UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(B) OR 12(G) OF
THE SECURITIES EXCHANGE ACT OF 1934
PPOL, Inc.
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(Exact name of the registrant as specified in its charter)
California 95-4436774
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(State or other jurisdiction of (I.R.S. employer
Incorporation or Organization) Identification no.)
One City Boulevard West Suite 870
Orange, CA 92868
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(Address of principal executive offices) (Zip code)
Company's Telephone number, including area code (714) 937-1987.
Securities to be registered pursuant to Section 12(b) of the Act:
Title of each class Names of each exchange on which
to be so registered each class is to be registered
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None None
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Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock
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(Title of Class)
ITEM 1: BUSINESS
A. OVERVIEW
PPOL, Inc., a California corporation (hereafter the "Company" or
"PPOL") is a holding company whose activities are limited to providing
management support services to its wholly owned subsidiary, AJOL Co., Ltd., a
Japan corporation ("AJOL"). AJOL is an acronym for "All Japan On Line." AJOL
does not conduct any business in the U.S.
AJOL generates revenues through the use of a multi-level 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 the Company's
proprietary "Kamome" brand. Additionally, AJOL generates revenues through
subscriptions to MOJICO hardware purchasers to access its on-line fax based
network - "Pan Pacific Online." Pan Pacific Online can only be accessed through
the MOJICO hardware.
THE MOJICO HARDWARE.
AJOL's primary product is a multi-functional facsimile based machine
with networking capabilities that it calls "MOJICO." [See - PRODUCTS AND
SERVICES - MOJICO Hardware.] The MOJICO hardware combines the attributes of a
telephone and fax machine with full I-Mode e-mail and data base search
capabilities. The MOJICO hardware uses a built in liquid crystal monitor
display. AJOL holds the Japanese patent rights on the MOJICO hardware. [See -
PATENT AND TRADEMARKS HELD.]
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 and Katakana, as
well as Kanji. Kanji refers to pictographs that are used extensively 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.
The Company believes 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. The Company's business plan relies on the assumption that subscribers
and potential subscribers believe that handwritten Moji (character) is a
superior form of communication to output typically associated with a computer
keyboard. [See - RISK FACTORS - Reliance on Future Use of Moji (character).]
-2-
AJOL'S NETWORK SERVICES - PAN PACIFIC ONLINE.
AJOL's 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 AJOL's multi-level distribution system. Access to AJOL's 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. [See - AJOL's Network Services.] AJOL actively encourages
subscribers to submit content for the database.
KAMOME 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 through
subscribers. The Kamome brand is granted to 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, 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. [See - PRODUCTS AND SERVICES - Kamome Products.]
MULTI LEVEL DISTRIBUTION SYSTEM.
AJOL sells the MOJICO hardware and Kamome products through a
multi-level network marketing and 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. AJOL refers to its subscribers who sell the MOJICO hardware and/or
Kamome products as "distributors." Unlike traditional distributors in a
multi-level distribution system, AJOL "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 AJOL, which AJOL then fulfills. Payment for AJOL products are paid
directly to AJOL.
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. AJOL pays
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 its purchaser. Rather, the commissionable sales amount is determined solely
by AJOL for each product to yield AJOL 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.
-3-
The Company emphasizes and encourages subscribers to develop personal
relationships among subscribers and between subscribers and non-subscribers as a
vehicle to increase awareness of AJOL and its products. The Company believes
that the subscribers' efforts to create personal relationships among themselves
and with non-subscribers create beneficial word of mouth advertising for AJOL's
products and services. AJOL sponsors social events, which include recreational
events, for its subscribers and their guests throughout Japan to encourage
interaction among subscribers and potential subscribers.
AJOL's President, Mr. Yoshihiro Aota, [See - PPOL's DIRECTORS AND
EXECUTIVE OFFICERS] speaks at approximately one hundred twenty (120) 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 multi level distribution system; and (3)
the benefits of purchasing Kamome brand products through the "Co-op of the 21st
Century." [See - "CO-OP OF THE 21ST CENTURY" Page 9.] Mr. Aota may be viewed as
a motivational speaker who is the personification of AJOL. [See - RISK FACTORS -
Dependence on Mr. Aota.]
B. THE INDUSTRY
The Company believes that AJOL operates 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
AJOL's 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 or subscriberships.
Unlike ISP's, AJOL relies heavily on word of mouth advertising
through its system of multi level distributors. In addition, the Company has
approximately 700 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.
The company is unaware of the percentage of the Japanese population
generally or the percentage of people in the various demographic groups that
engage in multi level sales.
-4-
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.
The Company was formed (under the name Diversified Strategies, Inc.)
pursuant to the Order Confirming Debtors' Joint Plan of Reorganization
(hereafter the "Bankruptcy Court Order") of the United States Bankruptcy Court
for the Central District of California dated November 20, 1992 in the cases of
IN RE SELECTTV OF CALIFORNIA, INC. (hereafter "SelectTV") and IN RE TELSTAR
SATELLITE CORPORATION OF AMERICA (hereafter "Telstar").
Pursuant to the Bankruptcy Court Order, the Company was incorporated
and all of the assets and other property (including all claims and causes of
action that the debtors had the power to assert) of SelectTV and Telstar were
transferred to the Company free and clear of all liens and other claims except
as specifically set forth in the Bankruptcy Court Order. The Bankruptcy Court
Order also forever barred any claims against the Company by the pre-petition
creditors of SelectTV and Telstar that were not filed prior to the date of the
Bankruptcy Court Order (or alternatively 60 days thereafter in the case of
claims less than $200).
Pursuant to the Bankruptcy Court Order, all of the pre-petition
creditors and shareholders of SelectTV and Telstar that were identified in
Bankruptcy Court Order elected to receive, and did receive, in full satisfaction
of their claims against the Company some combination of either (i) common stock,
(ii) convertible preferred stock, or (iii) warrants of the Company. As a result,
all of Select TV's and Telstar's pre-petition creditors and shareholders
surrendered their interests and were converted into equity holders of the
Company.
From the Company's inception, through March 31, 2002, it maintained
its existence, in part, as a "public shell" with no operating business and no
subsidiaries. The Company entered into a Stock Purchase and Business Combination
Agreement ("Agreement"), to be 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 common shares representing 95% of the Company'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 shares on a 1:7 basis. As a result of
the reverse stock split, the Company'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. The Company is obligated to purchase fractional shares that
resulted from the reverse stock split at a price equal to the opening bid price
of the Company's shares upon such shares becoming listed on the National
Association of Securities Dealers' OTC Bulletin Board.
(2) General Development of PPOL's Subsidiary's Business (AJOL).
-5-
The Company's sole 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. (The parent corporation is hereafter 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 whose activities are limited to providing
management support services to its wholly owned subsidiary, AJOL. AJOL is an
acronym for "All Japan On Line."
AJOL generates revenues through the use of a multi-level 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 the Company's
proprietary "Kamome" brand. Additionally, AJOL generates revenues through
subscriptions to MOJICO hardware purchasers to access its on-line fax based
network - "Pan Pacific Online." Pan Pacific Online can only be accessed through
the MOJICO hardware. AJOL does not conduct any business in the U.S.
(1) The MOJICO Hardware.
AJOL's primary product is a multi-functional facsimile based machine
with networking capabilities that it calls "MOJICO". The MOJICO hardware
combines the attributes of a telephone and fax machine with full I-Mode e-mail
and data base search capabilities. The MOJICO hardware uses a built in liquid
crystal monitor display. AJOL holds the Japanese patent rights on the MOJICO
hardware. [See - PATENT AND TRADEMARKS HELD.]
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 and Katakana, as
well as Kanji. Kanji refers to pictographs that are used extensively 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.
-6-
The Company believes 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. The Company's business plan relies on the assumption that subscribers
and potential subscribers believe that handwritten Moji (character) is a
superior form of communication to output typically associated with a computer
keyboard. [See - RISK FACTORS - Reliance on Future Use of Moji Characters.]
AJOL contracts for the manufacture of the MOJICO hardware and then
resells the MOJICO units through its multi-level distribution network. AJOL is
currently marketing the fourth generation version of MOJICO, the SF60. The first
three versions of MOJICO, the SF30, SF40, and SF50 were manufactured under
contract by its then parent corporation, Forval. Effective February 25, 2000,
AJOL contracted with Funai Electric Co., Ltd. for the manufacture of the fifth
generation SF60 model on an OEM basis.
The SF60 differs from previous MOJICO versions in that it connects
users to AJOL's database via the Internet rather than through conventional
telephone lines. The previous versions of MOJICO that utilized telephone lines
required users to incur long distance telephone charges in order to access
AJOL's 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.
Owners of the SF60 model may presently obtain Internet access through
NTT Communications (a Japanese telecommunications company) for approximately
(Y)980 per three hours of use. The NTT fee removes the variance in
telecommunications charges caused by varying long distance rates. As a result,
AJOL expects that telecommunications costs for MOJICO users will now be uniform
throughout Japan. [See RISK FACTORS - Internet Usage Rates and Long Distance
Telephone Rates.]
Because MOJICO is intended to be simple to use, there is very little
difference between the SF60 and previous versions of MOJICO from a user's
perspective. The SF60 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 SF60 connects via the Internet, rather than over the
telephone lines, is not obvious to most users.
AJOL's operating results materially depend on revenues received from
sales of the MOJICO product. In previous years, MOJICO sales have accounted for
up to 78% of AJOL's annual revenue. The price of MOJICO hardware is $2,865(1).
[See - Management Discussion & Analysis.]
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(1) MOJICO hardware is sold in Japanese Yen. The unit price as of March 31,
2002 has been converted into US dollars by applying the prevailing exchange
rate at March 31, 2002, of 1 $US = 132.62. As of March 31, 2002 and to the
date of this filing, the unit price for the MOJICO hardware in Japanese Yen
is 380,000.
-7-
(2) AJOL's Network Services.
AJOL's 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 AJOL's multi-level distribution system. Under Japanese law, sellers of
"services" as opposed to tangible merchandise are generally prohibited from
selling "services" through multi level distribution.
Access to AJOL's 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. [See - AJOL's Network Services.]
AJOL actively encourages subscribers to submit content for the database.
Unlike personal computer based services, AJOL's 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 AJOL's online service. In this sense MOJICO is
similar to a conventional fax machine.
Subscribers of AJOL's on-line service use the MOJICO hardware to
transmit their data to a centralized hub where AJOL receives hard copies. The
hard copies are then manually processed, screened for content, and then input to
a central 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.
AJOL's on-line services include a bulletin board service, a mail
service, and an information exchange service. AJOL's bulletin board service
allows subsribers 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 AJOL subscribers. All subscriber
submissions are screened for content and none are anonymous. AJOL encourages
subscribers to contribute to AJOL's database. At present, there are
approximately 20,000 pages of subscriber submissions in the database. A
subscriber's submission is retained in the database for 3 months at which time
it is deleted unless the subscriber resubmits his or her submission. Subscribers
may also reply to posted ads via this service. Similarly, AJOL's 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.
-8-
(3) Kamome 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 or
through subscribers. The Kamome brand is granted to 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, 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.
AJOL publishes a quarterly magazine to its subscribers introducing
goods manufactured and provided by its subscribers as well as independent third
parties, which have earned "Kamome" brand status. The "Kamome" brand is the AJOL
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 makes recommendations to the president of such goods
that they feel are worthy of becoming "Kamome" brand products.. AJOL's president
personally visits the factories and/or offices for final screening. Qualifying
goods are then featured in the magazines in articles regarding the virtues of
their goods as observed by the president. Subscribers can also write reviews of
Kamome products for submission to AJOL's 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 AJOL's headquarters.
AJOL's intent is to provide its 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. AJOL attempts 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.
"CO-OP OF THE 21ST CENTURY." AJOL obtains lower pricing for Kamome
products through volume purchasing and sells products to subscribers at
favorable prices. AJOL's method of buying and selling of Kamome products is
similar to a mutual benefit "cooperative" or "co-op." Unlike co-op's that
operate on a non-profit basis, AJOL's system is designed to generate profits
for AJOL. 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. AJOL's 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
AJOL subscribers throughout Japan. AJOL refers to its Japan wide co-op model as
creating the "Co-op of the 21st Century." The Company intends to create, through
its "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 multi level distribution
sales of Kamome products. The goal and marketing concept of the Co-op of the
21st Century is to provide value to its subscribers and generate interest for
new AJOL subscriptions and renewals.
-9-
AJOL pays commissions at the rate of 76% of "commissionable sales" of
Kamome products. 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 a margin of 23% of the purchase price paid
by the purchaser, in the aggregate, after deducting commissions paid and cost of
goods sold. In substance, the commissions allow subscribers to acquire Kamome
products below its retail price.
Subscribers are also encouraged to sell Kamome products to
non-subscribers.
E. MULTI LEVEL DISTRIBUTION.
AJOL sells the MOJICO hardware and Kamome products through a
multi-level network marketing and 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. AJOL refers to its subscribers who sell the MOJICO hardware and/or
Kamome products as "distributors." Unlike traditional distributors in a
multi-level distribution system, AJOL "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 AJOL, which AJOL then fulfills. Payment for AJOL products is made
directly to AJOL.
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. AJOL pays
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 its purchaser. Rather, the commissionable sales amount is determined solely
by AJOL for each product to yield AJOL 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.
The Company emphasizes and encourages subscribers to develop personal
relationships among subscribers and between subscribers and non-subscribers as a
vehicle to increase awareness of AJOL and its products. The Company believes
that the subscribers' efforts to create personal relationships among themselves
and with non-subscribers create beneficial word of mouth advertising for AJOL's
products and services. AJOL sponsors social events, which include recreational
events, for its subscribers and their non-subscriber guests throughout Japan to
encourage interaction among subscribers and potential subscribers.
-10-
AJOL conducts approximately 500 training sessions per year for its
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, [See - PPOL's DIRECTORS AND
EXECUTIVE OFFICERS] speaks at approximately one hundred twenty (120) 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 multi level 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. [See - RISK FACTORS - Dependence on Mr. Aota.]
AJOL also provides promotional awards for top producing distributors.
AJOL recently sponsored a trip to Las Vegas for its thirty (30) highest
producing distributors.
