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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Mark one:
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended December 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to _______
Commission File Number 000-50065
PPOL, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter.)
California 95-4436774
---------- ----------
(State of Incorporation) (IRS Employer Identification No.)
11661 San Vicente Boulevard, Suite 901, Los Angeles, California 90049
- --------------------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (310) 979-8513
1 City Boulevard West, Suite 870, Orange, California 92868
- ---------------------------------------------------- -----
(Former address of principal executive offices) (Zip Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock $0.001 par value 17,993,752
- ----------------------------- ----------------------------------
(Class) (Outstanding at February 14, 2005.)
PPOL, Inc.
2004 Quarterly Report on Form 10-Q
Table of Contents
PART 1: 3
- --------------------------------------------------------------------------------
ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS 3
Consolidated Balance Sheets as of December 31, 2004 and March 31, 2004 3
Consolidated Statements of Operations and Comprehensive Income for the
Three Months Ended December 31, 2004 and 2003 4
Consolidated Statements of Income and Comprehensive Income for the
Nine Months Ended December 31, 2004 and 2003 5
Consolidated Statements of Cash Flows for the Nine Months Ended
December 31, 2004 and 2003 6
Notes to Consolidated Financial Statements 7
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 13
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 16
ITEM 4: CONTROLS AND PROCEDURES 22
PART 2: 22
- --------------------------------------------------------------------------------
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 23
SIGNATURES 24
- --------------------------------------------------------------------------------
EXHIBITS: 25
- --------------------------------------------------------------------------------
Exhibit 31.1 - CEO Certification 25
Exhibit 31.2 - CFO Certification 26
Exhibit 32.1 - Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 27
2
PART 1:
ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS
PPOL, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2004 March 31, 2004
-------------- --------------
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 7,715,570 $ 12,083,556
Trade accounts receivable 1,280,118 309,063
Merchandise inventories 2,435,891 2,651,259
Deferred costs 51,774,889 63,159,328
Deferred income taxes 8,298,701 9,467,524
Prepaid expenses and other 888,613 281,784
-------------- --------------
Total current assets 72,393,782 87,952,514
RESTRICTED CASH 20,652,302 16,251,221
PROPERTY AND EQUIPMENT, net 1,194,096 1,250,975
SOFTWARE, net 10,599,738 7,444,657
DEFERRED COSTS 33,617,164 37,042,494
DEFERRED INCOME TAXES 5,125,294 5,494,095
LEASE DEPOSITS 873,536 766,457
DEPOSITS 4,502,799 3,984,883
OTHER ASSETS 423,742 181,987
-------------- --------------
TOTAL ASSETS $ 149,382,453 $ 160,369,283
============== ==============
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable, including related parties $ 10,677,590 $ 11,281,024
Advances received 3,017,296 1,353,721
Deferred revenue 71,505,438 84,644,397
Due to majority shareholder 3,311,985 --
Income taxes payable 5,514 1,086,260
Other current liabilities 1,684,331 1,888,976
-------------- --------------
Total current liabilities 90,202,154 100,254,378
DEFERRED REVENUE 44,712,399 49,155,662
ADVANCES RECEIVED - CUBE 20,652,302 16,251,221
CAPITAL LEASE OBLIGATIONS 94,320 --
-------------- --------------
Total liabilities 155,661,175 165,661,261
-------------- --------------
SHAREHOLDERS' DEFICIT:
Common Stock; $0.001 par value; 100,000,000 shares authorized;
17,993,752 shares issued and outstanding as of December 31,
2004 (unaudited) and March 31, 2004, respectively 17,994 17,994
Additional paid-in capital 3,362,359 3,362,359
Total other comprehensive income 264,389 316,307
Accumulated deficit (9,923,464) (8,988,638)
-------------- --------------
Total shareholders' deficit (6,278,722) (5,291,978)
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 149,382,453 $ 160,369,283
============== ==============
The accompanying notes are an integral part of these
consolidated financial statements.
3
PPOL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
Three months ended Three months ended
December 31, 2004 December 31, 2003
----------------- -----------------
(Unaudited) (Unaudited)
NET REVENUE:
Product sales and network services $ 25,906,504 $ 29,540,639
Other on-line services 5,914,417 4,916,892
------------- -------------
Total 31,820,921 34,457,531
------------- -------------
COSTS AND EXPENSES:
Cost of sales 9,358,981 7,598,685
Distributor incentives 15,336,634 17,505,163
Selling, general and administrative expenses 7,333,691 5,854,820
------------- -------------
Total costs and expenses 32,029,306 30,958,668
------------- -------------
OPERATING (LOSS) INCOME (208,385) 3,498,863
OTHER EXPENSE, net (245,822) (6,688)
------------- -------------
(LOSS) INCOME BEFORE INCOME TAX PROVISION (454,207) 3,492,175
------------- -------------
INCOME TAXES (BENEFIT):
Current (88,736) (279,512)
Deferred (340,086) 1,224,161
------------- -------------
Total income taxes (428,822) 944,649
------------- -------------
NET (LOSS) INCOME (25,385) 2,547,526
OTHER COMPREHENSIVE GAIN (LOSS)
Foreign currency translation 1,259,464 (69,213)
------------- -------------
COMPREHENSIVE INCOME $ 1,234,079 $ 2,478,313
============= =============
NET (LOSS) EARNINGS PER COMMON SHARE,
Basic $ (0.001) $ 0.14
============= =============
Diluted $ (0.001) $ 0.14
============= =============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING:
Basic 17,993,752 17,993,908
============= =============
Diluted 17,993,752 17,993,908
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
4
PPOL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
Nine months ended Nine months ended
December 31, 2004 December 31, 2003
----------------- -----------------
(Unaudited) (Unaudited)
NET REVENUE:
Product sales and network services $ 79,247,405 $ 86,473,350
Other on-line services 16,994,869 14,459,798
Consulting revenue -- 483,858
-------------- --------------
Total 96,242,274 101,417,006
-------------- --------------
COSTS AND EXPENSES:
Cost of sales 26,463,333 25,421,127
Distributor incentives 46,875,285 50,295,825
Selling, general and administrative expenses 21,571,065 18,237,187
-------------- --------------
Total costs and expenses 94,909,683 93,954,139
-------------- --------------
OPERATING INCOME 1,332,591 7,462,867
OTHER (EXPENSE) INCOME, net (242,397) 708,593
-------------- --------------
INCOME BEFORE INCOME TAX PROVISION 1,090,194 8,171,460
-------------- --------------
INCOME TAXES:
Current 487,396 1,214,872
Deferred 1,537,624 1,185,594
-------------- --------------
Total income taxes 2,025,020 2,400,466
-------------- --------------
NET (LOSS) INCOME (934,826) 5,770,994
OTHER COMPREHENSIVE LOSS
Foreign currency translation (51,918) (2,299,552)
-------------- --------------
COMPREHENSIVE (LOSS) INCOME $ (986,744) $ 3,471,442
============== ==============
NET (LOSS)EARNINGS PER COMMON SHARE,
Basic $ (0.05) $ 0.32
============== ==============
Diluted $ (0.05) $ 0.32
============== ==============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING:
Basic 17,993,752 17,994,586
============== ==============
Diluted 17,993,752 17,994,586
============== ==============
The accompanying notes are an integral part of these
consolidated financial statements.
