UNITED STATES
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
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from . . . . . . . .to . . . . . .
Commission file number . . . . . . . . . . . . . . 0-28725
Youthline USA, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 22-3674998
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4581 U.S Highway 9
Howell, New Jersey
----------------------------------------
(Address of principal executive offices)
07731
----------
(Zip Code)
(732) 886-0833
----------------------------------------------------
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares of Common Stock, par value $.0001 per share,
outstanding as of July 31, 2000: 12,499,165
<PAGE>
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of
June 30 2000 (unaudited) and 1999 . . . . . . . . . . . . . . 2-3
Consolidated Statements of Operations for the Six Months
June 30 2000 (unaudited) and 1999 . . . . . . . . . . . . . . 4-4a
Consolidated Statements of Stockholders' Equity for the Six Months
June 30 2000 (unaudited) and 1999 . . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows for Six Months
June 30 2000 (unaudited) and 1999 . . . . . . . . . . . . . . 6
Notes to the Financial Statements . . . . . . . . . . . . . . . 7-15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . 16-19
Part II. OTHER INFORMATION. . . . . . . . . . . . . . . . . . . 20
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Schedule 27 . . . . . . . . . . . . . . . . . . . . . . . . . . 22
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The consolidated balance sheet of the Company as of June 30, 2000, the related
consolidated statements of operations, and cash flows for the six months ended
June 30, 2000 and 1999 included in Item 1 have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. In the opinion of
management, the accompanying consolidated financial statements include all
adjustments (consisting of normal, recurring adjustments) necessary to summarize
fairly the Company's financial position and results of operations. The
consolidated results of operations for the periods ended June 30, 2000 and 1999
are not necessarily indicative of the results of operations for the full year or
any other interim period. These financial statements should be read in
conjunction with the audited financial statements and notes thereto included in
the Company's Annual Report on Form 10-KSB for the fiscal year ended December
31, 1999 as filed with the Commission.
<PAGE>
<TABLE>
<CAPTION>
YOUTHLINE USA, INC.
CONSOLIDATED BALANCE SHEET
ASSETS
June 30, December 31,
2000 1999
----------- -----------
(unaudited)
CURRENT ASSETS:
<S> <C> <C>
Cash $ 164,760 $ 572,720
Accounts Receivable 613,321 91,542
Stock Subscriptions Receivable 80,000 --
Prepaid Expenses 57,275 20,753
----------- -----------
TOTAL CURRENT ASSETS 915,356 685,015
----------- -----------
FIXED ASSETS
Office equipment and software (net of
accumulated depreciation of $55,948 and
$35,071, respectively) 227,030 107,795
----------- -----------
OTHER ASSETS
Organization costs (net of
accumulated amortization of $3,163 and
$2,578, respectively) 2,687 3,272
Intangible Assets - Trademarks, Goodwill
and Customer Lists (Net of accumulated
amortization of $33,500 and $13,000, respectively) 171,500 192,000
----------- -----------
TOTAL OTHER ASSETS 174,187 195,272
----------- -----------
TOTAL ASSETS $ 1,316,573 $ 988,082
=========== ===========
</TABLE>
See accompanying notes to financial statements
2
<PAGE>
<TABLE>
<CAPTION>
YOUTHLINE USA, INC.
CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30 December 31,
2000 1999
------------ ------------
(unaudited)
CURRENT LIABILITIES:
<S> <C> <C>
Accounts Payable and Accrued Expenses $ 1,227,971 $ 203,938
Unearned Revenue 148,609 76,180
Current Portion of Notes Payable 2,500,000 1,530,000
------------ ------------
TOTAL CURRENT LIABILITIES 3,876,580 1,810,118
------------ ------------
LONG TERM LIABILITIES
Notes Payable 250,000 220,000
------------ ------------
TOTAL LONG TERM LIABILITIES 250,000 220,000
------------ ------------
TOTAL LIABILITIES 4,126,580 2,030,118
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred Stock, $.0001 Par Value, 5,000,000 Shares
Authorized, No Shares Outstanding -- --
Common Stock, $.0001 par value, 50,000,000 Shares
Authorized; 11,639,165 and 10,071,665 shares issued
and outstanding, respectively, 1,164 1,007
Additional Paid In Capital 11,733,444 4,244,195
(Deficit) (14,544,615) (5,287,238)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY (2,810,007) (1,042,036)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,316,573 $ 988,082
============ ============
</TABLE>
See accompanying notes to financial statements
3
<PAGE>
YOUTHLINE USA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
NET SALES $ 567,035 $ 29,559
------------ ------------
OPERATING EXPENSES:
Cost of Goods Sold (Exclusive of Depreciation and Amortization,
shown separately below) 1,336,643 63,153
Employee Stock Based Compensation 1,550,000 --
Payroll and Related Costs 1,021,543 21,701
Consulting Services 1,558,545 --
Selling Expenses 955,587 38,164
Professional Fees 94,055 7,213
General and Administrative 318,830 20,616
