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, 2000
[ ] 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 X No .
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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 $15,836,422.
The aggregate market value of the common stock held by non-affiliates
computed based on the closing price of such stock on December 31, 2000 was
approximately $8,704,667.
The number of shares outstanding of the registrant's classes of common
stock, as of December 31, 2000 was 41,450,798.
Documents incorporated by reference: Portions of the registrant's Proxy
Statement to be filed with the Commission in connection with registrant's annual
meeting to be held May 1, 2001 are incorporated by reference in Part III of this
Form 10-KSB.
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
Factors Affecting Future Performance" 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
117,732 preferred listing customers subscribing on a monthly basis.
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We were originally incorporated in Nevada in 1996 as Renaissance Center,
Inc. 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 prior 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.
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 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.
We are also developing additional revenue through logo advertisements on our
direct mailer to expand services to our customers.
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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 our listing data. 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.
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
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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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Our Preliminary Injunction signed with The Federal Trade Commission ("FTC")
in July of 2000 allowed us to continue to solicit for new customers using our
direct marketing piece with a few modifications. Management decided to delay any
future direct marketing efforts until a final order has been agreed to by the
FTC and YP.Net, Inc. Management reserves its right to change its decision not to
continue its direct marketing efforts if it appears that the negotiations with
the FTC become protracted and or dilution becomes a serious force affecting the
company's customer base. Essentially the company has performed no direct
marketing from June 1999 to the present We have been in negotiation with the
FTC during this time and management believes it is possible to conclude a final
order with in the next 60 days. During the fiscal period ending September 30,
2000 ("Fiscal 2000") we have been able to maintain our customer base with some
dilution and attrition by developing a customer contact marketing strategy. We
have been contacting our customers to update their web site and description of
their business. Through these efforts we have been able to maintain our customer
base with out the direct mail advertising efforts.
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. These
relationships and strategic acquisitions will in addition to bringing increased
revenue will , management believes, lower dilution by creating a source for
businesses to find the services they need. Our preferred customers will be able
to obtain services at discounted prices as a consequence of their listing with
us.
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.
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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 involving the
Internet and/or 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.
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 December 31, 2000, we employed 19 full time personnel, including five
software developers, eight customer service representatives, two marketing
personnel, and four administrative personnel. Our employees are not covered by
any collective bargaining agreements.
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FACTORS AFFECTING FUTURE PERFORMANCE
YP.Net Gross Margins May Decline Over Time: We expects that gross margins
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may be adversely affected and YP.Net has determined that profit margins from the
electronic yellow pages offerings that it has profited from in the past, has
fluctuated. We have experienced a decrease in revenues from the Local Exchange
Carriers (LEC) from the effects of the Competitive Local Exchange Carriers
(CLEC) that are participating in providing local telephone services to
customers. YP.Net has begun to correct this problem and we are implementing
data filters to reduce the effects of the CLEC's. We have also sought other
billing methods to reduce the adverse effects of the CLEC billings. These other
billing methods may be cheaper or more expensive than our current LEC billing
and the company has not yet determined if they will be less or more effective.
YP.Net continues to look for profitable Internet opportunities; however there is
no assurances that this can be done, and presently we have no acquisitions in
progress.
YP.Net Dependence on Key Personnel: YP.Net performance is substantially
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dependant on the performance of its executive officers and other key employees
and its ability to attract, train, retain and motivate high quality personnel,
especially highly qualified technical and managerial personnel. The loss of
services of any executive officers or key employees could have a material
adverse effect on its business, results of operations or financial condition.
Competition for talented personnel is intense, and there can be no assurance
that we will be able to continue to attract, train, retain or motivate other
highly qualified technical and managerial personnel in the future.
Since our Growth Rate may slow, operating results for a Particular Quarter
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are difficult to predict: We expect that in the future, our net sales may grow
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at a slower rate than experienced in previous periods and that on a
quarter-to-quarter basis. This may be a direct cause of the projected changes
to our direct marketing pieces as well as the fact that the company has not be
performing its direct marketing at this time (SEE MARKETING). As a consequence,
operating results for a particular quarter are extremely difficult to predict.
Our ability to meet financial expectations could be hampered if we are unable to
correct the billing through the CLEC markets seen in fourth quarters reoccurs in
future periods. In addition, in response to customer demand, we continue to
attempt develop new products to reduce our customer attrition ratios.
We Expect to make Future Acquisitions where Advisable and Acquisitions
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involve Numerous Risks: The Internet business is highly competitive, and as
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such, our growth is dependent upon market growth, our ability to enhance our
existing products and our ability to introduce new products on a timely basis.
One of the ways we have addressed and will continue to address the need to
develop new products is through acquisitions of other companies. Acquisitions
involve numerous risks, including the following:- Difficulties in integrating
the operations, technologies, and products of the acquired companies; - The risk
of diverting management's attention from normal daily operations of the
business;- Risks of entering markets in which we have no or limited direct prior
experience and where competitors in such markets have stronger market
positions;- Insufficient revenues to offset increased expenses associated with
acquisitions; and- The potential loss of key employees of the acquired
companies. Mergers and acquisitions of high-technology companies are inherently
risky, and no assurance can be given that our previous or future acquisitions
will be successful and will not materially adversely affect our business,
operating results, or financial condition. We must also manage any growth
effectively. Failure to manage growth effectively and successfully integrate
acquisitions we made could harm our business and operating results in a material
way.
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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 $120,000 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.
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 upon acceptable terms.
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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. In December, 2000 we agreed in principal to settle the case for 5
payments of $25,000 per month starting January, 2001 and Holly K. Vigil would
return and deliver 220,000 shares of YP.Net common stock. The stock will be
treated as treasury stock for YP.Net.
