UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment No. 2
Mark one:
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to _______
Commission File Number 000-50065
PPOL, Inc.
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(Exact name of registrant as specified in its charter.)
California 95-4436774
---------- ----------
(State of Incorporation) (IRS Employer Identification No.)
1 City Boulevard West, Suite 870, Orange, California 92868
- ---------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (714) 221-7250
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock $0.001 par value 17,994,920
----------------------------- ------------------------------------
(Class) (Outstanding at December 31, 2002.)
1
PPOL, Inc.
2002 Quarterly Report on Form 10-Q
Table of Contents
PART 1: 3
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ITEM 1: FINANCIAL STATEMENTS 3
Consolidated Balance Sheets as of December 31 and March 31, 2002 3
Consolidated Statements of Income and Comprehensive Income for
the Three Months Ended December 31, 2002 and 2001 4
Consolidated Statements of Income and Comprehensive Income for
the Nine Months Ended December 31, 2002 and 2001 5
Consolidated Statements of Cash Flows for Nine Months Ended
December 31, 2002 and 2001 6
Notes to Consolidated Financial Statements 7
ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 13
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 15
ITEM 4: CONTROLS AND PROCEDURES 22
PART 2: 22
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ITEM 1: LEGAL PROCEEDINGS 22
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS 22
ITEM 3: DEFAULTS UPON SENIOR SECURITIES 22
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 22
ITEM 5: OTHER INFORMATION 22
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 22
SIGNATURES 23
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CERTIFICATIONS 24
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EXHIBIT: 26
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Exhibit 99 - Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 26
2
Part 1:
Item 1: Financial Statements
PPOL, INC.
CONSOLIDATED BALANCE SHEETS
December 31, March 31,
2002 2002
-------------- --------------
(Unaudited) (Restated)
ASSETS (Restated)
CURRENT ASSETS:
Cash and cash equivalents $ 14,313,481 $ 11,716,893
Trade accounts receivable, net of allowance for
doubtful accounts of $2,000 and $7,000 1,288,699 2,390,823
Merchandise Inventories 2,932,907 1,077,047
Advance payments to related parties 1,987,008
Advance payments 3,262,225
Deferred income taxes 10,021,875 10,055,692
Prepaid expenses and other 1,375,720 354,514
-------------- --------------
Total current assets 33,194,907 27,581,977
PROPERTY AND EQUIPMENT, net 6,286,588 6,927,851
DEFERRED COSTS 120,536,618 112,114,093
DEFERRED INCOME TAXES 7,071,927 6,693,738
LEASE DEPOSITS, INCLUDING RELATED PARTIES 671,361 601,167
OTHER ASSETS 820,026 864,778
-------------- --------------
$ 168,581,427 $ 154,783,604
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, including related parties $ 10,792,317 $ 12,731,466
Advances received 9,190,664 2,342,533
Income taxes payable 309,199 1,458,752
Other current liabilities 978,741 1,624,743
-------------- --------------
Total current liabilities 21,270,921 18,157,494
-------------- --------------
Deferred revenue 158,209,964 148,436,967
-------------- --------------
SHAREHOLDERS' DEFICIT:
Common Stock; $0.001 par value; 100,000,000 shares
authorized; 17,994,920 (unaudited) and 17,095,174 shares
issued and outstanding as of December 31 and
March 31, 2002, respectively 17,995 17,095
Additional paid-in capital 3,367,157 3,392,605
Total other comprehensive income 3,345,885 6,538,859
Accumulated Deficit (17,630,495) (21,759,416)
-------------- --------------
Total shareholders' deficit (10,899,458) (11,810,857)
-------------- --------------
$ 168,581,427 $ 154,783,604
============== ==============
The accompanying notes are an integral part
of these consolidated financial statements.
3
PPOL, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Three months ended Three months ended
December 31, December 31,
2002 2001
------------- -------------
(Unaudited) (Unaudited)
(Restated) (Restated)
NET REVENUE:
Product sales and network services $ 29,299,563 $ 29,042,593
Other on-line services 4,649,824 3,325,101
------------- -------------
Total 33,949,387 32,367,694
------------- -------------
COSTS AND EXPENSES:
Cost of sales 7,771,727 7,229,641
Distributor incentives 17,354,941 17,353,177
Selling, general and administrative expenses 6,537,395 5,273,906
------------- -------------
Total costs and expenses 31,664,063 29,856,724
------------- -------------
OPERATING INCOME 2,285,324 2,510,970
OTHER EXPENSE, net 55,879 13,792
------------- -------------
INCOME BEFORE INCOME TAXES 2,229,445 2,497,178
------------- -------------
INCOME TAXES:
Current 291,148 419,217
Deferred 377,040 2,426,652
------------- -------------
Total income taxes 668,188 2,845,869
------------- -------------
NET INCOME (LOSS) 1,561,257 (348,691)
OTHER COMPREHENSIVE (LOSS) GAIN -
Cumulative foreign currency translation (665,358) 2,894,628
------------- -------------
COMPREHENSIVE INCOME $ 895,899 $ 2,545,937
============= =============
NET INCOME PER COMMON SHARE,
Basic and diluted $ 0.09 $ (0.02)
============= =============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC AND DILUTED 17,994,920 17,095,174
============= =============
The accompanying notes are an integral part of
these consolidated financial statements.
