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U.S. Securities and Exchange Commission
Washington, D.C. 20549
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FORM 10-QSB
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(Mark One)
[x] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended December 31, 2002
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act
For the transition period from to
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Commission File Number 0-24217
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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 X No
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The number of shares of the issuer's common equity outstanding as of
February 6, 2003 was 48,916,840 shares of common stock, par value $.001.
Transitional Small Business Disclosure Format (check one):
Yes No X
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YP.NET, INC.
INDEX TO FORM 10-QSB FILING
FOR THE QUARTER ENDED DECEMBER 31, 2002
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheet
as of December 31, 2002 . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations
for the Three-Month Periods
Ended December 31 , 2002 and December 31, 2001. . . . . 4
Consolidated Statements of Cash Flows
for the Three-Month Periods Ended December 31, 2002
and December 31, 2001 . . . . . . . . . . . . . . . . . 5
Notes to the Consolidated Financial Statements . . . . . . . 7-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . .14-19
Item 3. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . 20
PART II
OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . 20
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . 20
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . 20
SIGNATURES
CERTIFICATIONS
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNAUDITED CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 2002
ASSETS:
CURRENT ASSETS
Cash and equivalents $ 889,532
Accounts receivable, net of allowance for doubtful accounts of $2,160,694 4,529,946
Prepaid expenses and other current assets 99,822
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Total current assets 5,519,300
ACCOUNTS RECEIVABLE, long term portion, net of allowance
for doubtful accounts of $213,701 488,853
CUSTOMER ACQUISITION COSTS, net of accumulated amortization of $483,054 1,918,983
PROPERTY AND EQUIPMENT, net 392,477
DEPOSITS AND OTHER ASSETS 88,631
INTELLECTUAL PROPERTY- URL, net of accumulated amortization of $1,481,148 3,492,271
ADVANCES TO AFFILIATES 342,720
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TOTAL ASSETS $12,243,235
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LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable $ 171,412
Accrued liabilities 81,976
Deferred income taxes 127,527
Income taxes payable 1,173,587
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Total current liabilities 1,554,502
NOTES PAYABLE - long term portion 115,868
DEFERRED INCOME TAXES 6,866
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Total liabilities 1,677,236
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STOCKHOLDERS' EQUITY:
Series E convertible preferred stock, $.001 par value, 200,000 shares authorized,
131,840 issued and outstanding, liquidation preference $39,552 11,206
Common stock, $.001 par value, 50,000,000 shares authorized,
49,499,340 issued and outstanding 49,582
Paid in capital 4,734,907
Treasury stock at cost (287,401)
Retained earnings 6,057,705
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Total stockholders' equity 10,565,999
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $12,243,235
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See the accompanying notes to these unaudited financial statements
3
YP.NET, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE-MONTH PERIODS ENDED DECEMBER 31, 2002 AND DECEMBER 31, 2001
NET REVENUES $ 5,741,455 $ 2,992,993
------------ ------------
OPERATING EXPENSES:
Cost of services 1,822,150 1,184,277
General and administrative expenses 1,376,078 865,801
Sales and marketing expenses 632,435 43,879
Depreciation and amortization 138,932 148,379
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Total operating expenses 3,969,595 2,242,336
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OPERATING INCOME 1,771,860 750,657
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OTHER (INCOME) AND EXPENSES
Interest (income) expense (720) 28,414
Other (income) expense (48,906) (4,291)
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Total other (income)expense (49,626) 24,123
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INCOME BEFORE INCOME TAXES 1,821,486 726,534
INCOME TAX PROVISION (BENEFIT) 728,594 420,185
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NET INCOME $ 1,092,892 $ 306,349
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NET INCOME PER SHARE:
Basic $ 0.02 $ 0.01
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Diluted $ 0.02 $ 0.01
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WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 46,515,590 43,813,680
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Diluted 46,515,590 43,813,680
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4
YP.NET, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE -MONTH PERIODS ENDED DECEMBER 31, 2002 AND DECEMBER 31, 2001
