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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Mark one:
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15
(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to
----------- -----------
Commission File Number 000-50065
PPOL, Inc.
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(Exact name of registrant as specified in its charter.)
California 95-4436774
(State of Incorporation) (IRS Employer Identification No.)
1 City Boulevard West, Suite 870, Orange, California 92868
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (714) 221-7250
--------------
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 X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock $0.001 par value 17,994,920
- ----------------------------- ----------------------------------
(Class) (Outstanding at February 13, 2002.)
PPOL, Inc.
2002 Quarterly Report on Form 10-Q
Table of Contents
PART 1: 3
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ITEM 1: FINANCIAL STATEMENTS 3
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31 AND MARCH 31, 2002 3
CONSOLIDATED INCOME STATEMENT FOR THREE MONTHS ENDED DECEMBER 31, 2002
AND 2001 4
CONSOLIDATED INCOME STATEMENT FOR NINE MONTHS ENDED DECEMBER 31, 2002
AND 2001 5
CONSOLIDATED STATEMENT OF CASH FLOWS FOR NINE MONTHS ENDED
DECEMBER 31, 2002 AND 2001 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7
ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 12
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 14
ITEM 4: CONTROLS AND PROCEDURES 21
PART 2: 22
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ITEM 1: LEGAL PROCEEDINGS 22
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS 22
ITEM 3: DEFAULTS UPON SENIOR SECURITIES 22
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 22
ITEM 5: OTHER INFORMATION 22
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 22
SIGNATURES 23
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CERTIFICATIONS 24
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CERTIFICATIONS 25
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CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 26
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2
Part 1:
Item 1: Financial Statements
PPOL, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, March 31,
2002 2002
------------- -------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 14,313,481 $ 11,716,893
Trade accounts receivable, net of allowance for
doubtful accounts of $2,000 and $7,000 1,288,699 2,390,823
Merchandise inventories 2,932,907 1,077,047
Advance payments to related parties 1,987,008
Advance payments 3,262,225
Deferred costs 7,326,226 12,332,908
Deferred income taxes 2,168,396 2,591,742
Prepaid expenses and other current assets 1,375,720 354,514
------------- -------------
Total current assets 32,667,654 32,450,935
PROPERTY AND EQUIPMENT, net 6,286,088 6,927,851
DEFERRED INCOME TAXES 794,700 764,489
LEASE DEPOSITS WITH RELATED PARTIES 671,361 540,246
OTHER ASSETS 820,524 925,701
------------- -------------
$ 41,240,327 $ 41,609,222
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, including related parties $ 10,792,317 $ 12,731,466
Advances received 8,706,806 2,342,533
Deferred revenue 11,257,036 16,530,850
Income taxes payable 309,199 1,458,752
Other current liabilities 1,116,744 1,899,017
------------- -------------
Total current liabilities 32,182,102 34,962,618
------------- -------------
SHAREHOLDERS' EQUITY:
Common stock; $0.001 par value; 100,000,000 shares
authorized; 17,994,920 (unaudited) and 17,095,174
shares issued and outstanding at December 31 and
March 31, 2002, respectively 17,995 17,095
Additional paid-in capital 3,367,157 3,392,605
Other comprehensive loss (1,299,096) (1,762,118)
Retained earnings 6,972,169 4,999,022
------------- -------------
Total shareholders' equity 9,058,225 6,646,604
------------- -------------
$ 41,240,327 $ 41,609,222
============= =============
See accompanying notes to financial statements.
3
PPOL, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Three months Three months
ended December ended December
31, 2002 31, 2001
------------- -------------
(Unaudited) (Unaudited)
NET REVENUE:
Product sales and network services $ 27,590,133 $ 26,525,598
Other on-line services 4,649,824 3,325,101
------------- -------------
Total 32,239,957 29,850,699
------------- -------------
COSTS AND EXPENSES:
Cost of sales 7,182,110 6,373,400
Distributor incentives 16,593,086 16,740,910
Selling, general and administrative expenses 6,537,395 5,273,906
------------- -------------
Total costs and expenses 30,312,591 28,388,216
------------- -------------
OPERATING INCOME 1,927,366 1,462,483
OTHER EXPENSE, net 55,879 13,792
------------- -------------
INCOME BEFORE INCOME TAXES 1,871,487 1,448,691
------------- -------------
INCOME TAXES:
Current 291,148 419,217
Deferred 366,924 348,136
------------- -------------
Total income taxes 658,072 767,353
------------- -------------
NET INCOME 1,213,415 681,338
OTHER COMPREHENSIVE GAIN (LOSS) -
Cumulative foreign currency translation 188,188 (654,390)
------------- -------------
COMPREHENSIVE INCOME $ 1,401,603 $ 26,948
============= =============
NET INCOME PER COMMON SHARE,
Basic and diluted $ 0.07 $ 0.04
============= =============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC AND DILUTED 17,994,920 17,095,174
============= =============
See accompanying notes to financial statements.
