Net
income for the second quarter and first half of fiscal 2005, as compared to the
corresponding periods for fiscal 2004, decreased due primarily to decreased
revenues. As a percentage of revenues, net income was 4.6% and 2.8% for the
second quarter and first half of fiscal 2005, respectively, as compared to 20.4%
and 21.9% for the second quarter and first half of fiscal 2004, respectively. As
a significant portion of our expenses are fixed, our profitability margins are
negatively impacted by declines in revenue.
Liquidity
and Capital Resources
Net
cash provided by operating activities increased $2,381,724 or 80.1%, to
$5,354,869 for the six months ended March 31, 2005 compared to $2,973,145 for
the six months ended March 31, 2004. The increase in cash generated from
operations is primarily due to a conversion of many of our customers from LEC
billing to alternate billing channels that have a shorter collection time and
the fact we did not actively market for new customer acquisition during the
first half of 2005 as we worked to resolve the previously discussed billing
issues.
Our
primary source of cash inflows is net remittances from our billing channels,
including LEC billings and ACH billings. For LEC billings, we receive
collections on accounts receivable through the billing service aggregators under
contracts to administer this billing and collection process. The billing service
aggregators generally do not remit funds until they are collected. Generally,
cash is collected and remitted to us (net of dilution and other fees and
expenses) over a 60- to 120-day period subsequent to the billing dates.
Additionally, for each monthly billing cycle, the billing aggregators and LECs
withhold certain amounts, or “holdback reserves,” to cover potential future
dilution and bad debt expense. These holdback reserves lengthen our cash
conversion cycle as they are remitted to us over a 12 to 18-month period of
time. We classify these holdback reserves as current or long-term receivables on
our balance sheet, depending on when they are scheduled to be remitted to us.
For ACH billings, we generally receive the net proceeds through our billing
service processors within 15 days of submission. Additionally, approximately 80%
of our accounts receivable are due from one of the Company’s
aggregators.
Our
most significant cash outflows include payments for marketing expenses and
general operating expenses. Cash outflows for direct response advertising, our
primary marketing strategy, typically occur in advance of expense recognition as
these costs are capitalized and amortized over 18 months, the average estimated
retention period for new customers. General operating cash outflows consist of
payroll costs, income taxes, and general and administrative expenses that
typically occur within close proximity of expense recognition.
Net
cash used for investing activities totaled $260,154 for the first half of fiscal
2005 and consisted of minor purchases of equipment and expenditures for
intangible assets. During the first half of fiscal 2004, cash used for investing
activities was $3,109,991, of which the primary component was advances to
affiliates of $2,725,000.
Net
cash flows from financing activities for the first half of fiscal 2005 consisted
primarily of payments of common stock dividends of $468,950. There were no
financing cash flows for the first half of fiscal 2004.
We
had working capital of $14,281,725 as of March 31, 2005, compared to $12,484,833
as of September 30, 2004. Despite our near breakeven performance during the
first fiscal quarter of 2005, our operating expenses consist of a substantial
amount of non-cash expenses, such as amortization of customer acquisition costs
and deferred stock compensation, which allows us to continue to grow our cash
and working capital.
We
maintain a $1,000,000 credit facility with Merrill Lynch Business Financial
Services, Inc. The applicable interest rate on borrowings, if any, will be a
variable rate of the one-month LIBOR rate (as published in the Wall
Street Journal),
plus 3%. The facility requires an annual line fee of 1% of the committed amount.
Outstanding advances are secured by all of our existing and acquired tangible
and intangible assets located in the United States. There was no balance
outstanding at March 31, 2005. The line is in process of being renewed for an
additional one-year period. The Company has received verbal approval of the
renewal and is awaiting updated documentation.
The
credit facility requires us to maintain a “Leverage Ratio” (total liabilities to
tangible net worth) that does not exceed 1.5-to-1 and a “Fixed Charge Ratio”
(earnings before interest, taxes, depreciation, amortization and other non-cash
charges minus any internally financed capital expenditures divided by the sum of
debt service, rent under capital leases, income taxes and dividends) that is not
less that 1.5-to-1 as determined quarterly on a 12-month trailing basis. The
credit facility includes additional covenants governing permitted indebtedness,
liens, and protection of collateral. As of March 31, 2005, we were in compliance
with the covenants and are able to fully draw on the credit
facility.
We
are contractually obligated to pay a $0.01 per share dividend each quarter,
subject to compliance with applicable laws, to all common stockholders,
including those who hold unvested restricted stock. The quarterly dividend
associated with the second fiscal quarter of 2005 was declared and paid in April
2005 and, therefore, was not accounted for in the three months ended March 31,
2005.
Although
our revenues have recently declined and we have only been slightly profitable
for the first half of fiscal 2005, we believe that our existing cash on hand
will provide us with sufficient liquidity to meet our operating needs for the
next twelve months.
Risk
Factors
An
investment in our common stock involves a substantial degree of risk. Before
making an investment decision, you should give careful consideration to the
following risk factors in addition to the other information contained in this
report. The following risk factors, however, may not reflect all of the risks
associated with our business or an investment in our common stock. Accordingly,
you should only consider investing in our common stock if you can afford to lose
your entire investment.