Depreciation and Amortization 41,962 3,281
------------ ------------
TOTAL OPERATING EXPENSES 6,877,165 154,128
------------ ------------
Loss from operations before provision for income taxes (6,310,130) (124,569)
------------ ------------
OTHER INCOME AND EXPENSES
Interest Expense (Net of Interest Income of $3,267 in 2000
and $0 in 1999) 2,947,047 9,114
------------ ------------
Loss before provision for Income Taxes (9,257,177) (133,683)
------------ ------------
PROVISION FOR STATE INCOME TAX 200 200
------------ ------------
Net Loss $ (9,257,377) $ (133,883)
============ ============
Net Loss per Common Share (Basic and Diluted) $ (0.85) $ (0.02)
============ ============
Weighted Average Common Shares Outstanding 10,855,415 5,508,200
============ ============
</TABLE>
See accompanying notes to financial statements
4
<PAGE>
YOUTHLINE USA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
NET SALES $ 303,533 $ 23,867
------------ ------------
OPERATING EXPENSES:
Cost of Goods Sold (Exclusive of Depreciation and
Amortization, shown separately below) 856,667 36,327
Employee Stock Based Compensation 1,550,000 --
Payroll and Related Costs 600,064 17,382
Consulting Services 1,501,708 --
Selling Expenses 650,008 20,716
Professional Fees 63,980 3,513
General and Administrative 143,308 (3,939)
Depreciation and Amortization 26,961 1,804
------------ ------------
TOTAL OPERATING EXPENSES 5,392,696 75,803
------------ ------------
Loss from operations before provision for income taxes (5,089,163) (51,936)
------------ ------------
OTHER INCOME AND EXPENSES
Interest Expense (Net of Interest Income of $3,267 in 2000
and $0 in 1999) 1,550,781 5,364
------------ ------------
Loss before provision for Income Taxes (6,639,944) (57,300)
------------ ------------
PROVISION FOR STATE INCOME TAX -- --
------------ ------------
Net Loss $ (6,639,944) $ (57,300)
============ ============
Net Loss per Common Share (Basic and Diluted) $ (0.61) $ (0.01)
============ ============
Weighted Average Common Shares Outstanding 10,855,415 5,508,200
============ ============
</TABLE>
See accompanying notes to financial statements
4a
<PAGE>
YOUTHLINE USA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
Common Stock
--------------------------- Capital Accumulated
Number of Par in excess of Deficit Total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1999 10,071,665 $ 1,007 $ 4,244,195 $ (5,287,238) $ (1,042,036)
Sale of Common Stock 910,000 91 1,819,909 -- 1,820,000
Stock Issued for Services and Financings 657,500 66 2,521,340 -- 2,521,406
Value Ascribed to Issuance of Warrants -- -- 1,790,000 -- 1,790,000
Convertible Notes - Beneficial Interest -- -- 1,358,000 -- 1,358,000
Net Loss for Period -- -- -- (9,257,377) (9,257,377)
------------ ------------ ------------ ------------ ------------
Balance at June 30, 2000 11,639,165 $ 1,164 $ 11,733,444 $(14,544,615) $ (2,810,007)
============ ============ ============ ============ ============
Balance at December 31, 1998 5,508,200 $ 551 $ 118,212 $ (500,238) $ (381,475)
Net Loss for Period -- -- -- (133,883) (133,883)
------------ ------------ ------------ ------------ ------------
Balance at June 30, 1999 5,508,200 $ 551 $ 118,212 $ (634,121) $ (515,358)
============ ============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements
5
<PAGE>
YOUTHLINE USA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
NET LOSS FROM OPERATIONS $(9,257,377) $ (133,883)
Adjustments to reconcile net loss from operations
to net cash used by operating activities:
Depreciation and Amortization Expense 41,962 1,477
Common Stock Issued for Services 1,460,906 --
Stock Based Compensation 1,550,000 --
Interest Expense - Beneficial Conversion Interest and
Intrinsic Value of Warrants 2,658,500 --
Increase in Accounts Receivables (521,779) --
Increase in Subscriptions Receivable (80,000) --
Decrease in Prepaid Expenses (36,522) --
Increase in Accounts Payable and Accrued Expenses 1,024,033 3,902
Increase in Unearned Revenues 72,429 1,771
----------- -----------
NET CASH USED BY OPERATIONS (3,087,848) (126,733)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Office Equipment (140,112) --
Repayment of Notes Payable (500,000) --
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES: (640,112) --
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in Loans and Exchanges -- 64,974
Sale of Common Stock 1,820,000 --
Issuance of Promissory Notes 500,000 --
Issuance of Convertible Promissory Notes 1,000,000 --
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,320,000 64,974
----------- -----------
Net Decrease in Cash and Cash Equivalents (407,960) (61,759)
Cash and Cash Equivalents at Beginning of Year 572,720 (738)
----------- -----------
Cash and Cash Equivalents at End of Year $ 164,760 $ (62,497)
----------- -----------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash Paid During the Period for
Interest $ 222,868 $ --
=========== ===========
Income Taxes $ 580 $ 200
=========== ===========
</TABLE>
See accompanying notes to financial statements
6
<PAGE>
YOUTHLINE USA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited financial statements of Youthline USA, Inc.
