 Change
----------------------------------
% of
Thousands total Thousands
of Yen revenues of Yen
----------------------------------------------------------------------
REVENUES:
Connectivity and value-added
services:
Dedicated access 10,625,268 166,435
Dial-up access 2,673,808 (257,501)
Value-added services 6,249,891 1,165,642
Other 3,673,872 55,761
------------ -----------
Total 23,222,839 1,130,337
Systems integration 23,504,537 7,022,544
Equipment sales 3,085,208 (910,884)
------------ -----------
Total revenues 49,812,584 100.0 7,241,997
------------ -----------
COST AND EXPENSES:
Cost of connectivity and value-
added services 20,077,990 467,368
Cost of systems integration 18,120,418 5,408,627
Cost of equipment sales 2,818,036 (924,820)
------------ -----------
Total cost 41,016,444 82.4 4,951,175
Sales and marketing 3,079,526 6.2 359,199
General and administrative 3,147,315 6.3 823,377
Research and development 158,155 0.3 19,118
------------ -----------
Total cost and expenses 47,401,440 95.2 6,152,869
------------ -----------
OPERATING INCOME 2,411,144 4.8 1,089,128
------------ -----------
OTHER INCOME:
Interest income 13,099 9,938
Interest expense (437,364) 39,925
Foreign exchange gains (losses) 3,470 (3,767)
Gain on other investments--net 3,197,690 (1,331,180)
Other--net 190,520 (133,915)
------------ -----------
Other income--net 2,967,415 6.0 (1,418,999)
------------ -----------
INCOME FROM
OPERATIONS BEFORE
INCOME TAX EXPENSE
(BENEFIT), MINORITY
INTERESTS AND EQUITY
IN NET LOSS OF EQUITY
METHOD INVESTEES 5,378,559 10.8 (329,871)
------------ -----------
INCOME TAX EXPENSE
(BENEFIT) 257,360 0.5 (1,061,303)
MINORITY INTERESTS IN
EARNINGS OF
SUBSIDIARIES (353,883) (0.7) 121,164
EQUITY IN NET LOSS OF
EQUITY METHOD
INVESTEES (13,746) (0.1) (196,453)
------------ -----------
NET INCOME 4,753,570 9.5 656,143
----------------------------------------------------------------------
Fiscal Year Ended Fiscal Year Ended
March 31, 2007 March 31, 2006
-------------------------------------
U.S.
Dollars Yen Yen
----------------------------------------------------------------------
BASIC WEIGHTED-
AVERAGE NUMBER OF
SHARES 203,992 195,613
DILUTED WEIGHTED-
AVERAGE NUMBER OF
SHARES 204,244 195,955
BASIC NET INCOME PER
SHARE 226 26,519 24,301
DILUTED NET INCOME
PER SHARE 225 26,487 24,258
----------------------------------------------------------------------
(Note)
1) The U.S. dollar amounts represent translations of yen amounts at
the rate of JPY 117.56, 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 March 30, 2007.
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.
