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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2002.
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 000-28871
SWITCHBOARD INCORPORATED
(Exact Name of Registrant as Specified in Its Charter)
Delaware 04-3321134
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
120 FLANDERS ROAD
WESTBORO, MASSACHUSETTS 01581
(Address and Zip Code of Principal Executive Offices)
Registrant's telephone number, including area code: 508-898-8000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value per share
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
As of June 28, 2002, the aggregate market value of the voting common stock
held by non-affiliates of the Registrant was approximately $15,598,000
(reference is made to Part II, Item 5 of this Annual Report on Form 10-K for the
statement of assumptions upon which this calculation is based).
On March 21, 2003, there were 18,879,847 shares of the Registrant's common
stock outstanding. The Registrant has no shares of non-voting common stock
authorized or outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Definitive Proxy Statement for its 2003 Annual
Meeting of Stockholders scheduled to be held on May 15, 2003 (the "2003 Proxy
Statement"), which will be filed with the Securities and Exchange Commission not
later than 120 days after December 31, 2002, are incorporated by reference into
Part III herein. With the exception of the portions of the 2003 Proxy Statement
expressly incorporated herein by reference, such document shall not be deemed
filed as part hereof.
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K includes forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 that are subject to a number of risks and
uncertainties. All statements, other than statements of historical fact,
included in this Annual Report on Form 10-K regarding our strategy, future
operations, financial position, estimated revenues, projected costs, prospects,
plans and objectives of management are forward-looking statements. When used in
this Annual Report on Form 10-K, the words "will", "believe", "anticipate",
"intend", "estimate", "expect", "project" and similar expressions are intended
to identify forward-looking statements, although not all forward-looking
statements contain these identifying words. We cannot guarantee future results,
levels of activity, performance or achievements and you should not place undue
reliance on our forward-looking statements. Our forward-looking statements do
not reflect the potential impact of any future acquisitions, mergers,
dispositions, joint ventures or strategic alliances. Our actual results could
differ materially from those anticipated in these forward-looking statements as
a result of various factors, including the risks described in "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Factors Affecting Operating Results, Business Prospects and Market Price of
Stock" and elsewhere in this Annual Report on Form 10-K. The forward-looking
statements provided by Switchboard in this Annual Report on Form 10-K represent
Switchboard's estimates as of the date this report is filed with the SEC. We
anticipate that subsequent events and developments will cause our estimates to
change. However, while we may elect to update our forward-looking statements in
the future we specifically disclaim any obligation to do so. Our forward-looking
statements should not be relied upon as representing our estimates as of any
date subsequent to the date this report is filed with the SEC.
This Annual Report on Form 10-K also contains estimates made by independent
parties and by us relating to market size and growth and other industry data.
These estimates involve a number of assumptions and limitations, and you are
cautioned not to give undue weight to such estimates. We have not independently
verified the accuracy of the estimates made by third parties. In addition,
projections, assumptions and estimates of our future performance and the future
performance of the industries in which we operate are necessarily subject to a
high degree of uncertainty and risk due to a variety of factors, including those
described in "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Factors Affecting Operating Results, Business Prospects
and Market Price of Stock" and elsewhere in this Annual Report on Form 10-K.
These and other factors could cause results to differ materially from those
expressed in the estimates made by the independent parties and by us.
1
WEB SITE ADDRESS
Our Web site address is www.switchboard.com. References herein to
www.switchboard.com, switchboard.com, any variations of the foregoing or any
other uniform resource locator, or URL, are inactive textual references only.
The information on our Web site or at any other URL is not incorporated by
reference herein and should not be considered to be a part of this document. We
make available through our Web site, free of charge our annual reports on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to those reports, filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably
practicable after such reports are electronically filed with, or furnished to,
the SEC. These reports may be accessed through the Web site's investor
information page.
TRADEMARKS
Switchboard, Ad Studio, MapsOnUs, My Corner, My Studio, SideClick, Think
Outside the Book and What's Nearby are registered service marks of Switchboard
Incorporated. Deals Nearby, Envenue, It's the Yellow Pages. Electrified.,
Nearbuy, and Switchboard Matrix are service marks of Switchboard Incorporated.
Other product, company or organization names cited herein may be service marks,
trademarks or trade names of their respective companies or organizations.
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SWITCHBOARD INCORPORATED
2002 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Part I
Item 1: Business................................................................................... 4
Item 2: Properties................................................................................. 12
Item 3: Legal Proceedings.......................................................................... 12
Item 4: Submission of Matters to a Vote of Security Holders........................................ 12
Executive Officers of the Registrant....................................................... 13
Part II
Item 5: Market for Registrant's Common Equity and Related Stockholder Matters...................... 14
Item 6: Selected Financial Data.................................................................... 15
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 16
Item 7A. Quantitative and Qualitative Disclosures About Market Risks................................ 34
Item 8. Financial Statements and Supplementary Data................................................ 35
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....... 62
Part III
Item 10. Directors and Executive Officers of the Registrant......................................... 62
Item 11. Executive Compensation..................................................................... 62
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters................................................................ 62
Item 13. Certain Relationships and Related Transactions............................................. 62
Item 14. Controls and Procedures.................................................................... 62
Part IV.
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................ 63
Signatures................................................................................. 66
Certifications............................................................................. 67
3
PART I
ITEM 1. BUSINESS
Our Company
Switchboard is a leading provider of Web hosted directory technologies and
customized yellow pages platforms to yellow pages publishers, newspaper
publishers and Internet portals that offer online local directory advertising
solutions to national retailers and "brick and mortar" merchants across a full
range of Internet and wireless platforms. Switchboard offers a broad range of
functions, content and services, including yellow and white pages, location
based searching, and interactive maps and driving directions. Our Web site,
Switchboard.com, is a showcase for our technology and breadth of directory
product offerings, and is a resource to consumers and businesses alike.
Switchboard is a Delaware corporation, which commenced operations in
February 1996. From our inception in February 1996 until March 2000, we were a
unit and later a subsidiary of ePresence, Inc. (formerly Banyan Worldwide). As
of December 31, 2002, ePresence beneficially owned approximately 52.0% of our
common stock. We operate in one business segment.
Our Market Opportunity
For decades, the yellow pages has been a primary source of local directory
information for individuals and businesses. The yellow pages are entrenched in
our daily lives and can be found in virtually every home and office. According
to the Kelsey Group ("Kelsey"), a global authority on local and personalized
commerce intelligence, the yellow pages industry today serves an estimated $14
billion annual market in the United States, and $25 billion worldwide. Kelsey
reports that while most of that market still purchases yellow pages advertising
in traditional printed form, the industry is experiencing a migration from paper
to online. Approximately 13% of yellow pages directory inquiries were conducted
online in 2002 compared to approximately 10% in 2001 and 2% in 2000, according
to Kelsey. Kelsey expects that the trend will continue with projections of 25%
growth in annual Internet yellow pages traffic during the next several years,
with online and wireless directory lookups accounting for 40% of the overall
yellow pages usage by 2006.
An online presence is important for all businesses, regardless of whether
the business actually sells its wares over the Internet. According to 2002
research conducted by Pew Internet & American Life, if a business provides
product and/or service information online, even if it does not sell products
online, nearly half of all Americans would be more likely to go to the physical
store to transact business. Online yellow pages are a key resource that
businesses can use to cost-effectively establish an online presence and provide
easy access to information to consumers who are actively searching for
businesses that meet their product and service needs. According to the 2002
Yellow Pages Industry Usage Study released by the Yellow Pages Integrated Media
Association, conducted by Knowledge Networks, 60% of online yellow pages users
make a purchase or are likely to do so. Market research continues to reinforce
the increasing role that Internet promotion plays in stimulating offline
transactions for brick and mortar businesses.
As the volume of directory references made online and via wireless devices
continues to grow, we believe that the industry will see a migration of print
yellow pages revenues to online yellow pages providers. Kelsey further reports
that the Internet yellow pages market, which generated $383 million in 2002, is
forecasted to reach $2 billion by 2006. We believe that as a leading provider of
Web-based directory technology we are well positioned to capitalize on this
opportunity through our network of current and future merchant network alliance
partners.
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Our Solution
We provide a complete Web based yellow pages solution, which we refer to as
a directory platform, for companies strategically focused on developing a
successful online directory business under their own brands. Our suite of
products and services are built around a proprietary database and search
technology, and full-featured customer and advertising management tools. Our
products and services are fully integrated to meet the needs of our merchant
network alliance partners (such as yellow pages publishers, newspaper publishers
and Internet portals), their merchant customers and the millions of consumers
across the country who use the Switchboard platform. Consumers access our
platform through Switchboard.com and the Internet brands of our extensive
network of merchant network alliance partners to locate business and residential
information locally and nationally.
Merchant Network Alliance Partners - With a focus on an alliance-oriented
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business model, our entire directory platform can be quickly and efficiently
customized to meet each merchant network alliance partner's unique business
requirements, allowing them to cost-effectively develop and grow their online
directory business.
Merchant Advertisers - With a focus on findability, we create a variety of
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advertising products that provide merchants with a Web presence that is highly
targeted to ready-to-buy consumers looking for the products and services that
those merchants offer.
Consumers - With a focus on user experience, we create simple user
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interfaces backed by sophisticated searching capabilities to deliver accurate
results quickly and easily.
Our Strategy
Our business model is primarily based on receiving a fee from our merchant
network alliance partners for:
* businesses promoted in the directory platforms that we develop and deploy
for those merchant network alliance partners or
* businesses promoted in the Switchboard.com directory site on behalf of
our merchant network alliance partners.
We believe our future growth is dependent upon our execution of the
following strategies:
* First, we intend to continue to invest in improving our technology and
the functionality of our directory platform. Through the ongoing
evolution of the directory platform, our merchant network alliance
partners will continue to have access to products designed to allow them
to deliver increasing value to their merchant customers.
* Second, we intend to work with each of our merchant network alliance
partners to grow their online base of merchant customers, by providing
premier support, training and tools focused on permitting them to
reliably sell and support hundreds of thousands of merchant customers
with our technology.
* Third, we intend to focus on increasing the number of merchant network
alliance partners using our platform and selling directory advertising to
merchants. We will target new independent yellow pages publishers,
Regional Bell Operating Companies (RBOCs), newspaper publishers and
Internet portals to add to our extensive list of existing merchant
network alliances.
* Fourth, we will continue to extend the usage and reach of our showcase
site, Switchboard.com, in order to provide value to merchant network
alliance partners looking to extend the distribution offered to their
merchant advertisers.
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Our Products
Yellow Pages Platform - Our Web-hosted yellow pages platform is comprised
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of four fully integrated components that enable our merchant network alliance
partners to develop and manage their online directory business.
* Sophisticated Database and Search Engine - We provide a highly scalable,
reliable and high performance directory engine in the market today.
Through our proprietary database technology, we are able to easily merge
data from multiple sources, allowing us to provide timely and
comprehensive content to our merchant network alliance partners. With the
release of our Switchboard Matrix technology, we were the first-to-market
with the introduction of searchable on-line "copy points". Copy points
are enhanced data typically found in paper yellow pages advertising. Copy
points enable merchants to be found via a wide variety of attributes,
including product and service offerings, business hours, specialties,
etc., moving beyond the traditional category / location searching of
paper-based or other online yellow pages offerings.
* Customizable Advertising Product Suite and Business Rules - Within the
yellow pages platform we provide a complete suite of local and national
advertising products that can be fully customized to match the unique
packaging and pricing requirements of our merchant network alliance
partners. With the introduction of our searchable "copy point" model, we
fully aligned our online advertising products with traditional yellow
pages products, offering similar enhanced data in a printed medium,
greatly improving our ability to streamline our merchant network alliance
partners' sales efforts.
* Comprehensive Merchant Management Tools - We have developed three
different tiers of merchant management software solutions to provide our
merchant network alliance partners with the level of functionality that
works most efficiently in coordination with their existing in-house
systems. For merchant network alliance partners looking for a complete
merchant management solution, we provide a rich customer relationship
management ("CRM") package that tracks merchant customer activity,
performs billing functions and manages merchant advertising. Our CRM
package also can be easily integrated with other applications to enable
customer support representatives to manage the fulfillment of a variety
of products from within a single interface. For merchant network alliance
partners that already possess CRM infrastructure, we provide a secure,
Web-based merchant management tool that allows merchant network alliance
partners to easily manage advertising campaigns and merchant collateral
within the yellow pages system. Lastly, for merchant network alliance
partners who regularly inject large volumes of merchant advertisements
into the system, we provide a bulk load interface that allows formatted
files containing merchant information and ad specifications to be
programmatically processed.
* Cobrandable User Interface - Through ongoing usability testing and close
analysis of consumer use of online yellow pages, we continue to evolve
our user interface and searching capabilities to quickly connect
consumers with the most relevant results. Through the modular
organization of functional elements of our interface, we can customize
the interface's look and feel so that it is consistent with the look and
feel of our merchant network alliance partners' Web sites and branding.
These modules separate the functional elements from the layout elements,
such as site appearance, thus facilitating rapid development. As we
enhance or build new functional elements, the underlying architecture
enables us to deploy these elements across all of the Web sites of our
merchant network alliance partners without making individual changes to
each specific implementation.
Switchboard.com - Our flagship Web site and the first site to deliver
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national white pages directory services on the Internet in 1996, Switchboard.com
is a showcase for our technology platform. Providing a free alternative to
costly directory assistance charges, over 100 million page views are generated
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on the site by more than 5 million unique users each month (according to Nielsen
NetRatings - December 2002) performing business, people and product lookups both
at home and in the workplace. The number of unique users on Switchboard.com grew
by more than 50% from January 2002 to December 2002. We attribute this growth to
the strong consumer appeal of the site and the enhanced searching capabilities
offered by the Switchboard Matrix platform. Yellow pages and general site
advertising on the Switchboard.com Web site can be purchased through our direct
sales force as well as through our merchant network alliance partners who sell
to their local merchant customers the additional distribution of their
advertisement within the Switchboard.com Web site "Switchboard Distribution" in
conjunction with their own online yellow pages products.
MapsOnUs.com - Maps and Directions - Our MapsOnUs technology integrates
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maps and driving directions into many areas of our directory platform, and is
also available through our MapsOnUs.com Web site. Utilizing our MapsOnUs
capabilities, we are able to provide businesses with dealer locators that can be
easily integrated into their Web sites to help visitors locate the closest
outlet, dealer or franchisee, such as the Post Office locator currently
implemented for the United States Postal Service on USPS.com. We also customize
the MapsOnUs maps and driving directions content for licensing to a number of
online destinations.
Principal Sources of Revenue
Merchant Network Revenue
------------------------
We derive revenue from our merchant network through our directory platform,
through distribution of merchant network alliance partner advertisements on
Switchboard.com and through merchant network services. In 2002, 2001 and 2000,
net revenue derived from our merchant network was $10.3 million, $6.2 million
and $8.3 million or 87.9%, 66.9% and 41.6% of total net revenues, respectively.
Directory Platform - Merchant network alliance partners typically pay us an
engineering fee for the creation and modification of a Web-hosted directory
platform plus a per-merchant fee per month (in the form of a fixed fee per
merchant or a percentage of revenue) based upon the number of merchants they
promote within the platform.
Our largest and most significant merchant network alliance partner is
America Online, Inc. Under our amended agreement with AOL, which expires in
December 2004, we paid AOL $15.0 million, issued 746,260 shares of our common
stock and will share directory advertising revenue with AOL. In addition AOL
committed to pay us at least $2.0 million in consulting or service fees over the
four-year term of the agreement. In 2002 and 2001, consulting and service fees
totaled $1.5 million and $1.9 million, respectively.
Net revenue recognized from AOL was $4.9 million, or 41.8% of net revenue,
and $26,000 for the years ended December 31, 2002 and 2001, respectively. There
was no net revenue from AOL in the year ended December 31, 2000. We anticipate
that AOL will continue to represent a significant percentage of our revenue in
2003 and will be a material component of our overall business.
Distribution of Merchant Network Alliance Partner Advertisements on
Switchboard.com - We offer our merchant network alliance partners and Certified
Marketing Representatives (CMR), advertising agencies who specialize in placing
yellow page advertisements, the ability to sell Switchboard.com distribution to
their merchant advertisers. Our merchant network alliance partners typically pay
us a per-merchant fee per month based upon the number of merchants they place
into Switchboard.com.
Merchant Network Services - We provide our merchant network alliance
partners Web site creation and hosting services for their merchants, for which
the merchant network alliance partner pays us a monthly fee per merchant.
Additionally, we provide direct marketing services to our merchant network
alliance partners aimed at increasing their local merchant subscription base.
7
Banner and Site Sponsorship Advertising Revenue
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We offer both site-wide banner and category-specific banner programs on the
Switchboard.com Web site. We provide standard run of site banner ad programs,
which include full banners across the top and bottom of Web pages and smaller
banners on the navigation bar on the Web site that allow advertisers to take
advantage of our high traffic volume on Switchboard.com. Additionally, our
patented banner ad serving technology enables us to place and rotate
category-specific banner ads of various sizes in targeted locations throughout
our site. We also sell sponsorship programs on a site-wide basis or for various
categories. Sponsorships are advertisements which do not rotate with other
advertisers and are prominently displayed on our Web site. Customers typically
pay us on a cost per thousand impressions (CPM) or cost per action (CPA) basis
for banner and sponsorship advertising. Banner and site sponsorship revenue in
2002, 2001 and 2000 was $1.4 million, $3.1 and $11.6 million, or 12.1%, 33.1%
and 58.4% of net revenue, respectively.
Technology
We have developed sophisticated technologies that enable rapid
dissemination of information requested by consumers using our Web site. These
technologies were conceived and developed by a staff of senior engineers
experienced in designing large-scale, distributed computer systems, a form of
computer architecture that divides system functionality over numerous computers,
each known as a server, to enhance overall system performance and reliability.
We also have particular strengths in the areas of database technologies,
advertising management, and content customization.
Directory Technology - We have been affiliated with ePresence, a pioneer of
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directory technology, since our founding in 1996. Directories played a key role
in the large-scale, multiple-site distributed systems deployed by Banyan
Worldwide (now ePresence) since 1983. Our founder, Dean Polnerow, designed and
originally developed StreetTalkTM, Banyan's directory service. Building on this
experience to create our own proprietary directory technology, we created what
we believe to be the first national directory of United States residential
information available on the Internet, as well as our innovative and proprietary
yellow pages business directory.
Site Design - Our directory technology was designed to provide high levels
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of performance, scalability, and reliability. The directory is implemented as a
set of Windows NT servers that are organized into groups. Each group of servers
provides different parts of the overall site's functionality and each type of
functionality is provided by more than one group of servers. Individual servers
in a group can be added or removed without affecting the functional capabilities
of the site, and most changes required are managed automatically by proprietary
software that we developed. This distributed architecture is designed to be
highly scalable, which means that system capacity and functionality can be
easily and inexpensively increased, typically with minimal or no time-consuming
software changes required. It is also designed to be reliable, which means it is
resistant to service interruptions and the unavailability of one or more servers
does not affect the operation of other servers or the directory as a whole.
Database Search Technologies - We have developed technology designed to
----------------------------
quickly exchange information between the groups of servers that provide the
interface consumers use to input their requests for information with the groups
of servers that store the databases of information we use to respond to these
requests. This technology allows data from multiple databases to be accessed and
combined, regardless of its structure or content. This simplifies the
development of new user interfaces and facilitates database updates. Our
database technology helps to maximize Web site performance through sophisticated
in-memory data structures that are optimized for rapid searching of various
combinations of data elements, and by automatically balancing the tasks being
performed by individual servers.
Our database technology includes sophisticated query management techniques,
which enable requests for large amounts of data to be retrieved in segments
while reducing the computer processing time typically associated with these
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operations using conventional design techniques. This enables ready access to a
large amount of data stored in any of the databases and results in faster
responses to the user.
Advertising Management - Our ad placement technology is used primarily to
----------------------
control the frequency and positioning of advertisements displayed on our Web
site. This technology rotates merchant ad displays in and out of prime locations
on our yellow pages screens according to priorities specifically purchased by
our merchant customers. We use an automated chain of software programs to
securely facilitate the addition, removal and modification of both individual
ads and large, aggregated volumes of merchant advertising into our yellow pages
directory.
We have also developed a proprietary ad placement methodology which
provides a simple way to allow a merchant to focus its advertising to the
surrounding communities it desires to target. This technology uses the physical
location of a business and a distance measurement selected by the merchant to
automatically determine the appropriate location targets. These ad management
tools and processes enable our support personnel and authorized ad resellers to
remotely manage and control national, regional, and local ad campaigns.
Merge-Purge Data Consistency - Data integrity for business listings and
----------------------------
advertising products is preserved through the application of business rules to
all data change requests (data merging and purging). Data integrity rules are
applied by our merge-purge technology as each data change request attempts to
modify listing and/or ad data. These rules include low-level data content and
constraint validation, as well as channel-specific rules that manage the
business logic associated with listing and ad attributes. This allows for
continuous refreshing of business listing data, and easy management of all
advertising products associated with a given business, while permitting the best
and latest available data to be presented to the consumer.
Customer Relationship Management - Our web-based CRM tools are specially
--------------------------------
designed to help our merchant network alliance partners easily manage many
facets of their relationships with their own merchant customers. The tools
provide product definition and merchant management capabilities for Switchboard
and its sales channels, including sales management, customer invoicing, credit
card transactions, self-service online advertising sales, account history and
reporting. Product definition capabilities allow each sales channel to combine
our available advertising products into packaged product offerings for their
specific merchant customer base, such as a variety of online ad presentations,
coupons, Web sites, and products fulfilled by 3rd-parties, along with the
pricing and discounting features of each ad product. The tools present an
access-controlled workflow process that manages and records all merchant
customer interactions, from initial sale and payment processing through
subsequent interaction logging, automatic renewal management and ongoing
reporting.
Competition
We compete primarily with three categories of businesses for local and
national advertising dollars and mind share, namely
* Internet-based yellow and white pages directories that do not utilize our
directory platform, such as Yahoo! Yellow Pages and Verizon SuperPages.
* Print yellow and white pages directories that compete with online
offerings for advertiser dollars.
* Internet-based pay-for-placement search engines and services, such as
Google and Overture, as they begin to expand their offerings to local
markets.
We compete with these organizations primarily on the basis of directory
technology, as well as the price and distribution of directory advertisements.
