U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________
Commission File Number: 0-24217
YP.NET, INC.
(Name of Small Business Issuer in its Charter)
NEVADA 85-0206668
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
4840 EAST JASMINE STREET, SUITE 105
MESA, ARIZONA 85205
(Address of principal executive offices) (Zip Code)
(480) 654-9646
(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, $.001 PAR VALUE
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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.
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Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
Registrant's revenues for its most recent fiscal year were $8,572,185.
The aggregate market value of the common stock held by non-affiliates
computed based on the closing price of such stock on August 14, 2000 was
approximately $12,189,406.
The number of shares outstanding of the registrant's classes of common
stock, as of August 14, 2000 was 40,900,798.
Documents incorporated by reference: NONE
Transitional Small Business Disclosure Format (check one):Yes No X.
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PART I
Except for historical information contained herein, this Form 10-KSB
contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). We intend
that the forward-looking statements be subject to the safe harbors created by
these statutory provisions. Forward-looking statements involve risks and
uncertainties and include, but are not limited to, statements regarding future
events, plans and expectations. Wherever possible, we have identified the
forward-looking statements by words such as "anticipates," "believes,"
"contemplates," estimates," "expects," "intends," "plans," "projects,"
"forecasts" and similar expressions.
Our forward-looking statements reflect only our current views with respect
to future events and financial performance or operations and speak only as of
the date the statements are made. Our actual results may differ materially from
such statements. Factors that may cause or contribute to such differences
include, but are not limited to, those discussed in "Description of Business"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations," as well as elsewhere in this report and in the exhibits
incorporated by reference.
Although we believe that the assumptions underlying the forward-looking
statements in this Form 10-KSB are reasonable, any of these assumptions could
prove inaccurate. In addition, our business and operations are subject to
substantial risks, some of which are identified in this report and which
increase the uncertainties inherent in the forward-looking statements included
in this Form 10-KSB. There can be no assurance that the results contemplated in
these forward-looking statements will be realized.
The inclusion of forward-looking information should not be regarded as a
representation by YP.Net or any other person that the future events, plans or
expectations contemplated will be achieved. We disclaim any obligation to
subsequently revise forward-looking statements to reflect subsequent events or
circumstances or the occurrence of unanticipated events.
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
We are in the business of providing Internet-based yellow page listing
services on our Yellow-Page.Net and yp.net Web sites. Our Web sites serve as a
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search engine for yellow page listings in the United States and Canada. We
charge our customers for a "preferred" listing of their businesses on searches
conducted by consumers through our Web sites. We currently have approximately
140,000 preferred listing customers on a monthly basis.
The predecessor company, Nuclear Corporations of New Mexico was
incorporated in state of New Mexico in 1968 and the domicile was changed to the
state of Nevada in 1994. Renaissance Center Inc. which was incorporated in
1996 in Nevada and Nuclear Corporation of New Mexico a Nevada Corporation were
merged in 1997. Our Articles of Incorporation were restated in July, 1997 and
our name was changed to Renaissance International Group, Ltd. Our name was
later changed to RIGL Corporation effective July, 1998. Our original business
involved the development of software to integrate digital multi-media equipment
and components and later changed to focus on the development of software for the
medial billing and practice management industry. None of these activities
progressed beyond the developmental stage. In June, 1999, we acquired Telco
Billing, Inc. and commenced our current operations through this entity.
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From August through December, 1999, we abandoned all subsidiaries
previously involved in the multi-media software and medical billing and practice
management areas. With the acquisition of Telco, our business focus shifted to
the Internet yellow page services business and this business is currently our
sole source of revenue. In October, 1999 we amended our Articles of
Incorporation to change our corporate name to YP.Net, Inc. to better identify
our company with our business focus. Telco is operated as a wholly-owned
subsidiary of YP.Net.
OUR WEB SITES
We control the domain names Yellow-Page.Net and yp.net and maintain these
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Web pages for Internet access. At these Web sites, consumers can search an
approximate 18 million listing database containing United States and Canadian
businesses. We provide yellow page listings for these businesses along with
directories and maps to the business location. We also provide nationwide 800
and 888 directory listings and search engines for e-mail addresses and persons.
Our site offers stock quotes, job searches, travel services, news and weather
information, movie reviews and listings, and entertainment and restaurant
information.
Our directory search service integrates yellow page information by
utilizing yellow page category headings in combination with a natural word
search feature to provide a user-friendly interface and navigation vehicle. We
enhance accuracy of responses to user queries by utilizing criteria searches in
the directory services. This allows users to search by specific city, state and
business categories.
We currently derive substantially all of our revenue from selling preferred
listings in the search results on our Web sites. A preferred listing is
displayed at the beginning of search results obtained by users in response to
their specific queries. A preferred listing is enhanced on the display of
search results and includes a "mini-Web page" listing where the preferred lister
can utilize up to 40 words to advertise and provide additional information
regarding its business. A preferred listing customer can also link its own Web
page to the search results identifying the preferred lister. We are also
developing banner advertisements and outside marketing efforts as an additional
revenue source.
TECHNOLOGY AND INFRASTRUCTURE
We believe that one of our principal strengths is our internally developed
technology, which we have designed specifically for handling our Internet-based
data. Our technology architecture features specially designed capabilities to
enhance performance, reliability and scalability of data regarding our preferred
listing customers. These features consist of multiple proprietary software
modules and processes that support the core internal functions of operations.
The technologies include Customer Service Applications, Billing Applications,
LEC Filtering Processes and Database Management.
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Customer Service Applications. We have designed proprietary Customer
Service Applications to enable rapid development and management of information
related to our preferred listing customers in a variety of formats. This
application incorporates an automated retrieval system that integrates with our
other technologies. This integration enables real-time updates to our database
as our customer service representatives interact with and obtain data from our
preferred listing clientele. This application also operates in conjunction with
the Billing Applications.
Billing Applications. Our billing process is primarily through local
exchange carriers ("LECs") which are local telephone service providers. Our LEC
billings are routed to the LEC's and appear on our preferred customers'
telephone billing statements. To a lesser extent, we direct bill our preferred
customers. Our Billing Applications facilitate both our LEC and direct billing
functions.
LEC Filtering Processes. The LEC Filtering Processes are core technologies
developed to enhance the applications that support our systems. By utilizing
these processes, we are able to more accurately bill our preferred listers
through the appropriate LEC. These processes are a vital component of our
ability to aggregate content from multiple sources for our billing process.
Information is sorted and updated with a method of maintaining an expanding
heterogeneous database and allows disparate data sources to be combined and
deployed through a single uniform interface, regardless of data structure or
content. This allows a single database query to produce a single result set
containing data extracted from multiple databases. Database clustering in this
manner reduces the dependence on single data sources, facilitates data updates
and reduces non-conforming data submitted to the LECs.
Database Management. We have also developed a proprietary database
technology to address specific requirements of our business strategy and
information infrastructure services. This technology enables us to provide our
services with fewer service personnel. Our database is integrated with the
applications modules and the LEC Filtering Processes. This database consists of
our current and potential customers and is updated on a real-time basis as a
customer's data is received from new listings or through our customer service
representatives. We utilize this database to maintain customer service and
monitor the quality of service provided by our customer service personnel. We
also use the database to determine new products desired by our customers. Our
technology has been specifically designed to function with a high degree of
efficiency within the unique operating parameters of the Internet, as opposed to
commonly used database systems.
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STRATEGIC ALLIANCES
In order to service users more effectively and to extend our
Yellow-Page.Net brand to other Internet sources, we have entered into strategic
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relationships with business partners offering content, technology and
distribution capabilities. We utilize Worldpages.com as our data listing and
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Web page hosting provider. Worldpages.com provides the server for our Web pages
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and our search engine capabilities. We have a cross-listing arrangement with
Superior Business Network ("SBN"). This cross-listing arrangement increases our
circulation by an additional 10,000,000 page views per month.
We are members of the Yellow Page Publication Association and the
Association of Directory Publishers. These organizations are trade associations
for yellow page publishers that promote quality of published content and
advertising methods.
In order to broaden Yellow-Page.Net's user base we have established
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cross-linking relationships with operators of commercial Web sites and Internet
access providers. We have over 400 affiliated Web sites that link to
Yellow-Page.Net. We believe these arrangements are important to the promotion
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of Yellow-Page.Net, particularly among new Web users that may access the
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Internet through these other Web sites. These co-promotional arrangements
typically are terminable at will. We also utilize Fax4free.com in a
co-promotional effort to provide services to our Web site users to allow these
users to receive and send unlimited facsimiles, and receive voicemail on e-mail
at no charge.
Our future success will depend on our ability and to continue to integrate
and distribute information services of broad appeal. Our ability to maintain
our relationships with content providers and to build new relationships with
additional content providers is critical to our marketing effect the success of
our business.
BILLING SERVICE AGREEMENTS
In order to bill our preferred listing customers through their LECs, we are
required to utilize one or more billing service integrators. These integrators
have been approved by various LECs to provide billing, collection and related
services through the LECs. We have entered into customer billing service
agreements with Integretel, Inc. ("IGT") and with Enhanced Services Billing,
Inc. ("ESBI") for these services. Under these agreements, our service providers
bill and collect our charges to preferred listing customers through LEC
billings. These amounts, net of reserves for bad debts, billing adjustments,
telephone company fees and the integrator's fees, are remitted to us on a
monthly basis.
MARKETING
Our primary marketing efforts are through direct mail solicitations that
utilize a promotional discount for listing in the form of a check. We market
exclusively to businesses and focus on businesses that utilize traditional
published yellow page services. We utilize our database as a source for our
mailing list. We have also implemented a "customer satisfaction" program.
Through this program we have retained a firm to contact each of our customers to
update the customer information regarding the customers business and links to
the customer's Web page if applicable.
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We intend to increase market share in our current markets through strategic
acquisitions providing value-added services to our core business as well as
other marketing campaigns. We are not presently a party to any acquisition
agreement. We intend to develop marketing strategies to increase credibility
and visibility of our Web page service to targeted markets. We also intend to
promote value-added services and product areas. Our future success will depend
on our ability to continue to integrate and distribute information services of
broad appeal. Our ability to maintain and to build new relationships with
content providers will be critical to the success of our business.
COMPETITION
We operate in the Internet services market, which is highly competitive and
rapidly expanding. We compete with online services, other Web site operators
and advertising networks, as well as traditional offline media such as
television, radio, traditional yellow page directory publishers and print share
advertising. Our services compete, or we expect to compete, with numerous
directory, content, Web site production and other Internet information service
providers. In particular, most larger LECs provide services similar to ours.
The principal competitive factors of these markets include personalization
of service, ease and use of directories, quality and responsiveness of search
results, availability of quality content, value-added products and services and
access to end users. Competition among current and future suppliers of Internet
navigational and informational services, high-traffic Web sites and Internet
access providers, as well as competition with other media for advertising
listings, could result in significantly lower prices for advertising and
reductions in advertising revenues.
Most, if not all, of our competitors have capital resources greater than
ours. These capital resources may allow our competitors to engage in
advertising and other promotional activities that will enhance their brand name
recognition. The LECs have the advantage of name recognition and far greater
access to potential customers because they already provide these customers with
local telephone exchange services.
We believe we can successfully compete in this market by providing quality
services at competitive prices and due to the name recognition of our Web site.
