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Exhibit 99.1
PPOL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2009, 2008 AND 2007
CONTENTS
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PAGE
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets 1
Consolidated Statements of Operations and Comprehensive (Loss) Income 2
Consolidated Statements of Shareholders' Equity (Deficit) 3
Consolidated Statements of Cash Flows 4
Notes to Consolidated Financial Statements 5
PPOL, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS MARCH 31, 2009 MARCH 31, 2008
--------------- ---------------
CURRENT ASSETS:
Cash and cash equivalents ............................................. $ 2,080,999 $ 2,559,039
Trade accounts receivable, net of doubtful account allowance of 0 and 0 11,254 195,783
Inventories ........................................................... 306,418
Deferred costs, current ............................................... 2,643,227
Prepaid expenses and other current assets ............................. 212,550 275,269
------------ ------------
TOTAL CURRENT ASSETS .............................................. 2,304,803 5,979,736
RESTRICTED CASH .......................................................... 18,435,213 22,554,129
PROPERTY AND EQUIPMENT, NET .............................................. 10,250 205,385
SOFTWARE, NET ............................................................ -- 2,016,983
DEFERRED COSTS, NON-CURRENT .............................................. -- --
GUARANTEED DEPOSITS ...................................................... -- 1,056,537
OTHER ASSETS ............................................................. 186,183 116,763
------------ ------------
TOTAL ASSETS ......................................................... $ 20,936,449 $ 31,929,533
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable ...................................................... 502,407 $ 1,463,296
Advances received ..................................................... -- 2,245
Deferred revenue, current ............................................. 2,375,904 6,211,985
Income taxes payable .................................................. -- 10,006
Other current liabilities ............................................. 100,518 295,252
------------ ------------
TOTAL CURRENT LIABILITIES ........................................... 2,978,829 7,982,784
------------ ------------
ADVANCES RECEIVED, CUBE .................................................. 18,435,213 22,554,129
DEFERRED REVENUE, NON-CURRENT ............................................ -- --
------------ ------------
TOTAL LIABILITIES ................................................. 21,414,042 30,536,913
------------ ------------
COMMITMENTS & CONTINGENCIES (NOTE 14)
SHAREHOLDERS' DEFICIT:
Common stock; $0.001 par value; 100,000,000 shares authorized; 205,146 and
205,428 shares issued and outstanding as of
March 31, 2009 and 2008, respectively .................................. 205 205
Additional paid-in capital ............................................... 14,506,867 14,506,867
Total other comprehensive income ......................................... 2,971,530 2,329,643
Accumulated deficit ...................................................... (17,956,195) (15,444,095)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) ................................ (477,593) 1,392,620
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
$ 20,936,449 $ 31,929,533
============ ============
The notes are an integral part of these consolidated financial statements.
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PPOL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, 2009 MARCH 31, 2008 MARCH 31, 2007
---------------- ---------------- ----------------
NET REVENUE
Product sales .......................................... $ 6,787,643 $ 32,403,683 $ 52,974,307
Service fee income ..................................... 4,499,777 9,081,566 15,618,601
------------- ------------- --------------
Total revenues ................................... 11,287,420 41,485,249 68,592,908
------------- ------------- --------------
COSTS AND EXPENSES
Cost of sales - Products ............................... 2,295,217 8,693,733 13,271,275
Cost of sales - Services ............................... 3,996,756 5,298,908 9,126,758
Distributor incentives ................................. 1,610,904 17,194,736 30,376,719
Selling, general and administrative expenses ........... 5,192,540 7,760,301 9,185,140
------------- ------------- --------------
Total costs and expenses ........................ 13,095,417 38,947,678 61,959,892
------------- ------------- --------------
OPERATING INCOME .......................................... (1,807,997) 2,537,571 6,633,016
------------- ------------- --------------
OTHER INCOME (EXPENSE):
Interest income (expense) .............................. 234 372
Others, net ............................................ 50,757 32,412 229,140
------------- ------------- --------------
Total other income, net .......................... 50,757 32,646 229,512
------------- ------------- --------------
INCOME BEFORE INCOME TAXES. ..... ......................... (1,858,754) 2,570,217 6,862,528
------------- ------------- --------------
INCOME TAX EXPENSE:
Current ................................................ 4,567 5,135 208,585
Deferred ............................................... 648,779 50,257 10,496,954
------------- ------------- --------------
Total income tax expense ........................ 653,346 55,392 10,705,539
------------- ------------- --------------
NET INCOME (LOSS) ........................................ (2,512,100) 2,514,825 (3,843,011)
------------- ------------- --------------
OTHER COMPREHENSIVE (LOSS) INCOME:
Foreign currency translation ........................... 641,887 294,271 (35,736)
------------- ------------- --------------
COMPREHENSIVE INCOME (LOSS) .............................. $ (1,870,213) $ 2,809,096 $ (3,878,747)
=============== ============== ==============
NET EARNINGS (LOSS) PER COMMON SHARE:
Basic .................................................. $ (12.25) $ 12.26 $ (18.71)
=============== ============== ==============
Diluted ................................................ $ (12.25) $ 12.26 $ (18.71)
=============== ============== ==============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic .................................................. 205,146 205,146 205,428
=============== ============== ==============
Diluted ................................................ 205,146 205,146 205,428
=============== ============== ==============
The notes are an integral part of these
consolidated financial statements.
