================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------------
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, 2007 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 jurisdiction (Commission File No.) (IRS Employer
of incorporation) Identification No.)
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 [] No [X]
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 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 March 31, 2008, 205,146 shares of PPOL, Inc.'s common stock, $0.001
par value per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE. Certain exhibits of PPOL, Inc. previously
filed with the SEC are incorporated by reference in item 15 of this report.
================================================================================
PPOL, INC.
FORM 10-K
TABLE OF CONTENTS
PART I 3
ITEM 1. Business 3
ITEM 1A. Risk Factors 13
ITEM 2. Properties 18
ITEM 3. Legal Proceedings 18
ITEM 4. Submission of Matters to A Vote of Security Holders 19
PART II 20
ITEM 5. Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities 20
ITEM 6. Selected Financial Data 21
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 22
ITEM 7a. Quantitative and Qualitative Disclosures About Market Risk 30
ITEM 8. Financial Statements and Supplementary Data 30
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 30
ITEM 9A. Controls and Procedures 30
PART III 31
ITEM 10. Directors and Executive Officers of the Registrant 31
ITEM 11. Executive Compensation 33
ITEM 12. Security Ownership of Certain Beneficial Owners and Management 35
ITEM 13. Certain Relationships and Related Party Transactions 37
ITEM 14. Principal Accountant Fees and Services 37
PART IV 38
ITEM 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 38
Signatures 40
Financial Statements 41
Exhibit 21 Subsidiaries of PPOL 65
Exhibit 31.1 CEO Certification 66
Exhibit 31.2 CFO Certification 67
Exhibit 32.0 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 68
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 UNCERTAINTY IN THE JAPANESE ECONOMY, WEAKENING OF THE
JAPANESE YEN, FAILURE OF PLANNED INITIATIVES TO GENERATE CONTINUED INTEREST AND
ENTHUSIASM 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.
Our total assets, in millions, were $56, $113 and $153 at March 31,
2007, 2006, and 2005, respectively.
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-Phone hardware that are 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) service fees and commissions.
Our revenues, in millions, are allocated as follows:
SF-70 AND U-PHONES CONSUMER PRODUCTS,
HARDWARE SUBSCRIPTIONS COMMISSIONS & OTHER TOTAL
-------- ------------- ------------------- -----
% OF % OF % OF % OF
FISCAL YEAR TOTAL TOTAL TOTAL TOTAL
ENDED MARCH 31: SALES SALES SALES SALES SALES SALES SALES SALES
--------------- ----- ----- ----- ----- ----- ----- ----- ------
2007....... $ 48 69.6% $ 11 15.9% $ 10 14.5% $ 69 100.0%
2006....... 73 68.2% 14 12.7% 20 19.0% 107 100.0%
2005....... 92 71.6% 14 11.3% 22 17.1% 128 100.0%
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.
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.
3
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 levels 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 Advance
Communications K.K., a Japanese corporation, (Advanced Communications) under a
one year contract, effective November 19, 2003, that 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
contract, 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, use of plain paper and enhanced
email functions. 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 obtains Internet access 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 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.
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 4.52% 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.
4
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
in addition, 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 co-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 that 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 offerings include bulletin boards, mail, and information
exchange services. 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 co-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.
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 co-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.
5
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
------------------------ ---------------------
2007...... 450
2006...... 337
2005...... 494
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 are 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.
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 from UMBA. The respective Chairmen
and BOT of USFA and UMBA are not employees of AJOL.
6
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, 2007, the cumulative 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 co-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.
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.
7
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 326 outlets
referred to as "Cabins" as of March 31, 2007 where prospective members can
receive live demonstrations of the SF-70 and U-Phones. The number of "Cabins"
has declined significantly from March 31, 2006 when we had over 1,000 as a
result of our change to direct marketing from our previous network marketing. In
direct marketing, "Cabins'" role for revenue generation is no longer critical.
The "Cabins" are independently operated by subscribers who are also
distributors.
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
As previously reported in the Company's Form 8-K, filed with the
Securities and Exchange Commission ("the Commission") on March 8, 2007, and in
the Company's definitive Schedule 14C, filed with the Commission on March 30,
2007, the Board, on February 16, 2007, unanimously voted to authorize a one (1)
for one hundred (100) reverse stock split (the "Reverse Split") of the Company's
issued and outstanding shares of common stock, and the payment of cash in lieu
of fractionalized shares otherwise issuable in connection with the Reverse
Split. The Reverse Split provides shareholders owning less than one hundred
(100) shares of common stock of the Company (the "Odd-Lot Holders") the benefit
of liquidating their relatively small odd-lot holdings for market value without
brokers' commissions. This is particularly beneficial to the Odd-Lot Holders
given the limited market for and trading in the Company's common stock. The
Odd-Lot Holders own less than one percent (1%) of the Company's outstanding
common stock. The Reverse Split will allow the Company to purchase and acquire
the common stock of approximately 1,088 holders of record of the Company, all of
whom reside in the United States and each of whom owns less than one hundred
(100) shares of common stock in the Company. The Reverse Split will also save
the Company administrative and related costs of sending proxy statements, annual
reports, quarterly reports and other communications to the Company's affected
shareholders. The Company also believes that the Reverse Split will facilitate
and allow for the benefits of the Spin-Off discussed below. The Reverse Split
was effective on April 23, 2007. This Form 10-K reflect the effect of the
Reverse Split retroactively.
Also, as previously reported in the above-referenced filings to the
Commission, the Board, on February 16, 2007, unanimously approved a transaction
involving the separation of the Company's wholly-owned subsidiary, AJOL, by
authorizing the issuance of shares of common stock of AJOL owned by the Company
to the stockholders of the Company in proportion to each stockholder's
percentage ownership in the Company (the "Spin-Off"). In authorizing the
foregoing, the Board considered that the Company's business is operated
exclusively in Japan through AJOL, and that there is relatively little or no
interest in the Company and its common stock and AJOL in the United States. The
Board also considered that a majority of the Company's shareholders reside in
Japan. The Board also believes that shareholders of the Company could maximize
the value of their shares in the Company by directly holding shares in AJOL, in
addition to continuing holding shares in the Company. The Board also considered
that AJOL would be in a position to seek and obtain private issuer status in the
United States following the Spin-Off, thereby allowing AJOL to seek suspension
of any reporting obligations to the Commission which it would be subject
following the Spin-Off. The Board also concluded that the Spin-Off will allow
AJOL to more effectively and efficiently focus on its business in Japan. Based
on the foregoing, the Board authorized the transaction whereby the Company will
seek divestiture of and Spin-Off AJOL to the stockholders of the Company, pro
rata. Following the Spin-Off, the stockholders of the Company will continue to
own the same number of shares in the Company that they held pre Spin Off, and
will in addition own AJOL shares in proportion to their percentage ownership in
the Company. Following the Spin-Off, the Company will acquire the status of a
public shell corporation with no operating business, and will seek merger,
acquisition or other business opportunities. The effective date of the Spin-Off
and the record date for stockholders to be eligible to receive AJOL shares in
the Spin-Off will be determined by the Board, as appropriate, and will be
subject to the filing and effectiveness of a registration statement with the
SEC, registering the AJOL shares. The Board can provide no assurance that a
public market or any market for the AJOL shares or the Company's shares, either
in Japan or the United States, will develop or exist or at what price following
the Spin-Off.
At March 31, 2007, and through the filing of this Form 10-K, the
Spin-Off was not completed. The financial information included herein does not
treat AJOL as a discontinued operation as of March 31, 2007 as AJOL will be
treated as the spinnor and surviving entity for accounting purposes even though
PPOL will be the spinnor and surviving entity for legal purposes. Additionally
the current shareholders of PPOL will continue to be shareholders of AJOL after
the Spin-Off, we believe the treatment of AJOL as a continuing operation to be
the most appropriate accounting recognition under the given circumstances. It
will also provide the reader with more comparable year to year performance
information.
9
Condensed stand alone balance sheet for PPOL as of March 31, 2007 and
2006 follows:
2007 2006
---- ----
Current assets $ 152,720 $ 857,022
Investment in AJOL 253,392 253,392
Other assets 4,409 8,245
----------- -----------
Total assets $ 410,521 $ 1,118,659
=========== ===========
Current liabilities $ 52,110 $ 161,715
Notes payable to AJOL 169,598 --
----------- -----------
Total liabilities 221,708 161,715
Capital stock and
additional-paid-in-capital 14,522,341 14,522,341
Accumulated other comprehensive income 2,344,055 2,344,055
Accumulated deficit (16,677,583) (15,909,452)
----------- -----------
Total shareholders' equity 188,813 956,944
----------- -----------
Total liabilities and
shareholders' equity $ 410,521 $ 1,118,659
=========== ===========
Condensed stand alone statement of operations for PPOL for the years
ended March 31, 2007, 2006 and 2005 follows:
2007 2006 2005
---- ---- ----
Service fee income from AJOL $ 309,171 $ -- $ --
Dividend income from AJOL -- -- 1,185,253
General and administrative expenses (892,521) (1,519,760) (2,379,002)
Other income (expense), net 20,567 (91,234) (67,319)
Income tax expense (205,349) (800) (37,441)
----------- ----------- -----------
Net loss $ (768,132) $(1,611,794) $(1,298,509)
=========== =========== ===========
Additionally, on February 16, 2007, the Board unanimously voted to
authorize an amendment to the Company's By-laws to provide for
certificateless/electronic book entry ownership of stock in the Company, such
that the Company will not issue stock certificates to evidence the ownership
thereof, but that information sufficient to identify ownership in the Company
will be entered in electronic form in the books of the Company maintained by its
transfer agent. The Company will adopt a system of issuance, recordation and
transfer of its shares by electronic or other means not involving any issuance
of certificates. The conversion to certificateless ownership will be facilitated
by the Company's stock transfer agent. The Company is currently in the process
of collecting the physical certificates from shareholders to convert them to
electronic book entry.
(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 completed our conversion
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.
10
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 Fiscal 2006 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 $1,967,092 (JPY212,210,538) 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. 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 8 to the
financial statements - Related Party Transactions for further information.
As noted in (1) above, following the Spin-Off, AJOL will obtain foreign
private issuer status in the United States and seek suspension of any reporting
obligations to the Commission which it may be subject following the Spin-Off.
(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.
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 reduced
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 believed that direct marketing was the 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.
11
During the fiscal year ended March 31, 2007, our revenues have
continued to decline since our transition to the direct marketing system. In
particular, shipments of SF-70 have been negligible. This is attributable to
customers' preference of the U-Phone's cosmetic appearance and ability to place
paperless orders of products and services whereas the SF-70 required paper
orders to be faxed to AJOL's offices. We have also been unable to compete
effectively with U-World in the sale of U-Phones. They utilize the network
marketing system and have a pricing structure similar to our former system. Our
failure to effectively compete with U-World appears to center around the
financial incentives provided to distributors by U-World despite the lower
initial costs incurred by the customer through a purchase through us.
Concurrently, we have been successful in reducing our costs resulting in an
increase of operating income by $5.9 million during the year ended March 31,
2007. The Company is continuously monitoring the appropriate balance between
cost reduction for current profitsand incurring costs that would improve future
profitability.
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 prior year U-World commenced operations. U-World 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 4.52% 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.
We maintain a cordial relationship with U-World and have discussed
alternatives in which AJOL and U-World can cooperate for mutual benefit,
including, but not limited to a merger of the two entities. The management and
directors of PPOL believe significant improvements to AJOL's business can be
achieved by entering into a formal relationship with U-World. Our discussions,
to date, can only be characterized as preliminary and exploratory. There is no
assurance that we will continue such discussions. Furthermore, even if
discussions should continue beyond the initial stages, there is no assurance
that we will be able to reach any terms and conditions that are acceptable to
both organizations.
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
------------------------ -------------------------
2007...... $ 0
2006...... $ 2,120,249
2005...... $ 279,204
Please refer to Item 7, Management's Discussion and Analysis: Research and
Development Expenses for more information.
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.
12
EMPLOYEE AND LABOR MATTERS
As of March 31, 2007, we employed 11 people on a full-time basis. We
also employed 10 part-time employees and 5 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 include intercompany management consulting
agreement between PPOL and AJOL in connection with Sarbanes Oxley compliance
requirements. Such income for PPOL, and corresponding expense for AJOL, is
eliminated in consolidation.
(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
continuing to investigate, but have not obtained, "Key Executive Insurance"
with respect to Mr. Aota.
Mr. Aota is the CEO of U-World, a direct competitor of the Company,
which uses a network sales model. 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 unviable. 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.
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. We have been unable to generate new subscribers
at the rate that we have been able to in the past. As a result, there can be no
assurances 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.
13
DEPENDENCE ON RENEWALS
As a result of our inability to generate new subscribers at the rate
that we have been able to in the past, we will need to rely more heavily on
renewals. There can be no assurances that we will be able to generate sufficient
renewals to remain profitable. We do not have any substantial historical basis
for predicting the rate of renewal increase in our subscriber base.
LACK OF PROFITABLE OPERATIONS
The Company recorded net losses for 2007, 2006 and 2005 of $3,843,011,
$2,386,538 and $2,740,733, respectively. We have an accumulated deficit of
approximately $18,000,000, at March 31, 2007. 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, 2007 and 2006, PPOL current liabilities exceeded current
assets by $5,852,282 and $2,596,174, respectively. See discussion on working
capital deficit in Liquidity and Capital Resources section on page 26.
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.
UNCERTAIN 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.
14
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.
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 $820,000 at
March 31, 2007 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.
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.
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.
15
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, co-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
co-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 co-proprietary
technology. We rely on a combination of patent, trademark, trade secret and
copyright law and contractual restrictions to protect our co-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 co-proprietary rights and may not prevail
in any litigation regarding those rights. Any litigation to enforce our
intellectual property rights would be expensive and time-consuming, would divert
management resources and may not be adequate to protect our business.
POSSIBLE INFRINGEMENT CLAIMS
We could be subject to claims that we have infringed the intellectual
property rights of others. In addition, we may be required to indemnify our
distributors and users for similar claims made against them. Any claims against
us could require us to spend significant time and money in litigation, pay
damages, develop new intellectual property or acquire licenses to intellectual
property that is the subject of the infringement claims. These licenses, if
required, may not be available at all or on acceptable terms. As a result,
intellectual property claims against us could have a material adverse effect on
our business, prospects, financial conditions and results of operations.
POSSIBLE SYSTEM FAILURE OR BREACH OF NETWORK SECURITY
Our operations are dependent on our ability to protect our network from
interruption by damage from fire, earthquake, power loss, telecommunications
failure, unauthorized entry, computer viruses or other events beyond our
control. As precautions, we utilize distributed processing systems, back-up
systems, Internet firewalls, 24/7 installation environment surveillance, and
private power generators as backup. There can be no assurance that our existing
and planned precautions of backup systems, regular data backups and other
procedures will be adequate to prevent significant damage, system failure or
data loss.
16
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, purchased from Advanced Communications,
K.K., an entity under common control, 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, 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.
