FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16 under
the Securities Exchange Act of 1934
For May 31, 2005
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 per-mitted by Regulation S-T Rule 101(b)(1): ____
Note: Regulation S-T Rule 101(b)(1) only permits the submission in paper of
a Form 6-K if submitted solely to provide an attached annual report to security
holders.
Indicate by check mark if the registrant is submitting the Form 6-K in
paper as per-mitted by Regulation S-T Rule 101(b)(7): ____
Note: Regulation S-T Rule 101(b)(7) only permits the submission in paper of
a Form 6-K if submitted to furnish a report or other document that the
registrant foreign private issuer must furnish and make public under the laws of
the jurisdiction in which the reg-istrant is incorporated, domiciled or legally
organized (the registrant's "home country"), or under the rules of the home
country exchange on which the registrant's securities are traded, as long as the
report or other document is not a press release, is not required to be and has
not been distributed to the registrant's security holders, and, if discussing a
mate-rial event, has already been the subject of a Form 6-K submission or other
Commission filing on EDGAR.
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes [ ] No [ X ]
If "Yes" is marked, indicate below the file number assigned to the
registrant in connection with Rule 12g3-2(b): 82-
-------------
EXHIBIT INDEX
Exhibit Date Description of Exhibit
------- ---- ----------------------
1 2005/05/27 IIJ to List on the Mothers market of the Tokyo
Stock Exchange
2 2005/05/27 Notice on Unaudited Financial Results for Fiscal
Year Ended in March 31, 2005 and Targets for
Fiscal Year Ending March 31, 2006
3 2005/05/27 Notice on the Board of Directors' Resolution
regarding the Issue of New Shares and Secondary
Offering
4 2005/05/27 Condensed Consolidated Financial Results for the
Third Quarter of the Fiscal Year Ended March 31,
2005
5 2005/05/28 Public Notice on Resolution of Board of Directors
for New Share Offering
6 2005/05/30 IIJ Announces Director and Executive Officer
Nominations
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Internet Initiative Japan Inc.
Date: May 31, 2005 By: /s/ Koichi Suzuki
----------------------------------------
Koichi Suzuki
President, Chief Executive Officer and
Representative Director
EXHIBIT 1
---------
IIJ to List on the Mothers market of the Tokyo Stock Exchange
TOKYO--(BUSINESS WIRE)--May 27, 2005--Internet Initiative Japan
Inc. (IIJ, NASDAQ:IIJI), one of Japan's leading Internet access and
comprehensive network solutions providers, today announced that it
received notification that the Tokyo Stock Exchange has approved the
listing of its shares of common stock on the Mothers market of the
Tokyo Stock Exchange. IIJ believes that listing on the Mothers market
will further expand its business by strengthening its presence in
Japan and by providing additional financing options. The expected
listing date is June 23, 2005.
In connection with the Mothers listing, IIJ plans to issue 2,500
new shares and two shareholders, NIF Ventures Co., Ltd. and JAFCO Co.,
Ltd., which are Japanese venture capital firms, plan to sell 900
existing shares in an underwritten public offering in Japan. In
addition, the lead underwriter will be provided by the selling
shareholders with the option to purchase up to additional 500 shares
to cover over-allotments, if any. The newly issued shares will
comprise approximately 6.1% of IIJ's total shares after giving effect
to the issuance. IIJ plans to use the proceeds from the issuance of
the new shares for ongoing capital investment in operations and
research and development.
The offer price for the public offering in Japan will be based on
the closing price of IIJ's American Depositary Receipts on the NASDAQ
National market on the date prior to the pricing date subject to a
discount determined in accordance with market demand. Pricing is
expected to occur on a date between June 14 and June 16.
Any shares sold in connection with the proposed offering have not
been and will not be registered under the U.S. Securities Exchange Act
of 1933, as amended (the "Securities Act") and may not be offered or
sold in the United States absent registration under the Securities Act
or an applicable exemption from the registration requirements of the
Securities Act.
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 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.
CONTACT: IIJ Corporate Communications,
Tel: +81-3-5259-6500
E-mail: ir@iij.ad.jp
URL: http://www.iij.ad.jp/
EXHIBIT 2
---------
Notice on Unaudited Financial Results for Fiscal Year Ending Ended
in March 31, 2005 and Targets for Fiscal Year Ending March 31, 2006
TOKYO--(BUSINESS WIRE)--May 27, 2005--Internet Initiative Japan
Inc. ("IIJ") would like to notify you that the unaudited consolidated
and non-consolidated financial results for the fiscal year ended March
31, 2005 (from April 1, 2004 to March 31, 2005) and the targets for
consolidated and non-consolidated financial results for the fiscal
year ending March 31, 2006 (from April 1, 2005 to March 31, 2006) are
as follows;
Consolidated (Under generally accepted accounting principles in
the United States of America
For the fiscal year or period ending
(Expressed in millions of Japanese Yen (JPY) except per share,
amounts less than JPY one million is omitted)
----------------------------------------------------------------
March 31, 2006 September 30, 2005
(Annual target) (Semi-annual target)
-----------------------------------------------
% of % of
JPY Total YoY % JPY Total YoY %
Revenues Revenues
----------------------------------------------------------------
Revenues 46,330 100.0 111.1 19,980 100.0 104.1
----------------------------------------------------------------
Operating
income (loss) 2,320 5.0 185.9 550 2.8 302.7
----------------------------------------------------------------
Income (loss)
before income
tax expense,
minority
interests and
equity in net
income of
equity method
investees 3,990 8.6 126.7 1,390 7.0 6,678.8
----------------------------------------------------------------
Net income
(loss) 3,700 8.0 127.3 1,320 6.6 -
----------------------------------------------------------------
Basic and
diluted net
income (loss)
per share 90,553 32,305
----------------------------------------------------------------
--------------------------------------------------------
March 31, 2005 March 31, 2004
(Unaudited) (Actual)
---------------------------------------
% of % of
JPY Total YoY % JPY Total
Revenues Revenues
--------------------------------------------------------
Revenues 41,702 100.0 107.5 38,779 100.0
--------------------------------------------------------
Operating
income (loss) 1,247 3.0 - (1,449) (3.7)
--------------------------------------------------------
Income (loss)
before income
tax expense,
minority
interests and
equity in net
income of
equity method
investees 3,148 7.6 - (467) (1.2)
--------------------------------------------------------
Net income
(loss) 2,906 7.0 - (2,270) (5.9)
--------------------------------------------------------
Basic and
diluted net
income (loss)
per share 75,858 (71,606)
--------------------------------------------------------
Non-consolidated
For the fiscal year or period ending
(Expressed in million of Japanese Yen (JPY) except per share,
amounts less than JPY one million is omitted)
----------------------------------------------------------------
March 31, 2006 September 30, 2005
(Annual target) (Semi-annual target)
-----------------------------------------------
% of % of
JPY Total YoY % JPY Total YoY %
Revenues Revenues
----------------------------------------------------------------
Revenues 37,000 100.0 109.8 15,910 100.0 102.9
----------------------------------------------------------------
Operating
income (loss) 1,300 3.5 203.7 290 1.8 -
----------------------------------------------------------------
Ordinary
income (loss) 1,260 3.4 294.7 280 1.8 -
----------------------------------------------------------------
Net income
(loss) 3,210 8.7 119.1 1,210 7.6 -
----------------------------------------------------------------
Basic and
diluted net
income (loss)
per share 78,560.94 29,613.31
----------------------------------------------------------------
Annual divided
per share - -
----------------------------------------------------------------
--------------------------------------------------------
March 31, 2005 March 31, 2004
(Unaudited) (Actual)
---------------------------------------
% of % of
JPY Total YoY % JPY Total
Revenues Revenues
--------------------------------------------------------
Revenues 33,711 100.0 108.1 31,198 100.0
--------------------------------------------------------
Operating
income (loss) 638 1.9 - (868) (2.8)
--------------------------------------------------------
Ordinary
income (loss) 427 1.3 - (1,160) (3.7)
--------------------------------------------------------
Net income
(loss) 2,695 8.0 - (1,932) (6.2)
--------------------------------------------------------
Basic and
diluted net
income (loss)
per share 70,270.65 (60,841.46)
--------------------------------------------------------
Annual divided
per share - -
--------------------------------------------------------
Notes:
1. Both unaudited consolidated and non-consolidated financial
results for the fiscal year ended March 31, 2005 have not been audited
in accordance to the rule in Article 193-2 of Securities and Exchange
Law (in Japan).
2. Basic and diluted net income (loss) per share in the
consolidated financial results for the fiscal year ended March 31,
2004 and March 31, 2005 are computed using the weighted-average number
of shares of common stock outstanding during the fiscal year. Basic
and diluted net income (loss) per share in the non-consolidated
financial results for the fiscal year ended March 31, 2004 and March
31, 2005 are computed using the weighted-average number of shares of
common stock in issuance during the fiscal year.
3. Consolidated and non-consolidated basic and diluted net income
per share for the period ending September 30, 2005 and the fiscal year
ending March 31, 2006 is calculated assuming that 40,860 shares will
be issued as of period end, including the 2,500 shares proposed to be
issued in connection with the contemplated listing.
4. 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, estimated and
projections about its business and the industry. These forward
-looking statements, such as targeted financial results, are subject
to various risks, uncertainties and other factors that could cause
IIJ's actual results to differ materially from those contained in any
looking-forward 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 filings on Form 20-F of its annual report and other
filings with the United States Securities and Exchange Commission.
CONTACT: Internet Initiative Japan Inc.
Akihisa Watai, +81-3-5259-6500
EXHIBIT 3
---------
[English Translation]
May 27, 2005
Koichi Suzuki
President, Chief Executive Officer and
Representative Director
Internet Initiative Japan Inc.
1-105 Kanda Jinbo-cho, Chiyoda-ku, Tokyo
Japan
(Code Number: 3774 TSE Mothers)
Contact: Akihisa Watai
Director, Chief Financial Officer and
Chief Accounting Officer
Telephone: +81-3-5259-6500
Notice on the Board of Directors' Resolution regarding the Issue of New Shares
------------------------------------------------------------------------------
and Secondary Offering
----------------------
Internet Initiative Japan Inc. (the "Company") would like to announce that
at the meeting of the Board of Directors held on May 27, 2005, the public
offering of new shares and secondary offering of shares accompanying the
proposed listing of its shares on the Mothers of the Tokyo Stock Exchange was
resolved. The details of the resolution are as follows:
1. Public Offering of New Shares
(1) Number of new shares to be 2,500 shares of common stock
issued
(2) Issue price To be determined on the date between Tuesday, June 14 to
Thursday, June 16 (the "Pricing Date") by the method as
prescribed in Article 7-2 of No.14 Rules of Fair
Practice of the Japan Securities Dealers Association.
(3) Amount of issue price not Amount of the issue price determined pursuant to Item (2)
to be included in stated above, less the amount to be incorporated into the
capital stated capital. The amount to be incorporated into the
stated capital means one half of the issue price, and
any fraction less than one yen remaining after the
calculation shall be rounded up to the nearest yen.
(4) Method of offering Public underwriting offering. Daiwa Securities SMBC
Co.Ltd., Nomura Securities Co., Ltd., Mizuho Securities
Co., Ltd., UFJ Tsubasa Securities Co., Ltd., Nikko
Citigroup Limited, Shinko Securities Co., Ltd., Okasan
Securities Co., Ltd., SMBC Friend Securities Co., Ltd.,
Takagi Securities Co., Ltd., Maruhachi Securities Co.,
Ltd., MONEX BEANS, Inc., Rakuten Securities, Inc. and
Retela Crea Securities Co., Ltd. will jointly and
severally subscribe for all shares.
