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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 2006 OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
PPOL, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 000-50065 95-4436774
(State or other (Commission File No.) (IRS Employer
jurisdiction Identification No.)
of incorporation)
1 CITY BOULEVARD WEST, SUITE 820
ORANGE, CALIFORNIA 92868
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code:
(714) 937-3211
Securities registered pursuant to Section 12(b) of the Act: NONE.
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
-------------------------------------- --------------------------------------
Common Stock, $.001 par value None
Indicate by check mark whether PPOL, Inc. (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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the PPOL, Inc.'s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |X|
Indicate by check mark whether PPOL, Inc. is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |_| No |X|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Act). Yes |_| No |X|
As of June 30, 2006 20,542,875 shares of PPOL, Inc.'s common stock,
$0.001 par value per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE. Portions of PPOL, Inc.'s definitive Proxy
Statement for PPOL, Inc.'s 2006 Annual Meeting of Stockholders which was filed
with the Securities and Exchange Commission within 120 days after PPOL, Inc.'s
fiscal year end are incorporated by reference in Part III of this report.
Certain exhibits of PPOL, Inc. previously filed with the SEC are incorporated by
reference in item 15 of this report.
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PPOL, INC.
FORM 10-K
TABLE OF CONTENTS
PART I 3
ITEM 1. BUSINESS 3
ITEM 1A. RISK FACTORS 11
ITEM 2. PROPERTIES 16
ITEM 3. LEGAL PROCEEDINGS 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16
PART II 16
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 17
ITEM 6. SELECTED FINANCIAL DATA 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 18
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE 26
ITEM 9A. CONTROLS AND PROCEDURES 27
PART III 29
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 29
ITEM 11. EXECUTIVE COMPENSATION 30
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 32
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS 33
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES 36
PART IV 36
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 36
SIGNATURES 39
Exhibit 21
Exhibit 31.1: CEO CERTIFICATION
Exhibit 31.2: CFO CERTIFICATION
EXHIBIT 32.0: CERTIFICATION PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002 40
FINANCIAL STATEMENTS
2
FORWARD LOOKING STATEMENTS
THIS ANNUAL REPORT ON FORM 10-K, IN PARTICULAR "ITEM 7 - MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," AND
"ITEM 1 - BUSINESS," INCLUDE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED AND SECTION 27A
OF THE SECURITIES ACT OF 1933, AS AMENDED. THESE STATEMENTS REPRESENT OUR
EXPECTATIONS OR BELIEFS CONCERNING, AMONG OTHER THINGS, FUTURE REVENUE,
EARNINGS, GROWTH STRATEGIES AND OTHER FINANCIAL RESULTS, NEW PRODUCTS, FUTURE
OPERATIONS AND OPERATING RESULTS, AND FUTURE BUSINESS AND MARKET OPPORTUNITIES.
WE WISH TO CAUTION AND ADVISE READERS THAT THESE STATEMENTS INVOLVE RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE
EXPECTATIONS AND BELIEFS CONTAINED HEREIN. BECAUSE A SUBSTANTIAL MAJORITY OF OUR
OPERATIONS ARE IN JAPAN, SIGNIFICANT VARIATIONS IN OPERATING RESULTS INCLUDING
REVENUE, GROSS MARGIN AND EARNINGS FROM THOSE EXPECTED COULD BE CAUSED BY
RENEWED OR SUSTAINED WEAKNESS IN THE JAPANESE ECONOMY, WEAKENING OF THE JAPANESE
YEN, FAILURE OF PLANNED INITIATIVES TO GENERATE CONTINUED INTEREST AND
ENTHUSIASUM AMONG DISTRIBUTORS OR TO ATTRACT NEW DISTRIBUTORS. FOR A SUMMARY OF
CERTAIN ADDITIONAL RISKS RELATED TO OUR BUSINESS, SEE "ITEM 1A - RISK
FACTORS."
PART I
ITEM 1 BUSINESS
OVERVIEW
PPOL, Inc., a California corporation ("PPOL" or "the Company") is a
holding company which conducts its business primarily through its wholly owned
subsidiary, AJOL Co., Ltd., a Japan corporation (sometimes referred to as "AJOL"
or "we" or "us" or "our"). AJOL does not conduct any business in the United
States.
PPOL's revenues are generated primarily through its one hundred percent
(100%) ownership of AJOL, which derives its revenues through the use of a direct
marketing and distribution system throughout Japan to sell: (1) its SF-70 and
U-Phones hardware, multi-functional facsimile based machines with telephone and
networking capabilities, (2) subscriptions to our co-proprietary UU Online
interactive database that can be accessed through our SF-70 and U-Phones
hardware, (3) various consumer products that primarily utilize AJOL's U-Brand,
and (4) services.
Our revenues, in millions, are allocated as follows:
CONSUMER PRODUCTS,
SF-70 AND U-PHONES HARDWARE SUBSCRIPTIONS COMMISSIONS & OTHER TOTAL
---------------------------- ---------------------------- ---------------------------- ----------------------------
FISCAL
YEAR % OF % OF % OF % OF
ENDED TOTAL TOTAL TOTAL TOTAL
MARCH 31: SALES SALES SALES SALES SALES SALES SALES SALES
-------------- --------------- ----------- --------------- ----------- --------------- ----------- --------------- -----------
2006...... $ 73 68.26% $ 14 12.72% $ 20 19.01% $ 107 100.00%
2005...... 92 71.60% 14 11.28% 22 17.12% 128 100.00%
2004...... 100 73.69% 15 11.37% 20 14.58% 136 100.00%
Note: May not sum to total due to rounding.
PRODUCTS AND SERVICES
(1) SF-70 AND U-Phones
Our primary products are multi-functional facsimile based machines with
telephone and networking capabilities, the SF-70 and U-Phone. Both products
feature a built-in liquid crystal color monitor display. The SF-70 and U-Phone
hardware combines the attributes of a telephone and fax machine with full
I-Mode(TM) e-mail and database search capabilities. I-Mode(TM) is a mobile
telephone system developed by Japan's largest mobile telecommunications company,
NTT Docomo. Through I-Mode(TM) one can access information on I-Mode(TM)
compatible Internet sites and exchange e-mails of up to 1,000 full size
characters with anyone having an Internet e-mail address. However, the SF-70 and
U-Phone hardware does not have the full functional capabilities that may be
available on an e-mail sent through a personal computer.
3
An important aspect of the SF-70 and U-Phone hardware is that it allows
users to communicate using handwritten Japanese characters, which comprise the
Japanese language's phonetic alphabets: Hiragana, Katakana, and especially
Kanji. "Kanji" are a set of pictographs used extensively in the Japanese written
language to represent words and ideas. Kanji is also used as artistic
expression, and could be considered as a form of calligraphy. Kanji characters
are unique in that their definition and meaning are subject to personal
interpretation by the reader. The reader's interpretation and understanding of
Kanji characters and, to a lesser extent, Hiragana and Katakana, are based
largely on the manner in which their respective characters are written.
We believe that the full texture and meaning of Kanji characters and, to
a lesser extent, Hiragana and Katakana, cannot be effectively communicated
through the preset fonts available on a typical computer. Therefore an important
aspect of the SF-70 and U-Phone hardware is that it allows users to communicate
using the full breadth of the Japanese language through the uniquely expressive
medium of handwriting. Furthermore, our SF-70 and U-Phone hardware expands the
communication capabilities of the elderly and children below junior high school
level by removing the obstacle of keyboard input. As English education does not
commence until the beginning of junior high school, children below junior high
school level are not familiar with the Roman alphabet and have difficulty using
a keyboard. The elderly are also more comfortable with handwritten Japanese
characters. Our business plan assumes that subscribers and potential subscribers
believe that handwritten Moji, i.e. Japanese characters, is a preferred form of
communication because they are more personal and accessible than computer-based
fonts.
We contract for the manufacture of the SF-70 and U-Phone hardware and
then resell the SF-70 and U-Phone units through our direct marketing
distribution network. We are currently marketing the fifth generation SF
version, the SF-70 and U-Phone. Such products are purchased from Advanced
Communications K.K., a Japanese corporation,(Advanced Communications) under a
one year contract. The contract became effective on November 19, 2003 and
automatically renews each anniversary for an additional one year term unless a
termination notice is provided two months prior to the anniversary by either
party. Under the OEM basis, we retained the rights to the design and metallic
mold required to manufacture the SF-70, but outsourced the actual manufacturing
of the SF-70 and U-Phone to Advanced Communications. By outsourcing the
manufacturing of the product, we avoid the investment required for the plant,
equipment and personnel required to manufacture the product. PPOL and Advanced
Communications became related parties as a common entity, K.K. Green Capital
(Green Capital), a Japan corporation, became the ultimate majority investor in
both companies during fiscal 2006.
The SF-70 and U-Phone differ from the previous SF-60 model with new
features consisting of a color display panel, uses plain paper and incorporate
an enhanced email notification function. The SF-70 is similar to the SF-60 in
that it connects users to our database via the Internet rather than through
conventional telephone lines. Versions of the hardware prior to the SF-60
utilized conventional telephone lines, requiring some users to incur long
distance telephone charges in order to access our services. The amount of these
charges varied from user to user. Subscribers living in areas with higher long
distance rates to contact their applicable server were required to pay more per
call than users in lower-rate localities. In addition, since long distance
charges are based on call time, frequent users of models prior to SF-60 incurred
higher charges than infrequent users. While the SF-70 and U-Phones use the
Internet to connect subscribers, it is not possible to browse the worldwide
Internet using these products.
Owners of the SF-70 and U-Phone must presently obtain an Internet
access connection through NTT Communications (a Japanese telecommunications
company) at hourly or monthly rates. The NTT fee removes the variance in
telecommunications charges caused by varying long distance rates. As a result,
we expect that telecommunications costs for SF-70 and U-Phone users will now be
uniform throughout Japan.
Because the SF-70 and U-Phone are intended to be simple to use, from a
user's perspective there are very few differences between them and previous
versions of SF-70. Since the SF-70 and U-Phone automatically connect to the UU
Online database via the Internet, the fact that they connect via the Internet,
rather than over the telephone lines, is not obvious to most users.
(2) AJOL'S Network services -- UU Online
The SF-70 and U-Phone hardware allow users to connect to our UU Online
without the use of a keyboard. Our customers purchase the SF-70 and U-Phone
hardware and, although not required, most concurrently subscribe to our
facsimile based network and database - "UU Online." The functionality of the
SF-70 and U-Phone hardware can only be fully utilized in conjunction with this
subscription. Our database contents are provided by subscribers who wish to
broaden their circle of acquaintances and actively share information with other
subscribers.
4
UU Online is a co-proprietary database we share with U-World K.K.
(U-World), a Japanese corporation, that is a wholly-owned subsidiary of K.K.
Seagull (Seagull), a Japanese corporation that also owns 4.51% of PPOL. U-World
also sells U-Phones, but not the SF-70. Its CEO is Yoshiyuki Aota, a Director of
PPOL. Subscribers may also submit information about various products and
services that they may offer to the UU Online database. Subscriptions to full
interactive access to UU Online are offered through AJOL on a monthly basis that
automatically renew unless cancelled by the subscriber.
Access to the UU Online network and database is only available to
subscribers through the SF-70 and U-Phone hardware. While the SF-70 and U-Phone
hardware can also be used to transmit and receive faxes outside the network and
to send and receive general I-Mode e-mails, the hardware's full capability is
only realized when used in conjunction with its connection to the UU Online
database subscription. Subscribers can search the network's database to find
other subscribers matching their search criteria to establish interpersonal
relationships, solicit categories of faxes, or to specify a group of recipients
for the subscriber's faxes, among other things. Subscribers can also search from
and/or submit to the database specific types of information. What is unique
about our database is that the great majority of the information stored in the
database is provided by the subscribers themselves. We actively encourage our
subscribers to submit content for the database.
Unlike personal computer based services, our on-line service utilizes
the SF-70 and U-Phone hardware and has paper-based input and output. Since users
are able to input handwritten information on paper into the SF-70 and U-Phone
hardware, many users with little computing knowledge, including young children
and the elderly, are able to utilize our online service. In this sense, the
SF-70 and U-Phone are similar to a conventional fax machine.
Subscribers of our on-line service use the SF-70 and U-Phone hardware to
transmit their data to a centralized hub where we receive hard copies. The hard
copies are then manually processed, screened for content, and input to a central
database. We use a centralized hub to manually process and screen hard copies
for content that does not meet our qualitative standards, such as language,
adult themes, slander, patent/copyright infringement and objectionable material.
We do this manually as we believe a centralized electronic system will not
effectively screen out materials that should not be admitted to our database.
SF-70 and U-Phone users are then able to access the central database through the
SF-70 and U-Phone hardware. Such accessed information can be transmitted from
the central database to the appropriate destination where the user(s) receive a
hard copy printout. Our proprietary database does not contain as much
information as may be available to an individual who searches the Internet on
any particular given subject. However, our database may contain information
which may not be available through a search of the Internet.
UU Online can be customized for each subscriber and each member of their
family. Representative services include mail and bulletin boards. Each service
can be utilized without the use of a keyboard and may include free hand
illustrations and writing which can be transmitted to other subscribers. Mail
service requires the input of the receiver's ID number. Our mail service is also
capable of sending the same message to a distribution list of up to 100 ID
numbers. Since the identity of the sender cannot be manipulated as is possible
over the Internet, spam mail is practically non-existent. Because each member of
the subscriber's family has a unique ID and password, the privacy of each family
member is also preserved.
Our on-line services include a bulletin board service, a mail service,
and an information exchange service. Our bulletin board service allows
subscribers to submit invitations, product advertisements, and help-wanted ads
to a bulletin board accessible by all our subscribers. Subscribers can also use
the bulletin board service to share personal experiences and create pen pal
relationships, among other things. All subscriber submissions are screened for
content and none are anonymous. We encourage subscribers to contribute to our
database. A subscriber's submission is retained in the database for 60 days
after which time it is deleted unless the subscriber resubmits his or her
submission. Subscribers may also reply to posted ads via this service.
Similarly, our service allows subscribers to send faxes to up to 50 other
subscribers at once. Families are able to designate personal identification
passwords to family members enabling them to print faxes addressed to them, and
thus maintaining the confidentiality of the fax.
(3) U-Brand Products
We created a proprietary brand called U-Brand, formerly Kamome, for use
in the sale of products associated with AJOL. U-Brand products may only be
purchased by or through subscribers of AJOL and U-World. The U-Brand is granted
to companies that sell products through a distribution agreement with us, and
which we can recommend to members for their reasonable pricing. The distribution
agreements require them to make direct shipments to the members. The customers
are charged the "retail" price while we pay these companies "wholesale." The
difference between the "retail" and "wholesale" price is reported as a part of
service fee income in the consolidated financial statements as we do not have
the risk of carrying inventories for these products.
5
The U-Brand is added to the selling company's existing brand, and
products are sold with dual branding. Additionally, we use the U-Brand as a
private brand on a limited basis. U-Brand products appear in catalogs, which are
distributed quarterly to subscribers and updated via our proprietary UU Online
interactive database system. U-Brand products may only be purchased through the
SF-70 and U-Phone, including those sold by U-World, hardware or by fax to our
headquarters. Because products are purchased through the SF-70 and U-Phone,
customers receive their orders via mail as opposed to a traditional retail
outlet whereby customers gain immediate possession and satisfaction of the
goods.
We re-evaluate U-Brand products based, in part, on feedback from our
subscribers. We also search for new products based, in part, on requests
received from subscribers. Following is a table of the number of U-Brand
products during each of the indicated periods.
NUMBER OF U-BRAND
MARCH 31: PRODUCTS
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2006...... 337
2005...... 494
2004...... 395
We publish a quarterly magazine for our subscribers introducing goods
manufactured and provided by our subscribers as well as independent third
parties. U-Brand products are featured in our periodical magazines in articles
highlighting the virtues of the products. We solicit feedback from subscribers
who can also write reviews of U-Brand products for submission to our database.
Although the qualification standards are subjective, only high quality
goods and services offered at reasonable prices are eligible to become U-Brand
products. Quality assurance and safety of products are foremost criteria. Low
price alone will not qualify for U-Brand status. To promote and develop the
image of the U-Brand, we place a high degree of emphasis on the manufacturer's
selectivity of raw materials, manufacturing process, and their pride in the
products.
Our intent is to provide our subscribers with a broad range of high
quality merchandise at prices lower than could be obtained through traditional
retailers. A subscriber's ability to purchase U-Brand products is a feature of
their subscription to UU Online. We attempt to obtain lower prices for U-Brand
products through operating efficiencies achieved by volume purchasing, efficient
distribution and reduced handling of merchandise through mail-order deliveries.
Subscribers are also encouraged to sell U-Brand products to non-subscribers.
"CO-OP OF THE 21ST CENTURY." We obtain lower pricing for U-Brand
products through volume purchasing and sell products to subscribers at favorable
prices. Our method of buying and selling of U-Brand products is similar to a
mutual benefit "cooperative" or "co-op." Unlike co-ops that operate on a
non-profit basis, our system is designed to generate profits for us. Co-ops
presently exist in Japan, but are generally limited to serving a limited
geographic region. A typical Japanese co-op draws upon local area residents and
businesses as members, and would not expect membership from residents or
businesses outside of that local area as their outlets are limited to a specific
municipality referred to as a prefecture in Japan. Our business plan is to
create and maintain the co-op model to extend beyond local regional borders and
to provide consistent and attractive pricing of U-Brand products to our
subscribers throughout Japan. We refer to our Japan wide co-op model as creating
the "Co-op of the 21st Century." We intend to create, through our "Co-op of the
21st Century," an increasingly valuable organization that will appeal to
potential and existing subscribers: (1) as a source of U-Brand products for
personal use, and (2) by expanding the U-Brand product list and creating the
potential for increased financial incentives through direct marketing
distribution sales of U-Brand products. The goal and marketing concept of the
Co-op of the 21st Century is to provide value to our subscribers and generate
interest for new AJOL subscriptions and renewals.
(4) Services
Service fees are generated primarily from administrative services we
provide to U-Service Mutual Benefit Association (UMBA). Commissions are
generated primarily through purchases of goods and services by members where
AJOL is not the vendor through use of members' prepayments to U-Service
Friendship Association (USFA). The nature of administrative services we provide
and commissions earned is covered in the next section covering UMBA and USFA.
U-SERVICE MUTUAL BENEFIT AND U-SERVICE FRIENDSHIP ASSOCIATIONS
UMBA and USFA, are associations established by owners of the SF-70 and
U-Phone, including earlier models (collectively, owners). The primary reason why
owners join USFA is to broaden their circle of acquaintances and actively share
information with others. Membership in UMBA or USFA is not required for owners
of SF-70 and U-Phones. PPOL and AJOL do not have any equity ownership in UMBA or
USFA.
6
UMBA and USFA are informal associations and do not have legal status.
However, under Japanese regulations, they are able to open bank accounts in
their own name. Concurrently, such regulations require bank accounts to only be
opened and maintained by a legal entity or natural persons. For purposes of
opening and maintaining the bank account, the Chairman of the Board of Trustees
(BOT) of UMBA or USFA, is named as the responsible party. However, under
Japanese law, such account is beyond each respective association's Chairman of
the BOT's personal creditors, even in bankruptcy or other receivership. As
customary for many not-for-profit organizations, the Chairman of USFA is not
compensated for his role as Chairman of the BOT. The Chairman and BOT of UMBA
are compensated for their respective roles.
UMBA offers various insurance products that are exclusively available to
members. They are not available to the general public. UMBA receives prepayments
directly from its members for payment of monthly insurance premiums available
through UMBA. Its cash disbursements are to the respective insurance companies
and AJOL for the administrative functions. UMBA has outsourced its
administrative functions (comprised of promotional activities, application
processing, and maintenance of required information on insured individuals) to
AJOL. AJOL's consideration for its services is a fixed percentage, ranging from
20% to 32% depending on the plan, of the insurance premiums that UMBA collects
directly from its members on a monthly basis. AJOL recognizes such fees received
on a monthly basis when UMBA collects such premiums. This matches the revenues
with the costs incurred by AJOL.
The insurance plans are provided by independent third-party insurance
companies. They are unrelated to AJOL and UMBA. There are no contracts between
AJOL and its members related to such insurance plans. AJOL has no title to cash
collected from and related liability to such insurance plans. PPOL's financial
statements do not reflect such cash and related liabilities.
USFA receives prepayments directly from its members for orders that they
will place in the future. The prepayment system, known as "Cube," was originally
established to facilitate the processing of orders received on goods and
services available through AJOL, including U-Brand products. Thus, it can be
regarded as a "Private debit card." Today, while the majority of purchases are
still through AJOL, its use has been expanded to purchases from other sources.
Members place orders directly with AJOL. After AJOL completes the order,
it invoices USFA, which in turn, makes payments every 10 days to AJOL. AJOL
records sales and related cost of sales upon shipment of the goods ordered from
its warehouse. Among the orders placed with AJOL by the members, there are goods
and services provided in which AJOL is not the vendor. The difference between
the amount paid by the member and what AJOL pays the vendor is recorded as a
commission.