(3) Consolidated Statements of Shareholders' Equity
Consolidated statements of shareholders' equity for the fiscal year
ended March 31, 2007
(Unit: Thousands of Yen)
----------------------------------------------------------------------
Shares of
Common
Stock
Outstanding
(Including
Treasury Additional
Stock) Common Paid-in Accumulated
(Shares) Stock Capital Deficit
----------------------------------------------------------------------
BALANCE, APRIL 1, 2006 204,300 16,833,847 26,599,217 (29,680,482)
Net income 5,409,713
Other comprehensive
loss, net of tax
Total comprehensive loss
Adjustment to initially
apply SFAS158, net of
tax
Decrease of common stock
due to exclusion of an
equity method investee
----------------------------------------------------------------------
BALANCE, MARCH 31, 2007 204,300 16,833,847 26,599,217 (24,270,769)
----------------------------------------------
Accumulated
Other
Comprehensive Treasury
Income Stock Total
----------------------------------------------------------------------
BALANCE, APRIL 1, 2006 6,553,594 (84,238)20,221,938
Net income 5,409,713
Other comprehensive loss, net of tax (5,492,154) (5,492,154)
-----------
Total comprehensive loss (82,441)
Adjustment to initially
apply SFAS158, net of tax (111,731) (111,731)
Decrease of common stock due to
exclusion of an equity method
investee 84,238 84,238
----------------------------------------------------------------------
BALANCE, MARCH 31, 2007 949,709 0 20,112,004
----------------------------------
Consolidated statements of shareholders' equity for the fiscal year
ended March 31, 2007
(Unit: Thousands of U.S. Dollars)
----------------------------------------------------------------------
Shares of
Common
Stock
Outstanding
(Including
Treasury Additional
Stock) Common Paid-in Accumulated
(Shares) Stock Capital Deficit
----------------------------------------------------------------------
BALANCE, APRIL 1, 2006 204,300 143,194 226,261 (252,471)
Net income 46,017
Other comprehensive loss, net
of tax
Total comprehensive loss
Adjustment to initially apply
SFAS158, net of tax
Decrease of common stock due
to exclusion of an equity
method investee
BALANCE, MARCH 31, 2007 204,300 143,194 226,261 (206,454)
-----------------------------------------
----------------------------------------------------------------------
Accumulated
Other
Comprehensive Treasury
Income Stock Total
----------------------------------------------------------------------
BALANCE, APRIL 1, 2006 55,747 (717) 172,014
Net income 46,017
Other comprehensive loss, net of tax (46,718) (46,718)
--------
Total comprehensive loss (701)
Adjustment to initially apply SFAS158,
net of tax (951) (951)
Decrease of common stock due to
exclusion of an equity method
investee 717 717
BALANCE, MARCH 31, 2007 8,078 0 171,079
--------------------------------
----------------------------------------------------------------------
(Note)
1) The U.S. dollar amounts represent translations of yen amounts at
the rate of JPY 117.56, 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 March 30, 2007.
Consolidated statements of shareholders' equity for the fiscal year
ended March 31, 2006
(Unit: Thousands of Yen)
----------------------------------------------------------------------
Shares of
Common
Stock
Outstanding
(Including
Treasury Additional
Stock) Common Paid-in Accumulated
(Shares) Stock Capital Deficit
----------------------------------------------------------------------
BALANCE, APRIL 1, 2005 191,800 13,765,372 23,637,628 (34,434,052)
Net income 4,753,570
Other comprehensive
loss, net of tax
Total comprehensive
income
Issuance of common
stock, net of
issuance cost 12,500 3,068,475 2,961,589
Purchase of common stock
by an equity method
investee
----------------------------------------------------------------------
BALANCE, MARCH 31, 2006 204,300 16,833,847 26,599,217 (29,680,482)
----------------------------------------------
Accumulated
Other
Comprehensive Treasury
Income Stock Total
----------------------------------------------------------------------
BALANCE, APRIL 1, 2005 8,690,125 (44,000) 11,615,073
Net income 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 6,030,064
Purchase of common stock by an
equity method investee (40,238) (40,238)
----------------------------------------------------------------------
BALANCE, MARCH 31, 2006 6,553,594 (84,238) 20,221,938
-----------------------------------
(4) Condensed Consolidated Statements of Cash Flows
----------------------------------------------------------------------
Fiscal Year
Ended
Fiscal Year Ended March 31,
March 31, 2007 2006 Change
------------------------------------------
Thousands
of U.S. Thousands Thousands Thousands
Dollars of Yen of Yen of Yen
----------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income 46,017 5,409,713 4,753,570 656,143