5
PPOL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months Nine months
ended ended
December 31, 2004 December 31, 2003
------------- -------------
(Unaudited) (Unaudited)
CASH FLOWS (USED FOR) PROVIDED BY OPERATING ACTIVITIES:
Net (loss) income $ (934,826) $ 5,770,994
ADJUSTMENTS TO RECONCILE NET (LOSS) INCOME TO NET CASH
PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Depreciation and amortization 3,040,118 1,801,359
(Gain) loss on sales/disposal of property and equipment (20,835) 101,905
Deferred income taxes 1,537,624 1,185,594
CHANGES IN ASSETS AND LIABILITIES:
(INCREASE) DECREASE IN ASSETS:
Restricted cash (4,019,876) (3,695,630)
Trade accounts receivable (929,701) (590,770)
Merchandise inventories 72,138 763,736
Advance payments to related parties -- 3,587,293
Deferred costs 15,095,110 18,084,297
Prepaid expenses and other (1,139,721) 583,247
INCREASE (DECREASE) IN LIABILITIES:
Accounts payable (673,645) 3,304,435
Advances received 1,568,066 (450,801)
Advances received - Cube 4,019,876 3,695,630
Deferred revenue (18,061,854) (23,343,655)
Income taxes payable (1,031,391) (900,631)
Other current liabilities (86,430) (11,584)
------------- -------------
Total adjustments (630,518) 14,114,425
------------- -------------
Net cash (used) provided by operating activities (1,565,347) 9,885,419
------------- -------------
CASH FLOWS USED FOR INVESTING ACTIVITIES:
Purchase of property and equipment (369,645) (2,726,558)
Software and software CIP (5,704,779)
Proceeds from sales of property and equipment 338,824
Other assets 309,763 (4,151,968)
------------- -------------
Net cash used for investing activities (5,427,837) (6,878,526)
------------- -------------
NET CASH PROVIDED (USED FOR) FINANCING ACTIVITIES:
Loan from majority shareholder 3,297,769 --
Fractional share liquidation -- (4,799)
------------- -------------
Net cash provided (used) for financing activities 3,297,769 (4,799)
------------- -------------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH & CASH EQUIVALENTS (672,571) 556,027
------------- -------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (4,367,986) 3,558,121
CASH AND CASH EQUIVALENTS, beginning of period 12,083,556 5,102,435
------------- -------------
CASH AND CASH EQUIVALENTS, end of period $ 7,715,570 $ 8,660,556
============= =============
SUPPLEMENTAL CASH FLOW INFORMATION -
Income taxes paid $ 1,643,634 $ 2,230,720
============= =============
Interest paid $ 24,446 $ 5,484
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
6
PPOL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED DECEMBER 31, 2004 AND 2003 (UNAUDITED)
(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.
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 consolidated financial statements
reflect the reverse stock split.
Effective April 1, 2002, AJOL Co., Ltd. ("AJOL") was acquired
by PPOL in a transaction accounted for as a reverse merger.
The Company, upon closing of the transaction on August 15,
2002, issued 899,746 shares (post split) of its common stock
for all of the issued and outstanding common stock of AJOL.
For legal purposes, PPOL is the acquirer. For accounting
purposes, AJOL has been treated as the acquirer and
accordingly, AJOL is presented as the continuing entity, and
the historical financial statements are those of AJOL. Prior
to the reverse merger PPOL had no business activity, thus
pro-forma information as though PPOL and AJOL had been
combined for all periods has not been provided.
AJOL is primarily engaged in sales of multi-functional
telecommunications equipment called MOJICO. AJOL distributes
MOJICO throughout Japan through a network marketing system and
has a network of registered distributors located throughout
Japan that introduce purchasers to AJOL. Using MOJICO, AJOL
provides original telecommunication services called "Pan
Pacific Online," including MOJICO bulletin board and mail
services. AJOL 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.
Gatefor, Inc. (Gatefor), a wholly owned subsidiary of PPOL,
was incorporated in Japan on June 16, 2004. The Company owned
6,000 shares or 100% of the issued and outstanding stock of
Gatefor. Gatefor amended its articles of incorporation to
increase its authorized shares of common stock from 8,000
to 45,000 shares, and the Company acquired an additional
24,000 shares in October 2004. As a result, the Company, as of
December 31, 2004, owns 30,000 shares or 100% of the issued
and outstanding common stock of Gatefor.
Gatefor was created to implement the new growth strategy of
the Company and will act as the distributor of US and European
sourced technologies into Japan. Gatefor introduced its
products of BridgeGate software and File Shelter software to
the market in Japan in November 2004.
BASIS OF PRESENTATION:
The unaudited consolidated financial statements have been
prepared by PPOL, Inc. (the "Company"), pursuant to the rules
and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally present
in annual consolidated financial statements prepared in
accordance with accounting principles generally accepted in
the United States of America have been omitted pursuant to
such rules and regulations. The information furnished herein
7
reflects all adjustments (consisting of normal recurring
accruals and adjustments), which are, in the opinion of
management, necessary to fairly present the operating results
for the prospective periods. These consolidated financial
statements should be read in conjunction with the audited
consolidated financial statements and footnotes for the years
ended March 31, 2004 and 2003 included in the Company's Form
10-K. The results of the nine months ended December 31, 2004
are not necessarily indicative of the results to be expected
for the full year ending March 31, 2005.
RECLASSIFICATIONS:
Certain reclassifications have been made to the prior period
consolidated financial statements in order to conform to the
current period presentation. These reclassifications had no
effect on previously reported results of operations.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include accounts of
PPOL, Inc. and its wholly owned subsidiaries, AJOL, Ltd. and
Gatefor, Inc. All significant intercompany balances and
transactions have been eliminated upon consolidation.
NET (LOSS) INCOME PER SHARE:
The Company reports both basic net income per share, which is
based on the weighted average number of common shares
outstanding, and diluted net income per share, which is based
on weighted average number of common shares outstanding and
dilutive potential common shares. Diluted earnings (loss) per
share is computed similar to basic earnings (loss) per share
except that the numerator is increased by the amount of
interest expense attributable to any convertible notes payable
and the denominator is increased to include the number of
additional common shares that would have been outstanding if
the potential common shares had been issued and if the
additional common shares were dilutive. For the nine months
ended December 31, 2004, all of the 1,220,000 issued and
outstanding common stock options have also been excluded as
they would have an antidilutive effect.
COMPUTER SOFTWARE:
Research and development costs are charged to expense as
incurred. However, the costs incurred for the development of
computer software that will be sold, leased or otherwise
marketed are capitalized when technological feasibility has
been established. These capitalized costs are subject to an
ongoing assessment of recoverability.
Amortization of capitalized software development costs begins
when the product is available for general release.
Amortization is provided on a product-by-product basis on
either the straight-line method or the sales ratio method.
Unamortized capitalized software development costs determined
to be in excess of net realizable value of the product are
expensed immediately.
