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PROSPECTUS FILED PURSUANT TO RULE 424(b)(3)
REGISTRATION NO. 333-30102
WORLDPAGES.COM, INC.
23,851,281 SHARES OF COMMON STOCK
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These shares of our common stock are being offered by certain Selling
Stockholders identified in this prospectus. The selling stockholders may sell
these shares from time to time in brokers' transactions, negotiated
transactions, or otherwise at prices current at the time of sales. We will not
receive any proceeds from these sales.
All expenses of the registration of these shares (other than brokerage
commissions and transfer taxes, which will be paid by the Selling Stockholders)
will be paid by us. We estimate that the expenses will be $265,000.
On or after the date hereof, the symbol under which our common stock is
traded on the New York Stock Exchange will be changed to "WPZ." On February 23,
2000, the closing sale price of our common stock as reported by the New York
Stock Exchange was $15.69 per share.
INVESTING IN WORLDPAGES COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON
PAGE 6.
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Neither the Securities Exchange Commission nor any state securities commission
has approved or disapproved of these securities or passed upon the adequacy or
accuracy of this Prospectus. Any representation to the contrary is a criminal
offense.
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<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
DISCOUNTS AND SELLING
PRICE TO PUBLIC COMMISSIONS STOCKHOLDERS
<S> <C> <C> <C>
Per Share................................ See Text Above See Text Above See Text Above
Total.................................... See Text Above See Text Above See Text Above
</TABLE>
The date of this prospectus is February 24, 2000.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PRELIMINARY NOTE............................................ 4
PROSPECTUS SUMMARY.......................................... 4
RISK FACTORS................................................ 6
USE OF PROCEEDS............................................. 14
PRICE RANGE OF COMMON STOCK AND DIVIDENDS................... 14
CAPITALIZATION.............................................. 15
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS........... 16
SELECTED HISTORICAL FINANCIAL INFORMATION OF ADVANCED....... 21
ADVANCED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 23
SELECTED HISTORICAL FINANCIAL INFORMATION OF YPTEL.......... 29
YPTEL MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 31
SELECTED HISTORICAL FINANCIAL INFORMATION OF WEB YP......... 36
WEB YP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 37
SELECTED HISTORICAL FINANCIAL INFORMATION OF BIG STUFF...... 38
BIG STUFF MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 39
BUSINESS.................................................... 41
MANAGEMENT OF WORLDPAGES.................................... 49
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 60
SELLING STOCKHOLDERS........................................ 62
PLAN OF DISTRIBUTION........................................ 65
DESCRIPTION OF WORLDPAGES CAPITAL STOCK..................... 66
LEGAL MATTERS............................................... 70
EXPERTS..................................................... 70
INDEX TO FINANCIAL STATEMENTS............................... F-1
</TABLE>
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PRELIMINARY NOTE
WorldPages was formerly incorporated under the name Advanced Communications
Group, Inc. and its stock was traded on the New York Stock Exchange under the
symbol "ADG." Shortly after Advanced acquired YPtel, Web YP and Big Stuff, it
changed the name under the which it was incorporated to WorldPages.com, Inc. On
or after the date hereof, the symbol under which its common stock is traded on
the New York Stock Exchange changed to "WPZ."
In this prospectus, WorldPages is referred to as Advanced only in the references
to the historical financial statements under the sections captioned
"Capitalization," "Unaudited Pro Forma Combined Financial Statements," "Selected
Historical Financial Information of Advanced" and "Advanced Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements of Worldpages appearing on pages F-1 - F-22.
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary is not complete and does not contain all of the information you
should consider before investing in WorldPages. You should read this entire
prospectus carefully.
WORLDPAGES
Beginning with its initial public offering in February 1998, WorldPages was
a yellow pages publisher and a telecommuications service provider operating a
local exchange carrier providing integrated telecommunications services. In
April 1999, as a result of its inability to adequately fund its
telecommunications operations, WorldPages determined to change its business
strategy to focus on its profitable yellow pages advertising segment and to
extend it into internet directory services. WorldPages pursued this new strategy
by selling its telecommunications operations in November 1999 and acquiring
YPtel, Web YP and Big Stuff in February 2000. This February acquisition
increased WorldPages' yellow pages publishing business as well as expanded its
operations to include providing internet directory services.
WorldPages is one of the largest independent yellow pages publishers in the
United States. It publishes and distributes approximately 6.6 million yellow
page directories annually in 41 markets in Texas, Oklahoma, California,
Washington, Oregon, Utah and Arizona. WorldPages also designs and produces
websites for yellow and white page publishers and operates a website designed to
bring buyers and sellers together.
WorldPages headquarters are located at 390 South Woods Mill Road,
Suite 260, St. Louis, Missouri. Its telephone number is (314) 205-8668.
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SHARES OF WORLDPAGES COMMON STOCK TO BE SOLD BY SELLING STOCKHOLDERS.
The selling stockholders individually identified under the caption Selling
Stockholders' offer for sale a total of 23,851,281 shares of common stock of
WorldPages. The selling stockholders obtained or will obtain the shares they are
selling pursuant to the exchange or conversion of securities, redemption or
exchange of indebtedness, or exercise of warrants or options in connection with
the acquisition by WorldPages of YPtel, Web YP and Big Stuff in February 2000.
THE OFFERING
<TABLE>
<S> <C>
Shares offered by selling 23,851,281(1)
stockholders:
Total shares outstanding after the 44,237,541(2)
offering:
Use of Proceeds: WorldPages will not receive any of
the proceeds from the sale of shares
of WorldPages common stock by the
selling stockholders.
</TABLE>
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(1) Of these shares, approximately 2,766,500 are issuable upon the exchange of
Class A Special Shares of ACG Exchange Company, a wholly owned subsidiary of
WorldPages, for WorldPages common stock on a one-for-one basis. An
additional 351,286 shares are issuable on the exercise of options or
warrants issued to former directors, officers, and certain employees of
YPtel and to two current and one former non-employee directors of
WorldPages. These securities must be converted into WorldPages common stock
before stock may be sold.
(2) Included in these shares are the 23,851,281 to be sold by the Selling
Stockholders.
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RISK FACTORS
You should carefully consider the risks and uncertainties described below in
conjunction with the other information contained in this prospectus before
purchasing shares of our common stock.
IF WORLDPAGES IS UNABLE TO FIND ADDITIONAL SOURCES OF FINANCING, IT WILL BE
UNABLE TO IMPLEMENT ITS STRATEGIC PLAN.
WorldPages will need additional sources of financing in order to refinance
its existing indebtedness. Further, WorldPages will need additional capital to
implement both its plans to acquire other yellow pages publishers and to
implement its Internet directory strategy.
WORLDPAGES MAY NOT BE ABLE TO ACHIEVE OR SUSTAIN PROFITABILITY.
Although WorldPages' print yellow pages businesses is profitable, WorldPages
expects to generate losses in the Internet operations while it further develops
that business. There can be no assurance that WorldPages will be able to
sufficiently increase its revenue base or achieve and sustain profitability and
generate sufficient cash flow to meet its working capital, capital expenditure
and debt service requirements. The inability to increase revenue and generate
sufficient cash flow may have a material adverse effect on WorldPages.
WORLDPAGES' LARGE DEBT LOAD COULD SIGNIFICANTLY AND MATERIALLY AFFECT
WORLDPAGES' PLANS TO IMPLEMENT ITS NEW BUSINESS FOCUS, STRATEGY AND DIRECTIONS.
