UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Mark one:
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For Quarter Ended September 30, 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.
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(Exact name of registrant as specified in its charter.)
California 95-4436774
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(State of Incorporation) (IRS Employer Identification No.)
11661 San Vicente Boulevard, Suite 901, Los Angeles, California 90049
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (310) 979-8513
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1 City Boulevard West, Suite 870, Orange, California 92868
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(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 November 12, 2004.)
PPOL, Inc.
2004 Quarterly Report on Form 10-Q
Table of Contents
PART 1: 3
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ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS 3
Consolidated Balance Sheets as of September 30, 2004 and March 31, 2004 3
Consolidated Statements of Income and Comprehensive Income for the
Three Months Ended September 30, 2004 and 2003 4
Consolidated Statements of Income and Comprehensive Income for the
Six Months Ended September 30, 2004 and 2003 5
Consolidated Statements of Cash Flows for Six Months Ended
September 30, 2004 and 2003 6
Notes to Consolidated Financial Statements 7
ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 11
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 14
ITEM 4: CONTROLS AND PROCEDURES 20
PART 2: 21
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ITEM 1: LEGAL PROCEEDINGS 21
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS 21
ITEM 3: DEFAULTS UPON SENIOR SECURITIES 21
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 21
ITEM 5: OTHER INFORMATION 21
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 23
SIGNATURES 24
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EXHIBITS: 25
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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
Exhibit 99.1 - Revised Letter of Understanding:
Object Innovation and Gatefor, Inc. 28
2
PART 1:
ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS
PPOL, INC.
CONSOLIDATED BALANCE SHEETS
September 30, March 31,
2004 2004
-------------- --------------
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 8,445,406 $ 12,083,556
Restricted cash 18,000,726 16,251,221
Trade accounts receivable, net of allowance for
doubtful accounts of $0 (unaudited) and $0 1,780,891 309,063
Merchandise inventories 1,811,972 2,651,259
Deferred costs 52,248,209 63,159,328
Deferred income taxes 8,090,944 9,467,524
Prepaid expenses and other 500,599 281,784
-------------- --------------
Total current assets 90,878,747 104,203,735
PROPERTY AND EQUIPMENT, net 1,301,990 1,250,975
SOFTWARE, net 9,814,044 7,444,657
DEFERRED COSTS 32,539,864 37,042,494
DEFERRED INCOME TAXES 4,992,965 5,494,095
LEASE DEPOSITS 720,022 766,457
DEPOSITS 4,000,393 3,984,883
OTHER ASSETS 512,131 181,987
-------------- --------------
TOTAL ASSETS $ 144,760,156 $ 160,369,283
============== ==============
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable, including related parties $ 13,611,114 $ 11,281,024
Advances received - Cube 18,000,726 16,251,221
Advances received 1,046,419 1,353,721
Deferred revenue 71,067,363 84,644,397
Due to parent 811,394 --
Income taxes payable 558,809 1,086,260
Other current liabilities 1,493,916 1,888,976
-------------- --------------
Total current liabilities 106,589,741 116,505,599
DEFERRED REVENUE 43,069,968 49,155,662
OTHER LIABILITIES 94,320 --
-------------- --------------
Total liabilities 149,754,029 165,661,261
-------------- --------------
SHAREHOLDERS' DEFICIT:
Common Stock; $0.001 par value; 100,000,000 shares authorized;
17,993,752 shares issued and outstanding as of September 30,
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 1,523,853 316,307
Accumulated deficit (9,898,079) (8,988,638)
-------------- --------------
Total shareholders' deficit (4,993,873) (5,291,978)
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDER'S DEFICIT $ 144,760,156 $ 160,369,283
============== ==============
The accompanying notes are an integral part of these consolidated financial statements.
3
PPOL, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Three months Three months
ended ended
September 30, September 30,
2004 2003
------------- -------------
(Unaudited) (Unaudited)
NET REVENUE:
Product sales and network services $ 26,851,737 $ 28,427,695
Other on-line services 5,556,924 4,874,857
Consulting revenue -- 483,858
------------- -------------
Total 32,408,661 33,786,410
------------- -------------
COSTS AND EXPENSES:
Cost of sales 9,403,238 10,090,801
Distributor incentives 15,684,705 15,455,809
Selling, general and administrative expenses 6,683,613 6,378,653
------------- -------------
Total costs and expenses 31,771,556 31,925,263
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OPERATING INCOME 637,105 1,861,147
OTHER EXPENSE, net 119,527 46,336
------------- -------------
INCOME BEFORE INCOME TAX PROVISION (BENEFIT) 517,578 1,814,811
------------- -------------
INCOME TAXES:
Current 542,714 1,361,866
Deferred 408,977 (1,714,437)
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Total income taxes 951,691 (352,571)
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NET (LOSS) INCOME (434,113) 2,167,382
OTHER COMPREHENSIVE GAIN (LOSS)
Foreign currency translation 441,555 (1,753,081)
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COMPREHENSIVE (LOSS) INCOME $ 7,442 $ 414,301
============= =============
NET (LOSS) EARNING PER COMMON SHARE,
Basic $ (0.02) $ 0.12
============= =============
Diluted $ (0.02) $ 0.12
============= =============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 17,993,752 17,994,920
============= =============
Diluted 17,993,752 17,994,920
============= =============
The accompanying notes are an integral part of these consolidated
financial statements.
