PPOL, Inc.
1 City Boulevard West, Suite 820
Orange, California 92868
June 4, 2006
U.S. Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549
Attn: Bob Carroll
Re: PPOL, Inc.
Form 10-K for Fiscal Year Ended March 31, 2005
Filed September 1, 2005
Form 10-Q for Quarter Ended December 31, 2005
Filed March 23, 2006
File No. 0-50065
Dear Mr. Carroll:
This letter is in response to your letter to us dated April 5, 2006,
and further to our supplemental response letter dated March 23, 2006. The
response numbers below refer to the comment numbers in your April 5 letter.
Form 10-K for the Fiscal Year ended March 31, 2005
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Note 1. Organization and Summary of Significant Accounting Policies
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Restricted Cash and Advances Received - Cube, page F-8
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RESPONSE 1
CURRENT TREATMENT CLASSIFIED AS RESTRICTED CASH. Based upon existing
documentation and representations from prior management, we have continued to
follow the methodology and treatment by the prior management. Their rationale,
with which we have heretofore concurred, was based upon the following:
We have a legal obligation to the distributors for the cash advances the
distributors made directly to U Mutual Benefit Association (UMBA), formerly
known as Kamome Mutual Benefit Association. At the time of the transfer, our
then members were notified of the transfer. Nevertheless, their agreements were
then, and remain to this day, with AJOL, PPOL's wholly-owned subsidiary. No
changes have been made as the administrative burden and monetary costs are
prohibitive. Following AJOL's transfer to UMBA, UMBA, in turn, has transferred
such cash over to U-Service Friendship Association (USFA)(1). Contracts entered
into subsequent to the transfer are with UMBA and USFA. AJOL has no title to
cash collected from and related liability to new members. PPOL's financial
statements do not reflect such cash and related liabilities
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(1) In October 2005, funds we transferred to UMBA, were in turn, transferred to
the U-Service Friendship Association (USFA), a not-for-profit membership
organization to succeed in the role UMBA took, except as discussed below. USFA
is unrelated to K.K. U-Service, which is referred to in Note 10 to the financial
statements. The purpose of the transfer was to restrict UMBA's purpose of
existence to obtain various insurance plans for its members at a discounted
premium. It should be noted that the transfer of funds from UMBA to USFA were by
and between those entities. AJOL is not a party to such agreements.
U.S. Securities and Exchange Commission
Page 2
What is reflected on PPOL's financial statements as "restricted cash" represents
cash collected from members who entered into contracts prior to the transfer
described in the foregoing paragraph. "Restricted cash" equals cash collected
from such members prior to and following the transfer, less payments made to
vendors following the transfer.
ALTERNATIVE TREATMENT UNDER CONSIDERATION. We are currently seeking opinion from
Japanese legal counsel as to what our legal obligation is with respect to cash
advances the distributors made directly to UMBA. As noted above, the
distributors' agreements were then, and remain to this day, with AJOL, PPOL's
wholly-owned subsidiary. The key component, however, is the notification AJOL
had given to the distributors of the transfer of their funds to UMBA. It is now
believed that AJOL's liability to the distributors may be limited to the amount
we transferred to UMBA. Any subsequent use of such advances at the direction of
distributors would reduce AJOL's liability. Under this scenario, the advances
transferred to UMBA would be classified as an asset "Advances made (to UMBA)"
and a corresponding liability "Advances received (from distributors)". Opinion
from Japanese legal counsel will be received prior to filing our 10-K for the
year ended March 31, 2006.
In addition, while UMBA and USFA are independent, non-profit membership
organizations and AJOL has no controlling interest in them, we are currently
making an internal investigation whether such transactions and relationships
with UMBA and USFA will require them to be classified as Variable Interest
Entities under FIN 46-Consolidation of Variable Interest Entities. Based on the
results of our investigation, which we expect to complete prior to filing of our
10-K for the year ended March 31, 2006, we may be required to include UMBA or
USFA into its consolidated financial statements.
If deemed appropriate, we will file amendments to prior 10-Qs and 10-Ks.
FLOW OF CASH COLLECTED FROM RECEIPT TO DISBURSEMENT
We describe below the flow of cash collected from members to its disbursement
from UMBA and USFA, together with a historical perspective covering the period
prior to AJOL transferring the cash to UMBA. For further background information,
please refer to footnote 1, on the previous page, with respect to the transfer
of funds from UMBA to USFA.