4
PPOL, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Nine months Nine months
ended December ended December
31, 2002 31, 2001
------------- -------------
(Unaudited) (Unaudited)
NET REVENUE:
Product sales and network services $ 89,066,086 $ 80,054,428
Other on-line services 12,497,365 9,854,274
------------- -------------
Total 101,563,451 89,908,702
------------- -------------
COSTS AND EXPENSES:
Cost of sales 22,911,538 22,073,706
Distributor incentives 54,149,447 48,018,435
Selling, general and administrative
expenses 19,365,875 16,244,123
------------- -------------
Total costs and expenses 96,426,860 86,336,264
------------- -------------
OPERATING INCOME 5,136,591 3,572,438
OTHER EXPENSE, net
45,486 54,346
------------- -------------
INCOME BEFORE INCOME TAXES 5,091,105 3,518,092
------------- -------------
INCOME TAXES:
Current 1,776,014 1,802,697
Deferred 393,135 217,542
------------- -------------
Total income taxes 2,169,149 2,020,239
------------- -------------
NET INCOME 2,921,956 1,497,853
OTHER COMPREHENSIVE GAIN (LOSS) -
Cumulative foreign currency translation 463,022 (308,395)
------------- -------------
COMPREHENSIVE INCOME $ 3,384,978 $ 1,189,458
============= =============
NET INCOME PER COMMON SHARE,
Basic and diluted $ 0.17 $ 0.09
============= =============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC AND DILUTED 17,549,991 17,095,174
============= =============
See accompanying notes to financial statements.
5
PPOL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months Nine months
ended ended
December 31, December 31,
2002 2001
------------- -------------
(Unaudited) (Unaudited)
CASH FLOWS PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Net income $ 2,921,956 $ 1,497,853
------------- -------------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Depreciation and amortization 1,698,088 1,966,798
Loss on sales/disposal of property and equipment 8,316 79,695
Deferred income taxes 393,135 217,542
Loss on write-off of deposits 85,548
Loss on write-down of software 95,839
CHANGES IN ASSETS AND LIABILITIES:
(INCREASE) DECREASE IN ASSETS:
Trade accounts receivables 1,335,839 644,556
Merchandise Inventories (1,673,170) 1,242,063
Advance payments to related parties (1,008,871) 1,096,010
Deferred costs 6,234,638 2,234,625
Prepaid expenses and other (956,887) (70,863)
INCREASE (DECREASE) IN LIABILITIES:
Accounts payable, including related parties (3,308,192) (6,233,533)
Advances received 5,890,324 1,354,737
Deferred revenue (6,967,031) (2,478,302)
Income taxes payable (1,276,455) (1,531,161)
Other current liabilities (670,499) 93,501
------------- -------------
Total adjustments (119,378) (1,384,332)
------------- -------------
Net cash provided by (used for) operating activities 2,802,578 113,521
------------- -------------
CASH FLOWS USED FOR INVESTING ACTIVITIES:
Purchase of property and equipment (603,683) (3,401,428)
Net decrease in lease deposits 0 589,770
Other assets (57,695) (59,948)
------------- -------------
Net cash used for investing activities (661,378) (2,871,606)
------------- -------------
CASH FLOWS USED FOR FINANCING ACTIVITIES -
Short Term Borrowings 2,448,600
Dividends paid (948,809) (942,711)
------------- -------------
(948,809) 1,505,889
------------- -------------
EFFECTS OF EXCHANGE RATE 1,404,197 (370,022)
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,596,588 (1,622,218)
CASH AND CASH EQUIVALENTS, beginning of period 11,716,893 10,914,661
------------- -------------
CASH AND CASH EQUIVALENTS, end of period $ 14,313,481 $ 9,292,443
============= =============
SUPPLEMENTAL CASH FLOW INFORMATION -
Income taxes paid $ 3,051,506 $ 3,333,911
============= =============
Interest paid $ 1,767 $ 6,513
============= =============
See accompanying notes to financial statements.
6
PPOL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED DECEMBER 31, 2002 AND 2001 (UNAUDITED)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION:
The unaudited financial statements have been prepared by PPOL,
Inc. (the "Company"), pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information
and footnote disclosures normally present in annual financial
statements prepared in accordance with accounting principles
generally accepted in the United States of America have been
omitted pursuant to such rules and regulations. These
financial statements should be read in conjunction with the
audited financial statements and footnotes for the years ended
March 31, 2002, 2001 and 2000 included in the Company's Form
10. The results of the nine months ended December 31, 2002 are
not necessarily indicative of the results to be expected for
the full year ending March 31, 2003.
ORGANIZATION:
PPOL, Inc. ("PPOL") (formerly Diversified Strategies, Inc.),
incorporated on May 19, 1993 in California, is primarily
engaged in sales of multi-functional telecommunications
equipment called MOJICO. The Company distributes MOJICO
throughout Japan through a network marketing system. The
Company has a network of registered distributors located
throughout Japan that introduce purchasers to the Company. The
Company operates in one operating segment.
Using MOJICO, the Company provides original telecommunication
services called "Pan Pacific Online," including MOJICO
bulletin board and mail services. The Company also provides
various other on-line services through Pan Pacific Online such
as ticket and mail-order services. These sales and services
are provided in Japan.
On August 15, 2002, the Company amended its articles of
incorporation to increase its authorized shares of common
stock from 10,000,000 to 100,000,000, change its name to PPOL,
Inc. and effected a 1 for 7 reverse stock split. All share
data presented in these financial statements reflect the
reverse stock split.
Effective April 1, 2002, AJOL Co., LTD. ("AJOL") was acquired
by PPOL in a transaction accounted for as a reverse merger.