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.
LACK OF MARKET FOR COMMON EQUITY SECURITIES
The Company's shares are currently quoted on the "Pink Sheets" of Pink
Sheets, LLC. Trading has been limited and sporadic. No assurance can be given
that any market for the Company's common stock will develop or be maintained.
17
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 controls beginning with our fiscal
year commencing on April 1, 2007 to maintain our status as a US reporting
company. 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
registered public accounting firm will be able to conclude that our internal
controls over financial reporting are effective as required by Section
404 of Sarbanes-Oxley Act of 2002.
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 occupied about 3,520 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
On October 17, 2005, PPOL's ultimate majority shareholder, Green
Capital, filed an action against Capital Aid, Inc., a Japan corporation, and
Messrs. Hiroshi Shibakawa, Kenji Nakamura, Yoshiyuki Okamura, Yoshiteru
Sazanami, Hiroshi Matsuo, Tokuji Koga and Chizuko Koga (the "Ide Group"), in
Tokyo District Court (case no. (wa) 2005-20878) to recover PPOL common share
stock certificates (the "PPOL Certificates") registered in the name of Foster
Strategic Investment Partnership ("FSIP"), and beneficially owned by Green
Capital. The Ide Group maintains physical possession of the PPOL Certificates.
Green Capital has alleged in its lawsuit that 1) the Ide Group purchased the
PPOL Certificates from a person who was not the owner or has any right or
interest therein); and 2) did not constitute a bona fide purchaser thereof, as
such is provided under the Article 131-2 of the Commercial Code of Japan, Green
Capital is entitled to the remedy of repossession of the PPOL Certificates at
issue. The Ide Group, in turn, has countersued Green Capital, Green Capital's
then-CEO, PPOL, PPOL's and AJOL's directors, PPOL's operating subsidiary, AJOL,
and Nobuo Takada, a former director and CEO of PPOL, for $9.2 million (1.056
billion yen) plus interest. In its countersuit, the Ide Group alleges Takada had
tricked them into buying the PPOL Certificates and borrowing money from them,
using the PPOL Certificates as collateral. The Ide Group has alleged in its
countersuit that each named counter-defendant conspired with Takada in a series
of alleged unlawful and improper transactions resulting in the Ide Group's
purchase of the PPOL Certificates and loan to Takada. At the time of the alleged
series of transactions, Takada was neither a director nor officer of PPOL or
AJOL. Green Capital has also contacted the Tokyo Metropolitan Police Department
and has filed a criminal complaint against Nobuo Takada for alleged embezzlement
of the PPOL Certificates registered in the name of FSIP and beneficially owned
by Green Capital. Green Capital, Green Capital's then-CEO, PPOL, PPOL's and
AJOL'S directors, and PPOL's operating subsidiary, AJOL have all denied
knowledge of any of the alleged transactions and any improper conduct associated
with such alleged transactions. Based, in part, on the advice of counsel, PPOL
believes the ultimate resolution of this litigation will not have a material
impact on the financial position, results of operations or cash flows of PPOL,
and its subsidiary.
18
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
1. Information required by this item is incorporated by reference to the first
and second paragraphs on page 9 of this filing.
19
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 "Pink Sheets" of
Pink Sheets, LLC, under the symbol "PPLI." Trading has been limited and
sporadic. No assurance can be given that any market for the Company's common
stock will develop or be maintained.
The following chart lists the high and low closing stock price range
from the Company's market makers, retroactively adjusted for reverse stock
splits. 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, 2007 HIGH LOW
--------------------------------------- ------------ ------------
First Quarter.......................... $ 215 $ 175
Second Quarter......................... $ 175 $ 105
Third Quarter.......................... $ 105 $ 51
Fourth Quarter......................... $ 61 $ 53
YEAR ENDED MARCH 31, 2006
---------------------------------------
First Quarter.......................... $ 400 $ 340
Second Quarter......................... $ 800 $ 390
Third Quarter.......................... $ 650 $ 300
Fourth Quarter......................... $ 350 $ 200
HOLDERS OF RECORD
As of March 31, 2007, there were 6,030 holders of record of our common
stock according to our transfer agents.
STOCK REPURCHASE PROGRAMS
We have not repurchased or had any stock repurchase programs during the
fiscal year ended March 31, 2007. In conjunction with our reverse stock split
which became effective on April 23, 2007, we will repurchase fractional shares
at $54 per post reverse stock split share ($0.54 per pre-reverse stock split
share). The number of shares we will be obligated to repurchase are
approximately 300 post reverse stock split shares (30,000 pre-reverse stock
split shares).
DIVIDENDS
We have not declared any dividends during the fiscal years ending March
31, 2007 and 2006. 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 currently does not intend to pay dividends in the foreseeable
future. We do not have restrictions on the payment of dividends by any
contractual obligations.
STOCK BASED COMPENSATION
For information on our equity compensation plans, refer to Notes 1 and
9 in our Notes to Consolidated Financial Statements.
20
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data (post reverse split)
as of and for the years ended March 31, 2003, 2004, 2005, 2006 and 2007 have
been derived from and qualified by reference to our audited consolidated
financial statements. See Item 7 for discussion on going concern.
YEAR ENDED MARCH 31:
---------------------------------------------------------------------------------------
2003 2004 2005 2006 2007
----------------- ---------------- ----------------- ---------------- -----------------
Net Revenues....................... $134,985,824 $135,805,340 $127,833,591 $106,624,069 $68,592,908
Net Income (loss) ................. 5,995,682 7,722,366 (2,740,733) (2,386,538) (3,843,011)
Net Income (loss) per
common share, basic............. 33.95 42.92 (15.23) (11.86) (18.71)
Net Income (loss) per
common share, diluted........... 33.95 42.92 (15.23) (11.86) (18.71)
Total Assets....................... 161,548,658 160,369,283 152,588,310 113,104,123 56,164,750
Long-term obligations.............. -- -- -- -- --
Cash dividends declared per common
share........................... 5.00 -- -- -- --
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS:
Certain matters discussed in this Annual Report on Form 10-K are
"forward-looking statements" intended to qualify for the safe harbor from
liability provided by the Private Securities Litigation Reform Act of 1995.
These forward-looking statements can generally be identified as such because the
context of the statement will include words such as PPOL "believes",
"anticipates", "expects", or words of similar import. Similarly, statements
which describe PPOL's future plans, objectives or goals are also forward-looking
statements. Such forward-looking statements are subject to certain risks and
uncertainties which are described in close proximity to such statements and this
could cause actual results to differ materially from those anticipated as of the
date of this Report. Shareholders, potential investors and other readers are
urged to consider these factors in evaluating the forward-looking statements and
are cautioned not to place undue reliance on such forward-looking statements.
The forward-looking statements included herein are only made as of the date of
this Report and PPOL undertakes no obligation to publicly update such
forward-looking statements to reflect subsequent events or circumstances, except
as required under applicable laws.
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, Inc., a California corporation, conducts its business primarily
through its wholly owned Japanese subsidiary, AJOL, Ltd. ("AJOL"), a Japanese
corporation. At the present time, the Company has administrative functions
occurring in California, but does not otherwise have any major business in the
United States. As disclosed in Note 12 - Spin-Off of AJOL, of the financial
statements, PPOL will Spin-Off its sole operating subsidiary, AJOL. Following
the Spin-Off, the Company will acquire the status of a public shell corporation
with no operating business, and will seek merger, acquisition or other business
opportunities. The discussion below should be read with such planned Spin-Off
taken into consideration.
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-Phone hardware (MOJICO), 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.
Some of the key developments during the year ended March 31, 2007
include:
INVOLVEMENT OF 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.
Mr. Aota is the CEO of U-World, a direct competitor of the Company
which uses a network sales model. 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 unviable. This is,
in part, due to Mr. Aota's strong personal ties to the leaders of our
distribution network.
Our revenues have declined approximately 36% for the fiscal year ended
March 31, 2007 from the prior year. We believe that Mr. Aota's involvement in
U-World has been a significant factor in this decline.
LONG TERM OUTLOOK
Notwithstanding our return to profitability before income taxes, the
long term outlook for the Company is bleak without the active involvement of Mr.
Aota. While AJOL, our sole operating subsidiary in Japan, is projected to have
income under US generally accepted accounting principles in the near term, it is
projected to have losses consistently for Japanese tax reporting purposes. This
means the deferred tax assets will not provide future economic benefits. Thus we
established a 100% valuation allowance for the remaining deferred tax assets in
the first quarter. This resulted in an income tax expense of $10.7 million
although our income before income taxes were approximately $6.9 million.
22
The majority of the income before income taxes is attributable to the
recognition of deferred revenue and related costs to that were recognized as
income and expense for financial accounting purposes. Deferred revenues and
related costs are attributable to (1) shipments of our MOJICO units primarily in
prior periods, and (2) on-line service fee subscriptions and renewals. As such
recognition of deferred revenues and the related costs in the current period do
not necessarily indicate current performance.
In the current period, shipments of MOJICO units were negligible
although renewals have been stable. As such, we made a conscientious effort to
reduce our selling, general and administrative costs. A more detailed discussion
follows immediately.
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."
GOING CONCERN
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. The Company has had recurring
losses during the last three years, negative cash flows from operations of
$1,470,920 and $14,700,864 for the years ended March 31, 2007 and 2006,
respectively, and, as of March 31, 2007, had a working capital deficit of
$5,852,282 and an accumulated deficit of $17,958,920. The majority of income
before income taxes in recent years is attributed to the release of deferred
revenue and related costs that are being recognized as income and expense for
financial accounting purposes. Deferred revenues and related costs are
attributable to (1) shipments of our MOJICO machines in prior periods and (2)
on-line service fee subscriptions and renewals. Shipments of our MOJICO machines
have been negligible during the years ended March 31, 2007 and 2006.
During the year ended March 31, 2006, the Company changed from a
network marketing plan (Network) method to a direct marketing plan (Direct)
method. Under the Network method and through the influence and guidance of
Yoshihiro Aota, a member of our Board of Directors, the Company generated
significant sales of its MOJICO machines. These sales generated significant cash
and deferred revenues and costs for the Company. After changing to a direct
sales method, however, the Company's sales of its MOJICO have effectively
ceased. Further, Mr. Aota has become the chief executive officer of U-World Co.,
Ltd., a wholly owned subsidiary of K.K. Seagull and a direct competitor of the
Company which utilizes a network marketing plan similar to the Company's
previous marketing plan. U-World is a related party through Mr. Aota who is a
member of the Board of Directors of both entities.
Management has been able to adjust the Company's organizational
structure to substantially reduce selling, general and administrative costs and
the liquidation of deferred costs and deferred revenues will not consume or
provide any cash.
Further, as discussed in detail in Note 12, on February 16, 2007, the
Board unanimously approved the divestiture and Spin-Off of its wholly owned
operating subsidiary, AJOL, to the Company's shareholders. Following the
Spin-Off, the Company will acquire the status of a public shell corporation with
no operating business, and will seek merger, acquisition, or other business
opportunities. As of the filing date of these consolidated financial statements,
the Spin-Off was not completed. Accordingly, the financial statements do not
treat AJOL as a discontinued operation.
These conditions raise substantial doubt about the Company's ability to
continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of these
uncertainties should the Company be unable to continue as a going concern.
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 Japanese 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.
23
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 reported amounts of assets
and liabilities, the disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and revenues and expenses during the
period reported.
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 reasonably assured. 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.
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 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. In this regard, we have evaluated the average customer relationship
period as of March 31, 2007 and determined three years as the appropriate period
over which revenues and costs are to be recognized. We will continue to evaluate
the average customer relationship period at least once a year in the future.
24
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. When the Spin-Off of AJOL becomes
effective, such gross profit may only be partially recognized.
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" ("FIN 46(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, 2007, 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.
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.
25
LITIGATION
PPOL is currently involved in certain legal proceedings (see Item 3 and
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). Prior to the
fourth quarter of 2006, 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.
RESULTS OF OPERATIONS
The following table sets forth the results of operations for the
periods indicated:
2007 % CHANGE 2006 % CHANGE 2005
---- -------- ---- -------- ----
Revenues
Product sales $52,974,307 -32.07% $ 77,983,915 -19.35% $ 96,690,799
Service fee income 15,618,601 -45.47% 28,640,154 -8.04% 31,142,792
Total revenues 68,592,908 -35.67% 106,624,069 -16.59% 127,833,591
Cost of sales and expenses
Cost of sales -- Products 13,271,275 -39.82% 22,053,203 -17.84% 26,842,453
Cost of sales -- Services 9,126,758 9.15% 8,361,781 6.32% 7,864,701
Distributor incentives 30,376,719 -35.65% 47,203,479 -24.00% 62,106,377
Selling, general and administrative 9,185,140 -67.56% 28,310,587 -1.64% 28,783,491
Total cost of sales and expenses 61,959,892 -41.51% 105,929,050 -15.66% 125,597,022
Operating income 6,633,016 854.36% 695,019 -68.92% 2,236,569
Other income (expense) 229,512 129.49% 100,010 143.49% (229,962)
Income before income tax
and loss from discontinued operations 6,862,528 763.18% 795,029 -60.38% 2,006,607
Income tax expense 10,705,539 236.49% 3,181,567 15.08% 2,764,576
Loss from discontinued operations 0 0.00% 0 -100.00% 1,982,764
Net (Loss) $(3,843,011) 61.03% $(2,386,538) -12.92% $ (2,740,733)
YEAR ENDED MARCH 31, 2007 COMPARED TO YEAR ENDED MARCH 31, 2006
PRODUCT SALES. For the year ended March 31, 2007 (Fiscal 2007), revenues
decreased by 32.07% over the year ended March 31, 2006 (Fiscal 2006) from
$77,983,915 to $52,974,307. The decrease in product sales is attributable to a
decline in SF-70 and U-Phone unit sales from 17,257 units in Fiscal 2006 to 312
units in Fiscal 2007. Such decline is attributable to the growing strength of
U-World, a direct competitor, whose CEO, Mr. Aota, is also a PPOL director, and
transition challenges of our revenue model from the network marketing to the
direct marketing system. Revenues from sales of other products, comprised of
cosmetics and foodstuffs ordered through our SF-70 and U-Phone, have been an
encouraging factor. Despite the overall declines in product sales, we have been
able to return to pre-tax profitability in fiscal 2007 due to cost reductions.
We are currently reviewing alternative strategies for our long term viability.
26
SERVICE FEE INCOME. Service fee income declined 45.47% in Fiscal 2007 over
Fiscal 2006 from $28,640,154 to $15,618,601. This decline is mainly attributable
to the loss of service fee income from insurance administrative services as a
result of new insurance regulations that prohibited us from providing such
services, which amounted to $9,779,145 in fiscal 2006.
COST OF PRODUCT SALES. Cost of product sales declined by 39.82% from $22,053,203
in the prior year to $13,271,275, a greater percentage decline than related
product sales. Management attributes this improvement to the shift in our
revenues to higher gross profit products.