(the "Company") as of June 30, 2000 have been prepared in accordance
with generally accepted accounting principles for interim information.
Accordingly, certain information and footnote disclosures required
under generally accepted accounting principles have been condensed or
omitted pursuant to the rules and regulations of the Securities and
Exchange Commission. In the opinion of management, all adjustments of a
recurring nature considered necessary for a fair presentation of the
results for the interim periods presented have been included. Operating
results for the six months ended June 30, 2000 are not necessarily
indicative of the results that may be expected for the entire year or
any other period.
NOTE 2 DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
PRINCIPLES
REVERSE ACQUISITION
In August 1999, the Company acquired all of the outstanding capital
stock of S & S Plus, Inc., a wholly owned subsidiary of the Company
which operated the publication of Youthline USA, in exchange for the
issuance of 5,500,000 shares of its common stock, representing a
majority of the total issued and outstanding capital stock of the
Company. On such date, the previous management's directors and officers
resigned and were replaced with the current officers and directors.
This exchange has been accounted for as a reverse acquisition, since
the former owners of S & S Plus, Inc. owned a majority of the
outstanding stock of Youthline USA, Inc. after the acquisition.
Accordingly, the combination of the two companies is recorded as
recapitalization of shareholders' equity of S & S Plus, Inc., pursuant
to which S & S Plus, Inc. is treated as the continuing entity for
accounting purposes and the historical financial statements presented
are those of S & S Plus, Inc.
A) DESCRIPTION OF BUSINESS
The Company, through its wholly owned subsidiary, S & S Plus, Inc.,
publishes YOUTHLINE USA, a weekly newspaper and a monthly magazine
written and designed for children ages 8 through 13. In every respect,
it is similar to an adult newspaper, except that it is written at the
children's level and it filters out news that is not age appropriate.
It is designed to attract and engage the attention of children within
this age range.
The Company provides curriculum and technology to schools using its
unique website and the daily news as a base. Youthline-USA.com provides
an integrated language arts curriculum, customized by city and state,
to subscribing schools, allowing them to teach their students the
required curriculum while introducing them to the world of technology.
7
<PAGE>
YOUTHLINE USA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
NOTE 2 DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
PRINCIPLES
(Continued)
Its appeal to schools is additionally enhanced by the incorporation of
lesson plans and an accountability package that allows educators to
track their students performance.
The Company also prints a weekly newspaper and monthly magazine to
supplement the website. The print products encourage further
integration of curriculum and technology, and also generates
advertisement and sponsorship revenue for Corporate America.
B) CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements include the accounts of the
Company and its subsidiary. All significant inter-company accounts and
transactions are eliminated. Management of the Company has made
estimates and assumptions relating to the reporting of assets and
liabilities and disclosure of contingent liabilities to prepare these
financial statements in conformity with generally accepted accounting
principles.
C) CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three
months or less to be cash equivalents.
D) ACCOUNTS RECEIVABLE AND REVENUE RECOGNITION
Accounts receivable consists of balances due the Company for newspaper
and advertising revenues. Accounts receivable are current, accordingly,
a provision for bad debt is not required. The Company recognizes
revenues through the sale of newspaper subscriptions, website
subscriptions and advertising. Subscription revenues are recognized
over the term of the contract which is generally one year. Advertising
revenues are recorded upon the placement of a sponsor's advertisement
in the Company's newspaper and delivery to subscribers.
E) FIXED ASSETS
Computer equipment and furniture and fixtures are depreciated using the
straight-line method over their estimated useful lives ranging from
five to seven years. The costs of additions and betterment are
capitalized, repairs and maintenance costs are charged to general and
administrative expenses. Organization costs are amortized over a period
of five years on a straight-line basis.
Intangible assets represents the purchase price at fair market value of
trademarks, goodwill and customer lists. Intangible assets are being
amortized over a period of five years using the straight-line method.
The amortization expense for the six months ended June 30, 2000 was
$20,500. At June 30, 2000, accumulated amortization was $33,500.
8
<PAGE>
YOUTHLINE USA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
NOTE 2 DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
PRINCIPLES
(Continued)
F) EARNINGS PER SHARE
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
Per Share" discusses the computation and presentation of earnings per
share ("EPS"). Basic EPS, as defined by SFAS No. 128, is computed by
dividing income available to common shareholders by the weighted
average number of common shares outstanding for the reporting period,
ignoring any potential effects of dilution.
Diluted EPS reflects the potential dilution that would occur if
securities, or other contracts to issue common stock, were exercised
for which the market price of the common shares exceeds the exercise
price, less shares which could have been purchased by the Company with
related proceeds. The additional shares of common stock converted would
then share in the earnings of the entity.
There were 7,155,000 common stock options/warrants outstanding as of
June 30, 2000. As a result of the losses reported in the periods
presented, these options, if exercised, would be antidilutive.