4
PPOL, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Six months Six months
ended ended
September 30, September 30,
2004 2003
------------- -------------
(Unaudited) (Unaudited)
NET REVENUE:
Product sales and network services $ 53,340,901 $ 57,007,051
Other on-line services 11,080,452 9,554,690
Consulting revenue -- 483,858
------------- -------------
Total 64,421,353 67,045,599
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COSTS AND EXPENSES:
Cost of sales 17,104,352 17,772,614
Distributor incentives 31,538,651 32,799,173
Selling, general and administrative expenses 14,237,374 12,366,648
------------- -------------
Total costs and expenses 62,880,377 62,938,435
------------- -------------
OPERATING INCOME 1,540,976 4,107,164
OTHER INCOME, net 3,425 642,317
------------- -------------
INCOME BEFORE INCOME TAX PROVISION 1,544,401 4,749,481
------------- -------------
INCOME TAXES:
Current 576,132 1,449,840
Deferred 1,877,710 (38,567)
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Total income taxes 2,453,842 1,411,273
------------- -------------
NET (LOSS) INCOME (909,441) 3,338,208
OTHER COMPREHENSIVE GAIN (LOSS)
Foreign currency translation 1,207,546 (1,389,841)
------------- -------------
COMPREHENSIVE INCOME $ 298,105 $ 1,948,367
============= =============
NET (LOSS) EARNING PER COMMON SHARE,
Basic $ (0.05) $ 0.19
============= =============
Diluted $ (0.05) $ 0.19
============= =============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING:
Basic 17,993,752 17,994,920
============= =============
Diluted 17,993,752 17,994,920
============= =============
The accompanying notes are an integral part of these consolidated
financial statements.
5
PPOL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months Six months
Ended Ended
September 30, September 30,
2004 2003
------------- -------------
(Unaudited) (Unaudited)
CASH FLOWS (USED FOR) PROVIDED BY OPERATING ACTIVITIES:
Net (loss) income $ (909,441) $ 3,338,208
ADJUSTMENTS TO RECONCILE NET (LOSS) INCOME TO NET CASH
PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Depreciation and amortization 2,004,642 1,016,122
Loss on disposals/impairment of software
& telephone rights 24,191 17,589
(Gain) loss on sales/disposal of property & equipment (2,671) 62,024
Deferred income taxes 1,877,710 881,132
CHANGES IN ASSETS AND LIABILITIES:
(INCREASE) DECREASE IN ASSETS:
Restricted cash (2,763,219) (1,722,404)
Trade accounts receivables (1,506,314) (432,221)
Merchandise inventories 685,898 1,988,800
Advance payments to related parties -- 1,134,765
Deferred costs 9,442,704 10,615,366
Prepaid expenses and other (569,612) 474,337
Net decrease in lease deposits -- 675,285
INCREASE (DECREASE) IN LIABILITIES:
Accounts payable 3,040,604 1,179,659
Advances received - Cube 2,763,219 1,722,404
Advances received (227,690) (1,004,034)
Deferred revenue (11,679,758) (12,760,486)
Income taxes payable (455,541) 563,426
Other current liabilities (318,036) 827,018
Other liabilities 16,048 119,231
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Total adjustments 2,332,175 5,358,013
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Net cash (used for) provided by operating activities 1,422,734 8,696,221
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CASH FLOWS USED FOR INVESTING ACTIVITIES:
Purchase of property and equipment (287,604) (4,223,090)
Software & Software CIP (4,457,039) --
------------- -------------
Net cash used for investing activities (4,744,643) (4,223,090)
------------- -------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Loan from majority shareholder 811,394 --
Investment in subsidiary (300,000) --
------------- -------------
Net cash provided by financing activities 511,394 --
------------- -------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH & CASH EQUIVALENTS (827,635) (612,647)
------------- -------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (3,638,150) 3,860,484
CASH AND CASH EQUIVALENTS, beginning of period 12,083,556 5,102,435
------------- -------------
CASH AND CASH EQUIVALENTS, end of period $ 8,445,406 $ 8,962,919
============= =============
SUPPLEMENTAL CASH FLOW INFORMATION -
Income taxes paid $ 1,175,535 $ 2,477
============= =============
Interest paid $ 19,964 $ 5
============= =============
The accompanying notes are an integral part of these consolidated financial statements.