COST OF SERVICE FEE INCOME. Cost of service fee income has increased 9.15% from
$8,361,781 in Fiscal 2006 to $9,126,758 despite the 45.47% decrease in service
fee income. This resulted from additional expenses incurred to provide new
services to replace lost revenues and our inability to reduce fixed overhead
related to lost revenues.
DISTRIBUTOR INCENTIVES. Distributor incentives decreased 35.65% over the prior
year from $47,203,479 in Fiscal 2006 to $30,376,719 in Fiscal 2007. The decrease
is substantially comparable to the decrease in total revenues of 35.67%.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased by 67.56% from $28,310,587 in Fiscal 2006 to
$9,185,140 in Fiscal 2007. We have reduced selling, general and administrative
costs to address our declining sales. Major cost reductions were achieved in
personnel - $3.9 million, selling expenses - $3.6 million, information
technology - $3.6 million, rent - $0.7 million, and outsourcing - $1.4 million.
In addition, we did not incur the transition costs to direct marketing and
merger integration costs with USC that were present in the prior year. We also
did not expend any funds for research and development in the current year that
accounted for $2.1 million in the prior year.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenditures are
included as a component of our selling, general and administrative expenses.
OTHER INCOME, NET. $229,512 in Fiscal 2007 represents a 129.49% increase from
$100,010 in Fiscal 2006. The income and expense included in this account are all
derived from (incurred for) one time non-recurring events. The largest item in
Fiscal 2007 is income from expired and unused gift certificates of $136,020.
INCOME TAXES. Income taxes were 156.00% of income before income taxes in Fiscal
2007. Our effective tax rate exceeded the expected rate of 40.69%. It is
primarily attributable to a net increase in our valuation allowance of
deferred tax assets of $7,685,037 due to reservations regarding its
future use.
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.
27
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%.
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.
LIQUIDITY AND CAPITAL RESOURCES
Historically, our principal needs for funds have been for operating
expenses including distributor incentives, working capital (principally
inventory purchases), capital expenditures and the development of operations
throughout Japan. We have generally relied on cash flow from operations, and
equity financing to meet our cash needs and business objectives without relying
on long-term debt to fund operating activities
During the year ended March 31, 2007, our cash position had a net
decline of $1,142,330, or 17.3%. Cash used by operating activities comprised
$1,470,920, Such uses were offset by cash generated from investing activities
primarily associated with the return of $347,675 from lease deposits. The impact
of foreign currency exchange was minimal. Management believes that cash flow
from operations will adequately meet the working capital needs for the
foreseeable future. Further comments on cash is on page 21 under "Going
Concern."
WORKING CAPITAL DEFICIT
At March 31, 2007,and 2006 PPOL's current liabilities exceeded current
assets by $5,852,282 and $2,596,174, respectively. As noted in the table below,
our current assets included deferred costs and current liabilities include
deferred revenue. 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 following fiscal year. 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, 2007 and 2006 is as follows:
WORKING
CURRENT CURRENT CAPITAL
ASSETS LIABILITIES (DEFICIT)
-------------- ------------- -------------
Working capital deficit at March 31, 2007 $ 28,403,133 $ 34,255,415 $( 5,852,282)
Less: Current deferred costs (22,025,853) -- (22,025,853)
Less: Current deferred revenues -- 31,668,727 31,668,727
------------ ------------ ------------
Working capital, adjusted for deferred revenues
and deferred costs, at March 31, 2007 $ 6,377,280 $ 2,586,688 $ 3,790,592
============ ============ ============
Working capital deficit at March 31, 2006 $ 55,813,085 $ 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 $ 16,840,867 $ 4,969,703 $ 11,871,164
============ ============ ============
28
CHANGES IN CASH AND CASH EQUIVALENTS BETWEEN 2006 THROUGH 2007
Cash and cash equivalents were $5,474,547 at March 31, 2007,
representing a $1,142,330 reduction from $6,616,877 at March 31, 2006. Net
decline of $10,831,591 in current assets and liabilities were offset by non-cash
expense items of $10,496,954 in deferred taxes, $2,588,159 in depreciation and
amortization, while net loss of $3,843,011 resulted in a net use of $1,470,920
for operating activities. Investing activities provided $345,411 in cash and
cash equivalents primarily from a $347,675 reduction in deposits and other
assets.
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.
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,
2007 are as follows:
PAYMENTS DUE DURING THE YEAR ENDING
----------------------------------------------------
TOTAL 2008 THEREAFTER
-------------- --------------- ---------------
CONTRACTUAL OBLIGATIONS.....
Operating Lease Obligations $ 249,060 $ 239,160 $ 9,900
Service Provider Contracts 75,327 75,327 --
-------------- --------------- --------------
Total....................... $ 324,387 $ 314,487 $ 9,900
============== =============== ==============
RECENT FINANCIAL ACCOUNTING PRONOUNCEMENTS
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" (FIN 48), an
interpretation of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." FIN 48 changes the accounting for uncertainty in
income taxes by prescribing a recognition threshold for tax positions taken or
expected to be taken in a tax return. FIN 48 is effective for fiscal years
beginning after December 15, 2006. FIN 48 will have no impact on our financial
position and results of operations.
In February 2007, the FASB issued Statement of Financial Accounting Standards
No. 159, "The Fair Value Option for Financial Assets and Financial
Liabilities--Including an amendment of FASB Statement No. 115" (FAS 159), FAS
159 permits entities to choose to measure many financial instruments and certain
other items at fair value. The objective is to improve financial reporting by
providing entities with the opportunity to mitigate volatility in reported
earnings caused by measuring related assets and liabilities differently without
having to apply complex hedge accounting provisions. This Statement is expected
to expand the use of fair value measurement, which is consistent with the FASB's
long-term measurement objectives for accounting for financial instruments. It is
not expected to have any impact on our financial position and results of
operations.
In September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, "Fair Value Measurements" (FAS 157). FAS 157 defines fair value,
establishes a framework for measuring fair value and expands disclosures about
fair value measurements. FAS 157 applies under other accounting pronouncements
that require or permit fair value measurement. FAS 157 does not require any new
fair value measurements and we do not expect the application of this standard to
change our current practice. FAS 157 requires prospective application for fiscal
years ending after November 15, 2007. It is not expected to have any impact on
our financial position and results of operations.
29
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 41 through 64,
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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. We maintain a system of
disclosure controls and procedures. The term "disclosure controls and
procedures," as defined by regulations of the SEC, means controls and other
procedures that are designed to ensure that information required to be disclosed
in the reports that we file or submit to the SEC under the Exchange Act, is
recorded, processed, summarized and reported, within the time periods specified
in the SEC's rules, regulations and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by us in the reports that we file or submit
to the SEC under the Exchange Act is accumulated and communicated to our
management, including our principal executive officer and our principal
financial officer, or persons performing similar functions, as appropriate to
allow timely decisions to be made regarding required disclosure. Each of Masao
Yamamoto, our Chief Executive Officer, and Richard Izumi, our Chief Financial
Officer, have evaluated the design and operating effectiveness of our disclosure
controls and procedures as of March 31, 2007. Based upon their evaluation, these
executive officers have concluded that our disclosure controls and procedures
were not effective as of March 31, 2007.
Specifically, we have identified the following material weaknesses in
our internal control over financial reporting: (i) we have not effectively
implemented comprehensive entity-level internal controls; (ii) we do not have a
sufficient complement of personnel with appropriate training and experience in
U.S. generally accepted accounting principals; (iii) we do not adequately
segregate the duties of different personnel within our accounting group due to
an insufficient complement of staff; (iv) we have not performed adequate
oversight of certain accounting functions and maintained inadequate
documentation of management review and approval of accounting transactions and
financial reporting processes; and (v) we have not fully implemented certain
control activities and capabilities in the design of our internal control over
financial reporting.
The Board of Directors has concluded that the delay in submitting this Form 10-K
filing was initially a result of determining the impact of restatements and
reclassifications required to financial statements issued in the quarter ended
June 30, 2005. This required management to take the time to obtain relevant
facts to make the appropriate restatements and reclassifications. In addition
there were significant communication delays in obtaining information from our
operating subsidiary, AJOL, in Japan in order to complete our consolidated
financial statements. 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 Commission, the Board of Directors has directed management of the
Company to prepare reports requiring significant information from its Japanese
operating subsidiary should be prepared in Japan.
During this initial delay, the NASD informed the Company that its securities
will be removed effective September 6, 2006, from the OTC Bulletin Board
("OTCBB"). Further, as a result of the Company's significant budgetary
constraints that prevented it from retaining additional personnel to resolve the
issues described in the foregoing paragraphs, and the fact that the majority of
our shareholders reside in Japan and are unable to trade our stock, the Board of
Directors have further concluded that the costs of remaining a US public
company, in its present form, far exceed the benefits to its existing
shareholder base. Thus, as more fully described in Note 12 - Spin-Off of AJOL,
to the consolidated financial statements, included herein, the Board of
Directors unanimously approved a transaction involving the separation of the
Company's wholly-owned Japanese subsidiary, AJOL, by authorizing the issuance of
shares of common stock of AJOL owned by the Company to the stockholders of the
Company in proportion to each stockholder's percentage ownership in the Company
30
(the "Spin-Off"). In authorizing the foregoing, the Board of Directors
considered that the Company's business is operated exclusively in Japan through
AJOL, and that there is relatively little or no interest in the Company and its
common stock and AJOL in the United States. The Board of Directors also
considered that over 75% of the Company's shareholders, who hold over 98% of its
outstanding shares, are residents of Japan. The Board of Directors also believes
that shareholders of the Company could maximize the value of their shares in the
Company by directly holding shares in AJOL, in addition to continuing holding
shares in the Company. The Board of Directors also considered that AJOL would be
in a position to seek and obtain private issuer status in the United States
following the Spin-Off, thereby allowing AJOL to seek suspension of any
reporting obligations to the Commission which it would be subject following the
Spin-Off.
Accordingly, we are in the process of preparing and filing all currently
required SEC filings in order to allow us to achieve our goals discussed in the
preceding paragraph.
INTERNAL CONTROL OVER FINANCIAL REPORTING. We also maintain internal control
over financial reporting. The term "internal control over financial reporting,"
as defined by regulations of the SEC, means a process designed by, or under the
supervision of, our principal executive and principal financial officers, or
persons performing similar functions, and effected by the our Board of
Directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles in the U.S. ("GAAP"), and includes those policies and
procedures that:
o Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of
our assets;
o Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with GAAP, and that our receipts and expenditures are
being made only in accordance with authorizations of our management
and directors; and
o Provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of our
assets that could have a material effect on our consolidated
financial statements.
The Company has initiated planning for the implementation of Section 404 of the
Sarbanes-Oxley Act. However, the Company has not yet hired an outside firm to
assist in the implementation to start its evaluation process. The implementation
of Section 404 may involve significant costs and commitments in terms of the
Company's financial and personnel resources, and based on the Company's plans to
spin off its operating subsidiary, AJOL, and seek and obtain foreign private
issuer status in the United States, it is unlikely that the Company will
complete its Section 404 compliance responsibilities by the established
deadline.
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 registered public
accounting firms, 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.
31
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:
CURRENT DIRECTORS COMMENCING AS OF MARCH 31, 2005
STANDING FOR
NAME AGE DIRECTOR SINCE TERM EXPIRES RE-ELECTION INDEPENDENT
---- --- -------------- ------------ ------------ -----------
Yoshihiro Aota 62 5/20/2005 2008 Yes No
Richard Izumi 54 3/31/2005 2008 No No
Masao Yamamoto 58 3/31/2005 2008 Yes No
The following is a brief background summary for each of the current and
nominee directors:
Mr. Yoshihiro Aota currently serves as CEO of U-World, 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
B.S. from Tokyo University.
Mr. Richard Izumi is 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. Izumi will resign as the Chief Financial Officer,
effective with the conclusion of the next Annual Shareholders Meeting, and has
elected not to stand for re-election to the Board of Directors.
Mr. Masao Yamamoto is Chief Executive Officer of PPOL, Inc. and Chief
Executive Officer of AJOL Co. Ltd. ("AJOL"), 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.
Mr. Manabu Nakamura is presently a Director of AJOL and General Manager
of Customer Service. He has joined AJOL in June, 1995 and has been a Director
since March, 2000. Prior to AJOL, he was a Managing Director of Drug Ando,
K.K., a Japanese corporation, from July, 1992. He graduated from Seikei College
with a B.S. in Law.
If elected, each of the nominees is expected to serve until the 2009
annual meeting of shareholders and thereafter until his or her successor is duly
elected and qualified.
32
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 Commission. This code of ethics is found as exhibit 14
to our 10-K for fiscal 2004 as filed with the Commission. 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. A copy of our code of ethics will be
provided, without charge, to any person who makes a request in writing by mail
to the attention of Investor Relations at our principal offices, 1 City
Boulevard West, Suite 820, Orange, California 92868.
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION AND OTHER INFORMATION
COMPENSATION DISCUSSION AND ANALYSIS
As disclosed in Item 10, the entire Board has been performing the
responsibilities of the Compensation Committee.
Compensation Objectives and Philosophy
The basic philosophy behind executive compensation is to reward executives for
performance and use an incentive to create shareholder value. Salary
adjustments, bonuses and long-term incentive grants are reviewed at least
annually to ensure consistency with this philosophy.
Elements of Compensation
The principal components of our compensation program are base salary, bonuses
and long-term incentive awards in the form of stock options. These elements are
intended to formulate compensation packages which provide competitive pay,
reward the achievement of financial, operational and strategic objectives, and
align the interests of our executive officers and other senior personnel with
those of our stockholders. We have not retained a compensation consultant to
review our policies and procedures with respect to executive compensation.
Designing a Competitive Compensation Package
Our goal of successful recruitment and retention of leadership to manage the
Company requires a competitive compensation package, involving salary, bonus
opportunities, and long-term incentive awards.
Base Salary
Base salaries of the Named Executive Officers are determined on an individual
basis and are based on job responsibilities and individual contributions.
Decisions regarding base salary are made based upon such factors as analysis of
compensation levels set by other companies, review of available compensation
studies, Company need and candidate availability. In general, in determining
executive officers' salaries, we considered individual experience and prior
service with the Company, level of responsibility and overall job performance.
Cash Bonus
Annual cash bonuses are designed to align employees' goals with the Company's
financial and operational objectives for the current year and to reward
individual performance. Decisions regarding bonuses are made based upon
achievement of the Company's objectives.
Long-Term Incentive Awards
To promote our long-term objectives, equity awards are made to executive
officers who are in a position to make a significant contribution to our
long-term success.
Termination Provisions
We have no Employment agreements with our executive officers currently.
Severance payments, if any, are at the discretion of the Board of Directors.
Separation benefits, if any, are intended to ease the consequences to an
executive of an unexpected termination of employment.
Tax and Accounting Implications
As part of its role, we review and consider the deductibility of executive
compensation under Section 162(m) of the Internal Revenue Code, or the Code,
which generally provides that the Company may not deduct compensation of more
than $1,000,000 that is paid to certain individuals. None of the Named Executive
Officers currently receive compensation amounts which would raise such a
deductibility issue.