Risks
Related to Our Business
The
loss of our ability to use existing billing methods would adversely impact our
results of operations.
Our
business model historically has depended heavily upon our ability to bill
advertisers on their telephone bills through their respective Local Exchange
Carriers, or LECs. We have recently faced challenges and impediments to our
ability to bill certain advertisers in this manner, causing significant revenue
declines from the third quarter of fiscal 2004 to the first quarter of fiscal
2005. While we have transitioned most of our existing customers to alternative
billing methods, such as ACH billing, we continue to utilize LEC billing for
approximately 26% of our customers. We bill the majority of our customers
through ACH billing.
The
existence of the LECs is the result of Federal legislation. In the same manner,
Congress could pass future legislation that obviates the existence of or the
need for the LECs. Additionally, regulatory agencies could limit or prevent our
ability to use the LECs to bill our advertisers. The introduction of and
advancement of new technologies, such as WiFi technology or other
wireless-related technologies, could render unnecessary the existence of fixed
telecommunication lines, which also could obviate the need for and access to the
LECs. Additionally, if the restrictions imposed on us by certain LECs become
more widespread, we could further lose the ability to utilize LEC billing. If
any of these events occur or, alternatively, if changes in regulations regarding
ACH billing limit our use of that billing method, our revenues and would have a
material adverse impact on our financial condition and results of
operations.
We
may experience increased dilution and our revenue may decline over time due to
the involvement of the CLECs.
We
have experienced a decrease in revenue from the LECs from the effects of the
Competitive Local Exchange Carriers, or CLECs, that are providing local
telephone services to IAP advertisers. With the competition in the telephony
industry, many business customers are finding alternative telephony suppliers,
such as CLECs, that offer less expensive alternatives to the LECs. When the LECs
effectuate a price increase this causes a rush of LEC customers looking for an
alternative telephone company, which may be a CLEC. When our advertising
customers switch service providers from the LECs to a CLEC, we are precluded
from billing these customers on their monthly telephone bill and must instead
convert them to alternative billing methods such as ACH billing or direct
invoicing. This conversion process can be disruptive to our operations and
result in lost revenue. We cannot provide any assurances that our efforts to
transition such customers to alternative billing methods will be successful. We
may experience future increases in dilution of our customer base that we are
able to bill on their monthly telephone bills, which, in turn, may result in
decreases in our revenue.
We
face a concentration of credit risk with respect to our billing service
providers.
Currently,
we utilize multiple vendors for both LEC and ACH billing; however, one service
provider handles a substantial majority of our LEC billing activity. If this
vendor discontinued providing services to us, we could face missed billings and
lost revenue which would adversely affect our ability to meet our existing
financial obligations. Moreover, over 80% of our existing outstanding
receivables are due from this service provider. If this vendor were to face
financial difficulty, our financial position would be materially impacted.
We
face intense competition, including from companies with greater resources, which
could adversely affect our growth and could lead to decreased revenues.
Several
companies, including Verizon, Yahoo and Microsoft, currently market Internet
Yellow Pages services that directly compete with our services and products. We
may not compete effectively with existing and potential competitors for several
reasons, including the following:
| |
· |
some
competitors have longer operating histories and greater financial and
other resources than we have and are in better financial condition than we
are; |
| |
· |
some
competitors have better name recognition, as well as larger, more
established, and more extensive marketing, IAP advertiser service, and IAP
advertiser support capabilities than we
have; |
| |
· |
some
competitors may supply a broader range of services, enabling them to serve
more or all of their IAP advertisers’ needs. This could limit our sales
and strengthen our competitors’ existing relationships with their IAP
advertisers, including our current and potential IAP
advertisers; |
| |
· |
some
competitors may be able to better adapt to changing market conditions and
IAP advertiser demand; and |
| |
· |
barriers
to entry are not significant. As a result, other companies that are not
currently involved in the Internet-based Yellow Pages advertising business
may enter the market or develop technology that reduces the need for our
services. |
Increased
competitive pressure could lead to reduced market share, as well as lower prices
and reduced margins for our services. If we experience reductions in our revenue
for any reason, our margins may continue to decline, which would adversely
affect our results of operations. We cannot assure you that we will be able to
compete successfully in the future.
Our
success depends upon our ability to establish and maintain relationships with
our advertisers.
Our
ability to generate revenue depends upon our ability to maintain relationships
with our existing advertisers, to attract new advertisers to sign up for
revenue-generating services, and to generate traffic to our advertisers’
websites. We primarily use direct marketing efforts to attract new advertisers.
These direct marketing efforts may not produce satisfactory results in the
future. We attempt to maintain relationships with our advertisers through IAP
advertiser service and delivery of traffic to their businesses. An inability to
either attract additional advertisers to use our service or to maintain
relationships with our advertisers could have a material adverse effect on our
business, prospects, financial condition, and results of
operations.
If
we do not introduce new or enhanced offerings to our advertisers and users, we
may be unable to attract and retain those advertisers and users, which would
significantly impede our ability to generate revenue.