THREE MONTHS THREE MONTHS
ENDED DECEMBER 31, ENDED DECEMBER 31,
CASH FLOWS FROM OPERATING ACTIVITIES: 2002 2001
--------------------- ---------------------
Net income $ 1,092,892 $ 306,349
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 138,933 148,379
Income recognized on forgiveness of debt (45,362) -
Deferred income taxes 41,251 -
Officers & consultants paid common stock 453,750 -
Common stock surrendered (115,979) -
Changes in assets and liabilities:
Trade and other accounts receivable (953,153) (47,694)
Customer acquisition costs (500,756) (190,750)
Prepaid and other current assets (35,611) (126,107)
Other assets 62,094 (60,765)
Accounts payable (23,982) 34,982
Accrued liabilities (101,317) (32,480)
Income taxes payable 687,344 420,185
Deferred revenue -
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Net cash provided by operating activities 700,104 452,099
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CASH FLOWS FROM INVESTING ACTIVITIES:
Advances made to affiliates and related parties (100,000) -
Purchases of intellectual property (6,761) -
Purchases of equipment (163,919) (29,800)
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Net cash (used in) investing activities (270,680) (29,800)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt 147,000 -
Purchase of Treasury Stock - (13,480)
Principal repayments on notes payable (454,000) (758,301)
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Net cash (used)/provided by financing activities (307,000) (771,781)
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INCREASE (DECREASE) IN CASH 122,424 (349,482)
CASH, BEGINNING OF PERIOD 767,108 683,847
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CASH, END OF PERIOD $ 889,532 $ 334,365
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5
YP.NET, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE-MONTH PERIODS ENDED DECEMBER 31, 2002 AND DECEMBER 31, 2001,
continued
SUPPLEMENTAL CASH FLOW INFORMATION:
Three month Three month
period ended period ended
December 31, 2002 December 31, 2001
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Interest Paid $ 6,000 $ 28,414
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE-MONTH PERIODS ENDED
DECEMBER 31, 2002 AND DECEMBER 31, 2001
1. Basis of Presentation
The accompanying unaudited financial statements represent the consolidated
financial position of YP.Net, Inc. ("the Company" or "YP.Net") for the three
month periods ended December 31, 2002, and December 31, 2001, which includes
results of operations of the Company and Telco Billing, Inc. ("Telco"), its
wholly owned subsidiary, and statement of cash flows for the three periods ended
December 31, 2002 and December 31, 2001. These statements have been prepared in
accordance with generally accepted accounting principles ("GAAP") for interim
financial information. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles 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.
2. Company Organization and Operations
YP.Net, Inc., a Nevada corporation (the "Company," "we," "us," or "our"), is in
the business of providing Internet-based yellow page advertising space on or
through www.Yellow-Page.Net and www.YP.Net .
The Company's "yellow page" database lists approximately 18 million businesses
throughout the United States. Our website enables internet users to search
through these "yellow page" listings and is used by businesses and consumers
attempting to locate a business and/or service provider in response to a user's
specific search criteria.
As our primary source of revenue, we offer "preferred" listings to businesses
for a monthly fee. The "preferred" listing provides a business with a priority
placement listing over non-paying listings and is displayed in a bigger and
bolder font at the beginning of, or in the first section of the user's search
results, thus featuring our paying customers more prominently to user's of our
website. In addition, our paying customers get a Mini-Webpage(TM) which includes
a 40-word description of their business, their hours of operation and other
useful information, a direct link to the paying customers website, (if they have
one and it is provided by the advertiser), map, driving directions to the paying
customers location and more. We market for advertisers of our "preferred"
listing service under the name "Yellow-Page.Net, exclusively to businesses
through a direct mail solicitation program. The solicitation includes a
promotional incentive (i.e. generally a $3.50 check) which, if cashed by the
business, automatically signs the business up for the Preferred Listing service
for an initial twelve month period with automatic renewals thereafter. This easy
subscription process provides a written confirmation (i.e. the check) of the
subscription by the newly subscribing business, which is verified by an
independent third party (i.e. the paying customers depositing bank). To
additionally insure the intention of sign-up, the Company then mails a written
confirmation card to the newly subscribing business generally within 30 days
from activation. The Company also provides a 120-day cancellation period whereby
the subscribing business may cancel and receive a full refund of any amounts
paid to the Company.