The offer price for the general public offering (offer
price) will be determined by the method as prescribed in
Article 7-2 of No.14 Rules of Fair Practice of the Japan
Securities Dealers Association. The offer price will be
determined in consideration of demand conditions and
will be based on the closing price of the Company's
American Depository Receipts ("ADR") on the U.S. NASDAQ
National Market on the day before the Pricing Date. In
the event that there is no closing price on that date,
the closing price on the nearest preceding date will be
used. The provisional terms are as follows. The ADR
closing price will be multiplied by 2,000, the stock-ADR
conversion rate. The resulting figure will be converted
to yen using the Bank of Tokyo-Mitsubishi's telegraphic
transfer middle rate on the Pricing Date. That figure
will then be multiplied by a number from 0.90 to 1.00.
Any remainders of less than one yen will be truncated.
Note: This notice is intended as a press release for a general announcement concerning
IIJ's issuance and sale of new shares. It is not intended as a solicitation of
investment. Any investments should be made at the discretion of individual
investors after reading IIJ's prospectus on the issuance and sale of shares and
any revisions thereto.
The shares subject to the aforementioned new share offering and secondary offering
have not been and will not be registered under the United States Securities Act
of 1933, as amended ("the Securities Act") and may not be offered or sold in the
United States or to US persons absent registration under the Securities Act or an
applicable exemption from the registration requirements of the Securities Act.
1
(5) Payment locations Sumitomo Mitsui Banking Corporation, Tokyo Branch
Mizuho Corporate Bank, Ltd., Head Office
UFJ Bank Limited, Nihonbashi Branch
(6) Underwriting contract The Mitsubishi Trust and Banking Corporation, Head Office
No underwriting fees will be paid. Instead, the total
amount of the difference between the offer price for the
general offering (offer price) and the price paid by the
underwriters to IIJ will be retained by the
underwriters.
(7) Subscription period Friday, June 17 to Tuesday, June 21, 2005. In
consideration of demand conditions, the application
period may be moved to an earlier period. The earliest
dates to which the application period could be moved
will be the period from Wednesday, June 15 to Friday,
June 17, 2005.
(8) Payment date Wednesday, June 22, 2005
(9) Commencement date for Friday, April 1, 2005
accrual of dividends
(10) Subscription deposit Equal to the amount of the offer price for the general
public offering (offer price).
(11) Minimum subscription unit 1 share
(12) The issue price, the amount of the issue price that will not be transferred to
capital, and all other matters of importance concerning this issue will be decided by
IIJ's President and Representative Director.
(13) Each of the above items shall be conditional on the effectiveness of registration
under the Securities and Exchange Law of Japan.
2. Secondary Offering
(1) Number of shares to be sold 1,400 shares of common stock
(1) Shares sold through underwriting by the underwriters:
900 shares of common stock
(2) Shares sold through over-allotment: maximum of 500
shares of common stock
(2) Offer Price Same as the offer price described above in "1. Public
Offering of New Shares."
(3) Sellers and the number of (1) Shares sold through underwriting by the underwriters
shares to be sold NIF Ventures Co., Ltd., 1-2-1 Kyobashi, Chuo-ku, Tokyo,
650 shares
JAFCO Co., Ltd., 1-8-2 Marunouchi, Chiyoda-ku, Tokyo,
250 shares
(2) Shares sold through over-allotment
Note: This notice is intended as a press release for a general announcement concerning
IIJ's issuance and sale of new shares. It is not intended as a solicitation of
investment. Any investments should be made at the discretion of individual
investors after reading IIJ's prospectus on the issuance and sale of shares and
any revisions thereto.
The shares subject to the aforementioned new share offering and secondary offering
have not been and will not be registered under the United States Securities Act
of 1933, as amended ("the Securities Act") and may not be offered or sold in the
United States or to US persons absent registration under the Securities Act or an
applicable exemption from the registration requirements of the Securities Act.
2
Daiwa Securities SMBC Co.Ltd., 1-8-1 Marunouchi, Chiyoda-
ku, Tokyo, maximum of 500 shares
Total of (1) and (2): maximum of 1,400 shares
(4) Sales method (1) Shares sold through underwriting by the underwriters
The full offering will be underwritten by Daiwa
Securities SMBC. Compensation to the underwriters for
the offering will consist of the total amount of the
difference between the offer price and the underwriting
price, which is the price paid by the underwriters to
IIJ.
(2) Shares sold through over-allotment
After taking into consideration the demand conditions of
the offering as specified above under "1. Public
Offering of New Shares," Daiwa Securities SMBC Co.Ltd.
will offer additional shares of IIJ common stock that it
plans to borrow from shareholders. Depending on demand
conditions, the offering through over-allotment may be
by partially or entirely cancelled.
(5) Subscription Period Same as the subscription period specified above under "1.
Public Offering of New Shares"
(6) Transfer date Thursday, June 23, 2005
(7) Minimum subscription unit 1 share
(8) Subscription deposit Equal to the offer price
(9) The offer price and all other matters required for this equity offering shall be
decided by IIJ's president and representative director.
(10) Each of the above items shall be conditional on the effectiveness of registration
under the Securities and Exchange Law of Japan. In addition, if the issuance of new
shares via public offering is cancelled, the sale through underwriting by the
underwriters and the sale through over-allotment will also be cancelled.
Note: This notice is intended as a press release for a general announcement concerning
IIJ's issuance and sale of new shares. It is not intended as a solicitation of
investment. Any investments should be made at the discretion of individual
investors after reading IIJ's prospectus on the issuance and sale of shares and
any revisions thereto.
The shares subject to the aforementioned new share offering and secondary offering
have not been and will not be registered under the United States Securities Act
of 1933, as amended ("the Securities Act") and may not be offered or sold in the
United States or to US persons absent registration under the Securities Act or an
applicable exemption from the registration requirements of the Securities Act.
3
[Reference]
1. Summary of Public Offering of New Shares and Secondary Offering
(1) Number of shares to be
issued and number of
shares to be sold
Number of new shares to be 2,500 shares of common stock
issued
Number of shares to be sold (1) Sold through underwriting by the underwriters
900 shares
(2) Sold through over-allotment (*)
Maximum of 500 shares
(2) Demand reporting period Wednesday, June 8 to Thursday, June 16, 2005.
In accordance with demand conditions, the reporting
period may be shortened. If it is changed, the shortest
demand reporting period will be from Wednesday, June 8,
to Tuesday, June 14, 2005.
(3) Pricing Date Any date from Tuesday, June 14 through Thursday, June
16, 2005
(4) Subscription period Friday, June 17, to Tuesday, June 21, 2005. In
accordance with demand conditions, the subscription
period may be changed to an earlier period. If it is
changed, the earliest period will be from Wednesday,
June 15, to Friday, June 17, 2005.
(5) Share transfer date Thursday, June 23, 2005
(6) Dividend Value Date Friday, April 1, 2005
(*) Shares sold through over-allotment
The sale of shares through over-allotment is an additional offering that
may be implemented by Daiwa Securities SMBC in accordance with investor demand.
Accordingly, the number of shares to be offered through over-allotment is shown
as the maximum number of shares, and it is possible that the number of shares
will be reduced or that the offering via allotment will be eliminated based on
demand conditions.
The IIJ common stock that will be sold through over-allotment will be
borrowed by Daiwa Securities SMBC from IIJ shareholders for the purpose of the
sale through over- allotment.
In the connection therewith, Daiwa Securities SMBC will be granted by IIJ
shareholders an option (hereafter, "green-shoe option") to additionally acquire
a maximum of 500 shares. The exercise period of the green shoe option will end
July 15, 2005. Daiwa Securities SMBC will return the shares borrowed from IIJ
shareholders using shares acquired through the exercise of the green-shoe
option, the syndicate cover transaction described below, or both.
Also, during the period from June 23 to July 15, 2005 (hereafter, syndicate
cover transaction period), Daiwa Securities SMBC may purchase shares of IIJ's
stock on the Tokyo Stock Exchange (hereafter, syndicate cover transaction), for
the purpose of returning shares borrowed from IIJ shareholders, with an upper
limit of the number of shares offered through over-allotment.
Daiwa Securities SMBC does not plan to exercise the green-shoe option for
the number of shares in the syndicate cover transaction. In addition, during the
syndicate cover transaction period, Daiwa Securities SMBC may decide not to
conduct the syndicate cover transaction or to conclude the transaction without
purchasing the maximum number of shares.
Note: This notice is intended as a press release for a general announcement concerning
IIJ's issuance and sale of new shares. It is not intended as a solicitation of
investment. Any investments should be made at the discretion of individual
investors after reading IIJ's prospectus on the issuance and sale of shares and
any revisions thereto.
The shares subject to the aforementioned new share offering and secondary offering
have not been and will not be registered under the United States Securities Act
of 1933, as amended ("the Securities Act") and may not be offered or sold in the
United States or to US persons absent registration under the Securities Act or an
applicable exemption from the registration requirements of the Securities Act.
4
2. Change in Number of Shares Issued as a Result of this Capital Increase:
Current number of shares 38,360 shares
issued
Increase in number of shares 2,500 shares
issued
Number of shares issued after 40,860 shares
capital increase
3. Use of the Proceeds from the Issue
The total proceeds of approximately 1,880,000 thousand yen will be
allocated to the future capital investment and research and development.
4. Distribution of Profits to Shareholders
(1) Basic policy on the distribution of profits
The Company has not paid dividends in the past years. The Company
considers the payment of dividends to shareholders to be an important
management issue. However, at the current time, the Company's policy
is to give priority to securing funds to strengthen its financial
position and to use for operational development. Therefore, there is
possibility that the Company would not pay dividends for a while.
(2) Specific plans to increase distribution of profits to shareholders in
the future.
The Company does not have any specific fixed plans at the current time.
5. Share Sales Policy
With regard to sales of the new shares, considering such factors as the
requirements of Tokyo Stock Exchange regulations related to meeting
the required level of the number of shareholders and obtaining the
proper level of distribution of the shares after listing, there may be
sales made to investors that did not report their requirements for
shares.
With regard to sales to investors that reported their intention to purchase
the new shares, the underwriters will follow their respective company
regulations and procedures, and choose from the ranks of investors
that reported their intention to purchase the new shares at or above
the offering price to carry out such sales, taking into consideration,
as a general principle, such factors as the degree of the investors'
experience, their knowledge of securities investment, and their
investing policies.
Concerning sales to investors that did not report requirements for shares,
the underwriters will make their decisions based on their respective
company rules and regulations and, as a general principle, will
consider such factors as knowledge and experience in securities
investment, investing policies, and transactions with underwriters
when making their decisions concerning such sales.
Note: In the above section "4. Distribution of Profits to Shareholders,"
the section that refers to future distribution of profits does not
guarantee a certain level of dividends and is based on current
forecasts.
The above represents a translation of the original version in the Japanese
language.
###
Note: This notice is intended as a press release for a general announcement concerning
IIJ's issuance and sale of new shares. It is not intended as a solicitation of
investment. Any investments should be made at the discretion of individual
investors after reading IIJ's prospectus on the issuance and sale of shares and
any revisions thereto.
