As filed with the Securities and Exchange Commission on September 29, 2009
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 20-F
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o
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REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
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OR
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended March 31, 2009
OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For
the transition period from
_____
to
_____
OR
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o
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SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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Date of event requiring this shell company report
_____
Commission file number: 0-30204
Kabushiki Kaisha Internet Initiative
(Exact Name of Registrant as Specified in Its Charter)
Internet Initiative Japan Inc.
(Translation of Registrants Name Into English)
Japan
(Jurisdiction of Incorporation or Organization)
Jinbocho Mitsui Bldg., 1-105 Kanda Jinbo-cho, Chiyoda-ku, Tokyo 101-0051, Japan
(Address of Principal Executive Offices)
Yuko Kazama, +81-3-5259-6500, +81-3-5205-6395,
Jinbocho Mitsui Bldg., 1-105 Kanda Jinbo-cho, Chiyoda-ku, Tokyo 101-0051, Japan
(Name, Telephone, Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange On Which Registered
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Common Stock
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The NASDAQ Stock Market
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Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
(Title of Class)
Indicate the number of outstanding shares of each of the issuers classes of capital or common
stock as of the close of the period covered by the annual report.
As of March 31, 2009, 206,478 shares of common stock were outstanding, including 15,990 shares
represented by an aggregate of 6,396,000 American Depositary Shares.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act.
Yes
o
No
þ
If this report is an annual or transition report, indicate by check mark if the registrant is
not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934.
Yes
o
No
þ
NoteChecking the box above will not relieve any registrant required to file reports pursuant
to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those
Sections.
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes
o
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
o
Accelerated filer
þ
Non-accelerated filer
o
Indicate by check mark which basis of accounting the registrant has used to prepare the
financial statements included in this filing:
þ
U.S. GAAP
o
International Financial Reporting Standards as issued by the International
Accounting Standards Board
o
Other
If Other has been checked in response to the previous question, indicate by check mark
which financial statement item the registrant has elected to follow.
Item 17
o
Item 18
o
If this is an annual report, indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).
Yes
o
No
þ
Cautionary Note Regarding Forward-Looking Statements
This annual report contains forward-looking statements about us and our industry that are
based on our current expectations, assumptions, estimates and projections. These forward-looking
statements are subject to various risks and uncertainties. These statements discuss future
expectations, identify strategies, discuss market trends, contain projections of results of our
operations and our financial condition, and state other forward-looking information. Known and
unknown risks, uncertainties and other factors could cause our actual results to differ materially
from those contained in or suggested by any forward-looking statement. We cannot provide any
assurance that our expectations, projections, anticipated estimates or other information expressed
in these forward-looking statements will turn out to be correct. We do not undertake any obligation
to update or revise any forward-looking statements, whether as a result of new information, future
events or otherwise.
Important risks and factors that could cause our actual results to differ materially from our
forward-looking statements are generally provided in Item 3.D. Risk Factors and elsewhere in this
annual report on Form 20-F and include, without limitation:
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that we may not be able to achieve or sustain profitability in the near future,
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that we may not be able to compete effectively against competitors which have
greater financial, marketing and other resources, and
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that our investments in our subsidiaries and affiliated companies may not produce
the returns that we expect or may adversely affect our results of operations and
financial condition.
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1
As used in this annual report, references to IIJ to Internet Initiative Japan Inc. and
references to the Company, the Group, we, our, our group and us are to Internet
Initiative Japan Inc. and its subsidiaries except as the context otherwise requires.
PART I
Item 1. Identity of Directors, Senior Management and Advisers.
Not required.
Item 2. Offer Statistics and Expected Timetable.
Not applicable.
Item 3. Key Information.
A. Selected Financial Data.
You should read the selected consolidated financial data below together with Item 5.
Operating and Financial Review and Prospects, of this annual report on Form 20-F and our
consolidated financial statements and the notes to our consolidated financial statements beginning
on page F-1. The consolidated statement of operations data and per share and American Depositary
Shares (ADS) data below for the fiscal years ended March 31, 2005, 2006, 2007, 2008 and 2009, the
consolidated balance sheet data below as of March 31, 2005, 2006, 2007, 2008 and 2009 and
consolidated statements of cash flows for the fiscal years ended March 31, 2005, 2006, 2007, 2008
and 2009 under operating data below are derived from our audited financial statements, which have
been prepared in accordance with accounting principles generally accepted in the United States
(U.S. GAAP), and audited by Deloitte Touche Tohmatsu, an independent registered public accounting
firm.
2
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As of and for the fiscal year ended March 31,
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2005
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2006
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2007
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2008
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2009
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2009
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(millions of yen, except per share and ADS data)
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(thousands of
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U.S. dollars,
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except per
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share and ADS
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data
(1)
)
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Statement of Operations Data:
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REVENUES:
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Connectivity and outsourcing services
(2)
:
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Connectivity services (corporate use)
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¥
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11,994
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¥
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11,179
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¥
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11,239
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¥
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12,149
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¥
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13,142
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$
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132,551
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Connectivity services (home use)
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2,316
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2,120
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1,969
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5,430
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6,538
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65,934
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Outsourcing services
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8,174
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9,924
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11,145
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13,724
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15,396
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155,278
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Total
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22,484
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23,223
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24,353
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31,303
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35,076
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353,763
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Systems integration
(3)
:
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Systems construction
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7,598
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12,296
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16,660
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18,021
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14,658
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147,841
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Systems operation and
maintenance
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8,256
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11,209
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13,867
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15,993
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18,989
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191,514
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Total
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15,854
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23,505
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30,527
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34,014
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33,647
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339,355
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Equipment sales
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3,365
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3,085
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2,175
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1,514
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985
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9,930
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ATM operation business
(4)
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4
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23
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237
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Total revenues
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41,703
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49,813
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57,055
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66,835
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69,731
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703,285
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COST AND EXPENSES:
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Cost of connectivity and outsourcing services
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19,484
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20,078
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20,545
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26,040
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29,318
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295,690
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Cost of systems integration
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12,200
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18,120
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23,529
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25,526
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25,543
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257,617
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Cost of equipment sales
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3,111
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2,818
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1,894
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1,300
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863
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8,704
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Cost of ATM operation business
(4)
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17
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422
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4,259
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Total cost
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34,795
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41,016
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45,968
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52,883
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56,146
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566,270
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Sales and marketing
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2,795
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3,080
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3,439
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4,329
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4,631
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46,703
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General and administrative
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2,666
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3,147
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3,971
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4,624
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5,622
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56,701
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Research and development
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199
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159
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177
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240
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415
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4,187
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Total cost and expenses
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40,455
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47,402
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53,555
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62,076
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66,814
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673,861
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OPERATING INCOME
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1,248
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2,411
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3,500
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4,759
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2,917
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29,424
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OTHER INCOME (EXPENSES):
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Interest income
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13
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13
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23
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63
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45
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455
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Interest expense
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(686
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)
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(437
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)
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(397
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)
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(438
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)
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(408
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)
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(4,117
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)
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Other net
|
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2,573
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3,392
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1,923
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(22
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)
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(520
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)
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(5,243
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)
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Other income (expenses) net
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1,900
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2,968
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1,549
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(397
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)
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(883
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)
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(8,905
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)
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INCOME FROM OPERATIONS BEFORE INCOME TAX EXPENSE
(BENEFIT), MINORITY INTERESTS IN (EARNINGS)
LOSSES OF SUBSIDIARIES AND EQUITY
IN NET INCOME (LOSS) OF EQUITY METHOD
INVESTEES
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3,148
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5,379
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5,049
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4,362
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2,034
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20,519
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INCOME TAX EXPENSE (BENEFIT)
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100
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257
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(804
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)
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(861
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)
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1,002
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10,113
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MINORITY INTERESTS IN (EARNINGS) LOSSES OF
SUBSIDIARIES
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(109
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)
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(354
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)
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(233
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)
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|
97
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|
352
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3,555
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EQUITY IN NET INCOME (LOSS) OF EQUITY METHOD
INVESTEES
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(33
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)
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(14
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)
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(210
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)
|
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(143
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)
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|
35
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|
354
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NET INCOME
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¥
|
2,906
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¥
|
4,754
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¥
|
5,410
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|
¥
|
5,177
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|
|
¥
|
1,419
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|
$
|
14,315
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3
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As of and for the fiscal year ended March 31,
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2005
|
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2006
|
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2007
|
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2008
|
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2009
|
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2009
|
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(millions of yen, except per share and ADS data)
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(thousands of
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U.S. dollars,
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except per
|
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share and ADS
|
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data
(1)
)
|
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Per Share and ADS Data
(5)
:
|
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Basic net income per share
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¥
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15,172
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¥
|
24,301
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¥
|
26,519
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¥
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25,100
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|
¥
|
6,918
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|
$
|
70
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|
Diluted net income per share
|
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|
15,172
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24,258
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26,487
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25,072
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|
|
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6,917
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|
70
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Basic net income per ADS equivalent
|
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37.93
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60.75
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66.30
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62.75
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|
17.29
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|
0.17
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Diluted net income per ADS equivalent
|
|
|
37.93
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|
|
|
60.65
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66.22
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62.68
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17.29
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0.17
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Cash dividends declared per share:
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Japanese Yen
|
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|
|
|
¥
|
1,500
|
|
|
¥
|
1,750
|
|
|
¥
|
2,000
|
|
|
|
|
|
U.S. Dollars
|
|
|
|
|
|
|
|
|
|
$
|
12.76
|
|
|
$
|
17.53
|
|
|
$
|
20.17
|
|
|
|
|
|
Basic weighted average number of shares
|
|
|
191,559
|
|
|
|
195,613
|
|
|
|
203,992
|
|
|
|
206,240
|
|
|
|
205,165
|
|
|
|
|
|
Diluted weighted average number of shares
|
|
|
191,559
|
|
|
|
195,955
|
|
|
|
204,244
|
|
|
|
206,465
|
|
|
|
205,195
|
|
|
|
|
|
Basic weighted average number of ADS equivalents
(thousands)
|
|
|
76,624
|
|
|
|
78,245
|
|
|
|
81,597
|
|
|
|
82,496
|
|
|
|
82,066
|
|
|
|
|
|
Diluted weighted average number of ADS
equivalents (thousands)
|
|
|
76,624
|
|
|
|
78,382
|
|
|
|
81,698
|
|
|
|
82,586
|
|
|
|
82,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
¥
|
5,286
|
|
|
¥
|
13,727
|
|
|
¥
|
13,555
|
|
|
¥
|
11,471
|
|
|
¥
|
10,188
|
|
|
$
|
102,751
|
|
Total assets
|
|
|
37,116
|
|
|
|
50,705
|
|
|
|
47,693
|
|
|
|
55,703
|
|
|
|
52,301
|
|
|
|
527,496
|
|
Short-term borrowings
|
|
|
4,725
|
|
|
|
4,555
|
|
|
|
6,050
|
|
|
|
9,150
|
|
|
|
7,350
|
|
|
|
74,130
|
|
Current portion of long-term borrowings,
including capital lease obligations
|
|
|
5,511
|
|
|
|
4,994
|
|
|
|
3,243
|
|
|
|
3,456
|
|
|
|
3,272
|
|
|
|
33,003
|
|
Long-term borrowings, including capital lease
obligations
|
|
|
5,869
|
|
|
|
5,271
|
|
|
|
4,318
|
|
|
|
4,738
|
|
|
|
4,866
|
|
|
|
49,078
|
|
Common stock
|
|
|
13,765
|
|
|
|
16,834
|
|
|
|
16,834
|
|
|
|
16,834
|
|
|
|
16,834
|
|
|
|
169,782
|
|
Total shareholders equity
|
|
|
11,615
|
|
|
|
20,222
|
|
|
|
20,112
|
|
|
|
24,981
|
|
|
|
25,169
|
|
|
|
253,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures, including capitalized
leases
(6)
|
|
¥
|
5,011
|
|
|
¥
|
4,762
|
|
|
¥
|
3,953
|
|
|
¥
|
6,078
|
|
|
¥
|
7,006
|
|
|
$
|
70,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin ratio
(7)
|
|
|
3.0
|
%
|
|
|
4.8
|
%
|
|
|
6.1
|
%
|
|
|
7.1
|
%
|
|
|
4.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
¥
|
5,238
|
|
|
¥
|
6,559
|
|
|
¥
|
7,402
|
|
|
¥
|
4,538
|
|
|
¥
|
8,631
|
|
|
$
|
87,049
|
|
Investing activities
|
|
|
1,974
|
|
|
|
1,805
|
|
|
|
(3,014
|
)
|
|
|
(5,444
|
)
|
|
|
(3,328
|
)
|
|
|
(33,566
|
)
|
Financing activities
|
|
|
(14,213
|
)
|
|
|
39
|
|
|
|
(4,560
|
)
|
|
|
(1,152
|
)
|
|
|
(6,573
|
)
|
|
|
(66,297
|
)
|
|
|
|
(1)
|
|
The U.S. dollar amounts represent translation of yen amounts at the rate of ¥99.15 which was
the noon buying rate in New York City for cable transfers in foreign currencies as certified
for customs purposes by the Federal Reserve Bank of New York prevailing as of March 31, 2009.
|
|
(2)
|
|
Value-added services and Other of connectivity and value added services were combined and
renamed as Outsourcing services as it is considered more suitable to combine the two
together as one service to clearly indicate that they are services provided to customers for
the purpose of operating a customers information network systems. Related to this change,
Connectivity and value-added services were renamed as Connectivity and outsourcing
services. Reclassifications to prior years have also been made to conform to the current year
presentation.
|
|
(3)
|
|
Systems construction and Systems operation and maintenance, which were components of
systems integration revenues, were separately disclosed to clarify the contents of Systems
integration revenues. The same disclosure were done for the previous years to conform to the
current year presentation.
|
|
(4)
|
|
ATM operation business revenues and Cost of ATM operation business were disclosed due to
the increase in the materiality of the business. The same disclosure has been made to the
previous year to conform to the current year presentation.
|
|
(5)
|
|
IIJ conducted a 1 to 5 stock split effective on October 11, 2005. The per share data is
calculated based on the assumption that the stock split was made at the beginning of the
fiscal year ended March 31, 2005.
|
|
(6)
|
|
Further information regarding capital expenditures, including capitalized leases and a
reconciliation to the most directly comparable U.S. GAAP financial measure can be found in the
following page.
|
|
(7)
|
|
Operating income as a percentage of total revenues.
|
4
Reconciliations of the Disclosed Non-GAAP Financial Measures to the Most Directly Comparable GAAP
Financial Measures
Capital expenditures
We define capital expenditures as purchases of property and equipment plus acquisition of
assets by entering into capital leases. We have included the information concerning capital
expenditures because our management monitors our capital expenditure budgets and believes that it
is useful to investors to know the trends of our capital expenditures and analyze and compare
companies on the basis of such investments. Capital expenditures, as we have defined it, may not be
comparable to similarly titled measures used by other companies.
The following table summarizes the reconciliation of capital expenditures to purchases of
property and equipment and acquisition of assets by entering into capital leases as reported in our
consolidated statements of cash flows prepared and presented in accordance with U.S. GAAP.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the fiscal year ended March 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
(millions of yen)
|
|
|
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of assets by entering into capital leases
|
|
¥
|
4,434
|
|
|
¥
|
3,843
|
|
|
¥
|
2,665
|
|
|
¥
|
4,222
|
|
|
¥
|
4,015
|
|
Purchases of property and equipment
|
|
|
577
|
|
|
|
919
|
|
|
|
1,288
|
|
|
|
1,856
|
|
|
|
2,991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures
|
|
¥
|
5,011
|
|
|
¥
|
4,762
|
|
|
¥
|
3,953
|
|
|
¥
|
6,078
|
|
|
¥
|
7,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange Rates
Fluctuations in exchange rates between the Japanese yen and the U.S. dollar and other
currencies will affect the U.S. dollar and other currency equivalent of the yen price of IIJ shares
and the U.S. dollar amounts received on conversion of any cash dividends, which in turn will affect
the U.S. dollar price of IIJ ADSs. We have translated some Japanese yen amounts presented in this
annual report into U.S. dollars solely for your convenience. Unless otherwise noted, the rate used
for the translations was ¥99.15 per U.S. $1.00, which was the noon buying rate in New York City for
cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank
of New York prevailing as of March 31, 2009, the date of our most recent consolidated balance sheet
contained in this annual report. Translations do not imply that the yen amounts actually represent,
or have been or could be converted into, equivalent amounts in U.S. dollars.
The following table presents the noon buying rates for Japanese yen per U.S. $1.00 in New York
City for cable transfers in foreign currencies as certified for customs purposes by the Federal
Reserve Bank of New York:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
Low
|
|
Average
(2)
|
|
Period-end
|
|
|
|
Fiscal year ended March 31,
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
¥
|
114.30
|
|
|
¥
|
102.26
|
|
|
¥
|
107.28
|
|
|
¥
|
107.22
|
|
2006
|
|
|
120.93
|
|
|
|
104.41
|
|
|
|
113.67
|
|
|
|
117.48
|
|
2007
|
|
|
121.81
|
|
|
|
110.07
|
|
|
|
116.55
|
|
|
|
117.56
|
|
2008
|
|
|
124.09
|
|
|
|
96.88
|
|
|
|
113.61
|
|
|
|
99.85
|
|
2009
|
|
|
110.48
|
|
|
|
87.80
|
|
|
|
100.85
|
|
|
|
99.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calendar year 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
|
|
¥
|
94.20
|
|
|
¥
|
87.80
|
|
|
¥
|
90.12
|
|
|
¥
|
89.83
|
|
February
|
|
|
98.55
|
|
|
|
89.09
|
|
|
|
92.92
|
|
|
|
97.74
|
|
March
|
|
|
99.34
|
|
|
|
93.85
|
|
|
|
97.86
|
|
|
|
99.15
|
|
April
|
|
|
100.71
|
|
|
|
96.49
|
|
|
|
98.92
|
|
|
|
98.76
|
|
May
|
|
|
99.24
|
|
|
|
94.45
|
|
|
|
96.64
|
|
|
|
95.55
|
|
June
|
|
|
98.56
|
|
|
|
95.19
|
|
|
|
96.58
|
|
|
|
96.42
|
|
July
|
|
|
96.41
|
|
|
|
92.33
|
|
|
|
94.30
|
|
|
|
94.54
|
|
August
|
|
|
97.65
|
|
|
|
92.82
|
|
|
|
94.90
|
|
|
|
92.82
|
|
September (through September 25, 2009)
|
|
|
93.09
|
|
|
|
89.83
|
|
|
|
91.54
|
|
|
|
89.83
|
|
|
|
|
(1)
|
|
For December 2008 and prior periods, the exchange rate refers to the noon buying rate as
reported by the Federal Reserve Bank of New York. For January 2009 and later periods, the
exchange rate refers to the exchange rate as set forth in the H.10 statistical release of the
Federal Reserve Board.
|
|
(2)
|
|
For fiscal years, calculated from the average of the exchange rates on the last day of each
month during the period. For calendar year months, calculated based on the average of daily
exchange rates.
|
The noon buying rate on September 25, 2009 was ¥89.83 per $1.00.
5
B. Capitalization and Indebtedness.
Not required.
C. Reasons for the Offer and Use of Proceeds.
Not applicable.
D. Risk Factors.
You should carefully consider the following information, together with the other information
contained in this annual report on
Form 20-F
, including our consolidated financial statements and
the related notes, before making an investment decision. Any risks described below could result in
a material adverse effect on our business, financial condition or results of operations.
We may not maintain our current level of revenues or achieve our expected revenues and profits in
the future.
Our business is principally conducted in Japan and most of our revenues are from customers
operating in Japan. If the Japanese economy deteriorates or does not improve, and it results in
significantly lower levels of network-related investment and expenditures, and corporate customers
respond to conditions by prioritizing low prices over quality, or we experience cancellation of
large accounts, it may become difficult to maintain our current level of revenues or achieve our
expected revenues and profits, particularly in network systems construction.
In addition to factors related to general economic conditions in Japan, we may not be able to
maintain our current level of revenues and profits or achieve our expected levels of revenues and
profits due to several other factors, including, but not limited to:
|
|
|
a decrease in revenues from our connectivity services because of lower unit prices
per bandwidth and cancellation of large accounts, due, for example, to severe price
competition,
|
|
|
|
|
lower revenue growth and lower margins if we fail to successfully differentiate our
services from those of our competitors, if corporate customers put off or stop placing
orders with us, if the number of systems construction projects decreases, or if the
average revenues for each projects decreases,
|
|
|
|
|
an increase in backbone costs due to increased volume of Internet traffic and
tightened demands for leasing backbone lines, or a decline in the profitability of
connectivity services if we contract for more capacity than we actually require to
serve our customers,
|
|
|
|
|
an increase in expenses for network infrastructure, research and development,
back-office systems and other similar investments which we may be forced to make in the
future in order to remain competitive, or an increase in expenses relating to the
leasing of additional equipment and an increase in amortization and depreciation,
|
|
|
|
|
failure to control personnel and outsourcing costs, especially in our systems
integration, if personnel and outsourcing costs increase, or we fail to manage
outsourcing resource effectively or fail to cover outsourcing costs by raising enough
revenues from outsourced projects,
|
|
|
|
|
an increase in SG&A costs, such as personnel expenses, advertising expenses and
office rent expenses, in conjunction with our expected or planned or continued business
expansion,
|
|
|
|
|
the recording of an impairment loss as a result of an impairment test on the
non-amortized intangible assets such as goodwill that are recorded related to any
mergers and acquisitions,
|
|
|
|
|
a decline in the value and trading volume of our holding of available-for-sale
securities from which we expect gains on sale,
|
|
|
|
|
an impairment losses on available-for-sale securities, nonmarketable equity
securities and funds,
|
|
|
|
|
the amount and timing of the recognition of deferred tax benefits or expenses
resulting from a release or an increase of valuation allowance against deferred income
tax assets related to tax operating loss carryforwards and other temporary differences,
and
|
|
|
|
|
a negative effect on our revenues and profits if newly established consolidated
subsidiaries cannot achieve our expected levels of revenues or manage costs and
expenses in a timely and adequate manner.
|
Please see Item 5, Operating and Financial Review and Prospects for more detailed
information concerning our operations and other results.
6
We may not be able to compete effectively, especially against competitors with greater financial,
marketing and other resources.
The major competitors of our connectivity and outsourcing services are major
telecommunications carriers such as NTT Communications Corporation (NTT Communications) and KDDI
Corporation (KDDI). Price competition for Internet connectivity services is still severe. For
outsourcing services, price competition may also increase. This competition may adversely affect
our revenues and profitability and may make it difficult for us to retain existing customers or
attract new customers. The major competitors of our systems integration business are systems
integrators, such as IBM Japan, Ltd., NEC Corporation, Fujitsu Limited, NTT Data Corporation and
their affiliates. Our major competitors have the financial resources to reduce prices in an effort
to gain market share. There is strong competition among systems integrators that may adversely
affect our revenues and profitability. Even though the NTT Group, which is comprised of Nippon
Telegraph and Telephone Corporation (NTT) and NTT Communications, is IIJs largest shareholder,
we plan to continue to operate the company separately and independently from the NTT Group, and
will therefore continue to compete with the NTT Group.
Our competitors have advantages over us, including, but not limited to:
|
|
|
substantially greater financial resources,
|
|
|
|
|
more extensive and well-developed marketing and sales networks,
|
|
|
|
|
higher brand recognition among consumers,
|
|
|
|
|
larger customer bases, and
|
|
|
|
|
more diversified operations which allow profits from some operations to support
operations with lower profitability, such as network services, for which we are a
competitor.
|
With these advantages, our competitors may be better able to:
|
|
|
sustain downward pricing pressure, including pressure on low-price Internet
connectivity services offered to corporate customers, which are our target customers,
|
|
|
|
|
develop, market and sell their services,
|
|
|
|
|
adapt quickly to new and changing technologies,
|
|
|
|
|
obtain new customers, and
|
|
|
|
|
aggressively pursue mergers and acquisitions to enlarge their customer base and
market share.
|
Our investments in our subsidiaries and affiliated companies may not produce the returns we expect
or may affect our results of operations and financial condition adversely.
In the past, we have invested in our group companies to expand our businesses and generate new
businesses. As of August 2009, we have ten consolidated subsidiaries and four equity method
investees. The financial performance of our consolidated subsidiaries affects our financial
condition and results of operations directly and the financial performance of our equity method
investees affects our financial condition and results of operations to the extent of our pro rata
portion of our equity-method investments. There can be no assurance that we will be able to
maintain or enhance the value or the performance of such companies in which we have invested or may
invest in the future, or that we will achieve the returns or benefits from these investments. We
may consider further reorganization of our group companies and there is no guarantee that we will
be able to achieve the benefits that we expect from such reorganization. We may provide additional
financial support in the form of loans, guarantees or additional equity investments in such
companies. We may lose all or part of our investment in such companies if their value decreases as
a result of their financial performance or if they go bankrupt. If our interests differ from those
of other investors in entities over which we do not exercise control, we may not be able to enjoy
synergies with the investees and it may adversely affect our financial condition and results of
operations.
In the fiscal years ended March 31, 2008 and 2009, IIJ has established four new subsidiaries;
GDX Japan Inc. (GDX), Trust Networks Inc. (Trust Networks), On-Demand Solutions Inc. (ODS)
and IIJ Innovation Institute Inc. (IIJ-II) to further expand our businesses. For these four new
subsidiaries, IIJ has invested a total of ¥2.2 billion as of August 31, 2009. As they are in their
early stages of business, there are no assurance whether they will be able to start their
businesses as planned or if their businesses start up take longer than expected, we may need to
provide them with additional financial support. If they cannot achieve our expected levels of revenues or manage costs and
expenses in a timely and adequate manner or if they go bankrupt, it may adversely affect our
financial condition and results of operations.
7
Trust Networks, IIJs consolidated subsidiary established in July 2007, operates automated
teller machines (ATMs) and its network systems and receives a commission for each bank withdrawal
transaction when a customer uses its serviced ATMs. During the fiscal year ended March 31, 2009,
Trust Networks completed its field test of 10 ATMs operations and as of June 2009, it operates 26
ATMs placed in Japanese pinball shops (PACHINKO parlor). Trust Networks expects to introduce around
8,000 ATMs in four to five years from the fiscal year ending March 31, 2010. As of August 2009, IIJ
has invested total of ¥1.3 billion in Trust Networks (73.8% share ownership). The ATM operation
business, which is conducted by Trust Networks, is still in the course of its business start up and
for the fiscal year ended March 31, 2009, it had ¥23 million of revenues and ¥399 million of gross
loss. If Trust Networks is not able to introduce ATMs in accordance with its plan, or does not
record ATMs withdrawing transactions as anticipated or incur unexpected additional costs, its
business start up may take longer than planned and its losses would widen and it may not be able to
achieve its future expected revenue and profit or it may become difficult to continue its business
which may adversely affect our financial conditions and results of operations. If Trust Networks
fails to secure lease arrangements for its ATMs, it would require additional cash to operate its
business. If the placement of ATMs increases, our capital expenditures including capitalized leases
may increase due to the leasing or purchasing of ATMs.
IIJs substantial investment in Crosswave Communications Inc. (Crosswave), IIJs former
equity method investee, became worthless due to Crosswaves commencement of corporate
reorganization proceedings. In August 2003, Crosswave filed a voluntary petition for the
commencement of corporate reorganization proceedings in Japan, and as a result of IIJs equity
method net loss and an impairment loss taken in respect of IIJs investment in Crosswave, our net
loss for the fiscal year ended March 31, 2003 was ¥15.6 billion, the highest net loss that we have
ever experienced. In February 2006, IIJ invested ¥0.8 billion in Internet Revolution Inc.
(i-revo), a joint venture that IIJ established with Konami Corporation, and i-revo is IIJs
equity method investee. After the investment through the fiscal year ended March 31, 2009, we
recorded total equity in net loss of i-revo of ¥0.7 billion.
If our systems integration revenues fluctuate or if we fail to execute our systems construction
projects in a timely or satisfactory manner, our results of operations and financial condition may
be adversely affected.
Systems construction revenues, a one-time revenue, have a tendency to fluctuate from time to
time compared to monthly recurring revenues from connectivity and outsourcing services and systems
operation and maintenance due to the budget systems in Japan, of which many ends in March. If
corporate investments decreases or if we fail to meet customer demands due to lack of sufficient
number of qualified engineers or lack of sufficient task-management capabilities to execute the
projects in a professional manner, corporate customers may put off or stop placing orders with us
and we may not be able to record systems construction revenues and operating profit as expected. If
we fail to execute the projects as contracted, our recognition of revenues may be delayed or lost
altogether, we could be held liable for damages or we could be sued, which could in turn have an
adverse impact on our reputation, results of operations and financial condition.
Generally, systems construction projects are more difficult to be effectively controlled as
they become larger in scale and if we fail to control costs such as personnel and outsourcing costs
or to retain adequate personnel for the projects, or if we fail to calculate the necessary
timeframe or the manpower to complete a project and the costs exceed the payment received from our
customers, our results of operations and financial condition related to systems integration may be
adversely affected.
We may have an impairment loss as a result of an impairment test on the intangible assets that are
recorded related to mergers and acquisitions.
As of March 31, 2009, the total balance of our intangible assets was approximately ¥5.8
billion, of which ¥5.5 billion was non-amortized intangible assets: ¥4.3 billion related to
IIJ-Technology Inc. (IIJ-Tech), ¥0.4 billion related to hi-ho Inc. (hi-ho), ¥0.3 billion
related to Net Care Inc. (Net Care), ¥0.2 billion related to IIJ Financial Systems Inc.
(IIJ-FS), and ¥0.2 billion related to Trust Networks. Amortized intangible assets related to
hi-ho as of March 31, 2009 was ¥0.2 billion. The amount of our intangible assets may increase if we
conduct mergers, acquisitions or investments in affiliates in the future. We conduct an impairment
test by each of our reporting unit and if the business operations for each of our reporting unit
are adversely affected by factors such as significant adverse changes in their business climate and
others, we may have an impairment loss as a result of an impairment test on intangible assets such
as goodwill. The realization of any impairment losses on intangible assets may result in material
adverse effects on our financial condition and results of operations.
8
If we fail to attract and retain qualified personnel, we may not be able to achieve our expected
business growth.
Our network, services, products and technologies are complex, and as a result, we depend
heavily on the continued service from our engineering, research and development, and other
personnel. As our business grows, we need to hire additional engineering, research and development,
and other personnel. In particular, in order to continue to increase our revenues from outsourcing
services and systems integration, we require more sales and engineering personnel to achieve our
expectations. We are not sure that we will be able to retain or attract such personnel and control
human resources costs adequately. Competition for qualified engineering, research and development
personnel is intense in the telecommunications service industry in Japan, and there is a limited
number of personnel with the necessary knowledge and experience we require. None of our employees
are bound by any employment or noncompetition agreement. The realization of any or all of these
risks may result in a failure to achieve our expected business growth.
Our business may be adversely affected if our network suffers interruptions, errors or delays.
Interruptions, errors or delays with respect to our network may be caused by human errors or
natural factors, many of which are beyond our control, including, but not limited to, damage from
fire, earthquakes or other natural disasters, power loss, sabotage, computer hackers, human error,
computer viruses and other similar events. Much of our computer and networking equipment and the
lines that make up our network backbones are concentrated in a few locations that are in
earthquake-prone areas. Any disruption, outages, or delays or other difficulties experienced by
any of our technological and information systems and networks could result in a decrease in new or
existing accounts, loss or exposure of confidential information, reduction in revenues and profits,
costly repairs or upgrades, reputational damage and decreased consumer confidence in our business,
any or all of which could have a material adverse effect on our business, financial condition and
results of operations.
If we fail to keep and manage our confidential customer information, we could be subject to
lawsuits, incur expenses associated with our security systems or suffer damage to our reputation.
We keep and manage confidential information and trade secrets obtained from our customers. We
exercise care in protecting the confidentiality of such information and take steps to ensure the
security of our network, in accordance with the law protecting personal information that came into
effect in April 2005 and the requirements set by the Ministry of Internal Affairs and
Communications (MIC), and the Ministry of Economy, Trade and Industry. However, our network, like
all Information Technology systems, is vulnerable to external attack from computer viruses, hackers
or other such sources. In addition, despite internal controls, misconduct by an employee could
result in the improper use or disclosure of confidential information. If any material leak of such
information were to occur, we could be subject to lawsuits for damages from our customers, incur
expenses associated with repairing or upgrading our security systems and suffer damages to our
reputation that could result in a severe decline in new customers as well as an increase in service
cancellations. The realization of these or similar risks may have a material adverse effect on our
business, financial condition and result of operations.
Business growth and a rapidly changing operating environment may strain our limited resources.
We have limited operational, administrative and financial resources, which could be inadequate
to sustain the growth we want to achieve. As the number of our customers and their Internet usage
increases, as traffic patterns change and as the volume of information transferred increases, we
will need to increase expenditures for our network and other facilities, including data center
facilities in the future, in order to adapt our services and to maintain and improve the quality of
our services. If we are unable to manage our growth and expansion adequately, the quality of our
services could deteriorate and our business may suffer. We may also need to increase office rent
expenditures along with our business expansion. If we are unable to prepare our network and other
facilities in a timely manner to meet our customers demand or our business expansion, we may miss
growth opportunities or may be obliged to bear higher costs to prepare our network and other
facilities.
If we fail to keep up with the rapid technological changes in our industry, our services may become
obsolete and we may lose customers.
Our markets are characterized by:
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rapid technological change, including the shift to new technology-based networks
such as IPv6,
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frequent new product and service introductions,
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continually changing customer requirements, and
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evolving industry standards.
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9
If we fail to obtain access to new or important technologies or to develop and introduce new
services and enhancements that are compatible with changing industry technologies and standards and
customer requirements, we may lose customers.
Our pursuit of necessary technological advances may require substantial time and expense. Many
of our competitors have greater financial and other resources than we do and, therefore, may be
better able to meet the time and expense demands of achieving technological advances. Additionally,
this may allow our competitors to respond more quickly to new and emerging technologies and
standards or invest more heavily in upgrading or replacing equipment to take advantage of new
technologies and standards.
We depend on our executive officers, and if we lose the service of our executive officers,
particularly Mr. Koichi Suzuki, our business and our relationships with our customers, major
shareholders of IIJ and other IIJ Group companies and our employees could suffer.
Our future success depends on the continued service of our executive officers, particularly
Mr. Koichi Suzuki, who is IIJs president, chief executive officer and representative director, as
well as the president and chief executive officer and representative director of IIJs major
subsidiaries. We rely in particular on his expertise in the operation of our businesses and on his
relationships with our shareholders, the shareholders of the IIJ Group companies, our business
partners and our employees. None of our executive officers, including Mr. Suzuki, is bound by an
employment or noncompetition agreement.
The amounts and timing of recognition of deferred tax benefits or expenses related to tax operating
loss carryforwards may adversely affect our financial results.
As of March 31, 2009, we had tax operating loss carryforwards related to corporate tax of ¥10.1
billion. The loss carryforwards are available to offset future taxable income and a large portion
of tax operating loss carryforwards will expire in the period ending March 31, 2011 (see Note 10 to
our consolidated financial statements). We recorded ¥0.6 billion of deferred tax expenses for the
fiscal year ended March 31, 2009. As of March 31, 2009, we had deferred tax asset (current) of ¥0.8
billion and deferred tax asset (noncurrent) of ¥2.3 billion, respectively, which will result in
deferred tax expense in the future. If there are changes in circumstances that causes a change in
judgment about the realizability of the related deferred tax asset in future years, a release or an
increase of valuation allowance against deferred income tax assets related to tax operating loss
carryforwards and other temporary differences would result in the decrease or increase in deferred
tax expense which may affect our financial condition and results of operations.
Fluctuations in the stock prices of companies or impairment losses on stocks of companies in which
we have invested may significantly influence our financial condition.
We have invested in non-affiliated companies in order to further our business relationships
with those companies. We have also invested in available-for-sale equity securities and in funds
which invest mainly in unlisted stocks. We recorded net impairment losses of ¥0.5 billion on
nonmarketable and available-for-sale equity securities in the fiscal year ended March 31, 2009. The
book value of available-for-sale securities was ¥0.7 billion, nonmarketable equity securities was
¥0.9 billion and funds was ¥0.4 billion as of March 31, 2009, respectively. We may acquire
additional securities of non-affiliated companies. However, the book value can decline
significantly due to changes in the financial condition of non-affiliated companies, general
economic conditions in Japan or fluctuations in the Japanese stock markets. Fluctuations in the
value of securities in which we have invested may affect our financial results. In addition, should
we choose to sell all or a portion of these shares, it is not certain that we will be able to do so
on favorable terms.
NTT, IIJs largest shareholder, could exercise substantial influence over us in a manner which may
not necessarily be in our interest or that of our other shareholders.
NTT and its affiliates owned 30.0% of IIJs outstanding voting shares as of March 31, 2009. As
IIJs largest shareholder, NTT may be able to exercise substantial influence over us. As of June
26, 2009, IIJ had one outside director, Mr. Takashi Hiroi, from NTT among IIJs 14 directors. While
we intend to conduct our day-to-day operations independently of NTT and its group companies and
believe that NTT also plans for us to operate independently, NTT may decide to exercise substantial
influence over us in a manner which could impair our ability to operate independently. Furthermore,
NTT may take actions that are in its best interests, which may not be in our interest or that of
other shareholders.
10
We rely greatly on other telecommunications carriers and other suppliers, and could be affected by
disruptions in service or delays in the delivery of their products and services.
We rely on telecommunications carriers such as NTT Communications and KDDI for a significant
portion of our network backbone and Nippon Telegraph and Telephone East Corporation (NTT East)
and Nippon Telegraph Telephone West Corporation (NTT West) and KDDI for local access lines for
our customers. We procure significant portions of our network backbone and data center facilities
pursuant to operating lease agreements with NTT Communications, our largest provider of network
infrastructure. For the fiscal year ended March 31, 2009, 69.2% in costs for our domestic network
backbone was for NTT Communications. For us to provide broadband mobile data communications as a
Mobile Virtual Network Operator (MVNO), we depend on mobile network operators. We are subject to
potential disruptions in these telecommunications services and, in the event of such disruption, we
may have no means of replacing these services, on a timely basis or at all.
We also depend on third-party suppliers of hardware components like routers that are used in
our network. We acquire certain components from limited sources, typically from Cisco Systems, Inc.
(Cisco) and Juniper Networks, Inc. (Juniper Networks). A failure by one of our suppliers to
deliver quality products on a timely basis, or the inability to develop alternative sources if and
as required, may delay our ability to expand the capacity and scope of our network.
Any problems experienced by our telecommunications carriers and other suppliers could have a
material adverse effect on our business, financial condition and results of operations.
Regulatory matters and new legislation could impact our ability to conduct our business.
The licensing, construction and operation of telecommunications systems and services in Japan
are subject to regulation and supervision by the MIC. We operate pursuant to licenses and approvals
that have been granted by the MIC.
Our licenses have an unlimited duration, but are subject to revocation by the MIC if we
violate any telecommunications laws and regulations in a manner that is deemed to harm the public
interest, if we or any of our directors are sentenced to a fine or any more severe penalty under
the telecommunications laws, if we employ a director who was previously sentenced to a fine or more
severe penalty thereunder or if we have had a license revoked in the past.
Existing and future governmental regulation may substantially affect the way in which we
conduct our business. These regulations may increase the cost of doing business or may restrict the
way in which we offer products and services. As a result of the amendment in April 2004 of the
Telecommunication Business Law and deregulation including elimination of the regulatory distinction
between carriers providing telecommunications services through networks owned by other
telecommunication carriers and carriers which own or have long-term leases for the networks through
which they offer telecommunication services, competition may increase. Recently, the MIC has been
considering adapting laws and regulations to control actions that hurt public order over the
Internet. Furthermore, we cannot predict future regulatory changes which may affect our business.
Any changes in laws, such as those described above, or regulations or MIC policy affecting our
business activities and those of our competitors could adversely affect our financial condition or
results of operations. For more information, see Item 4., Business Overview Regulation of the
Telecommunications Industry in Japan.
We may be named as defendants in litigation, which could have an adverse impact on our business,
financial condition and results of operations.
We are involved in normal claims and other legal proceedings in the ordinary course of our
business. We believe that there are no cases currently pending which would have a significant
financial impact on us, but we cannot be certain that we will not be named in a future lawsuit. Any
judgment against us in such a lawsuit, or in any future legal proceeding, could have an adverse
effect on our business, financial condition and results of operations.
In the event we need to raise capital, we may issue additional shares of IIJs common stock or
securities convertible into IIJs common stock, which may cause shareholders to incur substantial
dilution.
IIJ may raise additional funds in the future to raise additional working capital and for other
financial needs. IIJ issued 12,500 new shares of IIJs common stock along with IIJs listing on the
Mothers market of the Tokyo Stock Exchange in December 2005, after conducting a 1 to 5 split of our
shares of common stock in October 2005. On May 11, 2007, IIJ issued 2,178 shares of common stock to
make IIJs two consolidated subsidiaries wholly-owned through share exchanges. If IIJ choose to
raise such funds from the issuance of equity shares of IIJs common stock or securities convertible
into IIJs common stock, existing shareholders may incur substantial dilution.
11
Item 4. Information on the Company.
A. History and Development of the Company.
IIJ is incorporated in Japan as a joint stock corporation under the name Internet Initiative
Japan Inc. IIJ was incorporated in December 1992 and operate under the laws of Japan.
IIJ began its operations in July 1993, making IIJ one of the first commercial providers in
Japan to offer Internet connectivity services. In February 1994, IIJ acquired a Type II
Telecommunications license, which enables IIJ to operate IIJs own international backbone networks.
The main services that IIJ and the Group offers are Internet connectivity services, outsourcing
services, systems integration and equipment sales. The Group offers our services and solutions
directly to our customers and also work closely together as a Group in providing total network
solutions to our customers. In addition, the Group entered the ATM operation business through our
consolidated subsidiary, Trust Networks, which we established in July 2007. For descriptions and
the history of the Group, see Our Group Companies in Item 4.B.
IIJ became a public company in August 1999 with IIJs initial public offering of ADSs on the
Nasdaq National Market. On December 2, 2005, IIJ listed on the Mothers market of the Tokyo Stock
Exchange (TSE). In connection with the listing, IIJ issued 12,500 new shares of common stock for
an amount of ¥6.0 billion. As IIJ conducted a 1 to 5 split of IIJs shares of common stock on
October 11, 2005, the total number of IIJs issued shares of common stock increased to 204,300. On
December 14, 2006, IIJ moved to the First Section of the TSE for IIJs listing in Japan, without
the issuance of new shares. On May 11, 2007, IIJ made IIJ-Tech and Net Care our 100% owned
consolidated subsidiaries through share exchanges. In regard to this, IIJ issued 2,178 new shares
of common stock and as a result, the total number of IIJs issued shares of common stock increased
to 206,478.
IIJs head office is located at Jinbo-cho Mitsui Bldg., 1-105 Kanda Jinbo-cho, Chiyoda-ku,
Tokyo 101-0051, Japan, and IIJs telephone number at that location is (813) 5259-6500. IIJs agent
in the United States is IIJ America Inc. (IIJ America), 1211 Avenue of the Americas, Suite 2900, New
York, New York 10036 and the telephone number at that location is (212) 440-8080. IIJ has a web
site that you may access at http://www.iij.ad.jp/en/. Information contained on IIJs web site does
not constitute part of this annual report on Form 20-F.
For a discussion of capital expenditures and divestitures currently in progress and those for
the past three years, see Capital Expenditures in Item 4.B.
B. Business Overview.
The Group offers a comprehensive range of Internet connectivity services, outsourcing services
and network integration to our customers in Japan. We believe our services provide efficient and
reliable solutions to our customers on one of the most advanced and reliable Internet networks
available in Japan. Our services are based upon high-quality networking technology tailored to meet
specific needs and demands of our customers.
We offer, together with other companies or independently, a variety of services to our
customers, mainly corporate and governmental organizations, as total network solutions through a
single source. Our primary services are our connectivity services, outsourcing services, systems
integration and equipment sales. Our connectivity services includes full-spec IP service with
bandwidth ranging from 64 kbps up to 10 Gbps, low-cost broadband services such as optical
and/or ADSL lines which are mainly used to connect branch offices, and mobile access services. Our
outsourcing services include security-related outsourcing services that protect our customer
network systems from unauthorized access and secure remote connections to internal networks,
network-related outsourcing services such as router rental and Virtual Private Network (VPN),
server-related outsourcing services such as web server hosting and e-mail security service, and
data center-related outsourcing services. Our systems integration includes systems construction and
systems operation and maintenance. Systems construction are tailored to meet each of our customers
requirements, which include consulting, project planning, systems design and construction of
network systems, and sales of equipment and software purchased from third parties. Systems
operation and maintenance revenues include systems construction-related maintenance, monitoring and
other operating services. We aim to be the leading supplier of total network solutions in Japan.
In addition, we entered the ATM operation business through our consolidated subsidiary, Trust
Networks, which was established in July 2007. Trust Networks operates ATMs and its network systems
and receives a commission for each bank withdrawal transaction when a customer uses its serviced
ATMs. During the fiscal year ended March 31, 2009, Trust Networks completed its field test of 10
ATMs operations. As of June 30, 2009, Trust Networks operates 26 ATMs and aims to introduce around
8,000 ATMs in four to five years from the fiscal year ending March 31, 2010.
Starting from the fiscal year ended March 31, 2009, we have disclosed revenues and costs for
the ATM operation business for fiscal years ended March 31, 2008 and 2009 because the amount of
losses related to their business has become materially large.
12
Currently, we have two segments: Network services and systems integration business and ATM
operation business. Network services and systems integration business is comprised of: connectivity
and outsourcing services, systems integration and equipment sales.
The table below provides a breakdown of the total revenues and percentage by services among
our services over the past three fiscal years. Most of our revenues are generated in Japan and are
denominated in Japanese yen.
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For the fiscal year ended March 31,
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(millions of yen except for percentage data)
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2007
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2008
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2009
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Connectivity services
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13,208
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|
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|
23.2
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%
|
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|
17,579
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|
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|
26.3
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%
|
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19,680
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|
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28.2
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%
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Outsourcing services
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11,145
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|
|
|
19.5
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%
|
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|
13,724
|
|
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|
20.5
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%
|
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|
15,396
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|
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22.1
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%
|
Systems construction
|
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16,660
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|
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29.2
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%
|
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|
18,021
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|
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27.0
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%
|
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|
14,658
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|
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21.0
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%
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Systems operation and maintenance
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13,867
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|
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24.3
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%
|
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|
15,993
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|
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|
23.9
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%
|
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18,989
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27.3
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%
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Equipment sales
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2,175
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|
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3.8
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%
|
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|
1,514
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2.3
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%
|
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985
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|
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1.4
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%
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ATM operation business
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4
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0.0
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%
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23
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0.0
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%
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Total revenues:
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57,055
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100.0
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%
|
|
|
66,835
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100.0
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%
|
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69,731
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100.0
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%
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Connectivity Services
We offer two categories of Internet connectivity services: connectivity services for corporate
use and connectivity services for home use. Connectivity services for corporate use are based
mainly on dedicated local-line connections provided by telecommunications carriers between our
backbone and customers. Connectivity services for home use mainly require customers to connect to
our points of presence (POPs) through the publicly-switched telephone network or variety of
broadband access services, such as ADSL and optical lines. The last-one mile access such as
dedicated access, ADSL, fiber optic, Ethernet and others are provided by large telecommunications
carriers such as NTT East and West, NTT DoCoMo, Inc. (NTT Docomo) and others.
Starting from fiscal year ended March 31, 2009, we have launched a broadband mobile data
communication service as a mobile virtual network operator. Such new service provides inexpensive
high-speed, high-capacity last-one mile access, and we will continue to introduce new variations to
our Internet connectivity service to accommodate such developments.
The following table shows the number of our connectivity service subscribers as of the dates
indicated:
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As of March 31,
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2005
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2006
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2007
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2008
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2009
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Connectivity services (corporate use)
(1)
:
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IP Service (-99 Mbps)
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749
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739
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|
|
751
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|
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|
855
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|
|
|
938
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|
IP Service (100 Mbps 999 Mbps)
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|
|
90
|
|
|
|
117
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|
|
|
161
|
|
|
|
201
|
|
|
|
225
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|
IP Service (1 Gbps )
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24
|
|
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40
|
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63
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|
70
|
|
|
|
94
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|
IIJ Data Center Connectivity Service
|
|
|
231
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|
|
|
247
|
|
|
|
282
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|
|
|
288
|
|
|
|
298
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|
IIJ FiberAccess/F and IIJ DSL/F
(Broadband Services)
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9,873
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13,297
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16,418
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23,539
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26,023
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|
Others
(1)
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2,423
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|
|
1,760
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|
|
|
1,618
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|
|
3,002
|
|
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21,224
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Total connectivity
service (corporate use)
contracts
|
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13,390
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16,200
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19,293
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|
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27,955
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|
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48,802
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|
Connectivity services (home use) :
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Under IIJ Brand
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65,921
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|
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60,525
|
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55,907
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51,051
|
|
|
|
46,901
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|
hi-ho
|
|
|
|
|
|
|
|
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189,700
|
|
|
|
179,786
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|
OEM
(2)
|
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625,908
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568,307
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476,483
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232,515
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|
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216,725
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Total connectivity service (home use contracts)
|
|
|
691,829
|
|
|
|
628,832
|
|
|
|
532,390
|
|
|
|
473,266
|
|
|
|
443,412
|
|
|
|
|
(1)
|
|
Includes IIJ Mobile Service.
|
|
(2)
|
|
OEM services provided to other service providers.
|
13
Connectivity Services for Corporate Use
Our lineup of connectivity services for corporate use includes: IP Service, IIJ Data Center
Connectivity Service, IIJ FiberAccess/F and IIJ DSL/F (Broadband Services), dial-up services and
IIJ Mobile service.
|
|
|
IP Service and Data Center Connectivity Service.
Our IP Service and Data Center
Connectivity is a full-scale, high-speed access service that connects the customers
network to our backbone with dedicated access lines. The services are used mainly for
corporate headquarters or data centers, where reliable network service is
indispensable. The customer chooses the level of service it needs based upon its
bandwidth requirements. As of August 2009, we offer service at speeds ranging from 64
kbps to 10 Gbps.
|
|
|
|
|
We believe that as business customers continue to increase their use of the Internet as
their business tool and increasingly rely on the Internet, our Internet connectivity
service will continue to be the foundation of our total network solutions offerings.
|
|
|
|
|
Subscribers pay a monthly fee for the leased local access line from the customers
location to one of our POPs. The amount of this fee varies depending on the carrier, the
distance between the customers site and our POPs and its contracted bandwidth. We
collect the local access fee from the customer and pay the amount to the carrier. While
we prepare and arrange the leased access lines on behalf of customers under our name,
the usage fee collected from the customer and paid to the carriers is recorded gross in
our consolidated financial statements.
|
|
|
|
|
For our IP Service, we offer Service Level Agreements (SLA) to our customers to better
define the quality of services our customers receive. We were the first ISP in Japan to
introduce this type of agreement. We are able to offer these SLA due to our high quality
and reliable network. Our SLA provide customers with credit against the amount invoiced
for the services if our service quality fails to meet the prescribed standards.