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and
amortization 35,965 4,228,048 4,209,037 19,011
Provision for (reversal
of) doubtful accounts
and advances 104 12,232 (12,009) 24,241
Gains on other
investments--net (15,877)(1,866,510)(3,197,690) 1,331,180
Foreign exchange losses
(gains) 19 2,226 (7,825) 10,051
Equity in net loss of
equity method investees 1,788 210,199 13,746 196,453
Minority interests in
earnings of
subsidiaries 1,979 232,719 353,883 (121,164)
Deferred income tax
benefit (12,714)(1,494,685) (230,841)(1,263,844)
Others 4,542 534,035 215,480 318,555
Changes in operating
assets and liabilities:
Decrease (increase) in
accounts receivable 20,212 2,376,126 (4,460,173) 6,836,299
Increase in inventories,
prepaid expenses and
other current and
noncurrent assets (10,505)(1,235,003)(1,390,398) 155,395
Decrease (increase) in
accounts payable (15,932)(1,872,969) 4,975,623 (6,848,592)
Increase in accrued
expenses, other current
and noncurrent
liabilities 7,361 865,376 1,336,421 (471,045)
----------------------------------------------------------------------
Net cash provided by
operating activities 62,959 7,401,507 6,558,824 842,683
----------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchase of property and
equipment (10,955)(1,287,906) (919,366) (368,540)
Purchase of short-term and
other investments (22,091)(2,597,020) (674,569)(1,922,451)
Investment in an equity
method investee - - (750,000) 750,000
Proceeds from sales of
investment in an equity
method investee 1,581 185,900 - 185,900
Purchase of subsidiary
stock from minority
shareholders (26,180)(3,077,764) (192,142)(2,885,622)
Proceeds from sales and
redemption of short-term
and other investments 33,977 3,994,361 3,613,239 381,122
Acquisition of a newly
controlled company, net
of cash acquired - - 229,457 (229,457)
Acquisition of businesses (636) (74,751) - (74,751)
Refund (payment) of
guarantee deposits--net (1,007) (118,411) 506,795 (625,206)
Other (324) (38,020) (8,564) (29,456)
----------------------------------------------------------------------
Net cash provided by
(used in) investing
activities (25,635)(3,013,611) 1,804,850 (4,818,461)
----------------------------------------------------------------------
Fiscal Year
Ended
Fiscal Year Ended March 31,
March 31, 2007 2006 Change
------------------------------------------
Thousands
of U.S. Thousands Thousands Thousands
Dollars of Yen of Yen of Yen
----------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from issuance of
short-term borrowings
with initial maturities
over three months and
long-term borrowings 89,316 10,500,000 1,000,000 9,500,000
Repayments of short-term
borrowings with initial
maturities over three
months and long-term
borrowings (64,988)(7,639,963)(2,986,056)(4,653,907)
Proceeds from securities
loan agreement 8,997 1,057,680 4,897,040 (3,839,360)
Repayments of securities
loan agreement (17,500)(2,057,280)(5,626,960) 3,569,680
Principal payments under
capital leases (27,729)(3,259,875)(3,105,519) (154,356)
Net decrease in short-term
borrowings (28,538)(3,355,000) (169,633)(3,185,367)
Proceeds from issuance of
subsidiary stock to
minority shareholders 1,656 194,679 - 194,679
Proceeds from issuance of
common stock, net of
issuance cost - - 6,030,064 (6,030,064)
----------------------------------------------------------------------
Net cash provided by
(used in) financing
activities (38,786)(4,559,759) 38,936 (4,598,695)
----------------------------------------------------------------------
EFFECT OF EXCHANGE RATE
CHANGES ON CASH (5) (614) 37,934 (38,548)
NET INCREASE (DECREASE) IN
CASH (1,467) (172,477) 8,440,544 (8,613,021)
CASH, BEGINNING OF EACH
PERIOD 116,766 13,727,021 5,286,477 8,440,544
----------------------------------------------------------------------
CASH, END OF EACH PERIOD 115,299 13,554,544 13,727,021 (172,477)
----------------------------------------------------------------------
----------------------------------------------------------------------
ADDITIONAL CASH FLOW
INFORMATION:
Interest paid 3,262 383,461 426,692 (43,231)
Income taxes paid 2,959 347,826 148,101 199,725
NONCASH INVESTING AND
FINANCING ACTIVITIES:
Acquisition of assets by
entering into capital
leases 22,667 2,664,706 3,842,952 (1,178,246)
Exchange of common stock
investment due to merger:
Market value of common
shares acquired - - 7,390 (7,390)
Cost of investment - - 2,584 (2,584)
Acquisition of business
and a company:
Assets acquired 2,010 236,307 843,485 (607,178)
Cash paid (636) (74,751) (733,589) 658,838
Liabilities assumed 1,374 161,556 109,896 51,660
----------------------------------------------------------------------
(Note)
1) The U.S. dollar amounts represent translations of yen amounts at
the rate of JPY 117.56, 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 March 30, 2007.