In the fiscal quarter ended December 31, 2002, the Switchboard directory
platform served 8 million users per month on average through Switchboard.com and
the online directories of our merchant network alliance partners, as reported by
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Nielsen//NetRatings*. In 2002, Switchboard Matrix was one of the most utilized
directory platforms on the Internet, according to Nielson//NetRatings, claiming
a top spot among category leaders. We believe that Switchboard's directory
technology has allowed us to secure our key alliance with AOL as well as
alliances with other important customers and, along with the popularity of
Switchboard.com, has enabled us to capture the attention and loyalty of millions
of consumers. However, we continue to face competition from many sources both
traditional and untraditional, including some extremely powerful companies
which have substantially greater resources and name recognition than
Switchboard. In addition to Yahoo! and Verizon, there are numerous national and
regional publishers of online and print yellow pages advertising who compete
with us and our merchant network alliance partners for merchant advertising. We
may also face competition from internal development groups within our existing
and prospective customers, some of which may decide to develop their own
proprietary online directory solutions.
As directory references increase online, we believe advertising in an
online directory (versus print) will become increasingly important for
businesses both large and small. As more yellow pages advertising dollars are
spent on online advertising, we believe that the competition in the online
directory market will intensify. We believe publishers of yellow pages
advertising will seek best-in-class technology and tools to improve the
efficiency of their online operations and to differentiate their online
offerings to merchant advertisers. We believe factors that will enable online
directory providers to compete effectively in this environment include the
ability to offer a highly functional and scalable technology platform and
incremental web visibility for their merchant advertisers. We further believe
that Switchboard is well positioned to fulfill publishers' needs in these areas.
As online usage grows, companies offering local directories will compete to
bring greater value to online advertisers by further increasing consumer usage
of their directories in these ways:
* Speed of results
* Relevance of search results to intent
* Content breadth and depth and
* Ease of navigation
We believe that structured and highly specialized user interfaces and
database designs tailored to the needs of local advertisers will be an advantage
to easily guide consumers to local service and business information. We believe
that our depth of experience and focus on these areas will play an important
role in making our offerings attractive to users and thus to advertisers and
advertising publishers.
We believe our ability to compete successfully over the long-term depends
on many factors. In addition to those discussed above, these factors include
maintaining the quality of content and functionality we provide relative to our
competitors, the cost-effectiveness and reliability of our services relative to
our competitors, and our ability to generate value for local merchants and
national retailers. There can be no assurance that Switchboard will maintain its
current competitive advantages or that it will compete successfully in the
market for online directory advertising services in the future.
*Data is based on a custom monthly audience report from Neilson//NetRatings,
with merchant partners defined by Switchboard.
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Intellectual Property
We regard our patents, copyrights, service marks, trademarks, trade dress,
trade secrets, and other intellectual property as critical to our success. We
rely on a combination of patent, trademark and copyright law, trade secret
protection and confidentiality, and license agreements with our employees,
consultants, customers, merchant network alliance partners, and others to
protect our proprietary rights. All of our employees have executed
confidentiality and assignment of invention agreements. Prior to disclosing
confidential information to third parties, we generally require them to sign
confidentiality or other agreements restricting the use and disclosure of our
confidential information.
As of December 31, 2002, we had six patents issued by the U.S. Patent and
Trademark Office, three patents issued by the Canadian Intellectual Property
Office, four patent applications pending before the U.S. Patent and Trademark
Office, and two patent applications pending before the Canadian Intellectual
Property Office, all of which relate to the operation, features or performance
of our Web site. We pursue registration of our key trademarks and service marks
in the United States and, in some cases, internationally. However, effective
trademark, service mark, copyright and trade secret protection may not be
available or sought by us in every country in which our services are made
available online. Our patents, trademarks, or other intellectual property rights
may be successfully challenged by others or invalidated through administrative
process or litigation. Further, the validity, enforceability and scope of
protection of proprietary rights in Internet-related industries is uncertain and
still evolving.
We license our proprietary rights, such as patents, trademarks, and
copyrighted material, to third parties. Despite our efforts to protect our
proprietary rights, third parties may infringe or misappropriate our rights or
diminish the quality or reputation associated with our brand, which could have a
long-term material adverse affect on our business, results of operations, or
financial condition.
In addition, we license software, content and other intellectual property,
including trademarks, patents, and copyrighted material, from third parties. In
particular, we license residential and business listing data from Acxiom
Corporation under an agreement that expires in December 2005, and maps and
driving directions data and related software from Tele Atlas North America, Inc.
under an agreement that expires in February 2005. Further, the software code
underlying Switchboard.com contains software code that is licensed to us by
third parties. If any of these licenses are terminated or expire, it could have
a material adverse effect on our business, results of operations, or financial
condition.
We currently own a number of Internet domain names, including
Switchboard.com and MapsOnUs.com. Domain names generally are regulated by
Internet regulatory bodies. The relationship between regulations governing
domain names and laws protecting trademarks and similar proprietary rights is
unclear. Therefore, we could be unable to prevent third parties from acquiring
domain names that infringe or otherwise decrease the value of our trademarks and
other proprietary rights.
Research and Development
We employ an engineering staff to develop, test and document the
enhancement of existing, and creation of new, products and services we offer to
our merchant network customers as well as new services and features on our Web
hosted directory platform. The market in which we compete is rapidly evolving.
To remain competitive, we believe it is critical to continually work towards the
development of new technologies to improve the products and services we offer to
our merchant network customers, as well as to improve the functionality and
utility of our Web hosted directory platform. In 2002 and 2001, we directed the
efforts of our engineering staff primarily on the creation of our Switchboard
Matrix directory platform, the creation of data merging and purging tools and
further development of our web-based CRM tools. As of December 31, 2002, we
employed a staff of 36 full-time permanent employees dedicated to research and
development activities. Our research and development expenses have constituted,
and we expect they will continue to constitute for the foreseeable future, a
material use of our cash resources. Research and development expenses were $5.4
11
million, or 46.4% of net revenue, $6.7 million, or 72.2% of net revenue, and
$3.5 million, or 17.5% of net revenue, in 2002, 2001 and 2000, respectively.
Employees
As of December 31, 2002, we had 68 full-time employees. None of our
employees are represented by a labor union. We believe our relations with our
employees are good.
ITEM 2. PROPERTIES
Our principal administrative, sales and marketing, and research and
development facilities are located in Westboro, Massachusetts and consist of
approximately 17,463 square feet under a sublease that expires on December 31,
2003, with an aggregate annual base rent of approximately $227,000. We sublease
this space from ePresence.
In addition, we lease a sales office in Michigan. We also lease 2,782
square feet of office space in New York City, which we have subleased to a
third-party for the remaining term of our lease with the property owner, which
expires on April 28, 2005.
ITEM 3. LEGAL PROCEEDINGS
On May 31, 2002 the Company was sued in the Superior Court of Suffolk
County, Massachusetts by the former stockholders of Envenue, Inc., from whom the
Company purchased all of the stock of Envenue in November 2000. The suit, styled
Douglass J. Wilson et al v. Switchboard Incorporated et al, Civil Action No.
02-2370 BLS, alleges that the Company breached its agreement with the plaintiffs
by failing to pay the purchase price of the Envenue stock when it became due on
May 24, 2002. The Company paid $400,000, plus interest of $10,060, representing
a portion of the purchase price, to the plaintiffs. The suit seeks payment of
$1.6 million, representing the balance of the purchase price, plus additional
unquantified damages including treble damages under Mass. Gen. Laws c. 93A. The
court heard oral argument on the Company's motion to dismiss the complaint in
November 2002, and subsequently granted that motion in part. The plaintiffs
subsequently amended their complaint. The Company has moved to dismiss the
amended complaint and is awaiting the court's ruling on that motion.
On November 21, 2001, a class action lawsuit was filed in the United States
District Court for the Southern District of New York naming as defendants
Switchboard, the managing underwriters of Switchboard's initial public offering,
Douglas J. Greenlaw, Dean Polnerow, and John P. Jewett. Mr. Greenlaw and Mr.
Polnerow are officers of Switchboard, and Mr. Jewett is a former officer of
Switchboard. The complaint is captioned Kristina Ly v. Switchboard Incorporated,
et al., 01-CV-10595. In July 2002, Switchboard, Douglas J. Greenlaw, Dean
Polnerow and John P. Jewett joined in an omnibus motion to dismiss which
challenges the legal sufficiency of plaintiffs' claims. The motion was filed on
behalf of hundreds of issuers and individual defendants named in similar
lawsuits. The plaintiffs opposed the motion. On September 30, 2002, the lawsuit
against Messrs. Greenlaw, Polnerow and Jewett was dismissed without prejudice.
The Court heard oral argument on the motion in November 2002. On February 19,
2003, the court issued its decision on the defendants' motion to dismiss,
denying it in large part, but granting portions of it. In doing so, the court
dismissed the plaintiffs' claims under Section 10b-5 of the Securities Act of
1933 against certain defendants, including Switchboard. There have been no
further material developments since the Company filed its Quarterly Report on
Form 10-Q for the fiscal quarter ended September 30, 2002.
From time to time, we are involved in various legal proceedings incidental
to the conduct of our business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
12
EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers and their respective ages and positions with
Switchboard as of March 21, 2003 are as follows:
Name Age Position
- ------------------- --- ----------------------------------------------------------------
Douglas J. Greenlaw 58 Chief Executive Officer and Director
Dean Polnerow 47 President and Director
Robert P. Orlando 44 Vice President, Chief Financial Officer, Treasurer and Secretary
James M. Canon 51 Vice President, Business Development
Kevin P. Lawler 42 Vice President, Human Resources
Douglas J. Greenlaw has served as our Chief Executive Officer since October
1999 and as a director since January 2000. Prior to joining Switchboard, from
1997 to October 1999, Mr. Greenlaw served as an independent management
consultant. From 1994 to 1996, Mr. Greenlaw served as President and Chief
Operating Officer of Multimedia, Inc., a publisher of newspapers and operator of
television and radio stations.
Dean Polnerow founded Switchboard and has served as our President since
March 1998 and as a director since September 1998. Prior to his appointment as
our President, from 1996 to March 1998, Mr. Polnerow served as our Vice
President, Product and Business Development. From 1983 to 1996, Mr. Polnerow
served in various capacities, including as Vice President, Advanced Development,
at Banyan Systems Incorporated, now ePresence.
Robert P. Orlando has served as our Vice President, Chief Financial
Officer, Treasurer and Secretary since October 2001. Prior to joining
Switchboard, Mr. Orlando was the Chief Financial Officer and Treasurer of
Virtual Ink Corporation, a designer of hardware and software collaboration
tools, from 2000 to 2001. From 1991 through 2000, Mr. Orlando was the Chief
Financial Officer and Treasurer of Mathsoft, Inc., a provider of math,
engineering and scientific software solutions. Mr. Orlando also held financial
management positions with Bitstream, Inc., Unicco Service Company, Orion
Research, Inc. Previous to these positions, Mr. Orlando served as an auditor for
Arthur Andersen LLP.
James M. Canon has served as our Vice President, Business Development since
March 1998. Prior to his appointment as our Vice President, Business
Development, from 1997 to March 1998, Mr. Canon served in various capacities at
Switchboard, most recently as Director, Product Management. From 1991 to 1997,
Mr. Canon served in various capacities, including as Information Products
Architect at Banyan Systems Incorporated, now ePresence.
Kevin P. Lawler has served as our Vice President, Human Resources since May
2000. Prior to joining Switchboard, Mr. Lawler served as Director of Human
Resources at EMC Corporation, an information storage systems provider, from 1999
to 2000. From 1998 to 1999, Mr. Lawler served as Vice President, Human Resources
for Scriptgen Pharmaceuticals Incorporated, a pharmaceuticals company. From 1990
to 1998, Mr. Lawler served as Vice President, Human Resources for Immulogic
Pharmaceutical Corporation, a pharmaceuticals company.
Executive officers are elected annually and serve at the discretion of our
board of directors.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Market Data
Our common stock began trading on the NASDAQ National Market under the
symbol "SWBD" on March 2, 2000. Prior to that date there was no established
public trading market for our common stock. The following table sets forth the
range of high and low closing sale prices of our common stock for the periods
indicated, as quoted on the Nasdaq National Market.
PERIOD HIGH LOW
- ------ ----- -----
FISCAL 2001
First Quarter of Fiscal 2001 $6.25 $2.94
Second Quarter of Fiscal 2001 $6.00 $2.63
Third Quarter of Fiscal 2001 $6.25 $2.72
Fourth Quarter of Fiscal 2001 $3.47 $2.27
FISCAL 2002
First Quarter of Fiscal 2002 $5.32 $3.02
Second Quarter of Fiscal 2002 $6.39 $3.20
Third Quarter of Fiscal 2002 $3.30 $1.08
Fourth Quarter of Fiscal 2002 $3.13 $1.48
As of March 21, 2003, there were 113 holders of record of our common stock.
This number does not include stockholders who hold their shares in "street name"
or through broker or nominee accounts.
The closing per share sale price of our common stock on June 28, 2002 was
$3.38. For purposes of calculating the aggregate market value of the shares of
our common stock held by non-affiliates, as shown on the cover page of this
Annual Report, it has been assumed that all the outstanding shares were held by
non-affiliates, except for the outstanding shares known to us to be beneficially
held by our directors, executive officers, and each person or entity known to us
to own beneficially more than 5% of our outstanding shares of common stock.
However, this should not be deemed to be an admission that all these persons
are, in fact, affiliates of ours, or that there are not other persons who may be
deemed to be affiliates of ours.
We have never paid cash dividends on our common stock. We intend to retain
our earnings for use in our business and, therefore, do not anticipate paying
any cash dividends on our common stock in the foreseeable future.
Use of Proceeds of Initial Public Offering
On March 2, 2000, we made an initial public offering of up to 6,325,000
shares of common stock registered under a Registration Statement on Form S-1
(Registration No. 333-90013), which was declared effective by the Securities and
Exchange Commission on March 1, 2000.
Our total net proceeds from the offering were approximately $86.3 million,
of which $74.8 million was received in March 2000 and $11.5 million was received
in April 2000. All payments of the offering proceeds were to persons other than
directors, officers, general partners of Switchboard or their associates,
persons owning 10% or more of any class of equity securities of Switchboard or
affiliates of Switchboard. Through December 31, 2002, we used approximately
$21.1 million of the proceeds from the offering for working capital purposes, of
which approximately $4.8 million was for the purchase of fixed assets. In
December 2000 we paid $13.0 million of the proceeds to America Online, Inc.
pursuant to the terms of our Directory and Local Advertising Platform Services
Agreement entered into with America Online on that date. In April 2002, we paid
14
America Online $2.0 million upon the execution of the Second Amendment to the
Directory and Local Advertising Platform Services Agreement. In October 2002, we
paid the former stockholders of Envenue Incorporated approximately $410,000. In
addition, in March 2002, we used $1.3 million of the proceeds for the purchase
of 386,302 shares of our common stock from Viacom Inc. as treasury stock. As of
December 31, 2002, we have invested the remaining net proceeds in
interest-bearing, investment-grade securities and money market funds.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data should be read together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and related notes included
herein.
The selected consolidated financial data set forth below as of December 31,
2002 and 2001 and for the years ended December 31, 2002, 2001 and 2000 are
derived from the audited consolidated financial statements of Switchboard
included herein. All other selected consolidated financial data set forth below
is derived from audited financial statements of Switchboard not included herein.
Switchboard's historical results are not necessarily indicative of its results
of operations to be expected in the future. As discussed in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements and related notes.
Selected Consolidated Financial Data
(In thousands except per share data)
For the Years Ended December 31,
--------------------------------------------------------
2002 2001 (a) 2000 1999 1998
------- -------- -------- ------- --------
Statement of Operations
Gross revenue $13,747 $ 13,326 $ 20,310 $ 8,304 $ 6,536
Net revenue (b) $11,747 $ 9,278 $ 19,898 $ 8,304 $ 6,536
Operating loss $(5,921) $(69,975) $(20,708) $(8,656) $ (4,961)
Net loss attributable to common stockholders $(3,959) $(66,754) $(17,288) $(9,744) $ (5,658)
Basic and diluted net loss per share $(0.21) $(2.83) $(0.75) $(0.89) $ (0.81)
Balance Sheet Data
Total assets $57,788 $65,835 $ 98,557 $12,195 $ 3,565
Long term obligations $ 1,124 $ 518 $ 2,000 $ - $ 7,600
Redeemable convertible preferred stock $ - $ - $ - $16,320 $ 3,658
Total stockholders' equity (deficit) $51,087 $56,667 $ 90,730 $(9,588) $(11,419)
(a) Operating loss and net loss attributable to common stockholders in the
fiscal year ended December 31, 2001 includes a $22.2 million non-cash loss on
Viacom transaction and special charges of $17.3 million.
(b) Net revenue includes, as an offset to revenue, amortization of consideration
given to a customer of $2.0 million, $4.0 million and $412,000 for the years
ended December 31, 2002, 2001 and 2000, respectively, in accordance with
Emerging Issues Task Force Issue 01-9 "Accounting for Consideration Given by a
Vendor to a Customer (Including a Reseller of the Vendor's Products)", which
became effective for fiscal years beginning after December 15, 2001.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read the following discussion together with the consolidated
financial statements and related notes appearing elsewhere herein. This Item
contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities and Exchange Act of
1934 that involve risks and uncertainties. Actual results may differ materially
from those included in such forward-looking statements. Factors which could
cause actual results to differ materially include those set forth under "Factors
Affecting Our Operating Results, Business Prospects and the Market Price of Our
Stock", as well as those otherwise discussed in this section and elsewhere
herein. See "Forward Looking Statements."
OVERVIEW
Beginning in February 1996 when we commenced operations, we derived our
revenue principally from the sale of banner and site sponsorship advertising. We
now primarily derive revenue from our merchant network.
Net merchant network revenue includes revenue from various licensing
agreements with our merchant network alliance partners. These agreements
involve: engineering work to develop a Web-hosted platform for our merchant
network alliance partners which looks and feels like the merchant network
alliance partner's own Web site and includes our searching functionality and a
per-merchant fee per month (in the form of a fixed fee per merchant or a
percentage of revenue) based upon the number of merchants they promote in the
platform. Net merchant network revenue also includes revenue from activities in
which we run trademark and display ads in the Switchboard.com yellow pages
directory, build and host Web sites for local merchants and send related direct
electronic mail-based promotions. In addition, included as an offset to merchant
network revenue is consideration given to customers, for which the benefits of
such consideration are not separately identifiable from the revenue obtained
from those customers. During the year ended December 31, 2002, approximately
87.9% of our net revenue was derived from our local merchant network.
Our largest and most significant merchant network alliance partner is
America Online, Inc. Under our amended agreement with AOL, which expires in
December 2004, we paid AOL $15.0 million, issued 746,260 shares of our common
stock and will share directory advertisement revenue with AOL. We account for
consideration provided to AOL as an offset to revenue. In addition AOL committed
to pay us at least $2.0 million in consulting or service fees over the term of
the agreement. In 2002 and 2001, consulting and service fees totaled $1.5
million and $1.9 million, respectively. Revenue recognized from AOL, net of
amortization of consideration given to AOL, was $4.9 million, or 41.8% of net
revenue, and $26,000 for the years ended December 31, 2002 and 2001,
respectively. There was no revenue from AOL in the year ended December 31, 2000.
We anticipate that AOL will continue to represent a significant percentage of
our revenue in 2003 and will be a material component of our overall business.
We also generate revenue from the sale of national advertising and site
sponsorship revenue on white and yellow pages, as well as maps pages, across
both Switchboard.com and the Switchboard alliance partner network. Such revenue
is derived from banner advertisements, sponsorships, direct electronic
mail-based promotions and other forms of national advertising that are sold on
either a fixed fee, cost per thousand impressions or cost per action basis.
During the year ended December 31, 2002, approximately 12.1% of our net revenue
was derived from the sale of national advertising and site sponsorships.
Our cost of revenue consists primarily of expenses paid to third parties
under data licensing and Web site creation and hosting agreements, as well as
other direct expenses incurred to maintain the operations of our Web site as
well as the Web-hosted platforms of our merchant network alliance partners.
These direct expenses consist of data communications expenses related to
Internet connectivity charges, salaries and benefits for operations personnel,
equipment costs and related depreciation, costs of running our data centers,
which include rent and utilities, and a pro rata share of occupancy and
information system expenses. Cost of revenue as a percentage of revenue has
16
varied in the past, primarily as a result of the amount of revenue recognized in
the period being spread over relatively fixed cost of revenue.
Our sales and marketing expense consists primarily of employee salaries and
benefits, costs associated with channel marketing programs, collateral
production expenses, promotional advertising, third-party commission costs,
advertising and creative production expenses, public relations, market research,
provision for bad debts and a pro rata share of occupancy and information system
expenses. A significant portion of our Web site promotion costs in prior years
resulted from non-cash advertising expenses under an advertising and promotion
agreement that terminated in October 2001.
Our research and development expense consists primarily of employee
salaries and benefits, fees for outside consultants and related costs associated
with the development of new services and features on our Web hosted directory
platform, the enhancement of existing products, quality assurance, testing,
documentation and a portion of occupancy and information system expenses based
on employee headcount.
Our general and administrative expense consists primarily of employee
salaries and benefits and other personnel-related costs for executive and
financial personnel, as well as legal expenses, directors and officers insurance
and accounting costs, and a portion of occupancy and information system expenses
based on employee headcount.
Our amortization of goodwill, intangibles and other assets consists
primarily of amortization of goodwill resulting from our acquisition of Envenue,
Inc. in November 2000 and the amortization of other long-term assets.
We have experienced substantial net losses since our inception. As of
December 31, 2002, we had an accumulated deficit of $108.7 million. These net
losses and accumulated deficit resulted from insufficient revenue to cover the
significant costs incurred in the development of our Web hosted directory
platform and the establishment of our corporate infrastructure and organization.
To date, we have made no provision for income taxes.
