<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
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 001-13875
ADVANCED COMMUNICATIONS GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 76-0549396
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
390 S. WOODS MILL RD, SUITE 150 63017
ST. LOUIS, MISSOURI (Zip Code)
(Address of principal executive offices)
(314) 205-8668
(Registrant's telephone number, including area code)
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 twelve months, and (2) has been subject to such filing
requirements for the past 90 days. YES X NO _____
As of May 10, 1999, the registrant had 19,859,262 shares of common stock, $.0001
par value, outstanding.
1
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PART I - FINANCIAL INFORMATION
Item 1. - FINANCIAL STATEMENTS
ADVANCED COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------------------------------
Actual Actual Pro Forma
(In thousands, except per share data) 1999 1998 (1) 1998(2)
---------------- --------------- ---------------
<S> <C> <C> <C>
REVENUES $ 18,743 $ 9,183 $ 18,429
OPERATING COSTS:
Printing, distribution and listing 4,402 2,288 4,925
Sales and marketing 3,437 1,264 3,094
General and administrative 6,424 4,078 6,638
Depreciation and amortization 1,089 554 1,115
Stock-based compensation ---- 1,760 1,760
-------------- ------------- -------------
Income (loss) from continuing operations 3,391 (761) 897
OTHER INCOME (EXPENSE):
Interest expense (1,089) (282) (392)
Other 7 8 21
-------------- ------------- -------------
Income (loss) from continuing operations before
income taxes 2,309 (1,035) 526
Income tax expense (benefit) 1,278 (219) 542
-------------- ------------- -------------
Net income (loss) from continuing operations 1,031 (816) (16)
Net loss from discontinued operations, net of tax expense
(benefit) of $(4,117); 406; and 185, respectively (6,189) (308) (584)
Loss on sale of discontinued operations, net
of tax benefit of $4,363 (51,800) ---- ----
-------------- ------------- -------------
Net income (loss) $ (56,958) $ (1,124) $ (600)
-------------- ------------- -------------
-------------- ------------- -------------
Basic and diluted earnings (loss) per share:
Continuing operations $ .05 $ (.05) $ .00
Discontinued operations (.31) (.02) (.03)
Sale of discontinued operations (2.61) ---- ----
-------------- ------------- -------------
Net loss per share $ (2.87) $ (.07) $ (.03)
-------------- ------------- -------------
-------------- ------------- -------------
</TABLE>
(1) The Company completed its initial public offering on February 18, 1998,
concurrently with the acquisition of nine operating companies and a 49%
interest in another company. Actual results for 1998 include the operations
of the parent company for the three-month period and the results of the
acquired companies only for the period after February 18, 1998.
(2) The pro forma results were prepared giving effect to the offering and the
acquisitions as if they had occurred on January 1, 1998.
See accompanying notes to consolidated financial statements.
