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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, 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.
- --------------------------------------------------------------------------------
(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 17,993,752
- ----------------------------- -----------------------------------
(Class) (Outstanding at December 31, 2003.)
1
PPOL, Inc.
December 2003 Quarterly Report on Form 10-Q
Table of Contents
PART 1: 3
ITEM 1: FINANCIAL STATEMENTS 3
Consolidated Balance Sheets as of December 31 and March 31, 2003 3
Consolidated Statements of Income and Comprehensive Income for
Three Months Ended December 31, 2003 and 2002 4
Consolidated Statements of Income and Comprehensive Income for
Nine Months Ended December 31, 2003 and 2002 5
Consolidated Statements of Cash Flows for Nine Months
Ended December 31, 2003 and 2002 6
Notes to Consolidated Financial Statements 7
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 13
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 16
ITEM 4: CONTROLS AND PROCEDURES 22
PART 2: 23
- --------------------------------------------------------------------------------
ITEM 1: LEGAL PROCEEDINGS 23
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS 23
ITEM 3: DEFAULTS UPON SENIOR SECURITIES 23
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 23
ITEM 5: OTHER INFORMATION 23
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 23
SIGNATURES 24
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CERTIFICATIONS 25
- --------------------------------------------------------------------------------
CERTIFICATIONS 26
- --------------------------------------------------------------------------------
CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 27
2
Part 1:
Item 1: Financial Statements
PPOL, INC.
CONSOLIDATED BALANCE SHEETS
December 31 March 31,
2003 2003
-------------- --------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 22,935,227 $ 14,313,063
Trade accounts receivable, net of allowance for
doubtful accounts of $-0- and $212 798,560 149,313
Merchandise inventories 2,400,061 2,920,320
Advance payments -- 3,491,610
Deferred income taxes 9,319,411 9,944,929
Deferred costs 65,873,081 66,323,721
Prepaid expenses and other current assets 239,235 1,482,110
-------------- --------------
Total current assets 101,565,575 98,625,066
PROPERTY AND EQUIPMENT, NET 9,002,377 7,420,085
DEFERRED COSTS 40,279,646 47,563,043
DEFERRED INCOME TAXES 5,808,672 6,368,748
LEASE DEPOSITS, INCLUDING RELATED PARTIES 745,808 744,905
DEPOSITS 5,872,156 --
OTHER ASSETS 188,191 826,811
-------------- --------------
$ 163,462,425 $ 161,548,658
============== ==============
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 13,025,655 $ 8,612,478
Advances received 14,998,142 10,929,498
Deferred revenue 87,423,883 88,782,468
Income taxes payable -- 876,609
Other current liabilities 1,389,549 926,926
-------------- --------------
Total current liabilities 116,837,229 110,127,979
-------------- --------------
DEFERRED REVENUE 53,250,262 61,535,697
OTHER LIABILITIES 23,309 --
SHAREHOLDERS' DEFICIT:
Common stock; $0.001 par value; 100,000,000 shares authorized;
17,993,752 (unaudited) issued and outstanding at December 31,
2003 and 17,994,920 issued and outstanding at March 31, 2003 17,994 17,995
Additional paid-in capital 3,362,359 3,367,157
Total other comprehensive gain 911,282 3,210,834
Accumulated Deficit (10,940,010) (16,711,004)
-------------- --------------
Total shareholders' deficit (6,648,375) (10,115,018)
-------------- --------------
$ 163,462,425 $ 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 ended Three months ended
December 31, December 31,
2003 2002
------------- -------------
(Unaudited) (Unaudited)
(Restated)
NET REVENUE:
Product sales and network services $ 29,540,639 $ 29,299,563
Other on-line services 4,916,892 4,649,824
------------- -------------
Total 34,457,531 33,949,387
------------- -------------
COSTS AND EXPENSES:
Cost of sales 7,598,685 7,771,727
Distributor incentives 17,505,163 17,354,941
Selling, general and administrative expenses 5,854,820 6,537,395
------------- -------------
Total costs and expenses 30,958,668 31,664,063
------------- -------------
OPERATING INCOME 3,498,863 2,285,324
OTHER INCOME (EXPENSE), net (6,688) (55,879)
------------- -------------
INCOME BEFORE INCOME TAXES 3,492,175 2,229,445
------------- -------------
INCOME TAXES:
Current (279,512) 291,148
Deferred 1,224,161 377,040
------------- -------------
Total income taxes 944,649 668,188
------------- -------------
NET INCOME 2,547,526 1,561,257
OTHER COMPREHENSIVE GAIN (LOSS) -
Cumulative foreign currency translation (69,213) (665,358)
------------- -------------
COMPREHENSIVE INCOME $ 2,478,313 $ 895,899
============= =============
NET INCOME PER COMMON SHARE,
Basic and diluted $ 0.14 $ 0.09
============= =============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC AND DILUTED 17,993,908 17,994,920
============= =============
The accompanying notes are an integral part
of these consolidated financial statements.