ADOPTION OF EITF 01-9
Effective January 2002, we adopted Emerging Issues Task Force Issue 01-9
"Accounting for Consideration Given by a Vendor to a Customer (Including a
Reseller of the Vendor's Products)" ("EITF 01-9"), which became effective for
fiscal years beginning after December 15, 2001. We have concluded that EITF 01-9
is applicable to the accounting for our directory and local advertising platform
services agreement with AOL ("Directory Agreement"), as the benefits received
from consideration given to AOL are not sufficiently separable from the revenue
derived from AOL. Our 2000 and 2001 results have been adjusted to conform to the
presentation required by EITF 01-9. Accordingly, we have decreased our merchant
network revenue by $2.0 million, $4.0 million and $412,000 for the years ended
December 31, 2002, 2001 and 2000, respectively, and reduced our operating
expenses by corresponding amounts for the same periods. The adoption of EITF
01-9 had no effect on net income or our capital resources. The following table
illustrates the effect of the application of EITF 01-9:
Year Ended December 31,
----------------------------------
2002 2001 2000
------- ------- -------
Gross revenue $13,747 $13,326 $20,310
Less: Amortization of consideration given to AOL (2,000) (4,048) (412)
------- ------- -------
Net revenue $11,747 $ 9,278 $19,898
======= ======= =======
Operating expenses $15,924 $79,783 $37,528
Less: Amortization of consideration given to AOL (2,000) (4,048) (412)
------- ------- -------
Net operating expenses $13,924 $75,735 $37,116
======= ======= =======
17
SIGNIFICANT RELATIONSHIP
In December 2000, we entered into a Directory Agreement with AOL to develop
a new directory and local advertising platform and product set to be featured
across specified AOL properties (the "Directory Platform"). In November 2001,
April 2002, August 2002 and November 2002, certain terms of the agreement were
amended. Under the four-year term of the amended Directory Agreement, we share
with AOL specified directory advertisement revenue. In general, we receive a
majority of the first $12.0 million of such directory advertisement revenue and
a lesser share of any additional directory advertisement revenue pursuant to the
August 2002 amendment. We paid AOL and recorded an asset of $13.0 million at the
signing of the Directory Agreement. Following the incorporation of the Directory
Platform on the AOL.com, AOL Service and Digital City properties ("AOL Roll-In")
in January 2002, we recorded a second asset and a liability related to future
payments of $13.0 million. In April 2002, we established an additional asset and
liability of $1.0 million and paid $2.0 million upon the execution of the April
2002 amendment. Under the April 2002 amended agreement, we were scheduled to
make six additional quarterly payments of $2.0 million each, replacing the $13.0
million originally owed upon the AOL Roll-In. The August 2002 amendment, among
other things, eliminated the $12.0 million in remaining additional payments
established in the April 2002 amendment. AOL committed to pay us at least $2.0
million in consulting or service fees over the term of the Directory Agreement
under a payment schedule which ended in September 2002, of which AOL has paid
all $2.0 million and we have delivered all $2.0 million in services to AOL. In
addition, we are required to provide up to 300 hours of engineering services per
month to AOL at no charge, if requested by AOL for the term of the agreement.
These 300 hours are provided to support the Directory Platform, from which we
share in directory advertising revenue over the term of the amended agreement.
Any engineering services provided by us in excess of 300 hours per month are
charged to AOL on a time and materials basis. AOL typically exceeds these 300
hours each month. In 2002 and 2001, consulting and service fees totaled $1.5
million and $1.9 million, respectively.
The term of the August 2002 amended Directory Agreement expires in December
2004, and is subject to earlier termination upon the occurrence of specified
events, including, without limitation (1) Switchboard being acquired by one of
certain third parties, or (2) AOL acquiring one of certain third parties and AOL
pays us a termination fee of $25.0 million.
In connection with entering into the Directory Agreement, in December 2000,
we issued to AOL 746,260 shares of our common stock, which were restricted from
transfer until the AOL Roll-In, which occurred on January 2, 2002. We also
agreed to issue to AOL an additional 746,260 shares of common stock if the
Directory Agreement continued after two years and a further 746,260 shares of
common stock if the Directory Agreement continued after three years. Under the
amended agreement, the requirement to issue additional shares upon the two and
three-year continuations has been eliminated. If we renew the Directory
Agreement with AOL for at least an additional four years after the initial term,
we agreed to issue to AOL a warrant to purchase up to 721,385 shares of common
stock at a per share purchase price of $4.32.
The $13.0 million paid and value of the stock issued upon the signing of
the Directory Agreement was amortized on a straight-line basis over the original
four-year estimated life of the agreement. As of December 2001, the remaining
unamortized amounts of $11.7 million were written down to zero as a result of an
impairment analysis as of December 31, 2001. In 2002, we recorded amortization
based upon the remaining net book value of our AOL assets established upon the
AOL Roll-In and April 2002 amendment on a straight-line basis over the remaining
term of the amended agreement. As a result of the elimination in the August 2002
amendment of the remaining $12.0 million owed to AOL, an adjustment to
amortization of consideration given to a customer of $482,000 was recorded in
2002, offsetting amortization recorded in the period. Throughout the remaining
initial term of the amended agreement, we will no longer record amortization of
consideration given to AOL as these assets are now fully amortized and no
further consideration is due AOL. Amortization of assets related to AOL has been
reflected as a reduction of revenue in accordance with EITF 01-9.
18
Revenue recognized from AOL, net of amortization of consideration given to
AOL, was $4.9 million, or 41.8% of net revenue, and $26,000 for the years ended
December 31, 2002 and 2001, respectively. Net amounts due from AOL included in
accounts receivable at December 31, 2002 and 2001 were $549,000 and $774,000,
respectively. Unbilled receivables related to AOL at December 31, 2001 were
$618,000. As of December 31, 2002, AOL beneficially owned 7.9% of our
outstanding common stock.
RESULTS OF OPERATIONS
The following table presents certain consolidated statement of operations
information stated as a percentage of total net revenue:
Change
------------------------------
2002 2001 2000 2001 to 2002 2000 to 2001
----- ------ ------ ------------ ------------
Net revenue:
Merchant network 87.9% 66.9% 41.6% 66.3% (24.9)%
National advertising 12.1% 33.1% 58.4% (53.7)% (73.6)%
----- ----- ----- ----- -----
Total net revenue 100.0% 100.0% 100.0% 26.6% (53.4)%
===== ===== ====== ===== =====
Cost of revenue 31.9% 37.9% 17.5% 6.4% 0.8%
----- ------ ------ ------ ------
Gross profit 68.1% 62.1% 82.5% 38.9% (64.9)%
Sales and marketing 39.9% 265.2% 146.7% (81.0)% (15.7)%
Research and development 46.4% 72.2% 17.5% (18.7)% 92.9%
General and administrative 34.5% 45.1% 16.6% (3.0)% 26.6%
Amortization of goodwill, - 7.7% 5.8% (100.0)% (37.8)%
Intangibles and other assets
Loss on Viacom transaction - 239.3% - (100.0)% n/a
Special (credits) charges (2.2)% 186.7% - (101.5)% n/a
----- ------ ------ ------ ------
Total operating expenses 118.5% 816.3% 186.5% (81.6)% 104.0%
----- ------ ------ ------ ------
Operating loss (50.4)% (754.2)% (104.1)% (91.5)% (237.9)%
Other income (expense) 16.7% 34.7% 18.5% (39.1)% (12.7)%
----- ------ ------ ------ ------
Net loss (33.7)% (719.5)% (85.5)% (94.1)% 292.3%
===== ====== ======= ======= ======
Revenue
Total net revenue was $11.7 million, $9.3 million and $19.9 million in
2002, 2001 and 2000, respectively, representing an increase of $2.5 million, or
26.6%, from 2001 to 2002, and a decrease of $10.6 million, or 53.4%, from 2000
to 2001. The increase in net revenue in 2002 consisted primarily of an increase
in net merchant network revenue, offset in part by a decrease in national
advertising and site sponsorship revenue. The decrease in net revenue in 2001
when compared to 2000 consisted primarily of decreases in national advertising
revenue and net merchant network revenue.
Net merchant network revenue was $10.3 million, $6.2 million and $8.3
million in 2002, 2001 and 2000, respectively, representing an increase of $4.1
million, or 66.3%, from 2001 to 2002, and a decrease of $2.1 million, or 24.9%,
from 2000 to 2001. The increase in net merchant network revenue in 2002 was
primarily due a reduction in amortization of consideration given to AOL of $2.0
million as a result of the elimination of such amortization in August 2002 upon
the amendment to the Directory Agreement with AOL. The increase in 2002 was also
attributable to increases in merchant licensing revenues from AOL as well as our
other merchant network alliance partners, increased membership in our merchant
network and revenue attributable to additional services offered to existing
local merchants. The decrease in net merchant network revenue from 2000 to 2001
was due primarily to an increase of $3.6 million in amortization of
consideration given to AOL associated with the Directory Agreement, offset in
part by an increase in revenue from licensing revenue from AOL as well as new
licensing agreements with other merchant network alliance partners, increased
19
membership in our merchant network and revenue attributable to additional
services offered to existing local merchants.
National advertising and site sponsorship revenue was $1.4 million, $3.1
million and $11.6 million in 2002, 2001 and 2000, respectively, representing a
decrease of $1.6 million, or 53.7%, from 2001 to 2002, and a decrease of $8.6
million, or 73.6%, from 2000 to 2001. The decreases in national advertising and
site sponsorship revenue in 2002 and 2001 resulted from a decrease in both the
number of advertisers on the site, as well as the per impression fee charged to
those customers. We attribute these decreases to a decline in demand for
Internet advertising services as well as the overall state of the U.S. economy.
We do not anticipate substantial additional declines in 2003 in the demand for
Internet advertising. We expect that national advertising and site sponsorship
revenue will be relatively flat in 2003 when compared to 2002.
There was no revenue in 2002 generated from concurrent transactions, in
which we received promotion or marketing assets in exchange for promotion on our
Web site and inclusion in e-mail distributions to our user base. Revenue from
concurrent transactions was 9.5% and 28.0% of net revenue in 2001 and 2000,
respectively. In the year ended December 31, 2002, AOL accounted for 41.8% of
net revenue. We do not expect to incur revenue from concurrent transactions in
2003. In the year ended December 31, 2001, one customer accounted for 11.6% of
net revenue. In the year ended December 31, 2000, one customer accounted for
16.1% of net revenue.
Cost of Revenue
Cost of revenue was $3.7 million, $3.5 million and $3.5 million in 2002,
2001 and 2000, respectively. Cost of revenue increased $226,000, or 6.4%, in
2002 and remained relatively flat in 2001, when compared to 2000. In 2002, we
incurred an increase of $349,000 in depreciation associated with additional
equipment necessary to support our Web site and those of our merchant network
alliance partners; an increase of $177,000 in the cost of third-party data; and
an increase in revenue from lower margin merchant network services. These
increases were offset in part by a decrease of $286,000 in third-party Web site
creation and hosting expenses associated with our merchant programs and a
decrease of $216,000 in equipment related expenses incurred to support our local
merchant network alliance partners. In 2001, we incurred increases of $128,000
in salaries and benefits and $209,000 in equipment related expense to support
our local merchant network alliance partners. These increases were offset in
part by decreases of $271,000 in Web site creation and hosting fees in
connection with our merchant services programs and amortization of deferred
project costs.
Gross Profit
Gross profit in 2002 was 68.1% of net revenue, or $8.0 million, compared
with 62.1% of net revenue, or $5.8 million. in 2001 and 82.5%, or $16.4 million,
in 2000. The increase in gross profit dollars and percentage in 2002 was
primarily due to an increase in net revenue being spread over relatively fixed
costs of revenue, offset in part by an increase in lower margin merchant network
services revenue. The decrease in gross profit dollars and percentage in 2001
was primarily due to relatively fixed costs of revenue being spread over
decreased revenue, as well as a decrease in higher margin national advertising
revenue as a percentage of total net revenue.
Sales and Marketing
Sales and marketing expenses were $4.7 million, $24.6 million and $29.2
million in 2002, 2001 and 2000, respectively, representing a decrease of $19.9
million, or 80.1%, from 2001 to 2002, and a decrease of $4.6 million, or 15.7%,
from 2000 to 2001. The decrease in 2002 was primarily related to the elimination
of the non-cash advertising expense related to our former agreement with Viacom,
which accounted for $9.7 million and $11.8 million of our sales and marketing
expense during 2001 and 2000, respectively. The decrease in 2002 was also
attributable to decreases of $6.1 million in other corporate marketing program
expenses, $2.0 million in employee salaries and benefits resulting primarily
from actions taken during our corporate restructuring activities in the three
months ended December 31, 2001, $913,000 in provisions for doubtful accounts,
and $770,000 in merchant program expenses. The decrease in 2001 was due
primarily to decreases of $3.8 million in merchant services program expenses and
20
$2.1 million in CBS advertising, offset in part by increases of $533,000 in
other advertising expenses, $413,000 in provision for doubtful accounts,
$374,000 in employee salaries and benefits and $267,000 in costs associated with
additional leased facilities.
Research and Development
Research and development expenses were $5.4 million, $6.7 million and $3.5
million in 2002, 2001 and 2000, respectively, representing a decrease of $1.3
million, or 18.7%, from 2001 to 2002, and an increase of $3.2 million, or 92.9%,
from 2000 to 2001. The decrease in 2002 was due primarily to decreases of
$631,000 in outside consulting, $302,000 in employee salaries and benefits,
$163,000 in costs associated with leased facilities and $74,000 in recruiting
expenses. The increase in 2001 was due primarily to increases of $2.1 million in
salaries and benefits associated with new personnel resulting primarily from our
acquisition of Envenue, $525,000 in depreciation, $498,000 in outside consulting
expenses, and $395,000 in costs associated with additional leased facilities,
offset in part by an increase of $389,000 in the capitalization of deferred
project costs.
General and Administrative
General and administrative expenses were $4.1 million, $4.2 million and
$3.3 million in 2002, 2001 and 2000, respectively, representing a decrease of
$124,000, or 3.0%, from 2001 to 2002, and an increase of $878,000, or 26.6%,
from 2000 to 2001. The decrease in 2002 was primarily due to a decrease of
$787,000 in salaries and benefits resulting primarily from actions taken during
our corporate restructuring activities in the three months ended December 31,
2001 and a decrease of $261,000 in costs associated with leased facilities,
offset in part by an increase of $824,000 in expenses for professional services
incurred primarily as a result of amendments to our Annual Report on Form 10-K
for the year ended December 31, 2001 and our Quarterly Report on Form 10-Q for
the three months ended March 31, 2002 and the restatement of the financial
statements included therein. The increase in 2001 was due primarily to increases
of $275,000 in professional services, $261,000 in insurance expenses, $226,000
in salaries and benefits associated with new personnel and $59,000 in
depreciation.
Amortization of Goodwill, Intangibles and Other Assets
Amortization of goodwill, intangibles and other assets was none, $719,000,
and $1.2 million in 2002, 2001 and 2000, respectively, representing a decrease
of $719,000, or 100.0%, from 2001 to 2002, and $437,000, or 37.8%, from 2000 to
2001. The decrease in 2002 resulted primarily from the absence in 2002 of
amortization of goodwill resulting from our acquisition of Envenue, which was
written down to zero as of December 2001 as a result of an impairment analysis,
and amortization expense associated with a software license, which was fully
amortized as of December 2001. The decrease in 2001 resulted primarily from the
absence in 2001 of amortization of the value of warrants issued in connection
with a co-branded Web site and linking agreement, and a reduction in
amortization expense associated with a software license, offset in part by an
increase in amortization of goodwill resulting from our purchase of Envenue in
November 2000.
Loss on Viacom Transaction
As a result of our October 2001 restructuring of our relationship with
Viacom, we reported a one-time, non-cash accounting loss of $22.2 million in
2001 related to the termination of our advertising and promotion agreement with
Viacom. We agreed to terminate our right to the placement of advertising on
Viacom's CBS properties with an expected net present value of approximately
$44.5 million in exchange for, primarily, the reconveyance by Viacom to us of
approximately 7.5 million shares of our common stock, the cancellation of
warrants held by Viacom to purchase 533,469 shares of our common stock and the
reconveyance to us of the one outstanding share of our series E special voting
preferred stock. The non-cash accounting loss of $22.2 million results from the
difference between the net present value of our remaining advertising rights
with Viacom, which were terminated, and the value of the shares of our common
and preferred stock that were reconveyed and the warrants that were cancelled.
21
Special (Credits) Charges
In the three months ended December 31, 2002, we recorded the reversal of
$262,000 in excess restructuring reserves as a special credit. This reversal
resulted primarily from better than expected experience in the subleasing of
idle office space for which we had reserved as part of our 2002 special charges.
In December 2001, we recorded net pre-tax special charges of approximately
$17.3 million, comprised primarily of $15.6 million for the impairment of
certain assets, $1.0 million for costs related to facility closures and $700,000
in severance costs related to the reduction of approximately 21% of our
workforce. The restructuring resulted in 21 employee separations. These facility
closures and employee separation activities were substantially completed during
2002.
Included in the $15.6 million impairment charge for certain assets is an
amount recorded for the impairment of the unamortized portion of the value of
the common stock issued and amounts prepaid to AOL. We assessed the value of our
assets related to our AOL Directory Agreement for impairment as revenues were
lower at the end of the first year of the Directory Agreement than originally
anticipated. Based upon impairment analysis which indicated that the carrying
amount of these assets would not be fully recovered through estimated
undiscounted future operating cash flows, a charge of $11.7 million was recorded
as an additional component of special charges during 2001. The impairment was
measured as the amount by which the carrying amount of these assets exceeded the
present value of the estimated discounted future cash flows attributable to
these assets.
In December 2001, we exercised our rights under the Envenue acquisition
agreement to substantially reduce the funding of Envenue. We evaluated the
carrying value of our goodwill in Envenue, and determined it would not be fully
recovered through estimated undiscounted future operating cash flows. As a
result during the three months ending December 31, 2001, we recorded as a
component of the $15.6 million impairment charge for certain assets an
impairment charge of $1.9 million related to the Envenue goodwill. The
impairment was measured as the amount by which the carrying amount of these
assets exceeded the present value of the estimated discounted future cash flows
attributable to these assets.
Also included in the impairment charge for certain assets are amounts
related to prepaid advertising expenses. As a result of our change in overall
strategy from a destination site to a technology provider, we no longer consider
this prepaid advertising to be complementary to our corporate strategy.
Accordingly, we have recorded $1.4 million for the impairment of these prepaid
advertising assets.
Of the total $1.4 million facilities and severance charge, which is net of
the $262,000 special credit recorded in 2002, we currently estimate that $1.2
million is cash related. As of December 31, 2002, $1.3 million of the original
$1.4 million accrual had been utilized. We have a remaining liability of $52,000
on our balance sheet as of December 31, 2002 relating to the special charges.
Other Income
Other income was $2.0 million, $3.2 million and $3.7 million in 2002, 2001
and 2000, respectively, representing a decrease of $1.3 million, or 39.1%, from
2001 to 2002, and a decrease of $469,000, or 12.7%, from 2000 to 2001. The
decrease in 2002 was due primarily to a decrease in interest income earned as a
result of reduced funds available for investment and a decline in interest
rates, and an increase in interest expense incurred as a result of our financing
of equipment purchases made during 2001 and 2002, offset in part by a loss on
disposal of fixed assets in 2001. The decrease in 2001 was primarily due to a
decrease in interest income due to lower available funds for investment, offset
in part by a decrease in unrealized losses on an investment.
Net Loss
Our net loss decreased to $4.0 million in 2002, from $66.8 million in 2001
and $17.0 million in 2000. As of December 31, 2002, our accumulated deficit
totaled $108.7 million.
22
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2002, we had total cash and marketable securities of
$53.9 million, consisting of $38.4 million of cash and cash equivalents, $1.6
million of restricted cash, $3.6 million of short-term marketable securities and
$10.2 million of long-term marketable securities. During 2002, cash increased by
$34.2 million, primarily due to cash provided by investing activities of $39.1
million as we moved certain of our investments to more liquid cash equivalents,
offset in part by net cash used for operating activities of $4.9 million.
Net cash used for operating activities for 2002 was $4.9 million, primarily
due to a net loss of $4.0 million, $2.0 million paid under the Directory
Agreement with AOL, a decrease in accounts payable of $1.3 million and a
decrease in accrued restructuring expense of $922,000, offset in part by
depreciation and amortization of $3.6 million, as well as various other cash
flows from operating activities.
Net cash provided by investing activities for 2002 was $39.1 million.
Investing activities for the period were primarily related to net sales of
marketable securities of $40.7 million, purchases of property and equipment of
$847,000 and an increase in restricted cash of $766,000.
Net cash provided by financing activities for 2002 was $9,000, primarily
due to the proceeds from the issuance of notes payable of $2.7 million related
to the financing of equipment purchases and proceeds of $316,000 from the
issuance of stock, offset in part by the purchase of $1.3 million in treasury
stock, and payments of capital leases and notes payable of $1.8 million. In
February 2002, Viacom Inc. exercised its warrant to purchase 533,468 shares of
our common stock pursuant to a cashless exercise provision in the warrant,
resulting in the net issuance of 386,302 shares of common stock. In March 2002,
we repurchased the 386,302 shares of our common stock from Viacom at $3.25 per
share. The repurchased shares are being held as treasury stock.
In May 2002, we paid $794,000 to Fleet Capital Corporation to terminate our
lease obligations with Fleet Capital Corporation through an early buy-out. In
exchange for the amount paid, we assumed all right and title to the assets
leased under the facility. Additionally, our requirement to maintain a
compensating balance with Fleet National Bank ("Fleet") was eliminated.
In June 2002, we entered into a loan and security agreement (the "SVB
Financing Agreement") with Silicon Valley Bank ("SVB"), under which we have the
ability to borrow up to $4.0 million for the purchase of equipment. Amounts
borrowed under the facility accrue interest at a rate equal to prime plus 0.25%,
and are repaid monthly over a 30-month period. As of December 31, 2002, we had
utilized $2.7 million of this facility. The facility provided for the ability to
fund additional equipment purchases of up to $1.3 million through March 31,
2003. We did not utilize the facility in the three months ended March 31, 2003
to fund additional equipment purchases. The agreement also provides for a $1.0
million revolving line of credit. At December 31, 2002, we had no outstanding
borrowings under the revolving line of credit.
As a condition of the SVB Financing Agreement, we are required to maintain
in deposit or investment accounts at SVB not less than 95% of our cash, cash
equivalents and marketable securities. Additionally, covenants in the agreement
require us to maintain in deposit or in investment accounts with SVB at least
$20.0 million in unrestricted cash. As part of the transition to SVB, we
liquidated $35.7 million in marketable securities previously held at Fleet for
transfer to SVB. As a result of this liquidation, we recorded $402,000 in
realized gains during 2002. These amounts have been transferred to SVB.
In November 2000, we acquired Envenue, Inc., a wireless provider of
advanced product searching technologies designed to drive leads to traditional
retailers. The total purchase price included consideration of $2.0 million in
cash to be paid on or before May 24, 2002. We have not paid this amount, as we
are in a contractual dispute with the previous owners of Envenue. In June 2002,
we placed into escrow $2.0 million, which will be held in escrow until the
contractual dispute is resolved. We have recorded this amount as restricted
23
cash. In October 2002, we paid $410,000, representing the undisputed portion of
the purchase price plus interest from the original maturity date to the former
stockholders of Envenue.
