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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
Exchange Act of 1934
For the quarterly period ended September 30, 2000
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 (IRS Employer
Incorporation or Organization) Identification No.)
115 Flanders Road
Westboro, Massachusetts 01581
(Address, including Zip Code, of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (508) 898-1122
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Shares Outstanding at
Title of Class October 31, 2000
----------------- ------------------
Common Stock, par value $0.01 per share 24,875,343
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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 facts
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. We do not assume
any obligation to update any of the forward-looking statements we make.
WEB SITE ADDRESSES
Our Web site address is www.switchboard.com. References in this Quarterly
Report on Form 10-Q 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 into this Quarterly Report on Form 10-Q and should not
be considered to be a part of this document.
SWITCHBOARD INCORPORATED
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I - Financial Information
Item 1. -- Financial Statements
<S> <C>
Balance Sheets as of September 30, 2000 (Unaudited) and December 31, 1999.......................... 3
Statements of Operations for the Three and Nine Months Ended September 30, 2000
and 1999 (Unaudited).............................................................................. 4
Statements of Cash Flows for the Nine Months Ended September 30, 2000 and 1999
(Unaudited)....................................................................................... 5
Notes to Financial Statements...................................................................... 6
Item 2. -- Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................................................... 8
Item 3. -- Quantitative and Qualitative Disclosures About Market Risk............................... 24
</TABLE>
1
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<TABLE>
<S> <C>
PART II - Other Information
Item 2. -- Changes in Securities and Use of Proceeds................................................. 24
Item 6. -- Exhibits and Reports on Form 8-K.......................................................... 24
Signatures........................................................................................... 25
</TABLE>
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PART I -- FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
SWITCHBOARD INCORPORATED
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 2000 December 31,1999
------------------- -----------------
Assets: (Unaudited)
-------
<S> <C> <C>
Cash and cash equivalents $ 37,880,973 $ 3,604,551
Short-term investments 48,709,349 2,630,850
Accounts receivable, net of allowance of $199,772 and $162,183, respectively 5,729,794 3,060,249
Other current assets 1,165,007 477,876
------------ ------------
Total current assets 93,485,123 9,773,526
Property and equipment, net 1,462,410 1,202,578
Other assets, net 633,655 1,219,274
------------ ------------
Total assets $ 95,581,188 $ 12,195,378
============ ============
Liabilities and stockholders' equity (deficit):
-----------------------------------------------
Accounts payable $ 1,170,736 $ 775,202
Accrued expenses 3,070,518 2,739,665
Deferred revenue 1,733,930 1,349,145
Note payable, current portion - 600,000
------------ ------------
Total current liabilities 5,975,184 5,464,012
Redeemable convertible preferred stock, $0.01 par value; 3,552,421 shares issued - 16,319,570
and outstanding as of December 31, 1999
Stockholders' equity (deficit):
-------------------------------
Series E special voting preferred stock; one share authorized and designated; one - -
share issued and outstanding
Common stock, $.01 par value; authorized 85,000,000 shares; 246,853 146,640
issued and outstanding 24,685,321 and 14,663,934 shares, respectively
Additional paid-in capital 179,365,404 75,666,634
Accumulated other comprehensive income 66,161 1,855,950
Contribution receivable (57,448,481) (66,242,838)
Accumulated deficit (32,623,933) (21,014,590)
------------ ------------
Total stockholders' equity (deficit) 89,606,004 (9,588,204)
------------ ------------
Total liabilities and stockholders' equity (deficit) $ 95,581,188 $ 12,195,378
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
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SWITCHBOARD INCORPORATED
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
2000 1999 2000 1999
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Total revenue $ 5,699,510 $ 2,285,795 $ 14,283,944 $ 5,263,458
Cost of revenue 982,064 614,286 2,948,193 1,019,679
------------ ------------ ------------- ------------
Gross profit 4,717,446 1,671,509 11,335,751 4,243,779
Operating expenses:
-------------------
Sales and marketing 6,896,151 2,401,994 21,277,548 4,505,933
Product development 936,067 470,554 2,421,065 1,347,124
General and administrative 878,782 509,207 2,418,741 1,205,555
------------ ------------ ------------- ------------
Total operating expenses 8,711,000 3,381,755 26,117,354 7,058,612
Loss from operations (3,993,554) (1,710,246) (14,781,603) (2,814,833)
Interest income (expense), net 1,489,742 27,846 3,172,260 (185,822)
------------ ------------ ------------- ------------
Net loss (2,503,812) (1,682,400) (11,609,343) (3,000,655)
------------ ------------ ------------- ------------
Accrued dividends for preferred stockholders - 380,364 270,615 534,575
------------ ------------ ------------- ------------
Net loss attributable to common stockholders $ (2,503,812) $ (2,062,764) $ (11,879,958) $ (3,535,230)
============ ============ ============= ============
Basic and diluted net loss per share $(0.10) $(0.14) $(0.53) $(0.37)
============ ============ ============= ============
Shares used in computing basic and diluted 24,661,948 14,644,954 22,286,884 9,651,475
net loss per share
Unaudited pro forma basic and diluted net loss per share $(0.10) $(0.09) $(0.50) $(0.26)
============ ============ ============= ============
Shares used in computing unaudited pro forma basic 24,661,948 18,197,375 23,132,699 11,346,200
and diluted net loss per share
</TABLE>
The accompanying notes are an integral part of the financial statements.
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SWITCHBOARD INCORPORATED
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------------
2000 1999
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(11,609,343) $(3,000,655)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 890,542 485,258
Non-cash advertising and promotion expense 8,794,357 77,777
Provision for doubtful accounts 251,144 -
Expense related to warrant grants 552,306 311,654
Changes in operating assets and liabilities:
Accounts receivable (2,920,689) (496,953)
Other current assets (687,131) (96,404)
Other assets 158,536 (419,648)
Accounts payable 395,534 406,084
Accrued expenses 358,811 198,808
Deferred revenue 384,785 441,143
------------- ------------
Net cash used in operating activities (3,431,148) (2,092,936)
Cash flows from investing activities:
Purchases of property and equipment (723,291) (332,119)
Purchases of short term investments, net (47,868,288) -
------------- ------------
Net cash used in investing activities (48,591,579) (332,119)
Cash flows from financing activities:
Proceeds from convertible promissory notes - related party - 3,335,307
Proceeds from issuance of common stock, net 86,927,107 4,099,628
Payments on notes payable (627,958) (530,292)
------------- ------------
Net cash provided by financing activities 86,299,149 6,904,643
Net increase in cash and cash equivalents 34,276,422 4,479,588
Cash and cash equivalents at beginning of period 3,604,551 386,590
------------- ------------
Cash and cash equivalents at end of period $ 37,880,973 $ 4,866,178
============= ============
Supplemental statement of non-cash financing activity:
Settlement of convertible promissory notes through issuance of preferred stock $ 11,722,452
Issuance of common stock for technology $ 1,050,000
Non-cash issuance cost $ 375,000
Warrants received in connection with a Development, Access and License agreement $ 774,900
Conversion of redeemable preferred stock into common stock $ 16,319,570
Unrealized loss on short term investments $ 1,789,789
</TABLE>
The accompanying notes are an integral part of the financial statements.