7
Each paying customer is billed monthly for that month's service, the vast
majority of such monthly billings appear on the subscribing business's local
phone bill. Management believes this ability to bill the paying customer through
the paying customers phone bill is a significant competitive advantage for the
Company as few independent (not owned by a telephone company) yellow page
companies are authorized to bill directly on the phone bill for services
rendered.
We were originally incorporated as a New Mexico company in 1969 and the Company
was re-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. Effective July 1998, we changed our name
to RIGL Corporation. In June 1999, we acquired Telco Billing, Inc. ("Telco") and
commenced our current operations through this entity. 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.
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 main source of
revenue. Telco is operated as our wholly owned subsidiary.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents: This includes all short-term highly liquid
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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 December 31, 2002, cash deposits
exceeded those insured limits by $650,268.
Principles of Consolidation: The consolidated financial statements include
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the accounts of the Company and its wholly owned subsidiary, Telco Billing,
Inc. All significant intercompany accounts and transactions are eliminated.
Customer Acquisition Costs: These costs represent the direct response
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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 eighteen months,
the estimated average period of retention for new customers. The Company
capitalized costs of $983,000 and $219,000 during the three months ended
December 31, 2002 and 2001 respectively. The Company amortized $483,000 and
$59,000 , respectively, of total capitalized costs during the three months
ended December 31, 2002 and 2001.
The Company also incurs sales and marketing costs that are not considered
direct-response advertising. These other costs are expensed when incurred.
These sales and marketing expenses were $149,381 and $37,612 for the three
months ended December 31, 2002 and 2001 respectively.
8
Revenue Recognition: The Company's revenue is generated by customer
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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 based on estimated future
collections. The Company continuously reviews this estimate for
reasonableness based on its collection experience.
Income Taxes: The Company provides for income taxes based on the provisions
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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,
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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 Income Per Share: Net income per share is calculated using the weighted
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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
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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.
Significant estimates made in connection with the accompanying financial
statements include the estimate of dilution and fees associated with LEC
billings and the estimated reserve for doubtful accounts receivable.
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
9
accounting for stock based compensation using the intrinsic value method
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees."
4. 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 to 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 on historical experience and subsequent
information received from the billing companies. The Company also estimates
uncollectible account balances and provides an allowance for such
estimates. The billing companies retain certain holdbacks that may not be
collected by the Company for a period extending beyond one year. These
balances have been classified as long-term assets in the accompanying
balance sheet.
The Company experiences significant dilution of its gross billings by the
billing companies. The Company negotiates collections with the billing
companies on the basis of the contracted terms and historical experience.
The Company's cash flow may be affected by holdbacks, fees, and other
matters which are determined by the LEC's and the billing companies.
5. INTELLECTUAL PROPERTY
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
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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 supports the carrying of the asset. The Company
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periodically analyzes the carrying value of this asset to determine if
impairment has occurred. No such impairments were identified during the
year ended September 30, 2002 or the three months ended December 31, 2002.
The URL is amortized on an accelerated basis over the twenty-year term of
the licensing agreement. Amortization expense on the URL was $93,031 and
$107,500 for the three months ended December 31, 2002 and 2001
respectively.
6. 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.
10
During the year ended September 30, 2002, the Company structured certain
transactions related to its merger with Telco that allowed the Company to
utilize net operating losses that were previously believed to be
unavailable or limited under the change of control rules of Internal
Revenue Code 382. The deferred income tax asset of $1,471,000 related to
these net-operating losses recorded at September 30, 2001, was fully offset
by a valuation allowance. That valuation allowance was eliminated and
recognized as a benefit in the year ended September 30, 2002. Due to these
changes, the Company recognized an income tax benefit of $1,614,716 for the
year ended September 30, 2002. At September 30, 2002 the Company has
utilized all of its federal and state net operating losses.
Income taxes for three months ended December 31, is summarized as follows:
2002 2001
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Current Provision $ 687,344 $ 291,738
Deferred (Benefit) Provision 41,250 128,447
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Net income tax provision $ 728,594 $ 420,185
========================
At December 31, 2002, deferred income tax assets related to differences in
book and tax bases of accounts receivable, direct marketing costs and
intangible assets.