The following table summarizes our long-term contractual obligations as of
December 31, 2002 (in thousands):
Less than 1 year 1-3 years Total
---------------- --------- ------
Envenue note payable $1,600 $ - $1,600
Operating lease obligations (a) 689 363 1,052
Other long-term obligations (b) 1,099 1,124 2,223
------ ------ -----
Total $3,388 $1,487 $4,875
====== ====== ======
(a) Excludes our operating lease for our principal administrative, sales and
marketing, and research and development facility located in Westboro,
Massachusetts. On December 31, 2002, our lease for this space expired.
Subsequently, effective January 1, 2003 we entered into a new one-year lease,
which will expire on December 31, 2003. Under the new lease, we are required to
pay ePresence a base rent of approximately $227,000 during 2003.
(b) Consists of scheduled principal payments on our Silicon Valley Bank
Financing Agreement.
Since our inception, we have significantly increased our operating
expenses. We anticipate that our operating expenses and capital expenditures
will constitute a material use of our cash resources into the foreseeable
future. We expect that we may need to incur advertising expense in future
periods, which will require us to spend cash in order to continue to brand our
name and increase traffic to our Web site. In addition, we may utilize cash
resources to fund acquisitions or investments in businesses, technologies,
products or services that are strategic or complementary to our business. We
believe that the cash and marketable securities currently available will be
sufficient to meet our anticipated cash requirements to fund operations for at
least the next 12 months.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We have identified the policies below as critical to the understanding of
our results of operations. Note that our preparation of this Annual Report on
Form 10-K requires us to make estimates and assumptions that affect the reported
amount of assets and liabilities, disclosure of contingent assets and
liabilities at the date of our financial statements, and the reported amounts of
revenue and expenses during the reporting period. On an ongoing basis,
management evaluates its estimates and judgments, including those related to
revenue recognition, bad debts, investments, intangible assets, compensation
expenses, third-party commissions, restructuring costs, contingencies and
litigation. Management bases its estimates and judgments on historical
experience and on various other factors that are believed to be reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. There can be no assurance that actual results will
not differ from those estimates.
Critical accounting polices are those policies that are reflective of
significant judgments and uncertainties and potentially result in materially
different results under different assumptions and conditions. We believe our
most critical accounting policies are as follows:
Revenue Recognition
We generate our revenue primarily from our merchant network and banner and
site sponsorship advertising. Generally, revenue is recognized as services are
provided, so long as no significant obligations remain and collection of the
resulting receivable is probable. We believe that we are able to make reliable
judgments regarding the creditworthiness of our customers based upon historical
24
and current information available to us. There can be no assurances that our
payment experience with our customers will be consistent with past experience or
that the financial condition of these customers will not decline in future
periods, the result of which could be our failure to collect invoiced amounts.
Some of these amounts could be material, resulting in an increase in our
provision for bad debts.
In addition to bad debts arising from the any failure to collect monies due
from our customers for products and services delivered, under the Directory
Agreement we share a portion of bad debts incurred by AOL. The royalty we
receive from AOL is primarily based upon revenue recognized by AOL in the
period, less any commissions paid on such revenue and any amounts written off by
AOL as bad debt. Based upon AOL's historical bad debt experience, we have
established and maintained a sales allowance to reserve for our estimate of our
portion of AOL's future bad debts associated with revenue recognized during the
period. AOL's collection experience with their customers may be inconsistent
with its past experience. AOL decides to consider certain of their receivables
as bad debt at their own discretion. As a result, should AOL's bad debts exceed
our estimates, we will be required to further reduce our revenue for our share
of amounts considered uncollectable by AOL. These amounts could be material and
have a material adverse effect on our financial position, results of operations
and cash flows.
Risks, Concentrations and Uncertainties
We invest our cash and cash equivalents primarily in deposits, money market
funds and investment grade securities with financial institutions. We have not
experienced any material realized losses to date on our invested cash. A
potential exposure is a concentration of credit risk in accounts receivable. We
maintain reserves for credit losses and, to date, such losses have been within
our expectations. These expectations are based on historical experience,
analysis of information currently available to us with respect to our customer's
financial position, as well as various other factors. While we believe we can
make reliable estimates of these matters, it is possible that these estimates
may change in the near future due, for example, to changes in market conditions,
other economic factors or issues specific to individual customers. A change in
estimates could negatively affect our results of operations.
Accounting for Stock-Based Compensation
In January 2003, FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123"
("SFAS 148"), which provides alternative methods of transition for a voluntary
change to a fair value based method of accounting for stock-based employee
comensation. In addition, SFAS 148 amends the disclosure requirements of SFAS
123 to require prominent disclosures in annual financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. SFAS 148 is effective for us for the year ended
December 31, 2002. We have determined that we will continue to account for
stock-based compensation for employees under APB 25, and elect the
disclosure-only alternative under SFAS 123 and provide the enhanced disclosures
as required by SFAS 148.
We are required in the preparation of the disclosures required under SFAS
148 to make certain estimates when ascribing a value to stock options granted
during the year. These estimates include, but are not limited to, an estimate of
the average time option grants will be outstanding before they are ultimately
exercised and converted into common stock and an estimate of the future
volatility in the market value of our common stock over that period in which the
option grants are outstanding. These estimates are integral to the valuing of
these option grants. Any changes in these estimates may have a material effect
on the value ascribed to these option grants. This would in turn affect the
amortization used in the disclosures we make under SFAS 148, which could be
material. Further, the rules governing accounting for option grants continue to
evolve. Should we be required in future periods to include amortization of stock
options, such amortization would have a material adverse effect on our results
of operations.
25
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In January 2002, the EITF issued Issue No. 01-14 "Income Statement
Characterization of Reimbursements Received for "Out-of-Pocket" Expenses
Incurred" ("EITF 01-14"), relating to the accounting for reimbursements received
for out-of-pocket expenses. In accordance with EITF 01-14, reimbursements
received for out-of-pocket expenses incurred should be characterized as revenue
in the statement of operations. EITF 01-14 is effective for all financial
reporting periods beginning after December 15, 2001 and upon adoption, there is
a requirement to present comparative prior period financial information. The
adoption of EITF 01-14 did not have an impact on our financial position, results
of operations or cash flows.
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated
with Exit or Disposal Activities" ("SFAS 146"), which addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies EITF Issue No. 94-3 "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)". SFAS 146 is effective for Switchboard on
January 1, 2003. SFAS 146 creates a model whereby a liability is recognized at
its fair value in the period in which it is incurred, rather than at the date of
commitment to a plan. We do not expect the adoption of SFAS 146 to have a
material impact on our financial position, results of operations and cash flows.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others" (FIN 45). FIN 45 elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and initial measurement
provisions of the interpretation are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002 and the disclosure
requirements in this interpretation are effective for financial statements of
interim or annual periods ending after December 15, 2002. The adoption of FIN 45
is not expected to have a material impact on our financial position or results
of operations.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46) to clarify the conditions under which
assets, liabilities and activities of another entity should be consolidated into
the financial statements of a company. FIN 46 requires the consolidation of a
variable interest entity by a company that bears the majority of the risk of
loss from the variable interest entity's activities, is entitled to receive a
majority of the variable interest entity's residual returns, or both. The
provisions of FIN 46, required to be adopted in fiscal 2003, are not expected to
have a material impact on our financial position or results of operations.
In November 2002, the EITF finalized its consensus on EITF Issue 00-21,
"Revenue Arrangements with Multiple Deliverables" (EITF 00-21), which provides
guidance on the timing and method of revenue recognition for sales arrangements
that include the delivery of more than one product or service. EITF 00-21 is
effective prospectively for arrangements entered into in fiscal periods
beginning after June 15, 2003. Under EITF 00-21, revenue must be allocated to
all deliverables regardless of whether an individual element is incidental or
perfunctory. We do not expect the adoption of EITF 00-21 to have a material
impact on our financial position, results of operations and cash flows.
26
FACTORS AFFECTING OPERATING RESULTS, BUSINESS PROSPECTS AND MARKET PRICE OF
STOCK
We caution you that the following important factors, among others, in the
future could cause our actual results to differ materially from those expressed
in forward-looking statements made by or on behalf of Switchboard in filings
with the Securities and Exchange Commission, press releases, communications with
investors, and oral statements. Any or all of our forward-looking statements in
this Annual Report on Form 10-K and in any other public statements we make may
turn out to be wrong. They can be affected by inaccurate assumptions we might
make or by known or unknown risks and uncertainties. Many factors mentioned in
the discussion below will be important in determining future results.
Consequently, no forward-looking statement can be guaranteed. Actual future
results may vary materially. We undertake no obligation to publicly update any
forward-looking statements, whether as a result of new information, future
events or otherwise. You are advised, however, to consult any further
disclosures we make in our reports filed with the Securities and Exchange
Commission.
RISKS RELATED TO OUR BUSINESS
WE HAVE A HISTORY OF INCURRING NET LOSSES, WE EXPECT OUR NET LOSSES TO
CONTINUE FOR AT LEAST THE NEXT QUARTER, IF NOT THE NEXT SEVERAL QUARTERS, AND WE
MAY NEVER ACHIEVE PROFITABILITY
We have incurred significant net losses in each fiscal quarter since our
inception. From inception to December 31, 2002, we have incurred net losses
totaling $108.7 million. As a result, we need to generate additional revenue to
fund our operations. It is possible that we may never achieve profitability and,
even if we do achieve profitability, we may not sustain or increase
profitability on a quarterly or annual basis in the future. If we do not achieve
sustained profitability, we will eventually be unable to continue our
operations.
IF THE DIRECTORY SERVICES AGREEMENT WE ENTERED INTO WITH AMERICA ONLINE, INC.
("AOL"), A SUBSIDIARY OF AOL TIME WARNER, INC., IS NOT SUCCESSFUL, IT WOULD HAVE
A MATERIALLY NEGATIVE EFFECT ON OUR RESULTS OF OPERATIONS
The Directory Agreement we entered into with AOL may not generate
anticipated revenues or other benefits. Even though we have recently amended the
agreement, the agreement may still be prematurely terminated by breach or it
otherwise fails to be successful. Our revenue from AOL in recent quarters has
been lower than anticipated, due to AOL's longer-than-expected transition to a
third-party channel sales model in its directory advertising business, and it is
possible that this and other factors may lead to revenue from AOL being lower
than anticipated in future periods as well. Local merchants may not view the
alliance as an effective advertising vehicle for their products and services.
Even if the Directory Agreement is not successful, AOL may not have to return
any of the consideration, including cash and stock, which we have paid to AOL,
and we may have continuing contractual obligations to AOL under the agreement.
In 2002, revenue derived from AOL represented a significant portion of our
net revenue. AOL accounted for 41.8% of total net revenue in 2002. We anticipate
that AOL will represent greater than 50% of our net revenue during 2003 and will
be a material component of our overall business. The termination of our
agreement with AOL or the failure of our agreement with AOL to generate these
anticipated revenues would have a material adverse effect on our results of
operations and financial condition. The term of our agreement with AOL expires
in December 2004. We or AOL may elect not to renew the agreement upon its
expiration.
27
OUR QUARTERLY RESULTS OF OPERATIONS ARE LIKELY TO FLUCTUATE AND, AS A RESULT,
WE MAY FAIL TO MEET THE EXPECTATIONS OF OUR INVESTORS AND SECURITIES ANALYSTS,
WHICH MAY CAUSE THE PRICE OF OUR COMMON STOCK TO DECLINE
Our quarterly revenue and results of operations are volatile and are
particularly difficult to predict. Our quarterly results of operations have
fluctuated significantly in the past and are likely to fluctuate significantly
from quarter to quarter in the future. We do not believe that period-to-period
comparisons of our results of operations are necessarily meaningful and you
should not rely upon these comparisons as indicators of our future performance.
Factors that may cause our results of operations to fluctuate include:
* the addition, loss or success of relationships with third parties that
are our source of new merchants or that license our software;
* 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;
* the cost of acquiring, and the availability of, content, including
directory information and maps; and
* the fact that our expenses are only partially based on our expectations
regarding future revenue and are largely fixed in nature, particularly in
the short term.
As a result of these or other factors, results in any future quarter may be
below the expectations of securities analysts or investors. If so, the market
price of our common stock may decline significantly.
WE DEPEND ON MERCHANT NETWORK ALLIANCE PARTNERSHIPS WITH THIRD PARTIES TO GROW
OUR BUSINESS AND OUR BUSINESS MAY NOT GROW IF THE MERCHANT NETWORK ALLIANCE
PARTNERSHIPS UPON WHICH WE DEPEND FAIL TO PRODUCE THE EXPECTED BENEFITS OR ARE
TERMINATED
Our business depends upon our ability to maintain and benefit from our
existing merchant network alliance partnerships and to establish additional
merchant network alliance partnerships. For our business to be successful, we
must expand our merchant network and generate significant revenue from that
initiative. The success of our merchant network depends in substantial part upon
our ability to access a broad base of local merchants. The merchant base is
highly fragmented. Local merchants are difficult to contact efficiently and
cost-effectively. Consequently, we depend on relationships with merchant network
alliance partners to sell Internet yellow pages advertising in our merchant
network to local merchants and to provide billing and other administrative
services relating to our merchant services. The termination of any strategic
relationship with a merchant network alliance partner would significantly impair
our ability to attract potential local merchant customers and deliver our
merchant services to our current customers. Furthermore, we cannot be certain
that we will be able to develop or maintain relationships with new merchant
network alliance partners on terms acceptable to us or at all.
In addition to our relationship with AOL, we have entered into
relationships with merchant network alliance partners and third-party content
providers. These parties may not perform their contractual obligations to us
and, if they do not, we may not be able to require them to do so. Some of our
strategic customer and supplier relationships may be terminated by either party
on short notice.
Our strategic customer and supplier relationships are in early stages of
development. These relationships may not provide us benefits that outweigh the
costs of the relationships. If any strategic customer or supplier demands a
greater portion of revenue or requires us to make payments for access to its Web
site, we may need to terminate or refuse to renew that relationship, even if it
had been previously profitable or otherwise beneficial. In addition, if we lose
a significant strategic partner, we may be unable to replace that relationship
with other strategic relationships with comparable revenue potential, content or
user demographics.
28
IF WE CANNOT DEMONSTRATE THE VALUE OF OUR MERCHANT SERVICES TO LOCAL MERCHANTS
ENROLLED TO RECEIVE OUR SERVICES THROUGH OUR MERCHANT NETWORK ALLIANCE PARTNERS,
THOSE LOCAL MERCHANT CUSTOMERS MAY STOP USING THESE SERVICES, WHICH COULD REDUCE
OUR REVENUE
We may be unable to demonstrate the value of our merchant services to local
merchants enrolled to receive our services through our merchant network alliance
partners. If local merchants cancel our various services, which are generally
provided on a month-to-month basis, our revenue could decline and we may need to
incur additional expenditures to obtain new local merchant customers. We do not
presently provide data demonstrating the number of leads generated by our
merchant services. Regardless of whether our merchant services effectively
produce leads, our local merchant customers may not know the source of the leads
and may cancel our merchant services.
THE ATTRACTIVENESS OF OUR SERVICES COULD DIMINISH IF WE ARE NOT ABLE TO
LICENSE ACCURATE DATABASE INFORMATION FROM THIRD-PARTY CONTENT PROVIDERS
We principally rely upon single third-party sources to provide us with our
business and residential listings data and mapping data. The loss of any one of
these sources or the inability of any of these sources to collect their data
could significantly and adversely affect our ability to provide information to
consumers. Although other sources of database information exist, we may not be
able to integrate data from these sources into our database systems in a timely,
cost-effective manner, or without an inordinate disruption of internal
engineering resources. Other sources of data may not be offered on terms
acceptable to us. Moreover, a consolidation by Internet-related businesses could
reduce the number of content providers with which we could form relationships.
We typically license information under arrangements that require us to pay
royalties or other fees for the use of the content. In the future, some of our
content providers may demand a greater portion of advertising revenue or
increase the fees that they charge us for their content. If we fail to enter
into and maintain satisfactory arrangements with existing or substitute content
providers, we may be unable to continue to provide our services.
The success of our business depends on the quality of our services and that
quality is substantially dependent on the accuracy of data we license from third
parties. Any failure to maintain accurate data could impair the reputation of
our brand and our services, reduce the volume of users attracted to our Web site
as well as the Web sites of our merchant network alliance partners, and diminish
the attractiveness of our service offerings to those merchant network alliance
partners, advertisers and content providers.
ePRESENCE'S MAJORITY OWNERSHIP INTEREST IN US WILL PERMIT ePRESENCE TO CONTROL
MATTERS SUBMITTED FOR APPROVAL OF OUR STOCKHOLDERS, WHICH COULD DELAY OR PREVENT
A CHANGE IN CONTROL OR DEPRESS OUR STOCK PRICE
As of December 31, 2002, ePresence beneficially owned approximately 52.0%
of our common stock. Based upon this majority interest in us, ePresence is
generally able to control all matters submitted to our stockholders for approval
and our management and affairs, including the election and removal of directors
and any merger, consolidation or sale of all or substantially all of our assets.
Presently, three of the six members of our Board of Directors are officers or
directors of ePresence. ePresence's control over us could have the effect of
delaying or preventing a change of control of Switchboard that other
stockholders may believe would result in a more optimal return on investment. In
addition, this control could depress our stock price because purchasers will not
be able to acquire a controlling interest in us.
ePresence may elect to sell all or a substantial portion of its capital
stock to one or more third parties, in which case a third party with whom we
have no prior relationship could exercise the same degree of control over us as
ePresence presently does.
29
WE RELY ON A SMALL NUMBER OF CUSTOMERS, THE LOSS OF WHOM MAY SUBSTANTIALLY
REDUCE OUR REVENUE
We derive a substantial portion of our net revenue from a small number
customers. During 2002, net revenue derived from our top ten customers accounted
for approximately 68.3% of our total net revenue. Additionally, net revenue
derived from AOL alone accounted for 41.8% of our total net revenue in 2002.
Consequently, our revenue may substantially decline if we lose any of these
customers. We anticipate that our future results of operations will continue to
depend to a significant extent upon revenue from a small number of customers. In
addition, we anticipate that the identity of those customers will change over
time.
IF WE DO NOT INTRODUCE NEW OR ENHANCED OFFERINGS TO OUR MERCHANT NETWORK
ALLIANCE PARTNERS, WE MAY BE UNABLE TO ATTRACT AND RETAIN THOSE MERCHANT NETWORK
ALLIANCE PARTNERS, WHICH WOULD SIGNIFICANTLY IMPEDE OUR ABILITY TO GENERATE
REVENUE
We need to introduce new or enhanced products and services to attract and
retain merchant network alliance partners, and remain competitive. Our industry
has been characterized by rapid technological change, changes in user and
customer requirements and preferences and frequent new product and service
introductions embodying new technologies. These changes could render our
technology, systems and Web site obsolete. If we do not periodically enhance our
existing products and services, develop new technologies that address
sophisticated and varied consumer needs, respond to technological advances and
emerging industry standards and practices on a timely and cost-effective basis
and address evolving customer preferences, our products and services may not be
attractive to merchant network alliance partners, which would significantly
impede our revenue growth. In addition, if any new product or service
introduction, such as the Switchboard Matrix system with enhanced search
capabilities, is not favorably received, our reputation and our brand could be
damaged. We may also experience difficulties that could delay or prevent us from
introducing new products and services.
OUR BUSINESS MAY SUFFER IF WE LOSE THE SERVICES OF OUR CHIEF EXECUTIVE OFFICER
OR FOUNDER
Our future success depends to a significant extent on the continued
services and effective working relationships of our senior management and other
key personnel, including, but not limited to, Douglas Greenlaw, our Chief
Executive Officer, and Dean Polnerow, our founder and President. Our business
may suffer if we lose the services of Mr. Greenlaw, Mr. Polnerow or other key
personnel.
IF WE ARE NOT ABLE TO ATTRACT AND RETAIN HIGHLY SKILLED MANAGERIAL AND
TECHNICAL PERSONNEL WITH INTERNET EXPERIENCE, WE MAY NOT BE ABLE TO IMPLEMENT
OUR BUSINESS MODEL SUCCESSFULLY
We believe that our management must be able to act decisively to apply and
adapt our business model in the rapidly changing Internet markets in which we
compete. In addition, we rely upon our technical employees to develop and
maintain much of the technology used to provide our products and services.
Consequently, we believe that our success depends largely on our ability to
attract and retain highly skilled managerial and technical personnel. We may not
be able to hire or retain the necessary personnel to implement our business
strategy. In addition, we may need to pay higher compensation to employees than
we currently expect.
THE MARKETS FOR INTERNET CONTENT, SERVICES AND ADVERTISING ARE HIGHLY
COMPETITIVE, AND OUR FAILURE TO COMPETE SUCCESSFULLY WILL LIMIT OUR ABILITY TO
INCREASE OR RETAIN OUR MARKET SHARE
Our failure to maintain and enhance our competitive position would limit
our ability to increase or maintain our market share, which would seriously harm
30
our business. We compete in the markets for Internet content, services and
advertising. These markets are new, rapidly evolving and highly competitive. We
expect this competition to intensify in the future. We compete, or expect to
compete, with many providers of Internet content, information services and
products, as well as with traditional media, for audience attention and
advertising and sponsorship revenue. We license much of our database content
under non-exclusive agreements with third-party providers which are in the
business of licensing their content to many businesses, including our current
and potential competitors. Many of our competitors are substantially larger than
we are and have substantially greater financial, infrastructure and personnel
resources than we have. In addition, many of our competitors have
well-established, large, and experienced sales and marketing capabilities and
greater name recognition than we have. As a result, our competitors may be in a
stronger position to respond quickly to new or emerging technologies and changes
in customer requirements. They may also develop and promote their products and
services more effectively than we do. Moreover, barriers to entry are not
significant, and current and new competitors may be able to launch new Web sites
at a relatively low cost. We therefore expect additional competitors to enter
these markets.
Many of our current customers have established relationships with our
current and potential competitors. If our competitors develop content that is
superior to ours or that achieves greater market acceptance than ours, we may
not be able to develop alternative content in a timely, cost-effective manner,
or at all, and we may lose market share.
WE MAY NOT BE ABLE TO DEDICATE THE SUBSTANTIAL RESOURCES REQUIRED TO EXPAND,
MONITOR AND MAINTAIN OUR INTERNALLY DEVELOPED SYSTEMS WITHOUT CONTRACTING WITH
AN OUTSIDE SUPPLIER AT SUBSTANTIAL EXPENSE
We will have to expand and upgrade our technology, transaction-processing
systems and network infrastructure if the volume of traffic on our Web site or
our merchant network alliance partners' Web sites increases substantially. We
could experience temporary capacity constraints that may cause unanticipated
system disruptions, slower response times and lower levels of customer service.
