Yp Corp (YPNT) - Description of business

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Company Description
Corporate History YP Corp., a Nevada corporation (the "Company," "we," "us," or "our") is a national Internet Yellow Pages publisher, headquartered in Mesa, Arizona. Through our wholly-owned subsidiary, Telco Billing, Inc., or Telco,  located in Las Vegas, Nevada, we publish our Yellow Pages online at or through the following URL's: www.Yellow-Page.Net, www.YP.Net and www.YP.Com. Any information contained on the foregoing websites or any other websites referenced in this Annual Report are not a part of this Annual Report.     1   Table of Contents We were originally incorporated as a New Mexico company in 1969 and we re-incorporated in Nevada in 1996 as Renaissance Center, Inc. Our Articles of Incorporation were restated in July 1997 and our name was changed to Renaissance International Group, Ltd. Effective July 1998, we changed our name to RIGL Corporation. In June 1999, we acquired Telco Billing, Inc., or Telco, and commenced our current operations through this wholly-owned subsidiary. In October 1999, we amended our Articles of Incorporation to change our corporate name to YP.Net, Inc. to better identify our company with our current business focus. In April 2004, we again changed our name from YP.Net, Inc. to YP Corp. to strengthen the YP.com brand. Summary Business Description We use a business model similar to print Yellow Pages publishers. We publish basic directory listings on the Internet free of charge. Our basic listings contain the business name, address and telephone number for over 17 million U.S. businesses. We strive to maintain a listing for almost every business in America in this format. We generate revenues from advertisers that desire increased exposure for their businesses. As described below, advertisers pay us monthly fees in the same manner that advertisers pay additional fees to traditional print Yellow Pages providers for enhanced advertisement font, location or display. The users of our website are prospective customers for our advertisers, as well as the other businesses for which we publish basic listings. Products. Our primary product is our Internet Advertising Package(TM), or IAP. Under this package, the advertiser pays for additional exposure by purchasing a Mini-WebPage(TM). In order to provide search traffic to our advertiser's Mini-WebPage, we elevate the advertiser to a preferred listing status, at no additional charge. We also provide our IAP advertisers with enhanced presentation and additional unique products, such as larger font, bolded business name, map directions, ease of communication between our advertisers and users of our website, a link to the advertiser's webpage, as well as other benefits. We also offer our customers other products and services to enhance their use of the Internet, including a simple, effective, website development tool and a cost effective Internet dial-up package. These products are described in greater detail below under Products and Services . Marketing . Unlike most print Yellow Pages companies that sell advertising space by visiting or calling potential advertisers in their area, we solicit advertisers for our IAP product almost exclusively by direct mail. We believe direct mail is a less expensive form of marketing than visiting or calling potential customers. As a result, we believe this enables us to offer our products and services at more affordable rates than our competitors. Our direct mail marketing program historically has included a promotional incentive, generally in the form of a $3.25 activation check that a solicited business simply deposits to activate the service and become an IAP advertiser on a month-by-month basis. We have rigorous third-party verification and confirmation procedures to confirm the order and obtain the information necessary to build the IAP advertiser's Mini-WebPage. Within 30 days of activation, we also send a confirmation letter to the business. Additionally, we offer a full refund within the first 120 days of service. Our direct mail marketing program complies with and, in many instances, exceeds United States Federal Trade Commission, or FTC, requirements as established by an agreement signed between our company and the FTC in September 2001.     2   Table of Contents During the fourth quarter of 2004, certain changes in practices by our third-party billing providers limited the effectiveness of our activation checks as a direct means of activating accounts. As a result of these changes and other business reasons, we have discontinued the use of the check mailer as our primary letter of authorization or LOA in some LEC billing areas. See Item 6: Management's Discussion and Analysis - Executive Overview for a more detailed description of these changes and the impact they have had on our business and operations .   Billing . Similar to the local Regional Bell Operating Companies, we are approved to bill our products and services directly on most of our advertisers' local telephone bill through their local exchange carrier, or LEC, commonly referred to as their local telephone company. We believe that this is an efficient and cost-effective billing method as compared to direct billing methods. However, during the fourth quarter of fiscal 2004, several of these LECs changed their internal policies regarding the use of activation checks as the letter of authorization that allows us to bill our products and services directly on our advertisers' local telephone bill. During fiscal 2004, we had been in the process of converting many of our advertisers to billing via recurring direct bank account withdrawal options through an Automated Clearing House, or ACH billing, which is an efficient and cost-effective billing alternative to LEC billing. We have accelerated this process of converting advertisers to ACH billing in light of the change in the LEC internal policies described above. See Item 6: Management's Discussion and Analysis - Executive Overview for a more detailed description of these changes and the impact they have had on our business and operations. . Benefits to Advertisers . RH Donnelley indicated in its 2004 report that the Internet is the future of the Yellow Pages. YP.Com is a significant player in this arena. For advertisers, we believe that online Yellow Pages provide significant competitive advantages over existing print directories. For example, the ability of online advertisers to access and modify their displays and advertisements often results in more current information. Additionally, online advertisers can more readily advertise temporary or targeted specials or discounts. We provide added value to advertisers that have purchased our IAP through promotion and branding of our website to bring customers to our advertisers. We believe that the large number of IAPs, which include the Mini-WebPages, provide users of our website with more information about our advertisers and that this feature is more readily available on our website than that of our competitors. We believe that we provide users of our website with the information they are looking for, more quickly and more efficiently. We believe our call center provides the highest level of customer service providing IAP advertisers with the necessary resources to fully utilize the benefits of the IAP. We also believe the attraction of these users will, over the long-term, result in more sales for our IAP advertisers.     