7
PPOL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED SEPTEMBER 30, 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, is primarily engaged
in sales of multi-functional telecommunications equipment called
MOJICO. The Company distributes MOJICO throughout Japan through a
network marketing system. The Company has a network of registered
distributors located throughout Japan that introduce purchasers to the
Company. The Company operates in one operating segment.
Using MOJICO, the Company provides original telecommunication services
called "Pan Pacific Online," including MOJICO bulletin board and mail
services. The Company also provides various other on-line services
through Pan Pacific Online such as ticket and mail-order services.
These sales and services are provided in Japan.
On August 15, 2002, the Company amended its articles of incorporation
to increase its authorized shares of common stock from 10,000,000 to
100,000,000, change its name to PPOL, Inc. and effected a 1 for 7
reverse stock split. All share data presented in these consolidated
financial statements reflect the reverse stock split.
Effective April 1, 2002, AJOL Co., LTD. ("AJOL") was acquired by PPOL
in a transaction accounted for as a reverse merger. The Company, upon
closing of the transaction on August 15, 2002, issued 899,746 shares
(post split) of its common stock for all of the issued and outstanding
common stock of AJOL. For legal purposes, PPOL is the acquirer. For
accounting purposes, AJOL has been treated as the acquirer and
accordingly, AJOL is presented as the continuing entity, and the
historical financial statements are those of AJOL. Prior to the reverse
merger PPOL had no business activity, thus pro-forma information as
though PPOL and AJOL had been combined for all periods has not been
provided. AJOL and PPOL are collectively referred to herein as the
"Company."
Gatefor, Inc. (Gatefor) was incorporated in Japan on June 16, 2004.
PPOL owns 2,000 shares of Gatefor common stock or 100% of the issued
and outstanding stock of Gatefor which has 8,000 shares authorized.
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.
BASIS OF PRESENTATION:
The unaudited consolidated financial statements have been prepared by
PPOL, Inc. (the "Company"), pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and
footnote disclosures normally present in annual consolidated financial
statements prepared in accordance with accounting principles generally
accepted in the United States of America have been omitted pursuant to
such rules and regulations. The information furnished herein reflects
all adjustments (consisting of normal recurring accruals and
adjustments), which are, in the opinion of management, necessary to
fairly present the operating results for the prospective periods. These
consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and footnotes for the
years ended March 31, 2004 and 2003 included in the Company's Form
10-K. The results of the six months ended September 30, 2004 are not
necessarily indicative of the results to be expected for the full year
ending March 31, 2005.
8
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 3 and 6 months ended September 30, 2004, convertible notes payable
has not been included in calculating diluted loss per share because the
effect would be antidilutive. Additionally, all of the 1,220,000 issued
and outstanding common stock options have also been excluded as they
would have an antidilutive effect.
FORFEITED DISTRIBUTOR COMMISSIONS:
In April 2003, the Company amended its policy regarding distributor
commissions to state that distributor commissions are not paid out
unless they exceed a minimum threshold of approximately $30.00. If a
distributor does not attain the minimum commission threshold within one
year, then the commissions will be forfeited to the Company. In the
quarter ending June 30, 2003, the Company has recognized approximately
$714,000 of other income for the write-off of previously accrued
distributor commissions that exceeded the one year threshold at March
31, 2003. This amount, related to the change in accounting policy, is
included in other income on the statements of income and comprehensive
income for the six months ended September 30, 2003.
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 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 March 2004, the Financial Accounting Standards Board (FASB) approved
the consensus reached on the Emerging Issues Task Force (EITF) Issue
No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments." The objective of this Issue is to
provide guidance for identifying impaired investments. EITF 03-1 also
provides new disclosure requirements for investments that are deemed to
be temporarily impaired. The accounting provisions of EITF 03-1 are
effective for all reporting periods beginning after June 15, 2004,
while the disclosure requirements for certain investments are effective
for annual periods ending after December 15, 2003, and for other
investments such disclosure requirements are effective for annual
periods ending after June 15, 2004. The Company has evaluated the
impact of the adoption of EITF 03-1 and does not believe the impact
will be significant to the Company's overall results of operations or
financial position.
9
(2) RELATED PARTY TRANSACTIONS:
The following summarizes amounts due from or to Forval and related
transaction amounts.