Subscribers to our IP Service receive technical support 24 hours a day and seven days a
week. We guarantee the performance of the following elements under our SLA:
|
|
|
|
100% availability of our network,
|
|
|
|
|
the maximum average latency, or time necessary to transmit a signal, between designated POPs, and
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|
|
|
|
prompt notification of outage or disruption.
|
|
|
|
IIJ FiberAccess/F and IIJ DSL/F (Broadband Services).
IIJ FiberAccess/F and IIJ
DSL/F are broadband Internet connectivity services that uses FLETS services for
fiber optic access and ADSL access provided by NTT East and West and others allowing
service on a best-efforts basis. The services are used mainly to connect branch offices
and headquarters. We support this service by providing guarantees of latency rates
under SLA.
|
|
|
|
|
Dial-up Access Services.
We offer a variety of dial-up access services for corporate
use. Our dial-up services allow employees that are out of the office or frequent
travelers, to access the Internet or their own internal networks through one of our
POPs or through our roaming access points. When accessing their internal network, for
security purposes, it is usually accessed using the VPN function that is provided by
our outsourcing services or systems integration. Our main dial-up access services are
our IIJ Dial-up Advanced, Enterprise Dial-up IP Service and IIJ Dial-up Standard.
|
|
|
|
|
IIJ Mobile Service.
This service, launched in January 2008, provides wireless
broadband Internet connectivity exclusively for corporate customers as a MVNO. We use
the wireless networks of NTT DoCoMo and EMOBILE (EMOBILE Ltd.) for mobile access
network.
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|
|
|
|
Other Internet connectivity services.
We offer, other than the services mentioned
above, IIJ ISDN/F and IIJ Line Management/F service, which the former provides
dedicated Internet access for ISDN lines and the latter the procurement of FLETS
services on behalf of customers.
|
Connectivity Services for Home Use
We offer connectivity services for home use such as IIJ4U, IIJ
mio
, and hi-ho. IIJ
mio
has a
variety of Internet connectivity services, such as IIJ
mio
DSL/DF Service, IIJ
mio
FiberAccess/DF
Service, IIJ
mio
DSL/SF Service, IIJ
mio
FiberAccess/DC Service, IIJ
mio
FiberAccess/SF Service and
IIJ
mio
MobileAccess Service, depending on the type of local access. Connectivity services for home
use under the hi-ho brand, which we acquired in June 2007, are similar to IIJ4U. We also offer OEM
services for other network operators. In December 2008, IIJ
mio
and hi-ho introduced wireless
broadband Internet connectivity service.
14
Outsourcing Services
Our customers are increasingly seeking additional network-related services, in addition to
Internet connectivity. We provide our customers with a broad range of outsourcing services such as
security-related, network-related, server-related and data center-related outsourcing services.
We believe that business customers will increasingly rely on outsourcing services for costs
reduction, improve productivity and to rely on the outside expertise for a reliable network-related
operation. Therefore, we will continue our efforts on improving our services with new features and
enhancing the line ups by creating new services with our Internet expertise on a timely manner.
Our outsourcing services include:
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|
|
Security-related outsourcing services.
We offer services that protect customers
internal network systems from unauthorized access and secure remote connections to the
internal networks such as, IIJ DDoS Solution Service, IIJ Security Scan Service, IIJ
Managed IPS Service, IIJ Managed Firewall Service and IIJ Secure Remote Access. We were
the first ISP in Japan to provide firewall services, which we introduced in 1994.
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|
|
|
|
Network-related outsourcing services.
We offer Internet-VPN and router rental
services such as, IIJ Internet-LAN Service, IIJ SMFsx Service, IIJ Managed VPN PRO
Service, SEIL Rental Service and Managed Router Service. IIJ SMFsx Service is based on
the patent technology, the SEIL Management Framework (SMF) which enables centralized
management of network-configuration, administration and maintenance, reducing both
configuration and maintenance time and costs for large-scale network construction.
|
|
|
|
|
Server-related outsourcing services.
We offer services such as web hosting, e-mail
hosting, document storage and streaming services. Currently, the main service line ups
are, IIJ Secure MX Service, IIJ Secure Web Gateway Service, IIJ Document Exchange
Service, IIJ Download Site Service, IIJ URL Filtering Service, IIJ DNS Service and
Streaming Service.
|
|
|
|
|
Data center-related services.
We offer, IIJ data center facility services, IIJ data
center connectivity services and management and monitoring services. Our Internet data
center facility services are co-location services which allow companies to house their
servers and routers off-site on our premises. Our Internet data center facilities are
leased from third parties such as NTT Communications and are equipped with robust
security systems, 24-hours-a-day non-stop power supplies and fire extinguishing
systems, and have earthquake-resistant construction and high-speed Internet
connectivity with IIJ backbones. We also offer basic monitoring and maintenance
services for the equipment. This service enhances reliability because we provide
24-hours-a-day monitoring and have specialized maintenance personnel and facilities. We
offer management and monitoring services tailored to our customers requirements.
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|
|
|
|
Other services.
Other than the above, we offer customer support and help desk
solutions, IP Phone service and other services.
|
Systems Integration
Our systems integration consists of systems construction and systems operation and
maintenance. Systems construction are tailored to meet each of our customers requirements, which
include consulting, project planning, systems design and development of network systems. Our
systems construction mainly focuses on Internet business systems and Intranet and Extranet
corporate information systems. We have built a strong record in various business fields.
Examples of systems construction are:
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|
|
connecting over a hundred locations such as gas stations, bank branches and
retail shops via Internet-VPN, transmission of data over the Internet,
|
|
|
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|
outsourcing of large scale e-mail servers or systems to detect or delete e-mails
with viruses or spam or record all e-mails incoming to and outgoing from customers,
|
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|
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|
online brokerage systems for securities firms,
|
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|
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|
outsourcing of websites for online businesses,
|
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|
|
|
re-construction of overall corporate network systems suited to increased traffic
data,
|
|
|
|
|
voice over IP systems to transmit voice among customer branch offices over the
Internet,
|
|
|
|
|
construction of wireless local area networks (LAN), and
|
|
|
|
|
consultation on corporate network security.
|
15
In the planning phase of a systems construction project, we form special project management
teams for the project. We analyze and design the customers network and systems with three
engineering focuses: reliability, flexibility and extendibility.
In the network systems construction phase, we procure equipment such as servers and manage
application development and software programming tasks which are, depending on the size of the
project, outsourced to third parties. Network systems constructions are generally provided together
with our connectivity and outsourcing services.
In the operation phase, by utilizing data center facilities directly linked to our network, we
provide a range of outsourcing services, which take maximum advantage of the Internet system,
network operation and management know-how of the IIJ Group companies. Rather than simply looking
after the customers servers and equipments, we take care of the customers entire computing
environment, as well as custom-designed monitoring systems and provide around-the-clock operation
and management services. These outsourcing services enable customers to free themselves from the
burden of operating the network systems, which demands professional operation and maintenance to
ensure prompt and flexible responses to unexpected system problems.
We also provide our customers with basic, easy-to-order systems integration, which we refer to
as IBPS, including provision of network resources such as network equipment, data storage systems,
network monitoring and systems operation management, on demand and on a monthly basis, therefore
enabling our customers to launch their internal network system securely and cost effectively.
Equipment Sales
In addition to the connectivity and outsourcing services and systems integration, we sell
third-party equipment to meet the one-stop needs of our customers together with our in-house
developed router, the SEIL Series.
SEIL Series.
Our high-end in-house developed router, the SEIL Series was first released in
October 2001. Currently there are; SEIL/B1, SEIL/X, SEIL/Turbo, SEIL/Plus, SEIL/128. With the SMF
feature, which provides auto-configuration features, it enables customers to create a VPN network
by simply connecting the network into SEIL WAN interface.
ATM Operation Business
The ATM operation business is conducted by our consolidated subsidiary, Trust Networks which
operates ATMs and its network systems and receives a commission for each bank withdrawal
transaction when a customer uses its serviced ATMs. During the fiscal year ended March 31, 2009,
Trust Networks completed its field test of 10 ATMs operations and as of June 30, 2009, it operates
26 ATMs placed in Japanese pinball shops (PACHINKO parlor). Trust Networks aims to introduce around
8,000 ATMs in four to five years from the fiscal year ending March 31, 2010.
Network
Our network is one of our most important assets. We have developed and currently operate a
high-capacity network that has been designed to provide reliable, high-speed, high-quality Internet
connectivity services. The Internet network that we have created extends throughout Japan and to
the United States.
We are able to achieve and maintain high speeds through our advanced network architecture,
routing technology and load balancing that optimize traffic on our multiple Internet connections.
The primary components of our network are:
|
|
|
our backbone, which includes leased lines and network equipment, such as advanced
Internet routers,
|
|
|
|
|
POPs in major metropolitan areas in Japan,
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|
|
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|
Internet data centers, and
|
|
|
|
|
a network operations center (NOC).
|
16
Backbone
Leased lines
Our network is anchored by our extensive Internet backbone that extended throughout Japan
and to the United States. We use our expertise in developing and operating our network to
organize and connect these leased lines to form a backbone that has substantial transmission
capacity. As of August 2009, the total capacity between Japan and the United States was
40.8Gbps.
We lease high-capacity, high-speed digital transmission lines in Japan from various
carriers. The table below shows our backbone cost.
Backbone Cost
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|
For the fiscal year ended March 31,
|
|
|
2005
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
Backbone cost (thousand yen)
|
|
¥
|
3,550,885
|
|
|
¥
|
3,516,322
|
|
|
¥
|
3,515,934
|
|
|
¥
|
3,469,717
|
|
|
¥
|
3,692,286
|
|
Network equipment
We use advanced equipment in our network. Our primary routers in our network are Cisco and
Juniper Networks routers. The size of our routers varies depending on the number of customers
and volume of traffic served by our POPs. At each POP we connect our dedicated line and dial-up
access routers to Cisco backbone routers which then transmit and receive information throughout
our network. We primarily lease our network equipment under capital lease arrangements.
Points of Presence
.
POPs are the main points at which our customers connect to our backbone. We provide Internet
connectivity from our POPs to commercial and residential customers through leased lines and
dial-up connections over local exchange facilities. As of August 2009, we operate 11 primary POPs
for dedicated access and one universal POP for nationwide dial-up access in Japan. The universal
POP can be accessed from anywhere in Japan with the minimum local telephone charge.
Many of our POPs are located in the same facilities where other major carriers and ISPs have
their POPs, in facilities of various carriers in Japan like NTT Communications and KDDI. We
mainly lease the physical space. We maintain our routers and other networking equipment at these
POPs. Our POPs are in, or in close proximity to, the same buildings in which the switches and
routers of these carriers and ISPs are located enabling quick and easy interconnection of our
equipment with theirs.
Internet Data Centers.
As of August 2009, we operate 15 Internet data centers in Japan which we use to offer our
outsourcing data center services, five in Tokyo, two in Yokohama, and one each in Saitama, Osaka,
Sapporo, Sendai, Kawaguchi, Nagoya, Kyoto and Fukuoka. These data centers are specifically
designed for application hosting, co-location services and high capacity access to our networks.
These data centers are mainly leased from NTT Communications, ITOCHU Techno-Solutions
Corporation, and KDDI.
These data centers have 24-hours-a-day, seven-days-a-week operations and security and are
equipped with uninterruptible power supplies and backup generators, anti-seismic damage
precautions, fire suppression equipment and other features to optimize our ability to offer
high-quality services through these data centers.
Network operations center and technical and customer support.
Our NOC in Tokyo operates 24 hours a day and seven days a week. From our NOC, we monitor the
status of our network, the traffic on the network, the network equipment and components and many
other aspects of our network including our customers dedicated access lines leased from
carriers. From our NOC, we monitor our networks to ensure that we meet our commitments under our
SLA.
17
Our Group Companies
We offer our services directly and with our group companies. As of August 2009, we had ten
consolidated subsidiaries and four equity method investees, which all, except for IIJ-A and i-Heart
Inc. (i-Heart), are incorporated under the laws of Japan. IIJ-A is incorporated under the laws of
the state of California and the United States of America, and i-Heart is incorporated under the
laws of Republic of Korea. The financial results of our consolidated subsidiaries shown in this
section are prepared under generally accepted accounting principles in Japan, except for IIJ-A. Our
group companies work closely together in providing total network solutions to our customers. We
collaborate on the development of various services and products and market our services and
products together as a group. However, our group companies specialize in different aspects of the
Internet and networking. Our customers main point of contact is IIJ itself. We then draw upon the
resources and special capabilities of the group companies to offer total Internet solutions.
The ATM operation business is conducted by Trust Networks.
The table below sets out our group companies, including our subsidiaries and equity method
investees and our direct and indirect ownership of each of them as of August 2009:
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|
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|
|
Jurisdiction of
|
|
Proportion of ownership
|
Company Name
|
|
Incorporation
|
|
and voting interest
|
Consolidated Subsidiaries:
|
|
|
|
|
|
|
|
|
IIJ Technology Inc.
|
|
Japan
|
|
|
100.0
|
%
|
Net Care, Inc.
|
|
Japan
|
|
|
100.0
|
%
|
IIJ Financial Systems Inc.
|
|
Japan
|
|
|
100.0
|
%
|
Net Chart Japan Inc.
|
|
Japan
|
|
|
100.0
|
%
|
hi-ho Inc.
|
|
Japan
|
|
|
100.0
|
%
|
On-Demand Solutions Incorporated
|
|
Japan
|
|
|
100.0
|
%
|
IIJ Innovation Institute Inc.
|
|
Japan
|
|
|
100.0
|
%
|
Trust Networks Inc.
|
|
Japan
|
|
|
73.8
|
%
|
GDX Japan Inc.
|
|
Japan
|
|
|
60.2
|
%
|
IIJ America Inc.
|
|
|
U.S.A.
|
|
|
|
100.0
|
%
|
Equity method investees:
|
|
|
|
|
|
|
|
|
Taihei Computer Co., Ltd.
|
|
Japan
|
|
|
45.0
|
%
|
Internet Multifeed Co.
|
|
Japan
|
|
|
31.0
|
%
|
Internet Revolution Inc.
|
|
Japan
|
|
|
30.0
|
%
|
i-Heart Inc.
|
|
Republic of Korea
|
|
|
28.6
|
%
|
IIJ Technology Inc.
IIJ-Tech is an important element in our provision of total network solutions to our customers.
IIJ-Tech provides systems construction and systems operation and maintenance. IIJ-Tech assists
customers in consultation, network and system design, project management and implementation of
network systems such as web systems and e-mail systems for ISPs.
In May 2007, IIJ made IIJ-Tech wholly-owned through a share exchange. Before the share
exchange, IIJs ownership in IIJ-Tech increased to 95.2% as of April 2007 through the purchase of
IIJ-Tech shares from IIJ-Techs minority shareholders.
IIJ-Tech had revenues of ¥25.5 billion and operating income of ¥0.8 billion for the fiscal
year ended March 31, 2009. As of March 31, 2009, IIJ-Tech had 461 full-time employees, 17 of whom
were seconded from IIJ.
Net Care, Inc.
Net Care provides a broad array of support services, from monitoring and troubleshooting to
network operations, Data Center operations and an end-user help desk.
In May 2007, IIJ made Net Care a wholly-owned subsidiary through a share exchange. Before the
share exchange, IIJs ownership in Net Care increased to 92.5% as of April 2007 through the
purchase of Net Care shares from Net Cares minority shareholders.
Net Care had revenues of ¥3.9 billion and operating income of ¥0.3 billion for the fiscal year
ended March 31, 2009. As of March 2009, Net Care had 286 employees, 11 of whom were seconded from
IIJ.
18
IIJ Financial Systems Inc.
IIJ-FS is a company wholly-owned by IIJ-Tech, whose business was acquired from Yamatane Co.,
Ltd. in October 2004. IIJ-FS provides systems integration for securities trading systems.
IIJ-FS became IIJs wholly-owned consolidated subsidiary through indirect ownership due to the
fact that it is wholly-owned by IIJ-Tech and IIJ-Tech became IIJs wholly-owned subsidiary in May
2007.
IIJ-FS had revenues of ¥5.6 billion and operating income of ¥0.8 billion for the fiscal year
ended March 31, 2009. As of March 31, 2009, IIJ-FS had 87 employees.
Net Chart Japan Inc.
Netchart Japan Inc. (NCJ) was established in August 2006 as a company wholly-owned by IIJ.
NCJ commenced its business operations after it succeeded the business operations of Net Chart Japan
Corporation in October 2006. NCJ provides network construction services that are mainly related to
Local Area Networks, such as installation and configuration of equipment, wiring following network
installation, and installation and operation support for applications.
NCJ had revenues of ¥1.5 billion and operating loss of ¥14 million for the fiscal year ended
March 31, 2009. As of March 31, 2009, NCJ had 43 employees.
hi-ho Inc.
hi-ho is a company wholly-owned by IIJ. In June 2007, IIJ acquired 100% of the equity of hi-ho
from Panasonic Network Services Inc. (PNS) to take over PNSs Internet service business for
personal users and its solution business for corporate customers. A portion of the solution
business for corporate customers were transferred to IIJ-Tech in April 2008. IIJ had additionally
invested ¥0.3 billion as of March 2009.
hi-ho had revenues of ¥5.2 billion and operating income of ¥26 million for the fiscal year
ended March 31, 2009. As of March 31, 2009, hi-ho had 32 employees, 10 of whom were seconded from
IIJ.
On-Demand Solutions Incorporated
In April 2008, IIJ invested ¥130 million in and established ODS as our wholly-owned
consolidated subsidiary to provide print-on-demand and related services.
IIJ Innovation Institute Inc.
In June 2008, IIJ invested ¥100 million in and established IIJ-II as our wholly-owned
consolidated subsidiary, which engages in research and development of Internet-related basic
technology development and its business incubation. Additional ¥50 million was invested as of March
2009. On July 1, 2009, IIJ Research Laboratory was transferred into IIJ-II to strengthen the Group
research and development by reclassifying the Group research and development organization.
Trust Networks Inc.
In July 2007, IIJ invested ¥15 million in Trust Networks. In October 2007, IIJ additionally
invested ¥485 million in to Trust Networks and as a result, Trust Networks became our consolidated
subsidiary. IIJ had additionally invested ¥975 million from April 2008 to August 2009.
Trust Networks operates ATMs and its network systems and receives a commission for each bank
withdrawal transaction when a customer uses its serviced ATMs. During the fiscal year ended March
31, 2009, Trust Networks completed its field test of ATMs operations. As of June 30, 2009, Trust
Networks operated 26 ATMs .
Trust Networks recorded revenue of ¥23 million and operating loss of ¥715 million for the
fiscal year ended March 31, 2009. As of March 31, 2009, Trust Networks had 10 employees, five of
whom were seconded from us.
GDX Japan Inc.
In April 2007, IIJ and GDX Network, Inc., a company incorporated in the United States,
established a joint venture company, GDX, to provide a message exchange network service in Japan.
IIJ invested ¥300 million in GDX and GDX became our consolidated subsidiary. IIJ had additionally
invested ¥115 million from April 2008 to August 2009.
GDX recorded operating loss of ¥175 million for the fiscal year ended March 31, 2009.
19
IIJ America Inc.
IIJ-A is a U.S.-based ISP, catering mostly to U.S.-based operations of Japanese companies.
Reflecting the fact that IIJ-Tech, IIJ-As minority shareholder with 8.7% ownership, became
wholly-owned by us on May 11, 2007, IIJ-A became our wholly-owned consolidated subsidiary.
IIJ-A had revenues of $12 million and operating income of $0.07 million for the fiscal year
ended December 31, 2008. As of March 31, 2009, IIJ-A had 28 employees, five of whom were seconded
from IIJ.
Taihei Computer Co., Ltd.
In July 2007, IIJ invested ¥235 million in Taihei Computer Co., Ltd., (TCC), one of the
subsidiaries of Hirata Corporation, which manages customer loyalty reward program systems. As a
result of this investment, TCC became our equity method investee with a 45.0% ownership.
Internet Multifeed Co.
Internet Multifeed Co. (Multifeed) provides the location and facilities for directly
connecting high-speed Internet backbones with content servers to make distribution on the Internet
more efficient. Its technology was developed jointly with the NTT Group. Multifeed launched a new
IX (Internet eXchange where major ISPs exchange network traffic) service named JPNAP Tokyo 1 in
Tokyo in May 2001 and expanded the service to Osaka in December 2001. Multifeed launched a new IX
service named JPNAP Tokyo II in Tokyo in April 2008. We account Multifeed as an equity method
investee with a 31.0% ownership.
Internet Revolution Inc.
In February 2006, IIJ and Konami Corporation established a joint venture company, i-revo, to
operate comprehensive sites. IIJ invested ¥750 million in i-revo. We account i-revo as an equity
method investee with a 30.0% ownership.
i-Heart Inc.
In May 2000, we entered into the i-Heart joint venture with South Korean companies with a
total investment by us of ¥89 million. i-Heart is our equity method investee (28.6% ownership).
Capital Expenditures
The table below shows our capital expenditures, which we define as amounts paid for purchases
of property and equipment plus acquisition of assets by entering into capital leases, for the last
three years.
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|
|
|
|
|
For the fiscal year ended March 31,
|
|
|
2007
|
|
2008
|
|
2009
|
|
|
(millions of yen)
|
Capital expenditures,
including capitalized
leases
(1)
|
|
¥
|
3,953
|
|
|
¥
|
6,078
|
|
|
¥
|
7,006
|
|
|
|
|
(1)
|
|
Further information regarding capital expenditures, including capitalized leases and a
reconciliation to the most directly comparable U.S. GAAP financial measure, can be found in Item
3.A., Selected Financial Data Reconciliations of the Disclosed Non-GAAP Financial Measures to
the Most Directly Comparable GAAP Financial Measures.
|
Most of our capital expenditures relate to the expansion and improvement of our existing
network, including the installation of the routers and servers necessary to offer services on our
network. Capital expenditures, including capitalized leases for fiscal year ended March 31, 2009
were ¥7.0 billion, larger than the previous fiscal years largely because of the upgrade in backbone
routers, which comes once in every four or five years and new investments for back-office systems.
We believe that our expected capital expenditures, including capitalized leases, for the
fiscal year ending March 31, 2010 related to our network services and systems integration business
will be lower than the amount for the fiscal year ended March 31, 2009. If the ATM operation
business start up in accordance with its plan, additional capital expenditures, including
capitalized leases related to the placement of ATMs are expected. In total, we expect that our
capital expenditures, including capitalized leases, for the fiscal year ended March 31, 2010 to
slightly increase from the amount from the previous fiscal year.
We recorded losses on disposal of property and equipment of ¥151 million, ¥72 million and ¥443
million for the fiscal years ended March 31, 2007, 2008 and 2009, respectively. The losses for the
fiscal year ended March 31, 2007 and 2008 were mainly due to disposal of software such as for back-office systems, and network equipment
related to the closing of a network operation center. The losses for the fiscal year ended March
31, 2009 increased as there were disposal of network equipment and software due to the cancellation
from a certain large customer and the discontinuance in some services.
20
Seasonality
See Item 5.D., Trend Information Factors Affecting Our Future Financial Results Systems
integration revenues, including related equipment sales revenues.
Sales and Marketing
Our sales headquarter is in Tokyo. In addition, we have ten branch or sales offices in Osaka,
Nagoya, Fukuoka, Sapporo, Sendai, Toyama, Hiroshima, Yokohama, Toyota and Okinawa in order to cover
the major metropolitan areas in which the majority of large Japanese companies operate. As of March
31, 2009, we had 298 people working in sales and marketing.
IIJ organizes its sales personnel into four distinct, separate departments: the Sales
Department, the Marketing Planning and Development Division, the Operation Management and
Coordination Division, and Strategic Sales.
Also, its Sales Department is divided into seven divisions:
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|
|
Five divisions focus on its total network solutions and work with large corporate
clients, including financial institutions, manufacturers, retail companies and others.
In order to provide total network solutions, personnel in its sales divisions work
closely with other IIJ Group companies such as IIJ-Tech as well as with other non-IIJ
Group companies.
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One division focuses on total network solutions and works with governmental
institutions, and universities and other schools.
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One division focuses on developing and strengthening partnerships with sales agents,
including large telecommunications carriers and systems integrators to expand our
marketing reach.
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In addition, IIJ has sales personnel in the branch or sales offices indicated above.
IIJs Marketing Planning and Development Division mainly makes and conducts promotion plans on
IIJs products and services. IIJs Operation Management and Coordination Division handles
administrative issues. Strategic Sales is responsible for the planning and management on the sales
figures, processes and other information.
Customers
We had approximately 6,500 business and other institutional customers and approximately
440,000 individuals, which includes individuals subscribing to OEM services, as of March 31, 2009.
Our main customers continue to be major corporations, including ISPs.
Research and Development
Research and Development Organization
Our research and development are conducted by IIJ Research Laboratory, IIJ-II and other
departments.
IIJ Research Laboratory.
IIJ Research Laboratory was established as a research organization of
IIJ in April 1998 to engage in the research and development of new basic network technologies.
Through our IIJ Research Laboratory, we participate in various research and development activities
in cooperation with organizations from the private and academic sectors to promote the deployment
and implementation of IPv6. IIJ Research Laboratory is also engaged in the research and development
activities related to e-mail technologies and network traffic analysis. On July 1, 2009, IIJ
Research Laboratory was transferred into IIJ-II to reorganize and strengthen the Groups research
and development capabilities.
Other Departments.
Other departments, such as the Service Business Department, Network Service
Department and SEIL Business Unit play an important role in the research and development of
technologies to be applied to our services and solutions, collect information, evaluate new
technology and conduct business expansion.
IIJ Innovation Institute.
IIJ established IIJ-II in June 2008 as a wholly-owned subsidiary,
which engages in research and development of Internet-related basic technology development and its
business incubation. IIJ-II is currently focusing on the research and development of the
Distributed and Parallel Processing Platform for very large data sets. IIJ Research Laboratory
was transferred into IIJ-II to reorganize and strengthen the Groups research and development
capabilities on July 1, 2009.
21
Research and Development Strategy
Our primary research and development objective is to continue to develop innovative services,
applications and products that will meet the current and future demands of our customers and to
continue to be at the forefront of the Internet industry in Japan. Many of our engineers are
regularly engaged in the research and development activities related to the development of new
services, applications and products. These engineers have continued to develop innovative services,
applications and products, many of which have set the standard for the Internet industry in Japan.
They also work very closely with our sales and marketing personnel and technical engineers to
ensure that the innovative services, applications and products will meet the demands of our
customers.
Our second research and development objective is to continue participating in or otherwise
closely monitor new products, developments and initiatives of manufacturers and standards-setting
and research groups. We have also engaged in the research and development of new basic technology
since the establishment of IIJ Research Laboratory in 1998. In June 2008, IIJ-II which engages in
research and development of Internet-related basic technology development and its business
incubation was established. Through these efforts, we seek to ensure that we have timely and
effective access to new technologies, and that we implement these technologies effectively.
In furtherance of these objectives, our research and development efforts currently are focused
on a variety of projects, including:
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continued improvement of our SEIL router and SMF, systems which we developed
specifically to be integrated into IIJs network-related services,
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research and development of the latest e-mail implementation technologies and spam
countermeasures,
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research and development of IPv6-based mobile communications technology,
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research relating to the methodology of configuration of routers and other servers,
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research relating to the technology for next generation IP networks,
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research relating to the behavior of Internet routing systems,
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research of the Internet traffic monitoring and management,
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research and development of the Distributed and Parallel Processing Platform for
very large data sets,
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research and analysis of the characteristics of the captured malware and spam mails,
and,
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development relating to proprietary video distribution server software specifically
designed for digital television.
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Our research and development expenses averaged less than 1.0% of total revenues for the past
three consecutive years. For the fiscal years ended March 31, 2007, 2008 and 2009, our research and
development expenses were ¥177 million, ¥240 million and ¥415 million, respectively, most of which
was personnel expense. The level of research and development expenditures is low in relation to our
total costs primarily because we do not engages in extensive research and development of new
technologies and products that require large investments. Rather, as noted above, we are
intensively engaged in research and development related to our ongoing business. We focus on
monitoring developments in the industry and in developing new and innovative services and
applications by utilizing and enhancing existing technologies and products.
Because the rate of change in technology relevant to our business is so rapid, we believe that
the sophistication and experience of our research and development personnel is an important part of
our success.
Proprietary Rights
Although we believe that our success is more dependent upon our technical, marketing and
customer service expertise than our proprietary rights, we rely on a combination of trademark and
contractual restrictions to establish and protect our technology.
Licenses
For us to provide certain services to our customers, we have, as a licensee, entered into
license agreements with other suppliers, such as Check Point Software Technologies Ltd., WatchGuard
Technologies, Inc., Trend Micro Incorporated, RSA Security Inc., NRI Secure Technologies, Ltd., MX
Logic, Inc and Adobe Systems Software Ireland Limited.
We have purchased licenses from the companies in accordance with customer demands for our
services.
22
Trademarks
We have applied for trademark registrations of our corporate name, Internet Initiative Japan
Inc. and certain other corporate and product names in Japan, the United States and certain
European countries. As of August 31, 2009, 42 registrations had been granted, with four pending
application.
Patents
We have applied for patent registrations in relation to our technology in Japan and the United
States. As of August 31, 2009, six registrations had been granted, with five pending applications. The
latest acquired patent is for a system to centrally administer communications equipment and other
devices on WAN and other closed networks developed by IIJ and implemented in one of our competitive
services, SMF.
Legal Proceedings
We are involved in normal claims and other legal proceedings in the ordinary course of
business. Except as noted below, we are not involved in any litigation or other legal proceedings
that, if determined adversely to us, we believe would individually or in the aggregate have a
material adverse effect on us or our operations.
In December 2001, a class action complaint alleging violations of the federal securities laws
was filed against the Company, naming the Company, certain of its officers and directors as
defendants, and underwriters of the Companys initial public offering. Similar complaints have been
filed against over 300 other issuers that have had initial public offerings since 1998 and such
actions have been included in a single coordinated proceeding in the Southern District of New
York. An amended complaint was filed on April 24, 2002 alleging, among other things, that the
underwriters of the Companys initial public offering violated the securities laws (i) by failing
to disclose in the offerings 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 the Companys 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. On February
19, 2003, the Court ruled on the motions to dismiss. The Court granted the Companys motion to
dismiss the claims against it under Rule 10b-5 promulgated under the Exchange Act due to the
insufficiency of the allegations against the Company. The motions to dismiss the claims under
Section 11 of the Securities Act were denied for virtually all of the defendants in the
consolidated cases, including the Company. In June 2003, the Company conditionally approved a
proposed partial settlement with the plaintiffs in this matter. The Company, along with the
settling issuer defendants, filed a motion seeking the courts preliminary approval of the
settlement. The settlement would have provided, among other things, a release of the Company and of
the individual officer and director defendants for the alleged wrongful conduct in the amended
complaint in exchange for a guarantee from the Companys insurers regarding recovery from the
underwriter defendants and other non-monetary consideration from the Company. While the partial
settlement was pending approval, the plaintiffs continued to litigate against the underwriter
defendants. The District Court directed that the litigation proceed with a number of focus cases
rather than all of the 310 cases that had been consolidated. The Companys case is not one of these
focus cases.
On October 13, 2004, the District Court certified the focus cases as class actions in the
ongoing litigation. The underwriter defendants appealed that ruling, and on December 5, 2006, the
Court of Appeals for the Second Circuit reversed the District Courts class certification decision.
On April 6, 2007, the Second Circuit denied the plaintiffs petition for rehearing, and on May 18,
2007, the Second Circuit denied the plaintiffs petition for rehearing en banc. In light of the
Second Circuit opinion, liaison counsel for all issuer defendants, including the Company, informed
the District Court that the settlement could not be approved, because the defined settlement class,
like the litigation class, could not be certified. On June 25, 2007, the District Court entered an
order terminating the proposed settlement. On August 14, 2007, the plaintiffs filed their second
consolidated amended complaints against the six focus cases and on September 27, 2007, again moved
for class certification. On November 12, 2007, certain of the defendants in the focus cases moved
to dismiss the second consolidated amended class action complaints. On March 26, 2008, the District
Court denied the motions to dismiss except as to Section 11 claims raised by those plaintiffs who
sold their securities for a price in excess of the initial offering price and those who purchased
outside the previously certified class period. The motion for class certification was withdrawn
without prejudice on October 10, 2008. On February 25, 2009, liaison counsel for the plaintiffs
informed the District Court that a settlement had been agreed to in principle, subject to formal
approval by the parties, and preliminary and final approval by the District Court. On April 2,
2009, a stipulation and agreement of settlement among the plaintiffs, issuer defendants and
underwriter defendants was submitted to the District Court for preliminary approval. If the
District Court grants the motion for preliminary approval, notice will be given to all class
members of the settlement, a fairness hearing will be held and if the District Court determines
that the settlement is fair to the class members, the settlement will be approved. There can be no
assurance that this proposed settlement will be approved and implemented in its current form, or at
all. Due to the inherent uncertainties of litigation and because the settlement approval process is at a preliminary
stage, the ultimate outcome of the matter is uncertain.
23
Regulation of the Telecommunications Industry in Japan
The MIC regulates the Japanese telecommunications industry. Telecommunications carriers,
including us, are regulated by the MIC primarily under the Telecommunications Business Law.
The Telecommunications Business Law
The Telecommunications Business Law, which became effective in 1985, was established for the
purpose of privatization and deregulation in the telecommunications business. After several
amendments, the Telecommunications Business Law was considerably amended in July 2003, and the
amended Telecommunications Business Law became effective as of April 2004. The summary of the
regulations under the current Telecommunications Business Law is as follows:
The Telecommunications Business Law applies to the telecommunications business, except for the
telecommunications business exempt under the Telecommunications Business Law (Exempted
Business)
(1)
. The term telecommunications business is defined under the
Telecommunications Business Law as the business providing telecommunications services in order to
meet the demand of others
(2)
. The term telecommunications services is defined under
the Telecommunications Business Law as intermediating communications of others through the use of
telecommunications facilities, or any other acts of providing telecommunications facilities for the
use of communications of others. Our business falls within the definition of telecommunications
business, not Exempted Business, and therefore is subject to the Telecommunications Business Law.
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(1)
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The Exempted Business is the business related to facilities supplying broadcast services,
wire radio broadcasting, wire broadcast telephone services, wire television broadcasting
services, or the acceptance of applications for the use of the cable television broadcasting
facility.
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(2)
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The telecommunications business is defined as:
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(i)
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the telecommunications business which exclusively provides telecommunications
services to a single person (except one being a telecommunications carrier);
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(ii)
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the telecommunications business which provides telecommunications services with
telecommunications facilities, a part of which is to be established on the same premises
(including the areas regarded as the same premises) or in the same building where any
other part there of is also to be established, or with telecommunications facilities
which are below the standards stipulated in the ministerial ordinance of the MIC; and
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(iii)
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the telecommunications business installing no telecommunications circuit
facilities which provides telecommunications services other than the telecommunications
services which intermediate communications of others by using telecommunications
facilities;
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Provided that the provisions of Article 3 and Article 4 of the Telecommunications Business Law
apply to communications being handled by a person who operates the telecommunications business
listed above.
Start-up of Services
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Registration
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Registration with the Minister of the MIC is required for a telecommunications business
which meets the following two requirements established by the ministerial ordinance of the
MIC: (i) areas of installation of terminal-related transmission facilities are limited to
a single municipality (city, town or village) and (ii) areas of installation of
relay-related transmission facilities are limited to a single prefecture.
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Notification
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Notification to the MIC is required for a telecommunications business for which the
requirement of the registration does not apply. Our business is subject to this
notification requirement
(1)
.
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The Supplementary Provisions to the Telecommunications Business Law provide that the person who, at
the time of the enforcement of the provisions of Article 2 of the current Telecommunications
Business Law, is actually operating a Type II telecommunications business with registration under
Article 24 paragraph (1) of the old Telecommunications Business Law shall be deemed to be a person
who has submitted the notification of Article 16 paragraph (1) of the current Telecommunications
Business Law on the day of enforcement of the current Telecommunications Business Law. We were
actually operating a Type II telecommunications business at the time of the enforcement of the
provisions of Article 2 of the current Telecommunications Business Law with registration under
Article 24 paragraph (1) of the old Telecommunications Business Law, and therefore are deemed to have submitted the
notification of Article 16 paragraph (1) of the current Telecommunications Business Law on the day
of enforcement. In addition, the Supplementary Provisions to the Telecommunications Business Law
Implementation Rules provide that the person who, at the time of enforcement of the
Telecommunications Business Law Implementation Rules (i.e., April 1, 2004), is actually operating
a Type II telecommunications business with registration under Article 24 paragraph (1) of the old
Telecommunications Business Law, must submit a report prepared in the form of the notification of
Article 16 paragraph (1) of the current Telecommunications Business Law to the Minister of the MIC
without delay after the day of enforcement of the Telecommunications Business Law Implementation
Rules. We filed this report to the Minister of the MIC in April 2004.
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24
Terms and Conditions of Provision of Services and Charge
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Our business is unregulated, in general, as IIJ does not fall under either Basic
Telecommunications Services or Designated Telecommunications Services described below.
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Prior notification to the Minister of the MIC is required for Basic Telecommunications
Services (universal services specified by the ministerial ordinance of the MIC, i.e.,
analog or public fixed telephone services, analog or public remote island telephone
services, and analog or public emergency call telephone services). Providing these
telecommunications services other than pursuant to the terms and conditions and charges
notified to the Minister of the MIC is prohibited. Provided that the charges may be
discounted or waived pursuant to the exception criteria provided under the ministerial
ordinance of the MIC (i.e., an emergency call for the safety of ships and airplanes, an
emergency call for the safety of personal life and property in case of natural disaster,
calls to police agencies regarding crimes, and calls to the fire brigade (Emergency
Exception)
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Prior notification to the Minister of the MIC is required for Designated
Telecommunications Services (i.e., services provided through Category I Designated
Telecommunications Facilities and which meet the criteria provided by the ministerial
ordinance of the MIC as the services for which the guarantee of the terms and conditions
and charges are necessary for the protection of users, such as the basic fee). Category
I Designated Telecommunications Facilities are the facilities which meet the criteria
specified by the ministerial ordinance of the MIC as being the fixed telecommunications
facilities used for the services which are offered to a substantial percentage of users
in a given area, and which are currently only the facilities of NTT East and NTT West.
Providing these telecommunications services other than pursuant to the terms and
conditions and charges notified to the Minister of the MIC is prohibited, unless the
telecommunications carrier and the user agree otherwise, provided that the charges may be
discounted or waived in Emergency Cases, for emergency calls for injured persons in a
ship, and for use by a police agency, fire brigade and broadcasting companies.
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The Minister of the MIC at least once a year notifies the telecommunications carrier
providing the Specific Designated Telecommunications Services specified by the
ministerial ordinance of the MIC (i.e., Designated Telecommunications Services other than
voice services, except for telephone and general digital services and data transmission
services) the price cap regarding such services. The telecommunications carriers will be
required to obtain approval from the Minister of the MIC if a proposed change in charges
exceeds the price cap.
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Articles of Interconnection Agreements
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Our business is unregulated, in general, as IIJ does not fall under either Category I
Designated Telecommunications Facilities or Category II Designated Telecommunications
Facilities described below.
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Approval from the Minister of the MIC required for Category I Designated
Telecommunications Facilities.
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Prior notification to the Minister of the MIC required for Category II Designated
Telecommunications Facilities (i.e., the facilities which meet the criteria provided by
the ministerial ordinance of the MIC as being the mobile telecommunications facilities
used for the services which are offered to a substantial percentage of users in a given
area, and which are currently NTT DoCoMo, Okinawa Cellular and KDDI).
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Telecommunications Facilities of Carriers
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A telecommunications carrier that installs telecommunications circuit facilities must
maintain its telecommunications facilities (except telecommunications facilities
stipulated in the ministerial ordinance of the MIC as those having a minor influence on
the users benefit in the cases of damage or failure thereof) in conformity with the
technical standards provided in the ministerial ordinance of the MIC. Such
telecommunications carriers shall confirm that its telecommunications facilities are in
compliance with the technical standards specified in the ministerial ordinance of the
MIC.
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25
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A telecommunications carrier that provides Basic Telecommunications Services must
maintain its telecommunications facilities for provision of Basic Telecommunications
Services in conformity with the technical standards provided in the ministerial ordinance
of the MIC.
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Telecommunications carriers that install telecommunications circuit facilities or
provide Basic Telecommunications Services must establish their own administrative rules
in accordance with the ministerial ordinance of the MIC in order to secure the reliable
and stable provision of telecommunications services. These administrative rules must
regulate the operation and manipulation of telecommunications facilities and the
safeguarding, inspecting and testing regarding the construction, maintenance and
administration of telecommunications facilities, etc. as provided for by the ministerial
ordinance of the MIC. Such administrative rules must be submitted to the Minister of the
MIC prior to the commencement of operations, and changes must be submitted to the
Minister of the MIC once after they are implemented without delay.
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Order to Improve Business Activities
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The Minister of the MIC may, if it is deemed that business activities of a
telecommunications carrier fall under inappropriate cases set forth in the
Telecommunications Business Law, insofar as it is necessary to ensure the users benefit
or the public interest, order the telecommunications carrier to take actions to improve
operations methods or other measures.
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Right of Way Privilege for Authorized Carriers
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A telecommunications carrier which is engaged, or intends to engage, in the
telecommunications business by installing telecommunications circuit facilities and which
wishes to have the privileged use of land or other public utilities for circuit
facilities deployment, must obtain the authorization on the entire or a part of the
relevant telecommunications business by the Minister of the MIC.
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Merger, Business Transfer or Divestiture of Carriers
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Post facto notification to the Minister of the MIC without delay is required.
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Business Suspension, Abolition or Dissolution of Carriers
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Post facto notification to the Minister of the MIC without delay is required. Prior
announcement of withdrawals to service users is required in accordance with ministerial
ordinances of the MIC.
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Foreign Capital Participation
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Prior notification is required under the Foreign Exchange and Foreign Trade Law for
the acquisition of shares of telecommunications carriers to which registration for
start-up services is applicable. This is not applicable to purchasers of ADSs. The
one-third foreign ownership restriction is applicable only to NTT East and NTT West.
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C. Organizational Structure.
The information required by this item is in Our Group Companies above.
D. Property, Plants and Equipment.
The information required by this item is in Network above and in Note 6 Property and
Equipment and Note 8 Leases to our consolidated financial statements included in this annual
report on Form-20F.
Item 4A. Unresolved Staff Comments
None.
26
Item 5. Operating and Financial Review and Prospects.
A. Operating Results.
You should read the following discussion of our financial condition and results of operations
together with Item 3.A. of this annual report on
Form 20-F
and our consolidated financial
statements and the notes to those financial statements beginning on page F-1 of this annual report.
This discussion and analysis contains forward-looking statements that involve risks, uncertainties
and assumptions. Our actual results may differ materially from those anticipated in these
forward-looking statements as a result of factors including but not limited to those in Item 3.D.
of this annual report on
Form 20-F
.
Overview
The Group are a provider of a comprehensive range of Internet connectivity services and
network solution services in Japan. IIJ was founded in December 1992 and began offering Internet
connectivity services commercially in July 1993. IIJ was one of the first commercial ISPs in Japan
and have expanded the Group business to outsourcing services and systems integration along with the
expansion of usage of the Internet by customers.
Our primary sources of revenue are connectivity services, outsourcing services, systems
integration and equipment sales. Connectivity services consist of connectivity services for
corporate use and connectivity services for home use. For outsourcing services, we provide services
such as network security services, mail and web server hosting services, managed router services
and Internet data center services. For systems integration, we provide systems construction such as
consulting, project planning, systems design and development of network systems to meet each of our
customers requirements and systems operation and maintenance. For equipment sales, we provide
equipment as part of our provision of total network.
In addition, we entered the ATM operation business through our consolidated subsidiary, Trust
Networks, which was established in July 2007. Trust Networks operates ATMs and its network systems
to provide ATMs service and receives a commission for each bank withdrawal transaction when a
customer uses their ATMs. During the fiscal year ended March 31, 2009, Trust Networks completed its
field test of 10 ATMs operations. As of June 30, 2009, Trust Networks operates 26 ATMs placed in
PACHINKO parlor. Trust Networks aims to introduce around 8,000 ATMs in four to five years from the
fiscal year ending March 31, 2010.
Starting from the fiscal year ended March 31, 2009, we have disclosed revenues and costs for
the ATM operation business for fiscal years ended March 31, 2008 and 2009 because the amount of
losses related to these business has become material.
Currently, we have two segments: Network services and systems integration business and ATM
operation business. Network services and systems integration business is comprised of: Connectivity
and outsourcing services, Systems integration and Equipment sales.
Net revenue of network services and systems integration business and ATM operation business
before elimination of intersegment revenues were ¥70.0 billion and ¥23 million, respectively, of
our total net revenue in the fiscal year ended March 31, 2009. Our consolidated net revenue for the
fiscal year ended March 31, 2009 was ¥69.7 billion.
Substantially all of our revenues are from our customers in Japan, and we are the main point
of contact for customers for the various services we provide.
We refer to our subsidiaries and certain affiliates as our group companies, and we have
invested heavily in and exercise significant influence over these companies. For the fiscal year
ended March 31, 2009, we consolidated the results of operations of ten subsidiaries included among
our group companies IIJ-Tech, IIJ-A, Net Care, IIJ-FS, NCJ, hi-ho, Trust Networks, GDX, IIJ-II
and ODS. We account for our investments in the affiliated companies by the equity method. For
descriptions and the history of our group companies, see Our Group Companies in Item 4.B.
For a discussion of factors affecting our future financial results, see Item 5.D. Trend
Information.
27
Results of Operations
As an aid to understanding our operating results, the following tables show items from our
statement of income for the periods indicated in millions of yen (or thousands of U.S. dollars) and
as a percentage of total revenues. For further discussion about segment reporting, please see
Segment Information later in this section.
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Fiscal year ended March 31,
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2007
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2008
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2009
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(millions of yen except for percentage data)
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(thousands
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of U.S.