This large debt load could:
- limit the ability of WorldPages to obtain additional financing for its
working capital, capital expenditure and debt service requirements or
other purposes;
- require that a substantial portion of WorldPages' cash flow from
operations, if any, be dedicated to the payment of principal of and
interest on its indebtedness;
- limit its flexibility in planning, or reacting to, changes in its
business;
- make WorldPages' debt load higher than some of its competitors, which may
place it at a competitive disadvantage;
- make it more difficult for WorldPages to meet its obligations; and
- make WorldPages more vulnerable to a downturn in its business or in the
markets in which it operates.
WORLDPAGES' STOCK PRICE HAS BEEN AND MAY CONTINUE TO BE VOLATILE AND INVESTORS
MAY LOSE A SIGNIFICANT PORTION OF THEIR VALUE IN THEIR INVESTMENT IN WORLDPAGES'
COMMON STOCK.
WorldPages' stock price could be subject to wide fluctuations in response to
factors such as the following:
- the addition or loss of affiliates or content providers;
- conditions or trends in the Internet and e-commerce industries; and
- changes in the market valuations of other Internet, online service or
software companies.
In addition, the market for Internet and technology company stocks has
experienced extreme price and volume fluctuations that have often been unrelated
or disproportionate to the operating performance of these companies. These broad
market and industry factors may materially and adversely affect WorldPages'
stock price, regardless of its operating performance. The trading prices of the
stocks
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of many technology companies are at or near historical highs and reflect
price-earnings ratios substantially above historical levels. These trading
prices and price-earnings ratios may not be sustained.
EXPECTED BENEFITS OF THE ACQUISITIONS MAY NOT BE REALIZED WHICH MAY ADVERSELY
AFFECT EXPECTED EARNINGS AND THE MARKET PRICE OF WORLDPAGES' COMMON STOCK.
If WorldPages is not able to effectively integrate its technology,
operations and personnel in a timely and efficient manner, then the benefits of
acquiring YPtel, Web YP and Big Stuff will not be realized. In particular, if
the integration is not successful:
- WorldPages may not achieve the expected results from the acquisition of
YPtel, Web YP and Big Stuff with WorldPages;
- WorldPages may lose key personnel; and
- WorldPages may not be able to retain key business relationships.
The expected benefits of the February acquisitions may not be realized to
the extent and within the time frame expected by investors or financial analysts
and thus may adversely affect expected earnings and the market price of
WorldPages' common stock.
WORLDPAGES RELIES HEAVILY ON ONE OR TWO KEY INDIVIDUALS TO CONDUCT DAY-TO-DAY
OPERATIONS.
The loss of any one of these individuals would make it difficult for the
remaining individuals to continue operating WorldPages. Further, the loss of a
key individual would make it difficult for WorldPages to maintain its banking
relationships, obtain the financing it will need to implement its plans and to
supply the investing public with timely financial information. Given WorldPages'
current financial condition and current state of affairs, including liquidity
issues, attracting, recruiting and retaining the caliber of individuals with the
breadth and depth of experience needed to operate WorldPages is extremely
difficult.
THE ARRANGEMENTS REQUIRED TO PERMIT THE STOCKHOLDERS OF YPTEL WHO ARE CANADIAN
RESIDENTS TO TRANSFER THEIR YPTEL STOCK TO WORLDPAGES ON A TAX-DEFERRED BASIS
COULD RESULT IN SUBSTANTIAL RESTRICTIONS ON WORLDPAGES' ABILITY TO EXECUTE
TRANSACTIONS THAT MIGHT OTHERWISE BE IN THE BEST INTERESTS OF WORLDPAGES' OTHER
STOCKHOLDERS.
As described below, the terms of the various agreements and certain
securities issued to stockholders of YPtel contain numerous restrictions.
THE EXCHANGEABLE SHARE STRUCTURE REPRESENTS A SIGNIFICANT RESTRICTION ON
WORLDPAGES' FUTURE ABILITY TO PAY CASH OR STOCK DIVIDENDS ON WORLDPAGES
COMMON STOCK.
Shareholders of YPtel were issued Class A special shares by ACG Exchange
Company, a wholly-owned Nova Scotia subsidiary of WorldPages, which are
exchangeable on a one-for-one basis for WorldPages' common stock. Under the
acquisition terms and the share provisions by which the Class A Special Shares
were created, if WorldPages wishes to issue either a cash dividend or a stock
dividend on shares of WorldPages common stock, it is required to cause ACG
Exchange Company to issue an economically equivalent dividend to the holders of
the Class A Special Shares. The negative Canadian tax consequences of that
dividend could have the effect of making the whole dividend transaction cost
prohibitive to WorldPages.
THE EXCHANGEABLE SHARE STRUCTURE REPRESENTS A SIGNIFICANT RESTRICTION ON
WORLDPAGES' FUTURE ABILITY TO ENGAGE IN A TRANSACTION INVOLVING THE SALE
OF ITS SHARES AND ASSETS. EVEN IF WORLDPAGES IS ABLE TO ENGAGE IN THE
TRANSACTIONS, THE COMPLICATED STRUCTURE OF THE CLASS A SPECIAL SHARES
COULD RESULT IN A POTENTIAL PURCHASER DECREASING THE AMOUNT PER
WORLDPAGES SHARE IT WOULD BE WILLING TO PAY FOR WORLDPAGES.
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MERGERS. The terms of the acquisition of YPtel also restrict the ability of
WorldPages to engage in merger transactions with other companies unless the
WorldPages board of directors has used its best efforts to provide comparable
treatment between the holders of WorldPages common stock and the holders of
Class A Special Shares, taking into account the general tax effect of such
merger upon such holders, respectively, and economic equivalency.
A merger partner or acquirer willing to agree to continue the tax deferral
arrangement of the Class A Special Shares for the balance of the 5-year period
may offer a lower price or value for that reason. WorldPages believes that
potential acquirors or merger partners will be reluctant to agree to the
restrictions referenced above and the other restrictions contained in the
Exchange and Voting Trust Agreement, the Support Agreement and the Class A
Special Shares provisions.
- In a merger involving the exchange of other stock for WorldPages common
stock, if the merger partner or acquirer is unwilling to continue the tax
deferral arrangement provided by the ACG Exchange Company/Class A Special
Share structure, this could result in holders of Class A Special Shares
being allocated a higher per share consideration than holders of
WorldPages common stock in the merger.
- If the merger consideration is all cash to both holders of WorldPages
common stock and holders of Class A Special Shares, however, the same per
share cash consideration will be applicable to both groups.
SPINOFFS. It may be impossible to structure a stock spin-off to
stockholders of WorldPages during the time the Class A Special Shares are
outstanding.
THE EXCHANGEABLE SHARE STRUCTURE COULD RESULT IN A SIGNIFICANT COST IN
OBTAINING CONSENTS FROM THE HOLDERS OF CLASS A SPECIAL SHARES.
Most of the restrictions noted above are not applicable if WorldPages is
able to obtain the consent of the requisite majority of holders of the Class A
Special Shares to the actions WorldPages desires to take, but in many cases
obtaining such consent may not be easy or itself may require costly payments and
the need for significant tax and legal advice to determine how or if the
transaction can be structured and the applicable tax consequences to the various
parties.
WORLDPAGES MAY BE UNABLE TO INCLUDE THE VALUE OF CERTAIN SIGNIFICANT ASSETS IN
ITS BORROWING BASE FOR FINANCING PURPOSES WHICH MAY DECREASE THE AMOUNT OF MONEY
WORLDPAGES MAY BE ABLE TO BORROW.
