U.S. Securities and Exchange Commission Washington, D.C. 20549 ____________________ FORM 10-QSB ____________________ (Mark One) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 2001 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act For the transition period from _____________ to _______________ ____________________ Commission File Number 0-24217 ____________________ YP.NET, INC. (Exact name of small business issuer as specified in its charter) Nevada 85-0206668 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 4840 East Jasmine St. Suite 105 Mesa, Arizona 85205 (Address of principal executive offices) (480) 654-9646 (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The number of shares of the issuer's common equity outstanding as of August 1, 2001 was 40,615,464 shares of common stock, par value $.001. Transitional Small Business Disclosure Format (check one): Yes No X --- --- YP.NET, INC. INDEX TO FORM 10-QSB FILING FOR THE QUARTER ENDED JUNE 30, 2001 TABLE OF CONTENTS PART I FINANCIAL INFORMATION PAGE Item 1. Financial Statements Consolidated Comparative Balance Sheets as of June 30, 2001 2 Consolidated Statements of Operations for the Three Months and Nine Months Ended June 30, 2001 (unaudited) and 2000 (unaudited) 3 Consolidated Statements of Cash Flows for the Three Months and Nine Months Ended June 30, 2001 (unaudited) and 2000 (unaudited) 4 Notes to the Consolidated Financial Statements 5-7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8-11 PART II OTHER INFORMATION Item 1. Legal Proceedings 11-12 Item 2. Changes in Securities 13 Item 6. Exhibits and Reports on Form 8-K 13 SIGNATURES PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
YP.NET, INC. CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2001 ASSETS JUNE 30, 2001 (unaudited) CURRENT ASSETS: Cash and Cash Equivalents $ 51,087 Accounts Receivable 2,951,804 Prepaid Expenses 114,478 Direct Response Marketing - Net 210,166 Deferred income taxes 1,018,291 ------------ TOTAL CURRENT ASSETS 4,345,826 ------------ PROPERTY AND EQUIPMENT: Furniture and Fixtures 197,260 Equipment & Computer Equipment 261,981 Leasehold Improvements 319,150 LESS: Accumulated Depreciation and Amortization (377,214) ------------ TOTAL PROPERTY AND EQUIPMENT 401,177 ------------ OTHER ASSETS: Notes Receivables 129,273 Intangible Assets 5,010,000 Deposits 40,064 LESS: Accumulated Amortization (970,416) ------------ TOTAL OTHER ASSETS 4,208,921 ------------ TOTAL ASSETS 8,955,924 ------------ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Trade Accounts Payable 118,525 Income Taxes Payable 1,212,681 Short-Term Notes Payable - Note 1 524,726 Short-Term Notes Payables - Note 2 708,781 ------------ TOTAL CURRENT LIABILITIES 2,564,713 ------------ LONG-TERM LIABILITIES: Deferred income taxes 105,868 ------------ TOTAL LONG-TERM LIABILITIES 105,868 ------------ TOTAL LIABILITIES 2,670,581 ------------ STOCKHOLDER' EQUITY: Common Stock $.001 par value, 50,000,000 shares 40,836 40,615,464 and 40,560,464 issued and outstanding For June 30, 2001. Additional Paid In Capital 5,445,587 Treasury Stock (179,822) Retained Earnings 978,742 ------------ TOTAL STOCKHOLDERS' EQUITY 6,285,343 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,955,924 ------------
See the accompanying notes to these unaudited financial statements 2
YP.NET, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS AND NINE MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2000 THREE MONTH NINE MONTH THREE MONTH NINE MONTH ENDED ENDED ENDED ENDED JUNE 30, 2001 JUNE 30, 2001 JUNE 30, 2000 JUNE 30, 2000 ------------------------------------------------------------------ (unaudited) INCOME Revenue $ 4,033,088 $ 13,098,596 $ 4,247,263 $ 10,370,820 COST OF SALES 2,484,985 7,811,691 2,238,838 4,967,439 --------------- --------------- --------------- --------------- GROSS PROFIT 1,548,103 5,286,905 2,008,425 5,403,382 --------------- --------------- --------------- --------------- SELLING EXPENSES 14,623 50,095 2,149 22,932 GENERAL AND ADMINISTRATIVE 667,216 2,188,773 629,267 2,941,367 DEPRECIATION AND AMORTIZATION 151,536 456,251 154,930 466,185 --------------- --------------- --------------- --------------- TOTAL EXPENSES 833,375 2,695,119 786,346 3,430,483 --------------- --------------- --------------- --------------- EARNINGS (LOSS) FROM OPERATIONS 714,729 2,591,786 1,222,080 1,972,898 --------------- --------------- --------------- --------------- OTHER INCOME (EXPENSE) Other Income 57 121 10,270 45,518 Interest Income/(Expense) (96,418) (364,880) (199,541) (571,695) --------------- --------------- --------------- --------------- TOTAL OTHER INCOME (EXPENSE) (96,361) (364,759) (189,271) (526,178) --------------- --------------- --------------- --------------- Net Income (Loss) Before Income Taxes 618,367 2,227,027 1,032,809 1,446,721 Provisions for Income Taxes 189,515 705,345 -0- (100,494) --------------- --------------- --------------- --------------- NET INCOME (LOSS) $ 428,852 $ 1,521,682 $ 1,032,809 $ 1,547,215 =============== =============== =============== =============== EARNINGS (LOSS) PER SHARE: Basic Earnings (Loss) Per Share $ 0.01 $ 0.04 $ 0.03 $ 0.04 =============== =============== =============== =============== WEIGHTED AVERAGE NUMBER OF COMMON 40,615,464 40,362,083 40,986,354 40,516,876 =============== =============== =============== =============== SHARES OUTSTANDING Diluted Earnings (Loss) Per Share $ 0.01 $ 0.04 $ 0.03 $ 0.04 =============== =============== =============== =============== WEIGHTED AVERAGE NUMBER OF COMMON 40,615,464 40,362,083 40,986,354 40,516,876 =============== =============== =============== =============== AND COMMON SHARE EQUIVALENTS OUTSTANDING