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PPOL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL OTHER SHAREHOLDERS'
PAID-IN COMPREHENSIVE ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL (LOSS)GAIN DEFICIT (DEFICIT)
----------- ----------- ----------- ----------- ----------- -----------
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)
Fractional share buyback (282) -- (15,269) -- -- (15,269)
Foreign currency
translation adjustment -- -- -- 294,271 -- 294,271
Net income ................ -- -- -- -- 2,514,825 2,514,825
----------- ----------- ----------- ----------- ----------- -----------
Balance, March 31, 2008 .. 205,146 205 14,506,867 2,329,643 (15,444,095) 1,392,620
Foreign currency
translation adjustment -- -- -- 641,887 -- 641,887
Net loss .................. -- -- -- -- (2,512,100) (2,512,100)
----------- ----------- ----------- ----------- ----------- -----------
Balance, March 31, 2009 .. 205,146 205 14,506,867 2,971,530 (17,956,195) (477,593)
=========== =========== =========== =========== =========== ===========
The notes are an integral part of these
consolidated financial statements.
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PPOL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, 2009 MARCH 31, 2008 MARCH 31, 2007
-------------- -------------- ---------------
CASH FLOWS - OPERATING ACTIVITIES:
Net income (loss) .......................................... $ (2,512,100) $ 2,514,825 $ (3,843,011)
ADJUSTMENTS TO RECONCILE NET LOSS TO CASH (USED FOR)
PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization ............................ 132,403 1,908,878 2,588,159
Loss on sales/disposal of property, equipment and ........ 1,858,968 26,521 118,569
software
Loss on devaluation of other assets ...................... 139,271 525 --
Deferred income taxes .................................... 50,257 50,257 10,496,954
(INCREASE) DECREASE IN ASSETS:
Restricted cash .......................................... 4,118,916 (2,047,556) 562,461
Trade accounts receivables ............................... 184,529 57,596 134,201
Inventories .............................................. 306,418 (27,130) 1,870,237
Advance payments ......................................... -- -- --
Deferred costs ........................................... 2,643,227 21,699,922 38,893,197
Prepaid expenses and other current assets ................ 62,719 95,742 852,097
INCREASE (DECREASE) IN LIABILITIES:
Accounts payable, including related parties .............. (960,889) (475,826) (2,123,471)
Advances received ........................................ (2,245) (4,782) (35,118)
Advances received--Cube .................................. (4,118,916) 2,047,556 (562,461)
Deferred revenue ......................................... (3,836,081) (28,260,711) (50,228,006)
Income taxes payable ..................................... (10,006) 7,547 (29,120)
Other current liabilities ................................ (194,734) (342,828) (165,608)
------------ ------------ ------------
CASH USED FOR OPERATING ACTIVITIES ............................ (2,138,263) (2,749,464) (1,470,920)
------------ ------------ ------------
CASH FLOWS - INVESTING ACTIVITIES:
Proceeds from sale of property, equipment and software ..... 229,442 -- 52,166
Purchase of property, equipment and software ............... -- (151,652) (54,430)
Net decrease in deposits and other assets .................. 840,079 20,169 347,675
------------ ------------ ------------
CASH (USED FOR) PROVIDED BY INVESTING ACTIVITIES .............. 1,069,521 (131,483) 345,411
------------ ------------ ------------
CASH FLOWS - FINANCING ACTIVITIES:
Buyback of fractional shares ............................... -- (15,269) --
Return of Capital .......................................... -- -- --
Loans repaid ............................................... -- -- --
Proceeds from stock issuance ............................... -- -- --
------------ ------------ ------------
CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES .............. -- (15,269) --
------------ ------------ ------------
EFFECTS OF EXCHANGE RATE ...................................... 590,702 (19,292) (16,821)
------------ ------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS ..................... (478,040) (2,915,508) (1,142,330)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR .................. 2,559,039 5,474,547 6,616,877
------------ ------------ ------------
CASH AND CASH EQUIVALENTS OF CONTINUING OPERATIONS, END OF YEAR $ 2,080,999 $ 2,559,039 $ 5,474,547
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid .............................................. $ -- $ -- $ --
============ ============ ============
Income taxes paid .......................................... $ 17,682 $ 10,657 $ 44,254
============ ============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
(See Note 8 - Green Capital)
The notes are an integral part of these consolidated
financial statements.