4
PPOL, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Nine months ended Nine months ended
December 31, December 31,
2002 2001
-------------- --------------
(Unaudited) (Unaudited)
(Restated) (Restated)
NET REVENUE:
Product sales and network services $ 88,916,119 $ 88,340,898
Other on-line services 12,497,365 9,854,274
-------------- --------------
Total 101,413,484 98,195,172
-------------- --------------
COSTS AND EXPENSES:
Cost of sales 22,837,523 22,411,941
Distributor incentives 52,656,767 52,252,336
Selling, general and administrative
expenses 19,371,130 16,244,123
-------------- --------------
Total costs and expenses 94,865,420 90,908,400
-------------- --------------
OPERATING INCOME 6,548,064 7,286,772
OTHER EXPENSE, net 40,231 54,346
-------------- --------------
INCOME BEFORE INCOME TAXES 6,507,833 7,232,426
-------------- --------------
INCOME TAXES:
Current 1,776,014 1,802,697
Deferred (344,372) 2,438,019
-------------- --------------
Total income taxes 1,431,642 4,240,716
-------------- --------------
NET INCOME 5,076,191 2,991,710
OTHER COMPREHENSIVE (LOSS) GAIN -
Cumulative foreign currency translation (3,192,974) 1,104,575
-------------- --------------
COMPREHENSIVE INCOME $ 1,883,217 $ 4,096,285
============== ==============
NET INCOME PER COMMON SHARE,
Basic and diluted $ 0.29 $ 0.18
============== ==============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC AND DILUTED 17,549,991 17,095,174
============== ==============
The accompanying notes are an integral part of these
consolidated financial statements.
5
PPOL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended Nine months ended
December 31, December 31,
2002 2001
------------- -------------
(Unaudited) (Unaudited)
(Restated) (Restated)
CASH FLOWS PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Net income $ 5,076,191 $ 2,991,710
------------- -------------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY (USED FOR)
OPERATING ACTIVITIES:
Depreciation and amortization 1,698,088 1,966,798
Loss on sales/disposal of property and equipment 8,316 79,695
Deferred income taxes (344,372) 2,438,019
Loss on write-off of deposits 85,548 --
Loss on write-down of software 95,839 --
CHANGES IN ASSETS AND LIABILITIES:
(INCREASE) DECREASE IN ASSETS:
Trade accounts receivables 1,335,839 644,556
Merchandise Inventories (1,673,170) 1,242,063
Advance payments to related parties (1,008,871) 1,096,010
Deferred costs 4,515,177 6,586,295
Prepaid expenses and other (956,887) (70,863)
INCREASE (DECREASE) IN LIABILITIES:
Accounts payable, including related parties (3,308,192) (6,233,533)
Advances received 5,890,324 1,354,737
Deferred revenue (7,310,922) (10,764,772)
Income taxes payable (1,276,455) (1,531,161)
Other current liabilities (808,215) (122,563)
------------- -------------
Total adjustments (3,057,953) (3,314,719)
------------- -------------
Net cash provided by (used for) operating activities 2,018,238 (323,009)
------------- -------------
CASH FLOWS USED FOR INVESTING ACTIVITIES:
Purchase of property and equipment (603,683) (3,401,428)
Net decrease in lease deposits -- 589,770
Other assets (57,695) (59,948)
------------- -------------
Net cash used for investing activities (661,378) (2,871,606)
------------- -------------
CASH FLOWS USED FOR FINANCING ACTIVITIES -
Short Term Borrowings -- 2,448,600
Dividends paid (947,270) (942,711)
------------- -------------
Net cash (used for) provided by financing activities (947,270) 1,505,889
------------- -------------
EFFECTS OF EXCHANGE RATE 2,186,998 66,508
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,596,588 (1,622,218)
CASH AND CASH EQUIVALENTS, beginning of period 11,716,893 10,914,661
------------- -------------
CASH AND CASH EQUIVALENTS, end of period $ 14,313,481 $ 9,292,443
============= =============
SUPPLEMENTAL CASH FLOW INFORMATION -
Income taxes paid $ 3,051,506 $ 3,333,911
============= =============
Interest paid $ 1,767 $ 6,513
============= =============
Theaccompanying notes are an integral part of
these consolidated financial statements.
6
PPOL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED DECEMBER 31, 2002 AND 2001 (UNAUDITED)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION:
The unaudited financial statements have been prepared by PPOL,
Inc. (the "Company"), pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information
and footnote disclosures normally present in annual financial
statements prepared in accordance with accounting principles
generally accepted in the United States of America have been
omitted pursuant to such rules and regulations. The
information furnished herein reflects all adjustments
(consisting of normal recurring accruals and adjustments)
which are, in the opinion of management, necessary to fairly
present the operating results for the prospective periods.
These 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, as amended. The results of the nine months ended
December 31, 2002 are not necessarily indicative of the
results to be expected for the full year ending March 31,
2003.
