FILER:
COMPANY DATA:
--------------
COMPANY CONFORMED NAME: YP.NET, INC.
CENTRAL INDEX KEY: 0000875711
STANDARD INDUSTRIAL CLASSIFICATION: INTERNET ADVERTISING
IRS NUMBER: 85-0206668
STATE OF INCORPORATION: NEVADA
FISCAL YEAR END: 930
FILING VALUES:
---------------
FORM TYPE: 10-QSB
SEC ACT:
SEC FILE NUMBER: 00-24217
FILM NUMBER:
BUSINESS ADDRESS:
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STREET 1: 4840 EAST JASMINE STREET, SUITE 105
CITY: MESA
STATE: AZ
ZIP: 85205
BUSINESS PHONE: 480-654-9646
MAIL ADDRESS:
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STREET 1: 4840 EAST JASMINE STREET, SUITE 105
CITY: MESA
STATE: AZ
ZIP: 85205
<PAGE>
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U.S. Securities and Exchange Commission
Washington, D.C. 20549
____________________
FORM 10-QSB
____________________
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2000
[_] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act
For the transition period from _____________ to _______________
____________________
Commission File Number 0-24217
____________________
YP.NET, INC.
(Exact name of small business issuer as specified in its charter)
Nevada 85-0206668
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
4840 East Jasmine St. Suite 105
Mesa, Arizona 85205
(Address of principal executive offices)
(480) 654-9646
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes No X
----------- -----------
The number of shares of the issuer's common equity outstanding as of
December 31, 2000 was 41,450,798 shares of common stock, par value $.001.
Transitional Small Business Disclosure Format (check one):
Yes No X
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================================================================================
<PAGE>
YP.NET, INC.
INDEX TO FORM 10-QSB FILING
FOR THE QUARTER ENDED JUNE 30, 2000
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Comparative Balance Sheets
as of June 30, 2000 and September 30, 1999 . . . . . . .2
Consolidated Statements of Operations
for the Three Months and Nine Months Ended June 30, 2000 . . . .3
Consolidated Statements of Cash Flows
for the Three Months and Nine Months Ended June 30, 2000 . . . .4
Notes to the Consolidated Financial Statements . . . . . . . . .5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . .8
PART II
OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . .12
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . 12
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 12
SIGNATURES
<PAGE>
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
YP.NET, INC.
CONSOLIDATED COMPARATIVE BALANCE SHEETS
AS OF JUNE 30, 2000 and SEPTEMBER 30, 1999
ASSETS
JUNE 30, 2000 SEPTEMBER 30,
1999
<S> <C> <C>
(unaudited)
CURRENT ASSETS:
Cash and Cash Equivalents $ 124,091 $ 255,323
Accounts Receivable 3,031,082 951,177
Prepaid Expenses 127,287 138,400
Other Assets - 77,182
Direct Response Marketing - Net 565,881 633,900
Deferred income taxes 209,716 91,172
--------------- ---------------
TOTAL CURRENT ASSETS 4,058,057 2,147,154
--------------- ---------------
PROPERTY AND EQUIPMENT:
Furniture and Fixtures 152,261 -
Equipment & Computer Equipment 239,595 552,731
Leasehold Improvements 317,507 -
LESS: Accumulated Depreciation and Amortization (223,822) (116,833)
TOTAL PROPERTY AND EQUIPMENT 485,541 435,898
--------------- ---------------
OTHER ASSETS:
Intangible Assets 5,010,000 5,010,000
Deposits 13,287 13,287
LESS: Accumulated Amortization (517,083) (159,166)
--------------- ---------------
TOTAL OTHER ASSETS 4,506,204 4,864,121
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TOTAL ASSETS 9,049,803 7,447,173
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade Accounts Payable 57,597 55,000
Income Taxes Payable 331,292 260,427
Accrued Expenses 169,355 772,120
Finova Line-Of-Credit - Note 1 1,778,331 -
Short-Term Notes Payable - Note 2 900,000 4,808,865
--------------- ---------------
TOTAL CURRENT LIABILITIES 3,236,575 5,896,412
--------------- ---------------
LONG-TERM LIABILITIES:
Long-Term Notes Payables - Note 3 1,899,489 7,241
Deferred income taxes 18,050 70,865
--------------- ---------------
TOTAL LONG-TERM LIABILITIES 1,917,539 78,106
--------------- ---------------
TOTAL LIABILITIES 5,154,114 5,974,518
--------------- ---------------
STOCKHOLDER' EQUITY:
Common Stock $.001 par value, 50,000,000 shares 41,452 39,157
41,450,798 and 39,156,853 issued and outstanding
For June 30, 2000 and September 30, 1999
Additional Paid In Capital 5,769,112 892,538
Treasury Stock (69,822) (69,822)
Preferred Stock - Class B. $.001 par value 1,500 1,700
2,500,000 shares designated 1,500,000 and 1,700,000 issued
and outstanding for June 30, 2000 and September 30, 1999.