33
Accounting for Stock-Based Compensation
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
123R, "Share-Based Payments" on April 1, 2006. We adopted the Modified
Prospective Method in which compensation cost is recognized beginning with the
effective date of adoption (a) based on the requirements of SFAS No. 123R 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.
Discussion with Management
The entire Board of Directors have reviewed and discussed the foregoing
"Compensation Discussion and Analysis" with the Company's management. Based on
such review and discussion, the Compensation Committee recommended to the Board
of Directors that the "Compensation Discussion and Analysis" be included herein
for the fiscal year ended March 31, 2007.
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 57 Chief Executive Officer $ 0*
Richard Izumi 54 Chief Financial Officer $ 336,000
* Mr. Yamamoto's entire compensation is from AJOL, which is listed on the the
following page, describing compensation of certain AJOL employees.
Salary. Salaries for named executive officers are determined based on a variety
of factors, including the executive's scope of responsibilities, a market
competitive assessment of similar roles at peer group companies, and a
comparison of salaries to peers in Microsoft. Salaries are reviewed for our
named executive officers once each year, and may be adjusted after considering
the above factors and the named executive officer's performance.
The following table sets forth the stock options granted to directors and
officers of the company in fiscal 2005:
Percent of
total options
Number of granted to Potential realizable value
securities employers at assumed annual rates
underlying during Exercise of stock price appreciation
options fiscal price Expiration for option term (1)
Name granted* year per share* date 5% 10%
--------------------- ---------------- --------------- ------------ ---------------- ------------- -------------
Robert Brasch 400 50.00% $ 400 July 25, 2014 $274,400 $500,200
Lowell Hattori 400 50.00% $ 400 July 25, 2014 $274,400 $500,200
--- ------
Total for 2005 800 100.00%
=== ======
There were no additional options granted for the fiscal 2007 and 2006.
Outstanding Equity Awards at Fiscal Year-End
The following table presents information regarding outstanding equity awards as
of March 31, 2007 for the named executive officers and directors.
Number of Number of
securities securities
underlying underlying
unexercised unexercised Options Option
options* options* exercise expiration
Name exercisable unexercisable price* date
-----------------------------------------------------------------------------
Yoshihiro Aota 10,000 -- $400 March 25, 2014
Masao Yamamoto 400 -- $400 March 25, 2014
* As adjusted for 1 for 100 reverse stock split as of April 23, 2007
B. AJOL (THE COMPANY'S WHOLLY OWNED SUBSIDIARY)
The following table sets forth the compensation of AJOL's "Named
Executive Officers," which consist of a) all persons serving as the chief
executive officer during the fiscal year and b) the four (4) most highly
compensated individuals serving at the end of the fiscal year, in addition to
the chief executive officer:
34
SUMMARY ANNUAL COMPENSATION TABLE
---------------------------------------------------------------
FISCAL
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) TOTAL
--------------------------- ---- ---------- --------- -----
Yoshihiro Aota 2007 $ 0 $ 0 $ 0
Representative and Director 2006 $ 0 $ 0 $ 0
2005 $ 147,513 $ 557,880 $ 705,393
Manabu Nakamura 2007 $ 113,019 $ $ 113,019
Director 2006 $ 110,052 $ 44,172 $ 154,224
2005 $ 114,373 $ 41,881 $ 156,254
Masao Yamamoto 2007 $ 144,012 $ 0 $ 144,012
Representative Director 2006 $ 173,754 $ 0 $ 173,754
2005 $ 114,959 $ 55,841 $ 156,254
Maki Iida 2007 $ 52,688 $ 8,829 $ 61,517
Director 2006 $ 53,708 $ 10,601 $ 64,309
2005 $ 44,239 $ 19,052 $ 63,291
Go Takashima 2007 $ 36,210 $ 16,216 $ 52,426
Corporate Planning Staff 2006 $ 41,485 $ 13,892 $ 55,377
2005 $ 36,222 $ 17,723 $ 53,945
Tetsu Okada 2007 $ 37,658 $ 11,077 $ 48,736
Corporate Planning Staff 2006 $ 43,796 $ 10,623 $ 54,419
2005 $ 37,041 $ 14,339 $ 51,380
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 2007. The graph assumes that $100
was invested on March 31, 2006 in each of our common stock, American Composite
Index and the Russell 1000 Index.
PPOL American Composite Russell 1000
---------------------- ------------------------ ---------------------
3/30/07 $1.20 55.81% 2,174.90 112.34% 775.97 109.79%
3/29/07 $1.20 55.81% 2,172.20 112.20% 776.55 109.88%
3/28/07 $1.20 55.81% 2,151.25 111.12% 773.99 109.51%
3/27/07 $1.20 55.81% 2,154.77 111.30% 779.89 110.35%
3/26/07 $1.20 55.81% 2,162.79 111.71% 784.63 111.02%
3/23/07 $1.20 55.81% 2,150.21 111.07% 784.12 110.95%
3/22/07 $1.20 55.81% 2,156.01 111.36% 783.3 110.83%
3/21/07 $1.20 55.81% 2,164.50 111.80% 783.46 110.85%
3/20/07 $1.20 55.81% 2,140.12 110.54% 770.59 109.03%
3/19/07 $1.20 55.81% 2,111.39 109.06% 765.56 108.32%
3/16/07 $1.20 55.81% 2,098.32 108.38% 757.32 107.16%
3/15/07 $1.20 55.81% 2,082.76 107.58% 760.36 107.59%
3/14/07 $1.20 55.81% 2,063.37 106.58% 757.15 107.13%
3/13/07 $1.20 55.81% 2,064.99 106.66% 752.57 106.48%
3/12/07 $1.20 55.81% 2,108.03 108.89% 768.09 108.68%
3/9/07 $1.20 55.81% 2,094.46 108.19% 765.91 108.37%
3/8/07 $1.20 55.81% 2,075.60 107.21% 765.18 108.27%
3/7/07 $1.20 55.81% 2,074.42 107.15% 759.73 107.50%
3/6/07 $1.20 55.81% 2,081.01 107.49% 761.57 107.76%
3/5/07 $1.20 55.81% 2,055.91 106.19% 749.85 106.10%
3/2/07 $1.20 55.81% 2,087.74 107.84% 757.83 107.23%
3/1/07 $1.20 55.81% 2,113.99 109.19% 766.91 108.51%
2/28/07 $1.20 55.81% 2,116.56 109.33% 768.66 108.76%
2/27/07 $1.20 55.81% 2,105.03 108.73% 764.84 108.22%
2/26/07 $1.20 55.81% 2,175.57 112.38% 791.38 111.97%
2/23/07 $1.20 55.81% 2,165.47 111.85% 793.15 112.22%
2/22/07 $1.20 55.81% 2,162.70 111.71% 795.79 112.60%
2/21/07 $1.20 55.81% 2,154.43 111.28% 796.65 112.72%
2/20/07 $1.20 55.81% 2,150.77 111.09% 797.58 112.85%
2/16/07 $1.20 55.81% 2,157.98 111.47% 794.79 112.46%
2/15/07 $1.20 55.81% 2,168.14 111.99% 795.23 112.52%
2/14/07 $1.20 55.81% 2,169.86 112.08% 794.15 112.37%
2/13/07 $1.20 55.81% 2,154.78 111.30% 788.11 111.51%
2/12/07 $1.20 55.81% 2,138.27 110.45% 782.05 110.65%
2/9/07 $1.20 55.81% 2,153.06 111.21% 784.99 111.07%
2/8/07 $1.20 55.81% 2,165.59 111.86% 790.78 111.89%
2/7/07 $1.20 55.81% 2,162.95 111.72% 791.69 112.02%
2/6/07 $1.20 55.81% 2,148.88 111.00% 790.17 111.80%
35
PPOL American Composite Russell 1000
---------------------- ------------------------ ---------------------
2/5/07 $1.20 55.81% 2,134.92 110.28% 789.27 111.68%
2/2/07 $1.20 55.81% 2,136.22 110.34% 789.88 111.76%
2/1/07 $1.20 55.81% 2,145.76 110.84% 788.46 111.56%
1/31/07 $1.20 55.81% 2,123.71 109.70% 784.11 110.95%
1/30/07 $1.20 55.81% 2,115.73 109.28% 778.79 110.19%
1/29/07 $1.20 55.81% 2,104.61 108.71% 774.51 109.59%
1/26/07 $1.20 55.81% 2,087.36 107.82% 774.97 109.65%
1/25/07 $1.20 55.81% 2,075.30 107.20% 775.65 109.75%
1/24/07 $1.20 55.81% 2,088.94 107.90% 784.31 110.97%
1/23/07 $1.20 55.81% 2,086.80 107.79% 777.5 110.01%
1/22/07 $1.20 55.81% 2,060.44 106.43% 774.73 109.62%
1/19/07 $1.20 55.81% 2,067.95 106.82% 778.8 110.19%
1/18/07 $1.20 55.81% 2,063.03 106.56% 776.39 109.85%
1/17/07 $1.20 55.81% 2,080.41 107.46% 779.12 110.24%
1/16/07 $1.20 55.81% 2,060.80 106.45% 779.86 110.34%
1/12/07 $1.20 55.81% 2,058.03 106.30% 779.21 110.25%
1/11/07 $1.20 55.81% 2,037.57 105.25% 775.3 109.70%
1/10/07 $1.20 55.81% 2,015.74 104.12% 769.93 108.94%
1/9/07 $1.20 55.81% 2,010.47 103.85% 767.89 108.65%
1/8/07 $1.20 55.81% 2,008.52 103.75% 767.88 108.65%
1/5/07 $1.20 55.81% 1,999.60 103.29% 766.12 108.40%
1/4/07 $1.20 55.81% 2,023.60 104.53% 770.87 109.07%
1/3/07 $1.20 55.81% 2,050.01 105.89% 769.59 108.89%
12/29/06 $1.20 55.81% 2,056.43 106.22% 770.08 108.96%
12/28/06 $1.20 55.81% 2,053.48 106.07% 773.54 109.45%
12/27/06 $1.20 55.81% 2,056.31 106.21% 774.64 109.61%
12/26/06 $1.20 55.81% 2,039.24 105.33% 769.31 108.85%
12/22/06 $1.20 55.81% 2,034.67 105.10% 765.96 108.38%
12/21/06 $1.20 55.81% 2,040.11 105.38% 769.93 108.94%
12/20/06 $1.20 55.81% 2,057.26 106.26% 772.93 109.36%
12/19/06 $1.20 55.81% 2,069.33 106.89% 773.88 109.50%
12/18/06 $1.20 55.81% 2,043.76 105.57% 772.37 109.28%
12/15/06 $1.20 55.81% 2,061.81 106.50% 775.08 109.67%
12/14/06 $1.20 55.81% 2,066.93 106.76% 774.47 109.58%
12/13/06 $1.20 55.81% 2,076.84 107.28% 768.1 108.68%
12/12/06 $1.20 55.81% 2,081.01 107.49% 767.43 108.59%
12/11/06 $1.20 55.81% 2,085.15 107.70% 768.62 108.75%
12/8/06 $1.20 55.81% 2,086.28 107.76% 766.95 108.52%
12/7/06 $1.20 55.81% 2,089.35 107.92% 765.66 108.34%
12/6/06 $1.20 55.81% 2,093.80 108.15% 768.7 108.77%
12/5/06 $1.20 55.81% 2,082.80 107.58% 769.65 108.90%
12/4/06 $1.20 55.81% 2,075.78 107.22% 766.54 108.46%
12/1/06 $1.20 55.81% 2,065.93 106.71% 759.61 107.48%
11/30/06 $1.20 55.81% 2,069.16 106.88% 761.44 107.74%
11/29/06 $1.20 55.81% 2,059.57 106.38% 760.5 107.61%
11/28/06 $1.20 55.81% 2,039.93 105.37% 753.42 106.60%
11/27/06 $1.20 55.81% 2,020.33 104.36% 750.95 106.25%
11/24/06 $1.20 55.81% 2,037.12 105.22% 761.83 107.79%
11/22/06 $1.20 55.81% 2,026.34 104.67% 764.31 108.14%
11/21/06 $1.20 55.81% 2,022.19 104.45% 762.13 107.84%
11/20/06 $1.20 55.81% 2,008.68 103.75% 760.61 107.62%
11/17/06 $1.20 55.81% 1,996.66 103.13% 760.76 107.64%
11/16/06 $1.20 55.81% 1,996.77 103.14% 760.14 107.55%
11/15/06 $1.20 55.81% 2,010.56 103.85% 758.46 107.32%
11/14/06 $1.20 55.81% 1,987.32 102.65% 756.36 107.02%
11/13/06 $1.20 55.81% 1,979.90 102.27% 751.46 106.33%
11/10/06 $1.20 55.81% 1,986.37 102.60% 749.56 106.06%
11/9/06 $1.20 55.81% 1,999.36 103.27% 747.84 105.81%
11/8/06 $1.20 55.81% 1,993.68 102.98% 751.72 106.36%
11/7/06 $1.20 55.81% 1,981.39 102.35% 749.97 106.12%
11/6/06 $1.20 55.81% 1,992.07 102.90% 748.32 105.88%
11/3/06 $1.20 55.81% 1,974.36 101.98% 739.86 104.68%
11/2/06 $1.20 55.81% 1,950.25 100.74% 741.31 104.89%
11/1/06 $1.20 55.81% 1,948.95 100.67% 741.59 104.93%
10/31/06 $1.20 55.81% 1,965.35 101.52% 747.3 105.74%
10/30/06 $1.20 55.81% 1,971.68 101.84% 747.43 105.76%
10/27/06 $1.20 55.81% 1,983.34 102.45% 747.07 105.70%
10/26/06 $1.20 55.81% 1,992.52 102.92% 753.32 106.59%
10/25/06 $1.20 55.81% 1,984.85 102.52% 749.16 106.00%
10/24/06 $1.20 55.81% 1,955.18 100.99% 746.65 105.65%
10/23/06 $1.20 55.81% 1,946.33 100.53% 746.5 105.62%
10/20/06 $1.20 55.81% 1,936.66 100.03% 742 104.99%
10/19/06 $1.20 55.81% 1,933.08 99.85% 741.52 104.92%
10/18/06 $1.20 55.81% 1,916.87 99.01% 741.09 104.86%
10/17/06 $1.20 55.81% 1,915.00 98.92% 740.18 104.73%
10/16/06 $1.20 55.81% 1,928.04 99.59% 743.25 105.16%
10/13/06 $1.20 55.81% 1,902.87 98.29% 741.14 104.87%
10/12/06 $1.20 55.81% 1,879.92 97.10% 739.53 104.64%
10/11/06 $1.20 55.81% 1,864.81 96.32% 732.29 103.61%
