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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 June 30, 2003
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 June 30, 2003.)
PPOL, Inc.
2003 Quarterly Report on Form 10-Q
Table of Contents
PART 1: 3
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ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS 3
Consolidated Balance Sheets as of June 30, 2003 and March 31, 2003 3
Consolidated Statements of Income and Comprehensive Income for
the Three Months Ended June 30, 2003 and 2002 4
Consolidated Statements of Cash Flows for Three Months Ended June 30, 2003 and 2002 5
Notes to Consolidated Financial Statements 6
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 22
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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EXHIBIT: 26
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Exhibit 99 - Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 26
2
Part 1:
Item 1: Consolidated financial statements
PPOL, INC.
CONSOLIDATED BALANCE SHEETS
June 30, 2003 March 31, 2003
-------------- --------------
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 16,290,502 $ 14,313,063
Trade accounts receivable, net of allowance for
doubtful accounts of $0 and $212 621,431 149,313
Merchandise inventories 3,318,004 2,920,320
Advance payments 828,717 3,491,610
Deferred costs 61,370,471 66,323,721
Deferred income taxes 9,296,898 9,944,929
Prepaid expenses and other 734,732 1,482,110
-------------- --------------
Total current assets 92,460,755 98,625,066
PROPERTY AND EQUIPMENT, net 8,419,757 7,420,085
DEFERRED COSTS 40,490,059 47,563,043
DEFERRED INCOME TAXES 5,340,909 6,368,748
LEASE DEPOSITS, INCLUDING RELATED PARTIES 733,720 744,905
OTHER ASSETS 2,466,501 826,811
-------------- --------------
$ 149,911,701 $ 161,548,658
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, including related parties $ 9,674,244 $ 8,612,478
Advances received 12,018,407 10,929,498
Deferred revenue 82,275,953 88,782,468
Income taxes payable 85,262 876,609
Other current liabilities 1,516,405 926,926
-------------- --------------
Total current liabilities 105,570,271 110,127,979
DEFERRED REVENUE 52,859,915 61,535,697
OTHER LIABILITIES 62,467 --
-------------- --------------
Total liabilities 158,492,653 171,663,676
-------------- --------------
SHAREHOLDERS' EQUITY:
Common Stock; $0.001 par value; 100,000,000 shares authorized;
17,994,920 shares issued and outstanding as of
June 30, 2003 (unaudited) and March 31, 2003, respectively 17,995 17,995
Additional paid-in capital 3,367,157 3,367,157
Total other comprehensive income 3,574,074 3,210,834
Accumulated deficit (15,540,178) (16,711,004)
-------------- --------------
Total shareholders' equity (8,580,952) (10,115,018)
-------------- --------------
$ 149,911,701 $ 161,548,658
============== ==============
The accompanying notes are an integral part of these consolidated financial statements.
3
PPOL, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Three months Three months
ended ended
June 30, 2003 June 30, 2002
------------- -------------
(Unaudited) (Unaudited)
NET REVENUE:
Product sales and network services $ 28,579,162 $ 28,568,333
Other on-line services 4,680,027 3,770,909
------------- -------------
Total 33,259,189 32,339,242
------------- -------------
COSTS AND EXPENSES:
Cost of sales 7,681,813 7,084,105
Distributor incentives 16,629,674 17,033,964
Selling, general and administrative expenses 5,987,994 5,944,564
------------- -------------
Total costs and expenses 30,299,481 30,062,633
------------- -------------
OPERATING INCOME 2,959,708 2,276,609
OTHER (EXPENSE) INCOME, net (26,795) 16,157
------------- -------------
INCOME BEFORE INCOME TAXES 2,932,913 2,292,766
------------- -------------
INCOME TAXES:
Current 86,217 362,896
Deferred 1,675,870 (817,641)
------------- -------------
Total income taxes 1,762,087 (454,745)
------------- -------------
NET INCOME 1,170,826 2,747,511
OTHER COMPREHENSIVE GAIN (LOSS) -
Cumulative foreign currency translation 363,240 (2,944,963)
------------- -------------
COMPREHENSIVE INCOME (LOSS) $ 1,534,066 $ (197,452)
============= =============
NET INCOME PER COMMON SHARE,
Basic and diluted $ 0.07 $ 0.16
============= =============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC AND DILUTED 17,994,920 17,095,174
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
4
PPOL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months Three months
ended ended
June 30, 2003 June 30, 2002
------------- -------------
(Unaudited) (Unaudited)
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income $ 1,170,826 $ 2,747,511
------------- -------------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Depreciation and amortization 429,236 505,501
Loss on sales/disposal of property and equipment 61,517 --
Deferred income taxes 1,675,870 (817,641)
CHANGES IN ASSETS AND LIABILITIES:
(INCREASE) DECREASE IN ASSETS:
Trade accounts receivables (479,675) 883,077
Merchandise Inventories (446,487) (829,619)
Advance payments to related parties 2,639,707 (2,132,143)
Deferred costs 10,431,523 (9,945,539)
Prepaid expenses and other 733,137 (308,030)
INCREASE (DECREASE) IN LIABILITIES:
Accounts payable, including related parties 1,201,900 (3,777,168)
Advances received 1,259,734 10,312,013
Deferred revenue (13,069,708) 12,876,600
Income taxes payable (786,901) (1,170,485)
Other liabilities 715,343 1,278,699
------------- -------------
Total adjustments 4,365,196 6,875,265
------------- -------------