Accordingly, Basic EPS and diluted earnings per share are the same as
presented in the financial statements. The weighted-average number of
shares used in the computation of per share data was 10,885,415 in 2000
and 5,508,200 in 1999.
G) INCOME TAXES
The Company intends to follow Statement of Financial Accounting
Standards No. 109 (SFAS 109), "Accounting for Income Taxes" when either
operations achieve profitability or the realization of net operating
loss benefits can more readily be measured, whichever occurs first.
H) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions. These estimates and assumptions affect the reported
amounts of assets and liabilities, the disclosure of contingent
liabilities and the reported amounts of revenues and expenses. Actual
results could differ from estimates.
NOTE 3 FIXED ASSETS - OFFICE AND EQUIPMENT SOFTWARE
Office equipment and software consist of the following:
Office Equipment and Software $ 282,978
Less: Accumulated Depreciation (55,948)
-----------
Net Book Value $ 227,030
===========
Depreciation expense for the six months ended June 30, 2000 and 1999
amounted to $20,877 and $2,696, respectively.
9
<PAGE>
YOUTHLINE USA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
NOTE 3 FIXED ASSETS - OFFICE AND EQUIPMENT SOFTWARE
(Continued)
Other Assets and Organization costs consist of the following:
Organization Costs $ 5,850
Less: Accumulated Depreciation (3,163)
-----------
Net Book Value $ 2,687
===========
Amortization expense for the six months ended June 30, 2000 and 1999
amounted to $585 for each period.
NOTE 4 EMPLOYMENT AGREEMENTS
The Company executed two employment contracts on May 28, 1999 with
certain senior executives for future services that vary in length for
periods of up to five years. Each employment contract will call for a
base salary of $115,000 with annual increases of 7% per annum. The
employment agreements were amended in June and August 2000 to increase
the base salary to $160,000 annually. The amended agreement also calls
for the issuance of 20,000 warrants at an exercise price of $.10 per
warrant and 1% in cash, for each $1,000,000 of revenues received by the
Company commencing January 1, 2001. The contracts also include options
to purchase 10,000 shares of the Company's common stock at a 20%
discount off the maximum price per share in the Company's next private
placement. Additionally, the employment contract also includes a
one-time signing bonus equal to $30,000 payable as follows: $10,000
within 30 days of signing the contract (this amount has been paid), and
the balance of $20,000 (accrued as of June 30, 2000) payable upon the
Company attaining 10,000 subscribers for a period of two consecutive
months.
NOTE 5 NOTES PAYABLE
A) On February 1, 1998, the Company issued two promissory notes in the
principal amount of $125,000, payable to Saki Dodelson (President)
and Susan Gertler (Vice-President), aggregating $250,000. The notes
bear interest at an annual rate of 9%, payable monthly. Principle
repayment will be deferred until the gross annual sales of the
Company reach $1,000,000; at which point the Company will repay
$15,000 of principle on each note annually. The accrued interest
payable on these notes aggregated $28,150 through June 30, 2000.
B) On August 31, 1999, the Company entered into a bridge financing
agreement aggregating $500,000 (the "Note"). The note bears interest
at 8% per annum, matures on January 19, 2000, and is secured by all
assets and properties owned by the Company. The note was repaid in
January 2000.
C) On December 14, 1999, and December 21, 1999, the Company issued two
convertible promissory notes in the principal amount of $500,000
each, aggregating $1,000,000. The notes bear interest at an annual
rate of 8.5% and mature on December 14, 2000 and December 21, 2000,
respectively. Interest and principal will be paid at maturity.
10
<PAGE>
YOUTHLINE USA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
NOTE 5 NOTES PAYABLE
(Continued)
Additionally, any portion of the notes and accrued interest can also
be converted into shares of common stock at the lenders' option at a
price equal to 20% below the fair market value of the common shares,
with a minimum conversion price of $3.00 per share, and a maximum
price of $4.875 per share. The Company recorded a one-time interest
expense of $250,000 which is the intrinsic value of the beneficial
conversion feature of the note. The fair market value of the stock
at the date of issuance was $3.75 and $5.00 per common share on
December 14, 1999 and December 21, 1999, respectively.
D) During the first quarter ending March 31, 2000, the Company issued
several convertible promissory notes aggregating $1,000,000. The
notes bear interest at an annual rate of 8.5% and mature one year
from the date of issuance. Interest and principal will be repaid at
maturity. Additionally, any portion of the notes and accrued
interest can also be converted into shares of common stock at the
lenders' option at a price equal to 20% below the fair market value
of the common shares, with a minimum conversion price of $3.00 per
share, and a maximum price of $4.875 per share. The Company recorded
a one-time interest expense of $1,378,000 which is the intrinsic
value of the beneficial conversion feature of the note. The fair
market value of the stock at the date of issuance ranged between
$10.69 and $12.13 per common share.