RESTATEMENT OF PRIOR FINANCIAL INFORMATION
The Company had conducted an internal review of its revenue
recognition policies under the direction of the Company's
Chief Financial Officer. The Company sells the MOJICO hardware
for approximately $2,900 per unit and simultaneously charges
admission fees of approximately $150 to customers which afford
them the right to be a distributor for one year. As a result
of the review, the Company noted that customers renew and
remain distributors with the Company for an average of 3 years
in total. As such, the Company has revised its revenue
recognition policy on sales of MOJICO units. Revenues and
related costs of MOJICO units are now deferred and recognized
over 3 years. The Company previously recognized revenue from
MOJICO sales over a period of 3 months. Therefore, in
connection with this internal review, the financial results
for each of the years ended March 31, 2002, 2001 and 2000 are
being restated. Additionally, the company has restated the
three and nine months ended December 31, 2002 and 2001, the
three and six months ended September 30, 2002 and 2001 and the
three months ended June 30, 2002. The total impact of the
adjustments as of December 31, 2002 and for the three and nine
months ended December 31, 2002 is as follows:
------------------------------------------------
December 31, 2002
------------------------------------------------
Restated Original Change
-------- -------- ------
increase
(decrease)
- ----------------------------------------------------------------------------------------------------
Deferred costs - current 68,513,799 7,326,226 61,187,573
- ----------------------------------------------------------------------------------------------------
Deferred costs - long term 52,022,819 - 52,022,819
- ----------------------------------------------------------------------------------------------------
Deferred income taxes- current 10,021,875 2,168,396 7,853,479
- ----------------------------------------------------------------------------------------------------
Deferred income taxes - long term 7,071,927 794,700 6,277,227
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Total assets 168,581,427 41,240,327 127,341,100
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Other current liabilities 978,741 1,116,744 (138,003)
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Deferred revenues - current 91,259,138 11,257,036 80,002,102
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Deferred revenues - long term 66,950,826 - 66,950,826
- ----------------------------------------------------------------------------------------------------
Total liabilities 179,480,885 32,182,102 147,298,783
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Total other comprehensive income (loss) 3,345,885 (1,299,096) 4,644,981
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Retained earnings (accumulated deficit) (17,630,495) 6,972,169 (24,602,664)
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Total shareholders' equity (deficit) (10,899,458) 9,058,225 (19,957,683)
- ----------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity (deficit) 168,581,427 41,240,327 127,341,100
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7
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
RESTATEMENT OF PRIOR FINANCIAL INFORMATION (CONTINUED):
-------------------------------------------------------------------------------------------
Three Months Ended December 31:
-------------------------------------------------------------------------------------------
2002 2001
---- ----
Restated Original Change Restated Original Change
-------- -------- ------ -------- -------- ------
increase increase
(decrease) (decrease)
- ------------------------------------------------------------------------------------------------------------------------------------
Product sales and network services $29,299,563 $27,590,133 $1,709,430 $29,042,593 $26,525,598 $2,516,995
- ------------------------------------------------------------------------------------------------------------------------------------
Cost of sales 7,771,727 7,182,110 589,617 7,229,641 6,373,400 856,241
- ------------------------------------------------------------------------------------------------------------------------------------
Distributor incentives 17,354,941 16,593,086 761,855 17,353,177 16,740,910 612,267
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income 2,285,324 1,927,366 357,958 2,510,970 1,462,483 1,048,487
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 2,229,445 1,871,487 357,958 2,497,178 1,448,691 1,048,487
- ------------------------------------------------------------------------------------------------------------------------------------
Income taxes - deferred 377,040 366,924 10,116 2,426,652 348,136 2,078,516
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) 1,561,257 1,213,415 347,842 (348,691) 681,338 (1,030,029)
- ------------------------------------------------------------------------------------------------------------------------------------
Cummulative foreign currency translation (665,358) 188,188 (853,546) 2,894,628 (654,390) 3,549,018
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income (Loss) 895,899 1,401,603 (505,704) 2,545,937 26,948 2,518,989
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
Nine Months Ended December 31:
-------------------------------------------------------------------------------------------
2002 2001
---- ----
Restated Original Change Restated Original Change
-------- -------- ------ -------- -------- ------
increase increase
(decrease) (decrease)
- ------------------------------------------------------------------------------------------------------------------------------------
Product sales and network services $88,916,119 $89,066,086 $(149,967) $88,340,898 $80,054,428 $8,286,470
- ------------------------------------------------------------------------------------------------------------------------------------
Cost of sales 22,837,523 22,911,538 (74,015) 22,411,941 22,073,706 338,235
- ------------------------------------------------------------------------------------------------------------------------------------
Distributor incentives 52,656,767 54,149,447 (1,492,680) 52,252,336 48,018,435 4,233,901
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income 6,548,064 5,136,591 1,411,473 7,286,772 3,572,438 3,714,334
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 6,507,833 5,091,105 1,416,728 7,232,426 3,518,092 3,714,334
- ------------------------------------------------------------------------------------------------------------------------------------
Income taxes - deferred (344,372) 393,135 (737,507) 2,438,019 217,542 2,220,477
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 5,076,191 2,921,956 2,154,235 2,991,710 1,497,853 1,493,857
- ------------------------------------------------------------------------------------------------------------------------------------
Cummulative foreign currency translation (3,192,974) 463,022 (3,655,996) 1,104,575 (308,395) 1,412,970
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income (Loss) 1,883,217 3,384,978 (1,501,761) 4,096,285 1,189,458 2,906,827
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
The changes noted above are entirely attributable to revenue
recognition and associated deferral of costs of product sales
and network service revenues as discussed above. The
restatement resulted in an increase in earnings per share of
$0.02 (from $0.07 to $0.09) for the three months ended
December 31, 2002 and a decrease in earnings per share of
$0.06 (from earnings per share of $0.04 to net loss per share
of $0.02) for the three months ended December 31, 2001. The
restatement resulted in an increase in earnings per share of
$0.12 (from $0.17 to $0.29) for the nine months ended December
31, 2002 and a decrease in earnings per share of $0.09 (from
$0.09 to $0.18) for the nine months ended December 31, 2001.