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SWITCHBOARD INCORPORATED
NOTES TO THE FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
Switchboard Incorporated, a Delaware corporation (the "Company"), commenced
operations in February 1996. The Company is an Internet-based local merchant
network interconnecting consumers, merchants and national advertisers. The
Company offers its users local information about people and businesses across
the United States. The Company provides a broad range of functions, content and
services designed to connect consumers and businesses on the Internet.
2. BASIS OF PRESENTATION
The accompanying unaudited 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 generally accepted accounting
principles have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission. Results of operations for the
three- and nine-month periods ended September 30, 2000 are not necessarily
indicative of future financial results.
Investors should read these interim financial statements in conjunction with
the audited financial statements and notes thereto included in the Company's
Registration Statement on Form S-1 (Registration No. 333-90013), as amended,
which was declared effective by the Securities and Exchange Commission on March
1, 2000.
3. NET LOSS PER SHARE AND PRO FORMA NET LOSS PER SHARE
Basic net loss per share is computed using the weighted average number of
shares of common stock outstanding. Net loss used in the calculation is
increased by the accrued dividends for the preferred stock outstanding in each
period. Diluted net loss per share does not differ from basic net loss per
share, since potential common shares from conversion of preferred stock, stock
options and warrants are antidilutive for all periods presented and are
therefore excluded from the calculation. Options to purchase 3,093,230 and
1,627,100 shares of common stock as of September 30, 2000 and 1999,
respectively, preferred stock convertible into 3,552,422 shares of common stock,
and warrants for 1,751,937 shares of common stock as of September 30, 2000 and
1999, were not included in the computation of diluted net loss per share since
their inclusion would be antidilutive. An aggregate of 3,552,421 shares of
preferred stock converted into common stock automatically on March 7, 2000, upon
the closing of the Company's initial public offering. There was one share of
preferred stock issued and outstanding as of September 30, 2000. Pro forma
basic and diluted net loss per share have been calculated assuming the
conversion of all outstanding shares of preferred stock into common stock, as if
the shares had converted immediately upon their issuance.
4. Initial Public Offering
On March 7, 2000, the Company completed the sale of 5,500,000 shares of common
stock in its initial public offering at a per share price of $15.00. The
Company received an aggregate of $82.5 million in proceeds from that sale.
Subsequently, on April 6, 2000, the Company completed the sale of 825,000 shares
of common stock pursuant to the exercise of the over allotment option by the
underwriters for the Company's initial public offering. The shares were sold at
the initial public offering price of $15.00 per share. The Company received an
aggregate of $12.4 million in proceeds from that sale. Total expenses in
connection with the initial offering were approximately $8.6 million, consisting
of $6.6 million for
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underwriting discounts and commissions and approximately $2.0 million for
professional services and other expenses. Net proceeds from the 6,325,000 shares
sold were approximately $86.3 million.
5. BARTER REVENUE
The Company had barter transactions totaling $75,000 and $275,000, or 1.3%
and 1.9% of revenues, for the three and nine months ended September 30, 2000 and
1999, respectively. Revenues from barter transactions are recognized during the
period in which the advertisements are displayed in Switchboard properties.
Barter transactions are recorded at the fair value of the goods or services
provided or received, whichever is more readily determinable in the
circumstances. In determining the value of the goods or services provided, the
Company uses historical pricing of comparable cash transactions.
6. COMPREHENSIVE LOSS
Other comprehensive loss includes unrealized gains or losses on the Company's
available-for-sale investments.
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------------
2000 1999
------------ -----------
<S> <C> <C>
Net loss $(11,609,343) $(3,000,655)
Other comprehensive income:
Unrealized (loss) gain on investments (1,789,789) 176,400
------------ -----------
Comprehensive loss $(13,399,132) $(2,824,255)
============ ===========
</TABLE>
7. ADVERTISING EXPENSE
Advertising costs are expensed as incurred. For the three and nine months
ended September 30, 2000, advertising expenses totaled $3,237,959 and
$12,900,175, of which $950,477 and $8,794,357 were related to CBS non-cash
advertising, respectively. For the three and nine months ended September 30,
1999, advertising expenses totaled $1,028,014 and $1,701,443, respectively, of
which $77,777 was related to CBS non-cash advertising.
8. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accountings Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation, an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and among other issues clarifies
the following: the definition of an employee for purposes of applying APB
Opinion No. 25; the criteria for determining whether a plan qualifies as a
noncompensatory plan; the accounting consequence of various modifications to the
terms of previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. The
application of FIN 44 did not have a material impact on the Company's financial
position or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements",
("SAB 101") as subsequently amended by SAB 101A and SAB 101B, which is effective
no later than the fourth quarter of 2000. SAB 101 clarifies the Securities and
Exchange Commission's views related to revenue recognition and disclosure.
Switchboard adopted SAB 101 in the fourth quarter of 1999.
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In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The new standard established accounting
and reporting standards for derivative instruments, including some derivative
instruments embedded in other contracts, and for hedging activities. SFAS No.
133, as amended by SFAS No. 137, is effective for all quarters for fiscal years
beginning after June 15, 2000. The Company does not expect SFAS No. 133 to have
a material effect on our financial position or results of operations.
ITEM 2. -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
You should read the following discussion together with the condensed financial
statements and related notes appearing elsewhere in this Quarterly Report on
Form 10-Q. 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 12, as well as those otherwise discussed in
this section and elsewhere in this Quarterly Report on Form 10-Q. See "Forward-
Looking Statements."
OVERVIEW
Since commencing operations in February 1996, we have derived our revenue
principally from the sale of national advertising. We have also derived revenue
from the licensing of our directory technology content and related services to
third party Web sites, which we refer to as syndication, and from merchant
services.