USFA's functions described in the foregoing two paragraphs were
previously handled by UMBA. Due to changes in Japanese laws, an association
could no longer conduct insurance and non-insurance activities. Accordingly,
UMBA's non-insurance related activities were transferred to USFA.
DISTRIBUTION SYSTEM
As of March 31, 2006, the number of SF-70 and U-Phone users approximated
430,000. AJOL has grown to its present state through the proactive efforts of
its subscriber-distributors.
At the end of the quarter ended December 31, 2005, PPOL's wholly owned
subsidiary, AJOL had converted from its previous revenue model,
the network marketing plan (Network) method, and commenced its new revenue
model, the direct marketing plan (Direct) method. The Network method is still in
effect for units sold prior to the conversion to the Direct method. Under the
Direct method, the purchaser of the SF-70 and U-Phone can separately purchase a
monthly service giving them a monthly right to: (1) access the Company's
proprietary database, (2) enjoy the interactive features of the database, (3)
purchase consumer products that primarily utilize AJOL's U-Brand, and (4)
purchase services offered by various companies with whom we have cooperation
agreements through UU Online. There is no obligation for the purchaser of an
SF-70 or U-Phone, sold under the Direct method, to subscribe to such monthly
service. They can cancel such services at any time and re-subscribe to such
services again in the future without any penalty. Under the previous Network
method, the purchaser was required to purchase the SF-70 and subscribe to such
services for one year initially. Subsequent renewals are for one year periods.
We refer to our subscribers who sell the SF-70 and U-Phones hardware as
distributors. An AJOL distributor must be an AJOL subscriber to sell SF-70 and
U-Phone hardware and U-Brand products. All subscribers have an opportunity to
become a distributor. Subscribers who desire to become distributors must undergo
an application and screening process. Subscribers who lose the right to be a
distributor, for any reason, must apply to reacquire distributor status. Our
distributors are not required to purchase or maintain inventory of SF-70 and
U-Phone hardware or U-Brand products, and therefore are not at financial risk if
they do not complete sales. AJOL bears the risk of obtaining and maintaining
inventory. Distributors submit product orders to us, which we then fulfill.
Payment for our products is paid directly to us.
7
We emphasize and encourage subscribers to develop personal relationships
among subscribers and between subscribers and non-subscribers as a vehicle to
increase awareness of AJOL and its products. Distributors are required to attend
at least one monthly training session to retain the right to be a distributor.
We believe that the subscribers' efforts to create personal relationships among
themselves and with non-subscribers create beneficial word of mouth advertising
for our products and services. Year-round training sessions for our
distributors, as well as social and recreational events for our subscribers and
their guests, are held throughout Japan to encourage interaction among
subscribers and potential subscribers.
PPOL's Director, Mr. Yoshihiro Aota, places emphasis on and personally
speaks at many of these events. Attendees may consist of subscribers and
non-subscribers. The underlying themes of Mr. Aota's presentations include (1)
responding to each individual's needs for self realization in a new society, (2)
happiness is attained by those that make steady and persistent effort, and (3)
the fundamental source of a community's vitality is each individual's vigor and
energy.
THE INDUSTRY
From a macro viewpoint, AJOL is involved in the Network Service Provider
(NSP) industry. Within this industry categorization, the Internet has taken the
lead. However, AJOL offers its co-proprietary network service through its
"handwritten database" using the Internet. Information dispatch can be easily
performed in "handwriting" from the terminal of SF-70 and U-Phone. Thus the
relatively complicated operations that are required through a computer
are not required by the subscriber seeking access to its database. In addition,
AJOL is not merely a network service provider enterprise. At the core of our
corporate value is face to face interchange amongst our subscribers. AJOL holds
meetings throughout Japan on an annual basis where its subscribers meet other
subscribers and prospective subscribers.
We believe that we operate in a unique market niche. Although the
Company's business plan has similarities to those of Internet service providers
(ISP), its reliance on a fax based technology eliminates access to many of the
features and functionality offered by ISP's, including access to the Internet.
Unlike the Internet, which provides access to a worldwide database, the
subscribers access to information and networking capabilities is limited to our
fax based UU Online network and database. The Company's business plan does,
however, share a common objective with ISP of increasing and maintaining paid
subscriptions.
Unlike ISP's, we rely heavily on word of mouth advertising through our
system of direct marketing distributors. In addition, we had over 1,000 outlets
referred to as "Cabins" as of March 31, 2006 where prospective members can
receive live demonstrations of the SF-70 and U-Phones. The "Cabins" are
independently operated by subscribers who are also distributors. We believe
Cabins will play a role of growing importance for SF-70 and U-Phones user
support and will be placing more reliance on their contributions. With SF-70 and
U-Phones users at the focal point, we intend to establish our own closed market
of customized information, products and services. AJOL does not grant any
exclusive distribution rights based on geographic boundaries.
We are unaware of the percentage of the Japanese population generally,
or the percentage of people in various demographic groups, who engage in direct
marketing sales.
GENERAL DEVELOPMENT OF BUSINESS
(1) General Development of the Business of PPOL.
PPOL was incorporated as a California corporation on May 19, 1993 under
the name Diversified Strategies, Inc. On August 15, 2002, the Company amended
its articles of incorporation to change its name to PPOL, Inc.
From PPOL's inception through March 31, 2002 it maintained its
existence, in part, as a corporation with no operating business and no
subsidiaries. Thereafter, PPOL entered into a Stock Purchase and Business
Combination Agreement ("Agreement"), effective as of April 1, 2002, with the
shareholders of AJOL to acquire all of the outstanding common shares of AJOL in
exchange for the issuance of PPOL common shares representing 95% of PPOL's then
outstanding common shares ("AJOL Acquisition"). The transactions covered by the
Agreement closed as of August 15, 2002, effective as of April 1, 2002. As a
result of the AJOL Acquisition, AJOL became a wholly-owned subsidiary of PPOL.
In connection with the AJOL Acquisition, PPOL effected a reverse stock
split of its issued and outstanding common shares on a 1:7 basis. As a result of
the reverse stock split, PPOL's issued and outstanding shares were reduced from
6,298,231 (pre-reverse split) to 899,746 (post-reverse split) as of August 15,
2002. PPOL was obligated to and did purchase fractional shares that resulted
from the reverse stock split at a price equal to the opening bid price of PPOL's
shares on October 14, 2003 (the date the shares became listed on the National
Association of Securities Dealers' OTC Bulletin Board).
8
(2) General Development of PPOL's Subsidiary's Business (AJOL and K.K.
U-SERVICE)
PPOL's sole wholly-owned subsidiary is AJOL. AJOL was incorporated under
the laws of Japan on April 8, 1991 under the name Forval CDK. It was then a
wholly owned subsidiary of Forval Corporation ("Forval"), a Japan corporation.
In April 1992 Forval CDK changed its name to Forval Research Institute Co. Ltd.
Effective July 1, 2000, Forval Research Institute Co. Ltd amended its articles
to change its name to AJOL Co., Ltd.
In March 1999, AJOL dissolved its subsidiary, FO Technology Co., Ltd.
("FOT"). From March 1996 to its dissolution, FOT had been a subsidiary of AJOL.
AJOL presently has no subsidiaries.
In response to the slowing of activity and declining membership in
U-Service (formerly, Acube), the SF-70 and U-Phone users' organization, changing
attitudes toward network marketing, and recent changes in laws and regulations
that network marketing is subject to in Japan, we have begun a transition in
sales focus from network marketing to direct marketing. One of the primary
reasons for the declining membership in U-Service is attributable to the high
initial cost to the subscriber. We needed to reduce the initial cost to a
fraction of what we were able to offer our SF-70 and U-Phone products under
network marketing.
We have determined that the Direct method is best suited to reduce the
initial cost to the subscriber and also not the subject of recent changes in
laws and regulations affecting network marketing in Japan. Direct marketing
eliminated the manifold levels of distributors we had compensate for making a
sale. Thus, we were able to reduce the cost of the machines to the consumer. In
addition, consumer surveys have indicated more receptivity to direct marketing.
On May 30, 2005, the Company completed the acquisition of K.K.
U-Service, a Japanese corporation ("USC") based in Tokyo, Japan. Pursuant to the
Purchase Agreement dated May 30, 2005, by and between PPOL, USC and Green
Capital (the "Seller"), the Company purchased from the Seller all of the issued
and outstanding shares of USC in exchange for an amount equal to $3,522,422
(JPY380,000,000). As noted previously on page 4, Green Capital is the majority
investor in PPOL. At the end of the third quarter, USC was merged into AJOL.
The acquisition of USC played a crucial role in our ability to
transition from network marketing to direct marketing much more quickly than
would otherwise have been possible. USC had the critical leadership personnel
with experience in setting up and running direct marketing operations. The
purchase price represented a premium $1,967,092 (JPY212,210,538) over the
recorded net worth of USC's assets. In determining to pay this premium, we
considered various factors, including the opportunities that USC offers to
enhance our future growth opportunities, synergies with our present operations,
cost and time advantages of establishing a comparable company on our own,
contacts with prospective vendors and elimination of a potential competitor. For
financial accounting purposes, the excess of purchase price over the net assets
of USC is treated as a return of capital to Green Capital. See Note 3 to the
financial statements - Related Party Transactions for further information.
(3) General Development of PPOL's Subsidiary's Business (Gatefor)
Gatefor, Inc. ("Gatefor") was incorporated in Japan on June 16, 2004.
PPOL was the sole shareholder of 30,000 shares of Gatefor common stock or 100%
of the issued and outstanding stock of Gatefor. Gatefor was created to implement
a strategy of the Company and was to act as the distributor of US and European
sourced technologies into Japan. With Gatefor, the Company had two operating
segments: 1) network communications through sales of SF-70, U-Phone and related
services and products by AJOL and 2) technology sales by Gatefor. These segments
were determined based on the nature of products and services and their
respective channels of distribution. On March 31, 2005, the Company sold its
entire interest in Gatefor to Forval. Thus, at March 31, 2005, the Company again
operated in one reportable business segment.
The Company also had a minority investment of 1,500 shares of common
stock in Object Innovation, a Florida corporation, which produces and markets a
middleware software product called Bridgegate. Gatefor distributed Bridgegate
software in Japan. On March 31, 2005, the Company also sold its investment in
Object Innovation to Forval.
TRANSITION TO DIRECT MARKETING DISTRIBUTION
As noted under Distribution System above, commencing at the end of the
quarter ended December 31, 2005, the Company replaced its network marketing
system with a direct marketing system. This decision was precipitated by three
main factors: (1) reduced activity and declining membership in Acube, the SF-70
and U-Phone user's association, (2) changes in the laws regulating network
marketing and (3) changing attitudes toward network marketing. By revising its
marketing system, the company hopes to attract and maintain subscribers with a
lower sales price than possible under the Network method. Furthermore, the
Direct method is not subject to the same legal restrictions or consumer attitude
towards the Network method. Our decision to redefine our sales focus reflects
our continuing dedication to the constant development of our business and our
sensitivity to the concerns of our members.
9
Prior to January 2006, we sold SF-70 and U-Phone hardware and U-Brand
products through a network marketing system. Under this system all subscribers
had the opportunity to become "distributors," or retailers of SF-70 and U-Phone
hardware. In order to become a distributor, subscribers had to complete an
application and screening process. As part of our transition into direct
marketing, we discontinued acceptance of applications for network marketing
activities in October 2005. Unlike a traditional network marketing system, our
system did not require distributors to maintain an inventory of SF-70, U-Phone
or U-Brand products. Distributors submitted orders to us, which we then filled.
Payment for our products was made directly to us and we in turn disbursed
commissions to the various levels of the distribution network. Approximately
fifty percent (50%) of the sales price of each SF-70 and U-Phone unit was paid
to distributors, which contributed significantly to price markup. By eliminating
the multi-tier commission schedule of our network marketing program, we can
reduce the markup of SF-70 and U-Phone unit prices.
We believe that similarly to its predecessor, the network marketing
system, our direct distribution system appeals to a broad cross-section of
people in Japan including those seeking to supplement family income and start
small, in-home businesses. We believe that direct marketing is an ideal way to
market our products because the use of such products is enhanced by ongoing
personal relationships with other distributors. In addition, our utilization of
the direct marketing and distribution system allows us to continue to minimize
the fixed costs of maintaining an in-house sales force, as we were able to under
the Network method.
COMPETITIVE CONDITIONS
The market for companies that operate similar businesses, i.e.,
providing interactive telecommunications products and/or services, is intensely
competitive. We are and will continue to be in competition with companies with
substantially longer operating histories, greater financial, technical, product
development and marketing resources, greater name recognition and larger
customer bases than that of AJOL. Our competitors include sellers of products
that offer interactive telecommunications including, but not limited to,
telephones, facsimile machines, and personal computers.
Other companies not currently operating in AJOL's industry may attempt
to launch a business that is similar to or identical to AJOL's in the future.
New or existing competitors may develop products and/or services comparable to
or superior to those offered by AJOL. Competitors may devote substantially
greater resources to the development and promotion of their products. They may
also adapt more quickly to industry trends, new technologies, and customer
preferences. As a result, there can be no assurances that AJOL will be able to
compete effectively in the industry in which it operates.
During the current year U-World commenced operations. It is another
organization which sells U-Phones, but not the SF-70. Its CEO is Yoshiyuki Aota,
a Director of PPOL. U World is wholly owned by Seagull, which owns 4.51% of
PPOL. While we are in competition with them in selling the U-Phone hardware,
UU-Online is a co-proprietary database we share with them. In addition, we
derive revenues from their members who purchase U-Brand products which are only
available through AJOL.
RESEARCH AND DEVELOPMENT ACTIVITIES
We conduct research and development activities primarily aimed at
improving the functionality and reliability of future versions of our hardware.
Our research and development expenditures for each of the last three fiscal
years are as follows:
R&D
YEAR EXPENDITURES
--------------- ----------------------------
2006...... $ 2,120,249
2005...... $ 279,204
2004...... $ 1,653,331
Please refer to Item 7, Management's Discussion and Analysis: Research and
Development Expenses for more information.
10
ENVIRONMENTAL MATTERS
Japanese law requires that we dispose of returned or damaged SF-70 and
U-Phone units in an environmentally safe manner. We fully comply with Japanese
law. The cost of this compliance is not material to us.
EMPLOYEE AND LABOR MATTERS
As of March 31, 2006, we employed 18 people on a full-time basis. We
also employed 38 part-time employees and 52 others who are contracted through
temporary employment agencies. AJOL utilizes part-time employees and those
contracted through temporary employment agencies to provide specialized skills
and clerical tasks on an "as needed" basis. Utilization of such personnel gives
us the flexibility of expanding and contracting our staffing levels quickly as
considered necessary by the level of our operations. None of our employees are
represented by labor unions. We are not a party to any collective bargaining
agreements or labor union contracts. We have not been the subject of any
material strikes or employment disruptions in our history.
FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
(1) PPOL
PPOL has not derived any revenue either domestically or internationally
from the operation of any business during the last three fiscal years and does
not currently intend to actively operate any business, either within the United
States or internationally, other than holding 100% of the common stock of AJOL.
Exceptions to this business situation are that PPOL entered into two separate
service agreements with a former and current shareholder, namely, Forval
Corporation and Leo Global Fund, respectively, to provide them research on
investment opportunities and market trends in the United States. During the
quarter ended December 31, 2002, PPOL received an upfront payment of $483,858 in
connection with the foregoing services. PPOL completed these services in fiscal
2004, at which time the Company recorded the associated revenue.
(2) PPOL's Subsidiaries
For each of the last three fiscal years, all of AJOL's operations have
been conducted in Japan, and AJOL currently has no operations in countries other
than Japan.
From June 16, 2004 (inception) to March 31, 2005, when Gatefor was
disposed by PPOL, Gatefor's operations was conducted solely in Japan
On May 30, 2005, K.K. U Service (USC), a Japanese corporation with
operations in only Japan, was acquired by PPOL. USC was merged with AJOL in
December 2005.
ITEM 1A. RISK FACTORS
In addition to other information contained in this Annual Report, the
following factors could affect our future business, results of operations, cash
flows or financial position, and could cause future results to differ materially
from those expressed in any of the forward-looking statements contained in this
Annual Report.
DEPENDENCE ON MR. AOTA
We are highly dependent upon our Director, 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.
Mr. Aota has become the CEO of U-World. As such, the amount of time he
can devote to PPOL business has diminished. Our business and future prospects
have been materially and adversely affected. If Mr. Aota's services cease
completely, PPOL's current business has a strong likelihood of becoming
inviable. This is, in part, due to Mr. Aota's strong personal ties to the
leaders of our distribution network. We do not have an employment agreement with
Mr. Aota. We are currently considering terms to secure Mr. Aota's services and
co-exist with U-World.
11
LACK OF PROFITABLE OPERATIONS
The Company recorded net losses for 2006 and 2005 of $2,386,538 and
$2,740,733, respectively, and an accumulated deficit of 14,115,909, at March 31,
2006. The Company's ability to continue in business and maintain its financing
arrangements would be adversely affected by a continued lack of profitability.
WORKING CAPITAL DEFICIT
At March 31, 2006, PPOL current liabilities exceeded current assets by
$2,596,174. See discussion on working capital deficit in Liquidity and Capital
Resources section on page 24.
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 SF-70 and U-Phone hardware and U-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 of Japanese and
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. The Company's future 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 slowly improving in recent years
but may decline again. 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 our 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.
12
DEPENDENCE ON NEW SUBSCRIBERS
Historically, our operating results have depended on revenues received
from sales of the SF-70 and U-Phone products. SF-70 and U-Phone sales have
accounted for a majority of our annual revenue. SF-70 and U-Phone 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 SF-70 and U-Phones
hardware and UU 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 UU 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 $860,000 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 a majority 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.
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.
RELIANCE ON ONLINE SALES
We expect online sales of U-Brand products and other services through UU
Online will have a growing level of significance in our overall sales in the
future. If our members should reduce or stop their online purchases, this could
harm our results of operations.
13
LOSING SOURCES OF U-BRAND PRODUCTS
The loss of any of our sources of U-Brand products, or the failure of
sources to meet our needs, could restrict our ability to distribute U-Brand
products and harm our revenue as a result. Further, our inability to obtain new
sources of U-Brand 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 SF-70 and U-Phone
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 providing 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 change, 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 PROTECTION
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.
14
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.
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 previously operated 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 SF-70 and U-Phone machines are produced by an unrelated Original
Equipment Manufacturer (OEM). Should this OEM become incapable or unwilling to
produce the SF-70 and U-Phone for any reason, we could face a temporary decline
in SF-70 and U-Phone sales until another electronics manufacturer is sourced and
ready to produce the machines.
MINORITY SHAREHOLDER STATUS
Foster Strategic Investment Partnership and Leo Global Fund hold 51.34%
and 15.28%, respectively, of PPOL's common stock. Acting alone, Foster Strategic
Investment Partnership, as a majority shareholder, has significant influence on
PPOL's policies. Foster Strategic Investment Partnership and Leo Global Fund,
collectively, control 66.62% of PPOL's outstanding shares and voting power. As a
result, Foster Strategic Investment Partnership 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 management and affairs.
15
NO LOCK-UP AGREEMENT BETWEEN FOSTER STRATEGIC INVESTMENT PARTNERSHIP AND LEO
GLOBAL FUND
To date, PPOL has not entered into a separate lock-up arrangement with
Foster Strategic Investment Partnership 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
Foster Strategic Investment Partnership 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.
FAILURE TO ACHIEVE AND MAINTAIN EFFECTIVE INTERNAL CONTROLS IN ACCORDANCE WITH
SECTION 404 OF THE SARBANES-OXLEY ACT OF 2002 COULD HAVE A MATERIAL ADVERSE
EFFECT ON OUR BUSINESS AND STOCK PRICE.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we will be
required to furnish a report on our internal control over financial reporting.
In order to achieve compliance with Section 404 of Sarbanes-Oxley within the
prescribed period, we will need to engage in a process to document and evaluate
our internal control over financial reporting, which will be both costly and
difficult. There is a risk that neither we nor our independent auditors will be
able to conclude that our internal controls over financial reporting are
effective as required by Section 404 of Sarbanes-Oxley.
In addition, during the course of our testing, we may identify
deficiencies that we may not be able to remediate in time to meet the deadline
imposed by Sarbanes-Oxley for compliance with the requirements of Section 404.
Furthermore, if we fail to achieve and maintain the adequacy of our internal
controls, as such standards are modified, supplemented, or amended from time to
time, we may not be able to ensure that we can conclude on an ongoing basis that
we have effective internal controls over financial reporting in accordance with
Section 404 of Sarbanes-Oxley. Effective internal controls are necessary for us
to produce reliable financial reports and are important to helping prevent
financial fraud. If we cannot provide reliable financial reports or prevent
fraud, our business and results of operations could be harmed, investors could
lose confidence in our reported financial information, and the trading price of
our stock could drop significantly.