4
PPOL, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Nine months ended Nine months ended
December 31, December 31,
2003 2002
-------------- --------------
(Unaudited) (Unaudited)
(Restated)
NET REVENUE:
Product sales and network services $ 86,473,350 $ 88,916,119
Other on-line services 14,459,798 12,497,365
Consulting revenue 483,858 0
-------------- --------------
Total 101,417,006 101,413,484
-------------- --------------
COSTS AND EXPENSES:
Cost of sales 25,421,127 22,837,523
Distributor incentives 50,295,825 52,656,767
Selling, general and administrative expenses 18,237,187 19,371,130
-------------- --------------
Total costs and expenses 93,954,139 94,865,420
-------------- --------------
OPERATING INCOME 7,462,867 6,548,064
OTHER INCOME (EXPENSE), net 708,593 (40,231)
-------------- --------------
INCOME BEFORE INCOME TAXES 8,171,460 6,507,833
-------------- --------------
INCOME TAXES:
Current 1,214,872 1,776,014
Deferred 1,185,594 (344,372)
-------------- --------------
Total income taxes 2,400,466 1,431,642
-------------- --------------
NET INCOME 5,770,994 5,076,191
OTHER COMPREHENSIVE GAIN (LOSS) -
Cumulative foreign currency translation (2,299,552) (3,192,974)
-------------- --------------
COMPREHENSIVE INCOME $ 3,471,442 $ 1,883,217
============== ==============
NET INCOME PER COMMON SHARE,
Basic and diluted $ 0.32 $ 0.29
============== ==============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC AND DILUTED 17,994,586 17,549,991
============== ==============
The accompanying notes are an integral part
of these consolidated financial statements.
5
PPOL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months Nine months
Ended Ended
December 31, 2003 December 31, 2002
------------- -------------
(Unaudited) (Unaudited)
(Restated)
CASH FLOWS PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Net income $ 5,770,994 $ 5,076,191
------------- -------------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Depreciation and amortization 1,801,359 1,698,088
Loss on sales/disposal of property and equipment 101,905 8,316
Deferred income taxes 1,185,594 (344,372)
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 (590,770) 1,335,839
Merchandise Inventories 763,736 (1,673,170)
Advance payments to related parties 3,587,293 (1,008,871)
Deferred costs 18,084,297 4,515,177
Prepaid expenses and other 583,247 (956,887)
INCREASE (DECREASE) IN LIABILITIES:
Accounts payable 3,304,435 (3,308,192)
Advances received 3,244,829 5,890,324
Deferred revenue (23,343,655) (7,310,922)
Income taxes payable (900,631) (1,276,455)
Other current liabilities (11,584) (808,215)
------------- -------------
Total adjustments 7,810,055 (3,057,953)
------------- -------------
Net cash provided by operating activities 13,581,049 2,018,238
------------- -------------
CASH FLOWS USED FOR INVESTING ACTIVITIES:
Purchase of property and equipment (2,726,558) (603,683)
Other assets (4,151,968) (57,695)
------------- -------------
Net cash used for investing activities (6,878,526) (661,378)
------------- -------------
CASH FLOWS USED FOR FINANCING ACTIVITIES -
Dividends paid -- (947,270)
Fractional share liquidation (4,799) --
------------- -------------
Net cash used for financing activities (4,799) (947,270)
------------- -------------
EFFECTS OF FOREIGN CURRENCY EXCHANGE RATE 1,924,440 2,186,998
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 8,622,164 2,596,588
CASH AND CASH EQUIVALENTS, beginning of period 14,313,063 11,716,893
------------- -------------
CASH AND CASH EQUIVALENTS, end of period $ 22,935,227 $ 14,313,481
============= =============
SUPPLEMENTAL CASH FLOW INFORMATION -
Income taxes paid $ 2,230,720 $ 3,051,506
============= =============
Interest paid $ 5,484 $ 1,767
============= =============
The accompanying notes are an integral part
of these consolidated financial statements.