See the accompanying notes to these unaudited financial statements 3
YP.NET, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS AND NINE MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2000 THREE MONTHS NINE MONTHS THREE MONTHS NINE MONTHS ENDED ENDED ENDED ENDED JUNE 30, 2001 JUNE 30, 2001 JUNE 30, 2000 JUNE 30, 2000 ------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES (unaudited) Net Income $ 428,852 $ 1,521,682 $ 1,032,809 $ 1,547,215 Adjustments to reconcile net income to net cash used by operating activities. Depreciation and amortization 39,452 121,211 37,014 108,268 Officers & Consultants paid with common stock -0- 59,700 115,500 878,669 Common stock surrendered -0- (494,310) -0- -0- Amortization of intellectual property 107,402 334,902 117,917 357,917 Income tax benefit 189,515 705,345 -0- (100,494) (Increase) decrease in assets Trade accounts receivable (134,021) 754,078 (373,548) (2,079,905) Customer acquisition costs (210,166) (71,320) (79,569) 68,019 Other Receivables (129,273) (129,273) -0- 77,182 Prepaid and other current assets 155,556 98,053 30,550 (85,681) Other assets (16,777) (26,777) -0- 31,368 Increase (decrease) in liabilities Trade accounts payable 54,947 15,508 18,444 34,913 Accrued liabilities (46,494) (328,201) (339,402) (534,628) Deferred revenue -0- -0- -0- (81,190) ------------------------------------------------------------------ NET CASH PROVIDED (USED) IN OPERATING ACTIVITIES 438,993 2,560,598 559,715 221,654 CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment (5,441) (15,138) (30,037) (186,631) ------------------------------------------------------------------ NET CASH USED BY INVESTING ACTIVITIES (5,441) (15,138) (30,037) (186,631) CASH FLOWS FROM FINANCING ACTIVITIES Advances from line of credit -0- -0- 87,275 984,923 Principal repayments on notes payable (654,427) (2,713,986) (600,512) (1,151,178) ------------------------------------------------------------------ NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (654,427) (2,713,986) (513,237) (166,255) NET INCREASE (DECREASE) IN CASH (220,875) (168,526) 16,441 (131,232) CASH AT BEGINNING OF PERIOD 271,962 219,613 107,650 255,323 ------------------------------------------------------------------ CASH AT END OF PERIOD $ 51,087 $ 51,087 $ 124,091 $ 124,091 ==================================================================
See the accompanying notes to these unaudited financial statements 4 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2000 1. Basis of Presentation The accompanying unaudited financial statements represent the consolidated financial position of YP.Net, Inc. ("the Company") for the three and nine months ended June 30, 2001 and 2000 include results of operations of the Company and Telco Billing, Inc. ("Telco"), its wholly owned subsidiary, and cash flows for the three and nine months ended June 30, 2001 and 2000. These statements have been prepared in accordance with generally accepted accounting principles ("GAAP") for interim financial information and the instructions for Form 10-QSB. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments to these unaudited financial statements necessary for a fair presentation of the results for the interim period presented have been made. The results for the three and nine months period ended June 30, 2001 may not necessarily be indicative of the results for the entire fiscal year. These financial statements should be read in conjunction with the Company's Form 10-KSB for the year ended September 30, 2000, and Form 10-KSB/A for the year ended September 30, 2000 including specifically the financial statements and notes to such financial statements contained therein. 