3   Table of Contents Moreover, we provide additional value through our relationships. We provide the majority of our preferred listings on a number of competitors' websites, including www.switchboard.com, www.myareaguide.com,, and www.go2.com. go2 has exclusive contracts with Verizon Wireless(R), AT&T Wireless(R), ALLTEL(R), Nextel(R) and Sprint(R) to provide listings to their cellular telephone and hand-held device subscribers. Benefits to Users of our Website . A national, online Yellow Pages allows users of our website to access information nationally rather than relying exclusively on local listings such as those provided in print Yellow Pages directories. In addition, our product offerings allow users to find and take advantage of our advertisers' current special offerings and discounts. We also provide easy access to such information through desktop or laptop computers, cellular telephones or hand-held devices, such as personal digital assistants. We believe our offering of a national online Yellow Pages service meets the growing demand for immediate access and the increasing need and trend of Internet users who are more frequently traveling to areas outside the areas serviced by their local print directories. Directory Service and Search Engine . We believe that our products offer many competitive advantages over standard search engines. Our directory service and search engine format allows a user of our website to search by location using either a business name or business category. Unlike popular commercial search engines, our search engine does not search the Internet to provide results. Instead, it searches our defined database, resulting in a more focused, refined and, typically, quicker and more accurate search. Products and Services For those advertisers that want to get additional exposure for their businesses or to take full advantage of connectivity to the World Wide Web, we offer several products and services for a fee. Internet Advertising Package. Our primary product is our Internet Advertising Package, or IAP. Under this package, the advertiser pays for additional exposure by purchasing a Mini-WebPage. This Mini-WebPage contains, among other useful information, a 40-word description of the business, hours of operation and detailed contact information. The advertiser can easily access and modify its Mini-WebPage. This product is easily searched by users of our website on their personal computers, as well as cellular telephones and other hand-held devices. In order to provide search traffic to our advertiser's Mini-WebPage, we elevate the advertiser to a preferred listing status at no additional charge. As such, the preferred advertiser enjoys the benefit of having its advertisement displayed in a primary position before all of the basic listings in that particular category when users of our website perform searches on our website. We also provide our IAP advertisers with enhanced presentation and additional unique products:     · Larger font.   · Bolded business name.   · A "tagline" whereby the advertiser can differentiate itself from its competitors.   · An audio advertisement.   · Map directions.     4   Table of Contents   · A Click2Call(TM) feature, whereby a user of our website can place a telephone call to one of our advertising customers by clicking the icon that is displayed on the Mini-WebPage. This initiates a telephone call by the advertiser to the user, in a conference call type format. Once both are connected, it functions as a regular telephone call. Because we cover all charges for this telephone call, it is free of charge to both the user and the IAP advertiser. We have an agreement with WebDialogs, Inc. to provide this service.   · A link to the advertiser's own webpage and email address.   · Additional distribution network for preferred listings. This feature gives additional exposure to our IAP advertisers by placing their preferred listing on several online directory systems. There is currently no charge to the IAP advertiser for these additional channels of distribution. The majority of our IAP advertisers pay $29.95 per month; however, we have recently lowered our price to $27.50 per month for new advertisers. When combined with our Internet Dial-Up Package described below, these products account for over 99% of our revenue. Internet Dial-Up Package(TM) . We also offer all of our IAP advertisers a cost-effective and efficient Internet dial-up package to take advantage of the benefits offered by on-line access. This allows our advertisers that do not have Internet access to take full advantage of the IAP and QuickSite packages that we offer. In most instances, we offer this service bundled with our IAP service for between $29.95 and $34.95 per month. In some regions, we only offer the bundled product and not an IAP standalone product. Online QuickSite Package(TM). For those IAP advertisers that do not have their own website and that desire to provide more information than is offered through the IAP Mini-WebPage, we will design and create an eight page, template-driven website for the advertiser. This is known as a QuickSite(TM). Once set up, the advertiser can access its new QuickSite online and make modifications at its discretion. This essentially serves the same function as display advertisements in print Yellow Pages books, except that it can be changed more often to meet our advertisers' needs. Users of our website can access these QuickSites on the World Wide Web or from the advertiser's preferred listing or Mini-WebPage. Currently, this product accounts for less than 1% of our revenues. Expansion of Service Offerings to Other Countries . We currently are exploring our ability to offer our services in other English-speaking countries, which we believe we could accomplish without hiring a significant number of additional people or incurring additional training costs. We have an initiative pending with the Competition Bureau of Canada for approval to direct market in the Canadian Provinces. The YP trademark of Canada has been registered and we are merely awaiting government sanction. Additionally, we are exploring the possibility of translating our listings for the French speaking population in Canada. Billing Our billing process allows us to deliver high levels of service to our customers through convenient and timely billing and payment options. We currently bill our advertisers through (i) their LEC, (ii) ACH billing, (iii) their credit card or (iv) direct bill invoices.     