6
PPOL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED DECEMBER 31, 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 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 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. 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 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 nine months
ended December 31, 2003 are not necessarily indicative of the
results to be expected for the full year ending March 31,
2004.
7
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
RECLASSIFICATIONS:
Certain reclassifications have been made to the prior period
consolidated financial statements in order to conform to the
current period presentation
SHARE REPURCHASES:
Fractional shares in the Company's common stock resulted from
the Company's 1 for 7 reverse stock split which was effective
August 15, 2002. In accordance with the conditions of
Company's Stock Purchase and Business Combination agreement
dated July 19, 2002, the Company is obligated to purchase all
resulting fractional shares from shareholders based on the
fraction of the share owned by such shareholder multiplied by
the actual opening bid price of the shares upon such shares
becoming listed on the NASD OTC Bulletin Board. The Company's
shares became publicly listed on October 14, 2003 with an
opening bid price of $4.05. The value of all fractional shares
subject to repurchase was approximately $4,800. Upon
repurchase, 1,168 fractional shares were canceled.
GIFT CERTIFICATES:
The Company initiated a gift certificate program in September
2003. The Company introduced this gift certificate program as
a sales promotion tool for Kamome goods and also as a
marketing tool to assist distributors. As of December 31,
2003, the Company had approximately $142,000 of gift
certificate liability which is recorded under Advances
Received. Gift certificates are issued in denominations of
approximately $10 and have an expiration of 2 years from
issuance. Gift certificates are not redeemable for cash.
FORFEITED DISTRIBUTOR INCENTIVES:
In April 2003, the Company amended its policy regarding
distributor incentives to state that distributor incentives
are not paid out unless they exceed a minimum threshold of
approximately $30. If a distributor does not attain the
minimum incentive threshold within one year, then the
incentives will be forfeited to the Company. During the nine
months ended December 31, 2003, the Company has recognized
approximately $714,000 of other income for the write-off of
previously accrued distributor incentives that exceeded the
one-year threshold at March 31, 2003. This amount, related to
8
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
the change in distributor incentive policy, is included in
other income on the statements of income and comprehensive
income for the nine months ended December 31, 2003.
Distributor incentives written off greater than one year
during the three and nine month periods ended December 31,
2003 approximated $108,000 and $386,000, respectively. These
amounts are offset against distributor incentives on the
statement of income and comprehensive income for the three and
nine month periods ended December 31, 2003.
RECENT ACCOUNTING PRONOUNCEMENTS:
In April 2003, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (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 adoption as this statement did not have a
material effect on the consolidated 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
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
adoption as this statement did not have a material effect on
the consolidated financial statements.
In December 2003, the FASB issued a revised SFAS No. 132,
"Employers' Disclosures about Pensions and Other
Postretirement Benefits" which replaces the previously issued
Statement. The revised Statement increases the existing
disclosures for defined benefit pension plans and other
defined benefit postretirement plans. However, it does not
change the measurement or recognition of those plans as
required under SFAS No. 87, "Employers' Accounting for
Pensions," SFAS No. 88, "Employers' Accounting for Settlements
and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits," and SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions."
Specifically, the revised Statement requires companies to
provide additional disclosures about pension plan assets,
benefit obligations, cash flows, and benefit costs of defined
benefit pension plans and other defined benefit postretirement
plans. Also, companies are required to provide a breakdown of
plan assets by category, such as debt, equity and real estate,
and to provide certain expected rates of return and target
allocation percentages for these asset categories. The Company
has implemented this pronouncement and has concluded that the
adoption has no material impact to the financial statements.