E) On April 10, 2000, the Company issued a note for $250,000. The note
bears interest at an annual rate of 6.0% and matures on July 10,
2000. Additionally, in consideration of the loan, the Company issued
150,000 warrants to purchase common stock at $3.00 per share with an
expiration date of December 31, 2004.
F) On May 17, 2000, the Company issued a note for $250,000. The note
bears interest at an annual rate of 8.5% and matures on October 17,
2000. In consideration of such loan, the Company issued 250,000
shares of its restricted common stock. The 250,000 shares of the
Company's common stock were contingent upon the lender making an
additional loan of $300,000. The loan was made and subsequently
repaid. Accordingly, the Company recorded a one-time interest
expense aggregating $812,500 based on the fair market value of the
stock at the time of issuance.
Long Term Debt consists of the following:
<TABLE>
<CAPTION>
Total Long Term Current
---------- ---------- ----------
<S> <C> <C> <C>
A) Notes Payable - Officers $ 250,000 $ 250,000 $ --
B) Convertible Promissory Notes 1,000,000 -- 1,000,000
C) Convertible Promissory Notes 1,000,000 -- 1,000,000
E) Note Payable 250,000 -- 250,000
F) Note Payable 250,000 -- 250,000
---------- ---------- ----------
$2,750,000 $ 250,000 $2,500,000
========== ========== ==========
</TABLE>
11
<PAGE>
YOUTHLINE USA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
NOTE 5 NOTES PAYABLE
(Continued)
At June 30, 2000, the aggregate of amount of required payments on
long-term debt was as follows:
2000 $ 30,000
2001 30,000
2002 30,000
2003 30,000
2004 30,000
Thereafter 100,000
--------
Total Payments $250,000
========
NOTE 6 LOANS AND EXCHANGES
Certain officers advanced the Company funds. Such advances bore no
interest and had no definite repayment terms. At March 31, 2000, these
advances amounted to $120,000, which were subsequently repaid in April
2000.
NOTE 7 CAPITAL STOCK
The Company is currently authorized to issue 50,000,000 shares of its
common stock, $.0001par value. As of June 30, 2000, there were
11,639,165 shares of common stock issued and outstanding.
During the six months ended June 30, 2000, the Company issued 1,567,500
shares of common stock. Of such shares 910,000 were sold at $2.00 per
share, aggregating $1,820,000. The balance of the common shares issued
totaling 657,500 were issued for services and as additional
consideration in connection with loan financings. The Company recorded
a total of $2,521,406 in expenses from the issuance of such shares.
The Company has 5,000,000 authorized shares of preferred stock, $.0001
par value. The Company presently has no issued and outstanding
preferred stock.
NOTE 8 FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of financial instruments:
Cash and Cash Equivalents. The carrying amount reported in the balance
sheet for cash and cash equivalents approximates its fair value.
Accounts Receivable and Accounts Payable. The carrying amount of
accounts receivable and accounts payable in the balance sheet
approximates fair value.
Short-Term and Long-Term Debt. The carrying amount of the revolving
credit facility approximates fair value. The carrying amounts of the
Company's financial instruments at June 30, 2000 approximate fair value
with the exception of the interest rate swap agreement.
12
<PAGE>
YOUTHLINE USA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
NOTE 9 INCOME TAXES
As of December 31, 1999 the Company had $6,322,781 in available unused
Federal and State net operating loss carry forwards that may be applied
against future taxable income. These losses will expire over a period
of twenty years.
The Company intends to follow Statement of Financial Accounting
Standards No. 109 (SFAS 109), "Accounting for Income Taxes" when either
operations achieve profitability or the realization of net operating
loss benefits can more readily be measured, whichever occurs first.
NOTE 10 COMMITMENTS AND CONTINGENCIES
The Company entered into a five-year lease agreement with United
Securities Services, Inc. The lease currently calls for monthly rental
of $6,988 for approximately 4,533 square feet of office space located
in Howell, New Jersey.
The Company entered into a three-year lease agreement on May 1, 2000
with Cresskill Millennium Associates, LLC. The lease currently calls
for monthly rental of $1,727 including maintenance for approximately
1,275 square feet of office space located in Cresskill, New Jersey.
At June 30, 2000, the Company is committed to total minimum rental
under all noncancellable operating leases of $249,960. Generally, these
leases include additional charges for tax escalation and other
expenses. The minimum future rental commitments are payable at $61,305
per year for five years.
NOTE 11 WARRANTS
As of June 30, 2000, warrants consisted of the following:
Warrants Outstanding Exercise Price Date of Expiration
-------------------- -------------- ------------------
1,850,000 $ 1.00 December 31, 2004
1,190,000 $ 3.00 December 31, 2004
965,000 $ 4.00 December 31, 2004
1,375,000 $ 5.00 December 31, 2004
650,000 $ 7.00 December 31, 2004
250,000 $ 9.00 December 31, 2004
425,000 $10.00 December 31, 2004
50,000 $ .10 December 31, 2004
100,000 $14.63 March 31, 2003
300,000 $12.00 December 31, 2004
---------
Total 7,155,000
=========
As of June 30, 2000, no warrants have been exercised. All of the
outstanding warrants are restricted subject to Rule 144 of the act.
