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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
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
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
120 Flanders Road, Westboro, MA 01581
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (508) 898-8000
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 whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Title of Class Shares Outstanding as of April 30, 2003
-------------- ---------------------------------------
Common Stock, par value $0.01 per share 18,879,847
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q, 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 Quarterly Report on Form 10-Q. The forward-looking
statements provided by Switchboard in this Quarterly Report on Form 10-Q
represent Switchboard's estimates as of the date this report is filed with the
Securities and Exchange Commission (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.
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.
1
SWITCHBOARD INCORPORATED
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
PART I -- Financial Information
Item 1. -- Financial Statements
Consolidated Balance Sheets as of March 31, 2003 (unaudited) and December 31,
2002 (audited)......................................................................... 3
Consolidated Statements of Operations (unaudited) for the Three Months Ended
March 31, 2003 and 2002................................................................ 4
Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended
March 31, 2003 and 2002................................................................ 5
Notes to Consolidated Financial Statements................................................. 6
Item 2. -- Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................................... 13
Item 3. -- Quantitative and Qualitative Disclosures About Market Risk...................... 29
Item 4. -- Controls and Procedures......................................................... 29
PART II -- Other Information
Item 2. -- Changes in Securities and Use of Proceeds....................................... 29
Item 6. -- Exhibits and Reports on Form 8-K................................................ 30
Signatures................................................................................. 31
Certifications............................................................................. 32
2
PART I -- FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
SWITCHBOARD INCORPORATED
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
March 31, 2003 December 31, 2002
-------------- -----------------
(unaudited)
Assets:
Cash and cash equivalents $ 40,106 $ 38,390
Short-term marketable securities 2,050 3,589
Restricted cash 1,644 1,640
Accounts receivable, net of allowance of $379 and $350, respectively 1,774 1,558
Unbilled receivables 119 160
Other current assets 307 330
-------- --------
Total current assets 46,000 45,667
Long-term marketable securities 9,938 10,244
Property and equipment, net 1,571 1,877
-------- --------
Total assets $ 57,509 $ 57,788
======== ========
Liabilities and stockholders' equity:
Accounts payable $ 604 $ 966
Accrued expenses 1,607 1,437
Deferred revenue 553 475
Payable related to acquisition 1,600 1,600
Note payable, current portion 1,099 1,099
-------- --------
Total current liabilities 5,463 5,577
Note payable, net of current portion 849 1,124
-------- --------
Total liabilities 6,312 6,701
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 19,266,149 and 19,227,230 shares as of March 31, 2003 and
December 31, 2002, respectively. 193 192
Treasury stock, at cost, 386,302 shares as of March 31, 2003 and December 31,
2002. (1,255) (1,255)
Additional paid-in capital 162,486 162,437
Note and interest receivable for issuance of restricted common stock (1,538) (1,520)
Unearned compensation (141) (178)
Accumulated other comprehensive income 140 156
Accumulated deficit (108,688) (108,745)
-------- --------
Total stockholders' equity 51,197 51,087
-------- --------
Total liabilities and stockholders' equity $ 57,509 $ 57,788
======== ========
See accompanying notes.
3
SWITCHBOARD INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(in thousands, except per share amounts)
Three Months Ended March 31,
----------------------------
2003 2002
------ -------
Revenue $3,341 $ 4,023
Consideration given to a customer - (1,103)
------ -------
Net revenue 3,341 2,920
Cost of revenue 707 918
------ -------
Gross profit 2,634 2,002
------ -------
Operating expenses:
Sales and marketing 842 1,427
Research and development 1,114 1,505
General and administrative 804 707
------ -------
Total operating expenses 2,760 3,639
------ -------
Loss from operations (126) (1,637)
Other income (expense):
Interest income 228 656
Interest expense (42) (17)
Other expense (4) (44)
------ -------
Total other income 182 595
------ -------
Net income (loss) $ 56 $(1,042)
====== ========
Net income (loss) per share:
Basic $ - $(0.06)
=== ======
Diluted $ - $(0.06)
=== ======
Weighted average number of common shares:
Basic 18,627 18,495
Diluted 19,055 18,495
See accompanying notes.