Our advertising revenue is derived from banner advertisements, sponsorships,
direct electronic mail based promotions and other forms of national advertising
that are sold on either a fixed fee, cost per thousand impressions or cost per
click basis. We recognize revenue from national advertising upon delivery of
services. During the three and nine months ended September 30, 2000,
approximately 54% and 57% of our revenue was derived from the sale of national
advertising, respectively.
We also derive revenue from various syndication and licensing agreements with
customers which typically involve engineering work to integrate our products and
services with the customer's site and brand, as well as license fees. We
recognize these fees and related costs under these agreements ratably over the
term of the contract. During the three and nine months ended September 30,
2000, approximately 19% and 17% of our revenue was derived from syndication and
licensing, respectively.
We also generate revenue from merchant services in which we build Web sites
for local merchants, run display ads in our yellow pages directory and host Web
sites on our servers. Our merchant services program is aimed at companies that
have existing relationships with small businesses in order to sell our Web site
creation, hosting and advertising services to local merchants. We recognize
revenue on a monthly basis from the creation and hosting of display ads and Web
sites as services are provided. During the three and nine months ended
September 30, 2000, approximately 27% and 26% of our revenue was derived from
merchant services, respectively.
Our cost of revenue consists primarily of expenses paid to third parties under
data licensing agreements, as well as other direct expenses incurred to maintain
the operations of our Web site. These direct expenses consist of data
communications expenses related to Internet connectivity charges, salaries and
benefits for operations personnel, equipment costs and related depreciation, and
the costs to run our data center, which include rent and utilities. We
anticipate that our cost of revenue will increase in absolute dollars in the
future as a result of hiring additional employees and purchasing additional
equipment and outside services. Cost of revenue as a percentage of revenue has
varied in the past, primarily as a result of fluctuations in our
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Web site traffic, resulting in associated changes in variable costs and, to a
lesser extent, the cost of third-party content and technology.
Our sales and marketing expense consists primarily of costs associated with
Web site promotion, third-party revenue share costs, advertising and creative
production expenses, employee salaries and benefits, public relations, market
research and a pro rata share of occupancy and information system expenses. We
expect sales and marketing expense to increase in absolute dollars as we
continue to expand our marketing programs and our sales force and incur
advertising expenditures associated with our CBS Corporation ("CBS")-related
promotion and branding, carriage fees, and other marketing expenses associated
with building our merchant services program. We expect to record the net present
value of our $95.0 million of advertising and promotion services from CBS as
sales and marketing expense through June 2006. From commencement through
September 30, 2000, we have recorded $12.9 million of expense.
Our product 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 site, the enhancement of
existing products, quality assurance, testing and documentation and a share of
occupancy and information system expenses based on employee headcount. We expect
product development expense to increase in absolute dollars in the future as we
maintain and upgrade our Web site.
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, accounting and insurance costs and a share of
occupancy and information system expenses based on employee headcount. We expect
that our general and administrative expense will increase in absolute dollars as
we continue to expand our staffing to support growing operations and facilities,
and incur expenses relating to our responsibilities as a public company.
We have experienced substantial net losses since our inception. As of
September 30, 2000, we had an accumulated deficit of $32.6 million. These net
losses and accumulated deficit resulted from our lack of substantial revenue and
the significant costs incurred in the development of our Web site and the
establishment of our corporate infrastructure and organization. We expect to
increase our expenditures in all areas in order to execute our business plan,
particularly in sales and marketing and in product development.
RESULTS OF OPERATIONS
THREE- AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
Revenue. Revenue increased to $5.7 million and $14.3 million for the three-and
nine-month periods ended September 30, 2000, from $2.3 million and $5.3 million
for the comparable periods in 1999, respectively. The increases of $3.4 million
and $9.0 million in the three- and nine-month periods ended September 30, 2000,
when compared to the corresponding period in 1999, consisted primarily of
increases in national advertising revenue, merchant services revenue and
syndication and licensing revenue. The increases in national advertising revenue
for the three and nine months ended September 30, 2000 were primarily due to
increases in revenue per thousand page views ("RPM") resulting from both
utilization increases and traffic to our Web site. RPM was $12.98 and $12.27 for
the three-and nine-month periods ended September 30, 2000, compared to $5.25 and
$4.66 for the corresponding periods in 1999. The merchant services revenue
increases for the three and nine months ended September 30, 2000 were due to
increased membership and additional services in our local merchant network. The
increases in syndication and licensing revenue for the three and nine months
ended September 30, 2000 were due to new customer agreements. Barter revenues,
in which we received advertising in exchange for advertising on our Web site,
were 1.3% and 1.9% of total revenues for the three- and nine-month periods ended
September 30, 2000, respectively.
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Cost of revenue. Cost of revenue increased to $1.0 million, or 17.2% of
revenue, and $2.9 million, or 20.6% of revenue for the three and nine months
ended September 30, 2000, from $614,000, or 26.9% of revenue and $1.0 million,
or 19.4% of revenue, for the three and nine months ended September 30, 1999,
respectively. The dollar increase for the three months ended September 30, 2000
was primarily the result of increases in amortization of deferred project costs,
Web service fees in connection with our merchant services program and data
communication fees to support our Web site offset in part by a decrease in data
licensing fees. The percentage decrease in cost of revenue for the three months
ended September 30, 2000 was primarily due to increased revenues offset in part
by additional costs. The dollar and percentage increases for the nine months
ended September 30, 2000 were primarily the result of increases in Web service
fees, amortization of deferred project costs, data communication fees,
amortization of software licenses and data licensing fees.
Gross profit. Gross profit increased to $4.7 million and $11.3 million for
the three and nine months ended September 30, 2000 from $1.7 million and $4.2
million for the corresponding periods in 1999. Gross profit dollars increased
primarily due to higher revenue offset in part by an increase in cost of
revenue. As a percentage of revenue, gross profit for the three months ended
September 30, 2000 increased to 82.8% from 73.1% for the corresponding period in
1999. For the nine months ended September 2000, gross profit as a percentage of
revenue decreased to 79.4% from 80.6% for the corresponding period in 1999.
Sales and marketing. Sales and marketing expense increased to $6.9 million
and $21.3 million for the three and nine months ended September 30, 2000,
respectively, compared with $2.4 million and $4.5 million for the corresponding
periods in 1999. The increases of $4.5 million and $16.8 million for the three
and nine months ended September 30, 2000, respectively, were primarily related
to increases in the non-cash advertising expense related to our agreements with
CBS ("CBS Advertising"), other advertising expenses, merchant services program
expenses, employee salaries and benefits and additional public relations
expenses related primarily to our local merchant initiatives. As a percentage
of revenue, sales and marketing expenses were 121.0% and 149.0% for the three
and nine months ended September 30, 2000 compared with 105.0% and 85.6% for the
corresponding periods in 1999.