Principal Standard Items for Preparation of Consolidated Financial Statements
-----------------------------------------------------------------------------
The Terminology, Form, and Preparation Methods for the Consolidated Financial
Statements
The consolidated financial statements 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 87 "provisions for the
terminology, form, and preparation methods for consolidated financial
statements" (Ministry of Finance, ordinance No. 28, 1976).
IIJ registered the issuance of ADR under the United States Securities and
Exchange Commission ("the United States SEC") and listed the ADR on NASDAQ
market ("NASDAQ National 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.
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 consolidated financial statements to conform to generally
accepted accounting principles in the U.S. GAAP. These adjustments were not
recorded in the statutory accounts.
Consolidation
The consolidated financial statements include the accounts of IIJ and all of
its subsidiaries, Net Care, Inc. ("Net Care"), IIJ Technology Inc. ("IIJ-Tech"),
IIJ Financial Systems Inc. ("IIJ-FS"), Net Chart Japan Inc. ("Net Chart") and
IIJ America, Inc. ("IIJ America"), which have fiscal years ending March 31,
except for IIJ America. IIJ America's fiscal year end is December 31 and such
date was used for purposes of preparing the consolidated financial statements as
it is not practicable for the subsidiary to report its financial results as of
March 31. There were no significant events that occurred during the intervening
period that would require adjustment to or disclosure in the consolidated
financial statements. Significant inter-company transactions and balances have
been eliminated in consolidation. Investments in companies over which IIJ has
significant influence but do not control are accounted for by the equity method.
For other than a temporary decline in the value of investments in equity method
investee 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 U.S. GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and reported amounts of revenues and
expenses during the reporting period. Significant estimates and assumptions used
are primarily in the areas of impairment loss on advances to equity method
investee, 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, IIJ FiberAccess/F Service and others). 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
1
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 network
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. 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 software is delivered prior to other elements of
the arrangement or systems construction, 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 basis 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.
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 investee.
Fair value is determined as the Company's interest in the net assets of
investee.
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.
Lease
Capital Lease that meet specific criteria noted in SFAS No.13, "Accounting
for Leases", are capitalized at the inception of the lease at the present value
2
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. Under SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," ("SFAS No. 144"), the Company
evaluates the impairment of long-lived assets whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. There was no impairment loss for long-lived assets for the fiscal
year ended March 31, 2006 and 2007.
Goodwill and Intangible Assets
Under SFAS No. 142, "Goodwill and Other Intangible Assets," ("SFAS No. 142"),
goodwill (including equity-method goodwill) and intangible assets that are
deemed to have indefinite useful lives are not amortized, but are subject to
impairment testing. Impairment testing is required to be performed at adoption
and annually or more frequently if events or changes in circumstances indicate
that the asset might be impaired. The Company selected March 31 as its annual
impairment testing date.
Pension and severance indemnities plans
The company has pensions 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".
In September 29, 2006, the FASB issued SFAS No.158, "Employers' Accounting
for Defined Benefit and Other Retirement Benefit Plans, an amendment of the FASB
statements No. 87, 88, 106, and 132R." SFAS No. 158 which requires the employer
to; 1) to fully recognize the funded status of the defined benefit plans,
measured as the difference between plan assets at fair value and the benefit
obligation in its consolidated balance sheet, 2) to recognize as a component of
other comprehensive income, net of tax, the gains or losses and prior service
costs or credits that arise during the period but are not recognized as
components of net periodic benefit cost, 3) to measure defined benefit plan
assets and obligations as of the date of the employer's fiscal year-end
statement of consolidated financial position, 4) to disclose in the notes to
consolidated financial statements additional information about certain effects
on net periodic benefit cost for the next fiscal year that arise from delayed
recognition of the gains or losses, prior service costs or credits, and
transition asset or obligation.