A large portion of the value of the YPtel operating subsidiary will be
represented by YPtel, Inc. preferred shares held in the Canadian entity
structure. It may be difficult for WorldPages to borrow against the full value
of this asset because of concerns of a large Canadian tax liability connected to
these preferred shares. This tax liability would be incurred by YPtel, and
thereby also ACG Exchange Company and WorldPages, if such preferred shares are
sold, foreclosed or otherwise liquidated. In a lender foreclosure sale
situation, WorldPages may not receive any cash to pay the large tax liability.
WEB YP HAS A LIMITED OPERATING HISTORY.
WebYP, WorldPages' internet services subsidiary, has had a very limited
operating history, and has incurred net losses since inception of operations in
January 1998. At December 31, 1999, Web YP had an accumulated deficit of
approximately $6.5 million. WorldPages expects Web YP to incur significant
operating losses on a quarterly basis in the future. Therefore, WorldPages'
internet services business may never be profitable. WorldPages' prospects must
be considered in light of the risks, expenses and difficulties frequently
encountered by companies in their early stage of development, particularly
companies in new and rapidly evolving markets such as Internet services.
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THE INTERNET BUSINESS MODEL IS EVOLVING AND UNPROVEN AND MAY NOT BE SUCCESSFUL,
IN WHICH CASE WORLDPAGES' STOCK PRICE MAY BE DEPRESSED.
WorldPages' Internet business strategy is to facilitate transactions through
advertising, website production and design, and e-commerce between buyers and
sellers worldwide by establishing a premier Internet yellow pages network that
is integrated with local print yellow pages directories. WorldPages' business
model is relatively new to the Internet, is unproven and is likely to continue
to evolve. Accordingly, WorldPages' business model may not be successful and
WorldPages may need to change it. WorldPages' ability to generate significant
advertising and e-commerce revenues by promoting its advertisers' business
through its yellow pages website will depend, in part, on its ability to attract
site traffic and provide its advertisers with the necessary tools to transact
commerce on the Internet. WorldPages intends to continue to develop its business
model as it explores opportunities internationally and in new and unproven areas
such as e-commerce and to provide content and e-commerce solutions for emerging
Internet applications. WorldPages does not effectively execute its strategy,
WorldPages' business will suffer and may never achieve or sustain profitability.
IF THE COMMERCIAL USE OF THE INTERNET DOES NOT DEVELOP, OR IF THE INTERNET DOES
NOT DEVELOP AS AN EFFECTIVE AND MEASURABLE MEDIUM FOR ADVERTISING, WORLDPAGES'
BUSINESS WILL SUFFER.
Most advertising agencies and potential advertisers, particularly local
advertisers, have only limited experience advertising on the Internet and have
not devoted a significant portion of their advertising expenditures to Internet
advertising. As the Internet evolves, advertisers may find Internet advertising
to be a less effective means of promoting their products and services relative
to traditional methods of advertising and may not continue to allocate funds for
Internet advertising. Fluid and intense competition in the sale of advertising
on the Internet has led different vendors to quote a wide range of rates and to
offer a variety of pricing models for various advertising services. As a result,
WorldPages may have difficulty projecting future advertising revenues and
predicting which pricing models advertisers will adopt. In addition, if a large
number of consumers use "filter" software programs that limit or remove
advertising from the Internet, advertisers may choose not to advertise on the
Internet.
TO THE EXTENT THAT THE PRINT YELLOW PAGES BUSINESS MAY NOT BE AS PROFITABLE AS
IT HAS BEEN HISTORICALLY, NET INCOME MAY BE ADVERSELY AFFECTED.
The print yellow pages business will be the platform for growth for
WorldPages. The expansion of business will depend upon the ability of management
to successfully implement its strategy. A substantial portion of historical
growth has resulted from the introduction of new directories. Although one of
the strategies for achieving its financial objectives is increasing the number
of its directories and the local markets which they serve, there can be no
assurance that historical success in establishing new directories will continue.
Management intends to continue to seek out opportunities for future expansion
through the acquisition of yellow pages businesses, but there can be no
assurance that WorldPages will be able to identify, negotiate and consummate
acquisitions on satisfactory terms, if at all. There is no assurance that new
acquisitions or new directories can be operated profitably or integrated
successfully into WorldPages' operations. Furthermore, start-ups and
acquisitions require substantial attention from and place substantial demands
upon senior management, which may divert attention from and adversely impact
their ability to manage existing businesses.
CHANGING TECHNOLOGY AND NEW PRODUCT DEVELOPMENT MAY CAUSE A REDUCTION IN THE USE
OF WORLDPAGES' PRODUCTS AND SERVICES. THIS WOULD NEGATIVELY IMPACT NET PROFITS
OR MAY RESULT IN LOSSES.
The yellow pages directory business is subject to changes arising from
developments in technology, including information distribution methods, and
users' technological preferences. As a result of these
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factors, WorldPages' growth and future financial performance may depend upon its
ability to develop and market new products and services and create new
distribution channels, while enhancing existing products, services and
distribution channels, in order to accommodate the latest technological advances
and user preferences. WorldPages intends to use the Internet as a distribution
channel for its products and services and expects that, over the long-term, the
use of the Internet will be at least as important to the combined companies as
print directories. The increasing use of the Internet by consumers as a means to
transact commerce may result in new technologies being developed and services
provided that could compete with WorldPages' products and services. There can be
no assurance that WorldPages will be successful in any attempt to provide its
services over the Internet. A failure by WorldPages to anticipate or respond
adequately to changes in technology and user preferences, or an inability to
finance the necessary capital expenditures, could have a material adverse effect
on WorldPages' business, operating results and financial condition.
MANY OF WORLDPAGES' COMPETITORS HAVE GREATER FINANCIAL RESOURCES THAN
WORLDPAGES, WHICH MAY LIMIT WORLDPAGES' ABILITY TO COMPETE EFFECTIVELY FOR
ADVERTISING AND FUTURE ACQUISITIONS AND ADVERSELY AFFECT ITS NET INCOME.
The yellow pages directory industry is competitive. WorldPages competes with
large telephone utilities and to a lesser extent with independent yellow pages
publishers. There are over 225 independent yellow pages publishers operating in
competition with telephone utilities throughout the United States. Telephone
utility competitors are larger and have greater financial resources than
WorldPages. Other media in competition with yellow pages for local business and
professional advertising include newspapers, radio, television, billboards and
direct mail. There can be no assurance that WorldPages will be able to compete
effectively with these other firms for advertising or acquisitions in the
future.
IF WORLDPAGES FAILS TO ENTER INTO AND MAINTAIN SATISFACTORY ARRANGEMENTS WITH
CONTENT PROVIDERS, WORLDPAGES' BUSINESS WILL SUFFER.
Web YP typically licenses content under short-term arrangements that do not
require royalties or other fees for the use of the content. However, Web YP may
enter into revenue-sharing arrangements with certain content providers, and it
pays certain content providers and web portals a one-time fee and/or a fee for
each query from Web users. WorldPages expects that, in the future, certain of
Web YP's content providers and web portals will likely demand a greater portion
of advertising revenues or will increase the fees that they charge for their
content.
THE PRINT AND INTERNET YELLOW PAGES INDUSTRIES ARE EXPERIENCING CONSOLIDATION,
WHICH COULD LIMIT ACCESS TO CONTENT, REDUCE ADVERTISING, REDUCE THE CUSTOMER
BASE OR HARM THE BUSINESS.