September 30, September 30,
2004 2003
-------------- -------------
(Unaudited) (Unaudited)
Due to Forval - convertible debt $ 811,394 $ --
In June 2004, the Company borrowed $811,394 (90,000,000 Japanese yen)
from its majority shareholder, due December 30, 2004, with interest
payable at two percent (2%) per annum. The borrowing will automatically
convert to common stock at the closing market price on December 29,
2004 if there has been no additional capital contributions between the
borrowing and due date.
(3) 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. This investment is classified under
Other Assets on the September 30, 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.
(4) 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 were made under agreements directly
with AJOL and not with the Kamome Benefit Club.
(5) DEFERRED REVENUES AND DEFERRED COSTS:
Activity for deferred revenues and deferred costs are 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 10,019,669 14,793,701 15,154,362 19,428,598
Released amounts (17,179,857) (17,076,216) (23,693,353) (22,569,365)
Exchange rate effect (3,750,931) (2,220,115) (5,038,043) (2,944,927)
------------- ------------- ------------- -------------
Ending balance, September 30, 2004 $ 52,248,209 $ 32,539,864 $ 71,067,363 $ 43,069,968
============= ============= ============= =============
10
(6) COMMITMENTS & CONTINGENCIES:
In August 2004, the Company, through its wholly owned subsidiary
Gatefor, Inc., executed a Revised Letter of Understanding (the
"Letter") pursuant to the Common Stock Purchase Agreement (the
"Agreement") with Object Innovation, Inc. The Letter amends certain
licensing terms of the Agreement. The Letter also defines 3 milestones
which Object Innovation, Inc. 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 September 30, 2004, two of the three
milestones were achieved by Object Innovation for which they received
payment from the Company. The two payments made to Objective
Innovation, Inc. through September 30, 2004 were capitalized under
Software. When the final milestone is achieved, the entire capitalized
Software cost will be amortized in accordance with SFAS 86. The Company
still had a commitment of $60,000 to Object Innovation for the final
milestone as of September 30, 2004. Additionally, the Letter provides
that commencing on the first month following completion of the third
milestone, the Company will pay Object Innovation $9,000 per month
until April 2005 and $15,000 per month thereafter until the Company's
subsidiary, Gatefor, Inc., becomes a publicly traded company. These
payments are intended to allow Object Innovation to add additional
staff to support sales in Japan through Gatefor. The Letter also
provides for the issuance of stock warrants by Gatefor, Inc. to Object
Innovation equal to 5% of Gatefor, Inc.'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. However,
the Company believes that the financial position and results of
operations of the Company will not be materially affected once the
terms of the warrant is defined and a valuation is determined.
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.
(7) SUBSEQUENT EVENTS:
In October 2004, the Company borrowed an additional amount of
approximately $2.3 million (250,000,000 Japanese Yen) from its majority
shareholder, Forval Corporation for working capital purposes. Interest
accrues at the rate of 2% per annum and the loan, which is unsecured,
is due and payable on March 31, 2005.
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
it's 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 currently derived from the sales of (1) its "MOJICO"
hardware, a multifunctional facsimile based machine with networking
capabilities, (2) subscriptions to PPOL's proprietary "Pan Pacific Online"
interactive database that can only be accessed through its MOJICO hardware and
(3) various consumer products that utilize the Company's "Kamome" brand.
11
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 2004 AS COMPARED TO THE
THREE MONTHS ENDED SEPTEMBER 30, 2003
PRODUCT SALES AND NETWORK SERVICES. For the three months ended September 30,
2004, revenues of this category have decreased by 5.5% 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.
OTHER ONLINE SERVICES REVENUE. For the three months ended September 30, 2004,
revenues increased 14.0% 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 September 30, 2004, the cost of sales
expressed as a percentage of sales remained consistent with that of the same
period of the prior year.
DISTRIBUTOR INCENTIVES. For the three months ended September 30, 2004,
distributor incentives increased by approximately 1.5% in comparison to the same
period of the prior year. The overall increase in distributor incentives is
primarily the result of the product mix sold in the current period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. For the three months ended
September 30, 2004, selling, general and administrative expenses have increased
by approximately $0.4 million or 6.7% in comparison to the same period of the
prior year. The increase was primarily due to costs incurred by the Company's
new Gatefor subsidiary, which is currently localizing BridgeGate software for
sale in Japan. The BridgeGate software was licensed in June 2004 from Object
Innovation, Inc.
CURRENT INCOME TAX EXPENSE - For the three months ended September 30, 2004,
current income tax expense decreased approximately $819,000 from the same period
of the prior year primarily from the decline in income. The effective tax rate,
expressed as a percentage of income before income taxes was 105% vs. 75% in the
same period of the prior year. The increase 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 September 30, 2004,
deferred income tax expense increased approximately $2.1 million over the same
period of the prior year. The increase 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.