RECENT ACCOUNTING PRONOUNCEMENTS:
In November 2004, the FASB issued SFAS No. 151 "Inventory
Costs, an amendment of ARB No. 43, Chapter 4." The amendments
made by Statement 151 clarify that abnormal amounts of idle
facility expense, freight, handling costs, and wasted
materials (spoilage) should be recognized as current-period
charges and require the allocation of fixed production
overheads to inventory based on the normal capacity of the
production facilities. The guidance is effective for inventory
costs incurred during fiscal years beginning after June 15,
2005. Earlier application is permitted for inventory costs
incurred during fiscal years beginning after November 23,
2004. The Company has evaluated the impact of the adoption
of SFAS 151, and does not believe the impact will be
significant to the Company's overall results of operations or
financial position.
8
In December 2004, the FASB issued SFAS No.152, "Accounting for
Real Estate Time-Sharing Transactions--an amendment of FASB
Statements No. 66 and 67" ("SFAS 152"). This Statement amends
FASB Statement No. 66, "Accounting for Sales of Real Estate,"
to reference the financial accounting and reporting guidance
for real estate time-sharing transactions that is provided in
AICPA Statement of Position (SOP) 04-2, "Accounting for Real
Estate Time-Sharing Transactions." This Statement also amends
FASB Statement No. 67, "Accounting for Costs and Initial
Rental Operations of Real Estate Projects," to state that the
guidance for (a) incidental operations and (b) costs incurred
to sell real estate projects does not apply to real estate
time-sharing transactions. The accounting for those operations
and costs is subject to the guidance in SOP 04-2. This
Statement is effective for financial statements for fiscal
years beginning after June 15, 2005 with earlier application
encouraged. The Company has evaluated the impact of the
adoption of SFAS 152, and does not believe the impact will be
significant to the Company's overall results of operations or
financial position.
In December 2004, the FASB issued SFAS No.153, "Exchanges of
Nonmonetary Assets, an amendment of APB Opinion No. 29,
Accounting for Nonmonetary Transactions." The amendments made
by Statement 153 are based on the principle that exchanges of
nonmonetary assets should be measured based on the fair value
of the assets exchanged. Further, the amendments eliminate the
narrow exception for nonmonetary exchanges of similar
productive assets and replace it with a broader exception for
exchanges of nonmonetary assets that do not have commercial
substance. Previously, Opinion 29 required that the accounting
for an exchange of a productive asset for a similar productive
asset or an equivalent interest in the same or similar
productive asset should be based on the recorded amount of the
asset relinquished. Opinion 29 provided an exception to its
basic measurement principle (fair value) for exchanges of
similar productive assets. The Board believes that exception
required that some nonmonetary exchanges, although
commercially substantive, be recorded on a carryover basis. By
focusing the exception on exchanges that lack commercial
substance, the Board believes this Statement produces
financial reporting that more faithfully represents the
economics of the transactions. The Statement is effective for
nonmonetary asset exchanges occurring in fiscal periods
beginning after June 15, 2005. Earlier application is
permitted for nonmonetary asset exchanges occurring in fiscal
periods beginning after the date of issuance. The provisions
of this Statement shall be applied prospectively. The Company
has evaluated the impact of the adoption of SFAS 153, and does
not believe the impact will be significant to the Company's
overall results of operations or financial position.
In December 2004, the FASB issued SFAS No.123 (revised 2004),
"Share-Based Payment". Statement 123(R) will provide investors
and other users of financial statements with more complete and
neutral financial information by requiring that the
compensation cost relating to share-based payment transactions
be recognized in financial statements. That cost will be
measured based on the fair value of the equity or liability
instruments issued. Statement 123(R) covers a wide range of
share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share
appreciation rights, and employee share purchase plans.
Statement 123(R) replaces FASB Statement No. 123, "Accounting
for Stock-Based Compensation," and supersedes APB Opinion No.
25, "Accounting for Stock Issued to Employees." Statement 123,
as originally issued in 1995, established as preferable a
fair-value-based method of accounting for share-based payment
transactions with employees. However, that Statement permitted
entities the option of continuing to apply the guidance in
Opinion 25, as long as the footnotes to financial statements
disclosed what net income would have been had the preferable
fair-value-based method been used. Public entities (other than
those filing as small business issuers) will be required to
apply Statement 123(R) as of the first interim or annual
reporting period that begins after June 15, 2005. The Company
is currently evaluating the impact of the adoption of SFAS
123(R).
9
(2) RELATED PARTY TRANSACTIONS:
The following summarizes amounts due to Forval and related
transaction amounts.
December 31, March 31,
2004 2004
--------------------------------
(Unaudited) (Unaudited)
Due to Forval - Principal $3,298,000 --
Due to Forval - Interest $14,000 --
Due to Forval - Total $3,312,000 --
In June 2004, the Company borrowed (Y)90,000,000 Japanese yen
(approximately $873,000 at current exchange rate) from its majority
shareholder Forval, due December 30, 2004, with interest payable at two
percent (2%) per annum. The borrowing would have been automatically
converted to common stock at the closing market price on December 29,
2004 if there had been no additional capital contributions between the
borrowing and due date. However, the loan agreement was amended on
October 14, 2004 and the due date was extended to March 31, 2005. Under
the amended loan agreement, the convertible feature was cancelled.
In October 2004, the Company borrowed an additional (Y)250,000,000
Japanese yen (approximately $2,425,000 at current exchange rate) from
Forval to accommodate Gatefor's working capital needs. This loan is
also due and payable on March 31, 2005, with interest payable at two
percent (2%) per annum.
(3) SEGMENT INFORMATION:
With the new activity in Gatefor, the Company now has two operating
segments: 1) network communications through sales of MOJICO and related
services and 2) technology sales. (Prior to the quarter ended December
31, 2004, the Company was deemed to operate in one operating segment -
network communications through sales of MOJICO and related services.)
These operating segments were determined based on the nature of
products and services offered and also based on their respective
channels of distribution. Each of the two operating segments is managed
by two separate subsidiaries of the Company. Substantially all
operations and sales of the Company occur in Japan except for certain
corporate administrative matters that are handled in the United States.
Operating segments are defined as components of an enterprise about
which separate financial information is available that is regularly
evaluated by the chief operating decision-maker in deciding how to
allocate resources and in assessing performance. The Company evaluates
performance based on several factors, of which the primary financial
measure is income before income taxes. The following tables show the
operations of the Company's reportable segments:
10
Network
Nine months ended Communications Corporate and
December 31, 2004 (MOJICO) Technology Sales Eliminations Consolidated
- ----------------- -------- ---------------- ------------ ------------
Sales to unaffiliated customers $96,192,563 $ 49,711 -- $96,242,274
------------ ------------ ------------ ------------
Intersegment sales -- -- -- --
------------ ------------ ------------ ------------
Net sales 96,192,563 49,711 -- 96,242,274
------------ ------------ ------------ ------------
Income (loss) before tax 4,040,968 (1,309,656) (1,706,118) 1,090,194
------------ ------------ ------------ ------------
Network
Three months ended Communications Corporate and
December 31, 2004 (MOJICO) Technology Sales Eliminations Consolidated
-------- ---------------- ------------ ------------
Sales to unaffiliated customers $ 31,771,210 $ 49,711 -- $ 31,820,921
------------- ------------- ------------- -------------
Intersegment sales -- -- -- --
------------- ------------- ------------- -------------
Net sales 31,771,210 49,711 -- 31,820,921
------------- ------------- ------------- -------------
Income (loss) before tax 1,018,395 (741,177) (721,425) (454,207)
------------- ------------- ------------- -------------
Total assets - December 31, 2004 $147,361,182 $ 2,427,916 $ (406,645) $149,382,453
------------- ------------- ------------- -------------
Total assets - March 31, 2004 160,602,095 -- (232,812) 160,369,283
------------- ------------- ------------- -------------
(4) INVESTMENT:
On May 26, 2004, PPOL entered into a stock purchase agreement for an
investment of $300,000 in Object Innovation's (hereafter, OI) common
stock representing a 15% interest in OI. This investment is classified
under Other Assets on the December 31, 2004 balance sheet. A vesting
schedule, as defined in the agreement, for the ownership is tied to
revenues derived from PPOL's sales of OI products under an exclusive
Japan distribution agreement entered into concurrently. If revenue
thresholds are not met, OI has the option to repurchase PPOL's
investment at face value for the unvested shares. The Company accounts
for this investment under the cost method of accounting.