The shares subject to the aforementioned new share offering and secondary offering
have not been and will not be registered under the United States Securities Act
of 1933, as amended ("the Securities Act") and may not be offered or sold in the
United States or to US persons absent registration under the Securities Act or an
applicable exemption from the registration requirements of the Securities Act.
5
EXHIBIT 4
---------
[English Translation]
May 27, 2005
Takuo Tsurushima
President & CEO
Tokyo Stock Exchange, Inc.
Condensed Consolidated Financial Results for the Third Quarter of the
Fiscal Year Ended March 31, 2005
(U.S. Accounting Standards)
Listed company Internet Initiative Japan Inc.
(URL: http://www.iij.ad.jp/)
Head quarters 1-105 Kanda Jinbo-cho, Chiyoda-ku,
Tokyo Japan
Representative Koichi Suzuki, President, Chief
Executive Officer and Representative
Director
Contact Akihisa Watai, Director, Chief
Financial Officer and Chief Accounting
Officer
Telephone 03-5259-6500
I. Financial Results
Third quarter of the fiscal year ended March 2005 (from April 1, 2004 to
December 31, 2004)
i. Operational results (Unaudited)
-------------------------- ----------------------- ---------------------- --------------------- --------------------
Third quarter of the Third quarter of the
fiscal year ended fiscal year ended % increase Fiscal year ended
March 31, 2004 March 31, 2005 (decrease) March 31, 2004
-------------------------- ----------------------- ---------------------- --------------------- --------------------
(millions of yen) (millions of yen) (%) (millions of yen)
Total revenues - 29,448 - 38,779
-------------------------- ----------------------- ---------------------- --------------------- --------------------
Operating income (loss) - 591 - (1,449)
-------------------------- ----------------------- ---------------------- --------------------- --------------------
Income (loss) before
income tax expense
(benefit) - 763 - (467)
-------------------------- ----------------------- ---------------------- --------------------- --------------------
Net income (loss) - 650 - (2,270)
========================== ======================= ====================== ===================== ====================
Total assets - 45,259 - 42,736
-------------------------- ----------------------- ---------------------- --------------------- --------------------
Total shareholders' - 10,362 - 6,214
equity
-------------------------- ----------------------- ---------------------- --------------------- --------------------
1
ii. Cash flows (Unaudited)
-------------------------- --------------------------- ------------------------------- -----------------------------
Third quarter of the
fiscal year ended March Third quarter of the fiscal Fiscal year ended March 31,
31, 2004 year ended March 31, 2005 2004
-------------------------- --------------------------- ------------------------------- -----------------------------
(millions of yen) (millions of yen) (millions of yen)
Net cash provided by
operating activities - 2,697 1,923
-------------------------- --------------------------- ------------------------------- -----------------------------
Net cash provided by
(used in) investing
activities - 127 (852)
-------------------------- --------------------------- ------------------------------- -----------------------------
Net cash used in - (2,968) (7,668)
financing activities
-------------------------- --------------------------- ------------------------------- -----------------------------
Cash and cash
equivalent, end of
period (year) - 12,158 12,284
-------------------------- --------------------------- ------------------------------- -----------------------------
Notes:
1. Comparisons with the third quarter of the previous fiscal year have not been
included because the Company began quarterly disclosure of consolidated
results in the format required by TSE rules from the third quarter of the
fiscal year ended March 31, 2005.
2. The Company provides customers with a comprehensive range of connectivity
services, value-added services, systems integration, and equipment sales as a
combination. The Company does not classify results by segment because it
implements combined marketing, advertising, and sales management of such
services and does not regard them as separate segments.
3. In cash flows, the effect of exchange rate changes on cash and cash
equivalent was a negative YEN 43 million in the previous fiscal year, ended
March 31, 2004, and a positive YEN 18 million in the third quarter of the
fiscal year ended March 31, 2005.
2. Performance Overview (from April 1, to December 31, 2004)
(1) Performance Overview
In the third quarter of the fiscal year ended March 31, 2005, trends in
Japan's economy were favorable. Although there were such uncertain factors as
rising crude oil prices, consumer spending rose modestly, exports and industrial
production were up, and corporate earnings were favorable.
In the market for data communications, including the Internet, demand for
reliable systems with respect to information management and security is growing
in line with the establishment among corporations and government agencies of
networks that enable efficient usage of information.
In such an operating environment, during the third quarter of the fiscal year
ended March 31, 2005, the Company focused on offering total solutions that
provide customers with services comprehensively. Also, the Company focused
efforts on curbing costs and raising capacity utilization.
In the third quarter of the fiscal year ended March 31, 2005, the Company
recorded revenues of YEN 29,448 million, operating income of YEN 591 million,
income before income tax expense of YEN 763 million, and net income of YEN 650
million.
2
The Company's performance by service area was as follows.
a. Connectivity and Value-Added Services
In dedicated access services, the Company focused on the construction and
provision of network systems using Internet VPN services for corporate customers
with multiple operational sites. Internet VPN services, which use the relatively
lower-priced Flet's network for access lines, offer a low-cost alternative to
the network systems that use conventional dedicated lines or frame relay lines.
Contracts for dedicated access services increased significantly and contracted
bandwidth per customer rose. Meanwhile, relatively higher-priced IP services saw
the cancellation of certain large contracts and some customers shifted to new,
inexpensive packages that use the Flet's network for access lines. As a result
of such factors, revenues totaled YEN 8,531 million.
In dial-up access services, sales of services for individuals such as IIJ4U
declined, and revenues amounted to YEN 2,218 million.
In value-added services, with the growing corporate outsourcing needs, sales
of services related to security, network outsourcing, server outsourcing, and
data centers were up. Consequently, revenues from value-added services stood at
YEN 3,682 million.
In other services, the Company leased network equipment, offered customer
support through consolidated subsidiary Net Care, Inc., and sold Wide-area
Ethernet services. As a result, revenues were YEN 2,190 million.
As a result of the above, revenues from connectivity and value-added
services totaled YEN 16,623 million. The cost of revenues from connectivity and
value-added services declined mainly due to reduced backbone costs.
Consequently, gross margin was YEN 2,158 million, and the gross margin ratio for
connectivity and value-added services was 13.0%.
b. Systems Integration
In the third quarter of the fiscal year ended March 31, 2005, the revenues
from systems integration was YEN 10,501 million. Of that amount, the revenues
from the services likely to generate monthly ongoing revenues, such as network
operation and maintenance, was YEN 5,690 million.
Systems integration accounted for gross margin of YEN 2,332 million, and the
gross margin ratio was 22.2% mainly due to increased revenues from operation and
consulting.
c. Equipment Sales
In the third quarter of the fiscal year ended March 31, 2005, equipment
sales generated revenues of YEN 2,322 million, which were related to sales of
network equipment and equipment developed in-house by IIJ, such as SEIL routers,
to customers. Gross margin amounted to YEN 174 million, while the gross margin
ratio was 7.5%.
(2) Cash Flows
Cash and cash equivalent at the end of the third quarter of the fiscal year
ended March 31, 2005 totaled YEN 12,158 million.
(Net cash provided by operating activities)
Net cash provided by operating activities was YEN 2,697 million.
(Net cash provided by investing activities)
Net cash provided by investing activities amounted to YEN 127 million.
Proceeds from sale of other investments such as available-for-sale securities of
YEN 967 million offset purchase of property and equipment of YEN 480 million and
acquisition of business of YEN 371 million.
(Net cash used in financing activities)
Net cash used in financing activities totaled YEN 2,968 million. repayments
of long-term and short-term borrowings of YEN 3,269 million, principal payments
under capital leases of YEN 2,114 million, and the repurchase of convertible
notes of YEN 745 million exceeded proceeds from long-term borrowings and
proceeds from a securities loan agreement of YEN 2,972 million.
3
3. Outlook for the Fiscal Year Ended March 31, 2005
The outlook for the Company's consolidated results in the fiscal year ended
March 31, 2005, is as follows.
-------------------- ----------------------- ----------------------- ----------------------- -----------------------
Total revenues Operating income Income before income Net income
tax expense
-------------------- ----------------------- ----------------------- ----------------------- -----------------------
(millions of yen) (millions of yen) (millions of yen) (millions of yen)
Outlook 41,702 1,247 3,148 2,906
-------------------- ----------------------- ----------------------- ----------------------- -----------------------
Note: The above performance projections are based on the information that was
available to the Company on the date of release of this document. These
performance projections have been prepared based certain assumptions and contain
risks and uncertainties. Further, the Company's actual performance could differ
significantly from projected figures due to a variety of factors including
changes in operating conditions and market trends. At this time, the main
foreseeable risks and uncertainties facing the Company include: 1) a decline in
the willingness of corporations to invest in systems as a result of changes in
the economic situation such as sluggishness in Japan's economy; 2) a reduction
in the reliability of the Company's services resulting from the discontinuance
of services due to various events; 3) changes in the procurement procedures or
costs for such items as outsourcing or backbone lines required to provide
services; 4) further competition or price competition with competitors; 5) an
increase in the seasonal fluctuation of quarterly results; and 6) the effect of
changes in the market value of stockholdings on business performance or
financial position. With respect to these risks and uncertainties, please refer
to the Company's securities registration statements and other financial
documents, which the Company plans to release in adherence with Japan's laws and
disclosure regulations, and to its Form 20-F and other documents that the
Company files with the United States Securities and Exchange Commission in
adherence with securities laws of the United States of America.
