<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 September 30, 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 November 5,1999, the registrant had 20,084,253 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 Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
(In thousands, except per share data) 1999 1998 1999 1998 (1)
-------- -------- -------- ------------
<S> <C> <C> <C> <C>
REVENUES $ 9,113 $ 8,255 $ 42,337 $ 30,247
OPERATING COSTS:
Printing, distribution and listing 1,961 1,867 11,946 6,729
Sales and marketing 2,686 2,572 9,755 6,849
General and administrative 3,801 3,210 15,386 11,736
Depreciation and amortization 1,202 1,497 3,522 3,229
Stock-based compensation ---- ---- ---- 1,760
-------- -------- -------- --------
Income (loss) from continuing operations (537) (891) 1,728 (56)
OTHER INCOME (EXPENSE):
Interest expense (1,177) (361) (3,517) (919)
Other (6) (190) 1 (47)
-------- -------- -------- --------
Income (loss) from continuing operations before
income taxes (1,760) (1,422) (1,788) (1,022)
Income tax expense (benefit) 461 (147) 612 588
-------- -------- -------- --------
Net income (loss) from continuing operations (2,181) (1,295) (2,400) (1,610)
Net loss from discontinued operations, net of tax
benefit of $1,079; $369; $5,196; $506 and
$648, respectively ---- (2,396) (6,189) (4,236)
Loss on discontinued operations, net
of income tax benefit of $4,363 ---- ---- (51,800) ----
-------- -------- -------- --------
Net loss $ (2,181) $ (3,691) $(60,389) $ (5,846)
======== ======== ======== ========
Basic and diluted earnings (loss) per share:
Continuing operations $ (.11) $ (.07) $ (.12) $ (.09)
Discontinued operations ---- (.12) (.31) (.23)
Loss on discontinued operations ---- ---- (2.60) ----
-------- -------- -------- --------
Net loss per share $ (.11) $ (.19) $ (3.03) $ (.32)
======== ======== ======== ========
</TABLE>
(1) Actual results include the operations of the parent company for the nine
months ended September 30, 1998, and the results of operations of the
acquired companies only for the period from February 18, 1998 to September
30, 1998.
See accompanying notes to consolidated financial statements.
2
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ADVANCED COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(In thousands, except share data) (Unaudited)
Sept. 30, Dec. 31,
ASSETS 1999 1998
- ------ --------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,408 $ 13,734
Accounts receivable, net 17,681 13,317
Deferred costs 2,236 3,888
Prepaid expenses and other current assets 289 94
Deferred taxes 3,782 3,398
--------- ---------
Total current assets 25,396 34,431
--------- ---------
Property, plant and equipment, net 957 1,134
Intangible assets, net 76,546 78,746
Other assets 2,259 1,022
Net assets held for sale 41,222 69,780
--------- ---------
Total other assets 120,984 150,682
--------- ---------
Total assets $ 146,380 $ 185,113
========= =========
LIABILITIES AND STOCKHOLDERS'
- -----------------------------
Equity current liabilities:
Accounts payable and accrued liabilities $ 6,704 $ 4,844
Short-term debt and current maturities of long-term debt 55,000 17,117
Other current liabilities 2,691 3,017
--------- ---------
Total current liabilities 64,395 24,978
Long-term obligations:
Long-term debt ---- 17,233
Deferred tax liabilities 10,704 11,318
--------- ---------
Total liabilities 75,099 53,529
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock, Series A Redeemable Convertible, $.0001 par
value: 20,000,000 shares authorized; 0 and 142,857 shares
issued and outstanding, respectively ---- 1,122
Common stock, $.0001 par value: 180,000,000 shares
authorized; 20,070,003 and 19,859,262 shares outstanding,
respectively 2 2
Additional paid-in capital 147,744 146,611
Treasury stock, 168,257 and 234,141 common shares (938) (1,013)
Retained earnings (accumulated deficit) (75,527) (15,138)
--------- ---------
Total stockholders' equity 71,281 131,584
--------- ---------
Total liabilities and stockholders' equity $ 146,380 $ 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>
Nine Months Ended
September 30,
--------------------------
(In thousands) 1999 1998
---------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (60,389) $ (5,846)
--------- ---------
Adjustments to reconcile net loss to net cash:
Loss on discontinued operations, net 51,800 ----
Loss from discontinued operations, net 6,189 4,236
Depreciation and amortization 3,522 3,229
Stock-based compensation expense ---- 1,760
Provision for deferred tax (998) ----
Change in assets and liabilities:
Decrease (increase) in:
Accounts receivable, net (4,364) (3,571)
Deferred costs 1,652 1,886
Prepaid expenses and other current assets (195) 636
Other assets (2,280) (9,866)
Increase (decrease) in:
Accounts payable and accrued liabilities 1,860 (1,347)
Other current liabilities (326) 39
--------- ---------
Cash used in continuing operating activities (3,529) (8,884)
Cash used in discontinued operations (26,624) (6,102)
--------- ---------
Cash used in operating activities (30,153) (14,946)
--------- ---------
Cash flows from investing activities:
Cash paid for businesses acquired, net of cash ---- (83,277)
Proceeds from sale of assets 500 ----