The Company, upon closing of the transaction on August 15,
2002, issued 899,746 shares (post split) of its common stock
for all of the issued and outstanding common stock of AJOL.
These shares will be added into the outstanding shares of the
Company on the date of the transaction, August 15, 2002;
accordingly, they will then be included in the total common
shares outstanding thereafter. For legal purposes, PPOL is the
acquirer. For accounting purposes, AJOL has been treated as
the acquirer and accordingly, AJOL is presented as the
continuing entity, and the historical financial statements are
those of AJOL. Prior to the reverse merger PPOL had no
business activity, thus pro-forma information as though PPOL
and AJOL had been combined for all periods has not been
provided. AJOL and PPOL are collectively referred to herein as
the "Company."
7
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include accounts of the
PPOL, Inc. and its wholly owned subsidiary, AJOL, Ltd. All
significant intercompany balances and transactions have been
eliminated upon consolidation.
CONCENTRATION OF CREDIT RISK:
Financial instruments that potentially subject the Company to
concentration of credit risk consist of trade receivables and
cash and cash equivalents. The Company collects the
significant portion of payments from the ultimate customers
through major credit card and loan companies. One credit
company comprised 35.4% (unaudited) of accounts receivable at
December 31, 2002. The Company maintains cash deposits with
major banks. The Company periodically assesses the financial
conditions of the institutions and believes that the risk of
any loss is minimal.
RESEARCH AND DEVELOPMENT EXPENSE:
Research and development costs are charged to expense when
incurred. Research and development expenses included in cost
of sales for the nine months ended December 31, 2002 and 2001
approximated $614,391 (unaudited) and $1,082,167 (unaudited),
respectively.
ADVERTISING COSTS:
Advertising costs are expensed as incurred. Advertising
expenses for the nine months ended December 31, 2002 and 2001
approximated $10,521 (unaudited) and $15,737 (unaudited),
respectively.
8
(2) PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
December 31, March 31,
2002 2002
------------- -------------
(Unaudited)
Leasehold improvements $ 344,189 294,476
Office equipment 2,968,412 2,708,545
Software costs 5,360,052 17,642,168
------------- -------------
8,672,653 20,645,189
Less accumulated depreciation and amortization (2,386,565) (13,717,338)
------------- -------------
Property and equipment, net $ 6,286,088 $ 6,927,851
============= =============
Depreciation and amortization of property and equipment totaled
$1,698,088 (unaudited) and $1,966,798 (unaudited) for the nine months
ended December 31, 2002 and 2001, respectively.
In August 2000, the Company commenced the development of an integrated
information system to manage inventory, sales, on-line services and
distributor accounts, and incentive calculation. The development work
was executed by outside vendors. The capitalized software associated
with this integrated information system at December 31, 2002 was
$273,800 (unaudited). In September 2002, this integrated system was
placed in service.
(3) LINE OF CREDIT:
On December 31, 2002, the Company had available $2,526,330 (unaudited)
under a line of credit with its bank, which accrues interest at Japan's
market rate. There was no balance outstanding at December 31, 2002.
(4) RETAINED EARNINGS:
The following provides a reconciliation of retained earnings for the
nine months ended December 31, 2002.
Retained Earnings, March 31, 2002 $ 4,999,022
Net income for the nine months
ended December 31, 2002 2,921,956
Dividends Paid (948,809)
------------
Retained Earnings, December 31, 2002 $ 6,972,169
============
9
(5) INCOME TAXES:
Income taxes imposed by the national, prefecture and municipal
governments of Japan resulted in a normal statutory tax rate of
approximately 42.1%. Under Japanese tax law, the tax provision
encompasses only the operations of the Company's Japanese operating
subsidiary, AJOL, as a stand alone entity apart from the operations of
the Company's Japanese parent, Forval Corporation (" Forval").
A reconciliation between the statutory tax rate and the effective
income tax rate is as follows:
Nine months Nine months
ended ended
December 31, December 31,
2002 2001
------------ ------------
(Unaudited) (Unaudited)
Normal statutory tax rate 42.1% 42.1%
Entertainment and other non-
deductible expenses 10.6 14.6
Other (10.1) 0.7
--------- --------
Effective tax rate 42.6% 57.4%
========= ========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets are as follows:
December 31, March 31,
2002 2002
----------- -----------
(Unaudited)
Deferred tax assets:
Revenue recognition adjustment $1,652,902 $1,765,232
Excess of accrued bonus 98,788 108,321
Reserve for product return 58,030 115,333
Resort membership admission fees 231,589 177,883
Accrued compensated absences 103,243 124,035
Excess depreciation and
Amortization 521,443 586,606
Inventory write-down 220,624 338,136
Other 76,477 140,685
----------- -----------
Total deferred tax assets $2,963,096 $3,356,231
=========== ===========
Management believes that it is more likely than not that all of the
deferred tax assets will be realized through future earnings and/or tax
planning. Accordingly, no valuation allowance was recorded as of
December 31, 2002 (unaudited).
10
(6) RELATED PARTY TRANSACTIONS:
In March, 2002, Funai Electric Co. (Funai) liquidated its entire equity
interest in AJOL. Accordingly, all purchases, subsequent to March 31,
2002 of MOJICO and related Advance Payments and other transactions are
not considered to be related party transactions.