5   Table of Contents   We historically have billed the majority of our advertisers via their LEC. As compared to the direct invoice billing method, we have benefited from increased collection percentages, reduced chances of internal theft due to direct fund transfers, and higher trust with our advertisers because our fees appear on a pre-existing bill they already are accustomed to receiving. During the fourth quarter of fiscal 2004, several of the LECs changed their internal policies regarding the use of activation checks as the letter of authorization that would allow us to bill our products and services directly on our advertisers' local telephone bill. See Item 6: Management's Discussion and Analysis - Executive Overview for a detailed description of these changes and the effects they have had and will continue to have on our financial condition and results of operations. During fiscal 2004, due to advertisers changing from LECs to their Competitive Local Exchange Carriers, or CLECs, for their local telephone service, we began converting many of our advertisers to ACH billing. We accelerated this process of converting advertisers to ACH billing in light of the change in the LEC internal policies described above. We believe that ACH billing is an efficient and cost-effective billing method and has a faster collection time than LEC billing. However, it is time-consuming and labor-intensive to convert customers from one billing channel to another and can result in missed billings or customer cancellations. In cases where other billing methods are unavailable or instances where the customer requests that we bill them directly, we utilize direct bill invoices. Direct billing has a higher percentage of uncollectible accounts than other billing methods and, therefore, is our least attractive billing option. By enhancing our filtering methods both at the point of marketing and on the billing process, we have been able to reduce the number of duplicate records to which we mail and bill. Additionally by being able to compare records from multiple list vendors, we have been able to have more up-to-date information so that we can remove those businesses that recently closed and add information about new and additional businesses faster. With our changes to our internal controls, we are able to verify more quickly and accurately which customers' area codes have changed or which businesses have changed their telephone number or closed. All of these improvements have added to the number of paying customers and, we believe, to the actual number of activated customers. Billing Service Agreements . In order to bill our advertisers through their LECs, we are required to use one or more billing service aggregators. These aggregators have been approved by various LECs to provide billing, collection, and related services through the LECs. We have entered into customer billing service agreements with PaymentOne, Inc (formerly eBillit, Inc.) a wholly owned subsidiary of Integretel, Inc..and, more recently, with Billing Concepts, Inc. (which acquired ACI Communications, Inc., a former vendor, in April 2004). Under these agreements, our service aggregators bill (net of upfront rejects) and collect our charges to our advertisers through LEC billing and remit to us the proceeds, net of fees, bad debt expense, customer returns, and unbillable accounts, typically within 90 days of submission.     6   Table of Contents We also use billing service providers to process our ACH billings. These service providers process direct bank withdrawals through an Automated Clearing House (net of upfront rejects) and remit the proceeds, net of fees and customer refunds, typically within 15 days of settlement. Under our contractual agreements with our LEC billing service aggregators and our ACH service providers, these third-parties are entitled to withhold certain amounts from our net proceeds to serve as a security deposit or "holdbacks" or "reserves." In the case of LEC billing aggregators, such amounts are generally remitted to us over a 12-18 month period, depending on the terms of the respective agreements. ACH processors maintain a rolling reserve based on average monthly volume. On August 1, 2002, we signed a three-year agreement with PaymentOne. This agreement automatically renews for successive terms of one year each unless either party provides 90 days' written notice of its desire not to renew. Our agreement with Billing Concepts, Inc. is effective until February 2005 and automatically renews for successive one-year periods unless either party notifies the other party in writing at least 90 days prior to the expiration date. Check Processing Agreements . Our primary marketing efforts are through direct mail solicitations. Our direct mail marketing program historically has utilized a promotional incentive generally in the form of a $3.25 activation check that a solicited business simply deposits to activate the service and become an IAP advertiser on a month-to-month basis. While we utilized the activation check as our primary promotional incentive during fiscal 2004, we have modified this marketing strategy in certain LEC regions due to the fact that the activation check can no longer serve as the letter of authorization with certain LECs.   For a more detailed discussion, see Item 6: Management's Discussion and Analysis - Executive Overview.   Pricing We currently price our IAP product for new advertisers at $27.50 per month, which includes all of the service benefits previously described. By comparison, our major Internet competitors provide their products and services at monthly prices ranging from $25.00 to $35.00. While prices are comparable, we believe that we provide superior product offerings and services in many cases. For example, YP.com is the only site to provide the Click2Call feature. Superpages charges its customers $35.00 per month for a bolded-listing only. Our lower price includes the Mini-WebPage, which includes much more information, as well as the other features of the IAP product. Currently, only Yahoo Yellow Pages provides the website development services that we do. We believe that none of our major competitors in the Internet Yellow Pages space provide the full breadth of tools and customer service we do. The competing companies include independent Internet Yellow Pages providers and the online versions made available by telephone companies. Our pricing advantage is significant when compared with printed Yellow Pages. For a Yellow Pages listing with comparable information content, an advertiser would typically pay over $200 per month. This listing in the printed Yellow Pages would include a business description of comparable size to our IAP offering but would lack our Click2Call feature, mapping directions, and link to the advertiser's website. Our online Yellow Pages provide significant flexibility in terms of changing content and adding special informational items at any time throughout the year. Printed Yellow Pages advertisers are subject to an infrequent re-publication schedule if they desire to change their advertisement.     