2. Summary of Significant Accounting Policies The accounting policies followed by the Company, and the methods of applying those policies, which affect the determination of its financial position, results of operations and cash flows are summarized below: Cash and Cash Equivalents - ---------------------------- Cash and cash equivalents include all short-term liquid investments that are readily convertible to known amounts of cash and have original maturities of three months or less. At times cash deposits may exceed government insured limits. Principles of Consolidation - ----------------------------- The consolidated financial statements include the Company and its wholly owned subsidiary, Telco. All intercompany accounts in consolidation have been eliminated. Revenue Recognition - -------------------- The Company's revenue is generated by customer subscription of directory and advertising services. Revenue is recognized monthly for services subscribed in that specific month. The Company utilizes outside billing companies to transmit billing data that is forwarded to Local Exchange Carriers ("LECs"). Monthly subscription fees are included on the telephone bills of the LEC customers. The Company recognizes revenue based on net billings accepted by the LECs. Net billings result from gross submittals reduced by billing records rejected by the LEC's and adjusted for resubmittals. Revenue is reported gross of fees charged by the billing company and the LEC's. 5 Fair Value of Financial Instruments - --------------------------------------- The carrying amounts for investments in marketable securities, trade accounts receivable, trade accounts payable, accrued liabilities and notes payable, approximate their fair value due to the short maturity of these instruments. The Company has determined that the recorded amounts approximate fair value. Net Earnings Per Share - ------------------------- Net earnings per share are calculated using the weighted average number of shares of common stock outstanding during the year. The Company has adopted the provisions of Statement of Financial Accounting Standards No. 128, Earnings Per Share. Use of Estimates - ------------------ The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. This may affect the reported amounts of assets and liabilities and disclosure of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Stock-Based Compensation - ------------------------- Statements of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS 123"), established accounting and disclosure requirements using a fair-value based method of accounting for stock-based employee compensation. In accordance with SFAS 123, the Company has elected to continue accounting for stock based compensation using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25. 3. Business Combination On June 16, 1999, the Company exchanged 17,000,000 shares of its common stock for all of the common stock of Telco, which were 2,000 shares. 4. Intangible Asset In connection with the Company's acquisition of Telco, the Company is required to provide payment of licensing fees for the use of the Internet domain name or Universal Resource Locator ("URL") Yellow-Page.Net. The URL is recorded at its --------------- cost net of accumulated amortization. The Company's management believes that the Company's business is dependent on its ability to utilize this URL given the recognition of the "yellow page" term. The Company's management believes that the current revenue and cash flow generated using the URL Yellow-Page.Net --------------- substantiates the net book value of the asset. The Company will periodically analyze the net book value of this asset and determine if impairment has incurred. The URL is amortized on an accelerated basis over the twenty-year term of the licensing agreement. 6 5. Notes Payable and Line of Credit Notes payables are recorded and interest is accrued in accordance with the individual terms of each note. Notes payable at June 30, 2001 were as follows: Note 1: The Company entered into a loan agreement with Mr. Joseph Van Sickle - ------- during the acquisition of Telco under which Mr. Van Sickle lent $2,000,000 to the Company. At June 30, 2001 this note payable had an outstanding balance of $524,726. Mr. Van Sickle is a shareholder of the Company and owns approximately one percent of the Company's outstanding stock. Mr. Van Sickle is not a member of management and currently has no position on the Board of Directors of the Company. Note 2: The Company entered into an agreement with Matthew & Markson, Ltd., an - ------- Antigua corporation ("M&M"), in conjunction with the acquisition of Telco for the license of the URL Yellow-Page.Net. The Company agreed to pay M&M --------------- $5,000,000 to license URL Yellow-Page.Net. At June 30, 2001 the M&M note --------------- payable had an outstanding balance of $708,781. M&M owns approximately 23% of the Company's outstanding stock. 6. Common Stock Transactions in the Company's common stock issued for the acquisition of assets, products, or services are accounted for at 90% of fair value. Fair value is determined based on the closing price of the Company's common stock on the date of the transaction, or the fair value of the asset, product, or service received. 7. Income Taxes The Company provides for income taxes based on the provisions of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, which among other things, requires that recognition of deferred income taxes be measured by the provisions of enacted tax laws in effect at the date of financial statements. The provision for income taxes for interim periods is calculated on the basis of the expected effective rate for the full year. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Except for historical information contained herein, the following discussion contains forward-looking statements that involve risks and uncertainties. Such forward-looking statements include, but are not limited to, statements regarding future events and our plans and expectations. Our actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed elsewhere in this Form 10-QSB or incorporated herein by reference. See "Forward-Looking Statements" below. OVERVIEW YP.Net, Inc. ("we" or "our" refers to 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 later changed to RIGL Corporation in July 1998. With the acquisition of Telco Billing, Inc. ("Telco"), the Company shifted its focus of business and changed its name to YP.Net, Inc., effective October 1, 1999. The new name was chosen to reflect our focus on our Internet-based yellow page services. We provide Internet-based yellow page listing services on our Yellow-Page.Net and YP.Net Web sites. We acquired Telco in June 1999, changing - --------------- ------ our primary business focus to become an Internet-based yellow page listing service. Our websites serve as a search engine for yellow page listings in the United States and Canada. We charge our customers for a preferred listing of their businesses on our websites. We have experienced continued increases in competition in the Internet yellow page market, and continue to seek joint venture and investment acquisition opportunities to potentially lessen the effects of competition in the electronic yellow page markets. We utilized direct mailings as our primary marketing program. We have experienced some attrition in our customer base since September 2000. However, we have implemented a customer contact programs with the goals of assisting us in maintaining our customer base and growing our customer base without direct mail marketing efforts. We resumed our direct mailing program in February 2001 on a limited basis. As of September 30, 2000, we had 130,592 customers subscribing to our services. As of June 30, 2001, we had 99,862 customers. We believe the decrease in our customer base for these periods was primarily the result of natural attrition we have not sent a direct mailer to customers since June 2000 due to our election to close any open issues with the Federal Trade Commission. We have continued our customer contact program to attempt to increase our customer satisfaction and limit customer attrition. This program has and will continue to provide decrease in attrition and better customer satisfaction. 8 On July 30, 2001 the Company received a signed Stipulated Final Judgment and Order for Permanent Injunction and other Equitable Relief. The Company and the Federal Trade Commission agreed to this stipulation and the complaint states a claim upon which relief may be granted against the Company. There have been no findings or admissions of any wrongdoing by the Company. The Company has been restrained from using the word "rebate" on their solicitation and must state that the mailer is a solicitation of goods and services. The Company is also not allowed to use the "walking fingers" logo and we are also required to allow a refund to our customers from 90 days to 120 days. The Company has begun a test solicitation of 250,000 mail pieces incorporating all of the Federal Trade Commission changes in different formats. The Company will evaluate the results. Before resuming a regular mail solicitation program over 3000 new customers have responded to our test mailers. The above four items, and others have been adhered to by the Company in all of its future direct mailers. The Company has replace all direct mailers with the required stipulations set forth by the Federal Trade Commission. All parties have been exonerated of the preliminary injunction filed on June 26, 2000. Expenditures related to consulting fees were significant in the three and nine months period ended June 30, 2001 and 2000. Management believes that these expenditures will not be as significant in future periods. The consulting fees expended were to implement policy and procedures to comply with the stipulated order from the Federal Trade Commission and these expenses have adversely affected our current earnings for the three months and nine months ended June 30, 2001. Management is actively pursuing rescission and cancellation of certain common and preferred stock that was previously issued for services. The preferred shares that were issued by prior management of 1,500,000 of preferred shares have been cancelled and will not be converted and any person or entity holding the preferred shares should contact current management. Management has presently entered into a written agreement to settle and return of 1,425,334 shares of common stock that was issued by prior management to Hudson Consulting Group, Inc. The parties had prior