4
4. Financial Statements
Third quarter of the fiscal year ended March 2005 (from April 1, 2004, to
December 31, 2004)
(1) Quarterly Consolidated Balance Sheets (Unaudited)
-----------------------------------------------------------------------------------------------------------------
At the end of the third quarter of Consolidated balance sheets at
the fiscal year ended March 31, the end of the fiscal year
2005 ended March 31, 2004
(As of December 31, 2004) (As of March 31, 2004)
-----------------------------------------------------------------------------------------------------------------
Note(s) (thousands of yen) % of (thousands % of
total of yen) total
-----------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalent 12,158,790 12,284,239
Accounts receivable, net of
allowance for doubtful
accounts of YEN 20,975 thousand
and YEN 73,357 thousand at
December 31 and March 31, 2004 3 6,231,361 8,994,156
respectively
Inventories 372,144 438,435
Prepaid expenses 989,003 557,703
Other current assets 334,169 325,422
---------------------------- -------------------------
Total current assets 20,085,467 44.4 22,599,955 52.9
Investments in and Advances to
Equity Method Investees, Net of
Allowance for Doubtful Accounts
of YEN 23,900 Thousand at December 3 759,585 1.7 778,152 1.8
31, 2004
Other Investments 2, 5 11,072,053 24.4 7,931,893 18.6
Property and Equipment--Net 4 10,003,936 22.1 8,601,905 20.1
Intangible Assets--Net 576,689 1.3 141,341 0.3
Guarantee Deposits 4, 5 2,050,305 4.5 2,075,123 4.9
Other Assets, Net of Allowance for
Doubtful Accounts of YEN 320,883
Thousand and YEN 419,248 Thousand at
December 31 and March 31, 2004, 711,335 1.6 608,556 1.4
Respectively
---------------------------- -------------------------
Total assets 45,259,370 100.0 42,736,925 100.0
---------------------------- -------------------------
5
-----------------------------------------------------------------------------------------------------------------
At the end of the third quarter of Consolidated balance sheets at
the fiscal year ended March 31, the end of the fiscal year
2005 ended March 31, 2004
(As of December 31, 2004) (As of March 31, 2004)
-----------------------------------------------------------------------------------------------------------------
Note(s) (thousands of yen) % of (thousands % of
total of yen) total
-----------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term borrowings 5 4,825,844 6,564,093
Payable under securities loan
agreement 5 722,800 -
Long-term borrowings--current
portion 5 2,185,094 1,548,246
Convertible notes 5 11,088,000 11,832,000
Capital lease
obligations--current portion 4 2,784,469 2,387,754
Accounts payable 3 3,566,158 7,187,976
Accrued expenses 665,821 454,366
Other current liabilities 7 780,267 483,925
---------------------------- ------------------------
Total current liabilities 26,618,453 58.8 30,458,360 71.3
Long-Term Borrowings 5 2,389,339 5.3 2,308,019 5.4
Capital Lease
Obligations--Noncurrent 4 4,459,352 9.8 2,880,298 6.7
Accrued Retirement and Pension
Costs 120,732 0.3 72,687 0.2
Other Noncurrent Liabilities 320,393 0.7 161,122 0.4
---------------------------- ------------------------
Total Liabilities 33,908,269 74.9 35,880,486 84.0
---------------------------- ------------------------
MINORITY INTEREST 988,964 2.2 642,311 1.5
---------------------------- ------------------------
COMMITMENTS AND CONTINGENCIES 3, 6 - -
SHAREHOLDERS' EQUITY
Common-stock--authorized,
75,520 shares; issued and
outstanding, 38,360 shares at
March 31 and December 31, 2004 13,765,372 30.4 13,765,372 32.2
Additional paid-in capital 23,637,628 52.2 23,637,628 55.3
6
Accumulated deficit (36,689,673) (81.0) (37,340,321) (87.4)
Accumulated other
comprehensive income 9,692,810 21.4 6,195,449 14.5
Treasury stock--120 shares held
by an equity method investee (44,000) (0.1) (44,000) (0.1)
---------------------------- ------------------------
Total Shareholders' Equity 10,362,137 22.9 6,214,128 14.5
---------------------------- ------------------------
Total liabilities and 45,259,370 100.0 42,736,925 100.0
shareholders' equity
---------------------------- ------------------------
-----------------------------------------------------------------------------------------------------------------
See notes to quarterly consolidated financial statements.
7
(2) Quarterly Consolidated Statements of Operations (Unaudited)
--------------------------------------------------------------------------------------------------------------
Consolidated statements of
Third quarter of the fiscal year operations of the fiscal year
ended March 31, 2005 ended March 31, 2004
(from April 1, 2004, to December (from April 1, 2003 to March 31,
31, 2004) 2004)
--------------------------------------------------------------------------------------------------------------
of (thousands of yen) % of
(thousands of yen) % total total
Note(s) revenue revenue
--------------------------------------------------------------------------------------------------------------
Revenues: 3
Connectivity and
value-added services:
Dedicated access 8,531,798 12,862,132
Dial-up access 2,218,688 3,088,498
Value-added services 3,682,914 4,296,228
Other 2,190,473 2,117,794
------------------------- --------------------------
Total 16,623,873 22,364,652
Systems integration 10,501,959 11,847,687
Equipment sales 2,322,386 4,567,123
------------------------- --------------------------
Total revenues 29,448,218 100.0 38,779,462 100.0
------------------------- --------------------------
Cost and Expenses:
Cost of connectivity and
value-added services 3, 4 14,465,368 20,047,438
Cost of systems integration 8,169,863 9,851,726
Cost of equipment sales 2,147,704 4,346,243
------------------------- --------------------------
Total cost 24,782,935 84.2 34,245,407 88.3
Sales and marketing 2,058,342 7.0 3,527,490 9.1
General and administrative 1,866,051 6.3 2,098,481 5.4
Research and development 149,011 0.5 357,968 0.9
------------------------- --------------------------
Total cost and expenses 28,856,339 98.0 40,229,346 103.7
------------------------- --------------------------
Operating Income (Loss) 591,879 2.0 (1,449,884) (3.7)
------------------------- --------------------------
Other Income (Expenses):
Interest income 8,655 37,516
Interest expense (506,163) (702,036)
Foreign exchange losses (2,168) (6,493)
Gain on other investments 2 596,721 1,412,858
Gain on sale of securities
of equity method investees 25,933 -
8
Other--net 48,757 240,375
------------------------- --------------------------
Other income 171,735 0.6 982,220 2.5
(expenses)--net
------------------------- --------------------------
Income (Loss) from
operations before Income Tax
Expense (Benefit) 763,614 2.6 (467,664) (1.2)
Income Tax Expense
(Benefit) 70,031 0.2 32,536 0.1
Minority Interests in
Consolidated Subsidiaries (46,693) (0.2) 235,812 0.6
Equity in Net Income (Loss)
of Equity Method Investees: 3
Equity method net income
(loss) 3,758 0.0 (286,317) (0.8)
Impairment loss on
investment, advance and
deposits for Crosswave - (1,719,981) (4.4)
------------------------- --------------------------
Total equity in net
income (loss) of equity
method investees 3,758 0.0 (2,006,298) (5.2)
------------------------- --------------------------
650,648 2.2 (2,270,686) (5.9)
Net Income (Loss)
------------------------- --------------------------
--------------------------------------------------------------------------------------------------------------
9
---------------------------------------------------------------------------------------------------------------
Note(s) Consolidated statements of
Third quarter of the fiscal year operations of the fiscal year
ended March 31, 2005 ended March 31, 2004
(from April 1, 2004, (from April 1, 2003 to March 31,
to December 31, 2004) 2004)
---------------------------------------------------------------------------------------------------------------
Weighted-Average Number of 38,312 31,711
Common Shares Outstanding
Basic and Diluted Net
Income (Loss) per Common
Share 16,983 (71,606)
---------------------------------------------------------------------------------------------------------------
See notes to quarterly consolidated financial statements.
10
(3) Consolidated Statements of Shareholders' Equity (Capital Deficiency)
(Unaudited)
Consolidated statements of shareholders' equity (capital deficiency) for the
third quarter of the fiscal year ended March 31, 2005
(Unit: Thousands of yen)
------------------------------------------------------------------------------------------------------------------------
Number of
shares of
common
stock Accumulated
outstanding Additional other
(including paid-in Accumulated comprehensive Treasury
treasury Common stock capital deficit income stock Total
stock)
------------------------------------------------------------------------------------------------------------------------
Balance, April 1, 2004 38,360 13,765,372 23,637,628 (37,340,321) 6,195,449 (44,000) 6,214,128
Net income for the
nine months ended
December 31, 2004 650,648 650,648
Other comprehensive
income, net of tax 3,497,361 3,497,361
--------------------------
Total comprehensive 4,148,009
income
----------------------------------------------------------------------------------------------
Balance, December 31,
2004 38,360 13,765,372 23,637,628 (36,689,673) 9,692,810 (44,000) 10,362,137
----------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements for the third quarter of the fiscal year ended March 31, 2005.
Consolidated statements of shareholders' equity (capital deficiency) for the year ended March 31, 2004
(Unit: Thousands of yen)
------------------------------------------------------------------------------------------------------------------------
Number of
shares of
common
stock Accumulated
outstanding Additional other
(including paid-in Accumulated comprehensive Treasury
treasury Common stock capital deficit income stock Total
stock)
------------------------------------------------------------------------------------------------------------------------
Balance, April 1, 2003 22,480 7,082,336 17,068,353 (35,069,635) 914,610 (10,004,336)
Net income for the
year ended March 31,
2004 (2,270,686) (2,270,686)
Other comprehensive
income, net of tax 5,280,839 5,280,839
--------------------------
Total comprehensive 3,010,153
income
11
Issuance of common
stock --net of cost of
issuance 15,880 6,683,036 6,569,275 13,252,311
Purchase of common (44,000)
stock by an equity
method investee (44,000)
----------------------------------------------------------------------------------------------
Balance, March 31,
2004 38,360 13,765,372 23,637,628 (37,340,321) 6,195,449 (44,000) 6,214,128
----------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
12
(4) Quarterly Consolidated Statements of Cash Flows (Unaudited)
--------------------------------------------------------------------------------------------------------------------
Summarized statements of cash flows
Third quarter of the fiscal year of the fiscal year ended March 31,
ended March 31, 2005 2004
(from April 1, 2004, to December (from April 1, 2003 to March 31,
31, 2004) 2004)
------------------------------------------------------------------------
(thousands of yen) (thousands of yen)
--------------------------------------------------------------------------------------------------------------------
Operating Activities:
Net Income (loss) 650,648 (2,270,686)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization 3,132,149 4,008,324
Provision for doubtful accounts (11,423) 449,164
Loss (gains) on other
investments (596,721) (1,412,858)
Foreign exchange losses (gains) (6,825) 5,124
Gain (loss) on retirement of
convertible notes 5,195 (88,975)
Equity method net income (loss) (3,758) 286,317
Impairment loss on investment,
advance and deposits for
Crosswave - 1,719,981
Minority interest in net income
(loss) of consolidated subsidiaries 46,693 (235,812)
Deferred income tax expense 633 1,976
Others 139,140 163,280
Changes in operating assets and liabilities:
Decrease in accounts receivable 2,813,766 784,728
Decrease (increase) in
inventories 64,963 (30,813)
Decrease in accounts payable (3,513,394) (1,132,209)
Others (23,621) (324,175)
------------------------------------------------------------------------
Net cash provided by operating 2,697,445 1,923,366
activities
------------------------------------------------------------------------
13
Investing Activities:
Purchase of property and equipment (480,591) (1,657,302)
Purchase of other investments (10,227) (325,665)
Proceeds from sale of other
investments 967,367 2,170,584
Deposit of restricted cash for,
purchase of stock purchase right
of and advance to Crosswave - (1,719,981)
Refund of guarantee deposits-net 26,497 674,018
Acquisition of business (371,011) -
Others (4,976) 5,883
------------------------------------------------------------------------
Net cash provided by (used in) 127,059 (852,463)
investing activities
------------------------------------------------------------------------
Financing Activities:
Proceeds from issuance of
long-term borrowings 2,250,000 400,000
Repayments of long-term borrowings (1,531,832) (1,943,735)
Proceeds from securities loan
agreement 722,800 -
Principal payments under capital
leases (2,114,447) (2,733,012)
Net increase (decrease) in
short-term borrowings (1,738,250) 1,740,495
Repurchase of convertible notes (745,488) (3,047,460)
Proceeds from issuance of common
stock, net of issuance cost - 13,252,311
Proceeds from issuance of
subsidiary stock 188,632 -
------------------------------------------------------------------------
Net cash provided by (used in) (2,968,585) 7,668,599
financing activities
--------------------------------------------------------------------------------------------------------------------
14
--------------------------------------------------------------------------------------------------------------------
Summarized statements of cash flows
Third quarter of the fiscal year of the fiscal year ended March 31,
ended March 31, 2005 2004
(from April 1, 2004, to December (from April 1, 2003 to March 31,
31, 2004) 2004)
--------------------------------------------------------------------------------------------------------------------
(thousands of yen) (thousands of yen)
------------------------------------------------------------------------
Effect of Exchange Rate Changes 18,632 (43,615)
on Cash
------------------------------------------------------------------------
Net Increase (Decrease) in Cash
and Cash Equivalents (125,449) 8,695,887
Cash and Cash Equivalents,
Beginning of Quarter (Year) 12,284,239 3,588,352
------------------------------------------------------------------------
Cash and Cash Equivalents, End of 12,158,790 12,284,239
Quarter (Year)
------------------------------------------------------------------------
Additional Cash Flow Information:
Interest paid 441,685 625,248
Income taxes paid 28,837 48,413
Noncash Investing and Financing
Activities:
Acquisition of assets by entering
into capital leases 4,181,874 1,865,309
Exchange of common stock
investment due to merger
Market value of common shares
acquired 37,950 -
Cost of investment 2,500 -
--------------------------------------------------------------------------------------------------------------------
See notes to quarterly consolidated financial statements.