7   Table of Contents Marketing Unlike most print Yellow Pages companies that sell their advertising by having sales representatives personally visit or call each potential advertiser in their area, we solicit advertisers for our IAP product primarily through direct mail. This direct mail component enables us to offer our products and services on a nationwide basis. This would not be economically possible or manageable through the use of sales representatives making personal visits or calls to potential advertisers. In addition, we believe direct mail is a less expensive and more predictable form of marketing than physically visiting or calling potential advertisers and, therefore, allows us to offer potential advertisers quality products and services at much more affordable rates than our competitors. Direct Mail Solicitation . Our direct mail marketing solicitation is made up of several pages that describe in detail our products, services, pricing, sign-up instructions and billing alternatives. We include in this solicitation a promotional sign-up incentive; generally in the form of a $3.25 activation check made payable to the name of the solicited business. If a potential advertiser wishes to order our service, the advertiser deposits the incentive check in its bank account. Because a check made out to the name of a business can only be deposited into an account of that business, the advertiser's bank acts as a third-party verifier, confirming that the solicited advertiser is in fact the advertiser ordering the service. This deposited check then acts as a written letter of authorization, which is authenticated by the advertiser's bank. We obtain this letter of authorization from each and every advertiser prior to activating any service or billing. We have rigorous third-party verification and confirmation procedures to confirm the order and obtain the information necessary to build the advertiser's Mini-WebPage. Within 30 days of activation, we send a confirmation letter to the business. We also offer a 120 day cancellation period during which an advertiser may receive a full refund. Our direct mail marketing program complies with and, in many instances, exceeds United States Federal Trade Commission, or FTC, requirements as established by an agreement signed between our company and the FTC in September 2001. As discussed in greater detail in Item 6: Management's Discussion and Analysis - Executive Overview ,   the LECs have modified their internal policies regarding the use of activation checks as accepted letters of authorization. In some regions we are no longer able to use this check as the letter of authorization for LEC billing. Instead, we must obtain written or verbal authorization. This has diminished the effectiveness of the activation check as a simple and inexpensive means of attracting new business. Additionally, certain of our competitors have copied our strategy of utilizing activation checks as a sign-up incentive, which we believe has also decreased the effectiveness of our activation checks. Accordingly, by the end of fiscal 2004, we had transitioned the majority of our customers to direct debit and continue to bill some of our customers through the LECs.     8   Table of Contents We plan to continue to solicit new business through direct mail campaigns. Our current marketing strategy includes a tri-fold mailer in addition to the continued use of the check mailer in some regions. However, we are moving away from the use of activation checks as the primary letter of authorization. We will continue to use activation checks to identify potential new customers and as an LOA in certain areas. The target audience for our direct mail marketing program is every business in America. According to the U.S. Census Bureau, there are approximately 21 million businesses in the United States. We generally solicit approximately 1.3 million businesses per month. In areas where we no longer utilize LEC billing this allows use to expand the number of businesses to whom we may solicit. We also have entered into various marketing arrangements with other businesses whereby we pay commissions based on sales leads and revenue generated from these businesses. To date, such commissions have not been material. Mailing List Generation . To generate the leads for our mailing list operation, we purchase business directory listings on a monthly basis from three of the largest information providers in the North American market - Acxiom, InfoUSA and Experian. We refer to each information provider's list of business listings as a data set. Each data set consists of 10-19 million records with each record composed of several attributes, such as company name, address, employment range, telephone number, United States Standard Industrial Classification, or SIC code, and Standard Yellow Pages Heading, or SYPH code. While SYPH codes are proprietary to our information provider Acxiom, we believe our fluency in multiple industrial classifications and the additional cost and effort of acquiring data from several sources gives us a competitive edge over companies that purchase data from only a single provider of information or a provider that does not verify the accuracy of the information for each business listing. We continue to evaluate the accuracy of data provided to us by our information providers and continuously expand our list of information providers as necessary in order to maintain a competitive advantage. We believe the quality of a lead from each information provider's data set cannot be evaluated by business count alone. We consider other factors including overall quality, duplicates, out of business records, and records without telephone numbers. Each information provider verifies the information for each business listing differently. For example, some will attempt to verify information for each business by telephone while others will attempt to verify by using a United States Postal Service Certified Address Standardization process for converting addresses to a standard zipcode-4 format required to qualify for lower bulk mailing rates. Our agreement with InfoUSA became effective as of July 2002. The agreement had an initial term of one year and renews automatically for one-year terms unless either party provides written notice of its intention to terminate at least 90 days prior to the end of a term. Our agreement with Experian became effective as of February 2003. The agreement has an indefinite term until either party notifies the other of its intention to terminate. The only consideration exchanged for the data set was our agreement to perform televerification and data set analysis.     