We
will need to introduce new or enhanced products and services in order to attract
and retain advertisers and users and to remain competitive. Our industry has
been characterized by rapid technological change, changes in advertiser and user
requirements and preferences, and frequent new product and service introductions
embodying new technologies. These changes could render our technology, systems,
and website obsolete. We may experience difficulties that could delay or prevent
us from introducing new products and services. If we do not periodically enhance
our existing products and services, develop new technologies that address our
advertisers’ and users’ needs and preferences, or respond to emerging
technological advances and industry standards and practices on a timely and
cost-effective basis, our products and services may not be attractive to
advertisers and users, which would significantly impede our revenue growth. In
addition, our reputation and our brand could be damaged if any new product or
service introduction is not favorably received.
Our
quarterly results of operations could fluctuate due to factors outside of our
control.
Our
net revenues may grow at a slower rate on a quarter-to-quarter basis than we
have experienced in recent periods. Factors that could cause our results of
operations to fluctuate in the future include the following:
| |
· |
fluctuating
demand for our services, which may depend on a number of factors
including |
| |
o |
changes
in economic conditions and our IAP advertisers’
profitability, |
| |
o |
varying
IAP advertiser response rates to our direct marketing
efforts, |
| |
o |
our
ability to complete direct mailing solicitations on a timely basis each
month, |
| |
o |
changes
in our direct marketing efforts, |
| |
o |
IAP
advertiser refunds or cancellations, and |
| |
o |
our
ability to continue to bill IAP advertisers on their monthly telephone
bills, ACH or credit card rather than through direct
invoicing; |
| |
· |
timing
of new service or product introductions and market acceptance of new or
enhanced versions of our services or products;
|
| |
· |
our
ability to develop and implement new services and technologies in a timely
fashion in order to meet market demand; |
| |
· |
price
competition or pricing changes by us or our
competitors; |
| |
· |
new
product offerings or other actions by our
competitors; |
| |
· |
month-to-month
variations in the billing and receipt of amounts from LECs, such that
billing and revenues may fall into the subsequent fiscal quarter;
|
| |
· |
the
ability of our check processing service providers to continue to process
and provide billing information regarding our solicitation
checks; |
| |
· |
the
amount and timing of expenditures for expansion of our operations,
including the hiring of new employees, capital expenditures, and related
costs; |
| |
· |
technical
difficulties or failures affecting our systems or the Internet in
general; |
| |
· |
a
decline in Internet traffic at our website; |
| |
· |
the
cost of acquiring, and the availability of, information for our database
of potential advertisers; and |
| |
· |
our
expenses are only partially based on our expectations regarding future
revenue and are largely fixed in nature, particularly in the short
term. |
Our
ability to efficiently process new advertiser sign-ups and to bill our
advertisers monthly depends upon our check processing service providers and
billing aggregators, respectively.
We
currently use check processing companies to provide us with advertiser
information at the point of sign-up for our Internet Advertising Package. Our
ability to gather information to bill our advertisers at the point of sign-up
could be adversely affected if one or more of these providers experiences a
disruption in its operations or ceases to do business with us.
We
also depend upon our billing aggregators to efficiently bill and collect monies
from the LECs relating to the LECs’ billing and collection of our monthly
charges from advertisers, as well as collecting from those advertisers on ACH
billing. We currently have agreements with two billing aggregators and two ACH
service providers. Any disruption in our billing aggregators’ ability to perform
these functions could adversely affect our financial condition and results of
operations.
We
depend upon third parties to provide certain services and software, and our
business may suffer if the relationships upon which we depend fail to produce
the expected benefits or are terminated.
We
currently outsource to third parties certain of the services that we provide,
including the work of producing usable templates for and hosting of the
QuickSites, website templates known as Ezsites, and wholesale Internet access.
These relationships may not provide us with benefits that outweigh the costs of
the relationships. If any strategic supplier demands a greater portion of
revenue derived from the services it provides or increases its charges for its
services, we may decide to terminate or refuse to renew that relationship, even
if it previously had been profitable or otherwise beneficial. If we lose a
significant strategic supplier, we may be unable to replace that relationship
with other strategic relationships with comparable revenue potential. The loss
or termination of any strategic relationship with one of these third-party
suppliers could significantly impair our ability to provide services to our
advertisers and users.
We
depend upon third-party software to operate certain of our services. The failure
of this software to perform as expected would have a material adverse effect on
our business. Additionally, although we believe that several alternative sources
for this software are available, any failure to obtain and maintain the rights
to use such software would have a material adverse effect on our business,
prospects, financial condition, and results of operations. We also depend upon
third parties to provide services that allow us to connect to the Internet with
sufficient capacity and bandwidth so that our business can function properly and
our websites can handle current and anticipated traffic. Any restrictions or
interruption in our connection to the Internet would have a material adverse
effect on our business, prospects, financial condition, and results of
operations.
The
market for our services is uncertain and is still evolving.
Internet
Yellow Pages services are evolving rapidly and are characterized by an
increasing number of market entrants. Our future revenues and profits will
depend substantially upon the widespread acceptance and the use of the Internet
and other online services as an effective medium of commerce by merchants and
consumers. Rapid growth in the use of and interest in the Internet may not
continue on a lasting basis, which may negatively impact Internet-based
businesses such as ours. In addition, advertisers and users may not adopt or
continue to use Internet-base Yellow Pages services and other online services
that we may offer in the future. The demand and market acceptance for recently
introduced services generally is subject to a high level of uncertainty.