Net cash provided by operating activities 5,536,022 9,622,776
------------- -------------
CASH FLOWS USED FOR INVESTING ACTIVITIES:
Purchase of property and equipment (3,328,209) (13,991)
Other assets 4,348 (15,373)
------------- -------------
Net cash used for investing activities (3,323,861) (29,364)
------------- -------------
CASH FLOWS USED FOR FINANCING ACTIVITIES -
Dividends paid -- (963,732)
------------- -------------
Net cash (used for) financing activities -- (963,732)
------------- -------------
EFFECTS OF EXCHANGE RATE (234,722) (3,690,731)
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,977,439 4,938,949
CASH AND CASH EQUIVALENTS, beginning of period 14,313,063 11,716,893
------------- -------------
CASH AND CASH EQUIVALENTS, end of period $ 16,290,502 $ 16,655,842
============= =============
SUPPLEMENTAL CASH FLOW INFORMATION -
Income taxes paid $ 85,132 $ 1,536,165
============= =============
Interest paid $ -- $ --
============= =============
The accompanying notes are an integral part of these consolidated financial statements.
5
PPOL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 2003 AND 2002 (UNAUDITED)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
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 consolidated
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. 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."
BASIS OF PRESENTATION:
The unaudited consolidated 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 consolidated 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. The information furnished herein reflects
all adjustments (consisting of normal recurring accruals and
adjustments), which are, in the opinion of management, necessary to
fairly present the operating results for the prospective periods.
These consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and footnotes for
the years ended March 31, 2003 and 2002 included in the Company's Form
10-K. The results of the three months ended June 30, 2003 are not
necessarily indicative of the results to be expected for the full year
ending March 31, 2004.
6
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
RECLASSIFICATIONS:
Certain reclassifications have been made to the prior period
consolidated financial statements in order to conform to the current
period presentation.
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.
FORFEITED DISTRIBUTOR COMMISSIONS:
In April 2003, the Company amended its policy regarding distributor
commissions to state that distributor commissions are not paid out
unless they exceed a minimum threshold of approximately $30.00. If a
distributor does not attain the minimum commission threshold within
one year, then the commissions will be forfeited to the Company. In
the quarter ending June 30, 2003, the Company has recognized
approximately $714,000 of other income for the write-off of previously
accrued distributor commissions that exceeded the one year threshold
at March 31, 2003. This amount, related to the change in accounting
policy, is included in other income on the statements of income and
comprehensive income for the three months ended June 30, 2003.
Distributor commissions outstanding greater than one year for the
three month period ended June 30, 2003 approximated $148,000. This
amount is offset against distributor incentives on the statement of
income for the three months ended June 30, 2003.
RECENT ACCOUNTING PRONOUNCEMENTS:
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities". This Statement
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for
hedging activities under SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This Statement amends Statement
133 for decisions made (1) as part of the Derivatives Implementation
Group process that effectively required amendments to Statement 133,
(2) in connection with other Board projects dealing with financial
instruments, and (3) in connection with implementation issues raised
in relation to the application of the definition of a derivative, in
particular, the meaning of an initial net investment that is smaller
than would be required for other types of contracts that would be
expected to have a similar response to changes in market factors, the
meaning of underlying, and the characteristics of a derivative that
contains financing components. The Company does not anticipate that
the adoption of this Statement will have a material effect on the
financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity". This Statement establishes standards for how an issuer
classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an
issuer classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances). Many of those
instruments were previously classified as equity. Some of the
provisions of this Statement are consistent with the current
definition of liabilities in FASB Concepts Statement No. 6, Elements
of Financial Statements. The remaining provisions of this Statement
are consistent with the Board's proposal to revise that definition to
encompass certain obligations that a reporting entity can or must
settle by issuing its own equity shares, depending on the nature of
the relationship
7
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
RECENT ACCOUNTING PRONOUNCEMENTS (CONT.):
established between the holder and the issuer. While the Board still
plans to revise that definition through an amendment to Concepts
Statement 6, the Board decided to defer issuing that amendment until
it has concluded its deliberations on the next phase of this project.