9   Table of Contents Our agreement with Acxiom became effective as of March 2001. The agreement had an initial term of two years and renews automatically for one-year terms unless either party provides notice prior to the end of a term of its intention to terminate. National Accounts Marketing . In June 2004, we initiated our National Accounts Program. Unlike other IAP advertisers, we do not obtain these accounts through our direct mail program. These accounts represent large national organizations that purchase their advertising in bulk for their many locations. These are sophisticated advertisers for whom a "per click" revenue model is effective, desired and expected. We have built a software model that allows us to implement and bill these customers on a per click basis. We host their information on a separate spot on our search results page (beside the standard IAP listings) to give them high priority while allowing our smaller advertisers to compete directly when consumers are searching for products . We are actively pursuing national accounts that will appear on a "skyscraper" ad on the right side of the screen, with a hypertext link, when the related category is opened. This capability is currently undergoing needed enhancements, particularly to improve accuracy in counting click-throughs and other reports. We currently anticipate that these enhancements will be completed and the capability operational during the first half of fiscal 2005. At present, we are cultivating relationships with Certified Marketing Representatives, or CMRs, who are experienced in selling advertising to national accounts. We also are pursuing individual nationwide businesses and advertising agencies that in-call. Some existing national accounts include Red Lobster(R), CitiFinancial(R), Holiday Inn(R), Holiday Inn Express(R), and LifeWay Christian Stores. Thirteen other national advertising contracts are being finalized. Because the national accounts are "cost-per-click," we are developing an additional revenue stream by distributing these ads through our affiliate network to other local search sites and will be charging the advertisers accordingly. As this program was under development in 2004, no revenues have been generated from this program in fiscal 2004. We currently anticipate this program will begin generating revenue in the second quarter of fiscal 2005. Branding We have embarked on a substantial campaign to brand our YP.Com name and our products. We seek to become the "Internet Yellow Pages of choice" to advertisers and Internet users. We plan to use various forms of media, which may include Internet, print, television, radio, billboard and movie-theater advertising in selected markets as well as nationally. We believe such branding will help to attract users to our websites, as well as advertisers to sign-up for our IAP and other service offerings. The goal of our branding is to obtain instant customer recognition of our offerings that, over time, may enhance the response rate of our direct mail marketing program. Currently, we are increasing traffic to our website by the use of banner ads and skyscrapers on selected internet sites. This heightened traffic is an added benefit to our subscribers as well as an increased awareness of what we offer to potential advertisers. We acquired the rights to the YP.com URL from Onramp Access Inc. pursuant to a three-year license agreement executed in 2003. We received this license in exchange for $250,000 cash and 100,000 shares of our common stock. Under the terms of this agreement, there are certain events, including the performance of our stock price, that trigger the automatic transfer of ownership to us. If such events do not occur, we have the option to purchase the rights to this URL. Because of the importance of this URL to our branding strategy, we intend to purchase the rights to this URL if ownership has not already transferred by the end of the three-year license agreement.     10   Table of Contents Technology and Infrastructure   We have developed technologies to support the timely delivery of information requested by a user of our online Yellow Pages system. A staff of senior engineers experienced in large-scale system design and computer operation develops and maintains the technology. We believe we are particularly adept at large-scale database management, design, data modeling, operations and content management. To focus on a quality and timely product, we have divided our technology staff and technology base into a business operations unit and an advanced technologies group dedicated to our directory services product. Our business operations support a sophisticated call center, automated billing of our customers, customer relationship management, and automated mailing campaign. Our advanced technologies group supports all programming and other systems enhancements to the YP website and internal systems. These operations are described in the following paragraphs. YP.Com. The front end of our directory services and the showcase of our technology and marketing capabilities is our website, YP.Com. The YP.Com website currently is in its fifth generation of development. We develop ongoing enhancements to our website on a recurring schedule to meet the increased demand for our services and products. Our YP.com website provides several key and easy to use features, including timely information, simple search, search tips, reverse telephone number lookup, mapping, and residential and business directory listings. Database Management Systems. At the core of our infrastructure are several high-performance and proprietary database systems containing several terabytes of data representing billions of records with hundreds of attributes each, such as business name, telephone number, address, number of employees, and our unique-to-the-industry 40-word description of the business. We maintain the data for internal operations on high-performance servers and with large-scale storage systems at our Mesa, Arizona facility, which is co-located with our call center operation and technology teams. To meet the demand for our products and services