REGULATION
The Federal Trade Commission has aggressively pursued what it perceives as
deceptive practices related to direct mailer and other promotions and involving
LEC billing type practices. We have been involved in a significant Federal
Trade Commission enforcement action regarding these matters. See "Legal
Proceedings" below.
We are also subject to provisions of the Federal Trade Commission Act that
regulate advertising in all media, including the Internet, and require
advertisers to substantiate advertising claims before disseminating advertising.
The Federal Trade Commission has recently brought several actions charging
deceptive advertising via the Internet and is actively seeking new cases
involving advertising via the Internet.
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Due to increased use, laws and regulations relating to the Internet have
been adopted. These include regulation issues related to user privacy, pricing,
content, taxation, copyrights, distribution, and product and services quality.
Concern regarding Internet user privacy has led to the introduction of federal
and state legislation to protect Internet user privacy. In addition, the
Federal Trade Commission has initiated investigations and hearings regarding
Internet user privacy that could result in rules or regulations that could
adversely affect our business. As a result, we could become subject to new laws
and regulations that could limit our ability to conduct targeted advertising, or
distribute or collect user information.
These or any other laws or regulations that may be enacted in the future
could have several adverse effects on our business. These effects include
substantial liability including fines and criminal penalties, the prevention of
certain products or service offerings and the prevention or limitation of
certain marketing practices. As a result of these and future laws and
regulations, the growth in Internet usage could also be substantially limited.
EMPLOYEES
At August 31, 2000, we employed 16 full time personnel, including three
software developers, five customer service representatives and eight
administrative personnel. Our employees are not covered by any collective
bargaining agreements.
ITEM 2. DESCRIPTION OF PROPERTY
Our corporate offices are located in Mesa, Arizona. We lease a 16,772
square foot facility for annual cost of approximately $125,000 on a long-term
operating lease through June 2003. As part of the consideration related to our
license of the Yellow-Page.Net URL, we sublease approximately 8,000 square feet
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of leased space to Business Executive Services, Inc. through August 2003 for
$1.00 per year annual rent. See "Certain Relationships and Related
Transactions."
We are also obligated on another lease for office space that was utilized
prior to consolidating operations at the Mesa facility. The lease is through
August 2002 and annual rent ranges from $202,000 to $280,000 through the
remaining lease term. This space has been sublet for the full amount of the
lease payment through its term. However, YP.Net remains obligated on the lease
in the event the sub-tenant defaults.
ITEM 3. LEGAL PROCEEDINGS
We are currently involved in the following legal proceedings:
Federal Trade Commission. On June 26, 2000, the Federal Trade Commission
("FTC") filed a complaint in the United States District Court of Arizona against
YP.Net, Inc., certain of its past and present officers and directors and other
associated companies. The complaint alleged that YP.Net and the other
defendants had engaged in deceptive advertising practices and sought certain
preliminary injunctive remedies. The alleged deceptive practices related to the
direct mailer solicitation utilized in our marketing activities.
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On July 13, 2000, YP.Net entered into a negotiated settlement of the matter
with the FTC. Under the terms of a stipulated preliminary order, YP.Net
specifically denied that any of its practices with respect to the direct mailer
were deceptive or otherwise in violation of applicable law. The stipulated
preliminary order specified that the settlement agreement with the FTC was not
an admission of violation of any applicable law or rule or that any allegation
made by the FTC was true. YP.Net and the FTC agreed to certain modifications of
the mailer and related marketing program, and the FTC agreed that the modified
mailer and program would not be considered by their agency to be deceptive.
Upon hearing on July 13, 2000, the District Court approved the stipulated
preliminary order. YP.Net anticipates that it will enter into a stipulated
final consent decree with the same terms of the stipulated preliminary order.
However, the FTC has requested additional terms to the consent decree, the
majority of which are unacceptable and contrary to the terms of the settlement
agreement and stipulated preliminary order.
A Women's Place. In August, 1999, we filed a lawsuit in Superior Court of
Coconino County, Arizona against Holly K. Virgil, M.D., P.C. dba A Women's
Place. Prior management had negotiated an agreement to provide this medical
practice with management services and thereafter advanced interim funding. To
current management's knowledge no services contract was entered into. We are
seeking damages of approximately $235,000 for recovery of advances. The
defendant has counter-claimed for breach of contract and has claimed unspecified
damages.
Hudson Consulting Group. We are a party to an interpleader action filed by
American Registrar Transfer Agent, our stock transfer agent, in the Third
Judicial Court for Salt Lake County, Utah. The suit names Bruce M. Pritchett,
Hudson Consulting Group, Inc., Montana Capital International, Ltd. and Moore &
Elrod, Inc., as well as YP.Net as defendants. Prior management had engaged the
Hudson Consulting Group to obtain equity financing for the company. Current
management became aware that the Hudson Consulting Group and its principals were
involved in potential illegal activities and subject to Securities Exchange
Commission enforcement action. Prior management had issued 2,000,000 shares of
common stock to the Hudson Consulting Group for their services. Upon discovery
of the potential illegal activity, current management instructed its transfer
agent to stop all transfers of the subject shares. The Hudson Consulting Group
and other defendants threatened litigation if the transfer agent refused the
transfer of the shares in question. The transfer agent then filed an
interpleader action to seek a court determination of the ownership of the shares
and rights to transfer. YP.Net is seeking the return and cancellation of the
shares. The Hudson Consulting Group and other defendants are seeking transfer of
the shares and consequential damages.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the shareholders during the fourth
fiscal quarter covered by this Form 10-KSB.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
OUR COMMON STOCK
Our common stock is traded in the over-the-counter market under the symbol
"YPNT." Our symbol had been "RIGL" prior to October, 1999. Prior to March 23,
2000 our common stock was traded on the OTC Bulletin Board, but was delisted due
to failure to timely file required reports under the Exchange Act, including
this Form 10-KSB. We anticipate that our common stock will be relisted on the
OTC Bulletin Board when all Exchange Act filings are current and other listing
criteria has been satisfied.
The following table sets forth the quarterly high and low bid prices per
share for the common stock, as reported by the OTC Bulletin Board for the
periods stated. The quotations represent inter-dealer quotations, without
adjustment for retail mark-up, markdown or commission and may not represent
actual transactions.
FISCAL YEAR QUARTER ENDED HIGH LOW
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1998 December 31, 1997 . . . . . $2.50 . . . . .$1.03
March 31, 1998 . . . . . . .$2.37 . . . . .$1.10
June 30, 1998 . . . . . . . $3.50 . . . . .$0.83
September 30, 1998 . . . . .$1.94 . . . . .$0.37
1999 December 31, 1998 . . . . . $0.50 . . . . .$0.50
March 31, 1999 . . . . . . .$1.19 . . . . .$1.00
June 30, 1999 . . . . . . . $1.50 . . . . .$1.50
September 30, 1999 . . . . .$1.06 . . . . .$1.00
On September 30, 1999, there were approximately 650 shareholders of record
of our common stock. The transfer agent for our common stock is American
Registrar Transfer Agent in Salt Lake City, Utah.
DIVIDEND POLICY
Under Nevada law, dividends may only be paid out of net profits. Prior to
our acquisition of Telco, no significant revenue had been generated. We have
not paid, and do not currently intend to pay, cash dividends on our common stock
in the foreseeable future. The current policy of the Board of Directors is to
retain all earnings, if any, to provide funds for operation and expansion of our
business. We are also subject to restrictions and restrictive covenants on the
payment of dividends under the terms of our credit facility provided by Finova
Financial, Inc. In addition to statutory and contractual requirements, the
declaration of dividends, if any, will be subject to the discretion of the Board
of Directors, which may consider such factors as our results of operations,
financial condition, capital needs and acquisition strategies, among others.
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SALES OF UNREGISTERED SECURITIES
During the fiscal year ended September 30, 1999, YP.Net issued a total of
23,094,500 shares of common stock and 1,700,000 shares of Series B preferred
stock in reliance on exemptions from the registration requirements of the
Securities Act.
In June, 1999, YP.Net issued 17,000,000 shares of common stock to acquire
Telco in a stock for stock exchange. The shares were issued to the two
shareholders of Telco in reliance on Section 4(2) of the Securities Act.
YP.Net issued 4,500,000 shares of its common stock to secure two promissory
notes. In May, 1999, 2,500,000 shares were issued to secure a $2,000,000 note
payable and in June, 1999, 2,000,000 shares were issued to secure a separate
$2,000,000 note payable. Each note is a separate obligation with no contractual
relationship between the two obligations. Unless a default on the obligation
exists and the shares are transferred to the note holder, the shares are not
voted. Upon payment of the note obligation, the shares securing such note are
to be returned for cancellation. If YP.Net defaults under either note, shares
may be distributed solely to the note holder in satisfaction of the defaulted
obligation. If distributed, YP.Net anticipates that the shares will qualify for
the exemption from registration as provided by Section 4(2) of the Securities
Act.
Throughout the fiscal year ended September 30, 1999, YP.Net issued
1,694,500 shares of common stock to consultants and officers. The total value
of these shares was determined to be $2,145,178, which represents the trading
value of the shares on the date YP.Net became obligated to issue the shares.
The shares were issued in reliance on the exemption from registration provided
by Section 4(2) of the Securities Act.
In September, 1999, YP.Net issued 400,000 shares of its common stock in
cancellation of a $350,000 debt. The shares were issued to a shareholder who
had made a loan to YP.Net and who later became a director. The shares were
issued in reliance on the exemption from registration provided by Section 4(2)
of the Securities Act.
On January 1, 1999, YP.Net issued 1,500,000 shares of its Series B
preferred stock to certain of its directors, officers and employees and an
additional 2,000,000 shares on August 1, 2000. Shares of Series B preferred are
convertible into shares of common stock at varying rates based on the trading
price of the common stock upon conversion. The Series B shares are convertible
only upon the trading price of the YP.Net common stock reaching or exceeding
$5.00 or net annual income reaching or exceeding $5,000,000. The Series B
preferred has no dividend rate or liquidation value. No consideration was paid
for and no value was assigned to the Series B preferred shares for accounting
purposes. The shares were issued in reliance on the exemption from registration
under the Securities Act provided by Section 4(2) of the Securities Act.
Current management is reviewing the propriety of the issuance and intends to
seek rescission of these shares.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements in this report are forward-looking statements that
involve risks and uncertainties. Several factors could cause actual results to
differ materially from those described in such forward-looking statements.
These include our ability to manage growth, involvement in litigation,
competition in the advertising market, ongoing contractual relationships,
dependence upon key personnel, changes in customer attrition and the adoption of
new, or changes in, accounting policies or practices and estimates and the
application of such policies, practices, and estimates, and federal and state
governmental regulation, specifically in the areas of Internet advertising
products and services.
FISCAL 1999 OPERATIONS
General. Our operations changed in July, 1999 due to the acquisition of
Telco Billing, Inc. Our prior operations in the multi-media software and
medical billing and practice management areas were abandoned and our
subsidiaries engaged in these operations were closed. With the acquisition of
Telco, our business operations focused on Internet yellow page listing services.
In September, 1999, our Board of Directors and shareholders approved a name
change from RIGL Corporation to YP.Net, Inc. effective October 1, 1999. The
name change was chosen to reflect our new focus on Internet strategy and yellow
page Web sites.