ITEM 2. PROPERTIES
PPOL's corporate office is leased at One City Boulevard West, Suite 820,
Orange, California 92868 (telephone 714-937-3211). We occupy a 746 square foot
administrative office. AJOL's corporate office is leased at Tennozu First Tower
9th floor, 2-2-4 Higashi Shinagawa, Shinagawa-ku, Tokyo 140-0002, Japan
(telephone 03-5783-7323). We occupy 16,676 square feet for AJOL's corporate
headquarters as well as all other corporate functions. We believe that such
facilities will be adequate for our business needs in the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
PPOL, its subsidiary AJOL, and PPOL's directors are parties to a lawsuit
in Japan that arose in connection with its business. It is our policy to
evaluate such matters on a case by case basis. Our policy is to vigorously
contest any such claims we believe to be without merit. The Company has retained
legal counsel in Japan for defense in this case. Based partly on the opinion of
its counsel, management believes the ultimate resolution of this matter will not
have a material adverse impact, if any, on its consolidated financial position,
results of operations or cash flows.
In accordance with SFAS No. 5, "Accounting for Contingencies," PPOL
reserves for a legal liability when it is both probable that a liability has
been incurred and the amount of the loss can be reasonably estimated. At least
quarterly PPOL reviews and adjusts these reserves to reflect the impacts of
negotiations, settlements, rulings, advice of legal counsel and other
information and events pertaining to a particular case. The ultimate outcome of
such matters cannot presently be determined or estimated. PPOL's management
believes that PPOL has sufficiently reserved for legal matters and that the
ultimate resolution of pending matters will not have a material adverse impact
on PPOL's consolidated financial position, operating results or cash flows.
However, the results of legal proceedings cannot be predicted with certainty.
Should PPOL fail to prevail in current legal matters or should one or more of
these legal matters be resolved against PPOL, PPOL could be required to pay
substantial monetary damages and, its financial position, operating results and
cash flows could be materially adversely affected.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
The Company's Common Stock is currently quoted on the OTC Bulletin Board
system ("OTCBB"), and can be located on the OTCBB under the symbol "PPLC." The
following chart lists the high and low closing stock price range from the
Company's market makers. These over-the-counter market quotations reflect the
inter-deal prices without retail mark-up, markdown, or commissions and may not
necessarily represent actual transactions.
YEAR ENDED MARCH 31, 2006 HIGH LOW
---------------------------------- ------------ ------------
First Quarter..................... $ 4.00 $ 3.40
Second Quarter.................... $ 8.00 $ 3.90
Third Quarter..................... $ 6.50 $ 3.00
Fourth Quarter.................... $ 3.50 $ 2.00
YEAR ENDED MARCH 31, 2005
-----------------------------------
First Quarter..................... $ 5.00 $ 3.10
Second Quarter.................... $ 4.00 $ 3.65
Third Quarter..................... $ 4.00 $ 3.60
Fourth Quarter.................... $ 4.00 $ 3.15
HOLDERS OF RECORD
As of May 26, 2006, there were 7,124 holders of record of our common
stock.
DIVIDENDS
The declaration of any dividends in the future by the Company is subject
to the discretion of our Board of Directors and will depend upon various
factors, including our net earnings, financial condition, cash requirements,
future projects and other factors deemed relevant by our Board of Directors.
PPOL has not paid any cash or other dividends on its common stock since its
inception and currently does not intend to pay dividends in the foreseeable
future.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data as of and for the
years ended March 31, 2002, 2003, 2004, 2005 and 2006 have been derived from and
qualified by reference to our audited consolidated financial statements.
YEAR ENDED MARCH 31:
----------------------------------------------------------------------------------------
2002 2003 2004 2005 2006
---------------- ---------------- ---------------- ---------------- ----------------
Net Revenues................. $ 129,912,852 $ 134,985,824 $ 135,805,340 $ 127,833,591 $ 106,624,069
Net Income (loss)............ 2,997,017 5,995,682 7,722,366 (2,740,733) (2,386,538)
Net Income (loss) per
common share, basic........ 0.18 0.34 0.43 (0.15) (0.12)
Net Income (loss) per common
share, diluted............. 0.18 0.34 0.43 (0.15) (0.12)
Total Assets................. 154,783,604 161,548,658 160,369,283 152,588,310 113,104,123
Long-term obligations........ -- -- -- -- --
Cash dividends declared
per common share........... 0.05 0.05 -- -- --
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Annual Report includes forward-looking statements made based on
current management expectations. These statements are not guarantees of future
performance and actual outcomes may differ materially from what is expressed.
Factors that could cause future results to differ from PPOL's expectations
include the factors described in Item 1A "Risk Factors" or that are otherwise
described from time to time in our reports filed with the Securities Exchange
Commission after this Annual Report. We assume no obligation to update any
forward-looking statements to reflect events that occur or circumstances that
arise after the date as of which they are made.
Management's discussion and analysis that follows is designed to provide
information that will assist readers in understanding our consolidated financial
statements, changes in certain items in those statements from year to year and
the primary factors that caused those changes and how certain accounting
principles, policies and estimates affect our financial statements.
OVERVIEW
PPOL was incorporated in California on May 19, 1993. PPOL, originally
named Diversified Strategies, Inc., was formed pursuant to an Order Confirming
Debtors Joint Plan of Reorganization of the United States Bankruptcy Court for
the Central District of California dated November 20, 1992 in the combined cases
of IN RE SELECTTV OF CALIFORNIA, INC. and IN RE TELSTAR SATELLITE CORPORATION OF
AMERICA. Pursuant to the Joint Plan of Reorganization, creditors and
shareholders of the two bankrupt companies, and certain other parties,
surrendered their claims and interests against the bankrupt companies and, in
exchange, received stock in PPOL. PPOL did not engage in any significant
business activities prior to its acquisition of AJOL. Such acquisition was
effective April 1, 2002. Between its date of incorporation and its acquisition
of AJOL, PPOL was a corporation seeking to merge with or acquire a viable
operating company.
Effective April 1, 2002, PPOL acquired one hundred percent of the issued
and outstanding stock of AJOL from AJOL's pre-transaction shareholders. In
exchange for the AJOL shares, PPOL issued common stock such that immediately
after the transaction, the pre-transaction shareholders of AJOL owned
ninety-five percent (95%) of the issued and outstanding shares of PPOL. The
holdings of the pre-transaction shareholders of PPOL were diluted by the
issuance of the new shares such that immediately after the transaction, the
pre-transaction shareholders of PPOL owned five percent (5%) of the total issued
and outstanding shares of PPOL. Virtually all of PPOL's consolidated activities
are conducted through its wholly-owned subsidiary, AJOL.
AJOL was incorporated in Japan in 1991. Through the operations of AJOL,
the Company is primarily engaged in: (1) sales of SF-70 and U-Phone hardware,
multi-functional facsimile based machines with telephone and networking
capabilities, (2) subscriptions to our co-proprietary UU Online interactive
database that can be accessed through our SF-70 and U-Phone hardware, (3)
various consumer products that primarily utilize AJOL's U-Brand, and (4) service
fees and commissions Substantially all of its revenues are derived in Japan.
Some of the key developments during the fiscal year ended March 31, 2006
include:
o MR. AOTA'S INVOLVEMENT - Mr. Aota has also become the CEO of U-World,
a newly established competitor using the network marketing method.
His involvement with U-World has reduced the amount of time he is
able to devote to PPOL. See Item 1A of this Form 10-K , Risk Factors -
Dependence on Mr. Aota.
o NET LOSS - We posted a net loss of $2.4 million or $0.12 per share for
Fiscal 2006. The losses are attributable to declining
sales of our SF-70 and U-Phone, market entry of U-World which sells
U-Phones, and transition of our revenue model from the network marketing
to direct marketing system and integration costs related to the
acquisition of USC
o CHANGE OF REVENUE MODEL - The Company replaced its network marketing
system with a direct marketing system. This decision was precipitated by
three main factors: (1) reduced activity and declining membership in
U-Service, the SF-70 and U-Phone user's association, (2) changes in the
laws regulating network marketing and (3) changing attitudes toward
network marketing. By revising its marketing system, we hope
to attract and maintain subscribers with reduced initial costs.
Furthermore, direct marketing is not subject to the same legal
restrictions or popular biases as network marketing. Our decision to
redefine our sales focus reflects our continuing dedication to the
constant development of our business and our sensitivity to the concerns
of our members.
o INTRODUCTION OF U-PHONES - The Company had began selling U-Phones in
addition to the SF-70. U-Phones are similar in functionalities to the
SF-70, but with a more updated appearance.
18
o ACQUISITION OF USC - On May 30, 2005, we completed the acquisition of
USC. Such acquisition played a crucial role in our ability to transition
from network marketing to direct marketing much more quickly than would
otherwise have been possible. USC had the critical leadership personnel
with experience in setting up and running direct marketing operations.
In December 2005, we merged USC into AJOL to reduce operating costs.
o EXIT FROM COMPUTER SOFTWARE SALES- Concurrent with the installation of
new management on March 31, 2005, we disposed Gatefor, a company
involved in computer software sales. We entered into this business
during fiscal 2005 and lost $1,983,000. We believed Gatefor had no
synergies or economies of scale with AJOL and would have resulted in
further losses in fiscal 2006 had we not disposed of it.
We continue to face a variety of challenges and opportunities inherent
within our industry which is characterized by rapid change, evolving customer
demands and intense competition. Key challenges include focus on increasing
demand for our products in a highly competitive market, increasing revenue,
lowering costs, managing our supply chain and maintaining and increasing gross
margin percentages. See Item 1A "Risk Factors."
CURRENCY RISK AND EXCHANGE RATE INFORMATION
PPOL uses the U.S. dollar as its reporting currency for financial
statement purposes. PPOL conducts business through its international subsidiary
that uses local currency (Japanese yen) to denominate its transactions, and is,
therefore, subject to certain risks associated with fluctuating foreign
currencies. All revenues and expenses are translated at weighted average
exchange rates for the periods reported. Therefore, our reported revenue and
earnings will be positively impacted by a weakening of the U.S. dollar and will
be negatively impacted by a strengthening of the U.S. dollar. Given the
uncertainty of exchange rate fluctuations, we cannot estimate the effect of
these fluctuations on our future business, results of operations or financial
condition.
The resulting changes in the financial statements due to the fluctuating
exchange rates do not indicate any underlying changes in the financial position
of the international subsidiary but merely reflect the adjustment in the
carrying value of the net assets of the subsidiary at the current U.S. dollar
exchange rate. Due to the long-term nature of PPOL's investment in this
subsidiary, the translation adjustments resulting from these exchange rate
fluctuations are excluded from the results of operations and are recorded in a
separate component of consolidated stockholders' equity. PPOL monitors its
currency exposures but does not hedge its translation exposures primarily due to
the long-term nature of its investment.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results
of Operations contains a discussion of PPOL's consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of financial
statements and related disclosures in conformity with generally accepted
accounting principles and PPOL's discussion and analysis of our financial
condition and results of operations requires PPOL's management to make
judgments, assumptions and estimates that affect the amounts reported in our
consolidated financial statements are discussed in Note 1, Organization and
Summary of Significant Accounting Policies, in our notes to the consolidated
financial statements.
Management believes the following are "critical accounting estimates"
because they are particularly dependent on estimates and assumptions made by
management about matters that are highly uncertain at the time the accounting
estimates are made. In addition, while we have used our best estimates based on
facts and circumstances available to us at the time, different estimates
reasonably could have been used in the current period and changes in the
accounting estimates we used are reasonably likely to occur from period to
period which may have a material impact on the presentation of our financial
condition and results of operations. We review these estimates and assumptions
periodically and reflect the effects of revisions in the period that they are
determined to be necessary.
REVENUE RECOGNITION:
The Company commenced sales of its MOJICO product utilizing the Direct
Marketing method ("Direct Method") in January 2006. Revenues derived from the
Direct Method are recognized when (a) products are shipped or services are
provided, (b) customer payment is fixed, (c) payment is free of contingencies
and significant uncertainties, and (d) collection is probable. Under the Direct
Method, our customers may purchase only the deliverables they choose to purchase
and are not required to purchase multiple deliverables for one price.
Accordingly, our revenues and related profits will decline if our customers do
not choose to purchase the different deliverables they were previously required
to purchase as part of one sales price.
19
Revenue from MOJICO product sales sold under the Network Marketing
method ("Network Method") is accounted for in accordance with guidelines
established by the Emerging Issues Task Force Issue of the Financial Accounting
Standards Board Issue No. 00-21, "Accounting for Revenue Arrangements with
Multiple Deliverables," or EITF 00-21. Under the Network Method, customers were
required to purchase multiple deliverables for one price.
Revenue from the Network Method is recognized over the weighted average
customer relationship period of three years. Revenue from sales of annual online
subscription services to Pan Pacific Online is recognized over one year. The
revenue and associated costs deferred for revenue recognition purposes are
recorded as deferred revenue and deferred costs, respectively. Deferred costs
are comprised of costs of the MOJICO hardware and distributors incentive
commissions. Deferred costs are directly related to deferred revenues. Deferred
costs are amortized into income over the weighted average customer relationship
period of three years or the online subscription period of one year, as
applicable.
The weighted average customer relationship period will increase if we
are successful in increasing the length of time a customer maintains their
relationship with us. This translates into a longer period over which we would
recognize revenues from the sales of the MOJICO resulting in lower quarterly
revenues unless we are able to make up for the reduction by an increase in our
current MOJICO shipments and other revenues where deferred revenue recognition
is not required. Our other revenues where deferred revenue recognition is not
required is dependent, in part, on the length of our average customer
relationship period as this implies a broader base of customers from whom we can
derive revenues from. Conversely, if our average customer relationship period
declined, this would have the direct opposite effect of what was heretofore
discussed in this paragraph.
While we have terminated sales under the Network method, in December
2005, we continue to recognize revenues derived from the Network method as
required by EITF 00-21.
The impact of termination of the Network Method is a systematic
reduction of our existing largest asset and liability on our balance sheet,
deferred costs and deferred revenues, respectively, over the course of the next
three years. Deferred revenues and costs will be recognized as revenues and cost
of sales, respectively. It is expected that the difference by which our existing
deferred revenues exceed deferred costs will be recognized as gross profit to
the Company over the next three years. Any changes in the average customer
relationship period will result in the recognition of such gross profit over a
period shorter or longer than three years. While the Company, at this time has
no plans to dispose of its AJOL subsidiary, such gross profit will only be
partially recognized if the Company were to dispose AJOL.
VARIABLE INTEREST ENTITIES
PPOL has adopted Financial Accounting Standards Board Interpretation No.
46(R) "Consolidation of Variable Interest Entities (revised December 2003) - an
Interpretation of ARB No. 51" ("FIN46(R)" for the year ended March 31, 2005. The
company must consolidate variable interest entities ("VIE") if it has been
deemed the primary beneficiary of such entities. We have critically reviewed and
determined that there are no interests we hold in other entities, other than
AJOL, that we are required to absorb losses or entitled to receive residual
returns, respectively. Accordingly, we do not have any VIEs that we are required
to consolidate other than AJOL during the years ended March 31, 2006, and 2005.
TRANSLATION OF FOREIGN CURRENCY
Substantially all of our subsidiaries revenue and expenses are received
and incurred in Japanese Yen. PPOL's reporting currency is the United States
Dollar. 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 in accordance with the requirements of Statement of Financial
Accounting Standards ("SFAS") No. 52," Foreign Currency Translation." Assets and
liabilities are translated at the exchange rate as of the respective balance
sheet dates and related revenues and expenses are translated at average exchange
rates in effect during the period.
If the U.S. dollar strengthens relative to the Yen, our reported
revenue, gross profits and net income will likely be reduced. 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.
20
INVENTORY VALUATION
The business environment in which PPOL operates is subject to rapid
changes in technology and customer demand. We record write-downs for components
and products which have become obsolete or are in excess of anticipated demand
or net realizable value. We perform an assessment of inventory each quarter,
which includes a review of, among other factors, inventory on hand and forecast
requirements, product life cycle (including end of life product) and development
plans, component cost trends, product pricing and quality issues. Based on this
analysis, we record an adjustment for excess and obsolete inventory. PPOL may be
required to record additional write-downs if actual demand, component costs or
product life cycles differ from estimates, which would affect earnings in the
period the write-downs are made.
SOFTWARE
The Company follows the guidance in Statement of Position ("SOP") 98-1
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." SOP 98-1 requires that entities capitalize certain internal-use
software costs once certain criteria are met. Under SOP 98-1, overhead, general
and administrative and training costs are not capitalized. Capitalized software
costs are being amortized on a straight-line basis principally over 5 years. Our
computer software is also subject to review for impairment as events or changes
in circumstances occur indicating that the amount of the asset reflected in the
Company's balance sheet may not be recoverable.
INCOME TAXES
Income taxes are provided based on the asset and liability method of
accounting pursuant to SFAS No. 109, "Accounting for Income Taxes." Deferred
income taxes are recorded to reflect the tax consequences on future years of
differences between the tax basis of assets and liabilities and their financial
reporting amounts at year-end. These deferred taxes are measured by applying
currently enacted tax laws. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be realized.
LITIGATION
PPOL is currently involved in certain legal proceedings (see Note 6 to
the Consolidated Financial Statements). When a loss is considered probable in
connection with litigation or governmental proceedings and the loss amount can
be reasonably estimated within a range, we record the minimum estimated
liability related to the claim if there is no best estimate in the range. As
additional information becomes available, we assess the potential liability
related to the legal proceedings and revise those estimates. Revisions in
estimates of the potential liability could materially impact our results of
operations in the period of adjustment.
RECLASSIFICATIONS
During the fourth quarter of 2006, PPOL reclassified the presentation of
revenues and related cost of sales to Product sales and Service fee income as
line items in the statement of operations. As presented below, Product sales
include revenues we derive from the sale of tangible products, net of discounts,
returns, and allowances, while Service fee income represents revenues from
services the Company has performed. This reclassification conforms with
requirements of SEC's Regulation S-X Rule 5-03(b)(1) and (2). Previously our
revenues were classified as Product Sales and Network Services and Other-Online
Products as line items in the statement of operations. Both line items in each
previous classification include both sales of tangible products and revenues
from services. Prior year information has been reclassified to conform with
current year presentation.
CORRECTION OF AN ERROR IN PREVIOUSLY ISSUED FINANCIAL STATEMENTS
During the fourth quarter of 2006, PPOL has determined it has made an
error in prior periods in its application of accounting principles. The error
involved the reporting of revenues gross as a principal when we should have
reported them net as an agent as our involvement in such transactions was not as
their primary obligor and we did not any economic risk of carrying inventory or
credit risk. The impact of the accounting error was to overstate both sales and
cost of sales by $2,223,959 for the year ended March 31, 2005 and $1,018,962 for
the year ended March 31, 2004. Prior year information has been restated to
conform to current year presentation.
For financial reporting purposes, this error has been accounted for as a
prior period adjustment in accordance with APB Opinion 20, Accounting Changes.
There was no effect of this correction on income before income taxes and
discontinued operations, net (loss) income and net (loss) earnings per common
share during the years ended March 31, 2005 and 2004.
21
RESULTS OF OPERATIONS
The following table sets forth the results of operations for the periods
indicated:
2006 % Change 2005 % Change 2004
REVENUES
Product Sales 77,983,915 -19.35% 96,690,799 -7.65% 104,697,710
Service fee income 28,640,154 -8.04% 31,142,792 1.69% 30,623,772
Consulting 0 0.00% 0 -100.00% 483,858
Total Revenues 106,624,069 -16.59% 127,833,591 -5.87% 135,805,340
COST OF SALES AND EXPENSES
Cost of Sales -- Goods 22,053,203 -17.84% 26,842,453 -4.87% 28,215,427
Cost of Sales -- Services 8,361,781 6.32% 7,864,701 79.98% 4,369,847
Distributor Incentives 47,203,479 -24.00% 62,106,377 -8.64% 67,976,680
Selling General and Administrative 28,310,587 -1.64% 28,783,491 20.78% 23,831,706
Total Cost of Sales and Expenses 105,929,050 -15.66% 125,597,022 0.97% 124,394,098
Operating income 695,019 -68.92% 2,236,569 -80.40% 11,411,689
Other (Income) Expense (100,010) 143.49% 229,962 92.08% 119,721
Income before Taxes 795,029 -60.38% 2,006,607 -82.23% 11,291,968
Income Taxes 3,181,567 115.08% 2,764,576 -22.55% 3,569,602
Loss from Discontinued Operations 0 -100.00% 1,982,764 100.00% 0
Net Income (loss) (2,386,538) -12.92% (2,740,733) -135.49% 7,722,366
YEAR ENDED MARCH 31, 2006 COMPARED TO YEAR ENDED MARCH 31, 2005
PRODUCT SALES. For the year ended March 31, 2006 (Fiscal 2006), revenues
decreased by 19.35% over the year ended March 31, 2005 (Fiscal 2005) from
$96,690,799 to $77,983,915. The decrease in product sales is attributable to a
decline in SF-70 and U-Phone unit sales from 25,624 units in Fiscal 2005 to
17,257 units in Fiscal 2006. Such decline is attributable to market entry of
U-World, whose CEO, Mr. Aota, is also director of PPOL, that sells U-Phones, and
transition challenges of our revenue model from the network marketing to the
direct marketing system.
SERVICE FEE INCOME. Service fee income declined 8.04% for Fiscal 2006 over
Fiscal 2005 from $31,142,792 to $28,640,154. This minor decline, despite the
larger decline in product sales, reflects AJOL's emphasis on services, which
require less capital than revenues derived from tangible product sales.
