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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
__________________
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended March 31, 2004 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
PPOL, INC.
----------
(Exact name of registrant as specified in its charter)
CALIFORNIA 000-50065 95-4436774
---------- --------- ----------
(State or other (Commission File No.) (IRS Employer
jurisdiction Identification No.)
of incorporation)
1 CITY BOULEVARD WEST
SUITE 870
ORANGE, CALIFORNIA 92868
------------------------
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code:
(714) 221-7250
--------------
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Name of exchange on which registered
----------------------------- ------------------------------------
Common Stock, $.001 par value None
Indicate by check mark whether PPOL, Inc. (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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the PPOL, Inc.'s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether PPOL, Inc. is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
As of June 25, 2004, 17,993,752 shares of PPOL, Inc.'s common stock,
$0.001 par value per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE. Portions of PPOL, Inc.'s definitive Proxy
Statement for PPOL, Inc.'s 2004 Annual Meeting of Stockholders to be filed with
the Securities and Exchange Commission within 120 days after PPOL, Inc.'s fiscal
year end are incorporated by reference in Part III of this report. Certain
exhibits of PPOL, Inc. previously filed with the SEC are incorporated by
reference in item 15 of this report.
PPOL, INC.
FORM 10-K
TABLE OF CONTENTS
PART I...................................................................................................3
ITEM 1 BUSINESS..................................................................................3
ITEM 2. PROPERTIES...............................................................................16
ITEM 3. LEGAL PROCEEDINGS..........................................................................
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......................................16
PART II.................................................................................................17
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS....................17
ITEM 6. SELECTED FINANCIAL DATA..................................................................18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS....18
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...............................33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..............................................33
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.....33
ITEM 9A. CONTROLS AND PROCEDURES..................................................................33
PART III................................................................................................34
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......................................34
ITEM 11. EXECUTIVE COMPENSATION...................................................................34
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...........................34
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS.....................................34
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES...................................................34
PART IV.................................................................................................35
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K..........................35
SIGNATURES...........................................................................................37
Exhibit 31.1: CEO CERTIFICATION.....................................................................38
Exhibit 31.2: CFO CERTIFICATION.....................................................................39
EXHIBIT 32.0 - CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002...............40
FINANCIAL STATEMENTS...............................................................................F1-F21
2
FORWARD LOOKING STATEMENTS
THIS ANNUAL REPORT ON FORM 10-K, IN PARTICULAR "ITEM 7- MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," AND
"ITEM 1- BUSINESS," INCLUDE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED AND SECTION 27A
OF THE SECURITIES ACT OF 1933, AS AMENDED. THESE STATEMENTS REPRESENT OUR
EXPECTATIONS OR BELIEFS CONCERNING, AMONG OTHER THINGS, FUTURE REVENUE,
EARNINGS, GROWTH STRATEGIES AND OTHER FINANCIAL RESULTS, NEW PRODUCTS, FUTURE
OPERATIONS AND OPERATING RESULTS, AND FUTURE BUSINESS AND MARKET OPPORTUNITIES.
WE WISH TO CAUTION AND ADVISE READERS THAT THESE STATEMENTS INVOLVE RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE
EXPECTATIONS AND BELIEFS CONTAINED HEREIN. BECAUSE A SUBSTANTIAL MAJORITY OF OUR
OPERATIONS ARE IN JAPAN, SIGNIFICANT VARIATIONS IN OPERATING RESULTS INCLUDING
REVENUE, GROSS MARGIN AND EARNINGS FROM THOSE EXPECTED COULD BE CAUSED BY
RENEWED OR SUSTAINED WEAKNESS IN THE JAPANESE ECONOMY, WEAKENING OF THE JAPANESE
YEN, FAILURE OF PLANNED INITIATIVES TO GENERATE CONTINUED INTEREST AND
ENTHUSIASUM AMONG DISTRIBUTORS OR TO ATTRACT NEW DISTRIBUTORS. FOR A SUMMARY OF
CERTAIN ADDITIONAL RISKS RELATED TO OUR BUSINESS, SEE "ITEM 1 BUSINESS - RISK
FACTORS."
PART I
ITEM 1 BUSINESS
--------
A. OVERVIEW
PPOL, Inc., a California corporation (hereinafter referred to as "PPOL"
or the "Company") is a holding company which conducts its business primarily
through its wholly owned subsidiary, AJOL Co., Ltd., a Japan corporation
(sometimes hereinafter referred to as "AJOL" or "we" or "us" or "our.") AJOL is
an acronym for "All Japan On Line." AJOL does not conduct any business in the
United States.
PPOL's revenues are generated primarily through its one hundred percent
(100%) ownership of AJOL, which derives its revenues through the use of a
network marketing and distribution system throughout Japan to sell: (1) its
"MOJICO" hardware, which is a multi-functional facsimile based machine with
networking capabilities, (2) subscriptions to our proprietary "Pan Pacific
Online" interactive database that can only be accessed through our MOJICO
hardware, and (3) various consumer products that primarily utilize AJOL's
proprietary "Kamome" brand. We also generate commission revenue on sales of
insurance, tickets to various events, travel packages and other sales through
Pan Pacific On-Line. Kamome brand products can only be purchased through the Pan
Pacific Online network. The MOJICO hardware combines the attributes of a
telephone and fax machine with full e-mail and database search capabilities. The
current MOJICO hardware, the SF-70, uses a built in liquid crystal color monitor
display.
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Our revenues are allocated as follows:
- ---------- ------------------------- ------------------------ ------------------------ ------------------------------
Consumer products,
MOJICO hardware Subscriptions commissions & other Total
--------------- ------------- ------------------- -----
- ---------- ------------------------- ------------------------ ------------------------ ------------------------------
Fiscal
year % of % of % of
ended total total total % of total
March 31: Sales sales Sales sales Sales sales Sales sales
- -------- ----- ----- ----- ----- ----- ----- ----- -----
- ---------- --------------- --------- -------------- --------- -------------- --------- --------------- --------------
2004 $100,077,710 73.15% $15,443,206 11.28% $21,303,353 15.57% $136,824,269 100.00%
- ---------- --------------- --------- -------------- --------- -------------- --------- --------------- --------------
2003 103,809,418 76.90% 14,012,938 10.38% 17,163,468 12.72% 134,985,824 100.00%
- ---------- --------------- --------- -------------- --------- -------------- --------- --------------- --------------
2002 103,978,519 80.04% 12,397,101 9.54% 13,537,232 10.42% 129,912,852 100.00%
- ---------- --------------- --------- -------------- --------- -------------- --------- --------------- --------------
2001 117,015,871 82.26% 12,236,126 8.60% 12,998,276 9.14% 142,250,273 100.00%
- ---------- --------------- --------- -------------- --------- -------------- --------- --------------- --------------
2000 126,525,568 88.16% 7,583,990 5.28% 9,411,544 6.56% 143,521,102 100.00%
- ---------- --------------- --------- -------------- --------- -------------- --------- --------------- --------------
An important aspect of the MOJICO hardware is that it allows users to
communicate using handwritten Japanese characters, which comprise the Japanese
language's three phonetic alphabets: Hiragana, Katakana and especially Kanji.
We believe that the full texture and meaning of Kanji characters, and
to a lesser extent, Hiragana and Katakana, cannot be effectively communicated
through the preset fonts of a computer. Our business plan relies on the
assumption that subscribers and potential subscribers believe that handwritten
Moji (character) is a superior form of communication to output of preset fonts
of a computer.
AJOL'S NETWORK SERVICES - PAN PACIFIC ONLINE
Our customers purchase the MOJICO hardware and concurrently subscribe
to AJOL's facsimile based network and database - "Pan Pacific Online."
Subscriptions to Pan Pacific Online are only offered through AJOL and not
through our network marketing distribution system. Access to our proprietary
network and database is only available to subscribers through the MOJICO
hardware. The MOJICO hardware can also be used to transmit and receive faxes
outside the network and to send and receive general I-Mode e-mails. Subscribers
can search the network's database to find other subscribers matching their
search criteria to establish interpersonal relationships, solicit categories of
faxes, or to specify a group of recipients for the subscriber's faxes, among
other things. We actively encourage subscribers to submit content for the
database.
KAMOME PRODUCTS
We have created a proprietary brand "Kamome" for use in the sale of
products associated with AJOL. Kamome products may only be purchased through
subscribers. The Kamome branding is conferred upon companies that sell products
through a distribution agreement with AJOL and which pass AJOL's quality control
criteria. The Kamome brand is added to the selling company's existing brand and
products are sold with dual branding. Additionally, we use the Kamome brand as a
private brand on a limited basis. Kamome products appear in catalogs which are
distributed quarterly to subscribers and updated via the AJOL database system.
NETWORK MARKETING DISTRIBUTION SYSTEM
We sell the MOJICO hardware and Kamome products through a network
marketing distribution system. An AJOL distributor must be an AJOL subscriber to
sell MOJICO hardware and Kamome products. All subscribers have an opportunity to
become a MOJICO distributor. Subscribers, who desire to become distributors,
must undergo an application and screening process. We refer to our subscribers
4
who sell the MOJICO hardware and/or Kamome products as "distributors." Unlike
traditional distributors in a network marketing distribution system, our
"distributors" are not required to purchase or maintain inventory of MOJICO
hardware or Kamome products, and therefore are not at financial risk if they do
not complete sales. AJOL bears the risk of obtaining and maintaining inventory.
Distributors submit product orders to us, which we then fulfill. Payment for our
products is paid directly to us.
Approximately fifty percent (50%) of the sales price of each MOJICO
unit is paid to distributors based on a commission schedule, which spreads the
payout among the various levels of the distributor network. We pay commissions
at the rate of seventy-six percent (76%) of "commissionable sales" of Kamome
products. Commissionable sales do not reflect the purchase price paid by the
purchaser. Rather, the commissionable sales amount is determined solely by us
for each product to yield us a margin of twenty-three percent (23%) of the
purchase price paid by the purchaser, in the aggregate, after deducting
commissions paid and cost of goods sold.
We emphasize and encourage subscribers to develop personal
relationships among subscribers and between subscribers and non-subscribers as a
vehicle to increase awareness of AJOL and its products. We believe that the
subscribers' efforts to create personal relationships among themselves and with
non-subscribers create beneficial word of mouth advertising for our products and
services. We sponsor social events, which include recreational events, for our
subscribers and their guests throughout Japan to encourage interaction among
subscribers and potential subscribers.
Our President, Mr. Yoshihiro Aota, places emphasis on and speaks at
approximately one hundred fifty (150) events per year. On average, 110 people
attend local Live Speech events and 1,500 to 2,000 people attend regional Super
Live Speech events. Attendees may consist of subscribers and non-subscribers.
The underlying themes of Mr. Aota's presentations include:
(1) the benefits of interpersonal relationships for personal and
business growth and how MOJICO can help subscribers achieve that goal;
(2) the financial incentives of participating in AJOL's network
marketing distribution system; and
(3) the benefits of purchasing Kamome brand products through the "Co-op
of the 21st Century." Mr. Aota may be viewed as a motivational speaker
who is the personification of AJOL.
B. THE INDUSTRY
We believe that we operate in a unique market niche. Although the
Company's business plan has similarity to those of internet service providers,
its reliance on a fax based technology eliminates access to many of the features
and functionality offered by ISP's including access to the Internet. Unlike the
Internet, which provides access to a worldwide database, the subscribers access
to information and networking capabilities is limited to our fax based Pan
Pacific Online network and database. The Company's business plan does however
share the goal of ISP's, generally, of increasing and maintaining paid
subscriptions.
Unlike ISP's, we rely heavily on word of mouth advertising through our
system of network marketing distributors. In addition, we had 950 retail outlets
referred to as "Cabins" as of March 31, 2004. Subscribers that are also
distributors who sell AJOL products on a full time basis independently operate
these "Cabins." AJOL does not grant any exclusive distribution rights based on
geographic boundaries.
We are unaware of the percentage of the Japanese population generally,
or the percentage of people in various demographic groups, that engage in
network marketing sales.
5
C. GENERAL DEVELOPMENT OF BUSINESS
(1) General Development of the Business of PPOL.
PPOL was incorporated as a California corporation on May 19, 1993 under
the name Diversified Strategies, Inc. On August 15, 2002 the Company amended its
articles of incorporation to change its name to PPOL, Inc.
From PPOL's inception, through March 31, 2002, it maintained its
existence, in part, as a corporation with no operating business and no
subsidiaries. Thereafter, PPOL entered into a Stock Purchase and Business
Combination Agreement ("Agreement"), effective as of April 1, 2002, with the
shareholders of AJOL to acquire all of the outstanding common shares of AJOL in
exchange for the issuance of PPOL common shares representing 95% of PPOL's then
outstanding common shares ("AJOL Acquisition"). The transactions contemplated by
the Agreement closed as of August 15, 2002, effective as of April 1, 2002. As a
result of the AJOL Acquisition, AJOL became a wholly-owned subsidiary of PPOL.
In connection with the AJOL Acquisition, PPOL effected a reverse stock
split of its issued and outstanding common shares on a 1:7 basis. As a result of
the reverse stock split, PPOL's issued and outstanding shares were reduced from
6,298,231 (pre-reverse split) to 899,746 (post-reverse split) as of August 15,
2002. PPOL was obligated to and did purchase fractional shares that resulted
from the reverse stock split at a price equal to the opening bid price of PPOL's
shares on October 14, 2003 (the date the shares became listed on the National
Association of Securities Dealers' OTC Bulletin Board).
(2) General Development of PPOL's Subsidiary's Business (AJOL)
PPOL's sole wholly-owned subsidiary is AJOL. AJOL was incorporated
under the laws of Japan on April 8, 1991. AJOL was incorporated with the name
Forval CDK. It was then a wholly owned subsidiary of Forval Corporation, a Japan
corporation. (Forval Corporation is hereinafter referred to as "Forval.") In
April 1992 Forval CDK changed its name to Forval Research Institute Co. Ltd.
Effective July 1, 2000, Forval Research Institute Co. Ltd amended its articles
to change its name to AJOL Co., Ltd.
In March 1999, AJOL dissolved its subsidiary, FO Technology Co., Ltd.
FO Technology Co., Ltd, had been a subsidiary of AJOL's since October of 1996.
AJOL presently has no subsidiaries.
D. PRODUCTS AND SERVICES
PPOL is a holding company for its wholly-owned subsidiary, AJOL. AJOL
is an acronym for "All Japan On Line." PPOL's business, revenues and earnings
are generated primarily through AJOL.
AJOL generates revenues through the use of a network marketing and
distribution system throughout Japan to sell: (1) its "MOJICO" hardware, which
is a multi-functional facsimile based machine with networking capabilities, and
(2) various consumer products that utilize AJOL's proprietary "Kamome" brand.
Additionally, AJOL generates revenues through the sale of subscriptions to
purchasers of its MOJICO hardware, who then acquire access to AJOL's on-line fax
based network - "Pan Pacific Online." Pan Pacific Online can only be accessed
through the MOJICO hardware. We also generate revenues from commissions based
primarily on sales of tour tickets, events and concerts. AJOL does not conduct
any business in the United States.
6
(1) The MOJICO Hardware.