The financial results presented in this report reflect the
restatement of the Company's financial results. Based on the
substantial work done to date, the Company does not expect any
further restatements as a result of its internal review.
ORGANIZATION:
PPOL, Inc. ("PPOL") (formerly Diversified Strategies, Inc.),
incorporated on May 19, 1993 in California, is primarily
engaged in sales of multi-functional telecommunications
equipment called MOJICO. The Company distributes MOJICO
throughout Japan through a network marketing system. The
Company has a network of registered distributors located
throughout Japan that introduce purchasers to the Company. The
Company operates in one operating segment.
8
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION (CONTINUED):
Using MOJICO, the Company provides original telecommunication
services called "Pan Pacific Online," including MOJICO
bulletin board and mail services. The Company also provides
various other on-line services through Pan Pacific Online such
as ticket and mail-order services. These sales and services
are provided in Japan.
On August 15, 2002, the Company amended its articles of
incorporation to increase its authorized shares of common
stock from 10,000,000 to 100,000,000, change its name to PPOL,
Inc. and effected a 1 for 7 reverse stock split. All share
data presented in these financial statements reflect the
reverse stock split.
Effective April 1, 2002, AJOL Co., LTD. ("AJOL") was acquired
by PPOL in a transaction accounted for as a reverse merger.
The Company, upon closing of the transaction on August 15,
2002, issued 899,746 shares (post split) of its common stock
for all of the issued and outstanding common stock of AJOL.
These shares will be added into the outstanding shares of the
Company on the date of the transaction, August 15, 2002;
accordingly, they will then be included in the total common
shares outstanding thereafter. For legal purposes, PPOL is the
acquirer. For accounting purposes, AJOL has been treated as
the acquirer and accordingly, AJOL is presented as the
continuing entity, and the historical financial statements are
those of AJOL. Prior to the reverse merger PPOL had no
business activity, thus pro-forma information as though PPOL
and AJOL had been combined for all periods has not been
provided. AJOL and PPOL are collectively referred to herein as
the "Company."
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include accounts of the
PPOL, Inc. and its wholly owned subsidiary, AJOL, Ltd. All
significant intercompany balances and transactions have been
eliminated upon consolidation.
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% (unaudited) of accounts receivable at
December 31, 2002. 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 nine months ended December 31, 2002 and 2001
approximated $614,391 (unaudited) and $1,082,167 (unaudited),
respectively.
ADVERTISING COSTS:
Advertising costs are expensed as incurred. Advertising
expenses for the nine months ended December 31, 2002 and 2001
approximated $10,521 (unaudited) and $15,737 (unaudited),
respectively.
9
(2) PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
December 31, March 31,
2002 2002
------------- -------------
(Unaudited)
Leasehold improvements $ 344,189 $ 294,476
Office equipment 2,968,912 2,708,545
Software costs 5,360,052 17,642,168
------------- -------------
8,673,153 20,645,189
Less accumulated depreciation and amortization (2,386,565) (13,717,338)
------------- -------------
Property and equipment, net $ 6,286,588 $ 6,927,851
============= =============
Depreciation and amortization of property and equipment totaled
$1,698,088 (unaudited) and $1,966,798 (unaudited) for the nine months
ended December 31, 2002 and 2001, 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
was executed by outside vendors and placed in service in September
2002. The capitalized software associated with this integrated
information system at December 31, 2002 was $273,800 (unaudited).
(3) LINE OF CREDIT:
On December 31, 2002, the Company had available $2,526,330 (unaudited)
under a line of credit with its bank, which accrues interest at Japan's
market rate. There was no balance outstanding at December 31, 2002.
(4) ACCUMULATED DEFICIT:
The following provides a reconciliation of Accumulated Deficit for the
nine months ended December 31, 2002. (Restated for the nine months
ended December 31, 2002.)
Accumulated Deficit, March 31, 2002 $ (21,759,416)
Net income for the nine months
ended December 31, 2002 5,076,191
Dividends Paid (947,270)
--------------
Accumulated Deficit, December 31, 2002 $ (17,630,495)
==============
10
(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 Japanese tax law, the tax provision
encompasses only the operations of the Company's Japanese operating
subsidiary, AJOL, as a stand alone entity apart from the operations of
the Company's Japanese parent, Forval Corporation (" Forval").