9
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
In November 2002, the FASB issued FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others" (FIN 45). FIN 45 requires that upon issuance of a
guarantee, a guarantor must recognize a liability for the fair
value of an obligation assumed under a guarantee. FIN 45 also
requires additional disclosures by a guarantor in its interim
and annual financial statements about the obligations
associated with guarantees issued. The recognition provisions
of FIN 45 are effective for any guarantees issued or modified
after December 31, 2002. The disclosure requirements are
effective for financial statements of interim or annual
periods ending after December 15, 2002. The adoption of FIN45
did not have a material effect on the Company's financial
position, results of operations, or cash flows.
In January 2003, the FASB issued FIN 46, "Consolidation of
Variable Interest Entities." Interpretation 46 changes the
criteria by which one company includes another entity in its
consolidated financial statements. Previously, the criteria
were based on control through voting interest. Interpretation
46 requires a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk
of loss from the variable interest entity's activities or
entitled to receive a majority of the entity's residual
returns or both. A company that consolidates a variable
interest entity is called the primary beneficiary of that
entity. The consolidation requirements of Interpretation 46
apply immediately to variable interest entities created after
January 31, 2003. The consolidation requirements apply to
older entities in the first fiscal year or interim period
beginning after June 15, 2003. Certain of the disclosure
requirements apply in all financial statements issued after
January 31, 2003, regardless of when the variable interest
entity was established. The Company does not expect the
adoption to have a material impact to the Company's financial
position or results of operations.
In December 2003 the FASB concluded to revise certain elements
of FIN 46, which will be issued shortly. The FASB also
modified the effective date of FIN 46. For all entities that
were previously considered special purpose entities, FIN 46
should be applied in periods ending after December 15, 2003.
Otherwise, FIN 46 is to be applied for registrants who file
under Regulation SX in periods ending after March 15, 2004,
and for registrants who file under Regulation SB, in periods
ending after December 15, 2004. The Company does not expect
the adoption to have a material impact on the Company's
financial position or results of operations.
During October 2003, the FASB issued FASB Staff Position No.
FIN 46-6 deferring the effective date for applying the
provisions of FIN 46 until the end of the first interim or
annual period ending after December 31, 2003 if the variable
interest was created prior to February 1, 2003 and the public
entity has not issued financial statements reporting that
variable interest entity in accordance with FIN 46. The FASB
also indicated it would be issuing a modification to FIN 46
prior to the end of 2003. Accordingly, the Company has
deferred the adoption of FIN 46 with respect to VIEs created
prior to February 1, 2003. Management is currently assessing
the impact, if any, FIN 46 may have on the Company; however,
management does not believe there will be any material impact
on its consolidated financial statements, results of
operations or liquidity resulting from the adoption of this
interpretation.
(2) RELATED PARTY TRANSACTIONS:
The Company leased the majority of its office space from
Forval Corporation (Forval), its parent, until March 31, 2003.
Forval subsequently returned a lease deposit to the Company
during the three months ended June 30, 2003.
10
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
As of December 31, 2003, the Company had no related party
receivables or payables with Forval. As of March 31, 2003, the
Company had a lease deposit receivable from Forval in the
amount of $606,852 and a trade payable to Forval in the amount
of $159,800. For the nine months ended December 31, 2003, the
Company had no transactions with Forval. For the nine months
ended December 31, 2002, the Company incurred rental expenses
for its Tokyo office space in the amount of $546,979 from
Forval. Additionally, other transactions totaling $25,595 were
incurred with Forval for the nine months ended December 31,
2002.
PPOL entered into separate agreements with Forval and Leo
Global Fund, its two largest shareholders, which collectively
own 95% of PPOL, in which PPOL was to provide certain
consulting services during fiscal year 2003. The Company
completed the consulting services called for in the agreements
in the previous quarter at which time the Company also
recorded the related income of $483,858. There is no assurance
that PPOL will receive such projects from Forval and Leo
Global Fund in the future.
