YP Corp 10KSB/A #4 9-30-2002
U.S.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-KSB/A
(Amendment
No. 4)
(Mark
one)
x
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE
SECURITIES
EXCHANGE ACT OF 1934
For
the
fiscal year ended September 30, 2002
o
TRANSITION REPORT UNDER SECTION 13 OR 15 (d)
OF
THE
SECURITIES
EXCHANGE ACT OF 1934
For
the
Transition period from ________ to ____________
Commission
File Number: 0-24217
YP
CORP.
(Name
of
Small Business Issuer in its Charter)
NEVADA
|
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85-0206668
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(State
or other jurisdiction of incorporation or organization)
|
|
(IRS
Employer Identification No.)
|
4840
EAST JASMINE STREET, SUITE 105, MESA, ARIZONA
|
|
85205
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
(480)
654-9646
(Issuer’s
telephone number)
Securities
registered under Section 12(b) of the Exchange Act: NONE
Securities
registered under Section 12(g) of the Exchange Act:
COMMON
STOCK, $.001 PAR VALUE
(Title
of
Class)
YP.NET,
INC.
(Former
Name)
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
o.
Check
if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained,
to
the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB o.
Registrant’s
revenues for its most recent fiscal year were $12,618,126.
The
aggregate market value of the common stock held by non-affiliates computed
based
on the closing price of such stock on January 7, 2003 was approximately
$1,677,062.
The
number of shares outstanding of the registrant’s classes of common stock, as of
January 7, 2003 was 43,963,222.
EXPLANATORY
NOTE
This
Amendment on Form 10-KSB/A (this “Amendment”) amends the Annual Report on Form
10-KSB for the year ended September 30, 2002, as originally filed by YP Corp.
on
January 14, 2003 (the “Original Filing”), and as amended by Amendment No. 1 on
Form 10-KSB/A filed on April 10, 2003, and further amended by Amendment No.
2 on
Form 10-KSB/A filed on July 8, 2003, and further amended by Amendment No. 3
on
Form 10-KSB/A filed on January 22, 2004, solely for the purpose of revising
Part II, Items 6 and 7, to amend and restate the disclosure with
respect to our accounting for shares issued to, and subsequently recovered
from,
certain non-performing consultants during 1999 and 2000. The historical
financial statements generated by predecessor management reflected an expense
upon issuance of the shares and a reversal of this expense when it was deemed
(through a settlement agreement or judgment) that these shares would be
returned. However, after further analysis and consultation with the Securities
and Exchange Commission, it was determined to be inappropriate to recognize
the
initial expense and its subsequent reversal as no services were rendered by
these consultants. Instead, the issuance of these shares will be reflected
as
temporary equity, together with a related receivable, until the shares were
returned. The net decrease to cumulative after-tax income of approximately
$510,000 relates to shares issued in 1999 that were expected to be returned
but,
for various reasons, cannot be obtained. Such amounts will continue to be
reflected as expense in the year granted and our revised statements will no
longer reflect the reversal of this expense.
In
addition, in connection with the filing of this Amendment and pursuant to the
rules of the Securities and Exchange Commission, we are including with this
Amendment a currently dated consent of our independent public accountants and
certain currently dated certifications.
Except
as
described above, no other changes have been made to the Original Filing. This
Amendment continues to speak as of the date of the Original Filing, and, except
a specifically stated herein, we have not updated the disclosures contained
in
this Amendment to reflect any events that occurred at a date subsequent to
the
filing of the Original Filing. The filing of this Form 10-KSB/A is not a
representation that any statements contained in items of the Original Filing
other than that information being amended are true or complete as of any date
subsequent to the date of the Original Filing. The filing of this Form 10-KSB/A
shall not be deemed an admission that the Original Filing or the amendments
made
thereto, when made, included any untrue statement of a material fact or omitted
to state a material fact necessary to make a statement not
misleading.
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PART
II
ITEM
6.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OVERVIEW
We
provide Internet-based yellow page listing services on our YP.Net website.
We
acquired Telco Billing, Inc. in June 1999 as a wholly owned subsidiary, and,
as
a result of this acquisition, changed our primary business focus to become
an
electronic yellow page directory service. Our website enables users to search
for yellow page listings in the United States. We charge our customers for
a
Preferred Listing of their businesses on searches conducted by consumers on
our
website.
The
Company was originally incorporated in Nevada in 1996 as Renaissance Center,
Inc. Renaissance Center and Nuclear Corporation merged in 1997. Our articles
of
incorporation were restated in July 1997 and our name was changed to Renaissance
International Group, Ltd. Our name was subsequently changed to RIGL Corporation
in July 1998. With the acquisition of Telco and shift of the focus of our
business, our corporate name was again changed to YP.Net, Inc., effective
October 1, 1999. The new name was chosen to reflect our focus on Internet-based
yellow page services.
In
order
to ensure the accuracy and completeness of the Company’s financial information
in May, 2002, the independent members of the Company’s Board of Directors
engaged the services of Jerrold Pierce, the former Senior Special Agent of
the
Criminal Investigations Division of the Internal Revenue Service for seven
western states. Mr. Pierce performs unannounced inspections of the Company’s
financial records at least once every quarter. Mr. Pierce reports his findings
directly to the independent members of the Board, and to the Board in its
entirety. To date, Mr. Pierce has found no irregularities with current
management
RESULTS
OF OPERATIONS
Fiscal
Year End September 30, 2002 Compared to Fiscal Year End September 30,
2001.
Revenue
for the year ended September 30, 2002 ("Fiscal 2002") was $12,618,126 compared
to $13,501,966 for the year ended September 30, 2001 ("Fiscal 2001"). The
decrease in revenue is principally the result of a change in revenue recognition
on direct billings. In Fiscal 2002, revenue on direct billings was recognized
only as cash was collected in order to be more conservative. In Fiscal 2001,
direct revenue was recognized upon providing the Preferred Listing service
and a
reserve against such revenues was established in accordance with SAB #101.
Management believes that recognizing direct billings as revenue upon cash
collection is more conservative than its previous methodology.
We
utilize direct mailings as our primary marketing program and this program
generates our principal revenue of the Company. Our subscribing customers
increased to 113,565 at September 30, 2002, approximately a 24 % increase
for the fiscal year.
Cost
of
Services for Fiscal 2002 were $3,497,678 compared to $6,150,085. The decrease
in
cost of services is due to a decrease resulting from lower dilution (i.e.,
unbillable customer phone numbers, customer credits, LEC charge-backs) in 2002
compared to 2001 resulting from the previously mentioned improvement in the
Company’s LEC billing filtering process. We have been able to reduce our
dilution expenses with the third party billing companies, as the Company becomes
better able to track its individual subscriber billings and collections, The
Company ceased its relationship with a billing company due to the higher cost
of
doing business with this third party biller. The Company reduced its total
billing related expenses by $3,826,000 in the year ended September 30, 2002
primarily due to its ability to challenge dilution charges made by these third
party billers.
General
and administrative expenses for Fiscal 2002 were $4,754,665 compared to
$3,987,040 for Fiscal 2001. The increase was principally the result of increased
staffing costs of $953,000 and legal and professional fees of approximately
$182,000. These higher costs were partially offset by lower expense of
consultants and rent expense. The Company added staff in anticipation of adding
an outbound customer service group and to begin performing more of the billing
process in-house.
Sales
and
marketing expenses for Fiscal 2002 were $963,868 compared to $688,349 for Fiscal
2001. The increase was principally the result of our re-instituting our
marketing efforts in Fiscal 2002. The marketing expenses are attributed to
our
direct response marketing, which is our primary source of attracting new
customers. In Fiscal 2001, the Company’s management decided to cease all direct
mail marketing efforts until we had entered into a final settlement agreement
with the FTC. In July 2001 we entered into a settlement agreement and
voluntarily complied with the order set forth by the FTC. See our Form 10-QSB
for the period ended June 30, 2001.
Operating
income in Fiscal 2002 was $2,820,625 compared to $2,073,066 in Fiscal 2001
representing an increase of approximately 36%. Income before income taxes was
$3,182,814 in Fiscal 2002 and $1,317,698 in Fiscal 2001, an increase of over
140%. The increases in both operating income and income before income taxes
were
the result of the substantial savings in the billing company and LEC dilution
expenses and lower interest expense due to lower debt levels in Fiscal 2002.
The
Company is likely to continue to experience lower billing expenses as a
percentage of revenue but not on the level of the gains experienced in Fiscal
2002. However, the Company intends to increase its marketing efforts in the
short term resulting in higher marketing expenses.
The
cost
of the Yellow-Page.Net URL was capitalized at its cost of $5,000,000. The URL
is
amortized on an accelerated basis over the twenty-year term of the licensing
agreement. Amortization expense on the URL was $399,833 for the year ended
September 30, 2002. Annual amortization expense in future years related to
the
URL is anticipated to be approximately $200,000-300,000
Interest
expense for Fiscal 2002 was $92,341 compared to $571,248 for Fiscal 2001. The
decrease in interest expense was a result of decreased debt due to the repayment
of approximately $800,000 of debt in Fiscal 2002.