offers to settle the dispute over the issuance of common stock to Hudson Consulting Group, Inc. by prior management however the Company later settled the matter at a mediation hearing on July 16, 2001 for $85,000. The current management of the Company was informed that the owners of Hudson Consulting Group Inc., Allen Wolfson, was barred from working in the securities industry by the Securities Exchange Commission. Current management has also assured the NASD Regulation that prior management is no longer an employee, officer, or director of YP.Net. The cancellation of these shares will decrease our total outstanding shares, which will affect our earners per share. Our co-branded syndication with I411.com has provided our preferred customers and those using our site to find goods and services easier and faster. This arrangement has allowed us to have additional advertising space on our website which Management believes will bring in additional revenue. With I411.com powering our sites we will have more pages with our "Look and Feel". Management believes this syndication will help attract more people to our site. The company now has the ability to sell syndicate yellow page sites. The company is already able to offer our client visible storefronts. Through visible storefronts our clients will be able to set up "Web Stores" easily and cheaply; complete with the ability to utilitized credit cards to process orders. Management is currently testing these products and believes that they have the potential to add income. Management is also in the process of expanding its syndication revenue by offering web page designs and maps for Internet yellow page customers. We presently have approximately 3 million hits per month, which we believe will expend our customer base. 9 Management believes that our Direct Response Program if partnered with other reputable companies could be an additional source of revenue. The Company has embarked on a program to find and solicit promotional partners for its Direct Response Program on a test basis. RESULTS OF OPERATIONS Our Internet yellow page service is currently the sole source of our revenue. Revenues were $4,033,088 and $13,098,596 for the three and nine months period ended June 30, 2001, compared to $4,247,263 and $10,370,820 for three and nine months period ended June 30, 2000, respectively. Until other sources of revenue are developed, our total revenues will be directly dependent upon the number of customers subscribing to our preferred listing service. We are presently, seeking other revenue sources from advertising media through our new co-branding agreement with I411.com and syndication programs being developed. Cost of Sales were $2,484,985 and $7,811,691 for three and nine months period ended June 30, 2001, compared to $2,238,838 and $4,967,439 for three and nine months period ended June 30, 2000, respectively. Cost of sales is comprised of dilution expenses, allowances for bad debt, direct mailer marketing costs, and our billing costs. Dilution expenses include customer credits and any other receivable write-downs. Dilution expenses were approximately $1,171,935 for the three months ended June 30, 2001 compared to $1,216,829 for June 30, 2000. Cost of sales inclusive of dilution expenses has primarily increased because the expenses are directly related to the increase in revenue. Our cost of sales has increased also because an increase in dilution primarily due to the increase in competitive local exchange carriers (CLEC) that cannot be billed through the LEC's. Our dilution costs have also increased and we have reconciled the dilution expense to our data provided by the billing companies and have found unanswered and irreconcilable differences. We are presently requesting and audit of these differences and are awaiting the results. In our financial statements for the period ending we have recorded a more conservative amount of dilution. Therefore, any offsets will affect our net income. We have also made corrective steps to counter the increase in CLEC's by billing on credit cards and ACH. Selling expenses were $14,623 and $50,095 for three and nine months period ended June 30, 2001, compared to $2,149 and $22,932 for three and nine months period ended June 30, 2000, respectively. Selling costs are primarily associated with general advertising and marketing of other revenue sources. General and administrative expenses were $667,216 and $2,188,773 for three and nine months period ended June 30, 2001, compared to $629,297 and $2,941,367 for three and nine months period ended June 30, 2000, respectively. These costs are primarily related to staffing, which we believe provides better service to our customers. For the three months ended June 30, 2001 our professional fees were 93,432 compared to $121,724 for June 30, 2000, the decrease is primarily due to the final settlement of defending and negotiating with the Federal Trade Commission related to the allegations that the Company engaged in