AJOL had collected monthly cash advance payments from members through a
prepayment system known as Cube. These prepayments were accounted for as a
liability called Advances Received on AJOL's balance sheet. These advance
payments were prepayments for orders that the members would place in the future
via the Cube system. There were no restrictions on AJOL's use of this cash. Upon
receiving orders from these members for goods or services, the member's account
would be charged. On May 28, 2004, AJOL remitted approximately $16.3 million to
U (formerly Kamome) Mutual Benefit Association (UMBA), a not-for-profit
membership organization, to administer these advance payments from AJOL members
pursuant to the Cube Preservation Agreement (the Cube Agreement) dated May 21,
2004. Subsequently, advance payments from members have been received by UMBA and
not AJOL. Only AJOL members or their family may become members of UMBA, but are
not required to do so.
The Cube Agreement provides that UMBA will provide custodial services over the
advances received from AJOL members. It also states that the cash will only be
used in satisfaction of orders received from members. The agreement does not
provide for the transfer of title to the cash or transfer of the liability
associated with the Advances Received to UMBA. Therefore, AJOL now accounts for
this cash as restricted cash to be used only in satisfaction of orders received
from members.
U.S. Securities and Exchange Commission
Page 3
Also as noted in the previous section, while UMBA and USFA are independent,
non-profit membership organizations and AJOL has no controlling interest in
them, we are currently making an internal investigation whether such
transactions and relationships with UMBA and USFA will require them to be
classified as Variable Interest Entities under FIN 46-Consolidation of Variable
Interest Entities. Based on the results of our investigation, which we expect to
complete prior to filing of our 10-K for the year ended March 31, 2006, we may
be required to include UMBA or USFA into its consolidated financial statements.
If deemed appropriate, we will file amendments to prior 10-Qs and 10-Ks.
AJOL'S ARRANGEMENTS WITH UMBA AND USFA
UMBA
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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. There are
no other arrangements between AJOL and UMBA other than what is covered in our
response to your second comment.
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
UMBA's cash receipts are comprised of payments made by the members. Its cash
disbursements are to the respective insurance companies and AJOL for the
administrative functions.
USFA
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USFA receives prepayments directly from its members for orders that they will
place in the future via the Cube system. USFA will then place orders on behalf
of its members, as they are received, with the appropriate vendors and makes
payment.
USFA's receipts from members are unrelated and separate to those collected by
UMBA for the insurance premiums. Such receipts are based on contracts members
have with (1) AJOL prior to the original transfer to UMBA, (2) UMBA prior to the
subsequent transfer to USFA, and (3) USFA, thereafter.
PPOL's "Restricted cash" represents (1) described in the previous paragraph less
payments made to vendors following the original transfer from AJOL to UMBA.
AJOL is the vendor on a majority of the orders placed. AJOL records sales and
related cost of sales upon shipment of the goods ordered from its warehouse.
When AJOL is not the vendor, it receives commissions from the vendor. AJOL
records such commissions when cash is remitted from the vendor. These vendors
are unrelated to AJOL. AJOL does not record the gross sales amount realized by
and related cost of sales incurred by the vendor. It only reflects commission
income.
U.S. Securities and Exchange Commission
Page 4
RESPONSE 2
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As discussed in our response to your first comment, AJOL entered into the Cube
Agreement with UMBA. The Cube Agreement provides the following:
o The purpose of the agreement is to have a clear segregation of cash
received from members as prepayments for orders that they will place
in the future via the Cube system and AJOL's working capital.
o UMBA will provide custodial services over the advances received from
AJOL members,
o Such cash will only be used in satisfaction of orders received from
members.
o UMBA will provide monthly reports of receipts and disbursements to
AJOL, and special reports as requested by AJOL.
o UMBA's sole compensation for providing custodial services will be the
interest income earned on the funds in its custody.
The agreement does not specifically provide for the transfer of title to the
cash or transfer of the liability associated with the Advances Received to UMBA.
RESPONSE 3
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We will state the Revenue Recognition Policy for products and services sold to
distributors through the UMBA and USFA in future filings.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
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Year Ended March 31, 2005 Compared to Year Ended March 31, 2004
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Cost of Sales, page 24
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RESPONSE 4
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NATURE AND TERMS OF INSURANCE PRODUCTS
The insurance plans that are available through UMBA cover life, health and
property. Insurance plans are only available to members of UMBA. To join UMBA,
an individual must be a subscriber to AJOL's services. However, membership in
UMBA is not mandatory.