RESULTS OF OPERATIONS - SIX MONTHS ENDED SEPTEMBER 30, 2004 AS COMPARED TO THE
SIX MONTHS ENDED SEPTEMBER 30, 2003
PRODUCT SALES AND NETWORK SERVICES. For the six months ended September 30, 2004,
revenues of this category have decreased by 6.4% 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.
OTHER ONLINE SERVICES REVENUE. For the six months end September 30, 2004,
revenues increased 16.0% 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 six months ended September 30, 2004, the cost of sales
expressed as a percentage of sales remained consistent with that of the same
period of the prior year.
12
DISTRIBUTOR INCENTIVES. For the six months ended September 30, 2004, distributor
incentives decreased by approximately 3.8% in comparison to the same period of
the prior year. The overall decrease in distributor incentives is primarily the
result of lower sales in the current period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. For the six months ended September
30, 2004, selling, general and administrative expenses have increased by
approximately $2.0 million or 16.1% 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 its new commission calculation system, order &
receiving system and to the costs incurred by the Company's new Gatefor
subsidiary, which is currently localizing BridgeGate software for sale in Japan.
OTHER INCOME. For the six months ended September 30, 2004, other income
decreased by approximately $639,000 in comparison to 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 six months ended September 30, 2004,
current income tax expense decreased approximately $874,000 from the same period
of the prior year primarily from the decline in income. The effective tax rate,
expressed as a percentage of income before income taxes was 37% vs. 31% in the
same period of the prior year. The increase 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 six months ended September 30, 2004,
deferred income tax expense increased by approximately $1.9 million 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 to meet our cash
needs and business objectives without relying on long-term debt to fund
operating activities.
Cash and cash equivalents totaled $8,445,406 and $12,083,556 at September 30,
2004 and March 31, 2004, respectively. Cash provided from operations for the six
months ended September 30, 2004 and 2003 was $1,422,734 and $8,696,221,
respectively. Cash used for investing activities for the six months ended
September 30, 2004 and 2003 was $4,744,643 and $4,223,090, respectively. The
cash used for investing activity for the six months ended September 2004 was
primarily for the purchase of software and software in progress. Cash provided
by financing activities for the six months ended September 30, 2004 was the
result of a short term convertible loan obtained from our majority shareholder,
Forval Corporation, netted with an investment in a subsidiary. No cash was used
for financing activities in the six months ended September 30, 2003.
Management believes that cash flow from operations and the revolving credit
facility will adequately meet the working capital needs for the foreseeable
future.
13
Contractual Obligations
The Company's operating lease & purchase obligations as of September
30, 2004 are as follows:
Payments due by period
-----------------------------------------------------------------
More
Less than 1 1-3 3-5 than 5
Contractual obligations Total year years years years
----------------------- ----------- ----------- ----------- ----------- -----------
Operating Lease Obligations $ 45,000 $ 41,250 $ 3,750 $ -- $ --
Capital Lease Obligations 116,902 22,257 94,645 -- --
Service Provider Contracts 1,035,379 974,119 61,260 -- --
Loan repayments to parent 811,394 811,394 -- -- --
----------- ----------- ----------- ----------- -----------
Total $2,008,675 $1,849,020 $ 159,655 $ -- $ --
========== ========== ========== ============ ===========
The Company projects that it will need to satisfy at least $2.0 million of lease
and contract obligations within the twelve months following September 30, 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.
14
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
September 30, 2004, this investment was $300,000.
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.
15
FOREIGN CURRENCY (YEN) FLUCTUATIONS
Substantially all of our revenue and expenses are received and incurred in
Japanese Yen. Variation in foreign exchange rates may substantially affect our
revenue, expenses, and net income in U.S. dollar terms. In preparing our
financial statements, we translate revenue and expenses from Japanese Yen into
U.S. dollars using weighted average exchange rates. If the U.S. dollar
strengthens relative to the Yen, our reported revenue, gross profits and net
income will likely be reduced. For example, in 2001, the Japanese Yen
significantly weakened, which reduced our operating results on a U.S. dollar
reported basis. The Company's 2005 operating results could be similarly harmed
if the Japanese Yen weakens from current levels. Given the unpredictability of
exchange rate fluctuations, we cannot estimate the effect these fluctuations may
have upon future reported results, product pricing or our overall financial
condition.
POOR JAPANESE ECONOMIC CONDITIONS
Economic conditions in Japan have been poor in recent years and may worsen or
not improve. Continued or worsening economic and political conditions in Japan
could further reduce our revenue and net income.