Additions to property, plant and equipment, net (3,524) (871)
--------- ---------
Cash used in investing activities (3,024) (84,148)
--------- ---------
Cash flows from financing activities:
Borrowings of short-term debt 45,883 10,000
Repayment of short-term debt (25,118) (4,895)
Proceeds from stock option exercises 86 ----
Proceeds from common stock offering, net of offering costs ---- 99,900
--------- ---------
Cash provided by financing activities 20,851 105,005
--------- ---------
Net increase (decrease) in cash and cash equivalents (12,326) 5,911
Cash and cash equivalents-beginning of period 13,734 ----
--------- ---------
Cash and cash equivalents-end of period $ 1,408 $ 5,911
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
ADVANCED COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 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. Because the Company's operations
are seasonal and vary from quarter to quarter, results of operations for interim
periods may not be indicative of results for an entire year. 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 the
"Company"), a Delaware corporation, is an independent yellow pages directory
publisher in selected markets in California, Oklahoma and Texas. The Company
also maintains a regional competitive local exchange carrier ("CLEC")
business 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).
In June 1999, the Company announced the execution of definitive
agreements to acquire all the outstanding stock of YPtel Corporation, Web YP,
Inc. (d/b/a WorldPages.com) and a related company, Big Stuff, Inc. for newly
issued shares of common stock. In October 1999, the Company executed revised
definitive agreements for the aforementioned proposed acquisitions of the
outstanding stock of YPtel Corporation. The revisions relate principally to
the number of the Company's shares to be exchanged for YPtel shares, which
have been increased to 15.0 million. The total number of shares to be issued
in consideration for the acquisitions is 19,545,459. This total does not
include the shares issued in consideration for the conversion of promissory
notes or debt as discussed below.
In related transactions, the Company also intends to redeem $15.0
million of promissory notes and accrued interest due to the former owners of
Great Western Directories, Inc. for 2,840,909 shares of common stock and to
convert up to $6.0 million in debt of Web YP, Inc. and Big Stuff, Inc. in
exchange for up to 1,090,909 shares of common stock. The terms of the
acquisitions are subject to regulatory approvals and other conditions.
In addition, the parties have agreed to extend the termination date to
January 31, 2000, with certain extension periods if necessary, and have
agreed to remove a contingency provision that could have resulted in
additional shares being issued to YPtel. As a result of strong performance at
YPtel's operating subsidiary, the value of YPtel has increased significantly
since the signing of the original agreement. YPtel's new Portland directory
posted solid results and, based on the success of that market, YPtel is
establishing a directory in the Seattle market, which will be its largest
single market expansion to date.
5
<PAGE>
YPtel Corporation is the parent of Pacific Coast Publishing, Ltd., a
yellow pages directories 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 an Internet
yellow pages network that is integrated with its wholly-owned local print
yellow pages directories. By combining the yellow pages 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 of the Company, which
will be re-named WorldPages.com. The Company's stock will continue to be
traded on the NYSE under a new symbol to be released upon completion of the
transactions.
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").
Prior to February 1998, the Company had not conducted any operations
other than those relating to the IPO and the related 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.
All intercompany accounts have been eliminated in consolidation.
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. Customer
lists and goodwill are amortized on a straight-line basis over their estimated
useful lives ranging from 10 to 40 years. For the nine months ended September
30, 1999, amortization expense from continuing operations relating to intangible
assets was $3.2 million.
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.
6
<PAGE>
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 or at very steep discounts in
order to accelerate capturing market share; therefore, advertising revenues
derived from prototype directories are substantially less than revenues that
are expected in the first sold year. 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 one
prototype directory in both the nine months ended September 30, 1999 and
1998, respectively. The Company recognized approximately $3.1 million of net
costs relating to the 1999 prototype directory and $.4 million of net costs
relating to the 1998 prototype directory.
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 consolidated 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
telecommunications segment in connection with several strategic acquisitions.