(5) ADVANCES RECEIVED AND ADVANCES RECEIVED-CUBE:
AJOL had collected advance payments from distributors. Upon receiving
orders from these distributors for goods or services, the distributor's
account would be charged. On May 28, 2004, AJOL remitted approximately
$16.3 million to Kamome Benefit Club, an unrelated non-profit
organization, to administer the advance payments and orders from
distributors which were maintained through a system known as "Cube."
The effect of this transaction reduced Cash and Advances Received (a
liability) by approximately $16.3 million while simultaneously
increasing Restricted Cash and Advances Received - Cube (a liability).
Future advance Payments, which increase Restricted Cash and Advances
Received-Cube, and orders, which decrease Restricted Cash and Advances
Received-Cube, from distributors will be received by the Kamome Benefit
Club and not AJOL. A portion of Advances Received are still under a
liability to AJOL as those advances (classified as restricted cash)
were made under agreements directly with AJOL and not with the Kamome
Benefit Club.
11
(6) DEFERRED REVENUES AND DEFERRED COSTS:
Activity for deferred revenues and deferred costs is contained in the
table below:
Deferred Costs Deferred Revenues
----------------------------------- -----------------------------------
Current Non-current Current Non-current
------- ----------- ------- -----------
Beginning balance, April 1, 2004 $ 63,159,328 $ 37,042,494 $ 84,644,397 $ 49,155,662
Additional deferrals 14,543,047 20,054,496 22,204,684 26,663,156
Released amounts (26,293,081) (23,777,894) (35,882,711) (31,504,556)
Exchange rate effect 365,595 298,068 539,068 398,137
------------- ------------- ------------- -------------
Ending balance, December 31, 2004 $ 51,774,889 $ 33,617,164 $ 71,505,438 $ 44,712,399
============= ============= ============= =============
(7) COMMITMENTS & CONTINGENCIES:
In August 2004, the Company, through its wholly owned subsidiary
Gatefor, executed a Revised Letter of Understanding (the "Letter")
pursuant to the Common Stock Purchase Agreement (the "Agreement") with
Object Innovation. The Letter amends certain licensing terms of the
Agreement. The Letter also defines 3 milestones which Object Innovation
must meet in order to receive 3 payments of $60,000 each from the
Company. These payments are to cover localization work performed by
Object Innovation to prepare its BridgeGate software for the Japanese
market and to purchase co-ownership intellectual property rights in the
Japanese version of BridgeGate software. As of December 31, 2004, all
of the three milestones have been achieved by Object Innovation for
which they have received payment from Gatefor. The three payments made
to Objective Innovation are capitalized and are being amortized in
accordance with SFAS 86, "Accounting for Costs of Computer Software to
be Sold, Leased or Otherwise Marketed."
Additionally, the Letter provides that commencing on the first month
following completion of the third milestone, the Gatefor will pay
Object Innovation $9,000 per month until April 2005 and $15,000 per
month thereafter until the Company's subsidiary, Gatefor, becomes a
publicly traded company. These payments are intended to allow Object
Innovation to add additional staff to support sales in Japan through
Gatefor. These payments, which begin in January 2005, will be included
in the Selling, General and Administrative expenses of the Company. The
Letter also provides for the issuance of stock warrants by Gatefor to
Object Innovation equal to 5% of Gatefor's currently issued equity.
Because the terms of this warrant are unspecified in the Letter, the
Company is currently unable to calculate a value of the warrants under
the Black-Scholes or other valuation model. Therefore any effect to
expenses by this warrant is not ascertainable at this time.
On October 5, 2004, the Board of Directors of the Company authorized
its Audit Committee to retain independent legal counsel to investigate
and study internet rumors and other matters relating to the business
operations of AJOL, Co., Ltd. ("AJOL"). Counsel completed their inquiry
and report thereon (the "Report") on November 8, 2004. The Report found
that the present manner in which AJOL conducts its business does not
violate Japanese law.
(8) CAPITAL LEASES
The Company leases certain machinery and equipment, primarily computers
and peripheral equipment, under agreements that are classified as
capital leases. The cost of equipment under capital leases is included
in the Balance Sheet as Property and Equipment which was approximately
$120,000 and $0 at December 31, 2004 and March 31, 2004, respectively.
Accumulated amortization of the equipment under capital leases was
approximately $3,000 and $0 at December 31, 2004 and March 31, 2004,
respectively. Amortization of assets under capital leases is included
in depreciation expense. The obligations under these capital leasese is
included in the Balance Sheet in Other Current Liabilities and Other
Liabilities.
12
The future minimum lease payments required under the capital leases as
of December 31, 2004 are as follows:
Year Ending December 31: Amount
--------
2005 $31,200
2006 31,200
2007 31,200
2008 31,200
2009 22,300
thereafter -
--------
Net minimum lease payments 147,100
Less: Amount representing interest (30,198)
--------
Present value of net minimum lease payments $116,902
========
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 through
its wholly owned Japanese subsidiaries, AJOL, Ltd. ("AJOL"), a Japanese
corporation, and Gatefor, Inc. ("Gatefor"), a Japanese corporation. At the
present time, the Company has administrative functions occurring in California,
but does not otherwise have any major business in the United States.
The Company's revenues are currently derived from network communication sales by
AJOL of (1) its "MOJICO" hardware, a multifunctional facsimile based machine
with networking capabilities, (2) subscriptions to PPOL's proprietary "Pan
Pacific Online" interactive database that can only be accessed through its
MOJICO hardware and (3) various consumer products that utilize the Company's
"Kamome" brand. Additionally, technology sales are derived from Gatefor through
the sale and distribution of Bridgegate software.
13
RESULTS OF OPERATIONS - THREE MONTHS ENDED DECEMBER 31, 2004 AS COMPARED TO THE
THREE MONTHS ENDED DECEMBER 31, 2003
PRODUCT SALES AND NETWORK SERVICES. For the three months ended December 31,
2004, revenues of this category have decreased by approximately 12% in
comparison to the same period of the prior year. The decrease is primarily due
to a decline in MOJICO unit sales and corresponding new members and initial Pan
Pacific Online subscription fees. Included in Product Sales and Network Services
for the three months ended December 31, 2004 was approximately $50,000 of
software sales by Gatefor. This represents sales in a new business segment
(Technology Sales) and the Company expects sales in this area to continue into
the foreseeable future.