Most
potential advertisers have only limited, if any, experience advertising on the
Internet and have not devoted a significant portion of their advertising
expenditures to Internet advertising. Advertisers may find Internet Yellow Pages
advertising to be less effective for meeting their business needs than
traditional methods of Yellow Pages or other advertising and marketing. Our
business, prospects, financial condition or results of operations will be
materially and adversely affected if potential advertisers do not adopt Internet
Yellow Pages as an important component of their advertising
expenditures.
We
may not be able to secure additional capital to expand our operations.
Although
we currently have no material long-term needs for capital expenditures, we will
likely be required to make increased capital expenditures to fund our
anticipated growth of operations, infrastructure, and personnel. We currently
anticipate that our cash on hand as of September 30, 2004, together with cash
flows from operations, will be sufficient to meet our anticipated liquidity
needs for working capital and capital expenditures over the next 12 months. In
the future, however, we may seek additional capital through the issuance of debt
or equity depending upon our results of operations, market conditions or
unforeseen needs or opportunities. Our future liquidity and capital requirements
will depend on numerous factors, including the following:
| |
· |
the
pace of expansion of our operations; |
| |
· |
our
need to respond to competitive pressures;
and |
| |
· |
future
acquisitions of complementary products, technologies or
businesses. |
Our
forecast of the period of time through which our financial resources will be
adequate to support our operations is a forward-looking statement that involves
risks and uncertainties and actual results could vary materially as a result of
the factors described above. As we require additional capital resources, we may
seek to sell additional equity or debt securities or draw on our existing bank
line of credit. Debt financing must be repaid at maturity, regardless of whether
or not we have sufficient cash resources available at that time to repay the
debt. The sale of additional equity or convertible debt securities could result
in additional dilution to existing stockholders. We cannot provide assurance
that any financing arrangements will be available in amounts or on terms
acceptable to us, if at all.
We
depend upon our executive officers and key personnel.
Our
performance depends substantially on the performance of our executive officers
and other key personnel. The success of our business in the future will depend
on 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 personnel could have a material
adverse effect on our business, results of operations or financial condition. We
do not maintain key person life insurance on the lives of any of our executive
officers or key personnel.
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. In addition, market conditions
may require us to pay higher compensation to qualified management and technical
personnel than we currently anticipate. Any inability to attract and retain
qualified management and technical personnel in the future could have a material
adverse effect on our business, prospects, financial condition, and results of
operations.
Our
business is subject to a strict regulatory environment.
Existing
laws and regulations and any future regulation may have a material adverse
effect on our business. For example, we believe that our direct marketing
programs meet or exceed existing requirements of the United States Federal Trade
Commission. Any changes to FTC requirements or changes in our direct or other
marketing practices, however, could result in our marketing practices failing to
comply with FTC regulations. Our increasing dependence on ACH billing has
exposed us to greater scrutiny by the National Automated Clearing House
Association, or NACHA. As a result, we could be subject to substantial liability
in the future, including fines and criminal penalties, preclusion from offering
certain products or services, and the prevention or limitation of certain
marketing practices.
We
may face risks as we expand our business into international
markets.
We
currently are exploring opportunities to offer our services in other
English-speaking countries. We have limited experience in developing and
marketing our services internationally, and we may not be able to successfully
execute our business model in markets outside the United States. We will face a
number of risks inherent in doing business in international markets, including
the following:
| |
· |
international
markets typically experience lower levels of Internet usage and Internet
advertising than the United States, which could result in
lower-than-expected demand for our
services; |
| |
· |
unexpected
changes in regulatory requirements; |
| |
· |
potentially
adverse tax consequences; |
| |
· |
difficulties
in staffing and managing foreign
operations; |
| |
· |
changing
economic conditions; |
| |
· |
exposure
to different legal standards, particularly with respect to intellectual
property and distribution of information over the
Internet; |
| |
· |
burdens
of complying with a variety of foreign laws;
and |
| |
· |
fluctuations
in currency exchange rates. |
To
the extent that international operations represent a significant portion of our
business in the future, our business could suffer if any of these risks
occur.
We
may be unable to promote and maintain our brands.
We
believe that establishing and maintaining the brand identities of our Internet
Yellow Pages services is a critical aspect of attracting and expanding a base of
advertisers and users. Promotion and enhancement of our brands will depend
largely on our success in continuing to provide high quality service. If
advertisers and users do not perceive our existing services to be of high
quality, or if we introduce new services or enter into new business ventures
that are not favorably received by advertisers and users, we will risk diluting
our brand identities and decreasing their attractiveness to existing and
potential IAP advertisers.
We
may not be able to adequately protect our intellectual property
rights.