and to provide the highest level of reliability, we employ technologies and techniques providing data redundancy and clustering. Clustering is the use of several computers deployed in a manner that provides redundancy and additional computer processing power. High-Performance Database and Search Engine. We believe we provide the most complete and high-performing directory service in the market today. Our proprietary database enables us to collect and merge data from multiple sources to provide extensive and accurate content for our users. With the release of our xDirectory(TM) and DirectXML(TM) technologies in 2004, we expect to be the first to market real-time search feedback on accuracy, search time, spellchecking, synonym matching, automated content delivery, and multiple source data merging in a simple to use paradigm. We believe these technologies will simplify the search process and provide the most relevant content to suit our customers' and users' needs. Ultimately, we expect that these technologies will increase recurrent use of our system by users of our directory services.     11   Table of Contents xDirectory. xDirectory is the platform for our high-performance database and search engine. xDirectory is a proprietary content management system and repository for extensible data merged from multiple sources of North American listing data. xDirectory also serves as a platform for several proprietary features, including real-time search feedback on accuracy, search time, spellchecking, synonym matching, geographical positioning, automated content syndication, and the proprietary algorithms to perform listing data match-up and merging into a uniquely accurate record. DirectXML. DirectXML is the technology that supports our content syndication program and distribution network. DirectXML integrates our proprietary content management system with our distribution network to deliver up-to-date syndicated content. DirectXML leverages the XML standard for the definition, interoperability, transmission, validation, and interpretation of data between systems and organizations. Extensible Record . We purchase data from the largest information providers in North America and merge that data with our extensive in-house customer data set to form what we believe is the largest and most comprehensive content in the market. This effort provides users of our directory services the greatest number of results per search. With the release of our xDirectory, we now have the unique ability to weigh the accuracy of a wide variety of attributes from the source record for inclusion into the merged record. xDirectory's proprietary algorithm for identifying accurate information and removing inaccuracies during the merge process is complemented by our customer verification process that confirms the attributes of a given customer record. Content Syndication, Distribution, and Private Label Networks. We add value by increasing our IAP advertisers' visibility by providing automated conduits and content delivery to numerous search engines besides our own. We can deliver content both on the Internet and on mobile devices such as cell phones and personal digital assistants. Our market position and volume allows us to provide content to any of our strategic alliances, as discussed elsewhere in this Annual Report, at a cost below what would be accomplished if one were to attempt to duplicate our content and distribution network. We have further enhanced the capabilities of this global distribution network with the release of our DirectXML technology which provides high-volume automated record updates at least weekly and, where possible, daily to our distribution partners and private-label customers. Billing Operation. Our billing process is executed using a two-tier architecture that consists of foundation and business platforms. Our foundation platform is anchored with Microsoft(R) as the primary partner leveraging their SQL Server product line. This alliance aligns us technically with a stable industry standard with proven scaling ability to meet our aggressive growth needs. The option to have multiple processors ensures we will be able to handle our planned customer base growth. System stability is enabled through built-in design features like high availability, simplified database administration and security features. Our business applications tier rests on a program suite that consists of partner provided utilities and our own utilities developed specifically to our billing process. By having development abilities in-house, we have control over our application, which allows us greater flexibility, greater security and reduced dependencies on an external entity. These programs also reduce LEC submittal fees by cleaning our customer billing submittals prior to formal submission. They also optimize which provider best suits our needs and maximizes profit potential.     12   Table of Contents Call Center Operation. We use sophisticated call center technologies to support teams dedicated to servicing customer needs, managing the provisioning of new customers and the sale of additional services to existing customers. The call center operation is built around a high-volume telephone switch and sophisticated applications to manage, distribute and analyze workload across and between call center representatives. Since our call center is staffed six days a week, an automated call attendant is only employed after hours, on Sundays or during holidays. Site Design and Facilities. We implement our website on a set of large-scale, high-performance Unix servers with accompanying large-scale storage subsystems that are organized into layers and groups. Each layer and group provides different functionality across the site. We organize the site to allow the integration of new information and functionality without any interruption of service. To ensure our site is continuously available to our users, we house the site at environmentally controlled co-location facilities geographically distributed and repeated between three locations in Arizona, Nevada, and Florida. XO Communications, a leader and national provider of telecommunications services and facilities, provides the co-location services. The co-location facilities are interconnected by a high-performance, scalable and highly-reliable state-of-the-art fiber data network. Mailing List Generation . The technology for generating a mailing list is comprised of a proprietary application and five databases for generating a mailing list of leads. On a monthly basis our information providers send us leads in an electronic format for integration into a database. After data has been refreshed in each provider database, our proprietary application performs a comparison-and-merge process between data