The Company leases the majority of its office space from Forval, it's
parent. The following summarizes amounts due from or to Forval and
related transaction amounts. Transactions with and Advances to Funai
subsequent to March 31, 2002 are not considered related party
transactions.
Nine months Nine months
ended ended
December 31, December 31,
2002 2001
------------ ------------
(Unaudited) (Unaudited)
Due from Forval -
Lease deposit $ 603,330 $ 546,895
Due from Funai - Advance payment NA 1,930,029
Due to Forval - Accounts payable 26,729
Transactions with Forval:
Sales 37,636
Rental expenses 546,979 548,226
Other 25,595 15,990
Transactions with Funai:
Purchases N/A 9,994,933
Other N/A 166,263
PPOL entered into separate agreements with Forval and Leo Global Fund,
its two majority shareholders, to provide research on investment
opportunities and market trends in the United States. The agreements
specifically call for PPOL to provide research on: 1) US trends and
products in the communications and information technology area, 2) the
market for broadband services and related infrastructure and hardware
in the US, 3) research of US market trends with respect to business and
matters of interest to other subsidiaries of Forval, 4) formation of
strategic alliances and partnerships with synergistic US businesses, 5)
other related research on matters of interest to Forval, and 6)
investment opportunities. The total consideration for these services
was $493,858. There is no assurance that PPOL will receive such
projects from Forval and Leo Global Fund in the future.
(7) COMMITMENTS:
The Company entered into a lease agreement for approximately 1,793
square feet of office space in Orange, California for a term of 24
months from October 1, 2002 through December 31, 2004. The lease calls
for an initial annual base rent of approximately $39,800 with a 2.7%
increase after the first 12 months. Additionally, the Company is
responsible for a portion of the building's common area expenses.
11
Item 2: Managements Discussion and Analysis of Financial Condition and Results
of Operations
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS:
Certain matters discussed in this Quarterly Report on Form 10-Q are
"forward-looking statements" intended to qualify for the safe harbor from
liability provided by the Private Securities Litigation Reform Act of 1995.
These forward-looking statements can generally be identified as such because the
context of the statement will include words such as PPOL "believes",
"anticipates", "expects", or words of similar import. Similarly, statements
which describe PPOL's future plans, objectives or goals are also forward-looking
statements. Such forward-looking statements are subject to certain risks and
uncertainties which are described in close proximity to such statements and
which could cause actual results to differ materially from those anticipated as
of the date of this Report. Shareholders, potential investors and other readers
are urged to consider these factors in evaluating the forward-looking statements
and are cautioned not to place undue reliance on such forward-looking
statements. The forward-looking statements included herein are only made as of
the date of this Report and PPOL undertakes no obligation to publicly update
such forward-looking statements to reflect subsequent events or circumstances,
except as required under applicable laws.
OVERVIEW
PPOL, Inc., a California corporation, conducts its business primarily though its
wholly owned Japanese subsidiary, AJOL, Ltd., a Japanese corporation (hereafter,
collectively referred to as PPOL or the "Company.") At the present time, the
Company has administrative functions occurring in California, but does not
otherwise have any business in the US.
The Company's revenues are derived from the sales of (1) its "MOJICO" hardware,
a multifunctional facsimile based machine with networking capabilities, (2)
subscriptions to PPOL's proprietary "Pan Pacific Online" interactive database
that can only be accessed through it MOJICO hardware and (3) various consumer
products that utilize the Company's "Kamome" brand.
RESULTS OF OPERATIONS - NINE MONTHS ENDED DECEMBER 31, 2002
PRODUCT SALES AND NETWORK SERVICES. For the nine months end December 31, 2002,
revenues increased 11.3% over the comparable period of the prior year. The
increase was primarily due a sales campaign in May and June of 2002 combined
with unusually low performance in the prior period due to state of the economy
in Japan.
OTHER ONLINE SERVICES REVENUE. For the nine months end December 31, 2002,
revenues increased 26.8% over the comparable period of the prior year. This is a
result of the Company's continuing efforts to expand the on-line service
business while also shifting the mix of products to those with higher margins.
COST OF SALES. For the nine months ended December 31, 2002, cost of sales
expressed as a percentage of sales decreased 1.8% from the same period of the
prior year. This is a result of the Company's continuing efforts to shift to a
product mix with higher gross margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. For the nine months ended December
31, 2002, selling, general and administrative expenses have increased by 19.2%
over the same period of the prior year. This is primarily the result of the
expenses incurred relating to the Company's SEC registration process as well as
expenses incurred related to the newly introduced integrated information system.
Additionally, sales promotion expenses, particularly direct mail and distributor
training, have increased over the prior period as well.
RESULTS OF OPERATIONS - THREE MONTHS ENDED DECEMBER 31, 2002
PRODUCT SALES AND NETWORK SERVICES. For the three months end December 31, 2002,
revenues increased 4.0% over the comparable period of the prior year.
12
OTHER ONLINE SERVICES REVENUE. For the three months end December 31, 2002,
revenues increased 39.8% over the comparable period of the prior year. This is a
result of the Company's continuing efforts to expand the on-line service
business while also shifting the mix of products to those with higher margins.