In July 1999, the Company announced the execution of a definitive agreement
to sell its entire base of telecommunications operations for cash totaling
$49.8 million to Ionex Telecommunications, Inc. (formerly Compass
Telecommunications, Inc). The purchase price is subject to adjustment based
on the amount of working capital and other financial information at closing.
The transaction is subject to regulatory approvals, including those of the
FCC and various state public service commissions. Accordingly, the results
of all the telecommunications segment are classified as discontinued
operations in the accompanying consolidated financial statements. Revenues
from the discontinued telecommunications segment were $23.4 million and $16.9
million in the third quarter of 1999 and 1998, respectively. Net losses from
discontinued telecommunications operations of $7.5 million, net of income tax
benefits of $1.1 million, were included in the estimated loss on the sale
recognized in the first quarter of 1999. Net losses from telecommunications
operations were $2.4 million, net of income tax benefits of $.4 million in
the third quarter of 1998. Revenues from the discontinued telecommunications
segment were $72.5 million and $38.7 million in the nine months ended
September 30, 1999 and 1998, respectively. Net losses from discontinued
telecommunications operations were $23.4 million, net of an income tax
benefit of $5.2 million, and $4.2 million, net of an income tax benefit of
$.6 million in the nine months ended September 30, 1999 and 1998,
respectively.
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, and estimated proceeds from the sale. The estimate is
recorded net of an estimated income tax benefit of $4.4 million.
The net assets and liabilities of the discontinued telecommunications
operations are classified on the accompanying balance sheet as net assets
held for sale. Net assets held for sale at September 30, 1999, are net of the
remaining reserve established for the estimated loss on the sale.
7
<PAGE>
5. ACQUISITIONS
In February 1998, the Company completed its IPO. Concurrent with and as
a condition to the closing of the IPO, the Company acquired all of the
outstanding capital stock of Great Western Directories, Inc., Valu-Line of
Longview, Inc., Feist Long Distance Service, Inc., FirsTel, Inc. and
Tele-Systems, Inc., substantially all of the assets of Long Distance
Management II, Inc., Long Distance Management of Kansas, Inc., The
Switchboard of Oklahoma City, Inc., and National Telecom, a proprietorship,
and 49% of the outstanding capital stock of KINNET. The acquisitions were
accounted for using the purchase method of accounting. Except for the
acquisition of Great Western, the operations of all the other acquired
companies are intended to be sold and are therefore presented as discontinued
operations and net assets held for sale.
The following table sets forth for accounting purposes the fair value
of consideration paid with respect to the acquisition of Great Western and
the assets acquired:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Consideration Paid:
Cash $ 55,634
Common stock 8,000
Notes payable 15,000
Options and warrants 3,125
-----------
Total Purchase Price $ 81,759
===========
Assets Acquired:
Net working capital $ 6,160
Property and equipment 1,237
Customer lists 32,900
Goodwill 50,921
Net deferred tax liability (9,459)
-----------
Total Assets Acquired $ 81,759
===========
</TABLE>
The following pro forma operating information is presented for
comparative purposes as if the IPO and the acquisition of Great Western 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 related acquisitions had in fact
occurred on that date. Since the related 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.
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1998
====================================
As Reported Pro Forma
=========== =========
<S> <C> <C>
Revenue $30,247 $39,493
Income (loss) from
continuing operations $ (56) $ 1,602
Net income (loss)
from continuing operations $(1,610) $ (810)
</TABLE>
In addition to the acquisition of Great Western, the Company purchased
the other acquired companies for $62.6 million in cash, stock options and notes
payable. These acquisitions resulted in $47.0 million of goodwill, $14.9 in
customer lists and $.7 million of net other assets which have been classified as
net assets held for sale.
8
<PAGE>
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 assets and
liabilities of TRI have also been classified as net assets held for sale. 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.
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 prototype directory
activities and stock-based compensation expense:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ----------------------------------------
Pro Forma Actual
1999 1998 1999 1998 1998
------------ ------------ ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Directory revenues 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of services:
Printing, distribution and publishing 21.5 22.6 22.1 23.3 21.7
Sales and marketing 29.5 31.2 21.7 22.0 22.7
General and administrative 41.7 38.9 36.1 36.4 39.0
Depreciation and amortization 13.2 18.1 8.5 9.6 10.7
------------ ------------ ----------- ------------- -----------
Operating income (loss) from
continuing operations (5.9)% (10.8)% 11.6% 8.7% 5.9%
============ ============ =========== ============= ===========
</TABLE>
9
<PAGE>
Prior to February 1998, the Company had not conducted any operations
other than those relating to the IPO and the related acquisitions.