A reconciliation between the statutory tax rate and the effective
income tax rate is as follows:
Nine months ended Nine months ended
December 31, December 31,
2002 2001
------------------------------------
(Unaudited) (Unaudited)
Normal statutory tax rate 42.1% 42.1%
Entertainment and other non-
deductible expenses 10.6 14.6
Other (10.1) 0.7
------ ------
Effective tax rate 42.6% 57.4 %
======= =======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets are as follows (Restated as of
December 31, 2002 and March 31, 2002.):
December 31, March 31,
2002 2002
------------- -------------
(Unaudited)
Deferred tax assets (liabilities):
Deferred Revenue $66,283,577 $61,946,415
Deferred Costs (50,499,969) (46,787,984)
Excess of accrued bonus 98,788 108,321
Reserve for product return 58,030 115,333
Resort membership admission fees 231,589 177,883
Accrued compensated absences 103,243 124,035
Excess depreciation and
Amortization 521,443 586,606
Inventory write-down 220,624 338,136
Other 76,477 140,685
------------ ------------
Total net deferred tax assets $17,093,802 $16,749,430
============ ============
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
December 31, 2002 (unaudited).
11
(6) RELATED PARTY TRANSACTIONS:
In March, 2002, Funai Electric Co. (Funai) liquidated its entire equity
interest in AJOL. Accordingly, all purchases, subsequent to March 31,
2002 of MOJICO and related Advance Payments and other transactions are
not considered to be related party transactions.
The Company leases the majority of its office space from Forval, it's
parent. The following summarizes amounts due from or to Forval and
related transaction amounts. Transactions with and Advances to Funai
subsequent to March 31, 2002 are not considered related party
transactions.
Nine months ended Nine months ended
December 31, December 31,
2002 2001
------------------------------------
(Unaudited) (Unaudited)
Due from Forval -
Lease deposit $ 603,330 $ 546,895
Due from Funai - Advance payment NA 1,930,029
Due to Forval - Accounts payable 26,729
Transactions with Forval:
Sales -- 37,636
Rental expenses 546,979 548,226
Other 25,595 15,990
Transactions with Funai:
Purchases N/A 9,994,933
Other N/A 166,263
PPOL entered into separate agreements with Forval and Leo Global Fund,
its two majority shareholders, in which PPOL is to provide certain
consulting services during fiscal 2003. As provided for in the
agreements, PPOL received $493,858 from Forval and Leo Global Fund.
Since the Company has not completed the consulting services called for
in the agreements prior to December 31, 2002, the payments received are
included in advances received, as a liability, at December 31, 2002.
There is no assurance that PPOL will receive such projects from Forval
and Leo Global Fund in the future.
(7) COMMITMENTS:
The Company entered into a lease agreement for approximately 1,793
square feet of office space in Orange, California for a term of 24
months from October 1, 2002 through December 31, 2004. The lease calls
for an initial annual base rent of approximately $39,800 with a 2.7%
increase after the first 12 months. Additionally, the Company is
responsible for a portion of the building's common area expenses.
12
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS:
Certain matters discussed in this Quarterly Report on Form 10-Q are
"forward-looking statements" intended to qualify for the safe harbor
from liability provided by the Private Securities Litigation Reform Act
of 1995. These forward-looking statements can generally be identified
as such because the context of the statement will include words such as
PPOL "believes", "anticipates", "expects", or words of similar import.
Similarly, statements which describe PPOL's future plans, objectives or
goals are also forward-looking statements. Such forward-looking
statements are subject to certain risks and uncertainties which are
described in close proximity to such statements and which could cause
actual results to differ materially from those anticipated as of the
date of this Report. Shareholders, potential investors and other
readers are urged to consider these factors in evaluating the
forward-looking statements and are cautioned not to place undue
reliance on such forward-looking statements. The forward-looking
statements included herein are only made as of the date of this Report
and PPOL undertakes no obligation to publicly update such
forward-looking statements to reflect subsequent events or
circumstances, except as required under applicable laws.
OVERVIEW
PPOL, Inc., a California corporation, conducts its business primarily
though its wholly owned Japanese subsidiary, AJOL, Ltd., a Japanese
corporation (hereafter, collectively referred to as PPOL or the
"Company.") At the present time, the Company has administrative
functions occurring in California, but does not otherwise have any
business in the US.
The Company's revenues are derived from the sales of (1) its "MOJICO"
hardware, a multifunctional facsimile based machine with networking
capabilities, (2) subscriptions to PPOL's proprietary "Pan Pacific
Online" interactive database that can only be accessed through it
MOJICO hardware and (3) various consumer products that utilize the
Company's "Kamome" brand.
RESULTS OF OPERATIONS - NINE MONTHS ENDED DECEMBER 31, 2002
PRODUCT SALES AND NETWORK SERVICES. For the nine months ended December
31, 2002, overall revenues of this category remained at levels
consistent with the same period of the prior year. However, within this
category, sales of MOJICO hardware declined approximately $530,000
(less than 1%) while sales of new and continuing Pan Pacific On-Line
subscriptions increased by approximately $1.1 million (11.9%).
OTHER ONLINE SERVICES REVENUE. For the nine months ended December 31,
2002, revenues increased 26.8% over the comparable period of the prior
year. This is a result of the Company's continuing efforts to expand
the on-line service business while also shifting the mix of products to
those with higher margins.
COST OF SALES. For the nine months ended December 31, 2002, cost of
sales expressed as a percentage of sales remained consistent with the
same period of the prior year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. For the nine months ended
December 31, 2002, selling, general and administrative expenses have
increased by 19.2% over the same period of the prior year. This is
primarily the result of the expenses incurred relating to the Company's
SEC registration process as well as expenses incurred related to the
newly introduced integrated information system. Additionally, sales
promotion expenses, particularly direct mail and distributor training,
have increased over the prior period as well.