Our primary product is a multi-functional facsimile based machine with
networking capabilities that we call "MOJICO". The MOJICO hardware combines the
attributes of a telephone and fax machine with full I-Mode(TM) e-mail and
database search capabilities. I-Mode(TM) is a mobile telephone system developed
by Japan's largest mobile telecommunications company, NTT Docomo. Through the
I-Mode(TM) one can access information on I-Mode(TM) compatible Internet sites
and send and receive e-mails up to 1,000 full size characters with anyone having
an Internet e-mail address. The MOJICO hardware does not have the full
functional capabilities that may be available on an e-mail sent through a
personal computer. The MOJICO hardware uses a built-in liquid crystal color
monitor display.
The MOJICO hardware derives its name from "Moji Communications." Moji
means "character" in Japanese. An important aspect of the MOJICO hardware is
that it allows users to communicate using handwritten Japanese characters, which
comprise the Japanese language's phonetic alphabets: Hiragana, Katakana, and
especially Kanji. Kanji refers to pictographs that are used extensive in the
Japanese written language to represent words and ideas. Kanji is also used as
artistic expression, and could be considered as a form of calligraphy. Kanji
characters are unique in that their definition and meaning are subject to
personal interpretation by the reader. The reader's interpretation and
understanding of Kanji characters and to a lesser extent, Hiragana and Katakana,
are based in large part on the manner in which their respective characters are
written.
We believe that the full texture and meaning of Kanji characters, and
to a lesser extent, Hiragana and Katakana, cannot be effectively communicated
through the preset characters available on a typical computer keyboard. An
important aspect of the MOJICO hardware is that it allows users to communicate
using handwritten Japanese, as well as any other characters. The handwritten
Japanese characters are unique in that their definition and meaning are subject
to personal interpretation by the reader. We believe that the full texture and
meaning of the Japanese characters cannot be effectively communicated through
the preset fonts available on a typical computer. Our business plan assumes that
subscribers and potential subscribers believe that handwritten Moji, i.e.
Japanese characters, is a preferred form of communication when compared to the
output of preset fonts of a computer. This assumption is based on the fact that
some subscribers or members or their families cannot read the Roman alphabet on
the keyboard, especially the elderly or those below junior high school. English
education does not commence until the completion of junior high school.
We contract for the manufacture of the MOJICO hardware and then resell
the MOJICO units through our network marketing distribution network. We are
currently marketing the fifth generation version of MOJICO, the SF70. This
latest fifth generation version is manufactured by a third party under a one
year contract which began on November 19, 2003. This contract automatically
renews each anniversary for an additional one year term unless a termination
notice is provided two months prior to the anniversary by either party. Under
the OEM basis, we retained the rights to the design and metallic mold required
to manufacture the SF70, but outsourced the actual manufacturing of the MOJICO
to this third party. By outsourcing the manufacturing of the product, we avoid
the investment required for the plant and equipment and personnel required to
manufacture the product. The first three versions of MOJICO, the SF30, SF40 and
SF50 were manufactured by Funai Electric Co., Ltd. ("Funai") under contract with
our parent corporation, Forval. Effective February 25, 2000, we contracted
directly with Funai for the manufacture of the fourth generation SF60 model on
an original equipment manufacturer (OEM) basis. Funai was one of our
shareholders until March 2001, at which time it sold its interest in us to Leo
Global Fund.
The SF70 differs from the previous SF60 model in that it has a color
display panel, uses plain paper and has a newly enhanced email notification
function. The SF70 is similar to the SF60 in that it connects users to our
database via the Internet rather than through conventional telephone lines.
7
Versions of MOJICO previous to the SF60 utilized conventional telephone lines
requiring some users to incur long distance telephone charges in order to access
our services. The amount of these charges varied from user to user. Subscribers
that lived in areas with higher long distance rates to contact their applicable
server were required to pay more per call than users in lower-rate localities.
In addition, since long distance charges are based on call time, frequent MOJICO
users incurred higher charges than infrequent users. However, while the SF70
does use the internet to connect subscribers, users of the SF70 are not able to
browse the worldwide internet.
Owners of the SF70 model may presently obtain an Internet access
connection through NTT Communications (a Japanese telecommunications company)
for approximately $9.30 per three hours of use or monthly for approximately
$45.25 per month. The NTT fee removes the variance in telecommunications charges
caused by varying long distance rates. As a result, we expect that
telecommunications costs for MOJICO users will now be uniform throughout Japan.
Because the MOJICO is intended to be simple to use, there is very
little difference between the SF70 and previous versions of MOJICO from a user's
perspective. The SF70 signs on to the Internet and provides any required
passwords automatically without prompting the user for any information. As a
result, the fact that the SF70 connects via the Internet, rather than over the
telephone lines, is not obvious to most users.
Our operating results materially depend on revenues received from sales
of our MOJICO product. In previous years, MOJICO sales have accounted for up to
78% of AJOL's annual revenue. The unit price of MOJICO hardware, after foreign
currency translation, is $3,635.
(2) Subscriptions to AJOL's Proprietary "Pan Pacific Online"
Interactive Database
Our customers purchase the MOJICO hardware and concurrently subscribe
to our facsimile based network and database - "Pan Pacific Online." MOJICO
hardware can only be fully utilized in conjunction with this subscription.
Subscriptions to Pan Pacific Online are only offered through us and not through
our network marketing distribution system. Under Japanese law, sellers of
"services" as opposed to tangible merchandise are generally prohibited from
selling "services" through network marketing distribution.
Access to our proprietary network and database is only available to
subscribers through the MOJICO hardware. While the MOJICO hardware can also be
used to transmit and receive faxes outside the network and to send and receive
general I-Mode e-mails, the hardware's full capability is only realized when
used in conjunction with its connection to the Pan Pacific Online database
subscription. Subscribers can search the network's database to find other
subscribers matching their search criteria to establish interpersonal
relationships, solicit categories of faxes, or to specify a group of recipients
for the subscriber's faxes, among other things. Subscribers can also search from
and/or submit to the database, specific type of information. What is unique
about our database is that the great majority of the information stored in the
database is provided by the subscribers themselves. We actively encourage our
subscribers to submit content for the database.
Unlike personal computer based services, our on-line service utilizes
the MOJICO hardware and is paper based as to input and output. Since users are
able to input hand written information on paper into the MOJICO hardware, many
users with little computing knowledge, including young children and elderly, are
able to utilize our online service. In this sense MOJICO is similar to a
conventional fax machine.
Subscribers of our on-line service use the MOJICO hardware to transmit
their data to a centralized hub where we receive hard copies. The hard copies
are then manually processed, screened for content, and then input to a central
database. We use a centralized hub to manually process and screen hard copies
for content that does not meet our qualitative standards, such as language,
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adult themes, slander, patent/copyright infringement and objectionable material.
We do this manually as we believe a centralized electronic system will not
effectively screen out materials that should not be admitted to our database.
MOJICO users are then able to access the central database through the MOJICO
hardware. Such accessed information can be transmitted from the central database
to the appropriate destination where the user(s) receive a hard copy printout.
Our proprietary database does not contain as much information as may be
available to an individual who searches the Internet on any particular given
subject. However, our database may contain information which may not be
available through a search of the Internet.
Our on-line services include a bulletin board service, a mail service,
and an information exchange service. Our bulletin board service allows
subscribers to submit invitations, product advertisements, help-wanted ads,
share personal experiences, create pen pal relationships, among other things, to
a bulletin board accessible by all our subscribers. All subscriber submissions
are screened for content and none are anonymous. We encourage subscribers to
contribute to our database. At present, there are approximately 7,000 subscriber
submissions in the database. A subscriber's submission is retained in the
database for 60 days after which time it is deleted unless the subscriber
resubmits his or her submission. Subscribers may also reply to posted ads via
this service. Similarly, our service allows subscribers to send faxes to up to
50 other subscribers at once. Families are able to designate personal
identification passwords to family members to enable them to print faxes
addressed to them via a specific password, thus maintaining the confidentiality
of the fax.
(3) Kamome Products
We have created a proprietary brand called "Kamome" for use in the sale
of products associated with AJOL. Kamome products may only be purchased by or
through subscribers. The Kamome brand is granted to companies that sell products
through a distribution agreement with us, and which pass our quality control
criteria. The Kamome brand is added to the selling company's existing brand, and
products are sold with dual branding. Additionally, we use the Kamome brand as a
private brand on a limited basis. Kamome products appear in catalogs, which are
distributed quarterly to subscribers and updated via our proprietary "Pan
Pacific Online" interactive database system. Because products are purchased
through the MOJICO and related proprietary database, customers receive their
orders via mail as opposed to a traditional retail outlet whereby customers gain
immediate possession and satisfaction of the goods.
We re-evaluate "Kamome" brand products based, in part, on feedback from
our subscribers. We also search for new products based, in part, on requests
received from subscribers. Following is a table of the number of "Kamome"
products during each of the indicated periods.
----------------------- ----------------------
March 31: Number of Kamome
Products
----------------------- ----------------------
2004 395
----------------------- ----------------------
2003 358
----------------------- ----------------------
2002 500
----------------------- ----------------------
2001 480
----------------------- ----------------------
2000 610
----------------------- ----------------------
We publish a quarterly magazine to our subscribers introducing goods
manufactured and provided by our subscribers as well as independent third
parties, which have earned "Kamome" brand status. The "Kamome" brand is our
president's seal of approval and recommendation for the goods. Before goods are
accorded the "Kamome" brand status, goods are reviewed by a committee at AJOL
for initial screening and that committee then makes recommendations to our
president of such goods that they feel are worthy of becoming "Kamome" brand
products. Our president personally visits the factories and/or offices for final
9
screening. Qualifying goods are then featured in the magazines in articles
regarding the virtues of their goods as observed by our president. Subscribers
can also write reviews of Kamome products for submission to our database.
Although the qualification standards are subjective, only high quality
goods and services offered at reasonable prices are eligible to become "Kamome"
brand products. To promote and develop the image of the "Kamome" brand, the
president places a high degree of emphasis on the manufacturer's selectivity of
raw materials, manufacturing process, and their pride in the products. Kamome
products may only be purchased by or through subscribers through the MOJICO
hardware or by fax to our headquarters.
Our intent is to provide our subscribers with a broad range of high
quality merchandise at prices lower than could be obtained through traditional
retailers. A subscriber's ability to purchase Kamome products is a feature of
subscription to Pan Pacific Online. We attempt to obtain lower prices for Kamome
products by operating efficiencies achieved by volume purchasing, efficient
distribution and reduced handling of merchandise through mail-order deliveries.
Subscribers are also encouraged to sell "Kamome" products to non-subscribers.
"CO-OP OF THE 21ST CENTURY." We obtain lower pricing for Kamome
products through volume purchasing and sell products to subscribers at favorable
prices. Our method of buying and selling of Kamome products is similar to a
mutual benefit "cooperative" or "co-op." Unlike co-ops that operate on a
non-profit basis, our system is designed to generate profits for us. Co-ops
presently exist in Japan, but are generally limited to serving a limited
geographic region. A typical Japanese co-op draws upon local area residents and
businesses as members, and would not expect membership from residents or
businesses outside of that local area as their outlets are limited to a specific
municipality referred to as a prefecture in Japan. Our business plan is to
create and maintain the co-op model to extend beyond local regional borders and
to provide consistent and attractive pricing of Kamome products to our
subscribers throughout Japan. We refer to our Japan wide co-op model as creating
the "Co-op of the 21st Century." We intend to create, through our "Co-op of the
21st Century," an increasingly valuable feature that will appeal to potential
and existing subscribers: (1) as a source of Kamome products for personal use,
and (2) by expanding the Kamome product list and creating the potential for
increased financial incentives through network marketing distribution sales of
Kamome products. The goal and marketing concept of the Co-op of the 21st Century
is to provide value to our subscribers and generate interest for new AJOL
subscriptions and renewals.
E. NETWORK MARKETING DISTRIBUTION
We sell the MOJICO hardware and Kamome products through a network
marketing and distribution system. An AJOL distributor is required to be a
subscriber to our proprietary "Pan Pacific Online" interactive database to sell
MOJICO hardware and Kamome products. All subscribers have an opportunity to
become a MOJICO distributor. Subscribers, who desire to become distributors,
must undergo an application and screening process. We refer to our subscribers
who sell the MOJICO hardware and/or Kamome products as "distributors." Unlike
traditional distributors in a network marketing distribution system, our
"distributors" are not required to purchase or maintain inventory of MOJICO
hardware or Kamome products, and therefore are not at financial risk if they do
not complete sales. We bear the risk of obtaining and maintaining inventory.
Distributors submit product orders to us, which we then fulfill. Payments for
our products are made directly to us. Approximately fifty percent (50%) of the
sales price of each MOJICO unit is paid to distributors based on a commission
schedule (discussed above), which spreads the payout among the various levels of
the distributor network.
We emphasize and encourage subscribers to develop personal
relationships among subscribers and between subscribers and non- subscribers as
a vehicle to increase awareness of AJOL and its products. We believe that the
subscribers' efforts to create personal relationships among themselves and with
non-subscribers create beneficial word of mouth advertising for our products and
services. We sponsor social events, which include recreational events, for our
10
subscribers and their non-subscriber guests throughout Japan to encourage
interaction among subscribers and potential subscribers.
We conduct approximately 500 training sessions per year for our
distributors. The training sessions also serve as social events. Distributors
are required to attend at least a monthly training session to retain the right
to be a distributor. Subscribers who lose the right to be a distributor, for any
reason, must apply to reacquire distributor status.
AJOL's President, Mr. Yoshihiro Aota, speaks at approximately one
hundred fifty (150) social events per year. Mr. Aota generally speaks at social
events where there are 500 or more attendees, who may consist of subscribers and
non-subscribers. The underlying themes of Mr. Aota's presentations include:
(1) the benefits of interpersonal relationships for personal and
business growth and how MOJICO can help subscribers achieve that goal;
(2) the financial incentives of participating in AJOL's network
marketing distribution system; and
(3) the benefits of purchasing Kamome brand products through the "Co-op
of the 21st Century." Mr. Aota may be viewed as a motivational speaker
who is the personification of AJOL.
There are currently approximately 140,000 distributors who are
authorized to sell AJOL's products. Of these distributors, approximately six
thousand eight hundred (6,800) are considered active commission earners and nine
hundred fifty (950) of those maintain storefront businesses displaying our
products referred to as "Cabins." Subscribers who are also distributors who sell
our products on a full time basis independently operate these "Cabins." We do
not grant any exclusive distribution rights based on geographic boundaries.
We believe that our network distribution system appeals to a broad
cross-section of people in Japan including those seeking to supplement family
income and start small, in-home businesses. We believe that network marketing is
an ideal way to market our products because the use of such products is enhanced
by ongoing personal relationships with other distributors. In addition, our
utilization of the network marketing and distribution system allows us to
minimize the fixed costs of maintaining an in-house sales force.
Basic demographic information regarding our subscribers is as follows:
AGE GENDER
--- ------
20's 12% Male 61%
30's 32% Female 39%
40's 23%
50's 20%
over 60 13%
Most subscribers live in rural areas of Japan.
Each subscriber may use up to an additional 98 different passwords to
access our database. Subscribers may allocate passwords to family and friends to
access our network. Thus, the demographics of the population actually using our
database may be different than presented above. Based upon information provided
by subscribers and password holders, we believe that multigenerational
households use many MOJICO units. We believe that the MOJICO device is conducive
to multigenerational use, especially elderly persons and young children because
of its ease of use and because it's handwritten input does not require
additional computer, including keyboard, knowledge.