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dollars
(1)
)
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REVENUES:
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Connectivity and outsourcing services:
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Connectivity services (corporate use)
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¥
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11,239
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19.7
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%
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¥
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12,149
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18.2
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%
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¥
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13,142
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18.8
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%
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$
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132,551
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Connectivity services (home use)
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1,969
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3.5
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5,430
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8.1
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6,538
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9.4
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65,934
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Outsourcing services
(2)
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11,145
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19.5
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13,724
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20.5
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15,396
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22.1
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155,278
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Total
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24,353
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42.7
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31,303
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46.8
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35,076
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50.3
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353,763
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Systems integration:
(3)
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Systems construction
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16,660
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29.2
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18,021
|
|
|
|
27.0
|
|
|
|
14,658
|
|
|
|
21.0
|
|
|
|
147,841
|
|
Systems operation and maintenance
|
|
|
13,867
|
|
|
|
24.3
|
|
|
|
15,993
|
|
|
|
23.9
|
|
|
|
18,989
|
|
|
|
27.3
|
|
|
|
191,514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
30,527
|
|
|
|
53.5
|
|
|
|
34,014
|
|
|
|
50.9
|
|
|
|
33,647
|
|
|
|
48.3
|
|
|
|
339,355
|
|
Equipment sales
|
|
|
2,175
|
|
|
|
3.8
|
|
|
|
1,514
|
|
|
|
2.3
|
|
|
|
985
|
|
|
|
1.4
|
|
|
|
9,930
|
|
ATM operation business
(4)
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
0.0
|
|
|
|
23
|
|
|
|
0.0
|
|
|
|
237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
57,055
|
|
|
|
100.0
|
|
|
|
66,835
|
|
|
|
100.0
|
|
|
|
69,731
|
|
|
|
100.0
|
|
|
|
703,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of connectivity and outsourcing
services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Backbone cost
|
|
|
3,516
|
|
|
|
6.2
|
|
|
|
3,470
|
|
|
|
5.2
|
|
|
|
3,692
|
|
|
|
5.3
|
|
|
|
37,239
|
|
Local access line cost
(5)
|
|
|
4,616
|
|
|
|
8.1
|
|
|
|
7,102
|
|
|
|
10.6
|
|
|
|
8,113
|
|
|
|
11.6
|
|
|
|
81,828
|
|
Other connectivity cost
|
|
|
331
|
|
|
|
0.6
|
|
|
|
370
|
|
|
|
0.6
|
|
|
|
473
|
|
|
|
0.7
|
|
|
|
4,771
|
|
Depreciation and amortization
|
|
|
2,639
|
|
|
|
4.6
|
|
|
|
2,928
|
|
|
|
4.4
|
|
|
|
3,468
|
|
|
|
5.0
|
|
|
|
34,982
|
|
Other
|
|
|
9,443
|
|
|
|
16.5
|
|
|
|
12,170
|
|
|
|
18.2
|
|
|
|
13,572
|
|
|
|
19.5
|
|
|
|
136,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of connectivity and
outsourcing services
|
|
|
20,545
|
|
|
|
36.0
|
|
|
|
26,040
|
|
|
|
39.0
|
|
|
|
29,318
|
|
|
|
42.1
|
|
|
|
295,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of systems integration:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of equipment sales related to systems
integration
|
|
|
4,206
|
|
|
|
7.3
|
|
|
|
4,409
|
|
|
|
6.6
|
|
|
|
4,931
|
|
|
|
7.0
|
|
|
|
49,733
|
|
Other
|
|
|
19,323
|
|
|
|
33.9
|
|
|
|
21,117
|
|
|
|
31.6
|
|
|
|
20,612
|
|
|
|
29.6
|
|
|
|
207,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of systems integration
|
|
|
23,529
|
|
|
|
41.2
|
|
|
|
25,526
|
|
|
|
38.2
|
|
|
|
25,543
|
|
|
|
36.6
|
|
|
|
257,617
|
|
Cost of equipment sales
|
|
|
1,894
|
|
|
|
3.4
|
|
|
|
1,300
|
|
|
|
1.9
|
|
|
|
863
|
|
|
|
1.2
|
|
|
|
8,704
|
|
Cost of ATM operation business
(4)
|
|
|
|
|
|
|
|
|
|
|
17
|
|
|
|
0.0
|
|
|
|
422
|
|
|
|
0.6
|
|
|
|
4,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost
|
|
|
45,968
|
|
|
|
80.6
|
|
|
|
52,883
|
|
|
|
79.1
|
|
|
|
56,146
|
|
|
|
80.5
|
|
|
|
566,270
|
|
Sales and marketing
|
|
|
3,439
|
|
|
|
6.0
|
|
|
|
4,329
|
|
|
|
6.5
|
|
|
|
4,631
|
|
|
|
6.6
|
|
|
|
46,703
|
|
General and administrative
|
|
|
3,971
|
|
|
|
7.0
|
|
|
|
4,624
|
|
|
|
6.9
|
|
|
|
5,622
|
|
|
|
8.1
|
|
|
|
56,701
|
|
Research and development
|
|
|
177
|
|
|
|
0.3
|
|
|
|
240
|
|
|
|
0.4
|
|
|
|
415
|
|
|
|
0.6
|
|
|
|
4,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost and expenses
|
|
|
53,555
|
|
|
|
93.9
|
|
|
|
62,076
|
|
|
|
92.9
|
|
|
|
66,814
|
|
|
|
95.8
|
|
|
|
673,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME
|
|
|
3,500
|
|
|
|
6.1
|
|
|
|
4,759
|
|
|
|
7.1
|
|
|
|
2,917
|
|
|
|
4.2
|
|
|
|
29,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSES):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
23
|
|
|
|
0.0
|
|
|
|
63
|
|
|
|
0.1
|
|
|
|
45
|
|
|
|
0.1
|
|
|
|
455
|
|
Interest expense
|
|
|
(397
|
)
|
|
|
(0.7
|
)
|
|
|
(438
|
)
|
|
|
(0.6
|
)
|
|
|
(408
|
)
|
|
|
(0.6
|
)
|
|
|
(4,117
|
)
|
Foreign exchange gains (losses)
|
|
|
(0
|
)
|
|
|
(0.0
|
)
|
|
|
2
|
|
|
|
0.0
|
|
|
|
(29
|
)
|
|
|
(0.0
|
)
|
|
|
(288
|
)
|
Net gains on sales of other investments
|
|
|
3,230
|
|
|
|
5.7
|
|
|
|
218
|
|
|
|
0.3
|
|
|
|
16
|
|
|
|
0.0
|
|
|
|
158
|
|
Losses on write-down of other investments
|
|
|
(1,363
|
)
|
|
|
(2.4
|
)
|
|
|
(289
|
)
|
|
|
(0.4
|
)
|
|
|
(524
|
)
|
|
|
(0.8
|
)
|
|
|
(5,288
|
)
|
Other net
|
|
|
56
|
|
|
|
0.1
|
|
|
|
47
|
|
|
|
0.0
|
|
|
|
17
|
|
|
|
0.0
|
|
|
|
175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses) net
|
|
|
1,549
|
|
|
|
2.7
|
|
|
|
(397
|
)
|
|
|
(0.6
|
)
|
|
|
(883
|
)
|
|
|
(1.3
|
)
|
|
|
(8,905
|
)
|
INCOME FROM OPERATIONS BEFORE INCOME TAX
EXPENSE (BENEFIT), MINORITY INTERESTS IN
EARNINGS (LOSSES) OF SUBSIDIARIES AND EQUITY IN
NET INCOME (LOSS) OF EQUITY METHOD INVESTEES
|
|
|
5,049
|
|
|
|
8.8
|
%
|
|
|
4,362
|
|
|
|
6.5
|
%
|
|
|
2,034
|
|
|
|
2.9
|
|
|
|
20,519
|
|
INCOME TAX EXPENSE (BENEFIT)
|
|
|
(804
|
)
|
|
|
(1.4
|
)%
|
|
|
(861
|
)
|
|
|
(1.3
|
)%
|
|
|
1,002
|
|
|
|
1.4
|
|
|
|
10,113
|
|
MINORITY INTERESTS IN (EARNINGS) LOSSES OF
SUBSIDIARIES
|
|
|
(233
|
)
|
|
|
(0.4
|
)
|
|
|
97
|
|
|
|
0.1
|
|
|
|
352
|
|
|
|
0.5
|
|
|
|
3,555
|
|
EQUITY IN NET INCOME (LOSS) OF EQUITY METHOD
INVESTEES
|
|
|
(210
|
)
|
|
|
(0.3
|
)
|
|
|
(143
|
)
|
|
|
(0.2
|
)
|
|
|
35
|
|
|
|
0.0
|
|
|
|
354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
¥
|
5,410
|
|
|
|
9.5
|
%
|
|
¥
|
5,177
|
|
|
|
7.7
|
%
|
|
¥
|
1,419
|
|
|
|
2.0
|
%
|
|
$
|
14,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The U.S. dollar amounts represent translation of yen amounts at the rate of ¥99.15 which was
the noon buying rate in New York City for cable transfers in foreign currencies as certified
for customs purposes by the Federal Reserve Bank of New York prevailing as of March 31, 2009.
|
|
(2)
|
|
Value-added services and Other of connectivity and value added services were combined and
renamed as Outsourcing services as it is considered more suitable to combine the two
together as one service to clearly indicate that they are services provided to customers for
the purpose of operating a customers information network systems. Related to this change,
Connectivity and value-added services were renamed as Connectivity and outsourcing
services. Reclassifications to prior years have also been made to conform to the current year
presentation.
|
|
(3)
|
|
Systems construction and Systems operation and maintenance, which were components of
systems integration revenues, were separately disclosed to clarify the contents of Systems
integration revenues. The same disclosure were done for the previous years to conform to the
current year presentation.
|
|
(4)
|
|
ATM operation business revenues and Cost of ATM operation business were disclosed due to
the increase in the materiality of the business. The same disclosure has been made to the
previous year to conform to the current year presentation.
|
|
(5)
|
|
Telecommunications circuit cost of ¥2.9 billion for the fiscal year ended March 31, 2009 and
¥2.1 billion for the fiscal year ended March 31, 2008, related to hi-ho are included in local
access line cost.
|
28
Year Ended March 31, 2009 Compared to the Year Ended March 31, 2008
Total revenues
Our total revenues increased 4.3% to ¥69.7 billion for the fiscal year ended March 31, 2009
from ¥66.8 billion for the previous fiscal year. These increases were primarily due to an increase
in monthly recurring revenues from connectivity and outsourcing services and systems operation and
maintenance of systems integration revenues.
Connectivity and outsourcing services revenues.
Revenues from connectivity services and
outsourcing services, which comprise our connectivity services for corporate use, connectivity
services for home use, outsourcing services increased by 12.1% to ¥35.1 billion for the fiscal year
ended March 31, 2009 from ¥31.3 billion for the previous fiscal year.
|
|
|
Connectivity services for corporate use.
Revenues from connectivity services for
corporate use increased by 8.2% to ¥13.1 billion for the fiscal year ended March 31,
2009 from ¥12.1 billion for the previous fiscal year. IP service revenues, the service
mainly used for corporate headquarters and data centers, increased by 2.8% for the
fiscal year ended March 31, 2009 compared to the previous year and broadband services
increased by 8.7% for the fiscal year ended March 31, 2009 as a result of steady
demands for network expansion and the shift to higher bandwidths. Contracts of over 1
Gbps increased to 94 contracts compared to 70 contracts at the end of March 2008,
especially among content business operators and ISPs. IIJ Mobile service, a mobile data
communication services for corporate use are performing well, contributing to revenue
growth.
|
|
|
|
|
Connectivity services for home use.
Despite the decrease in revenues from IIJ4U and
OEM, revenues from connectivity services for home use increased by 20.4% to ¥6.5
billion for the fiscal year ended March 31, 2009 from ¥5.4 billion for the previous
fiscal year. This significant increase was mainly due to additional revenues incurred
by hi-ho, which we acquired in June 2007, of ¥5.0 billion (12 months) for the fiscal
year ended March 31, 2009 compared to ¥3.8 billion for the fiscal year ended March 31,
2008 (10 months).
|
|
|
|
|
Outsourcing services.
Our outsourcing services revenues increased by 12.2% to ¥15.4
billion for the fiscal year ended March 31, 2009 from ¥13.7 billion for the previous
fiscal year. This increase was mainly due to a steady increase in revenues from
services such as security-related and e-mail related outsourcing services for anti-spam
protection, data center services and network related solutions. The steady increase in
outsourcing services revenues was affected by an increase in demand for outsourcing
services by corporate customers.
|
Systems integration revenues.
Our revenues from systems integration, which include equipment
sales related to systems integration, decreased by 1.1% to ¥33.6 billion for the fiscal year ended
March 31, 2009 from ¥34.0 billion for the previous fiscal year. The decrease was due to a decrease
in systems construction revenues of 18.7% for the fiscal year ended March 31, 2009 compared to the
previous fiscal year, offsetting the increase in recurring revenues from systems operation and
maintenance of 18.7% for the fiscal year ended March 31, 2009 compared to the previous fiscal year.
Systems construction revenues were significantly affected by the weak Japanese economy, resulting
in many large projects getting delayed or postponed. The order backlog for systems integration and
equipment sales as of March 31, 2009 was ¥14.9 billion, a decrease of 6.5% compared to March 31,
2008. The order backlog for systems construction including equipment sales as of March 31, 2009
decreased by 39.9% to ¥2.9 billion and the order backlog for systems operation and maintenance
increased by 7.7% to ¥12.0 billion compared to the amount as of March 31, 2008, respectively.
Equipment sales revenues.
Our equipment sales decreased by 35.0% to ¥1.0 billion for the
fiscal year ended March 31, 2009 from ¥1.5 billion for the previous fiscal year. Equipment sales
revenues has been decreasing year by year because we have been focusing on providing systems
construction that have higher margin to our corporate customers instead of providing equipment
sales which has a relatively lower margin.
ATM Operation Business revenues.
Our revenues from the ATM operation business were ¥23 million
for the fiscal year ended March 31, 2009 compared to ¥4 million for the previous fiscal year. The
ATM operation business is conducted by our consolidated subsidiary, Trust Networks which operates
ATMs and its network systems to provide ATMs service. It receives commission for each bank
withdrawal transaction when customers use their serviced ATMs. During the fiscal year ended March
31, 2009, Trust Networks completed its field test of 10 ATMs operations.
29
Total cost of revenues
Our total cost of revenues increased by 6.2% to ¥56.1 billion for the fiscal year ended March
31, 2009 from ¥52.9 billion for the previous fiscal year. The increase was mainly due to the cost
of connectivity and outsourcing services revenues and the additional cost related to ATM operation
business.
Cost of connectivity and outsourcing services revenues
. Our cost of connectivity and
outsourcing services revenues increased by 12.6% to ¥29.3 billion for the fiscal year ended March
31, 2009 from ¥26.0 billion for the previous fiscal year. The increase was largely due to the
increase in network operation related costs including upgrade of large backbone routers which comes
once in every four to five years and the additional cost incurred by hi-ho of ¥4.5 billion (12
months) for the fiscal year ended March 31, 2009 compared to ¥4.0 billion for the fiscal year ended
March 31, 2008 (10 months). Backbone costs for the fiscal year ended March 31, 2009 increased by
6.4% to ¥3.7 billion from ¥3.5 billion for the previous fiscal year. Local access line costs for
the fiscal year ended March 31, 2009 increased by 14.2% to ¥8.1 billion from ¥7.1 billion for the
previous fiscal year. Additionally, costs related to GDX and ODS, newly established subsidiaries to
engage in new business developments, were ¥162 million for the fiscal year ended March 31, 2009 and
¥26 million for the previous fiscal year. The gross margin ratio in connectivity and outsourcing
services revenues, which is the ratio of (1) the amount obtained by subtracting cost of
connectivity and outsourcing services revenues from connectivity and outsourcing services revenues
to (2) connectivity and outsourcing services revenues, decreased to 16.4% for the fiscal year ended
March 31, 2009 from 16.8% for the previous fiscal year.
Cost of systems integration revenues.
Our cost of systems integration revenues were ¥25.5
billion for the fiscal year ended March 31, 2009, nearly the same amount as the previous fiscal
year. While purchasing costs largely decreased along with the decrease in systems construction
revenues, outsourcing and personnel related and network operation related costs increased compared
to the previous fiscal year. The gross margin ratio in systems integration revenues, which is the
ratio of (1) the amount obtained by subtracting cost of systems integration revenues from systems
integration revenues to (2) systems integration revenues, decreased to 24.1% for the fiscal year
ended March 31, 2009 from 25.0% for the previous fiscal year.
Cost of equipment sales.
Our cost of equipment sales decreased by 33.6% to ¥0.9 billion for
the fiscal year ended March 31, 2009 from ¥1.3 billion for the previous fiscal year. The decrease
is primary due to the decrease in equipment sales revenues. The gross margin ratio, as the figure
subtracting cost of equipment sales from equipment sales revenues to equipment sales revenues, in
equipment sales decreased to 12.3% for the fiscal year ended March 31, 2009 from 14.2% for the
previous fiscal year.
Cost of ATM Operation Business.
Cost of the ATM operation business was ¥422 million for the
fiscal year ended March 31, 2009 compared to ¥17 million for the previous fiscal year. Gross margin
was a loss of ¥399 million for the fiscal year ended March 31, 2009 compared to ¥13 million for the
previous fiscal year. Cost of ATM operation business increased as Trust Networks placed 10 ATMs as
a testing phase during the fiscal year ended March 31, 2009.
Total costs and expenses
Total costs and expenses, which include total cost of revenues, sales and marketing expenses,
general and administrative expenses and research and development expenses, increased by 7.6% to
¥66.8 billion for the fiscal year ended March 31, 2009 from ¥62.1 billion for the previous fiscal
year. The increase in total costs and expenses was primarily a result of an increase in the cost of
connectivity and outsourcing services, including the additional cost related to hi-ho services, the
new subsidiaries: GDX and ODS, the additional cost related to ATM operation business, and the
increase in sales and marketing expenses, general and administrative expenses and research and
development expenses including expenses related to new subsidiaries such as IIJ-II.
Sales and marketing.
Sales and marketing expenses increased by 7.0% to ¥4.6 billion for the
fiscal year ended March 31, 2009 from ¥4.3 billion for the previous fiscal year. The increase was
mainly due to the increase in personnel related expenses of ¥0.4 billion and the additional
expenses related to hi-ho of 12 months.
General and administrative.
General and administrative expenses increased by 21.6% to ¥5.6
billion for the fiscal year ended March 31, 2009 from ¥4.6 billion for the previous fiscal year.
The increase was mainly due to the increase in expenses related to four new subsidiaries and
personnel related expenses. There were also losses of ¥0.4 billion in the fourth quarter of the
fiscal year including disposal of property and equipment for our services and disposal of software
such as for back-office systems.
Research and development.
Research and development expenses increased by 72.7% to ¥415 million
for the fiscal year ended March 31, 2009 from ¥240 million for the previous fiscal year. The
increase was primary due to an increase in personnel expenses related to research and development.
IIJ established IIJ-II in June 2008 which engages in research and development of Internet-related
basic technology development.
30
Operating income
As a result of the foregoing factor, operating income decreased by 38.7% to ¥2.9 billion for
the fiscal year ended March 31, 2009 from ¥4.8 billion for the previous fiscal year as gross margin
for systems construction decreased while there were operating losses for four new subsidiaries of
¥1.3 billion including the loss from Trust Networks of ¥0.7 billion.
Other income (expenses)
-
net
Other expenses-net of ¥0.9 billion was recorded for the fiscal year ended March 31, 2009,
compared to net other expense of ¥0.4 billion for the previous fiscal year. There were net
impairment losses of ¥0.5 billion on nonmarketable and available-for-sale equity securities.
Interest income.
Interest income was ¥45 million for the fiscal year ended March 31, 2009,
compared to ¥63 million for the previous fiscal year. The decrease mainly resulted from the drop in
the interest rate in Japan.
Interest expense.
Interest expense, comprised of interest expense in respect of bank
borrowings and capital lease obligations, amounted to ¥408 million for the fiscal year ended March
31, 2009 compared to ¥438 million for the previous fiscal year. The decrease was mainly due to the
decrease in bank borrowings.
Foreign exchange gains (losses).
Foreign exchange losses amounted to ¥29 million for the
fiscal year ended March 31, 2009 compared to gains of ¥1 million for the previous fiscal year.
Net gains on sales of other investments.
For the fiscal year ended March 31, 2009, we recorded
net gains on sales of other investments of ¥16 million, which resulted from the sale of certain
nonmarketable and available-for-sale security, compared to net gains of ¥218 million for the
previous fiscal year.
Losses on write-down of other investments.
For the fiscal year ended March 31, 2009, we
recorded losses on write-down of other investments of ¥524 million from nonmarketable,
available-for-sale securities and others compared to losses of ¥289 million for the previous fiscal
year.
Other-net.
For the fiscal year ended March 31, 2009, we recorded other income of ¥17 million,
most of which is dividend income, compared to income of ¥47 million, most of which is also dividend
income, for the previous fiscal year.
Income from operations before income tax expense (benefit), minority interests in losses of
subsidiaries and equity in net income (loss) of equity method investees
We recorded income from operations before income tax expense, minority interests in losses of
subsidiaries and equity in net income of equity method investees of ¥2.0 billion for the fiscal
year ended March 31, 2009 compared to income from operations before income tax benefit, minority
interests in losses of subsidiaries and equity in net loss of equity method investees of ¥4.4
billion for the previous fiscal year. The decrease primarily reflects the decrease in operating
income and the increase in net impairment loss on equity securities.
Income tax expense (benefit)
For the fiscal year ended March 31, 2009, we recorded an income tax expense of ¥1.0 billion
compared to income tax benefit of ¥0.9 billion for the previous fiscal year. The income tax expense
for the fiscal year ended March 31, 2009 was mainly due to deferred tax expenses of ¥0.6 billion
whereas there was deferred tax benefit of ¥1.7 billion for the previous fiscal year, resulting from
the release of valuation allowance against deferred income tax assets related to tax operating loss
carryforwards and other temporary differences. We started the consolidated tax declaration for the
fiscal year ended March 31, 2009.
Minority interests in (earnings) losses of subsidiaries
For the fiscal year ended March 31, 2009, minority interests in losses of subsidiaries was
¥352 million compared to minority interests in losses ¥97 million for the previous fiscal year,
mainly related to GDX and Trust Networks.
Equity in net income (loss) of equity method investees
Equity in net income of equity method investees was ¥35 million for the fiscal year ended
March 31, 2009 compared to equity in net losses of ¥143 million for the previous fiscal year. While
equity in net income of equity method investees was recorded in Multifeed, equity in net loss of
equity method investees was mainly recorded in i-revo.
Net income
Net income for the fiscal year ended March 31, 2009 was ¥1.4 billion compared with ¥5.2
billion for the previous fiscal year. The decrease primarily reflects the decrease in operating
income of ¥1.8 billion compared to the previous year affected by the decrease in gross margin from
systems construction, impairment losses on nonmarketable and available-for-sale equity securities
of ¥0.5 billion compared to net gains of ¥0.2 billion for the previous fiscal year and income tax
expense of ¥1.0 billion compared to recording of an income tax benefit of ¥0.9 billion for the
previous fiscal year. There were also additional operating losses related to four new subsidiaries
of ¥1.3 billion for the fiscal year ended March 31, 2009 compared to ¥0.2 billion for the previous
fiscal year.
31
Year Ended March 31, 2008 Compared to the Year Ended March 31, 2007
Total revenues
Our total revenues increased 17.1% to ¥66.8 billion for the fiscal year ended March 31, 2008
from ¥57.1 billion for the previous fiscal year. These increases were primarily due to an increase
in monthly recurring revenues from connectivity and outsourcing services and systems operation and
maintenance of systems integration revenues.
Connectivity and outsourcing services revenues.
Revenues from connectivity services and
outsourcing services, which comprise our connectivity services for corporate use, connectivity
services for home use and outsourcing services, increased by 28.5% to ¥31.3 billion for the fiscal
year ended March 31, 2008 from ¥24.4 billion for the previous fiscal year.
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|
|
Connectivity services for corporate use.
Revenues from connectivity services for
corporate use increased by 8.1% to ¥12.1 billion for the fiscal year ended March 31,
2008 from ¥11.2 billion for the previous fiscal year. The increase was mainly due to an
increase in revenues from IP services, the service mainly used for corporate
headquarters and data centers, along with the shift to higher bandwidth, and an
increase in revenues from broadband services along with the expansion of broadband
utilization in the corporate internal network.
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Connectivity services for home use.
Despite the decrease in revenues from IIJ4U and
OEM, revenues from connectivity services for home use increased by 175.8% to ¥5.4
billion for the fiscal year ended March 31, 2008 from ¥2.0 billion for the previous
fiscal year. This significant increase was mainly due to additional revenues for the
fiscal year ended March 31, 2008 of ¥3.8 billion from hi-ho, which we acquired in June
2007.
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Outsourcing services. Our outsourcing services revenues increased by 23.1% to ¥13.7
billion for the fiscal year ended March 31, 2008 from ¥11.1 billion for the previous
fiscal year. This increase was mainly due to a steady increase in revenues from
services such as security and e-mail related services for anti-spam protection, data
center services, network related solutions, customer support and Wide-are Ethernet
services. The steady increase in outsourcing services revenues is affected by an
increase in demand for outsourcing services by corporate customers.
|
Systems integration revenues.
Our revenues from systems integration, which include equipment
sales related to systems integration, increased by 11.4% to ¥34.0 billion for the fiscal year ended
March 31, 2008 from ¥30.5 billion for the previous fiscal year. The increase was due to an increase
in systems construction, a one-time revenues, and a continuous increase in recurring revenues from
systems operation and maintenance. The order backlog for systems integration and equipment sales as
of March 31, 2008 was ¥15.9 billion, an increase of 68.0% compared to March 31, 2007. The order
backlog for systems construction including equipment sales increased by 35.3% to ¥4.8 billion and
the operation and maintenance of the systems increased by 87.3% to ¥11.1 billion compared to the
amount as of March 31, 2007.
Equipment sales revenues.
Our equipment sales decreased by 30.3% to ¥1.5 billion for the
fiscal year ended March 31, 2008 from ¥2.2 billion for the previous fiscal year. Equipment sales
revenues has been decreasing year by year because we have been focusing on providing systems
construction that have higher margin to our corporate customers instead of providing equipment
sales which has a relatively lower margin.
ATM Operation Business revenues.
We entered the ATM operation business through our
consolidated subsidiary, Trust Networks, which was established in July 2007. During the fiscal year
ended March 31, 2008, it was under planning and preparation for business launch and revenues from
the ATM operation business were ¥4 million for the fiscal year ended March 31, 2008,
Total cost of revenues
Our total cost of revenues increased by 15.0% to ¥52.9 billion for the fiscal year ended March
31, 2008 from ¥46.0 billion for the previous fiscal year. The increase was mainly because the cost
of connectivity and outsourcing services revenues and the cost of systems integration revenues
increased compared to the previous fiscal year corresponding with the increase in connectivity and
outsourcing services revenues and systems integration revenues, respectively.
32
Cost of connectivity and outsourcing services revenues
. Our cost of connectivity and
outsourcing services revenues increased by 26.7% to ¥26.0 billion for the fiscal year ended March
31, 2008 from ¥20.5 billion for the previous fiscal year. The additional cost for the fiscal year
ended March 31, 2008 from hi-ho, which we acquired in June 2007, was ¥3.9 billion. Backbone costs,
excluding the backbone cost related to hi-ho from the point of comparable disclosure to previous
fiscal years, for the fiscal year ended March 31, 2008 were ¥3.5 billion, almost the same as the
previous fiscal year. Local access line costs for the fiscal year ended March 31, 2008 increased by
53.8% to ¥7.1 billion from ¥4.6 billion for the previous fiscal year. Additionally, we engaged in
new business developments including the establishment of consolidated subsidiaries and an initial
cost of ¥0.1 billion for new business developments was incurred for the fiscal year ended March 31,
2008. The gross margin ratio in connectivity and outsourcing services revenues, which is the ratio
of (1) the amount obtained by subtracting cost of connectivity and outsourcing services revenues
from connectivity and outsourcing services revenues to (2) connectivity and outsourcing services
revenues, increased to 16.8% for the fiscal year ended March 31, 2008 from 15.6% for the previous
fiscal year. This increase is mainly a result of an increase in revenues from relatively
higher-margin value-added services.
Cost of systems integration revenues.
Our cost of systems integration revenues increased by
8.5% to ¥25.5 billion for the fiscal year ended March 31, 2008 from ¥23.5 billion for the previous
fiscal year. The increase is mainly due to the increase in systems integration revenues. The gross
margin ratio in systems integration revenues, which is the ratio of (1) the amount obtained by
subtracting cost of systems integration revenues from systems integration revenues to (2) systems
integration revenues, increased to 25.0% for the fiscal year ended March 31, 2008 from 22.9% for
the previous fiscal year.
Cost of equipment sales.
Our cost of equipment sales decreased by 31.3% to ¥1.3 billion for
the fiscal year ended March 31, 2008 from ¥1.9 billion for the previous fiscal year. The decrease
is mainly due to the decrease in equipment sales revenues. The gross margin ratio, as the figure
subtracting cost of equipment sales from equipment sales revenues to equipment sales revenues, in
equipment sales increased to 14.2% for the fiscal year ended March 31, 2008 from 12.9% for the
previous fiscal year.
Cost of ATM Operation Business.
Cost of the ATM operation business was ¥17 million for the
fiscal year ended March 31, 2008 and gross margin was a loss of ¥13 million.
Total costs and expenses
Total costs and expenses, which include total cost of revenues, sales and marketing expenses,
general and administrative expenses and research and development expenses, increased by 15.9% to
¥62.1 billion for the fiscal year ended March 31, 2008 from ¥53.6 billion for the previous fiscal
year. The increase in total costs and expenses was primarily a result of an increase in the cost of
connectivity and outsourcing services, including the additional cost related to hi-ho services, the
cost of systems integration, sales and marketing expenses, general and administrative expenses and
research and development expenses, along with business expansion.
Sales and marketing.
Sales and marketing expenses increased by 25.9% to ¥4.3 billion for the
fiscal year ended March 31, 2008 from ¥3.4 billion for the previous fiscal year. The increase was
mainly due to additional expenses of ¥0.4 billion related to hi-ho, and an increase in personnel
expenses of ¥0.2 billion and advertising expenses of ¥0.2 billion that increased along with our
business expansion.
General and administrative.
General and administrative expenses increased by 16.5% to ¥4.6
billion for the fiscal year ended March 31, 2008 from ¥4.0 billion for the previous fiscal year.
The increase was mainly due to an increase in personnel expenses of ¥0.2 billion and outsourcing
expenses of ¥0.2 billion resulting from our business expansion.
Research and development.
Research and development expenses increased by 35.6% to ¥240 million
for the fiscal year ended March 31, 2008 from ¥177 million for the previous fiscal year. The
increase was mainly due to an increase in personnel expenses related to research and development.
Operating income
As a result of the foregoing factors, operating income increased by 36.0% to ¥4.8 billion for
the fiscal year ended March 31, 2008 from ¥3.5 billion for the previous fiscal year. We engaged in
new business developments including the establishment of consolidated subsidiaries in the fiscal
year ended March 31, 2008, and the initial costs and expenses relating to these new business
developments were ¥0.3 billion including the loss from GDX and Trust Networks of ¥0.2 billion.
Other income (expenses)
-
net
Other expenses-net of ¥0.4 billion was recorded for the fiscal year ended March 31, 2008,
compared to other income of ¥1.5 billion for the previous fiscal year. The decrease was mainly due
to a large decrease in net gains on sales and exchanges of other investments.
33
Interest income.
Interest income was ¥63 million for the fiscal year ended March 31, 2008,
compared to ¥23 million for the previous fiscal year. The increase was mainly due to an increase in
interest income resulted from rising of an interest rate in Japan.
Interest expense.
Interest expense, comprised of interest expense in respect of bank
borrowings and capital lease obligations, amounted to ¥438 million for the fiscal year ended March
31, 2008 compared to ¥397 million for the previous fiscal year. The increase was mainly due to an
increase in borrowings.
Foreign exchange gains (losses).
Foreign exchange gains amounted to ¥1.4 million for the
fiscal year ended March 31, 2008 compared to losses of ¥0.3 million for the previous fiscal year.
Net gains on sales and exchange of other investments.
For the fiscal year ended March 31,
2008, we recorded net gains on sales and exchange of other investments of ¥0.2 billion, which
resulted from the sale of certain available-for-sale securities, compared to net gains of ¥3.2
billion for the previous fiscal year.
Losses on write-down of other investments.
For the fiscal year ended March 31, 2008, we
recorded losses on write-down of other investments of ¥0.3 billion, compared to losses of ¥1.4
billion for the previous fiscal year, including an impairment loss of ¥1.0 billion on the
securities of IP Mobile Incorporated.
Other-net.
For the fiscal year ended March 31, 2008, we recorded other income of ¥47 million,
most of which is dividend income, compared to income of ¥57 million, most of which is also dividend
income, for the previous fiscal year.
Income from operations before income tax benefit, minority interests in (earnings) losses of
subsidiaries and equity in net loss of equity method investees
We recorded income from operations before income tax benefit, minority interests in losses of
subsidiaries and equity in net loss of equity method investees of ¥4.4 billion for the fiscal year
ended March 31, 2008 compared to income from operations before income tax expense, minority
interests in earnings of subsidiaries and equity in net loss of equity method investees of ¥5.0
billion for the fiscal year ended March 31, 2007. The decrease primarily reflects the record of
other expenses-net for the fiscal year ended March 31, 2008 compared to the record of other
income-net for the fiscal year ended March 31, 2008, mainly due to the changes in net gain on sales
of other investments and losses on write-down of other investments.
Income tax benefit
For the fiscal year ended March 31, 2008, we recorded an income tax benefit of ¥0.9 billion
compared to an income tax benefit of ¥0.8 billion for the previous fiscal year. We started the
consolidated tax declaration for the fiscal year ended March 31, 2009 and recognized net deferred
income tax assets and liabilities in consideration of the application of the consolidated tax
declaration as of March 31, 2008. The income tax benefit for the fiscal year ended March 31, 2008
was mainly due to deferred tax benefits of ¥1.7 billion resulting from a release of valuation
allowance against deferred income tax assets related to tax operating loss carryforwards and others
temporary differences.
Minority interests in (earnings) losses of subsidiaries
For the fiscal year ended March 31, 2008, minority interests in losses of subsidiaries was
¥0.1 billion mainly related to GDX and Trust Networks, compared to minority interests in earnings
of subsidiaries of ¥0.2 billion for the fiscal year ended March 31, 2007. The change in minority
interests was mainly due to the elimination of minority interests related to our four consolidated
subsidiaries, IIJ-Tech, Net Care, IIJ-FS and IIJ America, which IIJ made wholly-owned through its
acquisition of shares of IIJ-Tech and Net Care from minority shareholders and share exchanges.
Equity in net loss of equity method investees
Equity in net loss of equity method investees was ¥0.1 billion for the fiscal year ended March
31, 2008 compared to ¥0.2 billion for the previous fiscal year. Although equity in net income of
equity method investees was recorded in Multifeed, a larger amount of equity in net loss of equity
method investees was recorded in i-revo.
Net income
Net income for the fiscal year ended March 31, 2008 was ¥5.2 billion compared with ¥5.4
billion for the previous fiscal year. The decrease primarily reflects a large decrease in net gain
on sales of other investments, in spite of the increase in operating income and recording of an
income tax benefit of ¥0.9 billion.
34
Segment Reporting
From the fiscal year ended March 31, 2009, we have disclosed revenues and costs for the ATM
operation business because the amount of losses related to this business is material.
Currently, we have two segments: Network services and systems integration business and ATM
operation business. Network services and systems integration business is comprised of: Connectivity
and outsourcing services, Systems integration and Equipment sales.
The following tables present net revenues and operating income (loss) for fiscal years 2008
and 2009 by segment.
Segment Summary:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
|
Millions of Yen
|
|
|
U.S.Dollars
|
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Network service and
systems integration
business
|
|
¥
|
66,831
|
|
|
¥
|
69,961
|
|
|
$
|
705,609
|
|
ATM operation business
|
|
|
4
|
|
|
|
23
|
|
|
|
237
|
|
Elimination
|
|
|
|
|
|
|
253
|
|
|
|
2,561
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
66,835
|
|
|
|
69,731
|
|
|
|
703,285
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Network service and
systems integration
business
|
|
|
4,854
|
|
|
|
3,663
|
|
|
|
36,944
|
|
ATM operation business
|
|
|
(89
|
)
|
|
|
(705
|
)
|
|
|
(7,104
|
)
|
Elimination
|
|
|
6
|
|
|
|
41
|
|
|
|
416
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
¥
|
4,759
|
|
|
¥
|
2,917
|
|
|
$
|
29,424
|
|
Year Ended March 31, 2009 Compared to the Year Ended March 31, 2008
Network services and Systems Integration Business
Net revenues from our Network services and systems integration business, before elimination of
intersegment revenues, increased by 4.7% to ¥70.0 billion for the fiscal year ended March 31, 2009
compared to ¥66.8 billion for the pervious fiscal year. The increase in revenues was primarily due
to the continuous increase in revenues from our monthly recurring services; connectivity and
outsourcing services and systems operation and maintenance. Operating expense for the fiscal year
ended March 31, 2009 increased to ¥66.3 billion compared to ¥62.0 billion for the previous fiscal
year mainly due to the increase in costs of connectivity and outsourcing services revenues. As a
result, operating income for the fiscal year ended March 31, 2009 decreased to ¥3.7 billion
compared to ¥4.9 billion for the previous fiscal year.
ATM Operation Business
Net revenues from our ATM operation business, before elimination of intersegment revenues,
increased by ¥19 million to ¥23 million for the fiscal year ended March 31, 2009 compared to ¥4
million for the pervious fiscal year. Operating expense for the fiscal year ended March 31, 2009
was ¥728 million compared to ¥93 million for the previous fiscal year. During the fiscal year ended
March 31, 2009, Trust Networks completed its field test of 10 ATMs operations. As a result,
operating loss for the fiscal year ended March 31, 2009 increased to ¥705 million compared to ¥89
million for the previous fiscal year.
35
Application of Critical Accounting Policies
In reviewing our financial statements, you should consider the sensitivity of our reported
financial condition and results of operations to changes in the conditions and assumptions
underlying the estimates and judgments made by our management in applying critical accounting
policies.
The preparation of financial statements requires the use of estimates, judgments and
assumptions that affect the reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses for the periods presented. Actual
results may differ from these estimates, judgments and assumptions. Note 1 to our consolidated
financial statements includes a summary of the significant accounting policies used in the
preparation of our financial statements. Certain accounting policies are particularly critical
because of their significance to our reported results and because of the possibility that future
events may differ significantly from the conditions and assumptions underlying the estimates used
and judgments made by our management in preparing our financial statements.
We have discussed the development and selection of critical accounting policies and estimates
with our Board of Directors, and the Board of Directors has reviewed the disclosure relating to
these, which are included in this Operating and Financial Review and Prospects. For all of these
policies, we caution that future events rarely develop exactly as forecast, and even the best
estimates may require adjustment.
Revenue recognition
Revenues from connectivity services consist principally of connectivity services for corporate
use and home use. Connectivity services for corporate use represent dedicated Internet access type
services, such as IP services and ADSL, or optical line broadband IP services such as IIJ DSL/F
Service and IIJ FiberAccess/F Service. Connectivity services for home use are provided under IIJ
brand such as IIJ4U and IIJmio, hi-ho brand and others, and consist of dial-up services, optical
based or ADSL based broadband services. The term of these contracts is one year for connectivity
services for corporate use and generally one month for connectivity services for home use. All
these services are billed and recognized monthly on a straight-line basis.
Outsourcing services revenues consist principally of sales of various Internet access-related
services such as security related services, network related services, hosting related services,
data center related services, Wide-area Ethernet services and call-center services. 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 outsourcing services
are deferred and recognized over the contract period.
Systems integration revenues consist principally of systems construction revenues and systems
operation and maintenance revenues. Systems construction revenues includes consulting, project
planning, system design, and development of network systems to meet each of our customers
requirements, and sales of equipment and software purchased from third parties. Systems operation
and maintenance revenues includes systems construction related maintenance, monitoring and other
operating services.
Systems construction revenues
Systems integration service is subject to the Emerging
Issues Task Force (EITF) Issue No. 00-21, Revenue Arrangements with Multiple Deliverables.
For deliverables in multiple-element arrangements, the guidance below is applied for
separability and allocation. A multi-element arrangement is separated into more than one unit
of accounting if all of the following criteria are met and is allocated to the separate units
of accounting based on each units relative fair value:
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The delivered item(s) has value to the client on a stand-alone basis,
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There is objective and reliable evidence of the fair value of the undelivered item(s), and
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|
If the arrangement includes a general right of return relative to the delivered
item(s), delivery or performance of the undelivered item(s) is considered probable and
substantially in the control of the company.
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Systems construction service, which generally completes in less than one year, has
stand-alone value as it is sometimes sold separately without undelivered items such as
maintenance, monitoring and other operating services . The Company maintains a standard range
of prices of those undelivered items, which is considered to be the reliable evidence of fair
value. In addition, the Company does not offer a general right of return relative to
constructed network systems. Therefore, the systems construction service is considered a
separate unit of accounting and the revenues are recognized when constructed network systems
including equipment are delivered and accepted by the customer.
Elements of systems construction service are also considered as separate units of
accounting. However, when the equipment is delivered prior to other elements of the systems
construction arrangement, revenue is deferred until other
systems construction service elements are completed and accepted by the customer because
in the event that the Company does not complete other systems construction service elements,
the customer may return all of the equipment.
36
Systems operation and maintenance revenues
Maintenance, monitoring and other operating
service revenues are separately accounted for from systems constructions. These revenues are
recognized ratably over the period of contract for the respective services, which is generally
for one year.
The company evaluates the criteria outlined in EITF Issue No. 99-19, Reporting Revenue Gross
as Principal versus Net as an Agent, in determining whether it is appropriate to record the gross
amount of revenues and related costs or the net amount earned in reporting Equipment sales. The
Company records the gross amounts billed to its customers based on the following acts: (i)it is
primary obligor in these transactions, (ii)it has latitude in establishing prices and selecting
suppliers, and (iii)it is involved in the determination of the service specifications.
Equipment sales are recognized when equipment is delivered and accepted by the customer. Title
to equipment passes when equipment is accepted by the customer.
ATM operation business revenues are mainly comprised of commission fees charged when customers
withdraw their deposits from ATMs. The commission fees are recognized when the fees are charged to
customers.
Useful lives of property and equipment
Property and equipment, net recorded on our balance sheet was ¥13.2 billion at March 31, 2009,
representing 25.2% of our total assets. The values of our property and equipment, including
purchased software and property and equipment under capital leases, are recorded in our financial
statements at acquisition cost, and are principally depreciated or amortized on a straight-line
basis over the shorter of the lease term or estimated useful life of the asset. Our depreciation
and amortization expenses for property and equipment for the fiscal years ended March 31, 2007,
2008 and 2009 were ¥4.2 billion, ¥4.7 billion and ¥5.2 billion, respectively.
We estimate the useful lives of property and equipment in order to determine the amount of
depreciation and amortization expense to be recorded in each fiscal year. We determine the useful
lives of our assets at the time the assets are acquired and base our determinations on expected
use, experience with similar assets, established laws and regulations as well as taking into
account anticipated technological or other changes. Estimated useful lives at March 31, 2009, were
as follows:
|
|
|
|
|
Item
|
|
Useful Lives
|
Data communications, office and other equipment
|
|
|
2 to 15 years
|
|
Leasehold improvements
|
|
|
3 to 15 years
|
|
Purchased software
|
|
|
5 years
|
|
Capitalized leases
|
|
|
4 to 7 years
|
|
If technological or other changes were to occur more rapidly or in a different form than
anticipated or new laws or regulations are enacted or the intended use changes, the useful lives
assigned to these assets may need to be shortened, or we may need to sell or write off the assets,
resulting in recognition of increased depreciation and amortization or losses in future periods.
Our losses on disposal of property and equipment for the fiscal years ended March 31, 2007, 2008
and 2009 were ¥151 million, ¥72 million and ¥443 million, respectively. The losses for the fiscal
year ended March 31, 2007 and 2008 were mainly due to disposal of software such as for back-office
systems, and network equipment related to the closing of a network operation center. The losses for
the fiscal year ended March 31, 2009 increased as there were disposal of network equipment and
software such as for back-office systems due to the cancellation from a certain large customer and
the discontinuance in some services..
A one-year change in the useful life of these assets would have increased or decreased
depreciation expense by approximately ¥1.9 billion and ¥1.2 billion, respectively.
Ordinary maintenance and repairs are charged to income as incurred. Major replacements and
improvements are capitalized. When properties are retired or otherwise disposed of, the property
and related accumulated depreciation accounts are relieved of the applicable amounts and any
differences are included in operating cost and expenses.
Useful lives of intangible assets
Goodwill (including equity-method goodwill) and intangible assets that are deemed to have
indefinite useful lives are not amortized, but are subject to impairment testing. Impairment
testing is performed annually or more frequently if events or changes in circumstances indicate
that the asset might be impaired. The Company performs annual impairment tests on March 31.
Intangible assets with finite useful lives, consisting of customer relationships and licenses, are
amortized using the
straight-line method over the estimated useful lives, which range from 3 to 10 years for
customer relationships and 5 years for licenses.
37
Impairment of long-lived assets
Long-lived assets consist principally of property and equipment, including those items leased
under capital leases and non-amortized intangible assets. We perform an impairment review for our
long-lived assets, whenever events or changes in circumstances indicate that the carrying amount of
the assets may not be recoverable in accordance with SFAS No. 144 Accounting for the Impairment or
Disposal of Long-Lived Assets. This analysis is separate from our analysis of the useful lives of
our assets, but it is affected by some similar factors. Factors that we consider important which
could trigger an impairment review include, but are not limited to, the impact of the following
trends or conditions:
|
|
|
significant decline in the market value of an asset,
|
|
|
|
|
current period operating cash flow loss,
|
|
|
|
|
introduction of competing technologies or services,
|
|
|
|
|
significant underperformance of expected or historical cash flows,
|
|
|
|
|
significant or continuing decline in subscribers,
|
|
|
|
|
changes in the manner or use of an asset,
|
|
|
|
|
disruptions in the use of network equipment under capital lease arrangements, and
|
|
|
|
|
other negative industry or economic trends.
|
When we determine that the carrying amount of specific assets may not be recoverable based on
the existence or occurrence of one or more of the above or other factors, we estimate the future
cash inflows and outflows expected to be generated by the assets over their expected useful lives.
We estimate the sum of expected undiscounted future cash flows based upon historical trends
adjusted to reflect our best estimate of future market and operating conditions. If the sum of the
expected undiscounted future net cash flows is less than the carrying value of the assets, we
record an impairment loss based on the fair values of the assets. Such fair values may be based on
established markets, independent appraisals and valuations or discounted cash flows. If actual
market and operating conditions under which assets are used are less favorable or shorter than
those projected by management, resulting in reduced cash flows, additional impairment charges for
assets not previously written-off may be required.
Allowance for doubtful accounts and uncollectible contractual prepayments
We maintain allowances for doubtful accounts for estimated losses resulting from the inability
of our customers to make required payments. At March 31, 2008 and 2009, we maintained allowances
for doubtful accounts of ¥114 million and ¥123 million, respectively. Management specifically
analyzes accounts and loans receivable including historical bad debts, customer concentrations,
customer credit-worthiness and current economic trends when evaluating the adequacy of the
allowances for doubtful accounts. If the financial condition of our customers or debtors were to
deteriorate, resulting in an impairment of their ability to make payments, additional allowances
may be required.
Deferred tax assets
To date, our deferred tax assets have been offset by a valuation allowance. We record a
valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to
be realized. As of March 31, 2009, we had tax operating loss carryforwards related to corporate tax
of ¥10.1 billion. The tax operating loss carryforwards are available to offset future taxable
income and will expire as shown in Note 10 of our consolidated financial statements. Deferred tax
expense for the fiscal year ended March 31, 2009 was ¥0.6 billion. While we have considered future
taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for
the valuation allowance, if there are changes in circumstances that causes a change in judgment
about the realizability of the related deferred tax asset in future years, a release or an increase
of valuation allowance against deferred income tax assets related to tax operating loss
carryforwards and other temporary differences would result in the decrease or increase in deferred
tax expense.
Valuation of investments
We have investments in securities, and the valuation of such investments, requires us to make
judgments using information that is generally uncertain at the time, such as assumptions regarding
future financial conditions and cash flows. As at March 31, 2009, we had investments in securities
classified as other investments in the amount of ¥1.9 billion. We routinely assess the impairment
of our investments by considering whether any decline in value is other-than-temporary. The factors
we consider are:
38
|
|
|
the length of time and the extent to which the market value has been less than cost,
|
|
|
|
|
the financial condition and near-term prospects of the issuer, including any
specific events which may influence the operations of the issuer such as changes in
technology that may impair the earnings potential of the investment, and
|
|
|
|
|
our intent and ability to retain the investment in the issuer for a period of time
sufficient to allow for any anticipated recovery in market value. If a decline in value
occurs and is deemed to be other-than-temporary, an impairment loss will be recorded to
write-down the carrying value of the investment to fair value. If, after taking into
account these considerations, the decline is judged to be other than temporary, the
cost basis of the individual security is written down to a new cost basis and the
amount of the write-down is accounted for as a realized loss.
|
Our unrealized loss on investments in marketable equity security relates to Japanese companies
(25 issuers) in various industries. The unrealized losses on these securities were due principally
to a temporary decline in the stock market. The fair value of each investment is between 1.4% to
29.5% less than its cost except for an investment of which the fair value has recovered to its cost
after April 2009. The duration of the unrealized loss position was less than 17 months. The Company
evaluated the near-term prospects of the issuer and the analyst reports in relation to the severity
and duration of impairment. Based on that evaluation and the Companys ability and intent to hold
the investment for a reasonable period of time sufficient for a recovery of fair value, the Company
does not consider the investment to be other-than-temporarily impaired at March 31, 2009.
Losses on write-down of investments in certain marketable and nonmarketable equity securities,
included in other income (expenses), were recognized to reflect the decline in value considered to
be other than temporary, which were ¥103 million and ¥185 million, respectively, for the year ended
March 31, 2008, and ¥164 million and ¥360 million, respectively, for the year ended March 31, 2009.
Such losses in certain nonmarketable equity securities, included in other income (expenses), were
¥1.4 billion for the year ended March 31, 2007.
In addition to investments in securities, we also have investments in equities and loans for
which we have significant influence over the investees operations and financial policies and are
accounted for by the equity method. For other than temporary declines in the value of such
investments below the carrying amount, the investment is reduced to fair value and an impairment
loss is recognized.
Pension benefits costs
Employee pension benefit costs and obligations are dependent on certain assumptions including
discount rate, retirement rate and rate of increase in compensation levels, which are based upon
current statistical data, as well as expected long-term rate of return on plan assets and other
factors. Specifically, the discount rate and expected long-term rate of return on assets are two
critical assumptions in the determination of periodic pension cost and pension liabilities.
Assumptions are evaluated at least annually and when events occur or circumstances change which
could have a significant effect on these critical assumptions. In accordance with U.S. GAAP, actual
results that differ from the assumptions are accumulated and amortized over future periods.
Therefore, actual results generally affect recognized expenses and the recorded obligations for
pensions in future periods. While management believes that the assumptions used are appropriate,
differences in actual experience or changes in assumptions may affect our pension obligations and
future expenses.
We used a discount rate of 1.6% for the pension plan as of March 31, 2009. The discount rate
was determined by using the market yield of Japanese Government Bonds with a term matched against
the average remaining service period of employees.
We used an expected long-term rate of return on pension plan assets of 2.3% as of March 31,
2009. To determine the expected long-term rate of return on pension plan assets, we consider a
combination of historical returns and prospective return assumptions derived from pension trust
funds managing company. The actual loss on pension plan for the year ended March 31, 2009 was
8.1%.
The following table illustrates the sensitivity to a change in the discount rate and the
expected return on pension plan assets, while holding all other assumptions constant, for our
pension plan as of March 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Assumption
|
|
Pre-Tax PBO
|
|
Pension Expense
|
|
Equity (Net of Tax)
|
|
|
|
|
|
|
(millions of yen)
|
|
|
|
|
50 basis point
increase/decrease
in discount rate
|
|
|
(174)/194
|
|
|
|
(*
|
)
|
|
|
(*
|
)
|
50 basis point
increase/decrease
in expected return
on assets
|
|
|
|
|
|
|
(5)/5
|
|
|
|
/(3
|
)
|
|
|
|
(*)
|
|
It is not available because of curtailment and settlement.
|
39
New Accounting Standards
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements which defines fair
value, establishes a framework for measuring fair value in generally accepted accounting
principles, and expands disclosures about fair value measurements. This statement clarifies how to
measure fair value as permitted or required under other accounting pronouncements, but does not
require any new fair value measurements. In February 2008, the FASB issued Staff Positions (FSP)
No. FAS 157-2, Effective Date of FASB Statement No.157, which partially delay the effective date
of SFAS No. 157 for one year for certain nonfinancial assets and liabilities and remove certain
leasing transactions from its scope. The Company adopted SFAS No. 157 in the first quarter
beginning April 1, 2008 for all financial assets and liabilities that are recognized or disclosed
at fair value in the financial statements. This adoption did not have a material effect on the
Companys financial position or results of operations. The adoption of SFAS No. 157 for all
nonfinancial asssets and liabilities beginning April 1, 2009 will not have a material effect upon
the Company s financial position or results of operations.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities, including an amendment of FASB Statement No. 115. SFAS No. 159
provides companies with an option to report selected financial assets and liabilities at fair
value. Unrealized gains and losses on items for which the fair value option has been elected will
be recognized in earnings. SFAS No. 159 is effective for fiscal years beginning after November 15,
2007 and is required to be adopted by the Company in the first quarter beginning April 1, 2008 and
was adopted by the Company in the first quarter beginning April 1, 2008. The adoption of SFAS No.
159 did not have an impact upon the Companys financial position or results of operations as the
Company did not elect to report financial assets and liabilities under fair value option.
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations. The Statement
establishes principles and requirements for how an acquirer recognizes and measures in
its financial statements the identifiable assets acquired, the liabilities assumed, any
noncontrolling interest in the acquiree and the goodwill acquired. SFAS No. 141(R) also establishes
disclosure requirements to enable the evaluation of the nature and financial effects of the
business combination. SFAS No. 141(R) is effective for fiscal years beginning on or after December
15, 2008. In April 2009, the FASB issued FSP No. FAS 141(R)-1, Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from Contingencies. FSP No. FAS 141(R)-1
amends the initial recognition and measurement, subsequent measurement and accounting, and
disclosure of assets and liabilities arising from contingencies in a business combination. FSP No.
FAS 141(R)-1 is effective for assets and liabilities arising from contingencies in business
combinations for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. The impact of the adoption of SFAS No.
141(R) and FSP No. FAS 141(R)-1 on the Companys financial position or results of operations will
be dependent on the size and nature of business combinations completed after the adoption of this
statement.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements, an amendment of ARB No. 51. The Statement establishes accounting
and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation
of a subsidiary. The Statement is effective on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. The adoption of SFAS No.160 will impact
the presentation of the Companys balance sheets and statements of income, however, it will not
have a material impact on the Companys financial position or results of operations.
In October 2008, the FASB issued FSP No. FAS 157-3, Determining the Fair Value of a Financial
Asset When the Market for That Asset Is Not Active. FSP No. FAS 157-3 clarifies the application of
SFAS No. 157 in a market that is not active and provides an example to illustrate key
considerations in determining the fair value of a financial asset when market for that financial
asset is not active. FSP No. FAS 157-3 is effective upon issuance, including prior periods for
which financial statements have not been issued. The adoption of FSP No. FAS 157-3 did not have a
material impact upon the Companys financial position or results of operations.