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ADVANCED COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(In thousands, except share data) (Unaudited)
March 31, Dec. 31,
ASSETS 1999 1998
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,724 $ 13,734
Accounts receivable, net 18,378 13,317
Deferred costs 4,607 3,888
Prepaid expenses and other current assets 154 94
Deferred taxes 3,398 3,398
------------- -------------
Total current assets 29,261 34,431
------------- -------------
Property, plant and equipment, net 1,107 1,134
Intangible assets, net 77,613 78,746
Other assets 698 1,022
Net assets of discontinued operations 24,495 69,780
------------- -------------
Total other assets 103,913 150,682
------------- -------------
Total assets $ 133,174 $ 185,113
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 7,116 $ 4,844
Short-term debt and current maturities of long-term debt 21,116 17,117
Other current liabilities 2,165 3,017
------------- -------------
Total current liabilities 30,397 24,978
Long-term obligations:
Long-term debt 17,116 17,233
Deferred tax liabilities 11,035 11,318
------------- -------------
Total liabilities 58,548 53,529
------------- -------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, Series A Redeemable Convertible $.0001 par
value: 20,000,000 shares authorized; 142,857 shares issued
and outstanding; $2,000 liquidation preference 1,122 1,122
Common stock, $.0001 par value: 180,000,000 shares
authorized; 19,859,262 outstanding 2 2
Additional paid-in capital 146,611 146,611
Treasury stock, 234,141 common shares (1,013) (1,013)
Retained earnings (accumulated deficit) (72,096) (15,138)
------------- -------------
Total stockholders' equity 74,626 131,584
------------- -------------
Total liabilities and stockholders' equity $ 133,174 $ 185,113
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
3
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ADVANCED COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------
(In thousands) 1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (56,958) $ (1,124)
------------ ------------
Adjustments to reconcile net loss to net cash:
Loss on sale of discontinued operations 51,800 ----
Loss from discontinued operations 6,189 308
Depreciation and amortization 1,089 554
Stock-based compensation expense ---- 1,760
Provision for deferred tax (283) ----
Change in assets and liabilities: ----
Decrease (increase) in:
Accounts receivable, net (5,061) (3,836)
Deferred costs (719) 1,470
Prepaid expenses and other current assets (60) 649
Other assets 402 (742)
Increase (decrease) in:
Accounts payable and accrued liabilities 2,272 93
Other current liabilities (852) 42
------------ ------------
Cash used in continuing operating activities (2,181) (826)
Cash used in discontinued operations (9,282) (412)
------------ ------------
Cash used in operations (11,463) (1,238)
------------ ------------
Cash flows from investing activities:
Cost of businesses acquired ---- (83,277)
Additions to property, plant and equipment, net (3,429) (276)
------------ ------------
Cash used in investing activities (3,429) (83,553)
------------ ------------
Cash flows from financing activities:
Borrowings of long-term debt 4,000 ----
Repayment of long-term debt (118) (3,637)
Proceeds from common stock offering, net of offering costs ---- 99,900
------------ ------------
Cash provided by financing activities 3,882 96,263
------------ ------------
Net decrease in cash and cash equivalents (11,010) 11,472
Cash and cash equivalents-beginning of period 13,734 --
------------ ------------
Cash and cash equivalents-end of period $ 2,724 $ 11,472
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
4
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ADVANCED COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(Unaudited)
1. INTERIM RESULTS
The financial statements contained herein are unaudited. In the opinion of
management, these financial statements reflect all adjustments, consisting only
of normal recurring adjustments, which are necessary for fair presentation of
the results of the interim periods presented. Reference is made to the footnotes
to the consolidated financial statements contained in the Company's Annual
Report on Form 10-K for the year ended December 31, 1998, filed with the
Securities and Exchange Commission.
2. BASIS OF PRESENTATION
Advanced Communications Group, Inc. ("Advanced Communications" or
"Company"), a Delaware corporation, is an independent yellow pages directory
publisher in selected markets in California, Oklahoma and Texas. The Company is
also a regional competitive local exchange carrier ("CLEC") that provides a
portfolio of telecommunications services to business and residential customers
primarily in seven mid-America states. In April 1999, the Company announced
certain strategic acquisitions and its intent to divest its CLEC operations.
Consequently, the telecommunications operations are presented as discontinued
operations (see Note 4).
The Company completed its initial public offering ("IPO") of its
common stock on February 18, 1998. In connection with the IPO, the Company
simultaneously acquired all of the outstanding capital stock of Great Western
Directories, Inc. ("Great Western"), Valu-Line of Longview, Inc.
("Valu-Line"), Feist Long Distance Service, Inc. ("Feist"), FirsTel, Inc.
("FirsTel") and Tele-Systems, Inc. ("Tele-Systems"), substantially all of the
assets of Long Distance Management II, Inc. ("LDM II"), Long Distance
Management of Kansas, Inc. ("LDM of Kansas"), The Switchboard of Oklahoma
City, Inc. ("Switchboard"), and National Telecom, a proprietorship, and 49%
of the outstanding capital stock of KIN Network, Inc. ("KINNET")
(collectively "Acquisitions" or "Acquired Companies").