11
We pay commissions on the sale of all tangible products, but none on
services on which we receive commissions from the service providers.
Commissionable sales do not reflect the purchase price paid by the purchaser.
Distributors earn commission income on the sale of all tangible AJOL
products, but none on services. Distributors are not required to maintain
inventories, and therefore are not at financial risk if they do not complete
sales. Distributors accept orders for MOJICO hardware as well as Kamome products
and submit the orders to us for processing. We fill the orders and allocate the
commission among the applicable levels of the distributor network.
Total commissions paid to the various levels of the distributor network
approximates fifty percent (50%) of the sales price of each MOJICO unit. For
Kamome products, total commissions paid and costs of products are set to yield
us a margin of twenty-three percent (23%) of the purchase price paid by the
purchaser. The formula for commissions on Kamome products is as follows:
Sales Price - Cost of Product Sold = Gross Profit
Sales Price X 23% = AJOL Margin
Gross Profit - AJOL Margin = Commission
F. SALES OF PRODUCT AND SERVICES/SUBSCRIBER BASE
The following is a table of MOJICO units sold, revenues derived from
MOJICO hardware sales and subscriptions to our "Pan Pacific Online" interactive
database which have been classified as product sales and network services in our
financial statements. Other "On-line Services," as classified in our financial
statements, are comprised of revenues from various food products that utilize
our proprietary "Kamome" brand. Commission revenue earned on sales of insurance,
tickets to various events, travel packages and other sales through "Pan Pacific
On-Line" is classified as "Other On-Line Services" in our financial statements.
---------------------- ---------- --------------- -------- ------------------ --------
Fiscal Year End MOJICO Product Sales % of Other On-Line % of
(March 31) Units and Network Sales Services Sales
Sold Services
---------------------- ---------- --------------- -------- ------------------ --------
March 31, 2004 25,624 $115,520,916 84.4% $20,819,495 15.2%
---------------------- ---------- --------------- -------- ------------------ --------
March 31, 2003 29,282 117,822,356 87.3% 17,163,468 12.7%
---------------------- ---------- --------------- -------- ------------------ --------
March 31, 2002 34,510 116,375,620 89.6% 13,537,232 10.4%
---------------------- ---------- --------------- -------- ------------------ --------
March 31, 2001 35,720 129,251,997 90.9% 12,998,276 9.1%
---------------------- ---------- --------------- -------- ------------------ --------
March 31, 2000 38,715 134,109,558 93.4% 9,411,544 6.6%
---------------------- ---------- --------------- -------- ------------------ --------
At March 31, 2004, we had 385,880 cumulative subscribers. The
cumulative subscribers represent customers who have purchased MOJICO units.
These customers can view the Pan Pacific Online database, but do not necessarily
have access to our interactive feature. Of the 385,880 cumulative subscribers,
approximately 140,000 have paid for access to our full interactive Pan Pacific
Online database. In addition, they are eligible to purchase "Kamome" brand
products and receive periodic mailings, which feature new "Kamome" products, and
social and community service activities endorsed or sponsored by us.
12
While all purchasers of our MOJICO products initially pay for
subscriptions to our interactive database, they must renew their subscription
status annually for approximately $95. We have not changed the annual dues for
the last five (5) years and do not intend to make changes in the foreseeable
future.
New and renewed subscriptions are as follows:
---------------------------------------------------
Year ended March 31:
---------------------------------------------------
2004 2003 2002 2001 2000
------------ ---------- -------- -------- ---------
------------ ---------- -------- -------- ---------
110,766 108,623 94,319 82,885 64,642
------------ ---------- -------- -------- ---------
G. PATENTS AND TRADEMARKS HELD
We currently own the rights to the following registered trademarks in
Japan: "Acube", "Pan Pacific Online", and "Kamome". Additionally, we own the
registered trademark rights to "Pan Pacific Online" in the United States.
H. COMPETITIVE CONDITIONS
To our knowledge there are no other companies that offer an identical
combination of products and services to Japanese consumers. However, the market
for companies that operate similar businesses i.e., providing interactive
telecommunications products and/or services is highly and intensely competitive.
We are and will continue to be in competition with companies with substantially
longer operating histories, greater financial, technical, product development
and marketing resources, greater name recognition and larger customer bases than
that of AJOL.
Our competitors include sellers of products that offer interactive
telecommunications including, but not limited to, telephones, facsimile
machines, and personal computers. Each of these means of telecommunication may
have functions that are not available on, or are available at a lower cost than,
the SF70. Similarly, the SF70 may have functionality not available from other
means of interactive telecommunications and at a lower cost than high-end
personal computers.
A device with functions most similar to the company's SF70 is NTT
L-mode fax machine. The L-mode fax machine features fax and e-mail capabilities
as well as a liquid crystal display screen from which sixteen genres of
information covering weather, shopping, restaurant, entertainment, travel and
others may be accessed. The primary difference of the L-mode with our SF70 is
the content of the database and their providers. The L-mode content is provided
by for profit entities unrelated to NTT-West and NTT-East. NTT-West and NTT-East
are companies resulting from the break-up of NTT. These entities pay fees to
NTT-West and NTT-East for the privilege of providing content through the L-mode.
NTT-West and NTT-East are restricted from providing any content and further
limited from entering the market due to geographical restrictions, as a matter
of Japanese law, on where they may conduct business. The content accessed
through the SF70 is furnished by AJOL and our subscribers, who are not charged
any fees for inclusion of content submitted in the database. Additionally, we do
not have any geographical restrictions, imposed by Japanese law, as to where we
may conduct business.
13
We believe the L-mode caters to a different market from our SF70 for the
following reasons:
- --------------------------- --------------------- ---------------------------
SF70 L-MODE
- --------------------------- --------------------- ---------------------------
Database Sponsor PPOL NTT-East or NTT-West
- --------------------------- --------------------- ---------------------------
Interactive Yes No
- --------------------------- --------------------- ---------------------------
Content Provider Subscribers and Commercial entities
database sponsor only: database sponsor
cannot provide content
- --------------------------- --------------------- ---------------------------
Content Nature Non-commercial and Solely commercial
commercial
- --------------------------- --------------------- ---------------------------
Geographic Coverage Nationwide Limited to western Japan
for NTT-West and eastern
Japan for NTT- East
- --------------------------- --------------------- ---------------------------
Fees for Inclusion of No fees Fees charged
Content
- --------------------------- --------------------- ---------------------------
Social Activities for Many throughout the None
Subscribers year
- --------------------------- --------------------- ---------------------------
Community Service Many throughout the None
Activities for Subscribers year
- --------------------------- --------------------- ---------------------------
Other companies not currently operating in AJOL's industry may attempt
to launch a business that is similar to or identical to AJOL's in the future.
New or existing competitors may develop products and/or services comparable to
or superior to those offered by AJOL. Competitors may devote substantially
greater resources to the development and promotion of their products. They may
also adapt more quickly to industry trends, new technologies, and customer
preferences. As a result, there can be no assurances that AJOL will be able to
compete effectively in the industry in which it operates. However, at this time,
we have no knowledge of any other entities that may attempt to launch a business
that is similar to or identical to AJOL's. Further, we believe that the (1)
initial capital investment required, (2) time required to cultivate a subscriber
base we possess, (3) know-how required to develop a database, such as ours, that
is constantly updated, and (4) creation of a workforce are significant barriers
to others who may desire to enter the market.
Our subscribers obtain access to our network and database through the
Internet or telephone service. Subscribers are given the option to connect
through the Internet to avoid long distance telephone charges. The primary
reason a customer would use our MOJICO product is to attain access to our
proprietary database and access to association with fellow subscribers through
the many social and community service events planned around the MOJICO. There
are many functionalities available through the MOJICO that are available through
Internet, computer, pen-based computer, telephone, or mail. MOJICO is not
intended to be a substitute that will take the place of such competing products
completely.
14
I. RESEARCH AND DEVELOPMENT ACTIVITIES
We conduct research and development activities primarily aimed at
improving the speed and stability of our central information processing systems.
We contract out our research and development ("R&D") activities to external
research laboratories.
Our research and development expenditures for each of the last three fiscal
years are as follows:
--------- --------------
Year R&D
Expenditures
--------- --------------
2004 $ 1,653,331
--------- --------------
2003 300,691
--------- --------------
2002 1,543,861
--------- --------------
J. ENVIRONMENTAL MATTERS
Japanese law requires that we dispose of returned or damaged MOJICO
units in an environmentally safe manner. We fully comply with Japanese law. The
cost of this compliance is not material to us.
K. EMPLOYEE AND LABOR MATTERS
AJOL currently employs 72 people on a full-time basis. AJOL also
employs 43 part-time employees and 80 others who are contracted through
temporary employment agencies. AJOL utilizes part-time employees and those
contracted through temporary employment agencies to provide specialized skills
and clerical tasks on an "as needed" basis. Utilization of such personnel gives
us the flexibility of expanding and contracting our staffing levels quickly as
considered necessary by the level of our operations. None of our employees is
represented by labor unions. We are not a party to any collective bargaining
agreements or labor union contracts. We have not been the subject of any
material strikes or employment disruptions in our history.
PPOL, as the standalone parent company, employs 2 people on a full time
basis. None of PPOL's employees is expected to be represented by labor unions.
PPOL is not a party to any collective bargaining agreements or labor union
contracts. PPOL has not been the subject of any material strikes or employment
disruptions in its history.
Additionally, PPOL has entered into a management consulting contract
with ECO2, LLC, an Orange County, California based company. Under the terms of
the agreement, ECO2, LLC will provide guidance to PPOL regarding: (a)
communications between PPOL and its investment bankers, legal counsel,
accountants and US investor relations firm; (b) assist PPOL and its investment
bankers, legal counsel and accountants with SEC and NASD filings; (c) drafting
of one private placement memorandum and related S-3 registration documents for
one private placement during the agreement term; (d) corporate communications
and investor relations in Japan ; (e) assistance in the planning and preparation
of the annual report; (f) assistance in the planning and preparation of the
shareholders meeting as requested; (g) assist PPOL's legal counsel and
accountants with SEC and NASD filings; (h) assist in the recruitment of outside
directors as requested; (i) assist in the site selection and operation of its
new headquarters in the U.S. as requested; and (j) assist in the translation of
documents with PPOL having responsibility for final translations. The initial
term of the agreement is for twelve (12) months commencing December 25, 2003 at
$25,000 per month and is automatically renewable for successive terms of one (1)
year, unless either party provides at least ninety (90) days written notice to
the other party prior to the termination of the initial or any renewal term.
15
L. HEAD OFFICE
PPOL's corporate office is located at One City Boulevard West, Suite
870, Orange, California 92868 (telephone 714-221-7250).
AJOL's corporate office is located at the Aoyama Oval Building 3F,
Jingu-mae 5-52-2, Shibuya-ku, Tokyo, Japan 150-0001 (telephone 03-5467-3015).
M. FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
(1) PPOL
PPOL has not derived any revenue either domestically or internationally
from the operation of any business during the last three fiscal years and does
not currently intend to actively operate any business, either within the United
States or internationally, other than holding 100% of the common stock of AJOL,
except that PPOL has entered into two (2) separate service agreements with its
two (2) majority shareholders, namely, Forval Corporation and Leo Global Fund,
to provide them research on investment opportunities and market trends in the
United States. During the quarter ended December 31, 2002, PPOL received an
upfront payment of $483,858 in connection with the foregoing services. PPOL
completed these services in fiscal 2004 at which time the Company recorded the
associated revenue.
(2) PPOL's Subsidiary (AJOL)
For each of the last three fiscal years, all of AJOL's operations have
been conducted in Japan, and AJOL currently has no operations in countries other
than Japan.
ITEM 2. PROPERTIES
----------
PPOL leases a 1,793 square foot administrative office suite located at
One City Boulevard West, Suite 870, Orange, CA 92868. The lease commenced
October 1, 2002 and expires September 30, 2004. The lease does not provide for
options to extend or renew the lease.
AJOL leases approximately 11,818 square feet located in the Oval
Building in Tokyo, Japan, directly from the landlord. This facility is currently
utilized as AJOL's headquarters. The lease term is April 1, 2003 to March 31,
2005 and automatically renewable for successive two year periods unless proper
notice of non-renewal is provided to the landlord.
ITEM 3. LEGAL PROCEEDINGS
-----------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
There were no matters submitted to a vote of the security holders
during the fourth quarter of the fiscal year ended March 31, 2004.
16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
---------------------------------------------------------------------
The Company's Common Stock began trading on the Over the Counter
Bulletin Board (OTCBB) during the third fiscal quarter on October 14, 2003. The
Company is currently quoted on the OTC Bulletin Board system ("OTCBB"), and can
be located on the OTCBB under the symbol "PPLC." The following chart lists the
high and low closing stock price range from the Company's market makers. These
over-the-counter market quotations reflect the inter-deal prices without retail
mark-up, markdown, or commissions and may not necessarily represent actual
transactions.
Year Ended March 31, 2004 High Low
------------------------------------- ---------- ---------
Prior to October 14, 2003 n/a n/a
October 14, 2003 - December 31, 2003 $ 4.50 $ 3.30
Fourth Quarter* $ 4.50 $ 3.30
* January 1, 2004 to March 31, 2004
The declaration of any dividends in the future by the Company is
subject to the discretion of our board of directors and will depend upon various
factors, including our net earnings, financial condition, cash requirements,
future projects and other factors deemed relevant by our board of directors.
PPOL has not paid any cash or other dividends on its common stock since its
inception and currently does not intend to pay dividends in the foreseeable
future.
Effective August 15, 2002, PPOL issued a total of 17,095,174 shares of
common stock in exchange for all 7,000 shares of the issued and outstanding
shares of AJOL. In this transaction, PPOL issued 10,647,594 shares to Forval
Corporation, a Japan corporation ("Forval") in exchange for Forval's 5,000
shares of AJOL stock, and 6,447,580 shares to Leo Global Fund ("Leo"), a Cayman
Islands Fund, in exchange for the remaining 2,000 shares of AJOL stock owned by
Leo.
This transaction was exempt from registration pursuant to section 4 (2)
of the Securities Act of 1933, as amended, and rule 506 promulgated thereunder.
Both Forval and Leo qualified as "accredited investors" as per Rule 501(a) of
the Securities Act of 1933, as amended, and neither received any general
solicitations in regard to the sale.
17
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
The following selected consolidated financial data as of and for the
years ended March 31, 2000, 2001, 2002, 2003 and 2004 have been derived from and
qualified by reference to our audited consolidated financial statements.