COST OF PRODUCT SALES. Cost of product sales declined by 17.84%$ from
$26,842,453 in the prior year to $22,053,203, a greater percentage decline than
related product sales. Management attributes the increase to the revenue mix
containing higher gross profit percentage items.
COST OF SERVICE FEE INCOME. Cost of service fee income has increased 6.32% from
$7,864,701 in Fiscal 2005 to $8,361,781 despite the 8.04% decrease in sales.
This is reflective of our investment in the future to maintain our current
customer base with lower priced services.
DISTRIBUTOR INCENTIVES. Distributor incentives decreased 24.00% over the prior
year from $62,106,377 to $47,203,479. The decrease, which is greater than the
sales decrease is due to lower mix of commissionable and high commission sales
in the current year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased by 1.64% from Fiscal 2005 even though total
revenues declined by 16.59%. While the Company has made every effort to reduce
costs, transition costs to direct marketing, merger integration with USC,
information system maintenance expense increases all contributed to the current
year selling general and administrative expenses.
22
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenditures are
included as a component of our selling, general and administrative expenses. For
Fiscal 2006, our expenditures were $2,120,249, which is a $1,841,045 increase
from Fiscal 2005 spending of $279,204. Fiscal 2006 expenditures are at the level
we consider necessary as an investment in the future. In Fiscal 2005, we used
our cash resources to enhance our internal use customized software.
OTHER EXPENSE, NET. The approximate $330,000 change in other expense from an
expense of $230,000 in Fiscal 2005 to $100,000 income in the current year were
associated with one time non-recurring events.
INCOME TAXES. Income taxes exceeded income before income taxes during the year
ended March 31, 2006. AJOL is subject to Japanese taxing authorities on a
standalone basis. Losses incurred at PPOL of approximately $1.6 million and $2.4
million at USC prior to merger with AJOL cannot be deducted from AJOL's
earnings. In addition, foreign currency translation of deferred income taxes had
a $1.1 million negative impact. Without the negative impact of these items, our
tax rate would have approximated 45.5%.
(LOSS) FROM DISCONTINUED OPERATIONS. We did not have any discontinued operations
in the current year.
YEAR ENDED MARCH 31, 2005 COMPARED TO YEAR ENDED MARCH 31, 2004
PRODUCT SALES. For the year ended March 31, 2005, revenues decreased by 7.65%
over Fiscal 2004 from $104,697,710 to $96,690,799 in Fiscal 2005 due to decline
in unit sales of the SF-70 due to a soft economy in Japan.
SERVICE FEE INCOME. Service income revenues increased 1.69% from $30,623,772 in
Fiscal 2004 to $31,142,792 in Fiscal 2005. This reflects AJOL's gradual shift of
revenues from sales of tangible goods to services.
COST OF PRODUCT SALES. Cost of sales declined by 4.87% from $28,215,427 in
Fiscal 2004 to $26,842,453 in Fiscal 2005. This decline, which is slightly
greater than the decline in Sales is attributable to a higher margin on
non-SF-70 products.
COST OF SERVICE FEE INCOME. Cost of sales increased 79.98% from $4,369,847 in
Fiscal 2004 to $7,864,701 in Fiscal 2005 even though related service fee income
increased only 1.69%. Management attributes the increase to higher labor and
other costs, including an accrual for "appreciation gifts" to insureds who had
no claims.
DISTRIBUTOR INCENTIVES. In line with the overall decrease in sales for Fiscal
2005, distributor incentives also decreased 8.64% from $67,976,680 in Fiscal
2004 to $62,106,377 in Fiscal 2005. The decrease is primarily due to the lower
mix of commissionable sales in the current year and also lower hardware unit
sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by 20.78% over Fiscal 2004 from $23,831,706 to
$28,783,491 for Fiscal 2005. This increase is attributable to increased
marketing expenses and travel and remuneration expenses of independent outside
directors. Additionally, information system updating expenses increased over
Fiscal 2004.
OTHER EXPENSE, NET. Items included in this category relate to one time
non-recurring events. As such, income and expenses included in this category
cannot be compared from year to year. The most significant of the expenses in
fiscal 2005 is an approximately $80,000 expense attributable to the devaluation
of corporate memberships to current market value.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenditures are
included as a component of our selling, general and administrative expenses. For
the year ended March 31, 2005, our expenditures were $279,204, a decline of
$1,374,127 from Fiscal 2004 spending of $1,653,331. We limited our research and
development expenditures in 2005 and allocated our cash resources to enhance our
internal use customized software.
INCOME TAXES. Income taxes exceeded income before income taxes during the year
ended March 31, 2005. AJOL is subject to Japanese taxes on a standalone basis.
Losses incurred at PPOL are not offset against AJOL's income which therefore
gives the appearance of a relatively high tax liability in comparison to the
consolidated income before tax amount. The change from Fiscal 2004 is also
attributable to unrealized foreign currency transactions.
(LOSS) FROM DISCONTINUED OPERATIONS. The loss from discontinued operations is
related to a one time loss associated with PPOL's entry into and exit from sales
of computer software during the year.
INFLATION
To date, the effects of inflation on our financial results have not been
significant. We cannot provide assurances, however, that inflation will not
affect us materially in the future.
23
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, equity
financing and short term debt to meet our cash needs and business objectives
without relying on long-term debt to fund operating activities.
WORKING CAPITAL DEFICIT
At March 31, 2006, PPOL current liabilities exceeded current assets by
$2,596,174. Our current liabilities include deferred revenue of $53,439,556
while our current assets include deferred costs of $38,972,218. The deferred
revenue and deferred costs are attributable to the revenue recognition policy
for revenue arrangements for multiple deliverables (see Note 1 to the
consolidated financial statements for further information). Current deferred
revenue will be recognized as revenues, and current deferred costs will be
recognized as cost of sales and distributor incentives, during the fiscal year
ending March 31, 2007. The recognition of these items as revenues, cost of
sales, and distributor incentives will not use or provide any working capital.
Working capital, adjusted for deferred revenues and deferred costs at March 31,
2006 is as follows:
Working
Current Current Capital
assets liabilities (Deficit)
------------ ------------ ------------
Working capital deficit at
March 31, 2006 $ 55,813,086 $ 58,409,259 ($ 2,596,174)
Less: Current deferred costs (38,972,218) -- (38,972,218)
Less: Current deferred revenues -- 53,439,556 53,439,556
------------ ------------ ------------
Working capital, adjusted for deferred
revenues and deferred costs,
at March 31, 2006 $ 16,840,767 $ 4,969,703 $ 11,871,164
============ ============ ============
EQUITY FINANCING
On May 30, 2005, we completed the private placement of 2,549,129 shares
without registration under the Securities Act of 1933, as amended in reliance on
one or more exemptions from the registration requirements under the Act,
including Regulation D. This private placement resulted in our raising
$10,196,516 at a price of $4 per share. The former CEO of PPOL, who had resigned
in December 2005, is also the Representative Director of one of the investors,
which purchased 463,478 shares for $1.9 million.
Pursuant to the Stock Purchase Agreements, the Company entered into a
Registration Rights Agreement ("Registration Rights Agreement"), dated May 30,
2005, with each of the four Investors, which granted "piggy-back" registration
rights to the Investors. Pursuant to the Registration Rights Agreement, if the
Company at any time files a registration statement (other than a Form S-4 or
Form S-8 registration statement) with the Securities and Exchange Commission
under the Act, we agreed to use its best efforts to include in such registration
statement such shares of the Investors' Common Stock as the Investors may
request, subject to the terms and conditions of the Registration Rights
Agreement.
The Company used the proceeds from the above noted sale of equity
securities to purchase 100% of the issued and outstanding common stock of USC.
In December 2005, we merged USC into AJOL.
CHANGES IN CASH AND CASH EQUIVALENTS BETWEEN 2005 THROUGH 2006
While we had raised $10,196,516 in equity capital, our cash and cash
equivalents declined $5,390,660 to $6,616,877 at March 31, 2006 from $12,007,537
at March 31, 2005. This decline is substantially attributable to loss from
operations of $2,386,538 for the year. Increases in inventories and prepaid
expenses used $1,052,521 and $652,112, respectively. Due to a reduction in the
number of SF-70 and U-Phones sold during the year, accounts payable declined
$7,828,340 and advances received declined $2,079,238. Changes in income taxes,
($941,359), and other current liabilities, ($1,195,234), offset by trade
accounts receivable, $853,211 and advance payments, $897,446 were also factors
in the net cash used by operating activities of $14,700,863. Deposit of
$3,317,382 related to prior leases was returned during the year while we paid
off loans of $1,115,760. The excess of cash paid in excess of net book value,
$1,967,092, for the acquisition of USC was treated as a return of capital to
Green Capital for accounting purposes and was a use of capital.
24
Cash and cash equivalents remained relatively stable with a decline of
$76,019 to $12,007,537 as of March 31, 2005 from $12,083,556 as of March 31,
2004. During the year ended March 31, 2005, we had a net loss of $2,740,733 and
used $7,164,787 for the purchase of property, equipment and software. Such uses
of cash were adjusted by non-cash expenses attributable to depreciation,
amortization and deferred taxes of $5,522,986 and financed by proceeds from
related parties in the form of loans of $1,115,760 and equity contributions of
$2,912,564.
While we believe that our current cash on hand, together with cash we
expect to generate from future operations, will be sufficient to satisfy our
anticipated cash requirements and capital expenditures for the next 12 months,
additional sources of financing will be considered if deemed to be in the best
interests of the Company.
CONTRACTUAL OBLIGATIONS
The Company's operating lease & purchase obligations as of March 31,
2006 are as follows:
PAYMENTS DUE DURING THE YEAR ENEDING
-----------------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS TOTAL 2007 2008 2009 THEREAFTER
-------------------------------- --------------- --------------- --------------- --------------- ---------------
Operating Lease
Obligations.............. $ 700,949 $ 513,169 $ 178,100 $ 9,680 --
Service Provider Contracts.. $ 73,349 $ 73,349 -- -- --
--------------- --------------- --------------- --------------- ---------------
Total....................... $ 774,298 $ 586,518 $ 178,100 $ 9,680 --
=============== =============== =============== =============== ===============
RECENT FINANCIAL ACCOUNTING PRONOUNCEMENTS
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections" which replaces Accounting Principles Board Opinion ("APB") No. 20
"Accounting Changes" and SFAS No. 3, "Reporting Accounting Changes in Interim
Financial Statements--an Amendment of APB Opinion No. 28" and changes the
requirements for the accounting for, and reporting of, a change in accounting
principle. SFAS 154 requires retrospective application to prior period financial
statements (to the extent practicable) of changes in accounting principle
instead of recognition of the cumulative effect of the change in net income in
the period of the change as required by APB No. 20. SFAS 154 also requires that
a change in depreciation or amortization be accounted for as a change in
accounting estimate affected by a change in accounting principle. SFAS 154 is
effective for accounting changes made by PPOL after January 1, 2006. Management
continues to evaluate the effect that adoption of SFAS 154 will have on PPOL's
consolidated results of operations and financial position.
In November 2005, the FASB issued Staff Position ("FSP") Nos. FAS 115-1
and 124-1, "The Meaning of Other-Than-Temporary Impairment and Its Application
to Certain Investments." This FSP addressees the determination as to when an
investment is considered impaired, whether the impairment is
'other-than-temporary', and the measurement of an impairment loss. The
investment is impaired if the fair value is less than cost. The impairment is
'other-than-temporary' for equity securities and debt securities that can
contractually be prepaid or otherwise settled in such a way that the investor
would not recover substantially all of its cost. If `other-than-temporary', an
impairment loss shall be recognized in earnings equal to the difference between
the investment's cost and its fair value. The guidance in this FSP is effective
in reporting periods beginning after December 15, 2005. The Company will review
FSP Nos. FAS 115-1 and 124-1, but does not expect the adoption of this FSP to
have a material impact on its operating results or financial position.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by Item 7A of this Form 10-K is incorporated
herein by reference to the information contained above in Item 7 of this Form
10-K, Management's Discussion and Analysis of Financial Condition and Results of
Operations - "Currency Risk and Exchange Rate Information" and in Item 1A of
this Form 10-K, Risk Factors - "Foreign Currency (Yen) Fluctuations,"
respectively.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
1. Information required by this item appears at pages F-1 through F-18,
attached to this Form 10-K report.
2. FINANCIAL STATEMENT SCHEDULES: Financial statement schedules have been
omitted because they are not required or are not applicable, or because the
required information is set forth in the financial statements or notes thereto.
25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On September 20, 2005, the Company's Board of Directors engaged Windes &
McClaughry Accountancy Corporation ("Windes & McClaughry"), as its independent
accountants, commencing with the review of the Company's unaudited consolidated
quarterly financial statements and related data for the first quarter in the
year ending March 31, 2006.
Prior to engaging Windes & McClaughry, the Company did not, nor did
anyone on its behalf, consult with Windes & McClaughry regarding the application
of accounting principles to a specified transaction, either completed or
proposed, or the type of audit opinion that might be rendered on the Company's
financial statements, any matter that was either the subject of a disagreement
(as defined in paragraph 304(a)(1)(iv) and the related instructions to Item 304
of Regulation S-K) or a reportable event (as described in paragraph 304(a)(1)(v)
of Regulation S-K), or any other matter described in Item 304(a)(2) or
Regulation S-K.
The registrant's prior auditors, Stonefield Josephson, Inc. ("Stonefield
Josephson"), resigned by letter dated September 1, 2005. Stonefield Josephson
notified the registrant that its client-auditor relationship with the registrant
would cease upon the completion of its review of the financial statements to be
included in registrant's Form 10-Q for the period ended June 30, 2005.
Stonefield Josephson's reports on the registrant's financial statements,
including those for the past two years, have not contained an adverse opinion or
a disclaimer of opinion, nor have they been qualified or modified as to
uncertainty, audit scope, or accounting principles.
On September 19, 2005, the registrant's Board of Directors dismissed
Stonefield Josephson from completing its SAS 100 review procedures of the
financial statements to be included in the registrant's quarterly report on Form
10-Q for the period ended June 30, 2005. On September 19, 2005, Stonefield
Josephson confirmed to the registrant that its client-auditor relationship will
cease immediately, as per the registrant's request.
As previously reported, the registrant was not able to file timely its
annual report on Form 10-K for the fiscal year ended March 31, 2005, as the
registrant and Stonefield Josephson had not completed their annual audit by the
filing deadline. On March 31, 2005, PPOL, Inc. (PPOL) sold its entire interest
in Gatefor, Inc. (Gatefor), it's wholly owned subsidiary, to Forval Corporation
(Forval). Forval was PPOL's majority shareholder at that time. The registrant
initially accounted for the sale in substantial accordance with FAS 144,
paragraph 43, included a one line item on the statement of operations as "Gain
from operations of discontinued Gatefor component (including gain on disposal of
$929,800)." Based upon management's subsequent discussions with Stonefield
Josephson, it was mutually agreed upon that the proper accounting treatment for
this transaction was as a capital contribution as opposed to a gain. This
conclusion was based upon the significant factor that the sale transaction was
with the registrant's then majority shareholder.
Stonefield Josephson has advised the registrant that the difference in
accounting treatment discussed above was a "disagreement" as defined in Item 304
of Regulation S-K. The registrant's Board of Directors have discussed the
foregoing and have authorized Stonefield Josephson to respond fully to the
inquiries of the registrant's successor auditor. The Registrant's Board has also
discussed the matters reported below and has authorized Stonefield Josephson to
respond fully to the inquiries of the registrant's successor auditor.
Stonefield Josephson also reported to the Board that the registrant's
overall staffing in the United States and Japan appear not to be sufficient for
a public reporting company. Specifically, Stonefield Josephson noted that during
the course of the audit, the Japanese staff was not sufficient to provide
documents, schedules and analysis in a timely manner. As for the registrant's
staff in the United States, Stonefield Josephson noted the registrant's staff in
the United States had limited involvement with the audit in Japan to determine
whether accounting issues were proper in accordance with Generally Accepted
Accounting Principals. Stonefield Josephson noted that some of these issues were
addressed when it resumed its fieldwork in the United States.
Stonefield also noted that the initial drafts of the financial
statements were not in accordance with Generally Accepted Accounting Principles.
The auditors made many revisions to the draft financial statements, stated that
the registrant's Japanese subsidiary needed to retain historical documents for a
period of at least seven (7) years and stated that the Board should discuss the
length of time to keep documents with its outside counsel.
Other than the issues described above, there were no other disagreements
or reportable events with Stonefield Josephson through the date of the cessation
of registrant's relationship with Stonefield Josephson.
26
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Under the supervision
and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, we evaluated the effectiveness of the
design and operation of our disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of
the end of the period covered by this report. Disclosure controls and procedures
are the controls and other procedures that we designed to ensure that we record,
process, summarize and report in a timely manner the information we must
disclose in reports that we file with or submit to the Securities and Exchange
Commission. Based on this evaluation, our Chief Executive Officer and our Chief
Financial Officer concluded that the aforementioned disclosure controls and
procedures were not effective as of March 31, 2006 and were revised, as
described in the following paragraphs. There were no other significant changes
made in our internal controls or in other factors that could significantly
affect internal controls subsequent to the date of their evaluation.
The Board of Directors has concluded that the delay in submitting this
10-K filing was primarily a result of inadequate documentation of factual
information in our files with respect to transactions occurring prior to present
management taking office. This required present management to take the time to
obtain relevant facts to determine whether such transactions have been properly
accounted for and its impact on the presentation of current financial
statements. Documentation of past transactions with future impact has been
substantially updated. In addition, the Company has devoted a substantial amount
of time to respond to comment letters from the Securities and Exchange
Commission (SEC) with respect to its Form 10-K for Fiscal Year Ended March 31,
2005 and Form 10-Q for the Quarter Ended December 31, 2005. The current 10-K
filing reflects the requirements of SEC pursuant to their comment letters. By
letter dated July 24, 2006, the SEC has notified us that they have completed
their review of our Form 10-K and related filings and do not, at this time, have
any further comments. To ensure we record, process summarize and report in a
timely manner the information we must disclose in reports that we file with or
submit to the Securities and Exchange Commission, the Board of Directors has
directed management of the Company to retain additional personnel to assist the
CFO.
Our independent registered public accounting firm, Windes & McClaughry,
has advised our audit committee and management that it considers the three
matters to be "material weaknesses" as that term is defined under standards
established by the Public Company Accounting Oversight Board (United States).
The first matter related to the fact that our independent registered
public accounting firm identified a material adjustment which was required to be
made to the financial statements for the nine months ended December 31, 2005.
The adjustment was to our provision for income taxes whereby we did not provide
for the tax benefit of an operating loss carryforward that was needed by AJOL,
our Japanese operating subsidiary. The adjustment was reflected in the financial
statements included on Form 10-Q. Had such adjustment not been recorded,
non-current deferred tax assets would have been understated by $532,540 at
December 31, 2005 and the net loss for the nine months ended December 31, 2005,
would have been overstated by $532,540.
The second matter was that during the course of our procedures in
preparing our third quarter 10-Q filing, we determined that Goodwill was
understated by $205,991 for the acquisition of USC on May 30, 2005. The impact
of the understatement of goodwill on the financial statements is as follows:
Statement of income
-------------------------
Balance Sheet 3 months 6 months (YTD)
------------------------ ------------------------
Comprehensive Other comprehensive gain
June 30, 2005 Goodwill Income Foreign currency translation
------------- ---------- ---------- ---------- ------------
As stated in 10-Q $1,761,211 $1,149,223 $ 243,404 n/a
As restated $1,919,068 $1,307,080 $ 401,261 n/a
Impact $ 157,857 $ 157,857 $ 157,857 n/a
September 30, 2005
------------------
As stated in 10-Q $1,761,211 $1,383,171 $ 233,948 $ 477,352
As restated $1,877,803 $1,499,763 $ 192,683 $ 593,944
Impact $ 116,592 $ 116,592 $ (41,265) $ 116,592
27
The third matter relates to minor errors and omissions in certain
financial statement disclosures discovered by our independent registered public
accounting firm, which have been corrected.
The Board of Directors has concluded that the understatement of
Goodwill, the material adjustment to deferred taxes and minor errors and
omissions in certain financial statement disclosures discovered by our
independent registered public accounting firm and the related delay in
submitting the third quarter 10-Q was the result of insufficient staffing and
the lack of internal expertise in international tax accounting. To ensure such
adjustments and filing delays will be avoided in the future, we have hired a
full time assistant to the CFO and retained the services of a consultant who was
formerly a Director of International Tax at a Big Four accounting firm with over
20 years of experience. With the retention of the aforementioned staff and
consultant, we believe that the controls and procedures designed to ensure that
we record, process, summarize and report in a timely manner the information we
must disclose in reports that we file with or submit to the Securities and
Exchange Commission as adequate.
Following the restatement of Goodwill as noted above, we have made a
subsequent discovery of facts, which existed at the time of PPOL's acquisition
of USC. What became known was that PPOL and USC were de facto entities under
common control of Green Capital, PPOL's ultimate parent through their position
as majority investor in Foster Strategic Investment Partnership. Prior to
acquisition by PPOL, USC was a wholly owned subsidiary of Green Capital.