Consequently, the actual financial statements included herein relate only to
the parent company prior to February 18, 1998, but include the results of
Great Western only for the period after February 18, 1998. Certain pro forma
operating information is presented for comparative purposes as if the IPO and
the related 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 related
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.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999, COMPARED
TO THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
Revenues from continuing operations, which consist of advertising
revenues from the Company's yellow pages directory operations, were $9.1
million in the third quarter of 1999 compared to $8.3 million in the third
quarter of 1998, an increase of 10.4%. Approximately $.4 million of the
increase is due to the publishing and distributing a directory in the
Channelview, Texas market in its first year after prototype. The increase in
revenue from recurring directories is due to a combination of increased
advertising revenue from existing customers and incremental sales from new
customers. In addition to the Channelview directory, the Company distributed
directories in the same seven markets in both the third quarters of 1999 and
1998.
Printing, distribution, and listing costs increased $0.1 million, or
5.0%, to $2.0 million in the third quarter of 1999 from $1.9 million in the
1998 third quarter. As a percent of sales, printing, distribution, and
listing costs decreased to 21.5% of sales in 1999 from 22.6% in 1998. The
decrease in the expense rate is due to economies of scale realized from
higher sales volume.
Sales and marketing costs increased to $2.7 million in the third
quarter of 1999 from $2.6 million in the comparable period of 1998. The
increase is due to direct costs associated with the higher sales volume. As a
percent of sales, sales and marketing decreased to 29.5% of sales in 1999
from 31.2% in 1998. The decrease in the expense rate is due to lower
incentive compensation and trade expenses resulting from restructured
incentive compensation and trade programs.
General and administrative expenses increased $.6 million, or 18.4%,
to $3.8 million for the three months ended September 30, 1999, from $3.2
million in 1998. The increase is due to higher bad debt expense associated
with higher sales volume in 1999. As a percentage of revenues, general and
administrative expenses increased to 41.7% of sales in 1999 from 38.9% in
1998. The increase in the expense rate is due to the aforementioned increase
in the bad debt expense.
10
<PAGE>
Depreciation and amortization was approximately $1.2 million in the
third quarter of 1999, a decrease of $.3 million from $1.5 million in 1998.
Depreciation and amortization consists principally of amortization of
goodwill and customer lists resulting from the acquisition of Great Western.
Interest expense for the third quarter was approximately $1.2
million in 1999, an increase of $.8 million from interest expense of $.4
million in the third 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 operating losses and growth in the telecommunications operations.
Income tax expense of $.5 million was recognized in the third
quarter of 1999 compared to income tax benefit of $0.1 million in 1998. The
change is due to higher taxable income in the 1999 third quarter than in
1998. The Company's effective tax rate is substantially higher than statutory
tax rates principally because amortization of intangible assets is not
deductible for tax purposes.
Net loss from continuing operations was $2.2 million, or $.11 per
share, in the three months ended September 30, 1999, compared to net loss
from continuing operations of $1.3 million, or $.07 per share in the 1998
third quarter. The increase in net loss was primarily due to the factors
noted above.
Earnings from continuing operations before interest, taxes,
depreciation, amortization, and stock-based compensation expense (EBITDA)
increased to $.7 million for the three months ended September 30, 1999, from
EBITDA of $.6 million in the third quarter of 1998. The increase is
principally due to the results of the North Channel, TX directory in its
first year after introduction. EBITDA is a measure commonly used 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 for the three months ended
September 30, 1999, has been included in the Company's estimated loss on the
sale of the discontinued operations recognized in the first quarter of 1999.
The actual net loss was $7.5 million compared to net loss from discontinued
operations of $2.4 million in the third quarter of 1998. Revenues from
discontinued telecommunications services were $23.4 million in the third
quarter of 1999 compared to $16.9 million in the third quarter of 1998, an
increase of 38.5%. 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 third quarter of 1999 was $13.0
million compared to third quarter 1998 local service revenue of $5.4 million.
At September 30, 1999, the Company had approximately 132,000 local access
lines in service.
Cost of discontinued services for the three months ended September
30, 1999, increased to $21.7 million, or 92.7% of telecommunications
revenues, from $11.2 million, or 66.3% of sales, in the third 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 telecommunications segment as a percentage of
telecommunications revenues in 1999 is due to a higher volume of lower margin
local service.