Retained Deficit (1,846,554) (3,390,918)
--------------- ---------------
TOTAL STOCKHOLDERS' EQUITY 3,895,688 1,472,655
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,049,803 $ 7,447,173
--------------- ---------------
</TABLE>
See the accompanying notes to these unaudited financial statements
2
<PAGE>
<TABLE>
<CAPTION>
YP.NET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDED JUNE 30, 2000
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, 2000 JUNE 30, 2000
-------------------- -------------------
(unaudited)
<S> <C> <C>
INCOME
Revenue $ 4,247,263 $ 10,370,820
COST OF SALES 2,238,838 4,967,438
-------------------- -------------------
GROSS PROFIT 2,008,425 5,403,382
-------------------- -------------------
SELLING EXPENSES 2,149 22,931
GENERAL AND ADMINISTRATIVE 629,267 2,941,367
DEPRECIATION AND AMORTIZATION 154,930 466,185
-------------------- -------------------
TOTAL EXPENSES 786,346 3,430,483
-------------------- -------------------
EARNINGS FROM OPERATIONS 1,222,080 1,972,898
-------------------- -------------------
OTHER INCOME (EXPENSE)
Other Income 10,270 45,518
Interest Income/(Expense) (199,541) (571,695)
-------------------- -------------------
TOTAL OTHER INCOME (189,271) (526,178)
-------------------- -------------------
Net Income Before Income Taxes 1,032,809 1,446,721
Provisions for Income Taxes -0- (100,494)
-------------------- -------------------
NET INCOME $ 1,032,809 $ 1,547,215
==================== ===================
EARNINGS PER SHARE:
Basic Earnings Per Share $ 0.03 $ 0.04
==================== ===================
WEIGHTED AVERAGE NUMBER OF COMMON 40,986,354 40,516,876
==================== ===================
SHARES OUTSTANDING
Diluted Earnings Per Share $ 0.03 $ 0.04
==================== ===================
WEIGHTED AVERAGE NUMBER OF COMMON 40,986,354 40,516,876
==================== ===================
AND COMMON SHARE EQUIVALENTS OUTSTANDING
</TABLE>
See the accompanying notes to these unaudited financial statements
3
<PAGE>
<TABLE>
<CAPTION>
YP.NET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS AND NINE MONTHS ENDED JUNE 30, 2000
THREE MONTHS NINE MONTHS
ENDED ENDED
JUNE 30, 2000 JUNE 30, 2000
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES (unaudited)
Net Income $ 1,032,809 $ 1,547,215
Adjustments to reconcile net income to net cash used by operating
activities.