OTHER ONLINE SERVICES REVENUE. For the three months ended December 31, 2004,
revenues increased by approximately 20% 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 which is a continuing corporate objective.
COST OF SALES. For the three months ended December 31, 2004, the cost of sales
expressed as a percentage of sales increased approximately 7% to 29% over the
22% of the comparable period of the prior year. The increase in the percentage
is primarily due to customers upgrading their old SF60 MOJICOs to the new SF70
MOJICO model. Customers who upgrade their MOJICOs are charged a reduced sales
price whereas the cost of the unit remains constant. This situation effectively
increases the cost of sales as a percentage of sales. The increase is also
partially due to establishing allowances for goodwill gift/refund of Kamome
insurance premiums for insureds with no claims. These allowances are new in the
current year and reflect a change in the insurance policies now being issued.
DISTRIBUTOR INCENTIVES. For the three months ended December 31, 2004,
distributor incentives decreased by approximately 12% in comparison to the same
period of the prior year. The overall decrease in distributor incentives is
primarily due to the decrease in sales. Additionally, it is the result of the
product mix sold and customer mix. Sales of products requiring less percentage
of incentives increased and sales to associate-members (which require payment of
a smaller percentage of incentives) increased during the current period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. For the three months ended December
31, 2004, selling, general and administrative expenses have increased by
approximately $1.5 million in comparison to the same period of the prior year.
The increase was primarily due to start-up costs incurred by the Company's new
Gatefor subsidiary, as well as the increase by AJOL in training and development
costs.
CURRENT INCOME TAX EXPENSE. For the three months ended December 31, 2004,
current income tax benefit decreased approximately $191,000 from the same period
of the prior year primarily from the decline in income. The decrease is due to
(1) non-deductible expenses, for tax reporting purposes, which did not decline
proportionate to the decline in pretax income, (2) head office expenses and
start-up expenses incurred by Gatefor, our subsidiary in the development stage,
which could not be consolidated with income from our operating subsidiary, and
offset by (a) a decline in revenues we were required to recognize earlier under
Japanese tax regulations than under US generally accepted accounting principles,
and (b) absence, in the current period, of prior model MOJICO units writeoff
that are not deductible until disposed of for tax purposes.
DEFERRED INCOME TAX EXPENSE. For the three months ended December 31, 2004,
deferred income tax expense decreased approximately $1.6 million over the same
period of the prior year. The decrease was primarily the result of the decline
experienced in deferred costs and deferred revenues associated with the sales of
the Company's MOJICO hardware and related Pan Pacific On-line subscription
services in addition to other timing differences such as accrued vacation,
depreciation and director bonuses.
14
RESULTS OF OPERATIONS - NINE MONTHS ENDED DECEMBER 31, 2004 AS COMPARED TO THE
NINE MONTHS ENDED DECEMBER 31, 2003
PRODUCT SALES AND NETWORK SERVICES. For the nine months ended December 31, 2004,
revenues of this category have decreased by approximately 8% in comparison to
the same period of the prior year. The decrease is primarily due to a decline in
MOJICO unit sales and corresponding new members and initial Pan Pacific Online
subscription fees. Included in Product Sales and Network Services for the nine
months ended December 31, 2004 was approximately $50,000 of software sales by
Gatefor. This represents sales in a new business segment (Technology Sales) and
the Company expects sales in this area to continue into the foreseeable future.
OTHER ONLINE SERVICES REVENUE. For the nine months end December 31, 2004,
revenues increased approximately 17% 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 which is a continuing corporate objective.
COST OF SALES. For the nine months ended December 31, 2004, the cost of sales
expressed as a percentage of sales increased 2.3% to 27.5% versus 25.2% for the
same period of the prior year. The increase was due to the increased cost of the
new MOJICO SF 70 model. Additionally, the increase was due to customers
upgrading their old SF60 MOJICOs to the new SF70 MOJICO model. Customers who
upgraded their MOJICOs are charged a reduced sales price whereas the cost of the
unit remains constant. This situation effectively increases the cost of sales as
percentage of sales. DISTRIBUTOR INCENTIVES. For the nine months ended December
31, 2004, distributor incentives expressed as a percentage of sales remained
relatively consistent with that of the same period of the prior year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. For the nine months ended December
31, 2004, selling, general and administrative expenses have increased by
approximately $3.3 million in comparison to the same period of the prior year.
The increase is primarily due to the incurrence of software related research
costs to develop AJOL's new commission calculation system, order & receiving
system and to the costs incurred by the Company's new Gatefor subsidiary.
OTHER INCOME. For the nine months ended December 31, 2004, net change in other
income was approximately $951,000 from the same period of the prior year.
Effective in April 2003, the Company revised its commission policy to state that
the Company would not pay any commissions less than a minimum threshold of
approximately $30.00. If the distributor does not earn the minimum threshold
within one year, then the commissions were to be forfeited. The decrease is
primarily due to the Company recognizing in April 2003 approximately $714,000 of
income associated with commissions that did not meet the minimum threshold of
the new commission policy and had been outstanding greater than one year as of
March 31, 2003. No material amount of such income was recognized in the current
period.
CURRENT INCOME TAX EXPENSE. For the nine months ended December 31, 2004, current
income tax expense decreased approximately $727,000 from the same period of the
prior year primarily from the decline in income. Our effective tax rate,
expressed as a percentage of income before income taxes was 37% vs. 15% in the
same period of the prior year. The increase is primarily due to non-deductible
expenses, for tax reporting purposes, which remained relatively consistent with
the prior period and did not decline proportionate to the decline in pretax
income.
DEFERRED INCOME TAX EXPENSE. For the nine months ended December 31, 2004,
deferred income tax expense increased by approximately $352,000 in comparison to
the same period of the prior year. The increase was primarily the result of the
activity associated with deferred costs and deferred revenues of the Company's
MOJICO hardware and related Pan Pacific On-line subscription services.
Liquidity and Capital Resources
- -------------------------------
Historically, our principal needs for funds have been for operating expenses
including distributor incentives, working capital (principally inventory
purchases), capital expenditures and the development of operations throughout
Japan. We have generally relied on cash flow from operations and short-term debt
from our majority shareholder to meet our cash needs and business objectives
without relying on long-term debt to fund operating activities.
15
Cash and cash equivalents totaled $7,715,570 and $12,083,556 at December 31,
2004 and March 31, 2004, respectively. Cash (used for) provided from operations
for the nine months ended December 31, 2004 and 2003 was $(1,565,347) and
$9,885,419, respectively. Cash used for investing activities for the nine months
ended December 31, 2004 and 2003 was $5,427,832 and $6,878,526, respectively.
Cash of $3,297,769 was provided from financing activities for the nine months
ended December 31, 2004 as a result of a loan obtained from the majority
shareholder. Management believes that cash flow from operations, borrowings from
our majority shareholder and the revolving credit facility will adequately meet
the working capital needs for the foreseeable future.