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 related to these net operating losses recorded at September
30,
2001, was partially offset by a valuation allowance of approximately $773,000.
That valuation allowance was eliminated and recognized as a benefit in the
year
ended September 30, 2002. Due to these changes, the Company recognized income
tax benefits of $917,000 that are included as part of the overall tax provision
for the year ended September 30, 2002. At September 30, 2002 the Company has
utilized all of its federal and state net operating losses.
Net
profits for Fiscal 2002 were $2,840,731, or $0.06 per share, compared to
$777,264, or $.02 per share for Fiscal 2001. The increase in net income resulted
from the increased subscribing customer count and associated revenue cited
above
with a less than corresponding increase in expenses cited above as well as
the
usage by the Company of remaining net operating losses which reduced the income
tax provision from the previous fiscal year.
LIQUIDITY
AND CAPITAL RESOURCES
Our
cash
balance increased to $767,108 for Fiscal 2002 from $683,847 for Fiscal 2001.
We
funded working capital requirements primarily from cash generated from operating
activities and utilized cash in investing activities and financing activities,
primarily through repayments of debt.
Operating
Activities.
Cash
provided by operating activities was $1,158,015 for Fiscal 2002 compared to
$3,880,158 for Fiscal 2001. The principal source of our operations revenue
is
from sales of Internet yellow page advertising. The decrease in cash provided
from operations resulted from an increase in the Company’s accounts receivable
and customer acquisition costs due to the increased subscribing customer count
resulting from our marketing solicitation program.
Investing
Activities.
Cash
used by investing activities was $244,077 for Fiscal 2002 compared to $165,672
for Fiscal 2001. We purchased $77,632 of computer equipment in Fiscal 2002
compared to $28,520 of computer equipment in Fiscal 2001. Increased computer
purchases in Fiscal 2002 resulted from growth in the customer base in Fiscal
2002 and in preparation for anticipated future growth in the customer
base.
Financing
Activities.
Cash
flows used from financing activities were $830,677 for Fiscal 2002 compared
to
$3,250,252 for Fiscal 2001. We had cash outflow of approximately $800,000 in
Fiscal 2002 relating to the repayment of debt and cash outflow in Fiscal 2001
resulting from the repayment of our credit facility relating to Matthew Markson
Ltd. of $3,199,452. During Fiscal 2002, the Company established a Trade
Acceptance Draft program with Actrade Financial Technologies which enables
the
Company to borrow up to $150,000. A trade acceptance draft ("TAD") is a draft
signed by the Company made payable to the order of a vendor providing services
to the Company. AcTrade provides payment to the vendor and collects from the
Company the amount advanced to the vendor (plus interest) under extended payment
terms, generally 30, 60 or 90 days. When used, the Company pays a rate of 1%
per
month of the amount of the TAD. There is no term to the agreement with Actrade
and either party may terminate the agreement at any time.
We
incurred debt in the acquisition of the license right to the Yellow-Page.Net
URL. A total of $4,000,000 was borrowed, $2,000,000 from Joseph and Helen
VanSickle, $1,000,000 from shareholders of the Company and $2,000,000 as a
Note
from Matthew & Markson Ltd. Management which has dedicated payments in the
amount of $100,000 per month for the payment of the VanSickle note. This note
was paid in full subsequent to year end. Management had also dedicated payments
to the Matthew & Markson note in the amount of $100,000 per month, with the
provision that no payment be made if we have less than 30 days operating capital
reserved, or if we are in an uncured default with any of our lenders. The
original note has been paid in full while a balance of $115,866 remains on
another note to Matthew & Markson. (see "Certain Relationships"). A total of
4,500,000 shares of our common stock were issued to secure these notes and
are
held in escrow.
Collections
on accounts receivables are received primarily through the billing service
integrators under contract to administer this billing and collection process.
The billing service providers generally do not remit funds until they are
collected. The billing companies maintain holdbacks for refunds and other
uncertainties. Generally, cash is collected and remitted to us over a 90 to
120
day period subsequent to the billing dates. In August 2002, the Company entered
into a new agreement with its primary billing service provider, IGT, whereby
cash is remitted to us on a sixty day timetable beginning November 2002.
We
market
our products primarily through the use of direct mailers to businesses
throughout the United States. We generally pay for these marketing costs when
incurred and amortize the costs of direct-response advertising on a
straight-line basis over eighteen months. The amortization lives are based
on
estimated attrition rates. During Fiscal 2002 we paid $2,258,006 in advertising
and marketing compared to $3,781,485 in Fiscal 2001. Management anticipates
the
outlays for direct-response advertising to remain consistent over the next
year.
The
acquisition of Telco by the Company called for the issuance of 17,000,000 new
shares of stock in exchange of the existing shares of Telco. As part of that
agreement, the Company gave the former shareholders the right to "Put" back
to
the Company certain shares of stock at a minimum stock price of 80% of the
current trading price with a minimum strike price of $1.00. The net effect
of
which was that each of the former Telco shareholders could require the Company
to repurchase shares of stock of the Company at a minimum cost of $10,000,000.
The agreement required the Company to attain certain market share
levels.
The
"Puts" were renegotiated and retired. As part of the renegotiated settlement,
the Company provided a credit facility of up to $10,000,000 to each of the
former Telco shareholders (Mathew & Markson and Morris & Miller. See
Item 11.), collateralized by the stock held by these shareholders, with interest
at least 0.25 points higher than the Company’s average cost of borrowing.
Additional covenants warrant that no more that $1,000,000 can be advanced at
any
point in time and no advances can be made in excess with out allowing at least
30 days operating cash reserves or if the Company is in an uncured default
with
any of its lenders. At September 30, 2002, the Company had advanced $233,073
under this agreement.
On
September 20, 2002, the Company entered into Executive Consulting Agreements
with Sunbelt Financial Concepts Inc. ("Sunbelt"), Advertising Management and
Consulting Services, Inc. ("AMCS") and Advanced Internet Marketing Inc. ("AIM")
relating to the employment of three executive managers and their respective
staffs. (See Certain Relationships and Related Transactions"). As part of these
agreements a Flex Compensation program was instituted. Under these agreements,
each of Sunbelt, AMCS and AIM may annually draw up to $220,000, $50,000 and
$30,000 respectively subject to sufficient cash on hand at the Company. The
amounts are increased by 10% annually and also contain a Due on Sale Clause,
whereby if there is a change of control of the Company, as defined, then the
respective agreements allows each to receive the greater of 30% of the amounts
due under the respective agreements or 12 months worth of fees.
FUTURE
OUTLOOK
For
fiscal year 2003 we expect to continue our customer satisfaction program whereby
we contact our existing customers for their many Mini-Webpage(TM) information
and to develop and market new products. We also are generating a new revenue
source to provide customer service and technical services to related and
industry entities. We presently have agreements with Dial-Up Services, Inc.
(dba
Simple.Net) to provide both customer and technical services. Simple.Net is
an
Internet service provider ("ISP") beneficially owned by a director (Deval
Johnson) of the Company. SN charges the Company’s customers $2.50 per month for
internet access. (See Footnote 12 to the financial statements).
We
have
offered our customers Internet access services and are currently gaining
customers weekly. Our dial-up ISP backbone provider is Simple.Net. Under our
current provider’s network, over 65 percent of the US’s population has the
ability to dial to a local point of presence. The remaining population will
be
allowed access through an 800 number solution. This revenue stream will prove
vital in expanding our ability to reach various customer needs.
Our
future success will depend on our ability to integrate continually and
distribute information services of broad appeal. Our ability to maintain our
relationships with content providers and to build new relationships with
additional content providers is critical to our marketing plan.
FACTORS
WHICH MAY AFFECT FUTURE OPERATING RESULTS
Set
forth
below and elsewhere in this Annual Report and in the other documents we file
with SEC, including the most recent 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 in the Annual
Report.
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.
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.
Since
our
Growth Rate may slow, 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. This
may be a direct cause of the projected changes to our direct marketing Pieces.
See "MARKETING," above. As a consequence, operating results for a particular
quarter are extremely difficult to predict. Our ability to meet financial
expectations could be hampered if we are unable to correct the billing through
the CLEC markets seen in the fourth quarter continue in the future.
Additionally, in response to customer demand, we continue to attempt develop
new
products to reduce our customer attrition rates.
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.
ITEM
7.
FINANCIAL STATEMENTS
YP.NET,
INC.
TABLE
OF CONTENTS
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Page
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REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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7
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CONSOLIDATED
FINANCIAL STATEMENTS:
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Consolidated
Balance Sheet at September 30, 2002
|
8
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Consolidated
Statements of Operations for the years ended September 30, 2002 and
September 30, 2001
|
9
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Consolidated
Statements of Stockholders’ Equity for the years ended September 30, 2002
and September 30, 2001
|
10
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Consolidated
Statements of Cash Flows for the years ended September 30, 2002 and
September 30, 2001
|
12
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NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
14
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REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To
the
Stockholders and Board
of
Directors of YP Corp.:
We
have
audited the accompanying consolidated balance sheet of YP Corp. and subsidiaries
as of September 30, 2002 and the related statements of operations, stockholders’
equity and cash flows for the each of the two years in the period then ended.