There are currently approximately sixty five thousand (65,000)
distributors who are authorized to sell AJOL's products. Of the 65,000
distributors, approximately six thousand (6,000) are considered active
commission earners, and approximately seven hundred (700) of those maintain
storefront businesses displaying AJOL's products 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.
The Company believes that AJOL's 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. The Company
believes that network marketing is an ideal way to market its products because
the use of such products is enhanced by ongoing personal relationships with
other distributors.
Basic demographic information regarding AJOL subscribers is as
follows:
AGE GENDER
--- ------
20's 21% Male 64%
30's 32% Female 36%
40's 22%
50's 18%
over 60 7%
Most subscribers live in rural areas of Japan.
-11-
Each subscriber may use up to an additional 98 different passwords to
access the AJOL database. Subscribers may allocate passwords to family and
friends to access the AJOL network. Thus, the demographics of the population
actually using the AJOL database may be different than presented above. Based
upon information provided by subscribers and password holders, AJOL believes
that multigenerational households use many MOJICO units. The Company believes
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.
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.
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.
F. PATENTS AND TRADEMARKS HELD
The Japan Patent Office issued a patent for MOJICO on December 24,
1998. The date of expiration for this patent is March 2, 2014. A similar patent
was obtained in Taiwan on August 11, 1997. This patent will expire on April 1,
2016. A patent application for MOJICO has also been made in South Korea and was
accepted on February 14, 2002. AJOL anticipates that the South Korean patent
will be effective for 20 years from the date of application.
All three of the above-described patent applications were made by
AJOL's then parent corporation, Forval. Pursuant to an agreement with Forval
dated March 28, 2000, AJOL acquired Forval's patent rights to the MOJICO in
Japan, Taiwan, and South Korea.
The Company currently owns the rights to the following registered
trademarks in Japan: "Acube", "Pan Pacific Online", and "Kamome". Additionally,
the Company owns the registered trademark rights to "Pan Pacific Online" in the
United States.
-12-
G. COMPETITIVE CONDITIONS
To the Company's 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. AJOL is 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.
In addition, 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. Further,
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.
H. RESEARCH AND DEVELOPMENT ACTIVITIES
AJOL conducts research and development activities primarily aimed at
improving the speed and stability of its central information processing systems.
AJOL contracts out its R&D activities to external research laboratories. AJOL's
research and development expenditures for each of the last three fiscal years
are as follows:
R&D Expenditures in R&D Expenditures Converted
JAPANESE YEN INTO US DOLLARS(2)
------------ ------------------
YEAR
2002 (Y)192,730,000 $1,543,861
2001 (Y)136,877,000 $1,239,258
2000 (Y)262,807,000 $2,369,530
The Company expects to introduce the next generation of the MOJICO
hardware in mid 2004. Total R&D costs to develop the next generation hardware
are expected to total approximately $2,403,076(3).
I. ENVIRONMENTAL MATTERS
Japanese law requires that AJOL dispose of returned or damaged MOJICO
units in an environmentally safe manner. AJOL contracts with a licensed company
to provide this service on AJOL's behalf. The cost of the service is not
material to AJOL.
- ---------------
(2) R&D expenditures are incurred in Japanese Yen. For convenience only, the
figures in this table have been converted into US dollars by applying the
fiscal year's average exchange rate on the last day of each respective
fiscal year. These exchange rates are the following: for 2002, 1 $US =
124.84(Y)JPN: for 2001, 1 $US = 110.45(Y)JPN: and for 2000 1 $US =
110.91(Y)JPN.
(3) R&D costs are expected to be incurred in Japanese Yen. For convenience
only, this figure has been converted into US dollars by applying the
prevailing exchange rate on the last day of AJOL's most recent fiscal year
of 1 $US = 124.84(Y)JPN.
-13-
J. EMPLOYEE AND LABOR MATTERS
AJOL currently employs 76 persons on a full-time basis. AJOL also
employs 72 part-time employees and 58 dispatched staff. None of AJOL's employees
is represented by labor unions. AJOL is not a party to any collective bargaining
agreements or labor union contracts. AJOL has not been the subject of any
material strikes or employment disruptions in its history.
The Company has hired an administrative assistant, on a full time
basis, to work in its United States office in Orange, California. None of the
Company's employees is expected to be represented by labor unions. The Company
is not a party to any collective bargaining agreements or labor union contracts.
The Company has not been the subject of any material strikes or employment
disruptions in its history. Additionally, the Company has entered into a
management consulting contract with ECO2, LLC, a Los Angeles, California based
company. Under the terms of the agreement, ECO2, LLC will provide management
consulting services and administrative support to the Company for an initial
term of twelve (12) months commencing September 25, 2002.
K. HEAD OFFICE
AJOL's corporate office is located at the Aoyama Oval Building 6F,
Jingu-mae 5-52-2, Shibuya-ku, Tokyo, Japan 150-0001 (telephone 03-5467-3015).
L. 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. PPOL 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.
(2) PPOL's Subsidiary (AJOL)
For each of the last three fiscal years, substantially all of AJOL's
operations have been conducted in Japan, and AJOL currently has no material
operations in countries other than Japan.
M. RISK FACTORS FOR INVESTORS
Investors contemplating an investment in the Company's common stock
should carefully consider the following risk factors and investment
considerations, each of which is applicable to AJOL's Japanese operations:
-14-
LIMITED OPERATING HISTORY
AJOL has a limited operating history in Japan upon which it can be
evaluated. Any investment in the Company must be considered in light of the
risks, expenses and difficulties encountered by companies in the early stage of
development in new and rapidly evolving markets, including the risks described
herein. The can be no assurances that AJOL will be successful in addressing
these risks.
UNPROVEN BUSINESS MODEL
AJOL cannot predict whether or not it will be successful because its
business model is unproven and its market is developing. It is too early to
reliably ascertain market penetration for AJOL's products and services. If
future demand for AJOL's products and services, including, but not limited to
demand for the MOJICO hardware and Kamome brand products is lower than
anticipated, or the costs of attracting subscribers is higher than anticipated,
then AJOL's financial condition and results from operations will be materially
and adversely affected.
FLUCTUATIONS IN OPERATING RESULTS
AJOL's operating results may fluctuate significantly in the future as
a result of a variety of factors, many of which are outside of AJOL's control.
These factors include the demand for the telecommunications products and
services offered by AJOL, introduction of new products or services by AJOL or
its competitors, delays in the introduction or enhancement of products and
services by AJOL or its competitors, changes in AJOL's pricing policies or those
of its competitors, AJOL's ability to anticipate and effectively adapt to
developing markets and rapidly changing technologies, changes in the mix
Japanese vs. non-Japanese revenue, changes in foreign currency exchange rates,
the mix of products and services sold by AJOL and the channels through which
those products and services are sold, general economic conditions, and specific
economic conditions in Internet and related industries. Additionally, in
response to evolving competitive conditions, AJOL may elect from time to time to
make certain pricing, service, marketing or acquisition decisions that could
have a material adverse affect on its financial performance.
FOREIGN CURRENCY (YEN) FLUCTUATIONS
Substantially all of AJOL's revenue and expenses are received and
incurred in Japanese Yen. Variation in foreign exchange rates may substantially
affect AJOL's revenue, expenses, and net income in U.S. dollar terms. In
preparing its financial statements, the Company translates revenue and expenses
from Yen into U.S. dollars using weighted average exchange rates. If the U.S.
dollar strengthens relative to the Yen, the Company's reported revenue, gross
profits and net income will likely be reduced. For example, in 2001, the
Japanese Yen significantly weakened, which reduced the Company's operating
results on a U.S. dollar reported basis. The Company's 2002 operating results
could be similarly harmed if the Japanese yen weakens from current levels. 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.
-15-
POOR JAPANESE ECONOMIC CONDITIONS
Economic conditions in Japan have been poor in recent years and may
worsen or not improve. Continued or worsening economic and political conditions
in Japan could further reduce the Company's revenue and net income.
RELIANCE ON HANDWRITTEN MOJI (CHARACTERS) AS PREFERRED METHOD OF WRITTEN
COMMUNICATIONS
The Company relies on the desire of subscribers and potential
subscribers to use handwritten Moji (characters) as their preferred method of
written communication as an underlying material assumption for the continuing
success of its business. A subscriber's or potential subscriber's desire to use
handwritten Moji (characters) is a matter of personal preference, which is
unpredictable. Any negative changes in perception by subscribers and potential
subscribers as to their desire to use handwritten Moji (characters) as their
preferred method of written communication, for any reason, including the
emergence of new, different, or alternative forms of written communications,
could have a materially adverse affect on AJOL and its business.
DEPENDENCE ON NEW SUBSCRIBERS
AJOL's operating results generally depend on revenues received from
sales of the MOJICO product. In previous years, MOJICO sales have accounted for
up to 78% of AJOL's annual revenue. MOJICO sales are primarily made to new
customers of AJOL. As a result, future revenues are primarily dependent on
AJOL's ability to generate new customers for its MOJICO hardware and Pan Pacific
Online services. There can be no assurances that AJOL will be able to continue
to generate new subscribers at the rate that it has been able to in the past,
nor that AJOL will be able to generate sufficient new subscribers to remain
profitable. AJOL does not have any substantial historical basis for predicting
the rate of increase in its subscriber base.
DEPENDENCE ON SUBSCRIBERS FOR CONTENT OF NETWORK
The information transmitted to AJOL subscribers via AJOL's
information network Pan Pacific Online is primarily generated by other AJOL's
subscribers. There can be no assurances that AJOL's subscribers will continue to
generate information that other subscribers will find sufficiently entertaining,
useful, or desirable so as to allow AJOL to profitably market the products and
services that provide access to AJOL's network.
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
-16-
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 its 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 level distributors, whether
by their own choice or through disciplinary actions for violations of Company
policies and procedures could negatively impact the growth of distributors and
the Company's revenue.
In addition, the Company's operations in Japan face significant
competition from existing and new competitors. Our operations would also be
harmed if our planned growth initiatives fail to generate continued interest and
enthusiasm among our distributors in this market and fail to attract new
distributors.
DEPENDENCE ON MR. AOTA
The Company is highly dependent upon its President Yoshihiro Aota to
recruit and retain subscribers. Mr. Aota represents the personification of AJOL.
Mr. Aota's talents, efforts, personality and leadership have been, and continue
to be, critical to AJOL and the Company's success. The diminution or loss of the
services of Mr. Aota, and any negative market or industry perception arising
from that diminution or loss, would have a material adverse affect on the
Company's business. The Company is investigating, but has not obtained "Key
Executive Insurance" with respect to Mr. Aota.
One of the Company's business strategies is to reduce its dependence
on Mr. Aota. 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.
-17-
FAILURE OF NEW PRODUCTS AND SERVICES TO GAIN MARKET ACCEPTANCE
A critical component of the Company's business is its ability to
develop new products and services that create enthusiasm among the Company's
distributor force. If any new product or service fails to gain market
acceptance, for any reason including quality problems, this could harm the
Company's results of operations.
LOSING SOURCES OF KAMOME PRODUCTS
The loss of any of the Company's sources of Kamome products, or the
failure of sources to meet the Company's needs, could restrict the Company's
ability to distribute Kamome products and harm its revenue as a result. Further,
the Company's inability to obtain new sources of Kamome products at prices and
on terms acceptable to the Company could harm the Company's results of
operations.
COMMENCING FOREIGN OPERATIONS
AJOL is exploring the possibility of commencing business activities
in South Korea, China, and Taiwan. In past years, these nations have experienced
significant economic and/or political instability. If AJOL commences business
activities in these nations, future instability will have a material adverse
affect on AJOL's ability to do business in these nations and may jeopardize
AJOL's investment in establishing business operations in those countries.
COMPETITION WITH TECHNICALLY SUPERIOR PRODUCTS AND SERVICES
AJOL's products and services utilize the facsimile-like MOJICO
hardware and rely on human personnel to screen and process information for
AJOL's database. AJOL's products and services are much less technically
sophisticated than those offered by other companies offering interactive
telecommunications products and services. This may put AJOL at a substantial
competitive disadvantage with present and/or future competitors.
INTERNET USAGE RATES AND LONG DISTANCE TELEPHONE RATES
AJOL's subscribers obtain access to AJOL's network via either the
Internet or telephone service. The costs that subscribers incur in obtaining
access to the AJOL network via these channels are beyond the control of AJOL.
Any increase in long distance telephone rates or rates for accessing the
Internet could materially and adversely affect demand for AJOL's products and
services.
-18-
RELIANCE ON INTERNET AS TRANSMISSION MEDIUM
The Company's future success will depend upon the Company's ability
to route the Company's customers' traffic through the Internet and through other
data transmission media. The Company's success is largely dependent upon the
viability of the Internet as a medium for the transmission of subscriber related
data. There can be no assurance that the Internet will prove to be a viable
communications media, that document transmission will be reliable, or that
capacity constraints which inhibit efficient document transmission will not
develop. The Internet may not prove to be a viable avenue to transmit
communications for a number of reasons, including lack of acceptable security
technologies, lack of access and ease of use, traffic congestion, inconsistent
quality or speed of service, potentially inadequate development of the necessary
infrastructure, excessive governmental regulation, uncertainty regarding
intellectual property ownership or lack of timely development and
commercialization of performance improvements.
TECHNOLOGICAL CHANGES OF THE MESSAGING AND COMMUNICATIONS INDUSTRY
The messaging and communications industry is characterized by rapid
technological change, changes in user and customer requirements and preferences,
and the emergence of new industry standards and practices that could render the
Company's existing services, proprietary technology and systems obsolete.
The Company's success depends, in part, on the Company's ability to
develop new services, functionality and technology that address the needs of
existing and prospective subscribers. If the Company does not properly identify
the feature preferences of subscribers and prospective subscribers, or if the
Company fail to deliver features that meet their standards, the Company's
ability to market the Company's products and services successfully and to
increase revenues could be impaired. The development of proprietary technology
and necessary service enhancements entail significant technical and business
risks and require substantial expenditures and lead-time. The Company may not be
able to keep pace with the latest technological developments. The Company may
also be unable to use new technologies effectively or adapt services to customer
requirements or emerging industry standards.
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.
-19-
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,
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. 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.
-20-
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 face 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.