Contractual Obligations
The Company's operating lease & purchase obligations as of December 31,
2004 are as follows:
Payments due by period
-----------------------------------------------------------------------------------
Less than More than
Contractual obligations Total 1 year 2-3 years 4-5 years 5 years
- ----------------------- ---------- ---------- ---------- ---------- ---------
Operating Lease Obligations $ 57,497 $ 57,497 -- -- --
Capital Lease Obligations 147,065 31,193 $ 62,386 $ 53,486
Service Provider Contracts 368,380 368,380 -- --
Professional Fees 169,628 157,698 11,930
Loan repayments to
majority shareholder 3,311,985 3,311,985 -- -- --
---------- ---------- ---------- ---------- ---------
Total $4,054,555 $3,926,753 $ 74,316 $ 53,486 $ --
========== ========== ========== ========== =========
The Company projects that it will need to satisfy at least $3.9 million of lease
and contract obligations within the twelve months following December 31, 2004.
Critical Accounting Policies and Estimates
- ------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses the Company's consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these consolidated financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. On an on-going basis, management evaluates its estimates
and judgments, including those related to revenue recognition, impairment of
long-lived and intangible assets, depreciation and amortization, financing
operations, inventory valuation, income tax and contingencies and litigation.
Management bases its estimates and judgments on historical experience and on
various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying value of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions. The most significant accounting estimates inherent in
the preparation of the Company's consolidated financial statements include
estimates as to the appropriate carrying value of certain assets and liabilities
which are not readily apparent from other sources. These accounting policies are
described in the notes to the consolidated financial statements for the years
ended March 31, 2004 and 2003 included in our Form 10-K.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Investment In Privately Held Company
- ------------------------------------
We have invested in a privately held company which can still be considered in
the startup or in the development stage. This investment is inherently risky as
the markets for the technologies or products they have under development are
typically in the early stages and may never materialize or may never be fully
developed. We could lose our entire initial investment in this company. As of
December 31, 2004, this investment was $300,000.
16
We Will Rely On The Availability Of Third-Party Licenses
- --------------------------------------------------------
Many of our future products to be sold under our new growth strategy will
include software or other intellectual property licensed from third parties. It
may be necessary in the future to seek or renew licenses relating to various
aspects of these products. There can be no assurance that the necessary license
would be available on acceptable terms, if at all. The inability to obtain
certain licenses or other rights or to obtain such licenses or rights on
favorable terms, or the need to engage in litigation regarding these matters,
could have a material adverse effect on our business, operating results, and
financial condition.
Limited Operating History
- -------------------------
We have a limited operating history in Japan upon which we can be evaluated. Any
investment in us must be considered in light of the risks, expenses and
difficulties encountered by companies in the early stage of development in new
and rapidly evolving markets, including the risks described herein. There can be
no assurances that we will be successful in addressing these risks.
Unproven Business Model
- -----------------------
We cannot predict whether or not we will be successful because our business
model is unproven and its market is developing. It is too early to reliably
ascertain market penetration for our products and services. If future demand for
AJOL's products and services, including, but not limited to demand for the
MOJICO hardware and Kamome brand products is lower than anticipated, or the
costs of attracting subscribers is higher than anticipated, then our financial
condition and results from operations will be materially and adversely affected.
Fluctuations In Operating Results
- ---------------------------------
Our operating results may fluctuate significantly in the future as a result of a
variety of factors, many of which are outside of our control. These factors
include the demand for the telecommunications products and services offered by
us, introduction of new products or services by us or our competitors, delays in
the introduction or enhancement of products and services by us or our
competitors, changes in our pricing policies or those of our competitors, our
ability to anticipate and effectively adapt to developing markets and rapidly
changing technologies, changes in the mix or Japanese vs. non-Japanese revenue,
changes in foreign currency exchange rates, the mix of products and services
sold by us and the channels through which those products and services are sold,
general economic conditions, and specific economic conditions in Internet and
related industries. Additionally, in response to evolving competitive
conditions, we may elect from time to time to make certain pricing, service,
marketing or acquisition decisions that could have a material adverse affect on
its financial performance.
Foreign Currency (Yen) Fluctuations
- -----------------------------------
Substantially all of our revenue and expenses are received and incurred in
Japanese Yen. Variation in foreign exchange rates may substantially affect our
revenue, expenses, and net income in U.S. dollar terms. In preparing our
financial statements, we translate revenue and expenses from Japanese Yen into
U.S. dollars using weighted average exchange rates. If the U.S. dollar
strengthens relative to the Yen, our reported revenue, gross profits and net
income will likely be reduced. For example, in 2001, the Japanese Yen
significantly weakened, which reduced our operating results on a U.S. dollar
reported basis. The Company's 2005 operating results could be similarly harmed
if the Japanese Yen weakens from current levels. Given the unpredictability of
exchange rate fluctuations, we cannot estimate the effect these fluctuations may
have upon future reported results, product pricing or our overall financial
condition.
17
Poor Japanese Economic Conditions
- ---------------------------------
Economic conditions in Japan have been poor in recent years and may worsen or
not improve. Continued or worsening economic and political conditions in Japan
could further reduce our revenue and net income.
Reliance On Handwritten Moji Characters As Preferred Method Of Written
- ----------------------------------------------------------------------
Communications
- --------------
We rely on the desire of subscribers and potential subscribers to use
handwritten Moji (characters) as their preferred method of written communication
as an underlying material assumption for the continuing success of its business.
A subscriber's or potential subscriber's desire to use handwritten Moji
(characters) is a matter of personal preference, which is unpredictable. Any
negative changes in perception by subscribers and potential subscribers as to
their desire to use handwritten Moji characters as their preferred method of
written communication, for any reason, including the emergence of new,
different, or alternative forms of written communications, could have a
materially adverse affect on us and our business.
Dependence On New Subscribers
- -----------------------------
Our operating results generally depend on revenues received from sales of the
MOJICO product. In previous years, MOJICO sales have accounted for up to 78% of
our annual revenue. MOJICO sales are primarily made to our new customers. As a
result, future revenues are primarily dependent on our ability to generate new
customers for our MOJICO hardware and Pan Pacific Online services. There can be
no assurances that we will be able to continue to generate new subscribers at
the rate that we have been able to in the past, nor that we will be able to
generate sufficient new subscribers to remain profitable. We do not have any
substantial historical basis for predicting the rate of increase in our
subscriber base.
Dependence On Subscribers For Content Of Network
- ------------------------------------------------
The information transmitted to our subscribers via our information network Pan
Pacific Online is primarily generated by other subscribers. There can be
no assurances that our subscribers will continue to generate information that
other subscribers will find sufficiently entertaining, useful, or desirable so
as to allow us to profitably market the products and services that provide
access to our network.
Liability For Content Of Network
- --------------------------------
As a provider of messaging and communications services, we may incur liability
for defamation, negligence, copyright, patent or trademark infringement and
other claims based on the nature and content of the materials transmitted via
our information network. To minimize our liability, we use a centralized hub to
manually process and screen hard copies for adult themes, slander,
patent/copyright infringement and objectionable material. However, there can be
no assurances that we will be able to effectively screen all of the content. We
have no insurance to cover claims of these types. Any imposition of liability
could have a material adverse affect on our reputation, financial condition, and
operating results.