sets. The proprietary algorithm within our application improves the quality of the record by verifying the accuracy of the information for every business listing sent to us. We compare information from each information provider to determine matching records, unique records, and the method employed to verify the information for each business listed in order to gauge the accuracy for each respective information provider. A unique record is one that exists only in a single provider's data set. The number of unique records varies from month to month and is one of the reasons we purchase from multiple sources. Following the merge process, our proprietary mailing application employs a sophisticated filtering process to determine address accuracy and facilitate the delivery of the solicitation mailer. Ultimately, the application generates an electronic file containing a list of leads with the name, address of the lead and type of business of each lead. We then send the list to our service provider for printing and mass mailing.     13   Table of Contents The Internet Yellow Pages Market According to The Kelsey Group and the Yellow Pages Integrated Media Association, or YPIMA, while there are approximately 200 major U.S. Yellow Pages print publishers, an increasingly mobile and computer-sophisticated population is accessing the Yellow Pages by way of the Internet at a sharply increasing rate. Internet access at home is now a reality for 67% of Americans according to Nielsen / NetRatings. Similarly, approximately 52% of small and medium-sized business (SMB) owners have embraced Websites or home pages as a marketing tool. According to the Kelsey Group, 24% of SMBs are using Internet Yellow Pages as part of their advertising and promotion mix. This equates to a 60% increase over last year. Moreover, approximately 33% of total local business searches in both print and online media were interactive in 2003 compared to approximately 9% in 2000. The Kelsey Group expects that this trend will continue and projects that interactive searches will account for more than half of usage by 2007. As the volume of directory references made online continues to grow. We believe merchants will continue to shift marketing expenditures away from print Yellow Pages toward Internet Yellow Pages providers. The Kelsey Group has published the following market information regarding the growth of the U.S. online and print Yellow Pages advertising revenue market. While print advertising is expected to be largely flat in the next five years, the Kelsey Group expects Yellow Pages online advertising to experience tremendous growth, as evidenced by an estimated 29% annual growth rate from 2003 to 2008. Advertising Revenue (in Billions)   2003 Market Share 2008 % Growth Per Year Market Share Print $15.0 97% $15.3 0.4% 90% Online $0.45 3% $1.6 29% 10% Total $15.45 100% $16.9 1.2% 100% Source: the Kelsey Group Based upon our revenues in fiscal 2004, we believe that we have approximately 10% of the fragmented online Yellow Pages market, assuming an estimated online Yellow Pages advertising market of approximately $580 million in 2004 (calculated based on 2003 market data and estimated future growth percentages per the Kelsey Group). Accordingly, we believe that we are one of the leading online Yellow Pages companies in terms of revenue. Internet Yellow Pages provide the following advantages over print Yellow Pages:   · More current and extensive listing information.   · Immediate access to business listings across the nation from any location.   · Broad accessibility via computers and hand-held devices, such as mobile phones and personal digital assistants.     14   Table of Contents   · Features such as mapping, direct calling to the advertiser, and e-mail at the click of a button also may be available. Internet Yellow Pages also offer lower costs for a given level of content and the ability to easily access and modify displays and advertisements, which allows for opportunistic or targeted specials or discounts. Strategic Alliances   In order to service users of our website more effectively and to extend our brand to other Internet sources, we have entered into strategic relationships with business partners that offer content, technology, and distribution capabilities. The following are descriptions of our most significant strategic relationships:   · We have cross-marketing arrangements with reciprocal linking of websites without any compensation to either party. These arrangements increase the page views for our advertisers' listings by being listed on the linked websites. During 2004, the number of websites providing such links to YP.com fluctuated between 30 and 100 websites. These co-promotional arrangements typically are terminable at will.   · We have distribution agreements with several websites, including My Area Guides, go2.com, Switchboard Incorporated, Yellow.com, Interchange and others. These agreements allow us to increase the page views for our advertisers' listings by displaying our advertisers' information on these sites. These contracts require monthly payments that are either fixed or variable, depending on website traffic.   · We have a license agreement with Palm, Inc. whereby we pay a fee to be a provider of Yellow Pages content on hand-held devices using the Palm operating system. We provide this content to Palm through a hypertext link from the Palm operating system to our website.   · We have an agreement with Overture.com to provide visibility to our website so that we can provide traffic to our advertisers. In exchange for monthly fees, Overture tries to ensure that our website will be one of the highest placed sites when Yellow Pages searches are done on major search engines, such as MSN(R) and Yahoo(R).   · We utilize WebDialogs in a co-promotional effort to provide automatic dialing services to our website users. These services allow these users to place a call to one of our IAP advertisers by simply clicking a button. This function powers our Click2Call feature. We have been members of the Yellow Pages Integrated Media Association, the Association of Directory Publishers, and the Direct Marketing Association since 1998. These organizations are trade associations for Yellow Pages publishers or others that promote the quality of published content and advertising methods.     