These financial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these financial statements
based
on our audits.
We
conducted our audit in accordance with the auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements
are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe our audits provide a reasonable basis
for our
opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of YP Corp. and
subsidiaries as of September 30, 2002, and the consolidated results of its
operations and cash flows for each of the two years in the period ended
September 30, 2002, in conformity with accounting principles generally accepted
in the United States of America.
As
described in Note 1, the Company restated its financial statements for the
years
ended September 30, 2002 and 2001.
/s/
Epstein, Weber & Conover, PLC
Scottsdale,
Arizona
December
2, 2002
(except
for the restatement of financial statements
described
in Note 1, for which the date is November 18, 2005)
CONSOLIDATED
BALANCE SHEET
SEPTEMBER
30, 2002
ASSETS:
|
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CURRENT
ASSETS
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Cash
and cash equivalents
|
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$
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767,108
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Accounts
receivable, net
|
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3,561,808
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Prepaid
expenses and other current assets
|
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64,211
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Total
current assets
|
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4,393,127
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ACCOUNTS
RECEIVABLE - long term portion
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513,485
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CUSTOMER
ACQUISITION COSTS, net of accumulated amortization of
$718,594
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1,418,227
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PROPERTY
AND EQUIPMENT, net
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274,459
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DEPOSITS
AND OTHER ASSETS
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150,725
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INTELLECTUAL
PROPERTY- URL, net of accumulated amortization of
$1,481,148
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3,578,542
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ADVANCES
TO AFFILIATES
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233,073
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RECEIVABLE
- COMMON STOCK TO BE RETURNED
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115,978
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DEFERRED
INCOME TAXES
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96,036
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TOTAL
ASSETS
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$
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10,773,652
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LIABILITIES
AND STOCKHOLDERS’ EQUITY:
|
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CURRENT
LIABILITIES:
|
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Accounts
payable
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$
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195,396
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Accrued
liabilities
|
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182,797
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Notes
payable - current portion
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352,362
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Deferred
income taxes
|
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87,221
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Income
taxes payable
|
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486,243
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Total
current liabilities
|
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1,304,019
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NOTES
PAYABLE - long-term portion
|
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115,866
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Total
liabilities
|
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1,419,885
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TEMPORARY
EQUITY - Common stock to be returned, 82,500 shares issued and
outstanding
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115,978
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STOCKHOLDERS’
EQUITY:
|
|
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Series
E convertible preferred stock, $.001 par value, 200,000 shares authorized,
131,840 issued and outstanding, liquidation preference
$39,552
|
|
|
11,206
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|
Common
stock, $.001 par value, 50,000,000 shares authorized, 43,853,624
issued
and outstanding
|
|
|
43,854
|
|
Paid
in capital
|
|
|
4,590,351
|
|
Treasury
stock at cost
|
|
|
(171,422
|
)
|
Retained
earnings
|
|
|
4,763,800
|
|
Total
stockholders’ equity
|
|
|
9,237,789
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
10,773,652
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR
THE
YEARS ENDED SEPTEMBER 30, 2002 AND SEPTEMBER 30, 2001
|
|
2002
|
|
2001
|
|
|
|
|
|
|
|
NET
REVENUES
|
|
$
|
12,618,126
|
|
$
|
13,501,966
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES:
|
|
|
|
|
|
|
|
Cost
of services
|
|
|
3,497,678
|
|
|
6,150,085
|
|
General
and administrative expenses
|
|
|
4,754,665
|
|
|
3,987,040
|
|
Sales
and marketing expenses
|
|
|
963,868
|
|
|
688,349
|
|
Depreciation
and amortization
|
|
|
581,290
|
|
|
603,426
|
|
Total
operating expenses
|
|
|
9,797,501
|
|
|
11,428,900
|
|
|
|
|
|
|
|
|
|
OPERATING
INCOME
|
|
|
2,820,625
|
|
|
2,073,066
|
|
|
|
|
|
|
|
|
|
OTHER
(INCOME) AND EXPENSES
|
|
|
|
|
|
|
|
Interest
expense and other financing costs
|
|
|
92,341
|
|
|
571,248
|
|
Interest
income
|
|
|
(17,682
|
)
|
|
(7,342
|
)
|
Other
Income
|
|
|
(436,848
|
)
|
|
191,462
|
|
|
|
|
|
|
|
|
|
Total
other expense
|
|
|
(362,189
|
)
|
|
755,368
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE INCOME TAXES
|
|
|
3,182,814
|
|
|
1,317,698
|
|
|
|
|
|
|
|
|
|
INCOME
TAX PROVISION (BENEFIT)
|
|
|
342,082
|
|
|
540,434
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$
|
2,840,732
|
|
$
|
777,264
|
|
|
|
|
|
|
|
|
|
NET
INCOME PER SHARE:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.06
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.06
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE COMMON SHARES OUTSTANDING:
|
|
|
|
|
|
|
|
Basic
|
|
|
44,024,329
|
|
|
40,738,839
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
44,024,329
|
|
|
40,738,839
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY FOR THE
YEARS
ENDED SEPTEMBER 30, 2002 AND SEPTEMBER 30, 2001
|
|
COMMON
STOCK
|
|
PREFERRED
A
|
|
TREASURY
|
|
PAID-IN
|
|
RETAINED
|
|
|
|
|
|
SHARES
|
|
AMOUNT
|
|
SHARES
|
|
AMOUNT
|
|
STOCK
|
|
CAPITAL
|
|
EARNINGS
|
|
TOTAL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE
OCTOBER 1, 2000
|
|
|
39,035,464
|
|
$
|
39,036
|
|
|
1,500,000
|
|
$
|
1,500
|
|
$
|
(69,822
|
)
|
$
|
4,081,399
|
|
$
|
1,146,298
|
|
$
|
5,198,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued for consulting services
|
|
|
850,000
|
|
|
850
|
|
|
|
|
|
|
|
|
|
|
|
147,950
|
|
|
|
|
|
148,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued for extension on debt
|
|
|
4,000,000
|
|
|
4,000
|
|
|
|
|
|
|
|
|
|
|
|
356,000
|
|
|
|
|
|
360,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancellation
of preferred stock
|
|
|
|
|
|
|
|
|
(1,500,000
|
)
|
|
(1,500
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(101,600
|
)
|
|
|
|
|
|
|
|
(101,600
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value
of common stock warrants issued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,176
|
|
|
|
|
|
7,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
777,264
|
|
|
777,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE
SEPTEMBER 30, 2001
|
|
|
43,885,464
|
|
$
|
43,886
|
|
|
-
|
|
$
|
-
|
|
$
|
(171,422
|
)
|
$
|
4,592,525
|
|
$
|
1,923,562
|
|
$
|
6,388,551
|
|
The
accompanying notes are an integral part of these consolidated financial
statements
YP.NET,
INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY FOR THE
YEARS
ENDED SEPTEMBER 30, 2002 AND SEPTEMBER 30, 2001 (CONTINUED)
|
|
COMMON
STOCK
|
|
PREFERRED
E
|
|
TREASURY
|
|
PAID-IN
|
|
RETAINED
|
|
|
|
|
|
SHARES
|
|
AMOUNT
|
|
SHARES
|
|
AMOUNT
|
|
STOCK
|
|
CAPITAL
|
|
EARNINGS
|
|
TOTAL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE
OCTOBER 1, 2001
|
|
|
43,885,464
|
|
$
|
43,886
|
|
|
-
|
|
$
|
-
|
|
$
|
(171,422
|
)
|
$
|
4,592,525
|
|
$
|
1,923,562
|
|
$
|
6,388,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued for services
|
|
|
100,000
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
8,900
|
|
|
|
|
|
9,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
E preferred stock issued in exchange for common shares
|
|
|
(131,840
|
)
|
|
(132
|
)
|
|
131,840
|
|
|
11,206
|
|
|
|
|
|
(11,074
|
)
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
E preferred stock dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(494
|
)
|
|
(494
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,840,732
|
|
|
2,840,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE
SEPTEMBER 30, 2002
|
|
|
43,853,624
|
|
$
|
43,854
|
|
|
131,840
|
|
$
|
11,206
|
|
$
|
(171,422
|
)
|
$
|
4,590,351
|
|
$
|
4,763,800
|
|
$
|
9,237,789
|
|
The
accompanying notes are an integral part of these consolidated financial
statements
CONSOLIDATED
STATEMENTS OF CASH FLOWS FOR THE
YEARS
ENDED SEPTEMBER 30, 2002 AND SEPTEMBER 30, 2001
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
2002
|
|
2001
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
2,840,732
|
|
$
|
777,264
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
581,290
|
|
|
603,426
|
|
Issuance
of common stock as compensation for services
|
|
|
9,000
|
|
|
148,800
|
|
Penalties
related to acquisition debt paid by issuance of debt, warrants and
stock
|
|
|
-
|
|
|
917,967
|
|
Deferred
income taxes
|
|
|
1,078,157
|
|
|
(421,457
|
)
|
Provision
for uncollectible accounts
|
|
|
1,375,226
|
|
|
(760,859
|
)
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(2,580,410
|
)
|
|
1,617,467
|
|
Customer
acquisition costs
|
|
|
(1,224,983
|
)
|
|
37,654
|
|
Prepaid
and other current assets
|
|
|
(44,042
|
)
|
|
79,060
|
|
Deposits
and other assets
|
|
|
(127,438
|
)
|
|
(11,500
|
)
|
Accounts
payable
|
|
|
(119,511
|
)
|
|
161,089
|
|
Accrued
liabilities
|
|
|
106,069
|
|
|
(230,644
|
)
|
Income
taxes payable
|
|
|
(736,075
|
)
|
|
961,891
|
|
Net
cash provided by operating activities
|
|
|
1,158,015
|
|
|
3,880,158
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
Advances
made to affiliate
|
|
|
(116,757
|
)
|
|
(137,152
|
)
|
Expenditures
for intellectual property
|
|
|
(49,688
|
)
|
|
-
|
|
Purchases
of equipment
|
|
|
(77,632
|
)
|
|
(28,520
|
)
|
Net
cash used for investing activities
|
|
|
(244,077
|
)
|
|
(165,672
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Principal
repayments on borrowings from line of credit
|
|
|
-
|
|
|
(1,577,547
|
)
|
Principal
repayments on notes payable
|
|
|
(830,677
|
)
|
|
(1,621,905
|
)
|
Purchase
of treasury stock
|
|
|
-
|
|
|
(50,800
|
)
|
Net
cash used for financing activities
|
|
|
(830,677
|
)
|
|
(3,250,252
|
)
|
|
|
|
|
|
|
|
|
INCREASE
IN CASH AND CASH EQUIVALENTS
|
|
|
83,261
|
|
|
464,234
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, beginning of year
|
|
|
683,847
|
|
|
219,613
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, end of year
|
|
$
|
767,108
|
|
$
|
683,847
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
YP.NET,
INC.