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. The Company under prior management
and directors, in the course of pursuing equity financing, engaged the services
of The Hudson Consulting Group, AK Elrod, and Allen Wolfson et al in the State
of Utah. The Company later became aware of certain legal issues pertaining to
The Hudson Consulting Group and some of its principals. The Company believes
the shares were improperly issued for no valid consideration in that the Company
claims it received no services as outlined in the agreement. 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 Company has made an offer to settle
the disagreement by having the other parties return the approximately 2,000,000
shares and having the Company reissue 500,000 shares. The other parties
responded by stating that they would agree to return 500,000 shares. The
Company believes that it is likely that this matter will be litigated but
believes that the likelihood of a favorable decision is high. If the dispute is
not settled in the Company's favor, the resulting expense would be determined on
the basis of the stock price at the time of the settlement. Due to the
uncertainty of this matter, and the opinion of Company counsel that the Company
will settle for a return of a substantial number of disputed shares.
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 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 prior to March 23, 2000 and by the National Quotation Bureau for the
periods on and after March 23, 2000. 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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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
2000 December 31, 1999 $ .24 $ .21
March 31, 2000 $ .52 $ .25
June 30, 2000 $ .35 $ .30
September 30, 2000 $ .50 $ .32
On September 30, 2000 there were approximately 604 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 three month period ended September 30, 2000, there no YP.Net
shares issued.
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.
OVERVIEW
We provide Internet-based yellow page listing services on our
Yellow-Page.Net and yp.net Web sites. We acquired Telco Billing, Inc. in June
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1999, and as a result of this acquisition changed our primary business focus to
become an electronic yellow page listing service. Our Web sites serve as a
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.
With the acquisition of Telco, we discontinued our prior operations in the
multi-media software and medical billing and practice management areas. We
completed closing down our operations in these areas in the fiscal quarter ended
December 31, 1999. We anticipate continued operations in our Internet yellow
page listings business and in other Internet-based product areas. We have
experienced continued increases in competition in the electronic yellow page
market, and continue to seek joint venture and investment acquisition
opportunities to potentially lessen the effects of competition in the electronic
yellow page markets.
From March 1999 to February 2000, all former officers resigned or were
removed. During this same period, all but one of the former directors resigned.
On February 3, 2000 a new Board of Directors was constituted. The current Board
members are Angelo Tullo, Walter Vogel, Daniel L. Coury, Sr., Wallace Olsen,
Jr., DeVal Johnson, Gregory B. Crane and Harold A. Roberts. This change 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 and due to a lack of confidence in former management's
ability to successfully operate this business.
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YP.Net was originally incorporated in Nevada in 1996 as Renaissance Center,
Inc. Renaissance Center and Nuclear Corporation 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 in July 1998. With the acquisition of Telco and shift of the focus
of our business, our corporate name was again changed to YP.Net, Inc., effective
October 1, 1999. The new name was chosen to reflect our focus on our
Internet-based yellow page services.
FISCAL 2000 OPERATIONS
We utilized direct mailings as our primary marketing program. At October
1, 1999, we had 103,133 customers subscribing to our services. Our subscribing
customers increased to 114,409 at December 31, 1999, 129,457 at March 31, 2000,
143,292 at June 30, 2000 and 130,592 at September 30, 2000, a 21% increase for
the fiscal year. We believe the increase in our customer base for these periods
was primarily a result of our marketing efforts. The FTC filed a temporary
restraining order on YP.Net and 12 days later the order was lifted and we began
our negotiations with the FTC to settle the matter. The FTC did not ban us from
sending any direct mail solicitations however, it was managements' decision to
not send any new direct mailers to new customers until the mail solicitation
piece had been reviewed and approved by the FTC. We have been in negotiations
on the design and contents of the mailer piece and we anticipate that a final
order from the FTC is possible within the next 60 days. In Fiscal 2001 we
intend to send out direct mail solicitations designed and approved by the FTC
and will continue our marketing efforts and growth of our customer base. In
March 2000, we implemented a customer contact program to attempt to increase our
customer satisfaction and decrease customer attrition. We believe that this
program has and will continue to provide these results. In the upcoming fiscal
year we will continue our customer contact program to develop and market new
products to our existing customer base.
Expenditures related to professional and consulting fees were significant
in the fiscal year ended September 30, 2000. Existing management believes that
these expenditures will not be as significant in future periods. Management is
actively pursuing rescission and cancellation of certain common and preferred
stock that was previously issued by former management for services. This action
may adversely affect our future earnings due to costs of potential litigation
that may result from management pursuing recession. However, if we are
successful in canceling some or all of these shares, our total outstanding
shares will decrease which will positively affect our per share operating
results in the future. Management has offered to settle certain of the disputed
share issuances with a return for cancellation of 1,500,000 of the class B
preferred shares issued to prior management. The return and cancellation of the
Hudson Consulting Group etal with full cancellation of 2,000,000 shares of
common stock issued by prior management and the issuance of 500,000 shares of
common stock in full settlement of the dispute. The return and cancellation of
500,000 of common shares of BJM Consulting and the newly issued 500,000 shares
of common stock for new consulting services presently engaged.
12
<PAGE>
On December 6, 1999, prior management entered into an engagement with
McGladry & Pullen, LLP ("M&P") to conduct the audit of our financial statements
for the fiscal year ended September 30, 1999. M&P estimated the cost to prepare
the fiscal year end audit to be from $75,000 to $150,000 with an estimated
completion date of January 28, 2000. We incurred and paid audit fees of
$150,000 in the three months ended March 31, 2000 in addition to the $150,000
incurred and paid in the previous three month period. In January 2000, M&P
informed management that the estimated cost to complete the audit would be an
additional $200,000. In February 2000, after the new Board of Directors was
appointed, M&P was dismissed as our auditors. The Board of Directors appointed
a new independent auditor, King, Weber & Associates, P.C.
During the third quarter ended June 30, 2000 and fourth quarter ended
September 30, 2000 our expenditures for legal fees were substantially increased
for due to the FTC orders and negotiations, and the additional expenditures to
become current with the SEC filings that were previously delinquent. Management
expects the legal expenditures for those periods to not reoccur.
During the fiscal year ended September 30, 2000, 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, 2000, YP.Net issued 1,490,334 shares to consultants and
550,000 shares to current and 253,611 shares to former officers and directors
valued at $865,095.
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.