Management Changes. In March, 1999, Tennessee Webb resigned as the
Chairman of the Board and in April, 1999, Eugene Starr resigned as a director of
YP.Net. In September of 1999, the resignations of Kevin Jones (Chief Executive
Officer, Chairman of the Board, Chief Financial Officer, Treasurer and
President), James Jones (Chief Technology Officer, President of RIGL
Technologies, Inc.), Peter DeKray (Secretary and Chief Operating Officer), and
Michael McKay (President of Renaissance Center Ltd.) were accepted to be
effective October 1999. In February 2000, William O'Neal resigned as a
director, General Counsel and Interim President effective March 1, 2000.
On February 3, 2000 a new Board of Directors was appointed by the sole
remaining director, DeVal Johnson, Pamela Thompson and Greg Cessna having
previously resigned as the only other remaining Board members after removal of
prior management. The new board members included Angelo Tullo, Walter Vogel,
Daniel L. Coury, Sr., Wallace Olsen, Jr., Gregory B. Crane and Harold Roberts.
This change of management was initiated in part by changes in core business
endeavors and strategies resulting from the acquisition of Telco and our focus
on the Internet electronic yellow page advertising business.
Acquisition of Telco Billing, Inc. On June 16, 1999, we exchanged
17,000,000 shares of common stock for all of the outstanding common stock of
Telco. We also licensed the right to use the URL Yellow-Page.Net for a 20-year
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period for $5,000,000. Our prior operations had not produced any meaningful
results and it was doubtful if any material results would materialize from these
operations. For financial accounting purposes, the acquisition was accounted
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for as a reverse merger and was treated as a recapitalization with Telco as the
acquirer. The accompanying financial statements present the historical cost
bases of assets and liabilities and results of operations of Telco. Subsequent
to the merger, YP.Net ceased the previous operations and abandoned the assets
related to those operations. The assets which were not abandoned are recorded
at their historical cost. The recapitalization of Telco reflects the book value
of the net assets of RIGL as of the date of the acquisition, June 16, 1999, of
$1,722,563.
Discontinued Operations. From September to December 1999, YP.Net closed
down and ceased all operations conducted by its five subsidiaries engaged in
multi-media software and medical billing and practice management operations.
These included:
Renaissance Center, Ltd. This subsidiary was engaged in the design and
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implementation of asset management software for the multimedia and entertainment
industry. The primary technology utilized by Renaissance Center, Ltd. was the
Asset Management and Information Retrieval Environment (AMIRE). Management
determined that the capital resources of YP.Net would no longer support the
viability of the AMIRE system.
RIGL Technologies, Inc. RIGL Technologies, Inc. was responsible for the
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design and implementation of AMIRE. This research and development stage
subsidiary was divested because management had misgivings regarding the heavy
research and development expenditures incurred, and consequently, would no
longer support any further capital funding for these concepts.
RIGL Medical Systems, Inc. RIGL Medical Systems, Inc. was to be
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responsible for creating the interface between the Medical AMIRE development
team and the ultimate end users. This development stage subsidiary was divested
because AMIRE and Medical AMIRE systems were deemed to be unprofitable resulting
in this subsidiary no longer having business purpose and management would no
longer support any further capital funding from YP.Net.
Medical Resource Systems, Inc. Medical Resource Systems, Inc., a
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subsidiary of RIGL Medical Systems, Inc. provided billing and collection
services to physician groups, primarily in the Phoenix, Arizona metropolitan
area. The subsidiary was acquired as a beta test site for the Medical AMIRE
system. This development stage subsidiary was divested because Medical AMIRE
system was deemed to be unprofitable.
Mountain Office Management Systems, Inc. Mountain Office Management
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Systems, Inc., a subsidiary of RIGL Medical Systems, Inc., was expected to
provide administrative support to physician practices. This development
stage subsidiary was divested because the Medical AMIRE systems were deemed to
be unprofitable and this line of business was abandoned.
RESULTS OF OPERATIONS
The acquisition of Telco was treated as a reverse merger for financial
accounting purposes. As a result of being treated as a reverse merger, Telco
was deemed to be the acquiring entity. For financial accounting purposes, Telco
was considered to have engaged in a recapitalization and acquired the assets of
12
<PAGE>
RIGL as of June, 1999. As a result of this treatment, the financial statements
for the year ended September 30, 1999 are the historic statements of Telco with
the operations of "old" RIGL being included from June, 1999 forward.
The financial statements for the year ended September 30, 1998 reflect the
historic operations of "old" RIGL. Financial statements for the year ended
September 30, 1998 are not included in this Form 10-KSB, but are included in the
Form 10-KSB for the fiscal year ended September 30, 1998. All comparisons of
fiscal year operating results in this section are comparing historic operations
of two distinct entities and are presented solely to compare predecessor
operations with our current operations.
During the fiscal year ended September 30, 1999, significant shares of
stock were issued to prior officers and consultants for services. The value of
those shares was determined based on the trading value of the shares at the
dates on which the agreements were made for the services. The expense recorded
for that consideration is equal to 90% of the trading value of the shares as a
discount for the regulatory restrictions on trading of those shares. During the
year ended September 30, 1999, YP.Net issued 1,694,500 shares to consultants
valued at $2,145,178.00.
The cost of the Yellow-Page.Net URL was capitalized at its cost of
---------------
$5,000,000. The URL is amortized on an accelerated basis over the twenty-year
term of the licensing agreement. Amortization expense on the URL was $149,166
for the year ended September 30, 1999. Annual amortization expense in future
years related to the URL is anticipated to be approximately $250,000.
Fiscal Year End September 30, 1999 Compared to Fiscal Year End September
30,1998.
Revenues for the year ended September 30, 1999 increased 1,019% to
$8,572,185 from $841,045 during the year ended September 30, 1998. The increase
in revenue is principally the result of the acquisition of Telco's operations.
Prior to the acquisition, no material operations had been commenced.
Sales and marketing expenses for the year ended September 30, 1999
increased to $3,714,427. No sales and marketing expenses had been incurred
during the year ended September 30, 1998. The increase was principally the
result of expended marketing due to the operations of Telco. The marketing
expenses are attributed to our direct response marketing, which is our primary
source of attracting new customers.
General and administrative expenses for the year ended September 30, 1999
decreased 35% to $1,731,209 from $2,659,924 during the year ended September 30,
1998. The decrease was principally due to the change in our core business and
the reduction of officer compensation, rent expenses and development costs and
associated development stage endeavors.
Interest expense for the year ended September 30, 1999 increased 19,623.1%
to $410,319 from $2,091 during the year ended September 30, 1998. The increase
in interest expense was a result of increased debt due to the acquisition of
Telco and the acquisition of the URL Yellow-Page.Net.
---------------
13
<PAGE>
At September 30, 1999, YP.Net had unused available federal net operating
losses of $7,804,435 which expire from 2011 through 2014. YP.Net also has
available net operating loss carry forward of $2,744,800 and has unavailable net
operating loss carry forward of $5,059,634. YP.Net may only utilize the
unavailable net operating loss of $5,059,634 upon generating taxable income at
the parent company level.
At September 30, 1999, YP.Net had unused state net operating losses of
$5,750,373 expiring 2003. YP.Net had available net operating loss carry forward
of $2,744,800 and an unavailable net operating loss carry forward of $3,005,572.
YP.Net may only utilize the unavailable net operating loss of $3,005,572 upon
generating taxable income at the parent company level.
Net losses for the year ended September 30, 1999 were $4,363,687, or $.20
per share, compared to losses of $1,941,202, or $.17 per share the year ended
September 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Our cash balance increased to $255,324 at year ended September 30, 1999
from $30,252 at the year ended September 30, 1998. We funded working capital
requirements primarily from cash generated from financing activities and
utilized cash in operating activities and investing activities. We have a
credit facility used primarily to finance our receivables.
Operating Activities. Cash used by operating activities decreased for the
year ended September 30, 1999 to $691,780 compared to $1,770,397 from the year
ended September 30, 1998, a 78% decrease. The principal source of our
operations revenue is from sales of electronic yellow page advertising.
Investing Activities. Cash used by investing activities was $106,512 for
the year ended September 30, 1999 compared to $478,409 for the year ended
September 30, 1998. We purchased $230,662 of additional computer equipment to
upgrade and replace incompatible equipment. We used $3,000,000 for partial
payment of the purchase of the 20-year license right to the URL Yellow-Page.Net,
---------------
the domain name for our Web site. We obtained cash in the amount of $3,124,150
which was utilized in the business combination.
Financing Activities. Cash flows provided from financing activities were
$1,023,364 in the year ended September 30, 1999 compared to $2,604,135 for the
year ended September 30, 1998, a 61% decrease. We had cash inflow from the
financing arrangements in the amount of $788,306 and from the sale of common
stock of $629,681. We had cash outflow for notes paid in the amount of
$394,623.
We incurred debt in the acquisition of the license right to the
Yellow-Page.Net URL. A total of $4,000,000 was borrowed, $2,000,000 from Joseph
and Helen VanSickle and $2,000,000 as a carry-back from Matthew & Markson Ltd.
Management has dedicated payments in the amount of $100,000 per month for the
payment of the VanSickle note. Management has also dedicated payments to the
14
<PAGE>
Matthew & Markson note in the amount of $100,000 per month, with the provision
that no payment be made if YP.Net has less than 30 days operating capital
reserved, or if it is in an uncured default with any of its lenders. A total of
4,000,000 shares were issued to secure these notes and are held in escrow.
Collections on accounts receivables are received primarily through the
billing service integrators under contract to administer this billing and
collection process. The billing service providers generally do not remit funds
until they are collected. The billing companies maintain holdbacks for refunds
and other uncertainties. Generally, cash is collected and remitted to YP.Net
over a 90 to 120 day period subsequent to the billing dates.
At September 30, 1999, YP.Net had a working capital deficiency of
$3,873,008. Subsequent to September 30, 1999, YP.Net restructured certain debt
and has increased the volume of its operations resulting in elimination of that
deficit at June 30, 2000. Management believes that it will have sufficient
working capital to implement its business plan.
YP.Net markets it products primarily through the use of direct mailers to
businesses throughout the United States. YP.Net generally pays for these
marketing costs when incurred and amortizes the costs of direct-response
advertising on a straight-line basis over eight months. The amortization lives
are based on estimated attrition rates. During the year ended September 30,
1999, YP.Net paid $2,029,575 for direct-response advertising. Management
anticipates the outlays for direct-response advertising to remain consistent
over the near term.
YP.Net does not intend to incur significant capital expenditures in the
near term.
Financial Institution Lending Agreements. We have an existing asset-based
collateralized line of credit with Finova Financial, Inc. Recently, Finova has
requested YP.Net to execute a forbearance agreement that will extend the line of
credit terms to October 3, 2000. Finova has requested that YP.Net seek a lender
that can accommodate its specialized Internet advertising business along with
its LEC billing practices. As a result, management has decided to seek other
potential lenders that specialize in this area of financing.
We have received a proposal from RFC Capital, a LEC billing financial
factoring company, and we have presented a loan request to Pacific Century Bank
for a line-of-credit facility of at least $3,000,000 to replace the facility
provided by Finova.
15
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT. . . . . . . . . . . . . . . . . . . . . . . . . 17
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheet at September 30, 1999. . . . . . . . . . . . .18
Consolidated Statement of Operations for the
year ended September 30, 1999 . . . . . . . . . . . . . . . . . . . . . 19
Consolidated Statement of Stockholders' Equity for the
year ended September 30, 1999 . . . . . . . . . . . . . . . . . . . . . 20
Consolidated Statement of Cash Flows for the year ended
September 30, 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . .21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . 23
16
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
-------------------------------
To the Stockholders and Board of Directors of
YP.Net, Inc.:
We have audited the accompanying balance sheet of YP.Net, Inc. as of September
30, 1999 and the related statements of operations, stockholders' equity and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of YP.Net, Inc. as of September
30, 1999, and the results of its operations and cash flows for the year then
ended, in conformity with generally accepted accounting principles.