Product development. Product development expense increased to $936,000 and
$2.4 million for the three and nine months ended September 30, 2000,
respectively, compared with $471,000 and $1.3 million for the corresponding
periods in 1999. These increases of $466,00 and $1.1 million for the three and
nine months ended September 30, 2000, respectively, were primarily due to
increases in salaries and benefits associated with new personnel and outside
consulting expenses. As a percentage of revenue, product development expenses
were 16.4% and 17.0% for the three and nine months ended September 30, 2000
compared with 20.6% and 25.6% for the corresponding periods in 1999.
General and administrative. General and administrative expense increased to
$879,000 and $2.4 million for the three and nine months ended September 30,
2000, respectively, as compared to $509,000 and $1.2 million for the
corresponding periods in 1999. The increases of $370,000 and $1.2 million for
the three and nine months ended September 30, 2000, respectively, were
primarily due to increases in salaries and benefits associated with new
personnel, allowances for doubtful accounts related to the increase in revenue
and additional travel expenses resulting from new personnel, offset in part by
reductions in recruiting expenses resulting from executive level hiring
activities in the three months ended September 30, 1999. As a percentage of
revenue, general and administrative expenses were 15.4% and 16.9% for the three
and nine months ended September 30, 2000 compared with 22.3% and 22.9% for the
corresponding periods in 1999.
Interest income (expense) net. Interest income increased to $1.5 million and
$3.2 million for the three and nine months ended September 30, 2000 as compared
to interest income of $28,000 and interest expense of $186,000 for the
corresponding periods in 1999. These increases of $1.5 million and $3.4 million
were primarily due to the interest income earned on the net proceeds from the
Company's initial public offering
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completed on March 7, 2000. As a percentage of revenues, interest income was
26.1% and 22.2% for the three and nine months ended September 30, 2000 compared
with interest income of 1.2% and interest expense of 3.5% for the corresponding
periods in 1999.
Net loss. Our losses increased to $2.5 million and $11.6 million for the
three and nine months ended September 30, 2000, from $1.7 million and $3.0
million for the corresponding periods in 1999. As of September 30, 2000, our
accumulated deficit totaled $32.6 million.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2000, we had cash and cash equivalents totaling $37.9
million. We also had short term investments valued at $48.7 million.
Net cash used for operating activities for the nine months ended September 30,
2000 was $3.4 million, primarily due to a net loss of $11.6 million, an increase
in accounts receivable of $2.9 million and an increase in other current assets
of $687,000, offset in part by non-cash CBS Advertising of $8.8 million and
depreciation and amortization of $891,000.
Net cash used for investing activities for the nine months ended September 30,
2000 was $48.6 million. Investing activities for the period were primarily
related to net purchases of short term investments of $47.9 million and
purchases of property and equipment of $723,000.
Net cash provided by financing activities for the nine months ended September
30, 2000 was $86.3 million, primarily due to the net proceeds received as a
result of the initial public offering, offset in part by payments made on notes
payable of $628,000.
Since our inception, we have significantly increased our operating expenses.
We anticipate that we will continue to experience significant increases in our
operating expenses through at least 2001, and that our operating expenses and
capital expenditures will constitute a material use of our cash resources. We
expect to incur significant expense increases as we attempt to brand our name
and increase the traffic to our Web site. These increases are expected to
result from substantial advertising expenses and increased marketing expenses
associated with merchant services. Additionally, we expect to add personnel in
all departments, which will increase salaries and benefits and other personnel-
related expenses. In addition, we may utilize cash resources to fund
acquisitions or investments in businesses, technologies, products or services
that are complementary to our business. Due to the fact that our primary
marketing expense will be the use of our non-cash CBS-related advertising, we
believe that the funds currently available will be sufficient to meet our
anticipated cash requirements to fund operations for at least the next 24
months. If cash generated from operations is insufficient to satisfy our
liquidity requirements, we may seek to sell additional equity or debt
securities, or obtain credit facilities. However, there can be no assurance that
we would be successful in obtaining this additional funding. The issuance of
additional equity or convertible debt securities could result in additional
dilution to our stockholders.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accountings Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation, an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and among other issues clarifies
the following: the definition of an employee for purposes of applying APB
Opinion No. 25; the criteria for determining whether a plan qualifies as a
noncompensatory plan; the accounting consequence of various modifications to the
terms of previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but
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certain conclusions in FIN 44 cover specific events that occurred after either
December 15, 1998 or January 12, 2000. The application of FIN 44 did not have a
material impact on our financial position or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements",
("SAB 101") as subsequently amended by SAB 101A and SAB 101B, which is effective
no later than the fourth quarter of 2000. SAB 101 clarifies the Securities and
Exchange Commission's views related to revenue recognition and disclosure.
Switchboard adopted SAB 101 in the fourth quarter of 1999.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The new standard established accounting
and reporting standards for derivative instruments, including some derivative
instruments embedded in other contracts, and for hedging activities. SFAS No.
133, as amended by SFAS No. 137, is effective for all quarters for fiscal years
beginning after June 15, 2000. We do not expect SFAS No. 133 to have a material
effect on our financial position or results of operations.
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 publicly
update any forward-looking statements, whether as a result of new information,
future events or otherwise. You are advised, however, to consult any further
disclosures we make in our reports filed with the Securities and Exchange
Commission.
RISKS RELATED TO OUR BUSINESS
OUR LIMITED OPERATING HISTORY AND OUR LACK OF ANY OPERATING HISTORY AS A STAND-
ALONE COMPANY MAKES IT DIFFICULT TO EVALUATE OUR BUSINESS AND OUR ABILITY TO
ADDRESS THE RISKS AND UNCERTAINTIES THAT WE FACE
We have only a limited operating history on which you can evaluate our
business and prospects. In addition, since commencing operations in 1996, we
have been a subsidiary of ePresence, formerly known as Banyan Worldwide.
Consequently, we have a limited operating history as a stand-alone company and
limited experience in addressing various business challenges without the support
of a corporate parent. We may not successfully address the risks and
uncertainties which confront stand-alone companies, particularly companies in
new and rapidly evolving markets like ours.