13
RESULTS OF OPERATIONS - THREE MONTHS ENDED DECEMBER 31, 2002
PRODUCT SALES AND NETWORK SERVICES. For the three months ended December
31, 2002, overall revenues of this category increased approximately
0.9% compared with the same period of the prior year. The increase was
primarily due to an increase of new and continuing Pan Pacific On-Line
subscriptions.
OTHER ONLINE SERVICES REVENUE. For the three months ended December 31,
2002, revenues increased 39.8% over the comparable period of the prior
year. This is a result of the Company's continuing efforts to expand
the on-line service business while also shifting the mix of products to
those with higher margins.
COST OF SALES. For the three months ended December 31, 2002, cost of
sales expressed as a percentage of sales remained consistent with the
same period of the prior year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. For the three months ended
December 31, 2002, selling, general and administrative expenses have
increased by 23.9% over the same period of the prior year. This is
primarily the result of the expenses incurred relating to the Company's
SEC registration process as well as expenses incurred related to the
newly introduced integrated information system. Additionally, sales
promotion expenses, particularly direct mail and distributor training,
have increased over the prior period as well.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $14,313,481 and US $11,716,893 at
December 31, 2002 and March 31, 2002, respectively. Cash provided from
(used in) operations for the nine months ended December 31, 2002 and
2001 was $2,018,238 and ($323,009), respectively. The Company also has
an available line of credit of $ 2.5 million. This revolving bank
credit facility is generally used to finance temporary operating cash
requirements. Management believes that cash flow from operations and
the revolving credit facility will adequately meet the working capital
needs for the foreseeable future.
PPOL has experienced positive cash flows in the nine month period ended
December 31, 2002 as a result of an approximate $5,900,000 increase in
advances received. Advances received represent the balance of customer
receipts prior to shipment of the MOJICO product. Positive cash flows
also resulted from a decrease in deferred costs approximating
$4,515,000 for the same nine month period. Deferred costs are comprised
of the costs for MOJICO hardware and distributor commissions. These
positive cash flows were partially offset by a decrease in deferred
revenue which resulted in a negative cash flow of approximately
$7,310,000 for the nine months ended December 31, 2002. Deferred
revenues are directly related to deferred costs. Deferred revenues and
deferred costs are amortized into income over the expected service
period of three years.
14
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results
of Operations discusses the Company's consolidated financial
statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The
preparation of these financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
On an on-going basis, management evaluates its estimates and judgments,
including those related to revenue recognition, intangible assets,
financing operations, and contingencies and litigation. Management
bases its estimates and judgments on historical experience and on
various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments
about the carrying value of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. The most
significant accounting estimates inherent in the preparation of the
Company's financial statements include estimates as to the appropriate
carrying value of certain assets and liabilities which are not readily
apparent from other sources. These accounting policies are described in
the notes to the consolidated financial statements for the years ended
March 31, 2002, 2001 and 2000 included in our Form 10.
Item 3: Quantitative and Qualitative Disclosures about Market Risk
LIMITED OPERATING HISTORY
AJOL has a limited operating history in Japan upon which it
can be evaluated. Any investment in the Company must be considered in
light of the risks, expenses and difficulties encountered by companies
in the early stage of development in new and rapidly evolving markets,
including the risks described herein. The can be no assurances that
AJOL will be successful in addressing these risks.
UNPROVEN BUSINESS MODEL
AJOL cannot predict whether or not it will be successful
because its business model is unproven and its market is developing. It
is too early to reliably ascertain market penetration for AJOL's
products and services. If future demand for AJOL's products and
services, including, but not limited to demand for the MOJICO hardware
and Kamome brand products is lower than anticipated, or the costs of
attracting subscribers is higher than anticipated, then AJOL's
financial condition and results from operations will be materially and
adversely affected.
FLUCTUATIONS IN OPERATING RESULTS
AJOL's operating results may fluctuate significantly in the
future as a result of a variety of factors, many of which are outside
of AJOL's control. These factors include the demand for the
telecommunications products and services offered by AJOL, introduction
of new products or services by AJOL or its competitors, delays in the
introduction or enhancement of products and services by AJOL or its
competitors, changes in AJOL's pricing policies or those of its
competitors, AJOL's ability to anticipate and effectively adapt to
developing markets and rapidly changing technologies, changes in the
mix Japanese vs. non-Japanese revenue, changes in foreign currency
exchange rates, the mix of products and services sold by AJOL and the
channels through which those products and services are sold, general
economic conditions, and specific Economic conditions in Internet and
related industries. Additionally, in response to evolving competitive
conditions, AJOL may elect from time to time to make certain pricing,
service, marketing or acquisition decisions that could have a material
adverse affect on its financial performance.
15
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. Given the unpredictability of
exchange rate fluctuations, the Company cannot estimate the effect
these fluctuations may have upon future reported results, product
pricing or the Company's overall financial condition.
POOR JAPANESE ECONOMIC CONDITIONS
Economic conditions in Japan have been poor in recent years
and may worsen or not improve. Continued or worsening economic and
political conditions in Japan could further reduce the Company's
revenue and net income.