10/9/06 $1.20 55.81% 1,887.45 97.49% 732.64 103.66%
10/6/06 $1.20 55.81% 1,881.67 97.19% 731.46 103.50%
36
PPOL American Composite Russell 1000
---------------------- ------------------------ ---------------------
10/5/06 $1.20 55.81% 1,888.64 97.55% 733.56 103.79%
10/4/06 $1.20 55.81% 1,875.20 96.86% 731.18 103.46%
10/3/06 $1.20 55.81% 1,870.34 96.61% 722.26 102.19%
10/2/06 $1.20 55.81% 1,896.80 97.98% 720.98 102.01%
9/29/06 $1.20 55.81% 1,906.86 98.50% 723.48 102.37%
9/28/06 $1.20 55.81% 1,916.92 99.01% 725.42 102.64%
9/27/06 $1.20 55.81% 1,917.56 99.05% 724.19 102.47%
9/26/06 $1.20 55.81% 1,908.05 98.56% 723.96 102.44%
9/25/06 $1.20 55.81% 1,898.90 98.08% 718.61 101.68%
9/22/06 $1.20 55.81% 1,918.27 99.08% 712.54 100.82%
9/21/06 $1.20 55.81% 1,933.97 99.90% 714.46 101.09%
9/20/06 $1.20 55.81% 1,933.86 99.89% 718.57 101.67%
9/19/06 $1.20 55.81% 1,930.90 99.74% 714.77 101.13%
9/18/06 $1.20 55.81% 1,949.05 100.67% 716.37 101.36%
9/15/06 $1.20 55.81% 1,939.28 100.17% 715.95 101.30%
9/14/06 $1.20 55.81% 1,936.23 100.01% 714.2 101.05%
9/13/06 $1.20 55.81% 1,942.96 100.36% 715.27 101.21%
9/12/06 $1.20 55.81% 1,983.34 102.45% 712.43 100.80%
9/11/06 $1.20 55.81% 1,958.76 101.18% 704.66 99.70%
9/8/06 $1.20 55.81% 1,977.49 102.14% 704.41 99.67%
9/7/06 $1.20 55.81% 1,984.63 102.51% 701.86 99.31%
9/6/06 $1.20 55.81% 2,001.68 103.39% 705.28 99.79%
9/5/06 $1.20 55.81% 2,033.17 105.02% 712.58 100.82%
9/1/06 $1.20 55.81% 2,030.22 104.87% 711.25 100.64%
8/31/06 $1.20 55.81% 2,022.33 104.46% 707.55 100.11%
8/30/06 $1.20 55.81% 2,021.14 104.40% 707.46 100.10%
8/29/06 $1.20 55.81% 2,008.30 103.74% 707.13 100.05%
8/28/06 $1.20 55.81% 2,006.91 103.66% 705.59 99.84%
8/25/06 $1.20 55.81% 2,003.69 103.50% 701.57 99.27%
8/24/06 $1.20 55.81% 1,994.89 103.04% 702.15 99.35%
8/23/06 $1.20 55.81% 2,001.21 103.37% 700.69 99.14%
8/22/06 $1.20 55.81% 2,008.48 103.74% 704.1 99.63%
8/21/06 $1.20 55.81% 2,007.69 103.70% 703.31 99.51%
8/18/06 $1.20 55.81% 1,998.80 103.24% 706.26 99.93%
8/17/06 $1.20 55.81% 1,986.50 102.61% 703.9 99.60%
8/16/06 $1.20 55.81% 2,000.57 103.34% 702.87 99.45%
8/15/06 $1.20 55.81% 1,986.18 102.59% 697.11 98.64%
8/14/06 $1.20 55.81% 1,968.11 101.66% 687.39 97.26%
8/11/06 $1.20 55.81% 1,971.72 101.85% 686.5 97.13%
8/10/06 $1.20 55.81% 1,989.90 102.78% 689.51 97.56%
8/9/06 $1.20 55.81% 2,001.72 103.40% 686.41 97.12%
8/8/06 $1.20 55.81% 1,991.33 102.86% 689.68 97.58%
8/7/06 $1.20 55.81% 1,993.68 102.98% 692.25 97.95%
8/4/06 $1.80 83.72% 1,990.90 102.84% 694.5 98.27%
8/3/06 $1.80 83.72% 1,993.44 102.97% 694.87 98.32%
8/2/06 $1.80 83.72% 2,000.39 103.33% 693.4 98.11%
8/1/06 $1.80 83.72% 1,971.59 101.84% 689.24 97.52%
7/31/06 $1.80 83.72% 1,970.42 101.78% 692.59 98.00%
7/28/06 $1.80 83.72% 1,964.16 101.46% 693.38 98.11%
7/27/06 $1.80 83.72% 1,931.66 99.78% 684.69 96.88%
7/26/06 $1.80 83.72% 1,948.92 100.67% 688.07 97.36%
7/25/06 $1.80 83.72% 1,931.25 99.76% 688.49 97.42%
7/24/06 $1.80 83.72% 1,921.69 99.26% 683.76 96.75%
7/21/06 $1.80 83.72% 1,891.87 97.72% 672.4 95.14%
7/20/06 $1.80 83.72% 1,897.54 98.01% 677.88 95.92%
7/19/06 $1.80 83.72% 1,911.54 98.74% 684.31 96.82%
7/18/06 $1.80 83.72% 1,882.80 97.25% 671.56 95.02%
7/17/06 $1.80 83.72% 1,871.69 96.68% 670.25 94.84%
7/14/06 $1.80 83.72% 1,895.27 97.90% 671.3 94.98%
7/13/06 $1.80 83.72% 1,899.88 98.13% 675.01 95.51%
7/12/06 $1.80 83.72% 1,922.11 99.28% 684.18 96.81%
7/11/06 $1.80 83.72% 1,936.85 100.04% 691.76 97.88%
7/10/06 $1.80 83.72% 1,935.70 99.99% 689.33 97.54%
7/7/06 $1.80 83.72% 1,944.44 100.44% 688.71 97.45%
7/6/06 $1.80 83.72% 1,956.93 101.08% 693.47 98.12%
7/5/06 $1.80 83.72% 1,938.14 100.11% 691.66 97.86%
7/3/06 $1.80 83.72% 1,945.76 100.50% 697.08 98.63%
6/30/06 $1.80 83.72% 1,928.59 99.62% 691.81 97.89%
6/29/06 $1.80 83.72% 1,900.94 98.19% 693.04 98.06%
6/28/06 $1.80 83.72% 1,856.66 95.90% 678.35 95.98%
6/27/06 $1.80 83.72% 1,847.34 95.42% 674.96 95.50%
6/26/06 $1.80 83.72% 1,874.94 96.85% 681.05 96.36%
6/23/06 $1.80 83.72% 1,866.05 96.39% 677.84 95.91%
6/22/06 $1.80 83.72% 1,858.73 96.01% 677.9 95.92%
6/21/06 $1.80 83.72% 1,865.81 96.37% 681.61 96.44%
6/20/06 $1.80 83.72% 1,846.93 95.40% 674.59 95.45%
6/19/06 $1.80 83.72% 1,841.36 95.11% 674.73 95.47%
6/16/06 $1.80 83.72% 1,858.87 96.02% 681.17 96.38%
6/15/06 $1.80 83.72% 1,814.11 93.70% 683.53 96.71%
6/14/06 $1.80 83.72% 1,810.57 93.52% 668.92 94.65%
6/12/06 $1.80 83.72% 1,859.34 96.04% 673.1 95.24%
6/9/06 $1.80 83.72% 1,883.14 97.27% 682.16 96.52%
37
PPOL American Composite Russell 1000
---------------------- ------------------------ ---------------------
6/8/06 $1.80 83.72% 1,894.41 97.85% 684.78 96.89%
6/7/06 $1.80 83.72% 1,910.34 98.68% 684.26 96.82%
6/6/06 $1.80 83.72% 1,924.49 99.41% 688.09 97.36%
6/5/06 $1.80 83.72% 1,950.95 100.77% 689.58 97.57%
6/2/06 $1.80 83.72% 1,977.44 102.14% 701.91 99.32%
6/1/06 $1.80 83.72% 1,957.20 101.10% 700.54 99.12%
5/31/06 $1.80 83.72% 1,928.36 99.61% 691.78 97.88%
5/30/06 $1.80 83.72% 1,929.55 99.67% 685.89 97.05%
5/26/06 $1.80 83.72% 1,953.55 100.91% 696.71 98.58%
5/25/06 $1.80 83.72% 1,925.65 99.47% 692.49 97.98%
5/24/06 $1.80 83.72% 1,890.83 97.67% 684.67 96.88%
5/23/06 $1.80 83.72% 1,897.37 98.01% 684.01 96.78%
5/22/06 $1.80 83.72% 1,901.64 98.23% 687.05 97.21%
5/18/06 $1.80 83.72% 1,916.13 98.97% 687.53 97.28%
5/16/06 $1.80 83.72% 1,969.87 101.75% 704.09 99.62%
5/15/06 $2.00 93.02% 1,951.71 100.81% 705.12 99.77%
5/12/06 $2.00 93.02% 1,992.77 102.93% 703.79 99.58%
5/11/06 $2.00 93.02% 2,012.84 103.97% 711.96 100.74%
5/10/06 $2.00 93.02% 2,041.64 105.46% 720.97 102.01%
5/9/06 $2.00 93.02% 2,044.78 105.62% 722.27 102.20%
5/8/06 $2.00 93.02% 2,024.23 104.56% 722.25 102.19%
5/5/06 $2.00 93.02% 2,028.68 104.79% 722.57 102.24%
5/4/06 $2.00 93.02% 2,015.12 104.09% 714.97 101.16%
5/3/06 $2.00 93.02% 2,001.00 103.36% 712.41 100.80%
5/2/06 $2.00 93.02% 2,020.21 104.35% 715.05 101.17%
4/28/06 $2.00 93.02% 2,007.83 103.71% 714.37 101.08%
4/27/06 $2.00 93.02% 1,991.73 102.88% 713.91 101.01%
4/26/06 $2.00 93.02% 2,000.26 103.32% 711.43 100.66%
4/25/06 $2.00 93.02% 2,006.39 103.64% 709.95 100.45%
4/24/06 $2.00 93.02% 2,020.04 104.34% 713.35 100.93%
4/21/06 $2.00 93.02% 2,017.63 104.22% 715.11 101.18%
4/20/06 $2.00 93.02% 1,995.59 103.08% 715.5 101.24%
4/19/06 $2.00 93.02% 2,011.13 103.88% 714.78 101.14%
4/18/06 $2.00 93.02% 1,986.47 102.61% 713.16 100.91%
4/17/06 $2.00 93.02% 1,959.71 101.23% 701.07 99.20%
4/13/06 $2.00 93.02% 1,941.68 100.29% 703.1 99.48%
4/12/06 $2.00 93.02% 1,944.93 100.46% 702.53 99.40%
4/11/06 $2.00 93.02% 1,936.18 100.01% 701.67 99.28%
4/10/06 $2.00 93.02% 1,950.99 100.77% 706.95 100.03%
4/7/06 $2.00 93.02% 1,954.59 100.96% 706.64 99.98%
4/6/06 $2.00 93.02% 1,975.63 102.05% 713.74 100.99%
4/5/06 $2.00 93.02% 1,955.99 101.03% 715.08 101.18%
4/4/06 $2.00 93.02% 1,952.45 100.85% 711.96 100.74%
4/3/06 $2.00 93.02% 1,935.31 99.96% 707.98 100.17%
------------------------------ ------------- -------------
3/31/06 $2.15 100.00% 1,935.99 100.00% 706.75 100.00%
------------- -------------
38
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 31, 2007, 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, 2007, there were 20,542,875 shares (1) of issued and outstanding
Common Stock. On April 23, 2007, PPOL effected a 1 for 100 reverse stock split.
As a result of the reverse stock split, the outstanding shares had been reduced
to approximately 204,000 shares. However, the percent of total common stock
owned by each individual or entity listed below had remained substantially the
same.
NUMBER OF SHARES
OF COMMON STOCK PERCENT OF TOTAL
NAME AND ADDRESS BENEFICIALLY OWNED (1) COMMON STOCK
---------------- ---------------------- ------------
5% Shareholders
Foster Strategic Investment Partnership(2) 105,475. 51.34%
9 Raffles Place #08-01, Republic Plaza
Singapore, 048619
Leo Global Fund(3) 31,385. 15.28%
Mori Bldg, 3F Toranomon 11
6-4 Toranomon, 2-Chome
Minato-Ku, Tokyo, Japan 105-0001
Directors and Officers
Yoshihiro Aota 0 0.00%
Tennozu Fist Tower, 9th floor
2-2-4 Higashi Shinagawa, Shinagawa-ku
Tokyo, Japan 140-0002
Richard H. Izumi 244 0.12%
1 City Boulevard West, Suite 820
Orange, California 92868
Masao Yamamoto 0 0.00%
Tennozu First Tower, 9th floor
2-2-4 Higashi Shinagawa, Shinagawa-ku
Tokyo, Japan 140-0002
(1) Beneficial ownership is determined in accordance with the rules of the
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.
39
EQUITY COMPENSATION PLAN INFORMATION
The following table summarizes information 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.
(A) (B) (C)
NUMBER OF SECURITIES REMAINING AVAILABLE FOR FUTURE ISSUANCE NUMBER OF SECURITIES
TO BE WEIGHTED-AVERAGE 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) 13,000 $400.00 7,000
Equity compensation
plans not approved by
security holders 0 Not applicable Not applicable
Total 13,000 $400.00 7,000
-----------------
(1) This plan is PPOL's 2004 Stock Option Plan.
* As adjusted for 1 for 100 reverse stock split as of April 23, 2007, 1,300,000
shares, $4.00, and 700,000 shares become 13,000 shares, $400, and 7,000 shares,
respectively.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
It is the corporate policy of PPOL that any transactions with related parties,
other than those within the consolidated group of PPOL that are eliminated in
consolidation, must be at arms length and have the written approval of at least
two of the three directors of PPOL.
The following are transactions with related parties during the fiscal year ended
March 31, 2007:
Advanced Communications
-----------------------
During the year ended March 31, 2007, PPOL entered into the following
transactions with Advanced Communications K.K. ("AC"), a Japanese corporation
that is 79.55% owned by Green Capital:
Inventory purchases $ 124,387
Information technology services 6,807,496
Other receipts, net (141,098)
----------------
$ 6,790,785
================
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. On March 31, 2007, we wrote
off our remaining inventory of SF-70 and U-Phone as a reserve for slow moving
inventory.
At March 31, 2007, our net accounts payable to AC was $511,584.
Seagull
-------
During the year ended March 31, 2007, PPOL entered into the following
transactions with K.K. Seagull (Seagull), a Japanese corporation and shareholder
of 4.52% of the Company's outstanding common stock:
Sales promotion activities $ 20,296
==============
UMBA
----
The Company has not received any funds during the year ended March 31,
2007 in service fee income from UMBA for providing certain administrative
services in connection with their insurance operations.
40
U-World
-------
PPOL made product sales of $367,351 and earned service revenues of
$1,153,759 from U-World and were billed $1,105,935 for services provided by them
during the fiscal year ended March 31, 2007. At March 31, 2007, our net accounts
payable to U-World was $21,717.