/s/ KING, WEBER & ASSOCIATES, P.C.
Tempe, Arizona
June 12, 2000
17
<PAGE>
YP.NET, INC.
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999
--------------------
ASSETS:
CURRENT ASSETS
Cash $ 255,323
Accounts receivable, net of allowance of $206,012 951,177
Customer acquisition costs, net of accumulated amortization
of $1,395,675 633,900
Other receivable 77,182
Prepaid expenses and other assets 14,650
Deferred income taxes 91,172
------------
Total current assets 2,023,404
PROPERTY AND EQUIPMENT, net 435,898
DEPOSITS 13,287
INTELLECTUAL PROPERTY- URL, net of accumulated
amortization of $159,166 4,850,834
DEFERRED FINANCING COSTS 123,750
------------
TOTAL ASSETS $ 7,447,173
============
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable $ 55,000
Accrued liabilities 447,360
Line of credit 788,306
Notes payable - current portion 4,020,559
Deferred revenue 324,760
Income taxes payable 260,427
------------
Total current liabilities 5,896,412
DEFERRED INCOME TAXES 70,865
NOTES PAYABLE - long-term portion 7,241
------------
Total liabilities 5,974,518
------------
STOCKHOLDERS' EQUITY:
Series B preferred stock, $.001par value, 2,500,000 shares
designated, 1,700,000 issued 1,700
Common stock, $.001 par value, 50,000,000 shares authorized,
39,156,853 issued and outstanding 39,157
Paid in capital 4,892,538
Treasury stock at cost (69,822)
Accumulated deficit (3,390,918)
------------
Total stockholders' equity 1,472,655
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,447,173
============
The accompanying notes are an integral part of these consolidated financial
statements.
18
<PAGE>
YP.NET, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1999
-------------------------------------------
NET REVENUES $ 8,572,185
--------------
OPERATING EXPENSES:
Cost of services 4,760,026
General and administrative expenses 1,731,209
Sales and marketing expenses 3,714,427
Depreciation and amortization 192,469
--------------
Total operating expenses 10,398,131
--------------
OPERATING LOSS (1,825,946)
--------------
OTHER (INCOME) AND EXPENSES
Interest expense 410,319
Interest income (5,401)
--------------
Total other expense 404,918
--------------
LOSS BEFORE DISCONTINUED OPERATIONS AND INCOME TAXES (2,230,864)
INCOME TAX PROVISION 240,119
--------------
LOSS FROM CONTINUING OPERATIONS (2,470,983)
LOSS FROM DISCONTINUED OPERATIONS
Loss from operations of medical billing services segment
(no effect for income taxes) (221,194)
Loss from abandonment of medical billing services segment
(no effect for income taxes) (1,671,510)
--------------
Total (1,892,704)
--------------
NET LOSS $ (4,363,687)
==============
NET LOSS PER SHARE:
Basic:
Continuing operations $ (0.11)
Discontinued operations (0.09)
--------------
Total Basic $ (0.20)
==============
Diluted:
Continuing operations $ (0.11)
Discontinued operations (0.09)
--------------
Total Diluted $ (0.20)
==============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 22,223,757
==============
Diluted 22,223,757
==============
The accompanying notes are an integral part of these consolidated financial
statements.
19
<PAGE>
<TABLE>
<CAPTION>
YP.NET, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE
FOR THE YEAR ENDED SEPTEMBER 30, 1999
-------------------------------------------
COMMON STOCK PREFERRED A TREASURY PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT STOCK CAPITAL DEFICIT TOTAL
----------- ------------ ---------- ---------- ----------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE OCTOBER 1, 1998 17,000,000 $ 17,000 - $ - $ - $ - $ 972,769 $ 989,769
Reverse merger 14,714,603 14,715 (69,822) 1,777,670 1,722,563
Common stock issued for
service rendered 1,694,500 1,695 2,143,483 2,145,178
Common stock
issued for cash 847,750 848 627,985 628,833
Common stock issued
as collateral for on
note payable 2,000,000 2,000 (2,000) 0
Common stock
placed in escrow as
collateral on debt 2,500,000 2,500 (2,500) 0
Employee preferred
stock grants 1,700 1,700 (1,700) 0
Conversion of debt 400,000 400 349,600 350,000
Net loss (4,363,687) (4,363,687)
----------- ------------ ---------- ---------- ----------- ---------- ------------ -----------
BALANCE
SEPTEMBER 30, 1999 39,156,853 $ 39,157 1,700 $ 1,700 $ (69,822) $4,892,538 $(3,390,918) $1,472,655
=========== ============ ========== ========== =========== ========== ============ ===========
The accompanying notes are an integral part of these consolidated financial statements
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
YP.NET, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE
YEAR ENDED SEPTEMBER 30, 1999
---------------------------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $(4,363,687)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Loss from discontinued operations 221,194
Loss on abandonment of net assets of discontinued operations 1,671,510
Depreciation and amortization 30,338
Issuance of common stock as compensation for services 2,146,872
Loss on disposal of equipment 89,319
Deferred income taxes (20,478)
Conversion of accrued interest to common stock 100,000
Amortization of intellectual property 149,166
Changes in assets and liabilities (net of business acquisitions and divestures):
Trade and other accounts receivable (124,826)
Customer acquisition costs (264,981)
Other receivables (32,671)
Prepaid and other current assets (9,616)
Other assets 49,525
Accounts payable (71,348)
Accrued liabilities 202,289
Income taxes payable 260,427
Deferred revenue 324,760
------------
Cash provided by continuing operations 357,793
Cash used by discontinued operations (1,049,574)
------------
Net cash (used in) operating activities (691,781)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (230,662)
Purchase of intellectual property (3,000,000)
Cash acquired in business acquisition 3,124,150
------------
Net cash (used in) investing activities (106,512)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings on line of credit 788,306
Principal repayments on notes payable (394,623)
Proceeds from sale of common stock 629,681
------------
Net cash provided by financing activities 1,023,364
------------
INCREASE IN CASH 225,071
CASH, BEGINNING OF YEAR 30,252
------------
CASH, END OF YEAR $ 255,323
============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
21
<PAGE>
YP.NET, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS, (CONTINUED)
FOR THE YEAR ENDED SEPTEMBER 30, 1999
-------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 64,677
=========
Income taxes paid $ -0-
=========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Conversion of debt to common stock $ 250,000
============
Note payable issued for
purchase of intellectual property $ 2,000,000
============
Common stock issued for business acquisition $ 1,722,563
============
The accompanying notes are an integral part of these consolidated financial
statements.
22
<PAGE>
YP.NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED SEPTEMBER 30, 1999
-------------------------------------------
1. ORGANIZATION AND BASIS OF PRESENTATION
YP.Net, Inc. (the "Company"), formally RIGL Corporation, had previously
attempted to develop software solutions for medical practice billing and
administration. The Company had made acquisitions of companies performing
medical practice billing services as test sites for its software and as
business opportunities. The Company was not successful in implementing its
medical practice billing and administration software products and looked to
other business opportunities. The Company acquired Telco Billing Inc.
("Telco") in June 1999, through the issuance of 17,000,000 shares of the
Company's common stock. Prior to its acquisition of Telco, RIGL had not
generated significant or sufficient revenue from planned operations.
Telco was formed in April 1998, to provide advertising and directory
listings for businesses on its Internet Web site in a "Yellow Page" format.
-----------
Telco provides those services to its subscribers for a monthly fee. These
services are provided primarily to all business throughout the United
States. Telco became a wholly owned subsidiary of YP.Net, Inc. after the
June 16, 1999 acquisition.
The accompanying financial statements represent the consolidated financial
position and results of operations of the Company and includes the accounts
and results of operations of the Company and Telco, its wholly owned
subsidiary, for the year ended September 30, 1999. The consolidated results
of operations and cash flows for the year ended September 30, 1999 include
that of Telco for the year ended September 30, 1999, and the Company from
the June 16, 1999 acquisition date through September 30, 1999.
At the time that the transaction was agreed to, the Company had 12,567,770
common shares issued and outstanding. As a result of the merger transaction
with Telco, there was 29,567,770 common shares outstanding, and the former
Telco stockholders held approximately 57% of the Company's voting stock.
For financial accounting purposes, the acquisition was a reverse
acquisition of the Company by Telco, under the purchase method of
accounting, and was treated as a recapitalization with Telco as the
acquirer. Accordingly, the historical financial statements have been
restated after giving effect to the June 16, 1999, acquisition of the
Company. The financial statements have been prepared to give retroactive
effect to October 1, 1998, of the reverse acquisition completed on June 16,
1999, and represent the operations of Telco. Consistent with reverse
acquisition accounting: (i) all of Telco's assets, liabilities, and
accumulated deficit, are reflected at their combined historical cost (as
the accounting acquirer) and (ii) the preexisting outstanding shares of the
Company (the accounting acquiree) are reflected at their net asset value as
if issued on June 16, 1999.
23
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash: Cash includes all short-term highly liquid investments that are
----
readily convertible to known amounts of cash and have original maturities
of three months or less. At times cash deposits may exceed government
insured limits. At September 30, 1999, cash deposits exceeded those insured
limits by $89,000.
Principles of Consolidation: The consolidated financial statements include
---------------------------
the accounts of the Company and its wholly owned subsidiary, Telco Billing
Company. All significant intercompany accounts and transactions are
eliminated.
Customer acquisition costs: These costs represent the direct response
----------------------------
marketing costs that are incurred as the primary method by which customers
subscribe to the Company's services. The Company purchases mailing lists
and sends advertising materials to prospective subscribers from those
lists. Customers subscribe to the services by positively responding to
those advertising materials which serve as the contract for the
subscription. The Company capitalizes and amortizes the costs of
direct-response advertising on a straight-line basis over eight months. The
amortization lives are based on estimated attrition rates.
The Company also incurs advertising costs that are not considered
direct-response advertising. These other advertising costs are expensed
when incurred. These advertising expenses were $168,744 for the year ended
September 30, 1999.
Property and equipment: These assets are stated at cost less accumulated
-----------------------
depreciation. Depreciation is recorded on a straight-line basis over the
estimated useful lives of the assets ranging from 3 to 5 years.
Depreciation expense for the year ended September 30, 1999 was $30,338.
Revenue recognition: The Company's revenue is generated by customer
--------------------
subscription of directory and advertising services. Revenue is billed and
recognized monthly for services subscribed in that specific month. The
Company utilizes outside billing companies to transmit billing data, much
of which is forwarded to Local Exchange Carriers ("LECs") that provide
local telephone service. Monthly subscription fees are generally included
on the telephone bills of the customers. The Company recognizes revenue
based on net billings accepted by the LEC's.
Some customers subscribe for a full year of service and pay in advance for
the service. The revenue associated with these subscriptions is deferred
and recognized ratably over twelve months.
Income taxes: The Company provides for income taxes based on the provisions
------------
of Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes, which, among other things, requires that recognition of
deferred income taxes be measured by the provisions of enacted tax laws in
effect at the date of financial statements.