Accordingly, the acquisition of USC must be treated in a way that is similar to
the pooling method in accordance with paragraph 11 of SFAS No. 141, "Business
Combinations," For accounting purposes, the excess of purchase price over the
net assets of USC will be treated as a return of capital to Green Capital. We
will restate and file amended filings for the quarters ended June 30, 2006,
September 30, 2006 and December 31, 2006. The impact of the restatement is as
follows, after taking into account the restatement noted above:
Balance Sheet Statement of income
Additional 3 months 6 months 9 months
Comprehensive paid-in Other comprehensive gain
Goodwill Income capital Foreign currency translation
----------- ----------- ----------- --------------------------------------
June 30, 2005
-------------
As stated in 10-Q $ 1,919,068 $ 1,307,080 $16,468,890 $ 401,261 n/a n/a
As restated -- 1,355,104 14,501,798 449,285 n/a n/a
----------- ----------- ----------- -----------
Impact $ 1,919,068 $ (48,024) $ 1,967,092 $ (48,024) n/a n/a
=========== =========== =========== ===========
September 30, 2005
As stated in 10-Q $ 1,877,803 $ 1,499,763 $16,468,890 $ 192,683 $ 593,944 n/a
As restated -- 1,589,052 14,501,798 233,948 683,233 n/a
----------- ----------- ----------- ----------- -----------
Impact $ 1,877,803 $ (89,289) $ 1,967,092 $ (41,265) $ (89,289) n/a
=========== =========== =========== ===========
December 31, 2005
As stated in 10-Q $ 1,800,408 $ 1,836,626 $16,468,890 $ 453,455 n/a $ 930,807
As restated -- 2,003,310 14,501,798 414,258 n/a 1,097,491
----------- ----------- ----------- ----------- -----------
Impact $ 1,800,408 $ (166,684) $ 1,967,092 $ 39,197 n/a $ (166,684)
=========== =========== =========== ===========
The Board of Directors have concluded that that the subsequent discovery
of facts was a result of our not being aware of the intentions of the fund
manager of Foster Strategic Investment Partnership to consult with Green Capital
regarding its investment in PPOL or to direct its votes on matters brought up
for shareholder voting, unless it had the prior concurrence of Green Capital.
Conversely, we have been advised that Foster Corporation will comply with any
matters Green Capital requested with respect to matters affecting FSIP's
investment in PPOL. While the fund manager's adherence to Green Capital's
requests and seeking prior concurrence of any decisions regarding FSIP's
investment in PPOL or to direct its votes on matters brought up for shareholder
voting is not believed to be legally binding, the substance is more important
than the form. Members of the Board of Directors will hold periodic meetings
with the fund manager of Foster Strategic Investment Partnership, as well as
Green Capital, to receive information on matters that should be given accounting
treatment by PPOL or otherwise disclosed to comply with reporting standards.
The Board of Directors has determined that the turnaround time in
obtaining information necessary for consolidated financial reporting is delayed
as a result of time zone differences between the United States and Japan.
Accordingly, the Board of Directors has directed the CFO to complete the
quarterly and annual consolidation procedures in Japan. This should shorten the
time required to obtain necessary information and help educate the subsidiary
accounting staff of what is required to be in compliance with SEC reporting
guidelines.
28
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rules
13a-15(f). Under the supervision and with the participation of management,
including our CEO and CFO, we conducted an evaluation of the effectiveness of
our internal controls over financial reporting based on the framework in
INTERNAL CONTROL--INTEGRATED FRAMEWORK issued by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO"). Based on our evaluation under
the framework in INTERNAL CONTROL--INTEGRATED FRAMEWORK, management has
concluded that our internal control over financial reporting was not effective
as of March 31, 2006. As a result of such evaluation, changes, as described in
the foregoing paragraphs, in our internal controls over financial reporting
identified during the most recent fiscal year that materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting were implemented.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Prior to their resignations on March 31, 2005, the board had four
independent directors who served on the 1) audit committee, 2) nominating and
corporate governance committee and 3) compensation committee. Subsequent to
March, 31, 2005, with the resignation of the former independent directors, the
current Board has not assigned any members to committees. However, the entire
Board has taken on the responsibilities of each of the committees until such
time that independent directors are added to the Board. The Company does not
have any independent directors at the current time. The following describes each
intended committee and its intended function upon formation.
Subsequent to March 31, 2005, the entire Board has been performing the
responsibilities of the Audit Committee. The functions of the Audit Committee,
upon reconstitution of independent directors, will include reviewing and
supervising the financial controls of the Company, making recommendations to the
Board of Directors regarding the Company's independent accountants, reviewing
the books and accounts of the Company, meeting with the officers of the Company
regarding the Company's financial controls, acting upon recommendations of the
independent accountants and taking such further actions as the Audit Committee
deems necessary to complete an audit of the books and accounts of the Company.
The members of the Audit Committee will be "independent" as defined in Rule
4200(a)(15) of the National Association of Securities Dealers' listing
standards. The Company currently does not have a financial expert on the audit
committee because it currently does not yet have any independent directors to
serve that role.
Subsequent to March 31, 2005 the entire Board has been performing the
responsibilities of the Compensation Committee. The Compensation Committee's
functions, upon appointment of its members, will include reviewing with
management cash and other compensation policies for employees, making
recommendations to the Board of Directors regarding compensation matters and
determining compensation for the Chief Executive Officer, Chief Operating
Officer and Chief Financial Officer. In addition, the Compensation Committee
will administer the Company's stock plans and determine the terms and conditions
of issuances of awards there under.
Subsequent to March 31, 2005, the entire Board has been performing the
responsibilities of the Nominating and Corporate Governance Committee. The
Nominating and Corporate Governance Committee, upon appointment of its members,
will make recommendations to the Board regarding the size and composition of the
Board, establish procedures for the nomination process, recommend candidates for
election to the Board of Directors and nominate officers for appointment by the
Board. In addition, the Committee will review and report to the Board on a
periodic basis with regard to matters of corporate governance. The Committee
will consider nominees recommended by security holders and evaluate those
nominees. Security holders making such a nomination must deliver the
recommendation in writing to the principal financial officer of the Company.
CURRENT DIRECTORS AND NOMINEES
The following table sets forth the name, age and other information of
current directors and nominees:
STANDING FOR RE-ELECTION
NAME AGE DIRECTOR SINCE TERM EXPIRES OR ELECTION INDEPENDENT
---- --- -------------- ------------ ----------- -----------
CURRENT DIRECTORS COMMENCING AS OF MARCH 31, 2005 AND STANDING FOR RE-ELECTION
Yoshihiro Aota 60 5/20/2005 2006 Yes No
Richard Izumi 52 3/31/2005 2006 Yes No
Masao Yamamoto 56 3/31/2005 2006 Yes No
The following is a brief background summary for each of the current and
nominee directors:
29
Mr. Yoshihiro Aota currently serves as CEO of U-World Co., Ltd., a
Japanese corporation involved in network marketing of U-phones, a direct
competitor of the Company. He was the President and a director of AJOL from 1994
through December 2004. Mr. Aota was also previously a director of PPOL through
December 31, 2004. Prior to AJOL, Mr. Aota worked for Forval Corporation which
was the majority shareholder in PPOL, Inc. While at Forval Corporation, Mr. Aota
directed Forval's business strategy, PC business and NW business. Prior to
Forval Corporation, Mr. Aota was in charge of business planning and
administration of Katena Corporation, a Japanese Corporation. Mr. Aota holds a
Bachelor of Science degree from Tokyo University.
Mr. Richard Izumi is serving as Chief Financial Officer of PPOL, Inc.
Mr. Izumi is also Senior Managing Director of JGS Co. Ltd, a Japanese
corporation involved in the licensing of energy and high-tech related
intellectual property and Director of City Communication, Inc., a Japanese
corporation involved in broadcast technology. He is also an independent
consultant to public companies, including previously the registrant, on
financial matters and international transactions, primarily between U.S. and
Japan. Earlier he served as Partner at accounting firms Ernst & Young and Price
Waterhouse (now known as PricewaterhouseCoopers). Mr. Izumi holds a B.S. in
Business Administration from the University of Southern California.
Mr. Masao Yamamoto is currently serving as Chief Executive Officer of
PPOL, Inc. and Chief Executive Officer of AJOL Co. Ltd., PPOL's wholly owned
subsidiary, where he previously served as General Manager of Finance and
Director. Prior to joining AJOL he was General Manager of accounting with Chiiki
Shinko Kyouiku Jigyo Foundation. Mr. Yamamoto graduated from the Koganei
Industrial School, with a major in Electronics.
If elected, each of the nominees is expected to serve until the 2007
annual meeting of shareholders and thereafter until his or her successor is duly
elected and qualified.
CODE OF ETHICS
The Company adopted a code of ethics applicable to all of its directors,
officers and employees which is a "code of ethics" as defined by the applicable
rules of the Securities and Exchange Commission (SEC). This code of ethics is
found as exhibit 14 to our 10-K for fiscal 2004 as filed with the SEC. If the
Company makes any amendments to this code of ethics other than technical,
administrative or other non-substantive amendments, or grants any waiver,
including implicit waivers, from a provision of this code of ethics, the Company
will disclose the nature of the amendments or waivers, its effective date and to
whom it applies in a report on Form 8-K filed with the SEC.
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION AND OTHER INFORMATION
A. THE COMPANY
The following table sets forth the compensation of PPOL's "Named
Executive Officers," which consist of a) all persons serving as the chief
executive officer during the fiscal year and b) Chief Financial Officer:
NAME AGE POSITION ANNUAL SALARY
Masao Yamamoto 56 Chief Executive Officer $ 0
Richard Izumi 52 Chief Financial Officer $330,000
Hisao Inoue 54 Chief Executive Officer $ 42,500
30
The following table sets forth the stock options granted to officers of the
company within the last three fiscal years:
PERCENT OF TOTAL
OPTIONS
NUMBER OF GRANTED TO POTENTIAL REALIZABLE VALUE
SECURITIES EMPLOYEES AT ASSUMED ANNUAL RATES
UNDERLYING DURING EXERCISE OF STOCK PRICE APPRECIATION
OPTIONS FISCAL PRICE FOR OPTION TERM (1)
NAME GRANTED YEAR PER SHARE EXPIRATION DATE 5% 10%
--------------------- ----------- ---------- ----------- --------------- ----------------------------
2004
Yoshihiro Aota 1,000,000 81.97% $ 4.00 March 25, 2014 6,859,300 12,505,600
Nobuo Takada 50,000 4.10% $ 4.00 March 25, 2014 342,900 625,300
Masao Yamamoto 40,000 3.28% $ 4.00 March 25, 2014 274,400 500,200
Toshiaki Shimojo 30,000 2.46% $ 4.00 March 25, 2014 205,800 375,200
Yuji Kamata 20,000 1.64% $ 4.00 March 25, 2014 137,200 250,100
Nobuyuki Ishii 40,000 3.28% $ 4.00 March 25, 2014 274,400 500,200
Manabu Nakamura 40,000 3.28% $ 4.00 March 25, 2014 274,400 500,200
----------- ----------
Total for 2004 1,220,000 100.00%
=========== ==========
2005
Robert Brasch 40,000 50.00% $ 4.00 July 25, 2014 274,400 500,200
Lowell Hattori 40,000 50.00% $ 4.00 July 25, 2014 274,400 500,200
----------- ----------
Total for 2005 80,000 100.00%
=========== ==========
There were no additional options granted for the fiscal year ended March 31,
2006.
B. AJOL (THE COMPANY'S WHOLLY OWNED SUBSIDIARY)
The following table sets forth the compensation of AJOL's "Named
Executive Officers," which consist of a) all persons serving as the chief
executive officer during the fiscal year and b) the four (4) most highly
compensated individuals serving at the end of the fiscal year, in addition to
the chief executive officer:
SUMMARY ANNUAL COMPENSATION TABLE
-------------------------------------------
FISCAL
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) TOTAL
--------------------------------------------------------------------- ---------
Yoshihiro Aota 2006 $ 0 $ 0 $ 0
Representative and Director 2005 $147,513 $557,880 $705,393
2004 $177,405 $274,430 $451,835
Manabu Nakamura 2006 $110,052 $ 44,172 $154,224
Director 2005 $114,265 $ 41,841 $156,106
2004 $108,813 $ 35,410 $144,223
Masao Yamamoto 2006 $173,754 $ 0 $173,754
Representative Director 2005 $133,118 $ 55,788 $188,906
2004 $109,242 $ 35,410 $144,652
Maki Iida 2006 $ 53,708 $ 10,601 $ 64,309
Director 2005 $ 44,960 $ 19,052 $ 64,012
2004 $ 42,345 $ 15,368 $ 57,713
Nobuyuki Ishii 2006 $ 0 $ 0 $ 0
Supervisor 2005 $112,320 $ 46,490 $158,810
2004 $ 92,250 $ 21,246 $113,496
Akihito Otani 2006 $ 0 $ 0 $ 0
Supervisor 2005 $ 66,649 $ 13,041 $ 79,690
2004 $ 63,343 $ 12,394 $ 75,737
The following is a line graph comparing the cumulative total stockholder return
on our common stock with the cumulative total return of the American Composite
Index and the Russell 1000 Index from March 2005. The graph assumes that $100
was invested on March 31, 2005 in each of our common stock, American Composite
Index and the Russell 1000 Index.
[GRAPH HERE]
31
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 31, 2006, certain
information with respect to the beneficial ownership of the Company's Common
Stock by (i) any person (including any "group" as that term is used in Section
13(d)(3) of the Exchange Act) known by the Company to be the beneficial owner of
more than 5% of any class of the Company's voting securities, (ii) each
director, (iii) each of the named executive officers, as defined below, and (iv)
all current directors and executive officers of the Company as a group. As of
March 31, 2006, there were 20,542,875 shares (1) of issued and outstanding
Common Stock.
NUMBER OF SHARES
OF COMMON STOCK PERCENT OF TOTAL
NAME AND ADDRESS BENEFICIALLY OWNED (1) COMMON STOCK
------------------------------------- ---------------------- ----------------
5% SHAREHOLDERS
Foster Strategic Investment Partnership(2) 10,547,594 51.34%
9 Raffles Place #08-01, Republic Plaza
Singapore, 048619
Leo Global Fund(3) 3,138,571 15.28%
Mori Bldg, 3F Toranomon 11
6-4 Toranomon, 2-Chome
Minato-Ku, Tokyo, Japan 105-0001
DIRECTORS AND OFFICERS
Yoshihiro Aota 0 0%
Aoyama Oval Bldg., 3rd Fl.
5-52-2 Jingu-mae, Shibuya-ku
Tokyo, Japan 150-001
Richard H. Izumi 24,489 0.12%
1 City Boulevard West, Suite 820
Orange, California 92868
Masao Yamamoto
Aoyama Oval Bldg., 3rd Fl. 0 0%
5-52-2 Jingu-mae, Shibuya-ku
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities.
(2) Based on reasonable inquiry, the Company is aware that Green Capital claims
beneficial ownership of 100% of the shares owned by Foster Strategic
Investment Partnership. The basis for this determination is an oral
understanding between Green Capital and Foster Strategic Investment
Partnership that Foster Strategic Management will exercise its shareholder
voting rights only with the concurrence of Green Capital. In October
2005, Green Capital, on behalf of Foster Strategic Investment Partnership,
filed a claim in the Tokyo District Civil Court to recover, from eight
Japanese investors, share certificates representing 6,100,000 shares
of the Company's common stock held of record by Foster Strategic
Investment Partnership. The investors allegedly purchased the shares
in March and April 2005 from Nobuo Takada, who was an affiliate of
Foster Strategic Investment Partnership and Leo Global Fund. Green
Capital contends in its lawsuit that Mr. Takada was not authorized to
sell the shares on behalf of Foster Strategic Investment Partnership.
The lawsuit is presently pending. Mr. Takada served as the Company's
Chief Executive Officer until July 2004 and was a director of the
Company until December 2004.
(3) Based on reasonable inquiry, the Company is aware that Green Capital claims
beneficial ownership of 98% of the shares owned by Leo Global Fund. The
basis for this determination is an oral understanding between Leo Global
Fund and Foster Strategic Investment Partnership that Leo Global Fund will
exercise its shareholder voting rights only with the concurrence of Green
Capital.
32
EQUITY COMPENSATION PLAN INFORMATION
The following table summarizes information, as of March 31, 2006, relating to
equity compensation plan of PPOL pursuant to which grants of options, warrants
or other rights to acquire shares may be granted from time to time.
(c)
NUMBER OF SECURITIES REMAINING
(a) (b) AVAILABLE FOR FUTURE ISSUANCE
NUMBER OF SECURITIES TO BE WEIGHTED-AVERAGE EXERCISE UNDER EQUITY COMPENSATION
ISSUED UPON EXERCISE OF PRICE OF OUTSTANDING PLAN, EXCLUDING SECURITIES
PLAN CATEGORY OUTSTANDING OPTIONS OPTIONS, WARRANTS AND RIGHTS REFLECTED IN COLUMN (a))
Equity compensation
plans approved by
security holders(1) 1,300,000 $ 4.00 700,000
Equity compensation
plans not approved by
security holders 0 not applicable not applicable
Total 1,300,000 $ 4.00 700,000
-------------
(1) This plan is PPOL's 2004 Stock Option Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Green Capital
-------------
On May 30, 2005, the Company completed the acquisition of K.K. U
Service, a Japanese corporation ("USC") based in Tokyo, Japan pursuant to a
Purchase Agreement dated May 30, 2005, by and between the Company, USC and K.K.
Green Capital, a Japan corporation (the Seller or Green Capital). The Company
purchased all of the issued and outstanding shares of USC for $3,522,000. Seller
is the majority investor in Foster Strategic Investment Partnership (FSIP), a
Singapore partnership, which owns approximately 10,547,594 shares of the
Company's common stock, representing approximately 51.34% of the Company's
issued and outstanding stock.
The following summarizes the assets acquired and liabilities assumed in
connection with the acquisition described in the preceding paragraph:
Current assets $ 899,000
Deposits 1,455,000
Intangibles 84,000
-----------
Total assets acquired 2,438,000
Liabilities assumed (883,000)
-----------
Net assets acquired $ 1,555,000
===========
The purchase price represented a significant premium over the recorded
net worth of USC's assets. In determining to pay this premium, we considered
various factors, including the opportunities that USC offers to enhance our
future growth opportunities, synergies with our present operations, cost and
time advantages of establishing a comparable company on our own, contacts with
prospective vendors and elimination of a potential competitor.
By virtue of the Seller's relationship with FSIP, it has been determined
that PPOL and USC are de facto entities under common control. Accordingly, we
have accounted for the acquisition of USC in a manner that is similar to the
pooling method to comply with paragraph 11 of Financial Accounting Standards
Board's Statement of Financial Accounting Standards Statement No. 141 Business
Combinations. For accounting purposes, the excess of purchase price over the net
assets of USC will be treated as a return of capital to Green Capital.
Advanced Communications
-----------------------
During the year ended March 31, 2006, PPOL entered into the following
transactions with Advanced Communications K.K., a Japanese corporation that is
79.55% owned by Green Capital:
Inventory purchases $ 12,123,000
Information technology services 13,925,000
-------------
$ 26,048,000
=============
33
Information technology services, above, includes $2,120,000 in research
and development activities for the enhancement of our SF-70's functional
features.
Inventory purchases, noted above, are comprised of the SF-70 and U-Phone
hardware under an automatically renewing one year contract, unless a termination
notice is provided two months prior to the anniversary by either party. Under
the OEM basis, we retained the rights to the design and metallic mold required
to manufacture the SF-70, but outsourced the actual manufacturing of the SF-70
and U-Phone to Advanced Communications.
Seagull
-------
During the year ended March 31, 2006, PPOL entered into the following
transactions with K.K. Seagull (Seagull), a Japanese corporation and shareholder
of 926,956 shares the Company's common stock:
Sales promotion activities $ 5,197,000
Events planning and production 1,451,000
Information technology services 212,000
-------------
$ 6,860,000
=============
Forval
------
Effective March 31, 2005 (the "Effective Date"), the Company entered
into a Purchase Agreement (the "Purchase Agreement"), as discussed below, with
Forval, which at the time of the Effective Date owned approximately 10,547,594
shares of common stock of the Company, representing approximately 58.62% of the
Company's issued and outstanding common stock. Forval's Chief Executive Officer
("CEO"), Hideo Ohkubo, also served as the CEO and Chairman of the Board of the
Company at the time of the Effective Date of the Purchase Agreement. The Company
was the 100% owner of the common stock of Gatefor (the "Gatefor Shares"), a
Japan joint stock company.. The Company was also the owner of 1,500 shares (the
"OI Shares") of common stock of Object Innovation, Inc., a Florida corporation
("OI") representing a 15% interest in OI. The Company and OI were parties to a
certain Exclusive Distribution Agreement, dated May 26, 2004 (the "Exclusive
Distribution Agreement), which agreement the Company assigned (the "Assignment")
to Gatefor pursuant to that certain Exclusive Distribution Right License
Agreement (the "Distribution Right License Agreement"), dated October 1, 2004,
between the Company and Gatefor. In connection with the Assignment, OI and
Gatefor entered into a revised letter of understanding, dated August 11, 2004
(the "Revised Letter of Understanding"), providing for, among other things, OI's
right to purchase 5% of the equity of Gatefor and certain payments to be made by
Gatefor to OI.