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. Our inability
to upgrade and expand as required could impair the reputation of our brand and
our services, reduce the volume of users able to access our Web site, and
diminish the attractiveness of our service offerings to our strategic partners,
advertisers and content providers. Because we developed these systems
internally, we must either dedicate substantial internal resources to monitor,
maintain and upgrade these systems or contract with an outside supplier for
these services at substantial expense.
WE HAVE LIMITED EXPERIENCE ACQUIRING COMPANIES, AND ANY ACQUISITIONS WE
UNDERTAKE COULD LIMIT OUR ABILITY TO MANAGE AND MAINTAIN OUR BUSINESS, RESULT IN
ADVERSE ACCOUNTING TREATMENT AND BE DIFFICULT TO INTEGRATE INTO OUR BUSINESS
We have limited experience in acquiring businesses and have very limited
experience in acquiring complementary technologies. In May 1998, we acquired
MapsOnUs, and in November 2000, we acquired Envenue. In the future we may
undertake additional acquisitions. Acquisitions, in general, involve numerous
risks, including:
* diversion of our management's attention;
* future impairment of substantial goodwill, adversely affecting our
reported results of operations;
* inability to retain the management, key personnel and other employees of
the acquired business;
* inability to assimilate the operations, products, technologies and
information systems of the acquired business with our business; and
* inability to retain the acquired company's customers, affiliates, content
providers, advertisers and key personnel.
31
OUR INTERNALLY DEVELOPED SOFTWARE MAY CONTAIN UNDETECTED ERRORS, WHICH COULD
LIMIT OUR ABILITY TO PROVIDE OUR PRODUCTS AND SERVICES AND DIMINISH THE
ATTRACTIVENESS OF OUR SERVICE OFFERINGS
We use internally developed, custom software to provide our products and
services. This software may contain undetected errors, defects or bugs. Although
we have not suffered significant harm from any errors or defects to date, we may
discover significant errors or defects in the future that we may not be able to
fix. Our inability to fix any of those errors could limit our ability to provide
our services, impair the reputation of our brand and our services, reduce the
volume of users who visit our Web site and diminish the attractiveness of our
service offerings to our strategic partners, advertisers and content providers.
IF WE ARE UNABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, OUR
TECHNOLOGY AND INFORMATION MAY BE USED BY OTHERS TO COMPETE AGAINST US
We depend upon our internally developed and other proprietary technology.
If we do not effectively protect our proprietary technology, others may become
able to use it to compete against us. To protect our proprietary rights, we rely
on a combination of copyright and trademark laws, patents, trade secrets,
confidentiality agreements with employees and third parties and protective
contractual provisions. Despite our efforts to protect our proprietary rights,
unauthorized parties may misappropriate our proprietary technology or obtain and
use information that we regard as proprietary. We may not be able to detect
these or any other unauthorized uses of our intellectual property or take
appropriate steps to enforce our proprietary rights. In addition, others could
independently develop substantially equivalent intellectual property.
IF OUR SERVICES INFRINGE ON INTELLECTUAL PROPERTY RIGHTS OF OTHERS, WE MAY BE
REQUIRED TO EXPEND SUBSTANTIAL RESOURCES TO REENGINEER OUR SERVICES AND TO INCUR
SUBSTANTIAL COSTS AND DAMAGES RELATED TO INFRINGEMENT CLAIMS
We are subject to the risk of claims alleging infringement of third-party
proprietary rights. If we are subject to claims of infringement of, or are
infringing on, the rights of third parties, we may not be able to obtain
licenses to use those rights on commercially reasonable terms. In that event, we
may need to undertake substantial reengineering to continue our service
offerings. Any effort to undertake such reengineering might not be successful.
In addition, any claim of infringement could cause us to incur substantial costs
defending against the claim, even if the claim is invalid, and could distract
our management. Furthermore, a party making such a claim could secure a judgment
that requires us to pay substantial damages. A judgment could also include an
injunction or other court order that could prevent us from providing our
services.
RISKS RELATED TO THE INTERNET
IF THE ACCEPTANCE AND EFFECTIVENESS OF INTERNET ADVERTISING DOES NOT BECOME
FULLY ESTABLISHED, THE GROWTH OF OUR YELLOW PAGES AND BANNER AND SITE
SPONSORSHIP ADVERTISING REVENUE WILL SUFFER
Our business model is heavily dependent upon increasing our sales,
ultimately through our merchant network alliance partners, of yellow pages
advertising to local merchants. If use of Internet yellow pages by consumers
does not increase, Internet yellow pages advertising will not become more
attractive to merchants and our yellow pages advertising revenue growth will
suffer.
Similarly, if Internet banner and site sponsorship advertising fails to
gain wide acceptance and to grow from year to year, our banner and site
sponsorship revenue will be affected. Even though we anticipate that revenue
from banner and site sponsorship advertisements will decline as a percentage of
our future revenue, our future success still depends, in part, on an increase in
the use of the Internet as an advertising medium. We generated 12.1%, 33.1% and
32
58.4% of our net revenue from the sale of banner and site sponsorship
advertisements during 2002, 2001 and 2000, respectively. The Internet
advertising market is new and rapidly evolving, and cannot yet be compared with
traditional advertising media to gauge its effectiveness. As a result, demand
for and market acceptance of Internet advertising is uncertain. Many of our
merchant network alliance partners' current and potential local merchant
customers have little or no experience with Internet advertising and have
allocated only a limited portion of their advertising and marketing budgets to
Internet activities. The adoption of Internet advertising, particularly by
entities that have historically relied upon traditional methods of advertising
and marketing, requires the acceptance of a new way of advertising and
marketing.
These customers may find Internet advertising to be less effective for
meeting their business needs than traditional methods of advertising and
marketing. In addition, there are some software programs that limit or prevent
advertising from being delivered to a user's computer. Widespread adoption of
this software could significantly undermine the commercial viability of Internet
advertising. If the market for Internet advertising fails to develop or develops
more slowly than we expect, our revenue will suffer.
There are currently no generally accepted standards for the measurement of
the effectiveness of Internet advertising. Standard measurements may need to be
developed to support and promote Internet advertising as a significant
advertising medium. Our banner and site sponsorship advertising customers may
challenge or refuse to accept either our or third-party measurements of
advertisement delivery.
IF WE ARE SUED FOR CONTENT DISTRIBUTED THROUGH, OR LINKED TO BY, OUR WEB SITE
OR THOSE OF OUR MERCHANT NETWORK ALLIANCE PARTNERS, 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 over the Internet. In
addition, third-party Web sites are accessible through our Web site or those of
our merchant network alliance partners. 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 our Web site. Other claims may be based on
links to sexually explicit Web sites 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.
WE MAY NEED TO EXPEND SIGNIFICANT RESOURCES TO PROTECT AGAINST ONLINE SECURITY
RISKS THAT COULD RESULT IN MISAPPROPRIATION OF OUR PROPRIETARY INFORMATION OR
CAUSE INTERRUPTION IN OUR OPERATIONS
Our networks may be vulnerable to unauthorized access, computer viruses and
other disruptive problems. Someone who is able to circumvent security measures
could misappropriate our proprietary information or cause interruptions in our
operations. Internet and online service providers have experienced, and may in
the future experience, interruptions in service as a result of the accidental or
intentional actions of Internet users, current and former employees or others.
We may need to expend significant resources protecting against the threat of
security breaches or alleviating problems caused by breaches. Eliminating
computer viruses and alleviating other security problems may require
interruptions, delays or cessation of service.
WE MAY BE SUED FOR DISCLOSING TO THIRD PARTIES PERSONAL IDENTIFYING
INFORMATION WITHOUT CONSENT
Individuals whose names, addresses and telephone numbers appear in our
yellow pages and white pages directories have occasionally contacted us because
their phone numbers and addresses were unlisted with the telephone company.
While we have not received any formal legal claims from these individuals, we
may receive claims in the future for which we may be liable. In addition, if we
begin disclosing to third parties personal identifying information about our
33
users without consent or in violation of our privacy policy, we may face
potential liability for invasion of privacy.
WE MAY BECOME SUBJECT TO BURDENSOME GOVERNMENT REGULATION AND LEGAL
UNCERTAINTIES, WHICH COULD LIMIT OUR GROWTH
Laws and regulations directly applicable to Internet communications,
commerce and advertising are becoming more prevalent. Laws and regulations may
be adopted covering issues such as user privacy, pricing, content, taxation and
quality of products and services. Any new legislation could hinder the growth in
use of the Internet and other online services generally and decrease the
acceptance of the Internet and other online services as media of communications,
commerce and advertising. Various U.S. and foreign governments might attempt to
regulate our transmissions or levy sales or other taxes relating to our
activities. 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.
IF WE CANNOT PROTECT OUR DOMAIN NAMES, OUR ABILITY TO SUCCESSFULLY BRAND
SWITCHBOARD WILL BE IMPAIRED
We currently hold various Web domain names, including Switchboard.com and
MapsOnUs.com. The acquisition and maintenance of domain names generally is
regulated by Internet regulatory bodies. The regulation of domain names in the
United States and in foreign countries is 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 conduct business. This problem may be exacerbated by the length of time
required to expand into any other country and the corresponding opportunity for
others to acquire rights in relevant domain names. Furthermore, it is unclear
whether laws protecting trademarks and similar proprietary rights will be
extended to protect domain names. Therefore, 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. We
may not be able to successfully carry out our business strategy of establishing
a strong brand for Switchboard if we cannot prevent others from using similar
domain names or trademarks.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to financial market risks, including changes in interest
rates. We typically do not attempt to reduce or eliminate our market exposures
on our investment securities because the majority of our investments are
short-term. We do not have any derivative instruments.
The fair value of our investment portfolio or related income would not be
significantly impacted by either a 100 basis point increase or decrease in
interest rates due mainly to the short-term nature of our investment portfolio.
All the potential changes noted above are based on sensitivity analysis
performed on our balances as of December 31, 2002.
34
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Report of Ernst & Young LLP, Independent Auditors............................................ 36
Report of PricewaterhouseCoopers LLP, Independent Accountants................................ 37
Consolidated Balance Sheets as of December 31, 2002 and 2001................................. 38
Consolidated Statements of Operations for each of the years in the three-year period ended
December 31, 2002, 2001 and 2000........................................................... 39
Consolidated Statements of Stockholders' Equity for each of the years in the three-year
period ended December 31, 2002, 2001 and 2000.............................................. 40
Consolidated Statements of Cash Flows for each of the years in the three-year period
ended December 31, 2002, 2001 and 2000..................................................... 42
Notes to Consolidated Financial Statements................................................... 43
35
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders of Switchboard Incorporated
We have audited the accompanying consolidated balance sheets of Switchboard
Incorporated as of December 31, 2002 and 2001 and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
then ended. Our audits also included the financial statement schedule listed in
the Index at Item 15. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit 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 that 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 Switchboard
Incorporated at December 31, 2002 and 2001 and the consolidated results of its
operations and its cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ Ernst & Young LLP
Boston, Massachusetts
January 24, 2003, except as to the settlement of the lawsuit described in Note
M, as to which the date is February 19, 2003
36
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Switchboard, Inc.:
In our opinion, the consolidated statement of operations, shareholders' equity
and cash flows for the year ended December 31, 2000 present fairly, in all
material respects the results of operations and cash flows of Switchboard, Inc.
and its subsidiaries for the year ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States of America. 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 audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 1, 2001
37
SWITCHBOARD INCORPORATED
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
December 31,
----------------------------
2002 2001
-------- --------
Assets:
Cash and cash equivalents $ 38,390 $ 4,212
Short-term marketable securities 3,589 36,547
Restricted cash (Note G) 1,640 874
Accounts receivable, net of allowance of $350 and $500, respectively 1,558 1,635
Unbilled receivables 160 623
Other current assets 330 631
-------- --------
Total current assets 45,667 44,522
Long-term marketable securities 10,244 18,333
Property and equipment, net 1,877 2,885
Other assets, net - 95
-------- --------
Total assets $ 57,788 $ 65,835
======== ========
Liabilities and stockholders' equity:
Accounts payable $966 $2,279
Accrued expenses 1,437 3,253
Deferred revenue 475 761
Payable related to acquisition 1,600 2,000
Note payable, current portion 1,099 -
Capital lease obligation, current portion - 357
-------- --------
Total current liabilities 5,577 8,650
Note payable, net of current portion 1,124 -
Capital lease obligation, net of current portion - 518
-------- --------
Total liabilities 6,701 9,168
Commitments and contingencies (Note M) - -
Stockholders' equity:
Preferred Stock, $0.01 par value per share; 4,999,999 shares authorized and
undesignated, none issued and outstanding - -
Series E special voting preferred stock, $0.01 par value per share; one share
authorized and designated. No shares issued and outstanding. - -
Common stock, $0.01 par value per share; authorized 85,000,000 shares.
Issued 19,227,230 shares and outstanding 18,840,928 shares as of December 31,
2002. Issued and outstanding 18,265,065 shares as of December 31, 2001. 192 183
Treasury stock, at cost, 386,302 shares as of December 31, 2002. (1,255) -
Additional paid-in capital 162,437 160,681
Note and interest receivable for issuance of restricted common stock (1,520) -
Unearned compensation (178) (334)
Accumulated other comprehensive income 156 923
Accumulated deficit (108,745) (104,786)
-------- --------
Total stockholders' equity 51,087 56,667
-------- --------
Total liabilities and stockholders' equity $ 57,788 $ 65,835
======== ========
See accompanying notes.
38
SWITCHBOARD INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Years Ended December 31,
-----------------------------------------
2002 2001 2000
------- -------- --------
Revenue $13,747 $ 13,326 $ 20,310
Consideration given to a customer (2,000) (4,048) (412)
------- -------- --------
Net revenue 11,747 9,278 19,898
Cost of revenue 3,744 3,518 3,490
------- -------- --------
Gross profit 8,003 5,760 16,408
Operating expenses:
Sales and marketing 4,683 24,606 29,183
Research and development 5,446 6,702 3,474
General and administrative 4,057 4,181 3,303
Amortization of goodwill, intangibles and other
assets - 719 1,156
Loss on Viacom transaction - 22,203 -
Special (credit) charges (262) 17,324 -
------- -------- --------
Total operating expenses 13,924 75,735 37,116
------- -------- --------
Loss from operations (5,921) (69,975) (20,708)
Other income (expense):
Interest income (net) 1,712 3,426 4,526
Realized gain on sales of marketable securities, net 382 92 6
Other-than-temporary unrealized loss on investment - (55) (714)
Other expense (132) (242) (128)
------- -------- --------
Total other income 1,962 3,221 3,690
------- -------- --------
Net loss (3,959) (66,754) (17,018)
Accrued dividends for preferred stockholders - - 270
------- -------- --------
Net loss attributable to common stockholders $(3,959) $(66,754) $(17,288)
======= ======== ========
Basic and diluted net loss per share attributable to
common stockholders $(0.21) $(2.83) $(0.75)
====== ====== ======
Shares used in computing basic and diluted
net loss per share attributable to common
stockholders 18,515 23,590 22,974
Unaudited pro forma basic and diluted net loss per
share (Note B) $(0.72)
======
Shares used in computing unaudited pro forma basic
and diluted net loss per share 23,607
See accompanying notes.
39
SWITCHBOARD INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share amounts)
Series E
Special Voting Treasury Stock
Preferred Stock Common Stock at Cost
--------------- ---------------- ----------------
Number Number Additional
of Number of Paid in
Shares Value of Shares Value Shares Value Capital
------ ----- ---------- ----- ------- ------- ----------
Balance, December 31, 1999 1 $ - 14,663,934 $147 - $ - $ 75,666
Issuance of common stock under
stock option and stock purchase
plans - - 157,627 2 - - 631
Issuance of stock options to non-
Employees - - - - - - 38
Issuance of common stock pursuant
to the Company's initial public
offering - - 6,325,000 62 - - 86,241
Conversion of preferred to
common stock in connection with
the Company's initial public
offering - - 3,552,421 36 - - 16,555
Issuance of common stock and
warrants related to third
party agreements - - 934,632 9 - - 3,482
Non-cash advertising and
promotion Expenses - - - - - - -
Accrued dividends for preferred
Stockholders - - - - - - (271)
Change in net unrealized gain on
Investments - - - - - - -
Net loss - - - - - - -
Comprehensive loss - - - - - - -
-- --- ---------- ---- ------- ------- --------
Balance, December 31, 2000 1 - 25,633,614 256 - - 182,342
Issuance of common stock under
stock option and stock purchase
plans - - 120,011 1 - - 259
Expenses resulting from issuance
of common stock and warrants
related to third party
agreements - - - - - - (110)
Unearned compensation associated
with grant of below market
stock options to an employee - - - - - - 436
Amortization of unearned
compensation - - - - - - -
Restructuring of Viacom Inc.
relationship (1) - (7,488,560) (74) - - (22,246)
Non-cash advertising and
promotion Expenses - - - - - - -
Change in net unrealized gain on
Investments - - - - - - -
Net loss - - - - - - -
Comprehensive loss - - - - - - -
-- --- ---------- ---- ------- ------- --------
Balance, December 31, 2001 - - 18,265,065 183 - - 160,681
Issuance of common stock under
stock option and stock purchase
plans - - 125,863 - - - 316
Issuance of common stock to
officer under stock incentive
plan - - 450,000 5 - - 1,444
Issuance of common stock under
warrant agreement - - 386,302 4 - - (4)
Repurchase of shares - - - - 386,302 (1,255) -
Interest due under note
receivable - - - - - - -
Amortization of unearned
compensation - - - - - - -
Change in net unrealized gain on
Investments - - - - - - -
Net loss - - - - - - -
Comprehensive loss - - - - - - -
-- --- ---------- ---- ------- ------- --------
Balance, December 31, 2002 - $ - 19,227,230 $192 386,302 $(1,255) $162,437
= === ========== ==== ======= ======= ========
40
SWITCHBOARD INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share amounts)
(continued)
Accumulated Total
Other Stockholders'
Note Contribution Unearned Comprehensive Accumulated Equity
Receivable Receivable Compensation Income Deficit (Deficit)
---------- ----------- ------------ ------------- ----------- ---------
Balance, December 31, 1999 $ - $(66,243) $ - $1,856 $ (21,014) $(9,588)
Issuance of common stock under
stock option and stock purchase
plans - - - - - 633
Issuance of stock options to non-
Employees - - - - - 38
Issuance of common stock pursuant
to the Company's initial public
offering - - - - - 86,303
Conversion of preferred to
common stock in connection with
the Company's initial public
offering - - - - - 16,591
Issuance of common stock and
warrants related to third
party agreements - 214 - - - 3,705
Non-cash advertising and
promotion Expenses - 11,825 - - - 11,825
Accrued dividends for preferred
Stockholders - - - - - (271)
Change in net unrealized gain on
Investments - - - (1,488) - (1,488)
Net loss - - - - (17,018) (17,018)
-------
Comprehensive loss - - - - - (18,506)
------- -------- ----- ------ --------- -------
Balance, December 31, 2000 - (54,204) - 368 (38,032) 90,730
Issuance of common stock under
stock option and stock purchase
plans - - - - - 260
Expenses resulting from issuance
of common stock and warrants
related to third party
agreements - - - - - (110)
Unearned compensation associated
with grant of below market
stock options to an employee - - (436) - - -
Amortization of unearned
compensation - - 102 - - 102
Restructuring of Viacom Inc.
relationship - 44,524 - - - 22,204
Non-cash advertising and
promotion Expenses - 9,680 - - - 9,680
Change in net unrealized gain on
Investments - - - 555 - 555
Net loss - - - - (66,754) (66,754)
-------
Comprehensive loss - - - - - (66,199)
------- -------- ----- ------ --------- -------
Balance, December 31, 2001 - - (334) 923 (104,786) 56,667
Issuance of common stock under
stock option and stock purchase
plans - - - - - 316
Issuance of common stock to
officer under stock incentive
plan (1,449) - - - - -
Issuance of common stock under
warrant agreement - - - - - -
Repurchase of shares - - - - - (1,255)
Interest due under note
receivable (71) - - - - (71)
Amortization of unearned
compensation - - 156 - - 156
Change in net unrealized gain on
Investments - - - (767) - (767)
Net loss - - - - (3,959) (3,959)
-------
Comprehensive loss - - - - - (4,726)
------- -------- ----- ------ --------- -------
Balance, December 31, 2002 $(1,520) $ - $(178) $ 156 $(108,745) $51,087
======= ======== ===== ====== ========= =======
See accompanying notes.
41
SWITCHBOARD INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended December 31,
-------------------------------------
2002 2001 2000
------- -------- --------
Cash flows from operating activities:
Net loss $(3,959) $(66,754) $(17,018)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 1,551 2,649 1,312
Amortization of unearned compensation 156 102 -
Non-cash interest income on note receivable (71) - -
Gain on sale of marketable securities (414) - -
Loss on disposal of property and equipment - 176 124
Expense related to warrant grants - 552
Amortization of AOL assets 2,000 4,048 412
Non-cash advertising and promotion expense - 9,680 11,824
Loss on Viacom Inc. transaction - 22,203 -
Special (credit) charges, non-cash portion (262) 16,955 -
Other-than-temporary unrealized loss on available for sale
investments 6 55 714
Expenses resulting from issuance of common stock
and warrants related to third party agreements - (110) -
Changes in operating assets and liabilities:
Accounts receivable 76 3,937 (5,479)
Unbilled receivables 463 954 1,391
Other current assets 300 (5,608) (220)
Other assets 95 1,833 (6,384)
Directory services agreement (2,000) - (6,500)
Accounts payable (1,313) 991 501
Accrued expenses (325) (1,266) 158
Accrued restructuring (922) 1,410 -
Deferred revenue (286) (751) 163
------- -------- --------
Net cash used in operating activities (4,905) (9,496) (18,450)
Cash flows from investing activities:
Purchases of property and equipment (847) (2,942) (1,017)
Acquisition of business - - (77)
Restricted cash (766) (874) -
Proceeds from sales (purchases) of marketable securities, net 40,687 (2,383) (51,568)
------- -------- --------
Net cash provided by (used in) investing activities 39,074 (6,199) (52,662)
Cash flows from financing activities:
Proceeds from issuance of common stock, net 316 260 86,907
Purchase of treasury stock (1,255) - -
Proceeds from issuance of note payable 2,747 - -
Proceeds from sales-type leases - 1,101 -
Payments on capital leases and notes payable (1,799) (226) (628)
------- -------- --------
Net cash provided by financing activities 9 1,135 86,279
------- -------- --------
Net increase (decrease) in cash and cash equivalents 34,178 (14,560) 15,167
Cash and cash equivalents at beginning of year 4,212 18,772 3,605
------- -------- --------
Cash and cash equivalents at end of year $38,390 $ 4,212 $ 18,772
======= ======== ========
Supplemental schedule of cash flow information:
Interest paid $161 $66 $42
Supplemental statement of non-cash investing and financing activity:
Conversion of redeemable preferred stock into common stock - - $16,590
Issuance of common stock for Directory Agreement - - $2,968
Issuance of payable and stock options related to acquisition - - $2,038
Unrealized (gain) loss on investments $767 $(555) $1,488
See accompanying notes.