15
Basis of Presenting Consolidated Financial Statements for the Third Quarter
of the Fiscal Year Ended March 31, 2005
1. The Terminology, Form, and Preparation Methods for Consolidated Financial
Statements for the Third Quarter of the Fiscal Year Ended March 31, 2005
The financial statements for the third quarter of the fiscal year ended March
31, 2005, have been prepared in accordance with the provisions of article 81
"provisions for the terminology, form, and preparation methods for interim
consolidated financial statements" (Ministry of Finance, ordinance No. 24,
1999), and based on the accounting treatment principles and procedures and
disclosure methods required in relation to the issuance of American Depository
Receipts ("ADRs") (primarily 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).
IIJ registered the sale of ADRs with the Securities and Exchange Commission
("SEC") of the United States of America under the Securities and Exchange Act of
1933, as amended and registered the quotation of the ADRs on the NASDAQ National
Market of the United States of America in August 1999. Further, in accordance
with Rule 13 of the U.S. Securities Exchange Act of 1934, as amended, IIJ
regularly files with the SEC an annual report on Form 20-F which includes
consolidated financial statements prepared in accordance with U.S. GAAP.
2. Main Differences from Preparation in Accordance with Provisions and
Principles for Interim Consolidated Financial Statements
The main differences between consolidated financial statements for the third
quarter of the fiscal year ended March 31, 2005 prepared in accordance with U.S
accounting standards and those prepared in accordance with Japan's provisions
and principles for interim consolidated financial statements and the effect on
important monetary items and on income before income tax expense in the third
quarter of the fiscal year ended March 31, 2005 are given below.
(1) Differences Regarding the Composition of Consolidated Financial Statements
Consolidated financial statements have been prepared based on accounting
standards of the United States of America comprise consolidated balance sheets,
consolidated statements of operations, consolidated statements of shareholders'
equity, consolidated statements of cash flows, and notes to consolidated
financial statements.
(2) Differences Regarding Disclosure in Consolidated Financial Statements
In consolidated statements of operations, equity in net income of equity method
investees is shown as a separate item after income from operations before income
tax expense.
(3) Differences Regarding Accounting Treatment Standards
a. Income taxes
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109. Changes in the deferred income tax asset
valuation allowance that relate to the tax effect of unrealized gains and losses
on available-for-sale securities have been recorded as a separate component of
other comprehensive income.
b. Accounting treatment of lease transactions
The Company accounts for significant lease transaction agreements that fulfill
the requirements for capitalized leases as stipulated by SFAS No. 13, in
accordance with SFAS. As a result, finance lease transactions, other than those
that recognize transfer of ownership to the lessee, are treated as purchases. In
the third quarter of the fiscal year ended March 31, 2005, this accounting
treatment of lease transactions resulted in a YEN 32,153 thousand reduction in
income from operations before income tax expense.
c. Securities
The Company accounts for securities received as the result of exchanges
associated with mergers with other companies using the fair value based on
Accounting Principles Board (APB) Opinion No. 29. In the third quarter of the
fiscal year ended March 31, 2005, this accounting treatment resulted in a
YEN 35,450 thousand increase in income from operations before income tax
expense.
16
d. Bond issuance cost
Bond issuance cost is recorded in other assets and amortized over the bond
redemption period. In the third quarter of the fiscal year ended March 31, 2005,
this accounting treatment resulted in a YEN 60,180 thousand reduction in income
from operations before income tax expense.
e. Stock issuance cost
Stock issuance cost is accounted for as expenses related to capital transactions
and deducted from additional paid-in capital. In the third quarter of the fiscal
year ended March 31, 2005, this accounting treatment resulted in a YEN 33,263
thousand increase in income from operations before income tax expense.
f. Retirement benefit accounting
Unfunded retirement benefits and noncontributory defined benefit pension
plans are accounted for in accordance with SFAS No. 87. In the third quarter of
the fiscal year ended March 31, 2005, this accounting treatment resulted in a
YEN 1,758 thousand reduction in income from operations before income tax
expense.
g. Comprehensive income
Comprehensive income is accounted for in accordance with SFAS No. 130 "reporting
comprehensive income." SFAS requires additional disclosure of information in
consolidated financial statements. In the third quarter of the fiscal year ended
March 31, 2005, this accounting treatment did not result in any change in income
before income from operations before income tax expense.
17
Notes to Quarterly Consolidated Financial Statements for the third quarter of
the fiscal year ended March 31, 2005
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Internet Initiative Japan Inc. ("IIJ"), a Japanese corporation, was founded in
December 1992 to develop and operate Internet access services and other
Internet-related services and is 31.6 percent owned by Nippon Telegraph and
Telephone Corporation ("NTT") and its subsidiary, NTT Communications Corporation
as of December 31, 2004. IIJ and consolidated subsidiaries (collectively, the
"Company") provide connectivity services throughout Japan and into the United
States of America and value-added services. Also, the Company provides Internet
access services into the rest of Asia through a direct connection to the A-Bone,
an Internet backbone that is operated by IIJ's equity method investee, Asia
Internet Holding Co., Ltd. The Company's operations include systems integration
and equipment sales, which mainly comprise consulting, design, development,
construction, operation, and maintenance for Internet-related systems; equipment
sales in relation to equipment procurement for the construction of systems; and
other Internet-related services.
The Company manages its business and measures results based on a single
Internet-related services industry segment including revenues from systems
integration. Substantially, all revenues are from customers operating in Japan.
The accompanying consolidated financial statements for the third quarter of the
fiscal year ended March 31, 2005 have been prepared on a going-concern basis,
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. The Company recorded operating income in the
third quarter of the fiscal year ended March 31, 2005, however, the Company has
incurred operating losses and net losses in each of the past six fiscal years,
with the exception of operating income recorded in the year ended March 31,
2002.
As of December 31, 2004, the Company had indebtedness of YEN 28,454,898
thousand including convertible notes of YEN 11,088,000 thousand due March 2005
and negative working capital of YEN 6,532,986 thousand. Although the Company is
considering various alternatives to increase revenues and improve profitability,
there can be no assurance that these actions and efforts will be successful.
However, the management believes that as of December 31, 2004, the Company's
cash and cash equivalents of YEN 12,158,790 thousand and available-for-sale
securities of YEN 10,006,681 thousand, including common stock investment in a
single Japanese company of YEN 8,735,616 thousand, cash provided by operating
activities, and continuing bank financing should provide the Company with
sufficient resources to redeem the convertible notes and meet its other near
term cash requirements.
Certain Significant Risks and Uncertainties
-------------------------------------------
The Company participates in a dynamic high technology industry and believes that
changes in any of the following areas could have a material adverse effect on
the Company's future financial position, results of operations or cash flows:
advances and trends in new technologies and industry standards; competitive
pressures in the form of new products or price reductions on current products;
changes in product mix and overall demand for products offered by the Company;
changes in certain strategic relationships or customer relationship; litigation
or claims against the Company based on intellectual property, product,
regulatory or other factors; risk associated with change in domestic and
international economic and/or political conditions or regulations; and
fluctuation in stock price of available-for-sale securities which the Company
owns.
The Company relies on telecommunications carriers, including NTT Communications
Corporation ("NTT Communications") for a significant portion of network
backbone, and Nippon Telegraph and Telephone East Corporation, Nippon Telegraph
and Telephone West Corporation, electric power companies and their affiliates
for local connections to customers, and third-party suppliers for the use of
hardware components such as routers and servers. The Company believes that its
use of multiple carriers, suppliers, and alternative facilities significantly
mitigates concentrations of credit risk. However, any disruption of
telecommunication services or the inability of suppliers to deliver hardware
components on a timely basis or to develop alternative sources of components
could have an adverse effect on operating results.
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash investments, accounts receivable and
guarantee deposits. The Company's management believes that the risk associated
with accounts receivable is mitigated by the large number of customers
comprising its customer base.
Summary of Significant Accounting Policies
18
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
generally accepted accounting policies in the United States of America ("U.S.
GAAP"). These adjustments were not recorded in the statutory accounts.
Consolidation
-------------
The consolidated financial statements for the third quarter of the fiscal year
ended March 31, 2005 include the accounts of IIJ and all of its subsidiaries:
Net Care, Inc. ("Net Care"), IIJ Technology Inc. ("IIJ Technology"), IIJ Media
Communications Inc. ("MC"), IIJ Financial Systems, Inc. ("IIJ-FS"), and IIJ
America, Inc. ("IIJ America"), which have third quarters ended December 31,
except for IIJ America. IIJ America's third quarter end is September 30 and such
date was used for purposes of preparing the consolidated financial statements as
it is not practicable for the subsidiary to report its financial results as of
December 31. There were no significant events that occurred during the
intervening period that would require adjustment to or disclosure in the
accompanying consolidated financial statements. Significant intercompany
transactions and balances have been eliminated in consolidation. Investments in
companies over which IIJ has significant influence but not control are accounted
for by the equity method. For other than a temporary decline in the value of
investments in equity method investees below the carrying amount, the investment
is reduced to fair value and an impairment loss is recognized.
Use of Estimates
----------------
The preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and reported amounts of revenues and
expenses during the reporting period. Significant estimates and assumptions used
are primarily in the areas of impairment loss on investment in and advances to
equity method investees, valuation allowances for deferred tax assets, allowance
for doubtful accounts, and estimated lives of fixed assets. Actual results could
differ from those estimates.
Revenue Recognition
-------------------
Revenues from customer connectivity services consist principally of dedicated
Internet access services and dial-up Internet access services. Dedicated
Internet access services represent full-line IP services and standard-level IP
services (T1 Standard and IIJ FiberAccess/F Service). Dial-up Internet access
services are provided to both enterprises and individuals (IIJ4U). The term of
these contracts is one year for dedicated Internet access services and generally
one month for dial-up Internet access services. All these services are billed
and recognized monthly on a straight-line basis.
Value-added service revenues consist principally of sales of various Internet
access-related services such as firewall services. Value-added services also
include monthly fees from data center services such as housing, monitoring, and
security services. Other revenues under connectivity and value-added services
consist principally of call-center customer support and wide-area network
services, which offer connectivity services for the construction of networks
that connect a customer's multiple operational sites. The terms of these
services are generally for one year and revenues are recognized on a
straight-line basis during the service period.
Initial set up fees received in connection with connectivity services and
value-added services are deferred and recognized over the contract period.
Systems integration revenues consist principally of the development of Internet
network systems or design 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
include multiple element arrangements such as 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.
Equipment sales represent revenues earned in which the Company acts as principal
in the transaction, takes title to the equipment and has risks and rewards of
ownership while in inventory and are reported gross as the indicators outlined
in the provisions of the Emerging Issues Task Force ("EITF") of the Financial
Accounting Standards Board ("FASB") Issue No. 99-19 "Reporting Revenue Gross as
a Principal versus Net as an Agent" are met.