4
SWITCHBOARD INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(in thousands)
Three Months Ended March 31,
----------------------------
2003 2002
------- -------
Cash flows from operating activities:
Net income (loss) $ 56 $(1,042)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 326 415
Amortization of unearned compensation 36 47
Non-cash interest income on note receivable (19) (18)
Consideration given to a customer - 1,103
Other-than-temporary unrealized loss on available for sale
Investments - 6
Changes in operating assets and liabilities:
Accounts receivable (215) (992)
Unbilled receivables 42 7
Other current assets 24 221
Other assets - 37
Accounts payable (362) (930)
Accrued expenses 172 (508)
Accrued restructuring (2) (762)
Deferred revenue 77 (80)
------- -------
Net cash provided by (used in) operating activities 135 (2,496)
------- -------
Cash flows from investing activities:
Purchases of property and equipment (20) (573)
Decrease (increase) in restricted cash (4) 86
Purchase of marketable securities (92) (3,160)
Proceeds from sales of marketable securities 1,920 4,028
------- -------
Net cash provided by investing activities 1,804 381
------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock, net 52 172
Purchase of treasury stock - (1,255)
Payments on capital leases and notes payable (275) (66)
------- -------
Net cash used in financing activities (223) (1,149)
------- -------
Net increase (decrease) in cash and cash equivalents 1,716 (3,264)
Cash and cash equivalents at beginning of period 38,390 4,212
------- -------
Cash and cash equivalents at end of period $40,106 $ 948
======= =======
Supplemental statement of non-cash investing and financing activity:
Note receivable from officer for issuance of common stock - $1,449
Asset and liability related to Directory Agreement - $13,000
Unrealized loss on investments $16 $447
See accompanying notes.
5
SWITCHBOARD INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. 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. ("ePresence"). As of March 31, 2003, ePresence beneficially owned
approximately 51.9% 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 offer
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, 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 relationships and limited operating history.
The Company has also experienced substantial net losses and, as of March
31, 2003, 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 and in the preliminary establishment of the Company's
infrastructure. 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.
2. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include all
adjustments, consisting only of normal recurring adjustments, that, in the
opinion of management, are necessary to present fairly the financial information
set forth therein. Certain information and note disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States have been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission. Results of
operations for the three-month period ended March 31, 2003 are not necessarily
indicative of future financial results.
Investors should read these interim consolidated financial statements in
conjunction with the audited consolidated financial statements and notes thereto
6
included in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2002, as filed with the Securities and Exchange Commission on March
28, 2003.
3. 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. 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
compensation. 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 March 31, 2003, the Company has three stock-based employee compensation
plans. 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 periods, the below
pro-forma effects are not necessarily indicative of the pro-forma effects on
future years.
7
Three Months Ended March 31,
----------------------------
2003 2002
----- -------
Net income (loss) as reported $56 $(1,042)
Add: Stock-based employee compensation expense included
in reported net loss, net of related tax effects 36 47
Add: Adjustment for previously amortized expense associated
with the unvested portion of options canceled in the
period - 2,251
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects (579) (1,182)
----- -------
Pro-forma net (loss) income $(487) $ 74
===== =======
Pro forma net (loss) income per share
Basic $(0.03) $ -
====== ===
Diluted $(0.03) $ -
====== ===
Shares used in computing pro forma net loss per share
Basic 18,627 18,495
Diluted 18,627 19,661
4. NET LOSS PER SHARE
Basic net income (loss) per share is computed using the weighted average
number of shares of common stock outstanding less any restricted shares. Diluted
income (loss) per share includes the dilutive effect of potential common shares
outstanding during the period. Potential common shares result from the assumed
exercise of outstanding stock options and warrants, the proceeds of which are
then assumed to have been used to repurchase outstanding common stock using the
treasury stock method. Potential common shares also include the unvested portion
of restricted stock.