Prior to February 1998, the Company had not conducted any operations
other than those relating to the IPO and the Acquisitions. Consequently, the
actual financial statements included herein relate only to the parent company
prior to February 18, 1998, and include the results of the Acquired Companies
only for the period after February 18, 1998. Certain pro forma operating
information is presented for comparative purposes as if the IPO and the
Acquisitions had occurred on January 1, 1998. The pro forma financial
information does not purport to represent the Company's results of operations
that would have actually occurred if the IPO and the Acquisitions had in fact
occurred on that date. Since the Acquired Companies were not under common
control or management, historical combined results of operations may not be
comparable to, or indicative of, future performance. The pro forma consolidated
statement of operations reflects the historical results of operations of the
Acquired Companies and was derived from the respective Acquired Companies'
financial statements. All inter-company accounts have been eliminated in
consolidation.
5
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3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTANGIBLE ASSETS FROM BUSINESS ACQUISITIONS -- Intangible assets
resulting from the cost of businesses acquired exceeding the fair value of net
assets acquired consist principally of the customer lists and goodwill. The
value of customer lists and their estimated useful lives were determined using
independent appraisals. Customer lists and goodwill are amortized on a
straight-line basis over their estimated useful lives ranging from 5 to 10 years
and 25 to 40 years, respectively. For the three months ended March 31, 1999,
amortization expense relating to intangible assets was $1,055,000.
REVENUE RECOGNITION -- Directory revenues are derived from the sale of
advertising space in telephone directories and are recognized on the date that
the directory is published and substantially delivered. If the estimate of total
directory costs exceeds advertising revenues for a specific region's telephone
directory, a provision is made for the entire amount of such estimated loss.
Directory costs are deferred until the date that the directory is published and
substantially delivered. Directory costs include all direct costs related to the
publishing of a region's telephone directory, such as publishing and
distribution expenses and commissions on sales, other sales expenses and
depreciation and amortization. General and administrative costs are charged to
expense as incurred.
Costs incurred with the expansion into new markets include all direct
costs related to the publishing of a first-year telephone directory (prototype
directory). Advertising space in prototype directories is generally provided to
advertisers at no cost; therefore, no advertising revenues are derived from
prototype directories. Because the future economic benefit of the direct costs
related to prototype directories cannot be determined, such direct costs are
charged to expense as incurred. The Company had no prototype directories for the
periods ended March 31, 1999 and 1998.
Telecommunications revenues are recognized when long-distance, local and
800 services are provided. Billings made in advance for local services are
deferred until earned.
USE OF ESTIMATES -- The preparation of the financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
4. DISCONTINUED OPERATIONS
In April 1999, the Company announced that it intends to divest its
telecommunication segment in connection with several strategic acquisitions
(See Note 5). Accordingly, the results of all the telecommunications segment
through the date of the announcement are classified as discontinued
operations in the accompanying consolidated financial statements. Revenues
from the discontinued telecommunications segment were $24.2 million and $6.6
million in the first quarter of 1999 and 1998, respectively. Net loss from
discontinued telecommunications operations were $6.2 million, net of an
income tax benefit of $4.1 million in the first quarter of 1999, and $.3
million, net of income tax expense of $.3 million in the first quarter of
1998.
6
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The Company has estimated the loss on the sale of the discontinued
telecommunications operations to be $51.8 million and has included this
estimate in the results of operations in the first quarter of 1999. The
estimated loss on the sale of the discontinued operations includes estimates
for operating losses expected to be incurred through the completion of the
sale, transaction costs, exit costs of leased facilities, employee severance
and termination costs, as well as estimated proceeds from the sale. The
estimated loss is recorded net of an estimated income tax benefit of $4.4
million.