WE HAVE A HISTORY OF INCURRING NET LOSSES, WE EXPECT OUR NET LOSSES TO CONTINUE
AS A RESULT OF PLANNED INCREASES IN OPERATING EXPENSES AND WE MAY NEVER ACHIEVE
PROFITABILITY
We have incurred significant net losses in each fiscal quarter since our
inception. From inception to September 30, 2000, we have incurred net losses
totaling $32.6 million. We expect to continue to incur net losses and negative
cash flows for the years ending December 31, 2000 and 2001 because we intend to
increase operating expenses to develop the Switchboard brand through marketing,
promotion and enhancement and to expand our services. As a result of this
expected increase in operating expenses, we will need to generate significant
additional revenue to achieve profitability. It is possible that we may never
achieve profitability and, even
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if we do achieve profitability, we may not sustain or increase profitability on
a quarterly or annual basis in the future. If we do not achieve sustained
profitability, we will be unable to continue our operations.
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 or loss of relationships with third parties that are our source
of new merchants or that license our services for use on their own Web sites;
. our ability to attract and retain consumers, local merchants and national
advertisers to our Web site;
. 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 partially based on our expectations regarding
future revenue and are largely fixed in nature, particularly in the short
term.
As a result of these 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.
OUR BUSINESS MODEL WILL FAIL IF OUR OPERATIONS ARE UNABLE TO GENERATE SUFFICIENT
REVENUE TO COVER THE COST OF THE CONTENT AND SERVICES WE PROVIDE TO CONSUMERS AT
NO CHARGE
Our model for conducting business is unproven and may not succeed. Because we
provide our services to consumers at no charge, our business model depends upon
our ability to generate revenue from:
. Internet advertising and sponsorships fees;
. Web site design, construction, hosting and enhancement services provided to
local merchants; and
. licensing of our services to third parties for use on their Web sites.
We may not be able to generate sufficient revenue to cover the cost of the
content and services that we provide to consumers at no charge.
WE NEED TO DEVELOP THE SWITCHBOARD BRAND TO ATTRACT USERS TO OUR WEB SITE, WHICH
WILL BE COSTLY AND MAY NOT GENERATE REVENUE
Building recognition of our brand is critical to attracting and expanding our
user base. We are pursuing an aggressive brand-building strategy and, if this
strategy is unsuccessful, we may never cover our costs. In
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addition to the advertising and promotion available to us from CBS, we intend to
continue to incur significant additional expenditures for future advertising and
promotional programs and activities. We may find it necessary to accelerate
expenditures on our sales and marketing efforts or otherwise increase our
financial commitment to creating and maintaining brand awareness among potential
users. In addition, even if awareness of our brand increases, the number of new
users of our Web site may not increase or result in increased revenue.
IF OUR RELATIONSHIP WITH CBS DOES NOT FOR ANY REASON RESULT IN POSITIVE
ASSOCIATION WITH THE SWITCHBOARD BRAND, OUR BRAND COULD BE DAMAGED
We use the "CBS" trademark and "eye" device under a license agreement with
CBS, which we entered into in June 1999. Therefore, we have limited experience
integrating CBS's trademarks into our effort to build our brand. While CBS's
trademarks are well-recognized, we cannot be certain that our use of these
trademarks will increase awareness of or preference for the Switchboard brand
due to our limited experience in using them and the potential for confusion
between CBS's businesses and our business. In addition, CBS licenses the use of
its name and trademarks to other companies, some of whom have unproven business
plans in competitive markets. If CBS or any of these companies experiences
business difficulties or conducts activities which damage the CBS brand, the
Switchboard brand could be damaged.
WE DEPEND ON STRATEGIC ALLIANCES WITH THIRD PARTIES TO GROW OUR BUSINESS AND OUR
BUSINESS MAY NOT GROW IF THE STRATEGIC ALLIANCES 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 strategic alliances and to establish additional strategic alliances. In
addition to our relationship with CBS and our existing relationships with
merchant aggregators, we have entered into relationships with syndication
customers and third-party content providers. These parties may not perform their
contractual obligations to us and, if they do not, we may not be able to require
them to do so. Some of our strategic relationships may be terminated by either
party on short notice.
Our strategic relationships are in early stages of development. These
relationships may not provide us benefits that outweigh the costs of the
relationships. If any strategic ally 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 ally, we may be unable to replace that relationship with other
strategic relationships with comparable revenue potential, content or user
demographics.
IF WE DO NOT ENTER INTO AND MAINTAIN RELATIONSHIPS WITH MERCHANT AGGREGATORS,
OUR ABILITY TO ATTRACT NEW LOCAL MERCHANT CUSTOMERS AND TO DELIVER SERVICES TO
CURRENT LOCAL MERCHANT CUSTOMERS WOULD BE IMPEDED
For our business to be successful, we must expand our merchant services
program and generate significant revenue from that program. The success of our
merchant services program depends in substantial part upon our ability to access
a broad base of local merchants. The local merchant base is highly fragmented.
Local merchants are difficult to contact efficiently and cost-effectively.
Consequently, we depend on merchant aggregators to provide us with local
merchant contacts and to provide billing and other administrative services
relating to our local merchant services. The termination of any strategic
relationship with a merchant aggregator would significantly impair our ability
to attract potential local merchant customers and deliver our local merchant
services to our current customers. Furthermore, we cannot be certain that we
will be able to develop or maintain relationships with new merchant aggregators
on terms acceptable to us or at all.
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IF WE CANNOT DEMONSTRATE THE VALUE OF OUR LOCAL MERCHANT SERVICES, LOCAL
MERCHANT CUSTOMERS MAY STOP USING OUR SERVICES, WHICH COULD REDUCE OUR REVENUE
We may be unable to demonstrate to our local merchant customers the value of
our local merchant services. If local merchants cancel our 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 our local merchant customers with data
demonstrating the number of leads generated by our local merchant services.
Other forms of advertising available to local merchants provide local merchants
with tangible evidence, such as a coupon, of a lead resulting from their
advertising efforts. Regardless of whether our local merchant services
effectively produce leads, our local merchant customers may not know the source
of the leads and may cancel our local merchant services.
THE ATTRACTIVENESS OF OUR SERVICES WOULD 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, e-mail 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 expenditure
of internal engineering resources. Other sources of data may not be offered on
terms acceptable to us. Moreover, the rapid consolidation being experienced 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 the
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
and diminish the attractiveness of our service offerings to our strategic
partners, advertisers and content providers.