COST OF SALES. For the three months ended December 31, 2002, cost of sales
expressed as a percentage of sales has declined by 1.0% compared to the same
period of the prior year. This reflects the Company's continuing shift in
emphasizing revenues generated from Kamome brand products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. For the three months ended December
31, 2002, selling, general and administrative expenses have increased by 23.4%
over the same period of the prior year. This is primarily the result of the
expenses incurred relating to the Company's SEC registration process as well as
expenses incurred related to the newly introduced integrated information system.
Additionally, sales promotion expenses, particularly direct mail and distributor
training, have increased over the prior period as well.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $14,313,483 and US$11,716,893 at December 31,
2002 and March 31, 2002, respectively. Cash provided from operations for the
nine months ended December 31, 2002 and 2001 was $2,802,578 and $113,521,
respectively. The Company also has an available line of credit of $ 2.5 million.
This revolving bank credit facility is generally used to finance temporary
operating cash requirements. Management believes that cash flow from operations
and the revolving credit facility will adequately meet the working capital needs
for the foreseeable future.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses the Company's consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
management to make estimates 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 during the reporting period. On an on-going
basis, management evaluates its estimates and judgments, including those related
to revenue recognition, intangible assets, financing operations, and
contingencies and litigation. Management bases its estimates and judgments on
historical experience and on various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. The most significant
accounting estimates inherent in the preparation of the Company's financial
statements include estimates as to the appropriate carrying value of certain
assets and liabilities which are not readily apparent from other sources. These
accounting policies are described in the notes to the consolidated financial
statements for the years ended March 31, 2002, 2001 and 2000 included in our
Form 10.
13
Item 3: Quantitative and Qualitative Disclosures about Market Risk
LIMITED OPERATING HISTORY
AJOL has a limited operating history in Japan upon which it can be
evaluated. Any investment in the Company must be considered in light of the
risks, expenses and difficulties encountered by companies in the early stage of
development in new and rapidly evolving markets, including the risks described
herein. The can be no assurances that AJOL will be successful in addressing
these risks.
UNPROVEN BUSINESS MODEL
AJOL cannot predict whether or not it will be successful because its
business model is unproven and its market is developing. It is too early to
reliably ascertain market penetration for AJOL's products and services. If
future demand for AJOL's products and services, including, but not limited to
demand for the MOJICO hardware and Kamome brand products is lower than
anticipated, or the costs of attracting subscribers is higher than anticipated,
then AJOL's financial condition and results from operations will be materially
and adversely affected.
FLUCTUATIONS IN OPERATING RESULTS
AJOL's operating results may fluctuate significantly in the future as a
result of a variety of factors, many of which are outside of AJOL's control.
These factors include the demand for the telecommunications products and
services offered by AJOL, introduction of new products or services by AJOL or
its competitors, delays in the introduction or enhancement of products and
services by AJOL or its competitors, changes in AJOL's pricing policies or those
of its competitors, AJOL's ability to anticipate and effectively adapt to
developing markets and rapidly changing technologies, changes in the mix
Japanese vs. non-Japanese revenue, changes in foreign currency exchange rates,
the mix of products and services sold by AJOL and the channels through which
those products and services are sold, general economic conditions, and specific
Economic conditions in Internet and related industries. Additionally, in
response to evolving competitive conditions, AJOL may elect from time to time to
make certain pricing, service, marketing or acquisition decisions that could
have a material adverse affect on its financial performance.
FOREIGN CURRENCY (YEN) FLUCTUATIONS
Substantially all of AJOL's revenue and expenses are received and
incurred in Japanese Yen. Variation in foreign exchange rates may substantially
affect AJOL's revenue, expenses, and net income in U.S. dollar terms. In
preparing its financial statements, the Company translates revenue and expenses
from Yen into U.S. dollars using weighted average exchange rates. If the U.S.
dollar strengthens relative to the Yen, the Company's reported revenue, gross
profits and net income will likely be reduced. For example, in 2001, the
Japanese Yen significantly weakened, which reduced the Company's operating
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results on a U.S. dollar reported basis. Given
the unpredictability of exchange rate fluctuations, the Company cannot estimate
the effect these fluctuations may have upon future reported results, product
pricing or the Company's overall financial condition.
POOR JAPANESE ECONOMIC CONDITIONS
Economic conditions in Japan have been poor in recent years and may
worsen or not improve. Continued or worsening economic and political conditions
in Japan could further reduce the Company's revenue and net income.
RELIANCE ON HANDWRITTEN MOJI (CHARACTERS) AS PREFERRED METHOD OF WRITTEN
COMMUNICATIONS
The Company relies on the desire of subscribers and potential
subscribers to use handwritten Moji (characters) as their preferred method of
written communication as an underlying material assumption for the continuing
success of its business. A subscriber's or potential subscriber's desire to use
handwritten Moji (characters) is a matter of personal preference, which is
unpredictable. Any negative changes in perception by subscribers and potential
subscribers as to their desire to use handwritten Moji (characters) as their
preferred method of written communication, for any reason, including the
emergence of new, different, or alternative forms of written communications,
could have a materially adverse affect on AJOL and its business.