For the three months ended March 31, 2003, options to purchase 2,531,190
shares of common stock, and 225,000 shares of restricted stock were excluded
from the calculation of diluted earnings per share, as their inclusion would be
antidilutive. This is due to the fact that the exercise price of these options
and the purchase price of these restricted shares is in excess of the average
8
price of the Company's common stock of $2.72 per share for the three months
ended March 31, 2003. For the three months ended of March 31, 2002, options to
purchase 3,754,346 shares of common stock, warrants to purchase 385,000 shares
of common stock, and 300,000 shares of restricted stock, were not included in
the computation of diluted net loss per share since their inclusion would be
antidilutive. For the three months ended March 31, 2002, 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, warrants and
restricted stock are antidilutive and are therefore excluded from the
calculation.
5. COMPREHENSIVE LOSS
Other comprehensive loss includes unrealized gains or losses on the
Company's available-for-sale investments (in thousands).
Three Months Ended March 31,
----------------------------
2003 2002
---- -------
Net income (loss) $ 56 $(1,042)
Other comprehensive (loss):
Unrealized loss on investment (16) (447)
---- -------
Comprehensive income (loss) $ 40 $(1,489)
==== =======
6. NOTES PAYABLE AND LINE OF CREDIT
In June 2002, the Company entered into a loan and security agreement (the
"SVB Financing Agreement") with Silicon Valley Bank ("SVB"), under which the
Company was able 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 March 31, 2003,
the Company had utilized $2.7 million of this facility. The Company's ability to
utilize the facility to fund additional equipment purchases expired on March 31,
2003. The SVB Financing Agreement also provides for a $1.0 million revolving
line of credit at an interest rate equal to prime. At March 31, 2003, the
Company had no outstanding borrowings under the revolving line of credit. The
Company's ability to utilize the revolving line of credit expires on May 30,
2003. The Company has recorded a note payable to SVB on its balance sheet
totaling $1.9 million and $2.2 million for equipment financed as of March 31,
2003 and December 31, 2002, of which $1.1 million and $1.1 million is classified
as a current liability, respectively.
As a condition of the SVB 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 SVB Financing
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 SVB
Financing Agreement are collateralized by all of the Company's tangible and
intangible assets, excluding intellectual property.
7. PAYABLE RELATED TO ACQUISITION
In November 2000, the Company acquired Envenue, Inc. ("Envenue"), a
wireless provider of advanced 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, which the Company has
classified as a payable related to acquisition within current liabilities. 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
9
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 purchase price, which
is non-interest bearing, is classified separately in the accompanying financial
statements. The Company has recorded $1.6 million as restricted cash at March
31, 2003 and December 31, 2002 related to the cash held in escrow. Additionally,
an earnout payment of up to $2.0 million was contingent upon meeting certain
performance criteria on or before May 24, 2002. These performance criteria were
not met, therefore no liability related to this contingency has been recorded.
8. AMERICA ONLINE, INC.
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 the three months ended
March 31, 2003 and 2002, consulting and service fees totaled $633,000 and
$56,000, 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
10
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. 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 August 2002, offsetting amortization recorded in the
period. Amortization of AOL assets totaled $1.1 million in the three months
ended March 31, 2002. There was no amortization of AOL assets in the three
months ended March 31, 2003. 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.
Net revenue recognized from AOL, including amortization of consideration
given to AOL, was $1.6 million, or 48.8% of net revenue, and $923,000, or 31.6%
of net revenue, for the three months ended March 31, 2003 and 2002,
respectively. Net amounts due from AOL included in accounts receivable at March
31, 2003 and December 31, 2002 were $787,000 and $549,000, respectively. As of
March 31, 2003, AOL beneficially owned 7.9% of the Company's outstanding common
stock.
9. NOTE RECEIVABLE FOR THE ISSUANCE OF RESTRICTED COMMON STOCK
In January 2002, the Company recorded a note receivable from its Chief
Executive Officer, Mr. Greenlaw, 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
March 31, 2003, 225,000 of such shares were unvested and restricted from
transfer. On each of January 4, 2004, 2005 and 2006, 75,000 of these restricted
shares vest, 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, 90 days from
the date Mr. Greenlaw ceases to be affiliated with the Company or January 4,
2008. At March 31, 2003, the Company has recorded $1.5 million in principal and
interest as a note receivable classified within stockholders' equity. During the
three months ended March 31, 2003 and 2002, the Company recorded $19,000 and
$18,000 in interest income resulting from this note receivable, respectively.