CONSOLIDATED
STATEMENT OF CASH FLOWS, (CONTINUED)
FOR
THE
YEARS ENDED SEPTEMBER 30, 2002 AND 2001
SUPPLEMENTAL
CASH FLOW INFORMATION:
|
|
2002
|
|
2001
|
|
Interest
Paid
|
|
$
|
99,541
|
|
$
|
421,013
|
|
Income
taxes paid
|
|
$
|
-0-
|
|
$
|
-0-
|
|
SUPPLEMENTAL
SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
|
|
2002
|
|
2001
|
|
Common
stock issued for services
|
|
$
|
9,000
|
|
$
|
148,800
|
|
Note
payable issued in payment of debt extension fee
|
|
$
|
-0-
|
|
$
|
550,791
|
|
Value
of common stock issued as payment of debt extension fee
|
|
$
|
-0-
|
|
$
|
360,000
|
|
Common
stock exchanged for Series E Convertible
|
|
|
|
|
|
|
|
Preferred
Stock
|
|
$
|
11,206
|
|
$
|
-0-
|
|
Liability
incurred for purchase of treasury stock
|
|
$
|
-0-
|
|
$
|
50,800
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
YEARS ENDED SEPTEMBER 30, 2002 AND 2001
1. |
ORGANIZATION
AND BASIS OF
PRESENTATION
|
YP.Net,
Inc. (the "Company"), formally RIGL Corporation, had previously attempted to
develop software solutions for medical practice billing and administration.
The
Company had made acquisitions of companies performing medical practice billing
services as test sites for its software and as business opportunities. The
Company was not successful in implementing its medical practice billing and
administration software products and looked to other business opportunities.
The
Company acquired Telco Billing Inc. ("Telco") in June 1999, through the issuance
of 17,000,000 shares of the Company’s common stock. Prior to its acquisition of
Telco, RIGL had not generated significant or sufficient revenue from planned
operations. Telco was formed in April 1998, to provide advertising and directory
listings for businesses on its Internet web site in a "Yellow
Page"
format.
Telco provides those services to its subscribers for a monthly fee. These
services are provided primarily to businesses throughout the United States.
Telco became a wholly owned subsidiary of YP.Net, Inc. after the June 16, 1999
acquisition.
At
the
time that the transaction was agreed to, the Company had 12,567,770 common
shares issued and outstanding. As a result of the merger transaction with Telco,
there were 29,567,770 common shares outstanding, and the former Telco
stockholders held approximately 57% of the Company’s voting stock. For financial
accounting purposes, the acquisition was a reverse acquisition of the Company
by
Telco, under the purchase method of accounting, and was treated as a
recapitalization with Telco as the acquirer. Consistent with reverse acquisition
accounting: (i) all of Telco’s assets, liabilities, and accumulated deficit were
reflected at their combined historical cost (as the accounting acquirer) and
(ii) the preexisting outstanding shares of the Company (the accounting acquiree)
were reflected at their net asset value as if issued on June 16, 1999. The
accompanying financial statements represent the consolidated financial position
and results of operations of the Company and include the accounts and results
of
operations of the Company and Telco, its wholly owned subsidiary, for the years
ended September 30, 2002 and September 30, 2001. Certain reclassifications
have
been made to the September 30, 2001 balances to conform to the 2002
presentation.
Restatement
of Financial Statements
Subsequent
to the issuance of the Company’s financial statements as of September 30, 2002,
and the year then ended, the Company determined that the accounting for its
common stock issued to, and subsequently recovered from, certain non-performing
consultants during 1999 and 2000 should not have been expensed when originally
issued as had been previously reported. The subsequent recovery of these shares
was recorded as an item in other income at the same value at which they were
originally issued. It has been determined to be inappropriate to recognize
the
initial expense and its subsequent reversal as no services were rendered by
these consultants. Instead, the issuance of these shares will be reflected
as
temporary equity, together with a related receivable, until the shares were
returned. The change in accounting for the recovery of the shares has the effect
in the year ended September 30, 2002 of a decrease in net income of $1,035,017
from $3,696,463 to $2,840,732 and a decrease in the net income per share from
per share from $0.08 to $0.06.
Additionally,
the Company’s consolidated statement of operations for the year ended September
30, 2002, had previously reported net revenues of $13,232,743 which has been
decreased by $614,617 due to reclassifications of certain customer refunds
of
$313,716 previously reported in cost of services and $300,901 of revenue
generated for services performed for an affiliate being reclassified as other
income. These changes had no effect on net income for the year ended September
30, 2002. It was also noted that 3,081,500 shares of issued common stock had
been improperly included in the outstanding shares. These shares were actually
treasury shares and therefore should be excluded from the number of shares
outstanding. The Company corrected the error by reclassifying the par value
of
those shares of $3,082 from the common stock account to the paid in capital
account. This matter had the effect of overstating the weighted average shares
outstanding.
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Cash
and Cash Equivalents:
This
includes all short-term highly liquid investments that are readily convertible
to known amounts of cash and have original maturities of three months or less.
At times cash deposits may exceed government insured limits. At September 30,
2002, cash deposits exceeded those insured limits by $563,000.
Principles
of Consolidation:
The
consolidated financial statements include 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 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 $1,941,000 and
$575,000 during the years ended September 30, 2002 and 2001 respectively. The
Company amortized $719,000 and
$613,000, respectively, of these capitalized costs during the years ended
September 30, 2002 and 2001.
The
Company also incurs advertising costs that are not considered direct-response
advertising. These other advertising costs are expensed when incurred. These
advertising expenses were $245,000 and $75,000 for the years ended September
30,
2002 and 2001 respectively.
Property
and Equipment:
Property
and equipment is stated at cost less accumulated depreciation. Depreciation
is
recorded on a straight-line basis over the estimated useful lives of the
assets
ranging from 3 to 5 years. Depreciation expense was $178,058 and $156,343
for
the years ended September 30, 2002 and 2001 respectively.
Revenue
Recognition:
The
Company’s revenue is generated by customer subscriptions of directory and
advertising services. Revenue is billed and recognized monthly for services
subscribed in that specific month. The Company utilizes outside billing
companies to transmit billing data, much of which is forwarded to Local Exchange
Carriers ("LEC’s") that provide local telephone service. Monthly subscription
billings are generally included on the telephone bills of the customers.
Due to
billings submitted by the Company being subject to adjustment by the billing
companies and the LEC’s, 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.
Revenues generated under billings through the LEC’s were approximately
$12,311,000 and $13,005,000 for the fiscal years ended September 30, 2002
and
September 30, 2001 respectively.
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.
Collections under this billing process have historically been poor. Monthly
direct bill subscription fee revenue is recognized as earned within the month
for which the service is provided. However, these monthly billings are adjusted
to take into consideration the poor collection experience. The Company
continuously reviews this estimate for reasonableness based on its collection
experience. Revenues generated under direct billings were $651,000 and $529,000
for the years ended September 30, 2002 and 2001 respectively.
Income
Taxes:
The
Company provides for income taxes based on the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes, which,
among other things, requires that recognition of deferred income taxes be
measured by the provisions of enacted tax laws in effect at the date of
financial statements.