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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, 2007. 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"), and
K.K. U-Service ("USC"), which are both Japanese corporations. USC was
merged into AJOL on December 28, 2005. See Note 8 for additional
information on USC. 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 has hired outside consultants to
assist the management in determining whether 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, 2009, 2008 and 2007, the management has concluded that the company
is 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 consolidated 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 2008, PPOL reclassified the presentation
of revenues and related cost of sales to Product sales and Service fee
income as line items in the consolidated statements 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 consolidated statements 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, shareholders' deficit or loss
per share.
TRANSLATION OF FOREIGN CURRENCY:
Our subsidiaries' functional currency is the Japanese Yen and PPOL's
reporting currency is the United States Dollar. The Company translates
the foreign currency financial statements in accordance with the
requirements of Statement of Financial Accounting Standards ("SFAS")
No. 52," Foreign Currency Translation." Assets and liabilities are
translated at the exchange rate as of the respective balance sheet
dates and related revenues and expenses are translated at average
exchange rates in effect during the period. Resulting translation
adjustments are recorded as a separate component in shareholders'
equity (deficit). Foreign currency transaction gains and losses are
included in determining comprehensive income (loss).
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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, valuation allowance for deferred tax assets 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, 2009 and 2008, 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, 2009 and 2008 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 $0 and $0, as of
March
31, 2009 and 2008, 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, 2007,
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.
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STOCK-BASED COMPENSATION:
The Company adopted SFAS No. 123R, "Share-Based Payments" on April 1,
2008. 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 equaled or exceeded 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; dividend yield of 0.0% for 2006;
average volatility factor of the expected market price of the Company's
common stock of 262% for 2006; and an expected life of the options of
10 years for 2006.
No options were granted in Fiscal 2009 and 2008 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 for the year ended March 31, 2006:
Net income (loss) as reported (in thousands $) (2,387)
Stock compensation calculated under APB25 (in thousands $) --
Stock compensation calculated under SFAS 123 (in thousands $) (1,041)
------
Pro forma (in thousands $) (3,428)
Basic earnings per share as reported (11.86)
Pro forma (17.03)
Diluted earnings per share as reported (11.86)
Pro forma (17.03)
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.
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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.
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, 2009,
2008, and 2007 were $0, $0 and $0, 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, 2009, 2008, and 2007 was $453,157,
$410,134, and 474,569, respectively.
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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 (loss) 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, 2009,
2008 and 2007 was primarily from the effects of foreign currency
translation adjustments.
EARNINGS PER SHARE:
The Company reports both basic earnings (loss) per share, which is
based on the weighted average number of common shares outstanding and
diluted net income (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 2009, 2008 and 2007, respectively, were outstanding but
not included in the computation of diluted earnings per common share
because the effect on dilutive earnings (loss) per common share would
have been anti-dilutive.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
INCOME TAXES
In June 2007, 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, 2008 for PPOL. The
adoption of this statement did not have a material impact on the
Company's financial position or results of operations.
ACCOUNTING CHANGES AND ERROR CORRECTIONS
In June 2007, 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. We adopted SFAS 154 in fiscal 2008. There was no impact
on our consolidated financial statements from the adoption of SFAS 154.
9
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EFFECTS OF PRIOR YEAR MISSTATEMENTS
In September 2007, 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, 2008, allowing a one-time transitional cumulative effect adjustment
to beginning retained earnings as of April 1, 2007, 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 2008, the FASB issued SFAS No. 141 (revised 2008), 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 2008, 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 two of the last three years, negative
cash flows from operations of $2,138,263, $2,749,464 and $1,470,920 for
the years ended March 31, 2009, 2008 and 2007, respectively, and, as of
March 31, 2009 had a working capital deficit of $2,003,048 and an
accumulated deficit of $17,956,195. 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, 2009 and 2008.
