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 November 13, 2006
Commission File Number: 0-30204
--------
Internet Initiative Japan Inc.
(Translation of registrant's name into English)
Jinbocho Mitsui Bldg. 1-105 Kanda Jinbo-cho, Chiyoda-ku, Tokyo 101-0051, Japan
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file
annual reports under cover Form 20-F or Form 40-F: Form
20-F [ X ] Form 40-F [ ]
Indicate by check mark if the registrant is submitting the Form 6-K in
paper as permitted by Regulation S-T Rule 101(b)(1): ____
Note: Regulation S-T Rule 101(b)(1) only permits the submission in paper of
a Form 6-K if submitted solely to provide an attached annual report to security
holders.
Indicate by check mark if the registrant is submitting the Form 6-K in
paper as permitted by Regulation S-T Rule 101(b)(7): ____
Note: Regulation S-T Rule 101(b)(7) only permits the submission in paper of
a Form 6-K if submitted to furnish a report or other document that the
registrant foreign private issuer must furnish and make public under the laws of
the jurisdiction in which the registrant is incorporated, domiciled or legally
organized (the registrant's "home country"), or under the rules of the home
country exchange on which the registrant's securities are traded, as long as the
report or other document is not a press release, is not required to be and has
not been distributed to the registrant's security holders, and, if discussing a
material event, has already been the subject of a Form 6-K submission or other
Commission filing on EDGAR.
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes [ ] No [ X ]
If "Yes" is marked, indicate below the file number assigned to the
registrant in connection with Rule 12g3-2(b): 82-
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EXHIBIT INDEX
Exhibit Date Description of Exhibit
------- ---- ----------------------
1 2006/11/09 IIJ Announces Second Quarter Results for the Year
Ending March 31, 2007
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: November 13, 2006 /s/ Koichi Suzuki
--------------------------------------------
Koichi Suzuki
President, Chief Executive Officer and
Representative Director
EXHIBIT 1
---------
IIJ Announces Second Quarter Results for the
Year Ending March 31, 2007
Continuous Increase in Revenues and Profits due to Strong Business
Environment
TOKYO--(BUSINESS WIRE)--Nov. 9, 2006--Internet Initiative Japan
Inc. (Nasdaq: IIJI, Tokyo Stock Exchange Mothers: 3774) ("IIJ"), one
of Japan's leading Internet-access and comprehensive network solutions
providers, today announced its financial results for the second
quarter of the fiscal year ending March 31, 2007 ("FY2006").(1)
Highlights of Second Quarter FY2006 Results
-- Revenue totaled JPY 14,007 million ($118.7 million), an
increase of 17.4% from 2Q05.
-- Operating income was JPY 811 million ($6.9 million), an
increase of 59.9% from 2Q05.
-- Net income was JPY 2,120 million ($18.0 million), an increase
of 111.9% from 2Q05.
Target for FY2006(2)
-- As announced on November 2, 2006, IIJ revised its original
targets for FY2006 that were announced on May 10, 2006. The
revised targets are JPY 56 billion for revenues, JPY 3.2
billion for operating income, JPY 5 billion for income before
income tax expense (benefit) and JPY 5 billion for net income.
Overview of 2nd Quarter of FY2006 Financial Results and Business
Outlook(2)
"We had a very strong second quarter, with revenues and profits
increasing compared to the same period last year," said Koichi Suzuki,
President and CEO of IIJ. "The business environment in IIJ's key
markets remained quite strong this quarter. Corporate customers
continued to shift to higher speed connectivity services due to the
steady expansion of corporate network usage. We also continued to see
strong demand for outsourcing services because corporate customers
faced an increase of network-related security incidents and an overall
shortage of Internet engineers. Corporate customers also increased the
construction of internal information technology networks based on
Internet technology. For Internet connectivity services, revenues
turned to increase compared to the previous quarter, despite the
continued stiff competition. The shift of customers to relatively
lower-priced broadband services has almost completed and customers of
IP Services, which are mainly used for Internet connectivity at
corporate headquarters and data centers, shifted to higher-speed
connections. Additionally, the number of contracts for broadband
services for the connection of corporate branch offices and shops via
Internet VPN increased. For value-added services, revenues increased
in a number of areas, including e-mail related services that provide
virus-fighting functions, isolate spam and record outgoing and
incoming e-mails comprehensively, security-related services, Internet
VPN related services and data center services. For systems
integration, revenues rose mainly due to an increase in projects for
companies that selected us to construct corporate information
technology networks that use Internet technology, systems related to
online business expansion and to enhance existing systems. In
addition, we introduced several new e-mail and security-related
products this quarter and will continue to try to capitalize on the
growing demand in out target markets."
"According to the favorable financial results for the first half
of FY2006, we announced revised targets for FY2006 on November 2,
2006," said Akihisa Watai, CFO of IIJ. "We revised our revenue target
for FY2006 from JPY 55 billion to JPY 56 billion. We maintain our
target for operating income of JPY 3.2 billion for FY2006, since our
annual revenues and operating income are largely influenced by the
financial results in the fourth quarter, which is very strong
historically due to seasonal factors mainly related to corporate
spending on systems integration projects, and those figures tend to
fluctuate greatly in that period."
2nd Quarter FY2006 Financial Results
----------------------------------------------------------------------
Operating Results Summary (JPY in millions)
----------------------------------------------------------------------
YoY %
2Q06 2Q05 change
----------------------------------------------------------------------
Total Revenues 14,007 11,929 17.4%
----------------------------------------------------------------------
Total Costs 11,448 9,873 16.0%
----------------------------------------------------------------------
SG&A Expenses and R&D 1,747 1,549 12.8%
----------------------------------------------------------------------
Operating Income 811 507 59.9%
----------------------------------------------------------------------
Income before Income Tax Expense 1,145 1,097 4.4%
----------------------------------------------------------------------
Net Income 2,120 1,001 111.9%
----------------------------------------------------------------------
Revenues
Revenues in 2Q06 totaled JPY 14,007 million, an increase of 17.4%
from JPY 11,929 million in 2Q05.
Revenues (JPY in millions)
----------------------------------------------------------------------
YoY %
2Q06 2Q05 change
----------------------------------------------------------------------
Total Revenues: 14,007 11,929 17.4%
----------------------------------------------------------------------
Connectivity and Value-added Services 6,156 5,767 6.7%
----------------------------------------------------------------------
Systems Integration 7,221 5,162 39.9%
----------------------------------------------------------------------
Equipment Sales 630 1,000 (37.0%)
----------------------------------------------------------------------
Connectivity and Value-added Services ("VAS") revenues were JPY
6,156 million in 2Q06, an increase of 6.7% compared to 2Q05. The
increase was mainly due to an increase in revenues from value-added
services, affected by an increase in demand for outsourcing services.
SI revenues increased 39.9% to JPY 7,221 million in 2Q06 compared
to 2Q05. The increase was mainly due to an increase in one-time
revenues from network design, construction and consultation and a
steady increase in monthly recurring revenues from network operation
and maintenance.
Equipment sales revenues were JPY 630 million in 2Q06, a decrease
of 37.0% compared to 2Q05.
Cost and expense
Cost of revenues was JPY 11,448 million in 2Q06, an increase of
16.0% compared to 2Q05.
Cost of Revenues (JPY in millions)
----------------------------------------------------------------------
YoY %
2Q06 2Q05 change
----------------------------------------------------------------------
Cost of Revenues: 11,448 9,873 16.0%
----------------------------------------------------------------------
Connectivity and Value-added Services 5,254 4,988 5.3%
----------------------------------------------------------------------
Systems Integration 5,611 3,919 43.2%
----------------------------------------------------------------------
Equipment Sales 583 966 (39.7%)
----------------------------------------------------------------------
Cost of Connectivity and VAS revenues was JPY 5,254 million in
2Q06, an increase of 5.3% compared to 2Q05.
Cost of SI revenues was JPY 5,611 million in 2Q06, an increase of
43.2% compared to 2Q05. The increase was mainly due to an increase in
revenues from systems integration projects.
Cost of Equipment Sales revenues was JPY 583 million in 2Q06, a
decrease of 39.7% compared to 2Q05.
Sales and marketing expenses were JPY 843 million in 2Q06, an
increase of 5.4% compared to 2Q05. The increase was mainly due to an
increase in advertising expenses and personnel expenses.
General and administrative expenses were JPY 862 million in 2Q06,
an increase of 23.3% compared to 2Q05. The increase was mainly due to
an increase in personnel expenses.
Operating income
Operating income was JPY 811 million in 2Q06, an increase of 59.9%
compared to 2Q05. 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 2Q06 was JPY 334 million, a decrease of 43.4% from
JPY 590 million in 2Q05. The decrease was mainly due to a decrease in
the gain from sale of available-for-sale securities, which is largely
a reflection of the decrease in the value of the securities held due
to market price fluctuations. The gain from the sale of
available-for-sale securities in 2Q06 was JPY 445 million.
Income tax benefit in 2Q06 was JPY 1,109 million, compared to
income tax expense of JPY 44 million in 2Q05. The benefit was mainly
because of deferred tax benefits of JPY 1,266 million resulting from a
release of valuation allowance against deferred income tax assets
related to tax operating loss carryforwards and others. Minority
interests in earnings of subsidiaries in 2Q06 was JPY 82 million.
Equity in net loss of equity method investees in 2Q06 was JPY 52
million.
Net income was JPY 2,120 million in 2Q06, an increase of 111.9%
compared to 2Q05.
2nd Quarter FY2006 Business Review
Analysis by Service
Connectivity and Value-added Services
For dedicated access services, customers for IP Services, which
are mainly used for corporate headquarters and data centers, continued
to shift to higher speed bandwidth for IP Services. The number of
contracts for broadband services also continued to increase
substantially compared to 2Q05, mainly due to the increasing demand
for services that connect branch offices and shops through Internet
VPN.
The number of contracts for dedicated access services increased by
3,410 to 16,112 compared to 2Q05. Total contracted bandwidth increased
by 102.2Gbps to 253.2Gbps compared to 2Q05.
Dedicated access service revenues were JPY 2,687 million, a
decrease of 0.3% compared to 2Q05. The decrease is mainly related to a
decrease of JPY 234 million in interconnection revenues between IIJ's
network and Asia Internet Holding Co., Ltd. ("AIH"), IIJ's former
equity method investee, because AIH was merged into IIJ in October
2005.
Dial-up access service revenues were JPY 606 million in 2Q06, a
decrease of 11.2% compared to 2Q05, mainly due to a decrease in
revenues from services for individual customers, such as IIJ4U, as
well as the discontinuance of services of certain large customer to
which we provided our services as OEM.
VAS revenues were JPY 1,906 million in 2Q06, an increase of 30.7%
compared to 2Q05. The increase was due to an increase in revenues from
various types of services, such as e-mail, security and Internet VPN
related services and data center services.
Other revenues were JPY 957 million in 2Q06, an increase of 2.9%
compared to 2Q05.
As a result, revenues from Internet connectivity and value-added
services in 2Q06 were JPY 6,156 million, an increase of 6.7% compared
to 2Q05. The gross margin for Internet connectivity and value-added
services in 2Q06 was JPY 901 million, an increase of 15.7% compared to
2Q05. The gross margin ratio in 2Q06 was 14.6%, compared to 13.5% in
2Q05.
Number of Contracts for Connectivity Services
----------------------------------------------------------------------
YoY
2Q06 2Q05 Change
----------------------------------------------------------------------
Dedicated Access Service Contracts 16,112 12,702 3,410
----------------------------------------------------------------------
IP Service (Low Bandwidth: 64kbps-
768kbps)(3) 70 61 9
----------------------------------------------------------------------
IP Service (Medium Bandwidth: 1Mbps-
99Mbps)(3) 682 637 45
----------------------------------------------------------------------
IP Service (High Bandwidth: 100Mbps-) 198 143 55
----------------------------------------------------------------------
IIJ T1 Standard and IIJ Economy 66 182 (116)
----------------------------------------------------------------------
IIJ Data Center Connectivity Service 266 234 32
----------------------------------------------------------------------
IIJ FiberAccess/F and IIJ DSL/F
(Broadband Services) 14,830 11,445 3,385
----------------------------------------------------------------------
Dial-up Access Service Contracts 585,471 663,527 (78,056)
----------------------------------------------------------------------
Dial-up Access Services, under IIJ
Brand 60,005 64,810 (4,805)
----------------------------------------------------------------------
Dial-up Access Services, OEM(4) 525,466 598,717 (73,251)
----------------------------------------------------------------------
Total Contracted Bandwidth 253.2Gbps151.0Gbps 102.2Gbps
----------------------------------------------------------------------
Connectivity and VAS Revenue Breakdown and Cost (JPY in millions)
----------------------------------------------------------------------
YoY %
2Q06 2Q05 Change
----------------------------------------------------------------------
Connectivity Service Revenues 3,293 3,378 (2.5%)
----------------------------------------------------------------------
Dedicated Access Service Revenues 2,687 2,695 (0.3%)
----------------------------------------------------------------------
IP Service (5) 2,095 2,121 (1.3%)
----------------------------------------------------------------------
IIJ T1 Standard and IIJ Economy 51 113 (54.7%)
----------------------------------------------------------------------
IIJ FiberAccess/F and IIJ DSL/F
(Broadband Services) 541 461 17.3%
----------------------------------------------------------------------
Dial-up Access Service Revenues 606 683 (11.2%)
----------------------------------------------------------------------
Under IIJ Brand 412 457 (9.8%)
----------------------------------------------------------------------
OEM 194 226 (14.1%)
----------------------------------------------------------------------
VAS Revenues 1,906 1,459 30.7%
----------------------------------------------------------------------
Other Revenues 957 930 2.9%
----------------------------------------------------------------------
Total Connectivity and VAS Revenues 6,156 5,767 6.7%
----------------------------------------------------------------------
Cost of Connectivity and VAS 5,254 4,988 5.3%
----------------------------------------------------------------------
Backbone Cost (included in the cost
of Connectivity and VAS) 876 846 3.5%
----------------------------------------------------------------------
Connectivity and VAS Gross Margin Ratio 14.6% 13.5% -
----------------------------------------------------------------------
Systems Integration
Revenue from systems integration was JPY 7,221 million in 2Q06, an
increase of 39.9% compared to 2Q05. The increase was mainly due to an
increase of 21.5% in monthly recurring revenues from outsourced
operations compared to 2Q05 as well as a significant increase of 61.0%
in one-time revenues from the construction of networks compared to
2Q05. The gross margin for systems integration in 2Q06 was JPY 1,610
million and the gross margin ratio in 2Q06 was 22.3%, compared to
24.1% in 2Q05.