Financial
Instruments:
Financial instruments consist primarily of cash, accounts receivable, and
obligations under accounts payable, accrued expenses and notes payable. The
carrying amounts of cash, accounts receivable, accounts payable, accrued
expenses and notes payable approximate fair value because of the short maturity
of those instruments. The Company has applied certain assumptions in estimating
these fair values. The use of different assumptions or methodologies may
have a
material effect on the estimates of fair values.
Net
Income Per Share:
Net
income per share is calculated using the weighted average number of shares
of
common stock outstanding during the year. The Company has adopted the provisions
of SFAS No. 128, Earnings Per Share.
Use
of
Estimates:
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
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
accounting for stock based compensation using the intrinsic value method
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for
Stock
Issued to Employees." The proforma effect of the fair value method is discussed
in Note 15.
Temporary
Equity:
During
fiscal 1999 and 2000, the Company issued 925,000 shares and 600,000 shares,
respectively, to consultants and other third parties whereupon it was
subsequently determined that the consultants did not perform under the terms
of
the related agreements. The Company has pursued legal action against the
consultants and third parties and expect the shares to be retrieved. The
value
of such shares, totaling $1,689,239, was not recorded as expense but rather
was
reflected as temporary equity, together with a related receivable until such
times that the shares are retrieved. During fiscal 2001, 1,442,500 of these
shares were returned.
Impairment
of Long-lived Assets:
The
Company assesses long-lived assets for impairment in accordance with the
provisions of SFAS 121, Accounting for the Impairment of Long-Lived Assets
and
for Long-Lived Assets to be Disposed Of. SFAS 121 requires that the Company
assess the value of a long-lived asset whenever there is an indication that
its
carrying amount may not be recoverable. Recoverability of the asset is
determined by comparing the forecasted undiscounted cash flows generated
by said
asset to its carrying value. The amount of impairment loss, if any, is measured
as the difference between the net book value of the asset and its estimated
fair
value.
Recently
Issued Accounting Pronouncements:
In June
2001, the Financial Accounting Standards Board (the FASB) issued Statement
of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets.
The Company will be required to adopt SFAS No. 142 at the beginning of its
2003
fiscal year. The Company is currently reviewing the impact of adoption of
SFAS
142, but does not believe the adoption of such will have a material effect
on
the financial position and results of operations of the Company.
In
June
2001, the FASB issued Statement of Financial Accounting Standards No.43,
Accounting for Asset Retirement Obligations. The Company is currently reviewing
the impact of adoption of SFAS 143, but does not believe the adoption of
such
will have a material effect on the financial position and results of operations
of the Company.
In
August
2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal
of
Long-Lived Assets. The Company will be required to adopt SFAS No. 144 at
the
beginning of its 2003 fiscal year. SFAS No. 144 supersedes SFAS 121, but
carries
over most of its general guidance. The Company is currently reviewing the
impact
of adoption of SFAS 144, but does not believe the adoption of such will have
a
material effect on the financial position and results of operations of the
Company. However, the provisions of SFAS will be applied to long-lived assets
such as the URL.
The
Company provides billing information to third party billing
companies for
the
majority of its monthly billings. Billings submitted are sorted and analyzed
for
accuracy and completeness ("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. The Company entered into a customer billing
service agreement with Integretel, Inc. Integretel provides the majority
of the
Company’s billings, collections, and related services. The net receivable due
from Integretel at September 30, 2002 was $3,955,218, including an allowance
for
doubtful accounts of $1,695,093.
At
September 30, 2002, the Company still had certain amounts due from Enhanced
Services Billing, Inc. (ESBI). In prior years, ESBI provided billing and
collection services very similar to Integretel, discussed above, but was
gradually phased out during the year. The receivable due from ESBI at September
30, 2002 of $154,037 has been fully reserved as collectibility of the remaining
amount is doubtful.
Subscription
receivables that are directly billed by the Company are valued and reported
at
the estimated future collection amount. Determining the expected collections
requires an estimation of both uncollectible accounts and returns and
allowances. The net subscriptions receivable at September 30, 2002 was $108,659.
Gross
accounts receivable and the aggregate related allowance was $5,944,422
and $1,869,129 at September 30, 2002. The following allowances on
accounts receivable existed at September 30, 2002:
Allowance
for doubtful accounts
|
|
$
|
1,034,899
|
|
Allowance
for billing company holdbacks
|
|
|
545,608
|
|
Allowance
for LEC holdbacks
|
|
|
288,622
|
|
Total
|
|
$
|
1,869,129
|
|
The
Company expensed billing fees to the LEC’s and third party billing companies of
$1,718,573 and $5,544,906 for the years ended September 30, 2002 and 2001
respectively.
In
connection with the Company’s acquisition of Telco, the Company was required to
provide accelerated payment of license fees for the use of the Internet domain
name or Universal Resource Locator (URL) Yellow-page.net.
Telco
had previously entered into a 20-year license agreement for the use of the
URL
with one of its two 50% stockholders. The original license agreement required
annual payments of $400,000. However, the agreement stated that upon a change
in
control of Telco, a $5,000,000 accelerated payment is required to maintain
the
rights under the licensing agreement. The URL holder agreed to discount the
accelerated payments from $8,000,000 to $5,000,000 at the time of the
acquisition. The Company agreed to make that payment upon effecting the
acquisition of Telco.
The
Company made a $3,000,000 cash payment and issued a note payable for $2,000,000
to acquire the licensing rights of the URL. The Company also issued 2,000,000
shares of its common stock to be held as collateral on the note. The note
payable was originally due on July 15, 1999. The Company failed to make the
$2,000,000 payment when due. The repayment terms were renegotiated to extend
the
due date to January 15, 2000. The Company was required to pay an extension
fee
of $200,000 at that time. The Company again renegotiated the repayment terms
on
April 26, 2000, to a demand note, with monthly installments of $100,000,
subject
to all operating requirements, which, management believes, have subsequently
been met by the Company.
In
the
year ended September 30, 2001, the former URL holder claimed that it was
due
additional amounts for the prior loan extensions. The Company reached a
settlement with the former URL holder that required the Company to issue
to the
former URL holder, 4,000,000 shares of the Company’s common stock, warrants to
purchase 500,000 shares of the Company’s common stock and
a
note payable for $550,000. The Company recorded an expense of approximately
$917,000 related to the settlement representing the principal amount of the
note
payable, $360,000 as the fair value of the 4,000,000 common shares and $7,176
as
the fair value of the warrants. The value of the common stock was determined
on
the basis of the quoted trading price of the shares on the date of the
agreement. The fair value of the warrants was determined on the using the
Black-Scholes option pricing model. The URL is recorded at its cost net of
accumulated amortization. Management believes that the Company’s business is
dependent on its ability to utilize this URL given the recognition of the
Yellow
page
term.
Also, its current customer base relies on the recognition of this term and
URL
as a basis for maintaining the subscriptions to the Company’s service.
Management believes that the current revenue and cash flow generated through
use
of Yellow-page.net
supports
the carrying of the asset. The Company 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. The URL is amortized
on an
accelerated basis over the twenty-year term of the licensing agreement.
Amortization expense on the URL was $403,232 and $471,667 for the years ended
September 30, 2002 and 2001 respectively.
5.
|
PROPERTY
AND EQUIPMENT
|
Property
and equipment consisted of the following at September 30, 2002:
Leasehold
improvements
|
|
$
|
332,492
|
|
Furnishings
and fixtures
|
|
|
108,629
|
|
Office
and computer equipment
|
|
|
256,588
|
|
Total
|
|
|
697,709
|
|
Less
accumulated depreciation
|
|
|
(423,250
|
)
|
|
|
|
|
|
Property
and equipment, net
|
|
$
|
274,459
|
|
The
Company has provided certain office equipment and leasehold improvements
to an
affiliated entity at no cost to that affiliated entity. This arrangement
was
made as part of the Company’s original default settlement with the prior owners
of the URL discussed in Note 4. The Company retains title and control of
these
assets; however, they are not being used by the Company. The net book value
of
the office equipment and leasehold improvements being utilized by the affiliated
entity was approximately $60,000 at September 30, 2002.
6.
|
NOTES
PAYABLE AND LINE OF CREDIT
|
Notes
payable at September 30, 2002 are comprised of the following:
|
|
|
|
Note
payable to stockholders, original balance of 2,000,000, interest
at 10%
per annum. Repayment terms require monthly installments of $100,000
plus
interest. Due January 11, 2002. Collateralized by 2,000,000 shares
of the
Company’s common stock. Note was paid off subsequent to September 30,
2002.
|
|
$
|
205,362
|
|
Note
payable to former Telco stockholders, original balance of $550,000,
interest at 10.5% per annum. Repayment terms require monthly installments
of principal and interest of $19,045 beginning December 15, 2002.
Stated
maturity September 25, 2004. Collateralized by all assets of the
Company.
|
|
|
115,866
|
|
Trade
acceptance draft, interest at 12.25% per annum, due November 4,
2002.
Collateralized by certain trade accounts receivable.
|
|
|
147,000
|
|
|
|
|
468,228
|
|
Less
current portion
|
|
|
352,362
|
|
Totals
|
|
$
|
115,866
|
|
Subsequent
to year-end, the Company settled the outstanding amount due on the note payable
to stockholder resulting in an immaterial gain on extinguishment.