RELIANCE ON HANDWRITTEN MOJI (CHARACTERS) AS PREFERRED METHOD OF
WRITTEN COMMUNICATIONS
The Company relies on the desire of subscribers and potential
subscribers to use handwritten Moji (characters) as their preferred
method of written communication as an underlying material assumption
for the continuing success of its business. A subscriber's or potential
subscriber's desire to use handwritten Moji (characters) is a matter of
personal preference, which is unpredictable. Any negative changes in
perception by subscribers and potential subscribers as to their desire
to use handwritten Moji (characters) as their preferred method of
written communication, for any reason, including the emergence of new,
different, or alternative forms of written communications, could have a
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.
16
LIABILITY FOR CONTENT OF NETWORK
As a provider of messaging and communications services, AJOL
may incur liability for defamation, negligence, copyright, patent or
trademark infringement and other claims based on the nature and content
of the materials transmitted via AJOL's information network. There can
be no assurances that AJOL will be able to effectively screen all of
the content generated by AJOL's subscribers. AJOL may be exposed to
liability with respect to this content. AJOL's insurance may not cover
claims of these types or may not be adequate to indemnify AJOL for all
liability that may be imposed. There is a risk that a single claim or
multiple claims, if successfully asserted against AJOL, could exceed
the total of AJOL's coverage limits. There is also a risk that a single
claim or multiple claims asserted against AJOL may not qualify for
coverage under AJOL's insurance policies as a result of coverage
exclusions that are contained within these policies. Any imposition of
liability, particularly liability that is not covered by insurance or
is in excess of insurance coverage, could have a material adverse
affect on AJOL's reputation, financial condition, and operating
results.
RELIANCE ON EXISTING DISTRIBUTORS AND NEED TO RECRUIT ADDITIONAL
DISTRIBUTORS
The Company depends on subscriber distributors to generate
substantially all of its revenues. To increase its revenue, the Company
must increase the number of and/or the productivity of its
distributors. The Company's distributors may terminate their status as
a distributor at any time. The number of distributors may not increase
and could decline in the future. The Company cannot accurately predict
how the number and productivity of distributors may fluctuate because
the Company relies upon its existing distributors to recruit, train and
motivate new distributors. The Company's operating results could be
harmed if it's existing and new business opportunities and products do
not generate sufficient interest to retain existing distributors and
attract new distributors.
The loss of a high-level distributor or a group of leading
distributors in the distributor's network of lower levels,
distributors, whether by their own choice or through disciplinary
actions for violations of Company policies and procedures could
negatively impact the growth of distributors and the Company's revenue.
In addition, the Company's operations in Japan face
significant competition from existing and new competitors. Our
operations would also be harmed if our planned growth initiatives fail
to generate continued interest and enthusiasm among our distributors in
this market and fail to attract new distributors. However, there was no
distributor that the Company relied upon for sales in excess of 1% of
total MOJICO units sold per year during the six months ended September
30, 2002 or for the fiscal years ended March 31, 2002, 2001 and 2000..
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.
17
One of the Company's business strategies is to reduce its
dependence on Mr. Aota. This will be done through additional external
training courses of employees and flattening of the organization to
three levels, senior management, leaders, general, so more employees
get on the job training from senior management. We have also involved
more staff on strategic planning and product development task teams.
Externally, our distributors have become more knowledgeable and are
making presentations to prospective subscribers. If the Company is
unsuccessful in accomplishing this strategy, and Mr. Aota's services
become unavailable, the Company's business and prospects could be
materially adversely affected. Neither the Company nor AJOL has an
employment agreement with Mr. Aota. If the Company loses Mr. Aota's
services, for any reason, including as a result of Mr. Aota's voluntary
resignation or retirement, the Company's business could be materially
adversely affected.
FAILURE OF NEW PRODUCTS AND SERVICES TO GAIN MARKET ACCEPTANCE
A critical component of the Company's business is its ability
to develop new products and services that create enthusiasm among the
Company's distributor force. If any new product or service fails to
gain market acceptance, for any reason including quality problems, this
could harm the Company's results of operations.
LOSING SOURCES OF KAMOME PRODUCTS
The loss of any of the Company's sources of Kamome products,
or the failure of sources to meet the Company's needs, could restrict
the Company's ability to distribute Kamome products and harm its
revenue as a result. Further, the Company's inability to obtain new
sources of Kamome products at prices and on terms acceptable to the
Company could harm the Company's results of operations.
COMMENCING FOREIGN OPERATIONS
AJOL is exploring the possibility of commencing business
activities in South Korea, China, and Taiwan. In past years, these
nations have experienced significant economic and/or political
instability. If AJOL commences business activities in these nations,
future instability will have a material adverse affect on AJOL's
ability to do business in these nations and may jeopardize AJOL's
investment in establishing business operations in those countries.
COMPETITION WITH TECHNICALLY SUPERIOR PRODUCTS AND SERVICES
AJOL's products and services utilize the facsimile-like MOJICO
hardware and rely on human personnel to screen and process information
for AJOL's database. AJOL's products and services are much less
technically sophisticated than those offered by other companies
offering interactive telecommunications products and services. This may
put AJOL at a substantial competitive disadvantage with present and/or
future competitors.
INTERNET USAGE RATES AND LONG DISTANCE TELEPHONE RATES
AJOL's subscribers obtain access to AJOL's network via either
the Internet or telephone service. The costs that subscribers incur in
obtaining access to the AJOL network via these channels are beyond the
control of AJOL. Any increase in long distance telephone rates or rates
for accessing the Internet could materially and adversely affect demand
for AJOL's products and services.