11
<PAGE>
Local service accounted for 55.4% of total telecommunications revenue in the
third quarter of 1999 compared to 32.1% in the third quarter 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 be able to achieve higher gross margins by providing
telecommunications services on its own network than it could obtain by
reselling the services of the incumbent providers; however, due to the
Company's change in stategic focus and direction, the investments to improve
operating margins have not been pursued.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999, COMPARED TO
THE PRO FORMA RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
Revenues from continuing operations, for the nine months ended
September 30, 1999, increased 7.2% to $42.3 million from pro forma $39.5
million in 1998. Approximately $.8 million of the increase is due to the
Company's introduction of a prototype directory in the Austin, Texas market
in the second quarter of 1999 and approximately $.4 million of the increase
is due to the first sold year publication of a directory in the North
Channel, Texas market. Excluding new and prototype directories, revenues
increased 5.6% to $41.5 million. The increase in revenue from recurring
directories is due to a combination of increased advertising revenue from
existing customers and incremental sales from new customers.
Printing, distribution and listing costs increased $2.6 million to
$11.9 million from pro forma $9.4 million in the nine months of 1998. The
increase is due to $2.8 million of costs related to the Austin prototype
directory incurred during the second quarter of 1999. Excluding prototype
directories, printing, distribution, and listing costs increased .4% to $9.1
million. As a percent of sales, printing, distribution and listing costs of
recurring directories decreased to 22.1% of sales in 1999 from 23.3% in 1998.
The decrease is due to negotiating lower costs from printers and outside
service providers for certain directories offset partially by higher costs on
certain other directories.
Sales and marketing costs increased to $9.8 million from pro forma
$8.7 million in the comparable period of 1998. The increase is principally
due to $.7 million of costs related to the Austin prototype directory.
Excluding prototype directories, sales and marketing costs increased 4.2% to
$9.1 million. As a percent of sales, sales and marketing costs decreased to
21.7% of sales in 1999 from 22.0% in 1998. The decrease in the expense rate
is due lower incentive compensation and trade expenses resulting from
restructured incentive compensation and trade programs.
General and administrative expenses increased $1.1 million, or 7.6%,
to $15.4 million for the nine months ended September 30, 1999, from pro forma
$14.3 million in 1998. The increase is partially due to $.4 million of
expenses related to the Austin prototype directory. Excluding prototype
directories, general and administrative expenses increased 4.8% to $15.0
million. As a percentage of revenues, general and administrative expenses
were 36.1% of sales in the nine months ended September 30, 1999, and 36.4% of
pro forma sales in the nine months ended September 30, 1998. The decrease in
the expense rate is due to operating efficiencies which are partially offset by
higher salaries and wages.
12
<PAGE>
Depreciation and amortization was approximately $3.5 million in the
nine months ended September 30, 1999 and $3.8 million in pro forma 1998.
Depreciation and amortization is principally amortization of goodwill and
customer lists resulting from the acquisition of Great Western.
Interest expense for the nine months of 1999 was approximately $3.5
million, an increase of $2.5 million from interest expense of pro forma $1.0
million in the comparable period of 1998. The increase is due to higher debt
from borrowings under the Company's revolving credit facility used to finance
the Company's operating losses and historical growth in the
telecommunications segment.
Income tax expense of $.6 million was recognized in the nine months
ended September 30, 1999, compared to pro forma income tax expense of $1.3
million in 1998. The decrease is due to lower taxable income in 1999 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.
Net loss from continuing operations was $2.4 million, or $.12 per
share, in the nine months ended September 30, 1999, compared to pro forma net
loss from continuing operations of $.8 million, or $.04 per share in the
comparable period of 1998. The increase in net loss was primarily due to
increased interest expense and the introduction of a new directory in the
second quarter of 1999.
EBITDA decreased to $5.3 million for the nine months ended September 30,
1999, from pro forma EBITDA of $7.2 million in the comparable period of 1998,
due to the previously mentioned Austin prototype directory. Excluding net
prototype costs of $3.1 million associated with the Austin directory, EBITDA
increased to $8.4 million for the first nine months of 1999, an increase of
16.7%.
DISCONTINUED OPERATIONS
Net loss from discontinued operations was $23.4 million for the nine
months ended September 30, 1999 compared to pro forma loss from discontinued
operations of $4.4 million in 1998. Approximately $16.9 million of these net
losses were included in the estimated loss on sale and were charged against
the reserve established in the first quarter of 1999. Revenues from
discontinued telecommunications services increased 58.0% to $72.5 million in
the first nine months of 1999 compared to pro forma $45.9 million in the
comparable period of 1998. 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 revenues in the first nine months of 1999 was
$38.8 million compared to the same period of 1998 local service revenues of
$10.6 million. At September 30, 1999, the Company had approximately 132,000
local access lines in service.