The
note
payable to the former Telco stockholders totaled $550,000 at the beginning
of
the fiscal year. In accordance with instructions that the Company received
from
said stockholders, the Company has made payments to third parties on behalf
of
the stockholders and applied those payments as reductions to the note payable.
Said stockholders are not a part of management or on the Board of Directors
of
the Company. Payments on the note were accelerated at the option of the Company.
Although the note calls for monthly payments of $19,045, the Company would
not
be required to make another payment until February 2004 under the original
repayment provisions of the note. The full remaining balance of $115,866
is due
in the year ended September 30, 2004.
The
trade
acceptance draft is effected similarly to factoring accounts receivable.
The
Company enters into separate financing agreements with the lender for specific
accounts receivable.
7.
|
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. 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
approximately $1,463,000 related to these net operating losses recorded at
September 30, 2001, was partially offset by a valuation allowance of
approximately $773,000. 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 approximately $917,000 included
as
part of the tax benefit 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 years ended September 30, is summarized as follows:
|
|
2002
|
|
2001
|
|
|
|
|
|
|
|
Current
Provision
|
|
$
|
376,582
|
|
$
|
271,878
|
|
Deferred
Provision
|
|
|
(34,500
|
)
|
|
268,556
|
|
|
|
|
|
|
|
|
|
Net
income tax provision
|
|
$
|
342,082
|
|
$
|
540,434
|
|
A
reconciliation of the differences between the effective and statutory income
tax
rates for years ended September 30, is as follows:
|
|
2002
|
|
|
|
2001
|
|
|
|
Federal
statutory rates
|
|
$
|
1,082,228
|
|
|
34
|
%
|
$
|
448,017
|
|
|
34
|
%
|
State
income taxes
|
|
|
222,811
|
|
|
7
|
%
|
|
94,275
|
|
|
6
|
%
|
Utilization
of valuation allowance
|
|
|
(
773,424
|
)
|
|
(43
|
)%
|
|
-
|
|
|
-
|
|
Change
in estimate of NOL due to structuring changes
|
|
|
(143,575
|
)
|
|
(4
|
)%
|
|
-
|
|
|
-
|
|
Other
|
|
|
(45,958
|
)
|
|
(1
|
)%
|
|
(1,858
|
)
|
|
-
|
|
Effective
rate
|
|
$
|
342,082
|
|
|
(7
|
)%
|
$
|
540,434
|
|
|
40
|
%
|
At
September 30, 2002, deferred income tax assets totaling $695,940 were comprised
of $494,252, $101,956, and $99,733 related to differences in book and tax
bases
of accounts receivable, stock based compensation and intangible assets
respectively. During the year ended September 30, 2002 the valuation allowance
was reduced by approximately $773,000. There was no change in the valuation
allowance in the year ended September 30, 2001.
At
September 30, 2002 deferred tax liabilities of $687,127 were comprised of
$581,473 and $105,654 related to differences in book and tax bases of customer
acquisition costs and property and equipment, respectively.
The
Company leases its office space and certain equipment under long-term operating
leases expiring through fiscal year 2005. Rent expense under these leases
was
$145,052 and $175,464 for the years ended September 30, 2002 and 2001,
respectively.
Future
minimum annual lease payments under operating lease agreements for years
ended
September 30 are as follows:
2003
|
|
$
|
138,015
|
|
2004
|
|
|
42,417
|
|
2005
|
|
|
28,278
|
|
|
|
|
|
|
Total
|
|
$
|
208,710
|
|
Common
Stock Issued for Services
The
Company has historically granted shares of its common stock to officers,
directors and consultants as payment for services rendered. The value of
those
shares was determined based on the trading value of the stock at the dates
on
which the agreements were made for the services. During the year ended September
30, 2002, the Company issued 100,000 shares of common stock to officers and
directors valued at $9,000. During the year ended September 30, 2001, the
Company issued 850,000 shares of common stock to officers, directors and
consultants valued at $148,800
Common
Stock Issued for Debt Extension
The
former holder of the Yellow-page.net.
URL
made a claim against the Company in the year ended September 30, 2001. The
former URL holder claimed that it was owed $1,000,000 that represented a
loan
extension fee for an extension given in 1999. The Company disputed the claim
but
ultimately settled with the former URL holder. The settlement agreement required
the Company to pay the former URL holder $550,000, 4,000,000 shares of the
Company’s common stock and warrants for and additional 500,000 shares of the
Company’s common stock. The Company recorded an expense of approximately
$917,000 related to the settlement representing the principal amount of the
note
payable, $360,000 as the fair value of the 4,000,000 common shares and $7,176
as
the fair value of the warrants. The value of the common stock was determined
on
the basis of the quoted trading price of the shares on the date of the
agreement. The fair value of the warrants was determined on the using the
Black-Scholes option pricing model.
Series
E Convertible Preferred Stock
During
the year ended September 30, 2002, the Company created a new series of capital
stock, 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 common stock. As of September 30, 2002, the liquidation
preference value of the outstanding Series E Convertible Preferred Stock
was
$39,552, and dividends totaling $494 had been accrued and paid associated
with
said shares.
Treasury
Stock
During
the year ended September 30, 2001, the Company acquired 254,000 shares of
its
common stock from a single stockholder for $101,600. At September 30, 2002,
there were 3,858,500 shares of stock held in treasury.
Other
The
Company granted 1,700,000 shares of Series B preferred stock to certain
employees during the year ended September 30, 1999. The Series B preferred
stock
has no stated dividend. The Series B preferred shares were convertible to
common
stock at the option of the holder. The shares were convertible at varying
rates
depending upon the trading price of the common stock at the time of conversion.
The initial conversion rate was one share of common for each share of preferred.
Conversion may not occur until certain "trigger events" occur and all rights
with respect to the preferred shares terminate on November 30, 2004. "Trigger
events" are defined as trading prices of the Company’s common stock reaching or
exceeding $5 through $10 per share and net income reaching or exceeding
$5,000,000. No value was assigned to the preferred shares in the accompanying
balance sheet nor was any compensation expense recognized for the year ended
September 30, 2001, because the preferred shares were not exercisable at
the
time of issuances because of the failure of the Company to meet the "trigger
events". Subsequently, management has cancelled the Series B preferred stock
and
rescinded those issuances and all shares of the Series B preferred stock
were
returned as of September 30, 2001.
10.
|
COMMITMENTS
AND CONTINGENCIES
|
Telco
Billing
The
acquisition of Telco by the Company called for the issuance of 17,000,000
new
shares of stock in exchange of the existing shares of Telco. As part of that
agreement, the Company gave the former shareholders the right to "Put" back
to
the Company certain shares of stock at a minimum stock price of 80% of the
current trading price with a minimum strike price of $1.00. The net effect
of
which was that each of the former Telco shareholders could require the Company
to repurchase shares of stock of the Company at a minimum cost of $10,000,000.
The agreement required the Company to attain certain market share
levels.
The
"Puts" were renegotiated and retired. As part of the renegotiated settlement,
the Company provided a credit facility of up to $10,000,000 to each of the
former Telco shareholders (Mathew & Markson and Morris & Miller),
collateralized by the stock held by these shareholders, with interest at
least
0.25 points higher than the Company’s average cost of borrowing. Additional
covenants warrant that no more that $1,000,000 can be advanced at any point
in
time and no advances can be made in excess with out allowing at least 30
days
operating cash reserves or if the Company is in an uncured default with any
of
its lenders. The advance agreement has no stipulated expiration date. At
September 30, 2002, the Company had advanced $233,073 under this agreement.
The
interest rate on these advances was 8% at September 30,2002. Based on the
requirement for 30 days cash reserve, the Company estimates that the maximum
balance that could be drawn under this agreement at September 30, 2002 is
approximately $525,000. At September 30, 2002 ,$233,073 was drawn on the
advance
agreement.
Billing
Service Agreements
The
Company has entered into a customer billing service agreement with Integretel,
Inc. (IGT). IGT provides billing and collection and related services associated
to the telecommunications industry. The agreement term is for two years,
automatically renewable in two-year increments unless appropriate notice
to
terminate is given by either party. The agreement will automatically renew
on
September 1, 2003, unless either party gives notice of termination 90 days
prior
to that renewal date. Under the agreement, IGT bills, collects and remits
the
proceeds to Telco net of reserves for bad debts, billing adjustments, telephone
company fees and IGT fees. If either the Company’s transaction volume decreases
by 25% from the preceding month, less than 75% of the traffic is billable
to
major telephone companies, IGT may at its own discretion increase the reserves
and holdbacks under this agreement. IGT handles all billing information and
collection of receivables. The Company’s cash receipts on trade accounts
receivable are dependent upon estimates pertaining to holdbacks and other
factors as determined by IGT. IGT may at its own discretion increase the
reserves and holdbacks under this agreement.
The
Company has also entered into an agreement with ACI Billing Services, Inc.
ACI
provides billing and collection and related services associated to the
telecommunications industry.