The print and Internet yellow pages industries have recently experienced
consolidation. This consolidation is expected to continue. Industry
consolidation could affect the combined companies in a number of ways,
including:
- companies from whom WorldPages intends to acquire content could be
acquired by one of their competitors and stop selling content to the
combined companies;
- WorldPages' customers could be acquired by one or more of their
competitors and stop buying advertising from the combined companies; and
- WorldPages' customers could merge with other customers, which could reduce
the size of the combined companies' customer base.
This consolidation in both the print and Internet industries could harm the
combined companies' business.
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WORLDPAGES MAY BECOME A TARGET OR AN ACQUIROR THAT COULD RESULT IN YOUR
INVESTMENT IN WORLDPAGES BEING CONVERTED INTO AN INVESTMENT IN ANOTHER COMPANY.
WorldPages has from time to time has held discussions with potential
strategic investors who have expressed an interest in making an investment in,
or in acquiring WorldPages. WorldPages has no current agreements understandings
or commitments to be acquired by another company. However, given the dynamic
nature of the print and internet yellow pages industry, and the strategic
alliances which have occurred to date, WorldPages believes that with the
acquisitions YPtel, Web YP and Big Stuff, it may be viewed as an attractive
acquisition candidate. Because of the way such acquisitions are often
structured, stockholders of WorldPages could find themselves being offered and
potentially having to accept stock of the acquiror in exchange for their shares
of WorldPages. Even in a strategic joint venture arrangement, stockholders of
WorldPages could find that the value of their investment in WorldPages may
depend on the operational ability of WorldPages' venture partner.
WORLDPAGES' SUCCESSFUL IMPLEMENTATION OF ITS NEW BUSINESS FOCUS, STRATEGY AND
DIRECTION MAY BE NEGATIVELY AFFECTED AS NEW MANAGEMENT DEVOTES TIME AND
ATTENTION TO LEARNING ABOUT WORLDPAGES AND AS IT ATTEMPTS TO INTEGRATE THE
COMBINED COMPANIES.
Much of the management of WorldPages is new to the company. Although this
new management personnel will be experienced executives in the yellow
pages publishing and Internet directory industries, they will have little
employment experience with and only a limited background knowledge of
WorldPages. This limited experience with the company could divert their
attention from implementing WorldPages' new business focus, strategy and
direction as they spend time learning about the company, and becoming acquainted
with and learning to work with the other new members of the management team as
well as with existing management. Also many of the employees are new to
WorldPages and the management team will have to become acquainted with and
integrate the new employees into the company.
In addition to personnel changes, the attention of the new management team
may be diverted as it learns and tries to integrate the policies, procedures and
processes of the companies acquired in the February acquisitions. Each company
has its own accounting systems, information systems, credit policies, billing
policies, collection policies and other policies that management will have to
integrate to make the combined companies operate smoothly and efficiently.
A less tangible, but not less important, issue will be integrating the
cultures of the combining companies, including the expectations and desires of
management and employees alike. Human resource policies and other policies
affecting the employees will have to be melded to help create a productive
working environment. The integration described in this paragraph and in the
immediately preceding one, if not implemented properly, could seriously and
adversely impact WorldPages. operations and its ability to realize the profit
potential from the February acquisition by combining.
WORLDPAGES WILL BECOME INCREASINGLY RELIANT UPON INTERNALLY DEVELOPED SOFTWARE
AND SYSTEMS WHICH MAY CONTAIN ERRORS AND WHICH MUST BE EXPANDED AND UPGRADED.
WORLDPAGES' INABILITY TO CORRECT ANY ERRORS OR TO EXPAND OR UPGRADE ITS SOFTWARE
AND SYSTEMS COULD AFFECT ITS ABILITY TO COMPETE.
WorldPages must expand and upgrade its technology, transaction-processing
systems and network infrastructure if the volume of traffic on its website or
its affiliates' websites increases substantially. In addition, as WorldPages
expands into e-commerce, it may have to significantly modify its systems.
WorldPages could experience periodic temporary capacity constraints, which may
cause unanticipated system disruptions, slower response times and lower levels
of customer service. WorldPages may be unable to accurately project the rate or
timing of increases, if any, in the use of its content services or to expand and
upgrade its systems and infrastructure to accommodate these increases in a
timely manner. Any inability to do so could harm WorldPages' business.
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IF THE PERFORMANCE AND RELIABILITY OF THE INTERNET DIMINISH, WORLDPAGES COULD
LOSE ADVERTISING AND E-COMMERCE REVENUES.
WorldPages success in its internet business will depend, in large part, on
other companies maintaining the Internet infrastructure. In particular, it will
rely on the ability of other companies to maintain a reliable network backbone
that provides adequate speed, data capacity and security and to develop products
that enable reliable Internet access and services. If the Internet continues to
experience significant growth in the number of users, frequency of use and
amount of data transmitted, the Internet infrastructure may be unable to support
the demands placed on it, and the Internet's performance or reliability may
suffer as a result of this continued growth. In addition, the Internet could
lose its commercial viability as a form of media due to delays in the
development or adoption of new standards and protocols to process increased
levels of Internet activity. Any such degradation of Internet performance or
reliability could cause advertisers to reduce their Internet expenditures. If
other companies do not develop the infrastructure or complementary products and
services necessary to establish and maintain the Internet as a viable commercial
medium, or if the Internet does not become a viable commercial medium or
platform for advertising, promotions and electronic commerce, the business of
WorldPages would suffer.
BREACHES IN THE SECURITY OF WORLDPAGES' NETWORK COULD DAMAGE ITS REPUTATION AND
SUBJECT IT TO LIABILITY AND BUSINESS LOSSES.
WorldPages' networks may be vulnerable to unauthorized access by hackers or
others, computer viruses and other disruptive problems. Someone who is able to
circumvent security measures could misappropriate WorldPages' proprietary
information or cause interruptions in its Internet operations which could harm
its business. WorldPages may need to expend significant capital or other
resources protecting against the threat of security breaches or alleviating
problems caused by breaches. Persons may be able to circumvent the measures that
WorldPages implements in the future. Eliminating computer viruses and
alleviating other security problems may require interruptions, delays or
cessation of service to users accessing web pages that deliver WorldPages'
content services, any of which would harm its business.
Users of online commerce services are highly concerned about the security of
transmissions over public networks. Concerns over security and the privacy of
users may inhibit the growth of the Internet and other online services
generally, and the web in particular, especially as a means of conducting
commercial transactions. Users could possibly circumvent the measures that
WorldPages takes to protect customer transaction data. To the extent that
WorldPages' activities involve the storage and transmission of proprietary
information, such as credit card numbers, security breaches could damage
WorldPages' reputation and expose it to a risk of loss or litigation and
possible liability. Any compromise of WorldPages' security could harm its
business.
WORLDPAGES MAY BE SUBJECT TO LIABILITY FOR INFORMATION CONTAINED IN ITS PRINT
AND INTERNET DIRECTORIES.
WorldPages obtains content from third parties. When it aggregates,
syndicates and distributes this content over the Internet, WorldPages may be
liable for the information that is contained in that content. This could subject
WorldPages to legal claims for such things as defamation, negligence,
intellectual property infringement and product or service liability. Many of the
agreements by which WorldPages obtains content do not contain indemnity
provisions in its favor. Even if a given contract does contain indemnity
provisions, these provisions may not cover a particular claim. While WorldPages
carries general business insurance, this coverage may be inadequate in amount or
may not cover asserted claims. Even if an asserted claim is defeated, WorldPages
may incur substantial legal fees and expenses and diversion of management time
and attention.