Systems Integration Revenue Breakdown and Cost (JPY in millions)
----------------------------------------------------------------------
YoY %
2Q06 2Q05 Change
----------------------------------------------------------------------
Systems Integration Revenues 7,221 5,162 39.9%
----------------------------------------------------------------------
Systems Integration 3,871 2,405 61.0%
----------------------------------------------------------------------
Outsourced Operation 3,350 2,757 21.5%
----------------------------------------------------------------------
Cost of Systems Integration 5,611 3,919 43.2%
----------------------------------------------------------------------
Systems Integration Gross Margin Ratio 22.3% 24.1% -
----------------------------------------------------------------------
Equipment Sales
Revenue from equipment sales was JPY 630 million in 2Q06. The
gross margin ratio for equipment sales in 2Q06 was 7.5%, compared to
3.5% in 2Q05.
Equipment Sales Revenue and Cost (JPY in millions)
----------------------------------------------------------------------
YoY %
2Q06 2Q05 Change
----------------------------------------------------------------------
Equipment Sales Revenues 630 1,000 (37.0%)
----------------------------------------------------------------------
Cost of Equipment Sales 583 966 (39.7%)
----------------------------------------------------------------------
Equipment Sales Gross Margin Ratio 7.5% 3.5% -
----------------------------------------------------------------------
Other Financial Statistics
Other Financial Statistics (JPY in millions)
----------------------------------------------------------------------
YoY %
2Q06 2Q05 change
----------------------------------------------------------------------
Adjusted EBITDA(6) 1,880 1,517 23.9%
----------------------------------------------------------------------
CAPEX, including capital leases(7) 636 795 (20.0%)
----------------------------------------------------------------------
Depreciation and amortization 1,069 1,010 5.8%
----------------------------------------------------------------------
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 1:
Adjusted EBITDA (JPY in millions)
----------------------------------------------------------------------
2Q06 2Q05
----------------------------------------------------------------------
Adjusted EBITDA 1,880 1,517
----------------------------------------------------------------------
Depreciation and Amortization (1,069) (1,010)
----------------------------------------------------------------------
Operating Income 811 507
----------------------------------------------------------------------
Other Income 334 590
----------------------------------------------------------------------
Income Tax Expense (1,109) 44
----------------------------------------------------------------------
Minority Interests in Earnings of Subsidiaries (82) (82)
----------------------------------------------------------------------
Equity in Net Income (Loss) of Equity Method
Investees (52) 30
----------------------------------------------------------------------
Net Income 2,120 1,001
----------------------------------------------------------------------
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)
----------------------------------------------------------------------
2Q06 2Q05
----------------------------------------------------------------------
Capital Expenditures 636 795
----------------------------------------------------------------------
Acquisition of Assets by Entering into
Capital Leases 513 681
----------------------------------------------------------------------
Purchase of Property and Equipment 123 114
----------------------------------------------------------------------
Target
In consideration of recent trends in the Company's financial
results, IIJ revised its targets for FY2006 financial results on
November 2, 2006. For details, please see the press release that IIJ
issued on November 2, 2006. The revised targets are as follows:
(JPY in millions)
----------------------------------------------------------------------
Income from Operations
before Income Tax Expense
Revenues Operating (Benefit), Minority Net Income
Income Interests and Equity in Net
Income (Loss) of Equity
Method Investees
----------------------------------------------------------------------
56,000 3,200 5,000 5,000
----------------------------------------------------------------------
Presentation
On November 10, 2006, 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 Mothers: 3774) is one of Japan's leading
Internet-access and comprehensive network solutions providers. The
company has built one of the largest Internet backbone networks in
Japan, and between Japan and the United States. IIJ and its group of
companies provide total network solutions that mainly cater to
high-end corporate customers. The company's services include
high-quality systems integration and security services, Internet
access, hosting/housing, and content design.
Statements made in this press release regarding IIJ's or
management's intentions, beliefs, expectations, or predictions for the
future are forward-looking statements that are based on IIJ's and
managements' current expectations, assumptions, estimates and
projections about its business and the industry. These forward-looking
statements, such as statements regarding FY2006 revenues and operating
and net profitability, are subject to various risks, uncertainties and
other factors that could cause IIJ's actual results to differ
materially from those contained in any forward-looking statement.
These risks, uncertainties and other factors include: IIJ's ability to
maintain and increase revenues from higher-margin services such as
systems integration and value-added services; the possibility that
revenues from connectivity services may decline substantially as a
result of competition and other factors; the ability to compete in a
rapidly evolving and competitive marketplace; the impact on IIJ's
profits of fluctuations in costs such as backbone costs and
subcontractor costs; the impact on IIJ's profits of fluctuations in
the price of available-for-sale securities; the impact of
technological changes in its industry; IIJ's ability to raise
additional capital to cover its indebtedness; the possibility that
NTT, IIJ's largest shareholder, may decide to exercise substantial
influence over IIJ; and other risks referred to from time to time in
IIJ's filings on Form 20-F of its annual report and other filings with
the United States Securities and Exchange Commission.
(1) Unless otherwise stated, all financial figures discussed in
this announcement are prepared in accordance with U.S. GAAP. All
financial figures are unaudited and consolidated. For all 2Q06
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 117.99 = US$1.00.
(2) This Overview and Business Outlook contains forward-looking
statements and projections such as statements regarding FY2006
revenues and operating and net income that are subject to known and
unknown risks and uncertainties that could cause actual results to
differ materially from those expressed or implied by these statements.
These risks and uncertainties include, but are not limited to, the
factors noted at the end of this release and to the risk factors and
other information included in IIJ's annual report on Form 20-F, filed
with the SEC on July 11, 2006, as well as other filings and documents
furnished to the Securities and Exchange Commission. IIJ plans to keep
this press release publicly available on its Web site (www.iij.ad.jp),
but may discontinue this practice at any time. IIJ intends to publish
its next Overview and Business Outlook in its 3Q06 earnings release,
presently scheduled for release in February 2007.
(3) Including IPv6 Services.
(4) OEM services provided to other service providers.
(5) IP Service revenues includes revenues from Data Center
Connectivity Service.
(6) Please refer to the Reconciliation of Non-GAAP Financial
Measures below.
(7) Please refer to the Reconciliation of Non-GAAP Financial
Measures below.
Appendix 1
Internet Initiative Japan Inc.
----------------------------------------------------------------------
Quarterly Consolidated Balance Sheets (Unaudited)
----------------------------------------------------------------------
(As of September 30, 2006 and March 31, 2006)
----------------------------------------------------------------------
As of September 30, 2006
--------------------------------------- -----------------------------
Thousands
of U.S. Thousands of
Dollars Yen %
--------------------------------------- --------- ------------ ------
ASSETS
CURRENT ASSETS:
Cash 108,990 12,859,745
Accounts receivable, net of allowance
for doubtful accounts of JPY 22,198
thousand and JPY 23,411 thousand at
September 30, 2006 and March 31,
2006, respectively 65,994 7,786,677
Inventories 5,034 593,899
Prepaid expenses 11,268 1,329,486
Other current assets, net of
allowance for doubtful accounts of
JPY 3,850 thousand and JPY 33,250
thousand at September 30, 2006 and
March 31, 2006, respectively 7,411 874,401
--------- ------------
Total current assets 198,697 23,444,208 53.2
INVESTMENTS IN AND ADVANCES TO EQUITY
METHOD INVESTEES, net of loan loss
valuation allowance of JPY 16,701
thousand at September 30, 2006 and
March 31, 2006 8,843 1,043,410 2.4
OTHER INVESTMENTS 52,694 6,217,408 14.1
PROPERTY AND EQUIPMENT-Net 80,484 9,496,329 21.6
INTANGIBLE ASSETS-Net 5,383 635,147 1.4
GUARANTEE DEPOSITS 12,985 1,532,046 3.5
OTHER ASSETS, net of allowance for
doubtful accounts of JPY 65,251
thousand and JPY 40,980 thousand at
September 30, 2006 and March 31, 2006,
respectively 14,144 1,668,884 3.8
--------- ------------
TOTAL 373,230 44,037,432 100.0
--------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings 48,733 5,750,000
Long-term borrowings--current portion 8,988 1,060,476
Payable under securities loan
agreement 4,076 480,960
Capital lease obligations--current
portion 23,739 2,800,937
Accounts payable 43,142 5,090,316
Accrued expenses 5,541 653,789
Other current liabilities 14,579 1,720,181
--------- ------------
Total current liabilities 148,798 17,556,659 39.9
LONG-TERM BORROWINGS - - -
CAPITAL LEASE OBLIGATIONS--Noncurrent 37,053 4,371,896 9.9
ACCRUED RETIREMENT AND PENSION COSTS 2,274 268,292 0.6
OTHER NONCURRENT LIABILITIES 5,671 669,131 1.5
--------- ------------
Total Liabilities 193,796 22,865,978 51.9
--------- ------------
MINORITY INTEREST 11,555 1,363,362 3.1
--------- ------------
COMMITMENTS AND CONTINGENCIES - - -
SHAREHOLDERS' EQUITY:
Common-stock
-authorized, 377,600 shares; issued
and outstanding, 204,300 shares at
September 30, 2006 and March 31,
2006 142,672 16,833,847 38.2
Additional paid-in capital 225,436 26,599,217 60.4
Accumulated deficit (227,363) (26,826,562) (60.9)
Accumulated other comprehensive
income 27,848 3,285,828 7.5
Treasury stock--777 shares held by an
equity method investee at September
30, 2006, and March 31, 2006 (714) (84,238) (0.2)
--------- ------------
Total shareholders' equity 167,879 19,808,092 45.0
--------- ------------
TOTAL 373,230 44,037,432 100.0
--------- ------------
----------------------------------------------------------------------
As of March 31, 2006
------------------------------------------------- --------------------
Thousands of
Yen %
------------------------------------------------- ------------- ------
ASSETS
CURRENT ASSETS:
Cash 13,727,021
Accounts receivable, net of allowance for
doubtful accounts of JPY 22,198 thousand and
JPY 23,411 thousand at September 30, 2006 and
March 31, 2006, respectively 11,962,304
Inventories 851,857
Prepaid expenses 1,031,325
Other current assets, net of allowance for
doubtful accounts of JPY 3,850 thousand and
JPY 33,250 thousand at September 30, 2006 and
March 31, 2006, respectively 214,121
-------------
Total current assets 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 September 30, 2006 and
March 31, 2006 1,162,971 2.3
OTHER INVESTMENTS 8,020,705 15.8
PROPERTY AND EQUIPMENT-Net 10,299,496 20.3
INTANGIBLE ASSETS-Net 632,594 1.2
GUARANTEE DEPOSITS 1,549,653 3.1
OTHER ASSETS, net of allowance for doubtful
accounts of JPY 65,251 thousand and JPY 40,980
thousand at September 30, 2006 and March 31,
2006, respectively 1,252,942 2.5
-------------
TOTAL 50,704,989 100.0
-------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings 4,555,000
Long-term borrowings--current portion 1,989,963
Payable under securities loan agreement 999,600
Capital lease obligations--current portion 3,003,914
Accounts payable 10,107,942
Accrued expenses 540,027
Other current liabilities 1,702,208
-------------
Total current liabilities 22,898,654 45.2
LONG-TERM BORROWINGS 290,000 0.6
CAPITAL LEASE OBLIGATIONS--Noncurrent 4,980,659 9.8
ACCRUED RETIREMENT AND PENSION COSTS 223,332 0.4
OTHER NONCURRENT LIABILITIES 827,086 1.6
-------------
Total Liabilities 29,219,731 57.6
-------------
MINORITY INTEREST 1,263,320 2.5
-------------
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' EQUITY:
Common-stock
-authorized, 377,600 shares; issued and
outstanding, 204,300 shares at September 30,
2006 and March 31, 2006 16,833,847 33.2
Additional paid-in capital 26,599,217 52.5
Accumulated deficit (29,680,482) (58.5)
Accumulated other comprehensive income 6,553,594 12.9
Treasury stock--777 shares held by an equity
method investee at September 30, 2006, and
March 31, 2006 (84,238) (0.2)
-------------
Total shareholders' equity 20,221,938 39.9
-------------
TOTAL 50,704,989 100.0
-------------
----------------------------------------------------------------------
(Note)
The U.S. dollar amounts represent translations of yen amounts at the
rate of JPY 117.99, 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
September 29, 2006.
Appendix 2
Internet Initiative Japan Inc.