These
agreements with the billing companies provide significant control to the
billing
companies over cash receipts and ultimate remittances to the Company. The
Company estimates the net realizable value of its accounts receivable on
historical experience and information provided by the billing companies
reflecting holdbacks and reserves taken by the billing companies and
LEC’s.
United
States Federal Trade Commission (FTC)
The
Company was a subject of an FTC investigation pertaining to claims made of
deceptive marketing practices. The Company has reached an agreement with
the FTC
requiring the Company to make certain changes to mailing and promotional
materials and notify certain customers that a refund of past paid service
fees
is available. The settlement requires the Company to notify approximately
11,000
customers. Each of those customers may receive a refund of up to $12.50.
At
September 30, 2001, the Company accrued $45,413 which was paid in the year
ended
September 30, 2002. Management does not believe that there will be any
additional material refunds. The Company may also be required to pay certain
expenses incurred in the FTC investigation. The Company intends to contest
payment of these expenses but believes that if such is a requirement of any
final settlement with the FTC, the amount could range from $50,000 to
$70,000.
Net
loss
per share is calculated using the weighted average number of shares of common
stock outstanding during the year. Preferred stock dividends are subtracted
from
the net income to determine the amount available to common shareholders.
There
were $494 and $ 0 preferred stock dividends in the years ended September
30,
2002 and 2001, respectively. Warrants to purchase 500,000 shares of common
stock
were excluded from the calculation for the year ended September 30, 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.
The
following presents the computation of basic and diluted loss per share from
continuing operations:
|
|
2002
|
|
2001
|
|
|
|
Income
|
|
Shares
|
|
Per
Share
|
|
Income
|
|
Shares
|
|
Per
share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
2,840,731
|
|
|
|
|
|
|
|
$
|
777,264
|
|
|
|
|
|
|
|
Preferred
stock dividends
|
|
|
(494
|
)
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
available to common Stockholders
|
|
$
|
2,840,237
|
|
|
|
|
|
|
|
$
|
777,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
EARNINGS PER SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
available to common stockholders
|
|
$
|
2,840,237
|
|
|
44,024,329
|
|
$
|
0.06
|
|
$
|
777,264
|
|
|
40,738,839
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities
|
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED
EARNINGS PER SHARE
|
|
$
|
2,840,237
|
|
|
44,024,329
|
|
$
|
0.06
|
|
$
|
777,264
|
|
|
40,738,839
|
|
$
|
0.02
|
|
12.
|
RELATED
PARTY TRANSACTIONS
|
During
the years ended September 30, 2002 and 2001, the Company entered into the
related party transactions with Board members, officers and affiliated entities
as described below:
Directors
& Officers
Board
of
Director fees for the years ended September 30, 2002 and 2001 were $101,120
and
$45,000 respectively. The Company also paid entities owned or controlled
by
certain board members $147,625 and $147,000 in 2002 and 2001, respectively,
for
consulting services other than routine Board duties. At September 30, 2002,
$40,000 of the 2002 amount was accrued but unpaid. The Company also granted
100,000 shares of common stock to certain directors as part of their Board
of
Director fees for the year ended September 30, 2002. During the year ended
September 30, 2002, the Company made loans to its Chief Executive Officer
and
its Chief Financial Officer. The Board of Directors approved the loans as
part
of the officers’ respective compensation packages. The loans carried an 8%
interest rate and were collateralized by shares of Company common stock owned
by
the officers’ valued at the greater of $1.00 per share or the current market
price of the shares. The loans to the CEO and CFO totaled approximately $200,000
and $17,000 respectively. At September 30, 2002, the loan to the CEO was
repaid
and a bonus of a similar amount was paid. In May 2002, the CFO resigned.
The
Company believes the value of the collateral may not be sufficient to cover
the
outstanding loan balance. Thus, the Company has fully reserved the balance
due
on the loan.
At
September 30, 2002, the Company had advanced $15,000 to its CEO related to
his
fiscal 2003 compensation and recorded a corresponding receivable. This amount
will be amortized to compensation expense during the 2003 fiscal year. During
the year ended September 30, 2001, the Company paid an entity controlled
by its
CEO approximately $158,000 for consulting services. During the years ended
September 30, 2002 and 2001, the Company paid approximately $70,000 and $67,000,
respectively, to an entity owned by its former CFO for other professional
services. During the year ended September 30, 2002, the Company paid
approximately $27,000 to an entity owned by its former COO for certain
consulting services he provided to the Company subsequent to his June 2002
termination of employment.
Simple.Net,
Inc. ("SN")
The
Company has contracted with Simple.Net, Inc. ("SN"), an internet service
provider owned by a director of the Company, to provide internet dial-up
and
other services to its customers. SN has sold said services to the Company
at
below market rate prices from time to time. During the years ended September
30,
2002 and 2001, the Company paid SN approximately $55,000 and $68,000,
respectively for said services. At September 30, 2002, $40,963 due SN was
accrued in accounts payable.
In
addition, SN pays a monthly fee to the Company for technical support and
customer service provided to SN’s customers by the Company’s employees. The
Company charges SN for these services according to a per customer pricing
formula:
Customer
Service & Management Agreement fees are calculated by number of customer
records of SN multiplied by a base cost of $1.02. Technical Support fees
are
calculated by number of customer records of SN multiplied by a base cost
of 60
cents.
For
the
years ended September 30, 2002 and 2001, the Company recorded revenues of
approximately $300,901 and $22,813, respectively, from SN for these
services.
Prior
to
July 2002, the Company provided accounting functions to SN for a $2,500 monthly
fee. This arrangement was canceled in July 2002. The principal stockholders
of
the Company have provided significant financing to SN in the form of interest
bearing loans. Said stockholders are not involved in the management of or
represented on the boards of the Company or SN.
Commercial
Finance Services d/b/a/ HR Management ("CFS")
The
Company leases its employees from Commercial Finance Services, Inc. d/b/a
HR
Management (CFS). CFS provides factoring and financing services as well as
act
as a professional employer organization ("PEO") for small to mid-sized
companies. CFS does not provide any services to the Company, other than those
of
a PEO. The majority of the Company’s payroll is paid via CFS. This arrangement
allows the Company to offer additional employee benefits by sharing those
costs
with other clients of CFS. The Company pays CFS a monthly fee of $2,800 for
payroll and benefit administration. The majority owner of CFS is Central
Account
Services, Inc.(CAS). CAS is partially owned by the Company’s primary legal
counsel (3% ownership) and its former CFO (4% ownership). The remaining
ownership of CAS is unrelated to the Company. The principal stockholders
of the
Company have provided significant financing to CFS in the form of an interest
bearing loan. Said stockholders are not involved in the management of or
represented on the boards of the Company or SN.
Business
Executive Services, Inc.
The
Company has contracted with Business Executive Services, Inc. ("BESI"), an
entity affiliated through certain common management, for processing of direct
mail solicitation, welcome letters, and other customer communications. BESI
subleases a portion of the Company’s office space. The Company pays a base fee
of $15,750 per month plus a fee based on a per mail piece price of $0.015
based
on the number of mail pieces prepared and sent. The floor amount is adjusted
quarterly. During the year ended September 30, 2002, the Company paid $176,149
to BESI related to this agreement.
A
director (Greg Crane) of the Company was employed, through an employee leasing
arrangement, by BESI and received a salary of approximately $2,000 per month
from BESI and bonuses in an undetermined amount. Mr. Crane is no longer employed
by BESI. BESI has no ownership in the Company. The Company paid BESI $90,000
under this arrangement.
Advertising
Management & Consulting Services, Inc.
Advertising
Management& Consulting Services Inc. ("AMCS"), is a marketing and
advertising company experienced in designing Direct Marketing Pieces, insuring
compliance with regulatory authorities for those pieces and designing new
products that can be mass marketed through the mail. AMCS’ president is a
director of the Company.
The
Company outsources the design and testing of its many direct mail pieces
to AMCS
for a monthly fee of $20,000 per month. AMS is also solely responsible for
the
new products that have been added to the Company’s website and is working on new
mass-market products to offer the Company’s customers.
Other
As
part
of the Company’s original default settlement with the prior owners of the URL
discussed in Note 4, the Company has provided certain equipment and improvements
to an affiliated entity at no cost to that affiliated entity. The Company
retains title and control of these assets. However, the assets are not being
utilized by the Company. The net book value of the office equipment and
leasehold improvements being utilized by the affiliated entity was approximately
$60,000 at September 30, 2002. The Company is also providing office space
to
this entity for substantially below market rental rates. This entity is
affiliated through commonality of certain management members.
Advances
to affiliates are summarized as follows at September 30, 2002:
Sunbelt
Financial
|
|
$
|
197,640
|
|
The
Thompson Group
|
|
|
16,899
|
|
Mathew
& Markson
|
|
|
233,073
|
|
Total
|
|
|
447,612
|
|
Less
allowance
|
|
|
(214,539
|
)
|
Total
|
|
$
|
233,073
|
|
13.
|
CONCENTRATION
OF CREDIT RISK
|
The
Company maintains cash balances at banks in Arizona. Accounts are insured
by the
Federal Deposit Insurance Corporation up to $100,000. At September 30, 2002,
the
Company had bank balances exceeding those insured limits of
$580,000.