5. ACQUISITIONS
Concurrent with and as a condition to the closing of the IPO, the Company
acquired all of the outstanding capital stock of Great Western, Valu-Line, Feist
Long Distance, FirsTel and Tele-Systems, substantially all of the assets of LDM
II and LDM of Kansas, Switchboard and National Telecom, and 49% of the
outstanding capital stock of KINNET pursuant to the terms of the Acquisitions.
The Acquisitions are accounted for using the purchase method of accounting with
the parent company being treated as the accounting acquirer. The interest in
KINNET is accounted for under the equity method of accounting.
The following table sets forth for accounting purposes the fair value
of consideration paid with respect to the Acquisitions and the assets
acquired.
(In thousands)
Consideration Paid for Acquired Companies:
<TABLE>
<CAPTION>
<S> <C>
Cash $ 85,043
Common stock 37,896
Notes payable 17,350
Options and warrants 4,101
---------
Total Purchase Price $ 144,390
---------
---------
Assets Acquired:
Net working capital $ 9,829
Property and equipment 5,141
Customer lists 47,800
Goodwill 96,741
Net deferred tax liability (15,121)
---------
Total Assets Acquired $ 144,390
---------
---------
</TABLE>
7
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In November 1998, the Company acquired all of the outstanding stock of
Telecom Resources, Inc. and affiliates (TRI) for 477,538 newly issued shares of
common stock valued at $1.6 million. TRI, based in Dallas, Texas, offers its
customers a web-based virtual office package that combines voice, fax and data
into a single interface. This acquisition is accounted for under the purchase
method of accounting. The excess of cost over the estimated fair value of assets
acquired and liabilities assumed of $3.3 million was allocated to goodwill and
is being amortized over 15 years. The results of operations and the pro forma
results would not have been significantly different if TRI had been acquired at
the beginning of 1998.
6. SUBSEQUENT EVENT
In April 1999, the Company's board of directors approved a letter of
intent to acquire all the outstanding stock of YPTel Corporation, WebYP, Inc.
(d/b/a WorldPages.com) and a related company, Big Stuff, Inc. for approximately
12.1 million newly issued shares of common stock. The terms of the acquisitions
are subject to negotiating definitive agreements, shareholder approvals, and
regulatory approvals and are expected to be completed during the third calendar
quarter.
YPTel Corporation is the parent of Pacific Coast Publishing, Ltd. a
yellow pages publisher located in Tacoma, Washington. WorldPages.com
maintains a web site and its mission is to facilitate transactions between
buyers and sellers worldwide by establishing a premier Internet yellow pages
network that is integrated with its wholly-owned local print yellow page
directories. By combining the yellow page customers of YPTel Corporation and
the Company, the new operation will be vertically integrated with both
Internet and print directories in 41 markets in 7 states.
The Company also announced that it will reorganize its board of
directors and senior management team upon the consummation of the
transaction. Richard O'Neal will continue as Chairman and CEO of the Company
and he and other debt holders have agreed to convert a $15 million note owed
by Advanced Communications into common stock in support of the Company's
strategy. The corporation will be re-named WorldPages.com and its stock is
expected continue to be traded on the NYSE under a new symbol to be released
upon completion of the transactions.
8
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ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The statements contained in this Report that are not historical facts
(including statements as to the Company's plans, beliefs or expectations) are
forward-looking statements within the meaning of the federal securities laws
that involve certain risks and uncertainties. Management wishes to caution the
reader that these forward-looking statements such as the Company's plans to
divest its telecommunications operations, the Company's expectations that it
will be able to meet its short-term working capital and capital requirements
from cash provided by operations and its existing credit facilities, and the
potential effects of the year 2000 issues, are plans and predictions regarding
future events and circumstances. Actual events or results may differ materially
as a result of risks facing the Company.