(3) VENDOR CONTRACT:
The Company contracted with a new vendor to produce its new
MOJICO SF-70. The contract is for a one year term beginning on
November 19, 2003 and is automatically renewable for
successive one year terms unless cancelled by either party
with 2 months notice. In establishing this new vendor
relationship, the Company was required to place a guarantee
deposit with this vendor in the amount of approximately $5.9
million. Except for a monthly administrative fee of
approximately $7,500 payable to the vendor, the Company is not
committed to any minimum purchase agreement with this vendor.
The contract is expected to create a concentration of products
provided by one vendor.
(4) 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 have
been 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 December 31, 2002 and the three and nine
months ended December 31, 2002 are as follows:
11
December 31, 2002
--------------------------------------------
Change
increase
Restated Original (decrease)
- -----------------------------------------------------------------------------------------------------
Deferred costs - current 68,513,799 7,326,226 61,187,573
- -----------------------------------------------------------------------------------------------------
Deferred costs - long term 52,022,819 -- 52,022,819
- -----------------------------------------------------------------------------------------------------
Deferred Income taxes - current 10,021,875 2,168,396 7,853,479
- -----------------------------------------------------------------------------------------------------
Deferred Income taxes - long term 7,071,927 794,700 6,277,227
- -----------------------------------------------------------------------------------------------------
Total assets 168,581,427 41,240,327 127,341,100
- -----------------------------------------------------------------------------------------------------
Other current liabilities 978,741 1,116,744 (138,003)
- -----------------------------------------------------------------------------------------------------
Deferred revenues - current 91,259,138 11,257,036 80,002,102
- -----------------------------------------------------------------------------------------------------
Deferred revenues - long term 66,950,826 -- 66,950,826
- -----------------------------------------------------------------------------------------------------
Total liabilities 179,480,885 32,182,102 147,298,783
- -----------------------------------------------------------------------------------------------------
Total other comprehensive income (loss) 3,345,885 (1,299,096) 4,644,981
- -----------------------------------------------------------------------------------------------------
Retained earnings (accumulated deficit) (17,630,495) 6,972,169 (24,602,664)
- -----------------------------------------------------------------------------------------------------
Total shareholders equity (deficit) (10,899,458) 9,058,225 (19,957,683)
- -----------------------------------------------------------------------------------------------------
Total liabilities and shareholders equity (deficit) 168,581,427 41,240,327 127,341,100
- -----------------------------------------------------------------------------------------------------
Three Months Ended
December 31, 2002
----------------------------------------------
Change
Increase
Restated Original (decrease)
--------------- --------------- --------------
Product sales and network services $ 29,299,563 $ 27,590,133 $ 1,709,430
- ----------------------------------------------------------------------------------------------
Cost of sales 7,771,727 7,182,110 589,617
- ----------------------------------------------------------------------------------------------
Distributor incentives 17,354,941 16,593,086 761,855
- ----------------------------------------------------------------------------------------------
Operating income 2,285,324 1,927,366 357,958
- ----------------------------------------------------------------------------------------------
Income before income taxes 2,229,445 1,871,487 357,958
- ----------------------------------------------------------------------------------------------
Income taxes - deferred 377,040 366,924 10,116
- ----------------------------------------------------------------------------------------------
Net income (loss) 1,561,257 1,213,415 347,842
- ----------------------------------------------------------------------------------------------
Cumulative foreign currency translation (665,358) 188,188 (853,546)
- ----------------------------------------------------------------------------------------------
Comprehensive Income (Loss) 895,899 1,401,603 (505,704)
- ----------------------------------------------------------------------------------------------
12
Nine months ended
December 31, 2002
----------------------------------------------
Change
increase
Restated Original (decrease)
- --------------------------------------------------------------------------------------------------
Product sales and network services 88,916,119 89,066,086 (149,967)
- --------------------------------------------------------------------------------------------------
Cost of sales 22,837,523 22,911,538 (74,015)
- --------------------------------------------------------------------------------------------------
Distributor incentives 52,656,767 54,149,447 (1,492,680)
- --------------------------------------------------------------------------------------------------
Operating Income 6,548,064 5,136,591 1,411,473
- --------------------------------------------------------------------------------------------------
Income before income taxes 6,507,833 5,091,105 1,416,728
- --------------------------------------------------------------------------------------------------
Income taxes - deferred (344,372) 393,135 (737,507)
- --------------------------------------------------------------------------------------------------
Net income 5,076,191 2,921,956 2,154,235
- --------------------------------------------------------------------------------------------------
Cumulative foreign currency translation (3,192,974) 463,022 (3,655,966)
- --------------------------------------------------------------------------------------------------
Comprehensive (loss) income 1,833,217 3,384,978 (1,501,761)
- --------------------------------------------------------------------------------------------------
The changes noted above are entirely attributable to revenue
recognition and associated deferral of costs of product sales
and network service revenues as discussed above. The
restatement resulted in an increase in earnings per share of
$0.02 (from $0.07 to $0.09) for the three months ended
December 31, 2002 and an increase in earnings per share of
$0.12 (from $0.17 to $0.29) for the nine months ended December
31, 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.