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
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 fiscal year ended September 30, 2000 include
operations of both YP.Net and Telco for the entire period.
13
<PAGE>
Fiscal Year End September 30, 2000 Compared to Fiscal Year End September 30,
1999.
Revenues for the year ended September 30, 2000 ("Fiscal 2000") increased
84% to $15,836,422 from $8,572,185 during the year ended September 30, 1999
("Fiscal 1999"). The increase in revenue is principally the result of Telco's
operations for the full fiscal period. Prior to the acquisition, no material
operations had been commenced.
Sales and marketing expenses for Fiscal 2000 were $1,619,113 as compared to
$3,714,427 for the Fiscal 1999. 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 Fiscal 2000 was $5,392,860 as
compared to $1,731,209 for Fiscal 1999. The increase was principally the result
of billing fees due to the operations of Telco and the increase in consulting
fees, legal fees, and accounting fees. The general expenses are attributed to
the additional costs to become current on our SEC filings and substantial legal
fees to negotiate with the FTC.
Interest expense for Fiscal 2000 was $853,761 compared to $410,319 for
Fiscal 1999. 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.
---------------
At Fiscal 2000 we had unused Federal net operating losses of $3,985,962
available under Internal Revenue Code 382 - change in control rules expiring
from 2011 through 2014. The Company has no available net operating loss
carryforwards under the separate return limitation year and has unavailable net
operating loss carryforwards of $3,985,962. The Company may utilize the
unavailable net operating loss carryforwards of $3,985,962 upon generating
taxable income in YP.Net, Inc rather than in the company's wholly owned
subsidiary Telco Billing, Inc.
14
<PAGE>
At Fiscal 2000 we had unused state net operating losses of $1,931,900 available
under the change in control rules expiring 2003. We had no available net
operating loss carryforwards under the separate return limitation year and has
unavailable net operating loss carryforwards of $1,931,900. We may utilize the
unavailable net operating loss carryforwards of $1,931,900 upon generating
taxable income in that operating entity.
Net profits for Fiscal 2000 were $2,847,977, or $.07 per share, compared to
losses of $4,363,687, or ($.20) per share for Fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
Our cash balance decreased to $219,613 at Fiscal 2000 from a $255,324 at
Fiscal 1999. We funded working capital requirements primarily from cash
generated from financing activities and utilized cash in operating activities
and investing activities and the reduction of debt. We have a credit facility
used primarily to finance our receivables.
Operating Activities. Cash provided by operating activities increased for
Fiscal 2000 to $960,303 compared to cash used by operating activities of
$691,780 from Fiscal 1999, a 172% increase. The principal source of our
operations revenue is from sales of electronic yellow page advertising.
Investing Activities. Cash used by investing activities was $211,803 for
Fiscal 2000 compared to $106,512 for Fiscal 1999. We purchased $211,803 of
additional computer equipment to upgrade and replace incompatible equipment for
Fiscal 2000 compared to $203,662 for Fiscal 1999. 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 used from financing activities were
$784,211 in Fiscal 2000 compared to cash flow provided from financing activities
of $1,023,364 for Fiscal 1999, a 123% increase. We had cash inflow from the
financing arrangements in the amount of $789,241 for Fiscal 2000 compared to
$788,306 for Fiscal 1999 and from the sale of common stock of $84,329 for Fiscal
2000 compared to $629,681 for Fiscal 1999. We had cash outflow for notes paid
in the amount of $1,657,781 for Fiscal 2000 compared to $394,623 for Fiscal
1999.
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
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
4,500,000 shares were issued to secure these notes and are held in escrow.
15
<PAGE>
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.
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 Fiscal 2000 YP.Net paid
$3,206,576 compared to fiscal 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 Capital Corporation. Because of
certain technical defaults under the terms of the loan agreement, which occurred
under prior management, Finova exercised its right to terminate the agreement.
We have entered into letter agreements whereby Finova has agreed to forbear the
exercise of any of its available remedies through March 3, 2001. Our line of
credit has been reduced to $1,400,000 for the period of November 6, 2000,
$1,200,000 for the period of December 5, 2000 and $1,000,000 for the period of
February 7, 2001. Management is seeking other potential lenders that specialize
in financing businesses utilizing LEC billings. We do not anticipate these
changes to have an adverse affect on our ability to continue operating at our
current levels.
16
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
YP.NET, INC.
CONSOLIDATED FINANCIAL STATEMENTS AS OF
SEPTEMBER 30, 2000
AND INDEPENDENT AUDITORS' REPORT
17
<PAGE>
YP.NET, INC.
TABLE OF CONTENTS
-----------------
PAGE
INDEPENDENT AUDITORS' REPORT 19
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheet at September 30, 2000 20
Consolidated Statements of Operations for the years ended
September 30, 2000 and September 30, 1999 21
Consolidated Statements of Stockholders' Equity for the
Years ended September 30, 2000 and September 30, 1999 22-23
Consolidated Statement of Cash Flows for the year ended
Years ended September 30, 2000 and September 30, 1999 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 25
18
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
-------------------------------
To the Stockholders and Board of Directors of
YP.Net, Inc.:
We have audited the accompanying consolidated balance sheet of YP.Net, Inc. as
of September 30, 2000 and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the two years in the period
ended September 30, 2000. 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 audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of YP.Net,
Inc. as of September 30, 2000, and the consolidated results of its operations
and cash flows for each of the two years in the period ended September 30, 2000,
in conformity with generally accepted accounting principles.
/s/ MARSHALL & WEBER, CPA's, PLC
Scottsdale, Arizona
December 20, 2000
19
<PAGE>
<TABLE>
<CAPTION>
YP.NET, INC.