RELIANCE ON HANDWRITTEN MOJI CHARACTERS AS PREFERRED METHOD OF WRITTEN
COMMUNICATIONS
We rely on the desire of subscribers and potential subscribers to use
handwritten Moji (characters) as their preferred method of written communication
as an underlying material assumption for the continuing success of its business.
A subscriber's or potential subscriber's desire to use handwritten Moji
(characters) is a matter of personal preference, which is unpredictable. Any
negative changes in perception by subscribers and potential subscribers as to
their desire to use handwritten Moji characters as their preferred method of
written communication, for any reason, including the emergence of new,
different, or alternative forms of written communications, could have a
materially adverse affect on us and our business.
DEPENDENCE ON NEW SUBSCRIBERS
Our operating results generally depend on revenues received from sales of the
MOJICO product. In previous years, MOJICO sales have accounted for up to 78% of
our annual revenue. MOJICO sales are primarily made to our new customers. As a
result, future revenues are primarily dependent on our ability to generate new
customers for our MOJICO hardware and Pan Pacific Online services. There can be
no assurances that we will be able to continue to generate new subscribers at
the rate that we have been able to in the past, nor that we will be able to
generate sufficient new subscribers to remain profitable. We do not have any
substantial historical basis for predicting the rate of increase in our
subscriber base.
16
DEPENDENCE ON SUBSCRIBERS FOR CONTENT OF NETWORK
The information transmitted to our subscribers via our information network Pan
Pacific Online is primarily generated by other of our subscribers. There can be
no assurances that our subscribers will continue to generate information that
other subscribers will find sufficiently entertaining, useful, or desirable so
as to allow us to profitably market the products and services that provide
access to our network.
LIABILITY FOR CONTENT OF NETWORK
As a provider of messaging and communications services, we may incur liability
for defamation, negligence, copyright, patent or trademark infringement and
other claims based on the nature and content of the materials transmitted via
our information network. To minimize our liability, we use a centralized hub to
manually process and screen hard copies for adult themes, slander,
patent/copyright infringement and objectionable material. However, there can be
no assurances that we will be able to effectively screen all of the content
generated by our subscribers. We may be exposed to liability with respect to
this content. Our insurance may not cover claims of these types or may not be
adequate to indemnify us for all liability that may be imposed. Our liability
coverage limit is 100,000,000 Japanese yen, approximately $950,000 at current
exchange rates, per occurrence. There is a risk that a single claim or multiple
claims, if successfully asserted against us, could exceed the total of our
coverage limits. There is also a risk that a single claim or multiple claims
asserted against us may not qualify for coverage under our insurance policies as
a result of coverage exclusions that are contained within these policies. Any
imposition of liability, particularly liability that is not covered by insurance
or is in excess of insurance coverage, could have a material adverse affect on
our reputation, financial condition, and operating results.
RELIANCE ON EXISTING DISTRIBUTORS AND NEED TO RECRUIT ADDITIONAL DISTRIBUTORS
We depend on subscriber distributors to generate substantially all of our
revenues. To increase our revenue, we must increase the number of and/or the
productivity of our distributors. Our distributors may terminate their status as
a distributor at any time. The number of distributors may not increase and could
decline in the future. We cannot accurately predict how the number and
productivity of distributors may fluctuate because we rely upon our existing
distributors to recruit, train and motivate new distributors. Our operating
results could be harmed if our existing and new business opportunities and
products do not generate sufficient interest to retain existing distributors and
attract new distributors.
The loss of a group of high-level distributors, or a group of leading
distributors in the distributor's network of lower level distributors, whether
by their own choice or through disciplinary actions for violations of our
policies and procedures could negatively impact the growth of distributors and
our revenue. There is no leading distributor whose departure, alone, will have a
material impact on the financial position or results of operations. In addition,
our operations in Japan face significant competition from existing and new
competitors. Our operations would also be harmed if our planned growth
initiatives fail to generate continued interest and enthusiasm among our
distributors in this market and fail to attract new distributors.
DEPENDENCE ON MR. AOTA
We are highly dependent upon our President Yoshihiro Aota to recruit and retain
subscribers. Mr. Aota represents the personification of AJOL. Mr. Aota's
talents, efforts, personality and leadership have been, and continue to be,
critical to us and our success. The diminution or loss of the services of Mr.
Aota, and any negative market or industry perception arising from that
diminution or loss, would have a material adverse affect on our business. We are
investigating, but have not obtained "Key Executive Insurance" with respect to
Mr. Aota.