MINORITY SHAREHOLDER STATUS
Forval Corporation and Leo Global Fund, former direct shareholders of
AJOL, hold 59.17% and 35.83% respectively of the Company's common stock. [ See -
DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED - Common Stock.] Acting
alone, Forval Corporation, as a majority shareholder, has significant influence
on Company policies. Forval Corporation and Leo Global Fund, collectively,
control 95% of the Company's outstanding shares, representing 95% of the
Company's voting power. As a result, Forval and Leo Global Fund, acting
together, will have the ability to control the outcome of all matters requiring
stockholder approval, including the election and removal of the Company's entire
Board of Directors, any merger, consolidation or sale of all or substantially
all of the Company's assets, and the ability to control the Company's management
and affairs.
NO LOCK-UP AGREEMENT BETWEEN FORVAL CORPORATION AND LEO GLOBAL FUND
To date, the Company has not entered into a separate lock-up
arrangement with Forval Corporation and Leo Global Fund pursuant to which these
shareholders would agree to be subject to volume and sale restrictions that will
limit their ability to sell shares in addition to the restrictions set forth
under Rule 144. If a suitable lock-up agreement is not in effect, then Forval
Corporation and/or Leo Global Fund may be eligible to sell a large volume of
shares, which could cause the price of shares to decline.
NO HISTORY AS REPORTING COMPANY
Prior to the effective date of the Company's filing of Form 10, the
Company has never been a public company, subject to the reporting requirements
of the Securities and Exchange Act of 1934, as amended, and the Company expects
that the obligations of being a public company, including substantial public
reporting and investor relations obligations, will require significant
additional expenditures, place additional demands on the Company's management
and may require the hiring of additional personnel. The Company may need to
implement additional systems in order to adequately function as a reporting
public company. Such expenditures could adversely affect the Company's financial
condition and results of operations.
-21-
N. FORWARD LOOKING STATEMENTS
This Registration Statement on Form 10 ("Registration Statement")
includes forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934 (the "Exchange Act"). These statements are based
on management's beliefs and assumptions, and on information currently available
to management. Forward-looking statements include, but are not limited to, the
information concerning possible or assumed future results of operations of PPOL,
Inc. (hereafter the "Company", the "Company" and/or "PPOL") set forth in Item 2
- - "FINANCIAL INFORMATION - Management's Discussion and Analysis of Financial
Condition and Results of Operations." Forward-looking statements also include
statements throughout this Registration Statement in which words such as
"expect", "anticipate", "intend", "plan", "believe", "estimate", "consider" or
similar expressions are used.
Forward-looking statements are not guarantees of future performance.
They involve risks, uncertainties and assumptions, including, but not limited
to, the risks discussed under the heading "BUSINESS - Risk Factors For
Investors" and elsewhere in this Registration Statement. The Company's future
results and stockholder values may differ materially from those expressed in
these forward-looking statements. Many of the factors that will determine these
results and values are beyond the Company's ability to control or predict.
Investors are cautioned not to put undue reliance on any forward-looking
statements. In addition, the Company does not have any intention or obligation
to update forward-looking statements after the effectiveness of this
Registration Statement, even if new information, future events or other
circumstances have made them incorrect or misleading. For these statements, the
Company claims the protection of the safe harbor for forward-looking statements
contained in Section 21E of the Exchange Act.
ITEM 2: FINANCIAL INFORMATION
AJOL REVENUE 2000 TO 2002
SALES SALES
IN THOUSANDS IN THOUSANDS
OF OF US
JAPANESE YEN DOLLARS(4) PERCENT
------------ ------- -------
YEAR ENDED MARCH 31, 2002
Product Sales and Network Services (Y)13,532,762 $108,404 88.90 %
Other On-Line Products 1,689,939 13,537 11.10
------------- -------- ------
TOTAL (Y)15,222,701 $121,941 100.00 %
============= ========= ======
<FN>
- ----------------
(4) Sales are recorded by AJOL in Japanese yen. The figures in this table have
been converted into US dollars by applying the total year's average
exchange rate of each respective fiscal year. These exchange rates are the
following: for 2002, 1 $US = 124.84 (Y)JPN: for 2001, 1 $US = 110.45(Y)JPN:
and for 2000 1 $US = 110.91(Y)JAP.
</FN>
-22-
YEAR ENDED MARCH 31, 2001
Product Sales and Network Services (Y)14,317,215 $129,625 90.89 %
Other On-Line Products 1,435,669 12,998 9.11
------------- -------- -----
TOTAL (Y)15,752,884 $142,623 100.00 %
============= ======== ======
YEAR ENDED MARCH 31, 2000
Product Sales and Network Services (Y)15,400,511 $138,854 93.65 %
Other On-Line Products 1,043,943 9,412 6.35
------------- -------- -----
TOTAL (Y)16,444,454 $148,266 100.00 %
============= ========= ======
THREE MONTHS ENDED JUNE 30, 2002
Product Sales and Network Services (Y)3,880,717 $ 30,816 89.02 %
Other On-Line Products 478,485 3,999 10.98
------------ -------- ------
TOTAL (Y)4,359,202 $ 34,615 100.00 %
============ ======== ======
THREE MONTHS ENDED JUNE 30, 2001
Product Sales and Network Services (Y)3,276,250 $ 28,662 89.32 %
Other On-Line Products 391,943 3,429 10.68
------------- -------- -----
TOTAL (Y) 3,668,193 $ 32,091 100.00 %
============= ========= ======
THREE MONTHS ENDED JUNE 30, 2000
Product Sales and Network Services (Y) 3,723,564 $ 34,588 92.11 %
Other On-Line Products 318,9623 2,963 7.89
------------- -------- -----
TOTAL (Y) 4,042,526 $ 37,551 100.00 %
============= ======== ======
A. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in connection
with the Company's Financial Statements and the notes thereto and other
financial information included elsewhere in this Registration Statement.
OVERVIEW
The Company was incorporated in California on May 19, 1993. The
Company, 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 the Company.
-23-
The Company did not engage in any significant business activities
prior to its acquisition of AJOL Co., Ltd. ("AJOL"). Such acquisition was
effective April 1, 2002. In connection therewith, the Company changed its name
to PPOL, Inc. Between its date of incorporation and its acquisition of AJOL, the
Company was essentially a "public shell" 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, the Company
had no material assets or liabilities, no revenue, and incurred only immaterial
administrative and franchise tax expenses.
Effective April 1, 2002, the Company acquired one hundred percent of
the issued and outstanding stock of AJOL from AJOL's pre-transaction
shareholders. In exchange for the AJOL shares, the Company 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 the
Company. The holdings of the pre-transaction shareholders of the Company were
diluted by the issuance of the new shares such that immediately after the
transaction, the pre-transaction shareholders of the Company owned five percent
(5%) of the total issued shares. Virtually all of the Company'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. The Company has no sales in the United States. The Company
does not engage in any manufacturing activities, and all of the MOJICO equipment
is manufactured exclusively for the Company by vendors located primarily in
Japan. The MOJICO equipment is currently in its fourth generation of technology
and combines certain attributes of a telephone and fax machine with a liquid
crystal display screen. The MOJICO equipment is paper based in that it allows
users to transmit hand written communication to other subscribers. The Company
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. See
"Risk Factors For Investors."
The Company'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. An important goal
of the Company is to increase the number of subscribers using the Pan Pacific
Online Service by offering 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-60),
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 has not
exceeded the excessive plant-and-equipment investment required for the telecom
infrastructure, high connection fees and subscriber acquisition costs. However,
-24-
AJOL offers its proprietary network service through its "handwritten database"
using the Internet (OCN tie-up). Information dispatch can be performed in
"handwriting" from the terminal of SF60 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. Within the background of AJOL's continued
profitability in the turbulent NSP industry is its close interpersonal contact
with its subscribers.]
BASIS OF PRESENTATION
INACTIVE PERIODS. The Company was inactive as of September 30,1999,
September 30, 2000 and September 30, 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, the Company 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 the Company 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. "GAAP"). AJOL reports its operations as a single
business segment.
PRODUCT SALES, NETWORK SERVICES. Product sales, sales of Pan Pacific
Online subscriptions and the grant 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 $2,865 as of March 31, 2002. The average price for an annual
subscription to Pan Pacific Online, exclusive of the cost of the MOJICO
equipment was $75 for the year ended March 31, 2002. The Company anticipates
that the average cost of the MOJICO equipment and Pan Pacific Online
subscriptions will remain to be $2,865 and $75, respectively, for the
foreseeable future. During the fiscal years ended March 31, 2002, 2001, and
2000, MOJICO unit sales were 35,210, 35,720, and 38,715.
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. The Kamome brand is granted to 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, 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.
-25-
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. They also include other costs that are considered to be
cost of goods sold under generally accepted accounting principles.
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.
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.
-26-
RESULTS OF OPERATIONS
The table below sets forth certain statement of operations data as a
percentage of total revenue for the years ended March 31, 2000, 2001 and 2002.
YEAR ENDED MARCH 31,
2000 2001 2002
---- ---- ----
Revenue
Product Sales, Network Sales 93.7% 90.9% 88.9%
Other On-Line Products 6.3% 9.1% 11.1%
----- ----- -----
Total Revenue 100.0% 100.0% 100.0%
----- ----- -----
Cost of Sales and Expenses
Cost of Sales 23.3% 22.5% 24.5%
Distributor Incentives 54.8% 53.6% 52.9%
Selling, General and Administrative 16.9% 19.1% 19.2%
----- ----- -----
Total Costs of Sales and Expenses 95.0% 95.2% 96.5%
Other Income (Expense) 0.0% 0.2% 0.0%
----- ----- -----
Income Before Taxes 5.0% 5.0% 3.5%
----- ----- -----
Income Taxes 1.7% 2.9% 2.0%
----- ----- -----
Net Income 3.3% 2.1% 1.5%
===== ===== =====
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001
PRODUCT SALES AND NETWORK SERVICES. For the three months ended June 30, 2002,
revenues increased 7.51% over the same period of the prior year. The increase
reflects a sales campaign in May and June of 2002, unusually low performance in
the prior year, reflecting the state of the economy in Japan, offset by the
currency exchange rate. In Japanese yen terms, revenues increased by 18.45%,
which may indicate that a turnaround in the Japanese economy may be under way.
OTHER ON-LINE PRODUCTS. Revenues from other on-line products increased 10.81%
for the three months ended June 30, 2002 over the comparable period of the prior
year and reflect the company's continuing shift of revenues from products with a
higher gross margin. Measured in U.S. currency, sales of other on-line products
increased by 22.08%.
COST OF SALES. For the three months ended June 30, 2002, cost of sales,
expressed as a percentage of sales has declined by .89% vs. the same period of
the prior year and reflects the continuing shift of emphasis of revenues to
Kamome brand products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For the three months ended June
30, 2002, expenses were higher than the comparable period in 2001 by 3.77%. This
was primarily attributable to the Company holding more promotional meetings for
current and prospective members, increased distributor expenses, and offset by
the currency exchange rate. In local currency terms, selling, general and
administrative expenses increased by 14.32%.
-27-
THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000
PRODUCT SALES AND NETWORK SERVICES. For the three months ended June 30, 2001,
product sales and network services revenue declined 17.13% as compared to the
comparable period of 2000. This was a result of large shipments in March 2001
impacting sales in the following period due to a sales campaign in February and
March of 2001 with the introduction of the new SF-60 MOJICO unit in March 2001.
The remaining difference is attributable to currency exchange rate. In local
currency terms, sales declined by 12.01%.
OTHER ON-LINE PRODUCTS. Revenues from other on-line products increased 15.73%
for the three months ended June 30, 2001 over the comparable period of the prior
year and reflect the company's continuing shift of revenues from products with a
higher gross margin. In local currency terms, sales of other on-line products
increased by 22.88%.
COST OF SALES. For the three months ended June 30, 2001, cost of sales,
expressed as a percentage of sales has increased by 0.63% vs. the same period of
the prior year and reflects the shift of emphasis of revenues to Kamome brand
products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. The 8.18% decline for the three
months ended June 30, 2001 over the comparable period of the prior year are
primarily due to a reduction in computer software amortization expenses and
currency exchange rate. Without the changes in the currency exchange rate, the
decline would have been 3.32%.
YEAR ENDED MARCH 31, 2002 COMPARED TO YEAR ENDED MARCH 31, 2001
PRODUCT SALES AND NETWORK SERVICES. For the year ended March 31, 2002, revenues
declined 16.37% from the prior year due primarily to the state of the Japanese
economy. The decline was exacerbated by the negative impact of the currency
exchange rate as MOJICO unit sales declined by only 3.38% from 35,720 to 34,510.
OTHER ON-LINE PRODUCTS. Despite the decline in MOJICO product and network
services revenues, revenues from other on-line products increased 4.15% for the
year ended June 30, 2002 over the comparable period of the prior year and
reflects the company's continuing shift of revenues from products with a higher
gross margin. In local currency terms, sales of other on-line products increased
by 17.71%.
COST OF SALES. For the year ended March 31, 2002, cost of sales, expressed as a
percentage of sales increased by 2.04% vs. the same period of the prior year.
The primary cause is the writeoff of $855,000 in the SF-50 MOJICO units
inventories due to the introduction of the newer and improved SF-60 model.
DISTRIBUTOR INCENTIVES. For the year ended years ended March 31, 2002,
distributor incentives declined was 15.67% as compared to the 3.81% decline in
revenue over the same period. Management attributes this difference to their
aggregate target in line with the decrease in sales and are substantially in
line with the decline in total revenues by 14.50%. The difference is
attributable to service revenues in which distributor incentives are not paid.
-28-
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. The decline of 14.17% in expenses
for the year ended March 31, 2002 over the comparable period of the prior year
is attributable to management staying focused to reduce expenses. Concurrently,
the Company has used such reductions in expenses to hold 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 the company. Thus,
meetings held during the year ended March 31, 2002 exceeded the number held in
the prior year. Management is constantly evaluating its investment in the future
against its current profitability. In local currency terms, selling, general and
administrative expenses declined by 2.99%.