The Company has adopted SFAS No.158 from the fiscal year ended March 31,
2007. The effect of adoption of SFAS No. 158 on IIJ's consolidated financial
position was a decrease in total shareholders' equity by JPY 111,731 thousand.
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
3
denominated in U.S. dollars, are stated at the amount as computed by using
year-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
an effective portion of the derivative's gain or loss is initially reported as a
component of other comprehensive income and subsequently reclassified into
earnings when the underlying transaction affects earnings. An ineffective
portion of the gain or loss is reported in earnings immediately.
The Company enters into contracts to hedge interest rate risks and does not
enter into contracts or utilize derivatives for trading purposes.
Stock-based Compensation
The Company accounts for stock-based compensation in accordance with revised
SFAS No.123, "Share-based Payments", adopted on April 1, 2006. Revised SFAS
No.123 requires compensation expense for stock options and other share-based
payment to be measure and recorded based on the instruments' fair value. The
company has adopted revised SFAS No.123 and the related FASB Staff Positions
("FSP") 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 revised SFAS No.123 had no impact on the Company's consolidated
financial position or results of preparation.
Research and Development
Research and development 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 fiscal
year. Diluted net income per share reflects the potential dilutive effect of
stock options. (See "NET INCOME PER SHARE (Unaudited)" in the latter part of
this document for reference.)
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, 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 implemented FASB Interpretation No. 48 "Accounting
for Uncertainty in Income Taxes ("FIN No. 48")", an interpretation of FASB
Statement No. 109 to clarify the accounting for uncertainty in income taxes
recognized in an enterprise's financial statements in accordance with FASB
Statement No. 109, Accounting for Income Taxes. FIN No. 48 prescribes a
4
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. It also provides guidance on derecognition, classification, interest
and penalties, accounting in interim periods, disclosure, and transition. FIN
No. 48 is effective from fiscal years beginning after December 15, 2006. The
Company is currently evaluating the impact of FIN No.48 on the Company's
consolidated financial position or results of operation.
In September 2006, FASB issued SFAS No.157, "Fair Value Measurements." SFAS
No.157 establishes a framework for measuring fair value in generally accepted
accounting principles (GAAP), and expands disclosures about fair value
measurements. SFAS No.157 is effective from fiscal years beginning after
November 15, 2007. The Company is currently evaluating the impact of SFAS No.157
on the Company's consolidated financial position or results of operation.
NET INCOME PER SHARE (Unaudited)
--------------------------------
The basic net income per share and diluted net income per share in the fiscal
year ended March 31, 2006 and 2007 was as follows. The 1 for 5 stock split that
IIJ conducted effective on October 11, 2005 is considered for the calculation
below.
--------------------------------------------------------------------------------------------------------------------------------
Fiscal Year Ended March 31, 2006 Fiscal Year Ended March 31, 2007
----------------------------------------------- -----------------------------------------------
Net income Shares Per share Net income Shares Per share
(numerator) (denominator) (numerator) (denominator)
--------------------------------------------------------------------------------------------------------------------------------
Thousand of Yen Shares Yen Thousand of Yen Shares Yen
Basic net income per share
Net income 4,753,570 195,613 240,301 5,409,713 203,992 26,519
Dilutive effect by
potential common shares
Stock option - 342 - 252
Diluted net income per
share
Net income 4,753,570 195,955 24,258 5,409,713 204,244 26,487
--------------------------------------------------------------------------------------------------------------------------------
For the fiscal year ended March 31, 2007 and 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 shares.