----------------------------------------------------------------------
Quarterly Consolidated Statements of Income (Unaudited)
----------------------------------------------------------------------
(For the three months ended September 30, 2006 and September 30, 2005)
----------------------------------------------------------------------
Three Months Ended September Three Months Ended
30, 2006 September 30, 2005
------------------------------- ---------------------
Thousands % of % of
of U.S. Thousands total Thousands total
Dollars of Yen revenues of Yen revenues
---------------- --------- ----------- --------- ----------- ---------
REVENUES:
Connectivity
and value-
added
services:
Dedicated
access 22,771 2,686,745 2,695,325
Dial-up access 5,134 605,809 682,439
Value-added
services 16,153 1,905,901 1,458,557
Other 8,112 957,103 930,205
--------- ----------- -----------
Total 52,170 6,155,558 5,766,526
Systems
integration 61,200 7,220,973 5,161,600
Equipment sales 5,340 630,066 1,000,701
--------- ----------- -----------
Total
revenues 118,710 14,006,597 100.0 11,928,827 100.0
--------- ----------- -----------
COST AND
EXPENSES:
Cost of
connectivity
and value-
added services 44,532 5,254,403 4,987,986
Cost of systems
integration 47,551 5,610,503 3,918,774
Cost of
equipment
sales 4,941 582,998 966,095
--------- ----------- -----------
Total cost 97,024 11,447,904 81.7 9,872,855 82.8
Sales and
marketing 7,143 842,796 6.0 799,562 6.7
General and
administrative 7,306 862,014 6.2 699,166 5.8
Research and
development 360 42,507 0.3 49,947 0.4
--------- ----------- -----------
Total cost
and
expenses 111,833 13,195,221 94.2 11,421,530 95.7
--------- ----------- -----------
OPERATING INCOME 6,877 811,376 5.8 507,297 4.3
--------- ----------- -----------
OTHER INCOME:
Interest income 38 4,432 5,773
Interest
expense (835) (98,498) (106,536)
Foreign
exchange gains (6) (700) (3,067)
Gain on other
investments-
net 3,769 444,650 660,039
Other-net (136) (16,085) 33,408
--------- ----------- -----------
Other
income-net 2,829 333,799 2.4 589,617 4.9
--------- ----------- -----------
INCOME FROM
OPERATIONS
BEFORE INCOME
TAX EXPENSE
(BENEFIT),
MINORITY
INTERESTS AND
EQUITY IN NET
INCOME (LOSS)
OF EQUITY
METHOD
INVESTEES 9,706 1,145,175 8.2 1,096,914 9.2
INCOME TAX
EXPENSE
(BENEFIT) (9,396) (1,108,657) (7.9) 43,900 0.4
MINORITY
INTERESTS IN
EARNINGS OF
SUBSIDIARIES (691) (81,534) (0.6) (81,777) (0.7)
EQUITY IN NET
INCOME (LOSS)
OF EQUITY
METHOD
INVESTEES (441) (52,049) (0.4) 29,403 0.3
--------- ----------- -----------
NET INCOME 17,970 2,120,249 15.1 1,000,640 8.4
----------------------------------------------------------------------
----------------------------------------------------------------------
BASIC WEIGHTED-
AVERAGE NUMBER
OF SHARES 203,989 191,489
DILUTED
WEIGHTED-
AVERAGE NUMBER
OF SHARES 204,104 191,787
BASIC WEIGHTED-
AVERAGE NUMBER
OF ADS
EQUIVALENTS 81,595,702 76,595,702
DILUTED
WEIGHTED-
AVERAGE NUMBER
OF ADS
EQUIVALENTS 81,641,597 76,715,032
BASIC NET INCOME
PER SHARE 88.09 10,394 5,226
DILUTED NET
INCOME PER
SHARE 88.04 10,388 5,217
BASIC NET INCOME
PER ADS
EQUIVALENT 0.22 25.98 13.06
DILUTED NET
INCOME PER ADS
EQUIVALENT 0.22 25.97 13.04
----------------------------------------------------------------------
(Note)
1) The U.S. dollar amounts represent translations of yen amounts at
the rate of JPY 117.99, 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 September 29, 2006.
2) IIJ conducted a 1 for 5 stock split effective on October 11, 2005.
The numbers of shares of common stock authorized, and issued and
outstanding, and shares held by an equity method investee in this
table are calculated with the assumption that the stock split was
made at the beginning of FY2005. IIJ issued 12,500 new shares of
common stock for public offering when it listed on the Mothers market
of TSE in December 2005.
Appendix 3
Internet Initiative Japan Inc.
----------------------------------------------------------------------
Quarterly Condensed Consolidated Statements of Cash Flows (Unaudited)
----------------------------------------------------------------------
(For the three months ended September 30, 2006 and September 30, 2005)
----------------------------------------------------------------------
Three
Months
Ended
Three Months Ended September
September 30, 2006 30, 2005
--------------------- -----------
Thousands
of U.S. Thousands Thousands
Dollars of Yen of Yen
------------------------------------ --------- ----------- -----------
OPERATING ACTIVITIES:
Net income 17,970 2,120,249 1,000,640
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 9,060 1,068,970 1,010,139
Reversal of doubtful accounts and
advances (67) (7,859) (1,673)
Gains on other investments-net (3,769) (444,650) (660,039)
Foreign exchange gains (48) (5,670) (4,131)
Equity in net loss (income) of
equity method investees 441 52,049 (29,403)
Minority interests in earnings of
subsidiaries 691 81,534 81,777
Deferred income tax benefit (10,731) (1,266,200) (10,681)
Others 466 54,939 (5,856)
Changes in operating assets and
liabilities:
Increase in accounts receivable (14,063) (1,659,286) (796,785)
Decrease in inventories, prepaid
expenses and other current and
noncurrent assets 6,172 728,292 119,783
Increase in accounts payable 9,421 1,111,574 1,272,038
Decrease in accrued expenses,
other current and noncurrent
liabilities (1,917) (226,196) (6,362)
------------------------------------ --------- ----------- -----------
Net cash provided by operating
activities 13,626 1,607,746 1,969,447
------------------------------------ --------- ----------- -----------
INVESTING ACTIVITIES:
Purchase of property and equipment (1,048) (123,604) (114,208)
Purchase of other investments (11,712) (1,381,951) (844)
Purchase of subsidiary stock from
minority shareholders - - (192,142)
Proceeds from sales and redemption
of short-term and other
investments 5,385 635,427 981,420
Acquisition of a newly controlled
company, net of cash acquired - - 229,457
Refund (payment) of guarantee
deposits-net 180 21,205 (7,256)
Other (51) (6,068) (7,655)
------------------------------------ --------- ----------- -----------
Net cash provided by (used in)
investing activities (7,246) (854,991) 888,772
------------------------------------ --------- ----------- -----------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term
borrowings - - 1,000,000
Repayments of long-term borrowings (4,745) (559,866) (1,458,892)
Proceeds from securities loan
agreement 4,076 480,960 1,734,800
Repayments of securities loan
agreement (4,204) (496,080) (1,746,800)
Principal payments under capital
leases (6,845) (807,669) (748,762)
Net increase in short-term
borrowings 3,390 400,000 198,790
------------------------------------ --------- ----------- -----------
Net cash used in financing
activities (8,328) (982,655) (1,020,864)
------------------------------------ --------- ----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON
CASH (12) (1,375) 9,753
NET INCREASE (DECREASE) IN CASH (1,960) (231,275) 1,847,108
CASH, BEGINNING OF EACH PERIOD 110,950 13,091,020 5,106,388
------------------------------------ --------- ----------- -----------
CASH, END OF EACH PERIOD 108,990 12,859,745 6,953,496
------------------------------------ --------- ----------- -----------
(Note)
The U.S. dollar amounts represent translations of yen amounts at the
rate of JPY 117.99, 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
September 29, 2006.
Note: The following information is to disclose IIJ's financial
results for the interim period ended September 30, 2006 in the form
defined by the Tokyo Stock Exchange.
Consolidated Financial Results for the Interim Period Ended
September 30, 2006
(Under accounting principles generally accepted in the United States
("U.S. GAAP"))
November 9, 2006
Company name: Internet Initiative Japan Inc.
Exchange listed: Tokyo Stock Exchange Mothers
Stock code number: 3774
Location of headquarters: Tokyo
(URL: http://www.iij.ad.jp)
Representative: Koichi Suzuki, President and Representative Director
Contact: Akihisa Watai, Director and CFO TEL: (03) 5259-6500
Name of the parent and other companies:
Nippon Telegraph and Telephone Corporation ("NTT")
(stock code number: 9432)*
Percentage ownership by the parent and other companies: 29.7%
Adoption of U.S. GAAP: Yes
* Shown as a company in whose affiliates IIJ is included in accordance
with the disclosure rules of the Tokyo Stock Exchange
1. Consolidated Financial Results for the Interim Period Ended
September 30, 2006
(April 1, 2006 to September 30, 2006)
(1) Consolidated Results of Operations
(Amounts less than one million yen are rounded)
----------------------------------------------------------------------
Income before
income tax
expense
Total revenues Operating income (benefit)
----------------------------------------------------------------------
Millions of Millions of Millions of
Yen % Yen % Yen %
Interim period ended
September 30, 2006 26,444 21.3 1,370 81.8 2,144 20.5
Interim period ended
September 30, 2005 21,809 13.7 754 315.0 1,779 -
----------------------------------------------------------------------
Fiscal year ended
March 31, 2006 49,813 2,411 5,379
----------------------------------------------------------------------
Diluted net
Basic net income income per
Net income per share share
----------------------------------------------------------------------
Millions of
Yen % Yen Yen
Interim period ended
September 30, 2006 2,854 75.8 13,991 13,978
Interim period ended
September 30, 2005 1,623 - 8,476 8,469
----------------------------------------------------------------------
Fiscal year ended
March 31, 2006 4,754 24,301 24,258
----------------------------------------------------------------------
(Notes)
1) Equity in net income (loss) of equity method investees was
equity in net loss of JPY 125 million, equity in net income of JPY 32
million and equity in net loss of JPY 14 million for the interim
period ended September 30, 2006, the interim period ended September
30, 2005 and the fiscal year ended March 31, 2006, respectively.
2) The weighted-average number of shares of common stock
outstanding on a consolidated basis was 203,989, 191,518, and 195,613
for the interim period ended September 30, 2006, the interim period
ended September 30, 2005 and the fiscal year ended March 31, 2006,
respectively.
IIJ conducted a 1 for 5 stock split effective on October 11, 2005.
The weighted-average number of shares of common stock outstanding for
the interim period ended September 30, 2005 is calculated with the
assumption that the stock split was made at the beginning of the
fiscal year ended March 31, 2006.
3) There is no change in accounting method from the most recent
fiscal year.
4) 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.
5) The percentage figures for the total revenues, operating income
and others show an increase or decrease compared to each year's
previous fiscal year. IIJ does not show the percentage figure for
income before income tax expense (benefit) and net income for the
interim period ended September 2005, because the amount for income
before income tax expense (benefit) exceeded 1,000% and IIJ recorded a
net loss for the interim period ended September 2004.
(2) Consolidated Financial Position
(Amounts less than one million yen are rounded)
----------------------------------------------------------------------
Shareholders'
equity as a
Share- percentage Shareholders'
Total holders' of total equity per
assets equity assets share
----------------------------------------------------------------------
Millions Millions Yen
of Yen of Yen %
Interim period ended
September 30, 2006 44,037 19,808 45.0 97,104
Interim period ended
September 30, 2005 36,121 11,380 31.5 59,430
----------------------------------------------------------------------
Fiscal year ended March 31,
2006 50,705 20,222 39.9 99,132
----------------------------------------------------------------------
(Note)
The number of shares of common stock outstanding on consolidated
basis was 203,989, 191,489 and 203,989 for the interim period ended
September 30, 2006, the interim period ended September 30, 2005 and
the fiscal year ended March 31, 2006, respectively.
(3) Consolidated Cash Flows
(Amounts less than one million yen are rounded)
----------------------------------------------------------------------
Net cash
Net cash provided
provided by (used Net cash Cash and cash
by in) used in equivalents,
operating investing financing end of
activities activities activities period
----------------------------------------------------------------------
Millions ofMillions ofMillions ofMillions of
Yen Yen Yen Yen
Interim period ended
September 30, 2006 2,512 (1,122) (2,251) 12,860
Interim period ended
September 30, 2005 2,997 846 (2,197) 6,953
----------------------------------------------------------------------
Fiscal year ended March
31, 2006 6,559 1,805 39 13,727
----------------------------------------------------------------------
(4) Items regarding the Scope of Consolidation and Adoption of
Equity Method
We had 5 consolidated subsidiaries, no non-consolidated equity
method subsidiaries and 4 equity method affiliates.
(5) Changes in the Scope of Consolidation and Adoption of Equity
Method
We added 1 new consolidated subsidiary.
2. Targets for Financial Results for the Fiscal Year Ending March 31,
2007
(From April 1, 2006 to March 31, 2007)
(Amounts less than one million yen are rounded)
----------------------------------------------------------------------
Income before
income tax
Operating expense
Total revenues income (benefit) Net income
----------------------------------------------------------------------
Millions of Millions of Millions of Millions of
Yen Yen Yen Yen
Fiscal year
ending March
31, 2007 56,000 3,200 5,000 5,000
----------------------------------------------------------------------
(Reference) Net income per share for the fiscal year ending March
31, 2007, based on the target above is JPY 24,511.
(Note)
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
management's current expectations, assumptions, estimates and
projections about IIJ's business and the industry. These
forward-looking statements, such as statements regarding revenues and
operating and net profitability above, 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. Current Status of IIJ Group
(1) Overview of the IIJ Group
IIJ, which has five consolidated subsidiaries and four equity method
investees as of the date of the announcement of this document, 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 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 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 Technology Inc. ("IIJ-Tech") IIJ-Tech mainly provides systems design, consultation,
development, construction, operation and maintenance, and
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 Financial Systems, Inc. ("IIJ-FS") IIJ-FS mainly provides the development, operation and
maintenance of systems for financial institutions.
IIJ-FS provides services classified into SI in IIJ's consolidated
financial statements.
------------------------------------------------------ -------------------------------------------------------------
Net Care, Inc. ("Net Care") Net Care mainly provides the monitoring and operation of
networks and outsourced customer support and call centers.
Net Care provides services classified into connectivity and VAS and
SI in IIJ's consolidated financial statements.
------------------------------------------------------ -------------------------------------------------------------
IIJ America Inc. ("IIJ America") IIJ America mainly provides Internet connectivity services
in the United States and constructs and operates an
Internet 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.
------------------------------------------------------ -------------------------------------------------------------
Net Chart Japan Inc. ("Net Chart") Net Chart mainly provides network construction that is
mainly related to Local Area Networks, such as installation
and configuration of equipment, wirings following network
installation, and installation and operational support for
applications. Net Chart provides services mainly classified
into SI in IIJ's consolidated financial statements.