19
From the third quarter of the fiscal year ended March 31, 2005, the Company
adopted EITF Issue No. 00-21, "Accounting for Revenue Arrangements with Multiple
Deliverables." EITF Issue No. 00-21 addresses certain aspects of the accounting
by a vendor for arrangements under which it will perform multiple
revenue-generating activities with respect to when revenue should be recognized
and how arrangement consideration should be measured. The adoption of EITF Issue
No. 00-21 did not have a material effect on the Company's consolidated financial
position or results of operations.
Cash and Cash Equivalents
-------------------------
Cash and cash equivalents includes time deposit and readily marketable
securities with original maturities of three months or less.
Allowance for Doubtful Accounts
-------------------------------
An allowance for doubtful accounts is established in amounts considered to be
appropriate based primarily upon the Company's past credit loss experience and
an evaluation of potential losses in the receivables outstanding.
Other Investments
-----------------
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," all
marketable equity securities are classified as available-for-sale securities,
which are accounted for at fair value with unrealized gains and losses excluded
from earnings and reported in accumulated other comprehensive income (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 and debt securities are carried at cost, however, if the
value of a security has declined and is judged to be other than temporary, the
security is written down to the estimated fair value.
Inventories
-----------
Inventories consist mainly of network equipment purchased for resale and
work-in-process for development of Internet network systems. Network equipment
purchased for resale is stated at the lower of cost, which is determined by the
average-cost method, or market. Work-in-process for development of network
systems is stated at the lower of actual production costs, including overhead
cost, or market. Inventories are reviewed periodically and items considered to
be slow-moving or obsolete are written down to their estimated net realizable
value.
Property and Equipment
----------------------
Property and equipment are recorded at cost. Depreciation and amortization of
property and equipment, including purchased software and capitalized leases, are
computed principally using the straight-line method based on either the
estimated useful lives of assets or the lease period, whichever is shorter.
The useful lives for depreciation and amortization by major asset classes are as
follows:
--------------------------------------------------------------------------------
Range of Useful Lives
--------------------------------------------------------------------------------
Data communications, office and other equipment 2 to 15 years
Leasehold improvements 3 to 15 years
20
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. On April 1, 2002, the Company adopted SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. The adoption of SFAS No. 144 did not have a material effect
on the Company's consolidated financial position and results of operations.
Prior to the adoption of SFAS No. 144, the Company accounted for long-lived
assets in accordance with SFAS No. 121, "Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." The Company evaluates the
impairment of long-lived assets whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. There was
no impairment loss for long-lived assets in the third quarter of the fiscal year
ended March 31, 2005.
Goodwill and Intangible Assets
------------------------------
On April 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets." Under the statement, goodwill (including equity-method
goodwill) and intangible assets that are deemed to have indefinite useful lives
are not amortized, but are subject to impairment testing. Impairment testing is
required to be performed at adoption and annually or more frequently if events
or changes in circumstances indicate that the asset might be impaired. The
Company selected March 31 as its annual impairment testing date. Upon the
adoption of the statement, the Company ceased the amortization of goodwill
recorded in past business combinations and acquisitions. Additionally, the
Company ceased the amortization of intangible assets that are deemed to have
indefinite lives. As required by SFAS No. 142, the Company also reassessed the
useful lives and the classification of its identifiable intangible assets and
determined them to be appropriate. In the third quarter of the fiscal year ended
March 31, 2005, the Company recorded impairment loss on goodwill and intangible
assets of YEN 25,954 thousand.
Income Taxes
------------
The provision for income taxes is based on earnings before income taxes and
includes the effects of temporary differences between assets and liabilities
recognized for financial reporting purposes and income tax purposes and
operating loss carryforwards. Valuation allowances are provided against assets
that are not likely to be realized.
Foreign Currency Transactions
-----------------------------
Foreign currency assets and liabilities, which consist substantially of cash and
accounts payable for connectivity leases to international carriers denominated
in U.S. dollars, are stated at the amount as computed by using exchange rates at
the end of the quarter and the resulting transaction gain or loss is recognized
in earnings.
Derivative Financial Instruments
--------------------------------
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"), the Company recognizes all derivatives as either assets or
liabilities in the balance sheet and measures those instruments at fair value.
In accordance with SFAS No. 133, the Company designated interest swap contracts
as a hedge of the variability of cash flows to be paid related to interest on
floating rate borrowings (cash flow hedge) and an effective portion of the
derivative's gain or loss is initially reported as a component of other
comprehensive income and subsequently reclassified into earnings when the
underlying transaction affects earnings. An ineffective portion of the gain or
loss is reported in earnings immediately.
The Company enters into contracts to hedge interest rate risks and does not
enter into contracts or utilize derivatives for trading purposes.
Stock-Based Compensation
------------------------
The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" and related interpretations. Accordingly, the
companies recognize compensation expense in an amount equal to the excess of the
quoted market price over the exercise price of the option at the grant date. For
options with a vesting period, the compensation expense is charged to operations
ratably over the vesting period. The Company has not recognized any stock-based
compensation expense for the third quarter of the fiscal year ended March 31,
2005.
21
Advertising
-----------
Advertising costs are expensed as incurred.
22
Basic and Diluted Net Income per Share
--------------------------------------
Basic and diluted net income per share are computed using the weighted-average
number of shares of common stock outstanding during the third quarter of the
fiscal year ended March 31, 2005. IIJ's potential common shares, shares issuable
upon exercise of stock options or conversion of convertible notes, have been
excluded from the computation of diluted net income per share for the third
quarter of the fiscal year ended March 31, 2005 because the exercise price of
stock options is higher than the average market price of common stock and the
effect of conversion of convertible notes would be antidilutive. Diluted net
income per share does not include the effects of the following potential common
shares:
--------------------------------------------------------------------------------------------------------------------
At the end of the third quarter of the fiscal year
ended March 31, 2005
(As of December 31, 2004)
--------------------------------------------------------------------------------------------------------------------
Shares issuable under stock options 545
Shares issuable related to convertible notes on an
"as-if-converted" basis 558
--------------------------------------------------------------------------------------------------------------------
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.
2. OTHER INVESTMENTS
--------------------
Pursuant to SFAS No. 115, all of the Company's marketable equity securities,
principally marketable shares of common stock of Japanese companies, were
classified as available-for-sale securities. Information regarding the
securities classified as available-for-sale at March 31, 2004, and at December
31, 2004, is as follows:
(Unit: Thousands of yen)
--------------------------------------------------------------------------------------------------------------------
At the end of the third quarter of the fiscal At the end of the fiscal year ended March 31,
year ended March 31, 2005 2004
(As of December 31, 2004) (As of March 31, 2004)
--------------------------------------------------------------------------------------------------------------------
Cost Unrealized Unrealized Fair Value Cost Unrealized Unrealized Fair Value
Gains Losses Gains Losses
--------------------------------------------------------------------------------------------------------------------
Available-for-sale-- 296,199 9,710,560 78 10,006,681 351,120 6,225,560 3,695 6,572,985
Equity securities
--------------------------------------------------------------------------------------------------------------------
The following table provides the fair value and gross unrealized losses of the
Company's investments, which have been deemed to be temporarily impaired,
aggregated by investment category and length of time that individual securities
have been in a continuous unrealized loss position, as of December 31, 2004:
(Unit: Thousands of yen)
--------------------- ------------------------------- ------------------------------- -------------------------------
Less than 12 Months 12 Months or More Total
--------------------- ------------------------------- ------------------------------- -------------------------------
Fair Value Unrealized Fair Value Unrealized Fair Value Unrealized
Losses Losses Losses
--------------------- --------------- --------------- --------------- --------------- --------------- ---------------
Marketable equity 1,303 78 - - 1,303 78
securities
--------------------- --------------- --------------- --------------- --------------- --------------- ---------------
23
The following table provides the fair value and gross unrealized losses of the
Company's investments, which have been deemed to be temporarily impaired,
aggregated by investment category and length of time that individual securities
have been in a continuous unrealized loss position, as of March 31, 2004:
(Unit: Thousands of yen)
---------------------------------------------------------------------------------------------------------------------
Less than 12 Months 12 Months or More Total
---------------------------------------------------------------------------------------------------------------------
Fair Value Unrealized Fair Value Unrealized Losses Fair Value Unrealized Losses
Losses
---------------------------------------------------------------------------------------------------------------------
Marketable
equity
securities - - 10,300 3,695 10,300 3,695
---------------------------------------------------------------------------------------------------------------------
The Company regularly reviews all of the Company's holdings to determine if any
investments are other-than-temporarily impaired. The analysis includes reviewing
industry analyst reports, sector credit ratings and volatility of the security's
market price.
Other investments include nonmarketable equity and debt securities
amounting to YEN 1,065,372 thousand and YEN 1,358,908 thousand at the end of the
third quarter ended March 31, 2005, and at the end of the fiscal year ended
March 31, 2004, respectively.
Losses on write-down of investments in certain marketable and nonmarketable
equity securities, included in other income (expense), were recognized to
reflect decline in value considered to be other than temporary, totaling
YEN 34,051 thousand and YEN 70,627 thousand, respectively, for the third quarter
of the fiscal year ended March 31, 2005. For the previous fiscal year, ended
March 31, 2004, such losses on write-down of investments in certain
nonmarketable equity and debt securities were YEN 229,944 thousand. With respect
to marketable equity securities, gain on exchange of securities of YEN 35,450
thousand, included in other income (expense), for the third quarter of the
fiscal year ended March 31, 2005, represented a non-monetary gain upon the
exchange of marketable common shares in a merger transaction.
Proceeds from the sale of available-for-sale securities were YEN 643,771
thousand for the third quarter of the fiscal year ended March 31, 2005 and YEN
122,650 thousand for the year ended March 31, 2004. Gross realized gain of YEN
587,449 thousand was included in other income (expense) for the third quarter of
the fiscal year ended March 31, 2005. Gross realized gain of YEN 55,965 thousand
and gross realized loss of YEN 8,925 thousand were included in other income
(expense) for the previous fiscal year, ended March 31, 2004. In November 2003,
IIJ sold all of its shares of DLJdirectSFG Securities Inc. (now, Rakuten
Securities, Inc.), which had been held as other investments. Proceeds and gross
realized gain from this sale were YEN 1,946,875 thousand and YEN 1,571,875
thousand, respectively.
3. Investments in and Advances to Equity Method Investees
---------------------------------------------------------
IIJ utilizes various business units in Japan and neighboring countries to
form and operate its Internet business. Businesses operated by its equity method
investees include connectivity services in Asian countries -- (Asia Internet
Holding Co., Ltd., "AIH"), multifeed technology services and location facilities
for connecting high-speed Internet backbones (Internet Multifeed Co.,
"Multifeed"), Web page design services (atom Co., Ltd.), and data center
services in South Korea (i-Heart Inc., "i-Heart").
IIJ owns at least 20 percent and at most 50 percent of such equity method
investees. IIJ accounts for investments in equity method investees using the
equity method because it has significant influence over their business and
financial policies.
IIJ's transactions with these equity method investees include cost and revenue
related to connectivity with AIH.
The Company had no guarantees or commitments to the equity method investees as
of March 31, 2004, or as of December 31, 2004.
The aggregate amounts of balances and transactions of the Company with these
equity method investees at the end of the third quarter of the fiscal year ended
March 31, 2005, and at the end of the fiscal year ended March 31, 2004 were
summarized as follows. However, the aggregate amounts of balances and
transactions of the Company with former equity method investee Crosswave
Communications Inc. ("Crosswave") as of March 31, 2004, and for the year ended
March 31, 2004, have not been included.