Depreciation and amortization 37,014 108,268,
Consultants & Officers paid with common stock 115,500 878,669
Amortization of intellectual property 117,917 357,917
Income tax benefit -- (100,494)
(Increase) decrease in assets
Trade accounts receivable (373,548) (2,079,905)
Customer acquisition costs (79,569) 68,019
Other receivables -- 77,182
Prepaid and other current assets 30,550 (85,681)
Other assets -- 31,368
Increase (decrease) in liabilities
Trade accounts payable 18,444 34,913
Accrued liabilities (339,402) (534,628)
Deferred revenue - (81,190)
--------------- ---------------
NET CASH PROVIDED IN OPERATING 559,715 221,654
ACTIVITIES
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (30,037) (186,631)
--------------- ---------------
NET CASH USED BY INVESTING ACTIVITIES (30,037) (186,631)
CASH FLOWS FROM FINANCING ACTIVITIES
Advances from line of 87,275 984,923
credit
Principal repayments on notes payable (600,512) (1,151,178)
--------------- ---------------
Proceeds from the issuance of common stock
NET CASH USED BY FINANCING ACTIVITIES (513,237) (166,255)
NET INCREASE (DECREASE) IN CASH 16,441 (131,232)
CASH AT BEGINNING OF PERIOD 107,650 255,323
--------------- ---------------
CASH AT END OF PERIOD $ 124,091 $ 124,091
=============== ===============
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid 66,290 118,887
</TABLE>
See the accompanying notes to these unaudited financial statements
4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2000
1. Basis of Presentation
The accompanying unaudited financial statements represent the consolidated
financial position of YP.Net, Inc. ("Company") as of June 30, 2000 and include
results of operations of the Company and Telco Billing, Inc. ("Telco"), its
wholly owned subsidiary, and cash flows for the three and nine months ended June
30, 2000. These statements have been prepared in accordance with generally
accepted accounting principles for interim financial information and the
instructions for Form 10-QSB. Accordingly, they do not include all the
information and footnotes required by generally accepted accounting principles
("GAAP") for complete financial statements. In the opinion of management, all
adjustments to these unaudited financial statements necessary for a fair
presentation of the results for the interim period presented have been made.
The results for the three and nine month periods ended June 30, 2000 may not
necessarily be indicative of the results for the entire fiscal year. These
financial statements should be read in conjunction with the Company's Form
10-KSB for the year ended September 30, 1999, including specifically the
financial statements and notes to such financial statements contained therein.
2. Summary of Significant Accounting Policies
The accounting policies followed by the Company, and the methods of applying
those policies, which affect the determination of its financial position,
results of operations or cash flows are summarized below:
Cash and Cash Equivalents
----------------------------
Cash and cash equivalents include all short-term 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.
Principles of Consolidation
-----------------------------
The consolidated financial statements include the Company and its wholly owned
subsidiary, Telco Billing, Inc. All intercompany accounts in consolidation have
been eliminated.
Revenue Recognition
--------------------
The Company's revenue is generated by customer subscription of directory and
advertising services. Revenue is recognized monthly for services subscribed in
that specific month. The Company utilizes outside billing companies to transmit
billing data that is forwarded to Local Exchange Carriers ("LECs"). Monthly
subscription fees are included on the telephone bills of the LEC customers. The
Company recognizes revenue based on net billings accepted by the LECs.
Fair Value of Financial Instruments
---------------------------------------
The carrying amounts for cash, investments in marketable securities, trade
accounts receivable, trade accounts payable, accrued liabilities and notes
payable, approximate their fair value due to the short maturity of these
instruments. The Company has determined that the recorded amounts approximate
fair value.
5
<PAGE>
Net Earnings Per Share
-------------------------
Net earnings per share are calculated using the weighted average number of
shares of common stock outstanding during the year. The Company has adopted the
provisions of Statement of Financial Accounting Standards 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.
This may affect the reported amounts of assets and liabilities and disclosure of
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.
3. Business Combination
On June 16, 1999, the Company exchanged 17,000,000 shares of common stock for
all of the common stock of Telco. Prior to the acquisition, 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. After 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.