Year ended March 31:
------------------------------------------------------------------------------------
2000 2001 2002 2003 2004
---- ---- ---- ---- ----
Net Revenues $143,521,102 $142,250,273 $129,912,852 $134,985,824 $136,824,269
Net Income (loss) 3,717,883 (1,564,934) 2,997,017 5,995,682 7,722,366
Net Income (loss)
per common
share, basic 0.21 (0.09) 0.18 0.34 0.43
Net Income (loss)
per common
share, diluted 0.21 (0.09) 0.18 0.34 0.43
Total Assets 196,893,068 166,270,537 154,783,604 161,548,658 160,369,283
Long-term
obligations --- --- --- --- ---
Cash dividends declared
per common share --- 0.06 0.05 0.05 ---
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
You should read the following discussion of our financial condition and
results of operations in conjunction with our Consolidated Financial Statements
and related notes. This discussion contains forward-looking statements that
involve risks and uncertainties. Our actual results may differ materially from
those anticipated in these forward-looking statements as a result of factors
including those discussed under "Risk Factors" discussed below. Any
forward-looking statements speak only as of the date such statements are made.
OVERVIEW
PPOL was incorporated in California on May 19, 1993. PPOL, originally
named Diversified Strategies, Inc., was formed pursuant to an Order Confirming
Debtors Joint Plan of Reorganization of the United States Bankruptcy Court for
the Central District of California dated November 20, 1992 in the combined cases
of IN RE SELECTTV OF CALIFORNIA, INC. and IN RE TELSTAR SATELLITE CORPORATION OF
AMERICA. Pursuant to the Joint Plan of Reorganization, creditors and
shareholders of the two bankrupt companies, and certain other parties,
surrendered their claims and interests against the bankrupt companies and, in
exchange, received stock in PPOL.
PPOL did not engage in any significant business activities prior to its
acquisition of AJOL. Such acquisition was effective April 1, 2002. In connection
therewith, the name of the company was changed to PPOL. Between its date of
incorporation and its acquisition of AJOL, PPOL was a corporation seeking to
merge with or acquire a viable operating company. Consequently, as of September
30, 1999, September 30, 2000 and September 30, 2001 and the years then ended,
PPOL had no material assets or liabilities, no revenue, and incurred only
immaterial administrative and franchise tax expenses.
Effective April 1, 2002, PPOL acquired one hundred percent of the
issued and outstanding stock of AJOL from AJOL's pre-transaction shareholders.
18
In exchange for the AJOL shares, PPOL issued common stock such that immediately
after the transaction, the pre-transaction shareholders of AJOL owned
ninety-five percent (95%) of the issued and outstanding shares of PPOL. The
holdings of the pre-transaction shareholders of PPOL were diluted by the
issuance of the new shares such that immediately after the transaction, the
pre-transaction shareholders of PPOL owned five percent (5%) of the total issued
and outstanding shares of PPOL. Virtually all of PPOL's consolidated activities
are conducted through its wholly-owned subsidiary, AJOL.
AJOL was incorporated in Japan in 1991. Through the operations of AJOL,
the Company is primarily engaged in sales in Japan of multi-functional
telecommunications equipment called MOJICO and the sale of an on-line network
service called Pan Pacific Online, through which subscribers communicate using
the MOJICO equipment. AJOL has no sales in the United States. AJOL does not
engage in any manufacturing activities, and all of the MOJICO equipment is
manufactured exclusively for AJOL by vendors located primarily in Japan. The
MOJICO equipment is currently in its fifth generation of technology, model SF70,
and combines certain attributes of a telephone and fax machine with a liquid
crystal color display screen. The MOJICO equipment is paper based in that it
allows users to transmit hand written communication to other subscribers. AJOL
believes that the transmission of hand-written communication is important and
accepted in Japan because of the use of KANJI symbols and characters whose
meanings vary by the manner in which the characters are physically written.
AJOL's sources of revenue consist of sales of the MOJICO equipment,
subscriber fees for use of the Pan Pacific Online service, and the sale of goods
and services to Pan Pacific Online subscribers. A potential strategy under
consideration to increase the number of subscribers using the Pan Pacific Online
Service is to offer its paper based communication system to subscribers in
countries other than Japan which utilize KANJI characters extensively and by
integrating the MOJICO system with technologically competitive internet and
cellular telephone technologies.
AJOL is involved in providing information and mail order services for
its members by a telecommunications infrastructure, as a base through its
proprietary network terminal (SF-70).
From a macro viewpoint, AJOL is involved in the Network Service
Provider (NSP) industry. Within this industry categorization, the Internet has
taken the lead. As a trend of the industry, the revenues derived have not
exceeded the excessive plant-and-equipment investment required for the telecom
infrastructure, high connection fees and subscriber acquisition costs. However,
AJOL offers its proprietary network service through its "handwritten database"
using the Internet. Information dispatch can be performed in "handwriting" from
the terminal of SF70 in which complicated operations are not required by the
subscriber seeking access to the proprietary database. In addition, AJOL is not
merely a network service provider enterprise. At the core of our corporate value
is face to face interchange amongst our subscribers. AJOL holds approximately
500 meetings throughout Japan on an annual basis where its subscribers meet
other subscribers and prospective subscribers. Within the background of AJOL's
continued profitability in the turbulent NSP industry is its close interpersonal
contact with its subscribers.
PPOL recently announced its new growth strategy focused on in-licensing
proven and promising information technologies developed in the United States and
Europe for introduction into Asia. The Company intends to seek technologies that
would either supplement PPOL's strong core business or establish additional
business opportunities. PPOL currently is considering certain technologies that
are not currently in-use in Japan but which have significant potential for
successful integration or launch there.
19
BASIS OF PRESENTATION
INACTIVE PERIODS. PPOL was inactive at September 30, 1999, 2000 and
2001 and for the years then ended, with the exception of incurring immaterial
administrative costs in each of those periods. The six month period ended March
31, 2002 was also inactive except for the certain professional fees and similar
costs incurred in connection with the acquisition of AJOL which was effective
April 1, 2002.
ACQUISITION OF AJOL. Effective April 1, 2002, PPOL acquired one hundred
percent of the outstanding stock of AJOL. The transaction was accounted for as a
purchase and constitutes an "Acquired Business" within the meaning of Rule 3-05.
AJOL has historically reported its operations on the basis of a fiscal year
ending March 31, and PPOL has adopted March 31 as its fiscal year for
consolidated financial reporting beginning effective March 31, 2002. AJOL
maintains its records and prepares its financial statements in accordance with
accounting principles generally accepted in Japan. Certain adjustments and
reclassifications have been incorporated in the financial information presented
to conform with accounting principles generally accepted in the United States,
(i.e. "U.S. GAAP") and in accordance with the Public Company Accounting
Oversight Board. AJOL reports its operations as a single business segment.
PRODUCT SALES, NETWORK SERVICES. Product sales, sales of Pan Pacific
Online subscriptions and the granting of distributor licenses are considered a
bundled transaction for revenue recognition purposes. Revenue recognition from
the sale of products and online subscriptions is deferred and recognized over
the expected service period of the contracts. Costs are similarly deferred and
matched against the revenue as it is recognized. Revenue from other online
products and goods sold by Pan Pacific Online is recognized at the time the
goods and products are delivered to the customer. All reported revenue is earned
by AJOL's activities in Japan. The retail price of a MOJICO unit was
approximately $3,635 as of March 31, 2004. The average price for an annual
subscription to Pan Pacific Online, exclusive of the cost of the MOJICO
equipment was $95 for the year ended March 31, 2004. AJOL anticipates that the
average cost of the MOJICO equipment and Pan Pacific Online subscriptions will
remain to be $3,635 and $95, respectively, for the foreseeable future. During
the fiscal years ended March 31, 2004, 2003 and 2002, MOJICO unit sales were
25,624, 29,282 and 34,510 respectively.
OTHER ON-LINE PRODUCTS. AJOL's has created a proprietary brand "Kamome"
for use in the sale of products associated with AJOL. Kamome products may only
be purchased by subscribers to the Pan Pacific Online network. The Kamome brand
is granted to companies that sell products to AJOL through a distribution
agreement with AJOL, and which pass AJOL's quality control criteria. The Kamome
brand is added to the selling company's existing brand, and products are sold
with dual branding. Additionally, AJOL is using the Kamome brand as a private
brand on a limited basis. Kamome products appear in catalogs which are
distributed quarterly to subscribers and updated via the AJOL database system.
COST OF SALES. Cost of sales are substantially comprised of the
acquisition cost of products sold, and writeoffs of products considered to be
slow moving or obsolete.
DISTRIBUTOR INCENTIVES. Distributor incentives are primarily comprised
of commissions paid to its distributors. AJOL pays commissions at the rate of
76% of "commissionable sales" on the sale of all tangible products, but none on
services on which AJOL receives commissions from the service providers.
Commissionable sales do not reflect the purchase price paid by its purchaser.
Rather, the commissionable sales amount is determined solely by AJOL for each
product to yield AJOL an aggregate margin targeted at 23% of the purchase price
paid by the purchaser, in the aggregate, after deducting commissions paid and
cost of goods sold.
20
Distributors earn commission income on the sale of all tangible AJOL
products, but none on services. Distributors are not required to maintain
inventories, and therefore are not at financial risk if they do not complete
sales. Distributors accept orders for MOJICO hardware as well as Kamome products
and submit the orders to AJOL for processing. AJOL fills the orders and
allocates the commission among the applicable levels of the distributor network.
Currently, fifty percent (50%) of the sales price of each MOJICO unit is paid to
subscriber distributors based on a commission schedule, which spreads the payout
among the various levels of the distributor network. For MOJICO unit sales, this
equates to 76% of "commissionable sales" described in the previous paragraph. In
addition, distributor incentives include assistance payments made to
distributors who establish retail outlets referred to as "Cabins." Subscribers
that are also distributors who sell AJOL products on a full time basis
independently operate these "Cabins." AJOL does not grant any exclusive
distribution rights based on geographic boundaries.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses are comprised of payroll and related costs, marketing,
public relations, meetings held for subscribers and prospective subscribers,
depreciation and amortization, lease fees, telecommunications, and other
operating expenses incurred in the ordinary course of the Company's business.
Results of Operations: The following table sets forth our operating results as a
percentage of revenue for the periods indicated:
Year Ended March 31,
-------------------------------------
2002 2003 2004
---- ---- ----
Revenues:
Product Sales, Network Sales 89.6% 87.3% 84.4%
Other Online Products 10.4% 12.7% 15.2%
Consulting 0% 0% 0.4%
-------------------------------------
Total Revenues 100.0% 100.0% 100.00%
-------------------------------------
Cost of Sales and Expenses:
Cost of Sales 23.0% 22.4% 24.6%
Distributor Incentives 52.9% 52.0% 49.7%
Selling General and Administrative 18.0% 18.5% 17.4%
-------------------------------------
Total Cost of Sales and Expenses 93.9% 92.9% 91.7%
-------------------------------------
6.1% 7.1% 8.3%
Other Income (Expense) ---% (0.6)% ---%
-------------------------------------
Income Before Taxes 6.1% 6.5% 8.3%
Income Taxes 3.8% 2.1% 2.7%
-------------------------------------
Net Income 2.3% 4.4% 5.6%
=====================================
YEAR ENDED MARCH 31, 2004 COMPARED TO YEAR ENDED MARCH 31, 2003
PRODUCT SALES AND NETWORK SERVICES. For the year ended March 31, 2004, revenues
decreased by 2.0% over the prior year from $117,822,356 in the year ended March
31, 2003 to $115,520,916 for the year ended March 31, 2004. The decrease in
sales is primarily due to the decline in MOJICO unit sales.
21
OTHER ON-LINE PRODUCTS. Overall revenues from other on-line products increased
21.3% for the year ended March 31, 2004 over the prior year from $17,163,468 to
$20,819,495 respectively. This reflects AJOL's continuing shift of revenues from
products with a higher gross margin, in particular mail order goods.
COST OF SALES. While cost of sales increased with the increase in sales for the
year ended March 31, 2004, cost of sales, expressed as a percentage of sales
increased by 2.2% vs. the same period of the prior year. Management attributes
the increase to the revenue mix containing lower gross profit percentage items.
DISTRIBUTOR INCENTIVES. Despite the overall increase in sales for the year ended
March 31, 2004, distributor incentives decreased 3.1% from $70,175,111 to
$67,976,680 for the years ended March 31, 2003 and 2004 respectively. The
decrease is primarily due to the lower mix of commissionable sales in the
current year, specifically lower MOJICO unit sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased by 4.79% from $25,030,237 to $23,831,706 for
the years ended March 31, 2003 and 2004, respectively. This is attributable to
holding fewer meetings for current and prospective members. Additionally, the
number of mailings has declined as well.
OTHER EXPENSE, NET. The significant decrease in other expenses, net from
$822,424 to $119,721 for the years ended March 31, 2003 and 2004 respectively is
primarily attributable to the incurrence of professional fees and associated
costs of the Company in becoming a publicly traded corporation in the United
States in the prior year.
INCOME TAXES. Income taxes expressed as a percentage of income before income
taxes for the Company was approximately 31.61% for both of the years ended March
31, 2004 and 2003. The normal statutory Japanese tax rate for AJOL declined to
40.7% in the year ended March 31, 2004 from 42.1% in the year ended March 31,
2003. However, this decline in the Japanese tax rate was met by an offsetting
decline in non deductible expenses to where the overall income tax expressed as
a percentage of income before taxes for the Company remained relatively
unchanged.
YEAR ENDED MARCH 31, 2003 COMPARED TO YEAR ENDED MARCH 31, 2002
PRODUCT SALES AND NETWORK SERVICES. For the year ended March 31, 2003, revenues
increased by 1.2% over the prior year from $116,375,620 in the year ended March
31, 2002 to $117,822,356 for the year ended March 31, 2003 despite the weakening
Japanese economy. The increase is primarily the result of increasing
subscription fees to PPOL's on-line services on both an initial basis and
continuing basis. The increase in subscription fees was partially offset by a
decline in MOJICO unit sales.
OTHER ON-LINE PRODUCTS. Overall revenues from other on-line products increased
26.8% for the year ended March 31, 2003 over the prior year from $13,537,232 to
$17,163,468, respectively, and reflects AJOL's continuing shift of revenues from
products with a higher gross margin. Additionally, Kamome product sales
increased 66% or approximately $1.6 million as operational efficiencies have
significantly shortened delivery times to customers. Commission earned from
insurance contract sales also increased 20% or approximately $1.7 million as the
base of PPOL network subscribers continues to increase.
COST OF SALES. While cost of sales increased with the increase in sales for the
year ended March 31, 2003, cost of sales, expressed as a percentage of sales
declined by 0.7% vs. the same period of the prior year. Management attributes
the decline to revenue mix to higher gross profit percentage items.
Additionally, the costs of the MOJICO units have slightly declined.
22
DISTRIBUTOR INCENTIVES. While distributor incentives increased with the increase
in sales for the year ended March 31, 2003, distributor incentives expressed as
a percentage of sales decreased 0.9%. The difference is attributable to revenues
for which the amount of "commissionable sales" was lower than in the prior year.
Specifically, the Company ceased paying their distributors commissions on the
PPOL online initiation fee.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by 7.2% from $23,356,430 to $25,030,237 for
the years ended March 31, 2002 and 2003, respectively. This is attributable to
holding more meetings for current and prospective members. The meetings are
held, in part, as an investment in the future and thus the curtailment of
meetings in times of weak economy will have a negative impact on the future
growth of AJOL.
OTHER INCOME AND EXPENSE, NET. The significant increase in other expenses, net
from $44,242 to $822,424 for the years ended March 31, 2002 and 2003
respectively is primarily attributable to the incurrence of professional fees
and associated costs of the Company becoming a publicly traded corporation in
the United States.