SUBSEQUENT EVENTS (Unaudited)
-----------------------------
On March 29, 2007, IIJ's board of directors resolved to acquire 100% of the
equity of hi-ho, Inc. from Panasonic Network services Inc. ("PNS") for JPY 1,200
million and signed definitive agreement with PNS. The acquisition will become
effective on June 1, 2007. IIJ Group will take over the Internet service
business that PNS provides under the "hi-ho" brand and the solution business
that PNS provides to its corporate customers.
On April 5, 2007, IIJ's board of directors resolved that IIJ make the two
consolidated subsidiaries, IIJ Technology Inc. and Net Care, Inc. 100% owned
through share exchanges. The share exchange became effective on May 11, 2007 and
on the same date the two consolidated subsidiaries became 100% owned. Through
this share exchanges, IIJ has newly issued 2,178 common stocks of IIJ.
OTHERS
------
Notes regarding leases, related party transactions, income tax effects,
equity securities, derivatives, retirement benefits, stock option plans are
omitted in the earnings release for the fiscal year ended March 31, 2007.
5
(Reference) STATUS OF PRODUCTION, RECEIPT OF ORDER AND SALES ACTIVITIES
(unaudited)
(1) Results of Production
Results of production for the fiscal year ended March 31, 2007 is as follows.
--------------------------------------------------------------------------------
Fiscal Year Ended March 31, 2007
--------------------------------------------------------------------------------
Thousands of Yen YoY Change (%)
--------------------------------------------------------------------------------
Systems integration 23,910,824 +27.8
--------------------------------------------------------------------------------
Total 23,910,824 +27.8
--------------------------------------------------------------------------------
*1 Consumption tax is not included.
*2 Results of production for Internet connectivity services, value-added
services and equipment sales are not included, since the Company does not
produce for.
(2) Results of Receiving Orders
Result of receiving orders for the fiscal year ended March 31, 2007 is as
follows.
---------------------------------------------------------------------------------------------------
Fiscal Year Ended March 31, 2007
---------------------------------------------------------------------------------------------------
Order received YoY Change Order backlog YoY Change
(Thousands of Yen) (%) (Thousands of Yen) (%)
---------------------------------------------------------------------------------------------------
Systems integration and 35,945,821 +27.9 9,470,757 +51.6
equipment sales
---------------------------------------------------------------------------------------------------
Total 35,945,821 +27.9 9,470,757 +51.6
---------------------------------------------------------------------------------------------------
*1 Consumption tax is not included.
*2 Results of receiving orders and order backlog for Internet connectivity
services and value-added services are not included, since the Company does
not produce for.
*3 Systems integration and equipment sales are totaled, as they cannot be
classified properly at the stage of receiving orders.
(3) Results of Sales Activities
Results of sales activities for the fiscal year ended March 31, 2007 is as
follows.
--------------------------------------------------------------------------------------------------------------------
Fiscal Year Ended Fiscal Year Ended
March 31, 2006 March 31, 2007 Change
--------------------------------------------------------------------------------------------------------------------
Thousands of Yen Thousands of Yen Thousands of Yen
--------------------------------------------------------------------------------------------------------------------
Connectivity and value-added services: 23,222,839 24,353,176 1,130,337
Dedicated access 10,625,268 10,791,703 166,435
Dial-up access 2,673,808 2,416,307 (257,501)
Value-added services 6,249,891 7,415,533 1,165,642
Other 3,673,872 3,729,633 55,761
--------------------------------------------------------------------------------------------------------------------
Systems integration 23,504,537 30,527,081 7,022,544
--------------------------------------------------------------------------------------------------------------------
Systems integration 12,295,624 16,659,629 4,364,005
Outsourced operation 11,208,913 13,867,452 2,658,539
--------------------------------------------------------------------------------------------------------------------
Equipment Sales 3,085,208 2,174,324 (910,884)
--------------------------------------------------------------------------------------------------------------------
Total 49,812,584 57,054,581 7,241,997
--------------------------------------------------------------------------------------------------------------------
*1 Consumption tax is not included.