IF WE DO NOT ATTRACT A LARGE NUMBER OF USERS TO OUR WEB SITE WHO HAVE
DEMOGRAPHIC CHARACTERISTICS THAT ARE ATTRACTIVE TO ADVERTISERS, THE ADVERTISING
REVENUE ON WHICH WE RELY WILL SUBSTANTIALLY DECLINE
We have derived a substantial portion of our revenue from the sale of
advertisements and sponsorships. If we are unable to remain an attractive medium
for advertising, our revenue will substantially decline. Our ability to remain
an attractive medium for advertising will depend upon a number of factors,
including, the acceptance of our services by a large number of users who have
demographic characteristics that are attractive to advertisers.
OUR AGREEMENTS TO SELL ADVERTISEMENTS EXPOSE US TO COMPETITIVE PRICING PRESSURES
AND MAY REQUIRE US TO PROVIDE ADVERTISING AT NO CHARGE IF WE DO NOT MEET MINIMUM
GUARANTEES
We typically sell advertisements under agreements with terms of less than six
months. These short-term agreements expose us to competitive pricing pressures
and potentially severe fluctuations in our results of operations. In addition,
these agreements often contain guarantees by us of a minimum number of
impressions or click throughs by Web users. If we fail to meet these guarantees,
we are required to provide our advertising customers with advertising at no
charge until the guarantees are met.
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WE RELY ON A SMALL NUMBER OF ADVERTISING AND SYNDICATION CUSTOMERS, THE LOSS OF
WHOM MAY SUBSTANTIALLY REDUCE OUR REVENUE
We derive a substantial portion of our revenue from a small number of
advertising and syndication customers. For the three and nine months ended
September 30, 2000, revenue derived from our top ten customers accounted for
approximately 66.4% and 50.6% of our total revenue, respectively. 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 SERVICES ON OUR WEB SITE, WE MAY BE
UNABLE TO ATTRACT AND RETAIN CONSUMERS AND LOCAL MERCHANTS, WHICH WOULD
SIGNIFICANTLY IMPEDE OUR ABILITY TO GENERATE REVENUE
We need to introduce new or enhanced services to attract and retain local
merchants to our services, attract more consumers to our Web site and respond to
competition. If we are not able to introduce new or enhanced services, we may
lose existing local merchants and consumers or fail to attract new ones, which
would significantly impede our revenue growth. Any new product or service
introduction not favorably received could damage our reputation and our brand.
We may also experience difficulties that could delay or prevent us from
introducing new services.
OUR BUSINESS WILL 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 Douglas Greenlaw, our Chief Executive Officer, and Dean
Polnerow, our founder and President. Our business will 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 SUCCESSFULLY
OUR BUSINESS MODEL
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 services. Consequently, we
believe that our success depends largely on our ability to attract and retain
highly skilled managerial and technical personnel. The industry in which we
compete has a high level of employee turnover. 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 for employees than we currently expect.
Individuals with the skills we require, particularly with Internet experience,
are in very short supply. Competition to hire from this limited pool is intense.
IF WE DO NOT IMPROVE OUR MANAGEMENT, FINANCIAL AND INFORMATION SYSTEMS AND
CONTROLS, WE MAY FAIL TO PROPERLY MANAGE OUR GROWTH, WHICH WOULD STRAIN OUR
RESOURCES AND COULD IMPEDE FURTHER GROWTH
We have significantly expanded our operations and must expand further if we
are to be successful in building our business. Our growth has placed, and will
continue to place, a significant strain on our management, operating and
financial systems, and sales, marketing and administrative resources. If we
cannot manage our expanding operations, we may not be able to continue to grow
or may grow at a slower pace. Furthermore, our operating costs may escalate
faster than we expect. To manage our growth successfully we will need to improve
our management, financial and information systems and controls.
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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 will 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 expenditures. We license much of our database
content under nonexclusive 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 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.
Some of these new competitors may be traditional media companies, who are
increasingly expanding onto the Internet.
Many of our current customers have established relationships with our current
and potential competitors. If our competitors develop content that is superior
to ours or that achieves greater market acceptance than ours, we may not be able
to develop alternative content in a timely, cost-effective manner, or at all,
and we may lose market share.
WE MAY NOT BE ABLE TO DEDICATE THE SUBSTANTIAL RESOURCES REQUIRED TO EXPAND,
MONITOR AND MAINTAIN OUR INTERNALLY DEVELOPED SYSTEMS WITHOUT CONTRACTING WITH
AN OUTSIDE SUPPLIER AT SUBSTANTIAL EXPENSE
We will have to expand and upgrade our technology, transaction-processing
systems and network infrastructure if the volume of traffic on our Web site or
our syndication 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.
OUR INTERNALLY DEVELOPED SOFTWARE MAY CONTAIN UNDETECTED ERRORS, WHICH COULD
LIMIT OUR ABILITY TO PROVIDE OUR SERVICES AND DIMINISH THE ATTRACTIVENESS OF OUR
SERVICE OFFERINGS
We use internally developed, custom software to provide our 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.
WE DO NOT HAVE A FORMAL DISASTER RECOVERY PLAN, AND A DISASTER THAT RESULTS IN
THE INABILITY OF CONSUMERS TO VISIT OUR SITE WOULD SEVERELY DAMAGE OUR
OPERATIONS.
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Our ability to generate revenue depends in large part on the number of users
that access our Web site. Our computer and communications hardware is located at
hosting facilities in Waltham, Massachusetts provided by Exodus Communications,
Inc. Our systems and operations could be damaged or interrupted by fire, flood,
power loss, telecommunications failure, Internet breakdown, break-in, earthquake
and similar events. We do not have a formal disaster recovery plan, and we do
not carry business interruption insurance that is adequate to compensate us for
losses that may occur. Any system interruptions resulting in the complete or
partial unavailability or slow or delayed delivery of our Web site could impair
the reputation of our brand and our services, diminish the attractiveness of our
service offerings to our strategic partners, advertisers and content providers
and reduce the volume of users able to access our Web site. Any volume
reductions could harm our ability to satisfy minimum advertising commitments. In
addition, a system interruption may give CBS the right to suspend or terminate
our advertising and promotion agreements and our license to use the "CBS"
trademark and "eye" device.
OUR INEXPERIENCE IN DOING BUSINESS IN INTERNATIONAL MARKETS EXPOSES US FURTHER
TO VARIOUS RISKS AND MAY LIMIT THE SUCCESS OF ANY EXPANSION OF OUR BUSINESS INTO
INTERNATIONAL MARKETS
In September 1999, we entered into a relationship to provide directory
services in Canada. As opportunities arise, we intend to pursue strategic
initiatives internationally. We will face additional risks related to doing
business in international markets, such as changes in regulatory requirements,
difficulties in protecting and enforcing our intellectual property, tariffs and
other trade barriers, fluctuations in currency exchange rates and adverse tax
consequences. Our inexperience in doing business in international markets
exposes us further to these risks and may make it more difficult for us to staff
and manage any foreign operations. In addition our services may not be perceived
to be valuable because of different consumer preferences and requirements in
specific international markets. The effects of one or more of these factors may
limit the success of any expansion of our business into international markets.