In furtherance of the Purchase Agreement, the Company sold to Forval the
Gatefor Shares and the OI Shares, and assigned to Forval the Company's
receivable from Gatefor (the "Gatefor Receivable") in the principal amount of
$1,643,000, plus accrued interest. The Purchase Agreement approximately valued
the Gatefor Shares at $1,395,000, and the OI Shares at $279,000. In connection
with Forval's acquisition of the Gatefor Shares, OI Shares and Gatefor
Receivable, Forval cancelled the Company's debt to Forval in the principal
amount of approximately $3,161,000 plus accrued interest, and further paid the
Company approximately $143,000. As further consideration in the transaction, the
Company assigned to Forval all of the Company's right, title and interest in and
to, and Forval assumed all obligations under, the Exclusive Distribution
Agreement and the Distribution Right License Agreement, except that the payment
of approximately $930,000 previously made by Gatefor to the Company pursuant to
the Distribution Right License Agreement was deemed non-refundable.
For accounting purposes, the transaction described in the preceding
paragraph, the difference between the sum of amount of Forval's cancellation of
the Company's debt plus accrued interest, approximately $143,000 cash
consideration, combined with approximately $930,000 deemed non-refundable and
PPOL's net book value in Gatefor immediately preceding the transaction was
accounted for as a capital contribution from the then majority shareholder,
Forval. A Special Committee (the "Committee") of independent directors of The
Company's Board of Directors was formed to review the terms and conditions of
the Purchase Agreement. The Committee approved The Company's execution, delivery
and performance of the Purchase Agreement.
PPOL entered into separate agreements with Forval and Leo Global Fund,
which collectively held approximately 94% the Company's common stock, in which
PPOL was to provide certain consulting services during fiscal 2003. As provided
for in the agreements, PPOL received a prepayment of $483,858 from Forval and
Leo Global Fund in fiscal 2003. Since the Company did not complete the
consulting services called for in the agreements prior to March 31, 2003, the
payments received were included in "deferred revenue," as a liability, at March
31, 2003. The consulting services were completed in fiscal 2004 at which time
the consulting revenues were recognized. There is no assurance that PPOL will
receive such projects from Forval and Leo Global Fund in the future.
34
Common stock offering:
----------------------
On May 30, 2005, the Company sold to four purchasers a total of
2,549,129 shares of its common stock, $0.001 par value per share ("Common
Stock") for an aggregate consideration of JPY1,100,000,000 (US $10,196,516) at
$4 per share. The Company entered into separate Stock Purchase Agreements
("Stock Purchase Agreements"), each dated as of May 30, 2005, with (i) K.K.
Contents Provider Tokyo, a Japan corporation, which paid JPY400,0000,000
(US$3,707,824); (ii) K.K. Seagull, a Japan corporation, which paid
JPY400,000,000 (US$3,707,824); (iii) K.K. H.I. Consultants, a Japan corporation,
which paid JPY200,000,000 (US$1,853,912); and (iv) K.K. System Partners, a Japan
corporation, which paid JPY100,000,000 (US$926,956) (collectively, the
"Investors"). The Company issued the Common Stock in a private placement without
registration under the Securities Act of 1933, as amended (the "Act"), in
reliance on one or more exemptions from the registration requirements under the
Act, including Regulation D.
Pursuant to the Stock Purchase Agreements, the Company entered into a
Registration Rights Agreement ("Registration Rights Agreement"), dated May 30,
2005, with each of the four Investors, which granted "piggy-back" registration
rights to the Investors. Pursuant to the Registration Rights Agreement, if the
Company at any time files a registration statement (other than a Form S-4 or
Form S-8 registration statement) with the Securities and Exchange Commission
under the Act, Registrant agrees to use its best efforts to include in such
registration statement such shares of the Investors' Common Stock as the
Investors may request, subject to the terms and conditions of the Registration
Rights Agreement.
The Company used the proceeds from the above noted sale of equity
securities to purchase 100% of the issued and outstanding common stock of K.K. U
Service, a Japanese corporation.
The CEO of PPOL is also the Representative Director of K.K. H.I.
Consultants.
UMBA
The Company has received $9,779,145, $11,166,830, and $10,426,425 during
the years ended March 31, 2006, 2005 and 2004, respectively, in service fee
income from UMBA for providing certain administrative services in connection
with their insurance operations.
Other
-----
Prior to his employment as CFO with PPOL, Inc. which began on March 31,
2005, Richard Izumi served the company as a consultant through his consulting
company, ECO2 Pacific Partners, LLC. We paid ECO2 Pacific Partners, LLC
$225,000 and $284,000 in the years ending March 31, 2005 and March 31, 2004,
respectively.
Tax services were performed by Izumi & Co. whose principal officer is
Ms. Miwa Izumi. Ms. Izumi is the spouse of our CFO, Richard Izumi. The Company
paid $8,000 and $12,000 to Izumi & Co. for tax planning and compliance related
matters in the fiscal years ended March 31, 2006 and 2005, respectively.
35
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES
The Company incurred the following fees to Stonefield Josephson, Inc.
during the 2006 and 2005 fiscal years:
2006 2005
----------- -----------
Assurance $ 339,000 $ 84,000
Tax fees -- --
All other fees -- --
----------- -----------
$ 339,000 84,000
=========== ===========
Stonefield Josephson, Inc ceased to be the Company's independent
accountants as of September 20, 2005. Commencing with the June 30, 2005
financial statements, Windes and McClaughry has been retained as the Company's
independent accountants: The Company incurred the following fees to Windes &
McClaughry during the 2006 fiscal year:
2006
-----------
Assurance $ 185,000
Tax fees --
All other fees --
-----------
$ 185,000
===========
Estimated fees for the fiscal year ended March 31, 2006 audit to be
invoiced from Windes & McClaughry in fiscal 2007 are $130,000.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) The following financial statement schedule of PPOL, Inc. and its
subsidiary for the fiscal years ended March 31, 2006, 2005, and
2004 is filed as part of this report and should be read in
conjunction with the Consolidated Financial Statements of PPOL,
Inc. and its subsidiary:
(2) The financial statements required by Item 8 of this report are
filed in the report on pages F1-F20.
Schedule II: Valuation and Qualifying Accounts
Schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be set
forth therein is included in the Consolidated Financial Statements or
Notes thereto.
(3) See exhibit list below.
(b) During the quarter ended March 31, 2006 through this filing, we filed
the following reports on Form 8-K:
(1) On April 4, 2005 the Company filed a Current Report on Form 8-K
under item 1.01, Entry into a Material Definitive Agreement,
which reported the sale of investments made into Gatefor, Inc.
and Object Innovation to the Company's then majority
shareholder, Forval Corporation. Additionally, the Company
reported Changes in Control of the Registrant under item 5.01
whereby Foster Strategic Fund acquired 10,547,594 shares of PPOL,
representing 58.6% of PPOL's outstanding shares for approximately
$8,370,000. Additionally, the Company reported the Departure of
Directors or Principle Officers, Election of Directors and
Appointment of Principle Officers pursuant to Item 5.02.
(2) On April 11, 2005, the Company reported Other Events and
Regulation FD Disclosure pursuant to Item 8.01 wherein the
Company completed the change in control of the Company under
which Forval Corporation's ownership in PPOL was transferred to
Foster Strategic Fund.
(3) On May 24, 2005, the Company filed a Current Report on Form 8-K
pursuant to Item 5.02 whereby Mr. Yoshihiro Aota was appointed to
the board of directors and whereby Mr. Hisao Inoue announced his
intention to resign as Chief Executive Officer of the Company
effective August 2, 2005, the planned date of the annual
shareholders' meeting.
(4) On June 3, 2005, the Company filed a Current Report on Form 8-K
announcing the acquisition of K.K. U Service ("USC"), a Japanese
corporation, by purchasing all issued and outstanding shares for
$3,522,432 from a related party. Also, the Company announced the
sale of 2,549,129 shares of its common stock to 4 purchasers for
$10,196,516 in a private placement without registration under the
Securities Act of 1933 as amended.
36
(5) On July 13, 2005, the Company filed a Current Report on Form 8-K
announcing the anticipated delay in filing the Company's 10-K for
the fiscal year ended March 31, 2005.
(6) On July 26, 2005, the Company filed a Current Report on Form 8-K
announcing the circumstances surrounding the increase of the
number of shareholders of the Company.
(7) On August 23, 2005, the Company filed a Current Report on Form
8-K announcing that a hearing was scheduled on September 1, 2005
with the OTCBB Filings Department of the National Association of
Security Dealers to discuss the Company's SEC reporting status.
(8) On September 9, 2005, the Company filed a Current Report on Form
8-K pursuant to Item 4.01 announcing the resignation of
Stonefield Josephson, Inc. as the Company's independent
accountants.
(9) On September 22, 2005, the Company filed a Current Report on Form
8-K pursuant to Item 3.01 discussing the Company's failure to
file its annual and quarterly reports as well as the Company's
request to the NASD for a hearing to review this issue.
Furthermore, the Company reported pursuant to Item 4.01 that the
Company engaged Windes and McClaughry Accountancy Corporation to
succeed Stonefield Josephson as the Company's independent
accountants.
(10) On September 22, 2005, the Company filed an Amended Current
Report on Form 8-K/A pursuant to Items 4.01 and 9.01. In the
report the Company further discussed the circumstances of the
resignation of Stonefield Josephson, Inc. as the Company's
independent accountants and provided as an exhibit a letter from
Stonefield Josephson to the SEC regarding the Form 8-K filed by
the Company on September 9, 2005.
(11) On September 26, 2005, the Company filed an Amended Current
Report on Form 8-K/A pursuant to Item 4.01 discussing the change
in the Company's independent accountants from Stonefield
Josephson, Inc. to Windes and McClaughry Accountancy Corporation.
(12) On December 16, 2005, the Company filed a Current Report on Form
8-K pursuant to Item 5.02 announcing the resignation of Hisao
Inoue as Chief Executive Officer. Masao Yamamoto was chosen to
succeed his position.
(13) On January 25, 2006, the Company filed an Amended Current Report
in Form 8-K/A pursuant to Items 4.01 and 9.01 which discussed the
resignation of Stonefield Josephson, Inc., including a letter
from Stonefield Josephson to the SEC regarding the Form 8-K/A
filed by the Company on September 26, 2005.
(c) Exhibits:
2.0 Stock Purchase and Business Combination Agreement (1)
3.1 Articles of Incorporation and Amendments thereto (1)
3.2 Bylaws (1)
10.5 Purchase Agreement between PPOL, Inc. and Forval Corporation for
shares of Gatefor, Inc. and Object Innovation. (4)
10.15 Purchase Agreement, dated as of May 30, 2005, by and between
PPOL, Inc., a California corporation, K.K. Green Capital, a Japan
corporation, and K.K. U Service, a Japan corporation. (5)
10.16 Stock Purchase Agreement, dated as of May 30, 2005, between PPOL,
Inc., a California corporation, and K.K. Contents Provider Tokyo,
a Japan corporation. (5)
10.17 Stock Purchase Agreement, dated as of May 30, 2005, between PPOL,
Inc., a California corporation, and K.K. Seagull, a Japan
corporation. (5)
10.18 Stock Purchase Agreement, dated as of May 30, 2005, between PPOL,
Inc., a California corporation, and K.K. H.I. Consultants, a
Japan corporation. (5)
10.19 Stock Purchase Agreement, dated as of May 30, 2005, between PPOL,
Inc., a California corporation, and K.K. System Partners, a Japan
corporation. (5)
10.20 Registration Rights Agreement, dated May 30, 2005, between PPOL,
Inc., a California corporation and the INVESTORS (as defined). (5)
14.0 Code of Ethics (2)
21.0 Subsidiaries of PPOL (3)
31.1 Certifications of CEO Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (3)
37
31.2 Certifications of CFO Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (3)
32.0 Certifications of CEO and CFO Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (3)
99.1 Stock Purchase Agreement denoting change in control of
registrant. (1)
(1) Previously filed with the SEC as an exhibit to SC 13D, filed on April 15,
2005, and is incorporated herein by reference.
(2) Previously filed with the SEC as exhibit 14.0 to the Company's Form 10-K
filed, on June 29, 2004, and is incorporated herein by reference.
(3) Filed herewith.
(4) Previously filed with the SEC an exhibit to the Company's 8-k filed on April
4, 2005, and is incorporated herein by reference.
(5) Previously filed with the SEC an exhibit to the Company's 8-k filed on June
3, 2005, and is incorporated herein by reference.
38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on September 5, 2006.
PPOL, INC.
By: /s/ Masao Yamamoto
----------------------------------------
Masao Yamamoto, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on September 5, 2006.
SIGNATURE CAPACITY IN WHICH SIGNED
--------------------------- ------------------------------------------------
/s/ Masao Yamamoto Chairman of the Board of Directors and
--------------------------- Chief Executive Officer
Masao Yamamoto (Principal Executive Officer)
/s/ Richard Izumi Director and Chief Financial Officer
--------------------------- (Principal Financial Officer and Accounting
Richard Izumi Officer)
/s/ Yoshihiro Aota Director
---------------------------
Yoshihiro Aota
39
PPOL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2005, 2004 AND 2003
CONTENTS
PAGE
------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - 2006 41
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - 2005 and 2004 42
CONSOLIDATED FINANCIAL STATEMENTS:
Balance Sheets 43
Statements of Operations and Comprehensive (Loss) Income 44
Statements of Shareholders' Deficit 45
Statements of Cash Flows 46
Notes to Consolidated Financial Statements 47
40
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of PPOL, Inc.
We have audited the accompanying consolidated balance sheet of PPOL, Inc. and
its subsidiaries as of March 31, 2006, and the related consolidated statements
of operations and comprehensive (loss) income, shareholders' deficit, and cash
flows for the year ended March 31, 2006. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of PPOL, Inc. and its
subsidiaries as of March 31, 2006, and the results of its operations and its
cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States of America.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in the index appearing under
Item 15(a)(1) is presented for the purposes of complying with the Securities and
Exchange Commission's rules and is not a required part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in our audits of the basic financial statements and, in our opinion, is fairly
stated in all material respects in relation to the basic financial statements
taken as a whole.
/s/ Windes & McClaughry
Irvine, CA
August 1, 2006
41
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of PPOL, Inc.
Orange, California
We have audited the accompanying consolidated balance sheet of PPOL, Inc. and
its subsidiary as of March 31, 2005, and the related consolidated statements of
operations and comprehensive (loss) income (as restated), shareholders' deficit,
cash flows and financial statement schedule for each of the two years in the
period ended March 31, 2005, as listed in the appendix appearing under items
15(a)(1) and (2) of the Annual Report on Form 10-K. These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. We were not
engaged to perform an audit of the Company's internal control over financial
reporting. Our audit included consideration of internal control over the
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements, assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of PPOL, Inc. and its
subsidiary as of March 31, 2005, and the results of their operations and their
cash flows for each of the two years in the period ended March 31, 2005 (as
restated), in conformity with generally accepted accounting principles in the
United States of America. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
/s/ Stonefield Josephson, Inc.
CERTIFIED PUBLIC ACCOUNTANTS
Los Angeles, California
August 17, 2005, (Except for Footnote 2, as to which the date is September 6,
2006)
42
PPOL, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS MARCH 31, MARCH 31,
2006 2005
---------------- ----------------
CURRENT ASSETS:
Cash and cash equivalents........................................... $ 6,616,877 $ 12,007,537
Trade accounts receivable........................................... 387,592 1,321,755
Inventories......................................................... 2,108,211 1,064,082
Advance payments.................................................... -- 1,054,393
Deferred costs, current............................................. 38,972,218 49,130,889
Deferred income taxes, current...................................... 6,506,531 8,358,713
Prepaid expenses and other current assets........................... 1,221,656 515,905
---------------- ----------------
Total current assets........................................... 55,813,085 73,453,274
RESTRICTED CASH........................................................ 21,124,979 20,686,915
PROPERTY AND EQUIPMENT, NET............................................ 447,914 905,703
SOFTWARE, NET.......................................................... 6,171,046 10,131,128
DEFERRED COSTS, NON-CURRENT............................................ 24,126,665 36,999,841
DEFERRED INCOME TAXES, NON-CURRENT..................................... 3,990,423 5,315,246
LEASE DEPOSITS......................................................... 442,820 742,583
DEPOSITS............................................................... -- 4,240,842
OTHER ASSETS........................................................... 987,191 112,778
---------------- ----------------
$ 113,104,123 $ 152,588,310
================ ================
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable.................................................... $ 4,057,276 $ 12,665,017
Advances received................................................... 41,978 2,234,253
Loans payable - related party....................................... 0 1,115,760
Deferred revenue, current........................................... 53,439,556 68,075,963
Income taxes payable................................................ 31,431 1,025,126
Other current liabilities........................................... 839,018 2,209,746
---------------- ----------------
Total current liabilities...................................... 58,409,259 87,325,865
---------------- ----------------
ADVANCES RECEIVED, CUBE................................................ 21,124,979 20,686,915
DEFERRED REVENUE, NON-CURRENT.......................................... 31,092,345 49,106,165
---------------- ----------------
TOTAL LIABILITIES.............................................. 110,626,583 157,118,945
---------------- ----------------
COMMITMENTS & CONTINGENCIES (NOTE 9)
SHAREHOLDERS' DEFICIT:
Common stock; $0.001 par value; 100,000,000 shares authorized;
20,542,875 and 17,993,752 shares issued and outstanding as
of March 31, 2005 and 2004, respectively............................ 20,543 17,994
Additional paid-in capital............................................. 14,501,798 6,274,923
Total other comprehensive income....................................... 2,071,108 905,819
Accumulated deficit.................................................... (14,115,909) (11,729,371)
---------------- ----------------
Total shareholders' deficit.................................... 2,477,540 (4,530,635)
---------------- ----------------
$ 113,104,123 $ 152,588,310
================ ================
The notes are an integral part of these financial statements
43
PPOL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, 2006 MARCH 31, 2005 MARCH 31, 2004
-------------------- -------------------- --------------------
NET REVENUE:
Product Sales.......................................... 77,983,915 96,690,799 104,697,710
Service fee income..................................... 28,640,154 31,142,792 30,623,772
Consulting -- related parties.......................... 0 -- 483,858
-------------------- -------------------- --------------------
Total (Restated - Note 2)......................... 106,624,069 127,833,591 135,805,340
-------------------- -------------------- --------------------
COSTS AND EXPENSES
Cost of Sales - Goods (Restated - Note 2)................. 22,053,203 26,842,453 28,215,418
Cost of Sales - Services (Restated - Note 2).............. 8,361,781 7,864,701 4,369,847
Distributor incentives.................................... 47,203,479 62,106,377 67,976,680
Selling, general and administrative expenses.............. 28,310,587 28,783,491 23,831,706
-------------------- -------------------- --------------------
Total costs and expenses.......................... 105,929,050 125,597,022 124,393,651
-------------------- -------------------- --------------------
OPERATING INCOME.......................................... 695,019 2,236,569 11,411,689
-------------------- -------------------- --------------------
OTHER (INCOME) EXPENSE:
Interest expense....................................... 10,374 48,463 11,130
Others, net............................................ (110,384) 181,499 108,591
-------------------- -------------------- --------------------
Other (income) expense, net....................... (100,010) 229,962 119,721
-------------------- -------------------- --------------------
INCOME BEFORE INCOME TAXES AND DISCONTINUED OPERATIONS.... 795,029 2,006,607 11,291,968
-------------------- -------------------- --------------------
INCOME TAXES:
Current................................................ 4,562 1,618,916 2,217,544
Deferred............................................... 3,177,005 1,145,660 1,352,058
-------------------- -------------------- --------------------
Total income taxes................................ 3,181,567 2,764,576 3,569,602
-------------------- -------------------- --------------------
NET (LOSS) INCOME FROM CONTINUING OPERATIONS.............. (2,386,538) (757,969) 7,722,366
-------------------- -------------------- --------------------
DISCONTINUED OPERATIONS
Loss from discontinued segment, including no gain on
disposal............................................. -- 1,982,764 --
Income tax benefit..................................... -- -- --
-------------------- -------------------- --------------------
1,982,764 --
-------------------- -------------------- --------------------
NET (LOSS) INCOME......................................... (2,386,538) (2,740,733) 7,722,366
-------------------- -------------------- --------------------
OTHER COMPREHENSIVE INCOME (LOSS),
Foreign currency translation........................... 1,165,289 589,512 (2,894,527)
-------------------- -------------------- --------------------
COMPREHENSIVE (LOSS) INCOME............................... $ (1,221,249) $ (2,151,221) $ 4,827,839
==================== ==================== ====================
NET (LOSS) INCOME PER COMMON SHARE,
Basic.................................................. $ (0.12) $ (0.15) $ 0.43
==================== ==================== ====================
Diluted................................................ $ (0.12) $ ($0.15) $ 0.43
==================== ==================== ====================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING -
Basic.................................................. 20,130,825 17,993,752 17,994,376
==================== ==================== ====================
Diluted................................................ 20,130,825 17,993,752 17,994,376
==================== ==================== ====================
The notes are an integral part of these financial statements
44
PPOL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
COMMON STOCK ADDITIONAL CUMULATIVE OTHER TOTAL
---------------------------------- PAID-IN COMPREHENSIVE ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT CAPITAL (LOSS) INCOME DEFICIT DEFICIT
--------------- --------------- --------------- --------------- --------------- --------------
Balance, April 1,
2003.............. 17,994,920 17,995 3,367,157 3,210,834 (16,711,004) (10,115,018)
Foreign currency
translation
adjustment........ (2,894,527) (2,894,527)
Fractional share
liquidation....... (1,168) (1) (4,798) (4,799)
Net income........... 7,722,366 7,722,366
--------------- --------------- --------------- --------------- --------------- --------------
Balance, March 31,
2004.............. 17,993,752 17,994 3,362,359 316,307 (8,988,638) (5,291,978)
Capital contribution
from majority
shareholder (Note
7)................ 2,912,564 2,912,564
Foreign currency
translation
adjustment........ 589,512 589,512
Net (loss)........... (2,740,733) (2,740,733)
--------------- --------------- --------------- --------------- --------------- --------------
Balance, March 31,
2005.............. 17,993,752 17,994 6,274,923 905,819 (11,729,371) (4,530,635)
Issuance of Common
Stock............. 2,549,129 2,549 10,193,967 10,196,516
Foreign currency
translation
adjustment........ 1,165,289 1,165,289
Return of Capital to
Green Capital........ (1,967,092) (1,967,092)
Fractional share
liquidation (6) --
Net (loss)........... (2,386,538) (2,386,538)
--------------- --------------- --------------- --------------- --------------- --------------
Balance, March 31,
2006.............. 20,542,875 20,543 14,501,798 2,071,108 (14,115,909) 2,477,540
=============== =============== =============== =============== =============== ==============
The notes are an integral part of these financial statements
45
PPOL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, 2006 MARCH 31, 2005 MARCH 31, 2004
------------ ------------ ------------
CASH FLOWS PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Net (loss) income ......................................... $ (2,386,538) $ (2,740,733) $ 7,722,366
------------ ------------ ------------
ADJUSTMENTS TO RECONCILE NET (LOSS) INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization ........................... 3,421,770 4,377,326 2,507,399
Loss on sales/disposal of property, equipment
and software ......................................... 323,151 66,687 109,004
Loss on sale of investment .............................. -- 21,060 --
Deferred income taxes ................................... 3,177,005 1,145,660 1,352,058
CHANGES IN ASSETS AND LIABILITIES:
(INCREASE) DECREASE IN ASSETS:
Restricted cash ......................................... 13,400,765 (4,946,574) (5,218,440)
Trade accounts receivables .............................. 853,211 (1,023,287) (129,039)
Inventories ............................................. (1,052,521) 1,341,728 606,505
Advance payments ........................................ 897,446 (1,055,392) 3,649,199
Deferred costs .......................................... 16,287,827 10,960,350 26,597,010
Prepaid expenses and other current assets ............... (652,112) (556,454) 648,218
INCREASE (DECREASE) IN LIABILITIES:
Accounts payable, including related parties ............. (7,828,340) 1,735,891 1,416,414
Advances received ....................................... (2,079,238) 923,571 (379,936)
Advances received--Cube ................................. (13,400,765) 4,946,574 5,218,440
Deferred revenue ........................................ (23,525,932) (12,462,083) (33,680,432)
Income taxes payable .................................... (941,359) (14,718) 73,842
Other current liabilities ............................... (1,195,234) 400,462 899,916
------------ ------------ ------------
Total adjustments .................................... (12,314,326) 5,860,801 3,670,158
------------ ------------ ------------
Net cash (used for) provided by operating
activities ........................................ (14,700,864) 3,120,068 11,392,524
------------ ------------ ------------
CASH FLOWS PROVIDED BY (USED FOR) INVESTING ACTIVITIES:
Proceeds from sale of property, equipment and software 22,792 365,886 --
Purchase of property, equipment and software .............. (275,780) (7,164,787) (2,941,327)
Investment in Object Innovation ........................... -- (300,000) --
Proceeds from sale of Object Innovation ................... -- 278,940 --
Net (increase) decrease in deposits and other assets ...... 3,317,382 11,826 (2,331,190)
------------ ------------ ------------
Net cash provided by (used for) investing activities 3,064,394 (6,808,135) (5,272,517)
------------ ------------ ------------
CASH FLOWS PROVIDED BY (USED FOR) FINANCING ACTIVITIES:
Proceeds from loan payable - related party ................ -- 1,115,760 --
Capital contribution by majority shareholder
- Discontinued Operations ............................... -- 2,912,564 --
Return of Capital ......................................... (1,967,092) -- --
Loans repaid .............................................. (1,115,760) -- --
Proceeds from stock issuance .............................. 10,196,516 -- --
Fractional share liquidation............................... -- -- (4,799)
------------ ------------ ------------
Net cash provided by (used for) financing
activities ........................................ 7,113,664 4,028,324 (4,799)
------------ ------------ ------------
EFFECTS OF EXCHANGE RATE ..................................... (867,854) (416,276) 1,077,513
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ......... (5,390,660) (76,019) 7,192,721
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ................. 12,007,537 12,083,556 4,890,835
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR ....................... $ 6,616,877 $ 12,007,537 $ 12,083,556
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid ............................................. $ 5,575 $ 19,000 $ 11,130
============ ============ ============
Income taxes paid ......................................... $ 974,810 $ 2,457,000 $ 2,188,171
============ ============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES (See Note 7 - Forval)
The notes are an integral part of these financial statements
46
PPOL, INC.