12
<PAGE>
In addition, individuals whose names appear in the WorldPages' yellow pages
and white pages directories have occasionally contacted WorldPages. These
individuals believed that their phone numbers and addresses were unlisted, and
WorldPages directories are not always updated to delete phone numbers or
addresses when they are changed from listed to unlisted. While WorldPages has
not received any claims from these individuals, it may receive claims in the
future. Any liability that WorldPages incurs as a result of content that it
receives from third parties could harm its financial results.
THIS PROSPECTUS STATEMENT CONTAINS FORWARD-LOOKING INFORMATION; ACTUAL RESULTS
MAY TURN OUT TO BE MATERIALLY AND ADVERSELY DIFFERENT THAN THE FORWARD-LOOKING
INFORMATION.
Forward-looking statements in this prospectus include "forward-looking
statements" within the meaning of Section 27a of the Securities Act of 1933, as
amended, and Section 21e of the Securities Exchange Act of 1934, as amended. All
statements other than statements of historical facts included in this
prospectus, including without limitation, certain statements under "Summary,"
"WorldPages Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business of WorldPages," "YPtel Management's Discussion
and Analysis of Financial Condition and Results of Operations," "Web YP
Management's Discussion and Analysis of Financial Condition and Results of
Operations," and "Big Stuff Management's Discussion and Analysis of Financial
Condition and Results of Operations" located elsewhere herein regarding
WorldPages', YPtel's, Web YP's and Big Stuff's financial conditions and business
strategies may constitute forward-looking statements. In addition,
forward-looking terminology such as "may," "will," "expect," "intend,"
"estimate," "anticipate," "believe," or "continue" or the negative thereof or
variations thereon or similar terminology are intended to identify
forward-looking statements. Although WorldPages believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to have been correct. Important
factors that could cause actual results to differ materially from WorldPages'
expectations are disclosed in this prospectus, including without limitation in
conjunction with the forward-looking statements included in this prospectus
under "Risk Factors".
13
<PAGE>
USE OF PROCEEDS
WorldPages will not receive any of the proceeds from the sale of the shares
by the selling stockholders pursuant to this prospectus.
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
On or after the date hereof, the symbol under which our common stock is be
traded on the New York Stock Stock Exchange will be "WPZ".
Set forth below are the high and low closing sale prices of WorldPages
common stock as reported by the New York Stock Exchange for the periods
indicated.
<TABLE>
<CAPTION>
MARKET PRICE
------------------- DIVIDENDS
1998 HIGH LOW PER SHARE
---- -------- -------- ---------
<S> <C> <C> <C>
1st Quarter (from February 18, 1998)........................ $17.50 $12.69 $0.00
2nd Quarter................................................. 16.00 6.63 0.00
3rd Quarter................................................. 12.94 4.88 0.00
4th Quarter................................................. 7.19 3.00 0.00
<CAPTION>
MARKET PRICE
------------------- DIVIDENDS
1999 HIGH LOW PER SHARE
---- -------- -------- ---------
<S> <C> <C> <C>
1st Quarter................................................. $ 7.00 $ 3.94 $0.00
2nd Quarter................................................. 13.00 4.75 0.00
3rd Quarter................................................. 9.50 6.63 0.00
4th Quarter................................................. 13.625 6.00 0.00
<CAPTION>
2000
----
<S> <C> <C> <C>
1st Quarter (through February 22, 2000)..................... 18.38 10.06 0.00
</TABLE>
No dividends have been paid on the common stock since WorldPages' inception.
The revolving credit facility of Great Western, a wholly owned subsidiary of
WorldPages, prohibits cash dividend payments and any new credit facility that
WorldPages may obtain for working capital requirements in the foreseeable future
may also place a prohibition or limitations on the payment of cash dividends.
Further, it is WorldPages' current intention to retain its earnings, if any,
to finance the change in its business focus, strategy and direction including
the expansion of its yellow pages publishing and internet directory business and
for general corporate purposes. Accordingly, WorldPages does not anticipate that
it will pay cash dividends for the foreseeable future.
Finally, it is unlikely that the WorldPages board will declare a dividend
during the time the Class A Special Shares issued by ACG Exchange Company, a
wholly owned subsidiary of WorldPages, in connection with the February
acquistions are owned by a party other than WorldPages or any of its
subsidiaries. Under the terms of the Support Agreement and the share provisions
by which the Class A Special Shares were created, if WorldPages wishes to
declare a cash dividend on shares of WorldPages common stock, it is required to
cause ACG Exchange Company to issue an economically equivalent dividend to the
holders of the Class A Special Shares. Declaring such dividends may make the
whole dividend transaction cost prohibitive to WorldPages.
WorldPages is not prohibited from declaring dividends on its common stock or
preferred stock payable in its capital stock, but the tax liability discussed
above with respect to cash dividends applies to stock dividends, as well. This
tax liability may make it unlikely that WorldPages will declare a stock dividend
either.
As of January 31, 2000, there were 188 owners of record of the common stock.
On February 23, 2000, the closing price of the common stock on the NYSE was
$15.69.
14
<PAGE>
CAPITALIZATION
The following table sets forth, as of December 31, 1999, the cash,
short-term debt and current maturities of long-term debt, and capitalization of
(i) Advanced on a historical basis and (ii) WorldPages on a pro forma combined
basis to give effect to the acquisitions of YPtel, Web YP and Big Stuff as if
they had occurred on December 31, 1999. This table should be read in conjunction
with the Unaudited Pro Forma Combined Financial Statements and the related notes
thereto included herein.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------------
WORLDPAGES
PRO FORMA
ADVANCED CONSOLIDATED
-------- ------------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................... $ 1,315 $ 1,508
======== ========
Short-term debt and current maturities of long-term debt.... $ 24,000 $ 16,545
Long-term debt.............................................. -- 35,276
Stockholders' equity:
Common stock $0.0001 par value, 180,000,000 shares
authorized; 20,426,753 and 43,669,480 shares issued and
outstanding, respectively............................... 2 4
Additional paid-in capital................................ 149,438 309,944
Retained earnings (accumulated deficit)................... (77,768) (81,461)
-------- --------
Total stockholders' equity.............................. 71,672 228,487
-------- --------
Total debt and capitalization......................... $ 95,672 $280,308
======== ========
</TABLE>
15
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined financial statements have been
derived from the application of pro forma adjustments to the historical
financial statements of YPtel and its predecessor, Pacific Coast Publishing,
Inc., Web YP and Big Stuff and the financial statements of Advanced, which are
included in this prospectus. The unaudited pro forma combined financial
statements give effect to the acquisitions of YPtel, Web YP and Big Stuff as if
they had occurred on (1) December 31, 1999 for purposes of the unaudited pro
forma combined balance sheet and (2) January 1, 1999 for purposes of the
unaudited pro forma combined statements of operations for the year ended
December 31, 1999. The unaudited pro forma combined financial statements should
be read in conjunction with the financial statements of Advanced, YPtel, Web YP
and Big Stuff which are included in this prospectus. All historical financial
statements of Big Stuff contained in this prospectus have been prepared and
restated by WorldPages based on information supplied by Big Stuff. The initial
information supplied by Big Stuff did not conform to generally accepted
accounting principles.