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.
13
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.
The Company's initial market maker filed an application with the
National Association of Securities Dealers (NASD) to begin public
trading in the Company's common stock. The NASD cleared the application
and the Company's common stock simultaneously began trading on October
14, 2003 on the OTC Bulletin Board under the ticker symbol "PPLC."
A. RESULTS OF OPERATIONS - THREE MONTHS ENDED DECEMBER 31, 2003 AS
COMPARED TO THE THREE MONTHS ENDED DECEMBER 31, 2002
PRODUCT SALES AND NETWORK SERVICES. For the three months end December
31, 2003, revenues increased 0.8% over the comparable period of the
prior year. The increase was primarily the result of currency exchange
rates experienced in the quarter as the Yen gained in relative strength
compared to the US dollar. Without the effects of the exchange rates,
Product Sales and Network Services experienced an 11.6% decline due to
the prevailing economic conditions in Japan.
OTHER ONLINE SERVICES REVENUE. For the three months end December 31,
2003, revenues increased 5.7% over the comparable period of the prior
year. The increase was primarily the result of the currency exchange
rates experienced this quarter as the Yen gained in relative strength
compared to the US dollar. Without the effect of exchange rates, Other
Online Services Revenue experienced an increase of 1.9% due to the
Company's continuing efforts to expand the on-line service business
while also shifting the mix of products to those with higher margins.
Additionally, the number of customers ordering these Online Services
continues to grow as the net MOJICO subscriber base grows.
COST OF SALES. For the three months ended December 31, 2003, cost of
sales expressed as a percentage of sales decreased 0.8% 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.
DISTRIBUTOR INCENTIVES. For the three months ended December 31, 2003,
distributor incentives increased 0.9%. The increase is primarily due to
the overall increase in Product Sales and Network Services during the
quarter due to the release of the new MOJICO SF-70 model in late August
2003.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. For the three months ended
December 31, 2003, selling, general and administrative expenses have
decreased by 10.4% over the same period of the prior year. This
decrease is primarily the result of fewer member events and a reduction
in direct mailings as compared to the same period of the prior year.
B. RESULTS OF OPERATIONS - NINE MONTHS ENDED DECEMBER 31, 2003 AS
COMPARED TO THE NINE MONTHS ENDED DECEMBER 31, 2002
PRODUCT SALES AND NETWORK SERVICES. For the nine months ended December
31, 2003, revenues decreased 2.7% over the comparable period of the
prior year. The decrease was the result of deteriorating economic
conditions in Japan. Without the effects of the exchange rates, Product
Sales and Network Services would have experienced a 9.0% decline.
OTHER ONLINE SERVICES REVENUE. For the nine months end December 31,
2003, revenues increased 15.7% over the comparable period of the prior
year. The increase was primarily the result of the currency exchange
rates experienced this quarter as the Yen gained in relative strength
compared to the US dollar. Without the effect of exchange rates, Other
Online Services Revenue experienced an increase of 8.3% due to the
Company's continuing efforts to expand the on-line service business
while also shifting the mix of products to those with higher margins.