42
SWITCHBOARD INCORPORATED
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2002
A. Nature of Business
Switchboard Incorporated, a Delaware corporation (the "Company"), commenced
operations in February 1996. From the Company's inception (February 19, 1996)
until March 7, 2000, the Company was a unit and later a subsidiary of ePresence
Inc. (formerly Banyan Worldwide, "ePresence"). As of December 31, 2002,
ePresence beneficially owned approximately 52.0% of the Company's common stock.
The Company is a provider of Web-hosted directory technologies and customized
yellow pages platforms to yellow pages publishers, newspaper publishers and
Internet portals that offers online local directory advertising solutions to
national retailers and brick and mortar merchants across a full range of
Internet and wireless platforms. The Company offers a broad range of functions,
content and services, including yellow and white pages, product searching,
location based searching and interactive maps and driving directions. The
Company's Web site, Switchboard.com, is a showcase for the Company's technology
and breadth of directory product offerings, and is a resource for consumers and
businesses alike. The Company offers its users local information about people
and businesses across the United States. The Company operates in one business
segment as a provider of Web-hosted directory technologies and customized yellow
pages platforms.
The Company is subject to risks and uncertainties common to growing
technology-based companies, including rapid technological change, growth and
commercial acceptance of the Internet, acceptance and effectiveness of Internet
advertising, dependence on principal products and third-party technology, new
product development, new product introductions and other activities of
competitors, dependence on key personnel, security and privacy issues,
dependence on strategic customer and vendor relationships and limited operating
history.
The Company has also experienced substantial net losses since its inception
and, as of December 31, 2002, had an accumulated deficit of $108.7 million. Such
losses and accumulated deficit resulted from the Company's lack of substantial
revenue and significantly increased costs incurred in the development of the
Company's products and services, in the preliminary establishment of the
Company's infrastructure and in the development of the Company's brand. The
Company expects to continue to incur significant operating expenses in order to
execute its current business plan, particularly sales and marketing and product
development expenses. The Company believes that the funds currently available
would be sufficient to fund operations through at least the next 12 months.
B. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying financial statements, which are derived from both the
independent books and records of the Company and its subsidiaries and the
historical books and records of ePresence, include the assets, liabilities,
revenues and expenses of the Company at historical cost. Intercompany accounts
and transactions have been eliminated.
These financial statements are intended to present management's estimates
of the results of operations and financial condition of the Company as if it had
operated as a stand-alone company since inception. Certain of the costs and
expenses are management estimates of the cost of services provided by ePresence
and its subsidiaries. As a result, the financial statements presented may not be
indicative of the results that would have been achieved had the Company operated
as a nonaffiliated entity.
43
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 the
disclosures of contingent liabilities at the period end, and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Cash Equivalents and Marketable Securities
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. Those instruments with
maturities as of the balance sheet date between three and twelve months are
considered to be short-term marketable securities, and investments with
maturities as of the balance sheet date of greater than one year are classified
as long-term marketable securities. Cash equivalents and marketable securities
are carried at market, and consist primarily of interest bearing deposits with
major financial institutions.
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
115 "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS
115"), the Company classifies all of its marketable equity securities as
available for sale securities. These securities are valued at fair value and
consist primarily of U.S government securities, corporate and municipal issues
and interest bearing deposits with major banks. Unrealized holdings gains and
losses are reported as a component of accumulated other comprehensive income, a
separate component of Stockholders' Equity. Other-than-temporary unrealized
losses are reported as a component of other income (expense) within the
Statement of Operations.
In 2002, 2001 and 2000, purchases of marketable securities were $12.8
million, $81.9 million and $408.7 million respectively. In 2002, 2001 and 2000,
proceeds from sales and maturities of marketable securities were $53.5 million,
$79.5 million and $357.1 million, respectively. In 2002, the Company recorded
$57,000 in realized losses on marketable securities.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the following estimated asset lives:
Computers, peripherals and servers.........3 years
Office equipment.........................3-5 years
Software...................................3 years
Furniture and fixtures.....................5 years
Leasehold improvements are depreciated over the asset's estimated useful
life or the remaining life of the lease, whichever is shorter. Maintenance and
repairs are charged to expense when incurred, while betterments are capitalized.
When property is retired or otherwise disposed of, the related cost and
accumulated depreciation are removed from the respective amounts and any gain or
loss is reflected in operations.
Goodwill and Intangibles
The Company recorded amounts in excess of assets acquired pursuant to its
acquisition of Envenue, Inc. ("Envenue") in November 2000 as goodwill. Pursuant
to a distribution agreement the Company entered into with America Online, Inc.
("AOL", the "Directory Agreement"), the Company issued shares of its common
stock to AOL. The value of these shares of common stock had been recorded as an
intangible asset, and had been amortized on a straight-line basis over the life
of the Directory Agreement. As of December 31, 2001, the Company evaluated the
44
net realizable value of all of its assets related to AOL and Envenue as a result
of lower than anticipated revenues in accordance with the Financial Accounting
Standards Board ("FASB") SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121") and
determined that both its assets related to AOL and Envenue had been impaired. As
a result, the Company recorded a loss on impairment as a component of its fourth
quarter of 2001 special charges to earnings (Notes F, G and R).
Effective January 1, 2002, the Company adopted the provisions of SFAS No.
142, "Goodwill and Other Intangible Assets" ("SFAS 142"). This statement affects
the Company's treatment of goodwill and other intangible assets. The statement
requires that goodwill existing at the date of adoption be reviewed for possible
impairment and that impairment tests be periodically repeated, with impaired
assets written down to fair value. Additionally, existing goodwill and
intangible assets must be assessed and classified within the statement's
criteria. The adoption of SFAS 142 did not have a material effect on the
financial statements as of December 31, 2002 or for the year then ended.
Impairment of Long-Lived Assets
In accordance with SFAS No. 144 "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed Of" ("SFAS 144"), the
Company periodically evaluates its long-lived assets for potential impairment.
Potential impairment is assessed when there is evidence that events or changes
in circumstances indicate that the carrying amount of an asset may not be
recovered. Recoverability of these assets is assessed based on undiscounted
expected future cash flows from the assets, considering a number of factors
including past operating results, budgets and economic projections, market
trends and product development cycles. An impairment in the carrying value of
each asset is assessed when the undiscounted expected future cash flows derived
from the asset are less than its carrying value. The adoption of SFAS 144 did
not have a material effect on the financial statements as of December 31, 2002
or for the year then ended.
Advertising Expense
Advertising costs are expensed as incurred and totaled $34,000, $15,430,000
and $16,719,000 in the years ended December 31, 2002, 2001 and 2000,
respectively. In 2001 and 2000, the costs included $9,680,000 and $11,824,000 of
non-cash advertising received from Viacom Inc. (formerly CBS Corporation) (Note
L), respectively.
Revenue Recognition
The Company generates its revenue primarily from its merchant network and
banner and site sponsorship advertising. Generally, revenue is recognized as
services are provided, so long as no significant obligations remain and
collection of the resulting receivable is probable. The Company believes that it
is able to make reliable judgments regarding the creditworthiness of its
customers based upon historical and current information available to the
Company. There can be no assurances that the Company's payment experience with
its customers will be consistent with past experience or that the financial
condition of these customers will not decline in future periods, the result of
which could be the failure to collect invoiced amounts. Some of these amounts
could be material, resulting in an increase in the Company's provision for bad
debts.
Revenues earned under the merchant network consist of advertising and
platform services. Through its merchant network, the Company offers certain
merchant network alliance partners the ability to offer Switchboard.com
distribution to their merchant advertisers. These efforts are reflected in the
Company's merchant network advertising revenues. For these advertising services,
the merchant network alliance partners pay the Company a monthly fee based on
the number of advertisements placed into Switchboard.com. The Company recognizes
this monthly fee as revenue as it is earned. Platform services relate to the
Company's offerings to its merchant network alliance partners, under which those
45
merchant network alliance partners can enter into a development and licensing
arrangement with the Company whereby the Company creates and/or modifies a
private labeled web-hosted directory platform. Once the web-hosted directory
platform is operational, the Company also earns additional fees based on the
number of merchants promoted within the platform. Revenue received by the
Company for such development and licensing arrangements is deferred until such
time as the customer accepts the platform. After acceptance by the customer,
revenue from such development and licensing agreements is recognized ratably
over the remaining life of the agreement. Any per merchant license fees or
additional engineering and other services fees earned are recognized as earned
due to their variable nature. In addition, included as an offset to revenue is
consideration given to customers, for which the benefits of such consideration
are not separately identifiable from the revenue obtained from those customers
(Note C).
Revenues earned under the Company's banner and site sponsorships consist
principally of advertising revenue earned though the Switchboard.com Web site.
Specifically, the Company offers both site-wide banner and category specific
banner programs on the Switchboard.com Web site.
Deferred revenue is principally comprised of billings relating to
advertising agreements and licensing fees received pursuant to advertising or
services agreements in advance of revenue recognition. Unbilled receivables are
principally comprised of revenues earned and recognized in advance of invoicing
customers, resulting primarily from contractually defined billing schedules.
Risks, Concentrations and Uncertainties
The Company invests its cash and cash equivalents primarily in deposits,
money market funds and investment grade securities with financial institutions.
The Company has not experienced any realized losses to date on its invested
cash.
A potential exposure to the Company is a concentration of credit risk in
accounts receivable. The Company minimizes this risk by maintaining reserves for
credit losses and, to date, such losses have been within management's
expectations. As of December 31, 2002 and 2001, AOL accounted for 28.8% and
47.3% of accounts receivable, respectively. AOL accounted for 41.8% of net
revenue for the year ended December 31, 2002. One customer accounted for 11.6%
of net revenue in the year ended December 31, 2001. One customer accounted for
16.1% of net revenue for the year ended December 31, 2000.
Income Taxes
The Company accounts for income taxes under the liability method. Under
this method, deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted rates in effect for the year in which those temporary differences
are expected to be recovered or settled. A deferred tax asset is established for
the expected future benefit of net operating loss and tax credit carry-forwards.
A valuation reserve against net deferred tax assets is required if, based upon
available evidence, it is more likely than not that some or all of the deferred
tax assets will not be realized.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, which include
cash equivalents, marketable securities, accounts receivable, accounts payable,
accrued expenses and a note payable, approximate their fair values.
46
Accounting for Stock-Based Compensation
The Company accounts for stock-based awards to employees using the
intrinsic value method as prescribed by Accounting Principles Board ("APB") No.
25, "Accounting for Stock Issued to Employees," ("APB 25") and related
interpretations. Accordingly, no compensation expense is recorded for options
issued to employees in fixed amounts and with fixed exercise prices at least
equal to the fair market value of the Company's common stock at the date of
grant. The Company has adopted the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," ("SFAS 123") through disclosure only (Note O). All
stock-based awards to non-employees are accounted for at their fair value in
accordance with SFAS 123.
In January 2003, FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123"
("SFAS 148"), which provides alternative methods of transition for a voluntary
change to a fair value based method of accounting for stock-based employee
comensation. In addition, SFAS 148 amends the disclosure requirements of SFAS
123 to require prominent disclosures in annual financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. SFAS 148 is effective for the Company for the
year ended December 31, 2002. The Company has determined that it will continue
to account for stock-based compensation for employees under APB 25, and elect
the disclosure-only alternative under SFAS 123 and provide the enhanced
disclosures as required by SFAS 148.
At December 31, 2002, the Company has three stock-based employee
compensation plans, which are more fully described in Note Q. The Company
accounts for those plans under the recognition and measurement principles of APB
25 and related interpretations. The table below illustrates the effect on the
net loss if the Company had applied the fair value recognition provisions of
SFAS 123 to stock-based employee compensation (in thousands, except per share
data). Because options vest over several years and additional option grants are
expected to be made in future years, the below pro-forma effects are not
necessarily indicative of the pro-forma effects on future years.
Years Ended December 31,
-----------------------------------
2002 2001 2000
------- -------- --------
Net loss attributable to common stockholders as reported $(3,959) $(66,754) $(17,288)
Add: Stock-based employee compensation expense included
in reported net loss attributable to common
stockholders, net of related tax effects 156 102 -
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects (1,220) (6,568) (5,842)
------- -------- --------
Pro-forma net loss attributable to common stockholders $(5,023) $(73,220) $(23,130)
======= ======== ========
Basic and diluted pro forma net loss per share attributable to
common stockholders $(0.27) $(3.10) $(1.01)
====== ====== ======
Shares used in computing basic and diluted pro forma net loss
per share attributable to common stockholders 18,515 23,590 22,974
Unaudited pro forma basic and diluted pro forma net loss per
share $(0.72)
======
Shares used in computing unaudited pro forma basic and
diluted pro forma net loss per share 23,607
47
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in each of the following periods:
Years Ended December 31,
---------------------------------
2002 2001 2000
------- ------- -------
Dividend yield 0% 0% 0%
Expected volatility 130% 130% 100%
Risk free interest rate 3.9% 4.3% 6.2%
Expected lives 4 years 4 years 4 years
The weighted average grant date fair values using the Black-Scholes option
pricing model were $3.28, $3.99 and $5.85 during the years ended December 31,
2002, 2001 and 2000, respectively.
Net Loss per Share and Pro Forma Net Loss per Share
Basic net loss per share is computed using the weighted average number of
shares of common stock outstanding less any restricted shares. In 2000, the net
loss used in the calculation of basic net loss per share attributable to common
stockholders is increased by the accrued dividends for the preferred stock
outstanding in the period. Diluted net loss per share does not differ from basic
net loss per share since potential common shares from conversion of preferred
stock, stock options and warrants are antidilutive for all periods presented and
are therefore excluded from the calculation. During the years ended December 31,
2002, 2001 and 2000, options to purchase 3,566,603, 4,206,080 and 3,526,080
shares of common stock, respectively, preferred stock convertible into none,
none and one shares of common stock, respectively, warrants for 918,468, 918,468
and 1,451,937 shares of common stock, respectively, and restricted common stock
of 300,000, 746,260 and none, respectively, were not included in the computation
of diluted net loss per share since their inclusion would be antidilutive. Pro
forma basic and diluted net loss per share have been calculated in 2000 assuming
the conversion of all outstanding shares of preferred stock into common stock,
as if the shares had converted immediately upon their issuance.
Comprehensive Loss
The Company adheres to SFAS No. 130, "Reporting Comprehensive Income",
which requires companies to report all changes in stockholders' equity during a
period, except those resulting from investment by owners and distribution to
owners, in comprehensive income in the period in which they are recognized.
Derivative Instruments and Hedging
During 2002, 2001 and 2000, the Company had no derivative investments or
accounting hedges in place.
Recent Accounting Pronouncements
In January 2002, the EITF issued Issue No. 01-14 "Income Statement
Characterization of Reimbursements Received for "Out-of-Pocket" Expenses
Incurred" ("EITF 01-14"), relating to the accounting for reimbursements received
for out-of-pocket expenses. In accordance with EITF 01-14, reimbursements
received for out-of-pocket expenses incurred should be characterized as revenue
in the statement of operations. EITF 01-14 is effective for all financial
reporting periods beginning after December 15, 2001 and upon adoption, there is
a requirement to present comparative prior period financial information. The
adoption of EITF 01-14 did not have an impact on the Company's financial
position, results of operations or cash flows.
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated
with Exit or Disposal Activities" ("SFAS 146"), which addresses financial
accounting and reporting for costs associated with exit or disposal activities
48
and nullifies EITF Issue No. 94-3 "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)". SFAS 146 is effective for the Company on
January 1, 2003. SFAS 146 creates a model whereby a liability is recognized at
its fair value in the period in which it is incurred, rather than at the date of
commitment to a plan. The Company does not expect the adoption of SFAS 146 to
have a material impact on its financial position, results of operations and cash
flows.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others" (FIN 45). FIN 45 elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and initial measurement
provisions of the interpretation are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002 and the disclosure
requirements in this interpretation are effective for financial statements of
interim or annual periods ending after December 15, 2002. The adoption of FIN 45
is not expected to have a material impact on the Company's financial position or
results of operations.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46) to clarify the conditions under which
assets, liabilities and activities of another entity should be consolidated into
the financial statements of a company. FIN 46 requires the consolidation of a
variable interest entity by a company that bears the majority of the risk of
loss from the variable interest entity's activities, is entitled to receive a
majority of the variable interest entity's residual returns, or both. The
provisions of FIN 46, required to be adopted in fiscal 2003, are not expected to
have a material impact on the Company's financial position or results of
operations.
In November 2002, the EITF finalized its consensus on EITF Issue 00-21,
"Revenue Arrangements with Multiple Deliverables" (EITF 00-21), which provides
guidance on the timing and method of revenue recognition for sales arrangements
that include the delivery of more than one product or service. EITF 00-21 is
effective prospectively for arrangements entered into in fiscal periods
beginning after June 15, 2003. Under EITF 00-21, revenue must be allocated to
all deliverables regardless of whether an individual element is incidental or
perfunctory. The Company does not expect the adoption of EITF 00-21 to have a
material impact on its financial position, results of operations and cash flows.
C. Adoption of EITF 01-9
Effective January 2002, the Company adopted Emerging Issues Task Force
Issue 01-9 "Accounting for Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendor's Products)" ("EITF 01-9"), which became
effective for fiscal years beginning after December 15, 2001. The Company has
concluded that EITF 01-9 is applicable to the accounting for its directory and
local advertising platform services agreement with AOL ("Directory Agreement").
The 2000 and 2001 results have been adjusted to conform to the presentation
required by EITF 01-9. Accordingly, the Company has decreased its merchant
network revenue by $2,000,000, $4,000,000 and $412,000 for the years ended
49
December 31, 2002, 2001 and 2000, respectively, and reduced its operating
expenses by corresponding amounts for the same periods. The adoption of EITF
01-9 had no effect on net income or the Company's capital resources. The
following table illustrates the effect of the application of EITF 01-9 (in
thousands):
Year Ended December 31,
---------------------------------
2002 2001 2000
------- ------- -------
Gross revenue $13,747 $13,326 $20,310
Less: Amortization of consideration given to AOL (2,000) (4,048) (412)
------- ------- -------
Net revenue $11,747 $ 9,278 $19,898
======= ======= =======
Operating expenses $15,924 $79,783 $37,528
Less: Amortization of consideration given to AOL (2,000) (4,048) (412)
------- ------- -------
Net operating expenses $13,924 $75,735 $37,116
======= ======= =======
D. Concurrent Transactions
The Company had no barter transactions in the year ended December 31, 2002.
The Company had barter transactions totaled $836,000, or 9.0% of net revenue,
and $1,630,000, or 8.2% of net revenue, for the years ended December 31, 2001
and 2000, respectively in which the Company received promotion in exchange for
promotion on the Company's Web site or through direct e-mail distributions.
Revenue from advertising barter has been valued based on similar cash
transactions which occurred within six months prior to the date of the barter
transaction in accordance with Emerging Issues Task Force Issue No. 99-17
"Accounting for Advertising Barter Transactions". The Company had no other
concurrent transactions in the year ended December 31, 2002. The Company had
other concurrent transactions totaling $42,000, or 0.4% of net revenue, and
$3,940,000, or 19.8% of net revenue, for the years ended December 31, 2001 and
2000, respectively, in which the Company received certain marketing assets in
exchange for promotion on the Company's Web site or through direct e-mail
distributions. Revenues from other concurrent transactions are recorded at the
fair value of the goods or services provided or received, whichever is more
readily determinable.
E. Property and Equipment
Property and equipment consisted of the following at:
December 31,
------------------
2002 2001
------ ------
(in thousands)
Computers, peripherals and servers $4,250 $4,120
Office equipment 236 269
Software 882 593
Furniture and fixtures 5 144
Leasehold improvements 326 342
------ ------
5,699 5,468
Accumulated depreciation (3,822) (2,583)
------ ------
Total $1,877 $2,885
====== ======
Depreciation expense for the years ended December 31, 2002, 2001 and 2000
was $1,521,000, $1,235,000 and $662,000, respectively.
50
F. AOL
In December 2000, the Company entered into a Directory Agreement with AOL
to develop a new directory and local advertising platform and product set to be
featured across specified AOL properties (the "Directory Platform"). In November
2001, April 2002, August 2002 and November 2002, certain terms of the agreement
were amended. Under the four-year term of the amended Directory Agreement, the
Company shares with AOL specified directory advertisement revenue. In general,
the Company receives a majority of the first $12.0 million of such directory
advertisement revenue and a lesser share of any additional directory
advertisement revenue pursuant to the August 2002 amendment. The Company paid
AOL and recorded an asset of $13.0 million at the signing of the Directory
Agreement. Following the incorporation of the Directory Platform on the AOL.com,
AOL Service and Digital City properties ("AOL Roll-In") in January 2002, the
Company recorded a second asset and a liability related to future payments of
$13.0 million. In April 2002, the Company established an additional asset and
liability of $1.0 million and paid $2.0 million upon the execution of the April
2002 amendment. Under the April 2002 amended agreement, the Company was
scheduled to make six additional quarterly payments of $2.0 million each,
replacing the $13.0 million originally owed upon the AOL Roll-In. The August
2002 amendment, among other things, eliminated the $12.0 million in remaining
additional payments established in the April 2002 amendment. AOL committed to
pay the Company at least $2.0 million in consulting or service fees over the
term of the agreement under a payment schedule which ended in September 2002, of
which AOL has paid all $2.0 million and the Company has delivered all $2.0
million in services to AOL. In addition, the Company is required to provide up
to 300 hours of engineering services per month to AOL at no charge, if requested
by AOL for the term of the agreement. These 300 hours are provided to support
the Directory Platform, from which we share in directory revenue over the term
of the amended agreement. Any engineering services provided by the Company in
excess of 300 hours per month are charged to AOL on a time and materials basis.
AOL typically exceeds these 300 hours each month. In 2002 and 2001, consulting
and service fees totaled $1.5 million and $1.9 million, respectively.
The August 2002 amended Directory Agreement has an initial term of four
years, expiring in December 2004, and is subject to earlier termination upon the
occurrence of specified events, including, without limitation (1) the Company
being acquired by one of certain third parties, or (2) AOL acquiring one of
certain third parties and AOL pays the Company a termination fee of $25.0
million.