NOTES TO CONSOLIDATED STATEMENTS
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION:
PPOL, Inc. ("PPOL" or the "Company" or "we") (Formerly Diversified
Strategies, Inc.), incorporated on May 19, 1993 in California, is
primarily engaged in sales of multi-functional telecommunications
equipment called SF-70 and U-Phone. The Company distributes SF-70 and
U-Phone 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 SF-70 and U-Phone, the Company provides original
telecommunication services called "UU Online," including SF-70 and
U-Phone bulletin board and mail services. The Company also provides
various other on-line services through UU Online such as sales of
products and services.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of PPOL,
Inc., and its wholly owned subsidiaries, AJOL Co., Ltd. ("AJOL"), K.K.
U-Service ("USC") and Gatefor, Inc. ("Gatefor"), which are all
Japanese corporations. Gatefor was disposed on March 31, 2005 and USC
was merged into AJOL on December 28, 2005. See Note 3 for additional
information on USC and Gatefor. All significant intercompany balances
and transactions have been eliminated upon consolidation.
GOING CONCERN
These financial statements have been prepared on the basis of PPOL
continuing as a "going concern" despite declining sales, losses
incurred in 2006 and 2005, working capital deficit in all three years
and shareholders' deficit in 2005 and 2004, and decline in cash as (1)
management has been able to adjust PPOL's organizational structure to
substantially reduce selling, general and administrative costs,
subsequent to March 31, 2006, (2) Shareholders' deficit at March 31,
2006 has been converted to a positive balance with an infusion of
capital during fiscal 2006, and (3) working capital deficit has been
reduced from a high of $13.9 million at March 31, 2005 to $2.6 million
at March 31, 2006. In addition the liquidation of deferred costs and
deferred revenues will not consume any cash being used or consumed. At
March 31, 2006 deferred costs exceeded deferred revenues by
$21,433,018.
VARIABLE INTEREST ENTITIES
PPOL has adopted Financial Accounting Standards Board Interpretation
No. 46(R) "Consolidation of Variable Interest Entities (revised
December 2003) - an Interpretation of ARB No. 51" ("FIN46(R)" for the
year ended March 31, 2004. The company must consolidate variable
interest entities ("VIE") if it has been deemed the primary
beneficiary of such entities. During the years ended March 31, 2006,
2005 and 2004, we were not the primary beneficiary of any VIEs.
BASIS OF PRESENTATION:
The Company's present and past subsidiaries in Japan have all
maintained its records and prepared its financial statements in
accordance with accounting principles generally accepted in Japan.
Certain adjustments and reclassifications have been incorporated in
the accompanying financial statements to conform to accounting
principles generally accepted in the United States of America ("U.S.
GAAP"). These adjustments were not recorded in the statutory books of
account. The principal adjustments relate to accounting for: (1)
revenue and related cost adjustments, (2) compensated absences and (3)
deferred assets and liabilities. The accounts of PPOL, on a stand
alone basis, are maintained in accordance with US GAAP.
47
RECLASSIFICATIONS:
Certain reclassifications have been made to the prior period
consolidated financial statements in order to conform to the current
period presentation.
During the fourth quarter of 2006, PPOL reclassified the presentation
of revenues and related cost of sales to Product sales and Service fee
income as line items in the statement of operations. Product sales
include revenues we derive from the sale of tangible products, net of
discounts, returns, and allowances, while Service fee income
represents revenues from services the Company has performed. This
reclassification conforms with requirements of SEC's Regulation S-X
Rule 5-03(b)(1) and (2). Previously our revenues were classified as
Product Sales and Network Services and Other-Online Products as line
items in the statement of operations. Both line items in each previous
classification include both sales of tangible products and revenues
from services. These reclassifications did not have any effect on
previously reported net income or shareholders' deficit.
TRANSLATION OF FOREIGN CURRENCY
Our subsidiaries' functional currency is the Japanese Yen and PPOL's
reporting currency is the United States Dollar. The Company translates
the foreign currency financial statements in accordance with the
requirements of Statement of Financial Accounting Standards ("SFAS")
No. 52," Foreign Currency Translation." Assets and liabilities are
translated at the exchange rate as of the respective balance sheet
dates and related revenues and expenses are translated at average
exchange rates in effect during the period. Resulting translation
adjustments are recorded as a separate component in shareholders'
equity (deficit). Foreign currency transaction gains and losses are
included in determining comprehensive income.
USE OF ESTIMATES:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management
to make estimates and assumptions that affect the reported amounts of
assets, liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ significantly from those estimates. The most
significant accounting estimates inherent in the preparation of the
Company's financial statements include estimates as to the appropriate
carrying value of certain assets and liabilities which are not readily
apparent from other sources, primarily deferred costs and deferred
revenue balances, and allowance for obsolete inventory.
CASH AND CASH EQUIVALENTS:
Cash and cash equivalents include all highly liquid investments,
generally with original maturities of three months or less, that are
readily convertible to known amounts of cash and are so near maturity
that they present insignificant risk of changes in value because of
changes in interest rates.
TRADE ACCOUNTS RECEIVABLE:
We record trade accounts receivable at net realizable value. This
value includes an appropriate allowance for estimated uncollectible
accounts to reflect any loss anticipated on the trade accounts
receivable balances and charged to the provision for doubtful
accounts. We calculate this allowance based on our history of
write-offs, level of past due-accounts based on the contractual terms
of the receivables, and our relationships with and economic status of
our customers.
FINANCIAL INSTRUMENTS:
The carrying amounts of the Company's financial instruments, which
include cash and cash equivalents, trade accounts receivable, accounts
payable, and advance payments approximate their fair values as of
March 31, 2006 and 2005.
48
INVENTORIES:
Inventories, consisting of purchased merchandise for resale, are
valued at the lower of cost (which is determined by the weighted
average method) or market, including provisions for obsolescence.
Inventories are shown net of an allowance for obsolescence of
$1,409,906 and $130,757 as of March 31, 2006 and 2005, respectively.
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost. Depreciation is computed
using the straight line and declining-balance methods at rates based
on the estimated useful lives of the related assets. The estimated
useful lives for leasehold improvements range from 3 to 15 years,
which approximate the life of the leases, while that for equipment is
2 to 3 years. Maintenance and repairs, including minor renewals and
betterments, are expensed as incurred.
RESTRICTED CASH 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. During the fiscal year ended
March 31, 2005, all such funds were turned over to U-Service
Friendship Association's ("USFA") predecessor, U-Service Mutual
Benefit Association (UMBA), formerly known as Kamome Mutual Benefit
Association and also referred to as Kamome Benefit Club, an unrelated
membership entity, 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) and simultaneously increased Restricted Cash and Advances
Received - Cube (a liability)dollar for dollar. Advance Payments,
which increase Restricted Cash and Advances Received - Cube, and
orders, which decrease Restricted Cash and Advances Received - Cube,
from distributors are received by the USFA 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 UMBA or USFA. We reviewed the
requirements of FIN46(R) and have determined UMBA and USFA are not
required to be consolidated.
STOCK-BASED COMPENSATION
The Company grants stock options with an exercise price equal to at
least the fair value of the stock at the date of grant. The Company
has elected to continue to account for its employee stock-based
compensation plans using an intrinsic value-based method of accounting
prescribed by Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB 25") and related Interpretations.
Under APB 25, because the exercise price of the Company's employee
stock options equals or exceeds the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
The Company has adopted only the disclosure provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation." It applies APB 25 and related
interpretations in accounting for its Stock Option Plan and does not
recognize compensation expense for its Stock Option Plan other than
for restricted stock and options issued to outside third parties.
The Company uses the Black-Scholes option valuation model. The
Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including
the expected stock price volatility. Because the Company's employee
stock options have characteristics significantly different from those
of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of employee stock options.
Pro forma information using the Black-Scholes method at the date of
grant was based on the following assumptions: average risk free
interest rate of 4.35% for 2006 and 4.34% for 2005 and 2004; dividend
yield of 0.0% for each of the years 2006, 2005 and 2004; average
volatility factor of the expected market price of the Company's common
stock of 262% for 2006, 251% for 2005 and 216% 2004; and an expected
life of the options of 10 years for 2006, 2005 and
2004.
Had compensation cost for the Company's stock-based compensation plans
been determined based on the fair value at the grant dates for awards
under those plans consistent with the method of FASB Statement 123,
the Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated below:
49
Years ended
March 31:
2006 2005 2004
------- ------- -------
Net income (loss) as reported (in thousands $) (2,387) (2,741) 7,723
Stock compensation calculated under APB25 (in thousands $) -- -- --
Stock compensation calculated under SFAS 123 (in thousands $) (1,041) (990) --
------- ------- -------
Pro forma (in thousands $) (3,428) (3,731) (935)
======= ======= =======
Basic earnings per share as reported (0.12) (0.15) 0.43
Pro forma (0.17) (0.21) 0.43
Diluted earnings per share as reported (0.12) (0.15) 0.43)
Pro forma (0.17) (0.21) 0.43)
On December 16, 2004, the Financial Accounting Standards Board
("FASB") issued Statement No. 123 (revised 2004), "Share-Based
Payment," which is a revision of Statement 123. Statement 123(R)
supersedes Opinion 25, and amends FASB Statement No. 95, Statement of
Cash Flows. Generally, the approach in Statement 123(R) is similar to
the approach described in SFAS No. 123. However, SFAS No. 123(R)
generally requires share-based payments to employees, including grants
of employee stock options and purchases under employee stock purchase
plans, to be recognized in the statement of operations based on their
fair values. Pro forma disclosure of fair value recognition will no
longer be an alternative. SFAS No. 123(R) permits public companies to
adopt its requirements using one of two methods:
Modified prospective method: Compensation cost is recognized beginning
with the effective date of adoption (a) based on the requirements of
SFAS No. 123(R) for all share-based payments granted after the
effective date of adoption and (b) based on the requirements of SFAS
No. 123 for all awards granted to employees prior to the effective
date of adoption that remain unvested on the date of adoption.
Modified retrospective method: Includes the requirements of the
modified prospective method described above, but also permits
restatement using amounts previously disclosed under the pro forma
provisions of SFAS No. 123 either for (a) all prior periods presented
or (b) prior interim periods of the year of adoption.
In April 2005, the SEC announced that the effective transition date
for SFAS No. 123(R) would be extended to annual periods beginning
after June 15, 2005. We are required to adopt this new standard on
April 1, 2006, with early-adoption permitted.
COMPUTER SOFTWARE:
The Company follows the guidance in Statement of Position ("SOP") 98-1
"Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use". SOP 98-1 requires that entities capitalize certain
internal-use software costs once certain criteria are met. Under SOP
98-1, overhead, general and administrative and training costs are not
capitalized. Capitalized software costs are being amortized on a
straight-line basis principally over 5 years. The Company reviews the
carrying value of Computer Software on a quarterly basis or whenever
events and circumstances indicate that the carrying value of an asset
may not be recoverable.
ADVANCES RECEIVED:
Advances received represent the balance of customer receipts prior to
shipment. Upon shipment, the balances transfer to deferred revenue
where it then is amortized into revenue in accordance with the
Company's revenue recognition policy.
IMPAIRMENT OF LONG-LIVED ASSETS:
The Company accounts for the impairment of long-lived assets in
accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." The statement provides a single
accounting model for the disposal of long-lived assets. New criteria
must be met to classify the asset as an asset held-for-sale. This
statement also focuses on reporting the effects of a disposal of a
segment of a business. The Company disposed of its Gatefor, Inc.
subsidiary on March 31, 2005.
50
REVENUE RECOGNITION:
Revenue from SF-70 and U-Phone product sales made prior to December
31, 2005, was recognized over the weighted average customer
relationship period of three years.
The revenue and associated costs deferred for revenue recognition
purposes are recorded as deferred revenue and deferred costs,
respectively. Deferred costs are comprised of costs of the SF-70 and
U-Phone hardware and distributors incentive commissions. Deferred
costs are directly related to deferred revenues. Deferred costs are
amortized into income over the weighted average customer relationship
period of three years or the online subscription period of one year,
as applicable.
Revenue from sales of annual online subscription services to UU Online
is recognized over one year. Revenue from SF-70 and U-Phone product
sales made after December 31, 2005, is recognized upon delivery of the
product. This change is attributable to the elimination of revenue
arrangements with multiple deliverables. Previously, a purchaser was
required to purchase the SF-70 and U-Phones with online subscription
services to UU-Online. After December 31, 2005, this requirement was
eliminated. A customer can now elect to not purchase any Online
subscriptions or purchase them in one month increments.
Revenue from other on-line services provided through UU Online
Services is recognized upon the delivery of underlying products,
including U-Brand products, or services. We also generate commissions
from ticket sales to tours, events and concerts which our UU Online
subscribers can purchase through the UU Online network.
SEGMENT INFORMATION:
The Company currently operates in one segment. Sales of the SF-70 and
U-Phone product, sales of the UU Online Services that represents sales
of online subscriptions services which enables access to the Company's
facsimile based network and database, and sales of the granting of a
distributor license are considered as one segment as each of the
Company's products and services are dependent upon one another. UU
Online Services are not useable without the SF-70 and U-Phone
hardware. The most advantageous use of SF-70 and U-Phone hardware's
functions are through the use of UU Online Services although not
required. Because of the interdependencies, the Company is considered
to operate in one segment.
RESEARCH AND DEVELOPMENT EXPENSE:
Research and development costs are charged to expense when incurred.
They are a component of Selling, general and administrative expenses.
Research and development expenses for the years ended March 31, 2006,
2005 and 2004 were $2,120,249, $279,204, and $1,653,331, respectively.
SHIPPING AND HANDLING COSTS:
Shipping and handling costs are included in selling, general and
administrative expenses. The amount of shipping and handling costs for
the fiscal years ended March 31, 2006, 2005 and 2004 was $966,909,
$1,166,912,and $1,121,323, respectively.
INCOME TAXES:
Income taxes are provided based on the asset and liability method of
accounting pursuant to SFAS No. 109, "Accounting for Income Taxes".
Deferred income taxes are recorded to reflect the tax consequences on
future years of differences between the tax basis of assets and
liabilities and their financial reporting amounts at year-end. These
deferred taxes are measured by applying currently enacted tax laws.
Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or
all of the deferred tax assets will not be realized.
Income taxes on the impact of foreign currency translation is not
provided for as earnings from AJOL, our subsidiary in Japan, is
considered to be indefinitely reinvested.
51
COMPREHENSIVE INCOME:
SFAS No. 130, "Reporting Comprehensive Income," establishes standards
for the reporting and display of comprehensive income and its
components in the consolidated financial statements. Other
comprehensive income, and cumulative other comprehensive income, for
the Company for the years ended March 31, 2006, 2005 and 2004 was
primarily from the effects of foreign currency translation
adjustments.
EARNINGS PER SHARE:
The Company reports both basic earnings per share, which is based on
the weighted average number of common shares outstanding and diluted
net income per share, which is based on the weighted average number of
common shares outstanding and dilutive potential common shares.
Stock options to purchase approximately 1,300,000, 1,300,000, and
1,220,000 shares of common stock during fiscal 2006, 2005 and 2004,
respectively, were outstanding but not included in the computation of
diluted earnings per common share because PPOL had a loss in fiscal
2006 and 2005 and the option exercise price was greater than the
average market price of the common stock in fiscal 2004, and
therefore, the effect on dilutive earnings per common share would have
been anti-dilutive.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and
Error Corrections" which replaces Accounting Principles Board Opinion
("APB") No. 20 "Accounting Changes" and SFAS No. 3, "Reporting
Accounting Changes in Interim Financial Statements--an Amendment of
APB Opinion No. 28" and changes the requirements for the accounting
for, and reporting of, a change in accounting principle. SFAS 154
requires retrospective application to prior period financial
statements (to the extent practicable) of changes in accounting
principle instead of recognition of the cumulative effect of the
change in net income in the period of the change as required by APB
No. 20. SFAS 154 also requires that a change in depreciation or
amortization be accounted for as a change in accounting estimate
affected by a change in accounting principle. SFAS 154 is effective
for accounting changes made by PPOL after January 1, 2006. Management
continues to evaluate the effect that adoption of SFAS 154 will have
on PPOL's consolidated results of operations and financial position.
