YAKC Yak Communications

Accounting Treatment for 2003 Software Transaction is Finalized and Financial Results Restated Yak Communications Inc. (NASDAQ:YAKC), a provider of telecommunication services to residential and business customers, today announced financial results for the fourth quarter and fiscal year ended June 30, 2005 and also announced that it was restating certain amounts previously reported. Operating Highlights and Accomplishments in 2005: - Increased net revenue by 15% to $92.7 million - Generated net income of $4.2 million - Reduced long term debt by $4.2 million to $1.0 million - Financed operations from internally-generated working capital - Implemented and began promotional activity for Yak's VoIP services - Began marketing of US dial-around services - Purchased the local resale customer base (Ontario and Quebec) and Centrex lines of Navigata Communications Limited thereby acquiring 450 SME customers, totaling 4,700 Centrex lines Overview: "We are pleased with our overall financial performance in fiscal year 2005," said Charles Zwebner, President and Chief Executive Officer. "We grew revenues by 15%, entered new markets and generated cash from operations, despite earnings pressure due to increased general and administrative expenses. "Our core Canadian dial-around business remains healthy and continues to generate significant operating cash. In fiscal 2005, we capitalized on that cash by initiating marketing campaigns in the U.S. directed at Hispanic communities and driving increased revenues, customers and minutes. Also, we entered the emerging VoIP marketplace, acquired an Ontario and Quebec customer portfolio for the Yak for Business division and invested in technology to improve the efficiency of our telecommunication networks. "We are particularly pleased to have reduced our indebtedness in fiscal 2005, while still investing in new markets and technology. During the last year, we fully paid down $5.7 million of our accounts receivable factoring facility and reduced long-term debt by another $4.2 million. In addition, we kept our balance sheet strong by funding our 2005 growth entirely from internally-generated working capital," continued Mr. Zwebner. Fourth Quarter Results: Net earnings for the fourth quarter of fiscal 2005 was $0.1 million or $0.01 per diluted share, compared with net earnings of $0.9 million, or $0.09 per diluted share for the fourth quarter of fiscal 2004. Net revenues increased 15.7% to $23.5 million for the fourth quarter of fiscal 2005, as compared to net revenues of $20.3 million for the fourth quarter of fiscal 2004. Consistent with earlier quarters in fiscal 2005, the majority of the revenue growth was generated by dial-around telephony, Yak's core business, which increased approximately 15.7% over the comparable quarter of fiscal year 2004. During the fourth quarter of fiscal 2005, Yak processed on its own network 287 million minutes of traffic, with 25.7 million calls serving approximately 905,000 monthly customers. Yak's Dial-Around/1+ business continued its strong growth. Revenues rose 21%, customers grew 12%, the number of minutes used increased 11% and the number of calls placed rose 13%. -0- *T --------------------------------------------------------------------- For the Quarter Ended June 30, 2005 --------------------------------------------------------------------- (All amounts in Thousands) --------------------------------------------------------------------- Products Revenue Customers Minutes Calls --------------------------------------------------------------------- Dial-Around/1+ $16,712 831 265,604 24,010 --------------------------------------------------------------------- LooneyCall $1,756 68 20,205 1,498 --------------------------------------------------------------------- Yakcell $157 6 1,509 172 --------------------------------------------------------------------- TOTAL $18,625 905 287,318 25,680 --------------------------------------------------------------------- --------------------------------------------------------------------- For the Quarter Ended June 30, 2004 --------------------------------------------------------------------- (All amounts in Thousands) --------------------------------------------------------------------- Products Revenue Customers Minutes Calls --------------------------------------------------------------------- Dial-Around/1+ $13,864 718 232,604 20,677 --------------------------------------------------------------------- LooneyCall $2,199 92 26,470 1,961 --------------------------------------------------------------------- Yakcell $39 1 297 46 --------------------------------------------------------------------- TOTAL $16,102 811 259,371 22,684 --------------------------------------------------------------------- *T Also consistent with the Company's results for previous fiscal 2005 quarters, the revenue gains in the fourth quarter of fiscal 2005 were offset in part by higher expenses when compared to the fourth quarter of fiscal 2004. General and administrative expenses increased on a year-over-year basis primarily as a result of salaries and professional fees. Sales and marketing expenses were higher due to introductory expenses for Yak's VoIP services and increased marketing expenses in the United States. Fiscal Year 2005 Results: For the fiscal year ended June 30, 2005, the Company reported net earnings of $4.2 million, or $0.32 per diluted share, compared with net earnings of $5.0 million, or $0.44 per diluted share in fiscal 2004. Net revenues increased 14.7% to $92.7 million for the fiscal year ended June 30, 2005 as compared to net revenues of $80.8 million for fiscal 2004. As a result of a private offering of approximately 1.5 million shares in March 2004, the weighted average number of diluted shares outstanding in fiscal 2005 was approximately 13% higher than that in fiscal 2004. Yak's Dial-Around/1+ business grew throughout the fiscal 2005. Revenues rose 23%, customers grew 16%, the number of minutes used increased 24% and the number of calls placed rose 26%. -0- *T --------------------------------------------------------------------- For the Year Ended June 30, 2005 --------------------------------------------------------------------- (All amounts in Thousands) --------------------------------------------------------------------- Products Revenue Customers Minutes Calls --------------------------------------------------------------------- Dial-Around/1+ $66,484 831 1,060,514 94,689 --------------------------------------------------------------------- LooneyCall $8,226 68 94,538 6,954 --------------------------------------------------------------------- Yakcell $406 6 4,590 542 --------------------------------------------------------------------- TOTAL $75,116 905 1,159,642 102,185 --------------------------------------------------------------------- --------------------------------------------------------------------- For the Year Ended June 30, 2004 --------------------------------------------------------------------- (All amounts in Thousands) --------------------------------------------------------------------- Products Revenue Customers Minutes Calls --------------------------------------------------------------------- Dial-Around/1+ $54,203 718 856,542 75,150 --------------------------------------------------------------------- LooneyCall $8,953 92 108,255 7,723 --------------------------------------------------------------------- Yakcell $87 1 819 127 --------------------------------------------------------------------- TOTAL $63,243 811 965,616 83,000 --------------------------------------------------------------------- *T Included in the results for the fiscal year ended June 30, 2005 was approximately $2.3 million of (i) consulting and professional fees associated with tax compliance and other regulatory matters related to the introduction of our products into the U.S. market; (ii) costs incurred due to the May 2005 restatements of certain historical financial statements with respect to a 2003 software transaction; (iii) fees incurred to recruit management personnel; and (iv) fees associated with exploring acquisition opportunities. Additionally, $4.5 million of higher advertising expenses in the United States, $0.2 million of fees incurred for Sarbanes-Oxley compliance, and $0.6 million of introductory expenses for our VoIP initiative contributed to the higher year-over-year expense comparisons. Also included in the results for 2005 was a $0.5 million impairment charge related to exiting the Company's joint venture in Peru offset by a $1.2 million gain on the early extinguishment of debt associated with the 2003 software transaction. Financial Restatements: As previously disclosed, the Company has been reviewing the accounting methodology used with respect to the June 2003 software acquisition transaction mentioned above and, in this regard, had sought guidance from the Office of the Chief Accountant ("OCA) of the SEC. While the OCA's guidance was pending, on May 31, 2005, the Company filed various amended Annual Reports on Form 10-K/A and Quarterly Reports on Form 10-Q/A for the applicable annual and quarterly periods; however as previously disclosed, those amended filings were subject to final guidance from the OCA, which as a result could require further restatements. Based on continuing discussions with the OCA, the Company decided to restate certain of its historic financial statements, as