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2000
------------------
ASSETS:
<S> <C>
CURRENT ASSETS
Cash $ 219,613
Accounts receivable, net of allowance of $1,796,852 3,705,881
Customer acquisition costs, net of accumulated amortization
of $2,975,678 230,898
Prepaid expenses and other assets 99,229
Deferred income taxes 771,382
-----------
Total current assets 5,027,003
PROPERTY AND EQUIPMENT, net 502,708
DEPOSITS 13,287
INTELLECTUAL PROPERTY- URL, net of accumulated
amortization of $630,833 4,379,167
DEFERRED FINANCING COSTS 21,250
-----------
TOTAL ASSETS $9,943,415
===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable $ 103,015
Accrued liabilities 328,128
Line of credit 1,577,547
Notes payable - current portion 2,370,019
Income taxes payable 260,427
-----------
Total current liabilities 4,639,136
DEFERRED INCOME TAXES 105,868
-----------
Total liabilities 4,745,004
-----------
STOCKHOLDERS' EQUITY:
Series B preferred stock, $.001 par value, 2,500,000 shares
designated, 1,500,000 issued 1,500
Common stock, $.001 par value, 50,000,000 shares authorized,
40,560,464 issued and outstanding 40,561
Paid in capital 5,769,113
Treasury stock at cost (69,822)
Accumulated deficit (542,941)
-----------
Total stockholders' equity 5,198,411
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $9,943,415
===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
20
<PAGE>
<TABLE>
<CAPTION>
YP.NET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999
-----------------------------------------------------------------------
2000 1999
------------ ------------
<S> <C> <C>
NET REVENUES $15,836,422 $ 8,572,185
------------ ------------
OPERATING EXPENSES:
Cost of services 5,234,906 4,760,026
General and administrative expenses 5,392,860 1,731,209
Sales and marketing expenses 1,619,113 3,714,427
Depreciation and amortization 616,660 192,469
------------ ------------
Total operating expenses 12,863,539 10,398,131
------------ ------------
OPERATING INCOME/(LOSS) 2,972,883 (1,825,946)
------------ ------------
OTHER (INCOME) AND EXPENSES
Interest expense 853,761 410,319
Interest income (802) (5,401)
Other Income (82,846) -
------------ ------------
Total other expense 770,113 404,918
------------ ------------
INCOME/(LOSS) BEFORE DISCONTINUED
OPERATIONS AND INCOME TAXES 2,202,770 (2,230,864)
INCOME TAX (BENEFIT) PROVISION (645,207) 240,119
------------ ------------
INCOME/(LOSS) FROM CONTINUING OPERATIONS 2,847,977 (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 INCOME/(LOSS) $ 2,847,977 $(4,363,687)
============ ============
NET INCOME/(LOSS) PER SHARE:
Basic:
Continuing operations $ 0.07 $ (0.11)
Discontinued operations - (0.09)
------------ ------------
Total Basic $ 0.07 $ (0.20)
============ ============
Diluted:
Continuing operations $ 0.07 $ (0.11)
Discontinued operations - (0.09)
------------ ------------
Total Diluted $ 0.07 $ (0.20)
============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 40,120,829 22,223,757
============ ============
Diluted 40,120,829 22,223,757
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
21
<PAGE>
<TABLE>
<CAPTION>
YP.NET, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE
YEARS ENDED SEPTEMBER 30, 2000 AND 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 1,700,000 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 1,700,000 $ 1,700 $(69,822) $4,892,538 $(3,390,918) $ 1,472,655
</TABLE>
(CONTINUED)
The accompanying notes are an integral part of these consolidated financial
statements
22
<PAGE>
<TABLE>
<CAPTION>
YP.NET, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE
YEARS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999 (CONTINUED)
--------------------------------------------------------------------------
COMMON STOCK PREFERRED A TREASURY PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT STOCK CAPITAL DEFICIT
---------- ------- ---------- -------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE OCTOBER 1, 1999 39,156,853 $39,157 1,700,000 $ 1,700 $(69,822) $4,892,538 $(3,390,918)
Common stock issued for
consulting services 500,000 500 463,450
Common stock issued for
exercised options 53,611 54 84,275
Common stock issued as board of
directors' fees 550,000 550 114,950
Common stock issued to former
officer to convert preferred shares
and as final compensation settlement 200,000 200 (200,000) (200) 89,800
Common stock issued to settle
lease agreement 100,000 100 124,100
Net income 2,847,977
---------- ------- ---------- -------- --------- ---------- ------------
BALANCE
SEPTEMBER 30, 2000 40,560,464 $40,561 1,500,000 $ 1,500 $(69,822) $5,769,113 $ (542,941)
========== ======= ========== ======== ========= ========== ============
TOTAL
----------
<S> <C>
BALANCE OCTOBER 1, 1999 $1,472,655
Common stock issued for
consulting services 463,950
Common stock issued for
exercised options 84,329
Common stock issued as board of
directors' fees 115,500
Common stock issued to former
officer to convert preferred shares
and as final compensation settlement 89,800
Common stock issued to settle
lease agreement 124,200
Net income 2,847,977
----------
BALANCE
SEPTEMBER 30, 2000 $5,198,411
==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
23
<PAGE>
<TABLE>
<CAPTION>
YP.NET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
YEARS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999
CASH FLOWS FROM OPERATING ACTIVITIES: 2000 1999
------------ ------------
<S> <C> <C>
Net income/(loss) $ 2,847,977 $(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 144,993 30,338
Issuance of common stock as compensation for services 669,250 2,146,872
Loss on disposal of equipment - 89,319
Deferred income taxes (645,207) (20,307)
Conversion of accrued interest to common stock - 100,000
Provision for Uncollectible Accounts 1,590,840 -
Amortization of intellectual property 471,667 149,166
Changes in assets and liabilities (net of business acquisitions and divestures):
Trade and other accounts receivable (4,345,544) (124,826)
Customer acquisition costs 403,002 (264,981)
Other receivables 77,182 (32,671)
Prepaid and other current assets 39,621 (9,616)
Other assets - 49,525
Accounts payable 48,014 (71,348)
Accrued liabilities (119,232) 202,118
Deferred Financing Costs 102,500 -
Income taxes payable - 260,427
Deferred revenue (324,760) 324,760
------------ ------------
Cash provided by continuing operations 960,303 357,793
Cash used by discontinued operations - (1,049,573)
------------ ------------
Net cash provided/(used) by operating activities 960,303 (691,780)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (211,803) (230,662)
Purchase of intellectual property - (3,000,000)
Cash acquired in business acquisition - 3,124,150
------------ ------------
Net cash (used in) investing activities (211,803) (106,512)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings on line of credit 789,241 788,306
Principal repayments on notes payable (1,657,781) (394,623)
Proceeds from sale of common stock 84,329 629,681
------------ ------------
Net cash (used)/provided by financing activities (784,211) 1,023,364
------------ ------------
(DECREASE)/INCREASE IN CASH (35,711) 225,072
CASH, BEGINNING OF YEAR 255,324 30,252
------------ ------------
CASH, END OF YEAR $ 219,613 $ 255,324
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
24
<PAGE>
YP.NET, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS, (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 2000 AND 1999
-------------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION:
2000 1999
-------- ----------
Interest Paid $833,993 $ 64,677
======== ==========
Income taxes paid $ -0- $ -0-
======== ==========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
2000 1999
-------- ----------
Common stock issued in settlement of lease $124,200 $ -0-
======== ==========
Conversion of debt to common stock $ -0- $ 250,000
======== ==========
Note payable issued for purchase of intellectual property $ -0- $2,000,000
======== ==========
Common stock issued for business acquisition $ -0- $1,722,563
======== ==========
25
<PAGE>
YP.NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2000 AND 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.
