UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Mark one:
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to _______
Commission File Number 000-50065
PPOL, Inc.
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(Exact name of registrant as specified in its charter.)
California 95-4436774
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(State of Incorporation) (IRS Employer Identification No.)
1 City Boulevard West, Suite 870, Orange, California 92868
---------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (714) 221-7250
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock $0.001 par value 17,994,920
----------------------------- -------------------------------
(Class) (Outstanding at September 30, 2003.)
PPOL, Inc.
2003 Quarterly Report on Form 10-Q
Table of Contents
PART 1: FINANCIAL INFORMATION 03
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ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS 03
Consolidated Balance Sheets as of September 30, 2003 and
March 31, 2003 03
Consolidated Statements of Income and Other Comprehensive Income
for the Three Months Ended September 30, 2003 and 2002 04
Consolidated Statements of Income and Other Comprehensive Income
for the Six Months Ended September 30, 2003 and 2002 05
Consolidated Statements of Cash Flows for Six Months Ended
September 30, 2003 and 2002 06
Notes to Consolidated Financial Statements 07
ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 12
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 14
ITEM 4: CONTROLS AND PROCEDURES 20
PART 2: OTHER INFORMATION 21
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ITEM 1: LEGAL PROCEEDINGS 21
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS 21
ITEM 3: DEFAULTS UPON SENIOR SECURITIES 21
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 21
ITEM 5: OTHER INFORMATION 21
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 21
SIGNATURES 22
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CERTIFICATIONS 23
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EXHIBIT: 25
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Exhibit 99 - Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 25
02
Part 1: FINANCIAL INFORMATION
Item 1: Consolidated financial statements
PPOL, INC.
CONSOLIDATED BALANCE SHEETS
September 30, March 31,
2003 2003
-------------- --------------
ASSETS (unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 20,758,881 $ 14,313,063
Trade accounts receivable, net of allowance for
doubtful accounts of $0 and $212 616,188 149,313
Merchandise inventories 987,048 2,920,320
Advance payments 2,497,307 3,491,610
Deferred costs 65,907,745 66,323,721
Deferred income taxes 10,239,108 9,944,929
Prepaid expenses and other current assets 426,201 1,482,110
-------------- --------------
Total current assets 101,432,478 98,625,066
PROPERTY AND EQUIPMENT, net 9,322,381 7,420,085
DEFERRED COSTS 43,518,116 47,563,043
DEFERRED INCOME TAXES 6,113,136 6,368,748
LEASE DEPOSITS, INCLUDING RELATED PARTIES 716,791 744,905
OTHER ASSETS 2,626,939 826,811
-------------- --------------
$ 163,729,841 $ 161,548,658
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, including related parties $ 10,369,949 $ 8,612,478
Advance received 12,342,007 10,929,498
Deferred revenue 88,234,991 88,782,468
Income taxes payable 1,525,848 876,609
Other current liabilities 1,858,465 926,926
-------------- --------------
Total current liabilities 114,331,260 110,127,979
DEFERRED REVENUE 57,520,433 61,535,697
OTHER LIABILITIES 44,799 --
-------------- --------------
Total liabilities 171,896,492 171,663,676
-------------- --------------
SHAREHOLDERS' EQUITY:
Common Stock; $0.001 par value; 100,000,000 shares authorized;
17,994,920 shares issued and outstanding as of
September 30, 2003 (unaudited) and March 31, 2003, respectively 17,995 17,995
Additional paid-in capital 3,367,157 3,367,157
Total other comprehensive income 1,820,993 3,210,834
Accumulated deficit (13,372,796) (16,711,004)
-------------- --------------
Total shareholders' equity (8,166,651) (10,115,018)
-------------- --------------
$ 163,729,841 $ 161,548,658
============== ==============
The accompanying notes are an integral part of these
consolidated financial statements.
03
PPOL, INC.
CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
Three months Three months
Ended Ended
September 30, September 30,
2003 2002
------------- -------------
(Unaudited) (Unaudited)
(Restated)
NET REVENUE:
Product sales and network services $ 28,427,695 $ 30,676,934
Other on-line services 4,874,857 4,444,445
Consulting revenue 483,858 --
------------- -------------
Total 33,786,410 35,121,379
------------- -------------
COSTS AND EXPENSES:
Cost of sales 10,090,801 7,981,315
Distributor incentives 15,455,809 18,265,172
Selling, general and administrative expenses 6,378,653 6,924,677
------------- -------------
Total costs and expenses 31,925,263 33,171,164
------------- -------------
OPERATING INCOME 1,861,147 1,950,215
OTHER (EXPENSE) INCOME, net (46,336) (644)
------------- -------------
INCOME BEFORE INCOME TAXES 1,814,811 1,949,571
------------- -------------
INCOME TAXES:
Current 1,361,866 1,121,725
Deferred (1,714,437) 96,229
------------- -------------
Total income taxes (352,571) 1,217,954
------------- -------------
NET INCOME 2,167,382 731,617
OTHER COMPREHENSIVE GAIN (LOSS)
Foreign currency translation (1,753,081) 5,472,579
------------- -------------
COMPREHENSIVE INCOME $ 414,301 $ 6,204,196
============= =============
NET INCOME PER COMMON SHARE,
Basic and diluted $ 0.12 $ 0.04
============= =============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC AND DILUTED 17,994,920 17,323,839
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
04
PPOL, INC.
CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
Six months Six months
Ended Ended
September 30, September 30,
2003 2002
------------- -------------
(Unaudited) (Unaudited)
(Restated)
NET REVENUE:
Product sales and network services $ 57,007,051 $ 59,245,267
Other on-line services 9,554,690 8,215,354
Consulting revenues 483,858 --
------------- -------------
Total 67,045,599 67,460,621
------------- -------------
COSTS AND EXPENSES:
Cost of sales 17,772,614 15,065,420
Distributor incentives 32,799,173 35,299,136
Selling, general and administrative expenses 12,366,648 12,869,241
------------- -------------
Total costs and expenses 62,938,435 63,233,797
------------- -------------
OPERATING INCOME 4,107,164 4,226,824
OTHER (EXPENSE) INCOME, net 642,317 15,513
------------- -------------
INCOME BEFORE INCOME TAXES 4,749,481 4,242,337
------------- -------------
INCOME TAXES:
Current 1,449,840 1,484,621
Deferred (38,567) (721,412)
------------- -------------
Total income taxes 1,411,273 763,209
------------- -------------
NET INCOME 3,338,208 3,479,128
OTHER COMPREHENSIVE GAIN (LOSS)
Foreign currency translation (1,389,841) (2,527,616)
------------- -------------
COMPREHENSIVE INCOME $ 1,948,367 $ 951,512
============= =============
NET INCOME PER COMMON SHARE,
Basic and diluted $ 0.19 $ 0.20
============= =============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC AND DILUTED 17,994,920 17,323,839
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
05
PPOL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months Six months
Ended Ended
September 30, September 30,
2003 2002
------------- -------------
(Unaudited) (Unaudited)
(Restated)
CASH FLOWS PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Net income $ 3,338,208 $ 3,479,128
------------- -------------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Depreciation and amortization 1,016,122 918,522
Loss on disposition of software 17,589 --
Loss on sales/disposal of property and equipment 62,024 1,058
Deferred income taxes 881,132 (721,412)
Loss on write-off of deposits -- 85,448
Other -- (24,548)
CHANGES IN ASSETS AND LIABILITIES:
(INCREASE) DECREASE IN ASSETS:
Trade accounts receivables (432,221) 1,832,350
Merchandise Inventories 1,988,800 (1,146,802)
Advance payments to related parties 1,134,765 (1,343,763)
Deferred costs 10,615,366 564,897
Prepaid expenses and other 453,878 (55,909)
INCREASE (DECREASE) IN LIABILITIES:
Accounts payable, including related parties 1,179,659 (2,330,635)
Advances received 718,370 3,881,372
Deferred revenue (12,760,486) (2,128,857)
Income taxes payable 563,426 (89,890)
Other current liabilities 827,018 (441,710)
Other liabilities 119,231 --
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Total adjustments 6,384,673 (999,879)
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Net cash provided by operating activities 9,722,881 2,479,249
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CASH FLOWS USED FOR INVESTING ACTIVITIES:
Purchase of property and equipment (4,223,090) (487,245)
Net decrease in lease deposits 675,285 --
Other assets 20,459 (50,314)
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Net cash used for investing activities (3,527,346) (537,559)
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CASH FLOWS USED FOR FINANCING ACTIVITIES
Dividends paid -- (947,270)
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Net cash (used for) financing activities -- (947,270)
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EFFECTS OF EXCHANGE RATE 250,283 1,383,120
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 6,445,818 2,377,540
CASH AND CASH EQUIVALENTS, beginning of period 14,313,063 11,716,893
------------- -------------
CASH AND CASH EQUIVALENTS, end of period $ 20,758,881 $ 14,094,433
============= =============
SUPPLEMENTAL CASH FLOW INFORMATION -
Income taxes paid $ 2,477 $ --
============= =============
Interest paid $ 5 $ 1,765
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
06
PPOL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 (UNAUDITED)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION:
PPOL, Inc. ("PPOL") (formerly Diversified Strategies, Inc.),
incorporated on May 19, 1993 in California, is primarily engaged in
sales of multi-functional telecommunications equipment called MOJICO.
The Company distributes MOJICO throughout Japan through a network
marketing system. The Company has a network of registered distributors
located throughout Japan that introduce purchasers to the Company. The
Company operates in one operating segment.
Using MOJICO, the Company provides original telecommunication services
called "Pan Pacific Online," including MOJICO bulletin board and mail
services. The Company also provides various other on-line services
through Pan Pacific Online such as ticket and mail-order services.
These sales and services are provided in Japan.
On August 15, 2002, the Company amended its articles of incorporation
to increase its authorized shares of common stock from 10,000,000 to
100,000,000, changed its name to PPOL, Inc. and effected a 1 for 7
reverse stock split. All share data presented in these consolidated
financial statements reflect the reverse stock split.
Effective April 1, 2002, AJOL Co., LTD. ("AJOL") was acquired by PPOL
in a transaction accounted for as a reverse merger. The Company, upon
closing of the transaction on August 15, 2002, issued 899,746
shares(post split) of its common stock for all of the issued and
outstanding common stock of AJOL. For legal purposes, PPOL is the
acquirer. For accounting purposes, AJOL has been treated as the
acquirer and accordingly, AJOL is presented as the continuing entity,
and the historical financial statements are those of AJOL. Prior to the
reverse merger PPOL had no business activity, thus pro-forma
information as though PPOL and AJOL had been combined for all periods
has not been provided. AJOL and PPOL are collectively referred to
herein as the "Company."
BASIS OF PRESENTATION:
The unaudited consolidated financial statements have been prepared by
PPOL, Inc. (the "Company"), pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and
footnote disclosures normally present in annual consolidated financial
statements prepared in accordance with accounting principles generally
accepted in the United States of America have been omitted pursuant to
such rules and regulations. The information furnished herein reflects
all adjustments (consisting of normal recurring accruals and
adjustments), which are, in the opinion of management, necessary to
fairly present the operating results for the prospective periods. These
consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and footnotes for the
years ended March 31, 2003 and 2002 included in the Company's Form
10-K. The results of the six months ended September 30, 2003 are not
necessarily indicative of the results to be expected for the full year
ending March 31, 2004.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include accounts of PPOL and its
wholly owned subsidiary AJOL. All significant intercompany balances and
transactions have been eliminated upon consolidation.
07
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (continued)
FORFEITED DISTRIBUTOR INCENTIVES:
In April 2003, the Company amended its policy regarding distributor
incentives to state that distributor incentives are not paid out unless
they exceed a minimum threshold of approximately $30.00. If a
distributor does not attain the minimum incentive threshold within one
year, then the incentives will be forfeited to the Company. During the
six months ending September 30, 2003, the Company has recognized
approximately $714,000 of other income for the write-off of previously
accrued distributor incentives that exceeded the one year threshold at
March 31, 2003. This amount, related to the change in distributor
incentive policy, is included in other income on the statements of
income and comprehensive income for the six months ended September 30,
2003. Distributor incentives outstanding greater than one year for the
three month period ended September 30, 2003 and six month period ended
September 30, 2003 approximated $130,000 and $278,000, respectively.
These amounts are offset against distributor incentives on the
statement of income for the three and six months ended September 30,
2003.