DEPENDENCE ON NEW SUBSCRIBERS
AJOL's operating results generally depend on revenues received from
sales of the MOJICO product. In previous years, MOJICO sales have accounted for
up to 78% of AJOL's annual revenue. MOJICO sales are primarily made to new
customers of AJOL. As a result, future revenues are primarily dependent on
AJOL's ability to generate new customers for its MOJICO hardware and Pan Pacific
Online services. There can be no assurances that AJOL will be able to continue
to generate new subscribers at the rate that it has been able to in the past,
nor that AJOL will be able to generate sufficient new subscribers to remain
profitable. AJOL does not have any substantial historical basis for predicting
the rate of increase in its subscriber base.
DEPENDENCE ON SUBSCRIBERS FOR CONTENT OF NETWORK
The information transmitted to AJOL subscribers via AJOL's information
network Pan Pacific Online is primarily generated by other AJOL's subscribers.
There can be no assurances that AJOL's subscribers will continue to generate
information that other subscribers will find sufficiently entertaining, useful,
or desirable so as to allow AJOL to profitably market the products and services
that provide access to AJOL's network.
15
LIABILITY FOR CONTENT OF NETWORK
As a provider of messaging and communications services, AJOL may incur
liability for defamation, negligence, copyright, patent or trademark
infringement and other claims based on the nature and content of the materials
transmitted via AJOL's information network. There can be no assurances that AJOL
will be able to effectively screen all of the content generated by AJOL's
subscribers. AJOL may be exposed to liability with respect to this content.
AJOL's insurance may not cover claims of these types or may not be adequate to
indemnify AJOL for all liability that may be imposed. There is a risk that a
single claim or multiple claims, if successfully asserted against AJOL, could
exceed the total of AJOL's coverage limits. There is also a risk that a single
claim or multiple claims asserted against AJOL may not qualify for coverage
under AJOL's insurance policies as a result of coverage exclusions that are
contained within these policies. Any imposition of liability, particularly
liability that is not covered by insurance or is in excess of insurance
coverage, could have a material adverse affect on AJOL's reputation, financial
condition, and operating results.
RELIANCE ON EXISTING DISTRIBUTORS AND NEED TO RECRUIT ADDITIONAL DISTRIBUTORS
The Company depends on subscriber distributors to generate
substantially all of its revenues. To increase its revenue, the Company must
increase the number of and/or the productivity of its distributors. The
Company's distributors may terminate their status as a distributor at any time.
The number of distributors may not increase and could decline in the future. The
Company cannot accurately predict how the number and productivity of
distributors may fluctuate because the Company relies upon its existing
distributors to recruit, train and motivate new distributors. The Company's
operating results could be harmed if it's existing and new business
opportunities and products do not generate sufficient interest to retain
existing distributors and attract new distributors.
The loss of a high-level distributor or a group of leading distributors
in the distributor's network of lower levels, distributors, whether by their own
choice or through disciplinary actions for violations of Company policies and
procedures could negatively impact the growth of distributors and the Company's
revenue.
In addition, the Company's operations in Japan face significant
competition from existing and new competitors. Our operations would also be
harmed if our planned growth initiatives fail to generate continued interest and
enthusiasm among our distributors in this market and fail to attract new
distributors. However, there was no distributor that the Company relied upon for
sales in excess of 1% of total MOJICO units sold per year during the six months
ended September 30, 2002 or for the fiscal years ended March 31, 2002, 2001 and
2000..
DEPENDENCE ON MR. AOTA
The Company is highly dependent upon its President Yoshihiro Aota to
recruit and retain subscribers. Mr. Aota represents the personification of AJOL.
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Mr. Aota's talents, efforts, personality and leadership have been, and continue
to be critical to AJOL and the Company's success. The diminution or loss of the
services of Mr. Aota, and any negative market or industry perception arising
from that diminution or loss, would have a material adverse affect on the
Company's business. The Company is investigating, but has not obtained "Key
Executive Insurance" with respect to Mr. Aota.
One of the Company's business strategies is to reduce its dependence on
Mr. Aota. This will be done through additional external training courses of
employees and flattening of the organization to three levels, senior management,
leaders, general, so more employees get on the job training from senior
management. We have also involved more staff on strategic planning and product
development task teams. Externally, our distributors have become more
knowledgeable and are making presentations to prospective subscribers. If the
Company is unsuccessful in accomplishing this strategy, and Mr. Aota's services
become unavailable, the Company's business and prospects could be materially
adversely affected. Neither the Company nor AJOL has an employment agreement
with Mr. Aota. If the Company loses Mr. Aota's services, for any reason,
including as a result of Mr. Aota's voluntary resignation or retirement, the
Company's business could be materially adversely affected.
FAILURE OF NEW PRODUCTS AND SERVICES TO GAIN MARKET ACCEPTANCE
A critical component of the Company's business is its ability to
develop new products and services that create enthusiasm among the Company's
distributor force. If any new product or service fails to gain market
acceptance, for any reason including quality problems, this could harm the
Company's results of operations.
LOSING SOURCES OF KAMOME PRODUCTS
The loss of any of the Company's sources of Kamome products, or the
failure of sources to meet the Company's needs, could restrict the Company's
ability to distribute Kamome products and harm its revenue as a result. Further,
the Company's inability to obtain new sources of Kamome products at prices and
on terms acceptable to the Company could harm the Company's results of
operations.