The pro forma adjustments are described in the notes to the unaudited pro
forma combined financial statements and are based on available information and
assumptions that management believes are reasonable. The unaudited pro forma
combined financial statements do not purport to present the financial position
or results of operations of WorldPages had the acquisitions occurred on the
dates specified, nor are they necessarily indicative of the results of
operations that may be achieved in the future. The unaudited pro forma combined
financial statements do not reflect any adjustments for the benefits that
management expects to realize in connection with the acquisitions. No assurances
can be made as to the amount or timing of such benefits, if any, that may be
realized.
The acquisitions will be accounted for using the purchase method of
accounting. Under this method, tangible and identifiable intangible assets
acquired and liabilities assumed are recorded at their estimated fair values.
The excess of the purchase price, including estimated fees and expenses related
to the acquisitions, over the fair value of the assets acquired is classified
with intangible and other assets on the accompanying unaudited pro forma balance
sheet. The estimated fair values and useful lives of assets acquired and
liabilities assumed are based upon a preliminary valuation and are subject to
final valuation adjustments. Final allocation of the purchase price to the fair
value of the assets acquired could vary the related amortization period of the
excess of cost over the fair value of net assets acquired.
16
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
WORLDPAGES
ADVANCED YPTEL WEB YP BIG STUFF PRO FORMA PRO FORMA
HISTORICAL HISTORICAL HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
---------- ---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues............................ $49,987 $38,079 $ 851 $ 862 $ (813)(a) $ 88,966
------- ------- ------- ----- -------- --------
Operating costs:
Printing, distribution and
listings........................ 13,440 8,800 -- -- $ (813)(a) 21,427
Sales and marketing............... 11,464 7,622 3,857 833 23,776
General and administrative........ 20,529 14,595 1,271 432 36,827
Depreciation and amortization..... 4,695 2,536 98 206 6,952 (b) 14,487
------- ------- ------- ----- -------- --------
Total operating costs............... 50,128 33,553 5,226 1,471 6,139 96,517
------- ------- ------- ----- -------- --------
Operating margin.................... (141) 4,526 (4,375) (609) (6,952) (7,551)
Other income (expense):
Other income and expense, net..... 75 47 -- -- 122
Interest expense.................. (4,766) (3,702) (143) (90) 750 (c) (7,951)
------- ------- ------- ----- -------- --------
Income (loss) from continuing
operations before income taxes..... (4,832) 871 (4,518) (699) (6,202) (15,380)
Income tax expense (benefit)........ (1,465) 298 -- -- 285(d) (882)
------- ------- ------- ----- -------- --------
Net income (loss) from continuing
operations......................... $(3,367) $ 573 $(4,518) $(699) $ (6,487) $(14,498)
======= ======= ======= ===== ======== ========
Net income (loss) per share from
continuing operations.............. $ (.17) $ (.34)
======= ========
Weighted average shares
outstanding........................ 19,956 23,243 (e) 43,199
======= ======== ========
</TABLE>
- ------------------------
(a) Reflects the elimination of revenue and cost of sales for services provided
to Advanced by Big Stuff and Web YP.
(b) Reflects the amortization of goodwill resultant from the acquisitions over
periods ranging from
10 to 30 years, as follows:
<TABLE>
<CAPTION>
AMORTIZATION PERIOD
(IN THOUSANDS) ------------ --------
<S> <C> <C>
YPtel................................................... $3,123 30 years
Web YP.................................................. 2,809 10 years
Big Stuff............................................... 1,020 10 years
------
$6,952
======
</TABLE>
(c) Reflects the elimination of interest expense incurred on the $15.0 million
5% Subordinated Notes payable, which will be converted to common stock in
connection with the acquisitions.
(d) Reflects the incremental provision for federal and state income taxes at an
effective tax rate of 38% for the applicable pro forma adjustments.
(e) Reflects the issuance of 19,545,454 shares issued for the purchase of the
acquired companies; 2,840,909 shares issued for the conversion of the 5%
Subordinated Notes payable; and 856,364 shares issued in exchange for
cancellation of indebtedness of $4.7 million to stockholders of Web YP and
Big Stuff.
17
<PAGE>
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
WORLDPAGES
ADVANCED YPTEL WEB YP BIG STUFF PRO FORMA PRO FORMA
HISTORICAL HISTORICAL HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
------------ ---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..... $ 1,315 $ 59 $ 18 $ 116 $ $ 1,508
Accounts receivable, net...... 14,223 10,039 252 42 24,556
Deferred costs................ 4,482 10,259 -- -- 14,741
Prepaid expenses and other.... 174 1,964 635 241 3,014
-------- ------- ------ ------ -------- --------
Total current assets........ 20,194 22,321 905 399 43,819
-------- ------- ------ ------ -------- --------
Property, plant and equipment,
net............................ 1,377 657 192 566 2,792
Intangible assets, net.......... 75,413 39,749 -- 120 131,976 (a) 247,258
Deferred taxes.................. 6,504 -- -- -- 6,504
Other assets.................... 5,571 5,571
-------- ------- ------ ------ -------- --------
Total other assets.......... 88,865 40,406 192 686 131,976 262,125
-------- ------- ------ ------ -------- --------
Total assets................ $109,059 $62,727 $1,097 $1,085 $131,976 $305,944
======== ======= ====== ====== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
expenses.................... $ 9,447 $ 3,790 $ 159 $ 61 $ 6,000 (a) $ 18,832
(625)(b)
Short-term debt and current
maturities of long-term
debt........................ 24,000 7,208 -- 337 (15,000)(b) 16,545
Deferred revenue.............. -- 1,831 464 -- 2,295
Notes due to shareholders..... -- -- 3,653 1,900 (5,553)(a) --
Other current liabilities..... 3,940 -- 224 -- 4,164
-------- ------- ------ ------ -------- --------
Total current liabilities... 37,387 12,829 4,500 2,298 (15,178) 41,836
Long-term liabilities:
Long-term debt................ -- 35,276 -- -- 35,276
Deferred taxes................ -- 345 -- -- 345
-------- ------- ------ ------ -------- --------
Total liabilities........... 37,387 48,450 4,500 2,298 (15,178) 77,457
-------- ------- ------ ------ -------- --------
Stockholders' equity:
Common stock.................. 2 13,780 -- -- 2 (a) 4
(13,780)(c)
Additional paid-in capital.... 149,438 -- 2,783 1,523 156,200 (d) 309,944
Retained earnings (deficit)... (77,768) 497 (6,186) (2,736) (3,693)(b) (81,461)
8,425 (c)
-------- ------- ------ ------ -------- --------
Total stockholders'
equity.................... 71,672 14,277 (3,403) (1,213) 147,154 228,487
-------- ------- ------ ------ -------- --------
Total liabilities and
stockholders' equity...... $109,059 $62,727 $1,097 $1,085 $131,976 $305,944
======== ======= ====== ====== ======== ========
</TABLE>
- ------------------------
SEE NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET ON FOLLOWING PAGE
18
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(a) Records the purchase of YPtel, Web YP and Big Stuff for approximately
$147.2 million, composed of the following:
<TABLE>
<CAPTION>
SHARES AMOUNT
------------------------ --------------------------------- TOTAL
(IN THOUSANDS) STOCK COMMON STOCK TRANSACTION PURCHASE
COMMON STOCK OPTIONS STOCK OPTIONS COSTS PRICE
------------- -------- -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
YPtel................ 15,000,000(1) 351,281 $102,000 $1,964 $4,000 $107,964
Web YP............... 4,020,000(2) -- 27,336 -- 1,000 28,336
Big Stuff............ 1,454,545 -- 9,891 -- 1,000 10,891
---------- ------- -------- ------ ------ --------
20,474,545 351,281 $139,227 $1,964 $6,000 $147,191
========== ======= ======== ====== ====== ========
</TABLE>
For financial reporting purposes, the WorldPages common stock was valued at
$6.80 per share (the average closing price for the five days before and
after the announcement of the acquisitions). The stock options were valued
using the Black-Scholes option pricing model. Transaction costs consist
primarily of legal, accounting, tax and financial advisory costs associated
with the acquisitions.