Financial
instruments that potentially subject the Company to concentrations of credit
risk are primarily trade accounts receivable. The trade accounts receivable
are
due primarily from business customers over widespread geographical locations
within the LEC billing areas across the United States. The Company historically
has experienced significant dilution and customer credits due to billing
difficulties and uncollectible trade accounts receivable. The Company estimates
and provides an allowance for uncollectible accounts receivable. The handling
and processing of cash receipts pertaining to trade accounts receivable is
maintained primarily by a single third party billing company. The Company
is
dependent upon this billing company for collection of its accounts receivable.
14.
|
STOCK
BASED COMPENSATION
|
From
time
to time, the Company issues stock options to executives, key employees and
members of the Board of Directors. The Company has adopted the disclosure-only
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation," and continues to account for stock based
compensation using the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees".
Accordingly, no compensation cost has been recognized for stock options granted
to employees. There were no options granted in the years ended September
30,
2002 and 2001 nor was there any additional vesting of options previously
granted.
During
the year ended September 30, 2002, the Company’s shareholders approved the 2002
Employees, Officers & Directors Stock Option Plan (the 2002 Plan). Under the
2002 Plan, the total number of shares of common stock that may be granted
is
3,000,000. The Plan provides that shares granted come from the Corporation’s
authorized but unissued common stock. The price of the options granted under
this plan shall not be less than 100% of the fair market value, or in the
case
of a grant to a principal shareholder, not less than 110% of the fair market
value of such common shares at the date of grant. The options expire 10 years
from the date of grant. At September 30, 2002, no stock options had been
granted
under the 2002 Plan. Under the Employee Incentive Stock Option Plan approved
by
the stockholders in 1998, the total number of shares of common stock that
may be
granted is 1,500,000. The plan provides that shares granted come from the
Corporation’s authorized but unissued common stock. The price of the options
granted pursuant to this plan shall not be less than 100 percent of the fair
market value of the shares on the date of grant. The options expire from
five to
ten years from date of grant. At September 30, 2002, the Company had granted
an
aggregate of 1,212,000 options under this plan, all of which had expired
as of
September 30, 2001.
In
addition to the Employee Incentive Stock Option Plan, the Company will
occasionally grant options to consultants and members of the board of directors
under specific stock option agreements. There were no such options granted
in
the years ended September 30, 2002 and 2001.
At
September 30, 2002, there were no options exercisable or outstanding. No
options
were granted in the years ended September 30, 2002 and 2001. The Company
has
issued warrants in connection with certain debt and equity transactions.
Warrants outstanding are summarized as follows:
|
|
2002
|
|
2001
|
|
|
|
|
|
Weighted
Average Exercise Price
|
|
|
|
Weighted
Average Exercise Price
|
|
Warrants
outstanding at beginning of year
|
|
|
500,000
|
|
$
|
2.12
|
|
|
350,000
|
|
$
|
2.00
|
|
Granted
|
|
|
-0-
|
|
|
|
|
|
500,000
|
|
$
|
2.12
|
|
Expired
|
|
|
-0-
|
|
|
|
|
|
(350,000
|
)
|
$
|
2.00
|
|
Exercised
|
|
|
-0-
|
|
|
|
|
|
-0-
|
|
|
|
|
Outstanding
at September 30,
|
|
|
500,000
|
|
$
|
2.12
|
|
|
500,000
|
|
$
|
2.12
|
|
The
warrants granted in the year ended September 30, 2001 were issued in connection
with the settlement with the former URL holder (NOTE 4). The exercise prices
of
the warrants range from $1.00 to $3.00. The fair values of these warrants
were
estimated at the date of grant using the Black-Scholes option-pricing model
with
the following assumptions:
Dividend
yield
|
|
|
None
|
|
Volatility
|
|
|
0.491
|
|
Risk
free interest rate
|
|
|
4.18
|
%
|
Expected
asset life
|
|
|
2.5
years
|
|
The
500,000 warrants outstanding at September 30, 2002, expire in September
2006.
15.
|
EMPLOYEE
BENEFIT PLAN
|
The
Company maintains a 401(k) profit sharing plan for its employees. Employees
are
eligible to participate in the plan upon reaching age 21 and completion of
three
months of service. The Company made contributions of $3,400 and $2,300 to
the
plan for the years ended September 30, 2002 and 2001.
Other
income for the year ended September 30, 2002, includes a gain of $267,000
related to the rescission of a consulting contract that was entered into
in a
prior year (NOTE 9). Also, included is a gain of $130,000, net of legal costs,
resulting from the settlement of a dispute with one of the Company’s former
billing companies.
17.
|
QUARTERLY
FINANCIAL DATA (UNAUDITED)
|
Subsequent
to filing the interim financial statements included on Form 10-QSB for the
periods ending December 31, 2000, March 31, 2001, June 30, 2001, December
31,
2001, March 31, 2002, and June 30, 2002, the Company has changed its accounting
treatment of shares issued to non-performing consultants. The previously
filed
interim statements reflected an expense upon issuance of the shares and a
reversal of this expense when it was deemed (through a settlement agreement
or
judgment) that these shares would be returned. However, after further analysis
and consultation with the Securities and Exchange Commission, it was determined
to be inappropriate to recognize the initial expense and its subsequent reversal
as no services were rendered by these consultants. Instead, the issuance
of
these shares will be reflected as temporary equity, together with a related
receivable, until the shares were returned. Such treatment is described in
Note
2.
The
following table sets forth the impact of this change on the following three
month periods:
|
|
Quarter
Ended
|
|
|
|
December
31,
2001
|
|
March
30,
2002
|
|
June
30,
2002
|
|
September
30,
2002
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly
Data Per 10-Q Filings
|
|
|
|
|
|
|
|
|
|
Net
revenues
|
|
$
|
2,992,993
|
|
$
|
2,839,438
|
|
$
|
3,416,953
|
|
|
na
|
|
Gross
profit
|
|
|
1,808,716
|
|
|
2,106,037
|
|
|
2,248,557
|
|
|
na
|
|
Net
income
|
|
|
306,349
|
|
|
620,288
|
|
|
798,742
|
|
|
na
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.01
|
|
$
|
0.01
|
|
$
|
0.02
|
|
|
na
|
|
Diluted
|
|
$
|
0.01
|
|
$
|
0.01
|
|
$
|
0.02
|
|
|
na
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revised
Quarterly Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues
|
|
$
|
2,992,993
|
|
$
|
2,839,438
|
|
$
|
3,416,953
|
|
$
|
3,368,742
|
|
Gross
profit
|
|
|
1,808,716
|
|
|
2,106,036
|
|
|
2,248,557
|
|
|
2,957,139
|
|
Net
income
|
|
|
306,349
|
|
|
620,286
|
|
|
640,728
|
|
|
1,273,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.01
|
|
$
|
0.01
|
|
$
|
0.01
|
|
$
|
0.03
|
|
Diluted
|
|
$
|
0.01
|
|
$
|
0.01
|
|
$
|
0.01
|
|
$
|
0.03
|
|
|
|
Quarter
Ended
|
|
|
|
December
31,
2000
|
|
March
30,
2001
|
|
June
30,
2001
|
|
September
30,
2001
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly
Data Per 10-Q Filings
|
|
|
|
|
|
|
|
|
|
Net
revenues
|
|
$
|
4,526,623
|
|
$
|
4,138,223
|
|
$
|
4,033,088
|
|
|
na
|
|
Gross
profit
|
|
|
1,640,271
|
|
|
1,697,869
|
|
|
1,548,103
|
|
|
na
|
|
Net
income
|
|
|
518,396
|
|
|
578,984
|
|
|
428,852
|
|
|
na
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.01
|
|
$
|
0.01
|
|
$
|
0.01
|
|
|
na
|
|
Diluted
|
|
$
|
0.01
|
|
$
|
0.01
|
|
$
|
0.01
|
|
|
na
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revised
Quarterly Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues
|
|
$
|
4,526,623
|
|
$
|
4,138,223
|
|
$
|
4,033,088
|
|
$
|
804,032
|
|
Gross
profit
|
|
|
1,640,271
|
|
|
1,697,869
|
|
|
1,548,103
|
|
|
2,465,638
|
|
Net
income
|
|
|
452,396
|
|
|
343,817
|
|
|
428,852
|
|
|
(447,801
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.01
|
|
$
|
0.01
|
|
$
|
0.01
|
|
$
|
(0.01
|
)
|
Diluted
|
|
$
|
0.01
|
|
$
|
0.01
|
|
$
|
0.01
|
|
$
|
(0.01
|
)
|
*
* * * *
*
The
following exhibits are attached hereto.
Exhibit
Number
|
|
Description
|
|
|
|
|
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Consent
of Epstein, Weber and Conover P.L.C
|
|
|
|
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|
Certification
pursuant to SEC Release No. 33-8238, as adopted pursuant to Section
302 of
the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002
|
In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated:
November 30, 2005
|
|
/s/
Peter J. Bergmann
|
|
|
Peter
J. Bergmann, Chief Executive
Officer
|
30