In December 2008, the FASB issued FSP No. FAS 132(R)-1, Employers Disclosures about
Postretirement Benefit Plan Assets. FSP No. FAS 132(R)-1 requires additional disclosure
about plan assets including investment allocation, fair value of major categories of plan assets,
development of fair value measurements, and concentrations of risk. FSP No. FAS 132(R)-1 is
effective for fiscal years ending after December 15, 2009. The Company is currently evaluating the
requirements of these additional disclosures, but does not expect the adoption of FSP No. FAS
132(R)-1 to have an impact on the Companys financial position or results of operations.
In April 2009, the FASB issued FSP No. FAS 115-2 and No. FAS 124-2, Recogniton and
Presentation of Other-Than-Temporary Impairments. FSP No. FAS 115-2 and No. FAS 124-2 amends the
other-than-temporary impairment guidance in U.S. GAAP for debt securities to make the guidance more
operational and to improve the presentation and disclosure of other-than-temporary impairments on
debt and equity securities in the financial statements. FSP No. FAS 115-2 and No. FAS 124-2 are
effective for fiscal years ending after June 15, 2009 and early adoption is
permitted. The adoption of FSP No. FAS 115-2 and No. FAS 124-2 will not have a material impact
on the Companys financial position and results of operations.
In April 2009, the FASB issued FSP No. FAS 157-4, Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly. FSP No. FAS 157-4 provides additional guidance for estimating
fair value in accordance with SFAS No. 157 when the volume and level of activity for the asset or
liability have significantly decreased. This FSP also includes guidance on identifying
circumstances that indicate a transaction is not orderly. FSP No. FAS 157-4 is effective for
interim and annual reporting periods ending after June 15, 2009. The adoption of FSP No. FAS 157-4
will not have a material impact upon the Companys financial position or results of operations.
40
B. Liquidity and Capital Resources.
Liquidity and Capital Requirements
Our principal capital and liquidity needs in recent years have been for capital expenditures
for the development, expansion and maintenance of our network infrastructure, lease payments,
payment of principal and interest on outstanding borrowings, investments in group companies and,
other working capital.
Capital expenditures.
Our capital expenditures relate primarily to the development, expansion and
maintenance of our network, including the installation of the routers and servers necessary to
offer services on our network. The table below shows our capital expenditures, which we define as
amounts paid for purchases of property and equipment plus acquisition of assets by entering into
capital leases, for the last three years. Capital expenditures, including capital leases for the
fiscal year ended March 31, 2009 were larger than the previous fiscal years largely because of the
additional investments for upgrade in backbone routers which is necessary once every four to five
years and new investments for back-office systems.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the fiscal year ended March 31,
|
|
|
2007
|
|
2008
|
|
2009
|
|
|
(millions of yen)
|
Capital expenditures,
including capitalized
leases
(1)
|
|
¥
|
3,953
|
|
|
¥
|
6,078
|
|
|
¥
|
7,006
|
|
|
|
|
(1)
|
|
Further information regarding capital expenditures, including capitalized leases and a
reconciliation to the most directly comparable U.S. GAAP financial measure, can be found in
Item 3.A., Selected Financial Data Reconciliation of the Disclosed Non-GAAP Financial
Measures to the Most Directly Comparable GAAP Financial Measures.
|
We believe that our expected capital expenditures, including capitalized leases, for the
fiscal year ending March 31, 2010 related to our network services and systems integration business
to be lower than the amount for the fiscal year ended March 31, 2009. If the ATM operation business
start up in accordance with its plan, additional capital expenditures, including capitalized leases
related to the placement of ATMs are expected. In total, we expect that our capital expenditures,
including capitalized leases, for the fiscal year ended March 31, 2010 to slightly increase from
the amount from the previous fiscal year.
We recorded a loss on disposal of property and equipment of ¥151 million, ¥72 million and ¥443
million for the fiscal years ended March 31, 2007, 2008 and 2009, respectively. The losses for the
fiscal year ended March 31, 2007 and 2008 were mainly due to disposal of software such as for
back-office systems, and network equipment related to the closing of a network operation center.
The losses for the fiscal year ended March 31, 2009 increased as there were disposal of network
equipment and software such as for back-office systems due to the cancellation from a certain large
customer and the discontinuance in some services.
Lease payments.
We have operating lease agreements with telecommunications carriers and others
for the use of connectivity lines, including our domestic and international backbone as well as
local access lines that customers use to connect to IIJs network. The leases for our domestic
backbone are generally non-cancelable for a minimum one-year lease period. The leases for our
international backbone connectivity for mainly three-year lease period are substantially
non-cancelable. We also lease office premises and certain office equipment under non-cancelable
operating leases which expire on various dates through the year 2011 and also lease network
operation centers under non-cancelable operating leases. If the ATM operation business start up in
accordance with its plan, additional lease payments for ATMs are expected.
Lease expenses related to backbone lines for the fiscal years ended March 31, 2007, 2008 and
2009, amounted to ¥3.5 billion, ¥3.5 billion and ¥3.7 billion, respectively. Lease expenses for
local access lines for the fiscal years ended March 31, 2007, 2008 and 2009, which are only
attributable to dedicated access revenues, amounted to ¥4.6 billion, ¥5.0 billion and
¥5.3 billion, respectively. Other lease expenses for the fiscal years ended March 31, 2007,
2008 and 2009, amounted to ¥4.4 billion, ¥6.2 billion and ¥7.2 billion, respectively.
41
We conduct our connectivity and other services by using data communications and other
equipment leased under capital lease arrangements. The fair values of the assets at the execution
of the capital lease agreements and accumulated depreciation amounted to ¥15.6 billion and ¥7.7
billion at March 31, 2008, respectively and ¥16.9 billion and ¥9.2 billion at March 31, 2009,
respectively.
As of March 31, 2009, future lease payments under non-cancelable operating leases, including
the aforementioned non-cancelable connectivity lease agreements (but excluding dedicated access
lines which we charge outright to customers), and capital leases were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment due by period
|
|
|
|
|
|
|
|
(millions of yen)
|
|
|
|
Total contractual
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
amount
|
|
|
Less than 1 year
|
|
|
1 to 3 years
|
|
|
4 to 5 years
|
|
|
More than 5 years
|
|
Connectivity lines operating leases
|
|
¥
|
2,398
|
|
|
¥
|
1,206
|
|
|
¥
|
1,039
|
|
|
¥
|
153
|
|
|
¥
|
|
|
Other operating leases
|
|
|
5,730
|
|
|
|
2,146
|
|
|
|
1,258
|
|
|
|
940
|
|
|
|
1,386
|
|
Capital leases
|
|
|
8,514
|
|
|
|
3,482
|
|
|
|
4,390
|
|
|
|
641
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease
payments
(1)
|
|
¥
|
16,642
|
|
|
¥
|
6,834
|
|
|
¥
|
6,687
|
|
|
¥
|
1,734
|
|
|
¥
|
1,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
See Note 8 Leases to our consolidated financial statements included in this annual report.
|
Payments of principal and interest on outstanding borrowings.
We require cash for payments of
interest and principal on our outstanding borrowings.
Short-term borrowings.
As of March 31, 2009, our short-term borrowings consisted of bank
overdrafts was ¥7.4 billion. The weighted average interest rate of our short-term borrowings was
1.223%. Our short-term borrowings as of March 31, 2009 decreased by ¥1.8 billion (net), compared to
the balance as of March 31, 2008, due to repayments. Our unused balance under our bank overdraft
agreements, uncommitted, was ¥11.2 billion in short-term borrowings as of March 31, 2009.
Long-term borrowings
. As of March 31, 2009, we had no outstanding long-term borrowings.
Collateral for borrowings
. Substantially all of our short-term and long-term borrowings are
made under agreements which, as is customary in Japan, provide that under certain conditions the
banks may require us to provide collateral or guarantees with respect to the borrowings. We did not
provide banks with any collateral for outstanding loans as of March 31, 2008 and 2009. Our primary
banking relationships are with Sumitomo Mitsui Banking Corporation, Mizuho Corporate Bank, Ltd.,
Bank of Tokyo-Mitsubishi UFJ, Ltd., and Mitsubishi UFJ Trust and Banking Corporation. The banks are
also shareholders and customers of ours.
Investments in current and former group companies.
In the past, we have made substantial
investments in current and former group companies. We may need to provide additional investment in
our group companies to enhance or maintain our business synergy with our affiliated companies in
the future. See Item 4.B., Our Group Companies for information on investment in equity method
investees.
Working capital needs.
Our principal working capital requirements are for operating lease
payments for our domestic and international backbone and local access lines. We also require
working capital requirements for personnel expenses, office rents and other operating expenses.
Capital Resources
We seek to manage our capital resources and liquidity to provide adequate funds for current
and future financial obligations. We have traditionally met our capital and liquidity requirements
through cash flows from operating activities, long-term and short-term borrowings from financial
institutions, capital leases and issuances of equity securities. At March 31, 2009, we had cash and
cash equivalents of ¥10.2 billion. We expect that cash from operating activities and other sources
of liquidity will be sufficient to meet our requirements through the year ending March 31, 2010.
Short-term and long-term Borrowings
. Short-term and long-term borrowings provide us with an
important source for maintaining adequate level of working capital, acquisition of fixed assets and
investments. We plan to continue to refinance our short-term borrowings or use the unused balance
outstanding of ¥11.2 billion, uncommitted, as of March 31, 2009 under
the bank overdraft agreement for maintaining adequate level of working capital, acquisition of
fixed assets and investments. See Payments of principal and interest on outstanding borrowings.
Cash flows from operating activities.
We generated ¥8.6 billion by operating activities for
the year ended March 31, 2009. See Cash Flows.
Capital Leases.
Capital leases also provide us with an important source of financing. See Note
8 Lease to our consolidated financial statements included in this annual report on Form 20-F.
42
Cash Flows
We had cash and cash equivalents of ¥10.2 billion at March 31, 2009 compared to ¥11.5 billion
at March 31, 2008.
The following table presents information about our cash flows during the fiscal years ended
March 31, 2007, 2008 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended March 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(millions of yen)
|
|
Net cash provided by operating activities
|
|
¥
|
7,402
|
|
|
¥
|
4,538
|
|
|
¥
|
8,631
|
|
Net cash used in investing activities
|
|
|
(3,014
|
)
|
|
|
(5,444
|
)
|
|
|
(3,328
|
)
|
Net cash used in financing activities
|
|
|
(4,560
|
)
|
|
|
(1,152
|
)
|
|
|
(6,573
|
)
|
Effect of exchange rate changes on cash and cash
equivalents
|
|
|
(0
|
)
|
|
|
(26
|
)
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(172
|
)
|
|
|
(2,084
|
)
|
|
|
(1,283
|
)
|
Cash and cash equivalents at beginning of the year
|
|
|
13,727
|
|
|
|
13,555
|
|
|
|
11,471
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of the year
|
|
¥
|
13,555
|
|
|
¥
|
11,471
|
|
|
¥
|
10,188
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, 2009 as Compared to the Year Ended March 31, 2008
Net cash provided by operating activities for the fiscal year ended March 31, 2009 was ¥8.6
billion, an increase of ¥4.1 billion from ¥4.5 billion for the previous fiscal year. Net cash
provided by operating activities for the fiscal year ended March 31, 2009 mainly reflected the
decrease of ¥0.4 billion in net income from continuing operations adjusted for non-cash income and
expenses, compared to the previous fiscal year, mainly due to the decrease in operating income
before depreciation and amortization as a result of the decrease in gross margin from systems
integration and operating loss related to 4 new subsidiaries. There were also expenses in deferred
income tax of ¥2.3 billion, depreciation and amortization of ¥0.7 billion, and loss on disposal of
property and equipment of ¥0.3 billion. In addition, the changes in operating assets and
liabilities for the fiscal year ended March 31, 2009 resulted in a positive impact of ¥4.5 billion
compared to the previous fiscal year mainly due to the decrease in account receivables, decrease in
inventories and prepaid expenses and the decrease in accounts payable related to systems
integration project on cash flows from operating activities.
Net cash used in investing activities for the fiscal year ended March 31, 2009 was ¥3.3
billion, a decrease of ¥2.1 billion from ¥5.4 billion for the previous fiscal year. Net cash used
in investing activities for the fiscal year ended March 31, 2009 decreased mainly reflecting the
absence in payment for purchase of subsidiary stock from minority shareholders of ¥2.0 billion and
the absence in payment of ¥0.8 billion for acquisition of a newly controlled company, net of cash
acquired. Payment for the purchase of property and equipment increased by ¥1.1 billion compared to
the previous fiscal year and the decrease in proceeds from sales of available-for-sale securities
had negative effect on cash flows from investing activities.
Net cash used in financing activities for the fiscal year ended March 31, 2009 was ¥6.6
billion, an increase of ¥5.4 billion, from ¥1.2 billion for the previous fiscal year. Net cash used
in financing activities for the fiscal year ended March 31, 2009 mainly reflected an increase in
net repayments of ¥4.6 billion in short-term borrowings and an increase in principal payment under
capital leases of ¥0.4 billion. Also, payments for acquisition of treasury stock of ¥0.4 billion in
comparison with no acquisition of treasury stock in the previous fiscal year resulted in a negative
effect on cash flows from financing activities compared to the previous fiscal year.
43
Year Ended March 31, 2008 as Compared to the Year Ended March 31, 2007
Net cash provided by operating activities for the fiscal year ended March 31, 2008 was ¥4.5
billion, a decrease of ¥2.9 billion from ¥7.4 billion for the previous fiscal year. Net cash
provided by operating activities for the fiscal year ended March 31, 2008 mainly reflected an
increase of ¥1.4 billion in net income from continuing operations adjusted for non-cash income and
expenses, compared to the previous fiscal year, mainly due to an increase in operating income
before depreciation and amortization derived from an increase in revenues from connectivity and
value-added services and systems integration, despite the payment of income tax for the fiscal year
ended March 31, 2008 was ¥1.1 billion, compared to ¥0.3 billion for the previous fiscal year. In
addition, the changes in operating assets and liabilities for the fiscal year ended March 31, 2008
resulted in a negative impact of ¥4.3 billion compared to the previous fiscal year mainly due to a
significant increase in account receivables on cash flows from operating activities.
Net cash used in investing activities for the fiscal year ended March 31, 2008 was ¥5.4
billion, an increase of ¥2.4 billion from ¥3.0 billion for the previous fiscal year. Net cash used
in investing activities for the fiscal year ended March 31, 2008 mainly reflected a decrease of
¥3.3 billion in proceeds from sales of available-for-sale securities due to a large decrease in the
sales of available-for-sale securities, a payment of ¥0.8 billion for the acquisition of a newly
controlled company, net of cash acquired, and an increase of ¥0.6 billion in a payment for the
purchase of property and equipment along with our business growth compared to the previous fiscal
year. Also, a decrease of ¥1.6 billion in payments for the purchase of short-term and other
investments and a decrease of ¥1.1 billion in payments for purchase of subsidiary stock from
minority shareholders resulted in a positive effect on cash flows from investing activities
compared to the previous fiscal year.
Net cash used in financing activities for the fiscal year ended March 31, 2008 was ¥1.2
billion, a decrease of ¥3.4 billion, from ¥4.6 billion for the previous fiscal year. Net cash used
in financing activities for the fiscal year ended March 31, 2008 mainly reflected an increase in
net repayments of ¥1.3 billion in short-term borrowings with initial maturities over three months
and long-term borrowings and an increase of ¥4.6 billion in net proceeds from short-term borrowings
with initial maturities of less than three months mainly in order to finance our acquisition of
shares of the two consolidated subsidiaries from their minority shareholders, and an absence of
¥1.0 billion in net amount of repayments of securities loan agreements due to the termination of
contracts compared to the previous fiscal year. Also, dividends payments of ¥0.5 billion in
comparison with no dividends payments in the previous fiscal year resulted in a negative effect on
cash flows from financing activities compared to the previous fiscal year.
Contingencies
We did not have any material contingent liabilities as of March 31, 2009.
C. Research and Development, Patents and Licenses, etc.
See the information in Item 4.B., Business Overview Research and Development.
D. Trend Information.
Factors Affecting Our Future Financial Results
We expect that the following are the most significant factors likely to affect our financial
results and those of our consolidated subsidiaries. You should also consult Item 3.D. Risk
Factors and the other portions of this annual report on Form 20-F for additional factors affecting
our financial results.
Revenues
We have disclosed revenues and costs for ATM operation business from the fiscal year ended
March 31, 2009 because the amount of losses related to the business has become materially large.
Currently, we have two segments: Network services and systems integration business and ATM
operation business. Network services and systems integration business is comprised of: Connectivity
and outsourcing services, Systems integration and Equipment sales.
Connectivity and outsourcing services revenues
Connectivity and outsourcing services revenues consist of our revenues from connectivity
services for corporate use, our revenues from connectivity services for home use, our revenues from
outsourcing services revenues. Our connectivity and outsourcing services revenues accounted for
50.3% of our revenues for the fiscal year ended March 31, 2009, 46.8% for the fiscal year ended
March 31, 2008, and 42.7% of our revenues for the fiscal year ended March 31, 2007. As our
connectivity services customers are more likely to use our outsourcing services or systems
integration services as their network needs develop, connectivity services are also important for
the growth of our outsourcing services or systems integration business.
44
Connectivity services for corporate use
Our revenues from connectivity services for corporate use accounted for 18.8% of our total
revenues for the fiscal year ended March 31, 2009, 18.2% for the fiscal year ended March 31, 2008,
and 19.7% for the fiscal year ended March 31, 2007. Revenues from connectivity services for
corporate use depend on the size of our customer base, the average contracted bandwidth and unit
price of our services. The market for connectivity services for corporate users is generally
following three trends:
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|
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Increased contracted bandwidth.
Total contracted bandwidth for connectivity services
for corporate user increased to 530.5 Gbps for the fiscal year ended March 31, 2009
from 392.4 Gbps for the previous fiscal year. The number of IP Service contracts for
the bandwidth over 100Mbps increased to 319 for the fiscal year ended March 31, 2009
from 271 for the previous fiscal year. This increase is mainly due to an increase in
customers demand for higher bandwidth for their Internet connectivity. The total
contracted bandwidth for connectivity services for corporate users are calculated by
adding the contracted bandwidth for the each of the following service: IP Service, IIJ
Data Center Connectivity Service and Broadband Services. The average monthly revenues
per contract for IP Services were approximately ¥0.5 million at the end of March 2009,
compared to the revenues per contract of ¥0.6 million at the end of March 2008. Though
we do not expect revenue per contract to grow in the fiscal year ending March 31, 2010
due to continuing competition, we believe that customer demand for higher bandwidth
will continue as the use of broadband by corporate customers expands, and we will try
to acquire new customers and increase the bandwidth of existing customers as well as
maintain the quality of our services to differentiate them from those of our
competitors.
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Increased demands for broadband services.
Demand for broadband services such as IIJ
FiberAccess/F, IIJ DSL/F and IIJ DSL/A are increasing steadily as the services are
used more often to connect corporate branches and remote offices. The services uses
ADSL lines at maximum 47 Mbps speed or optical lines at maximum 10 Mbps, 100 Mbps or
1Gbps as access lines. The number of contracts for IIJ FiberAccess/F and IIJ DSL/F
increased to 26,023 for the fiscal year ended March 31, 2009 from 23,539 for the
previous fiscal year. We also expect that it will also contribute to the increase of
outsourcing services and systems integration revenues as usage and implementation of
these connectivity services will increase the demand for outsourcing services such as
security services and network systems integration.
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Increased demands for Mobile Data Communications services.
Demand for our mobile
data communications service, IIJ Mobile Service, which is provided under MVNO is
increasing rapidly after the introduction in January 2008. Corporate customers who are
highly security conscious are looking for data communication services with high
security features such as VPN access and private access. We also expect that it will
also contribute to the increase of outsourcing services and systems integration
revenues as usage and implementation of these connectivity services will increase the
demand for outsourcing services such as security services and network systems
integration.
|
Connectivity services for home use
Our revenues from connectivity services for home use accounted for 9.4% of our total revenues
for the fiscal year ended March 31, 2009, 8.1% for the fiscal year ended March 31, 2008, and 3.5%
for the fiscal year ended March 31, 2007. Revenues from connectivity services for home user depend
on the size of our customer base and pricing. The size of our customer base depends primarily on
the popularity of services under the hi-ho brand name, our OEM services, and the attractiveness of
our service offerings which is measured primarily by the quality of service provided to subscribers
and our ability to attract new customers by offering remote access solutions in combination with
various access and security services.
Although we also market some services under the IIJ brand name, due to our limited brand name
recognition among consumers not familiar with the Internet and our limited marketing budget, a
primary focus of our efforts to increase our revenues from individual consumers is our range of OEM
services and services under the hi-ho brand name. For example of OEM services, Excite Japan Co.,
Ltd. markets and sells Internet connectivity services to individual customers under their own names
but provides such services through our Internet network infrastructure.
From fiscal year ended March 31, 2009, there were full contributions from hi-ho which we
acquired in June 2007. While the number of contracts for connectivity services for home use
decreased to 443,412 as of March 31, 2009 compared to 473,266 as of March 31, 2008, users are
shifting from dial-up and ADSL services to optical line services which charges higher monthly fees.
Additionally, from December 2008, high-speed mobile data communications service for home use was
introduced under hi-ho and the IIJ brand.
45
Outsourcing Services
Our revenues from outsourcing services accounted for 22.1% of our total revenues for the
fiscal year ended March 31, 2009, 20.5% for the fiscal year ended March 31, 2008, and 19.5% of our
revenues for the fiscal year ended March 31, 2007. Outsourcing services consist of network-related
services, server-related services, security-related services and data center-related facility
services and operation and management services. For the fiscal year ended March 31, 2009,
outsourcing services revenues increased to ¥15.4 billion from ¥13.7 billion for the fiscal year
ended March 31, 2008 and from ¥11.1 billion for the fiscal year ended March 31, 2007. The increase
is primarily due to the increasing demands for these services from our corporate connectivity
customers.
The growth of these services is primarily due to the increase in demand for security services,
data center services and network outsourcing services such as e-mail security services, data center
operations, VPN services for customers internal networks and customer support. We expect that
business customers will continue to increase their use of the Internet as a business tool and will
increasingly rely on an expanding range of outsourcing services to enhance productivity, reduce
costs and improve service reliability. As a result, we expect our revenue from outsourcing services
will continue to grow.
Systems integration revenues, including related equipment sales revenues
Our systems integration revenues consists of systems construction and systems operation and
maintenance.
Systems construction, which are one-time revenues, accounted for 21.0% of our total revenues
for the fiscal year ended March 31, 2009, 27.0% for the fiscal year ended March 31, 2008, and 29.2%
for the fiscal year ended March 31, 2007. Systems integration revenues, including related equipment
sales revenues for the fiscal year ended March 31, 2008 decreased by 18.7% from the previous fiscal
year heavily affected by the lack of IT investment. In the previous year, there was a large-scale
systems construction project whereas in the fiscal year ended March 31, 2009, there were mainly
small sized network related construction projects.
Systems operation and maintenance, which are monthly recurring revenues, accounted for 27.3%
of our total revenues for the fiscal year ended March 31, 2009, 23.9% for the fiscal year ended
March 31, 2008, and 24.3% for the fiscal year ended March 31, 2007. Systems operation and
maintenance showed steady increase as systems operation and maintenance revenues accumulates
followed by the completion of systems construction projects.
While recurring revenues from systems operation and maintenance is expected to show steady
increase, we expect one-time revenues from systems construction to continue to be strongly affected
by the Japanese economic situation and also by seasonal fluctuations in the fiscal year. The
primary seasonal variations in systems construction revenues relate to budgetary cycles of Japanese
companies which mostly ends in March. Systems construction revenues can also fluctuate
significantly in accordance with the absence or addition of a single large order, and are
accordingly difficult to forecast. However, in the mid-to long term, we believe systems integration
will drive growth in revenues and operating income.
Equipment sales revenues
Our equipment sales revenues consist primarily of sales of networking and other related
equipment, other than that provided in connection with our systems integration services. Our
equipment sales revenues accounted for 1.4% of our total revenues for the fiscal year ended March
31, 2009, 2.3% for the fiscal year ended March 31, 2008, and 3.8% for the fiscal year ended March
31, 2007. Our equipment sales revenues can fluctuate significantly, in accordance with the absence
or addition of a single large order, and are accordingly difficult to forecast.
ATM Operation Business revenues
ATM operation business revenues consist primarily of commissions for each withdrawing
transaction with the use of ATMs. ATMs commission collected from each withdrawal are aggregated
every month and recognized as ATM operation revenues. Our ATM operation business is currently in
the stage of business startup and there are risks of not able to introduce ATMs along with its plan
or will not record ATM withdrawal transaction as anticipated, and we may not be able to achieve the
expected revenue.
During the fiscal year ended March 31, 2009, Trust Networks completed its field test of 10
ATMs operations and aims to introduce around 8,000 ATMs in four to five years from the fiscal year
ending March 31, 2010. Revenue from our ATM operation business was ¥23 million for the fiscal year
ended March 31, 2009 and as of June 30, 2009, Trust Networks operated 26 ATMs.
46
Additional factors affecting revenues
A number of other factors may affect demand for our services and in turn our revenues,
including overall increases in business usage of Internet and network solutions and our range of
service offerings.
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Increase in business usage.
Our revenues will be affected by the extent and speed
with which businesses in Japan exploit the Internet and network solutions to their full
potential, including, for example, electronic transactions between businesses and
expanding the range of devices that access the Internet. Such services require
high-quality and high-capacity connectivity services for both businesses and
individuals. Such services also require provision of total network solutions including
various Internet connectivity services, systems integration and other outsourcing
services which we believe we are well positioned to provide. The degree of business
usage will also depend upon a variety of factors including:
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|
technological advances, reliability of security systems and users familiarity
with and confidence in new technologies,
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|
|
|
|
the rate at which Japanese companies in certain industries significantly
increases their Internet usage, and
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corporate budgets for information technologies, including Internet-related items.
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Range of service offerings.
To increase our revenues from business users, we provide
a wide variety of services and are introducing new services. For Internet connectivity
services, we added mobile access service. Additionally, we introduced security options
for the mobile service which are accounted in outsourcing service revenues. We have
also opened a new Internet data centers to strengthen our multi-site data center
solutions. We believe these steps will allow us to sell a greater variety of services
to our high-end corporate users and to capture a greater amount of the current growth
and demand. However, we will still be strongly dependent on Japanese companies and by
their Information Technology budgets. The weak Japanese economy is also expected to
continue to affect our overall revenues, especially with respect to systems
construction revenues. We expect Internet usage to continue to grow rapidly in Japan
and that businesses will continue to diversify their uses of the Internet. Our ability
to offer a broad range of services to meet our customers demands will significantly
influence our future revenues.
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Synergies between connectivity services, outsourcing services and systems
integration.
Most of our systems integration customers become Internet connectivity
service customers as well, and we expect these relationships to continue. As part of
our systems integration business, we offer solution services for corporate information
network systems, consulting, project planning, system design and systems/operation
outsourcing or Internet VPN solution services which combines the FLETS Internet
connectivity services with the SEIL, adopted by customers who have multiple locations,
such as branches, offices and factories. The number of contracts concerning these
services is steadily increasing and we seek to enlarge these network integration
services with relatively high gross margin services. The ability to introduce a wide
range of services, including solutions necessary to build corporate information network
systems, like disaster recovery services and Internet VPN, Voice over IP (VoIP),
SEIL, private mobile access solutions, SEIL/SMF and wireless LAN service, is an
important competitive factor.
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Synergies between group companies.
The group works together as a team to provide
network solutions to our customers, mainly corporate and governmental organizations.
|
Costs and expenses
Costs and expenses include cost of connectivity and outsourcing services revenues, cost of
systems integration revenues and equipment sales, Cost of ATM operation business, sales and
marketing, general and administrative and research and development expenses.
Cost of connectivity and outsourcing services revenues
Our primary cost of connectivity and outsourcing services revenues is the leasing fees that we
pay for the leased lines which comprise our network and for the dedicated local access lines that
our subscribers use to connect with our network. Other primary components of our costs are
depreciation and amortization of capital leases for network equipment, personnel and other expenses
for technical and customer support staff and network operation center costs. Most of our network
equipment is leased rather than purchased to take advantage of the financing provided by a capital
lease arrangement.
We have made continuous investments in the past few years in developing and expanding our
network. However, due to a slight increase in procurement prices for backbone circuits, our costs
have slightly increased. For the fiscal year
ended March 31, 2009, our leased line and other connectivity costs were ¥12.3 billion or 35.0%
of our connectivity and outsourcing services revenues. For the previous fiscal year, these costs
were ¥10.9 billion or 35.0% of our connectivity and outsourcing services revenues.
47
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|
|
Backbone cost.
Backbone cost for the fiscal year ended March 31, 2009 was ¥3.7
billion, a slight increase compared to the fiscal year ended March 31, 2008. We do not
expect that our backbone cost will increase significantly as compared with recent
fiscal years.
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|
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Dedicated local access line costs.
We collect dedicated local access line fees from
subscribers and pay these fees over to the carriers. Dedicated local access line costs
for the fiscal year ended March 31, 2009 were ¥8.1 billion, increased by 14.2%,
compared to the cost for the fiscal year ended March 31, 2008. This increase was mainly
resulted from the additional cost related to hi-ho, which we acquired in June 2007, of
¥2.9 billion (12 months) for the fiscal year ended March 31, 2009 compared to ¥2.1
billion (10 months) for the previous fiscal year. Other connectivity costs were ¥0.5
billion for the fiscal year ended March 31, 2009 compared to ¥0.4 billion for the
previous fiscal year.
|
Depreciation and amortization cost increased to ¥3.5 billion for the fiscal year ended March
31, 2009 from ¥2.9 billion for the fiscal year ended March 31, 2008. Capital expenditures for the
fiscal year ended March 31, 2009 increased to ¥7.0 billion from ¥6.1 billion for the fiscal year
ended March 31, 2008. We do not expect that the depreciation and amortization will change
significantly compared with recent fiscal years.
Costs of systems integration revenues and equipment sales
Our cost of systems integration revenues and equipment sales generally increases or decreases
in tandem with systems integration revenues and equipment sales revenues. In addition, as we incur
significant systems integration costs up front in connection with the provision of new types of
systems integration service or commencement of a systems integration project, our margins tend to
improve as the number of our customers grows and to the extent we provide ongoing systems
integration services, especially operation and maintenance services, for existing customers. The
main determinant of whether our costs will be high relative to our revenues is whether we are able
to generate significantly higher margin systems integration work. To do so, we must generate
systems integration work that relies more heavily on our engineering and technological expertise
instead of systems integration work that primarily focuses on the delivery of networking equipment.
By doing more planning, designing and engineering-related work rather than just equipment
procurement, we believe that not only will we be able to increase our margins, but we will also be
able to increase customer satisfaction and our subscriber retention and repeat business rates
because we will be able to provide our customers with advanced and cost-effective total Internet
solutions. However, during the fiscal year ending March 31, 2010, we will focus on controlling
personnel and outsourcing costs adequately with the assumption that systems construction revenue
will not increase much due to by the weak Japanese economy.
Costs of ATM Operation Business
Our cost of ATM operation business consists primarily of systems related cost including up
front application development and outsourcing related costs. During the fourth quarter of fiscal
year ended March 31, 2009, the ATM operation business recorded approximately ¥0.2 billion in cost
and we expect that this level in cost will continue quarter by quarter in the fiscal year ending
March 31, 2010. In addition, if the ATM operation business start up in accordance with its plan,
additional capital expenditures including capitalized lease related to the placement of ATMs in
Japanese PACHINKO parlors, operation and maintenance fees and other costs will increase.
Sales and marketing
Our sales and marketing expenses consist primarily of costs related to personnel, sales
activities, marketing activities, general advertising expenses and written-off accounts receivable.
Our sales and marketing expenses will increase to the extent that we expand our operations and
increase our sales and marketing activities. We expect sales and marketing expenses to slightly
increase in the fiscal year ending March 31, 2010 in accordance with our business growth.
General and administrative
Our general and administrative expenses include primarily expenses associated with our
management, accounting, finance and administrative functions, including personnel expenses. Our
general and administrative expenses will increase to the extent that we grow our business and add
new graduates. We expect general and administrative expenses to slightly increase in the fiscal
year ending March 31, 2010 in accordance with our business growth. However, we plan to keep tight
control over the number of outsourcing personnel and hiring of personnel other than new graduates.
Research and development
Our research and development expenses include primarily expenses associated with personnel
expenses related to research and development activities. Our research and development expenses will
increase to the extent that we expand
our research and development activities. We expect the research and development expenses will
increase for the fiscal year ending March 31, 2010 as we focus on strengthening our research and
development organizations.
48
Other income (expenses)
Our other income and expenses include interest income and expenses and other primary items
such as foreign exchange gains or losses, gains on sales of other investments and impairment losses
on write-downs of investments in certain marketable and nonmarketable equity securities.
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Interest expense.
Most of our interest expense is from bank borrowing and capital
leases. Interest income and interest expenses are also affected by the fluctuation of
market interest rates and our total amount of outstanding borrowings. As we increase
capital leases or borrowings in order to finance further development of our backbone
and data centers and for other investments, interest expenses will also increase.
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Losses on write-down of other investments.
We hold other investments comprised of
available-for-sale securities, nonmarketable equity securities and funds. The book
values of other investments are affected by the fluctuation in the market price or the
decrease in fair values of nonmarketable investments and funds. If a decrease below
cost in the market price or fair value of an investment is judged to be other than
temporary, we will have impairment losses on other investments.
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Income Tax Expense (Benefit)
Our income tax expense (benefit) is affected by deferred tax assets related to tax operating
carryforwards. We recorded ¥1.7 billion of deferred tax benefits for the fiscal year ended March
31, 2008 and a deferred tax expense of ¥0.6 billion for the fiscal year ended March 31, 2009. As of
March 31, 2009, we had deferred tax asset (current) of ¥0.8 billion and deferred tax asset
(noncurrent) of ¥2.3 billion, respectively, which will result in deferred tax expense in the
future.
E. Off-Balance Sheet Arrangements.
We do not have any off-balance sheet arrangements as is defined for purposes of Item 5.E. of
Form 20-F.
F. Tabular Disclosure of Contractual Obligations.
The following table shows our material contractual payment obligations under our agreements as of
March 31, 2009:
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Payments due by period (in millions of yen)
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Contractual Obligations
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Total
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less than
1 year
|
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1-3 years
|
|
|
3-5 years
|
|
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more than
5 years
|
|
Capital lease obligations
|
|
|
8,514
|
|
|
|
3,482
|
|
|
|
2,297
|
|
|
|
1,093
|
|
|
|
1,386
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|
Operating lease obligations
|
|
|
8,128
|
|
|
|
3,352
|
|
|
|
4,390
|
|
|
|
641
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total
(1) (2) (3) (4)
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|
¥
|
16,642
|
|
|
¥
|
6,834
|
|
|
¥
|
6,687
|
|
|
¥
|
1,734
|
|
|
¥
|
1,387
|
|
|
|
|
|
|
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(1) In addition to the above;
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We plan to contribute ¥167 million to our defined benefit pension plan for the fiscal
year ending March 31, 2009.
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In May 2006, in January 2007 and in January 2008, IIJ made agreements (three agreements
in total) to invest in funds which invest mainly in unlisted stocks with an investment
advisory company. IIJ committed to provide up to $5 million for each fund ($15 million in
total) at its request in several future years. IIJ has provided a total of ¥500,000
thousand ($5,043 thousand) to them as of March 31, 2008. (Please refer to Note 15 to our
consolidated financial statements).
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(2)
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The table above does not include short term borrowings. For short term borrowings, see Item
5.B Liquidity and Capital Resource and Note 9 Borrowings to our consolidated financial
statements included in this annual report on Form-20F.
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(3)
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The table above does not include obligations for interest payments on debt, as such payments
are not material. For interest payments regarding capital lease, see Note 8 Lease to our
consolidated financial statements included in this annual report on Form 20-F.
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(4)
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The table above does not include an unrecognized tax benefit of ¥66 million. For
unrecognized tax benefit, see Note 10 Income Taxes to our consolidated financial statements
included in this annual report on Form 20-F.
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49
Item 6. Directors, Senior Management and Employees.
A. Directors and Senior Management.
The following table provides information about our directors, executive officers and company
auditors as of June 26, 2009:
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Initial date of
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appointment as
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director, executive
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Number of IIJ
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|
|
|
|
|
|
|
officer or company
|
|
shares owned as of
|
Name
|
|
Position
|
|
Date of birth
|
|
Current term expires
|
|
auditor
|
|
September 18, 2009
|
Koichi Suzuki
|
|
President, Chief Executive Officer and Representative Director
|
|
Sep. 3, 1946
|
|
June 2012
|
|
Dec. 1992
|
|
|
12,846
|
|
Hideshi Hojo
|
|
Senior Managing Director
|
|
Dec. 22, 1957
|
|
June 2012
|
|
June 2000
|
|
|
*
|
|
Hitoshi Imafuku
|
|
Senior Managing Director
|
|
Apr. 2, 1957
|
|
June 2012
|
|
June 2009
|
|
|
*
|
|
Chiaki Furuya
|
|
Managing Director
|
|
Jul. 11, 1949
|
|
June 2012
|
|
June 2009
|
|
|
*
|
|
Takamichi Miyoshi
|
|
Director
|
|
May 5, 1963
|
|
June 2010
|
|
June 2002
|
|
|
*
|
|
Akihisa Watai
|
|
Director, Chief Financial Officer and Chief Accounting Officer
|
|
Sep. 30, 1965
|
|
June 2010
|
|
June 2004
|
|
|
*
|
|
Kazuhiro Tokita
|
|
Director
|
|
Apr. 25, 1969
|
|
June 2012
|
|
June 2005
|
|
|
*
|
|
Junichi Shimagami
|
|
Director
|
|
Apr. 17, 1967
|
|
June 2012
|
|
June 2007
|
|
|
*
|
|
Kiyoshi Ishida
|
|
Director
|
|
Nov. 22, 1960
|
|
June 2010
|
|
June 2008
|
|
|
*
|
|
Yasurou Tanahashi
|
|
Director
|
|
Jan. 4, 1941
|
|
June 2010
|
|
June 2004
|
|
|
Takashi Hiroi
|
|
Director
|
|
Feb. 13, 1963
|
|
June 2010
|
|
June 2004
|
|
|
Junnosuke Furukawa
|
|
Director
|
|
Dec. 5, 1935
|
|
June 2012
|
|
June 2005
|
|
|
Senji Yamamoto
|
|
Director
|
|
Apr. 14, 1946
|
|
June 2010
|
|
June 2006
|
|
|
*
|
|
Shingo Oda
|
|
Director
|
|
Nov. 8, 1944
|
|
June 2010
|
|
June 2008
|
|
|
Junichi Tate
|
|
Company Auditor
|
|
Nov. 6, 1949
|
|
June 2012
|
|
June 2006
|
|
|
Masaki Okada
|
|
Company Auditor
|
|
Jan. 9, 1959
|
|
June 2012
|
|
June 2004
|
|
|
Masaaki Koizumi
|
|
Company Auditor
|
|
Oct. 4, 1964
|
|
June 2012
|
|
June 2004
|
|
|
Hirofumi Takahashi
|
|
Company Auditor
|
|
Sep. 1, 1939
|
|
June 2012
|
|
June 2005
|
|
|
*
|
|
|
|
|
*
|
|
Owns less than 1% of outstanding shares of IIJs common stock.
|
Koichi Suzuki
has been our president and representative director since April 1994, and has
approximately 30 years of experience in the computer and communications industries. In addition,
Mr. Suzuki is chairman of IIJ-Tech and hi-ho, and president of Net Care, Multifeed and GDX. He also
serves as chairman of IIJ-A, and a director of i-Heart, TCC and IIJ-II. From December 1992 to April
1994, Mr. Suzuki was a director of IIJ. Prior to joining us, Mr. Suzuki was employed at Japan
Management Association where he served as a general manager.
Hideshi Hojo
has served as senior managing director of IIJ since June 2006 and as division
director of the Sales Department since August 2003. Mr. Hojo is also a director of Net Care, i-revo
and NCJ, and president of ODS. From February 1998 to June 2000, Mr. Hojo acted as general manager
of the Sales Division, from June 2000 to June 2002, as a director and from June 2002 to August
2003, as managing director and division director of the Sales & Marketing Department. Mr. Hojo
joined us in 1996. Prior to joining us, Mr. Hojo had 16 years of experience in the field of sales
working for the Itochu Group.
Hitoshi Imafuku
was appointed as senior managing director of IIJ in June 2009. Mr. Imafuku
joined us in 2009 and is serving as Director in charge of Business Planning. Mr. Imafuku joined
Nippon Telegraph and Telephone Public Corporation in April 1980 and prior to joining us, he worked
as Kagoshima General Manager of Nippon Telegraph and Telephone West Corporation from July 2006.
Chiaki Furuya
was appointed as a managing director of IIJ in June 2009 and will serve as
division director of the Administrative Department. Mr. Furuya has joined us as our advisor in
October 2008. Mr. Furuya joined Japan Broadcasting Corporation from April 1973 and prior to joing
us, he worked as Head of secretarys office of Japan Broadcasting Corporation from June 2006.
Takamichi Miyoshi
has served as a director of IIJ since June 2002 and as a director and
general manager of the Strategy Planning Division since April 2004. Mr. Miyoshi is also a director
of Multifeed. Mr. Miyoshi joined us in April 1993. From October 1994, Mr. Miyoshi acted as general
manager of the Network Operations and Systems Administration
Division.
50
Akihisa Watai
has served as a director, chief financial officer and chief accounting officer
since June 2004. Mr. Watai is a director of NCJ and Trust Networks, and a company auditor of
i-revo, TCC, ODS and IIJ-II. Mr. Watai joined
The Sumitomo Bank, Limited (currently Sumitomo Mitsui Banking Corporation) in April 1989 and
was temporarily transferred to IIJ from August 1996. In February 2000, Mr. Watai joined IIJ
permanently and has been general manager of the Finance Division since April 2004.
Kazuhiro Tokita
has served as a director since June 2005, was division director of the
Solution Department from April 2006 to March 2008 and has been division director of the Service
Business Department since April 2008. Mr. Tokita is also a director of IIJ-Tech and IIJ-FS. Mr.
Tokita was a deputy division director of the Sales Department from April 2005 to March 2006. Mr.
Tokita joined us in May 1995. Prior to joining us, Mr. Tokita was employed at Yasuda Kasai Systems
Co., Ltd (Currently Sompo Japan Systems Solutions Inc.).
Junichi Shimagami
has served as a director since June 2007 and has been division director of
the Network Service Department since April 2007. Mr. Shimagami is also a director of Multifeed and
hi-ho. Mr. Shimagami served as division director of the Network Engineering Section from April 2004
to March 2007. Mr. Shimagami joined us in 1996. Prior to joining us, Mr. Shimagami worked at Nomura
Research Institute, Ltd., which he joined in April 1990.
Kiyoshi Ishida
has served as a director of IIJ since June 2008 and has been division director
of the SEIL Business Unit since April 2006. Mr. Ishida joined us in March 1996. Prior to joining
us, Mr. Ishida worked at SEIKO Systems Inc. (Currently SEIKO Precision Inc.), which he joined in
April 1985.
Yasurou Tanahashi
has served as an outside director of IIJ since June 2004. Mr. Tanahashi has
served as an advisor of NS Solutions Corporation, an affiliated company of Nippon Steel Corporation
from June 2007 to June 2009. Mr. Tanahashi had been a president and representative director of NS
Solutions Corporation since April 2000 and had been chairman of NS Solutions Corporation since
April 2003.
Takashi Hiroi
has served as an outside director of IIJ since June 2004. Mr. Hiroi joined NTT
in April 1986 and has served as senior manager of the Corporate Management Strategy Division of NTT
from May 2005 to June 2008. Mr. Hiroi is serving as Strategic Business Development Division of NTT
since June 2008.
Junnosuke Furukawa
has served as an outside director of IIJ since June 2005. Furukawa had been
an advisor of The Furukawa Electric Co., Ltd. Mr. Furukawa was a director, member of the board and
senior advisor of The Furukawa Electric Co., Ltd. from June 2004 to May 2005. From June 1995, Mr.
Furukawa was president and CEO of The Furukawa Electric Co., Ltd. and from June 2003, Mr. Furukawa
was chairman and CEO of The Furukawa Electric Co., Ltd.
Senji Yamamoto
has served as a director of IIJ since June 2006. Mr. Yamamoto has been vice
chairman and representative director of IIJ-Tech, and president and representative director of
IIJ-FS since June 2006. From June 2000 to October 2005, Mr. Yamamoto was president and CEO of Sony
Communication Network Corporation (Currently So-net Entertainment Corporation).
Shingo Oda
has served as an outside director of IIJ since June 2008. From May 2005 to November
2007, Mr. Oda was president and representative director of Hewlett-Packard Japan, Ltd. From
February 2002, Mr. Oda was vice president and representative director of Hewlett-Packard Japan,
Ltd.
Junichi Tate
has been an outside company auditor of IIJ since June 2006. Mr. Tate is a company
auditor of IIJ-Tech, Net Care, NCJ, hi-ho and Trust Networks. Mr. Tate was a staff general manager
of Corporate Planning Department No.2 of Dai-Ichi Life Insurance Company.
Masaki Okada
has been an outside company auditor of IIJ since June 2004. Mr. Okada is admitted
to the Dai-ni Tokyo Bar Association and joined Ishii Law Office in April 1988. Mr. Okada has been a
partner in Ishii Law Office since April 1997.
Masaaki Koizumi
has been an outside company auditor of IIJ since June 2004. Mr. Koizumi is a
Japanese Certified Public Accountant and joined Eiwa & Co. (Currently Azsa & Co.) in October 1987.
Mr. Koizumi retired from Azsa & Co. in September 2003 and established Koizumi CPA Office in October
2003.
51
Hirofumi Takahashi
has been a company auditor of IIJ since June 2005. Mr. Takahashi joined us
in August 2002 as an Advisor. Prior to joining us, Mr. Takahashi was chairman and representative
director of Shinko Investment Trust Management. He has approximately 40 years of experience in the
financial industry.
B. Compensation.
For the fiscal year ended March 31, 2009, the aggregate compensation we paid or accrued for
all of our executive officers, directors and company auditors was approximately ¥545 million. We
established a retirement plan for full-time directors in March 2007. We recorded a liability for
retirement benefits for standing directors and company auditors of ¥293 million, which would be
required if they retire as of March 31, 2009. The liability for retirement benefits of ¥56 million
recognized for the fiscal year ended March 31, 2009 is included in the aggregate amount of
compensation shown above. For a description of our stock option and warrant issuances to directors
and employees, see Item 6.E.
C. Board Practices.
In accordance with the Corporation Law of Japan and our Articles of Incorporation, our
directors are elected at a general meeting of shareholders and our Board of Directors consists of
minimum of 3 and maximum of 14 directors. While the normal term of office of a director is two
years, a director may serve any number of consecutive terms. We do not have audit or remuneration
committees, as is the standard practice in Japan. We do not have any service contracts with any of
our directors providing for benefits upon termination of their employment.
We have a Board of Company Auditors as well as an accounting auditor who is an independent
certified public accountant. In accordance with the Corporation Law of Japan and our Articles of
Incorporation, our Board of Company Auditors consists of minimum of three company auditors, of whom
at least half must be from outside of the company, and company auditors are elected at a general
meeting of shareholders. Currently, three of our four company auditors are outside company
auditors. While the normal term of office of a company auditor is four years, a company auditor may
serve any number of consecutive terms. Our company auditors are under a statutory duty to supervise
the execution of duties by the directors, to investigate proposals and documents to be submitted by
the Board of Directors to the general meetings of shareholders and report their opinions thereon to
the shareholders, if necessary. They are required to attend meetings of the Board of Directors and
to express their opinions if necessary, but they are not entitled to vote. Each of our company
auditors also have a statutory duty to audit business reports and examine the audit report on our
financial statements prepared by our accounting auditor, and provide a report thereon to the
entire Board of Company Auditors, which must, in turn, submit its audit report to the Board of
Directors and/or the general meetings of shareholders. The Board of Company Auditors will also
determine matters relating to the duties of company auditors, such as audit policy and methods of
investigation of our affairs.
Following the requirements of the Company Law of Japan, we require a director to obtain the
approval of the Board of Directors in order for such director to accept a transfer of a product or
any other asset of IIJ, to transfer a product or any other asset of such director to IIJ, to
receive a loan from IIJ, or to effect any other transaction with IIJ, for himself or a third party.
If we issue common shares or other shares, stock acquisition rights or bonds with stock
acquisition rights under the Company Law of Japan, it is necessary for the Board of Directors to
determine the conditions of issuance. Additionally, if the company issues such securities to
persons other than shareholders (in case of common shares or other shares) at a specially favorable
issue price or (in case of stock acquisition rights or bonds with stock acquisition rights) on
specially favorable conditions, even when there are provisions related thereto in the Articles of
Incorporation, some matters related to such issuance shall be resolved by special resolution of the
shareholders meeting.
The rights of ADR holders, including their rights relating to corporate governance practices,
are provided in the deposit agreement which is an exhibit to this annual report.
LIMITATION OF LIABILITIES OF SOME OUTSIDE DIRECTORS AND AUDITORS
We have entered into an agreement with four of our outside directors, Mr. Junnosuke Furukawa,
Mr. Yasurou Tanahashi, Mr. Takashi Hiroi and Mr. Shingo Oda, and two of our outside company
auditors, Mr. Masaki Okada and Mr. Masaaki Koizumi that limits their liabilities to us for damages
suffered by us due to their acts taken in good faith and without gross negligence, amounting to ¥10
million or the aggregate of the amounts set forth in Article 427 paragraph 1 of the Corporation Law
of Japan, whichever is higher.
52
D. Employees.
As of March 31, 2009, we had 1,602 employees, including employees of our consolidated
subsidiaries, and we had 1,373 employees as of March 31, 2008 and 1,115 employees as of March 31,
2007. The following table shows the breakdown of the employees by main category of activity.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the fiscal year ended March 31,
|
|
|
2007
|
|
2008
|
|
2009
|
|
|
(number of employees)
|
Engineering
|
|
|
792
|
|
|
|
941
|
|
|
|
1,075
|
|
Sales
|
|
|
204
|
|
|
|
245
|
|
|
|
298
|
|
Administration
|
|
|
159
|
|
|
|
187
|
|
|
|
229
|
|
Except for the 23 employees in the United States employed by our subsidiary, IIJ-A, all of our
employees work in Japan. We have never experienced any labor disputes and consider our labor
relations to be good. To our knowledge, none of our employees is a member of any union.
E. Share Ownership.
The information on share ownership required by this item is in Item 6.A. Directors and Senior
Management above.