Financial Instruments: Financial instruments consist primarily of cash,
----------------------
accounts receivable, and obligations under accounts payable, accrued
expenses and notes payable. The carrying amounts of cash, accounts
receivable, accounts payable, accrued expenses and notes payable
approximate fair value because of the short maturity of those instruments.
The Company has applied certain assumptions in estimating these fair
values. The use of different assumptions or methodologies may have a
material effect on the estimates of fair values.
24
<PAGE>
Net loss per share: Net loss per share is calculated using the weighted
------------------
average number of shares of common stock outstanding during the year. The
Company has adopted the provisions of SFAS No. 128 Earnings Per Share.
Use of Estimates: The preparation of financial statements in conformity
----------------
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
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 from
those estimates.
Stock-Based Compensation: Statements of Financial Accounting Standards No.
------------------------
123, Accounting for Stock-Based Compensation, ("SFAS 123") established
accounting and disclosure requirements using a fair-value based method of
accounting for stock-based employee compensation. In accordance with SFAS
123, the Company has elected to continue accounting for stock based
compensation using the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." The proforma effect of the fair value method is discussed in
Note 15.
Impairment Loss: Impairment of long-lived assets is assessed by the Company
---------------
for impairment whenever there is an indication that the carrying amount of
the asset may not be recoverable. Recoverability of these assets is
determined by comparing the forecasted undiscounted cash flows generated by
those assets to the assets' net carrying value. The amount of impairment
loss, if any, is measured as the difference between the net book value of
the assets and the estimated fair value of the related assets.
3. ACCOUNTS RECEIVABLE
The Company provides billing information to third party billing companies
for the majority of its monthly billings. Billings submitted are "filtered"
by these billing companies and the LEC's. Net accepted billings are
recognized as revenue and accounts receivable. The billing companies remit
payments to the Company on the basis of cash ultimately received from the
LEC's by those billing companies. The billing companies and LEC's charge
fees for their services which are netted against the gross accounts
receivable balance. The billing companies also apply holdbacks for the
remittances for potentially uncollectible accounts. The Company estimates
uncollectible account balances and provides an allowance for such
estimates.
The Company has entered into a customer billing service agreement with
Integretel, Inc. on January 6, 1998, which was amended on April 2, 1998 and
again on September 1, 1999. Integretel provides billing and collection and
related services. Determining the net realizable value requires an
estimation of both uncollectible receivables or any returns and allowances.
The trade receivable due from Integretel at September 30, 1999 was
$304,423. These receivables have been reduced by an allowance for doubtful
accounts of $43,825.
The Company has also entered into a customer billing service agreement with
Olympic Telecommunications, Inc. on June 2, 1998. Olympic provides billing
and collection and related services. Determining the net realizable value
requires an estimation of both uncollectible receivables or any returns and
allowances. The trade receivable due from Olympic at September 30, 1999 was
$180,102.
25
<PAGE>
The Company has also entered into a customer billing service agreement with
Enhanced Services Billing, Inc. (ESBI). ESBI provides billing and
collection and related services. Determining the net realizable value
requires an estimation of both uncollectible receivables or any returns and
allowances. The trade receivable due from ESBI at September 30, 1999 was
$592,235 less aggregated amounts for Telco fees, and reserve holdbacks
based on dilution. This trade receivable has been reduced by an allowance
for doubtful accounts of $162,187.
Trade subscription receivables, which are directly administered and carried
by the Company, are valued and reported at net realizable value, the net
amount expected to be received. This amount may or may not be necessarily
the amount received. Determining the net realizable value requires an
estimation of both uncollectible accounts or any returns and allowances.
The net trade subscriptions receivable at September 30, 1999 was $75,929.
4. INTELLECTUAL PROPERTY
In connection with the Company's acquisition of Telco, the Company was
required to provide accelerated payment of license fees for the use of the
Internet domain name or Universal Resource Locator (URL) Yellow-Page.Net.
---------------
Telco had previously entered into a 20-year license agreement for the use
of the URL with one of its two 50% stockholders. The original license
agreement required annual payments of $400,000. However, the agreement
stated that upon a change in control of Telco, a $5,000,000 accelerated
payment is required to maintain the rights under the licensing agreement.
The URL holder agreed to discount the accelerated payments from $8,000,000
to $5,000,000 at the time of the acquisition. The Company agreed to make
that payment upon effecting the acquisition of Telco.
The Company made a $3,000,000 cash payment and issued a note payable for
$2,000,000 to acquire the licensing rights of the URL. The Company also
issued 2,000,000 shares of its common stock to be held as collateral on the
note. The note payable was originally due on July 15, 1999. The Company
failed to make the $2,000,000 payment when due. The repayment terms were
renegotiated to extend the due date to January 15, 2000. An extension fee
of $200,000 was paid by the Company at that time. The Company again
renegotiated the repayment terms on April 26, 2000, to a demand note, with
monthly installments of $100,000 subject to all operating requirements,
which have been met by the Company. The URL is recorded at its cost net of
accumulated amortization. Management believes that the Company's business
is dependent on its ability to utilize this URL given the recognition of
the yellow page term. Management believes that the current revenue and cash
-----------
flow generated through use of Yellow-Page.Net substantiates the net book
---------------
value of the asset. The Company will periodically analyze the net book
value of this asset and determine if an impairment has been incurred. The
URL is amortized on an accelerated basis over the twenty-year term of the
licensing agreement. Amortization expense on the URL was $149,166 for the
year ended September 30, 1999.
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at September 30, 1999:
Leasehold improvements $ 287,507
Furnishings and fixtures 105,333
Office and computer equipment 159,891
-------------
Total 552,731
Less accumulated depreciation (116,833)
-------------
Property and equipment, net $ 435,898
=============
26
<PAGE>
6. NOTES PAYABLE AND LINE OF CREDIT
Notes payable at September 30, 1999 are comprised of the following:
3,000,000 Revolving line of credit, interest at the
prime rate plus 3% (11.25% at September 30, 1999).
The facility is limited to 80% of eligible accounts
receivable. Assets of the Company collateralize the
credit facility. The credit facility expires on August 31,
2003. The institution may withdraw the line with a
notification within 90 days $ 788,306
Term loan from bank. Original balance of $40,525.
Repayment terms require monthly installments of
principal and interest of $1,844. Interest at 8.5% per
annum. Due January 1, 2001. Collateralized by
equipment 27,800
Note payable to stockholders, original balance of
2,000,000, interest at 8% per annum. Interest
payments due monthly through due date of November
11, 1999 Collateralized by 2,000,000 shares of the
Company's common stock. Subsequent to September
30, 1999, the repayment terms were subsequently
renegotiated extending the due date to January 11, 2001
with monthly payments of $100,000 plus interest 2,000,000
Note payable to former Telco shareholder for balance
of URL purchase price (Note 4). Repayment terms have
been extended requiring monthly installments of
principal and interest at 20% per annum of $100,000
and due upon demand. Collateralized by 2,000,000
shares of the Company's common stock 2,000,000
Totals 4,816,106
Less current portion (4,808,865)
Long-term portion $ 7,241
Principal payments due as follows:
Years ended September 30: 2000 $ 4,808,865
2001 7,241
---------------
Total $ 4,816,106
===============
27
<PAGE>
7. BUSINESS COMBINATION
On June 16, 1999, the Company exchanged 17,000,000 shares of common stock
for all of the common stock of Telco Billing Company ("Telco"). Prior to
the merger, the Company had not yet commenced material operations. For
financial accounting purposes, the acquisition was accounted for as a
reverse merger and was treated as a recapitalization with Telco as the
acquirer. The accompanying financial statements present the historical cost
bases of assets and liabilities and results of operations of Telco.
Subsequent to the merger, the Company ceased its previous operations and
abandoned assets related to those operations. The remaining Company assets
are recorded at their historical cost. The recapitalization of Telco
reflects the book value of the net assets of RIGL as of the date of the
merger as of June 16, 1999 of $1,722,563.
8. DISCONTINUED OPERATIONS
Effective with the acquisition of Telco on June 16 1999, the Company
determined that it would abandon its efforts to develop and market the
medical practice billing and administration business. The operations for
this segment are reflected as discontinued operations in the accompanying
statement of operations. Revenues of this segment were $160,154 for the
year ended September 30, 1999. The Company divested asset balances totaling
$1,646,000 related to this segment. The disposed components are as follows:
Capitalized software costs $ 673,000
Goodwill 152,000
Security deposits 62,000
Receivables 436,000
Other 323,000
----------
Total $1,646,000
==========
9. PROVISION FOR INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
The deferred tax consequences of temporary differences in reporting items
for financial statement and income tax purposes are recognized, if
appropriate. Realization of the future tax benefits related to the deferred
tax assets is dependent on many factors, including the Company's ability to
generate taxable income within the net operating loss period. The Company
has considered these factors in reaching its conclusion as to the valuation
allowance for financial reporting purposes.
At September 30, 1999 the Company has unused federal net operating losses
of $7,804,435 available under Internal Revenue Code 382 - change in control
rules expiring from 2011 through 2014. The Company has available net
operating loss carry forward under the separate return limitation year of
$2,744,800 and has unavailable net operating loss carry forward of
$5,059,634. The Company may utilize the unavailable net operating loss of
$5,059,634 upon generating taxable income in that operating entity.
28
<PAGE>
At September 30, 1999 the Company has unused state net operating losses of
$5,750,373 available under the change in control rules expiring 2003. The
Company has available net operating loss carry forward under the separate
return limitation year of $2,744,800 and has unavailable net operating loss
carry forward of $3,005,572. The Company may utilize the unavailable net
operating loss of $3,005,572 upon generating taxable income in that
operating entity.
Prior to the acquisition date of June 16, 1999 RIGL agreed to assume the
tax liability of Telco for the taxable income generated prior to June 16,
1999. The provision for income taxes is computed based on the pretax income
generated prior to the acquisition of Telco. The current income tax
provision of $260,427, less a net deferred benefit $20,478, related to
Telco for the year ended September 30, 1999, has been included in the
statement of income.
Income taxes for year ended September 30, 1999 is summarized as follows:
Current (Benefit) $ (1,708,515)
Deferred Benefit (Provision) 1,948,634
--------------
Net income tax provision $ 240,119
==============
The net income tax provision of $240,119 incurred for the year ended
September 30, 1999, was allocated to continuing operations. This provision
amount relates primarily to taxable income of Telco prior to the
acquisition. The loss from discontinued operations generated additional net
operating loss carryforwards which were fully offset by a valuation
allowance resulting in no tax effect.
A reconciliation for the differences between the effective and statutory
income tax rates is as follows:
Federal statutory rates $(1,402,013) (34)%
State income taxes (329,885) ( 8)%
Provision due to income generated
prior to merger 260,597 6 %
Valuation allowance for operating
loss carryforwards 1,694,534 42 %
Other 16,887 -
----------------------
Effective rate $ 240,119 6 %
======================
Deferred tax assets totaling $2,632,000 are substantially offset by a
valuation allowance of $2,541,000 resulting in a net deferred income tax
asset of $91,172. The valuation allowance was provided due to the
uncertainty of future realization of federal and state net operating loss
carryforwards that give rise to approximately $2,541,000 of the deferred
tax asset. The balance of the deferred tax asset relates to differences in
book and tax accounting relative to the previous allowances on accounts
receivable and compensation. The valuation allowance increased $1,694,534
in the year ended September 30, 1999, due to uncertainties as to the
Company's ability to generate sufficient taxable income to utilize the net
operating loss carryforwards because of the change in control matters
discussed above.
