Services Agreement - Internet Initiative Japan Ltd. and IIJ America Inc.
SERVICES AGREEMENT
THIS AGREEMENT is made as of January 1, 2004.
BETWEEN: Internet Initiative Japan, Ltd., a corporation organized
and existing under the laws of Japan, located at Jinbo-cho
Mitsui Building, 1-105 Kanda Jinbo-cho, Chiyoda-ku, Tokyo,
Japan 101-0051 (hereinafter referred to as IIJ).
AND IIJ America, Inc., a corporation organized and
existing under the laws of the State of California,
in the United States of America, located at 1211
Avenue of the Americas, Suite 2900, New York, New
York 10036, USA (hereinafter referred to as IIJA).
WHEREAS, IIJ is an Internet services provider based in Japan that operates a
Backbone Network for Internet connectivity between various points in Asia and
the United States;
WHEREAS, IIJA has special skills and knowledge in connection with establishing,
operating and maintaining the United States portions of the Backbone Network;
WHEREAS, under the terms and conditions herein set forth, the parties hereto
desire that IIJA provide services to IIJ.
NOW, THEREFORE, for and in consideration of the mutual covenants and agreements
set forth below, and for other valuable consideration received, the parties
hereto agree as follows:
1. TERM
Subject to the other provisions contained in this Agreement, the initial
term of this Agreement shall be for a period of twelve months commencing on
January 1, 2004 and continuing until December 31, 2004; provided, however,
that the term of this Agreement shall automatically be extended for
additional periods of twelve months each unless either party hereto gives
to the other party hereto, at least 30 days prior to the expiration of the
then existing term hereof, written notice of the termination, with or
without cause, of this Agreement as of the end of the then existing term
hereof.
2. SERVICES
During the term hereof, IIJA shall exercise its best efforts to provide the
assistance and services specified on Exhibit I hereto, as the same may from
time to time be amended with the written consent of both parties hereto.
3. EXAMINATION OF BOOKS AND RECORDS
1
<PAGE>
IIJ shall have the right at its expense to examine the books and records of
IIJA in connection with this Agreement during normal business hours at
IIJA's offices on reasonable notice.
4. SERVICE FEES
During the term hereof, in consideration of the services to be provided by
IIJA under this Agreement, IIJ shall pay to IIJA a monthly Service Fee to
be calculated as follows:
4.1 Assignment and Allocation of Costs. IIJA shall assign and/or allocate
all SG&A Costs and all Costs of Connection between IIJA's Backbone Division
and IIJA's Own Division in the following manner.
a. For the initial four month period of this Agreement, SG&A costs
shall be allocated in accordance with pre-determined
classifications of SG&A expenses: first, any salary, benefits and
overhead costs that are directly related to only one of the
Divisions shall be assigned to that Division in their entirety;
second, any remaining personnel costs shall be allocated on the
basis of the weighted aggregate average percentage of time spent
by all allocable employees with respect to each Division's
activities; third, any remaining business expenses such as travel
and remaining overhead costs shall be allocated based on the
percentages used for personnel costs for each Division; fourth,
outsourcing expenses for professional services shall be allocated
based on the estimated benefit that each Division shall enjoy from
such services, or equally, if such benefits are not reasonably
subject to estimation.
b. For the initial four month period of this Agreement, IIJA shall,
first, assign to each Division any Costs of Connection that are
directly related to only one of the Divisions and, second,
allocate any remaining Costs of Connection based on the relative
amount of aggregate bandwidth committed to customers of both IIJ
and IIJA as of October 2003. For subsequent years, the allocation
percentage for the following year will be determined once a year
based on the relative amount of aggregate bandwidth committed to
customers of both IIJ and IIJA as of the end of October of the
current year.
c. Beginning in May 2004 and continuing each February, May, August
and November subsequently, IIJA shall review and update the
amounts of costs allocable to each Division, based on actual costs
incurred during the immediately previous three month calculation
periods from January through March, April through June, July
through September, and October through December, respectively. The
amounts of the allocable costs as updated as above, shall take
effect as of May, August, November and the following February,
respectively, and be used for determining the Monthly Service Fee
as set forth in Section 4.2 for the current three month period.
4.2 Monthly Service Fee.
2
<PAGE>
a. One-third of the actual Costs of Connection for each calculation
period that are assigned and allocated to the Backbone Division
shall be charged as part of the Service Fee on a monthly basis for
the current three month period.
b. For the first four months of this Agreement, the SG&A costs to be
assigned and allocated shall be based on the average monthly
amount actually incurred by IIJA's Backbone Division during the
prior three month period of October through December 2003.
Thereafter, the SG&A costs to be assigned and allocated shall be
one-third of the actual SG&A costs of IIJA's Backbone Division for
the relevant three month calculation period. The SG&A costs for
each month that are assigned and allocated to the Backbone
Division shall be multiplied by one (1) plus the Mark-Up
Application Rate in effect for that year and the result shall be
charged as part of the Service Fee.