------------------------------------------------------ -------------------------------------------------------------
Four equity method affiliates
------------------------------------------------------ -------------------------------------------------------------
Internet Multifeed Co. ("Multifeed") Multifeed was established as a joint venture with NTT Group
and mainly operates Internet exchange, distributes high-volume
Internet content, and provides housing services.
------------------------------------------------------ -------------------------------------------------------------
atom Co., Ltd ("atom") atom mainly provides content design and production.
------------------------------------------------------ -------------------------------------------------------------
i-Heart Inc. ("i-Heart") i-Heart was established as a joint venture with Samsung
Corporation in South Korea and provides data center
services in South Korea.
------------------------------------------------------ -------------------------------------------------------------
Internet Revolution Inc. ("i-revo") i-revo was established as a joint venture with Konami
Corporation and mainly operates Internet portals.
------------------------------------------------------ -------------------------------------------------------------
(Note)
IIJ established Net Chart as its fully-owned subsidiary in August 2006. Net
Chart commenced its business operations after it succeeded the business
operations of Net Chart Japan Corporation in October 2006.
In addition to the above, NTT is IIJ's other related company as defined in
the disclosure rules of the Tokyo Stock Exchange, since IIJ is NTT's affiliate.
(2) Business Diagram
The overview of IIJ Group's business can be illustrated as follows:
-----------------------------------------------------------------------------------------------------------
| ----------------------------------------------------------------------------------------------------- |
| | 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 | . . | | |
| | | . . | Outsourcing | |
| | ----------------------- | . ......................-------------------------- | |
| | | IIJ-FS | | . | | atom | | |
| | | | <------------------| . |----------------> | | | |
| | ----------------------- Selling services | . | Selling services -------------------------- | |
| | | . | Outsourcing | |
| | Outsourcing | . . | | |
| | ----------------------- ....................... | | |
| | | Net Care | | . | | |
| | | | <------------------| . | ------------------------- | |
| | ----------------------- Selling services | . | | i-revo | | |
| | Outsourcing | . | ---------------> | | | |
| | | . | Selling services ------------------------- | |
| | Selling services | . | Outsourcing | |
| | Outsourcing | . | | |
| | ----------------------- ....................... | | |
| | | IIJ America | | . | | |
| | | | <------------------| . | ------------------------- | |
| | ----------------------- Selling services | . | | i-Heart | | |
| | | . | ---------------> | | | |
| | | . Advance ------------------------- | |
| | Purchase | . | |
| | Outsourcing | . | |
| | ----------------------- ....................... | |
| | | Net Chart | | | |
| | | | <------------------| | |
| | ----------------------- 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. |
-----------------------------------------------------------------------------------------------------------
2. Management Policy
(1) Basic Management Policy
IIJ's basic management policy is to lead the development of the information
society in Japan based on Internet technologies and contribute to the creation
of new markets and the development of industries. IIJ intends to fulfill its
social responsibility as a company by realizing this policy and by continuously
increasing its value.
(2) Basic Policy on the Distribution of Profits
While it regards the payment of dividends to shareholders as an important
management issue, IIJ did not pay dividends for the fiscal year ended March 31,
2006, since it recorded an accumulated deficit in its non-consolidated financial
statements for the fiscal year ended March 31, 2006. IIJ proposed the reductions
of additional paid-in capital and common stock in its non-consolidated financial
statements to the general shareholders' meeting held in June 2006 and the
reductions were approved. As a result, IIJ's accumulated deficit in its
non-consolidated financial statements was eliminated effective August 4, 2006.
IIJ expects to have retained earnings in its non-consolidated financial
statements for the fiscal year ending March 31, 2007. While it intends to pay
dividends to shareholders stably and continuously, IIJ has not decided if it
will pay dividends or has not decided about the level of payment of dividends
for the fiscal year ending March 31, 2007 at this moment, since a large portion
of net income is raised from gain from sale of available-for-sale securities and
it pays little tax due to tax operating loss carryforwards.
(3) Policies regarding the Reduction in the Size of the Investment Unit
IIJ believes that reducing the size of the investment unit is one of the
effective ways to expand its investor base and increase the liquidity of its
shares. IIJ intends to take it into account in the future, by closely watching
the level of the stock price, the number of shareholders, the effectiveness of
expenditures and the stock market environment and other items in general.
(4) Business Indicators as Targets
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.
(5) Medium and Long-term Business Strategies
The IIJ Group expects that the requirements by its customers for usage of
network systems will become more advanced and diversified, as broadband expands
in Japan and usage of Internet by corporate customers and public organizations
increases. The IIJ Group speculates that demands for reliable network systems
and outsourcing of network systems by corporate customers and public
organizations that are its main customers will continue to increase, and the IIJ
Group regards the current market trend as an opportunity for our growth. On the
other hand, the IIJ Group expects that competition in the fields of Internet
connectivity and value-added services and systems integration will become more
intense. Although price competition is high for Internet connectivity services,
the IIJ Group recognizes that it is possible for it to differentiate itself from
other companies by providing connectivity services along with value-added
services and systems integration. The IIJ Group believes it to be important for
its business development to actively promote research and development on new
technologies related to Internet and continuously provide total solutions that
are reliable, highly value-added and competitive.
(6) Issues that IIJ should Address
Although the environment surrounding the IIJ Group is becoming more favorable
and its results of operations are improving, it is important for the IIJ Group
to recognize the expansion of network usage by enterprises and public
organizations as a market opportunity, continue to provide reliable and
competitive services and enhance the business structure of IIJ and the IIJ
Group. In the fiscal year ending 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 41 recent graduates (including 29 new graduates recruited by IIJ)
during the fiscal year ended March 31, 2006. 82 recent graduates joined the IIJ
Group in April 2006 (including 49 new graduates recruited by IIJ).
(7) Items regarding the Parent and Other Companies
a. Trade Name of the Parent and Other Companies (as of September 30, 2006)
----------------------- ------------------------------ -------------------- ----------------------------------------
Parent and Other Type Its Ownership Securities Exchanges where its Shares
Company Percentage (%) are Listed
----------------------- ------------------------------ -------------------- ----------------------------------------
Tokyo Stock Exchange, Inc. (First
Section)
Osaka Securities Exchange, Co., Ltd.
Other related company (First Section)
Nippon Telegraph and defined in the disclosure 29.70 Nagoya Stock Exchange, Inc. (First
Telephone Corporation rules of the Tokyo Stock (4.99) Section)
Exchange (IIJ is NTT's Fukuoka Stock Exchange
affiliate) Sapporo Stock Exchange
New York Stock Exchange, Inc.
London Stock Exchange plc.
----------------------- ------------------------------ -------------------- ----------------------------------------
(Note) The percentage in parentheses is the indirect ownership by NTT included
in the figure above.
b. Position of the Listed Company (IIJ) in the Group of the Parent Company and
other Companies
The ownership percentage by NTT, which is IIJ's largest shareholder, was
29.7% as of September 30, 2006, 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.
IIJ entered into a subscription agreement with NTT in which IIJ granted to
NTT pre-emptive rights to subscribe to its pro rata portion of any future
issuances of shares by IIJ upon its completion of its private placement to NTT
in 2003. NTT did not exercise the rights upon IIJ's issuance of new shares of
common stock for public offering when it listed on the Mothers market of the
Tokyo Stock Exchange in December 2005.
c. Personal Relationships with the Parent Company and other Companies and their
Group Companies
IIJ's board of directors consists of 13 members including 4 outside
directors. Within the directors, Takashi Hiroi is an employee of NTT.
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.
Toshiya Asaba, a director and an executive vice president of IIJ, is a
director (part-time director) of NTT Resonant Inc., NTT's subsidiary. However,
he does not have any personal relationships, such as family relationships, with
the other directors and auditors of NTT and NTT Resonant Inc. He did not acquire
any interest such as capital or business relationships upon becoming an outside
director.
d. Business Relationship with NTT Group
IIJ uses services provided by NTT East and NTT West for a significant portion
of its access circuits, and services provided by NTT Communications for a
significant portion of its domestic and international backbones. The amount paid
to NTT East and West, and NTT Communications for their telecommunication
circuits was JPY 431,304 thousand and JPY 2,359,319 thousand, respectively for
the interim period ended September 30, 2006.
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.
(8) Transactions with Special Interest Groups
IIJ provides Internet connectivity services to Applied Research Institute,
Inc., which is wholly owned by Koichi Suzuki, President and Representative
Director of IIJ. The transaction amount for the services was JPY 351 thousand
for the interim period ended September 30, 2006, and the transaction is within
the scope of normal business practices.
3. Results of Operations and Financial Conditions
(1) Consolidated Results of Operations in the Interim Period Ended
September 30, 2006 (from April 1, 2006 to September 30, 2006)
a. Overview of Financial Results
For the interim period ended September 30, 2006, the business environment
surrounding IIJ continued to be very favorable. Corporate customers shifted to
higher speed services for Internet connectivity services as they increase usage
of networks, the demands for outsourcing services increased due to an increase
of security incidents and an overall shortage of Internet related engineers, and
the construction of corporate information network systems utilizing Internet
technologies increased. As a result, the revenues and profits increased compared
to the interim period ended September 30, 2005.
For Internet connectivity services, revenues turned to increase quarter over
quarter basis, as the shift of customers to lower-priced services caused by the
expansion of broadband services has almost finished, customers shifted to higher
speed services for IP Service, which is mainly used for Internet connections for
corporate headquarters and data centers, and the contracts for broadband
services, which are used for the connection between corporate branch offices and
shops increased.
For value-added services ("VAS"), revenues increased overall, such as e-mail
related services which provide comprehensive functions of deletion of computer
viruses, isolation of spam, recording of incoming and outgoing e-mails and
others, security-related services, Internet VPN related services and data center
services.
For systems integration ("SI"), revenues increased due to an increase in
revenues from the construction of corporate information network systems
utilizing Internet technology, construction of systems for the expansion of
businesses over the Internet by customers and enhancement of existing systems
and others.
In the interim period ended September 30, 2006, the IIJ Group continued its
efforts to capture the increase in demand mentioned above mainly by enhancing
line-ups of VAS. The IIJ Group began to provide "IIJ Managed VPN PRO", "IIJ
Secure MX Service", "IIJ Managed Firewall Service", "IIJ Document Exchange
Service" and "iiMail" and others.
As a result, for the IIJ Group's consolidated results of operation for the
interim period ended September 30, 2006, total revenues amounted to JPY 26,444
million, an increase of 21.3% compared to the interim period ended September 30,
2005, operating income amounted to JPY 1,370 million, an increase of 81.8%
compared to the interim period ended September 30, 2005, income before income
tax expense (benefit) amounted to JPY 2,144 million, an increase of 20.5%
compared to the interim period ended September 30, 2005 and net income amounted
to JPY 2,854 million, an increase of 75.8% compared to the interim period ended
September 30, 2005.
b. Analysis of the Results of Operations
1) Revenues
Revenues for the interim period ended September 30, 2006 totaled JPY 26,444
million, an increase of 21.3% compared to the interim period ended September 30,
2005.
--------------------------------------------------------------------------------------------------------------------
Interim period ended Interim period ended
September 30, 2005 September 30, 2006
(From April 1, 2005 to (From April 1, 2006 to YoY %
September 30, 2005) September 30, 2006) Change
--------------------------------------------------------------------------------------------------------------------
Millions of Yen Millions of Yen %
Connectivity and VAS 11,533 12,019 4.2
--------------------------------------------------------------------------------------------------------------------
SI 9,002 13,253 47.2
--------------------------------------------------------------------------------------------------------------------
Equipment Sales 1,274 1,172 (8.0)
--------------------------------------------------------------------------------------------------------------------
Total Revenues 21,809 26,444 21.3
--------------------------------------------------------------------------------------------------------------------
Connectivity and VAS revenues were JPY 12,019 million for the interim period
ended September 30, 2006, an increase of 4.2% compared to the interim period
ended September 30, 2005. The increase is mainly due to an increase in revenues
from VAS, which was affected by an increase in demand for outsourcing services.
SI revenues increased by 47.2% from the interim period ended September 30,
2005 to JPY 13,253 million for the interim period ended September 30, 2006. The
increase was mainly due to a significant increase in one-time revenues from
network design, construction and consultation and a continuously steady increase
in monthly recurring revenues from network systems operation and maintenance.
Equipment sales revenues were JPY 1,172 million for the interim period ended
September 30, 2006, a decrease of 8.0% compared to the interim period ended
September 30, 2005.
2) Cost of Revenues
The cost of revenues was JPY 21,582 million for the interim period ended
September 30, 2006, an increase of 20.0% compared to the interim period ended
September 30, 2005.
--------------------------------------------------------------------------------------------------------------------
Interim period ended Interim period ended
September 30, 2005 September 30, 2006
(From April 1, 2005 to (From April 1, 2006 to YoY %
September 30, 2005) September 30, 2006) Change
--------------------------------------------------------------------------------------------------------------------
Millions of Yen Millions of Yen %
Connectivity and VAS 9,952 10,324 3.7
--------------------------------------------------------------------------------------------------------------------
SI 6,829 10,192 49.2
--------------------------------------------------------------------------------------------------------------------
Equipment Sales 1,210 1,066 (11.9)
--------------------------------------------------------------------------------------------------------------------
Total Cost of Revenues 17,991 21,582 20.0
--------------------------------------------------------------------------------------------------------------------
The cost of connectivity and VAS revenues was JPY 10,324 million for the
interim period ended September 30, 2006, an increase of 3.7% compared to the
interim period ended September 30, 2005.
The cost of SI revenues increased by 49.2% to JPY 10,192 million for the
interim period ended September 30, 2006 from the interim period ended September
30, 2005, mainly due to an increase in revenues from SI.
The cost of equipment sales revenues was JPY 1,066 million for the interim
period ended September 30, 2006, a decrease of 11.9% compared to the interim
period ended September 30, 2005.
3) Sales and Marketing Expenses
Sales and marketing expenses were JPY 1,633 million for the interim period
ended September 30, 2006, an increase of 4.2% compared to the interim period
ended September 30, 2005. The increase was mainly due to an increase in
personnel expenses and advertising expenses.