Reliance On Existing Distributors And Need To Recruit Additional Distributors
- -----------------------------------------------------------------------------
We depend on subscriber distributors to generate substantially all of our
revenues. To increase our revenue, we must increase the number of and/or the
productivity of our distributors. Our distributors may terminate their status as
a distributor at any time. The number of distributors may not increase and could
decline in the future. We cannot accurately predict how the number and
productivity of distributors may fluctuate because we rely upon our existing
distributors to recruit, train and motivate new distributors. Our operating
results could be harmed if our existing and new business opportunities and
products do not generate sufficient interest to retain existing distributors and
attract new distributors.
18
The loss of a group of high-level distributors, or a group of leading
distributors in the distributor's network of lower level distributors, whether
by their own choice or through disciplinary actions for violations of our
policies and procedures could negatively impact the growth of distributors and
our revenue. There is no leading distributor whose departure, alone, will have a
material impact on the financial position or results of operations. In addition,
our operations in Japan face significant competition from existing and new
competitors. Our operations would also be harmed if our planned growth
initiatives fail to generate continued interest and enthusiasm among our
distributors in this market and fail to attract new distributors.
Dependence on Key Employees
- ---------------------------
One of our business strategies is to reduce our dependence on any one employee.
This has been, and will continue to be, done through additional external
training courses of employees and structuring of the organization to three (3)
levels, namely, senior management, leaders and 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. We believe that the current officers of AJOL are fully
capable of effectively and efficiently managing the day-to-day operations of
AJOL consistent with AJOL's policies, procedures and business model, and that
there are several capable motivational speakers among AJOL's distributors.
However, if we are unsuccessful in accomplishing our strategy to reduce our
dependence on any one employee, our business and prospects could be materially
adversely affected.
Failure Of New Products And Services To Gain Market Acceptance
- --------------------------------------------------------------
A critical component of our business is our ability to develop new products and
services that create enthusiasm among our distributor force. If any new product
or service fails to gain market acceptance, for any reason including quality
problems, this could harm our results of operations.
Losing Sources Of Kamome Products
- ---------------------------------
The loss of any of our sources of Kamome products, or the failure of sources to
meet our needs, could restrict our ability to distribute Kamome products and
harm our revenue as a result. Further, our inability to obtain new sources of
Kamome products at prices and on terms acceptable to us could harm our results
of operations.
Competition With Technically Superior Products And Services
- -----------------------------------------------------------
Our products and services utilize the facsimile-like MOJICO hardware and rely on
human personnel to screen and process information for our database. Our products
and services are much less technically sophisticated than those offered by other
companies offering interactive telecommunications products and services. This
may put us at a substantial competitive disadvantage with present and/or future
competitors.
Internet Usage Rates And Long Distance Telephone Rates
- ------------------------------------------------------
Our subscribers obtain access to AJOL's network via either the Internet or
telephone service. The costs that subscribers incur in obtaining access to our
network via these channels are beyond the control of AJOL. Any increase in long
distance telephone rates or rates for accessing the Internet could materially
and adversely affect demand for our products and services.
19
Reliance On Internet As Transmission Medium
- -------------------------------------------
Our future success will depend upon our ability to route our customers' traffic
through the Internet and through other data transmission media. Our success is
largely dependent upon the viability of the Internet as a medium for the
transmission of subscriber related data. There can be no assurance that the
Internet will prove to be a viable communications media, that document
transmission will be reliable, or that capacity constraints which inhibit
efficient document transmission will not develop. The Internet may not prove to
be a viable avenue to transmit communications for a number of reasons, including
lack of acceptable security technologies, lack of access and ease of use,
traffic congestion, inconsistent quality or speed of service, potentially
inadequate development of the necessary infrastructure, excessive governmental
regulation, uncertainty regarding intellectual property ownership or lack of
timely development and commercialization of performance improvements.
Technological Changes Of The Messaging And Communications Industry
- ------------------------------------------------------------------
The messaging and communications industry is characterized by rapid
technological changes, changes in user and customer requirements and
preferences, and the emergence of new industry standards and practices that
could render our existing services, proprietary technology and systems obsolete.
Our success depends, in part, on our ability to develop new services,
functionality and technology that address the needs of existing and prospective
subscribers. If we do not properly identify the feature preferences of
subscribers and prospective subscribers, or if we fail to deliver features that
meet their standards, our ability to market our products and services
successfully and to increase revenues could be impaired. The development of
proprietary technology and necessary service enhancements entail significant
technical and business risks and require substantial expenditures and lead-time.
We may not be able to keep pace with the latest technological developments. We
may also be unable to use new technologies effectively or adapt services to
customer requirements or emerging industry standards.
We must accurately forecast the features and functionality required by
subscribers and prospective subscribers. In addition, we must design and
implement service enhancements that meet subscriber requirements in a timely and
efficient manner. We may not successfully determine subscriber and prospective
subscriber requirements and may be unable to satisfy their demands. Furthermore,
we may not be able to design and implement a service incorporating desired
features in a timely and efficient manner. In addition, if subscribers do not
favorably receive any new service offered by us, our reputation could be
damaged. If we fail to accurately determine desired feature requirements or
service enhancements or to market services containing such features or
enhancements in a timely and efficient manner, our business and operating
results could suffer materially.
Possible Inadequate Intellectual Property Protections
- -----------------------------------------------------
Our success depends to a significant degree upon our proprietary technology. We
rely on a combination of patent, trademark, trade secret and copyright law and
contractual restrictions to protect our proprietary technology. However, these
measures provide only limited protection, and the Company may not be able to
detect unauthorized use or take appropriate steps to enforce our intellectual
property rights. In addition, we may face challenges to the validity and
enforceability of our proprietary rights and may not prevail in any litigation
regarding those rights. Any litigation to enforce our intellectual property
rights would be expensive and time-consuming, would divert management resources
and may not be adequate to protect our business.
Possible Infringement Claims
- ----------------------------
We could be subject to claims that we have infringed the intellectual property
rights of others. In addition, we may be required to indemnify our distributors
and users for similar claims made against them. Any claims against us could
require us to spend significant time and money in litigation, pay damages,
develop new intellectual property or acquire licenses to intellectual property
that is the subject of the infringement claims. These licenses, if required, may
not be available at all or on acceptable terms. As a result, intellectual
property claims against us could have a material adverse effect on our business,
prospects, financial conditions and results of operations.
20
Possible System Failure Or Breach Of Network Security
- -----------------------------------------------------
Our operations are dependent on our ability to protect our network from
interruption by damage from fire, earthquake, power loss, telecommunications
failure, unauthorized entry, computer viruses or other events beyond our
control. As precautions, we utilize distributed processing systems, back-up
systems, Internet firewalls, 24/7 installation environment surveillance, and
private power generators as backup. There can be no assurance that our existing
and planned precautions of backup systems, regular data backups and other
procedures will be adequate to prevent significant damage, system failure or
data loss.
Despite the implementation of security measures, our infrastructure may also be
vulnerable to computer viruses, hackers or similar disruptive problems.
Persistent problems continue to affect public and private data networks,
including computer break-ins and the misappropriation of confidential
information. Computer break-ins and other disruptions may jeopardize the
security of information stored in and transmitted through the computer systems
of the individuals and businesses utilizing our services, which may result in
significant liability to us and also may deter current and potential subscribers
from using our services. Any damage, failure or security breach that causes
interruptions or data loss in our operations or in the computer systems of our
customers could have a material adverse effect on our business, prospects,
financial condition and results of operations.
