April 2, 2004
Dear YP.Net Stockholders:
I would like to thank you for your attendance at this Annual Meeting of
Stockholders. We are extremely excited about the progress that the Company has
made over the past year, as well as the direction in which we are going.
Accordingly, I would like to comment upon the events of the past year and our
strategy moving forward.
I will briefly touch upon four major issues:
- Our financial performance through fiscal 2003 and how it has continued
in the first quarter of 2004.
- The business strategy that we have followed throughout the past year
and our focus going forward.
- The major recent events that have impacted the company.
- The challenges that we have faced over the past year and what we
anticipate in the future.
FINANCIAL PERFORMANCE
First, with regard to financial performance, you have received an
investor's kit that provides detailed financial statements for both the fiscal
year 2003 and the first quarter of 2004. However, I would like to summarize
broadly the Company's recent financial performance.
- Revenues increased remarkably to $30.8 million in 2003, an increase of
144% over the prior year. This outstanding increase continued into the
first quarter of fiscal 2004, during which revenues reached $13.9
million, a 152% increase over the comparable quarter of the prior
year.
- Net income during fiscal 2003 reached $7.9 million, which was a 114%
increase over the prior year. This triple digit increase continued in
the first quarter of fiscal 2004 when net income reached $3.3 million,
or over 200% from the comparable quarter of the prior year.
- Our remarkable growth was accomplished while maintaining or improving
already high margins at both the operating income and net income
levels. For example, our operating income margins reached 30% in
fiscal 2003 and improved further to 34% in the first quarter of fiscal
2004. Net income margins reached 26% in
fiscal 2003 and in the first quarter of fiscal 2004 improved over the
previous comparable quarter, rising to 24% from 20%.
- Our return on average shareholder's equity reached 60% in fiscal 2003
and continued to improve above 60% during the first quarter of fiscal
2004.
BUSINESS STRATEGY
The business strategy that we have followed over the past year has been
simple in concept and straight forward in execution. We have continued our
basic solicitation of businesses for our Internet Advertising Package(TM)
(IAP(TM)) with approximately 1 million mailings per month to a randomly selected
base of 18 million U.S. businesses. This is the fundamental driver of our
growth. Through December 31, 2003, this program has brought our activated
customer count up to 283,000, an increase of 68% in one year. We added over
9,000 paying customers per month throughout fiscal 2003 and have continued
growing our customer base in fiscal 2004.
In addition, we were able to increase prices throughout calendar 2003.
During the fourth calendar quarter of 2003, we experienced average monthly
revenue per paying customer of over $19.00. This compares with less than $15.00
in the last calendar quarter of 2002. In short, our strategy of monthly
mailings and strong customer service following customer activation is a highly
successful strategy and will be the cornerstone of our marketing efforts going
forward.
The major components of our business strategy going forward are:
- We will continue to grow our customer base at a healthy rate as the
fundamental driver of our financial performance.
- We will maintain the strength of our primary marketing strategy
represented by our unequalled mailing solicitation and customer
service program while implementing new marketing strategies such as
branding, pricing and others as outlined in our recent SEC filings.
- We recognize that we have a unique marketing advantage in that to our
knowledge we are the only web marketing company, not affiliated with a
local exchange carrier (LEC) that has the ability to invoice our
customers on their telephone bill in almost every U.S. region. This
capability provides us with the benefits of reduced billing cost and
high customer retention. We will continue to work closely with the
LEC's to strengthen this mutually beneficial relationship.
- The combination of our unique marketing strategy to a highly
fragmented marketplace and our billing capabilities makes us the only
consistently profitable independent company in the Internet yellow
page arena.
- We will continue to strengthen our technology base to provide users
rapid, accurate and flexible access to our advertising customers
business information.
RECENT EVENTS
In addition to achieving outstanding financial performance there have been
a number of other significant developments over the past year:
- We have reached additional agreements with companies in our marketing
arena, which, on a combined basis, expanded our number of page views
benefiting our customers to over 170 million per month as compared
with approximately 50 million per month at the end of 2002. These
agreements were with companies such as Switchboard, My Area Guide,
Overture, Palm and, most recently, Go2. The Palm and Go2 agreements
are particularly notable as they provide exposure for our customer
base to the mobile PDA user, which is the fastest growing segment of
the Internet Yellow Pages market.
- We also made substantial progress in bringing our technology to a
leading position in the industry. Searchers on our website now obtain
more robust information faster than ever before and in a clear and
easy to use format.