RECENT ACCOUNTING PRONOUNCEMENTS:
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities". This Statement
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging
activities under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities". This Statement amends Statement 133 for
decisions made (1) as part of the Derivatives Implementation Group
process that effectively required amendments to Statement 133, (2) in
connection with other Board projects dealing with financial
instruments, and (3) in connection with implementation issues raised in
relation to the application of the definition of a derivative, in
particular, the meaning of an initial net investment that is smaller
than would be required for other types of contracts that would be
expected to have a similar response to changes in market factors, the
meaning of underlying, and the characteristics of a derivative that
contains financing components. The Company does not anticipate that the
adoption of this Statement will have a material effect on the financial
statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity". This Statement establishes standards for how an issuer
classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an
issuer classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances). Many of those
instruments were previously classified as equity. Some of the
provisions of this Statement are consistent with the current definition
of liabilities in FASB Concepts Statement No. 6, Elements of Financial
Statements. The remaining provisions of this Statement are consistent
with the Board's proposal to revise that definition to encompass
certain obligations that a reporting entity can or must settle by
issuing its own equity shares, depending on the nature of the
relationship established between the holder and the issuer. While the
Board still plans to revise that definition through an amendment to
Concepts Statement 6, the Board decided to defer issuing that amendment
until it has concluded its deliberations on the next phase of this
project. That next phase will deal with certain compound financial
instruments including puttable shares, convertible bonds, and
dual-indexed financial instruments. The Company does not anticipate
that the adoption of this Statement will have a material effect on the
financial statements.
08
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (continued)
FIN 45 In November 2002, the FASB issued FASB Interpretation No. 45,
"Guarantor's accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others" (FIN 45). FIN
45 requires that upon issuance of a guarantee, a guarantor must
recognize a liability for the fair value of an obligation assumed under
a guarantee. FIN 45 also requires additional disclosures by a guarantor
in its interim and annual financial statements about the obligations
associated with guarantees issued. The recognition provisions of FIN 45
are effective for any guarantees issued or modified after December 31,
2002. The disclosure requirements are effective for financial
statements of interim or annual periods ending after December 15, 2002.
The adoption of FIN45 did not have a material effect on the Company's
financial position, results of operations, or cash flows.
In January 2003, the FASB issued 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. The consolidation
requirements of Interpretation 46 apply immediately to variable
interest entities created after January 31, 2003. The consolidation
requirements apply to older entities in the first fiscal year or
interim period beginning after June 15, 2003. Certain of the disclosure
requirements apply in all financial statements issued after January 31,
2003, regardless of when the variable interest entity was established.
The Company does not expect the adoption to have a material impact to
the Company's financial position or results of operations.
During October 2003, the FASB issued Staff Position No. FIN 46
deferring the effective date for applying the provisions of FIN 46
until the end of the first interim or annual period ending after
December 31, 2003 if the variable interest was created prior to
February 1, 2003 and the public entity has not issued financial
statements reporting that variable interest entity in accordance with
FIN 46. The FASB also indicated it would be issuing a modification to
FIN 46 prior to the end of 2003. Accordingly, the Company has deferred
the adoption of FIN 46 with respect to VIEs created prior to February
1,2003. Management is currently assessing the impact, if any, FIN 46
may have on the Company; however, management does not believe there
will be any material impact on its consolidated financial statements,
results of operations or liquidity resulting from the adoption of this
interpretation.
(2) RELATED PARTY TRANSACTIONS:
The Company leased the majority of its office space from Forval, its
parent, until March 31, 2003. Forval subsequently returned a lease
deposit to the Company during the three months ended June 30, 2003. The
following summarizes amounts due from or to Forval and related
transaction amounts.
Six months Six months
Ended Ended
September 30, 2003 September 30, 2002
-----------------------------------------
(Unaudited) (Unaudited)
Due from Forval- Lease deposit $ -- $ 588,549
Due to Forval - Accounts payable -- --
Transactions with Forval:
Rental expenses -- 364,262
Other -- 1,253
09
(2) RELATED PARTY TRANSACTIONS: (continued)
PPOL entered into separate agreements with Forval and Leo Global Fund,
its two majority shareholders, in which PPOL is to provide certain
consulting services during fiscal year 2003. Since the Company has
completed the consulting services called for in the agreements in this
quarter, the payments that were included in advances received, at June
30, 2003 for the amount of $483,858 were recognized in this quarter
ending September 30, 2003. There is no assurance that PPOL will receive
such projects from Forval and Leo Global Fund in the future.
(3) RESTATEMENT OF PRIOR FINANCIAL INFORMATION:
The Company had conducted an internal review of its revenue recognition
policies under the direction of the Company's Chief Financial Officer.
The Company sells its MOJICO hardware for approximately $2,900 per unit
and simultaneously charges admission fees of approximately $150 to
customers which afford them the right to be a distributor for one year.
As a result of the review, the Company noted that customers renew and
remain distributors with the Company for an average of 3 years in
total. As such, the Company has revised its revenue recognition policy
on sales of MOJICO units. Revenues and related costs of MOJICO units
are now deferred and recognized over 3 years. The Company previously
recognized revenue from MOJICO sales over a period of 3 months.
Therefore, in connection with this internal review, the financial
results for each of the years ended March 31, 2002, 2001 and 2000 have
been restated. Additionally, the company has restated the three and
nine months ended December 31, 2002 and 2001, the three and six months
ended September 30, 2002 and 2001 and the three months ended June 30,
2002. The total impact of the adjustments as of and for the six months
ended September 30, 2002 is as follows:
September 30, 2002
-------------- -------------- --------------
Restated Original Change
increase
(decrease)
-------------- -------------- --------------
Deferred costs - current $ 68,337,369 $ 9,834,153 $ 58,503,216
Deferred costs - long term 53,230,327 -- 53,230,327
Deferred income taxes - current 10,371,505 2,607,348 7,764,157
Deferred income taxes - long term 7,099,337 722,672 6,376,665
-------------- -------------- --------------
Total assets 168,536,850 42,662,485 125,874,365
============== ============== ==============
Other current liabilities $ 1,323,951 $ 1,532,376 $ (208,425)
Deferred revenues - current 91,164,006 13,988,262 77,175,744
Deferred revenues - long term 68,394,831 -- 68,394,831
-------------- -------------- --------------
Total liabilities 180,368,013 35,005,863 145,362,150
Total other comprehensive income (loss) 4,011,243 (1,450,871) 5,462,114
Retained earnings (accumulated deficit) (19,227,558) 5,722,341 (24,949,899)
-------------- -------------- --------------
Total shareholders' equity (deficit) (11,831,163) 7,656,622 (19,487,785)
Total liabilities and shareholders'
equity (deficit) 168,536,850 42,662,485 125,874,365
============== ============== ==============
10
(3) RESTATEMENT OF PRIOR FINANCIAL INFORMATION: (continued)
Six Months Ended
September 30, 2002
-------------- ------------- -------------
Restated Original Change
increase
(decrease)
-------------- ------------- -------------
Product sales and network services $ 59,245,267 $ 61,464,604 $ (2,219,337)
Cost of sales 15,065,420 15,727,035 (661,615)
Distributor incentives 35,299,136 37,549,511 (2,250,375)
Operating income 4,226,824 3,172,694 1,054,130
Income before income taxes 4,242,337 3,182,960 1,059,377
Income taxes - deferred (721,412) 26,211 (747,623)
Net income 3,479,128 1,672,128 1,807,000
Cumulative foreign currency translation (2,527,616) 311,247 (2,838,863)
Comprehensive (loss) income 951,512 1,983,375 (1,031,863)
============= ============= =============
The changes noted above are entirely attributable to revenue
recognition and associated deferral of costs of product sales and
network service revenues as noted above. The restatement resulted in an
increase in earnings per share of $0.10 (from $0.10 to $0.20) for the
six months ended September 30, 2002. The financial results presented in
this report reflect the restatement of the Company's financial results.