4. Intangible Asset
In connection with the Company's acquisition of Telco, the Company is required
to provide payment of licensing fees for the use of the Internet domain name or
Universal Resource Locator ("URL") Yellow-Page.Net. The URL is recorded at its
---------------
cost net of accumulated amortization. Management believes that the Company's
business is dependent on its ability to utilize this URL given the recognition
of the "yellow page" term. Management believes that the current revenue and
cash flow generated using the URL 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 impairment has incurred. The URL is amortized on an
accelerated basis over the twenty-year term of the licensing agreement.
5. Notes Payable and Line of Credit
Notes payables are recorded and interest is accrued in accordance with the
individual terms of each note. Notes payable at June 30, 2000 were as follows:
Note 1: The Company entered into an agreement with Finova Capital Corporation
-------
for a $3,000,000 revolving line of credit with interest payable at the prime
rate plus three percent. The amount available to be drawn under the facility is
limited to 80% of eligible account receivable. At June 30, 2000 the credit
facility had an outstanding balance of $1,778,331. Assets of the Company,
specifically accounts receivables, collateralize the credit facility. The
credit facility expired on August 31, 2003, and the institution may withdraw the
line with a notification within 90 days. The Company has executed three
forbearance agreements one dated August 15, 2000, November 3, 2000 and January
3, 2001. The January 3, 2001 forbearance reduced the credit facility from
$3,000,000 to $1,000,000 and the available and eligible accounts receivables may
be drawn at a 50% limit. This existing forbearance expires February 3, 2001
6
<PAGE>
Note 2: The Company entered into a loan agreement with Mr. Joseph Van Sickle
-------
during the acquisition of Telco under which Mr. Van Sickle lent $2,000,000 to
the Company. At June 30, 2000 this note payable had an outstanding balance of
$900,000. Mr. Van Sickle is a shareholder of the Company and owns approximately
one percent of the Company's outstanding stock. Mr. Van Sickle is not a member
of management and currently has no position on the Board of Directors of the
Company.
Note 3: The Company entered into an agreement with Matthew & Markson, Ltd., an
-------
Antigua corporation ("M&M"), in conjunction with the acquisition of Telco for
the license of the URL Yellow-Page.Net. The Company agreed to pay M&M
- ---------------
$5,000,000 for the licensing agreement of the URL Yellow-Page.Net. At June 30,
- ---------------
2000 the M&M note payable had an outstanding balance of $1,899,489. M&M owns
approximately 18% of the Company's outstanding stock.
6. Common Stock
Transactions in the Company's common stock issued for the acquisition of assets,
products, or services are accounted for at 90% of fair value. Fair value is
determined based on the traded closing price of the Company's common stock on
the date of the transaction, or the fair value of the asset, product, or service
received, whichever is more readily determinable.
7. 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. The provision for income taxes for interim periods is calculated on
the basis of the expected effective rate for the full year.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Such forward-looking statements include, but are not limited to,
statements regarding future events and our plans and expectations. Our actual
results could differ materially from those discussed herein. Factors that could
cause or contribute to such differences include, but are not limited to, those
discussed elsewhere in this Form 10-QSB or incorporated herein by reference.
See "Special Note on Forward-Looking Statements" below.
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
--------------- ------
1999, and because 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 prior fiscal
quarters 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.
We utilized direct mailings as our primary marketing program. We have not
sent out direct mailers nor solicited business customers since June 2000. We
have experience some attrition in our customer base since June 2000, however, we
have implemented a customer contact programs that has assisted us in maintaining
our customer base and growing out customer base without the solicitation of
direct mailing marketing efforts. We are intending to send out direct mailers
in the next 60 days. At October 1, 1999, we had 103,133 customers subscribing to
our services. At December 31, 1999, we had 114,409, at March 30, 2000, we had
129,457 customers, and at June 30, 2000 we had 143,292 customers. We believe
the increase in our customer base for these periods was primarily a result of
our marketing efforts. In March 2000, we implemented a customer contact program
to attempt to increase our customer satisfaction and decrease customer
attrition. This program has and will continue to provide decrease in attrition
and better customer satisfaction.