In November 2005, the FASB issued Staff Position ("FSP") Nos. FAS
115-1 and 124-1, "The Meaning of Other-Than-Temporary Impairment and
Its Application to Certain Investments." This FSP addresses the
determination as to when an investment is considered impaired, whether
the impairment is 'other-than-temporary', and the measurement of an
impairment loss. The investment is impaired if the fair value is less
than cost. The impairment is 'other-than-temporary' for equity
securities and debt securities that can contractually be prepaid or
otherwise settled in such a way that the investor would not recover
substantially all of its cost. If 'other-than-temporary', an
impairment loss shall be recognized in earnings equal to the
difference between the investment's cost and its fair value. The
guidance in this FSP is effective in reporting periods beginning after
December 15, 2005. The Company will review FSP Nos. FAS 115-1 and
124-1, but does not expect the adoption of this FSP to have a material
impact on its operating results or financial position.
(2) CORRECTION OF AN ERROR IN PREVIOUSLY ISSUED FINANCIAL STATEMENTS
During the fourth quarter of 2006, PPOL has determined it has made an
error in prior periods in its application of accounting principles.
The error involved the reporting of revenues gross as a principal when
we should have reported them net as an agent as our involvement in
such transactions was not as their primary obligor and we did not any
economic risk of carrying inventory or credit risk. The impact of the
accounting error was to overstate both sales and cost of sales by
$2,223,959 for the year ended March 31, 2005 and $1,018,962 for the
year ended March 31, 2004. Prior year information has been restated to
conform to current year presentation.
For financial reporting purposes, this error has been accounted for as
a prior period adjustment in accordance with APB Opinion 20,
Accounting Changes. There was no effect of this correction on income
before income taxes and discontinued operations, net (loss) income and
net (loss) earnings per common share during the years ended March 31,
2005 and 2004.
(3) DISPOSAL OF BUSINESS SEGMENT:
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.
Gatefor, Inc. ("Gatefor") was incorporated in Japan on June 16, 2004. PPOL
was the sole shareholder of 30,000 shares of Gatefor common stock or 100%
of the issued and outstanding stock of Gatefor. Gatefor was created to
implement a strategy of the Company and was to act as the distributor of US
and European sourced technologies into Japan. With Gatefor, the Company had
two operating segments: 1) network communications through sales of SF-70
and U-Phone and related services by AJOL and 2) technology sales by
Gatefor. These segments were determined based on the nature of products and
services and their respective channels of distribution. On March 31, 2005,
the Company sold its entire interest in Gatefor to Forval Corporation,
PPOL's majority shareholder up to such date. Thus, at March 31, 2005, the
Company again operates in one reportable business segment. See Note (7),
related party transactions.
52
Revenues and pretax loss from Gatefor approximated $270,000 and $1,980,000,
respectively, during the fiscal year ended March 31, 2005. There is no
income tax benefit from the pretax loss of Gatefor as it is not likely PPOL
can utilize such losses to offset future income. See Note (7) for further
information.
(4) PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
YEAR ENDED MARCH 31:
-----------------------------------------------
2006 2005
---------------------- ----------------------
Leasehold improvements.................... $ 101,709 $ 285,838
Office equipment.......................... 1,952,094 2,690,687
Less: accumulated depreciation............ (1,605,889) (2,070,822)
---------------------- ----------------------
Property & Equipment, net.............. $ 447,914 $ 905,703
====================== ======================
Software.................................. $ 9,252,781 $ 14,028,195
Less: accumulated amortization............ (3,081,735) (3,897,067)
---------------------- ----------------------
Software, net............................. $ 6,171,046 $ 10,131,128
====================== ======================
Depreciation and amortization of property and equipment totaled $3,421,770,
$4,377,326, and $2,507,399 for the years ended March 31, 2006, 2005 and
2004, respectively.
(5) FINANCING ARRANGEMENTS:
On March 31, 2006, the Company had a $4,252,135 line of credit with its
bank which accrues interest at 1.19% above Japan's money market rate. There
were no outstanding balances as of March 31, 2006 and 2005 under this line
of credit that expires on August 31, 2006.
On March 31, 2005, the Company borrowed $1,115,760 and an additional
$275,115 from a shareholder at 2.375% interest. The loan was repaid in full
on June 2, 2005.
(6) INCOME TAXES:
PPOL files stand-alone tax returns in the US as it is not permitted to file
consolidated tax returns with its Japanese subsidiary, AJOL. In Japan, AJOL
files its own separate tax returns. Income taxes imposed by the national,
prefecture and municipal governments of Japan resulted in a normal
statutory tax rate of approximately 42.1% for the fiscal year ended March
31, 2003. In fiscal year 2004, new Japanese legislation has changed rates
effective for the year ending March 31, 2005. The deferred tax assets
expected to be reversed in or after the year ending March 31, 2005 are
calculated at the new effective tax rate of 40.7%.
PPOL, on a stand-alone basis, does not conduct revenue generating
activities. Its primary source of income has been and will continue to be
dividends from AJOL for the foreseeable future. Thus, PPOL on a stand-alone
basis is not expected to have any taxable income unless it receives
dividends from its operating subsidiaries. At March 31, 2006, PPOL has net
operating loss carry forwards of approximately $1.2 million and $2.5
million for federal and California reporting purposes, respectively,
expiring through March 31, 2025. PPOL has provided a 100% valuation
allowance on such loss carryforwards as it is not likely that it can
utilize such losses to offset income in the future.
INCOME TAXES
INCOME BEFORE ----------------------------------------------
INCOME TAXES CURRENT DEFERRED TOTAL
-------------- -------------- -------------- --------------
2006
Japan $ 2,406,023 3,762 3,177,005 3,180,767
US (1,610,994) 800 -- 800
-------------- -------------- -------------- --------------
$ 795,029 4,562 3,177,005 3,181,567
============== ============== ============== ==============
2005
Japan $ 4,452,928 $ 1,581,475 $ 1,145,660 $ 2,727,135
US (2,446,321) 37,441 -- 37,441
-------------- -------------- -------------- --------------
$ 2,006,607 $ 1,618,916 $ 1,145,660 $ 2,764,576
============== ============== ============== ==============
2004
Japan $ 12,016,229 $ 2,250,413 $ 1,352,058 $ 3,602,471
US (724,261) (32,869) -- (32,869)
-------------- -------------- -------------- --------------
$ 11,291,968 $ 2,217,544 $ 1,352,058 $ 3,569,602
============== ============== ============== ==============
53
A reconciliation between the statutory tax rate and the effective income
tax rate is as follows:
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, 2006 MARCH 31, 2005 MARCH 31, 2004
-------------------- -------------------- --------------------
Normal statutory tax rate............... 40.7% 40.7% 40.7%
Entertainment and other non-deductible
expenses............................. 17.4 18.8 2.6
Effect of non-deductibility of US
Losses............................... 82.5 49.6 2.6
Effect on non-deductibility of acquired
entity's losses...................... 122.1
Foreign currency translation............ 137.0 23.0 -17.9
Other................................... .5 5.7 3.6
-------------------- -------------------- --------------------
Effective tax rate...................... 400.2% 137.8% 31.6%
==================== ==================== ====================
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets are as follows:
YEAR ENDED YEAR ENDED
MARCH 31, 2006 MARCH 31, 2005
-------------------- --------------------
Deferred tax assets (liabilities):
Deferred revenue............................. $ 34,396,031 $ 47,681,408
Deferred cost................................ (25,674,935) (35,046,594)
Excess of accrued bonus...................... 21,660 140,840
Resort membership admission fees............. 254,473 278,220
Accrued compensated absences................. 17,697 81,480
Excess depreciation and amortization......... 33,022 53,430
Inventory write-down......................... 573,689 20,470
Net operating losses 816,784 --
Others....................................... 58,533 464,705
-------------------- --------------------
Net deferred tax assets - Japan.............. 10,496,954 13,673,959
-------------------- --------------------
Net operating losses......................... 1,305,828 650,315
-------------------- --------------------
Net deferred tax assets - US................. 1,305,828 650,315
-------------------- --------------------
Net deferred tax assets - combined........... 11,802,775 14,324,274
Valuation allowance.......................... (1,305,828) (650,315)
-------------------- --------------------
Total deferred tax assets............... $ 10,496,954 $ 13,673,959
==================== ====================
Management believes that it is more likely than not that all of the
deferred tax assets attributable to operations in Japan will be realized
through future earnings, tax planning or future reversals of existing
temporary differences. Accordingly, no valuation allowance is recorded for
the Japan deferred tax assets as of March 31, 2006 and 2005.
The increase in deferred tax assets from fiscal 2005 to 2006 in the United
States is entirely from net operating losses of PPOL on a stand-alone basis
in fiscal 2006. PPOL does not have any revenue sources other than through
its subsidiary in Japan. As it is our intention to reinvest earnings for
future growth, management is uncertain of the realization of the tax
benefit associated with deferred tax assets attributable to net operating
losses in the United States. Accordingly, there is a 100% valuation
allowance for losses incurred in the United States at March 31, 2006 and
2005. The valuation allowance increased by $655,513 and $576,272 between
March 31, 2006 to 2005, and March 31, 2005 and 2004, respectively. At March
31, 2006, PPOL's net operating loss carry forward was approximately
$3,210,000 in the U.S. expiring through 2026 and $2,000,000 in Japan,
expiring through 2011.
54
(7) RELATED PARTY TRANSACTIONS:
GREEN CAPITAL
On May 30, 2005, the Company completed the acquisition of K.K. U Service, a
Japanese corporation ("USC") based in Tokyo, Japan pursuant to a Purchase
Agreement dated May 30, 2005, by and between the Company, USC and K.K.
Green Capital, a Japan corporation (the Seller or Green Capital). The
Company purchased all of the issued and outstanding shares of USC for
$3,522,000. Seller is the majority investor in Foster Strategic Investment
Partnership (FSIP), a Singapore partnership, which owns approximately
10,547,594 shares of the Company's common stock, representing approximately
51.34% of the Company's issued and outstanding stock.
The following summarizes the assets acquired and liabilities assumed in
connection with the acquisition described in the preceding paragraph:
Current assets $ 899,000
Deposits 1,455,000
Intangibles 84,000
------------
Total assets acquired 2,438,000
Liabilities assumed (883,000)
------------
Net assets acquired $ 1,555,000
============
The purchase price represented a significant premium over the recorded net
worth of USC's assets. In determining to pay this premium, we considered
various factors, including the opportunities that USC offers to enhance our
future growth opportunities, synergies with our present operations, cost
and time advantages of establishing a comparable company on our own,
contacts with prospective vendors and elimination of a potential
competitor.
By virtue of the Seller's relationship with FSIP, it has been determined
that PPOL and USC are de facto entities under common control. Accordingly,
we have accounted for the acquisition of USC in a manner that is similar to
the pooling method to comply with paragraph 11 of Financial Accounting
Standards Board's Statement of Financial Accounting Standards Statement No.
141 Business Combinations. For accounting purposes, the excess of purchase
price over the net assets of USC will be treated as a return of capital to
Green Capital.
ADVANCED COMMUNICATIONS
During Fiscal 2006, PPOL entered into the following transactions with
Advanced Communications K.K., a Japanese corporation that is 79.55% owned
by Green Capital:
Inventory purchases $12,123,000
Information technology services 13,925,000
-----------
$26,048,000
===========
Information technology services, above, includes $2,120,000 in research and
development activities for the enhancement of our U-Phones' functional
features.
SEAGULL
During Fiscal 2006, PPOL entered into the following transactions with K.K.
Seagull (Seagull), a Japanese corporation and shareholder of 926,956 shares
the Company's common stock:
Sales promotion activities $ 5,197,000
Events planning and production 1,451,000
Information technology services 212,000
-----------
$ 6,860,000
===========
FORVAL
Effective March 31, 2005 (the "Effective Date"), the Company entered into a
Purchase Agreement (the "Purchase Agreement"), as discussed below, with
Forval, which at the time of the Effective Date owned approximately
10,547,594 shares of common stock of the Company, representing
approximately 58.62% of the Company's issued and outstanding common stock.
Forval's Chief Executive Officer ("CEO"), Hideo Ohkubo, also served as the
CEO and Chairman of the Board of the Company at the time of the Effective
Date of the Purchase Agreement.
55
The Company was the 100% owner of the common stock of Gatefor (the "Gatefor
Shares"), a Japan joint stock company.. The Company was also the owner of
1,500 shares (the "OI Shares") of common stock of Object Innovation, Inc.,
a Florida corporation ("OI") representing a 15% interest in OI.
The Company and OI were parties to a certain Exclusive Distribution
Agreement, dated May 26, 2004 (the "Exclusive Distribution Agreement),
which agreement the Company assigned (the "Assignment") to Gatefor pursuant
to that certain Exclusive Distribution Right License
Agreement (the "Distribution Right License Agreement"), dated October 1,
2004, between the Company and Gatefor. In connection with the Assignment,
OI and Gatefor entered into a revised letter of understanding, dated August
11, 2004 (the "Revised Letter of Understanding"), providing for, among
other things, OI's right to purchase 5% of the equity of Gatefor and
certain payments to be made by Gatefor to OI.
In furtherance of the Purchase Agreement, the Company sold to Forval the
Gatefor Shares and the OI Shares, and assigned to Forval the Company's
receivable from Gatefor (the "Gatefor Receivable") in the principal amount
of $1,643,000, plus accrued interest. The Purchase Agreement approximately
valued the Gatefor Shares at $1,395,000, and the OI Shares at $279,000.
In connection with Forval's acquisition of the Gatefor Shares, OI Shares
and Gatefor Receivable, Forval cancelled the Company's debt to Forval in
the principal amount of approximately $3,161,000 plus accrued interest, and
further paid the Company approximately $143,000. As further consideration
in the transaction, the Company assigned to Forval all of the Company's
right, title and interest in and to, and Forval assumed all obligations
under, the Exclusive Distribution Agreement and the Distribution Right
License Agreement, except that the payment of approximately $930,000
previously made by Gatefor to the Company pursuant to the Distribution
Right License Agreement was deemed non-refundable.
For accounting purposes, the transaction described in the preceding
paragraph, the difference between the sum of amount of Forval's
cancellation of the Company's debt plus accrued interest, approximately
$143,000 cash consideration, combined with approximately $930,000 deemed
non-refundable and PPOL's net book value in Gatefor immediately preceding
the transaction was accounted for as a capital contribution from the then
majority shareholder, Forval.
A Special Committee (the "Committee") of independent directors of the
Company's Board of Directors was formed to review the terms and conditions
of the Purchase Agreement. The Committee approved the Company's execution,
delivery and performance of the Purchase Agreement.
PPOL entered into separate agreements with Forval and Leo Global Fund,
which collectively held approximately 94% the Company's common stock, in
which PPOL was to provide certain consulting services during fiscal 2003.
As provided for in the agreements, PPOL received a prepayment of $483,858
from Forval and Leo Global Fund in fiscal 2003. Since the Company did not
complete the consulting services called for in the agreements prior to
March 31, 2003, the payments received were included in "deferred revenue,"
as a liability, at March 31, 2003. The consulting services were completed
in fiscal 2004 at which time the consulting revenues were recognized. There
is no assurance that PPOL will receive such projects from Forval and Leo
Global Fund in the future.
UMBA
The Company has received $9,779,145, $11,166,830, and $10,426,425 during
the years ended March 31, 2006, 2005 and 2004, respectively, in service fee
income from UMBA for providing certain administrative services in
connection with their insurance operations.
OTHER
Prior to his employment as CFO with PPOL, Inc., which began on March 31,
2005, Richard Izumi served the Company as a consultant through his
consulting company, ECO2 Pacific Partners, LLC. We paid ECO2 Pacific
Partners, LLC $225,000 and $284,000 in the years ending March 31, 2005 and
March 31, 2004, respectively.
Tax services were performed by Izumi & Co. whose principal officer is Ms.
Miwa Izumi. Ms. Izumi is the spouse of our CFO, Richard Izumi. The Company
paid $8,000 and $12,000 to Izumi & Co. for tax planning and compliance
related matters in the fiscal years ended March 31, 2006 and 2005,
respectively.
(8) STOCK OPTIONS:
The Company established a stock option plan in March 2004 (the "2004
Plan"). In accordance with the 2004 Plan, the Company is authorized to
issue incentive stock options and non-qualified stock options for up to
2,000,000 shares of the Company's common stock to employees, directors and
consultants.
56
A total of 1,220,000 options were granted to employees on March 25, 2004
which vested 100% on March 25, 2006 (options cliff vest two years
after the grant date) and expire on March 25, 2014 (ten years after the
grant date). A summary of the Company's stock option plan activity is
presented below:
WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
-------------------- --------------------
Outstanding at March 31, 2004...... 1,220,000 $ 4.00
Granted............................ 80,000 4.00
Exercised.......................... -- --
Forfeited.......................... -- --
Expired............................ -- --
-------------------- --------------------
Outstanding at March 31, 2005...... 1,300,000 $ 4.00
-------------------- --------------------
Granted............................ -- --
-------------------- --------------------
Exercised.......................... -- --
-------------------- --------------------
Forfeited.......................... -- --
-------------------- --------------------
Expired............................ -- --
-------------------- --------------------
Outstanding at March 31, 2006...... 1,300,000 $ 4.00
==================== ====================
The following table summarizes information about the stock options
outstanding and exercisable at March 31, 2006:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- ----------------------------
WEIGHTED
FISCAL AVERAGE WEIGHTED WEIGHTED
YEAR RANGE OF REMAINING AVERAGE AVERAGE
OPTIONS EXERCISE CONTRACTUAL EXERCISE EXERCISE
GRANTED PRICES OPTIONS LIFE PRICE OPTIONS PRICE
------------- ------------- ------------- ------------- ------------- ------------- -------------
2004....... $ 4.00 1,220,000 8.00 $ 4.00 1,220,000 $ 4.00
2005....... $ 4.00 80,000 8.25 $ 4.00 80,000 $ 4.00
2006....... - - - - -
------------- ------------- ------------- ------------- -------------
Total.... 1,300,000 8.02 $ 4.00 1,300,000 $ 4.00
============= ============= ============= ============= =============
(9) COMMITMENTS:
Commitments
PPOL leases certain operating facilities and equipment under noncancelable
operating leases expiring at various dates through 2009. Rent expense for
fiscal years ended March 31, 2006, 2005, and 2004 were approximately
$1,081,212, $997,150, and $958,000, respectively. Additionally, the Company
has various professional consulting service contracts in effect which
collectively require payments in the future.
At March 31, 2006 minimum non-cancelable payments to be made in the future
are as follows:
Year ending Operating Consulting
March 31, leases services
2007 $ 513,169 $ 73,349
2008 $ 178,100 $ --
2009 $ 9,680 $ --
Thereafter $ -- $ --
Contingencies
PPOL is a party to various lawsuits, and claims that arise in connection
with its business. PPOL evaluates such matters on a case by case basis, and
its policy is to vigorously contest any such claims it believes are without
merit. PPOL is currently involved in certain legal proceedings. When a loss
is considered probable in connection with litigation or governmental
proceedings and the loss amount can be reasonably estimated within a range,
we record the minimum estimated liability related to the claim if there is
no best estimate in the range. As additional information becomes available,
we assess the potential liability related to the legal proceedings and
revise those estimates. Revisions in estimates of the potential liability
could materially impact our results of operations in the period of
adjustment. However, in the opinion of management, such matters will not
have a material impact on the financial position, results of operations or
cash flows based on information available at this time.
57
(10) CONCENTRATION OF CREDIT RISK:
Financial instruments that potentially subject the Company to concentration
of credit risk consist of trade receivables and cash and cash equivalents.
The Company collects a significant portion of payments from the ultimate
customers through major credit card and loan companies. One credit company
comprised 83.7% and 34.0% of accounts receivable at March 31, 2006 and
2005, respectively. The Company maintains cash deposits with major Japanese
and U.S. banks. The Company periodically assesses the financial conditions
of the institutions and believes that the risk of any loss is minimal.
58
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED MARCH 31, 2006, 2005 AND 2004
BEGINNING ADDITIONS NON-CASH ENDING
BALANCE CHARGED TO (REDUCTIONS) BALANCE
DESCRIPTION ACCRUAL INCOME OR ADDITIONS REVERSAL ACCRUAL
------------------------------- ------------------ ------------------ ------------------ ------------------ ------------------
Provision for doubtful
receivable
2006............. (0) -- -- -- (0)
2005............. (0) -- -- -- (0)
2004............. 212 -- -- (212) (0)
Provision for inventory
obsolescence
2006............. 50,316 -- 1,400,170 (40,580) 1,409,906
2005............. 130,757 -- (4,000) (76,441) 50,316
2004............. 401,636 120,617 30,940 (422,436) 130,757
59