4) General and Administrative Expenses
General and administrative expenses were JPY 1,777 million for the interim
period ended September 30, 2006, an increase of 25.7% compared to the interim
period ended September 30, 2005. The increase was mainly due to increases in
personnel expenses.
5) Operating Income
Operating income was JPY 1,370 million for the interim period ended September
30, 2006, an increase of 81.8% compared to the interim period ended September
30, 2005. The increase was mainly due to the increase in gross margin, which was
caused by the increase in revenues from VAS and SI.
6) Other Income and Others
Other income for the interim period ended September 30, 2006 was JPY 774
million, a decrease of 24.5% compared to the interim period ended September 30,
2005. The gain from the sale of available-for-sale securities for the interim
period ended September 30, 2006 was JPY 923 million, a decrease of 19.7%
compared to the interim period ended September 30, 2005.
The income tax benefit for the interim period ended September 30, 2006 was
JPY 960 million. Deferred tax benefits of JPY 1,245 million were recorded
resulting from a release of valuation allowance against deferred income tax
assets related to tax operating loss carryforwards and others. Minority
interests in earnings of subsidiaries was JPY 125 million. Equity in net loss of
equity method investees was JPY 125 million.
7) Net Income
Net income for the interim period ended September 30, 2006 was JPY 2,854
million, an increase of 75.8% compared to the interim period ended September 30,
2005.
c. Analysis by Service
1) Connectivity and VAS
For dedicated access services, customers shifted to higher speed services for
IP service, which are mainly used for Internet connection for corporate
headquarters and data centers and the number of contracts for broadband
services, which are used for the connection of corporate operational sites
increased. However, revenues from dedicated access service revenues were JPY
5,303 million for the interim period ended September 30, 2006, a decrease of
2.6% compared to the interim period ended September 30, 2005. The decrease is
mainly due to a decrease of revenues of JPY 468 million from the interconnection
of IIJ's network with AIH, IIJ's former equity method investee, which was caused
by the merger of AIH into IIJ.
Dial-up access service revenues were JPY 1,213 million for the interim period
ended September 30, 2006, a decrease of 12.2% compared to the interim period
ended September 30, 2005. The decrease is mainly due to the discontinuance of
services of certain large customer to which IIJ provided its services as OEM and
the decrease in revenues from services fro individual customers, such as IIJ4U.
VAS revenues were JPY 3,647 million for the interim period ended September
30, 2006, an increase of 28.1% compared to the interim period ended September,
2005. The increase was mainly due to an increase in revenues from various types
of services, such as e-mail, security and Internet VPN related services and data
center services.
Other revenues were JPY 1,857 million for the interim period ended September
30, 2006, a decrease of 0.3% compared to the interim period ended September 30,
2005.
As a result, revenues from connectivity and VAS for the interim period ended
September 30, 2006 were JPY 12,019 million, an increase of 4.2% compared to the
interim period ended September 30, 2005. The gross margin for connectivity and
VAS was JPY 1,695 million for the interim period ended September 30, 2006, an
increase of 7.2% compared to the interim period ended September 30, 2005. The
gross margin ratio for connectivity and VAS was 14.1% for the interim period
ended September 30, 2006.
(Connectivity and VAS Revenues, Cost of Revenues and Gross Margin Ratio)
--------------------------------------------------------------------------------------------------------------------
Interim period ended Interim period ended
September 30, 2005 September 30, 2006
(From April 1, 2005 to (From April 1, 2006 to YoY %
September 30, 2005) September 30, 2006) Change
--------------------------------------------------------------------------------------------------------------------
Millions of Yen Millions of Yen %
Connectivity and VAS Revenues 11,533 12,019 4.2
--------------------------------------------------------------------------------------------------------------------
Dedicated Access Service Revenues 5,442 5,303 (2.6)
--------------------------------------------------------------------------------------------------------------------
Dial-up Access Service Revenues 1,381 1,213 (12.2)
--------------------------------------------------------------------------------------------------------------------
VAS Revenues 2,846 3,647 28.1
--------------------------------------------------------------------------------------------------------------------
Other Revenues 1,863 1,857 (0.3)
--------------------------------------------------------------------------------------------------------------------
Cost of Connectivity and VAS 9,952 10,324 3.7
--------------------------------------------------------------------------------------------------------------------
Backbone Cost (included in the cost
of Connectivity and VAS) 1,710 1,747 2.2
--------------------------------------------------------------------------------------------------------------------
Connectivity and VAS Gross Margin Ratio 13.7% 14.1% -
--------------------------------------------------------------------------------------------------------------------
2) SI
Revenue from SI was JPY 13,253 million for the interim period ended September
30, 2006, an increase of 47.2% compared to the interim period ended September
30, 2005. The increase was mainly due to a significant increase of 84.8% in
one-time revenues from the construction of networks compared to the interim
period ended September 30, 2005 and an continuous increase of 22.2% in monthly
recurring revenues from outsourced operations compared to the interim period
ended September 30, 2005. The gross margin from SI was JPY 3,061 million and the
gross margin ratio for SI was 23.1% for the interim period ended September 30,
2006.
(SI Revenues, Cost of Revenues and Gross Margin Ratio)
--------------------------------------------------------------------------------------------------------------------
Interim period ended Interim period ended
September 30, 2005 September 30, 2006
(From April 1, 2005 to (From April 1, 2006 to YoY %
September 30, 2005) September 30, 2006) Change
--------------------------------------------------------------------------------------------------------------------
Millions of Yen Millions of Yen %
SI Revenues 9,002 13,253 47.2
--------------------------------------------------------------------------------------------------------------------
Systems Integration 3,598 6,649 84.8
--------------------------------------------------------------------------------------------------------------------
Outsourced Operation 5,404 6,604 22.2
--------------------------------------------------------------------------------------------------------------------
Cost of SI 6,829 10,192 49.2
--------------------------------------------------------------------------------------------------------------------
SI Gross Margin Ratio 24.1% 23.1% -
--------------------------------------------------------------------------------------------------------------------
3) Equipment sales
Revenue from equipment sales was JPY 1,172 million for the interim period
ended September 30, 2006. The gross margin for the equipment sales for the
interim period ended September 30, 2006 was JPY 106 million, and the gross
margin ratio was 9.0%, having improved from the interim period ended September
30, 2005.
(Equipment Sales Revenue and Cost)
--------------------------------------------------------------------------------------------------------------------
Interim period ended Interim period ended
September 30, 2005 September 30, 2006
(From April 1, 2005 to (From April 1, 2006 to YoY %
September 30, 2005) September 30, 2006) Change
--------------------------------------------------------------------------------------------------------------------
Millions of Yen Millions of Yen %
Equipment Sales Revenues 1,274 1,172 (8.0)
--------------------------------------------------------------------------------------------------------------------
Cost of Equipment Sales 1,210 1,066 (11.9)
--------------------------------------------------------------------------------------------------------------------
Equipment Sales Gross Margin Ratio 5.1% 9.0% -
--------------------------------------------------------------------------------------------------------------------
(2) Consolidated Financial Position
Cash at the end of the interim period ended September 30, 2006 was JPY 12,860
million (JPY 6,953 million at the end of the interim period ended September 30,
2005).
(Net cash provided by operating activities)
Net cash provided by operating activities was JPY 2,512 million for the
interim period ended September 30, 2006 (net cash provided by operating
activities was JPY 2,997 million for the interim period ended September 30,
2005). Net cash provided by operating activities mainly consisted of an increase
in operating income mainly due to an increase in VAS and SI, a decrease in
deferred income tax expense, an increase and a decrease in accounts receivable
and accounts payable.
(Net cash used in investing activities)
Net cash used in investing activities was JPY 1,122 million for the interim
period ended September 30, 2006 (net cash provided by investing activities was
JPY 846 million for the interim period ended September 30, 2005). Net cash used
in investing activities mainly consisted of proceeds of JPY 1,118 million from
gain from sale of short-term and other investments and purchase of short-term
and other investments of JPY 1,661 million.
(Net cash used in financing activities)
Net cash used in financing activities was JPY 2,251 million for the interim
period ended September 30, 2006 (net cash used in financing activities was JPY
2,197 million for the interim period ended September 30, 2005). Net cash used in
financing activities included proceeds from issuance of short-term borrowings of
JPY 1,195 million and proceeds from securities loan agreement of JPY 977
million. Net cash used in financing activities also included principal payments
under capital leases of JPY 1,708 million, repayments of securities loan
agreement of JPY 1,496 million and repayments of long-term borrowings of JPY
1,219 million.
(3) Targets for the Fiscal Year Ending March 31, 2007
On November 2, 2006, IIJ announced that it revised its financial targets for
the fiscal year ending March 31, 2007 in consideration of recent trends of its
financial results. The revised target is JPY 56,000 million for total revenues
(an increase of 12.4% compared to the fiscal year ended March 31, 2006), JPY
3,200 million for operating income (an increase of 32.7% compared to the fiscal
year ended March 31, 2006), JPY 5,000 million for income before income tax
expense (benefit) (a decrease of 7.0% compared to the fiscal year ended March
31, 2006) and JPY 5,000 million for net income (an increase of 5.2% compared to
the fiscal year ended March 31, 2006). The original target that IIJ announced on
May 10, 2006 was JPY 55,000 million for total revenues (an increase of 10.4 %
compared to the fiscal year ended March 31, 2006), JPY 3,200 million for
operating income (an increase of 32.7 % compared to the fiscal year ended March
31, 2006), JPY 6,300 million for income before income tax expense (benefit) (an
increase of 17.1% compared to the fiscal year ended March 31, 2006) and JPY
5,000 million for net income (an increase of 5.2% compared to the fiscal year
ended March 31, 2006). For details, please see the press release that IIJ made
on November 2, 2006.
Statements made in this press release regarding IIJ's or management's
intentions, beliefs, expectations, or predictions for the future are
forward-looking statements that are based on IIJ's and managements' current
expectations, assumptions, estimates and projections about its business and the
industry. These forward-looking statements, such as statements regarding
revenues and operating and net profitability in the fiscal year ending March 31,
2007, are subject to various risks, uncertainties and other factors that could
cause IIJ's actual results to differ materially from those contained in any
forward-looking statement. These risks, uncertainties and other factors include:
IIJ's ability to maintain and increase revenues from higher margin services such
as system integration and value-added services; the possibility that revenues
from connectivity services may decline substantially as a result of competition
and other factors; the ability to compete in a rapidly evolving and competitive
marketplace; the impact on IIJ's profits of fluctuations in costs such as
backbone costs and subcontractor costs; the impact on IIJ's profits of
fluctuations in the price of available-for-sale securities; the impact of
technological changes in its industry; IIJ's ability to raise additional capital
to cover its indebtedness; the possibility that NTT, IIJ's largest shareholder,
may decide to exercise substantial influence over IIJ; and other risks referred
to from time to time in IIJ's annual report on Form 20-F and other filings with
the United States Securities and Exchange Commission.
(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 a change in business environment of countries abroad
where the IIJ Group is conducting businesses and requirement of management
attention and financial resources
- 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 from the IIJ Group's results of operations and financial position
being affected by the IIJ Group's failure to lease backbone circuits
properly
- Risk from the IIJ Group's results of operations and financial position
being affected by the IIJ Group's failure to manage outsourcing costs, such
as failure to control the period or amount of contracts properly.
- 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 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 associated with regulatory matters and new legislation related to the
telecommunications law, and legal regulations of the Internet
- Risk of the IIJ Group's violation of intellectual property rights of other
parties
For details of risk regarding IIJ Group's business, please refer to a
Yuka-shoken-hokokusho, an annual report submitted to the regulatory public
organization in Japan in accordance with the laws and regulations in Japan, an
annual report on Form 20-F submitted to United States Securities and Exchange
Commission and others.