deceptive advertising. We settled with the Federal Trade Commission and entered into a final stipulated order for permanent injunction or other equitable relief on July 30, 2001. There were not finding or admissions of any wrongdoing. Interest expense net of interest income was $96,418 and $364,880 for three and nine months period ended June 30, 2001, compared to $199,541 and $571,695 for three and nine months period ended June 30, 2000, respectively. Interest expense was a result of our outstanding debt. This outstanding debt included debt incurred in connection with the acquisition of the URL Yellow-Page.Net. The ---------------- reduction in interest expense is due to the payoff of our credit facility with Finova Capital Corporation, and the reduction of Matthew Markson Ltd, and Joseph and Helen Van Sickle. 10 Net Income before income taxes was $618,367 and net income was $428,852 or $.01 per diluted share, and $2,227,027 net income before income tax and net income was $1,521,682 or $.04 per diluted share, for the three and nine month periods ended June 30, 2001, compared to $1,032,809 net income before income taxes and $1,032,809 net income, or $.03 per diluted share, and $1,446,721 net income before income taxes and $1,547,215 net income, or $.04 per diluted share, for the three and nine month periods ended June 30, 2000. The decrease in Net income is primarily due to the attrition of our customers from reduced marketing efforts due to the Federal Trade Commission's requirements. We have received a final settlement with the Federal Trade Commission we have received a final stipulation order for permanent injunction of other equitable relief on July 30, 2001. We have made now resumed our marketing efforts and have incorporated the corrective changes to our direct mailer to comply with the changes required. We have reconciled the dilution expense to our data provided by the billing companies and have found unanswered and irreconcilable differences. We are presently requesting and audit of these differences and are awaiting the results. In our financial statements for the period ending we have recorded a more conservative amount of dilution. Therefore, any offsets will affect our net income. We anticipate increasing marketing efforts in our fourth quarter ended September 30, 2001. LIQUIDITY AND CAPITAL RESOURCES Cash provided by operating activities was $2,560,598 for the nine months period ended June 30, 2001, compared to cash provided by operating activities of 221,654 for the nine months period ended June 30, 2000. Revenue was generated solely from providing electronic yellow page listing advertising. Cash from operating activities for the nine months period ended June 30, 2001 was used to increase our customer acquisition costs ($71,320), other accounts receivables ($129,273), and security deposits ($26,777), and to decrease trade accounts receivables by $754,078, prepaid expenses $98,053, and accrued liabilities ($328,201). Cash in the nine months period ended June 30, 2000 was generated by an increase in our accounts receivables ($2,079,905), in prepaid assets ($85,681), and by decreases in accrued liabilities ($534,628), deferred revenue ($81,190) and customer acquisition costs $68,019. 11 Cash used by investing activities was $15,138 for the nine months period ended June 30, 2001, compared to $186,631 for the nine months ended June 30, 2000. We purchased additional computer equipment of $15,138 for June 30, 2001 compared to $186,631 for June 30, 2000. Cash used by financing activities was $2,713,986 for nine months period ended June 30, 2001, compared to cash used by financing activities of $166,255 for the nine months ended June 30, 2000. The cash used by financing activities of $2,713,986 represents total payments made to reduce the principle balances of the outstanding notes for June 30, 2001. Cash used by financing activities was $166,255 for the nine months period ended June 30, 2000; we realized cash of $984,923 from advances on our line of credit and utilized $1,151,178 to pay notes payable. We have paid off our credit facility with Finova Corporation on June 8, 2001. Management is seeking other potential lenders that specialize in financing businesses utilizing LEC billings. We do not anticipate these changes to have an adverse affect on our ability to continue operating at our current levels. OTHER CONSIDERATIONS There are numerous factors that affect the Company business and the results of its operations. Sources of these factors include general economic and business conditions, federal and state regulation of our business activities, the level of demand for our services, the level and intensity of competition in the Internet-based yellow page industry and the pricing pressures that may result, our ability to develop new services based on new or evolving technology and the market's acceptance of those new services, our ability to timely and effectively manage periodic product transitions, the services, customer and