Other
-----
Tax services were performed by an accounting firm whose principal
officer is the spouse of our Chief Financial Officer. The Company paid $9,850 to
Izumi & Co. for tax planning and compliance related matters in the fiscal year
ended March 31, 2007
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES
The Company incurred the following fees to Windes and McClaughry
Accountancy Corporation in fiscal 2007 and Stonefield Josephson, Inc. in fiscal
2006.
2007 2006
---------------- ---------------
Assurance $ 124,080 $339,000
Tax fees -- --
All other fees -- --
---------------- ---------------
$ 124,080 $339,000
================ ===============
41
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, 2007, 2006, and 2005 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 41-61.
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 year ended March 31, 2007 through this filing, we
filed the following reports on Form 8-K:
(1) On September 8, 2006 the Company filed a Current
Report on Form 8-K under item 8.01, Other Events,
which reported that on September 6, 2006, the NASD
informed PPOL that its securities will be removed
effective immediately from the OTC Bulletin Board.
pursuant to NASD Rule 6530(e), the Company's
securities are not eligible for quotation on the
OTCBB for a period of one year, because the Company
has been delinquent three times in the past 24 months
in its reporting obligations under the Securities
Exchange Act of 1934, as amended. The Company is
presently delinquent in filing its annual report for
the fiscal year ended March 31, 2006, which was due
to be filed with the Commission on June 29, 2006, and
is delinquent in filing its quarterly report for the
quarter ended June 30, 2006, which was due to be
filed with the SEC on August 14, 2006. Following the
removal of the Company's securities from the OTCBB,
its securities shall not be eligible for quotation
until the Company has timely filed in a complete form
all required annual and quarterly reports due in a
one-year period.
(2) On March 8, 2007, the Company filed a Current Report
on Form 8-K under item 8.01, Other Events which
reported the approval by written consents of the
holders of a majority of the outstanding shares of
common stock of the Company on that day, of the
following resolutions by the Board of Directors: (a)
the Spin-Off of AJOL, and (b) 1 for 100 Reverse Stock
Split of the Company's presently issued and
outstanding shares of common stock, and to provide
for the payment of cash in lieu of fractionalized
shares otherwise issuable in connection with the
Reverse Split.
The Board unanimously voted to authorize an amendment
to the Company's By-laws to provide for
certificateless/electronic book entry ownership of
stock in the Company, such that the Company will not
issue stock certificates to evidence the ownership
thereof, but that information sufficient to identify
ownership in the Company will be entered in
electronic form in the books of the Company
maintained by its transfer agent. The Company will
adopt a system of issuance, recordation and transfer
of its shares by electronic or other means not
involving any issuance of certificates.
42
(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)
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)
----------------
(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.
43
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 October 16, 2008.
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 October 16, 2008.
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
Richard Izumi and Accounting Officer)
/s/ Yoshihiro Aota Director
------------------------------
Yoshihiro Aota
44
PPOL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2007, 2006 AND 2005
CONTENTS
--------
PAGE
----
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - 2007 and 2006 46
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - 2005 47
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets 48
Consolidated Statements of Operations and Comprehensive Loss 49
Consolidated Statements of Shareholders' Equity (Deficit ) 50
Consolidated Statements of Cash Flows 51
Notes to Consolidated Financial Statements 52
SCHEDULE II = VALUATION AND QUALIFYING ACCOUNTS 68
45
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of PPOL, Inc.
We have audited the accompanying consolidated balance sheets of PPOL, Inc. and
its subsidiaries as of March 31, 2007 and 2006, and the related consolidated
statements of operations and comprehensive (loss) income, shareholders' equity
(deficit), and cash flows for the years ended March 31, 2007 and 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 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. 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 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
subsidiaries as of March 31, 2007 and 2006, and the results of their operations
and their cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America.
The consolidated financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has had recurring losses during
the last three years, negative cash flows from operations of $1,470,920 and
$14,700,864 for the years ended March 31, 2007 and 2006, respectively, and, as
of March 31, 2007, had a working capital deficit of $5,852,282 and an
accumulated deficit of $17,958,920. These conditions raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 2. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Our audits were made for the purpose of forming an opinion on the basic
consolidated 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 consolidated financial statements. This schedule has been subjected
to the auditing procedures applied in our audits of the basic consolidated
financial statements and, in our opinion, is fairly stated in all material
respects in relation to the basic consolidated financial statements taken as a
whole.
/s/ Windes & McClaughry
Irvine, CA
October 9, 2008
46
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 statement of operations and
comprehensive (loss) income (as restated), shareholders' deficit, cash flow and
financial statement schedule for the year 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 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. 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 results of their operations, shareholders'
deficit and their cash flows for the year 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.
Los Angeles, California August 17, 2005, (Except for Footnote 10, as to which
the date is September 6, 2006)
47
PPOL, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS MARCH 31, 2007 MARCH 31, 2006
--------------- ---------------
CURRENT ASSETS:
Cash and cash equivalents .......................................... $ 5,474,547 $ 6,616,877
Trade accounts receivable, net of doubtful account allowance of 0 and 0 253,379 387,592
Inventories ........................................................ 278,343 2,108,211
Deferred costs, current ............................................ 22,025,853 38,972,218
Deferred income taxes, current ..................................... -- 6,506,531
Prepaid expenses and other current assets .......................... 371,011 1,221,656
--------------- ---------------
TOTAL CURRENT ASSETS ........................................... 28,403,133 55,813,085
RESTRICTED CASH ....................................................... 20,506,573 21,124,979
PROPERTY AND EQUIPMENT, NET ........................................... 244,994 447,914
SOFTWARE, NET ......................................................... 3,634,466 6,171,046
DEFERRED COSTS, NON-CURRENT ........................................... 2,317,296 24,126,665
DEFERRED INCOME TAXES, NON-CURRENT .................................... -- 3,990,423
GUARANTEED DEPOSITS.................................................... 896,876 926,890
OTHER ASSETS......................................................... 161,412 503,121
--------------- ---------------
TOTAL ASSETS $ 56,164,750 $ 113,104,123
=============== ===============
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES:
Accounts payable ................................................... $ 1,939,122 $ 4,057,276
Advances received .................................................. 7,027 41,978
Deferred revenue, current .......................................... 31,668,727 53,439,556
Income taxes payable ............................................... 2,459 31,431
Other current liabilities .......................................... 638,080 839,018
--------------- ---------------
TOTAL CURRENT LIABILITIES ........................................ 34,255,415 58,409,259
--------------- ---------------
ADVANCES RECEIVED, CUBE ............................................... 20,506,573 21,124,979
DEFERRED REVENUE, NON-CURRENT ......................................... 2,803,969 31,092,345
--------------- ---------------
TOTAL LIABILITIES .............................................. 57,565,957 110,626,583
--------------- ---------------
COMMITMENTS & CONTINGENCIES (NOTE 14)
SHAREHOLDERS' (DEFICIT) EQUITY:
Common stock; $0.001 par value; 100,000,000 shares authorized;
205,428 shares issued and outstanding
as of March 31, 2007 and 2006, respectively ......................... 205 205
Additional paid-in capital ............................................ 14,522,136 14,522,136
Accumulated other comprehensive income. .............................. 2,035,372 2,071,108
Accumulated deficit ................................................... (17,958,920) (14,115,909)
--------------- ---------------
TOTAL SHAREHOLDERS' (DEFICIT) EQUITY ............................. (1,401,207) 2,477,540
--------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
$ 56,164,750 $ 113,104,123
=============== ===============
The notes are an integral part of these consolidated financial statements.
48
PPOL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, 2007 MARCH 31, 2006 MARCH 31, 2005
---------------- ---------------- ----------------
NET REVENUE
Product sales .......................................... $ 52,974,307 $ 77,983,915 $ 96,690,799
Service fee income ..................................... 15,618,601 28,640,154 31,142,792
---------------- ---------------- ----------------
Total revenues ................................... 68,592,908 106,624,069 127,833,591
---------------- ---------------- ----------------
COSTS AND EXPENSES
Cost of sales - Products ............................... 13,271,275 22,053,203 26,842,453
Cost of sales - Services ............................... 9,126,758 8,361,781 7,864,701
Distributor incentives ................................. 30,376,719 47,203,479 62,106,377
Selling, general and administrative expenses ........... 9,185,140 28,310,587 28,783,491
---------------- ---------------- ----------------
Total costs and expenses ........................ 61,959,892 105,929,050 125,597,022
---------------- ---------------- ----------------
OPERATING INCOME .......................................... 6,633,016 695,019 2,236,569
---------------- ---------------- ----------------
OTHER INCOME (EXPENSE):
Interest income (expense) .............................. 372 (10,374) (48,463)
Others, net ............................................ 229,140 110,384 (181,499)
---------------- ---------------- ----------------
Total other income (expense), net ................ 229,512 100,010 (229,962)
---------------- ---------------- ----------------
INCOME BEFORE INCOME TAXES AND DISCONTINUED OPERATIONS .... 6,862,528 795,029 2,006,607
---------------- ---------------- ----------------
INCOME TAX EXPENSE:
Current ................................................ 208,585 4,562 1,618,916
Deferred ............................................... 10,496,954 3,177,005 1,145,660
---------------- ---------------- ----------------
Total income tax expense ........................ 10,705,539 3,181,567 2,764,576
---------------- ---------------- ----------------
NET (LOSS) FROM CONTINUING OPERATIONS ..................... (3,843,011) (2,386,538) (757,969)
DISCONTINUED OPERATIONS
Loss from discontinued segment, including
no gain on disposal .................................. -- -- 1,982,764
---------------- ---------------- ----------------
-- -- 1,982,764
---------------- ---------------- ----------------
NET LOSS .................................................. (3,843,011) (2,386,538) (2,740,733)
---------------- ---------------- ----------------
OTHER COMPREHENSIVE (LOSS) INCOME:
Foreign currency translation ........................... (35,736) 1,165,289 589,512
---------------- ---------------- ----------------
COMPREHENSIVE LOSS ....................................... $ (3,878,747) $ (1,221,249) $ (2,151,221)
================ ================ ================
NET LOSS PER COMMON SHARE:
Basic .................................................. $ (18.71) $ (11.86) $ (15.23)
================ ================ ================
Diluted ................................................ $ (18.71) $ (11.86) $ (15.23)
================ ================ ================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic .................................................. 205,428 201,308 179,937
================ ================ ================
Diluted ................................................ 205,428. 201,308 179,937
================ ================ ================
The notes are an integral part of these
consolidated financial statements.
49
PPOL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
CUMULATIVE TOTAL
COMMON STOCK ADDITIONAL OTHER SHAREHOLDERS'
PAID-IN COMPREHENSIVE ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL (LOSS)GAIN DEFICIT (DEFICIT)
----------- ----------- ----------- ----------- ----------- -----------
Balance, April 1, 2004 ........ 179,937 180 3,380,173 316,307 (8,988,638) (5,291,978)
Capital contribution from
majority shareholder ....... -- -- 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 ....... 179,937 180 6,292,737 905,819 (11,729,371) (4,530,635)
Issuance of common stock ...... 25,491 25 10,196,491 -- -- 10,196,516
Return of capital to Green
Capital .................... -- -- (1,967,092) -- -- (1,967,092)
Foreign currency
translation adjustment ..... -- -- -- 1,165,289 -- 1,165,289
Net loss ...................... -- -- -- -- (2,386,538) (2,386,538)
----------- ----------- ----------- ----------- ----------- -----------
Balance, March 31, 2006 ....... 205,428 205 14,522,136 2,071,108 (14,115,909) 2,477,540
Foreign currency
translation adjustment ..... -- -- -- (35,736) -- (35,736)
Net loss ................... .. -- -- -- -- (3,843,011) (3,843,011)
----------- ----------- ----------- ----------- ----------- -----------
Balance, March 31, 2007 ....... 205,428 205 14,522,136 2,035,372 (17,958,920) (1,401,207)
=========== =========== =========== =========== =========== ===========
The notes are an integral part of these consolidated financial statements.
50
PPOL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, 2007 MARCH 31, 2006 MARCH 31, 2005
-------------- -------------- --------------
CASH FLOWS (USED FOR) PROVIDED BY OPERATING ACTIVITIES:
Net loss .................................................... $ (3,843,011) $ (2,386,538) $ (2,740,733)
------------ ------------ ------------
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH (USED FOR)
PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization ............................. 2,588,159 3,421,770 4,377,326
Loss on sales/disposal of property, equipment and ......... 118,569 323,151 66,687
software
Loss on sale of investment ................................ -- -- 21,060
Deferred income taxes ..................................... 10,496,954 3,177,005 1,145,660
CHANGES IN ASSETS AND LIABILITIES:
(INCREASE) DECREASE IN ASSETS:
Restricted cash ........................................... 562,461 13,400,765 (4,946,574)
Trade accounts receivables ................................ 134,201 853,211 (1,023,287)
Inventories ............................................... 1,870,237 (1,052,521) 1,341,728
Advance payments .......................................... -- 897,446 (1,055,392)
Deferred costs ............................................ 38,893,197 16,287,827 10,960,350
Prepaid expenses and other current assets ................. 852,097 (652,112) (556,454)
INCREASE (DECREASE) IN LIABILITIES:
Accounts payable, including related parties ............... (2,123,471) (7,828,340) 1,735,891
Advances received ......................................... (35,118) (2,079,238) 923,571
Advances received--Cube ................................... (562,461) (13,400,765) 4,946,574
Deferred revenue .......................................... (50,228,006) (23,525,932) (12,462,083)
Income taxes payable ...................................... (29,120) (941,359) (14,718)
Other current liabilities ................................. (165,608) (1,195,234) 400,462
------------ ------------ ------------
Total adjustments ....................................... 2,372,091 (12,314,326) 5,860,801
------------ ------------ ------------
Net cash (used for) provided by operating activities .... (1,470,920) (14,700,864) 3,120,068
------------ ------------ ------------
CASH FLOWS PROVIDED BY (USED FOR) INVESTING ACTIVITIES:
Proceeds from sale of property, equipment and software ...... 52,166 22,792 365,886
Purchase of property, equipment and software ................ (54,430) (275,780) (7,164,787)
Investment in Object Innovation ............................. -- -- (300,000)
Proceeds from sale of Object Innovation ..................... -- -- 278,940
Net (increase) decrease in deposits and other assets ........ 347,675 3,317,382 11,826
------------ ------------ ------------
Net cash provided by (used for) investing activities .... 345,411 3,064,394 (6,808,135)
------------ ------------ ------------
CASH FLOWS PROVIDED BY 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 --
------------ ------------ ------------
Net cash provided by financing activities ............... -- 7,113,664 4,028,324
------------ ------------ ------------
EFFECTS OF EXCHANGE RATE ....................................... (16,821) (867,854) (416,276)
------------ ------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS ...................... (1,142,330) (5,390,660) (76,019)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ................... 6,616,877 12,007,537 12,083,556
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR ......................... $ 5,474,547 $ 6,616,877 $ 12,007,537
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid ............................................... $ -- $ 5,575 $ 19,000
============ ============ ============
Income taxes paid ........................................... $ 44,254 $ 974,810 $ 2,457,000
============ ============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
(See Note 7 - Green Capital and Forval)
The notes are an integral part of these consolidated financial statements.