At December 31, 2002 deferred tax liabilities were comprised of differences
in book and tax bases of customer acquisition costs and property and
equipment respectively.
7. STOCKHOLDERS' EQUITY
Series E Convertible Preferred Stock
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During the year ended September 30, 2002, the Company created a
new series of equity, the Series E Convertible Preferred Stock. The Company
authorized 200,000, $0.001 par value shares. The shares carry a $0.30 per
share liquidation preference and accrue dividends at the rate of 5% per
annum on the liquidation preference per share, payable quarterly from
legally available funds. If such funds are not available, dividends shall
continue to accumulate until they can be paid from legally available funds.
Holders of the preferred shares shall be entitled, after two years from
issuance, to convert them into common shares on a one-to-one basis together
with payment of $0.45 per converted share.
During the year ended September 30, 2002, pursuant to an existing
tender offer, holders of 131,840 shares of the Company's common stock
exchanged said shares for an equal number of the Series E Convertible
Preferred shares, at the then $0.085 market value of the
11
common stock. As of December 31, 2002, the liquidation preference value of
the outstanding Series E Convertible Preferred Stock was $39,552, and
dividends totaling $395 had been accrued associated with said shares.
Common Shares Received and Retired Under Legal Settlements-Treasury Stock
- -------------------------------------------------------------------------
During the three months ended December 31, 2002, the
Company acquired 82,500 shares of its common stock in connection with a
settlement with a former consultant to the Company. The shares were issued as
consideration under the consulting agreement. The return of the shares was
recorded as a gain in the three-month period ended December 31, 2002. The gain
was determined at the value at which the shares were originally issued of
$115,979. At December 31, 2002, there were 3,941,000 shares of stock held in
treasury.
During January 2003, the Company acquired 582,500 shares of its common stock in
connection with a settlement with two former consultants to the Company. The
shares were issued as consideration under the consulting agreements. In
consideration for the settlement agreements, the Company paid the former
associates an aggregate of $135,000 and the parties granted mutual releases.
8. NET INCOME PER SHARE
Net income per share is calculated using the weighted average number
of shares of common stock outstanding during the three months ended
December 31, 2002 and 2001, respectively. Preferred stock dividends are
subtracted from the net income to determine the amount available to common
shareholders. There were $395 and $-0- preferred stock dividends in the
three months ended December 31, 2002 and 2001, respectively. Warrants to
purchase 500,000 shares of common stock were excluded from the calculation
for the three months ended December 31, 2002. The exercise price of those
warrants was greater than the trading value of the common stock and
therefore inclusion of such would be anti-dilutive. Also excluded from the
calculation were 131,840 shares of Series E Convertible Preferred Stock
issued during the year ended September 30, 2002, which are considered
anti-dilutive due to the cash payment required by the holders of the
securities at the time of conversion. Neither the preferred stock or the
warrants were outstanding during the three month period ended December 31,
2001.
12
The following presents the computation of basic and diluted loss per share from
continuing operations for the three months ended December 31:
2002 2001
---------- ---------
Per Per
Income Shares Share Income Shares share
----------- ---------- ------ -------- ---------- ------
Net Income $1,092,892 $306,349
Preferred stock dividends (395) -0-
----------- --------
Income available to common
Stockholders $1,092,497 $306,349
=========== ========
BASIC EARNINGS PER SHARE:
Income available to common
stockholders $1,092,497 46,515,590 $ 0.02 $306,349 43,813,680 $ 0.01
=========== ====== ======== ======
Effect of dilutive securities
DILUTED EARNINGS PER SHARE $1,092,497 46,515,590 $ 0.02 $306,349 43,816,680 $ 0.01
=========== ====== ======== ======
9. RELATED PARTY TRANSACTIONS
During the three months ended December 31, 2002, the Company conducted
transactions with entities affiliated with the Company because of
commonality in members in management or direct or indirect control of the
affiliate by a member or members of the Company's management. The following
summarizes those transactions:
Entity Amount
------------ --------
Dial-Up Services, Inc. DBA Simple.Net ("SN") $ 56,102
Advertising Management Specialists, Inc. 96,398
Advanced Internet Marketing, Inc. 90,431
DLC Consulting 30,000
Sunbelt Financial Concepts, Inc. 164,250
--------
$437,181
========
The above amounts represent payments made to these entities during the
period.