-----------
Telcoprovides 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, 2000. 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 YP.Net (formerly
RIGL) 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 were 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.
26
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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, 2000, cash deposits exceeded those insured limits
by $110,000.
Principles of Consolidation: The consolidated financial statements include
---------------------------
the accounts of the Company and its wholly owned subsidiary, Telco Billing,
Inc. All significant inter-company accounts and transactions are
eliminated.
Customer acquisition 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 capitalized expenditures of
$1,177,000 and $1,464,000 during the years ended September 30, 2000 and
1999 respectively. The Company amortized those capitalized amounts at
$1,580,000 and $1,237,000 during the years ended September 30, 2000 and
1999 respectively.
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 $30,099 and $168,744 for the
years ended September 30, 2000 and 1999 respectively.
Property and equipment is 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 was
$144,993 and $30,338 for the years ended September 30, 2000 and 1999
respectively.
Revenue recognition: The Company's revenue is generated by customer
--------------------
subscriptions 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 ("LEC's") 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. Due to the periods of time for
which adjustments may be reported by the LEC's and the billing companies,
the Company estimates and accrues for dilution and fees reported subsequent
to year-end for initial billings related to services provided for periods
within the fiscal year.
Revenue for billings to certain customers whom are billed directly by the
Company and not through the LEC's, is recognized on the basis of cash
received due to poor experience associated with the collection of such
billings.
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.
27
<PAGE>
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.
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 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.
Recently Issued Accounting Pronouncements: In December 1999, the Securities
-----------------------------------------
and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 101,
Revenue Recognition in Financial Statements. SAB No. 101 summarizes the
staff's views in applying generally accepted accounting principles to
revenue recognition in financial statements. Management believes that the
Company's revenue recognition policies have complied with the those
prescribed in SAB 101 and therefore, the adoption of SAB No. 101 did not
have a material effect on the Company's revenues or revenue recognition
policy.
28
<PAGE>
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. These dilution amounts
will vary due to numerous factors and the Company may not be certain as to
the actual amounts of dilution on any specific billing submittal until
several months after that submittal. The Company estimates the amount of
these charges and holdbacks based historical experience and subsequent
information received from the billing companies. The Company estimates
uncollectible account balances and provides an allowance for such
estimates.
The Company entered into a customer billing service agreement with
Integretel, Inc. 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, 2000 was $2,135,486. These
receivables have been reduced by an allowance for doubtful accounts of
$640,646.
The Company also entered into a customer billing service agreement with
Enhanced Services Billing, Inc. (ESBI). ESBI provides billing and
collection and related services very similar to Integretel discussed above.
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, 2000 was $2,944,316 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 $765,522.
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, 2000 was $32,247.
The Company experienced significant dilution from the billing companies
during the year ended September 30, 2000. The billing companies began
increasing their holdbacks on billing submittals because of submittals
being rejected by the LEC's due to incompatible billing information. The
Company has attempted to resolve these matters with the billing companies.
The Company has resubmitted billing company rejections of $862,000
subsequent to September 30, 2000, that relate to services provided prior to
September 30, 2000. This amount is included in the gross accounts
receivable balances at September 30, 2000. The Company's management
believes that problems associated with the billing information have been
resolved and that the collection of these receivables, net of applicable
reserves, will occur in the normal course of the Company's operations
29
<PAGE>
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, management believes, have subsequently 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. Also, its current
-----------
customer base relies on the recognition of this term and URL as a basis for
maintaining the subscriptions to the Company's service. 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 occurred. The URL is amortized on an accelerated basis
over the twenty-year term of the licensing agreement. Amortization expense
on the URL was $471,667 and $149,166 for the years ended September 30, 2000
and 1999 respectively.
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at September 30, 2000:
Leasehold improvements $ 317,507
Furnishings and fixtures 197,261
Office and computer equipment 248,487
-------------
Total 763,255
Less accumulated depreciation (260,547)
-------------
Property and equipment, net $ 502,708
=============
The Company has provided certain equipment and improvements to an
affiliated entity at no cost to that affiliated entity. This arrangement
was made as part of the Company's original default settlement with the
prior owners of the URL discussed in Note 4. The Company retains title and
control of these assets. However, they are not being utilized by the
Company. The gross cost of the office equipment and leasehold improvements
being utilized by the affiliated entity was approximately $250,000 at
September 30, 2000.
30
<PAGE>
6. NOTES PAYABLE AND LINE OF CREDIT
Notes payable at September 30, 2000 are comprised of the following:
1,7000,000 Revolving line of credit, interest at the
prime rate plus 6% (15.5% at September 30, 2000).