24
(Unit: Thousands of yen)
--------------------------------------------------------------------------------------------------------------------
Third Quarter of the Fiscal Year Fiscal year ended March 31,
Ended March 31, 2005 2004
--------------------------------------------------------------------------------------------------------------------
(As of December 31, 2004) (As of March 31, 2004)
Accounts receivable 144,240 95,555
Accounts payable 95,485 14,152
(from April 1, 2004 to December (from April 1, 2003 to March 31,
31, 2004) 2004)
Revenues 931,160 1,329,482
Costs and expenses 858,212 1,245,607
--------------------------------------------------------------------------------------------------------------------
During the third quarter of the fiscal year ended March 31, 2005 and the fiscal
year ended March 31, 2004, the Company did not receive any dividends from its
equity method investees.
The Company's investments in and advances to equity method investees and
respective ownership percentage at the end of the third quarter of the fiscal
year ended March 31, 2005, and at the end of the fiscal year ended March 31,
2004, consisted of the following:
--------------------------------------------------------------------------------------------------------------------
At the end of the third quarter of the At the end of the fiscal year ended March
fiscal year ended March 31, 2005 31, 2004
(As of December 31, 2004) (As of March 31, 2004)
--------------------------------------------------------------------------------------------------------------------
Ownership (%) (thousands of yen) Ownership (%) (thousands of yen)
--------------------------------------------------------------------------------------------------------------------
AIH 26.69 331,180 26.69 362,134
Multifeed 28.56 239,446 28.30 197,927
atom 40.00 145,344 40.00 148,409
Other (including i-Heart) 43,615 69,682
--------------------------------------------------------------------------------------------------------------------
Total 759,585 778,152
--------------------------------------------------------------------------------------------------------------------
The advances to the equity method investees, included in the above, at the end
of the third quarter of the fiscal year ended March 31, 2005, and at the end of
the fiscal year ended March 31, 2004, were as follows. However, the amount at
the end of the third quarter of the fiscal year ended March 31, 2005, has been
reduced by an allowance for doubtful receivables of YEN 23,900 thousand.
(Unit: Thousands of yen)
--------------------------------------------------------------------------------------------------------------------
At the end of the third quarter of the At the end of the fiscal year ended March
fiscal year ended March 31, 2005 31, 2004
(As of December 31, 2004) (As of March 31, 2004)
--------------------------------------------------------------------------------------------------------------------
i-Heart 27,346 51,246
--------------------------------------------------------------------------------------------------------------------
Total 27,346 51,246
--------------------------------------------------------------------------------------------------------------------
With respect to the above advances to i-Heart Inc., the Company has received
securities that it has the right to dispose of freely as a protection of
accounts receivable. At the end of the third quarter of the fiscal year ended
March 31, 2005, the fair value of those securities was YEN 27,346 thousand.
25
4. Leases
---------
The Company enters into, in the normal course of business, various leases for
domestic and international backbone services, office premises, network operation
centers and data communications and other equipment. Certain leases that meet
one or more of the criteria set forth in the provision of SFAS No. 13,
"Accounting for leases" have been classified as capital leases and the others
have been classified as operating leases.
Operating Leases
----------------
The Company has operating lease agreements with telecommunications carriers and
others for the use of connectivity lines, including local access lines that
customers use to connect to IIJ's network. The leases for domestic backbone
connectivity at the end of the third quarter of the fiscal year ended March 31,
2005, are generally either non-cancelable for a minimum one-year lease period or
cancelable during a lease period of six years, with a significant penalty for
cancellation (25 percent or 35 percent of the aggregate lease charge). The
leases for international backbone connectivity at the end of the third quarter
of the fiscal year ended March 31, 2005, and at the end of the fiscal year ended
March 31, 2004, are entered into with carriers for lease periods ranging from
one to two years and are substantially non-cancelable. The Company also leases
its office premises, for which refundable lease deposits are capitalized as
guarantee deposits, and certain office equipment under non-cancelable operating
leases which expire on various dates through the year 2007 and also leases its
network operation centers under non-cancelable operating leases.
Refundable guarantee deposits at the end of the third quarter of the fiscal year
ended March 31, 2005, and at the end of the fiscal year ended March 31, 2004,
consist of the following:
(Unit: Thousands of yen)
--------------------------------------------------------------------------------------------------------------------
At the end of the third quarter
of the fiscal year ended March At the end of the fiscal year
31, 2005 ended March 31, 2004
(As of December 31, 2004) (As of March 31, 2004)
--------------------------------------------------------------------------------------------------------------------
Head office 1,705,036 1,705,036
Sales and subsidiaries offices 299,696 324,003
Others 45,573 46,084
--------------------------------------------------------------------------------------------------------------------
Total refundable guarantee deposits 2,050,305 2,075,123
--------------------------------------------------------------------------------------------------------------------
Lease expenses related to backbone lines for the third quarter of the fiscal
year ended March 31, 2005, and the fiscal year ended March 31, 2004, amounted to
YEN 2,719,842 thousand, and YEN 4,719,638 thousand, respectively. Lease expenses
for local access lines for the third quarter of the fiscal year ended March 31,
2005, and the fiscal year ended March 31, 2004, which are only attributable to
dedicated access revenues, amounted to YEN 2,891,741 thousand and YEN 3,500,468
thousand, respectively. Other lease expenses for the third quarter of the fiscal
year ended March 31, 2005, and the fiscal year ended March 31, 2004, amounted to
YEN 2,439,885 thousand and YEN 3,786,739 thousand, respectively.
The Company has subleased a part of its office premises. Lease expenses
mentioned above have been reduced by sublease revenues totaling YEN 314,432
thousand and YEN 88,895 thousand for the third quarter of the fiscal year ended
March 31, 2005, and the fiscal year ended March 31, 2004, respectively.
Capital Leases
--------------
The Company conducts its connectivity and other Internet-related services
by using data communications and other equipment leased under capital lease
arrangements. The fair values of the assets upon execution of the capital lease
agreements and accumulated depreciation amounted to YEN 12,707,450 thousand and
YEN 5,633,547 thousand at the end of the third quarter of the fiscal year ended
March 31, 2005, and YEN 10,420,774 thousand and YEN 5,422,186 thousand at the
end of the fiscal year ended March 31, 2004, respectively.
At the end of the third quarter of the fiscal year ended March 31, 2005, future
lease payments under non-cancelable operating leases, including the
aforementioned non-cancelable connectivity lease agreements (but excluding
dedicated access lines which the Company charges outright to customers), and
capital leases were as follows:
26
(Unit: Thousands of yen)
--------------------------------------------------------------------------------------------------------------------
Connectivity Lines Other Operating Leases Capital Leases
Operating Leases
--------------------------------------------------------------------------------------------------------------------
Through December 31, 2005 89,832 1,734,480 2,784,469
January 1, 2006, and
thereafter 48,920 795,370 4,459,352
--------------------------------------------------------------------------------------------------------------------
At the end of the fiscal year ended March 31, 2004, future lease payments under
non-cancelable operating leases, including the aforementioned non-cancelable
connectivity lease agreements (but excluding dedicated access lines which the
Company charges outright to customers), and capital leases were as follows:
(Unit: Thousands of yen)
--------------------------------------------------------------------------------------------------------------------
Connectivity Lines
Operating Leases Other Operating Leases
Capital Leases
--------------------------------------------------------------------------------------------------------------------
Through March 31, 2005 190,176 1,722,343 2,387,754
April 1, 2005, and
thereafter 45,088 1,797,657 2,880,298
--------------------------------------------------------------------------------------------------------------------
Future minimum lease payments have not been deducted by future minimum
revenues from non-cancelable subleases. Revenues from non-cancelable subleases
of YEN 473,741 thousand, YEN 96,786 thousand, YEN 412,430 thousand, and YEN
393,583 thousand, are expected for the years ended December 31, 2005, December
31, 2006, March 31, 2005, and March 31, 2006, respectively.
27
5. Borrowings and Convertible Notes
-----------------------------------
Short-term borrowings at the end of the third quarter of the fiscal year ended
March 31, 2005, and at the end of the fiscal year ended March 31, 2004,
consisted of bank overdrafts. Short-term borrowings bear fixed-rate interest and
their weighted average rates at the end of the third quarter of the fiscal year
ended March 31, 2005, and at the end of the fiscal year ended March 31, 2004,
were 1.375 percent and 1.464 percent, respectively.
Long-term borrowings at the end of the third quarter of the fiscal year ended
March 31, 2005, and at the end of the fiscal year ended March 31, 2004,
consisted of the following:
(Unit: Thousands of yen)
--------------------------------------------------------------------------------------------------------------------
At the end of the third
quarter of the fiscal year At the end of the fiscal year
ended March 31, 2005 ended March 31, 2004
(As of December 31, 2004) (As of March 31, 2004)
--------------------------------------------------------------------------------------------------------------------
Unsecured long-term loans payable to banks, 229,000
maturing at various dates through 2007.
Weighted average interest rate was 3.175
percent at the end of the third quarter of
the fiscal year ended March 31, 2005
Secured long-term loans payable to banks, 2,600,000 1,000,000
maturing at various dates through 2007.
Weighted average interest rate was 1.773
percent at the end of the third quarter of
the fiscal year ended March 31, 2005, and
1.686 percent at the end of the fiscal year
ended March 31, 2004.
Secured long-term loans payable to banks, 1,400,000 2,400,000
maturing at various dates through 2007.
Interest is payable at a variable rate based
on TIBOR. All interest is converted to a
fixed interest rate through interest rate
swap contracts. Weighted average fixed
interest rate was 1.926 percent at the end of
the third quarter of the fiscal year ended
March 31, 2005, and 1.748 percent at the end
of the fiscal year ended March 31, 2004.
Long-term installments loans payable at various 345,433 456,265
dates through 2007. Weighted average interest
rate was 2.55 percent at the end of the third
quarter of the fiscal year ended March 31, 2005,
and 2.55 percent at the end of the fiscal year
ended March 31, 2004.
--------------------------------------------------------------------------------------------------------------------
Total 4,574,433 3,856,265
--------------------------------------------------------------------------------------------------------------------
Less current portion (2,185,094) (1,548,246)
--------------------------------------------------------------------------------------------------------------------
Long-term borrowings, less current portion 2,389,339 2,308,019
--------------------------------------------------------------------------------------------------------------------
The Company entered into interest rate swap contracts to manage its interest
rate exposure resulting in a fixed interest rate for a portion of its long-term
debt.
On March 14, 2003, the Company entered into a long-term installment loan
agreement with a leasing company to finance the payment for rental deposits
given to other lessor for its new head office. The principal of the loan was YEN
345,433 thousand and YEN 456,265 thousand at the end of the third quarter of the
fiscal year ended March 31, 2005, and at the end of the fiscal year ended March
31, 2004, respectively, and the loan is secured by a first priority pledge
against a claim for the guarantee deposits of YEN 1,705,036 thousand. Also, the
Company provided banks with collateral for outstanding loans by means of
establishing a second priority pledge against such guarantee deposits.
28
The Company entered into bank overdraft agreements with certain Japanese banks
for which the unused balance outstanding at the end of the third quarter of the
fiscal year ended March 31, 2005, and at the end of the fiscal year ended March
31, 2004, was YEN 1,789,156 thousand and YEN 800,906 thousand, respectively.