RESULTS OF OPERATIONS
GENERAL
The following table sets forth, for the periods presented, certain
actual and pro forma information relating to the continuing operations of the
Company, expressed as a percentage of revenues, excluding stock-based
compensation expense:
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------
Actual Pro Forma
March 31, 1999 March 31, 1998
---------------- -----------------
<S> <C> <C>
Directory revenues 100.0% 100.0%
Cost of services:
Printing, distribution and publishing 23.5 26.7
Sales and marketing 18.3 16.8
General and administrative 34.3 36.0
Depreciation and amortization 5.8 6.1
-------- -------
Income (loss) from continuing operations 18.1% 14.4%
-------- -------
-------- -------
</TABLE>
Prior to February 1998, the Company had not conducted any operations
other than those relating to the IPO and the Acquisitions. Consequently, the
actual financial statements included herein relate only to the parent company
prior to February 18, 1998, but include the results of the Acquired Companies
only for the period after February 18, 1998. Certain pro forma operating
information is presented for comparative purposes as if the IPO and the
Acquisitions had occurred on January 1, 1998. The pro forma operating
information does not purport to represent the results of operations of the
Company that would have actually occurred if the IPO and the Acquisitions had in
fact occurred on the date stated above. Since the Acquired Companies were not
under common control or management, historical combined results of operations
may not be comparable to, or indicative of, future performance. The pro forma
Consolidated Statements of Operations reflect the historical results of
operations of the Acquired Companies and were derived from the respective
Acquired Companies' financial statements.
9
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RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999,
COMPARED TO THE PRO FORMA RESULTS OF OPERATIONS FOR THE THREE MONTHS
ENDED MARCH 31, 1998
Revenues from continuing operations, which consist of advertising
revenues from the Company's yellow pages directory operations, were $18.7
million in the first quarter of 1999 compared to $18.4 million pro forma
revenues the first quarter of 1998, an increase of 1.7%. The increase is due
to a combination of increased advertising revenue from existing customers and
incremental sales from new customers. The Company distributed directories in
the same five markets in both the first quarter of 1999 and 1998. The growth
rate is lower than the Company's historical growth experience as emphasis was
placed on the yellow pages sales force cross selling the Company's
telecommunications services which management believes negatively impacted its
yellow pages advertising sales in certain markets.
Printing, distribution and listing costs decreased $.5 million, or
10.6%, to $4.4 million in the first quarter of 1999 from pro forma $4.9 million
in the 1998 first quarter. As a percent of sales, printing, distribution and
listing costs decreased to 23.5% of sales in 1999 from 26.7% in 1998. The
decrease is due to negotiating lower costs from printers and outside service
providers.
Sales and marketing costs increased to $3.4 million from pro forma $3.1
million in the comparable period of 1998. As a percent of sales, sales and
marketing increased to 18.3% of sales in 1999 from 16.8% in 1998. The increase
is due to increased direct selling costs and advertising programs.
General and administrative expenses decreased $.2 million, or 3.2%,
to $6.4 million for the three months ended March 31, 1999, from pro forma
$6.6 million in 1998. The decrease is due primarily to a lower provision for
bad debts as a result of maturing markets and improved collections. As a
percentage of revenues, general and administrative expenses were 34.3% of
sales in the first quarter of 1999, and 36.0% in the same period of 1998. The
decrease in the expense rate is due to the aforementioned decrease in bad
debt provision and improved administrative efficiencies.
Depreciation and amortization was approximately $1.1 million in both
the first quarter of 1999 and 1998. Depreciation and amortization is principally
amortization of goodwill and customer lists resulting from the acquisition
of Great Western.
Interest expense for the first quarter was approximately $1.1 million
in the first quarter of 1999, an increase of $.7 million from pro forma interest
expense of $.4 million in the first quarter of 1998. The increase is due to
higher debt from borrowings under the Company's revolving credit facility used
to finance the Company's growth in the telecommunications segment.
Income tax expense of $1.3 million was recognized in the first quarter
of 1999 compared to pro forma income tax expense of $.5 million in 1998. The
increase is due to higher taxable income in the 1999 first quarter than in 1998.