The facility is limited to 70% of eligible accounts
receivable. All assets of the Company collateralize the
credit facility. The credit facility expires on February
4, 2001 under the amended forbearance agreement. $ 1,577,547
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 13, 2001. Collateralized by
equipment.
5,503
Note payable to stockholders, original balance of
2,000,000, interest at 10% per annum. Repayment
terms require monthly installments of $100,000 plus
interest. Due January 11, 2001. Collateralized by
2,000,000 shares of the Company's common stock. 600,000
Note payable to former Telco shareholder for balance
of URL purchase price (Note 4). Repayment terms
require 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 1,764,516
------------
Totals 3,947,566
Less current portion (3,947,566)
------------
Long-term portion $ -0-
============
The line of credit facility has been operated under a forbearance agreement
with the lender since August 4, 2000, due to certain defaults by the
Company of the loan agreement. Under the forbearance agreement, the lender
has agreed to continue making advances in accordance with the original loan
agreement as amended by the forbearance agreement. The Company and the
lender continue to operate the credit facility subsequent to the
forbearance termination date of November 2, 2000. The forbearance agreement
was extended to January 4, 2001, and then to February 7, 2001 changes
eligible accounts receivables from 60% to 50% and total line availability
from $1,700,000 to $1,000,000. The original loan agreement expired on
August 31, 2003. However, the Company is actively seeking to replace the
existing credit facility through a different lender. Management believes
that it will be successful in making that replacement. However, there can
be no assurances that the Company will obtain a new line of credit
facility. Management also, believes that the lender under the current line
of credit facility will allow the Company to continue making draws until a
replacement facility is in place.
31
<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, 2000 the Company has unused Federal net operating losses
of $3,985,962 available under Internal Revenue Code 382 - change in control
rules expiring from 2011 through 2014. The Company has no available net
operating loss carryforwards under the separate return limitation year and
has unavailable net operating loss carryforwards of $3,985,962. The Company
may utilize the unavailable net operating loss carryforwards of $3,985,962
upon generating taxable income in that operating entity.
32
<PAGE>
At September 30, 2000 the Company had unused state net operating losses of
$1,931,900 available under the change in control rules expiring 2003. The
Company has no available net operating loss carryforwards under the
separate return limitation year and has unavailable net operating loss
carryforwards of $1,931,900. The Company may utilize the unavailable net
operating loss carryforwards of $1,931,900 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 for the year ended September 30, 1999,
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 years ended September 30, is summarized as follows:
2000 1999
---- ----
Current Provision (Benefit) $ 1,527,389 $(1,708,515)
Deferred Benefit (Provision) (2,172,596) 1,948,634
----------------------------
Net income tax (benefit) provision $ (645,207) $ 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 for years ended September 30, is as follows:
2000 1999
---- ----
Federal statutory rates $ 748,942 34% $(1,402,014) (34)%
State income taxes 132,166 6% (329,885) ( 8)%
Utilization of valuation allowance (1,527,389) (69)%
Provision due to income
generated prior to merger - 260,597 6%
Valuation allowance for operating
loss carryforwards 1,694,534 42%
Other 1,074 - 16,887 -
------------ ----- ------------ -----
Effective rate $ (645,207) (29)% $ 240,119 6%
============ ===== ============ =====
33
<PAGE>
Deferred tax assets totaling $2,242,000 are comprised of $771,000 for
differences in book and tax bases of accounts receivable and intangible
assets and approximately $1,471,000 relates to net operating loss
carryforwards which is offset by a an equal valuation allowance resulting
in a net deferred income tax asset of $771,000. 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 $1,471,000
of the deferred tax asset because of restrictions on the utilization of
such carryforwards due to the change in control rules under Internal
Revenue Code Section 382. The valuation allowance decreased $1,070,000 in
the year ended September 30, 2000, due to resolution of uncertainties as to
the Company's ability to generate sufficient taxable income to utilize the
net operating loss carryforwards that could be utilized.
10. LEASES
The Company leases its office space under long-term operating leases
expiring through 2003. Rent expense under these leases was $176,637 and
$87,250 for the years ended September 30, 2000 and 2001. However, as part
of an agreement with the sub lessee of one of the properties, the Company
paid $124,000 in the form of shares of the Company's common stock to that
sub lessee. That amount was capitalized and is being amortized over the
remaining term of the lease. Rent expense for the year ended September 30,
2000 includes $40,000 for the amortization of that capitalized amount.
The Company consolidated office space from a variety of locations to a
single facility in the year ended September 30, 1999. 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, 2000:
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.
34
<PAGE>
Actions of the Board
-----------------------
Significant blocks of stock have been issued to former 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, 2000, the Company issued 500,000 shares of
common stock to consultants valued at $463,950. During the year ended
September 30, 1999, the Company issued 1,694,500 shares to former officers
and consultants valued at $2,145,178. See Note 12 pertaining to disputed
shares issued to consultants.
Also in the year ended September 30, 2000, the Company issued 550,000
shares of its common stock valued at $115,500 to members of the board of
directors as consideration and payment for directors' fees.
Effects of Delinquent Filings on Market Activity
------------------------------------------------------
The Company is delinquent in its filings under the 1934 Act. 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.
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 and diluted net income or loss per common share for the
years ended September 30, 2000 and 1999.
During the year ended September 30, 2000, the Company issued 100,000 shares
of its common stock to a sub lessee of certain office space for which the
Company is the primary lessee. Management agreed to issue these shares as
an inducement to the sub lessee and allow the Company to eliminate the
monthly obligation under that lease.
35
<PAGE>
Also in the year ended September 30, 2000, the Company agreed to settle all
outstanding issues with a former officer by agreeing to convert 200,000
shares of Series B preferred stock held by this individual to 200,000,
shares of common stock. The conversion was set at the original conversion
rate for the preferred shares. However, under the original terms, the
preferred shares were not convertible until the occurrence of certain
"trigger events". Those "trigger events" had not occurred but the former
officer was allowed to convert as part of the settlement agreement. The
conversion was recorded at the estimated value of the common stock on the
date of the conversion.
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.