4. Consolidated Financial Statements
(Unaudited)
(From April 1, 2006 through September 30, 2006)
(1) Consolidated Balance Sheets
----------------------------------------------------------------------
As of September 30, 2006 As of September
30, 2005
----------------------------------------------------------------------
ThousandsThousands of Thousands of
of U.S. Yen Yen
Dollars % %
----------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash 108,990 12,859,745 6,953,496
Accounts receivable,
net of allowance for
doubtful accounts of
JPY 22,198 thousand,
and JPY 33,537
thousand and JPY
23,411 thousand at
September 30, 2006,
September 30, 2005
and March 31, 2006,
respectively 65,994 7,786,677 6,684,910
Inventories 5,034 593,899 286,367
Prepaid expenses 11,268 1,329,486 989,785
Other current assets,
net of allowance for
doubtful accounts of
JPY 3,850 thousand
and JPY 33,250
thousand at September
30, 2006 and March
31, 2006,
respectively 7,411 874,401 145,243
--------------------- ------------
Total current assets 198,697 23,444,208 53.2 15,059,801 41.7
INVESTMENTS IN AND
ADVANCES TO EQUITY
METHOD INVESTEES, net
of loan loss valuation
allowance of JPY 16,701
thousand, JPY 31,378
thousand and JPY 16,701
thousand at September
30, 2006, September 30,
2005 and March 31,
2006, respectively 8,843 1,043,410 2.4 452,702 1.3
OTHER INVESTMENTS 52,694 6,217,408 14.1 8,048,512 22.3
PROPERTY AND EQUIPMENT-
Net 80,484 9,496,329 21.6 9,142,951 25.3
INTANGIBLE ASSETS-Net 5,383 635,147 1.4 628,361 1.7
GUARANTEE DEPOSITS 12,985 1,532,046 3.5 2,100,008 5.8
OTHER ASSETS, net of
allowance for doubtful
accounts of JPY 65,251
thousand, JPY 26,272
thousand and JPY 40,980
thousand at September
30, 2006, September 30,
2005 and March 31,
2006, respectively 14,144 1,668,884 3.8 688,200 1.9
--------------------- ------------
TOTAL 373,230 44,037,432 100.0 36,120,535 100.0
--------------------- ------------
----------------------------------------------------------------------
----------------------------------------------------------------------
As of September 30, 2006 As of September
30, 2005
----------------------------------------------------------------------
ThousandsThousands of Thousands of
of U.S. Yen Yen
Dollars % %
----------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS'
EQUITY
CURRENT LIABILITIES:
Short-term borrowings 48,733 5,750,000 4,922,177
Long-term borrowings-
current portion 8,988 1,060,476 2,537,997
Payable under
securities loan
agreement 4,076 480,960 1,518,400
Capital lease
obligations-current
portion 23,739 2,800,937 2,716,030
Accounts payable 43,142 5,090,316 5,205,982
Accrued expenses 5,541 653,789 515,976
Other current
liabilities 14,579 1,720,181 790,194
--------------------- ------------
Total current
liabilities 148,798 17,556,659 39.9 18,206,756 50.4
LONG-TERM BORROWINGS - - - 1,060,476 2.9
CAPITAL LEASE
OBLIGATIONS-Noncurrent 37,053 4,371,896 9.9 3,896,848 10.8
ACCRUED RETIREMENT AND
PENSION COSTS 2,274 268,292 0.6 181,289 0.5
OTHER NONCURRENT
LIABILITIES 5,671 669,131 1.5 387,259 1.1
--------------------- ------------
Total Liabilities 193,796 22,865,978 51.9 23,732,628 65.7
--------------------- ------------
MINORITY INTEREST 11,555 1,363,362 3.1 1,007,787 2.8
--------------------- ------------
COMMITMENTS AND
CONTINGENCIES - - - - -
SHAREHOLDERS' EQUITY:
Common-stock
-authorized, 377,600
shares; issued and
outstanding, 204,300
shares at September
30, 2006 and March
31, 2006
-authorized, 377,600
shares; issued and
outstanding, 191,800
shares at September 30,
2005 142,672 16,833,847 38.2 13,765,372 38.1
Additional paid-in
capital 225,436 26,599,217 60.4 23,637,628 65.4
Accumulated deficit (227,363)(26,826,562)(60.9)(32,810,738)(90.8)
Accumulated other
comprehensive income 27,848 3,285,828 7.5 6,872,096 19.0
Treasury stock-777
shares, 602 shares
and 777 shares held
by an equity method
investee at September
30, 2006, September
30, 2005 and March
31, 2006,
respectively (714) (84,238) (0.2) (84,238) (0.2)
--------------------- ------------
Total shareholders'
equity 167,879 19,808,092 45.0 11,380,120 31.5
--------------------- ------------
TOTAL 373,230 44,037,432 100.0 36,120,535 100.0
--------------------- ------------
----------------------------------------------------------------------
(1) Consolidated Balance Sheets
----------------------------------------------------------------------
As of March 31,
2006
----------------------------------------------------------------------
Thousands of
Yen %
----------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash 13,727,021
Accounts receivable, net of allowance for
doubtful accounts of JPY 22,198 thousand, and
JPY 33,537 thousand and JPY 23,411 thousand at
September 30, 2006, September 30, 2005 and March
31, 2006, respectively 11,962,304
Inventories 851,857
Prepaid expenses 1,031,325
Other current assets, net of allowance for
doubtful accounts of JPY 3,850 thousand and JPY
33,250 thousand at September 30, 2006 and March
31, 2006, respectively 214,121
-------------
Total current assets 27,786,628 54.8
INVESTMENTS IN AND ADVANCES TO EQUITY METHOD
INVESTEES, net of loan loss valuation allowance of
JPY 16,701 thousand, JPY 31,378 thousand and JPY
16,701 thousand at September 30, 2006, September
30, 2005 and March 31, 2006, respectively 1,162,971 2.3
OTHER INVESTMENTS 8,020,705 15.8
PROPERTY AND EQUIPMENT-Net 10,299,496 20.3
INTANGIBLE ASSETS-Net 632,594 1.2
GUARANTEE DEPOSITS 1,549,653 3.1
OTHER ASSETS, net of allowance for doubtful
accounts of JPY 65,251 thousand, JPY 26,272
thousand and JPY 40,980 thousand at September 30,
2006, September 30, 2005 and March 31, 2006,
respectively 1,252,942 2.5
-------------
TOTAL 50,704,989 100.0
-------------
----------------------------------------------------------------------
----------------------------------------------------------------------
As of March 31,
2006
----------------------------------------------------------------------
Thousands of
Yen %
----------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings 4,555,000
Long-term borrowings-current portion 1,989,963
Payable under securities loan agreement 999,600
Capital lease obligations-current portion 3,003,914
Accounts payable 10,107,942
Accrued expenses 540,027
Other current liabilities 1,702,208
-------------
Total current liabilities 22,898,654 45.2
LONG-TERM BORROWINGS 290,000 0.6
CAPITAL LEASE OBLIGATIONS-Noncurrent 4,980,659 9.8
ACCRUED RETIREMENT AND PENSION COSTS 223,332 0.4
OTHER NONCURRENT LIABILITIES 827,086 1.6
-------------
Total Liabilities 29,219,731 57.6
-------------
MINORITY INTEREST 1,263,320 2.5
-------------
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' EQUITY:
Common-stock
-authorized, 377,600 shares; issued and
outstanding, 204,300 shares at September 30,
2006 and March 31, 2006
-authorized, 377,600 shares; issued and
outstanding, 191,800 shares at September 30, 2005 16,833,847 33.2
Additional paid-in capital 26,599,217 52.5
Accumulated deficit (29,680,482)(58.5)
Accumulated other comprehensive income 6,553,594 12.9
Treasury stock-777 shares, 602 shares and 777
shares held by an equity method investee at
September 30, 2006, September 30, 2005 and March
31, 2006, respectively (84,238) (0.2)
-------------
Total shareholders' equity 20,221,938 39.9
-------------
TOTAL 50,704,989 100.0
-------------
----------------------------------------------------------------------
(Note)
The U.S. dollar amounts represent translations of yen amounts at
the rate of JPY 117.99, 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 September 29, 2006.
(2) Consolidated Statements of Income
----------------------------------------------------------------------
Interim Period Ended
September 30, 2006
------------------------------
ThousandsThousands % of
of U.S. of Yen total
Dollars revenues
----------------------------------------------------------------------
REVENUES:
Connectivity and value-added services:
Dedicated access 44,942 5,302,635
Dial-up access 10,279 1,212,804
Value-added services 30,911 3,647,219
Other 15,737 1,856,829
--------------------
Total 101,869 12,019,487
Systems integration 112,322 13,252,936
Equipment sales 9,930 1,171,611
--------------------
Total revenues 224,121 26,444,034 100.0
--------------------
COST AND EXPENSES:
Cost of connectivity and value-added
services 87,500 10,324,133
Cost of systems integration 86,379 10,191,816
Cost of equipment sales 8,774 1,066,013
--------------------
Total cost 182,913 21,581,962 81.6
Sales and marketing 13,838 1,632,728 6.2
General and administrative 15,058 1,776,725 6.7
Research and development 697 82,191 0.3
--------------------
Total cost and expenses 212,506 25,073,606 94.8
--------------------
OPERATING INCOME 11,615 1,370,428 5.2
--------------------
OTHER INCOME:
Interest income 63 7,481
Interest expense (1,742) (205,500)
Foreign exchange gains (losses) (0) (10)
Gain on other investments-net 7,821 922,836
Other-net 416 49,096
--------------------
Other income-net 6,559 773,903 2.9
--------------------
INCOME FROM OPERATIONS BEFORE INCOME TAX
EXPENSE (BENEFIT), MINORITY INTERESTS
AND EQUITY IN NET INCOME (LOSS) OF
EQUITY METHOD INVESTEES 18,174 2,144,331 8.1
--------------------
INCOME TAX EXPENSE (BENEFIT) (8,134) (959,783) (3.7)
MINORITY INTERESTS IN EARNINGS OF
SUBSIDIARIES (1,060) (125,108) (0.5)
--------------------
EQUITY IN NET INCOME (LOSS) OF EQUITY
METHOD INVESTEES (1,060) (125,086) (0.5)
--------------------
NET INCOME 24,188 2,853,920 10.8
----------------------------------------------------------------------
----------------------------------------------------------------------
Interim Period Ended
September 30, 2006
------------------------------
Thousands Thousands of Yen
of U.S.
Dollars
----------------------------------------------------------------------
BASIC WEIGHTED-AVERAGE NUMBER OF SHARES 203,989
DILUTED WEIGHTED-AVERAGE NUMBER OF
SHARES 204,166
BASIC NET INCOME PER SHARE 119 13,991
DILUTED NET INCOME PER SHARE 118 13,978
----------------------------------------------------------------------
(2) Consolidated Statements of Income
----------------------------------------------------------------------
Interim Period Ended Fiscal Year Ended
September 30, 2005 March 31, 2006
-----------------------------------------
Thousands % of Thousands % of
of Yen total of Yen total
revenues revenues
----------------------------------------------------------------------
REVENUES:
Connectivity and value-added
services:
Dedicated access 5,442,225 10,625,268
Dial-up access 1,381,109 2,673,808
Value-added services 2,846,450 6,249,891
Other 1,863,325 3,673,872
------------ -----------
Total 11,533,109 23,222,839
Systems integration 9,001,675 23,504,537
Equipment sales 1,274,139 3,085,208
------------ -----------
Total revenues 21,808,923 100.0 49,812,584 100.0
------------ -----------
COST AND EXPENSES:
Cost of connectivity and
value-added services 9,951,821 20,077,990
Cost of systems integration 6,829,036 18,120,418
Cost of equipment sales 1,209,794 2,818,036
------------ -----------
Total cost 17,990,651 82.5 41,016,444 82.4
Sales and marketing 1,567,363 7.2 3,079,526 6.2
General and administrative 1,413,083 6.5 3,147,315 6.3
Research and development 83,851 0.4 158,155 0.3
------------ -----------
Total cost and expenses 21,054,948 96.6 47,401,440 95.2
------------ -----------
OPERATING INCOME 753,975 3.4 2,411,144 4.8
------------ -----------
OTHER INCOME:
Interest income 7,874 13,099
Interest expense (215,913) (437,364)
Foreign exchange gains
(losses) 4,963 3,470
Gain on other investments-
net 1,148,797 3,197,690
Other-net 79,129 190,520
------------ -----------
Other income-net 1,024,850 4.7 2,967,415 6.0
------------ -----------
INCOME FROM OPERATIONS BEFORE
INCOME TAX EXPENSE
(BENEFIT), MINORITY
INTERESTS AND EQUITY IN NET
INCOME (LOSS) OF EQUITY
METHOD INVESTEES 1,778,825 8.1 5,378,559 10.8
------------ -----------
INCOME TAX EXPENSE (BENEFIT) 82,011 0.3 257,360 0.5
MINORITY INTERESTS IN
EARNINGS OF SUBSIDIARIES (105,632) (0.5) (353,883) (0.7)
------------ -----------
EQUITY IN NET INCOME (LOSS)
OF EQUITY METHOD INVESTEES 32,132 0.1 (13,746) (0.1)
------------ -----------
NET INCOME 1,623,314 7.4 4,753,570 9.5
----------------------------------------------------------------------
----------------------------------------------------------------------
Interim Period Ended Fiscal Year Ended
September 30, 2005 March 31, 2006
-----------------------------------------
Thousands of Yen Thousands of Yen
----------------------------------------------------------------------
BASIC WEIGHTED-AVERAGE NUMBER
OF SHARES 191,518 195,613
DILUTED WEIGHTED-AVERAGE
NUMBER OF SHARES 191,667 195,955
BASIC NET INCOME PER SHARE 8,476 24,301
DILUTED NET INCOME PER SHARE 8,469 24,258
----------------------------------------------------------------------
(Note)
1) The U.S. dollar amounts represent translations of yen amounts at
the rate of JPY 117.99, 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 September 29, 2006.
2) IIJ conducted a 1 for 5 stock split effective on October 11, 2005.
The numbers of shares of common stock authorized, and issued and
outstanding, and shares held by an equity method investee in this
table are calculated with the assumption that the stock split was
made at the beginning of FY2005. IIJ issued 12,500 new shares of
common stock for public offering when it listed on the Mothers market
of TSE in December 2005.
(3) Consolidated Statements of Shareholders' Equity
Consolidated statements of shareholders' equity for the interim period
ended September 30, 2006
----------------------------------------------------------------------
Shares of Common Additional Accumulated
Common Stock Paid-in Deficit
Stock Capital
Outstanding
(Including
Treasury
Stock)
(Shares)
----------------------------------------------------------------------
BALANCE, APRIL 1, 2006 204,300 16,833,847 26,599,217 (29,680,482)
Net income 2,853,920
Other comprehensive
loss, net of tax
Total comprehensive
loss
----------------------------------------------------------------------
BALANCE, SEPTEMBER 30,
2006 204,300 16,833,847 26,599,217 (26,826,562)
-----------------------------------------------
----------------------------------------------------------------------
Consolidated statements of shareholders' equity for the interim period
ended September 30, 2006
----------------------------------------------------------------------
Shares of Common Additional Accumulated
Common Stock Paid-in Deficit
Stock Capital
Outstanding
(Including
Treasury
Stock)
(Shares)
----------------------------------------------------------------------
BALANCE, APRIL 1, 2006 204,300 142,672 225,436 (251,551)
Net income 24,188
Other comprehensive
loss, net of tax
Total comprehensive
loss
----------------------------------------------------------------------
BALANCE, SEPTEMBER 30,
2006 204,300 142,672 225,436 (227,363)
-----------------------------------------------
----------------------------------------------------------------------
(Note)
1) The U.S. dollar amounts represent translations of yen amounts at
the rate of JPY 117.99, 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 September 29, 2006.