The Company's effective tax rate is substantially higher than statutory tax
rates principally because amortization of certain intangible assets is not
deductible for tax purposes.
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Net income from continuing operations was $1.0 million, or $.05 per
share, in the three months ended March 31, 1999, compared to pro forma net loss
from continuing operations of $.0 million, or $.00 per share in the 1998 first
quarter. The decrease in net loss was primarily due to the absence of
stock-based compensation in the 1999 first quarter. Stock based compensation
expense was $1.8 million in the first quarter of 1998.
Earnings from continuing operations before interest, taxes,
depreciation, amortization, equity interest in KINNET and stock-based
compensation expense (EBITDA) increased to $4.5 million for the three months
ended March 31, 1999, from pro forma EBITDA of $3.8 million in the first
quarter of 1998. EBITDA is a measure commonly used in industry and is
presented to assist in an understanding of the Company's operating results
and is not intended to represent cash flow or results of operations in
accordance with generally accepted accounting principles. EBITDA is not
necessarily comparable to other similarly titled measures of other companies.
DISCONTINUED OPERATIONS
Net loss from discontinued operations was $6.2 million in the three
months ended March 31, 1999 compared to pro forma loss from discontinued
operations of $.6 million in 1998. Revenues from discontinued telecommunication
services were $24.2 million in the first quarter of 1999 compared to pro forma
$13.8 million in the first quarter of 1998. Revenues from the telecommunications
segment increased 75.7% over the comparable quarter of 1998 and 15.3% over the
sequential quarter. The increase in telecommunications revenue is due to
increased local service revenue as the Company implemented aggressive sales and
marketing of local services in addition to long-distance services. The Company's
local service revenue in the first quarter of 1999 was $12.3 million compared to
first quarter 1998 pro forma local service revenue of $2.2 million. Local
service revenue for the first quarter of 1999, increased 29.5% sequentially over
the fourth quarter of 1998 local service revenue of $9.5 million. In the three
months ended March 31, 1999, the Company installed approximately 13,000 local
access lines and at March 31, 1999, the Company had approximately 138,000 local
access lines in service.
Cost of discontinued services for the three months ended March 31,
1999, increased to $21.2 million, or 87.6% of telecommunications revenues,
from pro forma $8.9 million, or 64.9% of sales, in the first quarter of 1998.
The higher cost of providing telecommunications service in gross dollars is
due to the increase in local service revenue. The increase in operating costs
of the telecommunication segment as a percentage of telecommunication
revenues in 1999 is due to a higher volume of lower margin local service.
Local service accounted for 50.7% of total telecommunications revenue in the
first three months of 1999 compared to 15.6% in the first three months of
1998. Also contributing to the higher rate for costs of telecommunications
service is a reduction in pricing for long distance services. In response to
competition for long distance service, the Company reduced prices thereby
increasing the expense rate on long distance service. The Company's
telecommunications strategy was to deploy its own local switching facilities,
and transition its resale customers to its own switch-based facilities. The
Company believed that it would achieve higher gross margins by providing
telecommunications services on its own network than it could obtain by
reselling the services of the incumbent providers.
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital at March 31, 1999 was negative $1.1
million and its ratio of current assets to current liabilities was .9.
The Company has a $25.0 million revolving credit facility with a
financial institution. At March 31, 1999, the Company had outstanding
borrowings of $21.0 million under this facility. The credit facility has been
used for working capital, capital expenditures and general corporate
purposes. Borrowings under the facility are limited to 85% of eligible
accounts receivable and interest is variable, 8.25% at March 31, 1999. The
credit facility expires on August 6, 1999.