All of the above transactions were effected by the issuance of restricted
common stock. The estimated value was determined to be 90% the closing
price of the common stock at the date of the transaction.
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, 2000, 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,
management has cancelled the Series B preferred stock and rescinded those
issuances. However, all shares of the Series B preferred stock were not yet
returned at September 30, 2000.
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.
36
<PAGE>
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.
Billing Service Agreements
----------------------------
The Company has entered into a customer billing service agreement with
Integretel, Inc. (IGT). 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. The agreement
will automatically renew on September 1, 2001, unless either party gives
notice of termination 90 days prior to that renewal date. 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. IGT handles all billing information and
collection of receivables. The Company's cash receipts on trade accounts
receivable are dependent upon estimates pertaining to holdbacks and other
factors as determined by IGT. 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). 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. The agreement automatically renews on December 3, 2001,
unless either party gives notice of termination 91 days prior to that
renewal dateUnder 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.
United States Federal Trade Commission (FTC)
-------------------------------------------------
The Company was a subject of an FTC investigation pertaining to claims made
of deceptive marketing practices. The Company believes that it has reached
a tentative agreement with the FTC requiring the Company to make certain
changes to mailing and promotional materials and notify certain customers
that a refund of past paid service fees is available. On the basis of the
proposed settlement, the Company would be required to notify approximately
11,000 customers. Each of those customers may receive a refund of up to
$12.50. Management does not believe that the refunds will be material based
on prior experience with such matters and the documentation requirements by
customers to receive refunds. The Company may also be required to pay
certain expenses incurred in the FTC investigation. The Company intends to
contest payment of these expenses but believes that if such is a
requirement of any final settlement with the FTC, the amount could range
from $50,000 to $70,000.
37
<PAGE>
Hudson Consulting Group et al
---------------------------------
The Company under prior management and directors, in the course of pursuing
equity financing, engaged the services of The Hudson Consulting Group, AK
Elrod, and Allen Wolfson et al in the State of Utah. The Company later
became aware of certain legal issues pertaining to The Hudson Consulting
Group and some of its principals. The Company believes the shares were
improperly issued for no valid consideration in that the Company claims it
received no services as outlined in the agreement. 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 Company
has made an offer to settle the disagreement by having the other parties
return the approximately 2,000,000 shares and having the Company reissue
500,000 shares. The other parties responded by stating that they would
agree to return 500,000 shares. The Company believes that it is likely that
this matter will be litigated but believes that the likelihood of a
favorable decision is high. The Company recorded an expense of $1,536,000
in the year ended September 30, 1999, for the approximately 1.1 million
shares issued to The Hudson Consulting Group. However, because of
discoveries made in the year ended September 30, 2000, and management's
belief that a substantial number of the 2,000,000 shares will be returned,
the Company recorded no consideration for the 890,334 shares issued to the
The Hudson Consulting Group in the year ended September 30, 2000. If the
dispute is not settled in the Company's favor, the resulting expense would
be determined on the basis of the stock price at the time of the
settlement. Due to the uncertainty of this matter, and the opinion of
Company counsel that the Company will settle for a return of a substantial
number of disputed shares, no additional accrual has been made for the
890,334 shares.
13. NET INCOME (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. There were no preferred stock dividends
in the years ended September 30, 2000 or 1999.
Preferred stock convertible to 1,500,000 shares of common stock were not
considered in the calculation for diluted earnings per share for the year
ended September 30, 2000 because the ability to convert is contingent upon
the Company attaining certain stock price and profitability goals. None of
which was met at September 30, 2000. Also, warrants to purchase 350,000
shares of common stock were not considered in the calculation for diluted
earnings per share for the year ended September 30, 2000 because the
exercise price of the warrants is greater than the average common stock
price for the period, therefore the effect of their inclusion would be
antidilutive. Also excluded from the calculation for the year ended
September 30, 2000, were 890,334 shares of common stock that are in dispute
(see Note 12).
Preferred stock convertible to 1,700,000 common shares and warrants to
purchase 1,355,000 shares of common stock 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. The
following presents the computation of basic and diluted loss per share from
continuing operations:
38
<PAGE>
<TABLE>
<CAPTION>
2000 1999
------------------------------------------
Per
Income Shares Share (Loss) Shares Per share
------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net Income (Loss) $2,847,977 $(4,363,687)
Preferred stock dividends -
Discontinued operations 1,892,704
------------
Income Loss from continuing 2,847,977 (2,470,983)
operations
BASIC EARNINGS PER SHARE
Income Loss available to
common stockholders 2,847,977 40,120,829 $ 0.07 $(2,470,983) 22,223,757 $ (0.11)
Effect of dilutive securities N/A
DILUTED EARNINGS PER SHARE $2,847,977 40,120,829 $ 0.07 $(3,191,426) 22,223,757 $ (0.11)
</TABLE>
13. RELATED PARTY TRANSACTIONS
The Company compensated certain members of the Board of Directors for
services other than routine duties of the Board. Fees paid to Board members
in the year ended September 30, 2000 were $150,000. The Company also
granted 550,000 shares of common stock to members of the Board of Directors
as directors' fees.
As part of the Company's original default settlement with the prior owners
of the URL discussed in Note 4, the Company has provided certain equipment
and improvements to an affiliated entity at no cost to that affiliated
entity. The Company retains title and control of these assets. However, the
assets are not being utilized by the Company. The gross cost of the office
equipment and leasehold improvements being utilized by the affiliated
entity was approximately $250,000 at September 30, 2000. The Company is
also providing office space to this entity for substantially below market
rental rates. This entity is affiliated through commonality of certain
management members
During the year ended September 30, 1999, the Company borrowed $500,000
from one of its shareholders, whom 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).
14. 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, 2000, the Company had bank balances exceeding those insured
limits of $110,000.
39
<PAGE>
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. The handling and processing of cash
receipts pertaining to trade accounts receivable is maintained by two third
party billing companies. The Company is dependent upon those two billing
companies for collection of its accounts receivable.