Consolidated statements of shareholders' equity for the interim period
ended September 30, 2005
----------------------------------------------------------------------
Shares of Common Additional Accumulated
Common Stock Paid-in Deficit
Stock Capital
Outstanding
(Including
Treasury
Stock)
(Shares)
----------------------------------------------------------------------
BALANCE, APRIL 1, 2005 191,800 13,765,372 23,637,628 (34,434,052)
Net income 1,623,314
Other comprehensive
loss, net of tax
Total comprehensive
income
Purchase of common
stock by an equity
method investee
----------------------------------------------------------------------
BALANCE, SEPTEMBER 30,
2005 191,800 13,765,372 23,637,628 (32,810,738)
-----------------------------------------------
----------------------------------------------------------------------
Consolidated statements of shareholders' equity for the fiscal year
ended March 31, 2006
----------------------------------------------------------------------
Shares of Common Additional Accumulated
Common Stock Paid-in Deficit
Stock Capital
Outstanding
(Including
Treasury
Stock)
(Shares)
----------------------------------------------------------------------
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)
-----------------------------------------------
(3) Consolidated Statements of Shareholders' Equity
Consolidated statements of shareholders' equity for the interim period
ended September 30, 2006
(Unit: Thousands of Yen)
----------------------------------------------------------------------
Accumulated Treasury Total
Other Stock
Comprehensive
Income
----------------------------------------------------------------------
BALANCE, APRIL 1, 2006 6,553,594 (84,238)20,221,938
Net income 2,853,920
Other comprehensive loss, net of tax (3,267,766) (3,267,766)
-----------
Total comprehensive loss (413,846)
----------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2006 3,285,828 (84,238)19,808,092
----------------------------------
----------------------------------------------------------------------
Consolidated statements of shareholders' equity for the interim period
ended September 30, 2006
(Unit: Thousands of U.S. Dollars)
----------------------------------------------------------------------
Accumulated Treasury Total
Other Stock
Comprehensive
Income
----------------------------------------------------------------------
BALANCE, APRIL 1, 2006 55,544 (714) 171,387
Net income 24,188
Other comprehensive loss, net of tax (27,695) (27,695)
-----------
Total comprehensive loss (3,507)
----------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2006 27,848 (714) 167,879
----------------------------------
----------------------------------------------------------------------
(Note)
1) The U.S. dollar amounts represent translations of yen amounts at
the rate of JPY 117.99, 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 September 29, 2006.
Consolidated statements of shareholders' equity for the interim period
ended September 30, 2005
(Unit: Thousands of Yen)
----------------------------------------------------------------------
Accumulated Treasury Total
Other Stock
Comprehensive
Income
----------------------------------------------------------------------
BALANCE, APRIL 1, 2005 8,690,125 (44,000)11,615,073
Net income 1,623,314
Other comprehensive loss, net of tax (1,818,029) (1,818,029)
-----------
Total comprehensive income (194,715)
Purchase of common stock by an
equity method investee (40,238) (40,238)
----------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2005 6,872,096 (84,238)11,380,120
----------------------------------
----------------------------------------------------------------------
Consolidated statements of shareholders' equity for the fiscal year
ended March 31, 2006
(Unit: Thousands of Yen)
----------------------------------------------------------------------
Accumulated Treasury Total
Other Stock
Comprehensive
Income
----------------------------------------------------------------------
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
----------------------------------------------------------------------
Interim
Period Fiscal Year
Ended Ended
Interim Period Ended September March 31,
September 30, 2006 30, 2005 2006
------------------------------------------
Thousands
of U.S. Thousands Thousands Thousands
Dollars of Yen of Yen of Yen
----------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income 24,188 2,853,920 1,623,314 4,753,570
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and
amortization 18,443 2,176,125 2,023,884 4,209,037
Reversal of doubtful
accounts and advances (38) (4,446) (7,012) (12,009)
Gains on other
investments-net (7,821) (922,836)(1,148,797)(3,197,690)
Foreign exchange gains (20) (2,386) (10,409) (7,825)
Equity in net loss
(income) of equity
method investees 1,060 125,086 (32,132) 13,746
Minority interests in
earnings of subsidiaries 1,060 125,108 105,632 353,883
Deferred income tax
expense (benefit) (10,553)(1,245,146) 7,662 (230,841)
Others 756 89,239 45,762 215,480
Changes in operating assets
and liabilities:
Decrease (increase) in
accounts receivable 35,160 4,148,536 824,634 (4,460,173)
Decrease (increase) in
inventories, prepaid
expenses and other
current and noncurrent
assets 787 92,884 (618,974)(1,390,398)
Increase (decrease) in
accounts payable (42,035)(4,959,668) 139,046 4,975,623
Increase in accrued
expenses, other current
and noncurrent
liabilities 305 36,014 44,335 1,336,421
----------------------------------------------------------------------
Net cash provided by
operating activities 21,294 2,512,430 2,996,945 6,558,824
----------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchase of property and
equipment (4,745) (559,868) (327,693) (919,366)
Purchase of short-term and
other investments (14,079)(1,661,181) (300,155) (674,569)
Investment in an equity
method investee - - - (750,000)
Purchase of subsidiary
stock from minority
shareholders (234) (27,559) (192,142) (192,142)
Proceeds from sales and
redemption of short-term
and other investments 9,473 1,117,775 1,496,078 3,613,239
Acquisition of a newly
controlled company, net of
cash acquired - - 229,457 229,457
Refund (payment) of
guarantee deposits-net 133 15,643 (46,466) 506,795
Other (58) (6,794) (13,303) (8,564)
----------------------------------------------------------------------
Net cash provided by
(used in) investing
activities (9,509)(1,121,984) 845,776 1,804,850
----------------------------------------------------------------------
Interim
Period Fiscal Year
Ended Ended
Interim Period Ended September March 31,
September 30, 2006 30, 2005 2006
------------------------------------------
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 36,868 4,350,000 1,000,000 1,000,000
Repayments of long-term
borrowings (10,336)(1,219,487)(1,667,546)(2,986,056)
Proceeds from securities
loan agreement 8,281 977,040 1,734,800 4,897,040
Repayments of securities
loan agreement (12,676)(1,495,680)(1,945,920)(5,626,960)
Principal payments under
capital leases (14,472)(1,707,548)(1,515,569)(3,105,519)
Net increase (decrease) in
short-term borrowings (26,740)(3,155,000) 197,544 (169,633)
Proceeds from issuance of
common stock, net of
issuance cost - - - 6,030,064
----------------------------------------------------------------------
Net cash provided by
(used in) financing
activities (19,075)(2,250,675)(2,196,691) 38,936
----------------------------------------------------------------------
EFFECT OF EXCHANGE RATE
CHANGES ON CASH (60) (7,047) 20,989 37,934
NET INCREASE (DECREASE) IN
CASH (7,350) (867,276) 1,667,019 8,440,544
CASH, BEGINNING OF EACH
PERIOD 116,341 13,727,021 5,286,477 5,286,477
----------------------------------------------------------------------
CASH, END OF EACH PERIOD 108,990 12,859,745 6,953,496 13,727,021
----------------------------------------------------------------------
----------------------------------------------------------------------
ADDITIONAL CASH FLOW
INFORMATION:
Interest paid 1,643 193,869 216,012 426,692
Income taxes paid 1,792 211,428 112,252 148,101
NONCASH INVESTING AND
FINANCING ACTIVITIES:
Acquisition of assets by
entering into capital
leases 7,783 918,273 1,000,719 3,842,952
Exchange of common stock
investment due to merger:
Market value of common
shares acquired - - - 7,390
Cost of investment - - - 2,584
Acquisition of business and
a company:
Assets acquired - - 843,485 843,485
Cash paid - - (733,589) (733,589)
Liabilities assumed - - 109,896 109,896
----------------------------------------------------------------------
(Note)
1) The U.S. dollar amounts represent translations of yen amounts at
the rate of JPY 117.99, 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 September 29, 2006.
[This is an English Translation of the Original Version in Japanese]
Significant Basic Items for Preparation of Consolidated Financial Statements for
--------------------------------------------------------------------------------
the Interim Period Ended September 30, 2006
-------------------------------------------
The Terminology, Form, and Preparation Methods for the Consolidated
Financial Statements for the Interim Period Ended September 30, 2006
The consolidated financial statements for the interim period ended September
30, 2006 have been prepared under the accounting principles, procedures and ways
of presentations requested for the issuance of American Depository Receipts
("ADRs") and others (generally accepted accounting principles in the United
States of America ("U.S. GAAP"), including Accounting Research Bulletins
("ARB"), Accounting Principles Board ("APB") Opinions, Statement of Financial
Accounting Standards ("SFAS") and related interpretation guidelines) in
accordance with the provisions of article 81 "provisions for the terminology,
form, and preparation methods for interim consolidated financial statements"
(Ministry of Finance, ordinance No. 24, 1999).
IIJ registered issuance of ADRs under the United States Securities and
Exchange Commission ("the United States SEC") and list IIJ's ADRs on NASDAQ
market in August 1999. Accordingly, IIJ regularly files its annual report on
Form 20-F in English with the United States SEC, including consolidated
financial statements in English prepared under U.S. GAAP, in accordance with
Rule 13 of the U.S. Securities Exchange Act of 1934, as amended.
Basis of Presentation
IIJ maintains its record in accordance with generally accepted accounting
principles in Japan. Certain adjustment and reclassifications have been
incorporated in the accompanying consolidated financial statements to conform to
U.S. GAAP. These adjustments were not recorded in the statutory accounts.
Consolidation
The consolidated financial statements for the interim period ended September
30, 2006 include the accounts of IIJ and all of its subsidiaries, Net Care, Inc.
("Net Care"), IIJ Technology Inc. ("IIJ Technology"), IIJ Financial Systems Inc.
("IIJ FS"), Net Chart Japan Inc. ("Net Chart") and IIJ America, Inc. ("IIJ
America"), which have interim periods ending September 30, except for IIJ
America. IIJ America's interim period end is June 30 and such date was used for
purposes of preparing the consolidated financial statements for the interim
period ended September 30, 2006 as it is not practicable for the subsidiary to
report its financial results as of September 30. There were no significant
events that occurred during the intervening period that would require adjustment
to or disclosure in the accompanying consolidated financial statements for the
interim period ended September 30, 2006. Significant intercompany transactions
and balances have been eliminated in consolidation. Investments in companies
over which IIJ has significant influence but not control are accounted for by
the equity method. For other than a temporary decline in the value of
investments in equity method investees below the carrying amount, the investment
is reduced to fair value and an impairment loss is recognized.
A subsidiary or equity method investee may issue its shares to third parties
at amounts per share in excess of or less than the Company's average per share
carrying value. With respect to such transactions, the resulting gains or losses
arising from the change in ownership are recorded in income for the year in
which such shares are issued.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period.
Significant estimates and assumptions used are primarily in the areas of
impairment loss on advances to equity method investees, valuation allowances for
deferred tax assets, allowance for doubtful accounts, and estimated lives of
fixed assets. Actual results could differ from those estimates.
Revenue Recognition
Revenues from customer connectivity services consist principally of dedicated
Internet access services and dial-up Internet access services. Dedicated
Internet access services represent full-line IP services and standard-level IP
services (T1 Standard and IIJ FiberAccess/F Service). Dial-up Internet access
services are provided to both enterprises and individuals (IIJ4U). The term of
these contracts is one year for dedicated Internet access services and generally
one month for dial-up Internet access services. All these services are billed
and recognized monthly on a straight-line basis.
Value-added service revenues consist principally of sales of various Internet
access-related services such as firewall services. Value-added services also
include monthly fees from data center services such as housing, monitoring, and
security services. Other revenues under connectivity and value-added services
consist principally of call-center customer support and Wide-area Ethernet
services to construct networks that connect multiple operational sites for
customers. The terms of these services are generally for one year and revenues
are recognized on a straight-line basis during the service period.
Initial set up fees received in connection with connectivity services and
value-added services are deferred and recognized over the contract period.
Systems integration revenues consist principally of the consultation of
Internet network systems, design, development or construction and related
maintenance, monitoring and other operating services. The period for the
development of the systems or designs is less than one year and revenues are
recognized when network systems and equipment are delivered and accepted by the
customer under the completed contract method. The development of the Internet
network systems or design includes multiple element arrangements such as
consultation, planning, systems design, and construction services, and equipment
and software purchased from third parties. When the equipment or system is
delivered prior to other elements of the arrangement, revenue is deferred until
other service elements are completed and accepted by the customer. Maintenance,
monitoring, and operating service revenues are recognized ratably over the
separate contract period, which is generally for one year.
Systems integration service is subject to the Emerging Issues Task Force
("EITF") of the Financial Accounting Standards Board ("FASB") Issue No. 00-21,
"Revenue Arrangements with Multiple Deliverables" which was adopted as of April
1, 2004.
Equipment sales are reported on a gross or net basis in accordance with EITF
Issue No. 99-19 "Reporting Revenue Gross as a Principal versus Net as an Agent".
Revenues are recognized when equipments are delivered and accepted by the
customer.
Cash and Cash Equivalents
Cash and cash equivalents include time deposits and readily marketable
securities with original maturities of three months or less.
Allowance for Doubtful Accounts
An allowance for doubtful accounts is established in amounts considered to be
appropriate based primarily upon the Company's past credit loss experience and
an evaluation of potential losses in the receivables outstanding.
Other Investments
In accordance with SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," all marketable equity securities are classified as
available-for-sale securities, which are accounted for at fair value with
unrealized gains and losses excluded from earnings and reported in accumulated
other comprehensive income (loss). The cost of securities sold is determined
based on average cost.
The Company reviews the fair value of available-for-sale investments on a
regular basis to determine if the fair value of any individual investment has
declined below its cost and if such decline is other than temporary. If the
decline in value is judged to be other than temporary, the cost basis of the
investment is written down to fair value. Other than temporary declines in value
are determined taking into consideration the extent of decline in fair value,
the length of time that the decline in fair value below cost has existed and
events that might accelerate the recognition of impairment. The resulting
realized loss is included in the consolidated statements of operations in the
period in which the decline was deemed to be other than temporary.
Non-marketable equity securities are carried at cost as fair value is not
readily determinable. If the value of a security is estimated to have declined
and such decline is judged to be other than temporary, the security is written
down to the fair value. Determination of impairment is based on the
consideration of such factors as operating results, business plans and change in
the regulatory, economic or technological environment of the investees. Fair
value is determined as the Company's interest in the net assets of investees.