Our
success depends both on our internally developed technology and our third party
technology. We rely on a variety of trademarks, service marks, and designs to
promote our brand names and identity. We also rely on a combination of
contractual provisions, confidentiality procedures, and trademark, copyright,
trade secrecy, unfair competition, and other intellectual property laws to
protect the proprietary aspects of our products and services. Legal standards
relating to the validity, enforceability, and scope of the protection of certain
intellectual property rights in Internet-related industries are uncertain and
still evolving. The steps we take to protect our intellectual property rights
may not be adequate to protect our intellectual property and may not prevent our
competitors from gaining access to our intellectual property and proprietary
information. In addition, we cannot provide assurance that courts will always
uphold our intellectual property rights or enforce the contractual arrangements
that we have entered into to protect our proprietary technology.
Third
parties may infringe or misappropriate our copyrights, trademarks, service
marks, trade dress, and other proprietary rights. Any such infringement or
misappropriation could have a material adverse effect on our business,
prospects, financial condition, and results of operations. In addition, the
relationship between regulations governing domain names and laws protecting
trademarks and similar proprietary rights is unclear. We may be unable to
prevent third parties from acquiring domain names that are similar to, infringe
upon or otherwise decrease the value of our trademarks and other proprietary
rights, which may result in the dilution of the brand identity of our services.
We
may decide to initiate litigation in order to enforce our intellectual property
rights, to protect our trade secrets, or to determine the validity and scope of
our proprietary rights. Any such litigation could result in substantial expense,
may reduce our profits, and may not adequately protect our intellectual property
rights. In addition, we may be exposed to future litigation by third parties
based on claims that our products or services infringe their intellectual
property rights. Any such claim or litigation against us, whether or not
successful, could result in substantial costs and harm our reputation. In
addition, such claims or litigation could force us to do one or more of the
following:
| |
· |
cease
selling or using any of our products that incorporate the challenged
intellectual property, which would adversely affect our
revenue; |
| |
· |
obtain
a license from the holder of the intellectual property right alleged to
have been infringed, which license may not be available on reasonable
terms, if at all; and |
| |
· |
redesign
or, in the case of trademark claims, rename our products or services to
avoid infringing the intellectual property rights of third parties, which
may not be possible and in any event could be costly and
time-consuming. |
Even
if we were to prevail, such claims or litigation could be time-consuming and
expensive to prosecute or defend, and could result in the diversion of our
management’s time and attention. These expenses and diversion of managerial
resources could have a material adverse effect on our business, prospects,
financial condition, and results of operations.
Current
capacity constraints may require us to expand our infrastructure and IAP
advertiser support capabilities.
Our
ability to provide high-quality Internet Yellow Pages services largely depends
upon the efficient and uninterrupted operation of our computer and
communications systems. We may be required to expand our technology,
infrastructure, and IAP advertiser support capabilities in order to accommodate
any significant increases in the numbers of advertisers and users of our
websites. We may not be able to project accurately the rate or timing of
increases, if any, in the use of our services or expand and upgrade our systems
and infrastructure to accommodate these increases in a timely manner. If we do
not expand and upgrade our infrastructure in a timely manner, we could
experience temporary capacity constraints that may cause unanticipated system
disruptions, slower response times, and lower levels of IAP advertiser service.
Our inability to upgrade and expand our infrastructure and IAP advertiser
support capabilities as required could impair the reputation of our brand and
our services, reduce the volume of users able to access our website, and
diminish the attractiveness of our service offerings to our advertisers.
Any
expansion of our infrastructure may require us to make significant upfront
expenditures for servers, routers, computer equipment, and additional Internet
and intranet equipment, as well as to increase bandwidth for Internet
connectivity. Any such expansion or enhancement will need to be completed and
integrated without system disruptions. An inability to expand our infrastructure
or IAP advertiser service capabilities either internally or through third
parties, if and when necessary, would materially and adversely affect our
business, prospects, financial condition, and results of
operations.
Failure
to achieve and maintain effective internal controls in accordance with Section
404 of the Sarbanes-Oxley Act could have a material adverse effect on our
business and stock price.
Pursuant
to Section 404 of the Sarbanes-Oxley Act of 2002, beginning with our Annual
Report on Form 10-K for the fiscal year ending September 30, 2006, we will be
required to furnish a report by our management on our internal control over
financial reporting. The internal control report must contain (i) a statement of
management’s responsibility for establishing and maintaining adequate internal
control over financial reporting, (ii) a statement identifying the framework
used by management to conduct the required evaluation of the effectiveness of
our internal control over financial reporting, (iii) management’s assessment of
the effectiveness of our internal control over financial reporting as of the end
of our most recent fiscal year, including a statement as to whether or not
internal control over financial reporting is effective, and (iv) a statement
that the Company’s independent auditors have issued an attestation report on
management’s assessment of internal control over financial reporting.
In
order to achieve compliance with Section 404 of the Act within the prescribed
period, we will need to engage in a process to document and evaluate our
internal control over financial reporting, which will be both costly and
challenging. In this regard, management will need to dedicate internal
resources, engage outside consultants and adopt a detailed work plan to (i)
assess and document the adequacy of internal control over financial reporting,
(ii) take steps to improve control processes where appropriate, (iii) validate
through testing that controls are functioning as documented and (iv) implement a
continuous reporting and improvement process for internal control over financial
reporting. We can provide no assurance as to our, or our independent auditors’,
conclusions at September 30, 2006 with respect to the effectiveness of our
internal control over financial reporting under Section 404 of the Act. There is
a risk that neither we nor our independent auditors will be able to conclude at
September 30, 2006 that our internal controls over financial reporting are
effective as required by Section 404 of the Act.