Based on the substantial work done to date, the Company does not expect
any further restatements as a result of its internal review.
(4) FINANCIAL ADVISOR:
The company entered into an agreement with an investment bank, Rodman &
Renshaw (the "Investment Bank"), in connection with the Company's
proposed public listing and financing.
The Company agreed to pay the Investment Bank certain fees as follows:
a. As a retainer, Fifty Thousand Dollars ($50,000) upon execution of
the Agreement, and four (4) monthly installments of Twenty Five
Thousand Dollars ($25,000) will be paid 30 days, 60 days, 90 days,
and 120 days after the execution of the agreement.
b. Upon successful closing of the Company's public listing, (i) 3.0% of
the gross proceeds raised in the form of equity, equity-linked or
convertible securities, (ii) 2.5% of the gross proceeds raised in
the form of non-convertible subordinated debt, and (iii) 2.0% of the
gross proceeds raised in the form of senior debt (including lines of
credit or commitments to fund which are undrawn at closing)
c. As an additional success fee, warrants to purchase an amount equal
to ten percent (10%) of the Company's equity securities (or equity
security equivalents) placed by the Investment Bank. The warrants
will be exercisable for five (5) years and will have an exercise
price of 100% of the actual or applied price per share of the
Company's common stock as determined by the Transaction. The
warrants will also contain customary terms and conditions.
The Investment Bank will be the exclusive financial advisor to the
Company with respect to the Company's public listing and financing for
a period of five (5) months commencing on the date of the Agreement,
subject to the termination provisions. The engagement and the terms
will be renewed automatically, or a month-to-month basis, until the
proposal is successfully completed or until this engagement is
terminated, as described in the Agreement.
(5) INVENTORY WRITE DOWN:
The Company has recorded an expense approximating $539,000 in the
September 30, 2003 quarter for a write down of SF-60 hardware that
remained in inventory. With the introduction of the SF-70 hardware in
August 2003, the Company determined that a certain number of the
remaining SF-60 units were not going to be sold resulting in the write
off.
11
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS:
Certain matters discussed in this Quarterly Report on Form 10-Q are
"forward-looking statements" intended to qualify for the safe harbor
from liability provided by the Private Securities Litigation Reform Act
of 1995. These forward-looking statements can generally be identified
as such because the context of the statement will include words such as
PPOL "believes", "anticipates", "expects", or words of similar import.
Similarly, statements which describe PPOL's future plans, objectives or
goals are also forward-looking statements. Such forward-looking
statements are subject to certain risks and uncertainties which are
described in close proximity to such statements and which could cause
actual results to differ materially from those anticipated as of the
date of this Report. Shareholders, potential investors and other
readers are urged to consider these factors in valuating the
forward-looking statements and are cautioned not to place undue
reliance on such forward-looking statements. The forward-looking
statements included herein are only made as of the date of this Report
and PPOL undertakes no obligation to publicly update such
forward-looking statements to reflect subsequent events or
circumstances, except as required under applicable laws.
OVERVIEW
PPOL, Inc., a California corporation, conducts its business primarily
through its Wholly-owned Japanese subsidiary, AJOL, Ltd., a Japanese
corporation (hereafter, collectively referred to as PPOL or the
"Company.") At the present time, the Company has administrative
functions occurring in California, but is not engaged in substantial
business in the US.
The Company's revenues are derived from the sales of (1) its "MOJICO"
hardware, a multifunctional facsimile based machine with networking
capabilities, (2) subscriptions to PPOL's proprietary "Pan Pacific
Online" interactive database that can only be accessed through its
MOJICO hardware and (3) various consumer products that utilize the
Company's "Kamome" brand.
On August 29, 2003, AJOL, Ltd., a wholly owned subsidiary of PPOL,
Inc., announced the release of its newest version of its MOJICO
flagship product, the SF-70, a multi-functional facsimile -based
machine with L-mode compatible networking capabilities. L-mode is an
Internet portal service and enables access to information services,
transaction services, e-mail and other services.
A. RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2003 AS
COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2002
PRODUCT SALES AND NETWORK SERVICES. For the three months ended
September 30, 2003, overall revenues of this category have declined
approximately $2,249,000 or 7.3% as compared with the second quarter of
2002. Sales declined as a number of prospective customers anticipated
the release of our new product which reduced demand for the SF-60
model.
OTHER ONLINE SERVICE REVENUE. For the three months ended September 30,
2003, revenue increased approximately $430,000 or 9.7%. The increase is
the result of the continuous effort to expand the on-line service
business, which is one of our business goals. The Cube system
(automatic monthly deposit system) contributed to the increase in
mail-order sales.
CONSULTING REVENUES. PPOL entered into separate agreements with Forval
and Leo Global Fund, its two majority shareholders to provide certain
consulting services during fiscal year 2003. In this quarter, the
company recognized consulting revenue of approximately $484,000.
COST OF SALES. For the three months ended September 30, 2003, the
increase in cost of sales, expressed as a percentage of sales, was 7.1%
as compared to the same period of the prior year. Inventory of obsolete
SF-60 hardware was written-down by approximately $539,000 and the new
SF-70 model costs the Company approximately 12% more per unit than the
previous model, resulting in the higher cost of sales percentage.