4.3 Mark-up Application Rate. The Mark-up Application Rate for the first
year of this Agreement shall be eight (8) percent, although such rate can
be subject to change under the following circumstances. In the event that
IIJ and IIJA agree that the Mark-up Application Rate no longer results in
an arm's length mark-up from a U.S. and Japanese transfer pricing
perspective, such Mark-up Application Rate shall be adjusted to so result
in an arm's length mark-up. Such adjusted Mark-up Application Rate shall be
effective as of the date agreed to by the parties, which can be retroactive
to an earlier point in the current calendar year.
4.4 True-up of Service Fee. Each January beginning with January 2005, IIJA
shall undertake the following true-up procedure:
a. IIJA shall determine whether IIJA's Backbone Division's ratio of
gross profit over operating expenses for the preceding calendar
year falls within the interquartile range of IIJA's comparable
companies' ratio of gross profit over operating expenses for the
second preceding year or satisfies some other methodology used for
U.S. transfer pricing purposes. If IIJA's Backbone Division's
ratio of gross profit over operating expenses falls within the
interquartile range of IIJA's comparable companies' ratio of gross
profit over operating expenses for the second preceding year or
satisfies some other methodology to be used for U.S. transfer
pricing purposes for the preceding year, no true-up shall be
required.
b. If, on the other hand, IIJA's Backbone Division's ratio of gross
profit over operating expenses as defined above does not fall
within the interquartile range of IIJA's comparable companies'
ratio of gross profit over operating expenses for the second
preceding year or satisfy some other methodology used for U.S.
transfer pricing purposes, IIJA shall determine the amount of
true-up required.
i. If IIJA's Backbone Division's ratio falls below the
interquartile range, IIJA shall calculate the additional
Mark-up Application Rate necessary for its ratio of gross
profit over operating expense for the preceding calendar
3
<PAGE>
year to fall within the interquartile range of IIJA's
comparable companies' ratio of gross profit over operating
expenses for the second preceding year. This difference in
the Mark-up Application Rate shall be multiplied by actual
SG&A expenses for the preceding year to determine the true-up
amount by which the Service Fee for the preceding year needs
to be increased.
ii. If IIJA's Backbone Division's ratio falls above the
interquartile range, IIJA shall calculate the reduction in
the Mark-up Application Rate necessary for its ratio of gross
profit over operating expense for the preceding calendar year
to fall within the interquartile range of IIJA's comparable
companies' ratio of gross profit over operating expenses for
the second preceding year. This difference in the Mark-up
Application Rate shall be multiplied by actual SG&A expenses
for the preceding year to determine the true-up amount by
which the Service Fee for the preceding year needs to be
reduced.
c. IIJA shall record for statutory accounting purposes for its most
recently ended calendar year, an increase or decrease in Service
Fee income and accounts receivable or payable, respectively, in
the amount calculated in b. above.
d. IIJ shall record for statutory accounting purposes for its current
fiscal year, an increase or decrease in Service Fee expense and
accounts payable or receivable, respectively, in the amount
calculated in b. above.
e. Notwithstanding the requirements of this subparagraph regarding
calculation of a true-up amount, the parties must also agree that
the true-up amount to be recorded by IIJ and IIJA appears
reasonable from a Japanese transfer pricing perspective.
4.5 Invoicing and Payment. IIJA shall furnish to IIJ within fifteen (15)
days after the end of each month an invoice for the Service Fee for that
month determined in accordance with subsections 4.2 and 4.4 of this
paragraph. IIJA shall furnish to IIJ a detailed explanation of the
computation of any monthly Service Fee upon IIJ's request. IIJ shall pay
the Service Fee specified in each invoice within sixty (60) days after
receipt of such invoice by telegraphic transfer. Payments shall be made in
U.S. dollars.
5. RELATIONSHIP OF THE PARTIES
5.1 The relationship between IIJA and IIJ under this Agreement shall be
that of service provider and client, respectively.
5.2 IIJA shall not contract in the name of IIJ and IIJA shall not represent
or hold itself out as the agent of IIJ nor do any act or thing which might
result in any third party believing that IIJA has authority to contract or
enter into any commitment on behalf of or in the name of IIJ.
4
<PAGE>
6. BREACH OR DEFAULT
Notwithstanding the term of this Agreement set forth in paragraph 1, in the
event of any breach or default by the other party of any of the terms or
conditions of this Agreement, either party may immediately terminate this
Agreement by giving written notice thereof to the other party. All amounts
due each of the parties hereto, respectively, shall thereupon become due
and immediately payable.
7. RISK AND LIABILITY
7.1 IIJA hereby warrants to IIJ that all Services shall be performed in a
professional and workmanlike manner. Except for the foregoing, IIJA makes
no other warranties or representations as to the Services rendered, and
hereby disclaims all express and implied warranties, including, but not
limited to, implied warranties of merchantability, fitness for a particular
purpose, and non-infringement. Further, IIJA disclaims any warranty that
the Service will succeed in resolving any problems, or that any work
product including, but not limited to inventions, of the Service will be
free from latent defects.
7.2 Notwithstanding the foregoing, all risk of shortfall in performance,
and any liability to third parties arising from such shortfall in
performance or from defective performance or non-performance of its
obligations to provide the services, shall be and remain with IIJ, and IIJ
shall hold IIJA harmless from any such liability to third parties howsoever
caused regardless of whether the loss is insured or uninsured.