51
PPOL, INC.
NOTES TO CONSOLIDATED FINANCIAL 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 direct marketing system from January
1, 2006, and a network marketing system, previously. 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 Notes 3 and 8 for additional
information on USC and Gatefor. All significant intercompany balances
and transactions have been eliminated upon consolidation.
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, 2007 and 2006, we
were not the primary beneficiary of any VIEs.
BASIS OF PRESENTATION:
The Company's present and past subsidiaries in Japan have all
maintained their records and prepared their 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 ("US 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.
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 net income.
52
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. At
March 31, 2007 and 2006, no allowance for doubtful accounts was
necessary.
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, 2007 and 2006 due to the short maturity of these instruments.
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 $2,934,452 and
$1,409,906, as of March 31, 2007 and 2006, 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. Leasehold
improvements are amortized over the shorter of their estimated useful
lives or intended lease term, including renewal options, and range from
3 to 15 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.
53
STOCK-BASED COMPENSATION:
The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 123R, "Share-Based Payments" on April 1, 2006. We adopted
the Modified Prospective Method in which 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.
Previously, PPOL had accounted 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 was recognized.
Thus, the Company utilized only the disclosure provisions of SFAS No.
123, "Accounting for Stock-Based Compensation," that applied to APB 25
and related interpretations in accounting for its Stock Option Plan and
did 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; dividend yield of
0.0% for 2006, and 2005; average volatility factor of the expected
market price of the Company's common stock of 262% for 2006, and 251%
for 2005; and an expected life of the options of 10 years for 2006, and
2005. No options were granted in Fiscal 2007 and all previously granted
options were fully vested prior to Fiscal 2007.
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 loss and loss per share would have been reduced to
the pro forma amounts indicated below:
YEARS ENDED MARCH 31:
------------------------------------
2006 2005
--------------- --------------
Net income (loss) as reported (in thousands $) (2,387) (2,741)
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)
Basic earnings per share as reported (11.86) (15.23)
Pro forma (17.03) (20.74)
Diluted earnings per share as reported (11.86) (15.23)
Pro forma (17.03) (20.74)
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.
54
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.
On March 8, 2007, the Company filed a Current Report on Form 8-K under
item 8.01, Other Events which reported the approval by written consents
of the holders of a majority of the outstanding shares of common stock
of the Company on that day, among other resolutions by the Board of
Directors, the Spin-Off of AJOL from the Company. SFAS No. 144 requires
us to an recognize an impairment loss, if any, when the asset is
disposed of, if the carrying amount of the asset (disposal group)
exceeds its fair value in addition to any impairment losses required to
be recognized while the asset is classified as held and used. The
Company has determined that the carrying amount of the asset is below
the fair market value of assets to be disposed of.
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, 2007,
2006, and 2005 were $0, $2,120,249, and $279,204, 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, 2007, 2006, and 2005 was $474,569,
$966,909, and $1,166,912, respectively.
55
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.
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 (loss), and accumulated other comprehensive
income, (loss) for the Company for the years ended March 31, 2007, 2006
and 2005 was primarily from the effects of foreign currency translation
adjustments.
EARNINGS PER SHARE:
The Company reports both basic loss per share, which is based on
the weighted average number of common shares outstanding and diluted
net loss per share, which is based on the weighted average number of
common shares outstanding and dilutive potential common shares.
Stock options to purchase approximately 13,000 shares of common stock
during fiscal 2007, 2006 and 2005, respectively, were outstanding but
not included in the computation of diluted loss per common share
because PPOL had a loss in the fiscal years ended March 31, 2007, 2006
and 2005 and therefore, the effect on dilutive loss per common
share would have been anti-dilutive.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
INCOME TAXES
In June 2006, the FASB issued an interpretation of SFAS No. 109,
Accounting for Income Taxes ("FIN 48"). The interpretation prescribes a
consistent recognition threshold and measurement attribute, as well as
criteria for subsequently recognizing, derecognizing and measuring such
tax positions for financial statement purposes. The interpretation also
requires expanded disclosure with respect to the uncertainty in income
taxes. We adopted FIN 48 commencing on April 1, 2007 for PPOL. There
was no impact of this interpretation on our consolidated financial
statements.
FAIR VALUE MEASUREMENTS
In September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements ("SFAS 157"), which defines fair value, establishes a
framework for measuring fair value in accordance with generally
accepted accounting principles, and expands disclosures about fair
value measurements. SFAS 157 was effective for the fiscal year
commencing on April 1, 2008, for PPOL. There is no impact of SFAS 157
on our Consolidated Financial Statements.
In February 2008, the FASB issued Staff Position 157-b, Effective Date
of FASB Statement No. 157, which delays the effective date of SFAS No.
157 for nonfinancial assets and nonfinancial liabilities until April 1,
2009, for PPOL.
ACCOUNTING CHANGES AND ERROR CORRECTIONS
In June 2006, the FASB issued SFAS No. 154, Accounting Changes and
Error Corrections ("SFAS 154"), which changed the requirements for the
accounting for and reporting of a change in accounting principle. This
Statement applies to all voluntary changes in accounting principle. It
also applies to changes required by an accounting pronouncement in the
unusual instance that the pronouncement does not include specific
transition provisions. When a pronouncement includes specific
transition provisions, those provisions should be followed. This
Statement carries forward without change the guidance contained in
Opinion 20 for reporting the correction of an error in previously
issued financial statements, change in accounting estimate, and
justification of a change in accounting principle on the basis of
preferability.
56
EFFECTS OF PRIOR YEAR MISSTATEMENTS
In September 2006, the Securities and Exchange Commission ("the
Commission") issued Staff Accounting Bulletin No. 108, "Considering the
Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements" ("SAB 108"), which provides
interpretive guidance on the consideration of the effects of prior year
misstatements in quantifying current year misstatements for the purpose
of a materiality assessment.
SAB 108 became effective as of the end of our fiscal year ended March
31, 2007, allowing a one-time transitional cumulative effect adjustment
to beginning retained earnings as of April 1, 2006, for errors that
were not previously deemed material, but are material under the
guidance in SAB 108. The adoption of SAB 108 did not have a material
impact on our consolidated financial statements.
BUSINESS COMBINATIONS
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business
Combinations ("SFAS 141R"), which changes how business combinations are
accounted for and will impact financial statements both on the
acquisition date and in subsequent periods. SFAS 141R is effective
April 1, 2009, for PPOL and will be applied prospectively. The impact
of adopting SFAS 141R will depend on the nature and terms of future
acquisitions.
NON-CONTROLLING INTERESTS IN CONSOLIDATED FINANCIAL STATEMENTS
In December 2007, the FASB issued SFAS No. 160, Noncontrolling
Interests in Consolidated Financial Statements ("SFAS 160"), which
changes the accounting and reporting standards for the noncontrolling
interests in a subsidiary in consolidated financial statements. SFAS
160 recharacterizes minority interests as noncontrolling interests and
requires noncontrolling interests to be classified as a component of
shareholders' equity. SFAS 160 is effective April 1, 2009 for PPOL and
requires retroactive adoption of the presentation and disclosure
requirements for existing minority interests. We do not believe the
adoption of SFAS 160 will have a material impact on our consolidated
financial statements.
(2) GOING CONCERN
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company
has had recurring losses during the last three years, negative cash
flows from operations of $1,470,920 and $14,700,864 for the years ended
March 31, 2007 and 2006, respectively, and, as of March 31, 2007, had a
working capital deficit of $5,852,282 and an accumulated deficit of
$17,958,320. The majority of income before income taxes in recent years
is attributed to the release of deferred revenue and related costs that
are being recognized as income and expense for financial accounting
purposes. Deferred revenues and related costs are attributable to (1)
shipments of our MOJICO machines in prior periods and (2) on-line
service fee subscriptions and renewals. Shipments of our MOJICO
machines have been negligible during the years ended March 31, 2007 and
2006.
During the year ended March 31, 2006, the Company changed from a
network marketing plan (Network) method to a direct marketing plan
(Direct) method. Under the Network method and through the influence and
guidance of Yoshihiro Aota, a member of our Board of Directors, the
Company generated significant sales of its MOJICO machines. These sales
generated significant cash and deferred revenues and costs for the
Company. After changing to a direct sales method, however, the
Company's sales of its MOJICO have effectively ceased. Further, Mr.
Aota has become the chief executive officer of U-World Co., Ltd., a
wholly owned subsidiary of K.K. Seagull, a direct competitor of the
Company which utilizes a network marketing plan similar to the
Company's previous marketing plan. U-World is a related party through
Mr. Aota who is a member of the Board of Directors of both entities.
Management has been able to adjust the Company's organizational
structure to substantially reduce selling, general and administrative
costs and the liquidation of deferred costs and deferred revenues will
not consume or provide any cash.
Further, as discussed in detail in Note 12,on February 16, 2007, the
Board unanimously approved the divestiture and Spin-Off of its wholly
owned operating subsidiary, AJOL, to the Company's shareholders.
Following the Spin-Off, the Company will acquire the status of a public
shell corporation with no operating business, and will seek merger,
acquisition, or other business opportunities. As of the filing date of
these consolidated financial statements, the Spin-Off was not
completed. Accordingly, the financial statements do not treat AJOL as a
discontinued operation.
57
These conditions raise substantial doubt about the Company's ability to
continue as a going concern. The consolidated financial statements do
not include any adjustments that might result from the outcome of these
uncertainties should the Company be unable to continue as a going
concern.
(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
(8), related party transactions.
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) 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 intermediaries. One
intermediary comprised 87.1% and 83.7% of accounts receivable at March
31, 2007 and 2006, 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.
(5) PROPERTY AND EQUIPMENT AND SOFTWARE:
Property and equipment and software consisted of the following:
YEAR ENDED MARCH 31:
----------------------------
2007 2006
----------- -----------
Leasehold improvements ............ $ 135,944 $ 101,709
Office equipment .................. 1,374,333 1,952,094
Less: accumulated depreciation .... (1,265,283) (1,605,889)
----------- -----------
Property & Equipment, net ......... $ 244,994 $ 447,914
=========== ===========
Software .......................... $ 6,081,563 $ 9,252,781
Less: accumulated amortization .... (2,447,097) (3,081,735)
----------- -----------
Software, net ..................... $ 3,634,466 $ 6,171,046
=========== ===========
Depreciation and amortization of property and equipment and software
totaled $2,588,159, $3,421,770, and $4,377,326 for the years ended
March 31, 2007, 2006 and 2005, respectively.
(6) FINANCING ARRANGEMENTS:
On March 31, 2007, the Company had a $4,239,947 line of credit with a
bank. This line of credit was never used and had expired on August 31,
2007 and was not renewed, thereafter. 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.
Additional financing arrangements are discussed under Note 8 under
Common Stock Offering.
58
(7) 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 40.69%. 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
-------------------- ------------------ ------------------- ------------------
2007
Japan $ 7,424,490 $ 3,236 $ 10,496,954 $ 10,500,190
US (561,962) 205,349 -- 205,349
-------------------- ------------------ ------------------- ------------------
$ 6,862,528 $ 208,585 $ 10,496,954 $ 10,705,539
==================== ================== =================== ==================
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
==================== ================== =================== ==================
A reconciliation between the statutory tax rate and the effective
income tax rate is as follows:
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, 2007 MARCH 31, 2006 MARCH 31, 2005
------------------- -------------------- -------------------
Normal statutory tax rate.............. 40.7% 40.7% 40.7%
Valuation reserve of deferred tax assets 108.4 -- --
Entertainment and other non-deductible
expenses........................... 0.2 17.4 18.8
Effect of non-deductibility of US losses 8.1 82.5 49.6
Effect on non-deductibility of
acquired entity's losses............ -- 122.1 --
Foreign currency translation........... (.5) 137.0 23.0
Other.................................. (1.0) .5 5.7
------------------- -------------------- -------------------
Effective tax rate..................... 155.9% 400.2% 137.8%
=================== ==================== ===================
59
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets are as follows:
MARCH 31, 2007 MARCH 31, 2006
---------------------- ----------------------
Deferred tax assets (liabilities):
Deferred revenues........................ $ 14,026,940 $ 34,396,031
Deferred costs........................... (9,905,227) (25,674,935)
Excess of accrued bonus................. 12,072 21,660
Resort membership admission fees........ -- 254,473
Accrued compensated absences............ 8,023 17,697
Excess depreciation and amortization.... 22,088 33,022
Inventory write-down.................... 1,175,216 573,689
Net operating losses 1,809,256 816,784
Others.................................. 309,475 58,533
---------------------- ----------------------
Net deferred tax assets - Japan......... 7,457,843 10,496,954
---------------------- ----------------------
Net operating losses.................... 1,533,022 1,305,828
---------------------- ----------------------
Net deferred tax assets - US............ 1,533,022 1,305,828
---------------------- ----------------------
Net deferred tax assets - combined...... 8,990,865 11,802,775
Valuation allowance..................... (8,990,865) (1,305,828)
---------------------- ----------------------
Total deferred tax assets........... $ -- $ 10,496,954
====================== ======================
Management believes that it is more likely than not that the deferred
tax assets attributable to operations in Japan will not be realized
through future earnings, tax planning or future reversals of existing
temporary differences with the exception of certain nominal items.
Accordingly, a valuation allowance is recorded for all Japanese
deferred tax assets as it is considered more likely to not be realized
as of March 31, 2007. At March 31, 2006, all items were considered to
be more likely than not to be realizeable, and no valuation allowance
was recorded.
The increase in deferred tax assets from fiscal 2006 to 2007 in the
United States is entirely from net operating losses of PPOL on a
stand-alone basis in fiscal 2007. 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, 2007 and 2006. The valuation
allowance increased by $7,685,037 and $655,513 between March 31, 2007
to 2006, and March 31, 2006 and 2005, respectively. At March 31, 2007,
PPOL's net operating loss carry forward was approximately $3,700,000 in
the U.S. expiring through 2027 and $7,000,000 in Japan, expiring
through 2012.
(8) 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 this acquisition:
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
================
60
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, $1,967,092, was treated as a return of capital to Green
Capital.
ADVANCED COMMUNICATIONS
During Fiscal 2007 and 2006, PPOL entered into the following
transactions with Advanced Communications K.K.("AC"), a Japanese
corporation that is 79.55% owned by Green Capital:
2007 2006
------------ -----------
Inventory purchases ........... $ 124,387 $12,123,000
Information technology services 6,807,496 13,925,000
Other transactions, net ....... (141,098) --
----------- -----------
$ 6,790,785 $26,048,000
=========== ===========
Information technology services in Fiscal 2006, includes $2,120,000 in
research and development activities for the enhancement of our
U-Phones' functional features.