12
DISTRIBUTOR INCENTIVES. For the three months ended September 30, 2003,
the distributor incentives decreased approximately $2,809,000 or 15.4%,
which in ratio to sales revenue decreased from 52% to 46% compared to
the same period of prior year. Distributor incentive expense increases
or declines based on the associated increase or decline in Product
Sales. Also, in April 2003, the Company amended its distributor
incentive policy to state that the Company would not pay any incentives
less than a minimum threshold of approximately $30.00. If a distributor
does not earn the minimum threshold by the end of one year their
incentives are forfeited to the Company. This change of policy resulted
in an offset of distribution incentives of approximately $130,000 in
this quarter.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. For the three months ended
September 30, 2003, selling, general and administrative expenses have
decreased approximately $546,000 or 7.9% in comparison to the same
period of the prior year. The company is continually focusing efforts
on reducing costs. A significant reason is the reduced sales promotion
costs realized by changing the monthly member magazine to bimonthly
publication, saving the Company approximately $443,000 this quarter.
DEFERRED INCOME TAX BENEFIT AND EXPENSE. Deferred income tax expense
for the three months ended September 30, 2002 was approximately
$96,000. Deferred income tax benefit for the three months ended
September 30, 2003 is approximately $1,714,000. The main reason for
this deferred income tax benefit is due to the large change of deferred
tax assets in dollar amounts caused by relatively large fluctuation of
dollar-Yen exchange rate from the end of the previous quarter to the
end of this quarter.
B. RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2003 AS
COMPARED TO THE SIX MONTHS ENDED SEPTEMBER 30, 2002
PRODUCT SALES AND NETWORK SERVICES. For the six months ended September
30, 2003, overall revenues of this category have declined approximately
$2,238,000 or 3.8%, compared with the same period of 2002. The entire
decline is attributable to the second quarter as described in the
previous section.
OTHER ONLINE SERVICES REVENUE. For the six months ended September 30,
2003, revenues increased approximately $1,339,000 or 16.3% over the
comparable period of the prior year. The increase is the result of the
continuous effort to expand the on-line service business, which is one
of our business goals. Especially, the Cube system (automatic monthly
deposit system) contributed to the increase in mail-order sales. The
mail-order sales in the six months ended September 30, 2002 were
approximately $1,585,000 while it was approximately $2,523,000 in the
six months ended September 2003, which resulted total increase of
approximately $938,000.
CONSULTING REVENUES. PPOL entered into separate agreements with Forval
and Leo Global Fund, its two majority shareholders, in which PPOL is to
provide certain consulting services during fiscal year 2003. In the
six-month period ended September 30, 2003, the company recognized the
revenue of approximately $484,000.
COST OF SALES. For the six months ended September 30, 2003, the cost of
sales increased approximately $2,707,000 or 18.0%, which in ratio to
sales revenue, increased from 22% to 27% in comparison to the same
period of the prior year. Inventory of obsolete SF-60 hardware was
written-down by approximately $539,000 and the new SF-70 model costs
the Company approximately 12% more per unit than the previous model,
resulting in the higher cost of sales percentage.
DISTRIBUTOR INCENTIVES. For the six months ended September 30, 2003,
the distributor incentives decreased approximately $2,500,000 or 7.1%.
In April 2003, the Company amended its distributor incentive policy to
state that the Company would not pay any incentives less than a minimum
threshold of approximately $30.00. If a distributor does not earn the
minimum threshold by the end of one year, their incentives are
forfeited to the Company. The ratio of distributor incentives as a
percentage of net revenue improved from 52.3% to 48.9% for this
six-month period. The absence of incentives for SF60 admission fees is
the main reason for this improvement.
13
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. For the six months ended
September 30, 2003, selling, general and administrative expenses have
decreased approximately $503,000 or 3.9% in comparison to the same
period of the prior year. One of the major reasons is the reduced sales
promotion cost. A significant reason is the reduced sales promotion
costs realized by changing the monthly member magazine to bimonthly
publication, saving the Company approximately $700,000 this period.
Also, the number of distributor events decreased. In the prior year,
there was a Mongolia tour for distributors that cost approximately
$200,000. This tour was eliminated this year.
OTHER (EXPENSE) INCOME, NET. For the six months ended September 30,
2003, the company recognized other income of approximately $642,000. In
the same period of 2002, the company recognized other income of
approximately $16,000. The increase is mainly due to forfeited
distributor incentive income of $714,000 in the first quarter of this
year. Please refer to the forfeited distributor incentives disclosure
contained in NOTE(1).
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents. Cash and cash equivalents totaled
$20,758,881 and $14,313,063 at September 30, 2003 and March 31, 2003,
respectively. Cash provided from operations for the six months ended
September 30, 2003 and 2002 was $9,722,881 and $2,479,249,
respectively. Cash used for investing activities for the six months
ended September 30, 2003 and 2002 was $3,527,346 and $537,559,
respectively. The cash used for investing activity for the quarter
ended September 2003 was primarily for the purchase of property and
equipment. No cash was used for financing activities in the six months
ended September 30, 2003. Cash used for financing activities was
$947,270 for the six months ended September 30, 2002 which was for the
payment of dividends to shareholders. The increase of the cash balance
is due mainly to an increase in MOJICO shipments, of approximately
$8,483,000, for the three-month period ended September 30, 2003 as
compared to the three month period ended March 31, 2003.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results
of Operations discusses the Company's consolidated financial
statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The
preparation of these consolidated financial statements requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses
during the reporting period. On an on-going basis, management evaluates
its estimates and judgments, including those related to revenue
recognition, impairment of long-lived and intangible assets,
depreciation and amortization, financing operations, inventory
valuation, income tax and contingencies and litigation. Management
bases its estimates and judgments on historical experience and on
various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments
about the carrying value of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. The most
significant accounting estimates inherent in the preparation of the
Company's consolidated financial statements include estimates as to the
appropriate carrying value of certain assets and liabilities which are
not readily apparent from other sources. These accounting policies are
described in the notes to the consolidated financial statements for the
years ended March 31, 2003 and 2002 included in our Form 10-K.
Item 3: Quantitative and Qualitative Disclosures about Market Risk
LIMITED OPERATING HISTORY
AJOL has a limited operating history in Japan upon which it can be
evaluated. Any investment in the Company must be considered in light of
the risks, expenses and difficulties encountered by companies in the
early stage of development in new and rapidly evolving markets,
including the risks described herein. There can be no assurances that
AJOL will be successful in addressing these risks.