During
the course of our testing we may identify deficiencies which we may not be able
to remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act for
compliance with the requirements of Section 404. In addition, if we fail to
achieve and maintain the adequacy of our internal controls, as such standards
are modified, supplemented or amended from time to time, we may not be able to
ensure that we can conclude on an ongoing basis that we have effective internal
controls over financial reporting in accordance with Section 404 of the
Sarbanes-Oxley Act. Moreover, effective internal controls, particularly those
related to revenue recognition, are necessary for us to produce reliable
financial reports and are important to helping prevent financial fraud. If we
cannot provide reliable financial reports or prevent fraud, our business and
operating results could be harmed, investors could lose confidence in our
reported financial information, and the trading price of our stock could drop
significantly.
Risks
Related to the Internet
We
may not be able to adapt as the Internet, Internet Yellow Pages services, and
IAP advertiser demands continue to evolve.
Our
failure to respond in a timely manner to changing market conditions or client
requirements could have a material adverse effect on our business, prospects,
financial condition, and results of operations. The Internet, e-commerce, and
the Internet Yellow Pages industry are characterized by:
| |
· |
rapid
technological change; |
| |
· |
changes
in advertiser and user requirements and
preferences; |
| |
· |
frequent
new product and service introductions embodying new technologies;
and |
| |
· |
the
emergence of new industry standards and practices that could render our
existing service offerings, technology, and hardware and software
infrastructure obsolete. |
In
order to compete successfully in the future, we must:
| |
· |
enhance
our existing services and develop new services and technology that address
the increasingly sophisticated and varied needs of our prospective or
current IAP advertisers; |
| |
· |
license,
develop or acquire technologies useful in our business on a timely basis;
and |
| |
· |
respond
to technological advances and emerging industry standards and practices on
a cost-effective and timely basis. |
Our
future success may depend on continued growth in the use of the
Internet.
Because
Internet Yellow Pages is a new and rapidly evolving industry, the ultimate
demand and market acceptance for our services will be subject to a high level of
uncertainty. Significant issues concerning the commercial use of the Internet
and online service technologies, including security, reliability, cost, ease of
use, and quality of service, remain unresolved and may inhibit the growth of
Internet business solutions that use these technologies. In addition, the
Internet or other online services could lose their viability due to delays in
the development or adoption of new standards and protocols required to handle
increased levels of Internet activity, or due to increased governmental
regulation. Our business, prospects, financial condition, and results of
operations would be materially and adversely affected if the use of Internet
Yellow Pages and other online services does not continue to grow or grows more
slowly than we expect.
We
may be required to keep pace with rapid technological change in the Internet
industry.
In
order to remain competitive, we will be required continually to enhance and
improve the functionality and features of our existing services, which could
require us to invest significant capital. If our competitors introduce new
products and services embodying new technologies, or if new industry standards
and practices emerge, our existing services, technologies, and systems may
become obsolete. We may not have the funds or technical know-how to upgrade our
services, technology, and systems. If we face material delays in introducing new
services, products, and enhancements, our advertisers and users, may forego the
use of our services and select those of our competitors, in which event our
business, prospects, financial condition and results of operations could be
materially and adversely affected.
Regulation
of the Internet may adversely affect our business.
Due
to the increasing popularity and use of the Internet and online services such as
online Yellow Pages, federal, state, local,
and foreign governments may adopt laws and regulations, or amend existing laws
and regulations, with respect to the Internet and other online services. These
laws and regulations may affect issues such as user privacy, pricing, content,
taxation, copyrights, distribution, and quality of products and services. The
laws governing the Internet remain largely unsettled, even in areas where
legislation has been enacted. It may take years to determine whether and how
existing laws, such as those governing intellectual property, privacy, libel,
and taxation, apply to the Internet and Internet advertising and directory
services. In addition, the growth and development of the market for electronic
commerce may prompt calls for more stringent consumer protection laws, both in
the United States and abroad, that may impose additional burdens on companies
conducting business over the Internet. Any new legislation could hinder the
growth in use of the Internet generally or in our industry and could impose
additional burdens on companies conducting business online, which could, in
turn, decrease the demand for our services, increase our cost of doing business,
or otherwise have a material adverse effect on our business, prospects,
financial condition, and results of operations.
We
may not be able to obtain Internet domain names that we would like to
have.
We
believe that our existing Internet domain names are an extremely important part
of our business. We may desire, or it may be necessary in the future, to use
these or other domain names in the United States and abroad. Various Internet
regulatory bodies regulate the acquisition and maintenance of domain names in
the United States and other countries. These regulations are subject to change.
Governing bodies may establish additional top-level domains, appoint additional
domain name registrars or modify the requirements for holding domain names. As a
result, we may be unable to acquire or maintain relevant domain names in all
countries in which we plan to conduct business in the future.