COMMENCING FOREIGN OPERATIONS
AJOL is exploring the possibility of commencing business activities in
South Korea, China, and Taiwan. In past years, these nations have experienced
significant economic and/or political instability. If AJOL commences business
activities in these nations, future instability will have a material adverse
affect on AJOL's ability to do business in these nations and may jeopardize
AJOL's investment in establishing business operations in those countries.
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COMPETITION WITH TECHNICALLY SUPERIOR PRODUCTS AND SERVICES
AJOL's products and services utilize the facsimile-like MOJICO hardware
and rely on human personnel to screen and process information for AJOL's
database. AJOL's products and services are much less technically sophisticated
than those offered by other companies offering interactive telecommunications
products and services. This may put AJOL at a substantial competitive
disadvantage with present and/or future competitors.
INTERNET USAGE RATES AND LONG DISTANCE TELEPHONE RATES
AJOL's subscribers obtain access to AJOL's network via either the
Internet or telephone service. The costs that subscribers incur in obtaining
access to the AJOL network via these channels are beyond the control of AJOL.
Any increase in long distance telephone rates or rates for accessing the
Internet could materially and adversely affect demand for AJOL's products and
services.
RELIANCE ON INTERNET AS TRANSMISSION MEDIUM
The Company's future success will depend upon the Company's ability to
route the Company's customers' traffic through the Internet and through other
data transmission media. The Company's success is largely dependent upon the
viability of the Internet as a medium for the transmission of subscriber related
data. There can be no assurance that the Internet will prove to be a viable
communications media, that document transmission will be reliable, or that
capacity constraints which inhibit efficient document transmission will not
develop. The Internet may not prove to be a viable avenue to transmit
communications for a number of reasons, including lack of acceptable security
technologies, lack of access and ease of use, traffic congestion, inconsistent
quality or speed of service, potentially inadequate development of the necessary
infrastructure, excessive governmental regulation, uncertainty regarding
intellectual property ownership or lack of timely development and
commercialization of performance improvements.
TECHNOLOGICAL CHANGES OF THE MESSAGING AND COMMUNICATIONS INDUSTRY
The messaging and communications industry is characterized by rapid
technological change, changes in user and customer requirements and preferences,
and the emergence of new industry standards and practices that could render the
Company's existing services, proprietary technology and systems obsolete.
The Company's success depends, in part, on the Company's ability to
develop new services, functionality and technology that address the needs of
existing and prospective subscribers. If the Company does not properly identify
the feature preferences of subscribers and prospective subscribers, or if the
Company fail to deliver features that meet their standards, the Company's
ability to market the Company's products and services successfully and to
increase revenues could be impaired. The development of proprietary technology
and necessary service enhancements entail significant technical and business
risks and require substantial expenditures and lead-time. The Company may not be
able to keep pace with the latest technological developments. The Company may
also be unable to use new technologies effectively or adapt services to customer
requirements or emerging industry standards.
18
The Company must accurately forecast the features and functionality
required by subscribers and prospective subscribers. In addition, the Company
must design and implement service enhancements that meet subscriber requirements
in a timely and efficient manner. The Company may not successfully determine
subscriber and prospective subscriber requirements and may be unable to satisfy
their demands. Furthermore, the Company may not be able to design and implement
a service incorporating desired features in a timely and efficient manner. In
addition, if subscribers do not favorably receive any new service offered by the
Company, the Company's reputation could be damaged. If the Company fails to
accurately determine desired feature requirements or service enhancements or to
market services containing such features or enhancements in a timely and
efficient manner, the Company's business and operating results could suffer
materially.
POSSIBLE INADEQUATE INTELLECTUAL PROPERTY PROTECTIONS
The Company's success depends to a significant degree upon the
Company's proprietary technology. The Company relies on a combination of patent,
trademark, trade secret and copyright law and contractual restrictions to
protect the Company's proprietary technology. However, these measures provide
only limited protection, and the Company may not be able to detect unauthorized
use or take appropriate steps to enforce the Company's intellectual property
rights. In addition, the Company may face challenges to the validity and
enforceability of the Company's proprietary rights and may not prevail in any
litigation regarding those rights. Any litigation to enforce the Company's
intellectual property rights would be expensive and time-consuming, would divert
management resources and may not be adequate to protect the Company's business.
POSSIBLE INFRINGEMENT CLAIMS
The Company could be subject to claims that the Company has infringed
the intellectual property rights of others. In addition, the Company may be
required to indemnify the Company's distributors and users for similar claims
made against them. Any claims against the Company could require the Company to
spend significant time and money in litigation, pay damages, and develop new
intellectual property or acquire licenses to intellectual property that is the
subject of the infringement claims. These licenses, if required, may not be
available at all or on acceptable terms. As a result, intellectual property
claims against the Company could have a material adverse effect on the Company's
business, prospects, financial conditions and results of operations.
POSSIBLE SYSTEM FAILURE OR BREACH OF NETWORK SECURITY
The Company's operations are dependent on the Company's ability to
protect the Company's network from interruption by damage from fire, earthquake,
power loss, telecommunications failure, unauthorized entry, computer viruses or
other events beyond the Company's control. As precautions, we utilize
19
distributed processing systems, backup systems, Internet firewalls, 24/7
installation environment surveillance, and private power generators as backup.