INCOME TAXES. Income taxes, expressed as a percentage of income before income
taxes, decreased to 31.6% for the year ended March 31, 2003 vs. the prior year's
61.9% primarily due to lower deferred income tax expense in the year ended March
31, 2003 of approximately $1.5 million and lower entertainment and other
non-deductible expenses in 2003.
INFLATION
To date, the effects of inflation on our financial results have not
been significant. We cannot provide assurances, however, that inflation will not
affect us materially in the future.
LIQUIDITY AND CAPITAL RESOURCES
Historically, our principal needs for funds have been for operating
expenses including distributor incentives, working capital (principally
inventory purchases), capital expenditures and the development of operations
throughout Japan. We have generally relied on cash flow from operations to meet
our cash needs and business objectives without relying on long-term debt to fund
operating activities.
Cash and cash equivalents totaled $28,334,777 at March 31, 2004, an
increase of $14,021,714 from March 31, 2003. Cash provided from operations
during 2004 was approximately $16,600,000 compared with $4,300,000 and
$5,200,000, in 2003 and 2002, respectively. Cash used in investing activities,
primarily comprised of purchasing property and equipment, was approximately
$5,270,000, $2,190,000, and $2,850,000 for the years ended March 31, 2004, 2003
and 2002, respectively. Cash used for financing activities of $5,000, $947,000
and $925,000 during the years ended March 31, 2004, 2003 and 2002, respectively.
AJOL currently has available a $2.9 million revolving bank credit facility with
Mizuho Bank, a Japanese bank, that is generally used to finance temporary
operating cash requirements at 1.09% above money market rates expiring on August
31, 2004. This credit line was unused at March 31, 2004 and 2003. Management
believes that cash flow from operations and the revolving credit facility will
adequately meet its working capital needs for the foreseeable future.
23
CONTRACTUAL OBLIGATIONS
The Company's operating lease & purchase obligations as of March 31,
2004 are as follows:
Payments due by period
--------------------------------------------------------------------
More
Less than 1-3 3-5 than 5
Contractual obligations Total 1 year years years years
- ----------------------- ------------ ------------ --------- --------- ---------
Operating Lease Obligations $ 978,536 $ 978,536 $ - $ - $ -
Service Provider Contracts 2,037,328 2,037,328 - - $ -
------------ ------------ --------- --------- ---------
Total $ 3,015,864 $ 3,015,864 $ - $ - $ -
============ ============ ========= ========= =========
The Company projects that it will need to satisfy at least $3.0 million
of lease and purchase obligations within the fiscal year ended March 31, 2005.
CURRENCY RISK AND EXCHANGE RATE INFORMATION
PPOL uses the U.S. dollar as its reporting currency for financial
statement purposes. PPOL conducts business through its international subsidiary
that uses local currency (Japanese yen) to denominate its transactions, and is,
therefore, subject to certain risks associated with fluctuating foreign
currencies. All revenues and expenses are translated at weighted average
exchange rates for the periods reported. Therefore, our reported revenue and
earnings will be positively impacted by a weakening of the U.S. dollar and will
be negatively impacted by a strengthening of the U.S. dollar. For example, in
2001, the Japanese yen significantly weakened, which reduced our operating
results on a U.S. dollar reported basis. Given the uncertainty of exchange rate
fluctuations, we cannot estimate the effect of these fluctuations on our future
business, results of operations or financial condition.
The resulting changes in the financial statements due to the
fluctuating exchange rates do not indicate any underlying changes in the
financial position of the international subsidiary but merely reflect the
adjustment in the carrying value of the net assets of the subsidiary at the
current U.S. dollar exchange rate. Due to the long-term nature of PPOL's
investment in this subsidiary, the translation adjustments resulting from these
exchange rate fluctuations are excluded from the results of operations and are
recorded in a separate component of consolidated stockholders' equity. PPOL
monitors its currency exposures but does not hedge its translation exposures
primarily due to the long-term nature of its investment.
CRITICAL ACCOUNTING POLICIES
The Company's accounting policies are more fully described in Note 1 of
the Notes to the Consolidated Financial Statements. As discussed there, the
preparation of financial statements in conformity with accounting principles
generally accepted in the U.S. requires management to make estimates and
assumptions about future events that affect the amounts reported in the
financial statements and accompanying notes. Since future events and their
effects cannot be determined with absolute certainty, the determination of
estimates requires the exercise of judgment. Actual results could differ from
those estimates, and such difference may be material to the financial
statements. The most significant accounting estimates inherent in the
preparation of the Company's financial statements include estimates as to the
appropriate carrying value of certain assets and liabilities which are not
readily apparent from other sources, primarily deferred costs and deferred
revenue balances, allowance for doubtful accounts and allowance for obsolete
inventory. Management bases its estimates on historical experience and on
24
various assumptions which are believed to be reasonable under the circumstances.
The Company reevaluates these significant factors as facts and circumstances
change.
RECENT FINANCIAL ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation No. 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. During October
2003, the FASB issued 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 such variable interest entity in accordance with FIN 46. On
December 24, 2003, the FASB issued FASB Interpretation No. 46 (Revised December
2003), Consolidation of Variable Interest Entities, (FIN-46R), primarily to
clarify the required accounting for interests in variable interest entities.
FIN-46R replaces FIN-46, Consolidation of Variable Interest Entities, that was
issued in January 2003. FIN-46R exempts certain entities from its requirements
and provides for special effective dates for entities that have fully or
partially applied FIN-46 as of December 24, 2003. In certain situations,
entities have the option of applying or continuing to apply FIN-46 for a short
period of time before applying FIN-46R. While FIN-46R modifies or clarifies
various provisions of FIN-46, it also incorporates many FASB Staff Positions
previously issued by the FASB. The adoption of this pronouncement did not have a
material effect on the financial statements of the Company.
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. Adoption of this Statement did
not 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 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
25
bonds, and dual-indexed financial instruments. Adoption of this Statement did
not have a material effect on the financial statements.
In December 2003, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition." SAB 104
supersedes SAB 101, "Revenue Recognition in Financial Statements." SAB 104's
primary purpose is to rescind accounting guidance contained in SAB 101 related
to multiple element revenue arrangements, superseded as a result of the issuance
of EITF 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables."
Additionally, SAB 104 rescinds the SEC's Revenue Recognition in Financial
Statements Frequently Asked Questions and Answers ("the FAQ") issued with SAB
101 that had been codified in SEC Topic 13, Revenue Recognition. Selected
portions of the FAQ have been incorporated into SAB 104. While the wording of
SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue
recognition principles of SAB 101 remain largely unchanged by the issuance of
SAB 104, which was effective upon issuance. The adoption of SAB 104 did not
impact 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 adoption of this pronouncement did not have a material
impact to the Company's financial statements.
RISK FACTORS
LIMITED OPERATING HISTORY
We have a limited operating history in Japan upon which we can be
evaluated. Any investment in us 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 we will be successful in addressing these
risks.
UNPROVEN BUSINESS MODEL
We cannot predict whether or not we will be successful because our
business model is unproven and its market is developing. It is too early to
reliably ascertain market penetration for our 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 our
financial condition and results from operations will be materially and adversely
affected.
FLUCTUATIONS IN OPERATING RESULTS
Our operating results may fluctuate significantly in the future as a
result of a variety of factors, many of which are outside of our control. These
factors include the demand for the telecommunications products and services
offered by us, introduction of new products or services by us or our
26
competitors, delays in the introduction or enhancement of products and services
by us or our competitors, changes in our pricing policies or those of our
competitors, our ability to anticipate and effectively adapt to developing
markets and rapidly changing technologies, changes in the mix or Japanese vs.
non-Japanese revenue, changes in foreign currency exchange rates, the mix of
products and services sold by us 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, we 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 our revenue and expenses are received and incurred
in Japanese Yen. Variation in foreign exchange rates may substantially affect
our revenue, expenses, and net income in U.S. dollar terms. In preparing our
financial statements, we translate revenue and expenses from Japanese Yen into
U.S. dollars using weighted average exchange rates. If the U.S. dollar
strengthens relative to the Yen, our reported revenue, gross profits and net
income will likely be reduced. For example, in 2001, the Japanese Yen
significantly weakened, which reduced our operating results on a U.S. dollar
reported basis. The Company's 2005 operating results could be similarly harmed
if the Japanese Yen weakens from current levels. Given the unpredictability of
exchange rate fluctuations, we cannot estimate the effect these fluctuations may
have upon future reported results, product pricing or our overall financial
condition.
POOR JAPANESE ECONOMIC CONDITIONS
Economic conditions in Japan have been poor in recent years and may
worsen or not improve. Continued or worsening economic and political conditions
in Japan could further reduce our revenue and net income.
RELIANCE ON HANDWRITTEN MOJI CHARACTERS AS PREFERRED METHOD OF WRITTEN
COMMUNICATIONS
We rely 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 us and our business.
DEPENDENCE ON NEW SUBSCRIBERS
Our operating results generally depend on revenues received from sales
of the MOJICO product. In previous years, MOJICO sales have accounted for up to
78% of our annual revenue. MOJICO sales are primarily made to our new customers.
As a result, future revenues are primarily dependent on our ability to generate
new customers for our MOJICO hardware and Pan Pacific Online services. There can
be no assurances that we will be able to continue to generate new subscribers at
the rate that we have been able to in the past, nor that we will be able to
generate sufficient new subscribers to remain profitable. We do not have any
substantial historical basis for predicting the rate of increase in our
subscriber base.
27
DEPENDENCE ON SUBSCRIBERS FOR CONTENT OF NETWORK
The information transmitted to our subscribers via our information
network Pan Pacific Online is primarily generated by other of our subscribers.
There can be no assurances that our subscribers will continue to generate
information that other subscribers will find sufficiently entertaining, useful,
or desirable so as to allow us to profitably market the products and services
that provide access to our network.
LIABILITY FOR CONTENT OF NETWORK
As a provider of messaging and communications services, we 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 our information network. To minimize our liability, we use a
centralized hub to manually process and screen hard copies for adult themes,
slander, patent/copyright infringement and objectionable material. However,
there can be no assurances that we will be able to effectively screen all of the
content generated by our subscribers. We may be exposed to liability with
respect to this content. Our insurance may not cover claims of these types or
may not be adequate to indemnify us for all liability that may be imposed. Our
liability coverage limit is 100,000,000 Japanese yen, approximately $950,000 at
current exchange rates, per occurrence. There is a risk that a single claim or
multiple claims, if successfully asserted against us, could exceed the total of
our coverage limits. There is also a risk that a single claim or multiple claims
asserted against us may not qualify for coverage under our 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
our reputation, financial condition, and operating results.
RELIANCE ON EXISTING DISTRIBUTORS AND NEED TO RECRUIT ADDITIONAL DISTRIBUTORS
We depend on subscriber distributors to generate substantially all of
our revenues. To increase our revenue, we must increase the number of and/or the
productivity of our distributors. Our distributors may terminate their status as
a distributor at any time. The number of distributors may not increase and could
decline in the future. We cannot accurately predict how the number and
productivity of distributors may fluctuate because we rely upon our existing
distributors to recruit, train and motivate new distributors. Our operating
results could be harmed if our existing and new business opportunities and
products do not generate sufficient interest to retain existing distributors and
attract new distributors.
The loss of a group of high-level distributors, or a group of leading
distributors in the distributor's network of lower level distributors, whether
by their own choice or through disciplinary actions for violations of our
policies and procedures could negatively impact the growth of distributors and
our revenue. There is no leading distributor whose departure, alone, will have a
material impact on the financial position or results of operations.
In addition, our 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
We are highly dependent upon our 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 us and our success. The diminution or loss of the services of
28
Mr. Aota, and any negative market or industry perception arising from that
diminution or loss, would have a material adverse affect on our business. We are
investigating, but have not obtained "Key Executive Insurance" with respect to
Mr. Aota.
One of our business strategies is to reduce our 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 we are unsuccessful in
accomplishing this strategy, and Mr. Aota's services become unavailable, our
business and prospects could be materially adversely affected. We do not have an
employment agreement with Mr. Aota. If we lose Mr. Aota's services, for any
reason, including as a result of Mr. Aota's voluntary resignation or retirement,
our business could be materially adversely affected.
FAILURE OF NEW PRODUCTS AND SERVICES TO GAIN MARKET ACCEPTANCE
A critical component of our business is our ability to develop new
products and services that create enthusiasm among our distributor force. If any
new product or service fails to gain market acceptance, for any reason including
quality problems, this could harm our results of operations.
LOSING SOURCES OF KAMOME PRODUCTS
The loss of any of our sources of Kamome products, or the failure of
sources to meet our needs, could restrict our ability to distribute Kamome
products and harm our revenue as a result. Further, our inability to obtain new
sources of Kamome products at prices and on terms acceptable to us could harm
our results of operations.
COMMENCING FOREIGN OPERATIONS
We continue to explore 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 we commence
business activities in these nations, future instability will have a material
adverse affect on our ability to do business in these nations and may jeopardize
our investment in establishing business operations in those countries.
COMPETITION WITH TECHNICALLY SUPERIOR PRODUCTS AND SERVICES
Our products and services utilize the facsimile-like MOJICO hardware
and rely on human personnel to screen and process information for our database.
Our products and services are much less technically sophisticated than those
offered by other companies offering interactive telecommunications products and
services. This may put us at a substantial competitive disadvantage with present
and/or future competitors.
INTERNET USAGE RATES AND LONG DISTANCE TELEPHONE RATES
Our subscribers obtain access to AJOL's network via either the Internet
or telephone service. The costs that subscribers incur in obtaining access to
our 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 our products and services.
29
RELIANCE ON INTERNET AS TRANSMISSION MEDIUM
Our future success will depend upon our ability to route our customers'
traffic through the Internet and through other data transmission media. Our
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 our
existing services, proprietary technology and systems obsolete.
Our success depends, in part, on our ability to develop new services,
functionality and technology that address the needs of existing and prospective
subscribers. If we do not properly identify the feature preferences of
subscribers and prospective subscribers, or if we fail to deliver features that
meet their standards, our ability to market our 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.
We may not be able to keep pace with the latest technological developments. We
may also be unable to use new technologies effectively or adapt services to
customer requirements or emerging industry standards.
We must accurately forecast the features and functionality required by
subscribers and prospective subscribers. In addition, we must design and
implement service enhancements that meet subscriber requirements in a timely and
efficient manner. We may not successfully determine subscriber and prospective
subscriber requirements and may be unable to satisfy their demands. Furthermore,
we 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 us, our reputation could be
damaged. If we fail to accurately determine desired feature requirements or
service enhancements or to market services containing such features or
enhancements in a timely and efficient manner, our business and operating
results could suffer materially.
POSSIBLE INADEQUATE INTELLECTUAL PROPERTY PROTECTIONS
Our success depends to a significant degree upon our proprietary
technology. We rely on a combination of patent, trademark, trade secret and
copyright law and contractual restrictions to protect our 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 our intellectual property rights. In addition, we may face challenges to
the validity and enforceability of our proprietary rights and may not prevail in
any litigation regarding those rights. Any litigation to enforce our
intellectual property rights would be expensive and time-consuming, would divert
management resources and may not be adequate to protect our business.