WE MAY NEED ADDITIONAL CAPITAL, WHICH MAY NOT BE AVAILABLE TO US AND WHICH, IF
AVAILABLE, MAY DILUTE YOUR OWNERSHIP INTEREST IN US
We may need to raise additional funds through public or private equity or debt
financings to:
. expand our sales and marketing operations to increase their productivity;
. develop new technology and upgrade current technology and data network
infrastructure to comply with rapidly evolving industry standards;
. develop new and expand current content and services to attract and retain
consumers and local merchants;
. pursue acquisitions or expansion opportunities in our consolidating markets;
or
. address additional general corporate needs.
If we cannot obtain any needed financing on acceptable terms, we may be forced
to curtail some or all of these activities. As a result we could grow more
slowly or stop growing. Any additional capital raised through the sale of equity
may dilute your ownership interest in us and may be on terms that are
unfavorable to holders of our common stock.
WE HAVE NO 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
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We have no experience in acquiring businesses and have very limited experience
in acquiring complementary technologies. In the future we may undertake
acquisitions. Acquisitions, in general, involve numerous risks, including:
. diversion of our management's attention;
. amortization 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, product, technologies and information
systems of the acquired business with our business; and
. inability to retain the acquired company's customers, affiliates, content
providers and advertisers.
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
judgement 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 OUR RELATIONSHIPS WITH CBS AND EPRESENCE
TERMINATION OF OUR AGREEMENTS WITH CBS WOULD NEGATIVELY AFFECT OUR FINANCIAL
RESULTS
If our agreements with CBS terminate, our business, particularly our branding
and advertising initiatives, would suffer, which would impede our revenue
growth. If our license agreement terminates, we would lose the right to use the
"CBS" trademark and "eye" device which are very important to our marketing and
brand building activities. Our license agreement with CBS will expire on June
30, 2009 and CBS is not obligated to renew it. If our advertising and promotion
agreement terminates, we may lose
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the unused portion of the $95.0 million of advertising and promotion services
which CBS has agreed to provide us through June 2006. Under specified
circumstances, CBS has the right to suspend or terminate the license agreement
and the advertising and promotion agreement prior to their scheduled
expirations.
CBS'S CONTRACTUAL RIGHT TO REQUIRE US TO REMOVE CONTENT FROM OUR WEB SITE AND TO
APPROVE ALL OF OUR USES OF ITS TRADEMARKS MAY RESTRICT OUR MARKETING ACTIVITIES
AND BUSINESS OPPORTUNITIES
Under our license agreement with CBS, CBS can require us to remove any content
on our Web site which it determines conflicts with, interferes with or is
detrimental to its reputation or business. We are also required to conform to
CBS's guidelines for the use of its trademark. CBS has the right to approve all
materials, such as marketing materials, that include CBS trademarks. Because of
these restrictions we may not be able to perform our desired marketing
activities or include some types of content on our Web site which we would
otherwise decide to include.
CBS DOES NOT GUARANTEE THE AVAILABILITY OF THE PARTICULAR ADVERTISING PLACEMENTS
THAT WE DESIRE OR ACCESS TO THE TYPE OF AUDIENCES AT WHICH WE TARGET OUR ADS,
AND THEREFORE OUR ADS MAY NOT BE EFFECTIVE
CBS does not guarantee us placement of our ads or the demographic composition
or size of the audience that views our ads. Moreover, CBS provides its
advertising and on-air promotions to us under the same terms as it provides to
its other advertising customers and does not extend us priority in the placement
of our ads. CBS has entered into agreements similar to ours with other
companies, some of whom may be targeting similar audiences for their ads as we
target for ours. We cannot be certain that we will receive the ad placements we
desire, particularly if other advertisers are seeking the same placements. Even
if we do receive our desired ad placements, we cannot be certain of the
demographic composition or size of the audience viewing our ads. Therefore, the
CBS advertising available to us may not be effective.
THE COMBINED OWNERSHIP OF EPRESENCE AND CBS WILL, IF EPRESENCE AND CBS ACT
TOGETHER, PERMIT EPRESENCE AND CBS TO CONTROL MATTERS SUBMITTED FOR APPROVAL OF
OUR STOCKHOLDERS WHICH COULD DELAY OR PREVENT A CHANGE OF CONTROL OR DEPRESS OUR
STOCK PRICE
As of September 30, 2000 ePresence beneficially owns approximately 39.7% of
our common stock and CBS beneficially owns approximately 33.1% of our common
stock. Acting together, ePresence and CBS will be able to control, and acting
alone each of ePresence and CBS will be able to substantially influence, 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. This control
could have the effect of delaying or preventing a change of control of
Switchboard that other stockholders may believe would result in a premium or
better management. In addition, this control could depress our stock price
because purchasers will not be able to acquire a controlling interest in us.
These risks would be exacerbated if a competitor of CBS acquires a 30% voting
interest in, or all or substantially all of the assets of, ePresence. In that
event, CBS has the right to purchase all of ePresence's shares of our stock.
Either or both of ePresence and CBS may elect to sell all or a substantial
portion of its capital stock to one or more third parties. In either case, a
third party with whom we have no prior relationship could exercise the same
degree of control over Switchboard as ePresence or CBS presently possess.
SO LONG AS EPRESENCE AND CBS MAINTAIN THEIR SIGNIFICANT OWNERSHIP INTEREST IN
SWITCHBOARD, YOU WILL NOT BE ABLE TO ELECT A MAJORITY OF OUR BOARD OF DIRECTORS
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We are a party to a voting agreement with ePresence and CBS. Under that voting
agreement ePresence has the right to designate a majority of our board of
directors for election. CBS has agreed to vote its shares of our capital stock
for the directors designated by ePresence. ePresence and CBS will together
continue to control enough shares of our capital stock to elect all of our
directors. As a result, directors designated for election by ePresence will
continue to control our board of directors and therefore all of our business and
affairs. You may not agree with the management decisions made by our board of
directors.