29
<PAGE>
10. LEASES
The Company leases its office space under long-term operating leases
expiring through 2003. Rent expense under these leases was $87,250 for the
year ended September 30, 1999. The Company consolidated office space from a
variety of locations to a single facility. The Company has subleased the
former Telco office space.
Future minimum annual lease payments and sublease rentals under operating
lease agreements for years ended September 30, 1999: Sublease
Rents Rentals
----- -------
2000 $ 351,095 $ 202,571
2001 407,676 280,212
2002 392,862 265,398
2003 95,598 -
-------------- ---------------
$ 1,247,231 $ 748,181
============== ===============
11. STOCKHOLDERS' EQUITY
Telco Acquisition
------------------
The Company issued 17,000,000 shares of its Common Stock in connection with
the Telco acquisition. The transaction was valued at the book value of the
net assets of RIGL as of the date of the transaction.
Actions of the Board
-----------------------
Significant blocks of stock have been issued to prior officers and
consultants for services rendered. It is not possible to determine the
effect, if any, of bringing current the required Exchange Act of 1934 (the
"1934 Act") filings and the financial statements and disclosures contained
therein, may have on the actions of current or former shareholders of the
Company affected by these transactions. The value of those shares was
determined based on the trading value of the stock at the dates on which
the agreements were made for the services. The expense for that
consideration is 90% of the trading value of the shares to factor in a
discount for the regulatory restrictions on trading of those shares. During
the year ended September 30, 1999, the Company issued 1,694,500 shares to
officers and consultants valued at $2,145,178.
Other
-----
During the year ended September 30, 1999, the Company issued 4,500,000
shares of its common stock as collateral on two notes payable. The shares
are held in escrow pending repayments of the obligations. Both notes have
been restructured, extending the due dates. The shares are non-voting as
long as they are held in escrow. These shares are not included in the
weighted average shares outstanding for purposes of calculating the
Company's basic net loss per common share for the year ended September 30,
1999.
30
<PAGE>
During the year ended September 30, 1999, the Company issued 400,000 shares
of its common stock as conversion of the remaining balance of a note
payable. The unpaid principal balance of the note converted was $250,000
and accrued interest of $100,000 was also converted.
The Company granted 1,700,000 shares of Series B preferred stock to certain
employees during the year ended September 30, 1999. The Series B preferred
stock has no stated dividend. The preferred shares are convertible to
common stock at the option of the holder. The shares are convertible at
varying rates depending upon the trading price of the common stock at the
time of conversion. The initial conversion rate is one share of common for
each share of preferred. Conversion may not occur until certain "trigger
events" occur and all rights with respect to the preferred shares terminate
on November 30, 2004. "Trigger events" are defined as trading prices of the
Company's common stock reaching or exceeding $5 through $10 per share and
net income reaching or exceeding $5,000,000. No value was assigned to the
preferred shares in the accompanying balance sheet nor was any compensation
expense recognized for the year ended September 30, 1999, because the
preferred shares were not exercisable at the time of issuances because of
the failure of the Company to meet the "trigger events". Subsequently, new
management has cancelled the Series B preferred stock and recinded those
issuances
Effects of Delinquent Filings on Market Activity
------------------------------------------------------
The Company is delinquent in its filings under the 1934 Act. The last
filing was the June 30, 1998 Form 10-QSB. Significant trading of the
Company stock has occurred by both related and unrelated parties during the
period subsequent to its filing. It is not possible to determine the
effect, if any, of bringing current the required 1934 Act filings and the
financial statements and disclosures contained therein, may have on the
actions of current or former shareholders of the Company affected by these
revisions.
Effects of Delinquent Filings on Rule 144 and Reg S Stock Issuances
---------------------------------------------------------------------------
The Company has been delinquent in its public filings but has attempted to
keep the public informed through press releases and 8-K filings while it
makes a concerted effort to become current in its filings. The Company is
determining the factual issues of this matter and is currently unable to
determine the materiality of violations, if any, or their impact on the
financial statements of the Company.
12. COMMITMENTS AND CONTINGENCIES
Telco Billing
--------------
The acquisition of Telco by the Company called for the issuance of
17,000,000 new shares of stock in exchange of the existing shares of Telco.
As part of that agreement, the Company gave the former shareholders the
right to "Put" back to the Company certain shares of stock at a minimum
stock price of 80% of the current trading price with a minimum strike price
of $1.00. The net effect of which was that the former Telco shareholders
could require the Company to repurchase shares of stock of the Company at a
minimum cost of $10,000,000. The agreement required the Company to attain
certain market share levels.
New management has renegotiated the "Puts," by which the "Puts" were
retired and the Company provided a credit facility of up to $5,000,000 to
the former Telco shareholders, collateralized by the stock held by the
shareholders, with interest at least 0.25 points higher than the Company's
average cost of borrowing. Additional covenants warrant that no more that
$1,000,000 can be advanced at any point in time and no advances can be made
in excess with out allowing at least 30 days operating capital plus reserve
or if the company is in an uncured default with any of its lenders.
31
<PAGE>
Billing Service Agreements
----------------------------
The Company has entered into a customer billing service agreement with
Integretel, Inc. (IGT) on January 6, 1998, which was amended on April 2,
1998 and again on September 1, 1999. IGT provides billing and collection
and related services associated to the telecommunications industry. The
agreement term is for two years, automatically renewable in two-year
increments unless appropriate notice to terminate is given by either party.
Under the agreement, IGT bills, collects and remits the proceeds to Telco
net of reserves for bad debts, billing adjustments, telephone company fees
and IGT fees. If either the Company's transaction volume decreases by 25%
from the preceding month, less than 75% of the traffic is billable to major
telephone companies, IGT may at its own discretion increase the reserves
and holdbacks under this agreement.
The Company has also entered into a customer billing service agreement with
Enhanced Services Billing, Inc. (ESBI) on February 1, 1999, which was
renewed on December 3, 1999. ESBI provides billing and collection and
related services associated to the telecommunications industry. The
agreement term is for two years, automatically renewable in one-year
increments unless appropriate notice to terminate is given by either party.
Under the agreement, ESBI bills, collects and remits the proceeds to Telco
net of reserves for bad debts, billing adjustments, telephone company fees
and ESBI fees. If either the Company's transaction volume decreases by 25%
from the preceding month, less than 75% of the traffic is billable to major
telephone companies, ESBI may at its own discretion increase the reserves
and holdbacks under this agreement.
The Company has also entered into a customer billing service agreement with
Olympic Telecommunications, Inc. (OLY) on June 2, 1998, and as a customer
Olympic provides billing and collection and related services associated to
the telecommunications industry. The agreement term is for one year,
automatically renewable in one-year increments unless appropriate notice to
terminate is given by either party. Under the agreement, OLY bills,
collects and remits the proceeds to Telco net of reserves for bad debts,
billing adjustments, telephone company fees and OLY fees. If either the
Company's transaction volume decreases by 25% from the preceding month,
less than 75% of the traffic is billable to major telephone companies, OLY
may at its own discretion increase the reserves and holdbacks under this
agreement. Both parties mutually terminated the agreement before September
30, 1999.
Pending Litigation:
A Women's Place
-----------------
The Company in the course of pursing the promotion of medical practices
entered into an agreement to provide practice management services to the
Flagstaff Arizona and Cottonwood Arizona offices of A Women's Place. The
Company advanced operating expenses of A Women's' Place during the
negotiations. No agreement was reached and A Women's' Place refused to
return the interim funding. The Company is presently pursuing litigation
for return of the advances in the amount of $236,000. A Woman's Place has
counter-claimed for unspecified damages for alleged breach of contract.
32
<PAGE>
Hudson Consulting Group et al
---------------------------------
The Company under prior management and directors, in the course of pursing
equity financing, engaged the services of The Hudson Consulting Group. The
Company later became aware of certain legal issues of The Hudson Consulting
Group and some of its principals. The Company believes the shares were
improperly issued for no valid consideration. Current management ordered a
"stop transfer" on the shares. Upon the transfer agent refusing the
transfer, The Hudson Consulting Group and its transferees threatened
litigation. The transfer agent filed an interpleader action and tendered
the shares to the court to determine ownership. The Company is seeking
return of the outstanding 2,000,000 shares of the common stock. The other
parties are seeking a determination to transfer the shares and for recovery
of consequential damages.
13. NET LOSS PER SHARE
Net loss per share is calculated using the weighted average number of
shares of common stock outstanding during the year. Preferred stock
dividends are subtracted from the net income to determine the amount
available to common shareholders. Preferred stock convertible to
1,700,000 common shares were not considered in the calculation for
diluted earnings per share for the year ended September 30, 1999
because the effect of their inclusion would be antidilutive. There
were no preferred stock dividends in the year ended September 30,
1999. The following presents the computation of basic and diluted loss
per share from continuing operations:
(Loss) Shares Per share
------------ ---------- -----------
Net (Loss) $(4,363,687)
Preferred stock dividends -
Discontinued operations 1,892,704
------------
Loss from continuing operations (2,470,983)
BASIC EARNINGS PER SHARE
Loss available to common stockholders $(2,470,983) 22,223,757 $ (0.11)
Effect of dilutive securities N/A
DILUTED EARNINGS PER SHARE $(3,191,426) 22,223,757 $ (0.11)
14. RELATED PARTY TRANSACTIONS
During the year ended September 30, 1999, the Company borrowed $500,000
from one of its shareholders, who later became a member of the board of
directors effective February 3, 2000. The Company repaid $250,000 of the
balance in cash and the board member converted the remaining $250,000 plus
$100,000 in accrued interest to 400,000 shares of the Company's common
stock. (Also see Note 4).
33
<PAGE>
15. CONCENTRATION OF CREDIT RISK
The Company maintains cash balances at banks in Arizona. Accounts are
insured by the Federal Deposit Insurance Corporation up to $100,000. At
September 30, 1999, the Company had bank balances exceeding those insured
limits of $89,000.
Financial instruments that potentially subject the Company to
concentrations of credit risk are primarily trade accounts receivable. The
trade accounts receivable are due primarily from business customers over
widespread geographical locations within the LEC billing areas across the
United States. The Company historically has experienced significant
dilution and customer credits due to billing difficulties and uncollectible
trade accounts receivable. The Company estimates and provides an allowance
for uncollectible accounts receivable.
16. STOCK BASED COMPENSATION
The Company issues stock options to executives, key employees and members
of the Board of Directors. The Company has adopted the disclosure-only
provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," and continues to account for
stock based compensation using the intrinsic value method prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees". Accordingly, no compensation cost has been recognized for the
stock options granted to employees. Had compensation cost for the Company's
stock options been determined based on the fair value at the grant date for
awards in 1999, consistent with the provisions of SFAS No. 123, the
Company's net loss and loss per share would have been increased to the pro
forma amounts indicated below:
1999
----
Net Loss - as reported $( 4,363,687)
Net Loss - pro forma $( 5,392,675)
Loss per share - as reported $ (0.20)
Loss per share - pro forma $ (0.24)
Under the provisions of SFAS No. 123, there were 1,212,000 fully vested
options and no proportionately vested options for the year ended September
30, 1999 used to determine net earnings and earnings per share under a pro
forma basis.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions for
years ended September 30, 1999:
Dividend yield None
Volatility 1.771
Risk free interest rate 6.00%
Expected asset life 2.5 years
Under the Employee Incentive Stock Option Plan approved by the stockholders
in 1998, the total number of shares of common stock that may be granted is
1,500,000. The plan provides that shares granted come from the
Corporation's authorized but unissued common stock. The price of the
options granted pursuant to this plan shall not be less than 100 percent of
the fair market value of the shares on the date of grant. The options
expire from five to ten years from date of grant. At September 30, 1999,
the Company had granted an aggregate of 1,212,000 options under this plan.