The purchase price was preliminarily allocated to the fair value of the net
assets acquired as summarized below:
<TABLE>
<CAPTION>
YPTEL WEB YP BIG STUFF TOTAL
(IN THOUSANDS) -------- -------- --------- --------
<S> <C> <C> <C> <C>
Net working capital................... $ 9,785 $ 1,000 $ 112 $ 10,897
Property and equipment................ 652 213 339 1,204
Long-term debt........................ (35,786) -- -- (35,786)
Deferred taxes........................ (134) -- -- (134)
Intangible assets..................... 133,447 27,123 10,440 171,010
-------- ------- ------- --------
Total purchase price.............. $107,964 $28,336 $10,891 $147,191
======== ======= ======= ========
</TABLE>
----------------------------
(1) Included in the shares issued as consideration for YPtel are all shares
of WorldPages common stock expected to be issued either directly and or
indirectly through exchange of Class A Special Shares. The Class A
Special Shares may be issued in lieu of WorldPages common stock for
Canadian tax reasons but are exchangeable into a like number of
WorldPages common stock.
(2) Included in the shares issued as consideration for the Web YP
acquisition are 929,091 shares assumed to be issued in exchange for
estimated indebtedness in the aggregate principal amount of $5.1 million
which has been incurred to finance operations of Web YP and Big Stuff
until the transaction closes. According to the terms of the acquisition
agreements, up to $6.0 million of such indebtedness may be incurred by
Web YP and Big Stuff, which will be exchanged for WorldPages common stock
based on the agreed upon price of $5.50 per share. If the entire
$6.0 million were loaned, 1,090,909 shares of WorldPages common stock
would be issued.
(3) A detailed analysis of the identifiable intangibles has not been
completed. Accordingly, the intangible assets resulting from the
acquisitions are currently assumed to be unidentified intangibles. Upon
completion of the analysis of such identifiable intangibles, such as
customer lists and intellectual property, an allocation will be made and
the underlying amortization periods established. The effect of such
modification in the allocation of intangibles has not been determined at
this time.
19
<PAGE>
(b) Reflects the conversion of the $15.0 million 5% subordinated notes payable
and $625,000 accrued interest owed by Advanced into 2,840,909 shares of
common stock and the resultant loss from the conversion. For financial
reporting purposes the stock was valued at $6.80 per share and will result
in an extraordinary loss of $3.7 million as a loss on early extinguishment
of debt. This extraordinary loss is not reflected in the pro forma results
of operations.
(c) Records the elimination of YPtel, Web YP and Big Stuff's historical retained
earnings (deficit) and common stock.
(d) Records the net effect of the following adjustments on capital in excess of
par value:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Issuance of shares and stock options for acquisitions....... $141,188
Issuance of shares for 5% Subordinated Notes payable........ 19,318
Elimination of YPtel, Web YP and Big Stuff's historical
paid-in capital........................................... (4,306)
--------
$156,200
========
</TABLE>
20
<PAGE>
SELECTED HISTORICAL FINANCIAL INFORMATION OF ADVANCED
The following tables present selected historical financial information for
Advanced which should be read in conjunction with the historical financial
statements, and the related notes thereto, of Advanced, Advanced Management's
Discussion and Analysis of Financial Condition and Results of Operations and
other financial data included elsewhere in this prospectus. The selected
historical financial data of Advanced for each of the three fiscal years in the
period ended December 31, 1999, have been derived from its audited consolidated
financial statements included elsewhere in this prospectus. All adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of results of the unaudited historical interim periods have been
included. See "Advanced Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Index to Financial Statements."
Prior to February 1998, Advanced had not conducted any operations other than
those relating to its IPO and the acquisitions of Great Western and its
telecommunications operations. Consequently, the actual financial statements
included herein relate only to the parent company prior to February 18, 1998,
and do not include the results of Great Western until after February 18, 1998.
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 Advanced's results
of operations that would have actually occurred if the IPO and the acquisition
of Great Western 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 Great Western and was derived from Great Western's financial
statements.
21
<PAGE>
ADVANCED COMMUNICATIONS GROUP, INC.
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACTUAL PRO FORMA
-------------------------------------- -------------
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
-------------------------------------- -------------
1999 1998 1997 1998
----------- ----------- ---------- -------------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenues............................................. $ 49,987 $ 38,090 $ -- $ 47,336
Expenses:
Printing, distribution and listings................ 13,440 8,670 -- 11,307
Sales and marketing................................ 11,464 8,976 -- 10,806
General and administrative......................... 20,529 16,689 2,071 19,249
Depreciation and amortization...................... 4,695 4,190 3 4,751
Stock-based compensation........................... -- 1,760 870 1,760
----------- ----------- ---------- -----------
Income (loss) from operations........................ (141) (2,195) (2,944) (537)
Other income (expense):
Interest expense................................... (4,766) (1,845) (256) (1,955)
Other.............................................. 75 177 -- 190
----------- ----------- ---------- -----------
Income (loss) from continuing operations before
income taxes....................................... (4,832) (3,863) (3,200) (2,302)
Income tax expense (benefit)......................... (1,465) (91) -- 670
----------- ----------- ---------- -----------
Net income (loss) from continuing operations......... (3,367) (3,772) (3,200) (2,972)
Loss from discontinued operations, net of tax benefit
of $4,007; $6,368; $0; and $6,226, respectively.... (7,378) (7,507) -- (7,704)
Loss on discontinued operations, net of tax benefit
of $8,145.......................................... (51,800) -- -- --
----------- ----------- ---------- -----------
Net loss............................................. $ (62,545) $ (11,279) $ (3,200) $ (10,676)
=========== =========== ========== ===========
Basic and diluted loss per share from:
Continuing operations.............................. $ (.17) $ (.20) $ (.39) $ (.15)
Discontinued operations............................ (.37) (.41) -- (.39)
Sale of discontinued operations.................... (2.60) -- -- --
----------- ----------- ---------- -----------
Net income (loss) per share........................ $ (3.14) $ (.61) $ (.39) $ (.54)
=========== =========== ========== ===========
Weighted average common shares outstanding........... 19,955,829 18,593,947 8,230,006 19,646,001
=========== =========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Balance Sheet Data:
Current assets............................................ $ 20,194 $ 34,431 $ --
Working capital (deficit)................................. (17,193) 9,453 (5,239)
Total assets.............................................. 109,059 187,622 2,695
Short-term borrowings..................................... 24,000 17,117 3,141
Long-term debt............................................ -- 17,233 --
Stockholders' equity (deficit)............................ 71,672 131,584 (2,544)
</TABLE>
22
<PAGE>
ADVANCED MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 Advanced,
expressed as a percentage of revenues, excluding prototype directories and
stock-based compensation expense:
<TABLE>
<CAPTION>
YEARS ENDED
------------------------------
PRO PRO
FORMA FORMA
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Directory revenues.......................................... 100.0% 100.0% 100.0%
Cost of services:
Printing, distribution and publishing..................... 21.7 23.5 23.4
Sales and marketing....................................... 21.8 22.8 24.1
General and administrative................................ 41.4 40.8 42.2
Depreciation and amortization............................. 9.7 10.1 10.3
------ ------ ------
Operating income from continuing operations................. 5.4% 2.8% 0%
====== ====== ======
</TABLE>
Prior to February 1998, Advanced had not conducted any operations other than
those relating to the IPO. 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 in continuing operations for the period
after February 18, 1998. Certain 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 operating information does not
purport to represent the results of operations of Advanced that would have
actually occurred if the IPO and the acquisition of Great Western had in fact
occurred on the date stated above. Since Great Western and Advanced were not
under common control or management, historical combined results of operations
may not be comparable to, or indicative of, future performance.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999, COMPARED TO THE
PRO FORMA RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998
Revenues from continuing operations for the year ended December 31, 1999,
increased 5.6% to $50.0 million from pro forma $47.3 million in 1998.