In addition to these transactions the Company advanced an additional
$100,000 to an entity that is a significant shareholder of the Company. The
total balance due from this entity was $300,000 at December 31, 2002. See
Liquidity and Capital Resources.
All of the amounts explained above, except for Simple.Net, Inc., represent
compensation to certain officers and directors of the Company and their
related staff in exchange for the services they provide to the Company.
These officers and directors are compensated by the Company only through
these entities.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for certain historical information contained herein, this Quarterly
Report contains forward-looking statements that involve risks, assumptions and
uncertainties, which are difficult to predict. All statements, other than
statements of historical fact, are statements that could be deemed
forward-looking statements, including any projections of earnings, revenues, or
other financial items, any statement of plans, strategies, or objectives of
management for future operations; any statements concerning proposed new
services or developments; any statements regarding future economic conditions or
performance; and any statements of belief and any statement of assumptions
underlying any of the foregoing. Words such as "believe," "may," "could,"
"expects," "hopes," "anticipates," and "likely," and variations of these words,
or similar expressions, are intended to identify such forward-looking
statements. Our actual results could differ materially from those discussed
here. Factors that could cause or contribute to such differences include, but
are not limited to, those discussed in the section entitled "Certain Risk
------------
Factors". We do not assume, and specifically disclaim, any obligation to update
- --------
any forward-looking statement contained in this Quarterly Report.
YP.Net, Inc., a Nevada corporation (the "Company," "we," "us," or "our"), is in
the business of providing Internet-based yellow page advertising space on or
through www.Yellow-Page.Net and www.YP.Net .
The Company's "yellow page" database lists approximately 18 million businesses
throughout the United States. Our website enables internet users to search
through these "yellow page" listings and is used by businesses and consumers
attempting to locate a business and/or service provider in response to a user's
specific search criteria. Through our own marketing of the website, as well as
through cross marketing and cross placement agreement(s) with other websites,
management estimates that an average of over 51 million page views are achieved
on its websites each month for the benefit of our Preferred listing advertisers
("paying customers"). YP.Net has recently been ranked in the top 12% of all
sites visited on the Internet according to TrafficRanking.com
As our primary source of revenue, we offer "Preferred" listings to businesses
for a monthly fee. The "preferred" listing provides a business with a priority
placement listing over non-paying listings and is displayed in a bigger and
bolder font at the beginning of, or in the first section of the user's search
results - thus featuring our paying customers more prominently to user's of our
website. In addition, our paying customers get a Mini-Webpage(TM) which includes
a 40-word description of their business, their hours of operation and other
useful information, a direct link to the paying customers website, (if they have
one and it is provided by the advertiser), map, driving directions to the paying
customers location and more. As of December 31, 2002 we have approximately
180,111 "preferred" listing advertisers who have subscribed for this enhanced
advertising service. This represents less than six tenths of 1% of the estimated
available market for preferred listings. We market for advertisers of our
"preferred" listing service, under the name "Yellow-Page.Net, exclusively to
businesses through a direct mail solicitation program. The solicitation includes
a promotional incentive (i.e. generally a $3.50 check) which, if cashed by the
business, automatically signs the business up for the Preferred Listing service
for an initial twelve month period with automatic renewals thereafter. This easy
subscription process provides a written confirmation (i.e. the check)
14
of the subscription by the newly subscribing business, which is verified by an
independent third party (i.e the paying customers depositing bank). To
additionally insure the intention of sign-up, the Company then mails a written
confirmation card to the newly subscribing business generally within 30 days
from activation. The Company also provides a 120-day cancellation period whereby
the subscribing business may cancel and receive a full refund of any amounts
paid to the Company.
Recently, the Company has created an outbound calling department whose function
is to proactively obtain the 40-word description to be used in the
Mini-Webpage(TM), as well as other information from each newly subscribing
customer. This effort is expected to provide more information for potential
customers searching our website to help them choose to do business with one of
our Preferred Listing advertisers.