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YOUTHLINE USA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
NOTE 11 WARRANTS
(Continued)
The Company has elected to follow APB No. 25, "Accounting for Stock
Issued to Employees" to account for warrants issued to its employees.
Under APB No. 25, when the exercise price of the Company's warrants
issued to its employees are less than the fair value price of the
underlying stock at the date of the grant, than compensation will be
recognized by the Company. The Company had granted 450,000 warrants to
certain key employees at exercise prices that were below the fair value
of the underlying stock. Accordingly, the Company recorded stock-based
compensation of $900,000 for the year ended December 31, 1999 based
upon the intrinsic value of the options at the grant date. No stock
warrants were issued in 1998. During the six months ended June 30,
2000, the Company granted an additional 400,000 warrants to certain
employees. Of the 400,000 warrants granted, 200,000 were at exercise
price below the fair market value of the underlying stock. Accordingly,
the Company recorded stock-based compensation of $1,550,000 for the six
months ended June 30, 2000, based upon the intrinsic value of the
options at the grant date and stock issued for services.
Pro forma information regarding earnings (loss) per common share is
required by SFAS #123, and has been determined as if the Company had
accounted for its warrants under the fair value method of that
statement. In 1999, the fair market value of these warrants was
estimated at the date of the grant using the Black-Scholes Option
Pricing Model with the following weighted average assumptions for 1999:
risk-free interest rate of 6.5%; dividend yield of 0%; volatility
factor for the expected market price of the Company's common stock of
81.2%; and a weighted average expected life of the option of four
years.
The Black-Scholes Option Pricing Model was developed for use in
estimating the fair value of traded options. In addition, option
valuation models require the input of highly subjective assumptions
including the expected stock price volatility. Because the Company's
stock options have characteristics significantly different for those of
traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion,
the existing models do not necessarily provide a reliable single
measure of the fair value of its stock options. During the year ended
December 31, 1999 the Company recorded $900,900 in stock-based
compensation on the 990,000 warrants outstanding issued to consultants.
The Company also recorded $952,000 at June 30, 2000 in stock based
compensation and $488,000 in interest in connection with debt financing
on an aggregate of 3,815,0000 warrants issues to consultants.
In accordance with the provision of SFAS #123, the Company applies APB
No. 25 and related interpretations in accounting for stock warrants
issued to its employees, and, accordingly, does not recognize
compensation costs for warrants with an exercise price greater then the
fair value of common shares at the time of the grant.
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YOUTHLINE USA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
NOTE 11 WARRANTS
(Continued)
However, if the Company had elected to recognize compensation costs
based on the fair value of the warrants granted at grant date as
prescribed by SFAS #123, net income and earnings per share would have
been reduced to the pro forma amounts indicated in the table below.
June 30, 2000 December 31, 1999
------------- -----------------
Net Loss - as reported $ (9,257,177) $ (4,787,000)
Net Loss - pro forma $(11,357,372) $ (5,834,603)
Loss Per Share - as reported $ (.85) $ (.48)
Loss Per Share - pro forma $ (.71) $ (.61)
The fair value of each warrant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions:
Expected dividend yield 0.0%
Expected stock price volatility 81.2%
Risk free interest rate 6.5%
The expected life of the options is 4 years, and they are immediately
exercisable upon issuance without restrictions.
The weighted average fair value of options granted during 1999 and 2000
is $5.22 and $4.51 per share, respectively.
NOTE 12 SUBSEQUENT EVENTS
In July 2000, the Company received $1,500,000 from the sale of 750,000
shares of its common stock at $2.00 per share. The proceeds were used
to partially payoff $775,000 of the notes outstanding.
In July 2000, the Company cancelled 3,450,000 warrants issued at
various prices to employees and related parties in exchange for the
issuance of 5,840,000 warrants at an exercise price of $.10 per share.
15
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MANAGEMENT DISCUSSION AND ANALYSIS
OVERVIEW
The Company, through its wholly owned subsidiary, S & S Plus, Inc., publishes
Youthline USA, a daily web site, weekly newspaper, and monthly magazine written
and designed for children ages 8 through 14. Youthline USA makes sure all
content is age-appropriate and is designed to attract and engage the attention
of children within this age range. In addition, the Web site offers curriculum
tools for educators, including curriculum-based interactive activities and
accountability tools for tracking student performance.
In August 1999, the Company acquired all of the outstanding capital stock of
S & S Plus, Inc., a wholly owned subsidiary of the Company which operated the
publication of Youthline USA, in exchange for the issuance of 5,500,000 shares
of its common stock, representing a majority of the total issued and outstanding
capital stock of the Company. On such date, the previous management's directors
and officers resigned and were replaced with the current officers and directors.