During the year ended March 31, 2007, 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, 2008, 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 consolidated financial statements do not
treat AJOL as a discontinued operation.
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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) OPERATING SEGMENTS:
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.
(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. Also, the
company has accounts receivable from a related party, and the above
receivables together comprised 100.0% and 83.2% of accounts receivable
at March 31, 2009 and 2008, 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 consisted of the following:
YEAR ENDED MARCH 31:
----------------------------
2009 2008
----------- -----------
Leasehold improvements ....... $ 15,233 $ 135,051
Office equipment ............. 54,035 1,248,497
Less: accumulated depreciation (59,018) (1,178,163)
----------- -----------
Property & Equipment, net .... $ 10,250 $ 205,385
=========== ===========
Software ..................... $ -- $ 4,094,343
Less: accumulated amortization -- (2,077,360)
----------- -----------
Software, net ................ $ -- $ 2,016,983
=========== ===========
Depreciation and amortization of property and equipment and software
totaled $23,868, $1,908,879, and $2,588,159 for the years ended March
31, 2009, 2008 and 2007, respectively.
(6) FINANCING ARRANGEMENTS:
The Company had a $4,239,947 line of credit with a bank at March 31,
2008 which was never used and had expired on August 31, 2008 and was
not renewed, thereafter.
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(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,
2007 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, 2009, PPOL had net
operating loss carry forwards of approximately $4.8 million and $6.0
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
-------------------- ------------------ ------------------- ------------------
2009
Japan $ (1,096,456) $ 3,567 $ 648,779 $ 652,546
US (762,298) 800 -- 800
-------------------- ------------------ ------------------- ------------------
$ (1,858,754) $ 4,567 $ 648,779 $ 653,346
==================== ================== =================== ==================
2008
Japan $ (1,855,554) $ 4,335 $ 50,257 $ 54,592
US (714,663) 800 -- 800
-------------------- ------------------ ------------------- ------------------
$ (2,570,217) $ 5,135 $ 50,257 $ 55,392
==================== ================== =================== ==================
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
==================== ================== =================== ==================
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The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets are as follows:
YEAR ENDED YEAR ENDED
MARCH 31, 2009 MARCH 31, 2008
------------ ------------
Deferred tax assets (liabilities):
Deferred revenues .................. $ 941,000 $ 1,452,130
Deferred costs ..................... --
Excess of accrued bonus ............ 9,215
Resort membership admission fees ... 149,000 295,464
Accrued compensated absences ....... 1,000 8,661
Excess depreciation and amortization 2,000 13,536
Inventory write-down ............... 689,000 972,713
Net operating losses ............... 5,866,000 4,373,591
Allowance for doubtful accounts .... 608,000 328,327
Computer software .................. 144,212
Others ............................. 44,000 35,159
------------ ------------
Net deferred tax assets - Japan .... 8,300,000 7,633,007
------------ ------------
Net operating losses ............... 2,587,974 1,732,331
------------ ------------
Net deferred tax assets - US ....... 2,587,974 1,732,331
------------ ------------
Net deferred tax assets - combined . 10,887,974 9,365,338
Valuation allowance ................ (10,887,974) (9,365,338)
------------ ------------
Total deferred tax assets ...... $ -- --
============ ============
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, 2009 and 2008.
The increase in deferred tax assets from fiscal 2008 to 2009 in the
United States is entirely from net operating losses of PPOL on a
stand-alone basis in fiscal 2009. 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, 2009 and 2008. The valuation
allowance increased by $374,473 and $7,685,037 between March 31, 2009
to 2008, and March 31, 2008 and 2007, respectively. At March 31, 2009,
PPOL's net operating loss carry forward was approximately $4.8 million
in the U.S. expiring through 2028 and $17,660,870 in Japan, expiring
through 2013.
(8) RELATED PARTY TRANSACTIONS:
ADVANCED COMMUNICATIONS
During Fiscal 2009, 2008 and 2007, PPOL entered into the following
transactions with Advanced Communications K.K.("AC"), a Japanese
corporation that is 79.55% owned by Green Capital:
2009 2008 2007
------------ ----------- -----------
Inventory purchases ........... $ $ 83,151 $ 124,387
Information technology services 4,706,753 5,484,580 6,807,496
Other transactions, net ....... (26,149) (259,937) (141,098)
----------- ----------- -----------
$4,680,604 $ 5,307,794 $ 6,790,785
========== =========== ===========
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, 2009 and 2008, PPOL's net accounts payable to AC was
$297,389, and $408,137, respectively.