7.3 IIJA shall give prompt notice in writing to IIJ of any third party
claim as is referred to in this paragraph whereupon IIJ shall have the
right at its own expense to assume the defense of, or to dispose of, or to
settle any such claim, and IIJA will give all reasonable assistance in its
defense of such claims.
8. CONFIDENTIALITY
8.1 Of the technical, business and other information provided by the other
party in relation to the performance of the entrusted business, neither
IIJA nor IIJ shall disclose to any third party any information, which is
designated as confidential in a writing, if disclosed in such writing, or
designated as confidential in a writing that specifies the contents thereof
and given within ten days of its disclosure, if disclosed orally
(hereinafter referred to as the "Confidential Information"); provided,
however, that the above provision shall not apply to any information
falling under any of the following items:
(1) information which is already in the public domain at the time it
is provided to or becomes known by the receiving party;
(2) information which the receiving party already possesses at the
time it is provided to or becomes known by the receiving party;
(3) information which comes into the public domain through no fault of
the receiving party after it is provided to or becomes known by
the receiving party;
(4) information which the receiving party becomes aware of through
developing such information independently of any information that
is provided to or becomes known by the receiving party;
5
<PAGE>
(5) information which the receiving party lawfully obtains from a
third party who has due authority without bearing any
confidentiality obligation; or
(6) information which the receiving party is requested to disclose by
any competent authority or a law or regulation.
8.2 IIJA and IIJ shall use the Confidential Information provided by the
other party only within the scope of the purpose of this Agreement.
8.3 The confidentiality obligation under this paragraph shall continue
for three years after the receipt of the relevant Confidential
Information.
8.4 Upon IIJ's request, IIJA shall return to IIJ all of IIJ's plans,
software, promotional and other material, etc. and all copies thereof
provided to IIJA in connection with the services.
9. AMENDMENT
This Agreement shall not be amended in any way other than by an agreement in
writing signed by both parties which is expressly stated to amend this
Agreement.
10. PROHIBITION OF ASSIGNMENTS
This Agreement shall be binding on and shall inure to the benefit of the
parties' successors and assigns. Notwithstanding the foregoing, neither party
may assign or delegate this Agreement or any of its rights or duties under this
Agreement without the prior written consent of the other except either party may
assign this Agreement to a person or entity into which it has been merged or
which has otherwise succeeded to all or substantially all of its business.
11. IMPOSSIBILITY OF PERFORMANCE
If, for any reason outside the control of IIJA, performance by IIJA of the
services or any of them becomes impractical for any reason after IIJA has taken
all reasonable steps to rectify the situation, then the parties will together
seek alternative solutions. If no practical alternative solution can be found,
then responsibility for the performance of such services that cannot any longer
be performed shall cease without liability falling upon IIJA.
12. FORCE MAJEURE
Neither IIJA nor IIJ shall be held liable for default, in the event that it
fails in the performance of all or part of its obligations under this Agreement
due to force majeure such as an act of God, a fire, an order or disciplinary
action by any governmental authority, and a transportation accident. In such
case, the relevant party shall promptly notify the other party, and consult with
the other party on the subsequent procedures to be taken.
13. WAIVER
6
<PAGE>
Failure at any time by either of the parties to enforce any of the provisions of
this Agreement shall not be construed as a waiver by such party of such
provisions or in any way affect the validity of this Agreement or any part
thereof.
14. LAW
The provision of this Agreement shall be construed in accordance with the laws
of New York, without giving effect to conflict of law principles thereof.
INTERNET INITIATIVE JAPAN, LTD.
By: /s/ Koichi Suzuki
-----------------------------------
Koichi Suzuki
President and CEO
Date: March 25, 2004
IIJ AMERICA, INC.
By: /s/ Isao Momota
-----------------------------------
Isao Momota
President
Date: March 25, 2004
7
<PAGE>
EXHIBIT 1 - DESCRIPTION OF SERVICE
IIJA shall provide the following services for IIJ:
1. 1. Negotiating and arranging with IIJ for connections between the
international lines to the routers which are possessed by IIJA and back out
to other U.S. ISPs through data lines and connections. Ensuring that such
connections are in place and operative 24 hours a day and seven days a
week.
2. Obtaining and maintaining routers at several points of presence (POP) with
the necessary capacity and functionality.
3. Ensuring that the backbone network within the United States is constantly
in good working condition in 24 hours a day, seven days a week.
4. In case of backbone circuit or router failures, IIJA will divert all
traffic to the alternative path that remains intact and unaffected by the
failure, and then investigate the cause of failure without impacting
production of traffic flow. IIJA will work with U.S. local carriers and
vendors until the failure is recovered.
5. Providing various liaison and information gathering services for IIJ
regarding the Internet market opportunities, market competitions and
trends, activities by U.S. ISPs and telecom carriers in the U.S. market, in
addition to other services as listed above.
Notes: IIJA currently operates its backbone facility in five points of
presence (POP) in New York, New York; Palo Alto, San Jose, and Los
Angeles, California; and Ashburn, Virginia.
8