30
POSSIBLE INFRINGEMENT CLAIMS
We could be subject to claims that we have infringed the intellectual
property rights of others. In addition, we may be required to indemnify our
distributors and users for similar claims made against them. Any claims against
us could require us to spend significant time and money in litigation, pay
damages, 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 us could have a material adverse effect on
our business, prospects, financial conditions and results of operations.
POSSIBLE SYSTEM FAILURE OR BREACH OF NETWORK SECURITY
Our operations are dependent on our ability to protect our network from
interruption by damage from fire, earthquake, power loss, telecommunications
failure, unauthorized entry, computer viruses or other events beyond our
control. As precautions, we utilize distributed processing systems, back-up
systems, Internet firewalls, 24/7 installation environment surveillance, and
private power generators as backup. There can be no assurance that our 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, our 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 our services, which may result in
significant liability to us and also may deter current and potential subscribers
from using our services. Any damage, failure or security breach that causes
interruptions or data loss in our operations or in the computer systems of our
customers could have a material adverse effect on our business, prospects,
financial condition and results of operations.
RELIANCE ON THIRD PARTY ACCESS FOR TELECOMMUNICATIONS
We rely on third parties to provide our 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, our business, prospects, financial
condition and results of operations could be materially and adversely affected.
EFFECT OF GOVERNMENT REGULATIONS
We provide access to our 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 we face from telecommunications
services and other aspects of our market. There can be no assurance that
existing or future laws, governmental action or rulings will not materially and
adversely affect our operations. Additionally, we operate through a network
marketing strategy which is subject to government regulation concerning consumer
protection. Changes in these regulations could affect compliance with these
regulations and jurisdictions where we carry on our business.
31
DEPENDENCE ON VENDOR
The MOJICO machine is produced by an unrelated third party. Should this
third party 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.
CONTROL BY OFFICERS AND DIRECTORS
Our executive officers, directors and entities affiliated with them, in
the aggregate, beneficially own common stock representing approximately 94.4% of
PPOL.
MINORITY SHAREHOLDER STATUS
Forval Corporation and Leo Global Fund, former direct shareholders of
AJOL, hold 58.62% and 35.79% respectively of PPOL's common stock. Acting alone,
Forval Corporation, as a majority shareholder, has significant influence on
PPOL's policies. Forval Corporation and Leo Global Fund, collectively, control
94.40% of PPOL's outstanding shares, representing 94.4% of PPOL's voting power.
As a result, Forval Corporation 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 PPOL's entire Board of
Directors, any merger, consolidation or sale of all or substantially all of
PPOL's assets, and the ability to control PPOL's and our management and affairs.
NO LOCK-UP AGREEMENT BETWEEN FORVAL CORPORATION AND LEO GLOBAL FUND
To date, PPOL 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 PPOL's shares to decline.
NO HISTORY AS REPORTING COMPANY
Prior to the effective date of the PPOL's filing of Form 10, PPOL has
never been a public company, subject to the reporting requirements of the
Securities and Exchange Act of 1934, as amended, and PPOL expects that the
obligations of being a public company, including substantial public reporting
and investor relations obligations, will require significant continuing
additional expenditures, place additional demands on our management and may
require the hiring of additional personnel. We may need to implement additional
systems in order to adequately function as a reporting public company. Such
expenditures could adversely affect our financial condition and results of
operations.
32
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
The information required by Item 7A of this Form 10-K is incorporated
herein by reference to the information contained above in Item 7 of this Form
10-K, Management's Discussion and Analysis of Financial Condition and Results of
Operations - "Currency Risk and Exchange Rate Information" and "Foreign Currency
(Yen) Fluctuations."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
1. Information required by this item appears at pages F-1 through F-19, attached
to this Form 10-K report.
2. FINANCIAL STATEMENT SCHEDULES: Financial statement schedules have been
omitted because they are not required or are not applicable, or because the
required information is set forth in the financial statements or notes thereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
None.
ITEM 9A. CONTROLS AND PROCEDURES
-----------------------
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Under the supervision
and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, we evaluated the effectiveness of the
design and operation of our disclosure controls and procedures (as defined in
Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) as of
the end of the period covered by this report. Disclosure controls and procedures
are the controls and other procedures that we designed to ensure that we record,
process, summarize and report in a timely manner the information we must
disclose in reports that we file with or submit to the Securities and Exchange
Commission. Based on this evaluation, our Chief Executive Officer and our Chief
Financial Officer concluded that, as of the date of their evaluation, our
disclosure controls and procedures were effective. There were no significant
changes made in our internal controls or in other factors that could
significantly affect internal controls subsequent to the date of their
evaluation.
33
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
The information required by this Item 10 of Part III is hereby
incorporated by reference to the information set forth in our Definitive Proxy
Statement for our 2004 annual meeting of stockholders to be filed with the
Securities and Exchange Commission within 120 days of the end of our fiscal year
ended March 31, 2004.
Code of Ethics Adopted - The Company has adopted a code of ethics
applicable to all employees of the Company, including its Chief Executive
Officer and Chief Financial Officer. The code of ethics is included herein as
exhibit 14.0.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
The information required by this Item 11 of Part III is hereby
incorporated by reference to the information set forth in our Definitive Proxy
Statement for our 2004 annual meeting of stockholders to be filed with the
Securities and Exchange Commission within 120 days of the end of our fiscal year
ended March 31, 2004.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The information required by this Item 12 of Part III is hereby
incorporated by reference to the information set forth in our Definitive Proxy
Statement for our 2004 annual meeting of stockholders to be filed with the
Securities and Exchange Commission within 120 days of the end of our fiscal year
ended March 31, 2004.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
----------------------------------------------------
The information required by this Item 13 of Part III is hereby
incorporated by reference to the information set forth in our Definitive Proxy
Statement for our 2004 annual meeting of stockholders to be filed with the
Securities and Exchange Commission within 120 days of the end of our fiscal year
ended March 31, 2004 and in Note 5 of the consolidated financial statements
contained in this Form 10-K report.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
--------------------------------------
The information required by this Item 14 of Part III is hereby
incorporated by reference to the information set forth in our Definitive Proxy
Statement for our 2004 annual meeting of stockholders to be filed with the
Securities and Exchange Commission within 120 days of the end of our fiscal year
ended March 31, 2004.
34
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
(a) The following documents are filed as part of this report:
(1) The financial statements required by Item 8 of this
report are filed in the report on pages F1-F20.
(2) The following financial statement schedule of
PPOL,Inc. and its subsidiary for the fiscal years
ended March 31, 2004, 2003 and 2002 is filed as part
of this report and should be read in conjunction with
the Consolidated Financial Statements of PPOL,Inc.
and its subsidiary:
Schedule II: Valuation and Qualifying Accounts
Schedules not listed above have been omitted because
they are not applicable or are not required or the
information required to be set forth therein is
included in the Consolidated Financial Statements or
Notes thereto.
(3) See exhibit list below.
(b) During the quarter ended March 31, 2004, we filed the
following reports on Form 8-K:
(1) On January 8, 2004, we filed a Current Report on Form
8-K reporting the replacement of Kazushige Shimizu as
CFO and Secretary with Yoichi Awagakubo.
(2) On March 2, 2004, we filed a Current Report on Form
8-K reporting the approval of the Company's "2004
Stock Incentive Plan" by the Board of Directors.
(3) On March 30, 2004 we filed a Current Report on Form
8-K announcing the granting of 1,220,000 stock
options to employees of AJOL, PPOL's subsidiary.
(c) Exhibits:
2.0 Stock Purchase and Business Combination Agreement (1)
3.1 Articles of Incorporation and Amendments thereto (1)
3.2 Bylaws (1)
10.1 Yamamoto Employment Contract (3)
10.2 Nakamura Employment Contract (3)
10.3 Ishii Employment Contract (3)
10.4 Miyazawa Employment Contract (3)
10.5 Pomeroy Employment Contract (3)
10.6 Consulting Services Agreement between PPOL, Inc. and
ECO2, LLC (3)
10.7 Common Stock Purchase Agreement (2)
14.0 Code of Ethics (3)
21.0 Subsidiaries of PPOL (1)
35
31.1 Certifications of CEO Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (3)
31.2 Certifications of CFO Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (3)
32.0 Certifications of CEO and CFO Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 (3)
(1) - Previously filed with the SEC as an exhibit to the Company's registration
statement on Form 10, filed on November 1, 2002, and is incorporated herein by
reference.
(2) Previously filed with the SEC as an exhibit to the Company's Form 8-K filed,
on June 1, 2004, and is incorporated herein by reference.
(3) Filed herewith.
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on June 25, 2004.
PPOL, INC.
By: /s/ Nobuo Takada
-------------------------------------
Nobuo Takada, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on June 25, 2004.
SIGNATURE CAPACITY IN WHICH SIGNED
- ----------------------------- --------------------------------------
/s/ Nobuo Takada Director and Chief Executive Officer
- ----------------------------- (Principal Executive Officer)
Nobuo Takada
/s/ Yoichi Awagakubo Director and Chief Financial Officer
- ----------------------------- (Principal Financial Officer and
Yoichi Awagakubo Accounting Officer)
/s/ Yoshihiro Aota Director and Chief Operating Officer
- -----------------------------
Yoshihiro Aota
37
PPOL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31,2004, 2003 AND 2002
CONTENTS
Page
----
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-1
CONSOLIDATED FINANCIAL STATEMENTS:
Balance Sheets F-2
Statements of Income and Comprehensive Income F-3
Statements of Shareholders' Deficit F-4
Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6-F-20
Report of Independent Registered Public Accounting Firm
Board of Directors
PPOL, Inc.
1 City Boulevard West, Suite 870
Orange, California
We have audited the accompanying consolidated balance sheets of PPOL, Inc. and
its subsidiary as of March 31, 2004 and 2003, and the related consolidated
statements of income and comprehensive income, shareholders' deficit, cash flows
and financial statement schedule for each of the three years in the period ended
March 31, 2004, as listed in the appendix appearing under items 15(a)(1) and (2)
of the Annual Report on Form 10-K. These consolidated financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of PPOL, Inc. and its
subsidiary as of March 31, 2004 and 2003, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
2004, in conformity with U.S. generally accepted accounting principles. Also, in
our opinion, the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
As discussed in Note 10 to the consolidated financial statements, certain errors
resulting in understatements of amounts previously reported on the statement of
income and comprehensive income and shareholders' deficit for the year ended
March 31, 2002, were discovered by management of the Company subsequent to the
filing of the fiscal year 2002 financial statements. Accordingly, the
consolidated financial statements for 2002 have been restated to reflect these
adjustments to correct for these errors.
/s/ Stonefield Josephson, Inc.
CERTIFIED PUBLIC ACCOUNTANTS
Santa Monica,California
June 2, 2004
F-1
PPOL, INC.
CONSOIDATED BALANCE SHEETS
ASSETS March 31, March 31,
2004 2003
-------------- --------------
CURRENT ASSETS:
Cash and cash equivalents $ 28,334,777 $ 14,313,063
Trade accounts receivable, net of allowance for
doubtful accounts of $0 and $212 309,063 149,313
Inventories 2,651,259 2,920,320
Advance payments -- 3,491,610
Deferred costs 63,159,328 66,323,721
Deferred income taxes 9,467,524 9,944,929
Lease deposit, related party -- 606,852
Prepaid expenses and other current assets 281,784 875,258
-------------- --------------
Total current assets 104,203,735 98,625,066
PROPERTY AND EQUIPMENT, NET 8,695,632 7,420,085
DEFERRED COSTS 37,042,494 47,563,043
DEFERRED INCOME TAXES 5,494,095 6,368,748
LEASE DEPOSITS 766,457 744,905
DEPOSITS 3,984,883 --
OTHER ASSETS 181,987 826,811
-------------- --------------
$ 160,369,283 $ 161,548,658
============== ==============
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable, including related parties $ 11,281,024 $ 8,612,478
Advances received 17,604,942 10,929,498
Deferred revenue 84,644,397 88,782,468
Income taxes payable 1,086,260 876,609
Other current liabilities 1,888,976 926,926
-------------- --------------
Total current liabilities 116,505,599 110,127,979
-------------- --------------
DEFERRED REVENUE 49,155,662 61,535,697
-------------- --------------
COMMITMENTS
SHAREHOLDERS' DEFICIT:
Common Stock; $0.001 par value; 100,000,000 shares
authorized; 17,993,752 and 17,994,920 shares issued and
outstanding as of March 31, 2004 and 2003, respectively 17,994 17,995
Additional paid-in capital 3,362,359 3,367,157
Total other comprehensive income 316,307 3,210,834
Accumulated deficit (8,988,638) (16,711,004)
-------------- --------------
Total shareholders' deficit (5,291,978) (10,115,018)
-------------- --------------
$ 160,369,283 $ 161,548,658
============== ==============
The accompanying notes are an integral part of these consolidated financial statements.
F-2
PPOL, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Year ended Year ended Year ended
March 31, 2004 March 31, 2003 March 31, 2002
--------------- --------------- --------------
(Restated)
NET REVENUE:
Product sales and network services $ 115,520,916 $ 117,822,356 $ 116,375,620
Other on-line services 20,819,495 17,163,468 13,537,232
Consulting - related parties 483,858 -- --
-------------- -------------- --------------
Total 136,824,269 134,985,824 129,912,852
-------------- -------------- --------------
COSTS AND EXPENSES:
Cost of sales 33,604,194 30,191,220 29,943,101
Distributor incentives 67,976,680 70,175,111 68,694,708
Selling, general and administrative
expenses 23,831,706 25,030,237 23,356,430
-------------- -------------- --------------
Total costs and expenses 125,412,580 125,396,568 121,994,239
-------------- -------------- --------------
OPERATING INCOME 11,411,689 9,589,256 7,918,613
-------------- -------------- --------------
OTHER EXPENSE:
Interest expense 11,130 1,784 8,155)
Other 108,591 820, 640 36,087)
-------------- -------------- --------------
Other expense, net 119,721 822,424 44,242)
-------------- -------------- --------------
INCOME BEFORE INCOME TAXES 11,291,968 8,766,832 7,874,371
-------------- -------------- --------------
INCOME TAXES:
Current 2,217,544 2,335,397 2,903,977
Deferred 1,352,058 435,753 1,973,377
-------------- -------------- --------------
Total income taxes 3,569,602 2,771,150 4,877,354
-------------- -------------- --------------
NET INCOME 7,722,366 5,995,682 2,997,017
OTHER COMPREHENSIVE (LOSS) INCOME,
Foreign currency translation (2,894,527) (3,328,025) 1,573,736
-------------- -------------- --------------
COMPREHENSIVE INCOME $ 4,827,839 $ 2,667,657 $ 4,570,753
============== ============== ==============
NET INCOME PER COMMON SHARE,
Basic $ 0.43 $ 0.34 $ 0.18
============== ============== ==============
Diluted $ 0.43 $ 0.34 $ 0.18
============== ============== ==============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING -
Basic 17,994,376 17,658,751 17,095,174
============== ============== ==============
Diluted 17,994,376 17,658,751 17,095,174
============== ============== ==============
The accompanying notes are an integral part of these consolidated financial statements.