10. RELATED PARTIES
ePresence provided the Company with telephone service and support under
corporate services agreements during the three month periods ended March 31,
2003 and 2002. Under the current corporate services agreement, which expires on
December 31, 2003, the Company pays ePresence an amount of $75,000 per year for
these services. The Company recorded $19,000 in expense under the agreements
11
in each of the three months ended March 31, 2003 and 2002, respectively. The
Company paid ePresence $19,000 under the agreements during the three months
ended March 31, 2003. No payments were made to ePresence under the agreements
during the three months ended March 31, 2002. The Company had $6,000 and $6,000
accrued under the agreements as of March 31, 2003 and December 31, 2002,
respectively.
The Company leased the space it occupied in 2002 from ePresence under a
sublease entered into in January 2001, which expired on December 31, 2002. The
Company leases the space it currently occupies from ePresence under a sublease
that expires on December 31, 2003. Under the current sublease agreement, the
Company pays an annual rent of $227,000. Under the lease agreements, the Company
recorded rent expense of $57,000 and $129,000 and paid ePresence $81,000 and
$129,000 in the three months ended March 31, 2003 and 2002, respectively. The
Company had $19,000 and $43,000 accrued under the lease agreements as of March
31, 2003 and December 31, 2002, respectively.
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 the three months ended March 31, 2003 and 2002, no
compensation was paid to these directors by the Company for their services other
than option grants under the Company's equity incentive plans in the three
months ended March 31, 2002.
12
ITEM 2. -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
You should read the following discussion together with the condensed
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 Operating Results, Business Prospects and Market Price of
Stock" commencing on page 20, 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, and build and host Web sites for local merchants. 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 three
months ended March 31, 2003, approximately 88.5% 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 $13.0 million in December 2000 and $2.0 million in
April 2002, 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, 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. Any engineering services provided by us in excess of 300
hours per month are charged to AOL on a time and materials basis. In the three
months ended March 31, 2003 and 2002, consulting and service fees totaled
$633,000 and $56,000, respectively. Revenue recognized from AOL, net of
amortization of consideration given to AOL, was $1.6 million, or 48.8% of net
revenue, and $923,000, or 31.6% of net revenue, for the three months ended March
31, 2003 and 2002, respectively. We anticipate that AOL will continue to
represent a significant percentage of our revenue throughout the remainder of
2003 and will be a material component of our overall business. As of March 31,
2003, AOL beneficially owned 7.9% of our outstanding common stock.
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
13
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 three months ended March 31, 2003, approximately 11.5% 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. In addition, cost of revenue also includes an
allocation of salaries and benefits for employees, as well as expenses resulting
from external consultants, directly associated with the delivery of billable
engineering and other services. Cost of revenue as a percentage of revenue has
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,
public relations, market research, provision for bad debts and a pro rata share
of occupancy and information system expenses.
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.
We have experienced substantial net losses. As of March 31, 2003, 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
We have 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"). 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"). Accordingly, we have
decreased our merchant network revenue by $1.1 million for the three months
ended March 31, 2002 and reduced our operating expenses by a corresponding
14
amount in the same period. There was no offset to revenue for consideration
given to a vendor in the three months ended March 31, 2003. 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 (in thousands):
Three Months Ended March 31,
----------------------------
2003 2002
------ -------
Gross revenue $3,341 $ 4,023
Less: Amortization of consideration given to AOL - (1,103)
------ -------
Net revenue $3,341 $ 2,920
====== =======
Operating expenses $2,760 $ 4,742
Less: Amortization of consideration given to AOL - (1,103)
------ -------
Net operating expenses $2,760 $ 3,639
====== =======
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 the three months ended March 31, 2003 and 2002, consulting
and service fees totaled $633,000 and $56,000, 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,
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
15
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
August 2002, offsetting amortization recorded in the period. Amortization of AOL
assets totaled $1.1 million in the three months ended March 31, 2002. There was
no amortization of AOL assets in the three months ended March 31, 2003.