OVERLAPPING MANAGEMENT AND BOARDS OF DIRECTORS COULD HINDER OR DELAY DECISIONS
REGARDING SIGNIFICANT BUSINESS MATTERS
Three of our directors hold positions as officers or directors of ePresence,
as described in the following table:
<TABLE>
<CAPTION>
Name Switchboard Position ePresence Position
---------------------------------------------------------------------------------------
<S> <C> <C>
William P. Ferry Chairman of the Board Chairman of the Board, President
and Chief Executive Officer
Richard M. Spaulding Director Senior Vice President and Chief
Financial Officer
Robert M. Wadsworth Director Director
</TABLE>
Serving as a director of Switchboard and either a director or an officer of
ePresence could create, or appear to create, potential conflicts of interest
when those directors and officers are faced with decisions that could have
different implications for us than for ePresence. These decisions may relate,
for example, to:
. potential acquisitions of businesses;
. intercompany agreements, such as our services agreement;
. the issuance or disposition of securities;
. the election of new or additional directors; and
. the payment of dividends by us.
These conflicts, or potential conflicts, of interest could hinder or delay our
management's ability to make timely decisions regarding significant matters
relating to our business.
IF EPRESENCE CEASES TO PROVIDE US WITH THE SERVICES AND FACILITIES THAT IT
CURRENTLY PROVIDES, WE MAY EXPERIENCE INCREASED COSTS AND DISRUPTION OF OUR
OPERATIONS TO REPLACE THOSE SERVICES AND FACILITIES
ePresence provides us with some of our administrative and operational services
and related support functions. In addition, we occupy our headquarters in
Westboro, Massachusetts under an agreement with ePresence. If ePresence ceases
or fails to provide these services satisfactorily or terminates our occupancy,
we would be required to perform these services ourselves or obtain these
services from another provider or locate new facilities. Replacing these
services may cause us to incur additional costs and experience disruption
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of our operations. We may not be able to replace these services on commercially
reasonable terms or, if we choose to perform these services ourselves, we may
not be able to perform them adequately.
RISKS RELATED TO THE INTERNET
IF THE ACCEPTANCE AND EFFECTIVENESS OF INTERNET ADVERTISING DOES NOT BECOME
FULLY ESTABLISHED, THE GROWTH OF OUR ADVERTISING REVENUE WILL SUFFER
Our future success depends, in part, on an increase in the use of the Internet
as an advertising medium. We generated 57% of our revenue from the sale of
advertisements and sponsorships during the nine months ended September 30, 2000,
45% during the year ended December 31, 1999 and 62% in the year ended December
31, 1998. The Internet advertising market is new and rapidly evolving, and
cannot yet be compared with traditional advertising media to gauge its
effectiveness. As a result, demand for and market acceptance of Internet
advertising is uncertain. Many of our 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 software programs that limit or prevent advertising from
being delivered to a user's computer. Widespread adoption of this software would
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 advertising 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 advertising customers may challenge or refuse to accept
our, or third-party, measurements of advertisement delivery.
IF WE ARE UNABLE TO ADAPT AS INTERNET TECHNOLOGIES AND CUSTOMER DEMANDS EVOLVE,
OUR SERVICES MAY NOT BE ATTRACTIVE TO CONSUMERS, LOCAL MERCHANTS AND ADVERTISERS
To remain competitive, we must continue to enhance and improve the
responsiveness, functionality and features of our Web site. Our industry has
been characterized by rapid technological change, changes in user and customer
requirements and preferences, frequent new product and service introductions
embodying new technologies. These changes could render our Web site, technology
and systems obsolete. If we do not periodically enhance our existing services,
develop new services and 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 services may not be attractive to consumers,
local merchants and advertisers.
IF WE ARE SUED FOR CONTENT DISTRIBUTED THROUGH, OR LINKED TO BY, OUR WEB SITE,
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. 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, such as
information deemed to constitute legal, medical, financial or investment advice.
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,
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implementing measures to reduce our exposure to this liability may require us to
spend substantial resources and limit the attractiveness of our content to
users.
WE MAY NEED TO EXPEND SIGNIFICANT RESOURCES TO PROTECT AGAINST ONLINE SECURITY
RISKS THAT COULD RESULT IN MISAPPROPRIATION OF OUR PROPRIETARY INFORMATION OR
CAUSE INTERRUPTION IN OUR OPERATIONS
Our networks may be vulnerable to unauthorized access, computer viruses and
other disruptive problems. Someone who is able to circumvent security measures
could misappropriate our proprietary information or cause interruptions in our
operations. Internet and online service providers have experienced, and may in
the future experience, interruptions in service as a result of the accidental or
intentional actions of Internet users, current and former employees or others.
We may need to expend significant resources protecting against the threat of
security breaches or alleviating problems caused by breaches. Eliminating
computer viruses and alleviating other security problems may require
interruptions, delays or cessation of service.
WE MAY BE SUED FOR DISCLOSING TO THIRD PARTIES PERSONAL IDENTIFYING INFORMATION
WITHOUT CONSENT
Individuals whose names, addresses and telephone numbers appear in our yellow
pages and white pages directories have occasionally contacted us because their
phone numbers and addresses were unlisted with the telephone company. While we
have not received any formal legal claims from these individuals, we may receive
claims in the future for which we may be liable. In addition, if we begin
disclosing to third parties personal identifying information about our 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 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
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the value of our trademarks and other proprietary rights. We may not be able to
successfully carry out our business strategy of establishing a strong brand for
Switchboard if we cannot prevent others from using similar domain names or
trademarks.
ITEM 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 are short-term. We
do not have any derivative instruments.
The fair value of our investment portfolio or related income would not be
significantly impacted by either a 100 basis point increase or decrease in
interest rates due mainly to the short-term nature of the major portion of our
investment portfolio.
All the potential changes noted above are based on sensitivity analysis
performed on our balances as of September 30, 2000.
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 and $11.5 million was received in
April. 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. From March 7, 2000 through September 30, 2000, we
used approximately $471,000 of the proceeds for the purchase of computer
equipment and the funding of operations. As of September 30, 2000, we have
invested the remaining net proceeds in short-term, interest-bearing, investment-
grade securities.
ITEM 6. -- EXHIBITS AND REPORTS ON FORM 8-K:
a. Exhibits
The Exhibits filed as part of this Quarterly Report on Form 10-Q 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
September 30, 2000.
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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
By:/s/ John P. Jewett
-----------------------
John P. Jewett
Principal Financial Officer and
Chief Accounting Officer
Date: November 14, 2000
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EXHIBIT INDEX
Exhibit No. Description
----------------------- --------------------------------------------------
10.1 Amendment to 1999 Stock Incentive Plan, as amended
27.1 Financial data schedule.
1