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.
19
POSSIBLE INADEQUATE INTELLECTUAL PROPERTY PROTECTIONS
The Company's success depends to a significant degree upon the
Company's proprietary technology. The Company relies on a combination
of patent, trademark, trade secret and copyright law and contractual
restrictions to protect the Company's proprietary technology. However,
these measures provide only limited protection, and the Company may not
be able to detect unauthorized use or take appropriate steps to enforce
the Company's intellectual property rights. In addition, the Company
may face challenges to the validity and enforceability of the Company's
proprietary rights and may not prevail in any litigation regarding
those rights. Any litigation to enforce the Company's intellectual
property rights would be expensive and time-consuming, would divert
management resources and may not be adequate to protect the Company's
business.
POSSIBLE INFRINGEMENT CLAIMS
The Company could be subject to claims that the Company has
infringed the intellectual property rights of others. In addition, the
Company may be required to indemnify the Company's distributors and
users for similar claims made against them. Any claims against the
Company could require the Company to spend significant time and money
in litigation, pay damages, and develop new intellectual property or
acquire licenses to intellectual property that is the subject of the
infringement claims. These licenses, if required, may not be available
at all or on acceptable terms. As a result, intellectual property
claims against the Company could have a material adverse effect on the
Company's business, prospects, financial conditions and results of
operations.
POSSIBLE SYSTEM FAILURE OR BREACH OF NETWORK SECURITY
The Company's operations are dependent on the Company's
ability to protect the Company's network from interruption by damage
from fire, earthquake, power loss, telecommunications failure,
unauthorized entry, computer viruses or other events beyond the
Company's control. As precautions, we utilize distributed processing
systems, backup systems, Internet firewalls, 24/7 installation
environment surveillance, and private power generators as backup. There
can be no assurance that the Company's existing and planned precautions
of backup systems, regular data backups and other procedures will be
adequate to prevent significant damage, system failure or data loss.
Despite the implementation of security measures, the Company's
infrastructure may also be vulnerable to computer viruses, hackers or
similar disruptive problems. Persistent problems continue to affect
public and private data networks, including computer break-ins and the
misappropriation of confidential information. Computer break-ins and
other disruptions may jeopardize the security of information stored in
and transmitted through the computer systems of the individuals and
businesses utilizing the Company's services, which may result in
significant liability to the Company and also may deter current and
potential subscribers from using the Company's services. Any damage,
failure or security breach that causes interruptions or data loss in
the Company's operations or in the computer systems of the Company's
customers could have a material adverse effect on the Company's
business, prospects, financial condition and results of operations.
20
RELIANCE ON THIRD PARTY ACCESS FOR TELECOMMUNICATIONS
The Company relies on third party to provide its subscribers
with access to the Internet. There can be no assurance that a third
party's current pricing structure for access to and use of the Internet
will not change unfavorably and, if the pricing structure changes
unfavorably, the Company's business, prospects, financial condition and
results of operations could be materially and adversely affected.
EFFECT OF GOVERNMENT REGULATIONS
The Company provides access to its database and services
through data transmissions over public telephone lines and other
facilities provided by telecommunications companies. These
transmissions are subject to regulatory government agencies. These
regulations affect the prices that subscribers must pay for
transmission services, the competition the Company faces from
telecommunications services and other aspects of the Company's market.
There can be no assurance that a existing or future laws, governmental
action or rulings will not materially and adversely affect the
Company's operations.
CONTROL BY OFFICERS AND DIRECTORS
AJOL's executive officers, directors and entities affiliated
with them, in the aggregate, beneficially own common stock representing
approximately 95% of the Company.
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
Item 4: Controls and Procedures
We have established and maintain disclosure controls and procedures and
conclude these controls/procedures are effective based on our
evaluation as of the "Evaluation Date," which is a date within 90 days
prior to the filing of this 10-Q. There were no significant changes in
our internal controls or in other factors that could significantly
affect our internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Part 2:
Item 1: Legal Proceedings
None
Item 2: Changes in Securities and Use of Proceeds
None
Item 3: Defaults Upon Senior Securities
None
Item 4: Submission of Matters to a Vote of Security Holders
None
Item 5: Other Information
None
Item 6: Exhibits and Reports on Form 8-K
Exhibit 99 - Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
--------------------------------------------
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
PPOL, Inc.
------------------------------------------
(Registrant)
August 12, 2003 /s/ Nobuo Takada
--------------- ------------------------------------------
Date Nobuo Takada, Chief Executive Officer
August 12, 2003 /s/ Kazushige Shimizu
--------------- ------------------------------------------
Date Kazushige Shimizu, Chief Financial Officer
23
CERTIFICATIONS
I, Nobuo Takada, certify that:
1. I have reviewed this quarterly report on Form 10-Q of PPOL, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: September 8, 2003
/s/ Nobuo Takada
----------------
Nobuo Takada
Chief Executive Officer
24
CERTIFICATIONS
I, Kazushige Shimizu, certify that:
1. I have reviewed this quarterly report on Form 10-Q of PPOL, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: September 8, 2003
/s/ Kazushige Shimizu
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Kazushige Shimizu
Chief Financial Officer
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