Stock Option Plan
|
|
|
June 2001 Stock Option Plan
. In June 2001, we implemented a stock option plan under
which 395 options to acquire a total of 1,975 shares or 790,000 ADS equivalents, or
approximately 1.8% of total outstanding shares on that date, were granted to 44
directors and employees on August 2, 2001. The option exercise price for the shares was
determined by setting the price 5% above the 30-days average of the closing market
prices beginning 45 days prior to the date of the grant which was ¥403,661 per share
and has been adjusted to ¥334,448 as a result of issuances of common shares. The
options are exercisable for eight years from the date the options became fully vested.
|
|
|
|
|
April 2000 Stock Option Plan
. In April 2000, we implemented a stock option plan
under which our directors and employees were granted 295 options to acquire a total of
1,475 shares or 590,000 ADS equivalents, or approximately 1.2% of total outstanding
shares on that date. The options were granted to 34 directors and employees on May 31,
2000. The option exercise price was determined by setting the price at 5% above the
30-day moving average of closing market prices beginning 45 days prior to the date of
grant, which was ¥2,611,112 per share and has been subsequently adjusted to ¥2,163,418
as a result of issuances of common shares. The options are exercisable for eight years
from the date the options became fully vested.
|
|
|
|
|
March 2001 Warrant Issuance
. On March 31, 2001, certain directors of IIJ were
provided with 375 warrants exercisable for shares of common stock of IIJ-Tech. Each
warrant is exercisable for one share of common stock up to seven or eight years from
the date of grant at an exercise price of ¥300,000 and was purchased for 1% of the
exercise price. In March 2006, 25 of those 375 warrants expired. In March, 2007, 250 of
those 375 warrants were exercised at the exercise price of ¥250,326. The exercise price
was revised from ¥300,000 to ¥250,326, due to the effects of issuances of new shares
during the year ended March 31, 2006. The remaining 100 warrants expired on March 29,
2007.
|
We conducted a 1 to 5 stock split effective on October 11, 2005. The numbers of shares and the
option exercise prices for the two stock option plans above are calculated based on the assumption
that the stock split was made at the time of implementation. For the two stock option plans above,
we had 515 unexercised options outstanding to acquire a total of 2,575 shares of common stock or
1,030,000 ADS equivalents.
Employee Stock Purchase Plan
We have an employee stockholding association that holds 1,844 shares of common stock, or 0.9%
of our outstanding shares, as of March 31, 2009. The association provides designated employees with
the opportunity to purchase shares at market value. Shares are basically held in the name of the
employee stock purchase program until employees leave the association, due to resignation or
retirement. The representative of the employee shareholders association exercises voting rights in
accordance with the instructions of each employee shareholder.
53
Director Stock Purchase Plan
The Director Stock Purchase Plan was implemented in November 2007. The plan provides
designated directors of IIJ and its wholly-owned subsidiaries with the opportunity to purchase IIJ
common shares at market value, every month, with a fixed amount of their own money through a
designated security broker.
Item 7. Major Shareholders and Related Party Transactions.
A. Major Shareholders.
The following table shows information regarding beneficial ownership of our common stock as of
March 31, 2009 by each shareholder known by us to own beneficially more than 5% of our common stock
and all directors and executive officers as a group. We are not required by Japanese law to
disclose beneficial ownership of our common stock. As explained in Reporting Requirements of
ShareholdersReport of Substantial Shareholdings in Item 10.B. of this annual report on Form
20-F, any person who becomes, beneficially and solely or jointly, a holder of more than 5% of our
outstanding common stock must file a report with the relevant local finance bureau of the Ministry
of Finance. The information in this table is based upon our shareholders of record and reports
filed with the Financial Services Agency and SEC.
|
|
|
|
|
|
|
|
|
|
|
Outstanding Voting Shares
|
|
|
as of March 31, 2009
(3)
|
|
|
Number
|
|
Percentage
|
Nippon Telegraph and Telephone Corporation and affiliates
(1)
|
|
|
60,675
|
|
|
|
30.0
|
%
|
Koichi Suzuki
|
|
|
12,823
|
|
|
|
6.3
|
|
Itochu Corporation
|
|
|
10,430
|
|
|
|
5.1
|
|
Directors and executive officers as a group
(2)
|
|
|
13,830
|
|
|
|
6.8
|
|
|
|
|
(1)
|
|
Includes NTT, which owns 50,475 shares, or 24.9% of our outstanding voting shares and 24.4%
of our total issued shares, and NTT Communications, which owns 10,200 shares, or 5.0% of our
outstanding voting shares and 4.9% of our total issued shares.
|
|
(2)
|
|
Includes Koichi Suzukis holdings which are also separately set forth above and Hirofumi
Takahashis holdings of 6,000 ADRs, which are equivalent to 15 shares of common stock. No
other director or executive officer except for Koichi Suzuki is a beneficial owner of more
than 5%.
|
|
(3)
|
|
In October 2008, the Company resolved at the meeting of Board of directors to repurchase our
own shares. During the authorized repurchasing period, we have purchased 3,934 shares of the
Company and hold them as treasury stock. For details, see Item 16E. Purchase of Equity
Securities by the Issuer and Affiliated Purchasers.
|
Our major shareholders have the same voting rights as other holders of our common stock.
According to our register of shareholders, as of March 31, 2009, there were 4,978 holders of
common stock of record worldwide. As of March 31, 2009, The Bank of New York Mellon, depositary for
our ADSs, held 7.7% of the outstanding common stock on that date. According to The Bank of New York
Mellon, as of March 31, 2009, there were 20 ADR holders of record with addresses in the United
States. Because some of these shares were held by brokers or other nominees, the number of record
holders with addresses in the United States might not fully show the number of beneficial owners in
the United States. Of the 206,478 shares of common stock outstanding as of March 31, 2009, 15,990
shares were held in the form of 6,396,000 ADSs.
B. Related Party Transactions.
NTT-affiliated Companies.
From April 1, 2008 through March 31, 2009, we have paid ¥7.1 billion
for international and domestic backbone and local access line costs to NTT-affiliated companies
such as NTT Communications, NTT East and NTT and NTT West. In addition, we paid ¥3.3 billion for
co-location costs and telecommunication expenses to NTT Communications, NTT East and NTT West and
paid ¥0.3 billion for other costs, mainly outsourcing costs to NTT Communications, NTT East and NTT
West. We received payments of ¥1.1 billion for OEM services, Internet connectivity services and
operation fees for data centers from NTT Communications, NTT East and NTT West. On an ongoing basis
in the ordinary course of business, we pay NTT-affiliated companies for international and domestic
backbone and local access line costs and for co-location costs and telecommunications expenses and
receive payments from NTT-affiliated companies for OEM services, Internet connectivity services and
operating fees for data centers. We do not have any outstanding loans between NTT and its
affiliated companies and us.
54
Transactions with equity method affiliates.
In the ordinary course of business, we have
various sales, purchase and other transactions with companies which are owned 20% to 50% by us and
are accounted for by the equity method. Account balances and transactions with such 20% to 50%
owned companies as of and for the fiscal year ended March 31, 2009 are presented as follows:
|
|
|
|
|
|
|
millions of yen
|
Accounts receivable
|
|
¥
|
67
|
|
Accounts payable
|
|
|
23
|
|
Revenues
|
|
|
672
|
|
Costs and expenses
|
|
|
258
|
|
As of March 31, 2009, we had loans to an equity method investee of which the carrying amount,
net of valuation allowance was ¥35 million.
Except as described above, since March 31, 2005, there has been no transaction with or loan
between us or any of our subsidiaries and:
|
|
|
any enterprise that directly or indirectly controls, is controlled by, or is in common
control with us or any of our subsidiaries,
|
|
|
|
|
any director, officer, company auditor or family member of any of the preceding or any
enterprise over which such person directly or indirectly is able to exercise significant
influence,
|
|
|
|
|
any individual shareholder directly or indirectly having significant influence over us
or any of our subsidiaries or a family member of such individual or any enterprise over
which such person directly or indirectly is able to exercise significant influence, or
their respective family members or enterprises over which they exercise significant
influence, or
|
|
|
|
|
any unconsolidated enterprise in which we have a significant influence or which has a
significant influence over us.
|
C. Interests of Experts and Counsel.
Not applicable.
Item 8. Financial Information.
A. Consolidated Statements and Other Financial Information.
Financial Statements
The consolidated financial statements required by this item begin on page F-1.
Legal or Arbitration Proceedings
The information on legal or arbitration proceedings required by this item is in Item 4.B.
Dividend Policy
Our basic dividend policy is that we pay dividends to our shareholders continuously and in a
stable manner while considering the need to have retained earnings for the enhancement of financial
position, medium and long-term business expansion and new business development. Under Japanese law,
a company is required to have retained earnings, without accumulated deficit, in order to be able
to conduct certain types of capital-related transactions such as payments of dividends in general.
The ordinary general meeting of shareholders held in June 2006 approved the elimination of
accumulated deficit through the reduction of additional-paid in capital and common stock in our
non-consolidated financial statements under generally accepted accounting principles in Japan. In
November 2008, IIJs board of directors resolved to pay an interim cash dividend to shareholders of
record at September 30, 2008 of ¥1,000 per share of common stock. On June 26, 2009, the ordinary
general meeting of shareholders approved the payment of year-end cash dividend to shareholders of
record at March 31, 2009 of ¥1,000 per share of common stock.
55
B. Significant Changes.
Except as otherwise disclosed in this annual report on Form 20-F, there has been no
significant change in our financial condition since March 31, 2009, the date of our last audited
financial statements.
Item 9. The Offer and Listing.
A. Offer and Listing Details.
ADSs representing our common stock have been quoted on the Nasdaq market since August 4, 1999
under the symbol IIJI and were transferred from the Nasdaq Global Market to the Nasdaq Global
Select Market on June 11, 2007. The current ADS/share ratio is 400 ADSs per 1 share of our common
stock. Our shares of common stock have been quoted on the Mothers market of the TSE since December
2, 2005 under the stock code number 3774 and were transferred to the First Section of the TSE on
December 14, 2006.
The following table shows, for the periods indicated, the high and low price of our ADSs and
shares of common stock on the TSE for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nasdaq
(1)
|
|
TSE
(1) (2)
|
|
|
(per ADS)
|
|
(per share of common stock)
|
Fiscal year ended/ending March 31,
|
|
High
|
|
Low
|
|
High
|
|
Low
|
2005
|
|
$
|
6.24
|
|
|
$
|
2.11
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
14.88
|
|
|
|
3.04
|
|
|
¥
|
584,000
|
|
|
¥
|
409,000
|
|
2007
|
|
|
10.65
|
|
|
|
6.41
|
|
|
|
517,000
|
|
|
|
296,000
|
|
2008
|
|
|
11.00
|
|
|
|
6.21
|
|
|
|
490,000
|
|
|
|
270,000
|
|
First Quarter
|
|
|
9.98
|
|
|
|
7.45
|
|
|
|
473,000
|
|
|
|
351,000
|
|
Second Quarter
|
|
|
8.94
|
|
|
|
6.21
|
|
|
|
432,000
|
|
|
|
284,000
|
|
Third Quarter
|
|
|
11.00
|
|
|
|
8.11
|
|
|
|
490,000
|
|
|
|
378,000
|
|
Fourth Quarter
|
|
|
10.59
|
|
|
|
6.98
|
|
|
|
447,000
|
|
|
|
270,000
|
|
2009
|
|
|
9.72
|
|
|
|
1.80
|
|
|
|
428,000
|
|
|
|
71,800
|
|
First Quarter
|
|
|
9.72
|
|
|
|
7.80
|
|
|
|
428,000
|
|
|
|
315,000
|
|
Second Quarter
|
|
|
9.40
|
|
|
|
3.97
|
|
|
|
417,000
|
|
|
|
176,100
|
|
Third Quarter
|
|
|
5.38
|
|
|
|
1.82
|
|
|
|
251,900
|
|
|
|
71,800
|
|
Fourth Quarter
|
|
|
3.43
|
|
|
|
1.80
|
|
|
|
107,800
|
|
|
|
77,900
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
4.40
|
|
|
|
2.50
|
|
|
|
169,000
|
|
|
|
99,500
|
|
Month
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2009
|
|
|
3.43
|
|
|
|
2.19
|
|
|
|
105,100
|
|
|
|
79,000
|
|
February 2009
|
|
|
2.76
|
|
|
|
1.88
|
|
|
|
100,900
|
|
|
|
79,000
|
|
March 2009
|
|
|
2.66
|
|
|
|
1.80
|
|
|
|
107,800
|
|
|
|
77,900
|
|
April 2009
|
|
|
3.55
|
|
|
|
2.50
|
|
|
|
141,900
|
|
|
|
99,500
|
|
May 2009
|
|
|
4.40
|
|
|
|
3.40
|
|
|
|
169,000
|
|
|
|
136,100
|
|
June 2009
|
|
|
4.10
|
|
|
|
3.46
|
|
|
|
159,800
|
|
|
|
143,000
|
|
July 2009
|
|
|
5.79
|
|
|
|
3.65
|
|
|
|
221,500
|
|
|
|
137,800
|
|
August 2009
|
|
|
6.33
|
|
|
|
5.95
|
|
|
|
246,400
|
|
|
|
192,000
|
|
September 2009
(3)
|
|
|
6.28
|
|
|
|
5.67
|
|
|
|
234,000
|
|
|
|
204,600
|
|
|
|
|
(1)
|
|
Price data are based on prices throughout the sessions for each corresponding period at each
stock exchange.
|
|
(2)
|
|
Our shares of common stock had been quoted on the Mothers market of the TSE since December 2,
2005 and were transferred to the First Section of the TSE on December 14, 2006.
|
|
(3)
|
|
The high and low prices of our ADSs and shares of common stock were the prices quoted during
the period, from September 1, 2009 to September 25, 2009.
|
B. Plan of Distribution.
Not applicable.
56
C. Markets.
ADSs representing our common stock have been quoted on the Nasdaq market since August 4, 1999
under the symbol IIJI and on June 11, 2007 were transferred from the Nasdaq Global Market to the
Nasdaq Global Select Market. Our shares of common stock have been quoted on the Mothers market of
the TSE since December 2, 2005 under the stock code number 3774 and were transferred to the First
Section of the TSE on December 14, 2006.
D. Selling Shareholders.
Not applicable.
E. Dilution.
Not applicable.
F. Expenses of the issue.
Not applicable.
Item 10. Additional Information.
A. Share Capital.
Not required.
B. Memorandum and Articles of Association.
Organization
IIJ is a joint stock corporation (kabushiki kaisha) incorporated in Japan under the
Corporation Law. It is registered in the Commercial Register (shogyo tokibo) maintained by the
Tokyo Legal Affairs Bureau and several other registry offices of the Ministry of Justice.
Objects and Purposes in Our Articles of Incorporation
Article 2 of our Articles of Incorporation states our objects and purposes:
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|
|
Telecommunications business under the Telecommunications Business Law,
|
|
|
|
|
Processing, mediation and provision of information and contents by using
telecommunications networks,
|
|
|
|
|
Agency for the management business such as the management of networks and the
management of information and telecommunications systems,
|
|
|
|
|
Planning, consulting service, development, operation and maintenance of or for
information and telecommunications systems,
|
|
|
|
|
Development, sales, lease and maintenance of computer software,
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|
|
|
|
Development, sales, lease and maintenance of telecommunications machinery and
equipment,
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|
|
|
|
Telecommunications construction,
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|
|
|
|
Agency for non-life insurance,
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|
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|
Research, study, education and training related to the foregoing, and
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Any and all businesses incidental or related to the foregoing.
|
57
Provisions Regarding Our Directors
There is no provision in our Articles of Incorporation as to a directors power to vote on a
proposal, arrangement or contract in which the director is materially interested, but the
Corporation Law of Japan provides that such director is required to refrain from voting on such
matters at the Board of Directors meetings.
The Corporation Law of Japan provides that compensation for directors is determined at a
general meeting of shareholders of a company. Within the upper limit approved by the shareholders
meeting, the Board of Directors will determine the amount of compensation for each director. The
Board of Directors may, by its resolution, leave such decision to the presidents discretion.
The Corporation Law of Japan provides that a significant loan from third party by a company
should be approved by the Board of Directors. Our regulations of the Board of Directors have
adopted this policy.
There is no mandatory retirement age for directors under the Corporation Law of Japan or our
Articles of Incorporation.
There is no requirement concerning the number of shares one individual must hold in order to
qualify him or her as a director under the Corporation Law of Japan or our Articles of
Incorporation.
Rights of Shareholders of our Common Stock
We have issued only one class of shares, our common stock. Rights of holders of shares of our
common stock have under the Corporation Law of Japan and our Articles of Incorporation include:
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|
the right to receive dividends when the payment of dividends has been approved at a
shareholders meeting, with this right lapsing three full years after the due date for
payment according to a provision in our Articles of Incorporation,
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|
|
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|
the right to receive interim dividends as provided for in our Articles of
Incorporation, with this right lapsing three full years after the due date for payment
according to a provision in our Articles of Incorporation,
|
|
|
|
|
the right to vote at a shareholders meeting (cumulative voting is not allowed under
our Articles of Incorporation),
|
|
|
|
|
the right to receive surplus in the event of liquidation, and
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|
|
|
|
the right to require us to purchase shares subject to certain requirements under the
Corporation Law of Japan when a shareholder opposes certain resolutions including (i)
the transfer of all or material part of the business, (ii) an amendment of the Articles
or Incorporation to establish a restriction on share transfer, (iii) a share exchange
or share transfer to establish a holding company, (iv) company split or (v) merger, all
of which must in principle, be approved by a Special Resolution of Shareholders
meeting.
|
Under the Corporation Law of Japan, a company is permitted to make distribution of surplus to
the extent that the aggregate book value of the assets to be distributed to shareholders does not
exceed the Distributable Amount provided for under the Corporation Law of Japan and the Ordinance
of the Ministry of Justice as of the effective date of such distribution of surplus.
The amount of surplus at any given time shall be the amount of a companys assets and the book
value of companys treasury stock after subtracting and adding the amounts of the items provided
for under the Corporation Law of Japan and the applicable Ordinance of the Ministry of Justice.
A shareholder is generally entitled to one vote per one unit of our shares at a shareholders
meeting. In general, under the Corporation Law of Japan and our Articles of Incorporation, a
shareholders meeting may adopt a resolution by a majority of the voting rights represented at the
meeting. The Corporation Law of Japan and our Articles of Incorporation require a quorum for the
election of directors and company auditors of not less than one-third of the total number of voting
rights held by all shareholders who can exercise their voting rights. A corporate shareholder,
having more than one-quarter of its voting rights directly or indirectly held by us, does not have
voting rights. We have no voting rights with respect to our own common stock. Shareholders may
exercise their voting rights through proxies, provided that a shareholder may appoint only one
shareholder who has a voting right as its proxy. Our Board of Directors may entitle our
shareholders to cast their votes in writing. Our Board of Directors may also entitle our
shareholders to cast their votes by electrical devices.
58
While the Corporation Law of Japan, in general, requires a quorum of the majority of voting
rights and approval of two-thirds of the voting rights presented at the meeting of any material
corporate actions, it allows a company to reduce the quorum for such Special Resolutions by its
Articles of Incorporation to not less than one-third of the total number of voting
rights held by all shareholders who can exercise their voting rights. We adopted a quorum of
not less than one-third of the total number of voting rights in our Articles of Incorporation for
Special Resolutions for material corporate actions, such as:
|
|
|
a reduction of the stated capital, (expect when a company reduces the stated capital
within certain amount provided for under the Corporation Law of Japan concurrently with
a share issue),
|
|
|
|
|
amendment of our Articles of Incorporation (except amendments that the Board of
Directors are authorized to make under the Corporation Law of Japan),
|
|
|
|
|
establishment of a 100% parent-subsidiary relationship through a share exchange or
share transfer requiring shareholders approval,
|
|
|
|
|
a dissolution, merger or consolidation requiring shareholders approval,
|
|
|
|
|
a company split requiring shareholders approval,
|
|
|
|
|
a transfer of the whole or an important part of our business,
|
|
|
|
|
the taking over of the whole of the business of any other corporation requiring
shareholders approval, and
|
|
|
|
|
issuance of new shares at a specially favorable price, or issuance of stock
acquisition rights or bonds with stock acquisition rights with specially favorable
conditions to persons other than shareholders.
|
The Corporation Law of Japan provides additional specific rights for shareholders owning a
substantial number of voting rights.
Shareholders holding 10% or more of the total number of voting rights of all shareholders (or
our total outstanding shares) have the right to apply to a court of competent jurisdiction, or
competent court, for:
|
|
|
dissolution, and
|
|
|
|
|
commencement of reorganization proceedings as provided for in the Company
Reorganization Law of Japan.
|
Shareholders who have held 3% or more of the total number of voting rights of all shareholders
(or our total outstanding shares) for six months or more have certain rights to under the
Corporation law of Japan which includes the rights to:
|
|
|
demand the convening of a general meeting of shareholders,
|
|
|
|
|
apply to a competent court for removal of a director or company auditor,
|
|
|
|
|
apply to a competent court for removal of a liquidator, and
|
|
|
|
|
apply to a competent court for an order to inspect our business and assets in a
special liquidation proceeding.
|
Shareholders holding 3% or more of the total number of voting rights of all shareholders (or
our total outstanding shares) have certain rights under the Corporation Law of Japan which include
the rights to:
|
|
|
examine our accounting books and documents and make copies of them, and
|
|
|
|
|
apply to a competent court for appointment of an inspector to inspect our operation
or financial condition.
|
Shareholders who have held 1% or more of the total number of voting rights of all shareholders
for six months or more have the right to apply to a competent court for appointment of an inspector
to review the correctness of the convocation and voting procedures of a general meeting of
shareholders.
Shareholders who have held 1% or more of the total number of voting rights of all shareholders
or 300 voting rights for six months or more have the right to demand that certain matters be made
objects and added to the agenda items at a general meeting of shareholders.
Shareholders who have held any number of shares for six months or more have the right to
demand that we take certain actions under the Corporation Law of Japan which include the rights to
demand:
|
|
|
the institution of an action to enforce the liability of one of our directors or
company auditors,
|
|
|
|
|
the institution of an action to recover from a recipient the benefit of a
proprietary nature given in relation to the exercise of the right of a shareholder, and
|
|
|
|
|
a director on our behalf for the cessation of an illegal or ultra vires action.
|
59
There is no provision under the Corporation Law of Japan or our Articles of Incorporation
which forces shareholders to make additional contributions when requested by us.
Under the Corporation Law of Japan, in order to change the rights of shareholders which are
stipulated and defined in our Articles of Incorporation, we must amend our Articles of
Incorporation. Amendments must, in principle, be approved by a Special Resolution of shareholders.
Annual general meetings and extraordinary general meetings of shareholders are convened by a
representative director based on the determination of our Board of Directors. A shareholder having
held 3% or more of our total outstanding shares for six months or more is entitled to demand the
directors to convene a shareholders meeting under the Corporation Law of Japan. Under our Articles
of Incorporation, shareholders of record as of March 31 of each year have the right to attend the
annual general meeting of our shareholders. We may, by prescribing a Record Date, determine the
shareholders who are stated or recorded in the shareholder registry on the Record Date as the
shareholders entitled to extraordinary general meetings of our shareholders, and in this case, we
are required to make a public notice of Record Date at least two weeks prior to the Record Date. A
convocation notice will be sent to these shareholders at least two weeks prior to the date of the
shareholders meeting.
Acquisition of Own Shares
Under applicable laws of Japan, we may acquire our own shares:
|
(i)
|
|
through market transactions on a stock exchange on which our shares are listed
or by way of tender offer (in either case pursuant to a resolution of the Board of
Directors as currently authorized by our Articles of Incorporation);
|
|
|
(ii)
|
|
from a specific shareholder other than any of our subsidiaries (pursuant to a
special resolution of a general meeting of shareholders); or
|
|
|
(iii)
|
|
from any of our subsidiaries (pursuant to a resolution of the Board of
Directors).
|
In case acquisition is made by way of (ii) above, any other shareholder may request within a
certain period of time provided under the applicable Ordinance of the Ministry of Justice before a
general meeting of shareholders that we also purchase our shares held by the requesting
shareholder, unless the purchase price or any other consideration to be delivered in exchange for
the acquisition of one of our shares does not exceed the market price of one of our shares
calculated by the method prescribed in the applicable Ordinance of the Ministry of Justice.
Any acquisition by us of our own shares must satisfy certain other requirements, including
that the total amount of the acquisition price may not exceed the Distributable Amount, as
described above.
We may hold the shares which we acquired by way of (i) through (iii) above, and may cancel
such shares by a resolution of the Board of Directors. We may also dispose of such shares subject
to a resolution of the Board of Directors and subject also to other requirements applicable to the
issuance of shares under the Corporation Law of Japan.
Restrictions on Holders of our Common Stock
There is no restriction on non-resident or foreign shareholders on the holding of our shares
or on the exercise of voting rights, except for filing requirements with respect to an acquisition
of shares by Non-resident of Japan under The Foreign Exchange and Foreign Trade Act of Japan and
related rules and regulations, as explained in Item 10.D (Exchange Controls). However, pursuant to
a provision of our share handling regulations, a shareholder who does not have an address or
residence in Japan is required to file its temporary address to receive notices in Japan or that of
a standing proxy having any address or residence in Japan with our transfer agent.
There is no provision in our Articles of Incorporation that would have the effect of delaying,
deferring or preventing a change in control that would operate only with respect to a merger,
acquisition or corporate restructuring involving us.
There is no provision in our Articles of Incorporation or other subordinated rules regarding
the ownership threshold, above which shareholder ownership must be disclosed. Pursuant to the
Financial Instruments and Exchange Law of Japan and its related regulations, a shareholder who has
become, solely or jointly, a holder more than 5% of the total issued shares in a company that is
listed on any stock exchange in Japan is required to file a report with the Finance Bureau of the
Ministry of Finance, and, with certain exceptions, a similar report must also be filed in respect
of any subsequent change of 1% or more in the holding or of any change in material matters set
forth in any previously filed report.
There is no provision in our Articles of Incorporation governing changes in the capital more
stringent than is required by law.
For a description of rights of holders of ADSs, please see the Description of American
Depositary Receipts section in our F-1 Registration Statement (File No. 333-10584), declared
effective on August 3, 1999, as amended, hereby incorporated by reference.
60
C. Material Contracts.
The following are summaries of our material contracts, other than those we entered into in the
ordinary course of business.
Limitation of Liability Agreements, dated June 27, 2008 and June 26, 2009, between Internet
Initiative Japan Inc. and outside directors and outside company auditors.
We entered into a
Limitation of Liability Agreement with Mr. Yasurou Tanahashi, Mr. Takashi Hiroi and Mr. Shingo Oda
as our outside directors and Mr. Masaki Okada and Mr. Masaaki Koizumi as our outside company
auditors on June 27, 2008, and with Mr. Junnosuke Furukawa as our outside director on June 26,
2009, respectively, under which we limit the liability of outside directors and outside company
auditors in accordance to the rules defined in Article 427 of the Corporation Law of Japan.
D. Exchange Controls.
The Foreign Exchange and Foreign Trade Act of Japan, as amended and the cabinet orders and
ministerial ordinances thereunder (the Foreign Exchange Regulations), regulate certain
transactions involving a Non-resident of Japan or a Foreign Investor, including the issuance of
securities by a resident of Japan outside of Japan, transfer of securities between a resident of
Japan and a Non-resident of Japan, inward direct investment by a Foreign Investor, and a payment
from Japan to a foreign country or by a resident of Japan to a Non-resident of Japan.
Non-residents of Japan is defined as individuals who are not resident in Japan and
corporations whose principal offices are located outside of Japan. Generally, branches and other
offices of Japanese corporations which are located outside of Japan are regarded as Non-residents
of Japan, but branches and other offices of non-resident corporations which are located within
Japan are regarded as residents of Japan.
Foreign Investors is defined as:
|
|
|
individuals who are Non-residents of Japan;
|
|
|
|
|
corporations which are organized under the laws of foreign countries or whose
principal offices are located outside of Japan; and
|
|
|
|
|
corporations (i) of which 50% or more of their voting rights are held by
individuals who are Non-residents of Japan and/or corporations which are organized under
the laws of foreign countries or whose principal offices are located outside of Japan or
(ii) a majority of whose officers, or officers having the power of representation, are
individuals who are Non-residents of Japan.
|
Under the Foreign Exchange Regulations, dividends paid on, and the proceeds of sales in Japan
of, shares held by Non-residents of Japan may in general be converted into any foreign currency and
repatriated abroad.
Under the Foreign Exchange Regulations, in general, a Non-resident of Japan who acquires
shares from a resident of Japan is not subject to any prior filing requirement, although the
Foreign Exchange Law empowers the Minister of Finance of Japan to require prior approval for any
such acquisition in certain limited circumstances. While such prior approval is not required in
general, in the case where a resident of Japan transfers shares of a Japanese company for
consideration exceeding ¥100 million to a non-resident of Japan, the resident of Japan that
transfers the shares is required to report the transfer to the Minister of Finance of Japan within
20 days from the date of the transfer, unless the transfer is made through a bank, securities
company or financial futures trader licensed under Japanese law.
If a Foreign Investor acquires our shares and, together with parties who have a special
relationship with that foreign investor, holds 10% or more of our issued shares as a result of such
acquisition, the Foreign Investor must, with certain limited exceptions, file a report of such
acquisition with the Minister of Finance and any other competent Minister within 15 days from and
including the date of such acquisition. In certain limited circumstances, however, a prior
notification of such acquisition must be filed with the Minister of Finance and any other competent
Minister, who may modify or prohibit the proposed acquisition.
61
E. Taxation.
Japanese Taxation
The following is a discussion summarizing material Japanese tax consequences to an owner of
shares or ADSs who is a non-resident of Japan or a non-Japanese corporation without a permanent
establishment in Japan to which the relevant income is attributable. The statements regarding
Japanese tax laws set forth below are based on the laws in force and as interpreted by the Japanese
taxation authorities as at the date hereof. These statements are subject to changes in the
applicable Japanese laws or double taxation conventions occurring after that date. This summary is
not exhaustive of all possible tax considerations which may apply to a particular investor.
Potential investors should satisfy themselves as to:
|
|
|
the overall tax consequences of the ownership and disposition of shares or ADSs,
including specifically the tax consequences under Japanese law,
|
|
|
|
|
the laws of the jurisdiction of which they are resident, and
|
|
|
|
|
any tax treaty between Japan and their country of residence, by consulting their own
tax advisers.
|
For purposes of the Treaty and Japanese tax law, U.S. holders of ADRs will be treated as the
owners of the shares underlying the ADSs evidenced by the ADRs.
Generally, a non-resident of Japan or a non-Japanese corporation is subject to Japanese
withholding tax on dividends paid by Japanese corporations. Stock splits, except when treated as
dividends in certain conditions, are not subject to Japanese income tax.
In the absence of any applicable tax treaty, convention or agreement reducing the maximum rate
of withholding tax, the rate of Japanese withholding tax applicable to dividends paid by Japanese
corporations to non-resident holders is 7%, which is applicable until December 31, 2011 (the
applicable period of the temporary rate of Japanese withholding tax has been extended pursuant to
2009 Japanese tax legislation) and 15% thereafter, except for dividends paid to any individual
shareholder who holds 5% or more of the issued shares of a company.
The Convention between the Government of Japan and the Government of the United States of
America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to
Taxes on Income (the Treaty) was newly signed on November 7, 2003 and the Treaty entered into
force on March 30, 2004. Upon the Treaty coming into force, the Convention between Japan and the
United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion
with Respect to Taxes on Income, signed on March 8, 1971 (the Prior Treaty) ceased to have
effect. The Treaty reduces the maximum rate of Japanese withholding tax which may be imposed on
dividends paid to a United States resident or corporation not having a permanent establishment in
Japan. A permanent establishment in Japan is generally a fixed place of business for industrial
or commercial activity in Japan. With respect to taxes withheld at source, the Treaty is applicable
for amount taxable on or after July 1, 2004. The other provisions of the Treaty are applicable to
the fiscal year beginning on or after January 1, 2005.
Under the Treaty, the maximum withholding rate for most shareholders is limited to 10% of the
gross amount actually distributed. However, the maximum rate is 5% of the gross amount actually
distributed, if the recipient is a corporation that owns directly or indirectly, on the date on
which entitlement to the dividends is determined, at least 10% of the voting shares of the paying
corporation. Moreover, withholding tax on dividends is not imposed, if the recipient is
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|
|
a corporation that has owned, directly or indirectly through one or more residents
of either Japan or the U.S., more than 50% of the voting shares of the paying
corporation for the period of twelve months ending on the date on which entitlement to
the dividends is determined and which meets additional requirements, or
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|
|
|
|
a pension fund, provided that such dividends are not derived from the carrying on of
a business, directly or indirectly, by such pension fund.
|
The following table summarizes changes of the maximum withholding rate imposed on dividends by
the Treaty:
|
|
|
|
|
|
|
|
|
|
|
The Prior Treaty
|
|
|
|
|
|
The Treaty
|
|
|
|
|
|
10% or more of the voting shares
|
|
|
10
|
%
|
|
More than 50% of the voting shares
|
|
|
0
|
%
|
|
|
|
|
|
|
10% to 50% of the voting shares
|
|
|
5
|
%
|
Others
|
|
|
15
|
%
|
|
Others
|
|
|
10
|
%
|
Japanese tax law provides in general that if the Japanese statutory rate is lower than the
maximum rate applicable under tax treaties, conventions or agreements, the Japanese statutory rate
shall be applicable.
62
Japan has entered into income tax treaties, conventions or agreements, reducing the
above-mentioned withholding tax rate for investors with a number of countries. These countries
include, among others, Australia, Belgium, Canada, Denmark, Finland, France, Germany, Ireland,
Italy, Luxembourg, the Netherlands, New Zealand, Norway, Singapore, Spain, Sweden, Switzerland, and
the United Kingdom. The withholding tax rate is further reduced if investors and IIJ have some
capital relationship as provided for in an applicable tax treaty.
Non-resident holders who are entitled to a reduced rate of Japanese withholding tax on payment
of dividends by IIJ must submit the required form in advance through IIJ to the relevant tax
authority before payment of dividends. The required form is the Application Form for Income Tax
Convention regarding Relief from Japanese Income Tax on Dividends. A standing proxy for
non-resident holders may provide such application service. See Description of Capital Stock
General. With respect to ADSs, the reduced rate is applicable if The Bank of New York Mellon, as
depositary, or its agent submits two Application Forms for Income Tax Convention one form must
be submitted before payment of dividends, and the other form must be submitted within eight months
after our fiscal year end. To claim the reduced rate, a non-resident holder of ADSs will be
required to file proof of taxpayer status, residence and beneficial ownership, as applicable. The
non-resident holder will also be required to provide information or documents clarifying its
entitlement to the tax reduction as may be required by the depositary.
A non-resident holder of shares or ADSs who does not submit an application in advance will be
entitled to claim from the relevant Japanese tax authority a refund of withholding taxes withheld
in excess of the rate of an applicable tax treaty.
Gains derived from the sale outside Japan of the shares or ADSs by a non-resident of Japan or
a non-Japanese corporation are in general not subject to Japanese income or corporation taxes. In
addition, gains derived from the sale of shares or ADSs within Japan by a non-resident of Japan or
non-Japanese corporation not having a permanent establishment in Japan are in general not subject
to Japanese income or corporation taxes. An individual who has acquired shares or ADSs as a
distributee, legatee or donee may have to pay Japanese inheritance and gift taxes at progressive
rates.
IIJ has paid or will pay any stamp, registration or similar tax imposed by Japan in connection
with the issue of the shares, except that IIJ will not pay any tax payable in connection with the
transfer or sale of the shares by a holder thereof.
United States Taxation
The following discusses United States federal income tax consequences of the ownership of
shares or ADSs. It only applies to U.S. holders of shares or ADSs, as defined below, who hold their
shares or ADSs as capital assets for tax purposes. It does not address special classes of holders,
some of whom may be subject to other rules including:
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tax-exempt entities,
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life insurance companies,
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dealers in securities,
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traders in securities that elect to use a mark-to-market method of accounting for
securities holdings,
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investors liable for alternative minimum tax,
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investors that actually or constructively own 10% or more of the voting stock of
IIJ,
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investors that hold shares or ADSs as part of a straddle or a hedging or conversion
transaction, or
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investors whose functional currency is not the U.S. dollar.
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This discussion is based on the tax laws of the United States, including the Internal Revenue
Code of 1986, as amended, its legislative history, existing and proposed regulations and
administrative and judicial interpretations, as currently in effect, as well as on the Treaty.
These laws are subject to change, possibly on a retroactive basis. In addition, this discussion is
based in part upon the representations of the depositary and the assumption that each obligation in
the deposit agreement relating to the ADRs and any related agreement will be performed in
accordance with its terms.
For purposes of this discussion, a U.S. holder is a beneficial owner of shares or ADSs that
is:
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a citizen or resident of the United States,
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a domestic corporation,
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an estate whose income is subject to United States federal income tax regardless of
its source, or
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a trust if a United States court can exercise primary supervision over the trusts
administration and one or more United States persons are authorized to control all
substantial decisions of the trust.
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63
This discussion addresses only United States federal income taxation. You should consult your
own tax advisor regarding the United States federal, state and local and other tax consequences of
owning and disposing of shares and ADSs in your particular circumstances.
In general, and taking into account the earlier assumptions, for United States federal income
tax purposes, if you hold ADRs evidencing ADSs, you will be treated as the owner of the shares
represented by those ADSs. Exchanges of shares for ADRs, and ADRs for shares, generally will not be
subject to United States federal income tax.
The discussion under the headings Taxation of Dividends and Taxation of Capital Gains
assumes that we will not be treated as a passive foreign investment company (PFIC) for U.S.
federal income tax purposes. For a discussion of the rules that apply if we are treated as a PFIC,
see the discussion under the heading PFIC Rules below.
Taxation of Dividends
Under the United States federal income tax laws, if you are a U.S. holder, the gross amount of
any dividend we pay out of our current or accumulated earnings and profits (as determined for
United States federal income tax purposes) is subject to United States federal income taxation. If
you are a noncorporate U.S. holder, dividends paid to you in taxable years beginning before January
1, 2011 that constitute qualified dividend income will be taxable to you at a maximum tax rate of
15% provided that you hold the shares or ADSs for more than 60 days during the 121-day period
beginning 60 days before the ex-dividend date and meet other holding period requirements.
You must include any Japanese tax withheld from the dividend payment in this gross amount even
though you do not in fact receive it. The dividend is taxable to you when you, in the case of
shares, or the depositary, in the case of ADSs, receive the dividend, actually or constructively.
The dividend will not be eligible for the dividends-received deduction generally allowed to United
States corporations in respect of dividends received from other United States corporations. The
amount of the dividend distribution that you must include in your income as a U.S. holder will be
the U.S. dollar value of the Japanese yen payments made, determined at the spot Japanese yen/U.S.
dollar rate on the date the dividend distribution is includible in your income, regardless of
whether the payment is in fact converted into U.S. dollars. Generally, any gain or loss resulting
from currency exchange fluctuations during the period from the date you include the dividend
payment in income to the date you convert the payment into U.S. dollars will be treated as ordinary
income or loss and will not be eligible for the special tax rate applicable to qualified dividend
income. The gain or loss generally will be income or loss from sources within the United States for
foreign tax credit limitation purposes.
Distributions in excess of current and accumulated earnings and profits, as determined for
United States federal income tax purposes, will be treated as a return of capital to the extent of
your basis in the shares or ADSs and thereafter as capital gain.
Subject to certain limitations, the Japanese tax withheld in accordance with the Treaty and
paid over to Japan will be creditable or deductible against your United States federal income tax
liability. Special rules apply in determining the foreign tax credit limitation with respect to
dividends that are subject to the maximum 15% tax rate. To the extent a refund of the tax withheld
is available to you under Japanese law or under the Treaty, the amount of tax withheld that is
refundable will not be eligible for credit against your United States federal income tax liability.
Dividends constitute income from sources outside the United States. Dividends will, depending
on your circumstances, be either passive or general income for purposes of computing the
foreign tax credit allowable to you.
Taxation of Capital Gains
If you sell or otherwise dispose of your shares or ADSs, you will recognize capital gain or
loss for United States federal income tax purposes equal to the difference between the U.S. dollar
value of the amount that you realize and your tax basis, determined in U.S. dollars, in your shares
or ADSs. Capital gain of a noncorporate U.S. holder that is recognized in taxable years beginning
before January 1, 2011 is generally taxed at a maximum rate of 15% where the holder has a holding
period greater than one year. Additionally, gain or loss will generally be from sources within the
United States for foreign tax credit limitation purposes.
PFIC Rules
We do not believe that we will be treated as a PFIC for United States federal income tax
purposes for our most recent taxable year. However, this conclusion is a factual determination made
annually and thus may be subject to change. Because of the nature of our income and assets, we
could be determined to be a PFIC for our current and subsequent taxable years.
In general, we will be a PFIC with respect to you if for any of our taxable years in which you
held our ADSs or shares:
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at least 75% of our gross income for the taxable year is passive income, or
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at least 50% of the value, determined on the basis of a quarterly average, of our
assets is attributable to assets that produce or are held for the production of passive
income.
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64
Passive income generally includes dividends, interest, royalties, rents (other than certain
rents and royalties derived in the active conduct of a trade or business), annuities and gains from
assets that produce passive income. If a foreign corporation owns at least 25% by value of the
stock of another corporation, the foreign corporation is treated for purposes of the PFIC tests as
owning its proportionate share of the assets of the other corporation, and as receiving directly
its proportionate share of the other corporations income.
We believe that more than 25% of our gross income is not passive income and that, based upon
our earnings history and projected market capitalization, we possess sufficient active assets,
including intangible assets, such that more than 50% of the value of our assets is attributable to
assets that produce or are held for the production of active income.
If we are treated as a PFIC and you did not make a mark-to-market election, as described
below, you will be subject to special rules with respect to:
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any gain you realize on the sale or other disposition of your shares or ADSs, and
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any excess distribution that we make to you (generally, any distributions to you
during a single taxable year that are greater than 125% of the average annual
distributions received by you in respect of the shares or ADSs during the three
preceding taxable years or, if shorter, your holding period for the shares or ADSs).
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Under these rules:
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the gain or excess distribution will be allocated ratably over your holding period
for the shares or ADSs,
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the amount allocated to the taxable year in which you realized the gain or excess
distribution will be taxed as ordinary income,
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the amount allocated to each prior year, with certain exceptions, will be taxed at
the highest tax rate in effect for that year, and
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the interest charge generally applicable to underpayments of tax will be imposed in
respect of the tax attributable to each such year.
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Special rules apply for calculating the amount of the foreign tax credit with respect to
excess distributions by a PFIC.
If your shares or ADSs are treated as stock of a PFIC, you may make a mark-to-market
marketable stock election. If you make this election, you will not be subject to the PFIC rules
described above. Instead, in general, you will include as ordinary income each year the excess, if
any, of the fair market value of your shares or ADSs at the end of the taxable year over your
adjusted basis in your shares or ADSs. These amounts of ordinary income will not be eligible for
the favorable tax rates applicable to qualified dividend income or long-term capital gains. You
will also be allowed to take an ordinary loss in respect of the excess, if any, of the adjusted
basis of your shares or ADSs over their fair market value at the end of the taxable year or over
their final sale or disposition prices, but only to the extent of the net amount of previously
included income as a result of the mark-to-market election. Your basis in the shares or ADSs will
be adjusted to reflect any such income or loss amounts.
In addition, notwithstanding any election you make with regard to the shares or ADSs,
dividends that you receive from us will not constitute qualified dividend income to you if we are a
PFIC either in the taxable year of the distribution or the preceding taxable year. Moreover, your
shares or ADSs will be treated as stock in a PFIC if we were a PFIC at any time during your holding
period in your shares or ADSs and the election subsequently terminates, even if we are not
currently a PFIC. For purposes of this rule, if you make a mark-to-market election with respect to
your shares or ADSs, you will be treated as having a new holding period in your shares or ADSs
beginning on the first day of the first taxable year beginning after the last taxable year for
which the mark-to-market election applies. Dividends that you receive that do not constitute
qualified dividend income are not eligible for taxation at the 15% maximum rate applicable to
qualified dividend income.
If you own shares or ADSs during any year that we are a PFIC with respect to you, you must
file Internal Revenue Service Form 8621.
F. Dividends and Paying Agents.
Not required.
G. Statement by Experts.
Not applicable.
65
H. Documents on Display.
We file periodic reports and other information with the SEC. The SEC maintains a web site at
www.sec.gov that contains reports and other information regarding us and other registrants that
file electronically with the SEC. You may read and copy any document we file with the the SEC at
the SECs public reference room at 100 F Street, NE, Washington, D.C. 20549. Please call SEC at
1-800-SEC-0330 for further information on the operation of its public reference room. In addition,
you may also inspect reports filed with the SEC and other information at our Tokyo headquarters,
located at Jinbocho Mitsui Bldg., 1-105 Kanda Jinbo-cho, Chiyoda-ku, Tokyo 101-0051, Japan.
I. Subsidiary Information.
Not applicable.
Item 11. Quantitative and Qualitative Disclosures about Market Risk.
We are exposed to market risks from changes in interest rates, equity prices and foreign
currency exchange rates.
Interest Rate Risk
As of March 31, 2009, our interest rate risk on short-term borrowings (Outstanding of ¥7.4
billion) was not material since the weighted average interest rate as of March 31, 2009 is
reasonably low (1.223%) and we do not expect interest rates to rise sharply in the near future. As
of March 31, 2008, our interest rate risk on short-term borrowings (Outstanding of ¥9.2 billion)
was also immaterial.
We had no outstanding long-term borrowings and interest rate swap contracts as of March 31,
2008 and 2009, respectively.
To the extent we have outstanding long-term borrowings, our basic policy on managing interest
rate risk is to hedge our exposure to variability in future cash flows of floating rate interest
payments on long-term bank borrowings. In order to reduce cash flow risk exposures on floating rate
borrowings, we utilize interest rate swaps to convert floating rate borrowings into fixed rate
borrowings. We do not hold derivative instruments for speculative purposes. Also, we do not hold or
issue financial instruments for trading purposes. To the extent we have outstanding interest rate
swaps, the changes in the fair value of interest rate swaps designated as hedging instruments are
reported in accumulated other comprehensive income. The fair value of interest rate swaps was ¥45
thousand as of March 31, 2007.
Equity Price Risk
The fair value of certain of our investments, primarily in marketable securities, exposes us
to equity price risks. In general, we have invested in highly liquid and low-risk instruments,
which are not held for trading purposes. We are exposed to changes in the market prices of the
securities. As of March 31, 2008 and 2009, the fair value of such investments was ¥844 million and
¥674 million, respectively. The potential loss in fair value resulting from a 10% adverse change in
equity prices would be approximately ¥84 million and ¥67 million as of March 31, 2008 and 2009,
respectively. See Note 3 to our consolidated financial statements, included in this annual report
on Form 20-F.
Foreign Currency Exchange Rate Risk
The assets held by us which are exposed to foreign currency exchange risk are U.S. dollar
denominated bank deposits. The carrying value, which also represents fair value, amounted to $3,486
thousand (¥348 million) and $2,044 thousand (¥203 million) at March 31, 2008 and 2009,
respectively. The potential loss in fair value for such financial instruments from a 10% adverse
change in quoted foreign currency exchange rates would have been approximately ¥35 million and ¥20
million at March 31, 2008 and 2009, respectively.
Item 12. Description of Securities Other than Equity Securities.
Not applicable.
66
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies.
None.
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds.
None.
Item 15. Controls and Procedures.
(a) Disclosure Controls and Procedures
As of the end of the fiscal year ended March 31, 2009, our management, with the participation
of Koichi Suzuki, our president, chief executive officer and representative director, and Akihisa
Watai, our director, chief financial officer and chief accounting officer, performed an evaluation
of our disclosure controls and procedures.
Under Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, disclosure
controls and procedures means our controls and other procedures that are designed to ensure that
information required to be disclosed by us in the reports that we file or submit under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time
periods specified in the SECs rules and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required to be disclosed by
us in the reports that we file or submit under the Securities Exchange Act of 1934 is accumulated
and communicated to our management, including our chief executive officer and chief financial
officer, as appropriate to allow timely decisions regarding required disclosure.
Based on that evaluation, our chief executive officer and chief financial officer concluded
that our disclosure controls and procedures were effective as of March 31, 2009.
(b) Managements Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over
financial reporting for our company.
Under Rules 13a-15(f) of the Securities Exchange Act of 1934, internal control over financial
reporting means a process designed by, or under the supervision of, our chief executive officer and
chief financial officer and effected by our Board of Directors, management and other personnel, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with accounting principles generally
accepted in the United States of America and includes those policies and procedures that:
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pertain to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of our assets,
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provide reasonable assurance that transactions are recorded as necessary to
permit preparation of our financial statements in accordance with accounting principles
generally accepted in the United States of America, and that our receipts and
expenditures are being made only in accordance with authorizations of our management
and directors, and
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provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have a material
effect on our financial statements.
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Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluations of effectiveness to future periods
are subject to the risk controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
Our management evaluated the effectiveness of our internal control over financial reporting
using the criteria set forth in Internal Control Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, management
concluded that our internal control over financial reporting was effective as of March 31, 2009.
The effectiveness of our internal control over financial reporting has been audited by
Deloitte Touche Tohmatsu, an independent registered public accounting firm, as stated in their
report, presented hereafter.
67
Changes in Internal Control Over Financial Reporting
As required by Securities Exchange Act Rule 13a-15(d), our management, including our principal
executive officer and principal financial officer, also conducted an evaluation of our companys
internal control over financial reporting to determine whether any changes occurred during the
period covered by this report that have materially affected, or are reasonably likely to materially
affect, our companys internal control over financial reporting. Based on that evaluation, our
management concluded that there has been no such change during the period covered by this report,
and that our internal controls are functioning effectively.
(c) Attestation Report of the Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Internet Initiative Japan Inc.:
We have audited the internal control over financial reporting of Internet Initiative Japan
Inc. and subsidiaries (the Company) as of March 31, 2009, based on criteria established in
Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. The Companys management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying Managements Annual Report on Internal
Control Over Financial Reporting. Our responsibility is to express an opinion on the Companys
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed by, or under the
supervision of, the companys principal executive and principal financial officers, or persons
performing similar functions, and effected by the companys board of directors, management, and
other personnel to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with accounting
principles generally accepted in the United States of America. A companys internal control over
financial reporting includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions
of the assets of the company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the companys assets that could have a material
effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including
the possibility of collusion or improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control
over financial reporting as of March 31, 2009, based on the criteria established in Internal
Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements as of and for the year ended
March 31, 2009 of the Company and our report dated June 26, 2009 expressed an unqualified opinion
on those financial statements.
/s/ DELOITTE TOUCHE TOHMATSU
Tokyo, Japan
June 26, 2009
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(d) Changes in Internal Control Over Financial Reporting
With the participation of our chief executive officer and chief financial officer, our
management also evaluated any change in our internal control over financial reporting that occurred
during the fiscal year ended March 31, 2009. Based on that evaluation, our chief executive officer
and chief financial officer concluded that no changes were made in our internal control over
financial reporting that occurred during the fiscal year ended March 31, 2009 that has materially
affected, or is reasonably likely to materially affect, our internal control over financial
reporting.
Item 16A. Audit Committee Financial Expert
At our shareholders meeting in June 2004, two company auditors were nominated and our Board
of Company Auditors determined that one of the nominated company auditors serving on the Board of
Company Auditors, Masaaki Koizumi, is an audit committee financial expert as defined in Item 16A.
of Form 20-F and to be independent under the standards of the NASDAQ Stock Market. Mr. Koizumi is
independent from us.
Item 16B. Code of Ethics.