The 1.750 percent unsecured yen convertible notes due March 2005 in the
aggregate principal amount of YEN 15,000,000 thousand were issued on April 11,
2000. The notes are convertible at the option of the holders currently at YEN
19,875 thousand per share at any time on or before March 15, 2005. The notes are
currently redeemable at the Company's option at any time before March 15, 2005,
in whole or in part, at par with unpaid and accrued interest; provided that the
closing trading price for the Company's shares for a certain period prior to
giving notice of redemption is at least 140 percent of the conversion price. For
the fiscal year ended March 31, 2004, and third quarter of the fiscal year ended
March 31, 2005, the Company repurchased and cancelled a portion of convertible
notes. At March 31, 2004, and at December 31, 2004, the Company had outstanding
convertible notes of YEN 11,832,000 thousand and YEN 11,088,000 thousand,
respectively.
For the third quarter of the fiscal year ended March 31, 2005, IIJ concluded a
securities loan agreement with a financial institution and in exchange for
securities received cash of YEN 722,800 thousand, as of December 31, 2004. Such
transactions are accounted for as secured loans. Proceeds (amount received) from
the agreement are shown as payable under securities loan agreement. IIJ pays
interest on such loans at a variable rate 0.56% above LIBOR. The interest rate
was 0.6311% at December 31, 2004.
IIJ provided available-for-sale securities of YEN 989,600 thousand as
lending stock for the securities loan agreement.
6. Commitments and Contingent Liabilities
The Company adopted FASB Interpretation No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the disclosures to be
made by a guarantor about its obligations under certain guarantees. It also
clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee.
In December 2001, a class action complaint alleging violations of the federal
securities laws was filed against the Company, naming IIJ, certain of its
officers and directors as defendants, and underwriters of IIJ's initial public
offering. An amended complaint was filed on April 24, 2002 alleging, among other
things, that the underwriters of IIJ's initial public offering violated the
securities laws (i) by failing to disclose in the offering's registration
statement certain alleged compensation arrangements entered into with the
underwriters' clients, such as undisclosed commissions or tie-in agreements to
purchase stock in the after-market, and (ii) by engaging in manipulative
practices to artificially inflate the price of IIJ's stock in the after-market
subsequent to the initial public offering. On July 15, 2002, the Company joined
in an `omnibus' motion to dismiss the amended complaint filed by the issuers and
individuals named in the various coordinated cases. In June 2003, the Company
approved a settlement with the plaintiffs in this matter. The settlement
releases IIJ and the individual defendants for liability for the conduct alleged
in the action. Under the settlement, the Company agreed to assign away, not
assert, or release certain potential claims the Company may have against IIJ's
underwriters. Approximately 260 defendant issuers participated in this
settlement. As to financial impact on the Company, the settlement provides that
the class members will be guaranteed $1 billion in recoveries by the insurers of
the issuers. In addition to IIJ's portion of the proposed settlement, some of
the continuing legal expenses incurred in connection with the partial settlement
would be borne by IIJ's insurer based on the settlement agreement and an
individual agreement between IIJ and IIJ's insurer. Consequently, the Company
believes that there will be no significant financial impact on the Company as a
result of this matter.
7. Derivative and Other Financial Instruments
Interest Rate Swap Agreement
----------------------------
The Company is exposed to changes in interest rates that are associated with
long-term bank borrowings. The Company's policy on managing the interest rate
risk is to hedge the exposure to variability in future cash flows of floating
rate interest payments on the long-term bank borrowings. In order to reduce cash
flow risk exposures on floating rate borrowings, the Company utilizes interest
rate swap agreements to convert a floating rate borrowing to a fixed rate
borrowing.
29
The Company is also exposed to credit-related losses in the event of
non-performance by counterparties to interest rate swaps, but it is not expected
that any counterparties will fail to meet their obligations, because
counterparties are internationally recognized financial institutions.
Changes in fair value of interest rate swaps designated as hedging instruments
is reported in accumulated other comprehensive income during the third quarter
of the fiscal year ended March 31, 2005, and the fiscal year ended March 31,
2004.
Changes in fair value of interest rate swaps designated as hedging
instruments are reported in accumulated other comprehensive income during the
third quarter of the fiscal year ended March 31, 2005, and the fiscal year ended
March 31, 2004. These amounts subsequently are reclassified into interest
expense as a yield adjustment in the same period in which the hedged bank
borrowings affect earnings. The term, notional amount, and repricing date of
interest rate swaps exactly match those of the long-term borrowings. The swap
terms are "at the market," so they have zero value at inception. Thus, there was
no ineffectiveness recognized in earnings for the third quarter of the fiscal
year ended March 31, 2005, and the year ended March 31, 2004. At December 31,
2004, the notional amount of interest rate swap contracts amounted to YEN
1,400,000 thousand, and net derivative loss on those contracts totaled YEN
13,966 thousand.
8. Subsequent Events
(for the third quarter of the fiscal year ended March 31, 2005)
The Company repaid all of the outstanding amount of the convertible notes
due March 2005, on the due date of March 31, 2005 with the proceeds from cash
and cash equivalent and gain on sale of a portion of available-for-sale
securities through the fiscal year ended March 31, 2005. Proceeds and gross
realized gain from this sale were YEN 2,614,768 thousand and YEN 2,477,607
thousand, respectively.
(5) Other
There are no applicable items.
The above represents a translation of the original version in the Japanese
language.
30
EXHIBIT 5
---------
[English Translation]
May 28, 2005
Koichi Suzuki
President, Chief
Executive Officer and
Representative
Director
Internet Initiative Japan
Inc.
1-105 Kanda Jinbo-cho
Chiyoda-ku, Tokyo
Japan
To: Shareholders
Public Notice on Resolution of Board of Directors
for New Share Offering
We are pleased to advise you of the public offering of new shares, as resolved
by the meeting of the Board of Directors held on May 27, 2005 as follows.
1. Number of new shares to be issued: 2,500 shares of common stock
2. Issue price:
To be determined by the method as prescribed in Article 7-2 of No. 14
Rules of Fair Practice of the Japan Securities Dealers Association.
3. Amount of issue price not to be included in stated capital:
Amount of the issue price determined pursuant to Item 2 above, less
the amount to be incorporated into the stated capital. The amount to
be incorporated into the stated capital means one half of the issue
price, and any fraction less than one yen remaining after the
calculation shall be rounded up to the nearest yen.
4. Method of offering:
Public offering. Daiwa Securities SMBC Co.Ltd., Nomura Securities Co.,
Ltd., Mizuho Securities Co., Ltd., UFJ Tsubasa Securities Co., Ltd.,
Nikko Citigroup Limited, Shinko Securities Co., Ltd., Okasan
Securities Co., Ltd., SMBC Friend Securities Co., Ltd., Takagi
Securities Co., Ltd., Maruhachi Securities Co., Ltd., MONEX BEANS,
Inc., Rakuten Securities, Inc. and Retela Crea Securities Co., Ltd.
will jointly and severally subscribe for all shares.
5. Payment date:
Wednesday, June 22, 2005
6. Commencement date for accrual of dividends:
April 1, 2005
7. Each of the above items shall be conditional on the effectiveness of
registration under the Securities and Exchange Law of Japan.
Notice of Secondary Offering
Along with the aforementioned new share offering, the Company will make a
secondary offering of 900 shares of common stock held by its shareholders. The
Company may also simultaneously offer common shares to be borrowed by Daiwa
Securities SMBC Co.Ltd. from the Company shareholders to the maximum limit of
500 shares.
Note
The shares subject to the aforementioned new share offering and secondary
offering have not been and will not be registered under the United States
Securities Act of 1933, as amended ("the Securities Act") and may not be offered
or sold in the United States or to US persons, unless the shares have been
registered under the Securities Act or an exemption from the registration
requirements of the Securities Act is available.
The above represents a translation of the original version in the Japanese
language.
EXHIBIT 6
---------
For Immediate Release
IIJ Announces Director and Executive Officer Nominations
--------------------------------------------------------
Tokyo, May 30, 2005 -- Internet Initiative Japan Inc. (IIJ, NASDAQ: IIJI), one
of Japan's leading Internet-access and comprehensive network solutions
providers, today announced the nomination of the following candidates for
positions on the Company's Board of Directors.
Four new Directors were nominated: Mr. Hiroyuki Hisashima, Mr. Kazuhiro Tokita,
Mr. Yoshifumi Nishikawa and Mr. Junnosuke Furukawa. Mr. Hisashima has been
Division Director of the Technology Department of IIJ since April 2004 and has
also been a Director of IIJ Technology Inc. (IIJ-Tech) since June 2003. Mr.
Tokita has been Deputy Division Director of the Sales Department of IIJ since
April 2005 and also Director of IIJ-Tech since September 2002. Mr. Yoshifumi
Nishikawa is a President & CEO of Sumitomo Mitsui Banking Corporation and
Sumitomo Mitsui Financial Group, Inc. Mr. Junnosuke Furukawa is a Director,
Member of the Board & Senior Advisor of The Furukawa Electric Co., Ltd.
One new Statutory Auditor was nominated: Mr. Hirofumi Takahashi. Mr. Takahashi
has served as an Adviser of IIJ since August 2002.
Mr. Kazumasa Utashiro will finish his term as, and retire from the position of,
director at the closing of ordinary general meeting of shareholders on June 29,
2005.
These nominations are subject to the approval of IIJ's Ordinary General Meeting
of Shareholders that will be held on June 29, 2005 and to the approval of the
Board of Directors at a meeting that will be held on the same day. If such
approvals are obtained, as of June 29, 2005, our directors and executive
officers will be as follows:
President Mr. Koichi Suzuki Chief Executive Officer and Representative Director
Executive Vice Presidents Mr. Toshiya Asaba Chief Technology Officer
Mr. Fukuzo Inoue Division Director of Administrative Department
Managing Director Mr. Hideshi Hojo Division Director of Sales Department
Directors Mr. Takamichi Miyoshi General Manager of Strategy Planning Division
Mr. Akihisa Watai Chief Financial Officer and Chief Accounting Officer
Mr. Hiroyuki Hisashima (1) Division Director of Technology Department
Mr. Kazuhiro Tokita (1) Deputy Division Director of Sales Department
Mr. Yasurou Tanahashi (2)
Mr. Takashi Hiroi (2)
Mr. Yoshifumi Nishikawa (1) (2)
Mr. Junnosuke Furukawa (1) (2)
Standing Statutory Auditor Mr. Hideki Matsushita
Statutory Auditors Mr. Masaki Okada (3)
Mr. Masaaki Koizumi (3)
Mr. Hirofumi Takahashi (1)
(1) New appointments
(2) Outside Directors
(3) Outside Statutory Auditors
About IIJ
Founded in 1992, Internet Initiative Japan Inc. (IIJ, NASDAQ: IIJI) 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.
The statements within this release contain forward-looking statements about our
future plans that involve risk and uncertainty. These statements may differ
materially from actual future events or results. Readers are referred to the
documents furnished by Internet Initiative Japan Inc. with the SEC, specifically
the most recent reports on Forms 20-F and 6-K, which identify important risk
factors that could cause actual results to differ from those contained in the
forward-looking statements.
For inquiries, contact:
IIJ Corporate Communications
Tel: +81-3-5259-6310 E-mail: press@iij.ad.jp URL: http://www.iij.ad.jp/