Additionally, the number of customers ordering these Online Services
continues to grow as the net MOJICO subscriber base grows.
14
COST OF SALES. For the nine months ended December 31, 2003, cost of
sales expressed as a percentage of sales has increased by 2.5% compared
to the same period of the prior year. This increase is primarily due to
the increased cost of the new SF70 MOJICO model, updated to use a color
screen and plain paper. Additionally, other fixed cost components of
Cost of Sales have been allocated to a declining sales base which has
also led to the increase.
DISTRIBUTOR INCENTIVES. For the nine months ended December 31, 2003,
distributor incentives declined 4.5%. The decrease is primarily due to
the overall decline in Product Sales and Network Services.
Additionally, this decrease Distributor Incentives declined due to
forfeited distributor incentives as discussed in the Organization and
Summary of Significant Accounting Policy section of the financial
statement footnotes contained herein.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. For the nine months ended
December 31, 2003, selling, general and administrative expenses have
decreased by 5.9% over the same period of the prior year. This decrease
was primarily due to a reduction is sales promotion costs. The Company
previously issued a monthly member magazine which was changed to a
bi-monthly issuance, thus reducing these promotion costs. Additionally,
the Company has decreased the number of member events.
OTHER INCOME AND EXPENSE. The Company had substantial other income for
the nine months ended December 31, 2003 due to a change in its
distributor incentive policy. In April 2003, the Company amended its
policy regarding distributor incentives to state that distributor
incentives will not be paid out unless they exceed a minimum threshold
of approximately $30. If a distributor does not attain the minimum
incentive threshold within one year, then the incentives are to be
forfeited to the Company. During the nine months ended December 31,
2003, the Company recognized approximately $714,000 of other income for
the relief of previously accrued distributor incentive liabilities that
exceeded the one year threshold as of March 31, 2003. This transaction
is not expected to recur in the future.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $22,935,227 and $14,313,063 at
December 31, 2003 and March 31, 2003, respectively. Cash provided from
operations for the nine months ended December 31, 2003 and 2002 was
$13,581,049 and $2,018,238 respectively. Cash used for investing
activities for the nine months ended December 31, 2003 and 2002 was
$6,878,526 and $661,378, respectively. The cash used for investing
activity for the quarter ended December 2003 was primarily for the
purchase of property and equipment. Substantially no cash was used for
financing activities in the nine months ended December 31, 2003. Cash
used for financing activities was $947,270 for the nine months ended
December 31, 2002 which was for the payment of dividends. The increase
of the cash balance is due mainly to an increase in MOJICO shipments
for the six month period ended December 31, 2003 as compared to the six
month period ended March 31, 2003 due to the introduction of the new
SF-70 MOJICO model in August 2003. The Company expects cash flows from
operations to be sufficient to maintain its working capital
requirements.
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
15
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.
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. There 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 effect 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. 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.
16
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
material adverse effect 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.
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.
17
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 effect on the Company's business. The
Company is considering, 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
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.
18
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 effect 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.
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.
19
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.
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.
20
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 w ill
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 a certain vendor. Should this vendor
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.
21
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 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.
22
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
--------------------------
Report on Form 8-K - PPOL, Inc. filed a report on Form 8-K on
January 8, 2004 reporting the appointment
of Yoichi Awagakubo as director and CFO,
replacing Kazushige Shimizu.
23
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, 2004 /s/ Nobuo Takada
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Date Nobuo Takada, Chief Executive Officer
February 13, 2004 /s/ Yoichi Awagakubo
----------------- -------------------------------------
Date Yoichi Awagakubo, Chief Financial Officer
24
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.
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.
6. The registrant's other certifying officer 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, 2004
-----------------
/s/ Nobuo Takada
-----------------------
Nobuo Takada
Chief Executive Officer
25
CERTIFICATIONS
I, Yoichi Awagakubo, 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.
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.
6. The registrant's other certifying officer 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, 2004
/s/ Yoichi Awagakubo
--------------------
Yoichi Awagakubo
Chief Financial Officer
26