OTHER EXPENSES, NET. During the year ended March 31, 2002, other expenses, net
had a change of approximately $360,000 over the prior year from other income,
net of approximately $313,425 to other expense, net of $44,226. The primary
cause of this change was a reduction in the amount of cash receipts from
unidentifiable sources for the purchase of Kamome products. In Japan, payments
are primarily received via direct wire transfers to the remittee's bank account
and not by check or credit cards as in the United States. When the corresponding
documentation is separately received, the Company matches it to the appropriate
remittance advice from the bank and arranges for the shipment of the related
merchandise. The Company waits for a period of four months for the corresponding
documentation to be received. After the passage of four months, such
unidentified cash receipts are booked to other income. While the Company would
honor subsequent receipt of the corresponding documentation, it has been
extremely rare for the Company to receive corresponding documentation after
three months. Management attributes the decline in such cash receipts during the
past year to the simplification of the corresponding documentation required by
the remitter.
INCOME TAXES. Income taxes, expressed as a percentage of income before income
taxes has increased to 61.87% for the year ended March 31, 2002 as compared to
the prior year's 58.20% primarily from the non-deductible expenses associated
with the Company holding more promotional meetings for current and prospective
members. In local currency terms, this rate would have increased to 57.29% from
48.92%.
YEAR ENDED MARCH 31, 2001 COMPARED TO YEAR ENDED MARCH 31, 2000
PRODUCT SALES AND NETWORK SERVICES. For the year ended March 31, 2001, revenues
declined 6.65% from the prior year due primarily to the state of the Japanese
economy that continued into 2002. The decline was mitigated by 1.09% from the
positive impact of the currency exchange rate as observed by MOJICO unit sales,
which by 7.74% from 38,715 to 35,720.
OTHER ON-LINE PRODUCTS. Despite the decline in MOJICO product and network
services revenues, revenues from other on-line products increased 38.10% for the
year ended March 31, 2001 over the comparable period of the prior year and
reflects the company's continuing shift of revenues from products with a higher
gross margin. In local currency terms, sales of other on-line products increased
by 37.52%.
-29-
COST OF SALES. For the year ended March 31, 2001, cost of sales, expressed as a
percentage of sales declined by 0.79% vs. the same period of the prior year.
Management attributes the decline to revenue mix to higher gross profit
percentage items.
DISTRIBUTOR INCENTIVES. For the year ended March 31, 2001, distributor
incentives decreased 5.94% while decrease in sales were 3.81%. The difference is
attributable to revenues for which the amount of "commissionable sales" [see
"Distributor Incentives" under Basis of Presentation above] was lower than in
the prior year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. The increase of 8.77% in expenses
for the year ended March 31, 2001 over the comparable period of the prior year
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 the company. Thus, more meetings were held in the year
ended March 31, 2001 compared to the prior year. In local currency terms,
selling, general and administrative expenses increased by 8.32%.
OTHER INCOME, NET. The increase in other income, net for the year ended March
31, 2001 over the comparable period of the prior year is primarily attributable
to (1) reduction in disposal of supplies due to changes in government imposed
regulations of approximately $110,000, (2) reduction in net interest expense of
approximately $72,000, and (3) increase in cash receipts from unidentifiable
sources. [See other expense, net under Year ended March 31, 2002 compared to
Year ended March 31, 2001 above.]
INCOME TAXES. Income taxes, expressed as a percentage of income before income
taxes has increased to 58.20% for the year ended March 31, 2001 as compared to
the prior year's 34.83% primarily from the non-deductible expenses associated
with the Company holding more promotional meetings for current and prospective
members and was exacerbated by the currency exchange rate. In local currency
terms, this rate would have increased to 48.92% from 44.99%.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled 1.55 billion (US$11.72 million) at
March 31, 2002, an increase of 183.1 million yen (US$802,233) and decrease of
443.5 million yen (US$899,659), 2001 and 2000, respectively. Cash provided from
operations during 2002 was 665.1 million yen (US$5,300,000) during 2002,
compared with 1,073 million yen (US$9,700,000) and 517,000,000 million yen
(US$4,700,000), in 2001 and 2000, respectively. The Company currently has
available a 300 million yen (US$2.26 million) revolving bank credit facility
that is generally used to finance temporary operating cash requirements.
Management believes that cash flow from operations and the revolving credit
facility will adequately meet its working capital needs for the foreseeable
future.
-30-
NEW FINANCIAL ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued SFAS No. 141, "Business Combinations."
SFAS No. 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. Goodwill and certain
intangible assets will remain on the balance sheet and not be amortized. On an
annual basis, and when there is reason to suspect that their values have been
diminished or impaired, these assets must be tested for impairment, and write
downs may be necessary. The Company adopted SFAS No. 141 on July 1, 2001 with no
material impact to the Company's financial position or results of operations.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 142 changes the accounting for goodwill from an
amortization method to an impairment-only approach. Amortization of goodwill,
including goodwill recorded in past business combinations, will cease upon
adoption of this statement. The Company implemented SFAS No. 142 on April 1,
2001 with no material impact to the Company's financial position or results of
operations.
In October 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which requires companies to record the fair value of a
liability for asset retirement obligations in the period in which they are
incurred. The statement applies to a company's legal obligations associated with
the retirement of a tangible long-lived asset that results from the acquisition,
construction, and development or through the normal operation of a long-lived
asset. When a liability is initially recorded, the company would capitalize the
cost, thereby increasing the carrying amount of the related asset. The
capitalized asset retirement cost is depreciated over the life of the respective
asset while the liability is accreted to its present value. Upon settlement of
the liability, the obligation is settled at its recorded amount or the company
incurs a gain or loss. The statement is effective for fiscal years beginning
after June 30, 2002. The Company does not expect the adoption to have a material
impact to the Company's financial position or results of operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". Statement 144 addresses the
accounting and reporting 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. This statement is effective for fiscal
years beginning after December 15, 2001. The Company does not expect the
adoption to have a material impact to the Company's financial position or
results of operations.
In April 2002, the FASB issued Statement No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This Statement rescinds FASB Statement No. 4, "Reporting Gains and
Losses from Extinguishment of Debt", and an amendment of that Statement, FASB
Statement No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements" and FASB Statement No. 44, "Accounting for Intangible Assets of
Motor Carriers". This Statement amends FASB Statement No. 13, "Accounting for
Leases", to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. The Company does not expect the adoption to have a material impact
to the Company's financial position or results of operations.
-31-
ITEM 3: PROPERTIES
The Company leases a 1,793 square foot 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.
The Company also leases one floor, comprising approximately 10,623
square feet, located in the Oval Building in Tokyo, Japan, from its parent
company, Forval Corporation. This facility is utilized as AJOL's headquarters.
The lease commenced April 1, 2002 and expires March 31, 2004. The lease is
cancelable with six months notice.
The Company also leases one floor, comprising approximately 1,497
square feet, located in the Shibuya Yasuda Building in Tokyo, Japan. This
facility is utilized by AJOL's finance and accounting department. The lease
commenced on February 1, 2001 and expires on March 1, 2003. The lease is
cancelable with six months notice.
ITEM 4: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
A. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
PPOL has issued and outstanding only one class of capital stock
(I.E., common stock). The following tables discloses information regarding the
beneficial ownership of the Company's common stock as of August 15, 2002 by each
person who is known by the Company to beneficially own more than five percent of
the Company's capital stock.
COMMON STOCK
NUMBER OF SHARES OF PERCENT
COMMON STOCK OF
NAME AND ADDRESS OF OWNER BENEFICIALLY OWNED(5) CLASS
- ------------------------- --------------------- -------
Forval Corporation
JBP Oval Building
Jingu-mae 5-52-2, Shibuya-ku
Tokyo 150-0001, Japan 10,647,594 59.17%
Leo Global Fund
Sogo Hirakawa-cho Building 10F
4-12, Hirakawa-cho 1-chome
Chiyoda, Tokyo 102-0093, Japan 6,447,580 35.83%
- -------------
(5) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. The owners listed above have
sole voting and investment power of the shares beneficially owned by them.
-32-
B. SECURITY OWNERSHIP OF MANAGEMENT
The following table discloses information regarding the beneficial
ownership of the Company's common stock, as of August 15, 2002, by the directors
and executive officers of PPOL.
COMMON STOCK
NUMBER OF SHARES OF PERCENT
COMMON STOCK OF
NAME AND ADDRESS OF OWNER BENEFICIALLY OWNED(6) CLASS
- ------------------------- ---------------------- -------
Nobuo Takada, 10th floor,
Sogo Hirakawa-cho Building,
1-4-12 Hirakwa-cho,
Chiyoda-ku,
Tokyo, Japan 102-0093 6,447,580 35.83%(7)
Yoshihiro Aota, 6th floor,
Oval Building, 5-52-2
Jingu-mae, Shibuya-ku,
Tokyo, Japan 150-0001 0 0%
Kazushige Shimizu, 6th floor,
Oval Building, 5-52-2
Jingu-mae, Shibuya-ku,
Tokyo, Japan 150-0001 0 0%(8)
ITEM 5: DIRECTORS AND EXECUTIVE OFFICERS
A. PPOL'S DIRECTORS AND EXECUTIVE OFFICERS
PPOL's directors and executive officers are comprised of the
following persons:
NAME AGE POSITION
---- --- --------
Nobuo Takada 54 Chairman of the Board, Chief Executive
Officer
Yoshihiro Aota 57 Director, President and Chief Operating
Officer
Kazushige Shimizu 57 Director, Chief Financial Officer and
Secretary
- ---------------
(6) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. The owners listed above have
sole voting and investment power of the shares beneficially owned by them.
(7) Includes 6,447,580 shares owned by Leo Global Fund for which Mr. Nobuo
Takada serves as its Chief Executive Officer.
(8) Does not include 10,647,597 shares owned by the Forval Corporation for
which Mr. Kazushige Shimizu serves as a Director.
-33-
(i) Terms of Office
The three PPOL directors listed above each began their term of office
on August 15, 2002. According to PPOL's bylaws, their terms of office extend to
the next annual shareholders meeting of PPOL, to be held in or about July, 2003.
B. PPOL'S SUBSIDIARY'S (AJOL) DIRECTORS AND EXECUTIVE OFFICERS
NAME AGE POSITION
---- --- --------
Yoshihiro Aota 57 President & CEO and Director
Manabu Nakamura 54 Director
Masao Yamamoto 53 Director
(1) Business Experience
NOBUO TAKADA,
Chairman of the Board and Chief Executive Officer of PPOL holds a
B.S. in Economics from Doshisha University and a MBA from Indiana University.
Mr. Takada joined Daiwa Securities in 1970 as a staff analyst in the Research
department and has held various positions in research, corporate finance,
trading and information systems at Daiwa Securities offices in Kyoto, Tokyo, and
Geneva, Switzerland. In 1992, Mr. Takada founded Aston Holdings, an investment
firm in Tokyo, Japan. In 1996, Mr. Takada formed Boston Advisory Services, an
investment advisory firm in Tokyo, Japan, where he currently serves as its CEO.
Mr. Takada is the CEO of Leo Global Fund, which holds 35.83% of the Company's
common shares. [See - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.]
YOSHIHIRO AOTA,
Director, President and Chief Operating Officer of PPOL and President
& CEO and Director of AJOL. Mr. Aota holds a Bachelor of Science degree from
Tokyo University. From 1987 to 1991 Mr. Aota held the following positions with
Katena Corporation, a Japan corporation: Head, Business Planning (1987-1988);
Managing Director, Business Planning (1988-1989); and Managing Director,
Business Administration (1989-1991). From 1991 to 1994 Mr. Aota then held the
following positions with Forval Corporation, the parent company of PPOL:
Director, Business Strategy (Jan. 1991 - Jun. 1991); Director, PC Business
(1991-1993); and Director, NW Business (1993-1994). Mr. Aota has been the
President and a director of AJOL since October, 1994.
-34-
KAZUSHIGE SHIMIZU,
Director, Chief Financial Officer and Secretary of PPOL, graduated
from Tohoku Gakuin University with a B.S. in Economics in 1968. From 1968 to
1982, Mr. Shimizu worked in the accounting department of Niigata Transport Co.,
Ltd. In 1982, Mr. Shimizu became a Section Chief, Accounting Manager at Emplas
Corporation, and held that position until 1990, when he became the Assistant
General Manager, Accounting Department of Forval Co., Ltd. Mr. Shimizu has held
various management positions with Forval Co., Ltd. in accounting, finance,
administration and became a director in 1995. In 2001, Mr. Shimizu became the
President of Forval Lanaissance, a wholly owned subsidiary of Forval Co., Ltd.
MANUBU NAKAMURA,
Director of AJOL, holds a Bachelor of Political Science degree from
Seikei University. Mr. Nakamura has served as a director of AJOL since March
2000. From 1992 until 1995 Mr. Nakamura served as Managing Director of Drug Ando
Corporation, a Japan corporation. Mr. Nakamura joined AJOL in June 1995 as
general manager of the Sales department and was transferred to the Business
Operations department as its general manager in March 1996. In October 1999, he
became the general manager of the Customer Center department. In March 2000, he
was appointed Director, and retained his position as general manager of the
Customer Center department.
MASAO YAMAMOTO,
Director of AJOL, graduated from Koganei Industrial High School in
1968. From 1993 to 1996 Mr. Yamamoto served as Director, Accounting, Educational
Affairs for Area-Promotional Educational Corporation, a Japan corporation. Mr.
Yamamoto has been an employee of AJOL since February 1996. In March, 1996, he
became the general manager of the Accounting department and was transferred to
the Business Planning department as its general manager In March, 2000 he was
appointed Director, and retained his position as general manager of the Business
Planning department. (See Exhibit N)
(2) Directorships
Mr. Takada serves as Managing Director of Boston Advisory Services
Co., Ltd. and CEO of Leo Global Fund; Mr. Shimizu serves as a Director of Forval
Corporation, PPOL's majority shareholder, President of Forval LaNaissance Co.,
Ltd., a wholly owned subsidiary of Forval Corporation, and a Director of Five
Eyes Network, Inc., a 28.57% owned affiliate of Forval.
(3) Involvement in Certain Legal Proceedings
NONE.
ITEM 6: EXECUTIVE COMPENSATION
A. PPOL
-35-
Up to and including PPOL's last fiscal year ending September 30,
2001, no executive officer of PPOL has received any compensation.