SEAGULL
During Fiscal 2009, 2008 and 2007, 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:
2009 2008 2007
---------- ---------- ----------
Sales promotion activities $ -- $ 20,296
Events planning and production -- --
Other $ 4,955 6,200 --
---------- ---------- ----------
$ $ 6,200 $ 20,296
========== ========== ==========
At March 31, 2009, and 2008, PPOL had no payables to Seagull.
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U-World
PPOL made product sales of $269,985, $27,854 and $0 and had earned
service revenues and expense reimbursements of $373,698, $1,120,203 and
$1,584,318 from U-World and were billed $1,426,899, $2,041,397 and
$1,351,194 for goods and services provided by them during the fiscal
years ended March 31, 2009, 2008 and 2007, respectively. At March 31,
2009 and 2008, our net accounts receivable from U-World was
$15,121,656, and ($10,316,767), respectively.
In a continuing effort to restructure the business, on April 14, 2009
AJOL transferred the catalogue order business to U-World at cost. As
the membership decreased, the Company was in a need to concentrate on
areas that will bring positive returns.
One of such business line that was losing money was the catalogue order
business. It was losing money due to the relatively high fixed cost
compared to the amount of business it was producing. The Company did
not want to cease the business immediately, since such action will
likely create immediate negative impression to the existing members.
The Company was able to transfer the business with its inventory and
personnel without incurring extra cost to U World. The Company was able
to get rid of large overhead costs and a losing business, which was
necessary to for the business to return to profitability.
COMMON STOCK OFFERING:
OTHER
Tax services were performed by an accounting firm whose principal
officer is the spouse of our Chief Financial Officer. The Company paid
$7,750, $8,000, and $9,850 to Izumi & Co. for tax planning and
compliance related matters in the fiscal years ended March 31, 2009,
2008, and 2007, 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 10)
common stock to employees, directors and consultants.
There have been no stock option plan activities in the years ended
March 31, 2009, 2008, and 2007.
The following table summarizes information about the stock options
outstanding and exercisable at March 31, 2009:
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 6.00 $ 400 12,200 $ 400
2005.......... 400 800 6.25 400 800 400
2006.......... -- -- -- -- -- --
2007.......... -- -- -- -- -- --
2008.......... -- -- -- -- -- --
2009.......... -- -- -- -- -- --
------ ---- ----- ------ -----
Total 13,000 6.02 $ 400 13,000 $ 400
====== ==== ===== ====== =====
As of March 31, 2009, 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.
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<page>
(10) 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.
(11) 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, 2009, 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, 2009 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.
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<page>
Condensed stand alone balance sheets for PPOL as of March 31, 2009 and
2008 follows:
2009 2008
----------- -----------
Current assets $ 120,882 $ 68,465
Investment in AJOL 253,392 253,392
Other assets 4,409 4,409
----------- -----------
Total assets $ 378,683 $ 326,266
=========== ===========
Current liabilities $ 68,425 $ 61,642
Notes payable to AJOL 1,614,455 805,722
----------- -----------
Total liabilities 1,682,880 867,364
Capital stock and
additional-paid-in-capital 14,507,072 14,507,072
Accumulated other comprehensive income 2,344,055 2,344,055
Accumulated deficit (18,155,324) (17,392,225)
----------- -----------
Total shareholders' equity (1,304,197) (541,098)
----------- -----------
Total liabilities and
shareholders' equity $ 378,683 $ 326,266
=========== ===========
Condensed stand alone statements of operations for PPOL for the years
ended March 31, 2009, 2008 and 2007 follows:
2009 2008 2007
----------- ----------- -----------
Service fee income from AJOL $ -- $ -- $ 309,171
Debt forgiveness by AJOL -- -- --
General and administrative expenses (701,982) (589,133) (892,521)
Other income (expense), net (60,316) (125,530) 20,567
Income tax expense (800) (800) (205,349)
----------- ----------- -----------
Net income (loss) $ (763,098) $ (715,463) $ (768,132)
=========== =========== ===========
(12) 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.
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<page>
(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, 2009, 2008, and 2007 were
approximately $11,800, $49,203, and $337,612, respectively.
Additionally, the Company has various professional consulting service
contracts in effect which collectively require payments in the future.