In connection with entering into the Directory Agreement, in December 2000,
the Company issued to AOL 746,260 shares of its common stock, which were
restricted from transfer until the AOL Roll-In, which occurred on January 2,
2002. The Company also agreed to issue to AOL an additional 746,260 shares of
common stock if the Directory Agreement continued after two years and a further
746,260 shares of common stock if the Directory Agreement continued after three
years. Under the amended agreement, the requirement to issue additional shares
upon the two and three-year continuations has been eliminated. If the Company
renews the Directory Agreement with AOL for at least an additional four years
after the initial term, it agreed to issue to AOL a warrant to purchase up to
721,385 shares of common stock at a per share purchase price of $4.32.
The $13.0 million paid and the value of the stock issued upon the signing
of the Directory Agreement was amortized on a straight-line basis over the
original four-year estimated life of the agreement. As of December 2001, the
remaining unamortized amounts were written down to zero as a result of an
impairment analysis as of December 31, 2001 (Note R). In 2002, the Company
recorded amortization based upon the remaining net book value of its AOL assets
established upon the AOL Roll-In and April 2002 amendment on a straight-line
basis over the remaining term of the amended agreement. As a result of the
elimination in the August 2002 amendment of the remaining $12.0 million owed to
AOL, an adjustment to amortization of consideration given to a customer of
$482,000 was recorded in 2002, offsetting amortization recorded in the period.
Throughout the remaining initial term of the amended agreement, the Company will
no longer record amortization of consideration given to AOL as these assets are
now fully amortized and no further consideration is due AOL. Amortization of
assets related to AOL has been reflected as a reduction of revenue in accordance
with EITF 01-9 (Note C).
51
Revenue recognized from AOL, net of amortization of consideration given to
AOL, was $4,906,000, or 41.8% of net revenue, and $26,000 for the years ended
December 31, 2002 and 2001, respectively. There was no revenue from AOL in the
year ended December 31, 2000. Net amounts due from AOL included in accounts
receivable at December 31, 2002 and 2001 were $549,000 and $774,000,
respectively. Unbilled receivables related to AOL at December 31, 2001 were
$618,000. As of December 31, 2002, AOL beneficially owned 7.9% of the Company's
outstanding common stock.
G. Envenue Acquisition
On November 24, 2000, the Company acquired Envenue, a wireless provider of
advanced product searching technologies designed to drive leads to traditional
retailers. The transaction was accounted for as a purchase. The total purchase
price included consideration of $2.0 million in cash, which was to be paid on or
before May 24, 2002, and $38,000 in recorded value of stock options to purchase
10,200 shares of the Company's common stock issued to non-employees. The Company
did not pay the $2.0 million on or before May 24, 2002, as it was involved in a
contractual dispute with the previous owners of Envenue. In June 2002, the
Company placed $2.0 million into an escrow account, which is to be held until
the resolution of this dispute. In October 2002, the Company paid $410,000 out
of the escrowed funds, representing the undisputed portion of the purchase price
plus interest from the original maturity date to the former stockholders of
Envenue. The remaining $1.6 million of the note payable, which is non-interest
bearing, is classified separately in the accompanying financial statements. The
Company has recorded $1.6 million as restricted cash at December 31, 2002
related to the cash held in escrow. The Company used a 0% dividend yield, 100%
expected volatility, 6.297% risk free interest rate, 5.0 year life and fair
value of $4.750 per share as inputs to the Black-Scholes option pricing model to
determine the value attributable to the options to purchase 10,200 shares of the
Company's common stock. Additionally, there was an 18-month earn-out of up to
$2.0 million contingent on performance to be paid on or before July 8, 2002.
These performance criteria were not met, therefore no liability related to this
contingency has been recorded.
The estimated total purchase price of the Envenue acquisition, excluding
any earn-out payment, is as follows (in thousands):
Payable related to acquisition $2,000
Options issued to non-employees 38
Estimated expenses of transaction 79
------
$2,117
======
The purchase price allocation is as follows (in thousands):
Net liabilities acquired $ (168)
Goodwill 2,285
-----
$2,117
======
The Company recorded $2,285,000 of goodwill from the acquisition in 2000.
Goodwill represents the excess of the purchase price of an investment in an
acquired business over the fair value of the underlying net identifiable assets.
The Company was amortizing this goodwill on a straight-line basis using an
estimated useful life of 5 years.
In December 2001, the Company exercised its rights under the acquisition
agreement to substantially reduce the funding of its Envenue acquisition.
Additionally, the Company evaluated the carrying value of its goodwill in
Envenue, and determined it would not be fully recovered through estimated
undiscounted future operating cash flows. As a result during the three months
ending December 31, 2001, the Company recorded an impairment charge of
$1,859,000 related to the Envenue goodwill. This impairment charge was recorded
as a component of special charges within our statement of operations (Note R).
52
H. Other Assets
Other assets totaling $95,000 at December 31, 2001 consisted of deferred
project costs. Deferred project costs represent costs incurred that are directly
associated with customer contracts for which the Company has not yet started
recognizing revenue. These costs, which consist mainly of salary and benefits
costs, are deferred until revenue on the related project is recognized in order
to properly match revenue and associated expenses. Deferred costs are amortized
over the same period as the related revenue, and are included in cost of
revenue. The Company recognized expense of $95,000, $202,000 and $246,000
related to these deferred project costs in the years ended December 31, 2002,
2001 and 2000, respectively.
Amortization expense for other assets, excluding deferred project costs and
the value of stock issued under the Company's Directory Agreement, was none,
$1,414,000 and $649,000 for the years ended December 31, 2002, 2001 and 2000,
respectively, and is included in operating expenses. In December 2001, the
Company wrote down the value of the stock issued under its Directory Agreement
with AOL to zero as a result of an impairment analysis. The write down was
included as a component of the Company's special charges recorded in December
2001 (See Notes F and T).
I. Marketable Securities
The following is a summary of investments at December 31, 2002 and 2001 (in
thousands):
2002
Unrealized
Amortized --------------- Estimated
Cost Gains Losses Fair Value
--------- ----- ------ ----------
Short Term
U.S. corporate debt securities $1,540 $ 7 $ - $1,547
U.S. Government obligations 2,032 10 - 2,042
------- ---- --- -------
Total short term investments 3,572 17 - 3,589
Long Term
U.S. corporate debt securities 2,548 42 - 2,590
U.S. Government obligations 6,057 97 - 6,154
Municipal obligations 1,500 - - 1,500
------- ---- --- -------
Total long term investments 10,105 139 - 10,244
------- ---- --- -------
Total investments $13,677 $156 $ - $13,833
======= ==== === =======
2001
Unrealized
Amortized --------------- Estimated
Cost Gains Losses Fair Value
--------- ----- ------ ----------
Short Term
U.S. corporate debt securities $14,738 $148 $11 $14,875
U.S. Government obligations 13,784 310 - 14,094
Municipal obligations 5,511 60 - 5,571
Marketable CDs 2,001 - - 2,001
Warrant 6 - - 6
------- ---- --- -------
Total short term investments 36,040 518 11 36,547
Long Term
U.S. corporate debt securities 15,856 384 - 16,240
U.S. Government obligations 2,061 32 - 2,093
------- ---- --- -------
Total long term investments 17,917 416 - 18,333
------- ---- --- -------
Total investments $53,957 $934 $11 $54,880
======= ==== === =======
53
In August 1999, in connection with a Development, Access and License
agreement with a third party, the Company was issued a warrant for 150,000
shares of common stock, with an exercise price of $9.19 per share. In December
2000, September 2001 and March 2002, the Company assessed a decline in market
value of the third party's publicly traded common stock and determined that the
decline in value was other-than-temporary. As a result, the Company recorded as
a component of other income and expense unrealized losses on investments of
$6,000, $55,000 and $714,000 in the years ended December 31, 2002, 2001 and
2000, respectively. In June 2002, the warrant expired.
In June 2002, the Company entered into a loan and security agreement (the
"SVB Financing Agreement") with Silicon Valley Bank ("SVB") (Note Q). As a
result of the conditions contained within the SVB Financing Agreement, the
Company liquidated $35.7 million in marketable securities previously held at
Fleet for transfer to SVB. This liquidation resulted in $402,000 in realized
gains during 2002.
J. Accrued Expenses
Accrued expenses consist of the following at:
December 31,
---------------
2002 2001
------ ------
(in thousands)
Compensation $ 776 $ 835
Professional services 260 162
Special charges (Note R) 52 1,541
Franchise and excise tax 36 163
Royalties 31 77
Other 282 475
------ ------
Total $1,437 $3,253
====== ======
K. Related Parties
The Company and ePresence entered into a corporate services agreement dated
November 1, 1996 under which ePresence's corporate staff provided certain
administrative services, including financial and accounting and payroll advice,
treasury, tax and insurance services for which the Company paid ePresence a
monthly fee based on the Company's headcount and the level of services provided
by ePresence. Under a revised agreement dated March 7, 2000, ePresence continued
to provide certain administrative, technical support and equipment maintenance
services for the Company. On March 7, 2001, the agreement expired. The Company
and ePresence entered into a new corporate services agreement dated March 7,
2002, under which ePresence will provide the Company with telephone service and
support only, for an amount of $75,000 per year. The new agreement included past
services incurred since the March 7, 2001 expiration of the previous agreement,
as well as future telephone services through February 28, 2003. As of December
31, 2002 and 2001, the Company had accrued expenses of $6,000 and $63,000
related to these services. For these services the Company paid ePresence
$131,000, $29,000, and $195,000 in 2002, 2001 and 2000, respectively.
Subsequently in March 2003, Switchboard entered into an agreement with ePresence
to provide telephone service and support only from March 2003 through December
2003 for $62,500. Management believes that the service fees charged by ePresence
are reasonable and that such fees are representative of the expenses the Company
would have incurred on a stand-alone basis.
For additional items such as legal support and support in financing and
acquisition transactions, the Company is charged based on ePresence's labor
costs for the employee performing the services. Further, the Company reimburses
ePresence for its pro rata share of employee benefit plan expenses.
The Company leased the space it occupied in 2002 under a sublease entered
into in January 2001, which expired on December 31, 2002. Under the sublease,
the Company paid approximately $475,000 and $488,000 to ePresence during 2002
and 2001, respectively, and had $43,000 accrued related to the lease as of
54
December 31, 2002. Previous to this sublease agreement, the Company paid
ePresence rent in an amount that was approximately equal to its pro rata share
of ePresence's rent and occupancy costs. The Company's share of ePresence's rent
and occupancy costs was $51,000 and $288,000 in 2001 and 2000, respectively.
Subsequently, in January 2003, the Company entered into a new lease agreement
with ePresence to lease the space it occupies for a total amount of $227,000,
which expires on December 31, 2003.
Certain directors of the Company hold positions as officers or directors of
ePresence. The Chairman of the Board of Directors of the Company is also
Chairman of the Board of Directors, President and Chief Executive Officer of
ePresence. One director of the Company is Senior Vice President and Chief
Financial Officer of ePresence. Another director of the Company is also a
director of ePresence. In 2002, 2001 and 2000, no compensation was paid to these
directors by the Company for their services other than option grants under the
Company's equity incentive plans.
L. Restructuring of Viacom Relationship
In 1999, the Company and Viacom Inc. ("Viacom", formerly CBS Corporation)
consummated a number of agreements under which Viacom acquired a 35% equity
stake in Switchboard, through the issuance of 7,468,560 shares of the Company's
common stock and one share of Series E Special Voting Preferred Stock. In
exchange, the Company received $5,000,000 in cash and the right to receive
advertising and promotional value over a term of seven years, across the full
range of CBS media properties, as well as those of its radio and outdoor
subsidiary, Infinity Broadcasting Corporation. As part of the transactions,
Viacom was also issued warrants to purchase up to an additional 1,066,937 shares
of the Company's common stock at a per share exercise price of $1.00, which
would have increased its ownership position in the Company to 40% at the time of
the transaction. The number of shares of common stock and warrants issued to
Viacom were subject to adjustment in the event of certain future issuances of
securities by the Company.
The Advertising and Promotion Agreement dated as of June 30, 1999 among the
Company, ePresence and Viacom provided advertising with a future value of $95
million to the Company over a seven-year period, subject to one year renewals
upon the mutual written agreement of the Company, ePresence and Viacom. The net
present value of the advertising was recorded as a contribution receivable for
the common stock issued. The contribution receivable was reduced as the Company
utilized advertising based on the proportion of advertising provided to the
total amount to be provided over the seven-year term.
In August 2001, the Company entered into a restructuring agreement with
Viacom and ePresence, under which, among other things, the Company agreed to
terminate its right to the placement of advertising on Viacom's CBS properties
with an expected net present value of approximately $44,524,000 in exchange for,
primarily, the reconveyance by Viacom to the Company of 7,488,560 shares of the
Company's common stock, the cancellation of warrants held by Viacom to purchase
533,469 shares of the Company's common stock and the reconveyance to the Company
of the one outstanding share of the Company's series E special voting preferred
stock. In addition, as part of the restructuring of the Company's relationship
with Viacom, its license to use specified CBS trademarks terminated on January
26, 2002.
On October 26, 2001, the Company obtained approval for the restructuring
agreement by its stockholders and closed the transactions contemplated by the
restructuring agreement. At the closing, the two individuals who had been
elected directors by Viacom pursuant to Viacom's rights as the holder of the
Company's special voting preferred stock resigned as directors of the Company.
Due to the reduction in the number of outstanding shares of the Company's stock
associated with the closing, ePresence became the Company's majority
stockholder, beneficially owning approximately 54% of the Company's outstanding
stock on October 26, 2001.
In connection with the termination of its advertising and promotion
agreement with Viacom, the Company recorded a one-time, non-cash accounting loss
of $22,203,000 in the Company's 2001 statement of operations. The non-cash
accounting loss resulted from the difference between the net present value of
the Company's remaining advertising rights with Viacom, which were terminated,
and the value of the shares of the Company's common and preferred stock that
55
were reconveyed and the warrants that were cancelled. The Company determined the
value of the 7,488,560 shares of common stock reconveyed and one share of
preferred stock cancelled to be $20,968,000 using the closing market price of
the Company's common stock of $2.80 per share on October 26, 2001. The Company
used the Black-Scholes warrant pricing model to determine a value of $1,352,544
attributable to the canceled warrants.
Subsequently, on February 27, 2002, Viacom exercised its warrant pursuant
to a cashless exercise provision in the warrant, resulting in the net issuance
of 386,302 shares of common stock. On March 12, 2002, the Company repurchased
these 386,302 shares of common stock from Viacom at a price of $3.25 per share,
for a total cost of $1.3 million. The Company has recorded the value of these
shares as treasury stock at cost.
M. Commitments and Contingencies
The Company leases facilities and certain equipment under non-cancelable
lease agreements which expire at various dates through March of 2005. Under
these agreements, the Company is obligated to pay for utilities, taxes,
insurance and maintenance. Excluding rent paid to ePresence (Note K), the
Company recorded rent expense of $17,000, $357,000 and $100,000 in the years
ended December 31, 2002, 2001 and 2000, respectively. Under various agreements,
the Company paid rent of approximately $517,000, $539,000 and $288,000 in 2002,
2001 and 2000 to ePresence, respectively. In addition, the Company has entered
into certain license agreements, under which the Company is required to pay
minimum royalty payments through October 2005 based upon the Company's revenue.
At December 31, 2002, future minimum lease payments under operating leases,
excluding our operating lease with ePresence, and license agreements with
minimum terms exceeding one year are as follows (in thousands):
2003 $ 984
2004 650
2005 389
---- ------
Total future minimum payments $2,023
======
On May 31, 2002 the Company was sued by the former stockholders of Envenue,
Inc., from whom the Company purchased all of the stock of Envenue in November
2000. The suit alleges that the Company breached its agreement with the
plaintiffs by failing to pay the purchase price of the Envenue stock when it
became due on May 24, 2002. The Company paid $400,000, plus interest,
representing a portion of the purchase price, to the plaintiffs. The suit seeks
payment of $1.6 million, representing the balance of the purchase price, plus
additional unquantified damages including treble damages. The court heard oral
argument on the Company's motion to dismiss the complaint in November 2002, and
subsequently granted that motion in part. The plaintiffs subsequently amended
their complaint. The Company has moved to dismiss the amended complaint and is
awaiting the court's ruling on that motion. At this time the Company is unable
to predict whether such motion to dismiss will be granted.
On November 21, 2001, a class action lawsuit was filed in the United States
District Court for the Southern District of New York naming as defendants
Switchboard, the managing underwriters of Switchboard's initial public offering,
Douglas J. Greenlaw, Dean Polnerow, and John P. Jewett. Mr. Greenlaw and Mr.
Polnerow are officers of Switchboard, and Mr. Jewett is a former officer of
Switchboard. In July 2002, the Company , Douglas J. Greenlaw, Dean Polnerow and
John P. Jewett joined in an omnibus motion to dismiss which challenges the legal
sufficiency of plaintiffs' claims. The motion was filed on behalf of hundreds of
issuer and individual defendants named in similar lawsuits. The plaintiffs
opposed the motion. On September 30, 2002, the lawsuit against Messrs. Greenlaw,
Polnerow and Jewett was dismissed without prejudice. The Court heard oral
argument on the motion in November 2002. On February 19, 2003, the court issued
56
its decision on the defendants' motion to dismiss, denying it in large part, but
granting portions of it. In doing so, the court dismissed the plaintiffs' claims
against certain defendants, including Switchboard.
The Company is currently involved in other legal proceedings that are
incidental to the conduct of its business, none of which it believes could
reasonably be expected to have a materially adverse effect on the Company's
financial condition.
N. Income Taxes
The Company has not provided for income taxes in each of the years ended
December 31, 2002, 2001 and 2000 due to its significant pre-tax losses. The
Company has not recorded a benefit for income taxes as the Company believes it
is more likely than not that net operating losses and tax credits will not be
utilized.
In assessing the realizability of deferred tax assets, the Company
considers whether it is more likely than not that some or all of the deferred
tax assets will not be realized. The Company believes that sufficient
uncertainty exists regarding the realizability of the deferred tax assets such
that a valuation of $40,346,000 and $38,574,000 for December 31, 2002 and 2001,
respectively, has been established for deferred tax assets. The components of
the net deferred tax assets (liabilities) and the related valuation allowance
are as follows:
December 31,
----------------------------
2002 2001
------------ -----------
Deferred tax assets:
Net operating loss carryforwards $35,769,000 $29,350,000
AOL impairment 1,187,000 4,827,000
Other deferred tax assets 3,390,000 4,397,000
----------- -----------
40,346,000 38,574,000
Less valuation allowance (40,346,000) (38,574,000)
----------- -----------
Net deferred tax assets $ - $ -
=========== ===========
As of December 31, 2002, the Company has net operating loss carryforwards
for federal and state tax purposes of approximately $86,874,000 and $86,848,000,
respectively. The federal and state net operating loss carryforwards will begin
to expire in 2012 and 2002, respectively. Ownership changes resulting from the
Company's issuance of capital stock may limit the amount of net operating loss
carryforwards that can be utilized annually to offset future taxable income.
O. Stock Option Plans
In November 2000, with its acquisition of Envenue, the Company adopted the
2000 Non-Statutory Stock Option Plan ("2000 Non-Statutory Plan"). A total of
446,000 shares of common stock have been reserved for issuance under the 2000
Non-Statutory Plan. As of December 31, 2002, options to purchase 261,800 shares
were issued and outstanding under the 2000 Non-Statutory Plan.
In October 1999, the Company adopted the 1999 Stock Incentive Plan (the
"1999 Option Plan"). A total of 4,044,390 shares of common stock have been
reserved for issuance under the 1999 Option Plan. As of December 31, 2002,
options to purchase 1,918,403 shares were issued and outstanding under the 1999
Option Plan. The 1999 Option Plan also permits awards of restricted stock at a
price determined by the Compensation Committee or the Board of Directors subject
to the Company's right to repurchase such stock in specified circumstances prior
to the expiration of a restricted period. In January 2002, the Company issued
450,000 shares of restricted common stock to its Chief Executive Officer, who is
also a director of the Company, at fair market value (Note S). As of December
31, 2002, 300,000 shares of such common stock remain unvested and are restricted
from transfer.
57
Switchboard also has the 1996 Stock Incentive Plan (the "1996 Option
Plan"), which provides for the issuance of options to purchase 1,386,400 shares
of Switchboard's common stock. As of December 31, 2002, options to purchase
1,386,400 shares were issued and outstanding under the 1996 Option Plan.
Generally, options under the 1996, 1999 and 2000 Non-Statutory Option Plans
vest over four years and have a maximum term of ten years. All options are fully
exercisable upon the date of grant into shares of restricted stock, for which
the restrictions laps over in accordance with the vesting under the original
stock option grant. A summary of the status of the Company's stock plans as of
December 31, 2002, 2001 and 2000 and the changes during the years ending on
those dates is presented below.
Weighted Average
Shares Exercise Price
---------- ----------------
Outstanding and exercisable at December 31, 1999 2,951,600 $6.23
Granted 1,005,730 7.31
Exercised (147,036) 3.80
Canceled (284,214) 7.99
---------- ----
Outstanding and exercisable at December 31, 2000 3,526,080 6.50
Granted 1,359,000 4.16
Exercised (73,700) 1.00
Canceled (605,300) 5.76
---------- ----
Outstanding and exercisable at December 31, 2001 4,206,080 5.95
Granted 1,193,365 3.51
Exercised (538,056) 3.15
Canceled (1,294,786) 8.15
---------- ----
Outstanding and exercisable at December 31, 2002 3,566,603 $4.74
========== =====
As of December 31, 2002, 1,656,031 shares and 184,200 shares were available
for grant under the 1999 Option Plan and the 2000 Non-Statutory Plan,
respectively. There were no shares available for grant under the 1996 Option
Plan.
The following table summarizes information about the stock options at
December 31, 2002:
Options Outstanding
-----------------------------
Weighted Options Vested and Exercisable
Average --------------------------------
Remaining Weighted Weighted
Range of Number Contractual Average Number Vested Average
Exercise Prices Outstanding Life Exercise Price and Exercisable Exercise Price
--------------- ----------- ----------- -------------- --------------- --------------
$1.00 - $2.53 1,041,100 5.70 $1.45 801,100 $1.33
$2.63 - $5.00 843,925 8.79 $3.61 144,251 $3.58
$5.07 - $7.50 970,198 7.80 $5.83 520,043 $5.78
$8.25 - $11.00 711,380 6.90 $9.41 521,251 $9.37
In June 2001, the Company issued to a director and officer of the Company
options to purchase 150,000 shares of its common stock under the 1999 Option
Plan at a price below market value. The Company recorded $437,000 in value
resulting from the difference between the market value on the date of grant of
$3.91 per share and the $1.00 per share exercise price as unearned compensation
as a component of Stockholders' Equity. The Company is amortizing this amount
over the two-year and nine-month vesting period. In 2002 and 2001, the Company
recognized $156,000 and $102,000 of amortization expense.