14
UNPROVEN BUSINESS MODEL
AJOL cannot predict whether or not it will be successful because its
business model is unproven and its market is developing. It is too
early to reliably ascertain market penetration for AJOL's products and
services. If future demand for AJOL's products and services, including,
but not limited to demand for the MOJICO hardware and Kamome brand
products is lower than anticipated, or the costs of attracting
subscribers is higher than anticipated, then AJOL's financial condition
and results from operations will be materially and adversely affected.
FLUCTUATIONS IN OPERATING RESULTS
AJOL's operating results may fluctuate significantly in the future as a
result of a variety of factors, many of which are outside of AJOL's
control. These factors include the demand for the telecommunications
products and services offered by AJOL, introduction of new products or
services by AJOL or its competitors, delays in the introduction or
enhancement of products and services by AJOL or its competitors,
changes in AJOL's pricing policies or those of its competitors, AJOL's
ability to anticipate and effectively adapt to developing markets and
rapidly changing technologies, changes in the mix Japanese vs.
non-Japanese revenue, changes in foreign currency exchange rates, the
mix of products and services sold by AJOL and the channels through
which those products and services are sold, general economic
conditions, and specific Economic conditions in Internet and related
industries. Additionally, in response to evolving competitive
conditions, AJOL may elect from time to time to make certain pricing,
service, marketing or acquisition decisions that could have a material
adverse effect on its financial performance.
FOREIGN CURRENCY (YEN) FLUCTUATIONS
Substantially all of AJOL's revenue and expenses are received and
incurred in Japanese Yen. Variation in foreign exchange rates may
substantially affect AJOL's revenue, expenses, and net income in U.S.
dollar terms. In preparing its consolidated financial statements, the
Company translates revenue and expenses from Yen into U.S. dollars
using weighted average exchange rates. If the U.S. dollar strengthens
relative to the Yen, the Company's reported revenue, gross profits and
net income will likely be reduced. Given the unpredictability of
exchange rate fluctuations, the Company cannot estimate the effect
these fluctuations may have upon future reported results, product
pricing or the Company's overall financial condition.
POOR JAPANESE ECONOMIC CONDITIONS
Economic conditions in Japan have been poor in recent years and may
worsen or not improve. Continued or worsening economic and political
conditions in Japan could further reduce the Company's revenue and net
income.
RELIANCE ON HANDWRITTEN MOJI (CHARACTERS) AS PREFERRED METHOD OF
WRITTEN COMMUNICATIONS
The Company relies on the desire of subscribers and potential
subscribers to use handwritten Moji (characters) as their preferred
method of written communication as an underlying material assumption
for the continuing success of its business. A subscriber's or potential
subscriber's desire to use handwritten Moji (characters) is a matter of
personal preference, which is unpredictable. Any negative changes in
perception by subscribers and potential subscribers as to their desire
to use handwritten Moji (characters) as their preferred method of
written communication, for any reason, including the emergence of new,
different, or alternative forms of written communications, could have a
material adverse effect on AJOL and its business.
15
DEPENDENCE ON NEW SUBSCRIBERS
AJOL's operating results generally depend on revenues received from
sales of the MOJICO product. In the current period, MOJICO sales have
accounted for approximately 75% of AJOL's annual revenue. MOJICO sales
are primarily made to new customers of AJOL. As a result, future
revenues are primarily dependent on AJOL's ability to generate new
customers for its MOJICO hardware and Pan Pacific Online services.
There can be no assurances that AJOL will be able to continue to
generate new subscribers at the rate that it has been able to in the
past, nor that AJOL will be able to generate sufficient new subscribers
to remain profitable. AJOL does not have any substantial historical
basis for predicting the rate of increase in its subscriber base.
DEPENDENCE ON SUBSCRIBERS FOR CONTENT OF NETWORK
The information transmitted to AJOL subscribers via AJOL's information
network Pan Pacific Online is primarily generated by other AJOL's
subscribers. There can be no assurances that AJOL's subscribers will
continue to generate information that other subscribers will find
sufficiently entertaining, useful, or desirable so as to allow AJOL to
profitably market the products and services that provide access to
AJOL's network.
FAILURE OF NEW PRODUCTS AND SERVICES TO GAIN MARKET ACCEPTANCE
A critical component of the Company's business is its ability to
develop new products and services that create enthusiasm among the
Company's distributor force. If any new product or service fails to
gain market acceptance, for any reason including quality problems, this
could harm the Company's results of operations.
LIABILITY FOR CONTENT OF NETWORK
As a provider of messaging and communications services, AJOL may incur
liability for defamation, negligence, copyright, patent or trademark
infringement and other claims based on the nature and content of the
materials transmitted via AJOL's information network. There can be no
assurances that AJOL will be able to effectively screen all of the
content generated by AJOL's subscribers. AJOL may be exposed to
liability with respect to this content. AJOL's insurance may not cover
claims of these types or may not be adequate to indemnify AJOL for all
liability that may be imposed. There is a risk that a single claim or
multiple claims, if successfully asserted against AJOL, could exceed
the total of AJOL's coverage limits. There is also a risk that a single
claim or multiple claims asserted against AJOL may not qualify for
coverage under AJOL's insurance policies as a result of coverage
exclusions that are contained within these policies. Any imposition of
liability, particularly liability that is not covered by insurance or
is in excess of insurance coverage, could have a material adverse
affect on AJOL's reputation, financial condition, and operating
results.
RELIANCE ON EXISTING DISTRIBUTORS AND NEED TO RECRUIT ADDITIONAL
DISTRIBUTORS
The Company depends on subscriber distributors to generate
substantially all of its revenues. To increase its revenue, the Company
must increase the number of and/or the productivity of its
distributors. The Company's distributors may terminate their status as
a distributor at any time. The number of distributors may not increase
and could decline in the future. The Company cannot accurately predict
how the number and productivity of distributors may fluctuate because
the Company relies upon its existing distributors to recruit, train and
motivate new distributors. The Company's operating results could be
harmed if it's existing and new business opportunities and products do
not generate sufficient interest to retain existing distributors and
attract new distributors. The loss of a high-level distributor or a
group of leading distributors in the distributor's network of lower
levels, distributors, whether by their own choice or through
disciplinary actions for violations of Company policies and procedures
could negatively impact the growth of distributors and the Company's
revenue.
16
In addition, the Company's operations in Japan face significant
competition from existing and new competitors. Our operations would
also be harmed if our planned growth initiatives fail to generate
continued interest and enthusiasm among our distributors in this market
and fail to attract new distributors.