The
extent to which laws protecting trademarks and similar proprietary rights will
be extended to protect domain names currently is not clear. We therefore may be
unable to prevent competitors from acquiring domain names that are similar to,
infringe upon or otherwise decrease the value of our domain names, trademarks,
trade names, and other proprietary rights. We cannot provide assurance that
potential users and advertisers will not confuse our domain names, trademarks,
and trade names with other similar names and marks. If that confusion occurs, we
may lose business to a competitor and some advertisers and users may have
negative experiences with other companies that those advertisers and users
erroneously associate with us. The inability to acquire and maintain domain
names that we desire to use in our business, and the use of confusingly similar
domain names by our competitors, could have a material adverse affect on our
business, prospects, financial conditions, and results of operations in the
future.
Our
business could be negatively impacted if the security of the Internet becomes
compromised.
To
the extent that our activities involve the storage and transmission of
proprietary information about our advertisers or users, security breaches could
damage our reputation and expose us to a risk of loss or litigation and possible
liability. We may be required to expend significant capital and other resources
to protect against security breaches or to minimize problems caused by security
breaches. Our security measures may not prevent security breaches. Our failure
to prevent these security breaches or a misappropriation of proprietary
information may have a material adverse effect on our business, prospects,
financial condition, and results of operations.
Our
technical systems could be vulnerable to online security risks, service
interruptions or damage to our systems.
Our
systems and operations may be vulnerable to damage or interruption from fire,
floods, power loss, telecommunications failures, break-ins, sabotage, computer
viruses, penetration of our network by unauthorized computer users and
“hackers,” natural disaster, and similar events. Preventing, alleviating, or
eliminating computer viruses and other service-related or security problems may
require interruptions, delays or cessation of service. We may need to expend
significant resources protecting against the threat of security breaches or
alleviating potential or actual service interruptions. The occurrence of such
unanticipated problems or security breaches could cause material interruptions
or delays in our business, loss of data, or misappropriation of proprietary or
IAP advertiser-related information or could render us unable to provide services
to our IAP advertisers for an indeterminate length of time. The occurrence of
any or all of these events could materially and adversely affect our business,
prospects, financial condition, and results of operations.
If
we are sued for content distributed through, or linked to by, our website or
those of our advertisers, we may be required to spend substantial resources to
defend ourselves and could be required to pay monetary damages.
We
aggregate and distribute third-party data and other content over the Internet.
In addition, third-party websites are accessible through our website or those of
our advertisers. As a result, we could be subject to legal claims for
defamation, negligence, intellectual property infringement, and product or
service liability. Other claims may be based on errors or false or misleading
information provided on or through our website or websites of our directory
licensees. Other claims may be based on links to sexually explicit websites and
sexually explicit advertisements. We may need to expend substantial resources to
investigate and defend these claims, regardless of whether we successfully
defend against them. While we carry general business insurance, the amount of
coverage we maintain may not be adequate. In addition, implementing measures to
reduce our exposure to this liability may require us to spend substantial
resources and limit the attractiveness of our content to users.
Risks
Related to Our Securities
Stock
prices of technology companies have declined precipitously at times in the past
and the trading price of our common stock is likely to be volatile, which could
result in substantial losses to investors.
The
trading price of our common stock has risen and fallen significantly over the
past twelve months and could continue to be volatile in response to factors
including the following, many of which are beyond our control:
| |
· |
decreased
demand in the Internet services sector; |
| |
· |
variations
in our operating results; |
| |
· |
announcements
of technological innovations or new services by us or our
competitors; |
| |
· |
changes
in expectations of our future financial performance, including financial
estimates by securities analysts and
investors; |
| |
· |
our
failure to meet analysts’ expectations; |
| |
· |
changes
in operating and stock price performance of other technology companies
similar to us; |
| |
· |
conditions
or trends in the technology industry; |
| |
· |
additions
or departures of key personnel; and |
| |
· |
future
sales of our common stock. |
Domestic
and international stock markets often experience significant price and volume
fluctuations that are unrelated to the operating performance of companies with
securities trading in those markets. These fluctuations, as well as political
events, terrorist attacks, threatened or actual war, and general economic
conditions unrelated to our performance, may adversely affect the price of our
common stock. In the past, securities holders of other companies often have
initiated securities class action litigation against those companies following
periods of volatility in the market price of those companies’ securities. If the
market price of our stock fluctuates and our stockholders initiate this type of
litigation, we could incur substantial costs and experience a diversion of our
management’s attention and resources, regardless of the outcome. This could
materially and adversely affect our business, prospects, financial condition,
and results of operations.
Certain
provisions of Nevada law and in our charter, as well as our Shareholder Rights
Plan, may prevent or delay a change of control of our
company.
We
are subject to the Nevada anti-takeover laws regulating corporate takeovers.