One of our business strategies is to reduce our dependence on Mr. Aota. This
will be done through additional external training courses of employees and
flattening of the organization to three levels, senior management, leaders,
general, so more employees get on the job training from senior management. We
have also involved more staff on strategic planning and product development task
teams. Externally, our distributors have become more knowledgeable and are
making presentations to prospective subscribers. If we are unsuccessful in
accomplishing this strategy, and Mr. Aota's services become unavailable, our
business and prospects could be materially adversely affected. We do not have an
employment agreement with Mr. Aota. If we lose Mr. Aota's services, for any
reason, including as a result of Mr. Aota's voluntary resignation or retirement,
our business could be materially adversely affected.
17
FAILURE OF NEW PRODUCTS AND SERVICES TO GAIN MARKET ACCEPTANCE
A critical component of our business is our ability to develop new products and
services that create enthusiasm among our distributor force. If any new product
or service fails to gain market acceptance, for any reason including quality
problems, this could harm our results of operations.
LOSING SOURCES OF KAMOME PRODUCTS
The loss of any of our sources of Kamome products, or the failure of sources to
meet our needs, could restrict our ability to distribute Kamome products and
harm our revenue as a result. Further, our inability to obtain new sources of
Kamome products at prices and on terms acceptable to us could harm our results
of operations.
COMMENCING FOREIGN OPERATIONS
We continue to explore the possibility of commencing business activities in
South Korea, China, and Taiwan. In past years, these nations have experienced
significant economic and/or political instability. If we commence business
activities in these nations, future instability will have a material adverse
affect on our ability to do business in these nations and may jeopardize our
investment in establishing business operations in those countries.
COMPETITION WITH TECHNICALLY SUPERIOR PRODUCTS AND SERVICES
Our products and services utilize the facsimile-like MOJICO hardware and rely on
human personnel to screen and process information for our database. Our products
and services are much less technically sophisticated than those offered by other
companies offering interactive telecommunications products and services. This
may put us at a substantial competitive disadvantage with present and/or future
competitors.
INTERNET USAGE RATES AND LONG DISTANCE TELEPHONE RATES
Our subscribers obtain access to AJOL's network via either the Internet or
telephone service. The costs that subscribers incur in obtaining access to our
network via these channels are beyond the control of AJOL. Any increase in long
distance telephone rates or rates for accessing the Internet could materially
and adversely affect demand for our products and services.
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.
18
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.
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.
19
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 approximately 94.4% of
PPOL.
MINORITY SHAREHOLDER STATUS
Forval Corporation and Leo Global Fund, former direct shareholders of AJOL, hold
58.62% and 35.79% respectively of PPOL's common stock. Acting alone, Forval
Corporation, as a majority shareholder, has significant influence on PPOL's
policies. Forval Corporation and Leo Global Fund, collectively, control 94.40%
of PPOL's outstanding shares, representing 94.4% of PPOL's voting power. As a
result, Forval Corporation and Leo Global Fund, acting together, will have the
ability to control the outcome of all matters requiring stockholder approval,
including the election and removal of PPOL's entire Board of Directors, any
merger, consolidation or sale of all or substantially all of PPOL's assets, and
the ability to control PPOL's and our management and affairs.
NO LOCK-UP AGREEMENT BETWEEN FORVAL CORPORATION AND LEO GLOBAL FUND
To date, PPOL has not entered into a separate lock-up arrangement with Forval
Corporation and Leo Global Fund pursuant to which these shareholders would agree
to be subject to volume and sale restrictions that will limit their ability to
sell shares in addition to the restrictions set forth under Rule 144. If a
suitable lock-up agreement is not in effect, then Forval Corporation and/or Leo
Global Fund may be eligible to sell a large volume of shares, which could cause
the price of PPOL's shares to decline.
NO HISTORY AS REPORTING COMPANY
Prior to the effective date of the PPOL's filing of Form 10, PPOL has never been
a public company, subject to the reporting requirements of the Securities and
Exchange Act of 1934, as amended, and PPOL expects that the obligations of being
a public company, including substantial public reporting and investor relations
obligations, will require significant continuing additional expenditures, place
additional demands on our management and may require the hiring of additional
personnel. We may need to implement additional systems in order to adequately
function as a reporting public company. Such expenditures could adversely affect
our financial condition and results of operations.
ITEM 4: CONTROLS AND PROCEDURES
We have established and maintain disclosure controls and procedures and conclude
these controls/procedures are effective based on our evaluation as of the
"Evaluation Date," which is as of the end of the period covered in the filing of
this 10-Q. There were no significant changes in our internal controls or in
other factors that could significantly affect our internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
20
PART 2:
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
On October 5, 2004, the Board of Directors of the Company authorized its
Audit Committee to retain an independent third party to investigate and
study internet rumors and other matters relating to the business
operations of AJOL Co., Ltd. ("AJOL"). Independent Japanese counsel was
retained by the Company in the foregoing regard. Counsel completed his
inquiry and report thereon (the "Report") on November 8, 2004. Counsel's
Report was considered by the full Board at its special meeting on
November 12, 2004.