Expenditures related to professional and consulting fees were significant
in the three and nine months periods ended June 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 for services. Management has
presently entered into a written offer to settle this dispute and the return of
approximately 66% of the disputed shares. If offers to settle are negated,
legal action regarding the disputed shares may adversely affect our future
earnings due to costs of potential litigation. 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.
8
<PAGE>
On March 13, 2000, management entered into an engagement with King, Weber &
Associates, P.C. ("K&W") to conduct the audit of our financial statements for
the fiscal year ended September 30, 1999. K&W estimated the cost to prepare the
fiscal year end audit to be from $75,000 to $100,000 with an estimated
completion date of August 2000. K&W subsequently issued the audited financial
statements on August 24, 2000 within the budgeted fees.
Common stock has been issued to the members of the new Board of Directors
for services rendered. 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 stated at 90% of the
trading value of the shares to reflect a discount for the regulatory
restrictions on trading of those shares. During the three months ended June 30,
2000, 550,000 common shares were issued to the new Board members. Prior
management also issued 845,049 common shares to the Hudson Consulting Group,
Inc. in the nine months ended June 30, 2000. We did not record any expenses
associated with this issuance of the Hudson Consulting Group, Inc. because we
are presently in litigation related to the consideration for the issuance. We
are seeking the rescission of these and other common shares issued to the Hudson
Consulting Group, Inc. by prior management. We have made and have received a
settlement offer regarding these disputed shares.
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.
The acquisition of Telco was treated as a reverse merger for financial
accounting purposes. Consequently, Telco was deemed the acquiring entity. For
financial accounting purposes, Telco was considered to have engaged in a
recapitalization and acquired the net assets of RIGL as of June 1999. Financial
statements of Telco for the nine months ended June 30, 1999 are not included in
this Form 10-QSB due to such statements not being available and the financial
hardship we would incur to prepared comparative financial statements for the
interim period ending June 30, 1999.
RESULTS OF OPERATIONS
With the acquisition of Telco, our business focus shifted to the Internet
yellow page services business and this business is currently the sole source of
our revenue. All operations conducted by RIGL prior to the acquisition of Telco
have been discontinued. Revenues for the three months ended June 30, 2000 were
$4,247,263 and for the nine months ended June 30, 2000 were $10,370,820. Until
other sources of revenue are developed, our total revenues will be directly
dependent upon the number of customers subscribing to our preferred listing
service.
Cost of sales for the three months ended June 30, 2000 was $2,238,838 and
for the nine months ended June 30, 2000 was $4,967,439. Cost of sales is
comprised of dilution expenses, direct mailer marketing costs, allowances for
bad debt and our billing costs. Dilution expenses include customer credits and
any other receivable write-downs. Dilution expenses were approximately
$1,216,829 for the three months ended June 30, 2000 and approximately $2,398,934
for the nine months ended June 30, 2000. Direct mailer marketing costs were
also a significant component of our costs of sales. These costs were $404,152
for the three months ended June 30, 2000 and $1,221,317 for the nine months
ended June 30, 2000.
Selling expenses, primarily the costs associated with general advertising
and market testing of other revenue sources, were approximately $1,500 and $5600
for the three and nine month periods ending June 30, 2000, respectively.
9
<PAGE>
General and administrative expenses for the three months ended June 30,
2000 were $629,267 and for the nine months ended June 30, 2000 were $2,941,367.
These costs are primarily related to customer service staffing, which we believe
provides better service to our customers. For the three months ended June 30,
2000 our professional fees were $121,724 and $227,923 for the Nine Months ended
June 30, 2000. These expenses were primarily a result of hiring a new
independent auditor and new law firm to represent the company in litigation
issues and SEC compliance issues. For the three months ended June 30, 2000 our
consulting expenses were $20,812 and $707,396 for the nine months ended June 30,
2000. The expenses related to the three months ended June 30, 2000 were a
result of hiring a consulting firm that specializes in LEC billing accounting to
assist the auditors to complete the audited financial statements for September
30, 1999. The expenses related to the nine months ended June 30, 2000, were
primarily a result of the issuance of common stock by prior management as
consideration under several consulting contracts and is not expected to be
recurring.