geographic sales mix of any particular period, and our ability to continue to improve our infrastructure (including personnel and systems) to keep pace with the growth in its overall business activities. FORWARD-LOOKING STATEMENTS Except for historical information contained herein, this Form 10-QSB contains express or implied forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act. We intend that such forward-looking statements be subject to the safe harbors created thereby. We may make written or oral forward-looking statements from time to time in filings with the SEC, in press releases, quarterly conference calls or otherwise. The words "believes," "expects," "anticipates," "intends," "forecasts," "project," "plans," "estimates" and similar expressions identify forward-looking statements. Such statements reflect our current views with respect to future events and financial performance or operations and speak only as of the date the statements are made. Forward-looking statements involve risks and uncertainties and readers are cautioned not to place undue reliance on forward-looking statements. Our actual results may differ materially from such statements. Factors that cause or contribute to such differences include, but are not limited to, those discussed elsewhere in this Form 10-QSB, as well as those discussed in our Form 10-KSB and Form 10-KSB/A which is incorporated by reference in this Form 10-QSB. 12 Although we believe that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate with the result that there can be no assurance the results contemplated in such forward-looking statements will be realized. The inclusion of such forward-looking information should not be regarded, as a representation that the future events, plans, or expectations contemplated will be achieved. We undertake no obligation to publicly update, review, or revise any forward-looking statements to reflect any change in our expectations or any change in events, conditions, or circumstances on which any such statements based. Our filings with the SEC, including the Form 10-KSB and 10-KSB/A, may be accessed at the SEC's Web site, www.sec.gov. ------------ PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS YP.Net is involved in various legal proceedings and claims as described in our Form 10-KSB and Form 10-KSB/A for the year ended September 30, 2000. We have settled through a mediation hearing with Hudson Consulting Group, Inc. on July 16, 2001. Prior management issued 1,425,334 shares of common stock to Hudson Consulting Group, Inc. for service to include but not be limited to advise the Company on the availability of potential lenders in the Company's market niche, assist in evaluating potential Public Relation firms and Investor Relations firms, and contact market makers and to provide other financial services. These services were never rendered, since Allen Wolfson, the owner of Hudson Consulting Group, Inc., and was barred from working in the securities industry by the Securities Exchange Commission. The Company agreed to pay $85,000 for the return of 1,425,334 shares of its common stock. The results of these proceedings will reduce the number of common stock outstanding and increase our earning per share. On June 26, 2000 the Federal Trade Commission ("FTC") filed a complaint against the Company and other defendants alleging that the Company and other defendants were engaged in deceptive advertising practices and sought a preliminary injunctive and the appointment of a receiver business and to freeze all our assets. The alleged deceptive practices related to a check mailer solicitation utilized in our marketing activities. On July 13, 2000, YP.Net and all other defendants entered into a global settlement with the FTC, resulting in dismissal of the receiver and termination of the asset freeze. The legal fees and litigation related to the FTC allegation have adversely affected our profitability and caused our marketing efforts to be greatly curtailed. We have entered into a Stipulated Final Judgement and Order For Permanent Injunction and other Equitable Relief with the FTC on July 30, 2001. Which Judge Stephen Macnamee has now signed. The company has never admitted liability. In this order we are required to modify our direct mailer that are mailed to our customers. There have been no findings or admissions of any wrongdoing by YP.Net, Inc. The order, in the opinion of management, should not and has not materially and adversely affect the Company's business. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 13 EXHIBITS 10.1 Federal Trade Commission Settlement Agreement 10.2 Hudson Consulting Group, Inc. Settlement Agreement REPORTS ON FORM 8-K No reports on Form 8-K were filed during the three months ended June 30, 2001. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on behalf by the undersigned thereunto duly authorized. YP.NET, INC. Dated: August 14, 2001 By /s/ Angelo Tullo ------------------------ Angelo Tullo, Chairman of the Board 14