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.
Revenue recognized from AOL, including amortization of consideration given
to AOL, was $1.6 million, or 48.8% of net revenue, and $923,000, or 31.6% of net
revenue, for the three months ended March 31, 2003 and 2002, respectively. Net
amounts due from AOL included in accounts receivable at March 31, 2003 and
December 31, 2002 were $787,000 and $549,000, respectively. As of March 31,
2003, AOL beneficially owned 7.9% of our outstanding common stock.
Results of Operations
Revenue
Net revenue was $3.3 million and $2.9 million in the three months ended
March 31, 2003 and 2002, respectively, representing an increase of $421,000, or
14.4%. The increase in net revenue for the three months ended March 31, 2003
consisted primarily of an increase in net merchant network revenue, as well as
an increase in national advertising and site sponsorship revenue.
Net merchant network revenue was $3.0 million and $2.6 million in the three
months ended March 31, 2003 and 2002, respectively, representing an increase of
$334,000, or 12.7%. The increase in net merchant network revenue for the three
months ended March 31, 2003 was primarily due to a reduction in amortization of
consideration given to AOL of $1.1 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 2003 was also attributable to an increase of $452,000
in revenue from engineering and other services, as well as additional licensing
revenue from new merchant network alliance partners. Offsetting these increases
was a decrease of $973,000 in licensing revenue from AOL, primarily as a result
of significantly reduced nationally oriented merchant advertising sales by AOL,
as well as a reduction in the percentage by which we share in directory revenue
generated by AOL under the Directory Agreement based upon the achievement of a
predetermined cumulative revenue milestone.
16
National advertising and site sponsorship revenue was $385,000 and $298,000
in the three months ended March 31, 2003 and 2002, respectively, representing an
increase of $87,000, or 29.2%. The increase in national advertising and site
sponsorship revenue for the three months ended March 31, 2003 resulted primarily
from an increase in traffic to our Web site, the addition of new customers and
an increase in revenue from existing customers due to additional advertising
placements on our site.
Cost of Revenue
Cost of revenue was $707,000, or 21.2% of net revenue, in the three months
ended March 31, 2003, compared with $918,000, or 31.4% of net revenue, in the
corresponding period in 2002. Cost of revenue decreased for the three months
ended March 31, 2003 primarily as a result of a decrease of $152,000 in Web site
creation and hosting fees in connection with our merchant services programs, a
decrease of $59,000 in data communication fees and a decrease of $36,000 in the
cost of third-party data. These decreases were offset in part by an increase of
$102,000 in employee salaries and benefits associated with the delivery of
engineering services, which are classified as cost of revenue.
Gross Profit
Gross profit in the three months ended March 31, 2003 was 78.8% of net
revenue, or $2.6 million, compared with 68.6% of net revenue, or $2.0 million,
in the comparable period of 2002. The increase in gross profit dollars and
percentage for the three months ended March 31, 2003 was primarily due to an
increase in net revenue being spread over lower costs of revenue, offset in part
by a relative increase in lower margin merchant network services revenue to
total net revenue.
Sales and Marketing
Sales and marketing expenses decreased to $842,000 for the three months
ended March 31, 2003, compared with $1.4 million for the corresponding period in
2002. The decrease for the three months ended March 31, 2003 was primarily
related to decreases of $242,000 in merchant program expenses, $106,000 in
employee salaries and benefits, $64,000 in public relations expenses, $50,000 in
promotional expenses, and $32,000 in occupancy costs. As a percentage of net
revenue, sales and marketing expenses were 25.2% for the three months ended
March 31, 2003, compared with 48.9% for the corresponding period in 2002.
Research and Development
Research and development expenses decreased to $1.1 million for the three
months ended March 31, 2003, compared with $1.5 million for the corresponding
period in 2002. The decrease for the three months ended March 31, 2003 was due
primarily to a decrease of $216,000 in outside consulting, a decrease of
$102,000 in salaries and benefits associated with the delivery of engineering
services which are classified as cost of revenue and a decrease of $87,000 in
other employee salaries and benefits. As a percentage of net revenue, research
and development expenses were 33.3% for the three months ended March 31, 2003,
compared with 51.5% for the corresponding period in 2002.