Interest expense net of interest income for the three months ended June 30,
2000 was $199,541 and for the nine months ended June 30, 2000 was $571,695.
Interest expense was a result of our debt outstanding. This debt outstanding
included debt incurred in connection with the acquisition of the URL
Yellow-Page.Net and due to an increase in the amount outstanding under our
---------------
credit facility with Finova Capital Corporation.
Net income for the three month period ended June 30, 2000 was $1,032,809 or
$.03 per diluted share. Net income for the nine month period ended June 30,
2000 was $1,547,215 or $.04 per diluted share.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities for the Nine Months ended June 30,
2000 was $221,654. Revenue was generated solely from providing electronic
yellow page preferred listing advertising. Cash from operating activities for
the nine months ended June 30, 2000 was utilized by an increase in our accounts
receivable ($2,079,905) and in prepaid assets ($85,681) and by decreases in
accrued liabilities ($534,628) and deferred revenue ($81,190). Cash in the nine
months ended June 30, 2000 was generated by decreases in customer acquisition
costs ($68,019), other receivables ($77,182), and prepaid and other assets
($31,638), and by increase in our trade accounts payable ($34,913).
Cash used by investing activities was $186,631 for the nine months ended
June 30, 2000. We purchased additional computer equipment of approximately
$98,631 and performed tenant leasehold improvements of approximately $88,000 in
the nine months ended June 30, 2000.
Cash used by financing activities was $166,255 for nine months ended June
30, 2000. For the nine months ended June 30, 2000, we realized cash of $984,923
from advances on our line of credit and utilized $1,151,178 to pay notes
payable. The $1,151,178 represents the total payments made to reduce the
principal balances of the outstanding notes.
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 February 3, 2001. Our line of credit has been reduced to
$1,400,000 for the period of November 6, 2000 through December 5, 2000 and to
$1,200,000 thereafter. 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.
10
<PAGE>
OTHER CONSIDERATIONS
There are numerous factors that affect our business and the results of its
operations. Sources of these factors include general economic and business
conditions, federal and state regulation of our business activities, the level
of demand for our services, the level and intensity of competition in the
electronic yellow page industry and the pricing pressures that may result, our
ability to develop new services based on new or evolving technology and the
market's acceptance of those new services, our ability to timely and effectively
manage periodic product transitions, the services, customer and geographic sales
mix of any particular period, and our ability to continue to improve our
infrastructure (including personnel and systems) to keep pace with the growth in
its overall business activities.
We have been delinquent in our filings under the Securities Exchange Act of
1934 ("Exchange Act"). This Form 10-QSB will cause our filings to be current.
It is management's intent to complete all past due filings and to cause all
required filings to be timely made in the future. While trading of our stock
has occurred during the periods before and after this filing, sales under Rule
144 have not been available until now. Management also intends to take actions
to cause YP.Net's common stock to be relisted on the OTC Bulletin Board as soon
as possible. It is not possible to determine the effect, if any, on the actions
of current of former shareholders of bringing current the required Exchange Act
filings, and the financial statements and disclosures contained therein.
We have attempted to keep the public informed through press releases and
Form 8-K filings while making a concerted effort to become current with our
filings. We are currently unable to determine the materiality of the affect of
the prior delinquent filings, if any, or the potential impact any such
delinquencies may have on our operations.
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
Except for historical information contained herein, this Form 10-QSB
contains express or implied forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act.
We intend that such forward-looking statements be subject to the safe harbors
created thereby. We may make written or oral forward-looking statements from
time to time in filings with the SEC, in press releases, quarterly conference
calls or otherwise. The words "believes," "expects," "anticipates," "intends,"
"forecasts," "project," "plans," "estimates" and similar expressions identify
forward-looking statements. Such statements reflect our current views with
respect to future events and financial performance or operations and speak only
as of the date the statements are made.