Cost of discontinued services for the nine months ended September
30, 1999, increased to $65.8 million, or 90.8% of telecommunications
revenues, from pro forma $32.4 million, or 70.6% of sales, in the comparable
period 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 telecommunications segment as a percentage of
telecommunications revenues in 1999 is due to a higher volume of lower margin
local service. Local service accounted for 53.6% of total telecommunications
revenues in the first nine months of 1999 compared to 24.0% in the first nine
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
13
<PAGE>
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 be able to achieve higher gross margins by providing
telecommunications services on its own network than it could obtain by
reselling the services of the incumbent providers; however, due to the
Company's change in strategic focus and direction, the investments to improve
operating margins have not been pursued.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital at September 30, 1999 was negative
$39.0 million and its ratio of current assets to current liabilities was .39.
These amounts include current maturities of long-term debt of $17.0 million
and short-term borrowings under the Company's revolving credit facility of
$38.0 million. In connection with the planned acquisitions of YPtel, Web YP
and Big Stuff, $15.0 million of the current maturities due in February 2000
are expected to be converted into approximately 2.7 million shares of common
stock. Further, the Company is expecting to refinance its existing revolving
credit facility prior to its expiration in May 2000. Excluding both the $15.0
million in notes which is expected to be converted to equity and the $38.0
million credit facility which is expected to be refinanced, the Company's
working capital at September 30, 1999 was positive $14.0 million. If the
Company is unable to close the acquisitions, refinance its existing revolving
facility or obtain alternative debt or equity financing, it will be unable to
meet its current obligations.
On May 14, 1999, the Company through its wholly-owned Great Western
subsidiary, entered into a $40.0 million revolving loan agreement with a
financial institution. The credit facility was used to retire the Company's
prior $25.0 million credit facility and the balance is for general working
capital requirements and other corporate purposes, subject to various
restrictions on such use. 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 13, 2000. The Company and its telecommunications
subsidiaries guaranteed the loan and have pledged substantially all their
assets. The Company intends to use the net proceeds from the sale of the
telecommunications subsidiaries to refinance the loan or reduce its balance.
At September 30, 1999, the Company had borrowed $38.0 million under this
facility.
Although the Company used $3.5 million in cash for continuing
operations in the first nine months of 1999, the Company's yellow pages
operations are cash flow positive. The Company's management believes that the
cash generated from its yellow pages business and the remaining cash
available under its line of credit will be sufficient to fund its anticipated
operating losses from the telecommunications segment until the sale of its
telecommunications subsidiaries or the acquisitions of YPtel, Web YP and Big
Stuff, if either transaction occurs before December 1999. If neither occurs
before December 1999, the Company will be required to obtain additional
financing. The Company's ability to obtain additional financing from a lender
will depend on the status of the planned acquisitions of YPtel, Web YP and
Big Stuff and the status of the sale of the telecommunications subsidiaries.
If the conditions required to close these transactions have been
substantially satisfied, management believes that it will be easier to obtain
the necessary funds. If
14
<PAGE>
it does not appear that the completion of one or both of these transactions
will occur, the Company's ability to obtain financing will be significantly
impaired which could require it to cease operations.
In any event, the Company will need additional capital to implement
both its plan to acquire other print yellow pages publishers and its Internet
directory strategy. However, the Company believes that if the sale of the
telecommunications subsidiaries and the acquisitions have occurred, it will
be in a much better position to obtain the needed financing, either by
incurring debt or by raising money through an equity offering. In order to
address all of its short-term and long-term financing needs, the Company is
actively investigating and evaluating a variety of debt and equity financing
alternatives.
YEAR 2000 ISSUE
The Year 2000 issue is a matter of worldwide concern for
telecommunications carriers and affects many aspects of technology including
the computer systems and software applications that are essential for network
administration and operations. A significant portion of the voice and data
network equipment, and many network management devices have date-sensitive
processing which enables basic network operations as well as administration
including functions such as service activation, fault remediation and billing.
The Company has evaluated the state of Year 2000 readiness of its
computer systems and software applications. As a result of this and in the
course of normal business operations, the Company's key network and data
processing systems have been upgraded or replaced. Vendors of these systems
have represented to The Company that the systems are now compatible with the
Year 2000 issue without further modifications. The Company requires
confirmation and warranty of Year 2000 compatibility in its requests for
proposals and purchase agreements from or with equipment and software
vendors. The Company currently operates some ancillary, non-essential systems
that may not be compatible with the Year 2000; however, the Company is
executing plans to replace or upgrade these systems by yearend. Failure of
the Company's computer-based systems and software applications to accommodate
the Year 2000 could have a material adverse effect on the Company's business,
financial condition, results of operations, and cash flow.