described below; therefore, the previously issued financial statements for these periods should not be relied upon. All applicable amounts relating to these restatements have been reflected in the consolidated financial statements and disclosed in the notes to the consolidated financial statements contained in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2005, filed yesterday. The following table highlights the effect of the restatements on net income, fully diluted earnings per share, total assets and total liabilities for each of the periods affected by the restated financial statements: -0- *T --------------------------------------------------------------------- Periodic Report Increase/ Increase/ Increase/ (Amounts in $ - (Decrease) (Decrease) (Decrease) Thousands) in Net in Fully in Total Income Diluted Assets Reported Earnings per Reported Share Reported(i) --------------------------------------------------------------------- Fiscal Year 2003 (ended 6/30/03) $0 $0.00 $(1,947) --------------------------------------------------------------------- First Fiscal Quarter 2004 (ended 9/30/03) 23 0.01 (1,883) --------------------------------------------------------------------- Second Fiscal Quarter 2004 (ended 12/31/03) 23 0.00 (1,818) --------------------------------------------------------------------- Third Fiscal Quarter 2004 (ended 3/31/04) 22 0.00 (1,752) --------------------------------------------------------------------- Fiscal Year 2004 (ended 6/30/04) (90) (0.01) (1,398) --------------------------------------------------------------------- First Fiscal Quarter 2005 (ended 9/30/04) 32 0.01 (1,350) --------------------------------------------------------------------- Second Fiscal Quarter 2005 (ended 12/31/04) 32 0.00 (1,302) --------------------------------------------------------------------- Third Fiscal Quarter 2005 (ended 3/31/05) (113) (0.01) (156) --------------------------------------------------------------------- (i) Earnings per share numbers are adjusted for January 29, 2004 stock split. *T Conclusion of Accounting Issues: "We believe that the accounting issues surrounding the Convenxia software acquisition are now finalized" Mr. Zwebner added. "The restatements made were non-cash related and primarily impacted the balance sheets for the periods affected. Additionally, there was no material impact on revenues or income from operations for these periods and the restatements should have no effect upon the Company's current operations or future performance. Reported earnings per share was increased by $0.01 per diluted share in the first fiscal quarter of 2004; reduced by $0.01 per diluted share in the fourth fiscal quarter of 2004; increased by $0.01 per share in the first quarter of 2005 and reduced by $0.01 per diluted share in the third fiscal quarter of 2005." "Once again, I am very grateful to the Yak staff, Audit Committee and Board of Directors, all of whom spent a great deal of time addressing these accounting issues. Now that this matter is behind us, we all look forward to focusing on Yak's growth potential and executing on our business plans for the future," concluded Mr. Zwebner. About Yak Communications Inc. Yak Communications Inc. (the "Company") (NASDAQ: YAKC) is an Integrated Communications Provider (ICP) offering a full array of long distance (1+, toll free and dial-around), local lines, travel cards, cellular long distance, data services, and voice services (VoIP) to residential and small businesses in North America over high speed internet access. Yak currently serves approximately 905,000 customers for its traditional telecom services. For more information, visit http://www.yak.com Forward Looking Statements: Statements contained in this news release, which are not strictly historical are forward looking within the meaning of the safe harbor clause of the Private Securities Litigation Reform Act of 1995. The Company makes these statements based on information available to it as of the date of this news release and assumes no responsibility to update or revise such forward-looking statements. Editors and investors are cautioned that forward-looking statements invoke risk and uncertainties that may cause the Company's actual results to differ materially from such forward-looking statements. Words such as "projects", "believe", "anticipates", "estimate", "plans", "expect", "intends", and similar words and expressions are intended to identify forward-looking statements and are based on our current expectations, assumptions, and estimates about us and our industry. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. Although the Company believes that such forward-looking statements are reasonable, we cannot assure you that such expectations will prove to be correct. Our actual results could differ materially from those anticipated in such forward-looking statements as a result of several factors, risks and uncertainties. These factors, risks and uncertainties include, without limitation, the results of the audit and review processes performed by the Company's independent auditors with respect to any restatement of the Company's historic financial statements, the results of any guidance received from the Office of the Chief Accountant of the SEC may require further restatement of the Company's historical financial statements, the Company's success in integrating the operations of any newly-acquired businesses, and associated reduction in costs, the successful implementation of its business plans including growth of existing product offerings, strategic acquisitions and development of broadband telephony products, the successful integration of new management team members, continued and increased demand for its services, the successful deployment of new equipment and realization of material savings there from, competition from larger and/or more experienced telecommunications providers, its ability to continue to develop its markets, general economic conditions, changes in governmental regulation, and other factors that may be more fully described in the Company's literature and periodic filings with the Securities and Exchange Commission. You are urged to carefully review and consider these disclosures, which describe certain factors that affect our business. -0- *T YAK COMMUNICATIONS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME FOR THE YEAR ENDED, JUNE 30 (AUDITED) 2004 2003 (in $thousands, except per share amounts) 2005 (Restated) (Restated) --------------------------------------------------------------------- $ $ $ NET REVENUE 92,700 80,802 40,404 COST OF REVENUE 57,636 53,149 25,403 ----------------------------- GROSS MARGIN 35,064 27,653 15,001 ----------------------------- OPERATING EXPENSES General and administration 18,524 11,220 3,497 Sales and marketing 7,293 3,894 4,207 Accounts receivable financing 429 514 499 Depreciation and amortization 2,943 2,980 803 Common stock issued to obtain note payable - 90 - Organizational and start-up costs 512 261 345 Writedown of property and equipment and licence fee - 313 119 ----------------------------- TOTAL OPERATING EXPENSES 29,701 19,272 9,470 ----------------------------- INCOME FROM OPERATIONS 5,363 8,381 5,531 ----------------------------- OTHER EXPENSES (INCOME) Share of net (gain)/loss of affiliate - (39) 29 Interest expense 464 455 14 Interest earned (406) (159) - Income from joint marketing agreement (421) (539) - Long-term debt discount amortization 391 535 - Loss on Impairment of joint venture receivable - 277 - Gain on settlement (1,242) - - ----------------------------- (1,214) 530 43 ----------------------------- EARNINGS BEFORE INCOME TAX 6,577 7,851 5,488 PROVISION FOR INCOME TAXES 2,397 2,882 1,999 ----------------------------- NET EARNINGS 4,180 4,969 3,489 OTHER COMPREHENSIVE INCOME Foreign currency translation adjustment 1,230 (364) 410 ----------------------------- COMPREHENSIVE INCOME 5,410 4,605 3,899 ----------------------------- ----------------------------- BASIC EARNINGS PER SHARE 0.32 0.46 0.37 ----------------------------- ----------------------------- DILUTED EARNINGS PER SHARE 0.32 0.44 0.29 ----------------------------- ----------------------------- WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 12,895 10,706 9,328 ----------------------------- ----------------------------- WEIGHTED AVERAGE NUMBER OF COMMON SHARES - ASSUMING DILUTION 12,901 11,405 11,896 ----------------------------- ----------------------------- YAK COMMUNICATIONS INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET AS AT JUNE 30, (AUDITED) 2004 (in $thousands) 2005 (Restated) --------------------------------------------------------------------- $ $ ASSETS CURRENT Cash and cash equivalents 16,751 22,149 Accounts receivable, net 16,220 15,649 Prepaid expenses and other current assets 1,413 725 ------------------- TOTAL CURRENT ASSETS 34,384 38,523 JOINT VENTURE RECEIVABLE - 2,805 PROPERTY AND EQUIPMENT, NET 13,559 9,596 LOAN RECEIVABLE - 445 INTANGIBLES, NET 2,005 1,585 GOODWILL 503 458 DEFERRED INCOME TAXES 797 238 ------------------- 51,248 53,650 ------------------- ------------------- LIABILITIES CURRENT Accounts payable and accrued liabilities 11,891 11,509 Due to Factor - 5,658 Income taxes payable 3,547 1,185 Current portion of advances from TELUS Communications Inc. 382 1,239 Current portion of obligations under capital leases 511 393 Current portion of note payable - 195 Unearned Revenue 1,096 