This exchange has been accounted for as a reverse acquisition, under the
purchase method of accounting, since the former owners of S & S Plus, Inc. owned
a majority of the outstanding stock of Youthline USA, Inc. after the
acquisition. Accordingly, the combination of the two companies is recorded as
recapitalization of shareholders' equity of S & S Plus, Inc., pursuant to which
S & S Plus, Inc. is treated as the continuing entity for accounting purposes and
the historical financial statements presented are those of S & S Plus, Inc.
YouthLine USA, Inc. (the "Company") was incorporated on July 27, 1999 pursuant
to the laws of the State of Delaware as the successor to Ult-I-Med Health
Centers, Inc., a Utah corporation ("Ult-I-Med"), which was incorporated in 1983
under the laws of the State of Utah (originally under the name Picadilly
Technology, Inc.). The Company was organized to effectuate a rein-corporation of
Ult-I-Med with and into the Company on August 16, 1999.
Ult-I-Med was originally organized to engage in the mining of metalliferous
chemicals. In 1988, Ult-I-Med ceased such activities and began engaging in the
business of owning and operating camping and recreation facilities. In 1991,
Ult-I-Med ceased such activities and began engaging in the business of owning
and operating supervised primary care, health and rehabilitation centers. In
January 1996, Ult-I-Med filed a Chapter 11 bankruptcy petition. Ult-I-Med
liquidated all of its assets and its plan of reorganization was filed with the
court in February 1998. All of Ult-I-Med debts were paid subsequent to June 30,
1999, and the court entered a final decree on September 24, 1999.
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<PAGE>
Presently, the Company addresses two multi-billion dollar markets: the
technology education market and Corporate America who advertises to today's
youth. To address the technology education market, the Company provides
curriculum and technology to schools using its unique website and the daily news
as a base. Youthline-USA.com provides an integrated language arts curriculum
customized by city and state, to subscribing schools, allowing them to teach
their students the required curriculum while introducing them to the world of
technology. Its appeal to schools is additionally enhanced by the incorporation
of lesson plans and an accountability package that allows educators to track
their students performance.
The Company also prints a weekly newspaper and monthly magazine to supplement
the website. The print products encourage further integration of curriculum and
technology and also generates advertisement and sponsorship revenue from
Corporate America. The Company markets itself to Corporate America as a unique,
flexible, focused and powerful media for reaching today's youth on a daily,
weekly and monthly basis. The Company believes that not only corporations which
provide products and services to that age group will advertise, but any
corporation concerned with promoting its products to tomorrow's consumers will
consider advertising and sponsoring on Youthline.
COMPONENTS
The Company generates revenue from:
1) Website subscriptions to schools-$16 per student per year
2) Newspaper subscriptions-$30 for individual subscriptions; $7 for
bulk subscriptions
3) Magazine subscriptions-$30 for individual subscriptions; $7 for bulk
subscriptions
4) Advertisements and sponsorships-$18,000 per page.
To date, there are 74 schools in 6 states who have subscribed to our website,
generating $588,236.00 in revenue, which is expected to be recognized over a
period of six months to three years. Inasmuch as the products are new and that
the concept is new, management believes that this is a strong beginning that
demonstrates the appeal our products will have to schools nationwide.
To date, the following entities have advertised with Youthline: Phillip Morris,
The Academy of Natural Sciences, The American Red Cross, The Annenberg
Center-International Children's Festival, The Crayon House, Creative Kids, The
Harlem Globetrotters, Kewlminds/Global Children's Network, KID International,
Loews/Sony Theatres, New York City Police Museum, Radio Disney, Sesame Place,
Six Flags Great Adventure, Space Farms Zoo, The Sound of Music, Spotco/Suessical
and Welcome America.
Management believes that as name recognition grows, our list of advertisers will
also grow significantly.
ITEM 2:
LIQUIDITY AND CAPITAL RESOURCES.
Management anticipates that the continued increase in subscribers will increase
advertising revenues and any future additional proceeds from financings will
result in improved liquidity during the coming year. The Company does not have
any plans that would materially affect its current demands and to the best of
management's belief there are no events that would result in major increase or
decreases in the Company's liquidity other than in the normal course of its
operations.
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<PAGE>
To date the Company has funded its operations and expansion through bridge
financing, capital contribution and the sale of convertible promissory notes.
The Company's potential sources of liquidity will be additional financings
through the sale of convertible notes and credit facilities with banks. At June
30, 2000, the Company's current assets consisted of $164,760 of cash, $613,321
of receivables and prepaid expenses of $57,275. At June 30, 2000 the current
liabilities exceeded its currents assets by $2,961,224. Current debt consisted
of $2,500,000 convertible promissory notes and accounts payable and accrued
expenses of $1,227,971, and $148,609 unearned revenue which will be recognized
over the next three months. Management anticipates that it will satisfy its
liquidity and capital requirements in the coming year through additional capital
and funds generated by operations.
CUSTOMER RETENTION
From inception through June 30, 2000, we have had a favorable response from
subscribers to our newspaper. Our customer retention experience has been 91% for
December, 1998, 93% for December, 1999.
Six Months Ended June 30, 2000 compared to Six Months Ended June 30, 1999.