At March 31, 2007 and 2006, PPOL's net accounts payable to AC was
$511,584 and none, respectively.
SEAGULL
During Fiscal 2007, 2006 and 2005, 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:
2007 2006 2005
---------- ---------- ----------
Sales promotion activities $ 20,296 $5,197,000 $7,434,765
Events planning and production -- 1,451,000 1,831,345
Other -- 212,000 732,149
---------- ---------- ----------
$ 20,296 $6,860,000 $9,988,259
========== ========== ==========
At March 31, 2007, 2006 and 2005, PPOL had payables to Seagull of $0,
$0, and $803,838, respectively.
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 valued the Gatefor and OI Shares at approximately $1,395,000,
and $279,000, respectively.
61
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, $2,912,564, 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. Following the consummation of the Purchase Agreement, the
independent directors and non-independent directors, prior to the
consummation of this transaction, resigned from the Board of Directors.
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 $0, $9,779,145, and $11,166,622 during the
years ended March 31, 2007, 2006 and 2005, respectively, in service fee
income from UMBA for providing certain administrative services in
connection with their insurance operations.
At March 31, 2007, 2006 and 2005, PPOL had no receivables or payables
to UMBA.
U-World
PPOL made product sales of $367,351 and $0 and had earned service
revenues of $1,153,759 and $299,662 from U-World and were billed
$1,105,935 and $1,509,921 for services provided by them during the
fiscal years ended March 31, 2007 and 2006, respectively. There were no
transactions between PPOL and U-World during the fiscal year ended
March 31, 2005. At March 31, 2007, our net accounts payable to U-World
was $21,717. At March 31, 2006,our net receivables from U-World was
$70,088.
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 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.
62
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, at the time of the offering, ia also the
Representative Director of K.K. H.I. Consultants.
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 in the year ending March 31, 2005.
Tax services were performed by an accounting firm whose principal
officer is the spouse of our Chief Financial Officer. The Company paid
$9,850, $8,000 and $12,000 to Izumi & Co. for tax planning and
compliance related matters in the fiscal years ended March 31, 2007,
2006, and 2005, respectively.
(9) 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
20,000 shares of the Company's post reverse stock split (see Note 11)
common stock to employees, directors and consultants.
A total of 12,200 post reverse stock split, 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). 800 post reverse stock split
options were granted to two outside directors of PPOL in fiscal 2005.
Such options became fully vested during fiscal 2006. A summary of the
Company's stock option plan activity is presented below for the fiscal
year ended March 31, 2005:. There have been no stock option plan
activities in the years ended March 31, 2007 and 2006.
WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
------- ----------------
Outstanding at March 31, 2004................ 12,200 $ 400
Granted................................... 800 400
Exercised................................. -- --
Forfeited................................. -- --
Expired................................... -- --
------ -----
Outstanding at March 31, 2005................ 13,000 $ 400
====== =====
The following table summarizes information about the stock options
outstanding and exercisable at March 31, 2007:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- -------------------
AVERAGE WEIGHTED WEIGHTED
YEAR RANGE OF REMAINING AVERAGE AVERAGE
OPTIONS EXERCISE CONTRACTUAL EXERCISE EXERCISE
GRANTED PRICES OPTIONS LIFE PRICE OPTIONS PRICE
------------ --------- ------- ----------- --------- ------- --------
2004.......... $ 400 12,200 7.00 $ 400 12,200 $ 400
2005.......... 400 800 7.25 400 800 400
2006.......... -- -- -- -- -- --
2007.......... -- -- -- -- -- --
------ ---- ----- ------ -----
Total 13,000 7.02 $ 400 13,000 $ 400
====== ==== ===== ====== =====
As of March 31, 2007, there was no unrecognized compensation cost
related to stock options outstanding. We recognize expense on stock
options using a graded vesting method, which recognizes the associated
expense based on the timing of option vesting dates.
(10) 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. Prior year information
has been restated to conform to current year presentation.
63
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 year ended March 31, 2005.
(11) REVERSE STOCK SPLIT:
As announced on March 30, 2007, the Board, on February 16, 2007,
unanimously voted to authorize a one (1) for one hundred (100) reverse
stock split (the "Reverse Split") of the Company's issued and
outstanding shares of common stock, and the payment of cash in lieu of
fractionalized shares otherwise issuable in connection with the Reverse
Split. The Reverse Split provided shareholders owning less than one
hundred (100) shares of common stock of the Company (the "Odd-Lot
Holders") the benefit of liquidating their relatively small odd-lot
holdings for market value without brokers' commissions. This is
particularly beneficial to the Odd-Lot Holders given the limited market
for and trading in the Company's common stock. The Odd-Lot Holders own
less than one percent (1%) of the Company's outstanding common stock.
The Reverse Split will allow the Company to purchase and acquire the
common stock of approximately 1,088 holders of record of the Company,
all of whom reside in the United States and each of whom owns less than
one hundred (100) shares of common stock in the Company. The Reverse
Split will also save the Company administrative and related costs of
sending proxy statements, annual reports, quarterly reports and other
communications to the Company's affected shareholders. The Company also
believes that the Reverse Split will facilitate and allow for the
benefits of the Spin-Off discussed below. The Reverse Split was
effective on April 23, 2007. The consolidated financial statements of
the Company reflect the effect of the reverse stock split
retroactively.
(12) SPIN-OFF OF AJOL
On February 16, 2007, the Board of Directors unanimously approved a
transaction involving the separation of the Company's wholly-owned
subsidiary, AJOL, by authorizing the issuance of shares of common stock
of AJOL owned by the Company to the stockholders of the Company in
proportion to each stockholder's percentage ownership in the Company
(the "Spin-Off"). In authorizing the foregoing, the Board considered
that the Company's business is operated exclusively in Japan through
AJOL, and that there is relatively little or no interest in the Company
and its common stock and AJOL in the United States. The Board also
considered that a majority of the Company's shareholders reside in
Japan. The Board also believes that shareholders of the Company could
maximize the value of their shares in the Company by directly holding
shares in AJOL, in addition to continuing holding shares in the
Company. The Board also considered that AJOL would be in a position to
seek and obtain private issuer status in the United States following
the Spin-Off, thereby allowing AJOL to seek suspension of any
reporting obligations to the Commission which it would following
the Spin-Off. The Board also concluded that the Spin-Off will allow
AJOL to more effectively and efficiently focus on its business in
Japan. Based on the foregoing, the Board authorized the transaction
whereby the Company will seek divestiture of and Spin-Off AJOL to the
stockholders of the Company, pro rata. Following the Spin-Off, the
stockholders of the Company will continue to own the same number of
shares in the Company that they held pre Spin-Off, and will in addition
own AJOL shares in proportion to their percentage ownership in the
Company. Following the Spin-Off, the Company will acquire the status of
a public shell corporation with no operating business, and will seek
merger, acquisition or other business opportunities. The effective date
of the Spin-Off and the record date for stockholders to be eligible to
receive AJOL shares in the Spin-Off will be determined by the Board, as
appropriate, and will be subject to the filing and effectiveness of a
registration statement with the SEC, registering the AJOL shares. The
Board can provide no assurance that a public market or any market for
the AJOL shares or the Company's shares, either in Japan or the United
States, will develop or exist or at what price following the Spin-Off.
At March 31, 2007, and through the filing of this Form 10-K, the
Spin-Off was not completed. The financial information included herein
does not treat AJOL as a discontinued operation as of March 31, 2007
as AJOL will be treated as the spinnor and surviving entity for
accounting purposes even though PPOL will be the spinnor and surviving
entity for legal purposes. Additionally the current shareholders of
PPOL will continue to be shareholders of AJOL after the Spin-Off, we
believe the treatment of AJOL as a continuing operation to be the
most appropriate accounting recognition under the given circumstances.
It will also provide the reader with more comparable year to year
performance information.
64
Condensed stand alone balance sheet for PPOL as of March 31, 2007 and
2006 follows:
2007 2006
---- ----
Current assets $ 152,720 $ 857,022
Investment in AJOL 253,392 253,392
Other assets 4,409 8,245
----------- -----------
Total assets $ 410,521 $ 1,118,659
=========== ===========
Current liabilities $ 52,110 $ 161,715
Notes payable to AJOL 168,777 --
----------- -----------
Total liabilities 220,887 161,715
Capital stock and
additional-paid-in-capital 14,522,341 14,522,341
Accumulated other comprehensive income 2,344,055 2,344,055
Accumulated deficit (16,676,762) (15,909,452)
----------- -----------
Total shareholders' equity 189,634 956,944
----------- -----------
Total liabilities and
shareholders' equity $ 410,521 $ 1,118,659
=========== ===========
Condensed stand alone statement of operations for PPOL for the years
ended March 31, 2007, 2006 and 2005 follows:
2007 2006 2005
---- ---- ----
Service fee income from AJOL $ 309,171 $ -- $ --
Dividend income from AJOL -- -- 1,185,253
General and administrative expenses (892,521) (1,519,760) (2,379,002)
Other income (expense), net 20,567 (91,234) (67,319)
Income tax expense (205,349) (800) (37,441)
----------- ----------- -----------
Net loss $ (768,132) $(1,611,794) $(1,298,509)
=========== =========== ===========
(13) CERTIFICATELESS/ELECTRONIC BOOK ENTRY OWNERSHIP
On February 16, 2007, the Board unanimously voted to authorize an
amendment to the Company's By-laws to provide for
certificateless/electronic book entry ownership of stock in the
Company, such that the Company will not issue stock certificates to
evidence the ownership thereof, but that information sufficient to
identify ownership in the Company will be entered in electronic form in
the books of the Company maintained by its transfer agent. The Company
will adopt a system of issuance, recordation and transfer of its shares
by electronic or other means not involving any issuance of
certificates. The conversion to certificateless ownership will be
facilitated by the Company's stock transfer agent. The Company is
currently in the process of collecting the physical certificates from
shareholders to convert them to electronic book entry.
65
(14) COMMITMENTS AND CONTINGENCIES:
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, 2007, 2006, and 2005 were
approximately $337,612, $1,081,212, and $997,150, respectively.
Additionally, the Company has various professional consulting service
contracts in effect which collectively require payments in the future.
At March 31, 2007 minimum non-cancelable payments to be made in the
future are as follows:
YEAR ENDING OPERATING CONSULTING
MARCH 31, LEASES SERVICES
----------------------- ------------------- ----------------
2008 $ 239,160 $ 75,327
Thereafter 9,900 --
CONTINGENCIES
On October 17, 2005, PPOL's ultimate majority shareholder, Green
Capital, filed an action against Capital Aid, Inc., a Japan
corporation, and Messrs. Hiroshi Shibakawa, Kenji Nakamura, Yoshiyuki
Okamura, Yoshiteru Sazanami, Hiroshi Matsuo, Tokuji Koga and Chizuko
Koga (the "Ide Group"), in Tokyo District Court (case no. (wa)
2005-20878) to recover PPOL common share stock certificates (the "PPOL
Certificates") registered in the name of Foster Strategic Investment
Partnership ("FSIP"), and beneficially owned by Green Capital. The Ide
Group maintains physical possession of the PPOL Certificates. Green
Capital has alleged in its lawsuit that 1) the Ide Group purchased the
PPOL Certificates from a person who was not the owner therefore (or
has any right or interest therein); and 2) did not constitute a bona
fide purchaser thereof, as such is provided under the Article 131-2 of
the Commercial Code of Japan, Green Capital is entitled to the remedy
of repossession of the PPOL Certificates at issue. The Ide Group, in
turn, has countersued Green Capital, Green Capital's then-CEO, PPOL,
PPOL's and AJOL's directors, PPOL's operating subsidiary, AJOL, and
Nobuo Takada, a former director and CEO of PPOL, for $9.2 million
(1.056 billion yen) plus interest. In its countersuit, the Ide Group
alleges Takada had tricked them into buying the PPOL Certificates and
borrowing money from them, using the PPOL Certificates as collateral.
The Ide Group has alleged in its countersuit that each named
counter-defendant conspired with Takada in a series of alleged
unlawful and improper transactions resulting in the Ide Group's
purchase of the PPOL Certificates and loan to Takada. At the time of
the alleged series of transactions, Takada was neither a director nor
officer of PPOL or AJOL. Green Capital has also contacted the Tokyo
Metropolitan Police Department and has filed a criminal complaint
against Nobuo Takada for alleged embezzlement of the PPOL Certificates
registered in the name of FSIP and beneficially owned by Green
Capital. Green Capital, Green Capital's then-CEO, PPOL, PPOL's and
AJOL'S directors, and PPOL's operating subsidiary, AJOL have all
denied knowledge of any of the alleged transactions and any improper
conduct associated with such alleged transactions. Based, in part, on
the advice of counsel, management believes the ultimate resolution of
this litigation will not have a material impact on the financial
position, results of operations or cash flows of the Company.
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.
66
QUARTERLY INFORMATION
(Unaudited)
Quarter Ended June 30 September 30 December 31 March 31 Total
Fiscal year ended March 31, 2007
Revenue $ 20,520,541 $ 17,961,325 $ 16,304,648 $ 13,806,394 $ 68,592,908
Gross profit $ 12,738,369 $ 12,366,453 $ 11,536,134 $ 9,553,919 $ 46,194,875
Net income (loss) $ (9,891,385) $ 2,291,900 $ 2,060,084 $ 1,696,390 $ (3,843,011)
Basic earnings per share $ (48.15) $ 11.16 $ 10.03 $ 8.25 $ (18.71)
Diluted earnings per share $ (48.15) $ 11.16 $ 10.03 $ 8.25 $ (18.71)
Fiscal year ended March 31, 2006
Revenue $ 31,844,425 $ 27,195,437 $ 25,069,610 $ 22,514,597 $ 106,624,069
Gross profit $ 23,013,837 $ 19,260,034 $ 17,728,385 $ 16,206,829 $ 76,209,085
Net income (loss) $ (3,042,260) $ (1,175,874) $ 135,638 $ 1,695,958 $ (2,386,538)
Basic earnings (loss) per share $ (16.12) $ (5.72) $ 0.66 $ 9.32 $ (11.86)
Diluted earnings per share $ (16.12) $ (5.72) $ 0.66 $ 9.32 $ (11.86)
67
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED MARCH 31, 2007, 2006 AND 2005
BEGINNING ADDITIONS NON-CASH ENDING
BALANCE CHARGED TO (REDUCTIONS) BALANCE
DESCRIPTION ACCRUAL INCOME OR ADDITIONS REVERSAL ACCRUAL
--------------------------- ---------------- --------------- ----------------- --------------- ---------------
Provision for doubtful
receivable
2007............ -- -- (0)
2006............ (0) -- -- -- (0)
2005............ (0) -- -- -- (0)
Provision for inventory
obsolescence
2007............ $1,409,906 $1,707,494 $ 29,961 $ (212,909) $ 2,934,452
2006............ $ 50,316 -- $1,400,170 $ (40,580) $ 1,409,906
2005............ $ 130,757 -- $ (4,000) $ (76,441) $ 50,316
68