Each paying customer is billed monthly for that month's service, the vast
majority of such monthly billings appear on the subscribing business's local
phone bill. Management believes this ability to bill the paying customer through
the paying customers phone bill is a significant competitive advantage for the
Company as few independent (not owned by a telephone company) yellow page
companies are authorized to bill directly on the phone bill for services
rendered.
We were originally incorporated as a New Mexico company in 1969 and the Company
was re-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. Effective July 1998, we changed our name
to RIGL Corporation. In June 1999, we acquired Telco Billing, Inc. ("Telco") and
commenced our current operations through this entity. 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.
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 main source of
revenue. Telco is operated as our wholly owned subsidiary.
GROWTH INITIATIVES
PRIMARY GROWTH STRATEGIES
PREFERRED LISTINGS-We currently derive almost all of our revenue from selling
Preferred Listings for the search results on our website. A Preferred Listing is
displayed at the beginning of search results in response to a user's specific
questions. A Preferred Listing is enhanced on the display of search results and
includes a "Mini-Webpage(TM)" listing where the paying customer can use up to 40
words to advertise; among other features. Our primary growth strategy is to
obtain a significantly greater number of Preferred Listings given the large,
estimated potential available market for such listings. As part of this
strategy, the Company has re-instituted its marketing program and plans to
regularly solicit its potential customer base of approximately 18 million
businesses through its direct mail solicitation program. As a result of such
program, the Company has increased its customer count from 88,799 at December
31, 2001 to 180,111 at December 31, 2002, an increase of over 100%
15
BRANDING-The Company also plans to further embark upon a substantial campaign to
brand its product using the YP.Net and Yellow-Page.Net names. The Company seeks
to become the "internet yellow pages of choice" to businesses and consumers
performing searches.
In addition to its cross marketing and cross placement agreement(s) with other
websites, the Company has signed a contract for advertising relating to Baca
Racing and National Hot Rod Association ("NHRA") events which provides us with
advertising on the Baca Racing vehicles as well as public relations and
advertising as a sponsor of NHRA In addition, we are members of both the Yellow
Pages Integrated Media Association (YPIMA) and the Association of Directory
Publishers (ADP). These organizations are trade associations for yellow page
publishers that promote quality of published content and advertising methods.
The Company plans to take an even more active role in the year ahead
In the future, the Company also plans to substantially increase its advertising
through print, media and fixed placement advertising in select markets.
RESULTS OF OPERATIONS
Net Revenue for the three-month period ended December 31, 2002, was
$5,741,455 compared to $2,992,993 for the three-month period ended December 31,
2001, an increase of over 90%. The increase in net revenue is primarily the
result of an increase in preferred listing customers. Preferred listing
customers increased to 180,111 at December 31, 2002 compared to 88,799 preferred
listing customers at December 31, 2001. The increase in preferred listing
customers is the result of our direct mail solicitation marketing efforts.
Cost of services for the three- month periods ended December 31, 2002 and
December 31, 2001 were $1,822,150 and $1,184,277, respectively. Cost of services
is comprised of billing aggregator dilution expenses, certain direct mailer
marketing costs and the amortization of such costs, allowances for bad debt and
our billing costs including billing fees charged by our billing aggregators.
Dilution expenses include customer credits and any other receivable write-downs.
The primary reason our cost of services has continued to increase is due to the
previously mentioned increase in preferred listing customers. Cost of services
as a percent of net revenue fell to approximately 31% for the three months ended
December 31, 2002 compared to approximately 39% for the same period in the prior
fiscal year as a result of the leveraging of our fixed overhead due to the
increased preferred listing customers. Also, previously implemented filtering
procedures continue to assure the proper filtering of our customer base to the
correct LEC for billing purposes to reduce dilution. Further, our customer
contact program has allowed the Company to obtain current information on its
customers who have moved or changed the names of their businesses further
reducing dilution.