Forward-looking statements involve risks and uncertainties and readers are
cautioned not to place undue reliance on forward-looking statements. Our actual
results may differ materially from such statements. Factors that cause or
contribute to such differences include, but are not limited to, those discussed
elsewhere in this Form 10-QSB, as well as those discussed in our Form 10-KSB
which is incorporated by reference in this Form 10-QSB.
Although we believe that the assumptions underlying the forward-looking
statements are reasonable, any of the assumptions could prove inaccurate with
the result that there can be no assurance the results contemplated in such
forward-looking statements will be realized. The inclusion of such
forward-looking information should not be regarded, as a representation that the
future events, plans, or expectations contemplated will be achieved. We
undertake no obligation to publicly update, review, or revise any
forward-looking statements to reflect any change in our expectations or any
change in events, conditions, or circumstances on which any such statements
based. Our filings with the SEC, including the Form 10-KSB, may be accessed at
the SEC's Web site, www.sec.gov.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
YP.Net is involved in various legal proceedings and claims as described in
our Form 10-KSB for the year ended September 30, 1999.
We have settled the case YP.Net, Inc vs. Vigil. YP.Net has agreed to pay a
settlement offer of $125,000 to the Vigils and the Vigils will deliver to YP.Net
the 250,000 shares of common stock of YP.Net. This settlement was agreed to in
December, 2000. We have also entered into a settlement offer with Hudson
Consulting Group. We have offer to enter into a new agreement with Hudson
Consulting Group for newly issued 500,000 shares of common stock of YP.Net, Inc.
and Hudson Consulting Group will return 1,900,000 shares of YP.Net's common
shares issued to them in fiscal year end September 30, 1999 and three months
ended December 31, 1999 by prior management. Final settlement is still
pending. No other material developments have occurred in any of these
proceedings. The costs associated with these legal proceedings could be
significant and could adversely affect the results of our future operations. An
unfavorable result in any of these proceedings could also adversely affect our
operations.
On June 26, 2000 the Federal Trade Commission ("FTC") filed a complaint
against us and other defendants alleging that YP.Net and other defendants were
engaged in deceptive advertising practices and sought preliminary injunctive
remedies, including the appointment of a receiver over the business and a freeze
on all assets. The alleged deceptive practices related to a check mailer
solicitation utilized in our marketing activities. On July 13, 2000, YP.Net and
all other defendants entered into a global settlement of the preliminary
injunction, resulting in dismissal of the receiver and dissolution of the asset
freeze. Subsequently, we have met with the FTC and anticipate a final order in
settlement of the matter to be negotiated. The legal fees and litigation
related to the allegation of the FTC has adversely affected our profitability
and has caused our marketing efforts to be greatly curtailed.
ITEM 2. CHANGES IN SECURITIES
In June 2000 YP.Net issued 550,000 common shares to the members of the
Board of Directors. The shares were issued in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
NONE
REPORTS ON FORM 8-K
Three reports on Form 8-K were filed during the three months ended June 30,
2000. These reports are as follows:
Form 8-K filed on April 6, 2000 announced the appointment of King, Weber &
Associates, P.C. as YP.Net's independent auditors.
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Form 8-K filed on May 22, 2000 disclosed the terms of the loan made to
YP.Net by Joseph and Helen Van Sickle.
Form 8-K/A filed on May 22, 2000 amended the Form 8-K/A filed on March 14,
2000. This Form 8-K/A was filed to included the letter sent by McGladry &
Pullen, LLP to YP.Net as a result of their termination as YP.Net's independent
auditors.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on behalf by the undersigned
thereunto duly authorized.
YP.NET, INC.
Dated: January _____, 2001 By /s/ Angelo Tullo
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Angelo Tullo, Chairman of the Board
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