34
<PAGE>
In addition to the Employee Incentive Stock Option Plan, the Company will
occasionally grant options to consultants and members of the board of
directors under specific stock option agreements. There were no such
options granted in the year ended September 30, 1999.
During the year ended September 30, 1999, the Company granted 1,212,000
options to certain key employees. These options all were immediately
vested. These options were granted at exercise prices of $1.00 to $2.50 the
fair market value of the underlying shares on the date of grant. The
options expire five years from date of grant. The summary of activity for
the Company's stock options is presented below:
Weighted
Average Exercise
1999 Price
---- ----------------
Options outstanding at beginning of year 1,374,474 $2.27
Granted 1,212,000 $1.31
Exercised ( 105,000) $1.00
Terminated/Expired ( 1,374,474) $2.27
Options outstanding at end of year 1,107,000 $1.34
Options exercisable at end of year 1,107,000
Options available for grant at end of year 288,000
Price per share of options outstanding $ 1.00-$2.50
Weighted average remaining contractual lives 4.3 years
Weighted Average fair value of options
granted during the year $ 0.85
The Company has issued warrants in connection with certain debt and equity
transactions. Warrants outstanding are summarized as follows:
Weighted
Average
Exercise Price
--------------
Warrants outstanding at beginning of year 3,416,920 $2.07
Granted 1,555,250 $2.00
Expired (3,417,170) $2.05
Exercised (200,000)
----------- ---------
Outstanding at September 30, 1999 1,355,000 $2.00
=========== =========
35
<PAGE>
The 720,000 warrants outstanding at September 30, 1999, expire as follows:
June 3, 2000 20,000
June 7, 2000 200,000
July 23,2000 635,000
September 9, 2000 150,000
October 22, 2000 250,000
March 23, 2001 100,000
17. EMPLOYEE BENEFIT PLAN
The Company maintains a 401(k) profit sharing plan for its employees.
Employees are eligible to participate in the plan upon reaching age 21 and
completion of three months of service. The Company made no contributions to
the plan for the year ended September 30, 1999.
36
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES
In November, 1999, YP.Net dismissed Singer Lewak Greenbaum & Goldstein, LLP
("Singer Lewak") which had been its principal independent accountant for the
audit of its 1998 and 1997 fiscal year financial statements. Except for a
"going concern" qualification, Singer Lewak's reports on these financial
statements contained no adverse opinion or disclaimer of opinion. Neither of
these reports on the financial statements were qualified or modified as to
uncertainty, audit scope, or accounting principles. The decision to replace
Singer Lewak was recommended and approved by our board of directors. During the
two past fiscal years and the subsequent interim periods, YP.Net had no
disagreements with Singer Lewak regarding any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure.
On March 14, 1999, YP.Net reported that it replaced McGladry and Pullen LLP
as its principal certified public accountants. McGladry and Pullen LLP had been
engaged as the independent auditors, but had not issued any audited reports.
On March 30, 2000, YP.Net appointed King, Weber & Associates, P.C., as its
independent auditors to conduct the audit of the September 30, 1999 fiscal year
financial statements.
37
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of YP.Net, their ages and positions
are as follows:
NAME AGE POSITIONS HELD (1)
---- --- ------------------
Angelo Tullo 43 Director, Chairman of the Board
Walter Vogel 60 Director, Vice Chairman of
the Board
Gregory B. Crane 36 Director, Director of Operations
Daniel L. Coury, Sr. 47 Director
Harold A. Roberts 71 Director
Wallace Olsen 59 Director
DeVal Johnson 35 Director, Secretary
(1) All current directors serve until the next annual shareholders meeting
or their earlier resignation or removal and until their successors have
been duly elected and qualified.
Angelo Tullo. Mr. Tullo has served as the Chairman of the Board of YP.Net
since February 2000. From December, 1999 to present, Mr. Tullo has been the
principal of Sunbelt Financial Solutions, Inc., an investment banking and
consultant firm in Scottsdale, Arizona. For over twenty years, Mr. Tullo has
been active as a business consultant. Mr. Tullo has actively worked with
commercial financial factoring for the past ten years. He has owned and
operated factoring companies, leasing companies, consulting companies, wholesale
companies, professional employment organizations, insurance agencies, heating
and air-conditioning contractors, retail oil companies, real estate companies
and restaurants. He is a former member of the CEO Club in New York.
In February, 2000, American Business Funding Corp. filed for protection
under Chapter 11 of the Bankruptcy Code in the Federal District Court of
Arizona. Mr. Tullo had been a director, officer and shareholder of American
Business Funding immediately prior to the time of the bankruptcy filing.
Walter Vogel. Mr. Vogel has been a director of YP.Net since February and
was previously a member of its board from March to October, 1998. Mr. Vogel has
been involved extensively in international business for many years. From 1996
to present, Mr. Vogel has been the owner and president of MC Management GmbH, a
business-consulting firm in Ottenfing, Germany. Mr. Vogel has served as a
director of several companies both in the United States and Europe.
38
<PAGE>
Gregory B. Crane. Mr. Crane has been a director of YP.Net since February,
2000 and also has served as its Director of Operations since this time. From
September 1998 to June, 1999, Mr. Crane was the General Manager of Telco
Billing, Inc. Mr. Crane owned and operated several businesses including
residential and commercial builders, multi-state mail order, and a
document-preparation company, and was also the creator of the Yellow-Page.Net
---------------
concept. Mr. Crane was a member of the Young Entrepreneur's Organization
("YEO").
Mr. Crane has owned and operated various businesses involved in the
homestead declaration document preparation and filing service. In connection
with these activities, Mr. Crane and certain of these businesses have been
subject to injunctive actions brought by the states of Arizona, Florida, Texas
and Washington. These actions generally involved mailer solicitations for the
document preparation services and all of these activites occurred prior to the
commencement of Telco Billing, Inc and are unrelated to Telco Billuing, Inc. or
YP.Net.. Mr. Crane and the subject entities have entered into consent orders
related to these actions which primarily required modification to the mailers
and the payment ofcertain amounts that are a matter of public record. The use
of the mailer solicitation was prohibited in the State of Washington. In
connection with violation of the Florida order, Mr. Crane is subject to a
judgment in the amount of approximately $1.4 million plus accrued interest. Mr.
Crane has satisfied judgments related to orders in all other states.. Mr. Crane
was also named in the action filed by the FTC against YP.Net and has been
included in the stipulated preliminary order entered into by YP.Net and the FTC.
See "Legal Proceedings".
Daniel L. Coury. Mr. Coury has served as a director of YP.Net since
February, 2000. Mr. Coury's principal business is Mesa Cold Storage, Inc. which
owns and operates several cold storage facilities located in Mesa, Arizona. He
has also participated in the ownership and operation of various real estate
projects and business ventures.
Harold Roberts. Mr. Roberts has served as a director of YP.Net since
February, 2000 and previously served as a director of its predecessor from 1994
to 1998. Mr. Roberts has practiced law in Santa Fe, New Mexico since 1955 and
since 1975 has engaged primarily in matters regulated by various regulatory
agencies, including the Securities and Exchange Commission. He has served as a
director and president of SunRay Oil Company, a company engaged in drilling,
exploration and distribution, from 1996 to present, as a director and officer of
Candu, Inc., a company engaged in electronic marketing, from 1985 to the present
and as a director and president of Verilite Aircraft Corporation, a company
engaged in air craft development, from 1994 to the present. Mr. Roberts is a
graduate of the University of Colorado Law School.
Wallace Olsen, Jr. Mr. Olsen has been a director of YP.Net since February,
2000. Mr. Olsen has been active in several businesses in the transportation,
hospitality, real estate and assisted living centers industries.
39
<PAGE>
DeVal Johnson. Mr. Johnson has served as a director since October, 1999
and Secretary of YP.Net since February, 2000. Mr. Johnson was the graphics
designer and director of Telco Billing from September, 1998 until July, 1999
when it was acquired. Mr. Johnson was responsible for the design of the in-house
sales presentation and creation of the corporate logo for YP.Net. Prior to his
role at Telco, Mr. Johnson was a graphics designer for Print Pro, Inc. Mr.
Johnson is actively involved with Website promotion, interactive design and
Internet advertising.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Based upon current management's knowledge, YP.Net has not been furnished
with any reports under Section 16(a) of the Exchange Act filed by persons who
would have been required to file such reports with respect to YP.Net's fiscal
year ended September 30, 2000. YP.Net has also not received written
representation from any person that no report under Form 5 would be required to
be filed by such person. YP.Net is currently attempting to obtain information
regarding the reports and to determine if delinquencies actually exist. Upon
completing this review, it will advise any person it believes to be delinquent
of such person's reporting obligations under the Exchange Act.
ITEM 10. EXECUTIVE COMPENSATION
The following table reflects all forms of compensation for the fiscal years
ended September 30, 1999, 1998 and 1997 for the Chief Executive Officer and the
other four most highly compensated executive officers of YP.Net for the years
stated.
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SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
OTHER
FISCAL ANNUAL
NAME AND PRINCIPAL POSITION YEAR SALARY COMPENSATION
-------------------------------------- ------ -------- -------------
Tennessee Webb (1) 1999 $130,000 -
Chief Executive Officer 1998 $ 93,333 $ 55,750
1997 $ 82,344 $ 18,000
-------------------------------------- ------ -------- -------------
Michael McKay (2) 1999 $130,000 -
Chief Technology Officer 1998 $143,710 -
1997 $ 64,329 $ 46,000
-------------------------------------- ------ -------- -------------
Peter DeKray (2) 1999 $130,000 -
Vice President and Secretary 1998 $162,825 -
1997 $ 61,224 -
-------------------------------------- ------ -------- -------------
William O'Neal (3) 1999 $130,000 -
Senior Vice President 1998 $130,000 -
1997 - -
-------------------------------------- ------ -------- -------------
Kevin Jones (3) 1999 $130,000 -
Chief Operating Officer and 1998 $130,000 -
President 1997 $ 20,000 $ 40,000
-------------------------------------- ------ -------- -------------
(1) Mr. Webb resigned in March, 1999.
(2) Messrs. McKay, DeKray and Jones resigned in September, 1999.
(3) Mr. O'Neal resigned in February, 2000.
All options to acquire YP.Net stock granted to the above executive officers
expired unexercised 90 days after their termination of employment with YP.Net.
DIRECTOR COMPENSATION
Upon appointment to the Board, Mr. Tullo was awarded 100,000 shares of
YP.Net common stock and Mr. Vogel was awarded 75,000 shares. All other
directors were awarded 50,000 shares. None of these shares have been issued to
date. Additionally, the directors receive $2,000 per month for their service on
the Board and $250 per hour for services related to any Board committee on which
they serve.
EMPLOYMENT AGREEMENTS
Since February, 2000, Gregory B. Crane has served as the Director of
Operations of YP.Net. His services are provided through Business Executive
Services, Inc. which began to receive compensation in May of 2000 in the amount
of $13,000 per month for these services. These services provided "at will" and
no written agreement exists.