DEPENDENCE ON MR. AOTA
The Company is highly dependent upon its President Yoshihiro Aota to
recruit and retain subscribers. Mr. Aota represents the personification
of AJOL. Mr. Aota's talents, efforts, personality and leadership have
been, and continue to be critical to AJOL and the Company's success.
The diminution or loss of the services of Mr. Aota, and any negative
market or industry perception arising from that diminution or loss,
would have a material adverse effect on the Company's business. The
Company is investigating, but has not obtained "Key Executive
Insurance" with respect to Mr. Aota.
One of the Company's business strategies is to reduce its dependence on
Mr. Aota. This will be done through additional external training
courses of employees and flattening of the organization to three
levels, senior management, leaders, general, so more employees get on
the job training from senior management. We have also involved more
staff on strategic planning and product development task teams.
Externally, our distributors have become more knowledgeable and are
making presentations to prospective subscribers. If the Company is
unsuccessful in accomplishing this strategy, and Mr. Aota's services
become unavailable, the Company's business and prospects could be
materially adversely affected. Neither the Company nor AJOL has an
employment agreement with Mr. Aota. If the Company loses Mr. Aota's
services, for any reason, including as a result of Mr. Aota's voluntary
resignation or retirement, the Company's business could be materially
adversely affected.
LOSING SOURCES OF KAMOME PRODUCTS
The loss of any of the Company's sources of Kamome products, or the
failure of sources to meet the Company's needs, could restrict the
Company's ability to distribute Kamome products and harm its revenue as
a result. Further, the Company's inability to obtain new sources of
Kamome products at prices and on terms acceptable to the Company could
harm the Company's results of operations.
COMMENCING FOREIGN OPERATIONS
AJOL is exploring the possibility of commencing business activities in
South Korea, China, and Taiwan. In past years, these nations have
experienced significant economic and/or political instability. If AJOL
commences business activities in these nations, future instability will
have a material adverse effect on AJOL's ability to do business in
these nations and may jeopardize AJOL's investment in establishing
business operations in those countries.
COMPETITION WITH TECHNICALLY SUPERIOR PRODUCTS AND SERVICES
AJOL's products and services utilize the facsimile-like MOJICO hardware
and rely on human personnel to screen and process information for
AJOL's database. AJOL's products and services are much less technically
sophisticated than those offered by other companies offering
interactive telecommunications products and services. This may put AJOL
at a substantial competitive disadvantage with present and/or future
competitors.
INTERNET USAGE RATES AND LONG DISTANCE TELEPHONE RATES
AJOL's subscribers obtain access to AJOL's network via either the
Internet or telephone service. The costs that subscribers incur in
obtaining access to the AJOL network via these channels are beyond the
control of AJOL. Any increase in long distance telephone rates or rates
for accessing the Internet could materially and adversely affect demand
for AJOL's products and services.
17
RELIANCE ON INTERNET AS TRANSMISSION MEDIUM
The Company's future success will depend upon the Company's ability to
route the Company's customers' traffic through the Internet and through
other data transmission media. The Company's success is largely
dependent upon the viability of the Internet as a medium for the
transmission of subscriber related data. There can be no assurance that
the Internet will prove to be a viable communications media, that
document transmission will be reliable, or that capacity constraints
which inhibit efficient document transmission will not develop. The
Internet may not prove to be a viable avenue to transmit communications
for a number of reasons, including lack of acceptable security
technologies, lack of access and ease of use, traffic congestion,
inconsistent quality or speed of service, potentially inadequate
development of the necessary infrastructure, excessive governmental
regulation, uncertainty regarding intellectual property ownership or
lack of timely development and commercialization of performance
improvements.
TECHNOLOGICAL CHANGES OF THE MESSAGING AND COMMUNICATIONS INDUSTRY
The messaging and communications industry is characterized by rapid
technological change, changes in user and customer requirements and
preferences, and the emergence of new industry standards and practices
that could render the Company's existing services, proprietary
technology and systems obsolete.
The Company's success depends, in part, on the Company's ability to
develop new services, functionality and technology that address the
needs of existing and prospective subscribers. If the Company does not
properly identify the feature preferences of subscribers and
prospective subscribers, or if the Company fails to deliver features
that meet their standards, the Company's ability to market the
Company's products and services successfully and to increase revenues
could be impaired. The development of proprietary technology and
necessary service enhancements entail significant technical and
business risks and require substantial expenditures and lead-time. The
Company may not be able to keep pace with the latest technological
developments. The Company may also be unable to use new technologies
effectively or adapt services to customer requirements or emerging
industry standards.
The Company must accurately forecast the features and functionality
required by subscribers and prospective subscribers. In addition, the
Company must design and implement service enhancements that meet
subscriber requirements in a timely and efficient manner. The Company
may not successfully determine subscriber and prospective subscriber
requirements and may be unable to satisfy their demands. Furthermore,
the Company may not be able to design and implement a service
incorporating desired features in a timely and efficient manner. In
addition, if subscribers do not favorably receive any new service
offered by the Company, the Company's reputation could be damaged. If
the Company fails to accurately determine desired feature requirements
or service enhancements or to market services containing such features
or enhancements in a timely and efficient manner, the Company's
business and operating results could suffer materially.
POSSIBLE INADEQUATE INTELLECTUAL PROPERTY PROTECTIONS
The Company's success depends to a significant degree upon the
Company's proprietary technology. The Company relies on a combination
of patent, trademark, trade secret and copyright law and contractual
restrictions to protect the Company's proprietary technology. However,
these measures provide only limited protection, and the Company may not
be able to detect unauthorized use or take appropriate steps to enforce
the Company's intellectual property rights. In addition, the Company
may face challenges to the validity and enforceability of the Company's
proprietary rights and may not prevail in any litigation regarding
those rights. Any litigation to enforce the Company's intellectual
property rights would be expensive and time-consuming, would divert
management resources and may not be adequate to protect the Company's
business.
18
POSSIBLE INFRINGEMENT CLAIMS
The Company could be subject to claims that the Company has infringed
the intellectual property rights of others. In addition, the Company
may be required to indemnify the Company's distributors and users for
similar claims made against them. Any claims against the Company could
require the Company to spend significant time and money in litigation,
pay damages, and develop new intellectual property or acquire licenses
to intellectual property that is the subject of the infringement
claims. These licenses, if required, may not be available at all or on
acceptable terms. As a result, intellectual property claims against the
Company could have a material adverse effect on the Company's business,
prospects, financial conditions and results of operations.