As a common carrier, the Company interconnects its network with
those of other LEC's and IXC's to provide service to its subscribers. If the
networks of these interconnecting carriers or those that they interconnect
with are not compatible with the Year 2000 issue and experience operational
impairments as a result, it could have a material, adverse affect on the
Company and its network. Most major domestic carriers have indicated that
they are addressing issues related to the Year 2000 in their own networks and
have announced that they anticipate being fully compatible. However, other
domestic and international carriers alike may not be compatible with the Year
2000 when it arrives. The Company cannot predict what effect their lack of
compatibility would have on its operations.
The Company intends to continue to monitor the readiness, disclosure
and status of key carriers and industry groups and will continue to monitor
the status of its own operating and support systems with the intent of
identifying and resolving any Year 2000 related issues before they
detrimentally affect the Company or its operations. As part of this
continuing effort, the Company may need to replace, upgrade, or re-program
some of its computer-based systems in addition to those already slated for
improvement. The Company believes that any such additional improvements can
be completed within the currently budgeted amount of $500,000.
15
<PAGE>
The Company is developing contingency plans for Year 2000 issues.
These contingency plans will be an integral part of disaster recovery plans
and will include response teams of key personnel, vendors and consultants.
Certain aspects of the contingency plans are as follows:
Network Elements-Network elements include systems, components, or
software that directly affect telecommunications switching, transmission and
reception equipment, including but not limited to, computer-based switches,
routers and amplifiers. These systems must continue to be operable with
real-time date sequences including the Year 2000. The company has taken steps
to assure itself of this readiness. In addition, these systems are critically
dependent on electrical power for continued operations. The Company
anticipates no issues from a potential commercial power interruption
resulting from a Year 2000 event because The Company currently tests and
maintains auxiliary power systems including battery backups and generators
intended to provide an uninterrupted power supply for all essential network
elements.
If any of the essential network elements fail and are unable to
operate as a result of the Year 2000 event, the Company plans to either
- transfer service to an alternate switch, if possible; or
- implement temporary date modifications to enable the equipment
until a permanent resolution can be established; or
- have an intermediate carrier redirect incoming calls to other
carriers for routing and completion.
Support Systems--Support systems include a variety of systems used in
the operations and maintenance of the network elements. While these systems
may not be essential to the real-time operations of the network, they do play
an important role to allow the Company to efficiently conduct business. The
Company believes that these systems are or will be continuously operable into
the Year 2000 without impairment. However, should these systems experience
problems with the Year 2000 date, the Company can continue operations with
manual processes until the impairment is resolved. These support systems are
included in the continuing evaluation and monitoring processes that The
Company is conducting.
The Company's administrative data network (LAN/WAN) also functions
as an important support system for its telecommunications and business
operations. Like most contemporary LAN/WAN systems, this network relies on
routers, switches, hubs, and connecting circuits provided by other carriers
to provide consistent and reliable data support. The Company maintains local
backups of data for up to the last five weeks of operations. In the event of
a failure of the LAN/WAN system, the backup data can be shipped between sites
by mail or courier and can be restored on the network once the impairment has
been resolved. The Company's assessment of Year 2000 risks associated with
its administrative network indicate that all or most of the electronic
equipment used in that network has been manufactured in the last two years
and as such has been designed with Year 2000 date compatibility included. The
Company has obtained certifications, representations, and warranties of year
2000 compliance and continued operation through the event from all major
vendors that supply equipment or network services used in the administrative
data network.
Auxiliary Systems--Auxiliary systems, including systems or components
such as payroll, human resources, security and access control, and
environmental systems, are all operated on third party software and hardware.
The Company believes that the limited size and complexity of these systems in
the company make it possible to operate manually if a system fails due to a
Year 2000 related issue. The Company intends to utilize
16
<PAGE>
the resources of vendors to either repair the failed system or to secure a
replacement for the failed system if necessary.
ITEM 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to minimal market risks based on its current
holdings and use of financial instruments. 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 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 September 30, 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. Certain significant legal proceedings to
which the Company is currently involved are described below.