F-3
PPOL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
Cumulative
Common Stock Additional Other Total
------------ Paid-In Comprehensive Accumulated Shareholders'
Shares Amount Capital (Loss)Income Deficit Deficit
------------- ------------- ------------- ------------- ------------- -------------
Balance, March 31, 2001 17,095,174 $ 17,095 $ 3,392,605 $ 4,965,123 $(23,831,222) $(15,456,399)
Foreign currency
translation adjustment -- -- -- 1,573,736 -- 1,573,736
Dividends paid -- -- -- -- (925,211) (925,211)
Net income (restated) -- -- -- -- 2,997,017 2,997,017
------------- ------------- ------------- ------------- ------------- -------------
Balance, March 31, 2002 17,095,174 17,095 3,392,605 6,538,859 (21,759,416) (11,810,857)
(restated)
Foreign currency
translation adjustment -- -- -- (3,328,025) -- (3,328,025)
Common stock issuance
for acquisition of
Diversified Strategies,
Inc 899,746 900 (25,448) -- -- (24,548)
Dividends paid -- -- -- -- (947,270) (947,270)
Net income -- -- -- -- 5,995,682 5,995,682
------------- ------------- ------------- ------------- ------------- -------------
Balance, March 31, 2003 17,994,920 17,995 3,367,157 3,210,834 (16,711,004) (10,115,018)
Foreign currency
translation adjustment -- -- -- (2,894,527) -- (2,894,527)
Fractional share
liquidation (1,168) (1) (4,798) -- -- (4,799)
Net income -- -- -- -- 7,722,366 7,722,366
------------- ------------- ------------- ------------- ------------- -------------
Balance, March 31, 2004 17,993,752 $ 17,994 $ 3,362,359 $ 316,307 $ (8,988,638) $ (5,291,978)
============= ============= ============= ============= ============= =============
The accompanying notes are an integral part of these consolidated financial statements.
F-4
PPOL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended Year ended Year ended
March 31, 2004 March 31, 2003 March 31, 2002
---------------- ---------------- ----------------
(Restated)
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income $ 7,722,366 $ 5,995,682 $ 2,997,017
---------------- ---------------- ----------------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization 2,507,399 1,688,718 2,704,124
Loss on sales/disposal of property and equipment 109,004 118,247 696,257
Deferred income taxes 1,352,058 435,753 1,973,377
CHANGES IN ASSETS AND LIABILITIES:
(INCREASE) DECREASE IN ASSETS:
Trade accounts receivables (129,039) 2,455,780 (1,536,427)
Inventories 606,505 (1,656,210) 1,947,894
Advance payments 3,649,199 (1,219,653) 990,208
Deferred costs 26,597,010 11,667,326 1,376,081
Prepaid expenses and other 648,218 (472,435) (225,463)
INCREASE (DECREASE) IN LIABILITIES:
Accounts payable, including related parties 1,416,414 (5,501,900) (1,467,890)
Advances received 4,838,504 8,050,180 31,465
Deferred revenue (33,680,432) (15,898,319) (4,541,878)
Income taxes payable 73,842 (737,808) (367,986)
Other current liabilities 899,916 (667,213) 668,196
---------------- ---------------- ----------------
Total adjustments 8,888,598 (1,737,534) 2,247,958
---------------- ---------------- ----------------
Net cash provided by operating activities 16,610,964 4,258,148 5,244,975
---------------- ---------------- ----------------
CASH FLOWS PROVIDED BY (USED FOR) INVESTING ACTIVITIES:
Proceeds from sale of property and equipment -- -- 82,699
Purchase of property and equipment (2,941,327) (1,457,331) (3,427,638)
Net (increase) decrease in lease deposits and
other assets (2,331,190) (733,864) 491,756
---------------- ---------------- ----------------
Net cash used for investing activities (5,272,517) (2,191,195) (2,853,183)
---------------- ---------------- ----------------
CASH FLOWS USED FOR FINANCING ACTIVITIES:
Fractional share liquidation (4,799) -- --
Dividends paid -- (947,270) (925,211)
---------------- ---------------- ----------------
Net cash used for financing activities (4,799) (947,270) (925,211)
---------------- ---------------- ----------------
EFFECTS OF EXCHANGE RATE 2,688,066 1,476,487 (664,349)
---------------- ---------------- ----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 14,021,714 2,596,170 802,232
CASH AND CASH EQUIVALENTS, beginning of year 14,313,063 11,716,893 10,914,661
---------------- ---------------- ----------------
CASH AND CASH EQUIVALENTS, end of year $ 28,334,777 $ 14,313,063 $ 11,716,893
=============== =============== ===============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 11,130 $ 1,780 $ 5,375
=============== =============== ===============
Income taxes paid $ 2,188,171 $ 3,073,207 $ 3,271,971
=============== =============== ===============
The accompanying notes are an integral part of these consolidated financial statements.
F-5
PPOL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2004, 2003 AND 2002
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION:
PPOL, Inc. ("PPOL" or the "Company" or "we") (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.
Sales of MOJICO hardware, Pan Pacific Online subscriptions and
other on-line services, excluding 2004 consulting revenues
which are not expected to recur, were as follows:
Year Ended
March 31, MOJICO Online Consumer
Hardware Subscriptions Products Total
2004 $100,077,710 $ 15,443,206 $ 20,819,495 $136,340,411
2003 $103,809,418 $ 14,012,938 $ 17,163,468 $134,985,824
2002* $103,978,519 $ 12,397,101 $ 13,537,232 $129,912,852
* - Restated. See Note 10.
Effective 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 7 to 1 reverse stock split. All share data
presented in these financial statements have been affected for
the reverse stock split.
PPOL was obligated to and did purchase the fractional shares
that resulted from the reverse stock split at a price equal to
the fractional share times the opening bid price of PPOL's
shares on October 14, 2003 (the date the shares became listed
on the National Association of Securities Dealers' OTC
Bulletin Board). Total consideration paid for these fractional
shares amounted to $4,799.
On August 15, 2002, AJOL Co., LTD. ("AJOL") was acquired by
PPOL in a transaction accounted for as a recapitalization of
AJOL. AJOL issued 899,746 shares (post split) of its common
stock for all of the issued and outstanding common stock of
PPOL. Prior to the merger PPOL had no business activity, and
thus pro-forma information as though the Company's had been
combined for all periods presented has not been provided. For
legal purposes, PPOL is the acquirer; for accounting purposes,
AJOL has been treated as the acquirer. Accordingly, AJOL is
presented as the continuing entity, and the historical
financial statements are those of AJOL.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of
the Company, PPOL, Inc., and its wholly owned subsidiary,
AJOL, Inc. All significant intercompany balances and
transactions have been eliminated upon consolidation.
F-6
PPOL, INC.
NOTES TO CONSOLDIATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2004, 2003 AND 2002
BASIS OF PRESENTATION:
The Company maintains its records and prepares its financial
statements in accordance with accounting principles generally
accepted in Japan. Certain adjustments and reclassifications
have been incorporated in the accompanying financial
statements to conform to accounting principles generally
accepted in the United States of America ("U.S. GAAP"). These
adjustments were not recorded in the statutory books of
account. The principal adjustments relate to accounting for:
(1) revenue and related cost adjustments, (2) compensated
absences and (3) deferred assets.
RECLASSIFICATIONS:
Certain reclassifications have been made to the prior period
consolidated financial statements in order to conform to the
current period presentation. These reclassifications did not
have any effect on previously reported net income or
shareholders' deficit.
TRANSLATION OF FOREIGN CURRENCY
The Company's functional currency is the Japanese Yen and its
reporting currency is the United States Dollar. The Company
translates the foreign currency financial statements in
accordance with the requirements of Statement of Financial
Accounting Standards ("SFAS") No. 52," Foreign Currency
Translation." Assets and liabilities are translated at the
exchange rate as of the respective balance sheet dates and
related revenues and expenses are translated at average
exchange rates in effect during the period. Resulting
translation adjustments are recorded as a separate component
in shareholders' equity (deficit). Foreign currency
transaction gains and losses are included in determining
comprehensive income.
USE OF ESTIMATES:
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ significantly from those estimates. The most
significant accounting estimates inherent in the preparation
of the Company's financial statements include estimates as to
the appropriate carrying value of certain assets and
liabilities which are not readily apparent from other sources,
primarily deferred costs and deferred revenue balances,
allowance for doubtful accounts and allowance for obsolete
inventory.
CASH AND CASH EQUIVALENTS:
Cash and cash equivalents include all highly liquid
investments, generally with original maturities of three
months or less, that are readily convertible to known amounts
of cash and are so near maturity that they present
insignificant risk of changes in value because of changes in
interest rates.
F-7
PPOL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2004, 2003 AND 2002
ACCOUNTS RECEIVABLE:
The Company provides an allowance for doubtful accounts equal
to the estimated uncollectible amounts. The Company's estimate
is based on historical collection experience and a review of
the current status of trade accounts receivable.
FINANCIAL INSTRUMENTS:
The carrying amounts of the Company's financial instruments,
which include cash and cash equivalents, trade accounts
receivable, accounts payable, and advance payments approximate
their fair values as of March 31, 2004 and 2003.
DEPENDENCY ON A MAJOR SUPPLIER:
The Company is dependent on a third-party manufacturer to
produce all of its MOJICO hardware. The Company is also
dependent on this third-party manufacturer to provide the
MOJICO on a timely basis and on favorable pricing terms. In
November 2003, the Company entered into a one year agreement
with this manufacturer to secure the supply of MOJICOs. The
agreement is renewable for subsequent one year periods unless
advance notice of termination is served by either party. The
Company believes that its relationship with this manufacturer
is satisfactory.
ADVANCE PAYMENTS:
Advance payments are prepayments to a specific vendor by the
Company for the MOJICO product. During the year ended March
31, 2003, an advance payment of 60% of the purchase price was
paid to this specific vendor prior to the shipment of the
MOJICO product. The Company changed vendors in fiscal 2004
whereby the advance payment is no longer required.
INVENTORIES:
Inventories, consisting of purchased merchandise for resale,
are valued at the lower of cost (which is determined by the
weighted average method) or market, including provisions for
obsolescence commensurate with known or estimated exposures.
Inventories are shown net of an allowance for obsolescence of
$130,757 and $401,636 as of March 31, 2004 and 2003,
respectively.
F-8
PPOL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2004, 2003 AND 2002
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost. Depreciation is
computed using the straight line and declining-balance methods
at rates based on the estimated useful lives of the related
assets. The estimated useful lives for leasehold improvements
range from 3 to 15 years, which approximate the life of the
leases, while that for equipment was 2 to 3 years. Maintenance
and repairs, including minor renewals and betterments, are
expensed as incurred.
STOCK-BASED COMPENSATION
The Company grants stock options with an exercise price equal
to at least the fair value of the stock at the date of grant.
The Company has elected to continue to account for its
employee stock-based compensation plans using an intrinsic
value-based method of accounting prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" (APB 25) and related Interpretations. Under APB
25, because the exercise price of the Company's employee stock
options equals or exceeds the market price of the underlying
stock on the date of grant, no compensation expense is
recognized.
The Company has adopted only the disclosure provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation." It applies
Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related
interpretations in accounting for its Stock Option Plan and
does not recognize compensation expense for its Stock Option
Plan other than for restricted stock and options issued to
outside third parties. If the Company had elected to recognize
compensation expense based upon the fair value at the grant
date for awards under the Stock Option Plan consistent with
the methodology prescribed by SFAS No. 123, the Company's net
income and income per share would have been affected by a
nominal amount; thus the associated pro forma net income and
pro forma net income per share disclosures have been excluded.
The Company uses the Black-Scholes option valuation model. The
Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no
vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective
assumptions including the expected stock price volatility.
Because the Company's employee stock options have
characteristics significantly different from those of traded
options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of
employee stock options.
F-9
PPOL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2004, 2003 AND 2002
COMPUTER SOFTWARE:
The Company follows the guidance in Statement of Position
("SOP") 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use". SOP 98-1 requires
that entities capitalize certain internal-use software costs
once certain criteria are met. Under SOP 98-1, overhead,
general and administrative and training costs are not
capitalized. Capitalized software costs are being amortized on
a straight-line basis principally over 5 years. The Company
reviews the carrying value of Computer Software on a quarterly
basis or whenever events and circumstances indicate that the
carrying value of an asset may not be recoverable.
ADVANCES RECEIVED:
Advances received represent the balance of customer receipts
prior to shipment. Upon shipment, the balances transfer to
deferred revenue where it then is amortized into revenue.
IMPAIRMENT OF LONG-LIVED ASSETS:
The Company accounts for the impairment of long-lived assets
in accordance with SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." The statement
provides a single accounting model for long-lived assets to be
disposed of. New criteria must be met to classify the asset as
an asset held-for-sale. This statement also focuses on
reporting the effects of a disposal of a segment of a
business.
REVENUE RECOGNITION:
Revenue from MOJICO product sales is recognized over the
weighted average customer relationship period of three years.
Revenue from sales of annual online subscription services to
Pan Pacific Online is recognized over one year. The revenue
and associated costs deferred for revenue recognition purposes
are recorded as deferred revenue and deferred costs,
respectively. Deferred costs are comprised of costs of the
MOJICO hardware and distributors incentive commissions.
Deferred costs are directly related to deferred revenues.
Deferred costs are amortized into income over the weighted
average customer relationship period of three years or the
online subscription period of one year, as applicable.
Revenue from other on-line services provided through Pan
Pacific Online Services is recognized upon the delivery of
underlying products, including Kamome brand products, or
services. We also generate commissions from ticket sales to
tours, events and concerts which our Pan Pacific Online
subscribers can purchase through the Pan Pacific Online
network.
In connection with its initial filing of Form 10 in November
2002 and subsequent discussions of issues with the Staff of
the Securities and Exchange Commission, the Company changed
its accounting for the period of recognition of deferred
revenue for product and related services and related costs to
a three year period.
F-10
PPOL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2004, 2003 AND 2002
SEGMENT INFORMATION:
The Company currently operates in one segment. Sales of the
MOJICO product, sales of the Pan Pacific Online Services that
represents sales of online subscriptions services which
enables access to the Company's facsimile based network and
database, and sales of the granting of a distributor license
are considered as a bundled transaction for revenue
recognition purpose. Each of the Company's products and
services are dependent upon one another. The MOJICO hardware
can only be operated through the use of the Pan Pacific Online
Services; those services are not useable without the MOJICO
hardware. Because of the interdependencies, the Company is
considered to operate in one segment.
RESEARCH AND DEVELOPMENT EXPENSE:
Research and development costs are charged to expense when
incurred. Research and development expenses included in cost
of sales for the years ended March 31, 2004, 2003 and 2002
were $1,653,331, $300,691 and $1,543,861, respectively.
SHIPPING AND HANDLING COSTS:
Shipping and handling costs are included in selling, general
and administrative expenses. The amount of shipping and
handling costs for the fiscal years ended March 31, 2004, 2003
and 2002 was $1,121,323, $1,177,638 and $1,086,102,
respectively.
ADVERTISING COSTS:
Advertising costs are expensed as incurred. Advertising
expenses for the years ended March 31, 2004, 2003 and 2002
amounted to $6,392, $10,596 and $29,150, respectively.
PRODUCT WARRANTY COSTS:
AJOL, the Company's wholly owned subsidiary, sells MOJICO
units to customers along with a repair or replacement warranty
for one full year from the date of purchase. Warranty costs
are expensed as incurred due to their immaterial nature to
financial statements taken as a whole.