RESULTS OF OPERATIONS
In 1999 and 1998, the Company's main source of revenues were from the sale of
newspaper subscriptions. For the six months ended June 30, 2000 the main source
of revenues was from subscriptions to the Company's website. Website
subscriptions aggregated $478,856 (84%) of the $567,035 in gross revenues
earned. Total revenues from subscriptions were $567,035 and $29,559 for the six
months ended June 30, 2000 and 1999, respectively. The Company incurred net
operating losses of $9,257,377 in 2000, compared to $133,883 in 1999. The losses
incurred for the six months ended June 30, 2000 included $1,378,000 of interest
expense utilizing the intrinsic value of the beneficial interest of the
convertible notes issued in the first quarter ending March 31, 2000, $1,790,000
in the value of warrants issued and $2,521,406 in stock issued for services. The
Company incurred substantial costs for printing, reproduction, mailing and
design of the newspaper during these periods. Additionally, the Company incurred
substantial costs in marketing, advertising and payroll expense.
Revenues.
During the six months ended June 30, 2000, sales revenues increased $537,476, to
$567,035 from $28,559 for the corresponding period in 1999. The increase was
attributable to increased subscribers and advertising revenues and $478,000 in
web subscriptions.
Cost of Goods Sold.
These costs include, but are not limited to printing and distribution costs.
During the six months ended June 30, 2000 costs of goods sold was $1,336,643, an
increase of $1,273,490 or 2,000% from the corresponding period in 1999. This
increase was attributable to an increase in paid and unpaid subscriptions.
Net Losses and Unusual Charges.
The Company incurred a net loss from operations of $9,257,377, or $.81 per share
as compared to a loss of $133,683, or $.02 per share in the comparable period in
1999. During the first two quarters ending June 30, 2000, the Company recorded
$1,378,000 of interest expense utilizing the intrinsic value of the beneficial
interest of the convertible notes issued, and $4,311,406 of warrants and stock
issued for services.
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<PAGE>
Operating Expenses.
Operating expenses during the six months ended June 30 2000 increased as
follows: payroll costs increased $959,842 to $981,543 from $21,701 for the
corresponding period in 1999. The increase was attributable to a substantial
increase in the number of employees hired as support staff. Professional fees
increased $86,842 to $94,055 (an increase of 1,897%) from $7,213 for the
corresponding period in 1999. The increased professional fees were mainly legal
and accounting fees. Selling expenses increased $917,423 to $955,587 (an
increase of 1,651%) from $38,164 for the corresponding period in 1999. General &
administrative costs increased $298,214 from $20,616 (an increase of 1,447%) for
the corresponding period in 1999. The increase in selling expenses and general
and administrative expenses is attributable to the continued investment in the
Company's aggressive sales and marketing, finance and other general and
administrative infrastructure necessary to support the Company's business
development and expansion.
Interest Expense.
Interest expense increased $2,937,933 to $2,947,047 for the six months ended
June 30, 2000 from $9,111 for the corresponding period ending June 30, 1999. The
increase is primarily associated with the increased borrowing used to fund the
operations of the Company as well as its expansion. Included in interest expense
is $2,678,500 issued for stock, warrants and the intrinsic value of interest on
convertible notes.
Interest Income.
Interest income was $3,267 for the six months ended June 30, 2000 compared to $0
in 1999. This increase was attributable to higher average balances of invested
cash and cash equivalents.
Circulation.
During the six month period that ended June 30, 2000, the Company increased its
(non-paid) circulation to 750,000 subscriptions, which should significantly
increase its revenues in the coming year. The Company, however, will continue to
incur expenses attributable to the growth of its business and therefore,
management cannot estimate the amount of losses it may incur in the future.
Income Taxes.
The Company incurred substantial losses form its inception through the current
period. From inception to August 16, 1999, the Company operated as a Sub-Chapter
S corporation. Accordingly, losses aggregating $1,300,493 generated during this
period flowed through to the individual shareholders. Subsequent to the
reorganization, losses aggregating $7,966,884 incurred by the Company will be
utilized against future operating profits. However, as a result of the net
operating losses sustained by the Company, a provision for corporate taxes was
not required and deferred taxes will be recognized when the Company achieves
profitability.
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PART II - OTHER INFORMATION
ITEM 2. CHANGE IN SECURITIES
During the second quarter ended June 30, 2000, the Company issued 407,500 shares
of Common Stock to employees and consultants, pursuant to Section 4(2) of the
Securities Act of 1933, as amended (the "Act").
During the second quarter ended June 30, 2000, the Company issued 250,000 shares
of Common Stock to a lender, as additional consideration in connection with a
loan in the amount of $550,000, pursuant to Section 4(2) of the Act.
During the second quarter ended June 30, 2000, the Company issued 910,000 shares
of Common Stock, at $2.00 per share, to accredited investors, pursuant to
Section 4(2) of the Act.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 14, 2000 Youthline USA, Inc.
By: /s/ SAKI DODELSON
----------------------------------
Saki Dodelson, Chief Executive,
Financial and Accounting Officer
21