General and administrative expense for the three-month periods ended
December 31, 2002 and December 31, 2001 were $1,376,078 and $865,8013,
respectively. General and Administrative expenses increased due to an increase
in costs and employees relating to our growth in preferred listing customers,
our Quality Assurance and Outbound marketing initiatives, as well as an increase
in certain officers compensation relating to executive services contracts which
provide the Company with the services of such officers. As a percent of net
revenues, such expenses declined to approximately 24% from approximately 29% in
the comparable prior year period.
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Sales and marketing expenses are primarily the costs associated with our
marketing relating to our direct mail solicitations. Sales and marketing
expenses for the three-month periods ended December 31, 2002 and December 31,
2001 were $632,435 and $43,879, respectively. The primary reason for the
increase in sales and marketing is due to the Company re-instituting its
marketing solicitation program and the implementation of new market strategies
and modification of direct mail marketing pieces. We capitalize certain direct
marketing expenses and amortize those costs over an 18-month period based on the
customer attrition rates analyzed by the Company.
The cost of our Yellow-Page.Net URL license was capitalized at $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 $91,125 and $148,379
for the three-month periods ended December 31, 2002 and December 31, 2002,
respectively. Annual amortization expense in future years related to the URL is
anticipated to be approximately $200,000 - 300,000.
Interest income, net of interest expense, for the three-month periods ended
December 31, 2002 was $720 and interest expense, net of interest income for the
three months ended December 31, 2001 was $28,414. The decrease in the interest
expense portion was a result of the payment of a substantial portion of our
debt.
We recorded other income of $48,906 and other expense of $4,291, respectively,
for the three-month periods ended December 31, 2002 and December 31, 2001. The
primary component of other income in the 2002 period was a gain of $115,979
resulting from a settlement with a former consultant to the Company.
Net income before taxes for the three-month periods ended December 31, 2002
and December 31, 2001 were $1,821,486 and $726,534, respectively. Net income for
the three-month periods ended December 31, 2002 and December 31, 2001 were
$1,092,892 , or $0.02 per diluted share, and $306,349, or $0.01 per diluted
share, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities for the three-month period ended
December 31, 2002, was $700,104 compared to $452,099 for the three-month period
ended December 31, 2001. The increase in cash generated from operations is
primarily due to a significant increase in net income resulting from an increase
in preferred listing customers offset by an increase in the accounts receivable
balance from such growth, funds expended for mailings related to the Company's
marketing efforts as well as payments to officers and consultants with common
stock.
We had working capital of $3,964,798 as of December 31, 2002 compared to
$1,740,083 as of December 31, 2001. The increase is due to increases in accounts
receivable of $1,612,142 and net capitalized direct marketing costs of
$1,534,988 resulting from our growth in preferred listing customers.
Cash used in investing activities was $270,680 for the three-month period
ended December 31, 2002. The primary components of cash used, represents
purchase of computer equipment and intellectual property of $170,680 and net
advances to affiliates of $100,000. Compared to the three-month period ended
December 31, 2001, cash used of $29,800 represented the purchase of computer
equipment.
17
Cash used by financing activities was $307,000 for the three-month period
ended December 31, 2002, compared to $771,781 for the three -month period ended
December 31, 2001. The cash used represents total payments made to reduce the
principal balances of our outstanding debt reduced by financing of $147,000
under the Company's trade acceptance draft program with AcTrade Financial
Technologies, Ltd.
We have repaid almost all of our debt. We believe that we will continue to
generate adequate cash flow from our operations to service our remaining debt.
As part of our "Puts" settlement agreement, we have a commitment to provide up
to $10,000,000 in loans to each of the M&M's (Morris & Miller, Ltd. and Matthew
& Markson, Ltd.). Those funding commitments are contingent upon the Company
having sufficient cash flow for its operations. Any amounts advanced to the
M&M's are to be repaid to the Company and can be offset against amounts owed to
the M&M's. We do not believe that the M&M's will make significant requests for
funding under this commitment since the M&M's are our largest shareholders and
any such advances would adversely affect our liquidity
CERTAIN RISK FACTORS
There are numerous factors that affect our business and the results of our
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 technology systems) to keep pace with
the growth in our overall business activities. Our operations can be adversely
affected if we are unable to increase our customer base and revenue through our
direct marketing efforts. We are also subject to intense competition from other
providers of Internet "yellow page" type services, Yahoo and Microsoft, as well
as competition from large telephone companies. Set forth below and elsewhere in
this Form 10-QSB are risks and uncertainties that could cause actual results to
differ materially from the results contemplated by the forward-looking
statements contained herein.