B. AJOL
SUMMARY COMPENSATION TABLE
NAME AND POSITION YEAR SALARY BONUS TOTAL
----------------- ---- ------ ----- -----
(Y)JPN $US(9) (Y)JPN $US(9) (Y)JPN $US(9)
(THOUSANDS) (THOUSANDS) (THOUSANDS)
Yoshihiro Aota, President and 2002 19,700 $157,807 27,000 $216,283 46,700 $374,090
CEO, and Director 2001 18,000 $162,969 19,000 $172,022 37,000 $334,991
2000 18,000 $162,292 0 $ 0 18,000 $162,292
Manabu Nakamura, Director 2002 12,292 $ 98,465 4,000 $ 32,042 16,292 $130,507
2001 12,108 $109,624 4,426 $ 40,072 16,534 $149,698
2000 7,430 $ 66,991 5,539 $ 49,941 12,968 $116,932
Masao Yamamoto, Director 2002 12,352 $ 98,946 4,000 $ 32,043 16,352 $130,988
2001 12,128 $109.805 3,906 $ 35,364 16,034 $145,169
2000 7,261 $ 65,467 7,064 $ 63,691 14,325 $129,158
Tetsushi Nishikawa, Manager 2002 5,820 $ 46,621 5,096 $ 40,821 10,916 $ 87,442
2001 5,269 $ 47,705 5,199 $ 47,071 10,468 $ 99,775
2000 4,917 $ 44,333 6,722 $ 60,607 11,639 $104,940
Yuji Kamata, Manager 2002 5,531 $ 44,306 4,751 $ 38,058 10,282 $ 82,364
2001 5,213 $ 47,198 7,049 $ 63,820 12,263 $111,018
2000 5,057 $45,598 5.766 $ 51,988 10,823 $ 97,583
ITEM 7: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
A. TRANSACTIONS WITH MANAGEMENT AND OTHERS
AJOL, the Company's wholly-owned subsidiary, subleases office space
from Forval Corporation, the Company's majority shareholder. AJOL pays rent to
Forval Corporation in the amount of approximately $48,000 per month pursuant to
a lease which commenced April 1, 2002, and expires March 31, 2004. The lease
covers approximately 10,623 square feet of space. AJOL believes that the lease
rate is equal to fair rental value of the space.
- --------------
(9) Salaries and bonuses are paid by AJOL in Japanese yen. The figures in this
table have been converted into US dollars by applying the fiscal year's
average exchange rate of each respective fiscal year. These exchange rates
are the following: for 2002, 1 $US = 124.84(Y)JPN: for 2001, 1 $US =
110.45(Y)JPN: and for 2000 1 $US = 110.91(Y)JAP
-36-
See also Item 10 Below -- Recent Sales of Unregistered Securities.
B. CERTAIN BUSINESS RELATIONSHIPS
NONE
ITEM 8: LEGAL PROCEEDINGS
None.
ITEM 9: MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
A. MARKET INFORMATION
There is no public trading market for PPOL's securities. PPOL intends
to apply for inclusion of its common shares on the Over the Counter Electronic
Bulletin Board. However, there can be no assurances that an active trading
market will develop, even if the securities are accepted for quotation.
Quotations on the OTC Bulletin Board reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions.
There are also no outstanding securities convertible into PPOL common stock, nor
are there any outstanding options or warrants to purchase PPOL's common stock.
Holders of PPOL's common stock are entitled to dividends when, as and
if declared by the Board of Directors out of funds legally available therefor.
PPOL does not anticipate the declaration or payment of any dividends in the
foreseeable future.
PPOL intends to retain earnings, if any, to finance the development
and expansion of its business. Future dividend policy will be subject to the
discretion of the Board of Directors and will be contingent upon future
earnings, if any, PPOL's financial condition, capital requirements, general
business conditions and other factors. Therefore, there can be no assurance that
any dividends of any kind will ever be paid.
PPOL registrar and transfer agent is U.S. Stock Transfer Corporation,
Glendale, California.
B. HOLDERS
As of the date of this registration statement, there are
approximately 2,500 record holders of PPOL's common stock.
-37-
C. DIVIDENDS
PPOL has not paid any cash or other dividends on its common stock
since its inception.
ITEM 10: RECENT SALES OF UNREGISTERED SECURITIES
Effective March 31, 2002, PPOL, Inc. issued a total of 17,095,174
shares of common stock (representing 95% of the PPOL common stock immediately
after the transaction) in exchange for all 7,000 of the issued and outstanding
shares of AJOL, Co. Ltd., a Japan corporation ("AJOL"). In this transaction,
PPOL issued 10,647,594 shares to Forval Corporation, a Japan corporation in
exchange for Forval's 5,000 shares of AJOL stock, and 6,447,580 shares to Leo
Global Fund, 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 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
solicitation in regard to the sale.
ITEM 11: DESCRIPTION OF PPOL'S SECURITIES TO BE REGISTERED
COMMON STOCK
PPOL is authorized to issue 100,000,000 shares of common stock. As of
the date of this Form 10 Registration Statement, 18,294,965 shares of PPOL
common stock are issued and outstanding. All the common stock is fully paid and
non-assessable.
Each outstanding share of common stock is entitled to one vote per
share on each matter submitted to a vote at a meeting of the shareholders. Each
shareholder may exercise such vote either in person or by proxy. Shareholders
are entitled to cumulate their votes in the election of directors in accordance
with Sections 301.5 and 708 of the California Corporations Code. A majority vote
is sufficient for most actions requiring the vote or concurrence of
shareholders. Two (2) of PPOL's shareholders own directly approximately 95% of
PPOL's capital stock. As such, these shareholders will be in a position to
constitute a majority of the shareholders at any vote of shareholders including
the election of directors.
There are no preemptive or subscription or other preferential or
conversion rights to purchase additional shares of PPOL's common stock. Upon
liquidation, dissolution or winding up of PPOL, the holders of the common stock
are entitled to receive, pro rata, the assets of PPOL which are legally
available for distribution to shareholders subject to the prior liquidation
rights of creditors.
(i) Modification of Shareholder Rights Other Than By Vote of
Shareholders
The bylaws of PPOL provide that the board of directors may adopt,
amend, or repeal any bylaw other than a bylaw (or amendment) changing the
authorized number of directors.
-38-
ITEM 12: INDEMNIFICATION OF DIRECTORS AND OFFICERS
PPOL's bylaws provide that PPOL shall have the authority to indemnify
its directors and officers to the full extent permitted by Section 317 of the
California Corporations Code. In addition, the bylaws permit the corporation,
upon a determination of the board of directors, to purchase and maintain
insurance on behalf of the directors and officers of PPOL against any liability
arising out of their status as directors and officers. Such insurance may be
purchased and maintained even if PPOL would not have the authority to indemnify
the officer or director.
ITEM 13: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PPOL's financial statements are included in a separate section of
this Form 10 following Item 15, below.
ITEM 14: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 15: FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements (Attached).
(i) PPOL audited financial statements for the years
ended March 31, 2002, 2001 and 2000;
(ii) PPOL financial statements (unaudited) for the
three (3) months ended June 30, 2002, 2001 and
2000;
(iii) Diversified Strategies, Inc. audited financial
statements for the six (6) months ended March 31,
2002 and for the years ended September 30, 2001,
2000 and 1999.
(b) Exhibits (Attached).
2.0 Stock Purchase and Business Combination Agreement
3.1 Articles of Incorporation and Amendments thereto
3.2 Bylaws
10.1 Yamamoto Employment Contract
10.2 Nakamura Employment Contract
10.3 Nishikawa Employment Contract
10.4 Kanazawa Employment Contract
10.5 Kamada Employment Contract
10.6 Consulting Services Agreement between PPOL, Inc. and
ECO2, LLC dated September 25, 2002
21 Subsidiaries of PPOL
-39-
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the company has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized.
PPOL, Inc.,
a California corporation
Date: NOVEMBER 1, 2002 By: /S/ NOBUO TAKADA
----------------------------
Nobuo Takada,
Chief Executive Officer
-40-
PPOL, INC.
FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2002, 2001 AND 2000
CONTENTS
PAGE
INDEPENDENT AUDITORS' REPORT F-1
FINANCIAL STATEMENTS:
Balance Sheets F-2
Statements of Income and Comprehensive Income F-3
Statement of Shareholders' Equity F-4
Statements of Cash Flows F-5
Notes to Financial Statements F-6 - F-13
STONEFIELD
JOSEPHSON, Inc.
INDEPENDENT AUDITORS' REPORT
Board of Directors
PPOL, Inc.:
We have audited the accompanying balance sheets of PPOL, Inc. (formerly
Diversified Strategies, Inc.) as of March 31, 2002 and 2001, and the related
statements of income and comprehensive income, shareholders' equity, and cash
flows for each of the three years in the period ended March 31, 2002. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the 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, such financial statements present fairly, in all material
respects, the financial position of the Company as of March 31, 2002 and 2001,
and the results of its operations and its cash flows for each of the three years
in the period ended March 31, 2002, in conformity with accounting principles
generally accepted in the United States of America.
/s/ Stonefield Josephson, Inc.
CERTIFIED PUBLIC ACCOUNTANTS
Santa Monica, California
June 27, 2002
F-1
PPOL, INC.
BALANCE SHEETS
ASSETS
March 31, March 31,
2002 2001
---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 11,716,893 $ 10,914,661
Trade accounts receivable, net of allowance for
doubtful accounts of $7,000 and $5,000 2,390,823 997,367
Inventories 1,077,047 3,073,533
Advance payments to related parties 1,987,008 3,082,459
Deferred costs 12,332,908 10,218,945
Deferred income taxes 2,591,742 2,111,153
Prepaid expenses and other 354,514 150,236
------------ ------------
Total current assets 32,450,935 30,548,354
PROPERTY AND EQUIPMENT, NET 6,927,851 7,492,863
DEFERRED INCOME TAXES 764,489 920,186
LEASE DEPOSITS, RELATED PARTIES 540,246 1,145,820
OTHER ASSETS 925,701 937,752
------------ ------------
$ 41,609,222 $ 41,044,975
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, including related parties $ 12,731,466 $ 14,902,892
Advances received 2,342,533 2,442,322
Deferred revenue 16,530,850 14,046,567
Income taxes payable 1,458,752 1,906,151
Other current liabilities 1,899,017 1,578,701
------------ ------------
Total current liabilities 34,962,618 34,876,633
------------ ------------
SHAREHOLDERS' EQUITY:
Common stock; $0.001 par value; 100,000,000 shares
authorized; 17,095,174 shares issued and outstanding 17,095 17,095
Additional paid-in capital 3,392,605 3,392,605
Total other comprehensive loss (1,762,118) (1,575,995)
Retained earnings 4,999,022 4,334,637
------------ ------------
Total shareholders' equity 6,646,604 6,168,342
------------ ------------
$ 41,609,222 $ 41,044,975
============ ============
See independent auditors' report and the accompanying notes to these
financial statements.
F-2
PPOL, INC.
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, 2002 MARCH 31, 2001 MARCH 31, 2000
-------------- -------------- --------------
NET REVENUE:
Product sales and network services $ 108,404,000 $ 129,625,356 $ 138,854,650
Other on-line services 13,537,233 12,998,275 9,412,437
------------- ------------- -------------
Total 121,941,233 142,623,631 148,267,087
------------- ------------- -------------
COSTS AND EXPENSES:
Cost of sales 29,924,292 32,093,162 34,535,423
Distributor incentives 64,447,604 76,421,542 81,248,805
Selling, general and administrative
expenses 23,356,432 27,212,729 25,018,515
------------- ------------- -------------
Total costs and expenses 117,728,328 135,727,433 140,802,743
------------- ------------- -------------
OPERATING INCOME 4,212,905 6,896,198 7,464,344
------------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest expense (8,155) -- (71,571)
Other income (expense), net (36,071) 313,425 124,947
------------- ------------- -------------
Other income (expense), net (44,226) 313,425 53,376
------------- ------------- -------------
INCOME BEFORE INCOME TAXES 4,168,679 7,209,623 7,517,720
------------- ------------- -------------
INCOME TAXES:
Current 2,903,977 3,633,349 2,816,402
Deferred (324,894) 562,621 (198,234)
------------- ------------- -------------
Total income taxes 2,579,083 4,195,970 2,618,168
------------- ------------- -------------
NET INCOME 1,589,596 3,013,653 4,899,552
OTHER COMPREHENSIVE LOSS -
cumulative foreign currency translation (186,123) (501,506) (1,074,489)
------------- ------------- -------------
COMPREHENSIVE INCOME $ 1,403,473 $ 2,512,147 $ 3,825,063
============= ============= =============
NET INCOME PER COMMON SHARE,
Basic and diluted $ 0.09 $ 0.18 $ 0.29
============= ============= =============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING -
basic and diluted 17,095,174 17,095,174 17,095,174
============= ============= =============
See independent auditors' report and the accompanying notes to these
financial statements.
F-3
PPOL, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
COMMON STOCK ADDITIONAL CUMULATIVE OTHER TOTAL
------------ PAID-IN COMPREHENSIVE RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL LOSS EARNINGS EQUITY
------ ------ ------- ---- -------- ------
Balance, March 31, 1999 17,095,174 $ 17,095 $ 3,392,605 $ -- $(2,627,918) $ 781,782
Cumulative foreign
currency translation
adjustment (1,074,489) (1,074,489)
Net income -- -- -- 4,899,552 4,899,552
----------- ----------- ----------- ----------- ----------- -----------
Balance, March 31, 2000 17,095,174 17,095 3,392,605 (1,074,489) 2,271,634 4,606,845
Cumulative foreign
currency translation
adjustment (501,506) (501,506)
Dividends paid -- -- -- -- (950,650) (950,650)
Net income 3,013,653 3,013,653
----------- ----------- ----------- ----------- ----------- -----------
Balance, March 31, 2001 17,095,174 17,095 3,392,605 (1,575,995) 4,334,637 6,168,342
Cumulative foreign
currency translation
adjustment (186,123) (186,123)
Dividends paid -- (925,211) (925,211)
Net income 1,589,596 1,589,596
----------- ----------- ----------- ----------- ----------- -----------
Balance, March 31, 2002 17,095,174 $ 17,095 $ 3,392,605 $(1,762,118) $ 4,999,022 $ 6,646,604
=========== =========== =========== =========== =========== ===========
See independent auditors' report and the accompanying notes to these
financial statements.