- We also have improved our website with significant new additions
regarding the Company's operations and financial results, which have
enhanced our communications with users, customers and the investment
community. Specifically, both our fact sheet and our recently
developed investor presentations may be accessed on our website.
- We took significant steps to structure certain major agreements to be
more congruent with our status as a publicly held company. We
terminated our Internet service provider agreement with Simple.Net, an
entity that is owned by DeVal Johnson, one of our directors. We now
have an agreement with an independent Internet service provider to
provide similar services at a competitive price. While we feel our
agreement with Simple.Net was appropriate during an earlier stage of
the Company's development, we have now reached a scale of operations
where the Company can obtain expanded services from an outside party
under attractive market terms. At the same time, this change allowed
us to offer new packages and services to our customers as their needs
change and develop.
- In February 2004, we announced that we were terminating, as of April
9, 2004, our loan agreements with two major stockholders, Mathew and
Markson and Morris & Miller, collectively known as the M&Ms, in favor
of paying dividends to all stockholders. The M&Ms will no longer have
the ability or the right to draw cash from the Company. All existing
loans to the M&Ms will take the form of a 3-year note fully
collateralized by the Company stock that they own.
CHALLENGES AND OPPORTUNITIES
We faced significant challenges over the past year, the most publicized of
which were attacks on the character and integrity of our management, our auditor
and our business practices. These attacks took the form of a series of
published reports on a website called Stocklemon.com. We have answered these
charges with a point-by-point rebuttal and have initiated legal actions against
those who we believe to be short-sellers
whose approach to making money is through spreading false and misleading
statements. Our responses to these attacks are contained in press releases,
which are in your investor kit.
Looking forward we will continue to face business challenges and
opportunities. We know that the competitive landscape is changing dramatically.
Recently there has been much publicity about the potential entry of many large
companies in the "local search" space. This has led to the anticipation of a
significant amount of industry consolidation as exemplified by the recent offer
by Infospace to buy Switchboard one of our major competitors. We believe this
will be a continuing trend in our industry and we welcome it. Your management
will continue to be vigilant, as these trends develop to make certain that we
maintain our competitive advantages and continue to provide outstanding
financial performance and returns to our shareholders.
In closing, I want to thank you for your support as stockholders throughout
the year. In spite of the challenges we faced, the rewards to our stockholders
have been remarkable. Our closing price on Tuesday of this week was $4.53 per
share compared with $0.19 exactly one year ago and $1.75 as recently as six
months ago. We intend to manage this Company in the future with the same
energy, imagination and skill that has provided the Company with the level of
success that we enjoy today and with a view toward continuing on a course of
outstanding financial performance.
Sincerely,
Angelo Tullo
Chairman and Chief Executive Officer
Forward Looking Statement Disclaimer
This letter includes statements that constitute "forward-looking statements,"
which are often characterized by the terms "may," "believes," "projects,"
"expects," or "anticipates," and do not reflect historical facts. Specific
forward-looking statements contained in this letter include, but are not limited
to the Company's (i) expectation that its strategy of monthly mailings and
customer service will continue to be the cornerstone of its marketing efforts;
(ii) continued dedication to growing its customer base at a rapid rate; (iii)
belief that it will be successful in continuing to grow its customer base at a
rapid rate; (iv) belief that growing its customer base at a rapid rate is the
fundamental driver of its financial performance; (v) belief that it can maintain
the strength of its primary marketing strategy while implementing new marketing
and branding campaigns; (vi) belief that it can continue to work closely with
LECs to solidy and continue its relationship with them and maintain the ability
to invoice customers on their telephone bills; (vii) expectation of continued
profitability; (viii) ability to strengthen its technology; and (ix) expectation
of industry consolidation.
Forward-looking statements involve risks, uncertainties and other factors that
may cause actual results, performance or achievements of YP.Net and its
subsidiary to be materially different from those expressed or implied by such
forward-looking statements. Factors that could affect the Company's results and
cause them to materially differ from those contained in the forward-looking
statements contained herein include, but are not limited to those set forth as
risk factors and cautionary statements made in the Company's periodic reports
filed with the SEC and other factors that YP.Net is currently unable to identify
or quantify, but may exist in the future. Forward-looking statements speak only
as of the date the statement was made. YP.Net does not undertake and
specifically declines any obligation to update any forward-looking statements.