In 1999, the Board of Directors adopted the 1999 Employee Stock Purchase
Plan (the "Purchase Plan"). A total of 300,000 shares of the Company's common
stock have been reserved for issuance to eligible employees under the Purchase
Plan. Under the Purchase Plan, the Company is authorized to make a series of
offerings during which employees may purchase shares of common stock through
58
payroll deductions made over the term of the offering. The per-share purchase
price at the end of each offering is equal to 85% of the fair market value of
the common stock at the beginning or end of the offering period (as defined by
the Purchase Plan), whichever is lower. As of December 31, 2002, 94,709 shares
of common stock were issued under the Purchase Plan.
P. Capital Lease
In March 2001, the Company entered into a computer equipment sale-leaseback
agreement with Fleet Capital Corporation ("FCC") under which the Company was
able to lease up to $3.0 million of equipment. Under the agreement, the Company
was to have leased computer equipment over a three-year period ending on June
28, 2004. At December 31, 2001, the Company had utilized approximately $1.1
million of this lease facility. The agreement had an estimated effective annual
percentage rate of approximately 7.90%. Under the terms of the agreement, the
Company was required to maintain on deposit with Fleet a compensating balance,
restricted as to use, in an amount equal to the principal outstanding under the
lease. The Company had accounted for the transaction as a capital lease.
In May 2002, the Company paid $794,000 to FCC to terminate its lease
obligations with FCC through an early buy-out. The $794,000 was comprised of
$764,000 in outstanding principal under the lease and $30,000 in expenses
associated with the early termination. In exchange for the amount paid, the
Company assumed all right and title to the assets leased under the facility.
Additionally, the Company's requirement to maintain a compensating balance with
Fleet was eliminated.
Q. Notes Payable and Line of Credit
In June 2002, the Company entered into the SVB Financing Agreement, under
which the Company has the ability to borrow up to $4.0 million for the purchase
of equipment. Amounts borrowed under the facility accrue interest at a rate
equal to prime plus 0.25%, and are repaid monthly over a 30 month period. As of
December 30, 2002, the Company had utilized $2.7 million of this facility. The
facility provided for the ability to fund additional equipment purchases of up
to $1.3 million through March 31, 2003. The agreement also provides for a $1.0
million revolving line of credit at an interest rate equal to prime. At December
31, 2002, no borrowings were outstanding under the revolving line of credit. The
Company has recorded a note payable to SVB on its balance sheet totaling $2.2
million for equipment financed as of December 31, 2002, of which $1.1 million is
classified as a current liability.
As a condition of the Financing Agreement, the Company is required to
maintain in deposit or investment accounts at SVB not less than 95% of its cash,
cash equivalents and marketable securities. Covenants in the Agreement require
the Company to maintain in deposit or in investment accounts with SVB at least
$20.0 million in unrestricted cash. Borrowings under the Agreement are
collateralized by all of the Company's tangible and intangible assets, excluding
intellectual property.
R. Special Credits and Charges
For the year ended December 31, 2002, the Company recorded the reversal of
$262,000 in excess restructuring reserves as a special credit. This reversal
resulted primarily from better than expected results in the subleasing of idle
office space which the Company had reserved for as part of its 2002 special
charges. Under a non-cancelable sublease, the Company received $72,000 in 2002,
and anticipates receiving $144,000, $144,000 and $60,000 in 2003, 2004 and 2005,
respectively.
In December 2001, the Company recorded net pre-tax special charges of
approximately $17.3 million, comprised primarily of $15.6 million for the
59
impairment of certain assets, $1.0 million for costs related to facility
closures and $700,000 in severance costs related to the reduction of
approximately 21% of the Company's workforce. The restructuring resulted in 21
employee separations.
Included in the $15.6 million impairment charge for certain assets is an
amount recorded for the impairment of the unamortized portion of the value of
the common stock issued and amounts prepaid to AOL. The Company assessed the
value of its assets related to its AOL Directory Agreement for impairment as
revenues were lower at the end of the first year of the Directory Agreement than
originally anticipated. Based upon impairment analysis which indicated that the
carrying amount of these assets would not be fully recovered through estimated
undiscounted future operating cash flows, a charge of $11.7 million was recorded
as an additional component of special charges during 2001. The impairment was
measured as the amount by which the carrying amount of these assets exceeded the
present value of the estimated discounted future cash flows attributable to
these assets.
In December 2001, the Company exercised its rights under the Envenue
acquisition agreement to substantially reduce the funding of Envenue. The
Company evaluated the carrying value of its goodwill in Envenue, and determined
it would not be fully recovered through estimated undiscounted future operating
cash flows. As a result during the three months ending December 31, 2001, the
Company recorded as a component of the $15.6 million impairment charge, $1.9
million related to the Envenue goodwill. The impairment was measured as the
amount by which the carrying amount of these assets exceeded the present value
of the estimated discounted future cash flows attributable to these assets.
Also included in the impairment charge for certain assets are amounts
related to prepaid advertising expenses. As a result of our change in overall
strategy from a destination site to a technology provider, the Company no longer
considered this prepaid advertising to be complementary to its corporate
strategy. Accordingly, the Company recorded $1.4 million for the impairment of
these prepaid advertising assets.
Of the total $1.4 million facilities and severance charge, which is net of
the $262,000 special credit recorded in 2002, approximately $1.2 million is cash
related. As of December 31, 2002, $1.3 million of the original $1.4 million
accrual had been utilized. The Company has a remaining liability of $52,000 on
its balance sheet as of December 31, 2002 relating to the special charges.
S. Note Receivable for the Issuance of Restricted Common Stock
In January 2002, the Company recorded a note receivable from its Chief
Executive Officer, who is also a member of its Board of Directors, for
approximately $1.4 million arising from the financing of a purchase of 450,000
shares of its common stock as restricted stock by that individual. As of
December 31, 2002, 300,000 of such shares were unvested and restricted from
transfer. On each of January 4, 2003, 2004, 2005 and 2006, 75,000 of these
restricted shares vests, respectively. The note bears interest at a rate of
4.875%, which is deemed to be fair market value, compounding annually and is
100% recourse as to principal and interest. The note is payable upon the earlier
of the occurrence of the sale of all or part of the shares by the issuer of the
note, or January 4, 2008. At December 31, 2002, the Company has recorded $1.5
million in principal and interest as a note receivable classified within
stockholders' equity. During 2002, the Company recorded $71,000 in interest
income resulting from this note receivable.
60
T. Condensed Quarterly Results of Operations (unaudited)
In thousands except per share data:
2002 Quarters Ended Mar 31, Jun 30, Sep 30, Dec 31,
- ------------------- ------- ------- -------- --------
Revenue $ 4,023 $ 3,014 $ 3,325 $3,385
Net revenue $ 2,920 $ 2,068 $ 3,374 $3,385
Gross profit $ 2,002 $ 956 $ 2,423 $2,622
Operating loss $(1,637) $(2,229) $(1,688) $ (367)
Net loss attributable to common stockholders $(1,042) $(1,355) $(1,382) $ (180)
Basic and diluted net loss per share $(0.06) $(0.07) $(0.07) $(0.01)
2001 Quarters Ended Mar 31, Jun 30, Sep 30, Dec 31,(a)
- ------------------- ------- ------- -------- ---------
Revenue $ 2,551 $ 3,817 $ 3,172 $ 3,786
Net revenue $ 1,539 $ 2,805 $ 2,160 $ 2,774
Gross profit $ 688 $ 1,966 $ 1,307 $ 1,799
Operating loss $(8,591) $(6,356) $(11,850) $(43,178)
Net loss attributable to common stockholders $(7,682) $(5,479) $(11,065) $(42,528)
Basic and diluted net loss per share $(0.31) $(0.22) $(0.44) $(2.18)
(a) Operating loss and net loss attributable to common stockholders in the
fiscal quarter ended December 31, 2001 includes a $22.2 million non-cash loss on
Viacom transaction (See Note L) and a $17.3 million special charges (See Note
R).
61
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On July 3, 2002 and amended on July 8, 2002, Switchboard filed a Current
Report on Form 8-K dated June 28, 2002 reporting under Item 4 that Switchboard
had dismissed Arthur Andersen LLP and had engaged Ernst and Young LLP as its
independent auditors.
On December 3, 2001, Switchboard filed a Current Report on Form 8-K dated
November 27, 2001 reporting under Item 4 that Switchboard had dismissed
PricewaterhouseCoopers LLP and had engaged Arthur Andersen LLP as its
independent auditors.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See "Executive Officers of the Registrant" in Part I of this Annual Report
on Form 10-K. The information required by Items 401 and 405 of Regulation S-K
and appearing in our definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on May 15, 2003, which will be filed with the Securities
and Exchange Commission not later than 120 days after December 31, 2002, is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 402 of Regulation S-K and appearing in our
definitive Proxy Statement for the Annual Meeting of Stockholders to be held on
May 15, 2003, which will be filed with the Securities and Exchange Commission
not later than 120 days after December 31, 2002, is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The information required by Item 201(d) and 403 of Regulation S-K and
appearing in our definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on May 15, 2003, which will be filed with the Securities
and Exchange Commission not later than 120 days after December 31, 2002, is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 404 of Regulation S-K and appearing in our
definitive Proxy Statement for the Annual Meeting of Stockholders to be held on
May 15, 2003, which will be filed with the Securities and Exchange Commission
not later than 120 days after December 31, 2002, is incorporated herein by
reference.
ITEM 14. CONTROLS AND PROCEDURES
The Company's principal executive officer and principal financial officer
have concluded that the Company's disclosure controls and procedures, as defined
in Exchange Act Rule 13a-14(c), based on their evaluation of such controls and
procedures conducted within 90 days prior to the date hereof, are effective to
ensure that information required to be disclosed by the Company in the reports
it files under the Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported within the time periods specified in the
rules and forms of the Securities and Exchange Commission and that such
information is accumulated and communicated to the Company's management,
including its principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required disclosure.
62
There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect these controls subsequent to
the date of the evaluation referred to above.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of or are included in this Annual
Report on Form 10-K:
1. Financial Statements:
* Consolidated Balance Sheets as of December 31, 2002 and 2001.
* Consolidated Statements of Operations for the years ended December 31,
2002, 2001 and 2000.
* Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2002, 2001 and 2000.
* Consolidated Statements of Cash Flows for the years ended December 31,
2002, 2001 and 2000.
* Notes to Consolidated Financial Statements.
* Reports of Independent Auditors for the years ended December 31, 2002,
2001 and 2000.
* Selected Financial Data for the years ended December 31, 2002, 2001,
2000, 1999 and 1998.
2. Financial Statement Schedules:
* Report of PricewaterhouseCoopers LLP, Independent Accountants, for the
year ended December 31, 2000.
* Schedule II--Valuation and Qualifying Accounts.
Schedules other than the one listed above have been omitted since they are
either not required, not applicable or the information is otherwise included.
3. Listing of Exhibits:
The Exhibits filed as part of this Annual Report on Form 10-K are listed on
the Exhibit Index immediately preceding such Exhibits, which Exhibit Index is
incorporated herein by reference. Documents listed on such Exhibit Index, except
for documents identified by footnotes, are being filed as exhibits herewith.
Documents identified by footnotes are not being filed herewith and, pursuant to
Rule 12b-32 under the Securities Exchange Act of 1934, reference is made to such
documents as previously filed as exhibits with the Securities and Exchange
Commission. Switchboard's file number under the Securities Exchange Act of 1934
is 000-28871.
(b) Reports on Form 8-K.
On October 3, 2002, Switchboard filed a Current Report on Form 8-K dated
October 2, 2002, reporting under Item 5 (Other Events) that it had issued a
press release announcing that it had been advised by NASDAQ that effective with
the opening of business on Thursday, October 3, 2002, its common stock would
resume trading under the original trading symbol, "SWBD."
63
SCHEDULE II
SWITCHBOARD INCORPORATED
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(in thousands)
Balance at Additions Charged
Beginning to Costs and Balance at End
Description of Period Expenses Deductions of Period
- ------------------------------- ---------- ----------------- ---------- --------------
Year Ended December 31, 2002:
Reserve for doubtful accounts
and sales allowances $500 $216 $366 $350
Year Ended December 31, 2001:
Reserve for doubtful accounts $402 $923 $825 $500
Year Ended December 31, 2000:
Reserve for doubtful accounts $162 $510 $270 $402
64
Report of Independent Accountants on
Financial Statement Schedules
To the Board of Directors and Stockholders of Switchboard Incorporated:
Our audit of the consolidated financial statements referred to in our
report dated February 1, 2001 appearing in the Switchboard, Inc. Form 10-K also
included an audit of the financial statement schedules listed in Item 15(a)(2)
of this Form 10-K for the year ended December 31, 2000. In our opinion, these
financial statement schedules present fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements.
/s/PricewaterhouseCoopers LLP
Boston, Massachusetts
February 1, 2001
65
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: March 28, 2003 SWITCHBOARD INCORPORATED
By:/s/ Robert P. Orlando
---------------------
Robert P. Orlando
Vice President and Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Name Title Date
- ------------------------ ----------------------------------------------- --------------
/s/ Douglas Greenlaw Chief Executive Officer and Director (Principal March 28, 2003
- -------------------- Executive Officer)
Douglas Greenlaw
/s/ Dean Polnerow President and Director March 28, 2003
- -----------------
Dean Polnerow
/s/ Robert P. Orlando Vice President and Chief Financial Officer March 28, 2003
- --------------------- (Principal Financial Officer and Principal
Robert P. Orlando Accounting Officer)
/s/ William P. Ferry Chairman of the Board of Directors March 28, 2003
- --------------------
William P. Ferry
/s/ Richard M. Spaulding Director March 28, 2003
- ------------------------
Richard M. Spaulding
/s/ David N. Strohm Director March 28, 2003
- -------------------
David N. Strohm
/s/ Robert M. Wadsworth Director March 28, 2003
- -----------------------
Robert M. Wadsworth
66
CERTIFICATIONS
I, Douglas J. Greenlaw, certify that:
1. I have reviewed this annual report on Form 10-K of Switchboard Incorporated
(the "registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c. Presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a. All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 28, 2003 /s/Douglas J. Greenlaw
----------------------
Douglas J. Greenlaw
Chief Executive Officer
(principal executive officer)
67
I, Robert P. Orlando, certify that:
1. I have reviewed this annual report on Form 10-K of Switchboard Incorporated
(the "registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c. Presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a. All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 28, 2003 /s/Robert P. Orlando
--------------------
Robert P. Orlando
Vice President and Chief
Financial Officer
(principal financial officer)
68
EXHIBIT INDEX
Exhibit No. Description
- ----------- ------------------------------------------------------------------
3.3(1) Restated Certificate of Incorporation.
3.5(2) Amended and Restated By-Laws.
4.1(2) Specimen certificate for shares of Common Stock, $0.01 par value
per share.
10.1(2)* 1996 Stock Incentive Plan, as amended, including forms of stock
option agreement for incentive and nonstatutory stock options.
10.2(1)* 1999 Stock Incentive Plan, as amended, including forms of stock
option agreement for incentive and nonstatutory stock options.
10.3(2)* 1999 Employee Stock Purchase Plan.
10.4* 2000 Nonstatutory Stock Option Plan.
10.5(2)* Employment Agreement between Switchboard Incorporated and Douglas
J. Greenlaw, dated October 8, 1999.
10.6(2)* Employment Agreement between Switchboard Incorporated and Dean
Polnerow, dated December 1, 1999.
10.7(2)* Employment Agreement between Switchboard Incorporated and James M.
Canon, dated December 31, 1999.
10.8(2)* Non-Statutory Stock Option Agreement Granted Under 1999 Stock
Incentive Plan between Switchboard Incorporated and Douglas J.
Greenlaw, dated October 13, 1999.
10.9(2)* Non-statutory Stock Option Agreement between Switchboard
Incorporated and Douglas J. Greenlaw, dated October 13, 1999.
10.10(2)* Incentive Stock Option Agreement between Switchboard Incorporated
and Dean Polnerow, dated October 13, 1999.
10.11(2)* Incentive Stock Option Agreement between Switchboard
Incorporated and James M. Canon, dated October 13, 1999.
10.12(2)* Non-Statutory Stock Option Agreement between Switchboard
Incorporated and William P. Ferry, dated September 14, 1999.
10.13(2)* Non-Statutory Stock Option Agreement between Switchboard
Incorporated and William P. Ferry, dated October 18, 1999.
10.14(2)* Non-Statutory Stock Option Agreement between Switchboard
Incorporated and Richard M. Spaulding, dated September 14, 1999.
10.15(2)* Non-Statutory Stock Option Agreement between Switchboard
Incorporated and David N. Strohm, dated September 14, 1999.
10.16(2)* Non-Statutory Stock Option Agreement between Switchboard
Incorporated and Robert M. Wadsworth, dated September 14, 1999.
10.17(3)* Incentive Stock Option Agreement between Switchboard Incorporated
and Kevin Lawler, dated May 24, 2000.
10.18(4) Stock Purchase Agreement dated as of November 24, 2000, among
Switchboard Incorporated, Envenue, Inc. and the Stockholders of
Envenue, Inc.
10.19(3)* Employment Agreement between Switchboard Incorporated and Kevin P.
Lawler, dated May 9, 2000.
10.20(5)* Employment Agreement between Robert Orlando and Switchboard
Incorporated, dated September 20, 2001.
10.21(6)* Restricted Stock Agreement Granted Under 1999 Stock Incentive Plan
between Douglas J. Greenlaw and Switchboard Incorporated dated
January 4, 2002.
10.22(6)* Secured promissory note between Douglas J. Greenlaw and
Switchboard Incorporated dated January 4, 2002.
10.23(6)* Collateral Assignment and Pledge Agreement between Douglas J.
Greenlaw and Switchboard Incorporated dated January 4, 2002.
10.24(6)* Consent to the cancellation of options granted on October 13, 1999
by Douglas J. Greenlaw on January 4, 2002.
69
10.25(6) Agreement of Amendment, Severance, and Mutual Release between John
Jewett and Switchboard Incorporated dated February 26, 2002.
10.26(2) Amended and Restated Registration Rights Agreement, as amended, by
and among Switchboard Incorporated, America Online, Inc., Digital
City Inc. and Banyan Worldwide, dated February 20, 1998.
10.27(3)+ Directory and Local Advertising Platform Services Agreement dated
as of December 11, 2000 between Switchboard Incorporated and
America Online, Inc.
10.28(3)+ Common Stock and Warrant Purchase Agreement dated as of
December 11, 2000 between Switchboard Incorporated and America
Online, Inc.
10.29(3) Form of Common Stock Purchase Warrant which may be issued to
America Online, Inc. pursuant to the Common Stock and Warrant
Agreement dated as of December 11, 2000 between Switchboard
Incorporated and America Online, Inc.
10.30(3) Registration Rights Agreement dated as of December 11, 2000
between Switchboard Incorporated and America Online, Inc.
10.31(6) First Amendment dated November 16, 2001 to the Directory and Local
Advertising Platform Services Agreement between Switchboard
Incorporated and America Online, Inc. dated December 11, 2000.
10.32(6)+ Second Amendment dated April 25, 2002 to the Directory and Local
Advertising Platform Services Agreement between Switchboard
Incorporated and America Online, Inc. dated December 11, 2000.
10.33(7)++ Third Amendment dated August 21, 2002 to Directory and Local
Advertising Platform Services Agreement between America Online,
Inc. and Switchboard Incorporated dated December 11, 2000.
10.34(2) Financial Reporting Agreement among Switchboard Incorporated,
Banyan Worldwide and CBS Corporation, dated as of
January 28, 2000.
10.35(2) Amended and Restated Registration Rights Agreement by and between
Switchboard Incorporated and Banyan Worldwide, dated May 3, 1999.
10.36(8) Registration Rights Agreement dated March 7, 2000 between
Switchboard Incorporated and Banyan Worldwide.
10.37(6) Termination Agreement between MediaMap, Inc. and Switchboard
Incorporated dated January 30, 2002.
10.38(6) Services Agreement dated March 7, 2002 between Switchboard
Incorporated and ePresence Inc.
10.39 Sublease between ePresence, Inc. and Switchboard Incorporated,
dated as of January 1, 2003.
10.40 Services Agreement dated March 1, 2003 between Switchboard
Incorporated and ePresence, Inc.
10.41 Master Services Agreement between Cable & Wireless Internet
Services Inc. and Switchboard Incorporated dated May 13, 2002.
10.42++ Order Form between Cable & Wireless Internet Services Inc. and
Switchboard Incorporated dated May 22, 2002.
10.43(7) Loan and Security Agreement between Silicon Valley Bank and
Switchboard Incorporated dated May 31, 2002.
10.44++ Data Products License Agreement by and between Switchboard
Incorporated and Acxiom Corporation, dated December 15, 2002.
10.45++ General Provisions Agreement by and between Switchboard
Incorporated and TeleAtlas North America, Inc., dated
February 19, 2003.
10.46++ Internet Provider License by and between Switchboard Incorporated
and TeleAtlas North America, Inc., dated February 21, 2003.
70
21.1 Subsidiaries of Switchboard Incorporated.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Ernst & Young LLP.
99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(1) Incorporated by reference to the Registrant's Annual Report on Form 10-K
(File No. 000-78871) filed with the Securities and Exchange Commission on
March 29, 2002, as amended.
(2) Incorporated by reference to the Registration Statement on Form S-1 (File
No. 333-90013) as declared effective by the Securities and Exchange
Commission on March 1, 2000.
(3) Incorporated by reference to the Registrant's Annual Report on Form 10- K
(File No. 000-28871) filed with the Securities and Exchange Commission on
April 2, 2001.
(4) Incorporated by reference to the Registrant's Current Report on Form 8-K
(File No. 000-28871) filed with the Securities and Exchange Commission on
February 7, 2001.
(5) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
(File No. 000-28871) filed with the Securities and Exchange Commission on
November 14, 2001.
(6) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
(File No. 000-78871) filed with the Securities and Exchange Commission on
May 9, 2002.
(7) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
(File No. 000-78871) filed with the Securities and Exchange Commission on
September 20, 2002.
(8) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
(File No. 000-28871) filed with the Securities and Exchange Commission on
May 15, 2000.
+ Confidential treatment granted as to certain portions, which portions have
been omitted and filed separately with the Securities and Exchange
Commission pursuant to a Confidential Treatment Request.
++ Confidential treatment requested as to certain portions, which portions
have been omitted and filed separately with the Securities and Exchange
Commission pursuant to a Confidential Treatment Request.
* Management contract or compensation plan or arrangement required to be
filed as an exhibit pursuant to Item 14(c) of Form 10-K.
71