That next phase will deal with certain compound financial instruments
including puttable shares, convertible bonds, and dual-indexed
financial instruments. The Company does not anticipate that the
adoption of this Statement will have a material effect on the
financial statements.
(2) RELATED PARTY TRANSACTIONS:
The Company leased the majority of its office space from Forval, its
parent, until March 31, 2003. Forval subsequently returned a lease
deposit to the Company during the three months ended June 30, 2003.
The following summarizes amounts due from or to Forval and related
transaction amounts.
Three months Three months
ended ended
June 30, 2003 June 30, 2002
---------------------------
(Unaudited) (Unaudited)
Due from Forval- Lease deposit $ -- $ 597,806
Due to Forval - Accounts payable -- 1,343
Transactions with Forval:
Rental expenses -- 186,814
Other -- 868
PPOL entered into separate agreements with Forval and Leo Global Fund,
its two majority shareholders, in which PPOL is to provide certain
consulting services during fiscal 2003. As provided for in the
agreements, PPOL received $493,858 from Forval and Leo Global Fund.
Since the Company has not completed the consulting services called for
in the agreements prior to June 30, 2003, the payments received are
included in advances received, as a liability, at June 30, 2003. There
is no assurance that PPOL will receive such projects from Forval and
Leo Global Fund in the future.
8
(3) RESTATEMENT OF PRIOR FINANCIAL INFORMATION
The Company had conducted an internal review of its revenue
recognition policies under the direction of the Company's Chief
Financial Officer. The Company sells its MOJICO hardware for
approximately $2,900 per unit and simultaneously charges admission
fees of approximately $150 to customers which afford them the right to
be a distributor for one year. As a result of the review, the Company
noted that customers renew and remain distributors with the Company
for an average of 3 years in total. As such, the Company has revised
its revenue recognition policy on sales of MOJICO units. Revenues and
related costs of MOJICO units are now deferred and recognized over 3
years. The Company previously recognized revenue from MOJICO sales
over a period of 3 months. Therefore, in connection with this internal
review, the financial results for each of the years ended March 31,
2002, 2001 and 2000 are being restated. Additionally, the company has
restated the three and nine months ended December 31, 2002 and 2001,
the three and six months ended September 30, 2002 and 2001 and the
three months ended June 30, 2002. The total impact of the adjustments
as of and for the three months ended June 30, 2002 is as follows:
Three Months Ended June 30, 2002
------------------------------------------------
Restated Original Change
increase
(decrease)
------------- ------------- -------------
Product sales and network services $ 28,568,333 $ 30,815,864 $ (2,247,531)
Cost of sales 7,084,105 7,642,042 (557,937)
Distributor incentives 17,033,964 19,356,990 (2,323,026)
Operating income 2,276,609 1,631,382 645,227
Income before income taxes 2,292,766 1,642,539 650,227
Income taxes - deferred (817,641) 313,742 (1,131,383)
Net income 2,747,511 963,117 1,784,394
Cummulative foreign currency translation (2,944,963) 415,399 (3,360,362)
Comprehensive (loss) income (197,452) 1,378,516 (1,575,968)
============= ============= =============
The changes noted above are entirely attributable to revenue
recognition and associated deferral of costs of product sales and
network service revenues as noted above. The restatement resulted in
an increase in earnings per share of $0.10 (from $0.06 to $0.16) for
the three months ended June 30, 2002. The financial results presented
in this report reflect the restatement of the Company's financial
results. Based on the substantial work done to date, the Company does
not expect any further restatements as a result of its internal
review.
9
Item 2: Management's 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 - THREE MONTHS ENDED JUNE 30, 2003
PRODUCT SALES AND NETWORK SERVICES. For the three months ended June 30, 2003,
overall revenues of this category have remained consistent in comparison to the
same period of the prior year.
OTHER ONLINE SERVICES REVENUE. For the three months end June 30, 2003, revenues
increased 24.1% 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 which
is a continuing corporate objective. Additionally, the Company has implemented
new operational systems and procedures to increase efficiencies in processing
and handling Other Online Services Revenues.