F-4
PPOL, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, 2002 MARCH 31, 2001 MARCH 31, 2000
-------------- -------------- --------------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income $ 1,589,596 $ 3,013,653 $ 4,899,552
------------ ------------ ------------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization 2,704,124 5,137,666 4,434,906
Loss on sales/disposal of property and equipment, net 778,956 893,267 731,046
Deferred income taxes 324,894 562,621 (198,234)
CHANGES IN ASSETS AND LIABILITIES:
(INCREASE) DECREASE IN ASSETS:
Trade accounts receivables (1,536,427) 1,007,182 (630,875)
Inventories 1,947,894 (1,334,577) 2,124,279
Advance payments to related parties 990,208 (3,504,929) --
Deferred costs (2,820,893) (255,861) (73,464)
Prepaid expenses and other (225,463) (92,955) 42,061
INCREASE (DECREASE) IN LIABILITIES:
Accounts payable, including related parties (1,467,890) 4,765,300 (6,636,725)
Advances received 31,465 (347,648) (155,584)
Deferred revenue 3,429,735 83,594 667,211
Income taxes payable (367,986) (80,235) 1,161,425
Other current liabilities 599,249 (130,465) (1,703,618)
------------ ------------ ------------
Total adjustments 3,738,078 6,702,960 (237,572)
------------ ------------ ------------
Net cash provided by operating activities 5,327,674 9,716,613 4,661,980
------------ ------------ ------------
CASH FLOWS PROVIDED BY (USED FOR) INVESTING ACTIVITIES:
Purchase of property and equipment (3,427,638) (6,956,124) (1,717,286)
Net decrease in lease deposits, related parties 605,574 802,580 --
Purchase of patent right from Forval -- -- (252,455)
Other assets (113,818) (254,924) 178,882
------------ ------------ ------------
Net cash used for investing activities (2,935,882) (6,408,468) (1,790,859)
------------ ------------ ------------
CASH FLOWS USED FOR FINANCING ACTIVITIES:
Net decrease in short-term borrowings -- -- (5,860,554)
Dividends paid (925,211) (950,650) --
------------ ------------ ------------
Net cash used for financing activities (925,211) (950,650) (5,860,554)
------------ ------------ ------------
EFFECTS OF EXCHANGE RATE (664,349) (2,260,068) 805,867
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 802,232 97,427 (2,183,566)
CASH AND CASH EQUIVALENTS, beginning of year 10,914,661 10,817,234 13,000,800
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ 11,716,893 $ 10,914,661 $ 10,817,234
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 5,375 $ -- $ 71,562
============ ============ ============
Income taxes paid $ 3,271,971 $ 3,713,574 $ 1,654,975
============ ============ ============
See independent auditors' report and the accompanying notes to these
financial statements.
F-5
PPOL, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2002, 2001 AND 2000
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION:
PPOL, Inc. ("PPOL" or the "Company") (formerly Diversified
Strategies, Inc.), incorporated on May 19, 1993 in
California, is primarily engaged in sales of
multi-functional telecommunications equipment called
MOJICO. The Company distributes MOJICO throughout Japan
through a network marketing system. The Company has a
network of registered distributors located throughout Japan
that introduce purchasers to the Company. The Company
operates in one operating segment.
Using MOJICO, the Company provides original
telecommunication services called "Pan Pacific Online,"
including MOJICO bulletin board and mail services. The
Company also provides various other on-line services
through Pan Pacific Online such as ticket and mail-order
services. These sales and services are provided in Japan.
On August 15, 2002, the Company amended its articles of
incorporation to increase its authorized shares of common
stock from 10,000,000 to 100,000,000, change its name to
PPOL, Inc. and effected a 7 to 1 reverse stock split. All
share data presented in these financial statements have
been affected for 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 the transaction on
August 15, 2002, issued 899,746 shares of its common stock
for all of the issued and outstanding common stock of AJOL.
Prior to the merger PPOL had no business activity. 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. AJOL and PPOL are collectively referred to as the
"Company."
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 with
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 adjustment, (2) compensated absences and (3)
deferred assets.
USE OF ESTIMATES:
The preparation of financial statements in conformity with
generally accepted accounting principles requires
management to make estimates and assumptions that affect
the reported amounts of assets and 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.
F-6
PPOL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 2002, 2001 AND 2000
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
FINANCIAL INSTRUMENTS:
The carrying amount of the Company's financial instruments,
which include cash and cash equivalents, trade accounts
receivable and accounts payable approximate their fair
values as of March 31, 2002, 2001 and 2000.
CASH AND CASH EQUIVALENTS:
Cash and cash equivalents include all highly liquid
investments, generally with original maturities of three
months or less, those 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.
CONCENTRATION OF CREDIT RISK:
Financial instruments that potentially subject the Company
to concentration of credit risk consist of trade
receivables and cash and cash equivalents. The Company
collects the significant portion of payments from the
ultimate customers through major credit card and loan
companies. One credit company comprised 35.4%, 20.1% and
48.6% of accounts receivable at March 31, 2002, 2001 and
2000, respectively. The Company maintains cash deposits
with major banks. The Company periodically assesses the
financial conditions of the institutions and believes that
the risk of any loss is minimal.
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.
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost. Depreciation is
computed using a declining-balance method 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 approximates the life of the
leases, while that for equipment was 3 years. Maintenance
and repairs, including minor renewals and betterment, are
expensed as incurred.
SOFTWARE:
Software is being amortized on a straight-line basis
principally over 3 years.
F-7
PPOL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 2002, 2001 AND 2000
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED:
IMPAIRMENT OF LONG-LIVED ASSETS:
In accordance with Statement of Financial Accounting
Standard ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of", long-lived assets to be held and used are
analyzed for impairment whenever events or changes in
circumstances indicate that the related carrying amounts
may not be recoverable. The Company evaluates at each
balance sheet date whether events and circumstances have
occurred that indicate possible impairment. If there are
indications of impairment, the Company uses future
undiscounted cash flows of the related asset or asset
grouping over the remaining life in measuring whether the
assets are recoverable. In the event such cash flows are
not expected to be sufficient to recover the recorded asset
values, the assets are written down to their estimated fair
value. Long-lived assets to be disposed of are reported at
the lower of carrying amount or fair value of asset less
cost to sell.
REVENUE RECOGNITION:
Product sales, provision of Pan Pacific Online and grant of
distributor license are considered as a bundled transaction
for revenue recognition purpose. Revenue from these product
sales and network service is recognized over the expected
service period. The revenue and costs deferred for revenue
recognition purpose are recorded as deferred revenue and
deferred costs, respectively. Revenue from other on-line
services provided through Pan Pacific Online is recognized
upon the delivery of underlying products/services.
STOCK-BASED COMPENSATION:
The Company accounts for its stock-based employee
compensation plan using the intrinsic value method
prescribed by Accounting Principles Board Opinion ("APB")
No. 25, Accounting for Stock Issued to Employees, and
provides pro forma disclosures of net income and net income
per share as if the fair value method prescribed by SFAS
No. 123, Accounting for Stock-Based Compensation, had been
applied in measuring compensation expense.
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, 2002, 2001 and
2000 approximated $1,543,861, $1,239,258 and $ 2,369,530,
respectively.
SHIPPING AND HANDLING COSTS:
Shipping and handling costs are included in selling,
general and administrative expenses.
F-8
PPOL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 2002, 2001 AND 2000
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED:
ADVERTISING COSTS:
Advertising costs are expensed as incurred. Advertising
expenses for the years ended March 31, 2002, 2001 and 2000
amounted to $29,150, $485,212 and $2,659,050, respectively.
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:
Comprehensive income for the Company for the years ended
March 31, 2000, 2001 and 2002 was primarily from the
effects of foreign currency translation adjustments.
NET INCOME PER SHARE:
Basic net income per share ("EPS") is computed based upon
the average number of shares of common stock outstanding
during each period and diluted EPS assumes the dilution
that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock
or resulted in the issuance of common stock.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
In June 2001, the FASB issued SFAS No. 141, "Business
Combinations." SFAS No. 141 requires that the purchase
method of accounting be used for all business combinations
initiated after June 30, 2001. Goodwill and certain
intangible assets will remain on the balance sheet and not
be amortized. On an annual basis, and when there is reason
to suspect that their values have been diminished or
impaired, these assets must be tested for impairment, and
write downs may be necessary. The Company adopted SFAS No.
141 on July 1, 2001 with no material impact to the
Company's financial position or results of operations.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and
Other Intangible Assets." SFAS No. 142 changes the
accounting for goodwill from an amortization method to an
impairment-only approach. Amortization of goodwill,
including goodwill recorded in past business combinations,
will cease upon adoption of this statement. The Company
implemented SFAS No. 142 on April 1, 2001 with no material
impact to the Company's financial position or results of
operations.
F-9
PPOL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 2002, 2001 AND 2000
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED:
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS, CONTINUED:
In October 2001, the FASB issued SFAS No. 143, "Accounting
for Asset Retirement Obligations," which requires companies
to record the fair value of a liability for asset
retirement obligations in the period in which they are
incurred. The statement applies to a company's legal
obligations associated with the retirement of a tangible
long-lived asset that results from the acquisition,
construction, and development or through the normal
operation of a long-lived asset. When a liability is
initially recorded, the company would capitalize the cost,
thereby increasing the carrying amount of the related
asset. The capitalized asset retirement cost is depreciated
over the life of the respective asset while the liability
is accreted to its present value. Upon settlement of the
liability, the obligation is settled at its recorded amount
or the company incurs a gain or loss. The statement is
effective for fiscal years beginning after June 30, 2002.
The Company does not expect the adoption to have a material
impact to the Company's financial position or results of
operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets".
Statement 144 addresses the accounting and reporting 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. This statement is
effective for fiscal years beginning after December 15,
2001. The Company does not expect the adoption to have a
material impact to the Company's financial position or
results of operations.
In April 2002, the FASB issued Statement No. 145,
"Rescission of FASB Statements No. 4, 44, and 64, Amendment
of FASB Statement No. 13, and Technical Corrections." This
Statement rescinds FASB Statement No. 4, "Reporting Gains
and Losses from Extinguishment of Debt", and an amendment
of that Statement, FASB Statement No. 64, "Extinguishments
of Debt Made to Satisfy Sinking-Fund Requirements" and FASB
Statement No. 44, "Accounting for Intangible Assets of
Motor Carriers". This Statement amends FASB Statement No.
13, "Accounting for Leases", to eliminate an inconsistency
between the required accounting for sale-leaseback
transactions and the required accounting for certain lease
modifications that have economic effects that are similar
to sale-leaseback transactions. The Company does not expect
the adoption to have a material impact to the Company's
financial position or results of operations.
F-10
PPOL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 2002, 2001 AND 2000
(2) PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
YEAR ENDED YEAR ENDED
MARCH 31, 2002 MARCH 31, 2001
-------------- --------------
Leasehold improvements $ 294,476 $ 296,786
Office equipment 2,708,545 3,484,541
Software costs 17,642,168 16,684,789
------------ ------------
20,645,189 20,466,116
Less: accumulated depreciation
and amortization 13,717,338 12,973,253
------------ ------------
Property and equipment, net $ 6,927,851 $ 7,492,863
============= ============
Depreciation and amortization of property and equipment totaled
$2,704,124, $5,137,666 and $4,434,906 for the years ended March 31,
2002, 2001 and 2000, respectively.
In August 2000, the Company commenced the development of an
integrated information system to manage inventory, sales, on-line
services and distributor accounts, and incentive calculation. The
development work is being executed by outside vendors. The
capitalized software associated with this integrated information
system for the years ended March 31, 2002 and 2001 was $2,766,424 and
$3,614,975, respectively. As of March 31, 2002, the balance of
capitalized software, net, included the software cost under
development associated with this project in the amount of $5,066,310.
(3) LINE OF CREDIT:
On March 31, 2002, the Company had a $2,262,000 (unaudited) line of
credit with its bank which accrues interest at Japan's market rate
There were no outstanding balances as of March 31, 2002.
(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%.
Under the Japanese tax law, the Company is not considered a part of
the consolidated company. Therefore, the tax provision is based on
the stand-alone entity.
F-11
PPOL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 2002, 2001 AND 2000
(4) INCOME TAXES, CONTINUED:
A reconciliation between the statutory tax rate and the
effective income tax rate is as follows:
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, 2002 MARCH 31, 2001 MARCH 31, 2000
-------------- -------------- --------------
Normal statutory tax rate 42.1% 42.1% 42.1%
Entertainment and other non-
deductible expenses 15.3 6.8 3
Other (0.1) (.0) (0.1)
------- -------- ---------
Effective tax rate 57.3% 48.9% 45.0%
======= ======== =========
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, 2002 MARCH 31, 2001
-------------- --------------
Deferred tax assets:
Revenue recognition adjustment $ 1,765,232 $ 1,609,524
Excess of accrued bonus 108,321 63,796
Reserve for product return 115,333 150,603
Resort membership admission fees 177,883 193,863
Accrued compensated absences 124,035 104,946
Excess depreciation and amortization 586,606 726,323
Inventory write-down 338,136 -
Other 140,685 182,284
------------- ------------
Total deferred tax assets $ 3,356,231 $ 3,031,339
============= ============
Management believes that it is more likely than not that all of the
deferred tax assets will be realized through future earnings and/or
tax planning. Accordingly, no valuation allowance was recorded as of
March 31, 2002 and 2001.
(5) RELATED PARTY:
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 Denki ("Funai") (a
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.
F-12
PPOL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 2002, 2001 AND 2000
(5) RELATED PARTY, CONTINUED:
The Company also leases its office space from Forval. The following
summarize amounts due from or to Forval and Funai and related
transaction amounts:
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, 2002 MARCH 31, 2001 MARCH 31, 2000
-------------- -------------- --------------
Due from Forval:
Accounts receivable $ - $ 7,811 $ 13,473
Lease deposit 540,246 1,145,820 1,948,400
Due from Funai - advance payment 1,987,008 3,082,459 -
Due to Forval - accounts payable 69,645 106,045 163,179
Transactions with Forval:
Sales 8,235 53,499 97,493
Purchases - 17,207,311 18,059,008
Royalty expenses - 1,704,069
Rental expenses 717,387 810,823 807,458
Purchase of fixed assets - 81,584 286,329
Interest expense - - 38,247
Other - 1,738 7,673
Transactions with Funai:
Purchases 13,978,218 2,532,106 -
Other 283,091 - -
F-13
PPOL, INC.
FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED
JUNE 30, 2002, 2001 AND 2000
CONTENTS
PAGE
FINANCIAL STATEMENTS:
Balance Sheets F-15
Statements of Income and Comprehensive Income F-16
Statements of Cash Flows F-17
Notes to Financial Statements F-18 - F-22
F-14
PPOL, INC.
BALANCE SHEETS
ASSETS
June 30,
2002
----
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 16,655,842
Trade accounts receivable, net of allowance for
doubtful accounts of $2,600 and $5,000 1,717,621
Inventories 2,063,538
Advance payments to related parties 4,439,125
Deferred costs 8,638,326
Deferred income taxes 2,286,840
Prepaid expenses and other 715,959
------------
Total current assets 36,517,251
PROPERTY AND EQUIPMENT, net 7,149,481
DEFERRED INCOME TAXES 755,649
LEASE DEPOSITS, RELATED PARTIES 597,806
OTHER ASSETS 1,032,170
------------
$ 46,052,357
============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, including related parties $ 10,118,944
Advances received 13,427,774
Deferred revenue 12,721,463
Income taxes payable 384,241
Other current liabilities 2,338,549
------------
Total current liabilities 38,990,971
------------
SHAREHOLDERS' EQUITY:
Common stock; $0.001 par value; 100,000,000 shares
authorized; 17,095,174 shares issued and outstanding 17,095
Additional paid-in capital 3,392,605
Total other comprehensive loss (1,346,719)
Retained earnings 4,998,405
------------
Total shareholders' equity 7,061,386
------------
$ 46,052,357
============
See accompanying notes to financial statements.
F-15
PPOL, INC.
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
THREE MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, 2002 JUNE 30, 2001
------------- -------------
(Unaudited) (Unaudited)
NET REVENUE:
Product sales and network services $ 30,815,864 $ 28,662,358
Other on-line services 3,799,537 3,428,924
------------ ------------
Total 34,615,401 32,091,282
------------ ------------
COSTS AND EXPENSES:
Cost of sales 7,642,042 7,371,902
Distributor incentives 19,356,990 17,276,440
Selling, general and administrative
expenses 5,984,987 5,767,658
------------ ------------
Total costs and expenses 32,984,019 30,416,000
------------ ------------
OPERATING INCOME 1,631,382 1,675,282
OTHER INCOME (EXPENSE), net 11,157 (21,836)
------------ ------------
INCOME BEFORE INCOME TAXES 1,642,539 1,653,446
------------ ------------
INCOME TAXES:
Current 365,680 274,486
Deferred 313,742 597,664
------------ ------------
Total income taxes 679,422 872,150
------------ ------------
NET INCOME 963,117 781,296
OTHER COMPREHENSIVE GAIN (LOSS) -
cumulative foreign currency translation 415,399 (92,887)
------------ ------------
COMPREHENSIVE INCOME $ 1,378,516 $ 688,409
============ ============
NET INCOME PER COMMON SHARE,
Basic and diluted $ .06 $ .05
============ ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC AND DILUTED 17,095,174 17,095,174
============ ============
See accompanying notes to financial statements.
F-16
PPOL, INC.
STATEMENTS OF CASH FLOWS
THREE MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, 2002 JUNE 30, 2001
------------- -------------
(Unaudited) (Unaudited)
CASH FLOWS PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Net income $ 963,117 $ 781,296
------------ ------------
ADJUSTMENTS TO RECONCILE NET INCOME TO
NET CASH PROVIDED BY (USED FOR)
OPERATING ACTIVITIES:
Depreciation and amortization 505,501 756,914
Loss on sales/disposal of property and equipment, net -- 78,019
Deferred income taxes 313,742 597,664
CHANGES IN ASSETS AND LIABILITIES:
(INCREASE) DECREASE IN ASSETS:
Trade accounts receivables 883,077 455,886
Inventories (829,619) (1,603,474)
Advance payments to related parties (2,132,143) 1,625,721
Deferred costs 4,766,524 2,992,600
Prepaid expenses and other (308,030) (45,869)
INCREASE (DECREASE) IN LIABILITIES:
Accounts payable, including related parties (3,777,168) (5,291,651)
Advances received 10,312,013 (550,449)
Deferred revenue (5,301,422) (3,613,955)
Income taxes payable (1,170,485) (472,560)
Other current liabilities 233,657 1,295,865
------------ ------------
Total adjustments 3,495,647 (3,775,289)
------------ ------------
Net cash provided by (used for) operating activities 4,458,764 (2,993,993)
------------ ------------
CASH FLOWS USED FOR INVESTING ACTIVITIES:
Purchase of property and equipment (13,991) (1,257,058)
Other assets (15,373) (10,140)
------------ ------------
Net cash used for investing activities (29,364) (1,267,198)
------------ ------------
CASH FLOWS USED FOR FINANCING ACTIVITIES -
dividends paid (963,732) (926,160)
------------ ------------
EFFECTS OF EXCHANGE RATE 1,473,281 432,519
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,938,949 (4,754,832)
CASH AND CASH EQUIVALENTS, beginning of period 11,716,893 10,914,661
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 16,655,842 $ 6,159,829
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION -
Income taxes paid $ 1,536,165 $ 747,045
============ ============
Interest paid $ -- $ --
============ ============
See accompanying notes to financial statements.
F-17
PPOL, INC.
NOTES TO FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 2002, 2001 AND 2000
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION:
The unaudited condensed financial statements have been
prepared by PPOL, Inc. (the "Company"), pursuant to the
rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures
normally present in annual financial statements prepared in
accordance with accounting principles generally accepted in
the United States of America have been omitted pursuant to
such rules and regulations. These financial statements
should be read in conjunction with the audited financial
statements and footnotes for the years ended March 31,
2002, 2001 and 2000 included in the Company's Form 10. The
results of the three months ended June 30, 2002 are not
necessarily indicative of the results to be expected for
the full year ending March 31, 2003.
ORGANIZATION:
PPOL, Inc. ("PPOL" or the "Company") (formerly Diversified
Strategies, Inc.), incorporated on May 19, 1993 in
California, is primarily engaged in sales of
multi-functional telecommunications equipment called
MOJICO. The Company distributes MOJICO throughout Japan
through a network marketing system. The Company has a
network of registered distributors located throughout Japan
that introduce purchasers to the Company. The Company
operates in one operating segment.
Using MOJICO, the Company provides original
telecommunication services called "Pan Pacific Online,"
including MOJICO bulletin board and mail services. The
Company also provides various other on-line services
through Pan Pacific Online such as ticket and mail-order
services. These sales and services are provided in Japan.
On August 15, 2002, the Company amended its articles of
incorporation to increase its authorized shares of common
stock from 10,000,000 to 100,000,000, change its name to
PPOL, Inc. and effected a 7 to 1 reverse stock split. All
share data presented in these financial statements have
been affected for 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 the transaction on
August 15, 2002, issued 899,746 shares of its common stock
for all of the issued and outstanding common stock of AJOL.
Prior to the merger PPOL had no business activity. 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. AJOL and PPOL are collectively referred to as the
"Company."
F-18
PPOL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED JUNE 30, 2002, 2001 AND 2000
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
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 73.4% (unaudited),
19.9% (unaudited) and 53.7% (unaudited) of accounts
receivable at June 30, 2002, 2001 and 2000, respectively.
The Company maintains cash deposits with major banks. The
Company periodically assesses the financial conditions of
the institutions and believes that the risk of any loss is
minimal.
RESEARCH AND DEVELOPMENT EXPENSE:
Research and development costs are charged to expense when
incurred. Research and development expenses included in
cost of sales for the three months ended June 30, 2002,
2001 and 2000 approximated $336,323 (unaudited), $337,999
(unaudited) and $105,596 (unaudited), respectively.
ADVERTISING COSTS:
Advertising costs are expensed as incurred. Advertising
expenses for the three months ended June 30, 2002, 2001 and
2000 approximated $0 (unaudited), $0 (unaudited) and
$479,399 (unaudited), respectively.
(2) PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
THREE MONTHS
ENDED
JUNE 30, 2002
-------------
(Unaudited)
Leasehold improvements $ 325,842
Office equipment 3,004,449
Software costs 19,529,196
------------
22,859,487
Less accumulated depreciation and amortization 15,710,006
------------
Property and equipment, net $ 7,149,481
============
Depreciation of property and equipment totaled $505,501 (unaudited),
$756,914 (unaudited) and $984,965 (unaudited) for the three months
ended June 30, 2002, 2001 and 2000, respectively.
F-19
PPOL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED JUNE 30, 2002, 2001 AND 2000
(2) PROPERTY AND EQUIPMENT, CONTINUED:
In August 2000, the Company commenced the development of an
integrated information system to manage inventory, sales, on-line
services and distributor accounts, and incentive calculation. The
development work is being executed by outside vendors. The
capitalized software associated with this integrated information
system for the three-month period ended June 30, 2001 was $1,207,297
(unaudited). There was no capitalized software associated with this
integrated information system for the three-month period ended June
30, 2002. As of June 30, 2002, the balance of capitalized software,
net, included the software cost under development associated with
this project in the amount of $5,335,170 (unaudited).
(4) LINE OF CREDIT:
On June 30, 2002, the Company had a $2,503,200 (unaudited) line of
credit with its bank, which accrues interest at Japan's market rate.
There were no outstanding balances as of June 30, 2002.
(5) INCOME TAXES:
Income taxes imposed by the national, prefecture and municipal
governments of Japan resulted in a normal statutory tax rate of
approximately 42.1%.
Under the Japan tax law, the Company is not part of a consolidated
tax return. Therefore, the tax provision is based on the stand-alone
basis.
A reconciliation between the statutory tax rate and the effective
income tax rate is as follows:
THREE MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, 2002 JUNE 30, 2001
------------- -------------
(Unaudited) (Unaudited)
Normal statutory tax rate 42.1% 42.1%
Entertainment and other non-
deductible expenses 19.1 15.4
---------- ----------
Effective tax rate 61.2% 57.5%
========== ==========
F-20
PPOL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED JUNE 30, 2002, 2001 AND 2000
(5) INCOME TAXES, CONTINUED:
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets are as follows:
THREE MONTHS
ENDED
JUNE 30, 2002
-------------
(Unaudited)
Deferred tax assets:
Revenue recognition adjustment $ 1,716,962
Excess of accrued bonus 124,392
Reserve for product return 67,979
Resort membership admission fees 196,835
Accrued compensated absences 144,075
Excess depreciation and
amortization 558,814
Inventory write-down 325,041
Other (91,609)
------------
Total deferred tax assets $ 3,042,489
=============
Management believes that it is more likely than not that all of the
deferred tax assets will be realized through future earnings and/or
tax planning. Accordingly, no valuation allowance was recorded as of
June 30, 2001.
(6) RELATED PARTY:
In April 1995, the Company 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 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.
F-21
PPOL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED JUNE 30, 2002, 2001 AND 2000
(6) RELATED PARTY, CONTINUED:
The Company also leases its office space from Forval. The following
summarize amounts due from or to Forval and Funai and related
transaction amounts:
THREE MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, 2002 JUNE 30, 2001
------------- -------------
(Unaudited) (Unaudited)
Due from Forval -
Lease deposit $ 597,806 $ 1,153,915
Due from Funai - Advance payment 4,439,125 1,614,116
Due to Forval - Accounts payable 1,343 -
Due to Funai - Accounts payable 47,310 20,207
Transactions with Forval:
Sales - -
Purchases - -
Rental expenses 186,814 179,531
Purchase of fixed assets - 31,995
Other 868 -
Transactions with Funai:
Purchases 3,824,055 4,421,190
Other 76,514 55,890
F-22
DIVERSIFIED STRATEGIES, INC.
FINANCIAL STATEMENTS
SIX MONTHS ENDED MARCH 31, 2002 AND
YEARS ENDED SEPTEMBER 30, 2001, 2000 AND 1999
CONTENTS
PAGE
INDEPENDENT AUDITORS' REPORT F-24
FINANCIAL STATEMENTS:
Balance Sheets F-25
Statements of Operations F-26
Statement of Stockholders' Deficiency F-27
Statements of Cash Flows F-28
Notes to Financial Statements F-29 - F-34
F-23
STONEFIELD
JOSEPHSON, Inc.
Board of Directors
Diversified Strategies, Inc.
We have audited the accompanying balance sheets of Diversified Strategies, Inc.,
as of March 31, 2002 and September 30, 2001 and 2000, and the related statements
of operations, stockholders' deficiency and cash flows for the six months ended
March 31, 2002 and for the years ended September 30, 2001, 2000 and 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the 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 financial statements referred to above present fairly, in
all material respects, the financial position of Diversified Strategies, Inc. as
of March 31, 2002 and September 30, 2001 and 2000, and the results of its
operations and its cash flows for the six months ended March 31, 2002 and for
the years ended September 30, 2001, 2000 and 1999 in conformity with accounting
principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown on the financial statements,
the Company has no established source of revenues. This raises substantial doubt
about the Company's ability to continue as a going concern. Management's plans
regarding this matter is described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ Stonefield Josephson, Inc.
CERTIFIED PUBLIC ACCOUNTANTS
Santa Monica, California
August 27, 2002
F-24
DIVERSIFIED STRATEGIES, INC.
BALANCE SHEETS
ASSETS
MARCH 31, SEPTEMBER 30,
2002 2001 2000
---- ---------- ----------
Total assets $ -- $ -- $ --
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES -
Accounts payable $ 5,046 $ 5,046 $ 3,925
Due to stockholder 19,502 14,469 8,876
----------- ----------- -----------
Total current liabilities 24,548 19,515 12,801
----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES, NOTE 2
STOCKHOLDERS' DEFICIENCY:
Common stock; no par value, 100,000,000 shares
authorized, 914,746, 914,746 and 777,792 shares
issued and outstanding 1,600,042 1,600,042 1,504,127
Common stock reserved for issuance; 0, 0 and
136,955 shares -- -- 95,915
Accumulated deficit (1,624,590) (1,619,557) (1,612,843)
----------- ----------- -----------
Total stockholders' deficiency (24,548) (19,515) (12,801)
----------- ----------- -----------
$ -- $ -- $ --
=========== =========== ===========
See accompanying notes to financial statements.