INCOME TAXES:
Income taxes are provided based on the asset and liability
method of accounting pursuant to SFAS No. 109, "Accounting for
Income Taxes". Deferred income taxes are recorded to reflect
the tax consequences on future years of differences between
the tax basis of assets and liabilities and their financial
reporting amounts at year-end. These deferred taxes are
measured by applying currently enacted tax laws.
COMPREHENSIVE INCOME:
SFAS No. 130, "Reporting Comprehensive Income," establishes
standards for the reporting and display of comprehensive
income and its components in the consolidated financial
statements. Other comprehensive income, and cumulative other
comprehensive income, for the Company for the years ended
March 31, 2004, 2003 and 2002 was primarily from the effects
of foreign currency translation adjustments.
NET INCOME PER SHARE:
The Company reports both basic net income per share, which is
based on the weighted average number of common shares
outstanding and diluted net income per share, which is based
on the weighted average number of common shares outstanding
and dilutive potential common shares.
F-11
PPOL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2004, 2003 AND 2002
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
In January 2003, the FASB issued Interpretation No. 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. During October 2003, the FASB issued 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 such variable interest entity in accordance with FIN
46. On December 24, 2003, the FASB issued FASB Interpretation
No. 46 (Revised December 2003), Consolidation of Variable
Interest Entities, (FIN-46R), primarily to clarify the
required accounting for interests in variable interest
entities. FIN-46R replaces FIN-46, Consolidation of Variable
Interest Entities, that was issued in January 2003. FIN-46R
exempts certain entities from its requirements and provides
for special effective dates for entities that have fully or
partially applied FIN-46 as of December 24, 2003. In certain
situations, entities have the option of applying or continuing
to apply FIN-46 for a short period of time before applying
FIN-46R. While FIN-46R modifies or clarifies various
provisions of FIN-46, it also incorporates many FASB Staff
Positions previously issued by the FASB. The adoption of this
pronouncement did not have a material effect on the financial
statements of the Company.
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. Adoption of this Statement did not 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
F-12
PPOL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2004, 2003 AND 2002
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONT.):
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. Adoption of this Statement
did not have a material effect on the financial statements.
In December 2003, the Securities and Exchange Commission
("SEC") issued Staff Accounting Bulletin ("SAB") No. 104,
"Revenue Recognition." SAB 104 supersedes SAB 101, "Revenue
Recognition in Financial Statements." SAB 104's primary
purpose is to rescind accounting guidance contained in SAB 101
related to multiple element revenue arrangements, superseded
as a result of the issuance of EITF 00-21, "Accounting for
Revenue Arrangements with Multiple Deliverables."
Additionally, SAB 104 rescinds the SEC's Revenue Recognition
in Financial Statements Frequently Asked Questions and Answers
("the FAQ") issued with SAB 101 that had been codified in SEC
Topic 13, Revenue Recognition. Selected portions of the FAQ
have been incorporated into SAB 104. While the wording of SAB
104 has changed to reflect the issuance of EITF 00-21, the
revenue recognition principles of SAB 101 remain largely
unchanged by the issuance of SAB 104, which was effective upon
issuance. The adoption of SAB 104 did not impact 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
adoption of this pronouncement did not have a material impact
to the Company's financial statements.
F-13
PPOL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2004, 2003 AND 2002
(2) PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
Year ended Year ended
March 31, 2004 March 31, 2003
-------------- --------------
Leasehold improvements $ 292,922 $ 256,162
Office equipment 3,116,689 3,408,521
Software costs 21,598,920 16,600,424
------------- -------------
25,008,531 20,265,107
Less: accumulated depreciation
and amortization 16,312,899 12,845,022
------------- -------------
Property and equipment, net $ 8,695,632 $ 7,420,085
============= =============
Depreciation and amortization of property and equipment totaled
$2,507,399, $1,668,718 and $2,704,124 for the years ended March 31,
2004, 2003 and 2002, respectively.
(3) LINE OF CREDIT:
On March 31, 2004 and 2003, the Company had a $2,879,000 and
$2,540,000, respectively, line of credit with its bank which accrues
interest at 1.09% above Japan's money market rate. There were no
outstanding balances as of March 31, 2004 and 2003. The line of credit
expires on August 31, 2004.
(4) INCOME TAXES:
Income taxes imposed by the national, prefecture and municipal
governments of Japan resulted in a normal statutory tax rate of
approximately 42.1% for the fiscal years ended March 31, 2003 and 2002.
In fiscal year 2004, new Japanese legislation has changed rates
effective for the year ending March 31, 2005. The deferred tax assets
expected to be reversed in or after the year ending March 31, 2005 are
calculated at the new effective tax rate of 40.7%.
Under the Japanese tax law, the parent PPOL, Inc. is not considered a
part of the consolidated company. Therefore, the tax provision is based
almost entirely on the stand-alone Japanese operating entity.
A reconciliation between the statutory tax rate and the effective
income tax rate is as follows:
Year ended Year ended Year ended
March 31, 2004 March 31, 2003 March 31, 2002
-------------- -------------- --------------
(Restated. Note 10)
Normal statutory tax rate 40.7% 42.1% 42.1%
Entertainment and other non-
deductible expenses 3.6 7.3 15.3
Other 2.6 2.4 (0.1)
------------ ------------ ------------
Effective tax rate 46.9% 51.8% 57.3%
============ ============ ============
F-14
PPOL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2004, 2003 AND 2002
(4) INCOME TAXES (CONT.):
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets are as follows:
Year ended Year ended
March 31, 2004 March 31, 2003
----------------- -----------------
Deferred tax assets (liabilities):
Deferred revenue $ 54,443,244 $ 62,248,833
Deferred cost (40,772,121) (47,147,402)
Excess of accrued bonus 190,202 151,508
Resort membership admission fees 255,384 224,293
Accrued compensated absences 139,347 75,826
Excess depreciation and amortization 95,067 321,913
Inventory write-down 53,205 169,964
Others 557,291 268,742
----------------- -----------------
Total net deferred tax assets $ 14,961,619 $ 16,313,677
================= =================
Management believes that it is more likely than not that all of the
deferred tax assets will be realized through future earnings, tax
planning or future reversals of existing temporary differences.
Accordingly, no valuation allowance was recorded as of March 31, 2004
and 2003.
(5) RELATED PARTY TRANSACTIONS:
In April 1995, AJOL entered into an agreement to act as an exclusive
sales agent of MOJICO with Forval Corp. ("Forval") (the Company's
parent). In the normal course of business, the Company purchased MOJICO
products, which were manufactured by Funai Electric, Co. ("Funai") (a
former shareholder of the Company), from Forval and made royalty
payments based upon the aforementioned agreement. In March 2000, the
Company purchased the patent rights relating to MOJICO from Forval for
$252,455 and the aforementioned license agreement was revoked. In March
2001, the Company entered into a contract to purchase MOJICO directly
from Funai. In March of 2002, Funai liquidated its entire equity
interest in AJOL. Accordingly, transactions with Funai subsequent to
March 31, 2002 are no longer considered related party transactions.
PPOL entered into separate agreements with Forval and Leo Global Fund,
which collectively hold approximately 94% the Company's common stock,
in which PPOL was to provide certain consulting services during fiscal
2003. As provided for in the agreements, PPOL received a prepayment of
$483,858 from Forval and Leo Global Fund in fiscal 2003. Since the
Company did not complete the consulting services called for in the
agreements prior to March 31, 2003, the payments received were included
in "deferred revenue," as a liability, at March 31, 2003. The
consulting services were completed in fiscal 2004 at which time the
consulting revenues were recognized. There is no assurance that PPOL
will receive such projects from Forval and Leo Global Fund in the
future.
F-15
PPOL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2004, 2003 AND 2002
(5) RELATED PARTY TRANSACTIONS (CONT.):
The Company also sub-leased its office space in Japan from Forval
through March 31, 2003. The following summarize amounts due from or to
Forval and Funai and related transaction amounts:
Year ended Year ended Year ended
March 31, 2004 March 31, 2003 March 31, 2002
-------------- --------------- --------------
Due from Forval:
Lease deposit - $ 606,852 $ 540,246
Due from Funai - advance payment n/a n/a $ 1,987,008
Due to Forval:
Accounts payable - $159,800 $ 69,645
Transactions with Forval:
Sales - - $ 8,235
Purchases $67,917 - -
Rental expenses - $ 673,283 $ 717,387
Other - $ 90,175 -
Transactions with Funai:
Purchases
n/a n/a $ 13,978,218
Other
n/a n/a $ 283,091
(6) STOCK OPTIONS:
The Company established a stock option plan in March 2004 (the "2004
Plan"). In accordance with the 2004 Plan, the Company is authorized to
issue incentive stock options and non-qualified stock options for up to
2,000,000 shares of the Company's common stock to employees, directors
and consultants.
A total of 1,220,000 options were granted to employees on March 25,
2004 which will vest 100% on March 25, 2006 (options will cliff vest
two years after the grant date) and expire on March 25, 2014 (ten years
after the grant date). A summary of the Company's stock option plan
activity is presented below:
Weighted
Average
Options Exercise Price
------------------ -----------------
Outstanding at March 31, 2003 -- --
Granted 1,220,000 $4.00
Exercised -- --
Forfeited -- --
Expired -- --
----------------- ------------------
Outstanding at March 31, 2004 1,220,000 $4.00
================= ==================
F-16
PPOL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2004, 2003 AND 2002
(6) STOCK OPTIONS (CONT.):
The following table summarizes information about the stock options
outstanding and exercisable at March 31, 2004:
Options Outstanding Options Exercisable
------------------------------------------ --------------------------
Weighted
Fiscal Average Weighted Weighted
Year Range of Remaining Average Average
Options Exercise Contractual Exercise Exercise
Granted Prices Options Life Price Options Price
------------ ----------- ---------- ------------- ----------- --------- -------------
2004 $4.00 1,220,000 10 Years $4.00 -- $ --
---------- ------------- ----------- --------- -------------
1,220,000 10 Years $4.00 -- $ --
========== ============= =========== ========= =============
(7) COMMITMENTS:
The Company entered into a lease agreement for approximately 1,793
square feet of office space in Orange, California for a term of 24
months from October 1, 2002 through September 30, 2004. The lease calls
for an initial annual base rent of approximately $39,800 with a 2.7%
increase after the first 12 months. Additionally, the Company is
responsible for a portion of the building's common area expenses. At
March 31, 2004, the minimum non-cancelable lease payments due are
$20,400 during the fiscal year ending March 31, 2005.
AJOL has leased approximately 11,818 square feet located in the Oval
Building in Tokyo, Japan. This facility it utilized as AJOL's
headquarters and operations center. The lease term is April 1, 2003 to
March 31, 2005 and is automatically renewable for successive two year
periods unless prior notice to terminate the lease is made by either
party. There are no minimum non-cancelable lease payments because this
lease is cancelable subject to a termination fee of approximately
$170,000 in addition to one month's rent and association fees of
approximately $70,000. Total rental payments and association dues under
the terms of the lease agreement are approximately $958,000 for the
fiscal year ended March 31, 2005.
On March 22, 2004, the Company had entered into an employment agreement
with a certain officer of the Company. Under the agreement, in the
event employment is terminated, (other than voluntarily by the employee
or by the Company for cause or upon death or disability of the
officer), the Company is committed to pay certain benefits, including a
monthly severance of $13,000 for the four months following the
termination.
(8) CONCENTRATION OF CREDIT RISK:
Financial instruments that potentially subject the Company to
concentration of credit risk consist of trade receivables and cash and
cash equivalents. The Company collects the significant portion of
payments from the ultimate customers through major credit card and loan
companies. One credit company comprised 42.1%, and 36.2% of accounts
receivable at March 31, 2004 and 2003, respectively. The Company
maintains cash deposits with major Japanese and U.S. banks. The Company
periodically assesses the financial conditions of the institutions and
believes that the risk of any loss is minimal.
F-17
PPOL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2004, 2003 AND 2002
(9) SUBSEQUENT EVENTS:
PPOL entered into an agreement effective May 26, 2004 ("the Agreement")
with Object Innovation, a private company, to make an investment of
$300,000 in the form of purchasing 1,500 shares of Object Innovation's
common stock, representing 15% of Object Innovation's common shares
outstanding, subject to a certain vesting schedule tied to revenues
derived from PPOL's sale of Object Innovation's BridgeGate software.
The Company intends to record this investment under the cost basis
method of accounting. Under the terms of the Agreement, PPOL will
license Object Innovation's BridgeGate software for marketing and
distribution in Japan. The Agreement will be in effect for 5 years and
may be cancelled by either party with 60 days notice. BridgeGate
Software is a Transformation and Exchange Infrastructure (TEI) that
allows disparate data systems to be rapidly connected together to share
data. To cater to the Japanese market, a Japanese version of BridgeGate
will be developed.
AJOL had collected advance payments from distributors. Upon receiving
orders from these distributors for goods or services, the distributor's
account would be charged. On May 28, 2004, AJOL remitted approximately
$16.3 million to Kamome Benefit Club, an unrelated non-profit
organization, to administer the advance payments and orders from
distributors. The effect of this transaction reduced Cash and Advances
Received (a liability) by approximately $16.3 million. All future
advance payments and orders from distributors will be received by the
Kamome Benefit Club and not AJOL.
(10) RESTATEMENT OF PRIOR FINANCIAL INFORMATION:
The Company had conducted an internal review of its revenue recognition
policies under the direction of the Company's then Chief Financial
Officer subsequent to the filing of the fiscal year 2002 financial
statements. The Company sells the 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 had 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 were 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.
F-18
PPOL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2004, 2003 AND 2002
(10) RESTATEMENT OF PRIOR FINANCIAL INFORMATION (CONT.):
The total impact of the adjustments for the year ended March 31, 2002
was as follows:
2002 2002
Restated Original Increase
-------- -------- --------
Product sales and network services $116,375,620 $108,404,000 $7,971,620
Cost of sales 29,943,101 29,924,292 18,809
Distributor incentives 68,694,708 64,447,604 4,247,104
Operating income 7,918,613 4,212,905 3,705,708
Income before income taxes 7,874,371 4,168,679 3,705,692
Income taxes - deferred 1,973,377 -324,894 2,298,271
Net income (loss) 2,997,017 1,589,596 1,407,421
Cumulative foreign currency translation 1,573,736 -186,123 1,759,859
Comprehensive Income 4,570,753 1,403,473 3,167,280
The changes noted above were 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 $0.09 (from $0.09 to $0.18) for
the year ended March 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.
F-19
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED MARCH 31, 2004, 2003 AND 2002
Beginning Additions Non-cash Ending
Balance Charged to (Reductions) Balance
Description Accrual Income or Additions Reversal Accrual
- ----------- ------- ------ ------------ -------- -------
Provision for doubtful receivable
2004 $ 212 $ - $ - $ (212) $ (0)
2003 7,000 212 - (7,000) 212
2002 4,541 7,000 - (4,541) 7,000
Provision for inventory obsolescence
2004 $ 401,636 $ 120,617 $ 30,940 $ (422,436) $ 130,757
2003 852,644 - 32,314 (483,322) 401,636
2002 - 852,644 - - 852,644
F-20