The Report stated that AJOL's marketing system is designated in Japan as
"Rensa Torihiki," which means multi-level marketing. The Report
confirmed that AJOL's multi-level marketing strategies are regulated by
the Tokutei Shotorihiki Act (the "Act") in Japan. The Report stated that
certain lawsuits have been filed against AJOL based upon claims that the
business of AJOL is being conducted in breach of the Act or public
policy, or constitutes fraud. The Report also suggested that certain
alleged communications made by representatives and members of AJOL to
induce new members may have been exaggerated or misleading. The Report
also stated that many complaints and criticisms about the business of
AJOL are based on alleged communications that membership in AJOL will
provide ongoing profit without fail. The Report, however, stated that no
judgment has been entered against the Company with respect to any
lawsuits or claims, and that, to the contrary, the Fukuoka High Court
ruled on August 27, 2004, that the business of AJOL was not in breach of
the Act, and that the agreements between AJOL and its members were
legally binding.
The Report also stated that the Act was revised on May 12, 2004,
effective November 11, 2004. Pursuant to revisions under the Act, the
Report states that AJOL must disclose any intention to induce proposed
AJOL members to purchase Mojico, may not give false information about
the price of products and services provided by AJOL, may not induce the
purchase of Mojico at any place exclusive of the general public unless
the prospective member is informed that any meeting is to induce
purchases of Mojico. The revised Act also provides that AJOL must accept
cancellation of an agreement in the event such agreement was offered or
accepted due to a misunderstanding. Additionally, any member of AJOL
shall be free to terminate his or her relationship with AJOL
indefinitely under certain conditions.
The Report found that the present manner in which AJOL conducts its
business will not violate the revised Act, although, the Report points
out that inasmuch as the revised Act would be more severe, it could make
it difficult for AJOL to conduct its business in the future.
After considering the Report, the Board resolved at its November 12,
2004, meeting further to investigate and study matters raised in the
Report, and if necessary, to take immediate corrective action, where
appropriate.
21
At its November 12, 2004, special meeting, the Board also considered a
proposal by Leo Global Fund ("Leo") to acquire 2,500,000 newly issued
shares of common stock of the Company at a price of $4.00 per share for
an aggregate investment of $10,000,000. The only condition in connection
with Leo's proposed investment is that the Company seek listing of its
securities on the AMEX national securities exchange and thereafter on
NASDAQ. In considering Leo's proposal, the Board noted that it continues
to evaluate and re-evaluate strategies and options to maximize the value
of the Company's core asset, AJOL, including, without limitation, the
merits and benefits of a merger or acquisition, the sale of AJOL,
diversification of the Company's asset base, as well as infusions of
additional equity. The Board also noted that it continues to evaluate
its options and strategies in the context of achieving listing of its
securities on NASDAQ, AMEX or other national securities exchanges, and
also in the context of avoiding, if possible, or limiting unnecessary
dilution to the Company's shareholders. No assurances can be provided
that any of the foregoing options and strategies or listing efforts will
prove to be successful. Further, the Board determined to defer any
decision on the acceptance of Leo's investment proposal pending further
consideration and analysis of Leo's offer in the context of the Report.
In the Company's form 8-K filed on June 1, 2004, the Company disclosed
that it had entered into a licensing and exclusive distribution
agreement with Object Innovation, Inc., providing for, among other
things, the Company's right to license and distribute Object
Innovation's BridgeGate software in Japan. By that certain Revised
Letter of Understanding, dated August 11, 2004, the Company's agreement
with Object Innovation was revised by, among other things, an assignment
of the original agreement to the Company's wholly-owned subsidiary,
GateFor, Inc. A copy of the Revised Letter of Understanding is attached
to this Form 10-Q as Exhibit 99.1
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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.
B - Reports on Form 8-K
1. On July 13, 2004, the Company furnished a report on Form 8-K
relating to the addition of four new independent board
members: Mr. Robert Brasch, Mr. Naota Hamaguchi, Mr. Lowell
Hattori and Mr. Yoshikazu Ohashi.
2. On July 26, 2004, the Company furnished a report on Form 8-K
relating to the resignation of its president, Mr. Peter
Pomeroy.
3. On November 1, 2004, the Company furnished a report on Form
8-K announcing the relocation of US corporate headquarters to
Los Angeles.
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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)
November 18, 2004 /s/ Hideo Ohkubo
----------------- -----------------------------------------
Date Hideo Ohkubo, Chief Executive Officer
November 18, 2004 /s/ Toshiaki Shimojo
----------------- -----------------------------------------
Date Toshiaki Shimojo, Chief Financial Officer
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