There can be no assurance that the Company's existing and planned precautions of
backup systems, regular data backups and other procedures will be adequate to
prevent significant damage, system failure or data loss.
Despite the implementation of security measures, the Company's
infrastructure may also be vulnerable to computer viruses, hackers or similar
disruptive problems. Persistent problems continue to affect public and private
data networks, including computer break-ins and the misappropriation of
confidential information. Computer break-ins and other disruptions may
jeopardize the security of information stored in and transmitted through the
computer systems of the individuals and businesses utilizing the Company's
services, which may result in significant liability to the Company and also may
deter current and potential subscribers from using the Company's services. Any
damage, failure or security breach that causes interruptions or data loss in the
Company's operations or in the computer systems of the Company's customers could
have a material adverse effect on the Company's business, prospects, financial
condition and results of operations.
RELIANCE ON THIRD PARTY ACCESS FOR TELECOMMUNICATIONS
The Company relies on third party to provide its subscribers with
access to the Internet. There can be no assurance that a third party's current
pricing structure for access to and use of the Internet will not change
unfavorably and, if the pricing structure changes unfavorably, the Company's
business, prospects, financial condition and results of operations could be
materially and adversely affected.
EFFECT OF GOVERNMENT REGULATIONS
The Company provides access to its database and services through data
transmissions over public telephone lines and other facilities provided by
telecommunications companies. These transmissions are subject to regulatory
government agencies. These regulations affect the prices that subscribers must
pay for transmission services, the competition the Company faces from
telecommunications services and other aspects of the Company's market. There can
be no assurance that a existing or future laws, governmental action or rulings
will not materially and adversely affect the Company's operations.
CONTROL BY OFFICERS AND DIRECTORS
AJOL's executive officers, directors and entities affiliated with them,
in the aggregate, beneficially own common stock representing approximately 95%
of the Company.
20
MINORITY SHAREHOLDER STATUS
Forval Corporation and Leo Global Fund, former direct shareholders of
AJOL, hold 59.17% and 35.83% respectively of the Company's common stock. [ See -
DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED - Common Stock.] Acting
alone, Forval Corporation, as a majority shareholder, has significant influence
on Company policies. Forval Corporation and Leo Global Fund, collectively,
control 95% of the Company's outstanding shares, representing 95% of the
Company's voting power. As a result, Forval and Leo Global Fund, acting
together, will have the ability to control the outcome of all matters requiring
stockholder approval, including the election and removal of the Company's entire
Board of Directors, any merger, consolidation or sale of all or substantially
all of the Company's assets, and the ability to control the Company's management
and affairs.
NO LOCK-UP AGREEMENT BETWEEN FORVAL CORPORATION AND LEO GLOBAL FUND
To date, the Company has not entered into a separate lock-up
arrangement with Forval Corporation and Leo Global Fund pursuant to which these
shareholders would agree to be subject to volume and sale restrictions that will
limit their ability to sell shares in addition to the restrictions set forth
under Rule 144. If a suitable lock-up agreement is not in effect, then Forval
Corporation and/or Leo Global Fund may be eligible to sell a large volume of
shares, which could cause the price of shares to decline.
NO HISTORY AS REPORTING COMPANY
Prior to the effective date of the Company's filing of Form 10, the
Company has never been a public company, subject to the reporting requirements
of the Securities and Exchange Act of 1934, as amended, and the Company expects
that the obligations of being a public company, including substantial public
reporting and investor relations obligations, will require significant
additional expenditures, place additional demands on the Company's management
and may require the hiring of additional personnel. The Company may need to
implement additional systems in order to adequately function as a reporting
public company. Such expenditures could adversely affect the Company's financial
condition and results of operations.
Item 4: Controls and Procedures
We have established and maintain disclosure controls and procedures and conclude
these controls/procedures are effective based on our evaluation as of the
"Evaluation Date," which is a date within 90 days prior to the filing of this
10-Q. There were no significant changes in our internal controls or in other
factors that could significantly affect our internal controls subsequent to the
date of our most recent evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
21
Part 2:
Item 1: Legal Proceedings
None
Item 2: Changes in Securities and Use of Proceeds
None
Item 3: Defaults Upon Senior Securities
None
Item 4: Submission of Matters to a Vote of Security Holders
None
Item 5: Other Information
None
Item 6: Exhibits and Reports on Form 8-K
Exhibit 99 - CERTIFICATION PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PPOL, Inc.
----------
(Registrant)
February 13, 2003 /s/ Nobuo Takada
- -------------------- ------------------------------------------
Date Nobuo Takada, Chief Executive Officer
February 13, 2003 /s/ Kazushige Shimizu
- -------------------- ------------------------------------------
Date Kazushige Shimizu, Chief Financial Officer
23
CERTIFICATIONS
I, Nobuo Takada, certify that:
1. I have reviewed this quarterly report on Form 10-Q of PPOL, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: February 13, 2003
-----------------------
/s/ Nobuo Takada
---------------------------
Nobuo Takada
Chief Executive Officer
24
CERTIFICATIONS
I, Kazushige Shimizu, certify that:
1. I have reviewed this quarterly report on Form 10-Q of PPOL, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: February 13, 2003
-----------------------
/s/ Kazushige Shimizu
---------------------------
Kazushige Shimizu
Chief Financial Officer
25