Reliance On Third Party Access For Telecommunications
- -----------------------------------------------------
We rely on third parties to provide our subscribers with access to the Internet.
There can be no assurance that a third party's current pricing structure for
access to and use of the Internet will not change unfavorably and, if the
pricing structure changes unfavorably, our business, prospects, financial
condition and results of operations could be materially and adversely affected.
Effect Of Government Regulations
- --------------------------------
We provide access to our database and services through data transmissions over
public telephone lines and other facilities provided by telecommunications
companies. These transmissions are subject to regulatory government agencies.
These regulations affect the prices that subscribers must pay for transmission
services, the competition we face from telecommunications services and other
aspects of our market. There can be no assurance that existing or future laws,
governmental action or rulings will not materially and adversely affect our
operations. Additionally, we operate through a network marketing strategy which
is subject to government regulation concerning consumer protection. Changes in
these regulations could affect compliance with these regulations and
jurisdictions where we carry on our business.
Dependence On Vendor
- --------------------
The MOJICO machine is produced by an unrelated third party. Should this third
party become incapable or unwilling to produce the MOJICO for any reason, we
could face a temporary decline in MOJICO sales until another electronics
manufacturer is sourced and ready to produce the machines.
Control By Officers And Directors
- ---------------------------------
Our executive officers, directors and entities affiliated with them, in the
aggregate, beneficially own common stock representing the majority of PPOL.
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Minority Shareholder Status
- ---------------------------
Forval Corporation and Leo Global Fund, former direct shareholders of AJOL, hold
approximately 58% and approximately 17% respectively of PPOL's common stock.
Acting alone, Forval Corporation, as a majority shareholder, has significant
influence on PPOL's policies. Forval Corporation and Leo Global Fund,
collectively, control the majority of PPOL's outstanding shares, representing
the majority of PPOL's voting power. As a result, Forval Corporation and Leo
Global Fund, acting together, will have the ability to control the outcome of
all matters requiring stockholder approval, including the election and removal
of PPOL's entire Board of Directors, any merger, consolidation or sale of all or
substantially all of PPOL's assets, and the ability to control PPOL's and our
management and affairs.
No Lock-Up Agreement Between Forval Corporation And Leo Global Fund
- -------------------------------------------------------------------
To date, PPOL has not entered into a separate lock-up arrangement with Forval
Corporation and Leo Global Fund pursuant to which these shareholders would agree
to be subject to volume and sale restrictions that will limit their ability to
sell shares in addition to the restrictions set forth under Rule 144. If a
suitable lock-up agreement is not in effect, then Forval Corporation and/or Leo
Global Fund may be eligible to sell a large volume of shares, which could cause
the price of PPOL's shares to decline.
No History As Reporting Company
- -------------------------------
Prior to the effective date of the PPOL's filing of Form 10, PPOL has never been
a public company, subject to the reporting requirements of the Securities and
Exchange Act of 1934, as amended, and PPOL expects that the obligations of being
a public company, including substantial public reporting and investor relations
obligations, will require significant continuing additional expenditures, place
additional demands on our management and may require the hiring of additional
personnel. We may need to implement additional systems in order to adequately
function as a reporting public company. Such expenditures could adversely affect
our financial condition and results of operations.
ITEM 4: CONTROLS AND PROCEDURES
We have established and maintain disclosure controls and procedures and conclude
these controls/procedures are effective based on our evaluation as of the
"Evaluation Date," which is as of the end of the period covered in the filing of
this 10-Q. There were no significant changes in our internal controls or in
other factors that could significantly affect our internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
The Company intends to initiate planning for the implementation of Section 404
of the Sarbanes-Oxley Act by April 2005. However, the Company has not yet hired
an outside firm to assist in the implementation to start its evaluation process.
The implementation of Section 404 will involve significant costs and commitments
in terms of the Company's financial and personnel resources, and there is a
possibility that the Company may not complete its Section 404 compliance
responsibilities by the established deadline.
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 . As reported in our Form 8-K, filed on December 14,
2004 (incorporated herein by reference), independent counsel concluded, among
other things, that Leo Global Fund ("Leo") engaged in an offer and sale of
certain of its shares of our common stock to residents of Japan in violation of
certain provisions of Japanese securities laws (the "Leo Sales"), and that AJOL
Co., Ltd. ("AJOL"), our wholly-owned subsidiary, also violated certain
provisions of Japanese securities
22
laws in connection with its solicitation and facilitation of the Leo Sales. We
reported at that time that we believed that the Leo Sales were made to
approximately 6,000 Japanese residents, and further believed that Leo sold in
excess of 3,500,000 of its shares of our common stock. We also reported at that
time that we believed the purchase prices received by Leo ranged from $3.00 to
$4.00 per share. As of the date of this report, we have not yet confirmed the
foregoing. However, we have confirmed that under Japanese law, while Leo and
AJOL may have violated certain provisions of the Securities and Exchange Law of
Japan in connection with the Leo Sales, such sales transactions in Japan were
not invalid as a result of such violations. We also confirmed that despite the
violations, our stock purchased by Japanese residents from Leo is eligible to be
sold in Japan and could be listed on a Japanese stock exchange. Accordingly, we
will now treat the Japanese residents who purchased our stock from Leo as
shareholders of the Company.
As reported in Item 5 of our Form 10-Q for the quarter ended September 30, 2004
(incorporated herein by reference), our board determined on November 12, 2004,
to defer any decision as to the acceptance of Leo Global Fund's ("Leo") proposal
to acquire 2,500,000 newly issued shares of our common stock at a price of $4.00
per share for an aggregate investment of $10,000,000. Our board has now fully
considered the Leo offer and determined at its January 19, 2005, meeting to
reject it.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K:
A - Exhibits:
Exhibit 31.1 - Chief Executive Officer Certification Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2 - Chief Financial Officer Certification Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1 - Certification of Chief Executive Officer and
Chief Financial Officer Pursuant to Rule 13a-14(b) of
the Exchange Act and 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
Exhibit 10-8 - (Y)90,000,000 yen loan agreement with Forval Corporation
Exhibit 10-9 - Amendment to (Y)90,000,000 yen loan agreement with
Forval Corporation
Exhibit 10-10 - (Y)250,000,000 yen loan agreement with Forval
Corporation
B - Reports on Form 8-K
1. On November 1, 2004, the Company furnished a report on Form
8-K announcing the relocation of US corporate headquarters to
Los Angeles.
2. On December 14, 2004, the Company furnished a report on Form
8-K announcing the resignation of its board member and Chief
Operating Officer, Mr. Yoshihiro Aota, and its board member,
Mr. Nobuo Takada.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
PPOL, Inc.
-----------------------------------------
(Registrant)
February 14, 2005 /s/ Hideo Ohkubo
----------------- -----------------------------------------
Date Hideo Ohkubo, Chief Executive Officer
February 14, 2005 /s/ Toshiaki Shimojo
----------------- -----------------------------------------
Date Toshiaki Shimojo, Chief Financial Officer
24