GROSS MARGINS MAY DECLINE OVER TIME: We expect that gross margins may be
adversely affected because we have determined that profit margins from the
electronic yellow pages offerings that we have profited from in the past have
fluctuated. We have experienced a decrease in revenue from the LEC from the
effects of the Competitive Local Exchange Carriers (CLEC) that are participating
in providing local telephone services to customers. We have begun to address
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 we have not yet determined if they
will be less or more effective. We continue to look for profitable Internet
opportunities; however there are no assurances that we will be successful, and
presently we have no acquisitions in progress.
18
DEPENDENCE ON KEY PERSONNEL: Our performance is substantially dependant on the
performance of our executive officers and other key employees and our 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 our
business, results of operations or financial condition. Competition for talented
personnel is intense, and there is 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. Our Chief Executive Officer is involved in
personal litigation, which may divert his attention from the management of the
Company.
Operating results for a particular quarter are difficult to predict: We expect
that in the future, our net sales may grow at a slower rate on a
quarter-to-quarter basis than experienced in previous periods.
REGULATORY ENVIRONMENT. Existing laws and regulations and any future regulation
may have a material adverse effect on our business. These effects could include
substantial liability including fines and criminal penalties, preclusion from
offering certain products or services and the prevention or limitation of
certain marketing practices. As a result of such changes, our ability to
increase our business through Internet usage could also be substantially
limited.
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," "may" 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 our Form 10-KSB for the year ended
September 30, 2002, may be accessed at the SEC's Web site, www.sec.gov.
------------
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ITEM 3 - CONTROLS AND PROCEDURES
As required by Rule 13a-14 under the Exchange Act, within 90 days prior to
the filing date of this report, the Company carried out an evaluation of the
effectiveness of the design and peration of the Company's disclosure controls
and procedures. This evaluation was carried on under the supervision and with
the participation of the Company's management, including our Chief Executive
Officer and Principal Accounting Officer. Based upon that evaluation, our Chief
Executive Officer and Principal Accounting Officer concluded that our controls
and procedures are effective. There have been no significant changes in the
Company's internal controls or in other factors that could significantly affect
internal controls subsequent to the date the Company carried out this
evaluation.
Disclosure controls and procedures are controls and other procedures that
are designed to ensure that information required to be disclosed in the
Company's reports filed or submitted under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms. Disclosure controls and
procedures include controls and procedures designed to ensure that information
required to be disclosed in Company reports filed under the Exchange Act is
accumulated and communicated to management, including the Company's Chief
Executive Officer and Principal Accounting Officer as appropriate, to allow
timely decisions regarding disclosures.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are party to ordinary routine litigation in the course of our
operations. See Footnote 7 to the Company's financial statements included
herein.
Previously, we have also been subject to certain state and federal
regulatory proceedings which have been settled.
ITEM 2. CHANGES IN SECURITIES
During the three-months ended December 31, 2002, the Company issued an
aggregate of approximately 6,050,000 shares in consideration of executive
service agreements and compensation to an employee.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
REPORTS ON FORM 8-K
None.
20
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: February 12th, 2003 s/s Angelo Tullo
------------------
Chairman, President, Chief Executive Officer
--------------------------------------------
(Principal Executive Officer)
-----------------------------
s/s David J. Iannini
--------------------
Chief Financial Officer
-----------------------
(Principal Accounting Officer)
------------------------------
21
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Angelo Tullo, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of YP.Net, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
22
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: February 12, 2003 By: /s/ ANGELO TULLO
------------------- ---------------------------------------
Angelo Tullo
Chairman, President and Chief Executive
Officer
23
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, David Iannini, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of YP.Net, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
24
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: February 12, 2003 By: /s/ DAVID IANNINI
----------------- -------------------
David Iannini
Chief Financial Officer
25