At our Board of Directors Meeting on April 28, 2004, we adopted a Code of Ethics, the Internet
Initiative Japan Code of Conduct, applicable to all employees and officers, including our chief
executive officer, chief financial officer and chief accounting officer. The Code of Conduct, as
amended, is attached as Exhibit 11.1 to this annual report on Form 20-F.
Item 16C. Principal Accountant Fees and Services.
Independent Auditor Fees and Services
The Board of Directors engaged Deloitte Touche Tohmatsu to perform an annual audit of our
financial statements for each of the fiscal years ended March 31, 2008 and 2009. The following
table sets forth the aggregate fees billed for services rendered by Deloitte Touche Tohmatsu and
its member firm for each of the last two fiscal years.
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Fiscal year ended March 31,
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2008
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2009
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(millions of yen)
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Audit fees
(1)
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105
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97
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Audit-related fees
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Tax fees
(2)
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26
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12
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All other fees
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Total fees
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131
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109
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(1)
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These are the aggregate fees billed for the fiscal year for professional services rendered by
Deloitte Touche Tohmatsu for the audit of our annual financial statements, the audit of our
internal control over financial reporting and services that are normally provided in
connection with statutory and regulatory filings or engagements for those fiscal years.
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(2)
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These are the aggregate fees billed for the fiscal year for professional services rendered by
member firms of Deloitte Touche Tohmatsu, such as Deloitte Tax LLP, for tax compliance, tax
advice and tax planning.
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Board of Company Auditors Pre-Approval Policies and Procedures
The Board of Company Auditors has adopted policies and procedures for pre-approving all audit
and permissible non-audit work performed by independent registered public accounting firm in
accordance with Rule 2-01(c)(7)(i)(B) under Regulation S-X. Under those policies and procedures,
the Board of Company Auditors must pre-approve individual audit and non-audit services to be
provided to us by our independent registered public accounting firm and its affiliates. Those
policies and procedures also describe prohibited non-audit services that may never be provided by
independent registered public accounting firm.
All of the services provided by our independent registered public accounting firm from May 6,
2003, when our pre-approval policies went into effect, through the end of the fiscal year ended
March 31, 2009 were pre-approved by the Board of Company Auditors pursuant to the pre-approval
policies described above, and none of such services were approved pursuant to the procedures described in Rule 2-01(c)(7)(i)(C) of Regulation S-X, which waives
the general requirement for pre-approval in certain circumstances.
69
Item 16D. Exemptions from the Listing Standards for Audit Committees.
With respect to the requirements of Rule 10A-3 under the Securities Exchange Act of 1934
relating to listed company audit committees, which apply to us through Rules 5605(c) of the NASD
Listing Rules, we rely on an exemption provided by paragraph (c)(3) of that Rule available to
foreign private issuers with Boards of Company Auditors meeting certain requirements. For a
Nasdaq-listed Japanese company with a Board of Company auditors, the requirements for relying on
paragraph (c)(3) of Rule 10A-3 are as follows:
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The Board of Company Auditors must be established, and its members must be selected,
pursuant to Japanese law expressly requiring such a board for Japanese companies that
elect to have a corporate governance system with company auditors,
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Japanese law must and does require the Board of Company Auditors to be separate from
the Board of Directors,
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None of the members of the Board of Company Auditors may be elected by management,
and none of the listed companys executive officers may be a member of the Board of
Company Auditors,
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Japanese law must and does set forth standards for the independence of the members
of the Board of Company Auditors from the listed company or its management, and
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The Board of Company Auditors, in accordance with Japanese law or the registrants
governing documents, must be responsible, to the extent permitted by Japanese law, for
the appointment, retention and oversight of the work of any registered public
accounting firm engaged (including, to the extent permitted by Japanese law, the
resolution of disagreements between management and the auditor regarding financial
reporting) for the purpose of preparing or issuing an audit report or performing other
audit, review or attest services for the listed company, including its principal
accountant which audits its consolidated financial statements included in its annual
reports on Form 20-F.
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To the extent permitted by Japanese law:
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The Board of Company Auditors must establish procedures for (i) the receipt,
retention and treatment of complaints received by us regarding accounting, internal
accounting controls, or auditing matters, and (ii) the confidential, anonymous
submission by our employees of concerns regarding questionable accounting or auditing
matters,
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The Board of Company Auditors must have the authority to engage independent counsel
and other advisers, as it determines necessary to carry out its duties, and
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The listed company must provide for appropriate funding, as determined by its Board
of Company Auditors, for payment of (i) compensation to any registered public
accounting firm engaged for the purpose of preparing or issuing an audit report or
performing other audit, review or attest services for us, (ii) compensation to any
advisers employed by the Board of Company Auditors, and (iii) ordinary administrative
expenses of the Board of Company Auditors that are necessary or appropriate in carrying
out its duties.
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In our assessment, our Board of Company Auditors, which meets the requirements for reliance on
the exemption in paragraph (c)(3) of Rule 10A-3 described above, is not materially less effective
than an audit committee meeting all the requirements of paragraph (b) of Rule 10A-3 (without
relying on any exemption provided by that Rule) at acting independently of management and
performing the functions of an audit committee as contemplated therein.
70
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c) Total Number of
|
|
(d) Maximum Number of
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased as
|
|
Shares that May Yet Be
|
|
|
(a) Total Number of
|
|
(b) Average Price
|
|
Part of Publicly
|
|
Purchased Under the
|
|
|
Shares Purchased
|
|
Paid per Share
|
|
Announced Plans or
|
|
Plans or
|
Period
|
|
(shares)
|
|
(yen)
|
|
Programs
|
|
Programs
(1)
|
Nov 1 to Nov 30, 2008
|
|
|
1,337
|
|
|
|
109,113.9
|
|
|
|
1,337
|
|
|
|
2,663
|
|
Dec 1 to Dec 31, 2008
|
|
|
1,408
|
|
|
|
105,454.4
|
|
|
|
1,408
|
|
|
|
1,255
|
|
Jan 1 to Jan 31, 2009
|
|
|
1,189
|
|
|
|
88,350.7
|
|
|
|
1,189
|
|
|
|
66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,934
|
(2)
|
|
|
101,528.7
|
|
|
|
3,934
|
|
|
|
|
|
|
|
|
(1)
|
|
The numbers described in column (d) are based on the aggregate number of 4,000 shares
authorized at the meeting of IIJs Board of Directors held on October 28, 2008.
|
|
(2)
|
|
Of the 3,934 shares repurchased, 1,056 shares were repurchased through the U.S. NASDAQ Stock
Market as IIJs American Depository Shares (ADSs) and the aggregated repurchase amount was
JPY 110,500 thousand (The aggregate repurchase price below JPY 1 was rounded off). The ADSs
are quoted on the U.S. Nasdaq Stock Market and the current ADS/share ratio is 400 ADSs per 1
share of IIJs common stock which can be transferred through our depository. The ADSs
purchased were transferred and are currently held as common stock.
|
On October 28, 2008, the Board of Directors of the Company has resolved to repurchase its own
shares pursuant to Article 156, Paragraph 1 of the Corporation Law as applied pursuant to Article
165, Paragraph 3 of the Corporation Law and the Companys Article of Incorporation.
|
|
|
Type of shares to be repurchased
|
|
: Common stock of IIJ
|
Total number of shares to be repurchased
|
|
: Up to 4,000 shares
|
Total amount to be repurchased
|
|
: Up to JPY 400,000 thousand
|
Repurchasing period
|
|
: From November 14, 2008 to January 30, 2009
|
Item 16F. Change in Registrants Certifying Accountant.
Not applicable.
Item 16G. Corporate Governance.
Nasdaq Listing Rule 5615 provides that a foreign private issuer may follow its home country
practice in lieu of the requirements of Rule 5600, provided that such foreign private issuer
discloses in its annual reports filed with the Securities and Exchange Commission or on its website
each requirement of Rule 5600 that it does not follow and describes the home country practice
followed by the issuer in lieu of such requirements.
Nasdaq Listing Rule 5605(b)(1) requires that (i) a majority of the Board of Directors be
independent directors as defined in Rule 5605(a)(2), (ii) independent directors have regularly
scheduled meetings at which only they are present, (iii) compensation of the chief executive
officer and other executive officers be determined, or recommended to the Board of Directors for
determination, either by a majority of the independent directors or by a compensation committee
comprised solely of independent directors, and (iv) director nominees be selected, or recommended
for selection by the Board of Directors, either by a majority of the independent directors or by a
nominations committee comprised solely of independent directors, in accordance with the nominations
process set forth in a formal written charter or board resolution. For large Japanese companies
under the Company Law of Japan including us, which employ a corporate governance system based on a
Board of Company Auditors, Japans Company Law has no independence requirement with respect to
directors. The task of overseeing management and accounting firms is assigned to the company
auditors, who are separate and independent from the companys management. We are required to have
at least 50% outside company auditors who must meet additional independence requirements under
the Company Law. An outside company auditor is defined in the Company Law as a company auditor who had not served as a director, manager or any other employee of the
company or any of its subsidiaries at any time prior to the appointment.
71
Nasdaq Listing Rule 5605(c)(1) requires that (i) each issuer have adopted a formal written
audit committee charter meeting the requirements of Rule 5605(c)(1) and (ii) the issuer have an
audit committee of at least three members who are independent as defined under Rule 5605(a)(2),
meet the independence criteria set forth in Rule 10A-3(b)(1) under the U.S. Securities Exchange Act
of 1934 and satisfy certain other criteria. We employ the company auditor system as described
above. Under this system, the Board of Company Auditors is a legally separate and independent body
from the Board of Directors. The function of the Board of Company Auditors is similar to that of
independent directors, including those who are members of the audit committee, of a U.S. company:
to monitor the performance of the directors, and review and express an opinion on the method of
auditing by the companys accounting firm and on such accounting firms audit reports, for the
protection of the companys shareholders. We are required to have at least three company auditors.
In addition, our auditors serve a longer term than our directors. With respect to the requirements
of Rule 10A-3 under the U.S. Securities Exchange Act of 1934 relating to listed company audit
committees, we rely on an exemption under paragraph (c)(3) of that rule which is available to
foreign private issuers with boards of company auditors meeting certain criteria.
Nasdaq Listing Rule 5620(c) provides that each issuer provide for a quorum as specified in its
by-laws for any meeting of holders of common stock, which shall be at least 33 1/3% of the
outstanding shares of the issuers voting common stock. We provide for a quorum as specified in the
Articles of Incorporation for any meeting of holders of common stock, which shall be at least
one-third of our outstanding shares of voting common stock.
Nasdaq Listing Rule 5620(b) provides that each issuer solicit proxies and provide proxy
statements for all meetings of shareholders and provide copies of such proxy solicitation to
Nasdaq. As a Japanese company whose shares are listed on the securities exchanges defined in the
Financial Instrument and Exchange Act, we may, but are not required to, solicit proxies for
meetings of shareholders. If we solicit proxies for a meeting of shareholders, we are required to
provide proxy statements and documents for reference as provided for in the Financial Instrument
and Exchange Act and provide copies of such proxy statements and documents for reference to the
Kanto Local Finance Bureau.
Nasdaq Listing Rule 5630(a) provides that each issuer conduct appropriate review and oversight
of all related party transactions for potential conflict of interest situations on an ongoing basis
by the issuers audit committee or another independent body of the Board of Directors. Following
the requirements of the Company Law of Japan, we require a director to obtain the approval of the
Board of Directors in order for such director to accept a transfer of a product or any other asset
of IIJ, to transfer a product or any other asset of such director to IIJ, to receive a loan from
IIJ, or to effect any other transaction with IIJ, for himself or a third party.
Nasdaq Listing Rule 5635 provides that shareholder approval be obtained prior to the issuance
of designated securities under subparagraphs (a), (b), (c) or (d) of Rule 5635. Where a Japanese
joint stock company (Kabushiki-Gaisha) issues common shares or other shares, stock acquisition
rights or bonds with stock acquisition rights under the Company Law of Japan, it is necessary for
the Board of Directors to determine the conditions of issuance; provided, however, that this shall
not apply if the Articles of Incorporation provide that such conditions shall be determined by the
shareholders meeting. Currently, IIJs Articles of Incorporation do not provide for any such
exception. Additionally, if the company issues such securities to persons other than shareholders
(in case of common shares or other shares) at a specially favorable issue price or (in case of
stock acquisition rights or bonds with stock acquisition rights) on specially favorable conditions,
even when there are provisions related thereto in the Articles of Incorporation, some matters
related to such issuance shall be resolved by special resolution of the shareholders meeting.
PART III
Item 17. Financial Statements.
Not applicable.
Item 18. Financial Statements.
See Financial Statements for Internet Initiative Japan Inc. and Subsidiaries beginning on page
F-1.
72
Item 19. Exhibits.
|
|
|
1.1
|
|
Articles of Incorporation, as amended (English translation)
|
|
|
|
1.2
|
|
Share Handling Regulations, as amended (English translation)
|
|
|
|
1.3
|
|
Regulations of the Board of Directors, as amended (English translation) *******
|
|
|
|
1.4
|
|
Regulations of the Board of Company Auditors, as amended (English translation)**
|
|
|
|
2.1
|
|
Bylaws of the IIJ Group Employee Shareholders Association (English translation) *******
|
|
|
|
2.2
|
|
Form of Deposit Agreement among IIJ, The Bank of New York Mellon as depositary and all
owners and holders from time to time of American Depositary Receipts, including the form
of American Depositary Receipt****
|
|
|
|
2.3
|
|
Bylaws of the IIJ Group Director Stock Purchase Plan (English translation) *******
|
|
|
|
4.1
|
|
Basic Agreement to Delegate Services, dated April 1, 1997, between Internet Initiative
Japan Inc. and IIJ Technology Inc. (English translation)***
|
|
|
|
4.2
|
|
Shareholders Agreement Relating to the Establishment of INTERNET MULTIFEED CO., dated
August 20, 1997, between Nippon Telegraph and Telephone Corporation and the Registrant
(English translation)***
|
|
|
|
4.3
|
|
Basic Agreement to Delegate Services, dated April 1, 1998, between Internet Initiative
Japan Inc. and Net Care, Inc. (English translation)***
|
|
|
|
4.4
|
|
Joint Venture Agreement, dated January 19, 2006, between Internet Initiative Japan Inc.
and Konami Corporation (English translation)*
|
|
|
|
4.5
|
|
Service Agreement, dated March 25, 2004, between Internet Initiative Japan Inc. and IIJ
America Inc.*****
|
|
|
|
4.6
|
|
Agreement on Limited Liability, dated June 27, 2008 and June 26, 2009, between Internet
Initiative Japan Inc. and outside directors and outside company auditors
|
|
|
|
8.1
|
|
List of Significant Subsidiaries (See Our Group Companies in Item 4.B. of this Form 20-F)
|
|
|
|
11.1
|
|
Internet Initiative Japan Code of Conduct*******
|
|
|
|
12.1
|
|
Certification of the principal executive officer required by 17 C.F.R. 240. 13a-14(a)
|
|
|
|
12.2
|
|
Certification of the principal financial officer required by 17 C.F.R. 240. 13a-14(a)
|
|
|
|
13.1
|
|
Certification of the chief executive officer required by 18 U.S.C. Section 1350
|
|
|
|
13.2
|
|
Certification of the chief financial officer required by 18 U.S.C. Section 1350
|
|
|
|
(*)
|
|
Incorporated by reference to the corresponding exhibit to our annual report on Form 20-F
(File No. 0-30204) filed on July 11, 2006.
|
|
(**)
|
|
Incorporated by reference to the corresponding exhibit to our annual report on Form 20-F
(File No. 0-30204) filed on August 3, 2005.
|
|
(***)
|
|
Incorporated by reference to the corresponding exhibit to our Form F-1 Registration
Statement (File No. 333-10584) declared effective on August 3, 1999.
|
|
(****)
|
|
Incorporated by reference to the Registration Statement on Form F-6 (File No. 333-110862)
filed on December 2, 2003.
|
|
(*****)
|
|
Incorporated by reference to the corresponding exhibit to our annual report on Form 20-F
(File No. 0-30204) filed on July 23, 2004.
|
|
(******)
|
|
We entered into a Limitation of Liability Agreement with Mr. Yasurou Tanahashi, Mr.
Takashi Hiroi and Mr. Shingo Oda as our outside directors and Mr. Masaki Okada and Mr. Masaaki
Koizumi as our outside company auditors on June 27, 2008, and with Mr. Junnosuke Furukawa as
our outside director on June 26, 2009.
|
|
(*******)
|
|
Incorporated by reference to the corresponding exhibit to our annual report on Form 20-F
(File No. 0-30204) filed on June 30, 2008.
|
We are not a party to any instruments with respect to long-term debt.
73
SIGNATURE
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F
and that it has duly caused and authorized the undersigned to sign this annual report on its
behalf.
|
|
|
|
|
|
Internet Initiative Japan Inc.
|
|
|
By:
|
/s/ Koichi Suzuki
|
|
|
|
Name:
|
Koichi Suzuki
|
|
|
|
Title:
|
President, Chief Executive Officer
and Representative Director
|
|
|
Date: September 29, 2009
74
Internet Initiative Japan Inc. and Subsidiaries
Index to Consolidated Financial Statements
|
|
|
|
|
Page
|
|
|
|
|
|
F-2
|
|
|
|
|
|
F-3
|
|
|
|
|
|
F-5
|
|
|
|
|
|
F-7
|
|
|
|
|
|
F-8
|
|
|
|
|
|
F-11
|
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Internet Initiative Japan Inc.:
We have audited the accompanying consolidated balance sheets of Internet Initiative Japan Inc. and
subsidiaries (the Company) as of March 31, 2008 and 2009 and the related consolidated statements
of income, shareholders equity, and cash flows for each of the three years in the period ended
March 31, 2009 (all expressed in Japanese yen). These financial statements are the responsibility
of the Companys management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects,
the financial position of Internet Initiative Japan Inc. and subsidiaries as of March 31, 2008 and
2009 and the results of their operations and their cash flows for each of the three years in the
period ended March 31, 2009, in conformity with accounting principles generally accepted in the
United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the Companys internal control over financial reporting as of March 31,
2009, based on the criteria established in
Internal Control Integrated Framework
issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report dated June 26, 2009
expressed an unqualified opinion on the Companys internal control over financial reporting.
Our audits also comprehended the translation of Japanese yen amounts into U.S. dollar amounts and,
in our opinion, such translation has been made in conformity with the basis stated in Note 1. Such
U.S. dollar amounts are presented solely for the convenience of readers outside Japan.
/s/ DELOITTE TOUCHE TOHMATSU
Tokyo, Japan
June 26, 2009
F-2
Internet Initiative Japan Inc. and Subsidiaries
Consolidated Balance Sheets
March 31, 2008 and 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Dollars
|
|
|
|
Thousands of Yen
|
|
|
(Note 1)
|
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents (Note 16)
|
|
¥
|
11,470,980
|
|
|
¥
|
10,187,724
|
|
|
$
|
102,751
|
|
Short-term investment
|
|
|
12,181
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net of allowance for
doubtful accounts of ¥24,677 thousand
and ¥22,072 thousand ($223 thousand)
at March 31, 2008 and 2009, respectively
(Notes 4, 5 and 20)
|
|
|
12,255,163
|
|
|
|
10,256,527
|
|
|
|
103,445
|
|
Inventories (Note 2)
|
|
|
1,184,160
|
|
|
|
529,756
|
|
|
|
5,343
|
|
Prepaid expenses
|
|
|
2,005,274
|
|
|
|
1,771,955
|
|
|
|
17,871
|
|
Other current assets, net of allowance for
doubtful accounts
of ¥7,470 thousand and ¥11,720 thousand ($118
thousand)
at March 31, 2008 and 2009, respectively
(Notes 4, 8 and 10)
|
|
|
1,557,869
|
|
|
|
1,610,807
|
|
|
|
16,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
28,485,627
|
|
|
|
24,356,769
|
|
|
|
245,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTMENTS IN EQUITY METHOD
INVESTEES (Note 5)
|
|
|
956,692
|
|
|
|
947,626
|
|
|
|
9,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INVESTMENTS (Notes 3, 15, 16 and 17)
|
|
|
2,363,770
|
|
|
|
1,914,594
|
|
|
|
19,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENTNet
(Notes 6 and 8)
|
|
|
11,740,210
|
|
|
|
13,172,891
|
|
|
|
132,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GOODWILL (Note 7)
|
|
|
2,507,258
|
|
|
|
2,639,319
|
|
|
|
26,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INTANGIBLE ASSETSNet (Note 7)
|
|
|
3,400,117
|
|
|
|
3,201,806
|
|
|
|
32,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GUARANTEE DEPOSITS (Notes 8)
|
|
|
2,037,165
|
|
|
|
2,072,652
|
|
|
|
20,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS, net of allowance for doubtful
accounts of ¥64,796 thousand and ¥72,800 thousand
($734 thousand) at March 31, 2008 and 2009,
respectively,
and net of loan loss valuation allowance of
¥16,701 thousand ($168 thousand) at March 31,
2008 and 2009,
respectively (Notes 4, 5, 8, 10 and 16)
|
|
|
4,211,707
|
|
|
|
3,995,542
|
|
|
|
40,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
¥
|
55,702,546
|
|
|
¥
|
52,301,199
|
|
|
$
|
527,496
|
|
|
|
|
|
|
|
|
|
|
|
(Continued)
F-3
Internet Initiative Japan Inc. and Subsidiaries
Consolidated Balance Sheets
March 31, 2008 and 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Dollars
|
|
|
|
Thousands of Yen
|
|
|
(Note 1)
|
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings (Note 9)
|
|
¥
|
9,150,000
|
|
|
¥
|
7,350,000
|
|
|
$
|
74,130
|
|
Capital lease obligationscurrent portion (Note 8)
|
|
|
3,455,948
|
|
|
|
3,272,257
|
|
|
|
33,003
|
|
Accounts payable (Notes 5 and 20)
|
|
|
7,895,238
|
|
|
|
6,064,829
|
|
|
|
61,168
|
|
Accrued expenses
|
|
|
994,138
|
|
|
|
1,069,310
|
|
|
|
10,785
|
|
Accrued retirement and pension costs-current (Note 11)
|
|
|
11,436
|
|
|
|
11,959
|
|
|
|
121
|
|
Deferred income
|
|
|
1,552,896
|
|
|
|
1,255,749
|
|
|
|
12,665
|
|
Other current liabilities
|
|
|
864,366
|
|
|
|
763,544
|
|
|
|
7,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
23,924,022
|
|
|
|
19,787,648
|
|
|
|
199,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAPITAL LEASE OBLIGATIONSNoncurrent (Note 8)
|
|
|
4,738,359
|
|
|
|
4,866,120
|
|
|
|
49,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACCRUED RETIREMENT AND PENSION COSTS
Noncurrent (Note 11)
|
|
|
1,101,951
|
|
|
|
1,399,592
|
|
|
|
14,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER NONCURRENT LIABILITIES (Note 10)
|
|
|
663,399
|
|
|
|
1,004,920
|
|
|
|
10,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
30,427,731
|
|
|
|
27,058,280
|
|
|
|
272,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MINORITY INTEREST
|
|
|
294,102
|
|
|
|
73,735
|
|
|
|
744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES (Note 15)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY (Notes 3, 11, 12 and 13):
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stockauthorized, 377,600 shares;
issued and outstanding, 206,478 shares at
March 31, 2008 and 2009, respectively
|
|
|
16,833,847
|
|
|
|
16,833,847
|
|
|
|
169,782
|
|
Additional paid-in capital
|
|
|
27,611,737
|
|
|
|
27,611,737
|
|
|
|
278,484
|
|
Accumulated deficit
|
|
|
(19,555,489
|
)
|
|
|
(18,549,142
|
)
|
|
|
(187,082
|
)
|
Accumulated other comprehensive income (loss)
|
|
|
90,618
|
|
|
|
(320,711
|
)
|
|
|
(3,235
|
)
|
Treasury stock3,934 shares at March 31, 2009
|
|
|
|
|
|
|
(406,547
|
)
|
|
|
(4,100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
24,980,713
|
|
|
|
25,169,184
|
|
|
|
253,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
¥
|
55,702,546
|
|
|
¥
|
52,301,199
|
|
|
$
|
527,496
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
(Concluded)
F-4
Internet Initiative Japan Inc. and Subsidiaries
Consolidated Statements of Income
Three Years in the Period Ended March 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Dollars
|
|
|
|
Thousands of Yen
|
|
|
(Note 1)
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
REVENUES (Notes 5 and 20):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Connectivity and Outsourcing services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Connectivity services (corporate use)
|
|
¥
|
11,239,062
|
|
|
¥
|
12,148,490
|
|
|
¥
|
13,142,393
|
|
|
$
|
132,551
|
|
Connectivity services (home use)
|
|
|
1,968,948
|
|
|
|
5,429,955
|
|
|
|
6,537,370
|
|
|
|
65,934
|
|
Outsourcing services
|
|
|
11,145,166
|
|
|
|
13,724,218
|
|
|
|
15,395,833
|
|
|
|
155,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
24,353,176
|
|
|
|
31,302,663
|
|
|
|
35,075,596
|
|
|
|
353,763
|
|
Systems integration
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Systems construction
|
|
|
16,659,629
|
|
|
|
18,021,089
|
|
|
|
14,658,502
|
|
|
|
147,841
|
|
Systems operation and maintenance
|
|
|
13,867,452
|
|
|
|
15,992,843
|
|
|
|
18,988,595
|
|
|
|
191,514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
30,527,081
|
|
|
|
34,013,932
|
|
|
|
33,647,097
|
|
|
|
339,355
|
|
Equipment sales
|
|
|
2,174,324
|
|
|
|
1,514,543
|
|
|
|
984,585
|
|
|
|
9,930
|
|
ATM operation business
|
|
|
|
|
|
|
4,161
|
|
|
|
23,452
|
|
|
|
237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
57,054,581
|
|
|
|
66,835,299
|
|
|
|
69,730,730
|
|
|
|
703,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST AND EXPENSES (Notes 5, 8, 11 and 20):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of connectivity and Outsourcing
services
|
|
|
20,545,358
|
|
|
|
26,039,660
|
|
|
|
29,317,645
|
|
|
|
295,690
|
|
Cost of systems integration
|
|
|
23,529,045
|
|
|
|
25,526,033
|
|
|
|
25,542,758
|
|
|
|
257,617
|
|
Cost of equipment sales
|
|
|
1,893,216
|
|
|
|
1,299,793
|
|
|
|
863,031
|
|
|
|
8,704
|
|
Cost of ATM operation business
|
|
|
|
|
|
|
17,135
|
|
|
|
422,285
|
|
|
|
4,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost
|
|
|
45,967,619
|
|
|
|
52,882,621
|
|
|
|
56,145,719
|
|
|
|
566,270
|
|
Sales and marketing (Note 19)
|
|
|
3,438,725
|
|
|
|
4,328,598
|
|
|
|
4,630,579
|
|
|
|
46,703
|
|
General and administrative
|
|
|
3,970,692
|
|
|
|
4,624,293
|
|
|
|
5,621,870
|
|
|
|
56,701
|
|
Research and development
|
|
|
177,273
|
|
|
|
240,423
|
|
|
|
415,180
|
|
|
|
4,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost and expenses
|
|
|
53,554,309
|
|
|
|
62,075,935
|
|
|
|
66,813,348
|
|
|
|
673,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME
|
|
|
3,500,272
|
|
|
|
4,759,364
|
|
|
|
2,917,382
|
|
|
|
29,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSES):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
23,037
|
|
|
|
63,030
|
|
|
|
45,153
|
|
|
|
455
|
|
Interest expense
|
|
|
(397,439
|
)
|
|
|
(438,163
|
)
|
|
|
(408,152
|
)
|
|
|
(4,117
|
)
|
Foreign exchange gains (losses)
|
|
|
(297
|
)
|
|
|
1,409
|
|
|
|
(28,515
|
)
|
|
|
(288
|
)
|
Net gains on sales of other investments
(Note 3)
|
|
|
3,229,899
|
|
|
|
217,957
|
|
|
|
15,631
|
|
|
|
158
|
|
Losses on write-down of other investments
(Note 3)
|
|
|
(1,363,389
|
)
|
|
|
(288,643
|
)
|
|
|
(524,287
|
)
|
|
|
(5,288
|
)
|
Othernet
|
|
|
56,605
|
|
|
|
46,715
|
|
|
|
17,276
|
|
|
|
175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses)net
|
|
|
1,548,416
|
|
|
|
(397,695
|
)
|
|
|
(882,894
|
)
|
|
|
(8,905
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM OPERATIONS BEFORE INCOME TAX
EXPENSE (BENEFIT), MINORITY INTERESTS IN
(EARNINGS) LOSSES OF SUBSIDIARIES AND
EQUITY IN NET INCOME(LOSS) OF EQUITY METHOD
INVESTEES
|
|
|
5,048,688
|
|
|
|
4,361,669
|
|
|
|
2,034,488
|
|
|
|
20,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAX EXPENSE (BENEFIT)(Note 10)
|
|
|
(803,943
|
)
|
|
|
(861,414
|
)
|
|
|
1,002,711
|
|
|
|
10,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FORWARD
|
|
¥
|
5,852,631
|
|
|
¥
|
5,223,083
|
|
|
¥
|
1,031,777
|
|
|
$
|
10,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Continued)
F-5
Internet Initiative Japan Inc. and Subsidiaries
Consolidated Statements of Income
Three Years in the Period Ended March 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Dollars
|
|
|
|
Thousands of Yen
|
|
|
(Note 1)
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FORWARD
|
|
¥
|
5,852,631
|
|
|
¥
|
5,223,083
|
|
|
¥
|
1,031,777
|
|
|
$
|
10,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MINORITY INTERESTS
IN (EARNINGS)
LOSSES OF
SUBSIDIARIES
|
|
|
(232,719
|
)
|
|
|
96,706
|
|
|
|
352,428
|
|
|
|
3,555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY IN NET
INCOME (LOSS) OF
EQUITY METHOD
INVESTEES (Note
5):
|
|
|
(210,199
|
)
|
|
|
(143,200
|
)
|
|
|
35,099
|
|
|
|
354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
¥
|
5,409,713
|
|
|
¥
|
5,176,589
|
|
|
¥
|
1,419,304
|
|
|
$
|
14,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME PER SHARE
(Note 14):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC WEIGHTED-AVERAGE
NUMBER OF COMMON
SHARES OUTSTANDING
|
|
|
203,992
|
|
|
|
206,240
|
|
|
|
205,165
|
|
|
|
|
|
DILUTED
WEIGHTED-AVERAGE
NUMBER
OF COMMON SHARES
OUTSTANDING
|
|
|
204,244
|
|
|
|
206,465
|
|
|
|
205,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yen
|
|
|
U.S. Dollars
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC NET INCOME PER
COMMON SHARE
|
|
¥
|
26,519
|
|
|
¥
|
25,100
|
|
|
¥
|
6,918
|
|
|
$
|
70
|
|
DILUTED NET INCOME PER
COMMON SHARE
|
|
¥
|
26,487
|
|
|
¥
|
25,072
|
|
|
¥
|
6,917
|
|
|
$
|
70
|
|
See notes to consolidated financial statements.
(Concluded)
F-6
Internet Initiative Japan Inc. and Subsidiaries
Consolidated Statements of Shareholders Equity
Three Years in the Period Ended March 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen
|
|
|
|
Shares of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
|
|
|
|
Additional
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Treasury
|
|
|
|
|
|
|
(Including
|
|
|
Common
|
|
|
Paid-in
|
|
|
Deficit
|
|
|
Income (Loss)
|
|
|
Stock
|
|
|
|
|
|
|
Treasury Stock)
|
|
|
Stock
|
|
|
Capital
|
|
|
(Note 12)
|
|
|
(Notes 11 and 13)
|
|
|
(Note 12)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, APRIL 1, 2006
|
|
|
204,300
|
|
|
¥
|
16,833,847
|
|
|
¥
|
26,599,217
|
|
|
¥
|
(29,680,482
|
)
|
|
¥
|
6,553,594
|
|
|
¥
|
(84,238
|
)
|
|
¥
|
20,221,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,409,713
|
|
|
|
|
|
|
|
|
|
|
|
5,409,713
|
|
Other comprehensive loss, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,492,154
|
)
|
|
|
|
|
|
|
(5,492,154
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(82,441
|
)
|
Adjustment to initially apply SFAS158, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(111,731
|
)
|
|
|
|
|
|
|
(111,731
|
)
|
Dissolution of reciprocal interests due to sale of investment in an equity method investee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84,238
|
|
|
|
84,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, MARCH 31, 2007
|
|
|
204,300
|
|
|
|
16,833,847
|
|
|
|
26,599,217
|
|
|
|
(24,270,769
|
)
|
|
|
949,709
|
|
|
|
|
|
|
|
20,112,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,176,589
|
|
|
|
|
|
|
|
|
|
|
|
5,176,589
|
|
Other comprehensive loss, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(859,091
|
)
|
|
|
|
|
|
|
(859,091
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,317,498
|
|
Dividends paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(461,309
|
)
|
|
|
|
|
|
|
|
|
|
|
(461,309
|
)
|
Issuance of common stock for the purchase of minority interests of consolidated subsidiaries,
net of issuance cost
|
|
|
2,178
|
|
|
|
|
|
|
|
1,012,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,012,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, MARCH 31, 2008
|
|
|
206,478
|
|
|
|
16,833,847
|
|
|
|
27,611,737
|
|
|
|
(19,555,489
|
)
|
|
|
90,618
|
|
|
|
|
|
|
|
24,980,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,419,304
|
|
|
|
|
|
|
|
|
|
|
|
1,419,304
|
|
Other comprehensive loss, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(411,329
|
)
|
|
|
|
|
|
|
(411,329
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,007,975
|
|
Dividends paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(412,957
|
)
|
|
|
|
|
|
|
|
|
|
|
(412,957
|
)
|
Purchase of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(406,547
|
)
|
|
|
(406,547
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, MARCH 31, 2009
|
|
|
206,478
|
|
|
¥
|
16,833,847
|
|
|
¥
|
27,611,737
|
|
|
¥
|
(18,549,142
|
)
|
|
¥
|
(320,711
|
)
|
|
¥
|
(406,547
|
)
|
|
¥
|
25,169,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of U.S. Dollars (Note 1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Treasury
|
|
|
|
|
|
|
Common
|
|
|
Paid-in
|
|
|
Deficit
|
|
|
Income (Loss)
|
|
|
Stock
|
|
|
|
|
|
|
Stock
|
|
|
Capital
|
|
|
(Note 12)
|
|
|
(Notes 11 and 13)
|
|
|
(Note 12)
|
|
|
Total
|
|
|
BALANCE, MARCH 31, 2008
|
|
$
|
169,782
|
|
|
$
|
278,484
|
|
|
$
|
(197,231
|
)
|
|
$
|
914
|
|
|
$
|
|
|
|
$
|
251,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
14,315
|
|
|
|
|
|
|
|
|
|
|
|
14,315
|
|
Other comprehensive loss, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,149
|
)
|
|
|
|
|
|
|
(4,149
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,166
|
|
Dividends paid
|
|
|
|
|
|
|
|
|
|
|
(4,166
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,166
|
)
|
Purchase of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,100
|
)
|
|
|
(4,100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, MARCH 31, 2009
|
|
$
|
169,782
|
|
|
$
|
278,484
|
|
|
$
|
(187,082
|
)
|
|
$
|
(3,235
|
)
|
|
$
|
(4,100
|
)
|
|
$
|
253,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-7
Internet Initiative Japan Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Three Years in the Period Ended March 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Dollars
|
|
|
|
Thousands of Yen
|
|
|
(Note 1)
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
¥
|
5,409,713
|
|
|
¥
|
5,176,589
|
|
|
¥
|
1,419,304
|
|
|
$
|
14,315
|
|
Adjustments to reconcile net income
to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
4,228,048
|
|
|
|
4,774,804
|
|
|
|
5,317,141
|
|
|
|
53,628
|
|
Impairment loss on other intangible assets
|
|
|
|
|
|
|
|
|
|
|
113,360
|
|
|
|
1,143
|
|
Provision for retirement and
pension costs, less payments
|
|
|
382,682
|
|
|
|
191,057
|
|
|
|
127,662
|
|
|
|
1,288
|
|
Provision for (reversal of) allowance for
doubtful accounts
|
|
|
12,232
|
|
|
|
(416
|
)
|
|
|
26,020
|
|
|
|
262
|
|
Loss on disposal of property and
equipment
|
|
|
150,731
|
|
|
|
72,086
|
|
|
|
443,019
|
|
|
|
4,468
|
|
Net gains on sales of other investments
|
|
|
(3,229,899
|
)
|
|
|
(217,957
|
)
|
|
|
(15,631
|
)
|
|
|
(158
|
)
|
Losses on write-down of other
investments
|
|
|
1,363,389
|
|
|
|
288,643
|
|
|
|
524,287
|
|
|
|
5,288
|
|
Foreign exchange losses, net
|
|
|
2,226
|
|
|
|
10,415
|
|
|
|
9,605
|
|
|
|
97
|
|
Equity in net (income) loss of equity
method investees, less dividends received
|
|
|
210,199
|
|
|
|
143,200
|
|
|
|
(4,719
|
)
|
|
|
(48
|
)
|
Minority interests in earnings (losses) of
subsidiaries
|
|
|
232,719
|
|
|
|
(96,706
|
)
|
|
|
(352,428
|
)
|
|
|
(3,555
|
)
|
Deferred income tax expense (benefit)
|
|
|
(1,494,685
|
)
|
|
|
(1,653,275
|
)
|
|
|
636,818
|
|
|
|
6,423
|
|
Others
|
|
|
622
|
|
|
|
|
|
|
|
1,741
|
|
|
|
18
|
|
Changes in operating assets and
liabilities net of effects from
acquisition of business and a company:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in accounts
receivable
|
|
|
2,376,126
|
|
|
|
(2,584,327
|
)
|
|
|
1,947,490
|
|
|
|
19,642
|
|
Decrease (increase) in inventories,
prepaid expenses and other current
and noncurrent assets
|
|
|
(1,235,003
|
)
|
|
|
(995,434
|
)
|
|
|
467,023
|
|
|
|
4,710
|
|
Decrease in accounts payable
|
|
|
(1,872,969
|
)
|
|
|
(668,481
|
)
|
|
|
(2,005,074
|
)
|
|
|
(20,223
|
)
|
(Decrease) increase in income taxes
payable
|
|
|
312,292
|
|
|
|
(274,475
|
)
|
|
|
(188,517
|
)
|
|
|
(1,901
|
)
|
Increase in accrued
expenses and other current
and noncurrent liabilities
|
|
|
553,084
|
|
|
|
372,023
|
|
|
|
163,768
|
|
|
|
1,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by
operating
activities(Forward)
|
|
¥
|
7,401,507
|
|
|
¥
|
4,537,746
|
|
|
¥
|
8,630,869
|
|
|
$
|
87,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Continued)
F-8
Internet Initiative Japan Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Three Years in the Period Ended March 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Dollars
|
|
|
|
Thousands of Yen
|
|
|
(Note 1)
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by
operating activities(Forward)
|
|
¥
|
7,401,507
|
|
|
¥
|
4,537,746
|
|
|
¥
|
8,630,869
|
|
|
$
|
87,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(1,287,906
|
)
|
|
|
(1,856,249
|
)
|
|
|
(2,991,378
|
)
|
|
|
(30,170
|
)
|
Purchases of available-for-sale securities
|
|
|
(802,662
|
)
|
|
|
(609,787
|
)
|
|
|
(187,516
|
)
|
|
|
(1,891
|
)
|
Purchases of short-term and other investments
|
|
|
(1,794,358
|
)
|
|
|
(232,122
|
)
|
|
|
(175,264
|
)
|
|
|
(1,768
|
)
|
Investment in an equity method investee
|
|
|
|
|
|
|
(273,909
|
)
|
|
|
|
|
|
|
|
|
Purchases of subsidiary stock
from minority shareholders
|
|
|
(3,077,764
|
)
|
|
|
(1,975,123
|
)
|
|
|
|
|
|
|
|
|
Proceeds from sales of available-for-sale
securities
|
|
|
3,883,915
|
|
|
|
616,920
|
|
|
|
3,417
|
|
|
|
34
|
|
Proceeds from sales and redemption of
short-term and other investments
|
|
|
110,446
|
|
|
|
69,722
|
|
|
|
111,509
|
|
|
|
1,125
|
|
Proceeds from sales of investment in an equity
method investee
|
|
|
185,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments of guarantee deposits
|
|
|
(146,172
|
)
|
|
|
(353,911
|
)
|
|
|
(109,929
|
)
|
|
|
(1,109
|
)
|
Refund of guarantee deposits
|
|
|
27,761
|
|
|
|
11,847
|
|
|
|
66,124
|
|
|
|
667
|
|
Payments for refundable insurance policies
|
|
|
(38,273
|
)
|
|
|
(49,753
|
)
|
|
|
(52,364
|
)
|
|
|
(528
|
)
|
Refund from insurance policies
|
|
|
4,969
|
|
|
|
3,905
|
|
|
|
7,382
|
|
|
|
74
|
|
Acquisition of a newly controlled company,
net of cash acquired
|
|
|
|
|
|
|
(788,608
|
)
|
|
|
|
|
|
|
|
|
Acquisition of business
|
|
|
(74,751
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
(4,716
|
)
|
|
|
(6,698
|
)
|
|
|
(53
|
)
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(3,013,611
|
)
|
|
|
(5,443,766
|
)
|
|
|
(3,328,072
|
)
|
|
|
(33,566
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of short-term
borrowings with initial maturities over
three
months and long-term borrowings
|
|
|
10,500,000
|
|
|
|
17,525,000
|
|
|
|
10,750,000
|
|
|
|
108,422
|
|
Repayments of short-term borrowings with
initial maturities over three months and
long-term borrowings
|
|
|
(7,639,963
|
)
|
|
|
(15,940,000
|
)
|
|
|
(12,125,000
|
)
|
|
|
(122,289
|
)
|
Proceeds from securities loan agreement
|
|
|
1,057,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments of securities loan agreement
|
|
|
(2,057,280
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments under capital leases
|
|
|
(3,259,875
|
)
|
|
|
(3,506,842
|
)
|
|
|
(3,953,833
|
)
|
|
|
(39,877
|
)
|
Net (decrease) increase in short-term
borrowings
|
|
|
(3,355,000
|
)
|
|
|
1,225,000
|
|
|
|
(425,000
|
)
|
|
|
(4,287
|
)
|
Proceeds from issuance of subsidiary
stock to minority shareholders
|
|
|
194,679
|
|
|
|
6,000
|
|
|
|
|
|
|
|
|
|
Dividends paid
|
|
|
|
|
|
|
(461,309
|
)
|
|
|
(412,957
|
)
|
|
|
(4,166
|
)
|
Payments for purchase of treasury stock
|
|
|
|
|
|
|
|
|
|
|
(406,547
|
)
|
|
|
(4,100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing
activities(Forward)
|
|
¥
|
(4,559,759
|
)
|
|
¥
|
(1,152,151
|
)
|
|
¥
|
(6,573,337
|
)
|
|
$
|
(66,297
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Continued)
F-9
Internet Initiative Japan Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Three Years in the Period Ended March 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Dollars
|
|
|
|
Thousands of Yen
|
|
|
(Note 1)
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities(Forward)
|
|
¥
|
(4,559,759
|
)
|
|
¥
|
(1,152,151
|
)
|
|
¥
|
(6,573,337
|
)
|
|
$
|
(66,297
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATE
CHANGES ON CASH AND CASH
EQUIVALENTS
|
|
|
(614
|
)
|
|
|
(25,393
|
)
|
|
|
(12,716
|
)
|
|
|
(128
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET DECREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(172,477
|
)
|
|
|
(2,083,564
|
)
|
|
|
(1,283,256
|
)
|
|
|
(12,942
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
|
|
|
13,727,021
|
|
|
|
13,554,544
|
|
|
|
11,470,980
|
|
|
|
115,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS,
END OF YEAR
|
|
¥
|
13,554,544
|
|
|
¥
|
11,470,980
|
|
|
¥
|
10,187,724
|
|
|
$
|
102,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Dollars
|
|
|
|
Thousands of Yen
|
|
|
(Note 1)
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
ADDITIONAL CASH FLOW
INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
¥
|
383,461
|
|
|
¥
|
438,850
|
|
|
¥
|
408,712
|
|
|
$
|
4,122
|
|
Income taxes paid
|
|
|
347,826
|
|
|
|
1,083,341
|
|
|
|
772,533
|
|
|
|
7,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NONCASH INVESTING AND
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of assets by
entering into capital leases
|
|
|
2,664,706
|
|
|
|
4,221,807
|
|
|
|
4,014,537
|
|
|
|
40,490
|
|
Facilities purchase liabilities
|
|
|
85,574
|
|
|
|
72,966
|
|
|
|
182,564
|
|
|
|
1,841
|
|
Purchase of minority interests of consolidated subsidiaries
through share exchanges
|
|
|
|
|
|
|
1,012,520
|
|
|
|
|
|
|
|
|
|
Acquisition of business and a company:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets acquired
|
|
|
236,307
|
|
|
|
2,319,277
|
|
|
|
|
|
|
|
|
|
Cash paid
|
|
|
(74,751
|
)
|
|
|
(1,715,450
|
)
|
|
|
|
|
|
|
|
|
Liabilities assumed
|
|
|
161,556
|
|
|
|
367,989
|
|
|
|
|
|
|
|
|
|
Minority interests assumed
|
|
|
|
|
|
|
235,838
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
(Concluded)
F-10
Internet Initiative Japan Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1.
|
|
DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
|
|
|
Internet Initiative Japan Inc. (IIJ, a Japanese corporation) was founded in December 1992 to
develop and operate Internet access services and other Internet-related services in Japan.
30.0 percent of IIJs voting shares were jointly owned by Nippon Telegraph and Telephone
Corporation (NTT) and its subsidiary as of March 31, 2009. IIJ and subsidiaries
(collectively, the Company) provide Internet access services throughout Japan and into the
United States of America and the rest of Asia. The Company also provides Systems integration
which is consisted of systems construction and systems operation and maintenance. A subsidiary
engaged in a new business which operated Automated Teller Machines (ATM) and its network
systems in 2007. The subsidiary completed its field test of operations during 2008.
|
|
|
|
Certain Significant Risks and Uncertainties
|
|
|
|
The Company relies on telecommunications carriers for a significant portion of network
backbone and on regional NTT subsidiaries, electric power companies and their affiliates for
local connections to customers. Currently, NTT Communications, a wholly owned subsidiary of
NTT, is the largest provider of network infrastructure. The Company believes that its use of
multiple carriers and suppliers significantly mitigates damages from service disruptions.
However, any disruption of telecommunication services could have an adverse effect on
operating results.
|
|
|
|
Financial instruments that potentially subject the Company to concentrations of credit risk
consist principally of cash investments, accounts receivable and guarantee deposits. The
Companys management believes that the risks associated with accounts receivable is mitigated
by the large number of customers comprising its customer base.
|
|
|
|
Summary of Significant Accounting Policies
|
|
|
|
Basis of Presentation
IIJ maintains its records and prepares its financial statements in
accordance with generally accepted accounting principles in Japan. Certain adjustments and
reclassifications have been incorporated in the accompanying consolidated financial statements
to conform to generally accepted accounting principles in the United States of America (U.S.
GAAP). These adjustments were not recorded in the statutory accounts.
|
|
|
|
Reclassification
Certain reclassifications have been made to prior periods to conform
to the current year presentation: (1) Value-added services and Other of connectivity and
value added services were combined and renamed as Outsourcing services as it is considered
more suitable to combine the two together as one service to clearly indicate that they are
services provided to customers for the purpose of operating a customers information network
systems. Related to this change, Connectivity and value-added services were renamed as
Connectivity and Outsourcing services. (2) Systems construction and Systems operation and
maintenance, which were components of systems integration revenues, were separately disclosed
to clarify the contents of Systems integration revenues. (3) ATM operation business revenues
and Cost of ATM operation business were disclosed due to the increase in the materiality of
the business. (4)Loans to an equity method investee, which had been previously disclosed in
Investments in and advances to equity method investees, were reclassified to Other assets
because it has been not a permanent investment to equity method investees.
|
|
|
|
Translation into U.S. Dollars
IIJ maintains its accounts in Japanese yen, the currency of the
country in which it is incorporated and principally operates. The U.S. dollar amounts
included herein represent a translation using the noon buying rate in New York City for cable
transfers in yen as certified for customs purposes by the Federal Reserve Bank of New York at
March 31, 2009 of ¥99.15 = $1, solely for the convenience of the reader. The translation
should not be construed as a representation that the yen amounts have been, could have been,
or could in the future be converted into U.S. dollars.
|
F-11
|
|
Consolidation
The consolidated financial statements include the accounts of IIJ and all of its
subsidiaries, Net Care, Inc. (Net Care), IIJ Technology
Inc. (IIJ-Tech), IIJ America, Inc. (IIJ America), IIJ Financial Systems Inc. (IIJ-FS), Netchart Japan Inc. (NCJ), which was
established on August 10, 2006, GDX Japan Inc.(GDX), which was invested in on April 9, 2007,
hi-ho Inc.(hi-ho), which was purchased from Panasonic network services Inc. on June 1, 2007,
Trust network Inc.(Trust), which was established on July 17, 2007, On-Demand Solutions Inc.
(ODS), which was established on April 4, 2008 and IIJ Innovation Institute Inc. (IIJII),
which was established on June 10, 2008, which all, except for IIJ America, have fiscal years
ending March 31. IIJ Americas fiscal year end is December 31 and such date was used for
purposes of preparing the consolidated financial statements as it is not practicable for the
subsidiary to report its financial results as of March 31. There were no significant events
that occurred during the intervening period that would require adjustment to or disclosure in
the accompanying consolidated financial statements. Intercompany transactions and balances
have been eliminated in consolidation.
|
|
|
|
Investments in companies over which IIJ has significant influence but not control are
accounted for by the equity method. For other than a temporary decline in the value of
investments in equity method investees below the carrying amount, the investment is reduced to
fair value and an impairment loss is recognized.
|
|
|
|
A subsidiary or equity method investee may issue its shares to third parties at amounts per
share in excess of or less than the Companys average per share carrying value. With respect
to such transactions, the resulting gains or losses arising from the change in ownership are
recorded in income for the year in which such shares are issued.
|
|
|
|
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and reported amounts of revenues and
expenses during the reporting period. Significant estimates and assumptions used are
primarily in the areas of evaluation of cost method investments, valuation allowances for
deferred tax assets, allowance for doubtful accounts, determination of pension benefit costs
and obligations, estimated useful lives of fixed assets and intangible assets with finite
useful lives and impairment of long-lived assets, goodwill and intangible assets deemed to
have indefinite useful lives. Actual results could differ from those estimates.
|
|
|
|
Revenue Recognition
Revenues from customer connectivity services consist principally of
connectivity services for corporate and home use. Connectivity services for corporate use
represent dedicated Internet access type services, such as IP services and ADSL, or optical
line broadband IP services such as IIJ DSL/F Service and IIJ FiberAccess/F Service.