Inventories
Inventories consist mainly of network equipment purchased for resale and
work-in-process for development of Internet network systems. Network equipment
purchased for resale is stated at the lower of cost, which is determined by the
average-cost method, or market. Work-in-process for development of network
systems is stated at the lower of actual production costs, including overhead
cost, or market. Inventories are reviewed periodically and items considered to
be slow-moving or obsolete are written down to their estimated net realizable
value.
Leases
Capital leases, which meet specific criteria noted in SFAS No. 13,
"Accounting for Leases", are capitalized at the inception of the lease at
present value of the minimum lease payments. All other leases are accounted for
as operating leases. Lease payments for capital leases are apportioned to
interest expense and a reduction of the lease liability so as to achieve a
constant rate of interest on the remaining balance of the liability. Operating
lease payments are recognized as an expense on a straight-line basis over the
lease term.
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization of
property and equipment, including purchased software and capitalized leases, are
computed principally using the straight-line method based on either the
estimated useful lives of assets or the lease period, whichever is shorter.
The useful lives for depreciation and amortization by major asset classes are
as follows:
----------------------------------------------------------------------------------------------------
Range of useful lives
----------------------------------------------------------------------------------------------------
Data communications, office and other equipment 2 to 15 years
Leasehold improvements 3 to 15 years
Purchased software 5 years
Capitalized leases 4 to 7 years
----------------------------------------------------------------------------------------------------
Impairment of Long-Lived Assets
Long-lived assets consist principally of property and equipment, including
those items leased under capital leases. The Company evaluates the impairment of
long-lived assets whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable in accordance with SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets". There
were no impairment loss for long-lived assets for the interim period ended
September 30, 2005, and the interim period ended September 30, 2006 and the
fiscal year ended March 31, 2006.
Goodwill and Intangible Assets
In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets",
goodwill (including equity-method goodwill) and intangible assets that are
deemed to have indefinite useful lives are not amortized, but are subject to
impairment testing. Impairment testing is performed annually or more frequently
if events or changes in circumstances indicate that the asset might be impaired.
The Company performs annual impairment tests on March 31.
Pension and severance indemnities plans
The Company has pension plans and /or severance indemnities plans. The cost
of the pension plans and severance indemnities plans are accrued based on
amounts determined using actuarial methods, in accordance with SFAS No. 87,
"Employers' Accounting for Pensions".
Income Taxes
The provision for income taxes is based on earnings before income taxes and
includes the effects of temporary differences between assets and liabilities
recognized for financial reporting purposes and income tax purposes and
operating loss carryforwards. Valuation allowances are provided against assets
that are not likely to be realized.
Foreign Currency Transactions
Foreign currency assets and liabilities, which consist substantially of cash
and accounts payable for connectivity leases to international carriers
denominated in U.S. dollars, are stated at the amount as computed by using
period-end exchange rates and the resulting transaction gain or loss is
recognized in earnings.
Derivative Financial Instruments
All derivatives are recorded at fair value as either asset or liabilities in
the balance sheet in accordance with SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS No. 138 and No. 149
(collectively, "SFAS No. 133"). In accordance with SFAS No. 133, the Company
designated interest swap contracts as a hedge of the variability of cash flows
to be paid related to interest on floating rate borrowings (cash flow hedge) and
the effective portion of the derivative's gain or loss is initially reported as
a component of other comprehensive income and subsequently reclassified into
earnings when the underlying transaction affects earnings. The ineffective
portion of the gain or loss is reported in earnings immediately.
The Company enters into contracts to hedge interest rate risks and does not
enter into contracts or utilize derivatives for trading purposes.
Stock Sprits
On August 4, 2005, IIJ's board of directors approved a five-for-one split of
IIJ's common stock. Shareholders of record on August 31, 2005 received an
additional common share. The stock split was effective on October 11, 2005. In
order to reflect this split, information pertaining to the number of shares of
common stock and net income per share has been restated in the accompanying
financial statements and related notes.
Stock-based Compensation
The Company accounts for stock-based compensation in accordance with SFAS No.
123R, "Accounting for Stock-Based Compensation" from the interim period ended
September 30, 2006. SFAS No. 123R requires compensation expense for stock
options and other share-based payment to be measured and recorded based on the
instruments' fair value. The Company adopted SFAS No. 123R and the related FASB
Staff Positions on April 1, 2006 by using modified prospective application,
which requires recognizing expenses for options granted prior to the adoption
date equal to the fair value of unvested amounts over the remaining vesting
period. The portion of these options' fair value attributable to vested awards
prior to the adoption of SFAS No. 123R is never recognized.
As all existing granted stock-based awards of the Company have vested, the
adoption of SFAS No. 123R did not have any impact on the Company's consolidated
financial position or results of operations.
Research and Development and Advertising
Research and development and advertising costs are expensed as incurred.
Advertising
Advertising costs are expensed as incurred.
Basic and Diluted Net Income per Share
Basic net income per share is computed by dividing net income by the
weighted-average number of shares of common stock outstanding during the period.
Diluted net income per share reflects the potential dilutive effect of stock
options. (See note 8 - Basic and Diluted Net Income per Share)
Other Comprehensive Income (Loss)
Other comprehensive income (loss) consists of translation adjustments
resulting from the translation of financial statements of a foreign subsidiary,
unrealized gains or losses on available-for-sale securities and gains or losses
on cash flow hedging derivative instruments.
Segment Reporting
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," establishes standards for reporting information about operating
segments. Operating segments are defined as components of an enterprise that
engages in business activities from which it may earn revenues and incur expense
and for which separate financial information is available that is evaluated
regularly by the chief operation decision maker in deciding how to allocate
resources and in assessing performance.
The Company provides a comprehensive range of network solutions to meet its
customers' needs by cross-selling a variety of services, including Internet
connectivity services, value-added services, systems integration and sales of
network-related equipment. The Company's chief operating decision maker, who is
IIJ's President and Representative Director, regularly reviews the revenue and
cost of sales on a consolidated basis and makes decisions regarding how to
allocate resources and assess performance based on a single operating unit.
New Accounting Standards
In June 2006, the FASB issued FASB Interpretation ("FIN") No. 48, "Accounting
for Uncertainty in Income Taxes," which clarifies the accounting for uncertainty
in income taxes recognized in an enterprise's financial statements in accordance
with SFAS No. 109, "Accounting for Income Taxes." This interpretation prescribes
a recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. This interpretation also provides guidance on derecognition,
classification, interest and penalties, accounting in quarterly financial
statements, disclosure, and transition. FIN No. 48 is effective for fiscal years
beginning after December 15, 2006. The Company is currently evaluating the
impact of adopting this interpretation.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements."
SFAS No. 157 establishes a framework for measuring fair value in applying
generally accepted accounting principles, and expands disclosures about fair
value measurements. SFAS No. 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007. The Company is currently
evaluating the impact of adopting SFAS No. 157.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans - An amendment of FASB
Statements No. 87, 88, 106, and 132(R)" (SFAS No. 158). SFAS No. 158 requires an
employer to recognize the overfunded or underfunded status of their benefit
plans as an asset or liability in its balance sheet and to recognize changes in
that funded status in the year in which the changes occur as a component of
other comprehensive income. SFAS No. 158 is effective for fiscal years ended
after December 15, 2006 except for the change in measurement date which is
effective as of the beginning of the fiscal year beginning after December 15,
2008. The adoption of SFAS No. 158 is not expected to impact the Company's
consolidated financial condition and results of operations.
5. Other Investments (Unaudited)
Available-for-sale Securities:
---------------------------------------------------------------------------------------------------------------------
At the end of the Interim Period ended September 30, 2005
(As of September 30, 2005)
---------------------------------------------------------------------------------------------------------------------
Cost Unrealized gains Unrealized losses Fair value
---------------------------------------------------------------------------------------------------------------------
Available-for-sale--Equity
securities
(Thousands of Yen) 207,783 6,886,536 - 7,094,319
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
At the end of the Interim Period ended September 30, 2006
(As of September 30, 2006)
---------------------------------------------------------------------------------------------------------------------
Cost Unrealized gains Unrealized losses Fair value
---------------------------------------------------------------------------------------------------------------------
Available-for-sale--Equity
securities
(Thousands of Yen) 216,860 3,283,043 - 3,499,903
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
At the end of the Fiscal Year ended March 31, 2006
(As of March 31, 2006)
---------------------------------------------------------------------------------------------------------------------
Cost Unrealized gains Unrealized losses Fair value
---------------------------------------------------------------------------------------------------------------------
Available-for-sale--Equity
securities
(Thousands of Yen) 222,807 6,552,623 42 6,775,388
---------------------------------------------------------------------------------------------------------------------
In addition to the above, the aggregate cost of the Company's cost method
investments, included in other investments, totaled JPY 954,193 thousand, JPY
2,717,505 thousand and JPY 1,245,317 thousand at September 30, 2005, September
30, 2006, and March 31, 2006, respectively.
6. Leases
Notes regarding leases are omitted since the information is disclosed on
Electronic Disclosure for Investors' NETwork (EDINET), the disclosure system
operated by Financial Services Agency in Japan.
7. Derivative and Other Financial Instruments
Notes regarding derivative and other financial instruments are omitted since
the information is disclosed on Electronic Disclosure for Investors' NETwork
(EDINET), the disclosure system operated by Financial Services Agency in Japan.
8. Basic and Diluted Net Income per Share
The basic and diluted net income per share for the interim period ended
September 30, 2005, the interim period ended September 30, 2006 and the fiscal
year ended March 31, 2006 was as follows:
--------------------------------------------------------------------------------------------------------------------
Interim Period Ended Interim Period Ended Fiscal Year Ended March
September 30, 2005 September 30, 2006 31, 2006
(From April 1, 2005 to (From April 1, 2006 to (From April 1, 2005 to
September 30, 2005) September 30, 2006) March 31, 2006)
--------------------------------------------------------------------------------------------------------------------
Numerator:
Net income (Thousands of Yen) 1,623,314 2,853,920 4,753,570
Dilutive effect
(Thousands of Yen) - - -
--------------------------------------------------------------------------------------------------------------------
Diluted net income
(Thousands of Yen) 1,623,314 2,853,920 4,753,570
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
Denominator:
Basic weighted average number of 191,518 203,989 195,613
shares of common stock outstanding
Effect by stock option 149 177 342
--------------------------------------------------------------------------------------------------------------------
Diluted weighted average number
of shares of common stock
outstanding 191,667 204,166 195,955
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
Basic net income per share 8,476 13,991 24,301
--------------------------------------------------------------------------------------------------------------------
Diluted net income per share 8,469 13,978 24,258
--------------------------------------------------------------------------------------------------------------------
For the interim period ended September 30, 2005, the interim period ended
September 30, 2006 and the fiscal year ended March 31, 2006, the number of the
potential common shares excluded from the computation of diluted net income per
share because the exercise prices of the options were greater than the average
market price of the common shares was 975, 950 and 975, respectively.
9. Subsequent Events (Unaudited)
None.
10. Status of Production, Receipt of Order and Sales Activities
(1) Results of Production
Results of production for the interim period ended September 30, 2006 was as
follows.
--------------------------------------------------------------------------------------------------------------------
Interim Period Ended September 30, 2006
(From April 1, 2006 to September 30, 2006)
--------------------------------------------------------------------------------------------------------------------
Thousands of Yen YoY % Change
--------------------------------------------------------------------------------------------------------------------
Systems integration 9,993,745 +43.7
--------------------------------------------------------------------------------------------------------------------
Total 9,993,745 +43.7
--------------------------------------------------------------------------------------------------------------------
(Notes)
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 interim period ended September 30, 2006
was as follows.
--------------------------------------------------------------------------------------------------------------------
Interim Period Ended September 30, 2006
(From April 1, 2006 to September 30, 2006)
--------------------------------------------------------------------------------------------------------------------
Order received YoY % Order backlog YoY %
(Thousands of Yen) (Thousands of Yen)
--------------------------------------------------------------------------------------------------------------------
Systems integration and equipment
sales 18,539,942 +44.7 10,361,880 +42.5
--------------------------------------------------------------------------------------------------------------------
Total 18,539,942 +44.7 10,361,880 +42.5
--------------------------------------------------------------------------------------------------------------------
(Notes)
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 interim period ended September 30, 2006
was as follows.
---------------------------------------------------------------------------------------------------------------------
Interim Period Ended Interim Period Ended Change
September 30, 2005 September 30, 2006
(From April 1, 2005 to (From April 1, 2006 to
September 30, 2005) September 30, 2006)
---------------------------------------------------------------------------------------------------------------------
Thousands of Yen Thousands of Yen Thousands of Yen
---------------------------------------------------------------------------------------------------------------------
Connectivity and value-added 11,533,109 12,019,487 486,378
services:
Dedicated access 5,442,225 5,302,635 (139,590)
Dial-up access 1,381,109 1,212,804 (168,305)
Value-added services 2,846,450 3,647,219 800,769
Other 1,863,325 1,856,829 (6,496)
---------------------------------------------------------------------------------------------------------------------
Systems integration 9,001,675 13,252,936 4,251,261
---------------------------------------------------------------------------------------------------------------------
Systems integration 3,597,591 6,648,818 3,051,227
Outsourced operation 5,404,084 6,604,118 1,200,034
---------------------------------------------------------------------------------------------------------------------
Equipment Sales 1,274,139 1,171,611 (102,528)
---------------------------------------------------------------------------------------------------------------------
Total 21,808,923 26,444,034 4,635,111
---------------------------------------------------------------------------------------------------------------------
(Notes)
1. Consumption tax is not included.
2. Sales to each customer and its ratio to aggregate sales for the interim
period ended September 30, 2005 and the interim period ended September 30,
2006 are omitted as the ratios are less than 0.1.
CONTACT: IIJ Corporate Communications
Taisuke ONO
+81-3-5259-6500
ir@iij.ad.jp
http://www.iij.ad.jp/