*2 Sales to each customer and its ratio to aggregate sales for the fiscal year
ended March 31, 2006 and 2007 are omitted as the ratios are less than 0.1.
CONTACT: IIJ Investor Relations Office
Taisuke ONO, +81-3-5259-6500
ir@iij.ad.jp
http://www.iij.ad.jp/
EXHIBIT 2
[English Translation] May 15, 2007
------------
Company name: 1-105 Kanda Jimbo-cho, Chiyoda-ku, Tokyo
------------------------------------------------------
Internet Initiative Japan Inc.
------------------------------
Company representative: Koichi Suzuki, President and Representative Director
----------------------------------------------------------------------------
(Stock Code Number: 3774 The First Section of the Tokyo Stock Exchange)
-----------------------------------------------------------------------
Contact: Akihisa Watai, Director and CFO
----------------------------------------
TEL: 03-5259-6500
-----------------
Information on the Affiliated Company
-------------------------------------
1. Information on the affiliated company (as of March 31, 2007)
-----------------------------------------------------------------------------------------------
Parent and Other Type Its Ownership Securities Exchanges where its
Company Percentage (%) Shares are Listed
-----------------------------------------------------------------------------------------------
Tokyo Stock Exchange, Inc.
(First Section)
Osaka Securities Exchange, Co.,
Nippon Telegraph IIJ is NTT's Ltd. (First Section)
and Telephone affiliate 29.70 Nagoya Stock Exchange, Inc.
Corporation company (4.99) (First Section)
Fukuoka Stock Exchange
Sapporo Stock Exchange
New York Stock Exchange, Inc.
London Stock Exchange plc.
-----------------------------------------------------------------------------------------------
(Notes)
1. The percentage in parentheses is the indirect ownership by NTT included in
the figure above.
2. On April 5, 2007, IIJ's board of directors resolved that IIJ make the two
consolidated subsidiaries, IIJ Technology Inc. and Net Care, Inc. 100%
owned through share exchanges and has issued 2,178 share of common stock of
IIJ, effective May 11, 2007. After this exchange, the number of shares of
common stock of IIJ as of May 15, 2007 increased to 206,478 shares.
2. Position of the Listed Company (IIJ) in the Group of the Parent Company and
other Companies
a. Position of the Listed Company (IIJ) in the Group of the Parent Company
The ownership percentage by NTT, which is IIJ's largest shareholder, was
29.7% as of March 31, 2007, including its indirect ownership. However, IIJ's
sales activities are not affected by NTT's ownership in IIJ and IIJ is
maintaining its management independence.
b. Personal Relationships with the Parent Company, other Related Company and
their Group Companies
IIJ's board of directors consists of 13 members including 4 outside
directors. Takashi Hiroi, an outside director (part-time director) of IIJ, is an
employee of NTT (Senior Manager, Corporate Management Strategy Division of NTT).
However, he is monitoring IIJ's business operations as an outside director and
does not have any personal relationships, such as family relationships, with
IIJ's other directors and auditors. He did not acquire any interest such as
capital or business relationships upon becoming an outside director.
c. Business Relationship with NTT Group
IIJ uses services provided by Nippon Telegraph and Telephone East
Corporation ("NTT East") and Nippon Telegraph and Telephone West Corporation
("NTT West") for a significant portion of its access circuits, and services
provided by NTT Communications Corporation ("NTT Communications") for a
significant portion of its domestic and international backbones. The amount paid
to NTT East and West, and to NTT Communications for their telecommunication
circuits was JPY 902,844 thousand and JPY 4,593,122 thousand, respectively for
the fiscal year ended March 31, 2007.
Business transactions with the NTT Group are within the scope of normal
business practices, and there is no special contract made in relation to the
investment by NTT Group, as the business transactions existed before NTT Group
became our largest shareholder.
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: May 15, 2007 By: /s/ Koichi Suzuki
----------------------------------------------
Koichi Suzuki
President, Chief Executive Officer and
Representative Director