COST OF SALES. For the three months ended June 30, 2003, the change in cost of
sales, expressed as a percentage of sales, increased 1.2% in comparison to the
same period of the prior year. The increase is consistent with the increase in
revenues.
10
DISTRIBUTOR INCENTIVES. For the three months ended June 30, 2003, the change in
distributor incentives, expressed as a percentage of sales, decreased by 0.5%.
In April 2003, the Company amended its distributor commission policy to state
that the Company would not pay any commissions less than a minimum threshold of
approximately $30.00. If the distributor does not earn the minimum threshold at
the end of one year, then the commissions will be forfeited to the Company. The
decrease is the result of the forfeited distributor commissions during the
quarter ended June 30, 2003, which offset distributor incentives by
approximately $148,000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. For the three months ended June 30,
2003, selling, general and administrative expenses have remained consistent with
same period of the prior year. The company is continually focusing efforts on
reducing costs. The Company's monthly member magazine was redefined as a
bi-monthly magazine which resulted in material savings. However, these savings
were offset as the Yen strengthened against the US dollar.
OTHER INCOME. For the three months ended June 30, 2003, other income increased
approximately $671,000 in comparison to the same period of the prior year.
Effective in April 2003, the Company revised its commission policy to state that
the Company would not pay any commissions less than a minimum threshold of
approximately $30.00. If the distributor does not earn the minimum threshold
within one year, then the commissions will be forfeited. The increase in
primarily due to the Company recognizing approximately $714,000 of income
associated with commissions that did not meet the minimum threshold of the new
commission policy and had been outstanding greater than one year as of March 31,
2003.
DEFERRED INCOME TAX EXPENSE. For the three months ended June 30, 2003, deferred
income tax expense increased approximately $2.5 million. The increase was
primarily the result of deferred tax assets reversing against income.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $16,290,502 and $16,655,842 at June 30, 2003
and 2002, respectively. Cash provided from operations for the three months ended
June 30, 2003 and 2002 was $5,536,022 and $9,622,776, respectively. Cash used
for investing activities for the three months ended June 30, 2003 and 2002 was
$3,323,861 and $29,364, respectively. The cash used for investing activity for
the quarter ended June 2003 was primarily for the purchase of property and
equipment. No cash was used for financing activities in the three months ended
June 30, 2003. Cash used for financing activities was $963,732 for the three
months ended June 30, 2002 which was for the payment of dividends to
shareholders. The Company also has an available line of credit of approximately
$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 consolidated financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the consolidated
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, impairment of
long-lived and intangible assets, depreciation and amortization, financing
operations, inventory valuation, income tax 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 consolidated 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, 2003 and 2002 included in our Form 10-K.
11
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
consolidated 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, if the Japanese Yen
significantly weakened, it would result in a reduction of the Company's
operating 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.
12
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 the current period, MOJICO sales have accounted for
approximately 75% 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.
13
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.
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.
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.
14
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.
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.
15
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 fails
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.
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.
16
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 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.
17
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.
DEPENDENCE ON VENDOR
The MOJICO machine is produced by Funai Electric Co ("Funai") which is a former
shareholder of AJOL. Should Funai become incapable or unwilling to produce the
MOJICO for any reason, we could face a temporary decline in MOJICO sales until
another electronics manufacturer is sourced and ready to produce the machines.
AJOL owns the patent rights to the MOJICO and the technical production
requirements of the MOJICO can be met by other electronics manufacturers.
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. 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.
18
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.
19
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 as of the end of the period covered in 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.
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
20
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)
September 9, 2003 /s/ Nobuo Takada
- --------------- ------------------------------------------
Date Nobuo Takada, Chief Executive Officer
September 9, 2003 /s/ Kazushige Shimizu
- --------------- ------------------------------------------
Date Kazushige Shimizu, Chief Financial Officer
21
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 consolidated 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 officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and 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) designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting
and preparation of financial statements for external purposes in accordance with
accounting principles generally accepted in the United States of America;
c) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
d) 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 officer 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
Date: September 9, 2003
/s/ Nobuo Takada
-----------------------
Nobuo Takada
Chief Executive Officer
22
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 consolidated 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 officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and 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) designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting
and preparation of financial statements for external purposes in accordance with
accounting principles generally accepted in the United States of America;
c) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
d) 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
Date: September 9, 2003
/s/ Kazushige Shimizu
-----------------------
Kazushige Shimizu
Chief Financial Officer
23