15. 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. There were no options granted in the
year ended September 30, 2000 nor was there any additional vesting of
options previously granted. 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 for the year ended September 30,
1999, 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, 2000:
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, 2000,
the Company had granted an aggregate of 1,212,000 options under this plan.
40
<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 years ended September 30, 2000 and 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:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
2000 1999 ---------
----------- ------------- Price
---------
<S> <C> <C> <C> <C>
Options outstanding at beginning of
year 1,107,000 $1.34 1,374,474 $ 2.27
Granted -0- 1,212,000 $ 1.31
Exercised (53,611) $1.00 ( 105,000) $ 1.00
Terminated/Expired (1,053,389) ( 1,374,474) $ 2.27
Options outstanding at end of year -0- 1,107,000 $ 1.34
Options exercisable at end of year -0- 1,107,000
Options available for grant at end of
year 1,341,389 288,000
$ 1.00-
Price per share of options outstanding N/A 2.50
Weighted average remaining
contractual lives N/A 4.3 years
Weighted Average fair value of
options granted during the year N/A $ 0.85
</TABLE>
The Company has issued warrants in connection with certain debt and equity
transactions. Warrants outstanding are summarized as follows:
<TABLE>
<CAPTION>
2000 1999
---- ----
Weighted Weighted
Average Average
Exercise Exercise
Price Price
--------- ---------
<S> <C> <C> <C> <C>
Warrants outstanding at beginning of
year 1,355,000 $ 2.00 3,416,920 $ 2.07
Granted -0- 1,555,250 $ 2.00
Expired (1,005,00) $ 2.00 (3,417,170) $ 2.05
Exercised -0- (200,000)
---------- --------- ----------- ---------
Outstanding at September 30, 350,000 $ 2.00 1,355,000 $ 2.00
========== ========= =========== =========
</TABLE>
41
<PAGE>
The 350,000 warrants outstanding at September 30, 2000, expire as follows:
October 22, 2000 250,000
March 23, 2001 100,000
16. 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, 2000.
* * * * * *
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. On December 31, 2000 King, Weber & Associates, P.C.
changed its corporate name to Marshall & Weber, CPA's, PLC.
42
<PAGE>
PART III
In accordance with Instruction E.3 to Form 10-KSB, Items 9, 10, 11 and 12
are incorporated by reference from YP. Net's definitive Proxy Statement to be
filed in accordance with Regulation 14A under the Securities Exchange Act.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
3.1 (1) Certificate of Restated Articles of Incorporation of Renaissance
International, Inc.
3.2 (7) Amended Articles - To change the name to YP.Net, Inc., and
Authorized Capital Increase to 50,000,000 Form 8-K 7/6/98
3.3 (7) Amended Articles - Name Change to YP.Net
3.4 (7) Certificate of Designation - Series B preferred shares
3.5 (1) Bylaws of Renaissance International Group, Ltd.
3.5 (7) Amended Bylaws
10.1 (2) 1998 Stock Option Plan
10.2 (7) Agreement with Worldpages.com
--------------
10.3 (7) Agreement with Integretel
10.4 (7) Agreement with Enhanced Services Billing, Inc.
10.5 (7) Lease regarding Mesa Facility
10.6 (7) Sub-Lease to BESI
10.7 (7) Van Sickle Loan Agreement
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.
43
<PAGE>
10.11 (4) Exclusive License Agreement between Matthews & Markson, Ltd.
and Telco Billing, Inc. dated September 21, 1998
10.12 (7) Modification to Matthew & Markson Promissory Note.
10.14 (8) International Profits Associates, Inc. Consulting Agreement
10.15 (8) BJM Consulting, Inc. Advisory Agreement
10.16 (8) International Profit Associates Organization for Management
10.17 (8) Sublease Agreement between Y.P.Net, Inc. and Empire Capital
Group, LLC
10.18 (9) Loan and Security Agreement dated August 31, 1999 between
Fremont Financial Corporation and Telco
10.19 (9) Forbearance Letter Agreement dated August 4, 2000 between Telco
and Finova Capital Corporation as successor by merger to Fremont
Financial Corporation
10.20 (9) Forbearance Letter Agreement Dated September 28, 2000 between
Telco and Finova Capital Corporation as successor by merger to
Fremont Financial Corporation
10.21 (9) Forbearance Letter Agreement dated November 7, 2000 between
Telco and Finova Capital Corporation as successor by merger to
Fremont Financial Corporation
10.22 Forbearance Letter Agreement dated January 5, 2001 between Telco
and Finova Capital Corporation as successor by merger to Fremont
Financial Corporation
11 Statement Regarding Computation of Per Share Earnings:
incorporated in Item 7 of the Audited Financial Statements for
period ending September 30, 1999 and September 30, 2000
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 of YP.Net, Inc.: Telco Billing, Inc.
44
<PAGE>
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.
7 Incorporated by reference from Form 10-QSB for the fiscal year ended
September 30, 1999.
8 Incorporated by reference from Form 10-QSB for the quarter ended December
31, 2000.
9 Incorporated by reference from Form 10-QSB for the quarter ended June 30,
2000.
REPORTS ON FORM 8-K
One report on Form 8-K was filed in the fiscal quarter ended September 30,
2000. A Form 8-K filed on July 18, 2000 disclosed the FTC litigation and that a
receiver for YP.Net had been appointed on June 26, 2000 and subsequently removed
as if it had not occurred by order of the court July 13th, 2000.
45
<PAGE>
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
---------------- -----------------------------------
Angelo Tullo, Chairman of the Board
BOARD OF DIRECTORS
Dated: , 2000 By
---------------- -----------------------------------
Angelo Tullo
Dated: , 2000 By
---------------- -----------------------------------
Walter Vogel
Dated: , 2000 By
---------------- -----------------------------------
Gregory B. Crane
Dated: , 2000 By
---------------- -----------------------------------
Daniel L. Coury, Sr.
Dated: , 2000 By
---------------- -----------------------------------
Harold A. Roberts
Dated: , 2000 By
---------------- -----------------------------------
Wallace Olsen
Dated: , 2000 By
---------------- -----------------------------------
DeVal Johnson
46
<PAGE>