At March 31, 2009 minimum non-cancelable payments to be made in the
future are as follows:
YEAR ENDING OPERATING CONSULTING
MARCH 31, LEASES SERVICES
----------------------- ------------------- ----------------
2009 $ 27,178 $ 446,809
Thereafter -- --
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 ("Repossession
Lawsuit"). 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 ("Countersuit"). 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 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. On February 18,
2009, the Tokyo District Court held in its decision in the Countersuit
that Takada pay to the Ide Group 956 million yen in damages plus
interest. The Court dismissed the Countersuit as to the remaining
parties and thereafter, with no appeal by the Ide Group, the decision
has been confirmed. On the same day, the Court dismissed the
Repossession Lawsuit, however, as the result of an appeal of the
dismissal, the Repossession Lawsuit it still pending. 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.
The company has received a letter from Japanese counsel, Shimon Takagi
of the law firm of White & Case, Tokyo, Japan, dated April 21, 2009.
Counsel's letter points out that if the KFB or other governmental
agency in Japan determines that the Company must comply with
registration and reporting obligations in Japan, the Company's failure
to do so could result in criminal sanctions. Pending further advice
from the Kanto Regional Financial Bureau ("KFB") in Japan, the Company
has elected at this time not to proceed with any reporting obligations
it may have in Japan.
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
17
<page>
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.
(15) SUBSEQUENT EVENTS
CATALOG ORDER BUSINESS
In a continuing effort to restructure the business, on April 14, 2008 AJOL
transferred the catalogue order business to U-World at cost. As the
membership decreased, the Company was in a need to concentrate on areas
that will bring positive returns. One of such business line that was
losing money was the catalogue order business. It was losing money due to
the relatively high fixed cost compared to the amount of business it was
producing. The Company did not want to cease the business immediately,
since such action will likely create immediate negative impression to the
existing members. The Company was able to transfer the business with its
inventory and personnel without incurring extra cost to U World. The
Company was able to get rid of large overhead costs and a losing business,
which the management believes was necessary for the business to return to
profitability.
In an effort to strengthen the cooperative ties with U World, Mr. Masao
Yamamoto, who is currently an officer of PPOL and director of AJOL was
appointed as a director of U World in June 2008. Mr. Masao Yamamoto has
subsequently resigned from the office of director of U World on March 23,
2009.
POTENTIAL SECURITIES REGISTRATION REQUIREMENT IN JAPAN
As aforementioned in "Contingency," the company has received a letter from
Japanese counsel, Shimon Takagi of the law firm of White & Case, Tokyo,
Japan, dated April 21, 2009.
Counsel's letter points out that if the KFB or other governmental agency
in Japan determines that the Company must comply with registration and
reporting obligations in Japan, the Company's failure to do so could
result in criminal sanctions. Pending further advice from the Kanto
Regional Financial Bureau in Japan, the Company has elected at this time
not to proceed with any reporting obligations it may have in Japan.
RESIGNATION AND APPOINTMENT OF NEW OFFICERS
Effective March 31, 2009, Richard Izumi resigned as the chief financial
officer ("CFO") and secretary, and as a member of the board of directors,
of PPOL, Inc. (the "Company"). Mr. Izumi stated that he elected to resign
the aforementioned positions after he determined that he was not
receiving expected cooperation from the Company in connection with his
internal investigation of related party transactions, and in furtherance
of his concern with respect to the Company's compliance with disclosure
requirements in Japan. Effective April 1, 2009, the sole remaining
director of the Company, Masao Yamamoto, appointed Mitsuhisa Ogata and
Manabu Nakamura to serve as members of the board of the Company to fill
the vacancies created by the resignations of Messrs. Izumi and Aota. Mr.
Yamamoto also determined to serve as the Company's chief financial
officer and secretary to fill the vacancies in such offices created by
the resignation of Mr. Izumi.
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<page>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED MARCH 31, 2009, 2008 AND 2007
BEGINNING ADDITIONS NON-CASH ENDING
BALANCE CHARGED TO (REDUCTIONS) BALANCE
DESCRIPTION ACCRUAL INCOME OR ADDITIONS REVERSAL ACCRUAL
- --------------------------- ---------------- --------------- ----------------- --------------- ---------------
Provision for doubtful
receivable
2009............ (0) -- -- -- (0)
2008............ (0) -- -- -- (0)
2007............ (0) -- -- -- (0)
Provision for inventory
obsolescence
2009............ $1,894,724 -- -- $ (1,894,724) --
2008............ $2,934,452 -- -- $ (1,039,728) $ 1,894,724
2007............ $1,409,906 $1,707,494 $ 29,961 $ (212,909) $ 2,934,452
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