Connectivity services for home use are provided under IIJ brand such as IIJ4U and IIJmio,
hi-ho brand and others, and consist of dial-up services, optical based or ADSL based broadband
services. The term of these contracts is one year for connectivity services for corporate use
and generally one month for connectivity services for home use. All these services are billed
and recognized monthly on a straight-line basis.
|
|
|
|
Outsourcing services revenues consist principally of sales of various Internet access-related
services such as security related services, network related services, hosting related
services, data center related services, Wide-area Ethernet services and call-center services.
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 outsourcing services
are deferred and recognized over the contract period.
|
|
|
|
Systems integration revenues consist principally of systems construction revenues and systems
operation and maintenance revenues. Systems construction revenues includes consulting, project
planning, system design, and development of network systems to meet each of our customers
requirements, and sales of equipment and software purchased from third parties. Systems
operation and maintenance revenues includes systems construction related maintenance,
monitoring and other operating services.
|
|
(a)
|
|
Systems construction revenues
Systems integration service is subject to the
Emerging Issues Task Force (EITF) Issue No. 00-21, Revenue Arrangements with Multiple
Deliverables. For deliverables in multiple-element arrangements, the guidance below is
applied for separability and allocation. A multiple-element arrangement is separated into
more than one unit of accounting if all of the following criteria are met and is
allocated to the separate units of accounting based on each units relative fair values:
|
F-12
|
|
|
The delivered item(s) has value to the client on a stand-alone basis;
|
|
|
|
|
There is objective and reliable evidence of the fair value of the undelivered item(s); and
|
|
|
|
|
If the arrangement includes a general right of return relative to the delivered
item(s), delivery or performance of the undelivered item(s) is considered probable and
substantially in the control of the company.
|
|
|
|
Systems construction service, which generally completes in less than one year, has
stand-alone value as it is sometimes sold separately without undelivered items such as
maintenance, monitoring and other operating services . The Company maintains a standard
range of prices of those undelivered items, which is considered to be the reliable
evidence of fair value. In addition, the Company does not offer a general right of return
relative to constructed network systems. Therefore, the systems construction service is
considered a separate unit of accounting and the revenues are recognized when constructed
network systems including equipment are delivered and accepted by the customer.
|
|
|
|
|
Elements of systems construction service are also considered as separate units of
accounting. However, when the equipment is delivered prior to other elements of the
systems construction arrangement, revenue is deferred until other systems construction
service elements are completed and accepted by the customer because in the event that the
Company does not complete other systems construction service elements, the customer may
return all of the equipment.
|
|
|
(b)
|
|
Systems operation and maintenance revenues
Maintenance, monitoring and other
operating service revenues are separately accounted for from system constructions. These
revenues are recognized ratably over the period of contract for the respective services,
which is generally for one year.
|
|
|
The Company evaluates the criteria outlined in EITF Issue No. 99-19, Reporting Revenue Gross
as Principal Versus Net as an Agent, in determining whether it is appropriate to record the
gross amount of revenues and related costs or the net amount earned in reporting Equipment
sales. The Company records the gross amounts billed to its customers based on the following
acts: (i)it is primary obligor in these transactions, (ii)it has latitude in establishing
prices and selecting suppliers, and (iii)it is involved in the determination of the service
specifications.
|
|
|
|
Equipment sales are recognized when equipment is delivered and accepted by the customer. Title
to equipment passes when equipment is accepted by the customer.
|
|
|
|
ATM operation business revenues are mainly comprised of commission fees charged when
customers withdraw their deposits from ATMs. The commission fees are recognized when the fees
are charged to customers.
|
|
|
|
Cash and Cash Equivalents
Cash and cash equivalents includes time deposit 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 Companys 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, the Company
classifies its marketable equity securities 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 securities on a regular basis to
determine if the fair value of any individual security 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 income in the period in which the decline is deemed
to be other than temporary.
|
F-13
|
|
Non-marketable equity securities are carried at cost as fair value is not readily
determinable. If the value of a security is estimated to have declined and such decline is
judged to be other than temporary, the security is written down to the fair value.
Determination of impairment is based on the consideration of such factors as operating results, business plans and change in the regulatory, economic or technological
environment of the investees. For purposes of computing an impairment loss, fair value is
determined as the Companys interest in the net assets of investees.
|
|
|
Inventories
Inventories consist mainly of network equipment purchased for resale and
work-in-process for development of Internet network systems. Network equipment purchased for
resale is stated at the lower of cost, which is determined by the average-cost method, or
market. Work-in-process for development of network systems is stated at the lower of actual
production costs, including overhead cost, or market. Inventories are reviewed periodically
and items considered to be slow-moving or obsolete are written down to their estimated net
realizable value.
|
|
|
|
Leases
Capital leases, which meet specific criteria noted in SFAS No.13, Accounting for
Leases, are capitalized at the inception of the lease at the present value of the minimum
lease payments. All other leases are accounted for as operating leases. Lease payments for
capital leases are apportioned to interest expense and a reduction of the lease liability so
as to achieve a constant rate of interest on the remaining balance of the liability. Operating
lease payments are recognized as an expense on a straight-line basis over the lease term.
|
|
|
|
Sales-type Leases
The Company has some sales-type lease agreements with customers. The
Company recognizes revenues on sales-type leases when the assets under lease are delivered to
and accepted by the customers. The revenue recognized is calculated at the net present value
of the future receipt amounts. Interest income in sales-type leases is recognized in other
income using the interest method.
|
|
|
|
Property and Equipment
Property and equipment are recorded at cost. Depreciation and
amortization of property and equipment, including purchased software and capital leases, are
computed principally using the straight-line method based on either the estimated useful lives
of assets or the lease period, whichever is shorter.
|
|
|
|
The useful lives for depreciation and amortization by major asset classes are as follows:
|
|
|
|
|
|
|
|
Range of
|
|
|
|
Useful Lives
|
|
|
Data communications, office and other equipment
|
|
|
2 to 15 years
|
|
Leasehold improvements
|
|
|
3 to 15 years
|
|
Purchased software
|
|
|
5 years
|
|
Capital 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 and amortized intangible assets.
The Company evaluates the impairment of long-lived assets whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable in
accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets.
|
|
|
|
Goodwill and Intangible Assets
In accordance with SFAS No. 142, Goodwill and Other
Intangible Assets, goodwill (including equity-method goodwill) and intangible assets that are
deemed to have indefinite useful lives are not amortized, but are subject to impairment
testing. Impairment testing is performed annually or more frequently if events or changes in
circumstances indicate that the asset might be impaired. The Company performs annual
impairment tests on March 31. Intangible assets with finite useful lives, consisting of
customer relationship and licenses, are amortized using the straight-line method over the
estimated useful lives, which range from 3 to 10 years for customer relationship and 5 years
for licenses.
|
|
|
|
Pension and severance indemnities plans
The Company has pension plans and /or severance
indemnities plans. The cost of the pension plans and severance indemnities plans are accrued
based on amounts determined using actuarial methods.
|
|
|
|
On March 31, 2007, the Company adopted the recognition and disclosure provisions of SFAS No.
158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans, an
amendment of FASB statements No. 87, 88, 106 and 132(R) (SFAS No. 158). SFAS No. 158
required the Company to recognize the funded status of its pension plans, measured as the
difference between plan assets at fair value and the benefit obligation, in the March 31, 2007
consolidated balance sheet, with a corresponding adjustment to accumulated other comprehensive
income, net of tax. The adjustment to accumulated other
|
F-14
|
|
comprehensive income at adoption represented the unrecognized actuarial loss and unrecognized
transition obligation, which were previously netted against the plans funded status in the
consolidated balance sheet pursuant to the provisions of SFAS No. 87. These amounts are
subsequently recognized as net periodic pension cost pursuant to the Companys historical
accounting policy for amortizing such amounts. Further, actuarial gains and losses that arise
in subsequent periods and are not recognized as net periodic pension cost in the same periods
are recognized as a component of other comprehensive income (loss). Those amounts are
subsequently recognized as a component of net periodic pension cost on the same basis as the
amounts recognized in accumulated other comprehensive income (loss) at adoption of SFAS No.
158. On March 31, 2009, the Company adopted the measurement date provision of SFAS No. 158.
The adoption of the measurement date provision had no effect on the consolidated financial
statements, because the Companys measurement date was March 31 before the adoption.
|
|
|
Income Taxes
Income tax expense is based on reported earnings before income taxes. Deferred
income taxes reflect the impact of temporary differences between assets and liabilities
recognized for financial reporting purposes and such amounts recognized for tax purposes and
tax loss carryforwards. These deferred taxes are measured using the currently enacted tax
rates in effect for the year in which the temporary differences or tax loss carryforwards are
expected to reverse. Valuation allowances are provided against deferred tax assets when it is
more likely than not that a tax benefit will not be realized.
|
|
|
|
April 1, 2007, the Company adopted FASB interpretation No. 48 (FIN No. 48), Accounting for
Uncertainty in Income Taxes, which clarifies the accounting for uncertainty in income taxes
recognized in an enterprises financial statements in accordance with SFAS No. 109,
Accounting for Income Taxes.
|
|
|
|
The Company recognizes the financial statement effect of tax positions when they are more
likely than not, based on the technical merits, that the tax positions will be sustained upon
examination by the tax authorities. Benefits from tax positions that meet more-likely-than-not
recognition threshold are measured at the largest amount of benefit that is greater than 50
percent likely of being realized upon settlement. Interest and penalties accrued related to
unrecognized tax benefits are included in income tax expense in the consolidated statements of
income. See Note 10 for further discussion of the effect of adopting FIN 48 on the Companys
financial statements.
|
|
|
|
Foreign Currency Translation
Foreign currency financial statements have been translated in
accordance with SFAS No. 52, Foreign Currency Translation. Pursuant to this statement, the
assets and liabilities of a foreign subsidiary and an equity method investee are translated
into Japanese yen at the respective year-end exchange rates. All income and expense accounts
are translated at average rates of exchange. The resulting translation adjustments are
included in accumulated other comprehensive income.
|
|
|
|
Foreign currency assets and liabilities, which consist substantially of cash denominated in
U.S. dollars, are stated at the amount as computed by using year-end exchange rates and the
resulting transaction gain or loss is recognized in earnings.
|
|
|
|
Stock-based Compensation
On April 1, 2006, the Company adopted SFAS No. 123R, Share-Based
Payment and the related interpretations, which requires compensation expense for stock
options and other share-based payments to be measured and recorded based on the instruments
fair value, by using the modified prospective application method. SFAS No. 123R requires
recognizing expenses for share-based payments granted prior to the adoption date equal to the
fair value of unvested amounts over the remaining requisite service period. The portion of
these share-based payments fair value attributable to vested awards prior to the adoption of
SFAS No. 123R is never recognized. As all existing granted stock-based awards of the Company
had vested, the adoption of SFAS No. 123R did not have any impact on the Companys
consolidated financial position or results of operations.
|
|
|
|
Prior to April 1, 2006, the Company accounted for stock-based compensation using the intrinsic
value method prescribed in Accounting Principle Board Opinion (APB) No. 25, Accounting for
Stock Issued to Employers and related interpretations.
|
|
|
|
Research and Development
Research and development costs are expensed as incurred.
|
|
|
|
Advertising
Advertising costs are expensed as incurred and are recorded in Sales and
marketing.
|
|
|
|
Basic and Diluted Net Income per Common Share
Basic net income per common share is computed
by dividing net income by the weighted-average number of shares of common stock outstanding
during the year. Diluted net income per common share reflects the potential dilutive effect
of stock options.
|
F-15
|
|
Other Comprehensive Income (Loss)
Other comprehensive income (loss) consists of translation
adjustments resulting from the translation of financial statements of a foreign subsidiary,
unrealized gains or losses on available-for-sale securities, gains or losses on cash flow
hedging derivative instruments and defined benefit pension plans adjustment.
|
|
|
Segment Reporting
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, establishes standards for reporting information about operating segments.
Operating segments are defined as components of an enterprise that engage in business
activities from which it may earn revenues and incur expense and for which separate financial
information is available that is evaluated regularly by the chief operation decision maker in
deciding how to allocate resources and in assessing performance.
|
|
|
|
The Company provides a comprehensive range of network solutions to meet its customers needs
by cross-selling a variety of services, including Internet connectivity services, outsourcing
services, systems integration and sales of network-related equipment, and ATM operation
services. The Companys chief operating decision maker, who is the Companys Chief Executive
Officer (CEO), regularly reviews the revenue and cost of sales on the two operating
segments, which are Network service and systems integration business segment and ATM operation
business segment. CEO also makes decisions regarding how to allocate resources and assess
performance based on the segments.
|
|
|
|
New Accounting Standards
|
|
|
|
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements which defines
fair value, establishes a framework for measuring fair value in generally accepted accounting
principles, and expands disclosures about fair value measurements. This statement clarifies
how to measure fair value as permitted or required under other accounting pronouncements, but
does not require any new fair value measurements. In February 2008, the FASB issued Staff
Positions (FSP) No. FAS 157-2, Effective Date of FASB Statement No.157, which partially
delay the effective date of SFAS No. 157 for one year for certain nonfinancial assets and
liabilities and remove certain leasing transactions from its scope. The Company adopted SFAS
No. 157 in the first quarter beginning April 1, 2008 for all financial assets and liabilities
that are recognized or disclosed at fair value in the financial statements. This adoption did
not have a material effect on the Companys financial position or results of operations. The
adoption of SFAS No. 157 for all nonfinancial asssets and liabilities beginning April 1, 2009
will not have a material effect upon the Company s financial position or results of
operations.
|
|
|
|
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities, including an amendment of FASB Statement No. 115. SFAS No.
159 provides companies with an option to report selected financial assets and liabilities at
fair value. Unrealized gains and losses on items for which the fair value option has been
elected will be recognized in earnings. SFAS No. 159 is effective for fiscal years beginning
after November 15, 2007 and is required to be adopted by the Company in the first quarter
beginning April 1, 2008 and was adopted by the Company in the first quarter beginning April 1,
2008. The adoption of SFAS No. 159 did not have an impact upon the Companys financial
position or results of operations as the Company did not elect to report financial assets and
liabilities under fair value option.
|
|
|
|
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations. The Statement
establishes principles and requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the
acquiree and the goodwill acquired. SFAS No. 141(R) also establishes disclosure requirements to enable the
evaluation of the nature and financial effects of the business combination. SFAS No. 141(R) is effective for fiscal years beginning on or after December 15, 2008. In April 2009, the FASB issued FSP No.
FAS 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business
Combination That Arise from Contingencies. FSP No. FAS 141(R)-1 amends the initial
recognition and measurement, subsequent measurement and accounting, and disclosure of assets
and liabilities arising from contingencies in a business combination. FSP No. FAS 141(R)-1 is
effective for assets and liabilities arising from contingencies in business combinations for
which the acquisition date is on or after the beginning of the first annual reporting period
beginning on or after December 15, 2008. The impact of the adoption of SFAS No. 141(R) and FSP
No. FAS 141(R)-1 on the Companys financial position or results of operations will be
dependent on the size and nature of business combinations completed after the adoption of this
statement.
|
|
|
|
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements, an amendment of ARB No. 51. The Statement establishes accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary.
The Statement is effective on or after the beginning of the first annual reporting period beginning on or after
December 15, 2008. The adoption of SFAS No.160 will impact the presentation of the Companys balance sheets and statements of income, however, it will not have a material impact on the
Companys financial position or results of operations.
|
F-16
|
|
In October 2008, the FASB issued FSP No. FAS 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active. FSP No. FAS 157-3 clarifies the application of
SFAS No. 157 in a market that is not active and provides an example to illustrate key
considerations in determining the fair value of a financial asset when market for that
financial asset is not active. FSP No. FAS 157-3 is effective upon issuance, including prior
periods for which financial statements have not been issued. The adoption of FSP No. FAS 157-3
did not have a material impact upon the Companys financial position or results of operations.
|
|
|
|
In December 2008, the FASB issued FSP No. FAS 132(R)-1, Employers Disclosures about
Postretirement Benefit Plan Assets. FSP No. FAS 132(R)-1 requires additional disclosure about plan assets
including investment allocation, fair value of major categories of plan assets, development of fair
value measurements, and concentrations of risk. FSP No. FAS 132(R)-1 is effective for fiscal
years ending after December 15, 2009. The Company is currently evaluating the requirements of
these additional disclosures, but does not expect the adoption of FSP No. FAS 132(R)-1 to have
an impact on the Companys financial position or results of operations.
|
|
|
|
In April 2009, the FASB issued FSP No. FAS 115-2 and No. FAS 124-2, Recogniton and
Presentation of Other-Than-Temporary Impairments. FSP No. FAS 115-2 and No. FAS 124-2 amends
the other-than-temporary impairment guidance in U.S. GAAP for debt securities to make the
guidance more operational and to improve the presentation and disclosure of
other-than-temporary impairments on debt and equity securities in the financial statements.
FSP No. FAS 115-2 and No. FAS 124-2 are effective for fiscal years ending after June 15, 2009
and early adoption is permitted. The adoption of FSP No. FAS 115-2 and No. FAS 124-2 will not
have a material impact on the Companys financial position and results of operations.
|
|
|
|
In April 2009, the FASB issued FSP No. FAS 157-4, Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly. FSP No. FAS 157-4 provides additional guidance for estimating fair value in
accordance with SFAS No. 157 when the volume and level of activity for the asset or liability have
significantly decreased. This FSP also includes guidance on identifying circumstances that indicate a
transaction is not orderly. FSP No. FAS 157-4 is effective for interim and annual reporting periods ending after
June 15, 2009. The adoption of FSP No. FAS 157-4 will not have a material impact upon the
Companys financial position or results of operations.
|
F-17
2.
|
|
INVENTORY
|
|
|
|
The components of inventories as of March 31, 2008 and 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
|
Thousands of Yen
|
|
|
U.S. Dollars
|
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
Network equipment purchased for resale
|
|
¥
|
74,622
|
|
|
¥
|
130,730
|
|
|
$
|
1,319
|
|
Work in process
|
|
|
1,109,538
|
|
|
|
399,026
|
|
|
|
4,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
¥
|
1,184,160
|
|
|
¥
|
529,756
|
|
|
$
|
5,343
|
|
|
|
|
|
|
|
|
|
|
|
3.
|
|
OTHER INVESTMENTS
|
|
|
|
Pursuant to SFAS No. 115, all of the Companys marketable equity securities were
classified as available-for-sale securities. Information regarding the securities classified
as available-for-sale at March 31, 2008 and 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-saleEquity
securities
|
|
¥
|
489,172
|
|
|
¥
|
423,362
|
|
|
¥
|
68,053
|
|
|
¥
|
844,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-saleEquity
securities
|
|
¥
|
507,391
|
|
|
¥
|
225,811
|
|
|
¥
|
58,948
|
|
|
¥
|
674,254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of U.S. Dollars
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
March 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-saleEquity
securities
|
|
$
|
5,117
|
|
|
$
|
2,278
|
|
|
$
|
595
|
|
|
$
|
6,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides the fair value and gross unrealized losses of the Companys
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, 2008 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
|
12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-saleEquity
securities
|
|
¥
|
219,962
|
|
|
¥
|
68,053
|
|
|
¥
|
|
|
|
¥
|
|
|
|
¥
|
219,962
|
|
|
¥
|
68,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-saleEquity
securities
|
|
¥
|
293,704
|
|
|
¥
|
48,136
|
|
|
¥
|
35,120
|
|
|
¥
|
10,812
|
|
|
¥
|
328,824
|
|
|
¥
|
58,948
|
|
F-18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of U.S. Dollars
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
|
12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
March 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-saleEquity
securities
|
|
$
|
2,962
|
|
|
$
|
486
|
|
|
$
|
354
|
|
|
$
|
109
|
|
|
$
|
3,316
|
|
|
$
|
595
|
|
|
|
The Company regularly reviews all of the Companys investments to determine if any are
other-than-temporarily impaired. The analysis includes reviewing industry analyst reports,
sector credit ratings and volatility of the securitys market price.
|
|
|
|
The Companys unrealized loss on investments in marketable equity security relates to Japanese
companies (25 issuers) in various industries. The unrealized losses on these securities were
due principally to a temporary decline in the stock market. The fair value of each investment
is between 1.4% to 29.5% less than its cost except for an investment of which the fair value
has recovered to its cost after April 2009. The duration of the unrealized loss position was
less than 17 months. The Company evaluated the near-term prospects of the issuer and the
analyst reports in relation to the severity and duration of impairment. Based on that
evaluation and the Companys ability and intent to hold the investment for a reasonable period
of time sufficient for a recovery of fair value, the Company does not consider the investment
to be other-than-temporarily impaired at March 31, 2009.
|
|
|
|
Proceeds from the sale of available-for-sale securities were ¥3,883,915 thousand, ¥616,920
thousand and ¥3,417 thousand ($34 thousand) for the years ended March 31, 2007, 2008 and 2009,
respectively. Gross realized gains of ¥3,242,257 thousand, ¥218,070 thousand were included in
other income (expenses) for the year ended March 31, 2007 and 2008, respectively, and gross
realized losses of ¥12,358 thousand, ¥113 thousand and ¥2,049 thousand ($21 thousand) were
included in other income (expenses) for the years ended March 31, 2007, 2008 and 2009,
respectively.
|
|
|
|
The aggregate cost of the Companys cost method investments totaled ¥1,519,289 thousand and
¥1,240,340 thousand ($12,510 thousand) at March 31, 2008 and 2009, respectively.
|
|
|
|
Losses on write-down of investments in certain marketable and nonmarketable equity securities,
included in other income (expenses), were recognized to reflect the decline in value
considered to be other than temporary, which were ¥103,243 thousand and ¥185,400 thousand,
respectively, for the year ended March 31, 2008 , and ¥163,836 thousand ($1,652 thousand) and
¥360,451 thousand ($3,635 thousand), respectively, for the year ended March 31, 2009. Such
losses in certain nonmarketable equity securities, included in other income (expenses), were
¥1,363,389 thousand for the year ended March 31, 2007.
|
|
|
|
In Japan, there is a market in which participants lend and borrow debt and equity
securities without collateral from financial institutions under agreements known as lending
and borrowing debt and equity securities contracts. Under the agreement, the Company loans
equity securities without collateral. The Company has loaned ¥114,400 thousand and ¥12,760
thousand ($129 thousand) of available-for-sale securities to the financial institution as of
March 31, 2008 and 2009, respectively.
|
F-19
4.
|
|
ALLOWANCE FOR DOUBTFUL ACCOUNTS AND LOAN
|
|
|
|
An analysis of the allowance for doubtful accounts for the years ended March 31, 2007, 2008
and 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen
|
|
|
|
|
|
|
|
|
|
|
|
Provision for
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
|
(Reversal of)
|
|
|
|
|
|
|
Beginning of
|
|
|
Credits
|
|
|
Doubtful
|
|
|
Balance at
|
|
|
|
Year
|
|
|
Charged Off
|
|
|
Accounts
|
|
|
End of Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended March 31, 2007
|
|
¥
|
114,342
|
|
|
¥
|
(3,764
|
)
|
|
¥
|
12,232
|
|
|
¥
|
122,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended March 31, 2008
|
|
¥
|
122,810
|
|
|
¥
|
(8,750
|
)
|
|
¥
|
(416
|
)
|
|
¥
|
113,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended March 31, 2009
|
|
¥
|
113,644
|
|
|
¥
|
(16,371
|
)
|
|
¥
|
26,020
|
|
|
¥
|
123,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of U.S. dollars
|
|
|
|
Balance at
|
|
|
|
|
|
|
Reversal of
|
|
|
|
|
|
|
Beginning of
|
|
|
Credits
|
|
|
Doubtful
|
|
|
Balance at
|
|
|
|
Year
|
|
|
Charged Off
|
|
|
Accounts
|
|
|
End of Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended March 31, 2009
|
|
$
|
1,146
|
|
|
$
|
(165
|
)
|
|
$
|
262
|
|
|
$
|
1,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
|
INVESTMENTS IN EQUITY METHOD INVESTEES
|
|
|
|
IIJ utilizes various companies in Japan and neighboring countries to form and operate its
Internet business. Businesses operated by its equity method investees include multifeed technology services and
location facilities for connecting high-speed Internet backbones (Internet Multifeed Co., Multifeed),
data center services in Asian countries ( i-Heart Inc., i-Heart), comprehensive portal sites operations
(Internet Revolution Inc., i-revo) and point management systems operations (Taihei Computer Co., Ltd.,
TCC)
|
|
|
|
On March 28, 2007, IIJ sold all its shares in atom for ¥185,900 thousand with a gain of ¥252
thousand. IIJ accounted for atom as an equity method investee through March 2007.
|
|
|
|
On July 6, 2007, IIJ invested ¥235,389 thousand in TCC to partner with TCC on the management
of customer loyalty reward program systems.
|
|
|
|
The aggregate amounts of balances and transactions of the Company with these equity method
investees as of March 31, 2008 and 2009, and for each of the three years in the period ended
March 31, 2009 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
|
Thousands of Yen
|
|
|
U.S. Dollars
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
¥
|
|
|
|
¥
|
60,420
|
|
|
¥
|
66,880
|
|
|
$
|
675
|
|
Accounts payable
|
|
|
|
|
|
|
20,197
|
|
|
|
23,373
|
|
|
|
236
|
|
Revenues
|
|
|
481,850
|
|
|
|
582,290
|
|
|
|
672,014
|
|
|
|
6,778
|
|
Costs and expenses
|
|
|
172,971
|
|
|
|
207,670
|
|
|
|
257,732
|
|
|
|
2,599
|
|
|
|
On June 30, 2008, the Company received ¥30,380 thousand ($306 thousand) of dividends from
Multifeed.
|
F-20
|
|
The Companys investments in these equity method investees and respective ownership percentage
at March 31, 2008 and 2009 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
|
|
|
|
|
Thousands of Yen
|
|
|
U.S. Dollars
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
2009
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifeed
|
|
|
31.00
|
%
|
|
¥
|
621,906
|
|
|
|
31.00
|
%
|
|
¥
|
713,375
|
|
|
$
|
7,195
|
|
i-revo
|
|
|
30.00
|
|
|
|
80,567
|
|
|
|
30.00
|
|
|
|
24,114
|
|
|
|
243
|
|
TCC
|
|
|
45.00
|
|
|
|
218,176
|
|
|
|
45.00
|
|
|
|
188,775
|
|
|
|
1,904
|
|
i-Heart
|
|
|
28.57
|
|
|
|
36,043
|
|
|
|
28.57
|
|
|
|
21,362
|
|
|
|
216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
¥
|
956,692
|
|
|
|
|
|
|
¥
|
947,626
|
|
|
$
|
9,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company also had a loan of ¥34,545 thousand ($348 thousand) to i-Heart, net of loan loss
valuation allowance, which was included in the OTHER ASSETS in the Companys balance sheets
as of March 31, 2008 and 2009.
|
F-21
6. PROPERTY AND EQUIPMENT
Property and equipment as of March 31, 2008 and 2009 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
|
Thousands of Yen
|
|
|
U.S. Dollars
|
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
Data communications equipment
|
|
¥
|
646,592
|
|
|
¥
|
1,010,283
|
|
|
$
|
10,189
|
|
Office and other equipment
|
|
|
1,037,273
|
|
|
|
1,190,217
|
|
|
|
12,004
|
|
Leasehold improvements
|
|
|
919,851
|
|
|
|
1,010,805
|
|
|
|
10,195
|
|
Purchased software
|
|
|
7,600,204
|
|
|
|
9,459,207
|
|
|
|
95,403
|
|
Assets under capital leases, primarily data
communications equipment
|
|
|
15,566,075
|
|
|
|
16,946,896
|
|
|
|
170,922
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
25,769,995
|
|
|
|
29,617,408
|
|
|
|
298,713
|
|
Less accumulated depreciation
and amortization
|
|
|
(14,029,785
|
)
|
|
|
(16,444,517
|
)
|
|
|
(165,855
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipmentnet
|
|
¥
|
11,740,210
|
|
|
¥
|
13,172,891
|
|
|
$
|
132,858
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expenses for the years ended March 31, 2007, 2008 and 2009
amounted to ¥4,228,048 thousand, ¥4,720,325 thousand and ¥5,235,218 thousand ($52,801
thousand), respectively.
The Company recorded losses on disposal of property and equipment of ¥150,731 thousand,
¥72,086 thousand and ¥443,019 thousand ($4,468 thousand) for the year ended March 31, 2007,
2008 and 2009, respectively, in General and Administrative expenses in the Companys
statements of income.
7. GOODWILL AND OTHER INTANGIBLE ASSETS
The components of intangible assets as of March 31, 2008 and 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
|
Thousands of Yen
|
|
|
U.S. Dollars
|
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Licenses
|
|
¥
|
143,110
|
|
|
¥
|
143,110
|
|
|
$
|
1,443
|
|
Customer relationship
|
|
|
289,000
|
|
|
|
289,000
|
|
|
|
2,915
|
|
Backlog
|
|
|
2,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
434,380
|
|
|
|
432,110
|
|
|
|
4,358
|
|
Less accumulated amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
Licenses
|
|
|
|
|
|
|
(16,697
|
)
|
|
|
(169
|
)
|
Customer relationship
|
|
|
(53,083
|
)
|
|
|
(118,309
|
)
|
|
|
(1,193
|
)
|
Backlog
|
|
|
(2,270
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(55,353
|
)
|
|
|
(135,006
|
)
|
|
|
(1,362
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized intangible assetsnet
|
|
|
379,027
|
|
|
|
297,104
|
|
|
|
2,997
|
|
|
|
|
|
|
|
|
|
|
|
Non-amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Telephone rights
|
|
¥
|
12,513
|
|
|
¥
|
9,485
|
|
|
$
|
96
|
|
Trademark
|
|
|
192,000
|
|
|
|
192,000
|
|
|
|
1,936
|
|
Customer relationship
|
|
|
2,816,577
|
|
|
|
2,703,217
|
|
|
|
27,264
|
|
Goodwill
|
|
|
2,507,258
|
|
|
|
2,639,319
|
|
|
|
26,619
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
5,528,348
|
|
|
|
5,544,021
|
|
|
|
55,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
¥
|
5,907,375
|
|
|
¥
|
5,841,125
|
|
|
$
|
58,912
|
|
|
|
|
|
|
|
|
|
|
|
F-22
Amortized intangible assets in relation to acquired businesses during the year ended
March 31, 2008 totaled ¥432,810 thousand, which consisted of license of ¥143,110 thousand,
customer relationship of ¥289,000 thousand and backlog of ¥700 thousand, respectively. The
amortized intangible assets acquired during the year ended March 31, 2008 did not have any
residual values. The weighted average amortization period for customer relationship is
approximately 4.5 years and the amortization period for licenses is 5 years, respectively. The
amortization expenses for the years ended March 31, 2008 and 2009 were ¥54,479 thousand and
¥81,923 thousand ($826 thousand), respectively. The estimated aggregate amortization expense
of intangible assets for each of the next five years is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
Year Ending March 31
|
|
Thousands of yen
|
|
U.S. Dollars
|
2010
|
|
¥
|
92,322
|
|
|
$
|
931
|
|
2011
|
|
|
59,684
|
|
|
|
602
|
|
2012
|
|
|
54,989
|
|
|
|
555
|
|
2013
|
|
|
54,989
|
|
|
|
555
|
|
2014
|
|
|
20,236
|
|
|
|
204
|
|
Non-amortized intangible assets other than goodwill acquired for the year ended March 31, 2008
were ¥1,531,165 thousand which consisted of trademark of ¥192,000 thousand and customer
relationship of ¥1,339,165 thousand, respectively.
The following table shows changes in the carrying amount of goodwill for the year ended March
31, 2009, by operating segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen
|
|
|
Thousands of U.S. Dollars
|
|
|
|
Network
|
|
|
|
|
|
|
|
|
|
|
Network
|
|
|
|
|
|
|
|
|
|
service and
|
|
|
|
|
|
|
|
|
|
|
service and
|
|
|
|
|
|
|
|
|
|
systems
|
|
|
ATM
|
|
|
|
|
|
|
systems
|
|
|
ATM
|
|
|
|
|
|
|
integration
|
|
|
operation
|
|
|
|
|
|
|
integration
|
|
|
operation
|
|
|
|
|
|
|
business
|
|
|
business
|
|
|
Total
|
|
|
business
|
|
|
business
|
|
|
Total
|
|
Balance at March
31, 2007
|
|
¥
|
1,386,252
|
|
|
¥
|
|
|
|
¥
|
1,386,252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions
|
|
|
997,234
|
|
|
|
123,772
|
|
|
|
1,121,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March
31, 2008
|
|
|
2,383,486
|
|
|
|
123,772
|
|
|
|
2,507,258
|
|
|
$
|
24,039
|
|
|
$
|
1,248
|
|
|
$
|
25,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions
|
|
|
20,282
|
|
|
|
111,779
|
|
|
|
132,061
|
|
|
|
205
|
|
|
|
1,127
|
|
|
|
1,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March
31, 2009
|
|
¥
|
2,403,768
|
|
|
¥
|
235,551
|
|
|
¥
|
2,639,319
|
|
|
$
|
24,244
|
|
|
$
|
2,375
|
|
|
$
|
26,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On March 30, 2007, IIJ purchased the shares of IIJ-Tech from its minority shareholders for
¥2,725,205 thousand by cash, in order to acquire the additional interests in IIJ-Tech. The
Company acquired an order backlog of ¥696 thousand, customer relationships valued at
¥1,329,987 thousand and recorded goodwill of ¥751,266 thousand in the transaction.
On April 5, 2007, IIJ purchased the shares of IIJ-Tech from its minority shareholders for
¥1,635,123 thousand by cash, and on May 11, 2007, IIJ exchanged its new 1,848 shares which
valued ¥861,475 thousand to the 2,200 shares of IIJ-Tech. The acquisition price was determined
on the basis of discounted future cash flows amounts of IIJ-Tech. Through these transactions,
IIJ made IIJ-tech a 100% owned subsidiary. The Company acquired an order backlog of ¥700
thousand customer relationships valued at ¥1,339,165 thousand and recorded goodwill of
¥644,759 thousand in the transaction.
On June 1, 2007, IIJ purchased all shares of hi-ho, Inc. (hi-ho) for ¥1,230,450 thousand
which was a wholly owned subsidiary of Panasonic Network Services Inc.(PNS) and is operating
the ISP business provided by PNS under the hi-ho service brand and the solution business to
corporate customers. The acquisition price of the shares was determined on the basis of
discounted future cash flows amounts of hi-ho. The acquisition of hi-ho was consistent with
the Companys strategy for expanding its internet service business by providing safe and
high-quality services to individual customers, applying the Companys engineering and network
operating expertise cultivated in its internet business for corporate customers. The Company
acquired the trademark right of ¥192,000 thousand, customer relationships of ¥289,000 thousand
which was subject to amortization and recorded goodwill of ¥177,770 thousand in the
transaction. The pro
F-23
forma impact of the acquisition of the business on consolidated revenues and net income of the
Company, assuming the acquisition had been completed at the beginning of the year ended March
31, 2007 and the year ended March 31, 2008, would have been an increase to consolidated
revenues of ¥5.5 billion and ¥0.8 billion, respectively, and a increase to net income of ¥288
million and a decrease of ¥18 million respectively. Basic net income per common share for the
year ended March 31, 2007 and 2008 would have been ¥27,930 and ¥25,013 respectively and
diluted net income per common share for the year ended March 31, 2007 and 2008 would have been
¥27,896 and ¥24,986 respectively.
In the year ended March 31, 2008, IIJ acquired the following two entities for a total cost of
¥799,998 thousand which was paid in cash: (i)GDX, a start-up company to provide a message
exchange network service in Japan, (ii)Trust, a start-up company to operate networks for ATMs.
The Company recorded licenses of ¥143,110 thousand and goodwill of ¥123,772 thousand.
In the year ended March 31, 2009, IIJ acquired additional shares of GDX for ¥50,000
thousand ($504 thousand) and Trust for ¥349,500 thousand ($3,525 thousand). IIJ recorded
goodwill of ¥20,282 thousand ($205 thousand) for GDX and ¥111,779 thousand ($1,127 thousand) for Trust.
A certain customer relationship was impaired for the year ended March 31, 2009 because it
is expected that the volume of business with a specific customer will decrease in the near
future. As a result of the decrease in the business, the fair value of the customer
relationship became worthless and the Company recorded an impairment loss of ¥113,360 thousand
($1,143 thousand) in Sales and marketing expenses in the Companys statements of income for
the year ended March 31, 2009. The amount of the impaired customer relationship was included
in the Network service and Systems integration business segment. The Company applied the
excess earnings method to evaluate the impairment loss on the customer relationship. No
impairment on goodwill and intangible assets were recognized during the years ended March 31,
2007 and 2008.
8. 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.
A portion of the Companys sales result from multi-year lease agreements, under which the
Company leased some network equipment to customers. The leases are classified as sale-type
leases which the Company accounts for in accordance with SFAS No. 13.
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 IIJs network. The leases for domestic backbone connectivity are generally
non-cancelable for a minimum one-year lease period. The leases for international backbone
connectivity for mainly three-year lease period are substantially non-cancelable. The Company
also leases its office premises, for which refundable lease deposits are capitalized as
guarantee deposits, and certain office equipment under non-cancelable operating leases which
expire on various dates through the year 2011 and also leases its network operation centers
under non-cancelable operating leases.
Refundable guarantee deposits as of March 31, 2008 and 2009 consist of as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
|
Thousands of Yen
|
|
|
U.S. Dollars
|
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
Head office
|
|
¥
|
1,262,508
|
|
|
¥
|
1,268,634
|
|
|
$
|
12,795
|
|
Sales and subsidiaries offices
|
|
|
713,383
|
|
|
|
754,987
|
|
|
|
7,615
|
|
Others
|
|
|
61,274
|
|
|
|
49,031
|
|
|
|
494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total refundable guarantee deposits
|
|
¥
|
2,037,165
|
|
|
¥
|
2,072,652
|
|
|
$
|
20,904
|
|
|
|
|
|
|
|
|
|
|
|
F-24
Lease expenses related to backbone lines for the years ended March 31, 2007, 2008 and 2009
amounted to ¥3,515,934 thousand, ¥3,469,717 thousand and ¥3,692,286 thousand ($37,239
thousand), respectively. Lease expenses for local access lines for the years ended March 31,
2007, 2008 and 2009, which are only attributable to dedicated access revenues, amounted to ¥4,616,431 thousand, ¥4,997,621
thousand and ¥5,303,651 thousand ($53,491 thousand), respectively. Other lease expenses for
the years ended March 31, 2007, 2008 and 2009 amounted to ¥4,381,951 thousand, ¥6,236,004
thousand and ¥7,186,361 thousand ($72,480 thousand), respectively.
The Company has subleased a part of its office premises. Lease expenses mentioned above have
been reduced by sublease revenues totaling ¥22,034 thousand, ¥22,034 thousand and ¥24,719
thousand ($249 thousand) for the years ended March 31, 2007, 2008 and 2009, respectively.
The following is a schedule by years of minimum future sublease revenues as of March 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
|
Thousands of Yen
|
|
|
U.S. Dollars
|
|
|
|
2009
|
|
|
2009
|
|
Year ending March 31:
|
|
|
|
|
|
|
|
|
2010
|
|
¥
|
25,559
|
|
|
$
|
258
|
|
2011
|
|
|
24,391
|
|
|
|
246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
¥
|
49,950
|
|
|
$
|
504
|
|
|
|
|
|
|
|
|
F-25
Capital Leases
The Company conducts its connectivity and other 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 ¥15,566,075 thousand and ¥7,673,873 thousand at March 31, 2008 and ¥16,946,896 thousand
($170,922 thousand) and ¥9,175,869 thousand ($92,545 thousand) at March 31, 2009,
respectively.
Lessee Future Minimum Lease Payments
As of March 31, 2009, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen
|
|
|
Thousands of U.S. Dollars
|
|
|
|
Connectivity
|
|
|
|
|
|
|
|
|
|
|
Connectivity
|
|
|
|
|
|
|
|
|
|
Lines
|
|
|
Other
|
|
|
|
|
|
|
Lines
|
|
|
Other
|
|
|
|
|
|
|
Operating
|
|
|
Operating
|
|
|
Capital
|
|
|
Operating
|
|
|
Operating
|
|
|
Capital
|
|
|
|
Leases
|
|
|
Leases
|
|
|
Leases
|
|
|
Leases
|
|
|
Leases
|
|
|
Leases
|
|
Year ending March 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
¥
|
1,205,573
|
|
|
¥
|
2,145,914
|
|
|
¥
|
3,482,557
|
|
|
$
|
12,159
|
|
|
$
|
21,643
|
|
|
$
|
35,124
|
|
2011
|
|
|
855,671
|
|
|
|
720,743
|
|
|
|
2,732,294
|
|
|
|
8,630
|
|
|
|
7,269
|
|
|
|
27,557
|
|
2012
|
|
|
183,187
|
|
|
|
537,023
|
|
|
|
1,657,567
|
|
|
|
1,848
|
|
|
|
5,416
|
|
|
|
16,717
|
|
2013
|
|
|
76,800
|
|
|
|
514,494
|
|
|
|
580,805
|
|
|
|
775
|
|
|
|
5,189
|
|
|
|
5,858
|
|
2014
|
|
|
76,800
|
|
|
|
425,320
|
|
|
|
59,661
|
|
|
|
774
|
|
|
|
4,290
|
|
|
|
602
|
|
2015 and thereafter
|
|
|
0
|
|
|
|
1,386,549
|
|
|
|
838
|
|
|
|
0
|
|
|
|
13,985
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
¥
|
2,398,031
|
|
|
¥
|
5,730,043
|
|
|
|
8,513,722
|
|
|
$
|
24,186
|
|
|
$
|
57,792
|
|
|
|
85,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less amounts representing interest
|
|
|
|
|
|
|
|
|
|
|
375,345
|
|
|
|
|
|
|
|
|
|
|
|
3,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of net minimum capital
lease payments
|
|
|
|
|
|
|
|
|
|
|
8,138,377
|
|
|
|
|
|
|
|
|
|
|
|
82,081
|
|
Less current portion
|
|
|
|
|
|
|
|
|
|
|
3,272,257
|
|
|
|
|
|
|
|
|
|
|
|
33,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent portion
|
|
|
|
|
|
|
|
|
|
¥
|
4,866,120
|
|
|
|
|
|
|
|
|
|
|
$
|
49,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales-type Leases
The components of the net investment in sales-type leases as of March 31,
2008 and 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
|
Thousands of Yen
|
|
|
U.S. Dollars
|
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
Year ending March 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
|
|
¥
|
345,571
|
|
|
$
|
3,485
|
|
2011
|
|
|
|
|
|
|
350,241
|
|
|
|
3,532
|
|
2012
|
|
|
|
|
|
|
82,792
|
|
|
|
835
|
|
2013
|
|
|
|
|
|
|
59,740
|
|
|
|
603
|
|
|
|
|
|
|
|
|
1,363
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments to be received*
|
|
¥
|
995,266
|
|
|
|
839,707
|
|
|
|
8,469
|
|
Estimated residual value of leased property (unguaranteed)
|
|
|
215,917
|
|
|
|
215,917
|
|
|
|
2,178
|
|
Less unearned income
|
|
|
45,246
|
|
|
|
35,764
|
|
|
|
361
|
|
|
|
|
|
|
|
|
|
|
|
Net investment in sales-type leases
|
|
|
1,165,937
|
|
|
|
1,019,860
|
|
|
|
10,286
|
|
Less current portion
|
|
|
383,177
|
|
|
|
325,829
|
|
|
|
3,286
|
|
|
|
|
|
|
|
|
|
|
|
Non-current net investment in sales-type leases
|
|
¥
|
782,760
|
|
|
¥
|
694,031
|
|
|
$
|
7,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Estimated executory costs, including profit thereon, of ¥315,619 thousand and ¥222,835
thousand ($2,247 thousand) were excluded from total minimum lease payments to be
received as of March 31, 2008 and 2009.
|
F-26
9. BORROWINGS
Short-term borrowings at March 31, 2008 and 2009 consist of bank overdrafts that bear fixed
rate interest. The weighted average rates at March 31, 2008 and 2009 were 1.365 percent and
1.223 percent, respectively.
Substantially all short-term borrowings are made under agreements which, as is customary in
Japan, provide that under certain conditions the bank may require the borrower to provide
collateral (or additional collateral) or guarantor with respect to the borrowings and that the
bank may treat any collateral, whether furnished as security for short-term or long-term loans
or otherwise, as collateral for all indebtedness to such bank. Also, provisions of certain loan
agreements grant certain rights of possession to the lenders in the event of default. The
Company did not provide banks with any collateral for outstanding loans as of March 31, 2009.
The Company entered into bank overdraft agreements with certain Japanese banks for which the
unused balance outstanding as of March 31, 2009 was ¥11,170,000 thousand ($112,658 thousand).
10. INCOME TAXES
Income taxes imposed by the national, prefectural and municipal governments of Japan resulted in
a normal statutory rate of approximately 41 percent for the years ended March 31, 2007, 2008 and
2009.
Income from operations before income tax expense (benefit), minority interests and equity in net
income (loss) of equity method investees and income tax expense (benefit) for the years ended
March 31, 2007, 2008, and 2009 consists of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
|
Thousands of Yen
|
|
|
U.S. Dollars
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
Income from operations before income tax
expense (benefit), minority interests
and equity in net income (loss)
of equity method investees:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
¥
|
5,055,155
|
|
|
¥
|
4,382,741
|
|
|
¥
|
2,060,855
|
|
|
$
|
20,785
|
|
Foreign
|
|
|
(6,467
|
)
|
|
|
(21,072
|
)
|
|
|
(26,367
|
)
|
|
|
(266
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
¥
|
5,048,688
|
|
|
¥
|
4,361,669
|
|
|
¥
|
2,034,488
|
|
|
$
|
20,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
¥
|
798,922
|
|
|
¥
|
778,152
|
|
|
¥
|
359,143
|
|
|
$
|
3,622
|
|
Foreign
|
|
|
(108,180
|
)
|
|
|
13,709
|
|
|
|
6,750
|
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
¥
|
690,742
|
|
|
¥
|
791,861
|
|
|
¥
|
365,893
|
|
|
$
|
3,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
¥
|
(1,494,685
|
)
|
|
¥
|
(1,653,275
|
)
|
|
¥
|
636,818
|
|
|
$
|
6,423
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
¥
|
(1,494,685
|
)
|
|
¥
|
(1,653,275
|
)
|
|
¥
|
636,818
|
|
|
$
|
6,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In September 2007, the Company applied for the consolidated tax declaration and the
application was approved by the national tax agency. The company started the consolidated tax
declaration for the fiscal year ended March 31, 2009.
Net deferred income tax assets and liabilities are reflected on the consolidated balance sheets
as of March 31, 2008 and 2009 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
|
Thousands of Yen
|
|
|
U.S. Dollars
|
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets Other current assets
|
|
¥
|
1,090,698
|
|
|
¥
|
762,221
|
|
|
$
|
7,687
|
|
Noncurrent Assets Other assets
|
|
|
2,458,895
|
|
|
|
2,253,464
|
|
|
|
22,728
|
|
Noncurrent liabilities Other noncurrent liabilities
|
|
|
(92,908
|
)
|
|
|
(167,611
|
)
|
|
|
(1,690
|
)
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
¥
|
3,456,685
|
|
|
¥
|
2,848,074
|
|
|
$
|
28,725
|
|
|
|
|
|
|
|
|
|
|
|
F-27
The approximate effect of temporary differences and carryforwards giving rise to deferred tax
balances at March 31, 2008 and 2009 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
|
Thousands of Yen
|
|
|
U.S. Dollars
|
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
Deferred
|
|
|
Deferred
|
|
|
Deferred
|
|
|
Deferred
|
|
|
Deferred
|
|
|
Deferred
|
|
|
|
Tax
|
|
|
Tax
|
|
|
Tax
|
|
|
Tax
|
|
|
Tax
|
|
|
Tax
|
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Assets
|
|
|
Liabilities
|
|
Unrealized gains on
available-for-sale securities
|
|
¥
|
|
|
|
¥
|
146,201
|
|
|
¥
|
|
|
|
¥
|
79,392
|
|
|
$
|
|
|
|
$
|
801
|
|
Capital leases
|
|
|
93,409
|
|
|
|
|
|
|
|
78,314
|
|
|
|
|
|
|
|
790
|
|
|
|
|
|
Accrued expenses
|
|
|
325,448
|
|
|
|
|
|
|
|
342,146
|
|
|
|
|
|
|
|
3,451
|
|
|
|
|
|
Retirement and pension cost
|
|
|
456,073
|
|
|
|
|
|
|
|
578,616
|
|
|
|
|
|
|
|
5,836
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
|
10,918
|
|
|
|
|
|
|
|
19,997
|
|
|
|
|
|
|
|
202
|
|
|
|
|
|
Depreciation
|
|
|
25,996
|
|
|
|
|
|
|
|
44,077
|
|
|
|
|
|
|
|
444
|
|
|
|
|
|
Net loss on other investment
|
|
|
665,594
|
|
|
|
|
|
|
|
811,120
|
|
|
|
|
|
|
|
8,181
|
|
|
|
|
|
Operating loss carryforward
|
|
|
6,207,609
|
|
|
|
|
|
|
|
5,157,278
|
|
|
|
|
|
|
|
52,015
|
|
|
|
|
|
Transactions in transit*
|
|
|
|
|
|
|
64,333
|
|
|
|
|
|
|
|
72,397
|
|
|
|
|
|
|
|
730
|
|
Amortization of goodwill
|
|
|
|
|
|
|
123,002
|
|
|
|
|
|
|
|
108,663
|
|
|
|
|
|
|
|
1,096
|
|
Impairment loss on telephone rights
|
|
|
85,727
|
|
|
|
|
|
|
|
85,923
|
|
|
|
|
|
|
|
866
|
|
|
|
|
|
Accrued Enterprise tax
|
|
|
58,954
|
|
|
|
|
|
|
|
72,496
|
|
|
|
|
|
|
|
731
|
|
|
|
|
|
Other
|
|
|
61,774
|
|
|
|
93,407
|
|
|
|
181,884
|
|
|
|
97,609
|
|
|
|
1,834
|
|
|
|
984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
7,991,502
|
|
|
|
426,943
|
|
|
|
7,371,851
|
|
|
|
358,061
|
|
|
|
74,350
|
|
|
|
3,611
|
|
Valuation allowance
|
|
|
(4,107,874
|
)
|
|
|
|
|
|
|
(4,165,716
|
)
|
|
|
|
|
|
|
(42,014
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
¥
|
3,883,628
|
|
|
¥
|
426,943
|
|
|
¥
|
3,206,135
|
|
|
¥
|
358,061
|
|
|
$
|
32,336
|
|
|
$
|
3,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
This item was caused by the transactions between IIJ and IIJ America, which were recorded in
the different periods as a result of the difference in each companys fiscal year end.
|
As of March 31, 2008 and 2009, the valuation allowance for deferred tax assets has been provided
at amounts which are not considered more likely than not to be realized. The net changes in the
valuation allowance for deferred tax assets were a decrease of ¥607,917 thousand, a decrease of
¥2,455,640 thousand and an increase of ¥57,842 thousand ($583 thousand) for the years ended
March 31, 2007, 2008 and 2009, respectively.