There are currently four plans covering life and health: the Big Plan, the Wide
Plan, the 3 Major Adult Illnesses Plan, and the Security Plan. Premiums are paid
on a monthly basis and calculated according to a schedule determined by age,
gender, and level of coverage requested. Depending on the plan, subscribers may
receive compensation for death, hospitalization, surgery, or disabilities due to
accidents or illness. Compensation is calculated using a fixed schedule based on
age, coverage level, gender, and type of claim. The plans are underwritten by
insurance companies such as Pacific Life Insurance and Hannover Insurance Group.
One plan, the "119(2) Plan" covers health and property losses from accidents or
disasters such as fire, theft, blizzards, or plumbing failure. Compensation is
calculated based on the nature of the accident and whether or not the policy
holder owns the damaged property. It is also possible to file claims for
hospitalization. This plan is underwritten by Germany's R&V Insurance Company.
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(2) The number "119" is a reference to Japan's phone number equivalent of US'
"911" for emergencies other than those requiring police assistance.
U.S. Securities and Exchange Commission
Page 5
The insurance premium on each of these plans range from $17 to $58 per month.
While each plan is for a term of one year, they are cancelable by the insured
with a one month notice.
REVENUE RECOGNITION POLICY FOR INSURANCE PRODUCTS
As discussed in response 1 under "AJOL's arrangements with UMBA and USFA -
UMBA," 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.
There are no other arrangements between AJOL and UMBA other than what is covered
in our response to your second comment. There are no arrangements between AJOL
and the insurance companies that provide the insurance products.
EITF 99-19
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While EITF 99-19's paragraph 4 specifically excludes insurance and reinsurance
premiums, we believe its intent is applicable to us. Our revenues are based on
services we perform over a definite period of time and booked as revenues when
we provide them. Our revenues are not subject to adjustment based on unknown
future events. The revenue we have recorded is not the gross amount of insurance
premiums collected by UMBA, but the amount we collect for providing services.
Indicators of gross revenue reporting discussed in paragraphs 7-14 of EITF 99-19
are not present at AJOL. Conversely, all indicators of net revenue reporting
discussed in paragraphs 15-17 are present at AJOL.
REFUND ACCRUAL PROPRIETY
We believe it is appropriate to accrue 1/12th of the total refund on a monthly
basis as we record 1/12th of the annual revenues on a monthly basis, as
described in "Revenue recognition policy" above. We also confirm that the total
amount subject to refund does not exceed our fees. Specifically, we received
2,234 yen per month on the "Security Plan" noted above, which is 32% of 6,980
yen premium collected by UMBA per month. Our monthly accrual was 833 yen
representing 1/12th of the total refund of 10,000 yen.
Form 10-Q for the period ended December 31, 2005
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Note 2. Related Party Transaction, page 10
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RESPONSE 5
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Subsequent to your inquiries, I have met and inquired of Foster Corporation and
Green Capital management to clarify the ownership structure, control over FSIP's
investment decision making process. I have been informed by Foster Corporation
that it was always their intention to not make any decisions regarding FSIP's
investment in PPOL or to direct its votes on matters brought up for shareholder
voting, unless it had the prior concurrence of Green Capital. Conversely, I have
been informed that Foster Corporation will comply with any matters Green Capital
requested with respect to matters affecting FSIP's investment in PPOL.
While Foster Corporation's adherence to Green Capital's requests and seeking
prior concurrence of any decisions regarding FSIP's investment in PPOL or to
direct its votes on matters brought up for shareholder voting is not believed to
be legally binding, the substance is more important than the form. Thus, it has
been determined that PPOL and USC are de facto entities under common control.
U.S. Securities and Exchange Commission
Page 6
Based upon the subsequent discovery of facts, which existed at the time of
PPOL's acquisition of USC, it is concluded that PPOL must restate all affected
filings for the accounting treatment of the acquisition of USC in accordance
with paragraph 11 of FAS141. We will account for the acquisition in a manner
that is similar to the pooling method. For accounting purposes, the excess of
purchase price over the net assets of USC will be treated as a dividend to Green
Capital.
RESPONSE 6
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As noted in our response to your comment 5, we will restate all affected filings
for the accounting treatment of the acquisition of USC in accordance with
paragraph 11 of FAS141. Accordingly, Goodwill will be eliminated in the restated
financial statements.
* * * * *
We hope the foregoing responses adequately address the issues raised in your
letter. If you have any additional questions, please do not hesitate to call me.
Very truly yours,
PPOL, INC.
/s/ RICHARD IZUMI
By Richard Izumi
Chief Financial Officer