In August 1996, one of the Company's telecommunications
subsidiaries, Valu-Line entered into a written agreement with MCI
Communications Corporation under which, for a fee, MCI would provide access
to Valu-Line so that Valu-Line could provide services as a long distance
carrier. After execution of the written agreement, service failures by MCI
occurred. To address the service failures and MCI relocation of circuits
serving Valu-Line, representatives of Valu-Line and MCI agreed upon a reduced
fee structure and revised
17
<PAGE>
network architecture in order to provide restitution to Valu-Line and to
address the service quality issues. The resulting agreement reflecting the
reduced fee structure was never set forth in writing.
Both before and after The Company acquired Valu-Line, the payments
made under the Valu-Line contract with MCI were in accordance with the
modified agreement. In April-May 1999, after the acquisition of MCI by
WorldCom, Inc., MCI WorldCom, Inc., as the owner of the successor-in-interest
to MCI, took the position that ACG owed $2.9 million in delinquent amounts
under the original written contract, ignoring the modification to the
contract between the parties. MCI WorldCom has not taken any legal action
against the Company or Valu-Line. The Company has agreed to pursue the
Company's rights and defenses in arbitration.
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
During the quarter ended September 30, 1999, the Company filed
a Current Report on Form 8-K dated July 14, 1999, relating
to activities in connection with the Company's change in
business focus, strategy and direction. These activities
include the sale of the Company's telecommunications
subsidiaries to Ionex Telecommunications, Inc. (formerly
Compass Telecommunications, Inc.) and the acquisitions of
YPtel Corporation, Web YP, Inc. and Big Stuff, Inc.
18
<PAGE>
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: November 14, 1999 /s/ Richard O'Neal
--------------------------
Richard O'Neal
Chairman and Chief Executive Officer
Date: November 14, 1999 /s/ Michael A. Pruss
--------------------
Michael A. Pruss
Vice President
and Chief Financial Officer
(Principal Financial and Accounting Officer)
19
<PAGE>
EXHIBIT 11
ADVANCED COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(Unaudited)
<TABLE>
<CAPTION>
(In thousands, except share amounts) Three Months Ended September 30,
------------------------------------
1999 1998
----------------- ------------------
<S> <C> <C>
EARNINGS PER SHARE:
Average number of common shares outstanding for
basic and diluted computation (see Note) 19,968,478 19,615,865
================= ==================
Net loss from continuing operations $ (2,181) $ (1,295)
Loss from discontinued operations, net of tax ---- (2,396)
Loss on discontinued operations, net ---- ----
----------------- ------------------
$ (2,181) $ (3,691)
================= ==================
Basic and diluted loss per share from:
Continuing operations $ (.11) $ (.07)
Discontinued operations ---- (.12)
Loss on discontinued operations ---- ----
----------------- ------------------
$ (.11) $ (.19)
================= ==================
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------------
(In thousands, except share amounts)
1999 1998
----------------- ------------------
<S> <C> <C>
EARNINGS PER SHARE:
Average number of common shares outstanding for
basic and diluted computation (see Note) 19,896,067 18,179,968
================= ==================
Net loss from continuing operations $ (2,400) $ (1,610)
Loss from discontinued operations, net of tax (6,189) (4,236)
Loss on discontinued operations, net (51,800) ----
----------------- ------------------
$ (60,389) $ (5,846)
================= ==================
Basic and diluted loss per share from:
Continuing operations $ (.12) $ (.09)
Discontinued operations (.31) (.23)
Loss on discontinued operations (2.60) ----
----------------- ------------------
$ (3.03) $ (.32)
================= ==================
</TABLE>
Note: The effect of the assumed exercise of stock options and the assumed
conversion of the notes 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.
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEC FORM
10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,408
<SECURITIES> 0
<RECEIVABLES> 26,668
<ALLOWANCES> 8,987
<INVENTORY> 0
<CURRENT-ASSETS> 25,396
<PP&E> 2,377
<DEPRECIATION> 1,420
<TOTAL-ASSETS> 146,380
<CURRENT-LIABILITIES> 64,395
<BONDS> 0
0
0
<COMMON> 2
<OTHER-SE> 71,279
<TOTAL-LIABILITY-AND-EQUITY> 71,281
<SALES> 42,337
<TOTAL-REVENUES> 42,337
<CGS> 40,609
<TOTAL-COSTS> 40,609
<OTHER-EXPENSES> (1)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,517
<INCOME-PRETAX> (1,788)
<INCOME-TAX> 612
<INCOME-CONTINUING> (2,400)
<DISCONTINUED> (6,189)
<EXTRAORDINARY> (51,800)
<CHANGES> 0
<NET-INCOME> (60,389)
<EPS-BASIC> (3.03)
<EPS-DILUTED> (3.03)
</TABLE>