On May 14, 1999, the Company entered into a new $40.0 million revolving
loan agreement with another financial institution. The new credit facility will
be used to retire the Company's existing $25.0 million credit facility and for
general working capital requirements. Interest on the new facility is LIBOR plus
2.75% or the institution's base rate, as defined, plus .75%. The new facility
requires a commitment fee of .5% on the unused balance and is subject to various
restrictions and the maintenance of certain financial ratios. The new facility
expires on May 14, 2000.
Although the Company used $2.2 million in cash for continuing
operations in the first quarter of 1999, the Company's yellow pages
operations are cash flow positive, generating approximately $6.0 million, or
12.6% of revenues, in cash from operations in 1998. While the Company's
yellow pages publishing operations generate positive cash flow, they have not
been sufficient to cover the cash required by the Company's CLEC operations.
Because the Company has not had the capital resources to install its own
facilities, it has continued to operate as a reseller with low gross margins.
The low resale margins together with significant investment in
telecommunications sales and marketing has resulted in significant uses of
cash in the telecommunications segment. Management believes that cash
generated from it yellow pages operations and the funds available under the
new revolving credit facility are adequate to meet the short-term working
capital requirements of the telecommunications business until such time that
its CLEC operations are sold. In connection with the planned acquisitions,
the Company is evaluating a variety of financing alternatives to fund is
growth strategies in the yellow pages and Internet business.
YEAR 2000 ISSUE
The year 2000 issue is a matter of worldwide concern for carriers and
affects many aspects of telecommunications technology, including the computer
systems and software applications that are essential for network administration
and operations. A significant portion of the voice and data networking and
network management devices have date-sensitive processing in them which affect
network administration and operations functions such as service activation,
service assurance and billing processes.
The Company and its vendors have evaluated the year 2000 readiness of
the Company's computer systems and software applications. Certain of the
Company's key processing systems have recently been implemented and the vendors
of such systems have represented to the Company that the systems are compliant
with the year 2000 issues without any modification. The Company requires
12
<PAGE>
confirmation of year 2000 compliance in its current requests for proposals from
equipment and software vendors. Other legacy computer systems and software that
are currently in use are not currently compliant with the year 2000 issues;
however, management had previously planned on replacing or upgrading such
systems for business reasons other than the year 2000 issue. These replacements
and upgrades are expected to be complete by September 30, 1999. The failure of
the Company's computer systems and software applications to accommodate the year
2000 could have a material adverse effect on the Company's business, financial
condition, results of operation and cash flow.
Further, if the networks, and systems of the ILECs, IXCs and others on
whose services the Company depends and with whom the Company's networks and
systems must interface are not year 2000 functional, it could have a material
adverse effect on the operation of the Company's networks and, as a result, have
a material adverse effect on the Company. Most major domestic carriers have
indicated that they are addressing all of their network and support systems to
make them year 2000 functional by mid-1999. However, other domestic and
international carriers may not be year 2000 functional. The Company plans to
participate in the interoperability testing processes being put in place by
industry organizations and the Company intends to continue to monitor the
performance of its accounting, information and processing systems and software
applications and those of its third-party constituents to identify and resolve
any year 2000 issues. To the extent necessary, the Company may need to replace,
upgrade or reprogram certain systems and software applications to ensure that
all of the Company's computer systems and software applications and all of its
interoperability applications are year 2000 functional. However, based on
current information, the Company does not believe that it will incur costs for
any replacement, upgrade or reprogramming of its existing computer systems and
software applications to resolve any year 2000 issues that will be materially in
excess of the $500,000 currently budgeted.
ITEM 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to minimal market risks. The Company does not hold or
issue any financial instruments for trading purposes. Financial instruments
held for other than trading purposes do not impose a material market risk.
The Company is exposed to interest rate risk, as additional financing is
periodically needed due to the current operating losses and capital
expenditures associated with establishing and expanding the Company's
business. The interest rate that the Company will be able to obtain on debt
financing will depend on market conditions at that time, and may differ from
the rates the Company has secured on its current debt. Additionally, the
Company is exposed to interest rate risk on amounts borrowed against its
credit facility as of March 31, 1999. Advances against the facility
periodically renew, at which point the borrowings are subject to the then
current market interest rates, which may differ from the rates the Company is
currently paying on its borrowings.