General and Administrative
General and administrative expenses increased to $804,000 for the three
months ended March 31, 2003, compared with $707,000 for the corresponding period
in 2002. The increase for the three months ended March 31, 2003 was primarily
17
due to increases of $54,000 in salaries and benefits and $32,000 in professional
servcies expense. As a percentage of net revenue, general and administrative
expenses were 24.1% for the three months ended March 31, 2003, compared with
24.2% for the corresponding period in 2002.
Other Income
Other income decreased to $182,000 for the three months ended March 31,
2003, compared with $595,000 for the corresponding period in 2002. The decrease
in the three months ended March 31, 2003 was due primarily to a decrease in
interest income earned as a result of a decline in interest rates, as well as
reduced funds available for investment.
Income Taxes
In accordance with generally accepted accounting principles, the Company
provides for income taxes on an interim basis using its estimated annual
effective income tax rate. The Company anticipates that it will not have a tax
provision in 2003 due to utilization of net operating loss carryforwards.
Net Income (Loss)
Our net income for the three months ended March 31, 2003 was $56,000,
compared with a net loss of $1.0 million for the corresponding period in 2002.
As of March 31, 2003, our accumulated deficit totaled $108.7 million.
Liquidity and Capital Resources
As of March 31, 2003, we had total cash and marketable securities of $53.7
million, consisting of $40.1 million of cash and cash equivalents, $1.6 million
of restricted cash, $2.1 million of short-term marketable securities and $9.9
million of long-term marketable securities. During the three months ended March
31, 2003, cash and cash equivalents increased by $1.7 million, primarily due to
cash provided by investing activities of $1.8 million and cash provided by
operating activities of $135,000, offset in part by net cash used for financing
activities of $223,000.
Net cash provided by operating activities for the three months ended March
31, 2003 was $135,000, primarily due to net income of $56,000 and $343,000 in
adjustments made for non-cash expenses, including depreciation and amortization
of $326,000. The increase in cash was also due to an increase of $172,000 in
accrued expenses, an increase of $77,000 in deferred revenue and a decrease of
$42,000 in unbilled receivables. These increases were offset in part by a
decrease of $362,000 in accounts payable and an increase of $215,000 in accounts
receivable, as well as various other cash flows from operating activities.
Net cash provided by investing activities for the three months ended March
31, 2003 was $1.8 million, primarily due to $1.9 million in proceeds from sales
of marketable securities, offset in part by purchases of marketable securities
of $92,000, as well as various other cash flows from investing activities.
Net cash used in financing activities for the three months ended March 31,
2003 was $223,000, primarily due to payments on notes payable of $275,000,
offset in part by proceeds of $52,000 from the issuance of stock.
18
In June 2002, we entered into a loan and security agreement (the "SVB
Financing Agreement") with Silicon Valley Bank ("SVB"), under which we had 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 March 31, 2003, we had
utilized $2.7 million of this facility. On March 31, 2003, our ability to fund
additional equipment purchases under the facility expired. The SVB Financing
Agreement also provides for a $1.0 million revolving line of credit. At March
31, 2003, we had no outstanding borrowings under the revolving line of credit.
Our ability to utilize the revolving line of credit expires on May 30, 2003.
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 SVB
Financing Agreement require us to maintain in deposit or in investment accounts
with SVB at least $20.0 million in unrestricted cash. Borrowings under the SVB
Financing Agreement are collateralized by all of our tangible and intangible
assets, excluding intellectual property.
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. In October 2002, we paid out of the escrow
$410,000, representing the undisputed portion of the purchase price plus
interest from the original maturity date to the former stockholders of Envenue.
The remainder of the amount held in escrow will remain held in escrow until the
contractual dispute is resolved. We have recorded this amount as restricted
cash.
On December 31, 2002, our operating lease for our principal administrative,
sales and marketing, and research and development facility located in Westboro,
Massachusetts expired. 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.