F-28
As of March 31, 2009, IIJ and certain subsidiaries had tax operating loss carryforwards. These
loss carryforwards are available to offset future taxable income, and will expire in the
period ending March 31, 2016 in Japan and December 31, 2027 in the United States of America as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousand of Yen
|
|
|
|
Corporate tax
|
|
|
Inhabitant and
|
|
|
|
|
|
|
subject to
|
|
|
enterprise tax subject
|
|
|
|
|
Year Ending
|
|
consolidation tax
|
|
|
to consolidation tax
|
|
|
|
|
March 31
|
|
filing
|
|
|
filing
|
|
|
Others
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
¥
|
2,322,336
|
|
|
¥
|
3,758,736
|
|
|
¥
|
|
|
2011
|
|
|
7,353,136
|
|
|
|
7,353,136
|
|
|
|
|
|
2012
|
|
|
415,384
|
|
|
|
415,384
|
|
|
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 and thereafter
|
|
|
|
|
|
|
354,309
|
|
|
|
1,901,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
¥
|
10,090,856
|
|
|
¥
|
11,881,565
|
|
|
¥
|
1,901,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousand of U.S. Dollars
|
|
|
|
Corporate tax
|
|
|
Inhabitant and
|
|
|
|
|
|
|
subject to
|
|
|
enterprise tax subject
|
|
|
|
|
Year Ending
|
|
consolidation tax
|
|
|
to consolidation tax
|
|
|
|
|
March 31
|
|
filing
|
|
|
filing
|
|
|
Others
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
$
|
23,423
|
|
|
$
|
37,910
|
|
|
$
|
|
|
2011
|
|
|
74,162
|
|
|
|
74,162
|
|
|
|
|
|
2012
|
|
|
4,189
|
|
|
|
4,189
|
|
|
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 and thereafter
|
|
|
|
|
|
|
3,573
|
|
|
|
19,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
101,774
|
|
|
$
|
119,834
|
|
|
$
|
19,179
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation between the amount of reported income taxes and the amount of income taxes
computed using the normal statutory rate for each of the three years in the period ended March
31, 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
|
Thousands of Yen
|
|
|
U.S. Dollars
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount computed by using
normal Japanese statutory
tax rate
|
|
¥
|
2,069,962
|
|
|
¥
|
1,788,284
|
|
|
¥
|
834,140
|
|
|
$
|
8,413
|
|
Increase (decrease) in taxes
resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses not deductible for
tax purpose
|
|
|
60,340
|
|
|
|
81,117
|
|
|
|
78,705
|
|
|
|
794
|
|
Provision for (reversal of) reserve
for tax contingencies
|
|
|
(108,782
|
)
|
|
|
12,365
|
|
|
|
6,707
|
|
|
|
67
|
|
Inhabitant tax-per capita
|
|
|
25,141
|
|
|
|
25,780
|
|
|
|
27,475
|
|
|
|
277
|
|
Realization of tax benefit of
operating loss carryforwards
|
|
|
(2,163,531
|
)
|
|
|
(769,583
|
)
|
|
|
|
|
|
|
|
|
Other change in valuation allowance
|
|
|
(717,049
|
)
|
|
|
(1,980,018
|
)
|
|
|
38,046
|
|
|
|
384
|
|
Enterprise tax
- not based on income
|
|
|
42,135
|
|
|
|
45,283
|
|
|
|
55,083
|
|
|
|
556
|
|
Othernet
|
|
|
(12,159
|
)
|
|
|
(64,642
|
)
|
|
|
(37,445
|
)
|
|
|
(378
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
as reported
|
|
¥
|
(803,943
|
)
|
|
¥
|
(861,414
|
)
|
|
¥
|
1,002,711
|
|
|
$
|
10,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-29
In September 2006, IIJ America filed an application with the Internal Revenue Service (IRS)
for the Bilateral Advance Pricing Agreement Request (BAPA), relating to the terms of transactions
with IIJ and the use of tax operating loss carryforwards in its taxation. IIJ America reserved for tax
contingencies related
to the denial of the past use of tax operating loss carryforwards, which amounted to ¥102,310
thousand as of March 31, 2007. IIJ America did not have the reserve for the potential penalty relating to the
past use of the
tax operating loss carryforwards. The Company believed that IRS would not impose tax penalty
in case that the Company applied the BAPA.
The Company adopted FIN No.48 effective April 1, 2007. As a result of implementation of FIN
No.48, the Company identified liabilities for uncertain tax positions of ¥102,310 thousand which
included unrecognized tax benefit of ¥77,417 thousand and related interest accrual of ¥24,893 thousand
as of April 1, 2007 and did not require a cumulative-effect adjustment to retained earnings.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
|
Thousands of Yen
|
|
|
U.S. Dollars
|
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at April 1
|
|
¥
|
77,417
|
|
|
¥
|
79,434
|
|
|
$
|
801
|
|
Increases related to
positions taken on
items from current
year
|
|
|
5,410
|
|
|
|
2,801
|
|
|
|
28
|
|
Translation adjustment
|
|
|
(3,393
|
)
|
|
|
(16,424
|
)
|
|
|
(166
|
)
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31
|
|
¥
|
79,434
|
|
|
¥
|
65,811
|
|
|
$
|
663
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2009, the amount of unrecognized tax benefits was ¥65,811 thousand ($663 thousand), which would
decrease the effective tax rate, if recognized.
Interest associated with uncertain tax positions of ¥7,356 thousand and ¥3,906 thousand ($39
thousand) were recognized as income tax expense for the year ended March 31,2008 and 2009,
respectively, and accrued interest of ¥30,982 thousand and ¥28,143 thousand ($284 thousand)
was recognized as of March 31,2008 and 2009, respectively. Penalties associated with uncertain
tax positions were not recognized and not accrued as of March 31, 2008 and 2009. The Company
believed that the IRS would not impose a tax penalty in case that the Company applied the
BAPA.
The Company does not reasonably expect that the unrecognized tax benefit will change
significantly within the next twelve months.
The Company has open tax years subject to examination from the year ended March 31,
2001 in Japan and from the year ended December 31, 1997 in the U.S.
F-30
11. RETIREMENT AND PENSION PLANS
Until March 31, 2009, IIJ and certain subsidiaries had unfunded severance benefit and
noncontributory defined benefit pension plans which together cover substantially all of their
employees who are not directors and also participate in a contributory multi-employer pension
plan, the Japan Computer Information Service Employees Pension Fund (the Multi-Employer
Plan), covering substantially all of their employees.
Effective March 31, 2009, IIJ amended the defined benefit pension plan, as the current
tax-qualified benefit pension plan system will terminate in March 2012. IIJ transferred 71% of
the current benefit pension plan into a new defined benefit pension plan and 29% of the
current benefit pension plan into a defined contribution plan. This plan amendment reduced
projected benefit obligation by ¥337,845 thousand ($3,407 thousand), accumulated benefit
obligation by ¥199,234 thousand ($2,009 thousand) and plan assets by ¥140,103 thousand ($1,413
thousand) which reflects the benefits transferred to the defined contribution plan. As a
result of the plan amendment, a curtailment and partial settlement occurred, and ¥126,715
thousand ($1,278 thousand) of gain was recorded for the year ended March 31, 2009.
The following information regarding net periodic pension cost and accrued pension cost also
includes the unfunded severance benefit. Under the severance and pension plans, all of IIJs
employees are entitled, upon voluntary retirement with 15 years or more service, or upon
mandatory retirement at age 60, to a 10-year period of annuity payments (or lump-sum severance
indemnities) based on the rate of pay at the time of retirement, length of service and certain
other factors. IIJs employees who do not meet these conditions are entitled to lump-sum
severance indemnities.
As stipulated by the Japanese Welfare Pension Insurance Law, the Multi-Employer Plan is
composed of a substitutional portion of Japanese Pension Insurance and a multi-employers
portion of a contributory defined benefit pension plan. The benefits for the substitutional
portion are based on a standard remuneration schedule under the Welfare Pension Insurance Law
and the length of participation. The multi-employers portion of the benefits is based on the
employees length of service. However, assets contributed by an employer including IIJ are
not segregated in a separate account or restricted to provide benefits only to employees of
that employer. The net pension cost under the Multi-Employer Plan is recognized when
contributions become due.
Net periodic pension cost for the years ended March 31, 2007, 2008 and 2009 included the
following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
|
Thousands of Yen
|
|
|
U.S. Dollars
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
¥
|
257,960
|
|
|
¥
|
325,065
|
|
|
¥
|
372,954
|
|
|
$
|
3,762
|
|
Interest cost
|
|
|
26,589
|
|
|
|
31,076
|
|
|
|
36,307
|
|
|
|
366
|
|
Expected return on plan assets
|
|
|
(26,942
|
)
|
|
|
(29,098
|
)
|
|
|
(26,952
|
)
|
|
|
(272
|
)
|
Amortization of transition
obligation
|
|
|
402
|
|
|
|
402
|
|
|
|
402
|
|
|
|
4
|
|
Amortization of net actuarial loss
|
|
|
2,505
|
|
|
|
3,699
|
|
|
|
8,098
|
|
|
|
82
|
|
Effect of curtailment
|
|
|
|
|
|
|
|
|
|
|
(197,181
|
)
|
|
|
(1,989
|
)
|
Effect of settlement
|
|
|
|
|
|
|
|
|
|
|
70,466
|
|
|
|
711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost
|
|
¥
|
260,514
|
|
|
¥
|
331,144
|
|
|
¥
|
264,094
|
|
|
$
|
2,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-31
Other changes in plan assets and benefit obligations recognized in other comprehensive
income for the year ended March 31, 2009 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
|
Thousands of Yen
|
|
|
U.S. Dollars
|
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
Net actuarial loss
|
|
¥
|
167,746
|
|
|
¥
|
250,029
|
|
|
$
|
2,522
|
|
Amortization of net actuarial loss
in net periodic pension cost
|
|
|
(3,699
|
)
|
|
|
(8,098
|
)
|
|
|
(82
|
)
|
Amortization of transition
obligation in net periodic
pension cost
|
|
|
(402
|
)
|
|
|
(402
|
)
|
|
|
(4
|
)
|
Effect of curtailment
|
|
|
|
|
|
|
(561
|
)
|
|
|
(6
|
)
|
Effect of settlement
|
|
|
|
|
|
|
(70,466
|
)
|
|
|
(711
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in other
comprehensive income
|
|
|
163,645
|
|
|
|
170,502
|
|
|
|
1,719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net periodic pension cost
and amounts recognized in other
comprehensive income
|
|
¥
|
494,789
|
|
|
¥
|
434,596
|
|
|
$
|
4,383
|
|
|
|
|
|
|
|
|
|
|
|
The change in benefit obligation and plan assets for the years ended March 31, 2008 and 2009
and the amounts recognized in the consolidated balance sheets as of March 31, 2008 and 2009
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
|
Thousands of Yen
|
|
|
U.S. Dollars
|
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
¥
|
1,635,586
|
|
|
¥
|
2,044,301
|
|
|
$
|
20,618
|
|
Service cost
|
|
|
325,065
|
|
|
|
372,954
|
|
|
|
3,762
|
|
Interest cost
|
|
|
31,076
|
|
|
|
36,307
|
|
|
|
366
|
|
Actuarial loss
|
|
|
89,636
|
|
|
|
122,069
|
|
|
|
1,231
|
|
Benefit paid
|
|
|
(37,062
|
)
|
|
|
(48,694
|
)
|
|
|
(491
|
)
|
Effect of curtailment
|
|
|
|
|
|
|
(197,742
|
)
|
|
|
(1,994
|
)
|
Effect of settlement
|
|
|
|
|
|
|
(140,103
|
)
|
|
|
(1,413
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
¥
|
2,044,301
|
|
|
¥
|
2,189,092
|
|
|
$
|
22,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning
of year
|
|
¥
|
1,077,696
|
|
|
¥
|
1,171,804
|
|
|
$
|
11,819
|
|
Actual return on plan assets
|
|
|
(49,012
|
)
|
|
|
(101,008
|
)
|
|
|
(1,019
|
)
|
Employer contribution
|
|
|
164,873
|
|
|
|
167,433
|
|
|
|
1,688
|
|
Benefits paid
|
|
|
(21,753
|
)
|
|
|
(27,605
|
)
|
|
|
(278
|
)
|
Effect of settlement
|
|
|
|
|
|
|
(140,103
|
)
|
|
|
(1,413
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
¥
|
1,171,804
|
|
|
¥
|
1,070,521
|
|
|
$
|
10,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status at end of year
|
|
|
(872,497
|
)
|
|
|
(1,118,571
|
)
|
|
|
(11,282
|
)
|
|
|
|
|
|
|
|
|
|
|
F-32
Amounts recognized in the consolidated balance sheets as of March 31, 2008 and 2009 consist
of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
|
Thousands of Yen
|
|
|
U.S. Dollars
|
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
Accrued retirement and pension costs-current
|
|
¥
|
(11,436
|
)
|
|
¥
|
(11,959
|
)
|
|
$
|
(121
|
)
|
Accrued retirement and pension costs-non current
|
|
|
(861,061
|
)
|
|
|
(1,106,612
|
)
|
|
|
11,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
¥
|
(872,497
|
)
|
|
¥
|
(1,118,571
|
)
|
|
$
|
(11,282
|
)
|
|
|
|
|
|
|
|
|
|
|
The accumulated benefit obligation for the Companys defined benefit pension plans as of March
31, 2008 and 2009 was ¥1,144,901 thousand and ¥1,246,825 thousand ($12,575 thousand), respectively.
The aggregate projected benefit obligation and aggregate fair value of plan assets for plans
with projected benefit obligations in excess of plan assets were ¥2,044,301 thousand and
¥1,171,804 thousand at March 31, 2008 and ¥2,189,092 thousand ($22,079 thousand) and ¥1,070,521
thousand ($10,797 thousand) at March 31, 2009, respectively. The aggregate accumulated benefit
obligations of plans with no plan assets were ¥314,253 thousand and ¥448,224 thousand ($4,521
thousand) at March 31, 2008 and 2009, respectively.
Amounts recognized in accumulated other comprehensive income at March 31, 2008 and 2009 consist
of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
|
Thousands of Yen
|
|
|
U.S. Dollars
|
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
|
¥
|
312,889
|
|
|
¥
|
484,354
|
|
|
$
|
4,885
|
|
Obligation at transition
|
|
|
3,212
|
|
|
|
2,249
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
¥
|
316,101
|
|
|
¥
|
486,603
|
|
|
$
|
4,908
|
|
|
|
|
|
|
|
|
|
|
|
The estimated net actuarial loss and obligation at transition for the defined benefit pension
plans that will be amortized from accumulated other comprehensive income into net periodic
pension cost in the fiscal year ending March 31, 2010 are ¥18,092 thousand ($182 thousand) and
¥322 thousand ($3 thousand), respectively.
Actuarial assumptions as of March 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit
|
|
|
|
|
Obligations
|
|
Net Periodic Costs
|
|
|
2008
|
|
2009
|
|
2007
|
|
2008
|
|
2009
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
1.8
|
%
|
|
|
1.6
|
%
|
|
|
2.0
|
%
|
|
|
1.9
|
%
|
|
|
1.8
|
%
|
Expected long-term rate of return
on plan assets
|
|
|
|
|
|
|
|
|
|
|
2.7
|
|
|
|
2.7
|
|
|
|
2.3
|
|
Rate of increase in compensation
|
|
|
3.6
|
|
|
|
3.5
|
|
|
|
3.4
|
|
|
|
3.5
|
|
|
|
3.6
|
|
The Company sets the discount rate assumption annually at March 31 to reflect the market yield
of Japanese Government Bonds matched against the average remaining service period of employees.
The basis for determining the long-term rate of returns is a combination of historical returns
and prospective return assumptions derived from pension trust funds managing company.
IIJs funding policies with respect to the noncontributory plan are generally to contribute
amounts considered tax deductible under applicable income tax regulations. Plan assets
including life insurance pooled investment portfolios consist of Japanese Government bonds,
other debt securities and marketable equity securities.
Life insurance pooled investment portfolios are managed by an insurance company and guarantee a
minimum rate of return.
The Companys investment strategy for the plan assets is to manage the assets in order to pay
retirement
benefits to plan participants while minimizing cash contributions from the Company over the
life of the plans.
F-33
This is accomplished by preserving capital through diversification in equity
and debt securities based on portfolio determined by the insurance company forecasting
macroeconomics in order to maximize long-term rate of return, while considering the liquidity
need of the plans.
The projected allocation of the plan assets managed by the insurance company is developed in
consideration of the expected long-term investment returns for each category of the plan
assets. Approximately 63.0%, 35.0%, and 2.0% of the plan assets excluding pooled investment
portfolios will be allocated to debt securities, equity securities and other financial
instruments, respectively, to moderate the level of volatility in pension plan asset returns
and reduce risks. 50% of the employers contribution to the plan during the year ending March
31, 2010 will be allocated to life insurance pooled investment portfolios and other 50% will be
allocated to the aforementioned investments.
The Companys pension plan asset allocations as of March 31, 2008 and 2009 by asset category
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
20.2
|
%
|
|
|
(35.1
|
)%
|
|
|
21.2
|
%
|
|
|
(35.4
|
)%
|
Debt securities
|
|
|
36.2
|
|
|
|
(62.9
|
)
|
|
|
37.4
|
|
|
|
(62.6
|
)
|
Life insurance pooled investment portfolios
|
|
|
42.4
|
|
|
|
(
|
)
|
|
|
40.2
|
|
|
|
(
|
)
|
Other
|
|
|
1.2
|
|
|
|
(2.0
|
)
|
|
|
1.2
|
|
|
|
(2.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
(100.0)
|
%*
|
|
|
100
|
%
|
|
|
(100.0)
|
%*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
The percentages in parentheses represent the Companys plan asset allocation excluding
life
insurance pooled investment portfolios.
|
The unrecognized net loss and the unrecognized net obligation at the date of initial
application are being amortized over 14 years and 21 years, respectively.
Contributions due and paid during the years ended March 31, 2007, 2008 and 2009 under the
Multi-Employer Plan, including its substitutional portion, amounted to ¥522,269 thousand,
¥621,786 thousand and ¥758,642 thousand ($7,651 thousand), respectively.
IIJ expects to contribute ¥167,432 thousand ($1,689 thousand) to its defined benefit pension
plan in the year ending March 31, 2010.
The following benefit payments, which reflect expected future service, as appropriate,
are expected to be paid.
|
|
|
|
|
|
|
|
|
Year Ending
|
|
|
|
|
|
Thousands of
|
|
March 31
|
|
Thousands of yen
|
|
|
U.S. Dollars
|
|
2010
|
|
¥
|
37,607
|
|
|
$
|
379
|
|
2011
|
|
|
46,589
|
|
|
|
471
|
|
2012
|
|
|
58,809
|
|
|
|
593
|
|
2013
|
|
|
69,740
|
|
|
|
704
|
|
2014
|
|
|
86,383
|
|
|
|
871
|
|
2015 2019
|
|
|
582,610
|
|
|
|
5,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
¥
|
881,738
|
|
|
$
|
8,893
|
|
|
|
|
|
|
|
|
The amount of retirement benefits for retiring directors and company auditors must be approved
by the shareholders. The Company has retirement plans for full-time company auditors and
retirement plans for full-time directors. The Company recorded a liability for retirement
benefit for full-time directors and company auditors of ¥240,890 thousand and ¥292,980 thousand
($2,955 thousand), which would be required if they retire at March 31, 2008 and 2009,
respectively.
The retirement benefits paid to retired directors and company auditors were ¥3,000 thousand,
¥6,480 thousand and ¥3,780 thousand ($38 thousand) for the years ended March 31, 2007, 2008 and
2009, respectively.
F-34
12. SHAREHOLDERS EQUITY
On and after May 1, 2006, Japanese companies are subject to a new corporation law (the
Corporation Law) which reformed and replaced the Commercial Code of Japan (the Code) with
various revisions that are, for the most part, applicable to events or transactions occurring
on or after May 1, 2006 and for the fiscal years ending on or after May 1, 2006. The
significant changes brought about by the Corporation Law that affect financial matters are
summarized below:
(a) Dividends
Under the Corporation Law, companies can pay dividends at any time during the fiscal year in
addition to the year-end dividend in accordance with an approval of a shareholders meeting.
For companies that meet certain criteria such as: (1) having a Board of Directors, (2) having
independent auditors, (3) having a Board of Statutory Auditors, and (4) having a term of
service for directors prescribed as one year rather than two years as the normal term by its
articles of incorporation, the Board of Directors may declare dividends (except for dividends
in kind) if the company has prescribed so in its articles of incorporation. However, IIJ
cannot do so because it does not meet the criteria (4) above.
The Corporation Law permits companies to distribute dividends in kind to shareholders subject
to a certain limitation and additional requirements. Semiannual interim dividends may also be
paid once a year upon resolution of the Board of Directors if the articles of incorporation of
the company so stipulate. The Corporation Law provides certain limitations on the amounts
available for dividends or the purchase of treasury stock. The limitation is defined as the
amount available for distribution to the shareholders, but the amount of net assets after
dividends must be maintained as at least ¥3 million.
(b) Increases / decreases and transfer of common stock, reserve and surplus
The Corporation Law requires that an amount equal to 10% of dividends must be appropriated as
legal reserve (a component of retained earnings) or as additional paid-in capital (a component
of capital surplus) depending on the equity account charged upon the payment of such dividends
until the total of aggregate amount of legal reserve and additional paid-in capital equals 25%
of common stock. Under the Corporation Law, the total amount of additional paid-in capital and
legal reserve may be reversed without limitation. The Corporation Law also provides that
common stock, legal reserve, additional paid-in capital, and other capital surplus and
retained earnings can be transferred among the accounts under certain conditions upon
resolution of shareholders.
(c) Treasury stock and treasury stock acquisition rights
The Corporation Law also provides for companies to purchase treasury stock and dispose of such
treasury stock by resolution of the Board of Directors. The amount of treasury stock purchased
cannot exceed the amount available for distribution to the shareholders which is determined by
specific formula.
The Corporation Law also provides that companies can purchase both treasury stock acquisition
rights and treasury stock.
At the 14
th
Ordinary General Shareholders Meeting held on June 28, 2006, IIJs
shareholders approved the reductions of additional paid-in capital of ¥21,980,395 thousand and
common stock of ¥2,539,222 thousand to eliminate the accumulated deficit for purpose of
reporting under the Corporation Law in its non-consolidated financial statements. The
effective date was August 4, 2006.
The amount of retained earnings available for dividends under the Corporation Law is based on
the amount of retained earnings recorded in IIJs general books of account with accepted
Japanese accounting practices. The adjustments included in the accompanying consolidated
financial statements for U.S. GAAP purposes but not recorded in the general books of account
have no effect on the determination of retained earnings available for dividends under the
Corporation Law. Retained earnings shown in IIJs general books of account amounted to
¥9,209,977 thousand ($92,889 thousand) at March 31, 2009.
In May 11, 2007, IIJ issued new 2,178 shares and exchanged them for the shares of two
consolidated subsidiaries.
On June 26, 2007, IIJs shareholders approved the payment of cash dividend to shareholders of
record at March 31, 2007 of ¥1,500 per share or in the aggregate amount of ¥306,450 thousand.
On November 12, 2007, the board of directors of IIJ resolved the payment of cash dividend to
shareholders of record at September 30, 2007 of ¥750 per share or in the aggregate amount of
¥154,859 thousand.
F-35
On June 27, 2008, IIJs shareholders approved the payment of cash dividend to shareholders of
record at March 31, 2008 of ¥1,000 per share or in the aggregate amount of ¥206,478 thousand ($2,083
thousand).
On November 13, 2008, the board of directors of IIJ resolved the payment of cash dividend to
shareholders of record at September 30, 2008 of ¥1,000 per share or in the aggregate amount of
¥206,479 thousand ($2,083 thousand).
On October 28, 2008, the board of directors of IIJ authorized the repurchase of up to 4,000
shares and the amount of ¥400,000 thousand ($4,034 thousand) of IIJ common stock over the
period which ended on January 30, 2009. IIJ repurchased 3,934 shares of common stock, which
amounted to ¥399,414 thousand ($4,028 thousand), plus commissions under the authorization.
Stock Option Plans
In May 2000, IIJ granted 295 options to 34 directors and employees. The
options vested fully on April 8, 2002 and are exercisable for eight years from that date. In
August 2001, IIJ granted 395 options to 44 directors and employees. The options became fully
vested on June 28, 2003 and are exercisable for eight years from that date. No options are
available for additional grant as of March 31, 2009. No compensation expense has been
recognized in the consolidated statements of income pursuant to APB No. 25, because the
exercise price was greater than the market price on the dates of grant.
In March 2000, subsidiary IIJ-Tech issued bonds with 2,000 detachable warrants in the amount
of ¥600,000 thousand. The bonds were repurchased in April 2000 and warrants to purchase the
subsidiarys 775 common shares at an exercise price of ¥300,000 per share based on fair market
value were immediately purchased by certain officers and employees of IIJ and the subsidiary.
One thousand warrants were purchased by IIJ. Warrants were exercisable upon issuance. On
March 29, 2006, 1,000 of the warrants of IIJ-Tech expired. The exercise price was revised to ¥250,326 per share as of March 31, 2006,
due to the effects of issuances of new shares during the year ended March 31, 2006.
In March, 2007, 770 of the warrants were exercised at the above-mentioned exercise price. The
remaining 230 warrants expired on March 29, 2007.
The following table summarizes the transactions of IIJs stock option plans for the year in
the period ended March 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Number of
|
|
|
Number of
|
|
|
Exercise Price per
|
|
|
|
Options
|
|
|
Shares
|
|
|
Common Shares
|
|
|
Unexercised options outstandingMarch 31, 2008
|
|
|
515
|
|
|
|
2,575
|
|
|
¥
|
1,009
|
|
Options granted
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
Options forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unexercised options outstandingMarch 31, 2009
|
|
|
515
|
|
|
|
2,575
|
|
|
¥
|
1,009
|
|
|
|
|
|
|
|
|
|
|
|
Due to the effect of the stock split in October 2005, grantees of options can purchase
five shares by exercising one option.
Summarized information about stock options outstanding as of March 31, 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
Exercisable
|
|
Total Intrinsic
|
Exercise Price
|
|
Number of Shares
|
|
Remaining Life
|
|
Number of Shares
|
|
Value (Thousands of
|
(Thousands of Yen)
|
|
Underlying Options
|
|
(in Years)
|
|
Underlying Options
|
|
Yen)
|
¥2,163
|
|
|
950
|
|
|
|
1.0
|
|
|
|
950
|
|
|
|
|
|
334
|
|
|
1,625
|
|
|
|
2.3
|
|
|
|
1,625
|
|
|
|
|
|
F-36
13. OTHER COMPREHENSIVE INCOME
The changes in each component of other comprehensive income (loss) for the years ended March
31, 2007, 2008 and 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen
|
|
|
|
Before Tax
|
|
|
Tax (Expense)
|
|
|
Net of Tax
|
|
|
|
Amount
|
|
|
or Benefit
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended March 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
¥
|
11,653
|
|
|
¥
|
|
|
|
¥
|
11,653
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gain (loss) on
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount arising during the period
|
|
|
(2,277,976
|
)
|
|
|
933,970
|
|
|
|
(1,344,006
|
)
|
Less: Reclassification adjustments for
gains included in net income
|
|
|
(3,229,899
|
)
|
|
|
1,324,259
|
|
|
|
(1,905,640
|
)
|
Increase in deferred tax asset valuation
allowance*
|
|
|
|
|
|
|
(2,258,229
|
)
|
|
|
(2,258,229
|
)
|
|
|
|
|
|
|
|
|
|
|
Net unrealized holding gain (loss) during
the period
|
|
|
(5,507,875
|
)
|
|
|
|
|
|
|
(5,507,875
|
)
|
|
|
|
|
|
|
|
|
|
|
Gain on cash flow hedging derivative
instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount arising during the period
|
|
|
(708
|
)
|
|
|
|
|
|
|
(708
|
)
|
Less: Reclassification adjustments for
losses included in net income
|
|
|
4,776
|
|
|
|
|
|
|
|
4,776
|
|
|
|
|
|
|
|
|
|
|
|
Net gain on cash flow hedging derivative
instruments
|
|
|
4,068
|
|
|
|
|
|
|
|
4,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
¥
|
(5,492,154
|
)
|
|
¥
|
|
|
|
¥
|
(5,492,154
|
)
|
|
|
|
|
|
|
|
|
|
|
Year ended March 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
¥
|
(20,029
|
)
|
|
¥
|
|
|
|
¥
|
(20,029
|
)
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gain (loss) on
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount arising during the period
|
|
|
(574,683
|
)
|
|
|
235,620
|
|
|
|
(339,063
|
)
|
Less: Reclassification adjustments for
gains included in net income
|
|
|
(114,714
|
)
|
|
|
47,032
|
|
|
|
(67,682
|
)
|
Increase in deferred tax asset valuation
allowance*
|
|
|
|
|
|
|
(282,652
|
)
|
|
|
(282,652
|
)
|
|
|
|
|
|
|
|
|
|
|
Net unrealized holding gain (loss) during
the period
|
|
|
(689,397
|
)
|
|
|
|
|
|
|
(689,397
|
)
|
|
|
|
|
|
|
|
|
|
|
Loss on cash flow hedging derivative
instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount arising during the period
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Reclassification adjustments for
gains included in net income
|
|
|
(45
|
)
|
|
|
|
|
|
|
(45
|
)
|
|
|
|
|
|
|
|
|
|
|
Loss on cash flow hedging derivative
instruments
|
|
|
(45
|
)
|
|
|
|
|
|
|
(45
|
)
|
|
|
|
|
|
|
|
|
|
|
Defined benefit pension plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount arising during the period
|
|
|
(167,746
|
)
|
|
|
22,247
|
|
|
|
(145,499
|
)
|
Less: Reclassification adjustments for losses
included in net income
|
|
|
4,101
|
|
|
|
(1,418
|
)
|
|
|
2,683
|
|
Less: Other reclassification
|
|
|
(11,522
|
)
|
|
|
4,718
|
|
|
|
(6,804
|
)
|
|
|
|
|
|
|
|
|
|
|
Net defined benefit pension plans
|
|
|
(175,167
|
)
|
|
|
25,547
|
|
|
|
(149,620
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
¥
|
(884,638
|
)
|
|
¥
|
25,547
|
|
|
¥
|
(859,091
|
)
|
|
|
|
|
|
|
|
|
|
|
F-37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen
|
|
|
|
Before Tax
|
|
|
Tax (Expense)
|
|
|
Net of Tax
|
|
|
|
Amount
|
|
|
or Benefit
|
|
|
Amount
|
|
Year ended March 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
¥
|
(80,588
|
)
|
|
¥
|
|
|
|
¥
|
(80,588
|
)
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gain (loss) on
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount arising during the period
|
|
|
(354,330
|
)
|
|
|
145,275
|
|
|
|
(209,055
|
)
|
Less: Reclassification adjustments for
losses included in net income
|
|
|
165,884
|
|
|
|
(68,012
|
)
|
|
|
97,872
|
|
Increase in deferred tax asset valuation
allowance*
|
|
|
|
|
|
|
(77,263
|
)
|
|
|
(77,263
|
)
|
|
|
|
|
|
|
|
|
|
|
Net unrealized holding gain (loss) during
the period
|
|
|
(188,446
|
)
|
|
|
|
|
|
|
(188,446
|
)
|
|
|
|
|
|
|
|
|
|
|
Defined benefit pension plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount arising during the period
|
|
|
(250,029
|
)
|
|
|
30,502
|
|
|
|
(219,527
|
)
|
Less: Reclassification adjustments for losses
included in net income
|
|
|
8,500
|
|
|
|
(2,295
|
)
|
|
|
6,205
|
|
Less: Reclassification adjustments on effect of
curtailment and settlement
|
|
|
71,027
|
|
|
|
|
|
|
|
71,027
|
|
|
|
|
|
|
|
|
|
|
|
Net defined benefit pension plans
|
|
|
(170,502
|
)
|
|
|
28,207
|
|
|
|
(142,295
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
¥
|
(439,536
|
)
|
|
¥
|
28,207
|
|
|
¥
|
(411,329
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of U.S. Dollars
|
|
|
|
Before Tax
|
|
|
Tax (Expense)
|
|
|
Net of Tax
|
|
|
|
Amount
|
|
|
or Benefit
|
|
|
Amount
|
|
Year ended March 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
$
|
(813
|
)
|
|
$
|
|
|
|
$
|
(813
|
)
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gain (loss) on
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount arising during the period
|
|
|
(3,574
|
)
|
|
|
1,465
|
|
|
|
(2,109
|
)
|
Less: Reclassification adjustments for
losses included in net income
|
|
|
1,673
|
|
|
|
(686
|
)
|
|
|
987
|
|
Increase in deferred tax asset valuation
allowance*
|
|
|
|
|
|
|
(779
|
)
|
|
|
(779
|
)
|
|
|
|
|
|
|
|
|
|
|
Net unrealized holding gain (loss) during
the period
|
|
|
(1,901
|
)
|
|
|
|
|
|
|
(1,901
|
)
|
|
|
|
|
|
|
|
|
|
|
Defined benefit pension plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount arising during the period
|
|
|
(2,522
|
)
|
|
|
307
|
|
|
|
(2,215
|
)
|
Less: Reclassification adjustments for losses
included in net income
|
|
|
86
|
|
|
|
(23
|
)
|
|
|
63
|
|
Less: Reclassification adjustments on effect of
curtailment and settlement
|
|
|
717
|
|
|
|
|
|
|
|
717
|
|
|
|
|
|
|
|
|
|
|
|
Net defined benefit pension plans
|
|
|
(1,719
|
)
|
|
|
284
|
|
|
|
(1,435
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
$
|
(4,433
|
)
|
|
$
|
284
|
|
|
$
|
(4,149
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
The increase in the deferred tax asset valuation allowance has resulted from unrealized
losses on
available-for-sale securities.
|
F-38
The components of accumulated other comprehensive income (loss) at March 31, 2008 and 2009 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
|
Thousands of Yen
|
|
|
U.S. Dollars
|
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
¥
|
(3,340
|
)
|
|
¥
|
(83,928
|
)
|
|
$
|
(847
|
)
|
Unrealized holding gain on securities
|
|
|
355,309
|
|
|
|
166,863
|
|
|
|
1,683
|
|
Defined benefit pension plans
|
|
|
(261,351
|
)
|
|
|
(403,646
|
)
|
|
|
(4,071
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
¥
|
90,618
|
|
|
¥
|
(320,711
|
)
|
|
$
|
(3,235
|
)
|
|
|
|
|
|
|
|
|
|
|
14. BASIC AND DILUTED NET INCOME PER COMMON SHARE
Basic and diluted net income per common share computation for three years ended March 31,
2007, 2008 and 2009 is as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
|
Thousands of Yen
|
|
|
U.S. Dollars
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income-basic and diluted
|
|
¥
|
5,409,713
|
|
|
¥
|
5,176,589
|
|
|
¥
|
1,419,304
|
|
|
$
|
14,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares
|
|
|
|
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares
outstanding-basic
|
|
|
203,992
|
|
|
|
206,240
|
|
|
|
205,165
|
|
|
|
|
|
Dilutive effect of stock options
|
|
|
252
|
|
|
|
225
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares
outstanding-diluted
|
|
|
204,244
|
|
|
|
206,465
|
|
|
|
205,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yen
|
|
|
U.S. Dollars
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per common share
|
|
¥
|
26,519
|
|
|
¥
|
25,100
|
|
|
¥
|
6,918
|
|
|
$
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per common
share
|
|
¥
|
26,487
|
|
|
¥
|
25,072
|
|
|
¥
|
6,917
|
|
|
$
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended March 31, 2007, 2008 and 2009, potentially dilutive shares have been
excluded from the computation of diluted net income because the exercise prices of the options
were greater than the average market price of the common shares.
Diluted net income per share does not include the effects of the following potential common
shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended March 31
|
|
|
2007
|
|
2008
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issuable under stock options
|
|
|
950
|
|
|
|
950
|
|
|
|
950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-39
15. COMMITMENTS AND CONTINGENT LIABILITIES
The Company is involved in normal claims and other legal proceedings in the ordinary
course of business. Except as noted below, the Company is not involved in any litigation or
other legal proceedings that, if determined adversely to us, the Company believe would
individually or in the aggregate have a material adverse effect on us or our operations.
In December 2001, a class action complaint alleging violations of the federal securities
laws was filed against the Company, naming the Company, certain of its officers and directors
as defendants, and underwriters of the Companys initial public offering. Similar complaints
have been filed against over 300 other issuers that have had initial public offerings since
1998 and such actions have been included in a single coordinated proceeding in the Southern
District of New York. An amended complaint was filed on April 24, 2002 alleging, among other
things, that the underwriters of the Companys initial public offering violated the securities
laws (i) by failing to disclose in the offerings 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 the Companys 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. On February 19, 2003, the Court ruled on the motions
to dismiss. The Court granted the Companys motion to dismiss the claims against it under Rule
10b-5 promulgated under the Exchange Act due to the insufficiency of the allegations against
the Company. The motions to dismiss the claims under Section 11 of the Securities Act were
denied for virtually all of the defendants in the consolidated cases, including the Company.
In June 2003, the Company conditionally approved a proposed partial settlement with the
plaintiffs in this matter. The Company, along with the settling issuer defendants, filed a
motion seeking the courts preliminary approval of the settlement. The settlement would have
provided, among other things, a release of the Company and of the individual officer and
director defendants for the alleged wrongful conduct in the amended complaint in exchange for
a guarantee from the Companys insurers regarding recovery from the underwriter defendants and
other non-monetary consideration from the Company. While the partial settlement was pending
approval, the plaintiffs continued to litigate against the underwriter defendants. The
District Court directed that the litigation proceed with a number of focus cases rather than
all of the 310 cases that had been consolidated. The Companys case is not one of these focus
cases. On October 13, 2004, the District Court certified the focus cases as class actions in
the ongoing litigation. The underwriter defendants appealed that ruling, and on December 5,
2006, the Court of Appeals for the Second Circuit reversed the District Courts class
certification decision. On April 6, 2007, the Second Circuit denied the plaintiffs petition
for rehearing, and on May 18, 2007, the Second Circuit denied the plaintiffs petition for
rehearing en banc. In light of the Second Circuit opinion, liaison counsel for all issuer
defendants, including the Company, informed the District Court that the settlement could not
be approved, because the defined settlement class, like the litigation class, could not be
certified. On June 25, 2007, the District Court entered an order terminating the proposed
settlement. On August 14, 2007, the plaintiffs filed their second consolidated amended
complaints against the six focus cases and on September 27, 2007, again moved for class
certification. On November 12, 2007, certain of the defendants in the focus cases moved to
dismiss the second consolidated amended class action complaints. On March 26, 2008, the
District Court denied the motions to dismiss except as to Section 11 claims raised by those
plaintiffs who sold their securities for a price in excess of the initial offering price and
those who purchased outside the previously certified class period. The motion for class
certification was withdrawn without prejudice on October 10, 2008. On February 25, 2009,
liaison counsel for the plaintiffs informed the District Court that a settlement had been
agreed to in principle, subject to formal approval by the parties, and preliminary and final
approval by the District Court. On April 2, 2009, a stipulation and agreement of settlement
among the plaintiffs, issuer defendants and underwriter defendants was submitted to the
District Court for preliminary approval. If the District Court grants the motion for
preliminary approval, notice will be given to all class members of the settlement, a fairness
hearing will be held and if the District Court determines that the settlement is fair to the
class members, the settlement will be approved. There can be no assurance that this proposed
settlement will be approved and implemented in its current form, or at all. Due to the
inherent uncertainties of litigation and because the settlement approval process is at a
preliminary stage, the ultimate outcome of the matter is uncertain.
In addition to the foregoing, the Company is a party to other suits and claims that arise
in the normal course of business. The negative adverse outcome of such suits and claims would
not have a significant impact on the financial statements.
In May 2006, January 2007 and January 2008, IIJ made agreements (three agreements in total)
for investing in funds which invest in mainly unlisted stocks with an investment advisory
company. IIJ committed to provide up to $5 million for each fund ($15 million in total) at its request basically in
future several years. IIJ has provided a total of ¥500,000 thousand ($5,043 thousand) to them
as of March 31, 2009. The amounts invested in their funds were recorded as other investments
in the Companys consolidated balance sheets.
F-40
16. FINANCIAL INSTRUMENTS
Fair Value
In the normal course of business, the Company invests in financial assets.
To estimate the fair value of those financial assets, the Company used quoted market prices to
the extent that they were available. Where a quoted market price is not available, the
Company estimates fair value using primarily the discounted cash flow method. For certain
financial assets and liabilities, such as trade receivables and trade payables, which are
expected to be collected and settled within one year, the Company assumed that the carrying
amount approximates fair value due to their short maturities. For guarantee deposits, which
are fully refunded at the end of lease contracts, the remaining noncancellable lease terms
are principally within two years and the Company assumed that the carrying amount approximates
fair value. Investment for which it is not practicable to estimate fair value primarily
consists of investments in a number of unaffiliated and unlisted smaller sized companies and
the estimate of their fair values cannot be made without incurring excessive costs.
Refundable insurance policies are carried at cash surrender value. The carrying amounts and
fair value of financial instruments are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
Thousands of Yen
|
|
U.S. Dollars
|
|
|
2008
|
|
2009
|
|
2009
|
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
|
|
Amount
|
|
Value
|
|
Amount
|
|
Value
|
|
Amount
|
|
Value
|
Other
investments
for which it is:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Practicable to
estimate
fair value
|
|
¥
|
844,481
|
|
|
¥
|
844,481
|
|
|
¥
|
674,254
|
|
|
¥
|
674,254
|
|
|
$
|
6,800
|
|
|
$
|
6,800
|
|
Not practicable
|
|
|
1,519,289
|
|
|
|
|
|
|
|
1,240,340
|
|
|
|
|
|
|
|
12,510
|
|
|
|
|
|
Noncurrent
refundable
insurance
policies
(other assets)
|
|
|
161,404
|
|
|
|
161,404
|
|
|
|
206,387
|
|
|
|
206,387
|
|
|
$
|
2,082
|
|
|
$
|
2,082
|
|
Cash and cash equivalents at March 31, 2008 and 2009 included U.S. dollar denominated current
bank deposits and time deposits of ¥348,127 thousand and ¥202,689 thousand ($2,044 thousand),
respectively.
17. FAIR VALUE MEASUREMENTS
SFAS 157 defines fair value as the price that would be received to sell an asset or paid
to transfer a liability (an exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants at the measurement
date. SFAS 157 establishes a three-level fair value hierarchy that prioritizes the inputs used
to measure fair value as follows:
|
Level 1
|
|
Inputs are quoted prices in active markets for identical assets or liabilities.
|
|
|
Level 2
|
|
Inputs are quoted prices for similar assets or liabilities in active markets,
quoted prices for identical or similar assets or liabilities in markets that are not
active, inputs other than quoted prices that are observable, and inputs that are derived
principally from or corroborated by observable market data by correlation or other means.
|
|
|
Level 3
|
|
Inputs are derived from valuation techniques in which one or more significant
inputs or value drivers are unobservable, which reflect the reporting entitys own
assumptions about the assumptions that market participants would use in establishing a
price.
|
F-41
Assets Measured at Fair Value on a Recurring Basis
The following table presents the Companys assets and liabilities that are measured at fair
value on a recurring basis at March 31, 2009 consistent with the fair value hierarchy
provisions of SFAS No.157.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen
|
|
|
Total
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities-equity securities
|
|
¥
|
674,254
|
|
|
|
|
|
|
|
|
|
|
¥
|
674,254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of U.S Dollars
|
|
|
Total
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities-equity securities
|
|
$
|
6,800
|
|
|
|
|
|
|
|
|
|
|
$
|
6,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities are comprised of marketable securities, which are listed
on Japan, U.S. and Hong Kong securities market,which are valued using an unadjusted quoted
market price in active markets with sufficient volume and frequency of transactions.
Assets Measured at Fair Value on a Nonrecurring Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
impairment loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-marketable securities-equity securities
|
|
|
|
|
|
|
|
|
|
¥
|
298,280
|
|
|
¥
|
360,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of U.S Dollars
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
impairment loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-marketable securities-equity securities
|
|
|
|
|
|
|
|
|
|
$
|
3,008
|
|
|
$
|
3,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In accordance with the provisions of APB No. 18, The Equity Method of Accounting for
Investments in Common Stock, we review the carrying values of our investments when events and
circumstances warrant. This review requires the comparison of the fair values of our
investments to their respective carrying values.
Non-marketable equity securities with a carrying amount of ¥658,732 thousand ($6,644 thousand
) were written down to their fair value of ¥298,280 thousand ($3,008 thousand), resulting in
an other-than-temporary impairment charge of ¥360,452 thousand ($3,635 thousand), which was
included in earnings for the year ended March 31, 2009. All impaired non-marketable equity
securities were classified as Level 3 instruments and the Company uses the unobservable inputs
to these investments. The Company evaluated the fair value of these investments based on the
net assets of each issuers, as the Company could not obtain other information such as future
cash flows related to the issuers.
F-42
18. BUSINESS SEGMENT
The operating segments reported below are those for which segment-specific financial
information is available. Accounting policies used to determine segment profit/loss and
segment assets are consistent with those used to prepare the consolidated financial statements
in accordance with accounting principles generally accepted in the United States. The
Companys management uses this financial information to make decisions on the allocation of
management resources and to evaluate business performance.
Network service and systems integration business segment comprises revenues from connectivity
and outsourcing services, systems integration and equipment sales.
ATM operation business segment comprises revenues from ATM operation business.
ATM operation business segment has met a quantitative threshold for the year ended March 31,
2009 and the segment data for the year ended March 31, 2008 were presented for comparative
purposes. No segment data for the year ended March 31, 2007 have been presented because ATM operation business did not
operate and the Companys management reviewed the financial information on a consolidated
basis and made the decisions and evaluate business performance on a single operating unit in
the year.
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
|
Thousands of Yen
|
|
|
U.S. Dollars
|
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Network service and
systems integration
business:
|
|
|
|
|
|
|
|
|
|
|
|
|
Customers
|
|
¥
|
66,831,138
|
|
|
¥
|
69,707,278
|
|
|
$
|
703,048
|
|
Intersegment
|
|
|
|
|
|
|
253,985
|
|
|
|
2,561
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
66,831,138
|
|
|
|
69,961,263
|
|
|
|
705,609
|
|
ATM operation business
|
|
|
|
|
|
|
|
|
|
|
|
|
Customers
|
|
|
4,161
|
|
|
|
23,452
|
|
|
|
237
|
|
Intersegment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4,161
|
|
|
|
23,452
|
|
|
|
237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Elimination
|
|
|
|
|
|
|
253,985
|
|
|
|
2,561
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total
|
|
¥
|
66,835,299
|
|
|
¥
|
69,730,730
|
|
|
$
|
703,285
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit or loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
|
Thousands of Yen
|
|
|
U.S. Dollars
|
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Network service and
systems integration
business
|
|
¥
|
4,854,309
|
|
|
¥
|
3,663,040
|
|
|
$
|
36,944
|
|
ATM operation business
|
|
|
(89,195
|
)
|
|
|
(704,431
|
)
|
|
|
(7,104
|
)
|
Elimination
|
|
|
5,750
|
|
|
|
41,227
|
|
|
|
416
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated operating
income
|
|
¥
|
4,759,364
|
|
|
¥
|
2,917,382
|
|
|
$
|
29,424
|
|
|
|
|
|
|
|
|
|
|
|
F-43
Segment assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
|
Thousands of Yen
|
|
|
U.S. Dollars
|
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Network service and
systems integration
business
|
|
¥
|
55,046,212
|
|
|
¥
|
51,799,206
|
|
|
$
|
522,433
|
|
ATM operation business
|
|
|
656,334
|
|
|
|
504,144
|
|
|
|
5,085
|
|
|
|
|
|
|
|
|
|
|
|
Elimination
|
|
|
|
|
|
|
2,151
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total assets
|
|
¥
|
55,702,546
|
|
|
¥
|
52,301,199
|
|
|
$
|
527,496
|
|
|
|
|
|
|
|
|
|
|
|
Other significant items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
|
Thousands of Yen
|
|
|
U.S. Dollars
|
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and
amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Network service and
systems integration
business
|
|
¥
|
4,771,468
|
|
|
¥
|
5,417,275
|
|
|
$
|
54,637
|
|
ATM operation business
|
|
|
3,336
|
|
|
|
13,226
|
|
|
|
133
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total
|
|
¥
|
4,774,804
|
|
|
¥
|
5,430,501
|
|
|
$
|
54,770
|
|
|
|
|
|
|
|
|
|
|
|
Transfers between reportable businesses are made at arms-length prices. Operating income
is sales and operating revenue less costs and operating expenses.
Substantially all revenues are from customers operating in Japan. Geographic information is
not presented due to immateriality of revenue attributable to international operations.
There have been no sales and operating revenue from transactions with a single external
customer amounting to 10% or more of the Companys revenues for the years ended March 31,
2007, 2008 and 2009.
19. ADVERTISING EXPENSES
Advertising expenses incurred during the years ended March 31, 2007, 2008 and 2009 related
primarily to advertisements in magazines, journals and newspapers and amounted to ¥337,768
thousand, ¥575,306 thousand and ¥459,679 thousand ($4,636 thousand), respectively.
F-44
20. RELATED PARTY TRANSACTIONS
NTT and its subsidiary own 29.4 percent of IIJs outstanding common shares and 30.0 percent of
IIJs voting shares as of March 31, 2009.
The Company entered into a number of different types of transactions with NTT and its
subsidiaries including purchases of wireline telecommunication services for the Companys
offices. For the Companys connectivity and value added services, the Company purchases
international and domestic backbone services, local access lines and rental rack space in data
centers from NTT and its subsidiaries. The Company sells to NTT and its subsidiaries its
services including OEM services, system integration services and monitoring services for their
data centers.
The amounts of balances as of March 31, 2008 and 2009 and transactions of the Company with NTT
and its subsidiaries for the each of the three years in the period ended March 31, 2009, are
summarized as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
Thousands of Yen
|
|
U.S. Dollars
|
|
|
2007
|
|
2008
|
|
2009
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
¥
|
|
|
|
¥
|
283,238
|
|
|
¥
|
194,258
|
|
|
$
|
1,959
|
|
Accounts payable
|
|
|
|
|
|
|
685,018
|
|
|
|
1,184,399
|
|
|
|
11,946
|
|
Revenues
|
|
|
1,308,843
|
|
|
|
1,186,771
|
|
|
|
1,129,160
|
|
|
|
11,388
|
|
Costs and expenses
|
|
|
7,725,572
|
|
|
|
9,437,253
|
|
|
|
10,689,937
|
|
|
|
107,816
|
|
As for equity method investees, refer to Note 5, INVESTMENTS IN EQUITY METHOD INVESTEES .
21. SUBSEQUENT EVENTS
On June 26, 2009, IIJs shareholders approved the payment of cash dividend to shareholders of
record at
March 31, 2009 of ¥1,000 ($10.09) per share or in the aggregate amount of ¥202,544 thousand
($2,043
thousand).
* * * * * *
F-45
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