PART II - OTHER INFORMATION
ITEM 1. - LEGAL PROCEEDINGS
As is the case with many companies, the Company faces exposure to
actual and potential claims and lawsuits involving its business and assets. The
Company is currently a party to various lawsuits consisting of ordinary, routine
litigation that is incidental to the business of the Company. The Company
believes that any liabilities resulting from such claims should not have a
material adverse effect on the Company's financial position, liquidity or
results of operations.
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 11 - Computation of Earnings Per Share
Exhibit 27 - Financial Data Schedule (filed with the
Securities and Exchange Commission only)
(b) Reports on Form 8-K
13
<PAGE>
During the quarter ended March 31, 1999, the Company filed a Current
Report on Form 8-K dated January 14, 1999 - Item 5 thereto relating to the
Company's sale of its investment in KINNET.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Advanced Communications Group, Inc.
(Registrant)
Date: May 14, 1999 /s/ Richard O'Neal
----------------------
Richard O'Neal
Chairman and Chief Executive Officer
Date: May 14, 1999 /s/ William H. Zimmer III
--------------------------
William H. Zimmer III
Executive Vice President
and Chief Financial Officer
(Principal Financial and Accounting
Officer)
14
<PAGE>
Exhibit 11
ADVANCED COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------------------------------------
(In thousands, except per share amounts) Actual Actual Pro Forma
1999 1998 1998
----------------- ------------------ --------------------
<S> <C> <C> <C>
EARNINGS PER SHARE:
Average number of common shares outstanding
for basic and diluted computation (see Note) 19,859,262 15,269,364 19,615,865
----------------- ------------------ --------------------
Net income (loss) from continuing operations $ 1,031 $ (816) $ (16)
Loss from discontinued operations, net of tax (6,189) (308) (584)
Loss on sale of discontinued operations, net (51,800) ---- ----
----------------- ------------------ ------------------
$ (56,958) $ (1,124) $ (600)
----------------- ------------------ --------------------
----------------- ------------------ --------------------
Basic and diluted earnings (loss) per share from:
Continuing operations $ .05 $ (.05) $ .00
Discontinued operations (.31) (.02) (.03)
Sale of discontinued operations (2.61) ---- ----
----------------- ------------------ ------------------
$ (2.87) $ (.07) $ (.03)
----------------- ------------------ --------------------
----------------- ------------------ --------------------
</TABLE>
Note: The effect of the assumed exercise of stock options and the assumed
conversion of the note payable and preferred stock have not been included in the
computation of diluted earnings per share for the period after issuance because
to do so would have been anti-dilutive for the periods presented
See accompanying notes to consolidated financial statements.
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEC
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 2,724
<SECURITIES> 0
<RECEIVABLES> 27,357
<ALLOWANCES> 8,979
<INVENTORY> 0
<CURRENT-ASSETS> 29,261
<PP&E> 2,382
<DEPRECIATION> 1,275
<TOTAL-ASSETS> 133,174
<CURRENT-LIABILITIES> 30,397
<BONDS> 0
1,122
0
<COMMON> 2
<OTHER-SE> 73,502
<TOTAL-LIABILITY-AND-EQUITY> 133,174
<SALES> 18,743
<TOTAL-REVENUES> 18,743
<CGS> 15,352
<TOTAL-COSTS> 15,352
<OTHER-EXPENSES> (7)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,089
<INCOME-PRETAX> 2,309
<INCOME-TAX> 1,278
<INCOME-CONTINUING> 1,031
<DISCONTINUED> (6,189)
<EXTRAORDINARY> (51,800)
<CHANGES> 0
<NET-INCOME> (56,958)
<EPS-PRIMARY> (2.87)
<EPS-DILUTED> (2.87)
</TABLE>