We have incurred significant operating expenses since our inception. 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 internal
research and development activities, 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 several policies as critical to the understanding of our
results of operations. Note that our preparation of this Quarterly Report on
Form 10-Q 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. The critical accounting policies we identified
in our most recent Annual Report on Form 10-K related to revenue recognition,
risks, concentrations and uncertainties, and accounting for stock-based
compensation. It is important that the historical discussion in this
Management's Discussion and Analysis of Financial Condition and Results of
Operations be read in conjunction with our critical accounting policies as
discussed in our Annual Report on Form 10-K for the year ended December 31,
2002.
19
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 Quarterly Report on Form 10-Q 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 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 MAY INCUR NET LOSSES DURING
FUTURE QUARTERS, IF NOT THE NEXT SEVERAL QUARTERS, AND WE MAY NEVER ACHIEVE
PROFITABILITY AGAIN
We have incurred significant net losses in each fiscal quarter previous to
the most recent fiscal quarter ended March 31, 2003. From inception to March 31,
2003, we have an accumulated deficit totaling $108.7 millon. We need to generate
substantial revenue to fund our operations. Although we recorded a small profit
in the fiscal quarter ended March 31, 2003, 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 AGREEMENT WE ENTERED INTO WITH AMERICA ONLINE, INC., 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 amended the
Directory Agreement, the Directory Agreement may still be prematurely terminated
by breach or otherwise fail 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
Directory Agreement.
In 2002 and the first three months of 2003, revenue derived from AOL
represented a significant portion of our net revenue. AOL accounted for 41.8% of
total net revenue in 2002 and 48.8% of total net revenue in the three months
ended March 31, 2003. We anticipate that AOL will represent greater than 50% of
our net revenue during the remainder of 2003 and will be a material component of
our overall business. The termination of our Directory Agreement with AOL or the
failure of our Directory 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 Directory Agreement with AOL expires in
20
December 2004. We or AOL may elect not to renew the agreement upon its
expiration.
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
21
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.
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
22
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 BY OUR STOCKHOLDERS, WHICH COULD DELAY OR PREVENT
A CHANGE IN CONTROL OR DEPRESS OUR STOCK PRICE
As of March 31, 2003, ePresence beneficially owned approximately 51.9% 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.
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 of
customers. During the three months ended March 31, 2003, net revenue derived
from our top ten customers accounted for approximately 71.1% of our total net
revenue. Additionally, net revenue derived from AOL alone accounted for 48.8% of
our total net revenue in the three months ended March 31, 2003. 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
23
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
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.
24
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.
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.
25
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, 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 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 11.5% and 10.2%
of our net revenue from the sale of banner and site sponsorship advertisements
during the three months ended March 31, 2003 and 2002, 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.
26
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.
27
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
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.
28
ITEM 3. 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 have
maturities within two years. 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 March 31, 2003.
ITEM 4. 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.
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 II -- OTHER INFORMATION
ITEM 2. -- CHANGES IN SECURITIES AND USE OF PROCEEDS
(a.) Not applicable.
(b.) Not applicable.
(c.) Not applicable.
(d.) 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 March 31, 2003, we used approximately $21.2
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 America
29
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 March 31,
2003, we have invested the remaining net proceeds in interest-bearing,
investment-grade securities and money market funds.
ITEM 6. -- EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
The Exhibits filed as part of this report 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 filed 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.
We did not file a current report on Form 8-K during the quarter ended March
31, 2003.
30
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SWITCHBOARD INCORPORATED
Date: May 15, 2003 By:/s/ Robert P. Orlando
---------------------
Robert P. Orlando
Principal Financial Officer and
Chief Accounting Officer
31
CERTIFICATIONS
I, Douglas J. Greenlaw, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Switchboard
Incorporated;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
32
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 15, 2003 /s/Douglas J. Greenlaw
----------------------
Douglas J. Greenlaw
Chief Executive Officer
(principal executive officer)
33
I, Robert P. Orlando, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Switchboard
Incorporated;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
34
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 15, 2003 /s/Robert P. Orlando
--------------------
Robert P. Orlando
Vice President and Chief Financial Officer
(principal financial officer)
35
EXHIBIT INDEX
Exhibit No. Description
- ----------- ------------------------------------------------------------------
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.
36