These anti-takeover laws prevent Nevada corporations from engaging in a merger,
consolidation, sales of its stock or assets, and certain other transactions with
any stockholder, including all affiliates and associates of the stockholder, who
owns 10% or more of the corporation’s outstanding voting stock, for three years
following the date that the stockholder acquired 10% or more of the
corporation’s voting stock except in certain situations. In addition, our
amended and restated articles of incorporation and bylaws include a number of
provisions that may deter or impede hostile takeovers or changes of control or
management. These provisions include the following:
| |
· |
our
board is classified into three classes of directors as nearly equal in
size as possible, with staggered three
year-terms; |
| |
· |
the
authority of our board to issue up to 5,000,000 shares of serial preferred
stock and to determine the price, rights, preferences, and privileges of
these shares, without stockholder approval; |
| |
· |
all
stockholder actions must be effected at a duly called meeting of
stockholders and not by written consent unless such action or proposal is
first approved by our board of directors; |
| |
· |
special
meetings of the stockholders may be called only by the Chairman of the
Board, the Chief Executive Officer, or the President of our company;
and |
| |
· |
cumulative
voting is not allowed in the election of our
directors. |
We
also recently adopted a Shareholder Rights Plan, commonly referred to as a
poison pill. This Plan serves as a strong deterrent to any unsolicited or
hostile takeover attempts and, effectively, requires an interested acquirer to
negotiate with our board of directors.
These
provisions of Nevada law and our articles and bylaws, as well as our poison
pill, could prohibit or delay mergers or other takeover or change of control of
our company and may discourage attempts by other companies to acquire us, even
if such a transaction would be beneficial to our stockholders.
Our
common stock may be subject to the “penny stock” rules as promulgated under the
Exchange Act.
In
the event that no exclusion from the definition of “penny stock” under the
Exchange Act is available, then any broker engaging in a transaction in our
common stock will be required to provide its customers with a risk disclosure
document,
disclosure of market quotations, if any, disclosure of the compensation of the
broker-dealer and its sales person in the transaction, and monthly account
statements showing the market values of our securities held in the customer’s
accounts. The bid and offer quotation and compensation information must be
provided prior to effecting the transaction and must be contained on the
customer’s confirmation of sale. Certain brokers are less willing to engage in
transactions involving “penny stocks” as a result of the additional disclosure
requirements described above, which may make it more difficult for holders of
our common stock to dispose of their shares.
| ITEM
3. |
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK |
As
of March 31, 2005, we did not participate in any market risk-sensitive commodity
instruments for which fair value disclosure would be required under Statement of
Financial Accounting Standards No. 107. We believe that we are not subject in
any material way to other forms of market risk, such as foreign currency
exchange risk or foreign customer purchases (of which there were none in the
first six months of fiscal 2005 or in any of 2004) or commodity price
risk.
Disclosure
controls and procedures are designed with an objective of ensuring that
information required to be disclosed in our periodic reports filed with the
Securities and Exchange Commission, such as this Quarterly Report on Form 10-Q,
is recorded, processed, summarized and reported within the time periods
specified by the Securities and Exchange Commission. Disclosure controls are
also designed with an objective of ensuring that such information is accumulated
and communicated to our management, including our chief executive officer and
chief financial officer, in order to allow timely consideration regarding
required disclosures.
The
evaluation of our disclosure controls by our principal executive officer and
principal financial officer included a review of the controls’ objectives and
design, the operation of the controls, and the effect of the controls on the
information presented in this Quarterly Report. Our management, including our
chief executive officer and chief financial officer, does not expect that
disclosure controls can or will prevent or detect all errors and all fraud, if
any. A control system, no matter how well designed and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. Also, projections of any evaluation of the disclosure controls
and procedures to future periods are subject to the risk that the disclosure
controls and procedures may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.
Based
on their review and evaluation as of the end of the period covered by this Form
10-Q, and subject to the inherent limitations all as described above, our
principal executive officer and principal financial officer have concluded that
our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934) are effective as of the end
of the period covered by this report. They are not aware of any significant
changes in our disclosure controls or in other factors that could significantly
affect these controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses. During the period covered by this Form 10-Q, there have not been any
changes in our internal control over financial reporting that have materially
affected, or that are reasonably likely to materially affect, our internal
control over financial reporting.
PART
II - OTHER INFORMATION
From time
to time, we are party to certain legal proceedings incidental to the conduct of
our business. We believe that the outcome of pending legal proceedings will not,
either individually or in the aggregate, have a material adverse effect on our
business, financial position, results of operations, cash flows or
liquidity.
The
following exhibits are either attached hereto or incorporated herein by
reference as indicated:
|
Exhibit
Number |
|
Description |
| |
|
|
|
|
|
Form
of Restricted Stock Agreement under 2003 Stock Plan |
| |
|
|
|
|
|
Certifications
pursuant to SEC Release No. 33-8238, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 |
| |
|
|
|
|
|
Certifications
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 |
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
YP.CORP.
|
|
|
Dated:
May 16, 2005 |
/s/
W. Chris Broquist |
|
|
W.
Chris Broquist |
|
|
Chief
Financial Officer |
EXHIBIT
INDEX
|
Exhibit
Number |
|
Description |
| |
|
|
|
|
|
Form
of Restricted Stock Agreement under 2003 Stock Plan |
| |
|
|
|
|
|
Certifications
pursuant to SEC Release No. 33-8238, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 |
| |
|
|
|
|
|
Certifications
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 |