F-25
DIVERSIFIED STRATEGIES, INC.
STATEMENTS OF OPERATIONS
SIX MONTHS
ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, 2002 SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2001 2000 1999
-------------- ------------- ------------- -------------
REVENUES $ -- $ -- $ -- $ --
GENERAL AND ADMINISTRATIVE EXPENSES 5,033 6,714 6,194 2,650
------- ------- ------- -------
NET LOSS $(5,033) $(6,714) $(6,194) $(2,650)
======= ======= ======= =======
NET LOSS PER COMMON SHARE,
basic and diluted $ $ $ $
======= ======= ======= =======
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING, basic and diluted ======= ======= ======= =======
See accompanying notes to financial statements.
F-26
DIVERSIFIED STRATEGIES, INC.
STATEMENT OF STOCKHOLDERS' DEFICIENCY
COMMON STOCK TOTAL
COMMON STOCK RESERVED FOR ISSUANCE ACCUMULATED STOCKHOLDERS'
------------
SHARES AMOUNT SHARES AMOUNT DEFICIT DEFICIENCY
------ ------ ------ ------ ------- ----------
Balance at September 30, 1998 711,397 1,385,752 203,350 214,290 (1,602,692) (2,650)
Issuance of common stock 66,395 118,375 (66,395) (118,375) --
Net loss -- -- -- -- (3,957) (3,957)
----------- ----------- ----------- ----------- ----------- -----------
September 30, 1999 777,792 1,504,127 136,955 95,915 (1,606,649) (6,607)
Issuance of common stock
Net loss -- -- -- -- (6,194) (6,194)
----------- ----------- ----------- ----------- ----------- -----------
Balance at September 30, 2000 777,792 1,504,127 136,955 95,915 (1,612,843) (12,801)
Issuance of common stock 136,954 95,915 (136,955) (95,915) -- --
Net loss -- -- -- -- (6,714) (6,714)
----------- ----------- ----------- ----------- ----------- -----------
Balance at September 30, 2001 914,746 1,600,042 -- -- (1,619,557) (19,515)
Net loss -- -- -- -- (5,033) (5,033)
----------- ----------- ----------- ----------- ----------- -----------
Balance at March 31, 2002 914,746 $ 1,600,042 -- $ -- $(1,624,590) $ (24,548)
=========== =========== =========== =========== =========== ===========
See accompanying notes to financial statements.
F-27
DIVERSIFIED STRATEGIES, INC.
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
SIX MONTHS
ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2000 1999
-------------- ------------- ------------- -------------
CASH FLOWS USED FOR OPERATING ACTIVITIES:
Net loss $(5,033) $(6,714) $(6,194) $(3,957)
Accounts payable -- 1,121 1,275 --
------- ------- ------- -------
(5,033) (5,593) (4,919) (3,957)
------- ------- ------- -------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Proceeds from officers 5,033 5,593 4,919 3,957
------- ------- ------- -------
NET INCREASE (DECREASE) IN CASH -- -- -- --
CASH AND CASH EQUIVALENTS, beginning of year -- -- -- --
------- ------- ------- -------
CASH AND CASH EQUIVALENTS, end of year $ -- $ -- $ -- $ --
======= ======= ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ -- $ -- $ -- $ --
======= ======= ======== ========
Income taxes paid $ -- $ -- $ -- $ --
======= ======= ======== ========
See accompanying notes to financial statements.
F-28
DIVERSIFIED STRATEGIES, INC.
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED MARCH 31, 2002 AND
YEARS ENDED SEPTEMBER 30, 2001, 2000 AND 1999
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION:
Diversified Strategies, Inc. ("the Company or DSI"), was
incorporated on May 19, 1993 in California but was inactive
until October 15, 1993. The Company was formed as the
reorganized debtor of SelecTV of California, Inc.
("SelecTV") and Telstar Satellite Corporation of America
("Telstar"). Both companies filed petitions for relief
under Chapter 11 of the Federal Bankruptcy laws on December
16, 1988 and March 17, 1989 for Telstar and SelecTV,
respectively. Under the Joint Plan of Reorganization (the
"Plan") filed by SelecTV and Telstar, confirmed and
declared effective on November 20, 1992 and October 15,
1993, respectively, DSI acquired, in exchange for its
common stock, preferred stock and warrants, certain assets
of SelecTV and net proceeds from the liquidation of zero
coupon bonds underlying certain revenue bonds previously
issued by Telstar. Proceeds generated from the liquidation
of the zero coupon bonds were first used to pay
administrative expenses arising out of the SelecTV and
Telstar Chapter 11 proceedings and certain tax claims
against SelecTV. The aforementioned claims were assumed by
the Company in accordance with the Plan.
GOING CONCERN:
The Company's financial statements have been presented on
the basis that the Company will continue as a going
concern, which contemplates the realization of assets and
the satisfaction of liabilities in the normal course of
business. The Company has no established sources of
revenues. This raises substantial doubt about the Company's
ability to continue as a going concern unless the Company
raise additional capital and establish a source of revenue.
Management is currently attempting to acquire an operating
subsidiary. The financial statements do not include any
adjustments that might be necessary if the Company is
unable to continue as a going concern.
USE OF ESTIMATES:
The preparation of financial statements in conformity with
accounting principles generally accepted in the United
States of America requires management to make estimates and
assumptions that affect certain reported amounts of assets
and 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 from those
estimates.
FAIR VALUE:
The Company's financial instruments consist principally of
an amount due to a stockholder for which the carrying value
approximates its fair value due to the short-term nature of
this amount.
F-29
DIVERSIFIED STRATEGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED MARCH 31, 2002 AND
YEARS ENDED SEPTEMBER 30, 2001, 2000 AND 1999
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED:
COMPREHENSIVE LOSS:
Comprehensive loss consists of net loss only, and
accordingly, a Statement of Comprehensive Loss is not
presented.
INCOME TAXES:
Deferred income taxes are reported using the liability
method. Deferred tax assets are recognized for deductible
temporary differences and deferred tax liabilities are
recognized for taxable temporary differences. Temporary
differences are the differences between the reported
amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities
are adjusted for the effects of changes in tax laws and
rates on the date of enactment.
NEW ACCOUNTING PRONOUNCEMENTS:
In July 2001, the FASB issued SFAS No. 141 "Business
Combinations." SFAS No. 141 supersedes Accounting
Principles Board ("APB") No. 16 and requires that any
business combinations initiated after June 30, 2001 be
accounted for as a purchase; therefore, eliminating the
pooling-of-interest method defined in APB 16. The statement
is effective for any business combination initiated after
June 30, 2001 and shall apply to all business combinations
accounted for by the purchase method for which the date of
acquisition is July 1, 2001 or later. The adoption did not
have a material impact to the Company's financial position
or results of operations, since the Company has not
participated in such activities covered under this
pronouncement after the effective date.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and
Other Intangibles." SFAS No. 142 addresses the initial
recognition, measurement and amortization of intangible
assets acquired individually or with a group of other
assets (but not those acquired in a business combination)
and addresses the amortization provisions for excess cost
over fair value of net assets acquired or intangibles
acquired in a business combination. The statement is
effective for fiscal years beginning after September 15,
2001, and is effective July 1, 2001 for any intangibles
acquired in a business combination initiated after June 30,
2001. The Company does not expect the adoption to have a
material impact to the Company's financial position or
results of operations.
F-30
DIVERSIFIED STRATEGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED MARCH 31, 2002 AND
YEARS ENDED SEPTEMBER 30, 2001, 2000 AND 1999
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED:
NEW ACCOUNTING PRONOUNCEMENTS, CONTINUED:
In October 2001, the FASB recently issued SFAS No. 143,
"Accounting for Asset Retirement Obligations," which
requires companies to record the fair value of a liability
for asset retirement obligations in the period in which
they are incurred. The statement applies to a company's
legal obligations associated with the retirement of a
tangible long-lived asset that results from the
acquisition, construction, and development or through the
normal operation of a long-lived asset. When a liability is
initially recorded, the company would capitalize the cost,
thereby increasing the carrying amount of the related
asset. The capitalized asset retirement cost is depreciated
over the life of the respective asset while the liability
is accreted to its present value. Upon settlement of the
liability, the obligation is settled at its recorded amount
or the company incurs a gain or loss. The statement is
effective for fiscal years beginning after June 30, 2002.
The Company does not expect the adoption to have a material
impact to the Company's financial position or results of
operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets".
Statement 144 addresses the accounting and reporting 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. This statement is
effective for fiscal years beginning after September 15,
2001. The Company does not expect the adoption to have a
material impact to the Company's financial position or
results of operations.
In April 2002, the FASB issued Statement No. 145,
"Rescission of FASB Statements No. 4, 44, and 64, Amendment
of FASB Statement No. 13, and Technical Corrections." This
Statement rescinds FASB Statement No. 4, "Reporting Gains
and Losses from Extinguishment of Debt", and an amendment
of that Statement, FASB Statement No. 64, "Extinguishments
of Debt Made to Satisfy Sinking-Fund Requirements" and FASB
Statement No. 44, "Accounting for Intangible Assets of
Motor Carriers". This Statement amends FASB Statement No.
13, "Accounting for Leases", to eliminate an inconsistency
between the required accounting for sale-leaseback
transactions and the required accounting for certain lease
modifications that have economic effects that are similar
to sale-leaseback transactions. The Company does not expect
the adoption to have a material impact to the Company's
financial position or results of operations.
F-31
DIVERSIFIED STRATEGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED MARCH 31, 2002 AND
YEARS ENDED SEPTEMBER 30, 2001, 2000 AND 1999
(2) COMMITMENTS AND CONTINGENCIES:
During the year ended September 30, 1996, the Company entered into an
agreement with the Internal Revenue Service for payment of delinquent
tax payments. The agreement stipulated that the Company would place
6,502 shares of its common stock in a trust account for which the
Chairman of the Company would be the trustee. The trust shares would
be sold in the market and the funds used to pay the delinquent taxes.
As of March 31, 2002, the shares of common stock have not been sold
and the delinquent taxes have not been extinguished.
(3) SHAREHOLDERS' EQUITY:
PREFERRED STOCK
The Company's Board of Directors (the "Board") has authority, without
action by the shareholders, to issue preferred stock from time to
time in series having such designated preferences, rights,
qualifications and limitations as the Board may determine.
(4) INCOME TAXES:
The components of the provision for income taxes is as follows:
March 31, SEPTEMBER 30,
----------------------------------------------------
2002 2001 2000 1999
---- -------------- --------------- -------------
Current tax expense:
U.S. Federal $ - $ - $ - $ -
State and local - - - -
---------------- -------------- -------------- ---------------
Total current - - - -
---------------- -------------- -------------- ---------------
Deferred tax expense:
U.S. Federal - - - -
State and local - - - -
---------------- -------------- -------------- ---------------
Total deferred - - - -
---------------- -------------- -------------- ---------------
Total tax provision from
continuing operations $ - $ - $ - $ -
================ ============== ============== ===============
F-32
DIVERSIFIED STRATEGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED MARCH 31, 2002 AND
YEARS ENDED SEPTEMBER 30, 2001, 2000 AND 1999
(4) INCOME TAXES, CONTINUED:
The reconciliation of the effective income tax rate to the federal
statutory rate is as follows:
March 31, SEPTEMBER 30,
----------------------------------------------------
2002 2001 2000 1999
---- -------------- --------------- -------------
Federal income tax rate (34.0)% (34.0)% (34.0)% (34.0)%
Effect of valuation allowance 34.0 34.0 34.0 34.0
----------- ----------- ----------- ------------
Total income tax rate 0.0% 0.0% 0.0% 0.0%
=========== =========== =========== ============
At March 31, 2002, the Company had net carryforward losses of
approximately $1,050,000. A valuation allowance equal to the tax
benefit for deferred taxes has been established due to the
uncertainty of realizing the benefit of the tax carryforward.
Deferred tax assets and liabilities reflect the net tax effect of
temporary differences between the carrying amount of assets and
liabilities for financial reporting purposes and amounts used for
income tax purposes. Significant components of the Company's deferred
tax assets and liabilities at September 30 are as follows:
March 31, SEPTEMBER 30,
----------------------------------------------------
2002 2001 2000 1999
---- -------------- --------------- -------------
Deferred tax assets:
Loss carryforwards $ 367,000 $ 367,000 $ 367,000 $ 367,000
Less valuation allowance (367,000) (367,000) (367,000) (367,000)
-------------- ---------------- --------------- -------------
Net deferred tax assets $ - $ - $ - $ -
============== ================ =============== =============
Net operating loss carryforwards expire in 2009 through 2011.
As of the date of the Plan, certain federal tax disputes were pending
related to SelecTV and Telstar. The Board of the Company authorized
management to negotiate a settlement with the Internal Revenue
Service ("IRS") on behalf of SelecTV and Telstar in order to resolve
the dispute although the Company did not assume any tax liabilities
of these entities as part of the Plan. In connection with a
settlement with the IRS, the Company agreed to pay the IRS $35,000 in
cash and issue to the IRS approximately 50,000 shares of common stock
as full payment for the tax disputes. 45,517 shares of stock were
subsequently issued (see Note 2).
F-33
DIVERSIFIED STRATEGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED MARCH 31, 2002 AND
YEARS ENDED SEPTEMBER 30, 2001, 2000 AND 1999
(5) SUBSEQUENT EVENTS:
MERGER
On August 15, 2002, the Company entered into an agreement which was
effective April 1, 2002, to acquire 100% (7,000 shares) of the
outstanding common stock of AJOL Co, Ltd for 17,095,174 shares of the
Company's common stock.
COMMON STOCK
The Company has issued 13,571 and cancelled 28,571 shares of its
common stock.
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, to change its name to PPOL, Inc. and to effect a 1 to 7
reverse stock split. All share data presented in these financial
statements have been affected for the reverse stock split.
F-34