15   Table of Contents Customer Service   We believe that superior customer service is an important factor in differentiating ourselves from our competitors. To meet this objective, our customer service department is comprised of four main departments - inbound, outbound, quality assurance and administration. Inbound Call Center . Our call center supports incoming calls from our advertisers for all of our products. The inbound customer service representatives, or CSRs, are responsible for taking calls, billing, technical service and general questions. The CSRs are empowered to activate new accounts, adjust accounts with credits, accept payments, change the billing method, and cancel accounts. Our proprietary CSR software is tiered in order to limit the actions taken with an advertiser's account, depending on the CSR's position. If a CSR is unable to accommodate the advertiser's request, the CSR transfers the call to a supervisor to ensure the customer is satisfied. Requests beyond those a supervisor can handle are given to a department manager or our quality assurance group. The CSRs have the ability to update advertiser's accounts by adding or changing a Mini-WebPage, changing hours of operation, changing the business category, and adding the link to the advertiser's website and email. After the CSR makes the requested changes, the new information will appear on our website within two business days, enabling the advertiser to make timely changes to their listing. The inbound customer call center is generally staffed six days a week. Outbound Calling . We established the outbound call center to help our IAP advertisers receive the full benefit for the advertising they purchased. The outbound CSRs primarily call new advertisers. They confirm the sale and, in the case of a new advertiser, they obtain the information to build the advertiser's Mini-Webpage. After the outbound CSR speaks with the advertiser and obtains all the information for the advertiser's listing, that listing is then sent to our proofreaders. Every listing that is updated is proofread prior to being placed on our site. This additional step ensures that our advertisers are represented professionally and accurately to their customers. Since our outbound CSRs only call existing or new advertisers, we are not affected by the "National Do Not Call" list. Quality Assurance . The goal of the Quality Assurance group is to monitor inbound and outbound calls, take calls transferred from CSRs, perform customer satisfaction surveys, and make test calls into our customer care line on a random basis. The quality assurance department reports directly to the Chief Operating Officer to ensure separation from the inbound and outbound departments. In addition to the quality assurance representatives, we have a Training & Process Development supervisor that reports to the Quality Assurance manager. This supervisor's responsibility is to produce and distribute training material to the entire call center to ensure consistent information is provided to all departments. Administration . The purpose of our administration department is to assist our customers with timely feedback when requested through the mail, e-mail or by facsimile. In addition to the CSRs answering incoming calls, we have individuals trained to assist customers via email. Our website and our incoming greeting on the telephone give our customers and our website users our email address. We review these emails daily and generally reply within two business days. We have found that many advertisers prefer to email us with their changes and are very satisfied with our response time and ability to respond to their request. The administration department receives, sorts, and distributes all incoming and outgoing mail. They also are responsible for filing the hard copies of the cashed incentive checks. All information that is sent to our advertisers or potential customers by the call center is routed through the administration department in order to ensure that accurate and consistent information is sent.     16   Table of Contents Competition We operate in the highly competitive and rapidly expanding business-to-business Internet services market. Our largest competitors are LECs, which are generally known as local telephone companies. We compete with other online Yellow Pages services, website operators, advertising networks, and traditional offline media, such as traditional Yellow Pages directory publishers, television, radio, and print share advertising. Our services also compete with many directory website production businesses and Internet information service providers. The principal competitive factors of the markets that we compete in include personalization of service, ease and use of directories, quality and responsiveness of search results, availability of quality content, value-added products and services, and access to end-users. We compete for advertising listings with the suppliers of Internet navigational and informational services, high-traffic websites, Internet access providers, and other media. This competition could result in significantly lower prices for advertising and reductions in advertising revenues. Increased competition could have a material adverse effect on our business. Many of our competitors have greater capital resources than we have. These capital resources could allow our competitors to engage in advertising and other promotional activities that will enhance their brand name recognition at levels we cannot match. The LECs, given their existing local access customers, have brand name recognition and access to potential customers. We believe that we are in a position to successfully compete in these markets due to the lack of material debt on our books, our recent ability to generate cash, and the effectiveness of our direct mail marketing program. Furthermore, we have begun testing various branding campaigns using web banners and radio. We believe this will increase market awareness of the YP.com brand, which will enhance the value of YP.com to our IAP advertiser base. We further believe that we can compete effectively by continuing to provide quality services at competitive prices and by actively developing new products and services for customers. We believe our listings and our Mini-WebPages provide users of our website with readily available information that is easy to understand and from which they can make their buying decisions. We believe that our calling center is a competitive advantage. Through our calling centers, we continually receive and process requests to update customer information on our website and, accordingly, we believe our site contains more useful and timely information than that of our competitors. We further believe that this, in turn, will translate into more page views and advertisers.     17   Table of Contents Employees As of September 30, 2004, our only direct employees are our four executive officers. As of September 30, 2004, we also engaged 125 full-time and 26 part-time independent contractors through employee leasing or temporary help agencies. Such team members are not covered by any collective bargaining agreements.

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