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1998 STOCK OPTION PLAN
YP.Net's Board of Directors adopted and its shareholders approved in June,
1998 the 1998 Stock Option Plan. The purpose of the Plan was to provide
incentives to employees, directors and service providers to promote the success
of YP.Net. The Plan provides for the grant of both qualified and non-qualified
options to purchase up to 1,500,000 shares of its common stock at prices
determined but, in the case of incentive options, at a price not less than the
fair market value of the stock on the date of the grant. The Plan is
administered by the Board of Directors or by a committee appointed by the Board.
As of September 30, 1999, options to purchase 1,107,000 shares remain
outstanding which are exercisable at prices of $1.00 to $2.50.
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ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth, as of June 30, 2000, the ownership of each
person known by management to be the beneficial owner of five percent or more of
YP.Net's common stock, each officer and director individually, and all officers
and directors as a group. YP.Net has been advised that each person has sole
voting and investment power over the shares listed below unless otherwise
indicated.
NAME AND ADDRESS AMOUNT AND NATURE
OF BENEFICIAL OWNER OF OWNERSHIP PERCENT OF CLASS(1)
------------------------------------ ------------------ -------------------
Angelo Tullo (2) 0 -
4840 East Jasmine Street
Suite 105
Mesa, AZ 85205
Walter Vogel (3) 120,000 .32%
4840 East Jasmine Street
Suite 105
Mesa, AZ 85205
Gregory B. Crane (4) 500 (5)
4840 East Jasmine Street
Suite 105
Mesa, AZ 85205
Daniel L. Coury, Sr. (4) 130,000 .35%
4840 East Jasmine Street
Suite 105
Mesa, AZ 85205
Harold A. Roberts (4) 208,000 .56%
4840 East Jasmine Street
Suite 105
Mesa, AZ 85205
Wallace Olsen, Jr. (4) 497,500 1.33%
4840 East Jasmine Street
Suite 105
Mesa, AZ 85205
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NAME AND ADDRESS AMOUNT AND NATURE
OF BENEFICIAL OWNER OF OWNERSHIP PERCENT OF CLASS(1)
------------------------------------ ------------------ -------------------
DeVal Johnson (4) 75,000 .20%
4840 East Jasmine Street
Suite 105
Mesa, AZ 85205
Matthew & Markson Ltd. (6) 7,600,000 20.32%
Woods Centre, Frair's Road
P.O. Box 1407
St. John's
Antigua, West Indies
Morris & Miller Ltd. 9,350,000 25.00%
Woods Centre, Frair's Road
P.O. Box 1407
St. John's
Antigua, West Indies
All Directors as a Group (7 persons) 1,031,000 2.76%
(1) Based on 37,400,798 shares outstanding as of June 30, 2000. This amount
excludes 4,500,000 shares issued and held as collateral for obligations of
YP.Net under two promissory notes. Upon payment of the notes, the shares will
be returned to YP.Net for cancellation.
(2) Mr. Tullo has been awarded 100,000 shares which have not been issued and
are not included in this table.
(3) Mr. Vogel has been awarded 75,000 shares which have not been issued and are
not included in this table.
(4) All directors except Mr. Tullo and Mr. Vogel, have been awarded 50,000
shares which have not been issued and are not included in this table.
(5) Less than 0.01%.
(6) The number of shares held by Matthew & Markson, Ltd. excludes 2,000,000
shares issued as collateral for a note payable issued by YP.Net. These shares
will be returned to YP.Net and cancelled upon payment of the note.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Note Conversion. YP.Net borrowed $500,000 from Mr. Wallace Olsen, a
shareholder who later became a member of the Board of Directors effective
February 4, 2000. In September, 1999, YP.Net repaid $250,000 of the balance in
cash and Mr. Wallace Olsen converted the remaining $250,000 plus $100,000 in
accrued interest to 400,000 shares of YP.Net's common stock.
Acquisition of Telco. In June, 1999, YP.Net's predecessor acquired all of
the outstanding stock of Telco Billing, Inc. in exchange for 17,000,000 shares
of its common stock. Matthew & Markson, Ltd. and Morrison & Miller, Ltd., as
the shareholders of Telco, were issued 7,650,000 and 9,350,000 shares,
respectively. The original agreement provided for certain put rights with
respect to these shares that were terminated. In exchange for cancellation of
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the put rights, YP.Net agreed to provide the former Telco shareholders with a
$5,000,000 credit facility. The obligations under this facility are to be
secured by a pledge of the former Telco shareholders' YP.Net stock. Interest
for borrowings under this facility is to be at least 0.25% higher than YP.Net's
average borrowing costs. No advances in excess of $1,000,000 may be made at any
one time and no advances in excess of $1,000,000 are to be made unless YP.Net
has available at least 30 days operating capital plus other reserves available.
No advances are to be made if YP.Net is in default with respect to any of its
lender obligations. The credit facility has not been formerly documented and no
advances have been made or are expected until documentation is completed.
Gregory B. Crane and DeVal Johnson were employees of and primarily involved
in the start-up of Telco. Mr. Crane, on behalf of the former Telco shareholders
negotiated the acquisition of Telco by YP.Net's predecessor.
License of URL. In connection with the acquisition of Telco, YP.Net's
predecessor also agreed to pay Matthew & Markson $5,000,000 as a discounted
accelerated royalty payment for a 20-year license of the URL Yellow-Page.Net.
---------------
The accelerated payment was made under the terms of an Exclusive Licensing
Agreement dated September 21, 1998 between Telco and Matthew & Markson. The
payment was originally to be paid in full on the acquisition of Telco. To
extend the payment obligations, YP.Net advanced a $1,000,000 extension fee and
agreed to provide $250,000 of tenant improvements to approximately one-half of
its Mesa facility to Matthew & Markson's designee for $1.00 per year throughout
the term of the lease. The $1,000,000 extension fee was applied to the
$5,000,000 accelerated royalty and an additional $2,000,000 was paid in July,
1999. Matthew & Markson also agreed to take a $2,000,000 note for the balance
due.
YP.Net defaulted on payment of the $2,000,000 note on September 15, 1999
and also defaulted on extensions of the note on January 15, 2000. On April 20,
2000, the note was renegotiated to a demand note with monthly installments of
$100,000 per month. The payments may be suspended if YP.Net does not have
certain cash reserves or is otherwise in default under other obligations. The
note is secured by 2,000,000 shares of YP.Net common stock held in escrow. The
shares are to be returned for cancellation upon payment of the note. As
consideration for the September 15, 1999 extension, YP.Net paid Matthew &
Markson an extension fee of $200,000.
The sub-lessee of the nominal rent sub-lease was Business Executive
Services, Inc. ("BESI"). BESI leases portions of the facility to unrelated
third parties as well as businesses associated with Mr. Crane and Mr. Tullo.
Mr. Crane is employed by BESI and receives a salary of approximately $2,000 per
month from BESI and bonuses in an undetermined amount.
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Related Party Transaction Policy. Our general policy for entering into
transactions with directors, officers and affiliates that have a financial
interest in the transaction is to adhere to Nevada corporate law regarding the
approval of such transactions. In general, a transaction between a Nevada
corporation and a director, officer or affiliate of the corporation in which
such person has a financial interest is not void or voidable if the interest is
disclosed and approved by disinterested directors or shareholders or if the
transaction is otherwise fair to the corporation.
ITEM 13. EXHIBITS AND REPORTS N FORM 8-K
EXHIBITS
3.1(1) Certificate of Restated Articles of Incorporation of
Renaissance International, Inc.
3.2 Amended Articles - Name Change to RIGL Corporation &,
authorized Capital Increased.
3.3 Amended Articles - Name Change to YP.Net
3.5(1) Bylaws of Renaissance International Group, Ltd.
3.6 Addendum to Bylaws to add office of Vice Chairman
10.1(2) 1998 Stock Option Plan
10.2 Reseller Agreement with Worldpages.com
10.3 Billing Service Agreement with Integretel
10.4 Enhanced Services Billing and Information Management
Services Agreement with Enhanced Services Billing, Inc.
10.5 Standard Industrial Commercial Multi-Tenant Lease Gross
regarding Mesa Facility and amendment
10.6 Sub-Lease Agreement to Business Executive Services, Inc.
10.7 VanSickle Loan Agreement, Stock Pledge Agreement, and
Modifications
10.8(3) First Amendment to Loan Agreement between YP.Net,Inc.and
Joseph and Helen VanSickle dated March 31, 2000
10.9(4) Stock Purchase Agreement between RIGL Corporation, Telco
Billing, Inc. and Matthew & Markson, Ltd. dated March 16, 1999
10.10(4) Amendment to Stock Purchase Agreement between RIGL
Corporation, Telco Billing, Inc., Morris & Miller, Ltd.
10.11(4) Exclusive License Agreement between Matthews & Markson,
Ltd. and Telco Billing, Inc. dated September 21, 1998
10.12 Modification to Matthew & Markson Promissory Note.
11 Statement Regarding Computation of Per Share Earnings.
16.1(5) Letter of Singer Lewak Greenbaum & Goldstein LLP dated
November 24, 1999
16.2(6) Letter of McGladrey & Pullen LLP dated March 23, 2000;
Letter of McGladrey & Pullen, LLP dated February 4, 2000
21 Subsidiaries: Telco Billing, Inc.
27 Financial Data Schedule
46
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1 Incorporated by reference from Form 10-SB as filed May 6, 1998.
2 Incorporated by reference from Form S-8 as filed July 10, 1998.
3 Incorporated by reference from Form 8-K as filed on May 22, 2000.
4 Incorporated by reference from Form 8-K/A as filed on June 30, 1999.
5 Incorporated by reference from Form 8-K as filed on December 3, 1999.
6 Incorporated by reference from Form 8-K as filed on March 29, 2000 and Form
8-K/A as filed on May 22, 2000.
REPORTS ON FORM 8-K
Three reports on Form 8-K were filed in the fiscal quarter ended September
30, 1999. These reports are as follows:
Form 8-K filed on June 7, 1999 disclosing under Item 6 of such report the
resignation of Tennessee Webb as the Chairman of the Board of Directors and
Eugene Starr as a director.
Form 8-K filed on June 30, 1999 disclosing under Item 2 of such report the
acquisition of Telco Billing, Inc. and Exclusive License Agreement for the
Yellow-Page.Net URL. Financial statements of Telco Billing, Inc. as of February
---------------
28, 1999 were attached as an exhibit.
Form 8-K filed September 16, 1999 disclosing under Item 2 of such report
the obtaining of a $3,000,000 credit facility from Fremont Financial Corporation
by Telco in accordance with the terms of the agreement of acquisition of Telco
under Item 2 of such report.
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In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
YP.NET, INC.
Dated: __________, 2000 By /s/ Angelo Tullo
--------------------------------------
Angelo Tullo, Chairman of the Board
BOARD OF DIRECTORS
Dated: __________, 2000 By /s/ Angelo Tullo
----------------------
Angelo Tullo
Dated: __________, 2000 By
--------------------------------------
Walter Vogel
Dated: __________, 2000 By /s/ Gregory B. Crane
--------------------------------------
Gregory B. Crane
Dated: __________, 2000 By /s/ Daniel L. Coury, Sr.
--------------------------------------
Daniel L. Coury, Sr.
Dated: __________, 2000 By
--------------------------------------
Harold A. Roberts
Dated: __________, 2000 By
--------------------------------------
Wallace Olsen
Dated: __________, 2000 By /s/ DeVal Johnson
--------------------------------------
DeVal Johnson
<PAGE>