951 ------------------- 17,427 21,130 ------------------- LONG-TERM DEBT Advances from TELUS Communications Inc. - 349 Obligations under capital leases 977 1,073 Note payable - 3,774 ------------------- 977 5,196 ------------------- 18,404 26,326 ------------------- STOCKHOLDERS' EQUITY COMMON STOCK 225 225 ADDITIONAL PAID-IN CAPITAL 16,692 16,582 COMMON STOCK PURCHASE WARRANTS 2,433 2,433 ACCUMULATED OTHER COMPREHENSIVE INCOME - TRANSLATION ADJUSTMENT 1,343 113 RETAINED EARNINGS 12,151 7,971 ------------------- 32,844 27,324 ------------------- 51,248 53,650 ------------------- ------------------- YAK COMMUNICATIONS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED, JUNE 30 (AUDITED) 2004 2003 (in $thousands) 2005 (Restated) (Restated) --------------------------------------------------------------------- $ $ $ CASH FLOWS FROM OPERATING ACTIVITIES Net earnings 4,180 4,969 3,489 Adjustments for Amortization of discount 391 535 - Depreciation and amortization 2,943 2,980 803 Deferred income taxes (559) 2,130 346 Writedown of property and equipment and licence fee - 313 119 Impairment of loan receivable 499 - - Settlement of JV/Note payable agreement 5 (2,406) - - Stock compensation expense 81 26 - Loss on impairment of joint venture receivable - 277 - Loss on sale of property, equipment and software 49 - 2 Common stock issued through business operations 29 141 116 Share of net (gain)/loss of affiliate - (39) 29 Changes in assets and liabilities (4,028) 807 2,100 ----------------------------- Net cash from operating activities 1,179 12,139 7,004 ----------------------------- CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES Purchase of property and equipment (6,322) (4,995) (2,795) Purchase of intangibles (713) - - Proceeds from sale of property, equipment, and software 13 - - Purchase of shares of Contour Telecom - (5,473) - Investment in Odyssey Management Group, Inc. - 510 (500) Foreign exchange difference on purchase of shares of Contour Telecom - 52 - Loan receivable (54) (285) (161) Increase in deferred acquisition cost - - (1,659) ----------------------------- Net cash used in investing activities (7,076) (10,191) (5,115) ----------------------------- CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES Issuance of common shares - 16,823 1,000 Repayments on obligations under capital leases (291) (35) (111) Repayments on advances from TELUS Communications Inc. (1,206) (1,028) 2,472 Repayments on notes payable - (567) - Repurchase of capital stock - - (800) Receipt of principal portion of Joint Venture receivable 215 374 - ----------------------------- Net cash from (used in) financing activities (1,282) 15,567 2,561 ----------------------------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 1,781 (809) 410 ----------------------------- (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (5,398) 16,706 4,860 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 22,149 5,443 583 ----------------------------- CASH AND CASH EQUIVALENTS, END OF PERIOD 16,751 22,149 5,443 ----------------------------- ----------------------------- Supplemental disclosure of cash flow information: Interest paid 464 1,132 14 Taxes paid 736 1,361 - Supplemental disclosure of non-cash investing and financing activities: Capital leases for acquisition of furniture and equipment 312 1,473 - Notes payable on purchase of software (Note 5) - - 3,718 Joint Venture receivable on purchase of software (Note 5) - - 3,195 Issuance of common stock for services rendered 29 - 116 Acquisition of Software - - 1,561 YAK COMMUNICATIONS INC. AND SUBSIDIARIES Key Financial Metrics Qtr ended Fiscal Yr ended June 30, June 30, (in $thousands) 2005 2004 2005 2004 --------------------------------------------------------------------- $ $ $ $ GAAP Net Revenue 23,500 20,306 92,700 80,802 Yak for Business 3,500 2,790 11,745 11,773 Contour 1,310 1,381 5,558 5,646 Other 65 33 281 140 Non-GAAP Core Revenue 18,625 16,102 75,116 63,243 *T In addition to disclosing financial results prepared in accordance with U.S. generally accepted accounting principles, the Company discloses information regarding core revenue. Core revenue is a non-GAAP financial measure defined as revenue generated by Dial around, 1+, LooneyCall and YakCell. The Company provides the above reconciliation to net revenues which is the most directly comparable GAAP measure. As core revenue is a non-GAAP financial measure, it should not be considered in isolation or as a substitute for net revenues or any other GAAP measure. Because core revenues are not calculated in the same manner by all companies, the Company's definition of core revenue may not be consistent with that of other companies. Yak Communications Inc. (NASDAQ:YAKC)