POSSIBLE SYSTEM FAILURE OR BREACH OF NETWORK SECURITY
The Company's operations are dependent on the Company's ability to
protect the Company's network from interruption by damage from fire,
earthquake, power loss, telecommunications failure, unauthorized entry,
computer viruses or other events beyond the Company's control. As
precautions, we utilize distributed processing systems, backup systems,
Internet firewalls, 24/7 installation environment surveillance, and
private power generators as backup. There can be no assurance that the
Company's existing and planned precautions of backup systems, regular
data backups and other procedures will be adequate to prevent
significant damage, system failure or data loss.
Despite the implementation of security measures, the Company's
infrastructure may also be vulnerable to computer viruses, hackers or
similar disruptive problems. Persistent problems continue to affect
public and private data networks, including computer break-ins and the
misappropriation of confidential information. Computer break-ins and
other disruptions may jeopardize the security of information stored in
and transmitted through the computer systems of the individuals and
businesses utilizing the Company's services, which may result in
significant liability to the Company and also may deter current and
potential subscribers from using the Company's services. Any damage,
failure or security breach that causes interruptions or data loss in
the Company's operations or in the computer systems of the Company's
customers could have a material adverse effect on the Company's
business, prospects, financial condition and results of operations.
RELIANCE ON THIRD PARTY ACCESS FOR TELECOMMUNICATIONS
The Company relies on third party to provide its subscribers with
access to the Internet. There can be no assurance that a third party's
current pricing structure for access to and use of the Internet will
not change unfavorably and, if the pricing structure changes
unfavorably, the Company's business, prospects, financial condition and
results of operations could be materially and adversely affected.
EFFECT OF GOVERNMENT REGULATIONS
The Company provides access to its database and services through data
transmissions over public telephone lines and other facilities provided
by telecommunications companies. These transmissions are subject to
regulatory government agencies. These regulations affect the prices
that subscribers must pay for transmission services, the competition
the Company faces from telecommunications services and other aspects of
the Company's market. There can be no assurance that a existing or
future laws, governmental action or rulings will not materially and
adversely affect the Company's operations.
CONTROL BY OFFICERS AND DIRECTORS
AJOL's executive officers, directors and entities affiliated with them,
in the aggregate, beneficially own common stock representing
approximately 95% of the Company.
19
DEPENDENCE ON VENDOR
The MOJICO machine is produced by Funai Electric Co ("Funai") which is
a former shareholder of AJOL. Should Funai become incapable or
unwilling to produce the MOJICO for any reason, we could face a
temporary decline in MOJICO sales until another electronics
manufacturer is sourced and ready to produce the machines. AJOL owns
the patent rights to the MOJICO and the technical production
requirements of the MOJICO can be met by other electronics
manufacturers.
MINORITY SHAREHOLDER STATUS
Forval Corporation and Leo Global Fund, former direct shareholders of
AJOL, hold 59.17% and 35.83% respectively of the Company's common
stock. Acting alone, Forval Corporation, as a majority shareholder, has
significant influence on Company policies. Forval Corporation and Leo
Global Fund, collectively, control 95% of the Company's outstanding
shares, representing 95% of the Company's voting power. As a result,
Forval and Leo Global Fund, acting together, will have the ability to
control the outcome of all matters requiring stockholder approval,
including the election and removal of the Company's entire Board of
Directors, any merger, consolidation or sale of all or substantially
all of the Company's assets, and the ability to control the Company's
management and affairs.
NO LOCK-UP AGREEMENT BETWEEN FORVAL CORPORATION AND LEO GLOBAL FUND
To date, the Company has not entered into a separate lock-up
arrangement with Forval Corporation and Leo Global Fund pursuant to
which these shareholders would agree to be subject to volume and sale
restrictions that will limit their ability to sell shares in addition
to the restrictions set forth under Rule 144. If a suitable lock-up
agreement is not in effect, then Forval Corporation and/or Leo Global
Fund may be eligible to sell a large volume of shares, which could
cause the price of shares to decline.
NO HISTORY AS REPORTING COMPANY
Prior to the effective date of the Company's filing of Form 10, the
Company has never been a public company, subject to the reporting
requirements of the Securities and Exchange Act of 1934, as amended,
and the Company expects that the obligations of being a public company,
including substantial public reporting and investor relations
obligations, will require significant additional expenditures, place
additional demands on the Company's management and may require the
hiring of additional personnel. The Company may need to implement
additional systems in order to adequately function as a reporting
public company. Such expenditures could adversely affect the Company's
financial condition and results of operations.
Item 4: Controls and Procedures
We have established and maintain disclosure controls and procedures and
conclude these controls/procedures are effective based on our
evaluation as of the "Evaluation Date," which is as of the end of the
period covered in the filing of this 10-Q. There were no significant
changes in our internal controls or in other factors that could
significantly affect our internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
20
Part 2: OTHER INFORMATION
Item 1: Legal Proceedings
None
Item 2: Changes in Securities and Use of Proceeds
None
Item 3: Defaults Upon Senior Securities
None
Item 4: Submission of Matters to a Vote of Security Holders
a) PPOL, Inc. held its annual meeting of shareholders on September
25, 2003;
b) The following individuals were elected as directors of PPOL, Inc.
at the annual meeting: Nobuo Takada; Yoshihiro Aota; and Kazushige
Shimizu
c) Mr. Takada received 17,283,121 votes for election as a director;
Mr. Aota received 17,283,121 votes for election as a director; and
Mr. Shimizu received 17,283,121 votes for election as a director.
Additionally, Shareholders approved the appointment of Stonefield
Josephson, Inc. as the independent auditor of PPOL, Inc. for the
fiscal ending March 31, 2004, with a total vote of 17,282,888
shares.
Item 5: Other Information
None
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
99(a) - Certifications pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002;
99(b) - Certifications pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K during the quarter ended September 30, 2003
A Form 8-K was filed on August 19, 2003, under Item 5,
announcing the delay of 10-Q filing deadline of August 19,
2003, for the quarter ended June 30, 2003.
A Form 8-K was filed on August 19, 2003, under Item 5,
regarding the issuance of a press release about the
introduction of its next generation MOJICO unit, the SF-70.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PPOL, Inc.
------------------------------------------
(Registrant)
November 19, 2003 /s/ Nobuo Takada
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Date Nobuo Takada, Chief Executive Officer
November 19, 2003 /s/ Kazushige Shimizu
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Date Kazushige Shimizu, Chief Financial Officer
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