Approximately $.8 million of the increase is due to the introduction of a
prototype directory in the Austin, Texas market in the second quarter of 1999
and approximately $.6 million of the increase is due to the first sold year
publication of a directory in the North Channelview, Texas market. Excluding new
and prototype directories, revenues increased 3.0% to $48.6 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 for the year ended December 31,
1999, increased $2.1 million to $13.4 million from pro forma $11.3 million in
1998. The increase is due to $2.8 million of costs related to the Austin, Texas
prototype directory incurred during the second quarter of 1999. Excluding
prototype directories, printing, distribution, and listing costs decreased 5.0%
to $10.5 million. As a percent of sales, printing, distribution and listing
costs of recurring directories decreased to 21.7% of sales in 1999 from 23.5% 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.
23
<PAGE>
Sales and marketing costs for the year ended December 31, 1999, increased to
$11.5 million from pro forma $10.8 million in 1998. The increase is principally
due to $.7 million of costs related to the Austin, Texas prototype directory.
Excluding prototype directories, sales and marketing costs were $10.6 million.
As a percent of sales, sales and marketing costs decreased to 21.8% of sales in
1999 from 22.8% 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 $1.3 million, or 6.6%, to
$20.5 million for the year ended December 31, 1999, from pro forma
$19.2 million in 1998. The increase is partially due to $.4 million of expenses
related to the Austin, Texas prototype directory. Excluding prototype
directories, general and administrative expenses increased 4.5% to
$20.1 million. As a percentage of revenues, general and administrative expenses
were 41.4% of sales for the year ended December 31, 1999, and 40.8% of pro forma
sales in the year ended December 31, 1998. The increase in the expense rate is
due to increases in the bad debt reserve and salaries and wages, which is
partially offset by operating efficiencies.
Depreciation and amortization was approximately $4.7 million in the year
ended December 31, 1999, and $4.8 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 year ended December 31, 1999, was approximately
$4.8 million, an increase of $2.8 million from interest expense of pro forma
$2.0 million in 1998. The increase is due to higher debt from borrowings under
Great Western's revolving credit facility used to finance Advanced's operating
losses and growth in the discontinued telecommunications segment. No interest
expense has been allocated to discontinued operations.
Income tax benefit of $1.5 million was recognized for the year ended
December 31, 1999, compared to pro forma income tax expense of $.7 million in
1998. The decrease is due to lower taxable income in 1999 than in 1998.
Advanced's effective tax rate is substantially higher than statutory tax rates
principally because amortization of goodwill and customer lists is not
deductible for tax purposes.
Net loss from continuing operations was $3.4 million, or $.17 per share, for
the year ended December 31, 1999, compared to pro forma net loss from continuing
operations of $3.0 million, or $.15 per share in the comparable period of 1998.
The decrease in net loss was primarily due to the improved operating leverage in
printing, distribution and listings and an income tax benefit.
Earnings before interest, taxes, depreciation and amortization and
stock-based compensation (EBITDA) is a measure commonly used in the
communications industry and is presented to assist in understanding Advanced's
operating results. However, it is not intended to represent cash flow or results
of operations in accordance with generally accepted accounting principles. As a
result, EBITDA may not be comparable to the presentation provided by other
companies. EBITDA decreased to $4.6 million for the year ended December 31,
1999, from pro forma EBITDA of $6.0 million in the comparable period of 1998,
due to the previously mentioned Austin, Texas prototype directory. Excluding net
prototype costs of $3.1 million associated with the Austin, Texas directory and
the results of the first year sold publication in the North Channelview, Texas
market, EBITDA increased to $7.3 million for the year ended December 31, 1999,
an increase of 21.1%.
DISCONTINUED OPERATIONS
Net loss from discontinued operations was $28.3 million for the period from
January 1, 1999 to November 19,1999, compared to net loss from discontinued
operations of $13.9 million in the year ended 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.
24
<PAGE>
Revenues from discontinued telecommunications services increased 28.8% to
$86.2 million in 1999 compared to $59.6 million in 1998. The increase in
telecommunications revenue is due to increased local service revenue as Advanced
implemented aggressive sales and marketing of local services in addition to
long-distance services. Advanced's local service revenues in 1999 were
$46.3 million compared to 1998 local service revenues of $19.1 million.
PRO FORMA RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998
COMPARED TO THE YEAR ENDED DECEMBER 31, 1997
Pro forma directory revenues for the year ended December 31, 1998 increased
9.5% to $47.3 million from $43.2 million in 1997. Advanced distributed
twenty-three directories in 1998 and twenty-four directories in 1997. Two
directories, which accounted for $.9 million of revenue in 1997, were
discontinued in 1998. This decrease in revenue was offset by $2.6 million of
revenue from another directory that was recognized in 1998 but not in 1997
because the timing of distribution resulted in Advanced recognizing no revenue
in 1997, pursuant to its revenue recognition policy. Advanced does not recognize
revenue from a directory until a directory is substantially delivered. Excluding
the impact of these nonrecurring directories, pro forma revenues from recurring
directories increased 5.7%.
Pro forma printing, distribution and listing costs increased $1.2 million,
or 11.9%, to $11.3 million from $10.1 million in 1997. The increase is due in
part to $.2 million of costs related to a prototype directory. As a percent of
sales, pro forma printing, distribution and listing costs, excluding prototype
directories, increased to 23.5% of sales in 1998 from 23.4% in 1997. The
increase is due to increased costs from printers and outside service providers.
Pro forma sales and marketing costs increased to $10.8 million from
$10.4 million in 1997. As a percent of sales, pro forma sales and marketing
costs decreased to 22.8% of sales in 1998 from 24.1% in 1997. The decrease is
due to higher pro forma directory revenues in 1998.
Pro forma general and administrative expenses for the year ended
December 31, 1998, increased to $19.2 million from $18.3 million in 1997. The
increase in gross dollars is due primarily to the direct costs associated with
the higher sales volume. As a percentage of total revenues, pro forma general
and administrative costs were 40.8% in 1998, and 42.2% in 1997. The decrease in
the expense rate in 1998 is due to economies of scale realized from the higher
sales volume.
Pro forma depreciation and amortization was approximately $4.8 million in
1998 and $4.5 million in 1997. Pro forma depreciation and amortization includes
approximately $4.2 million of amortization in both periods relating to
intangible assets resulting from the acquisition of Great Western.
Stock-based compensation expense of $1.8 million was recognized in the year
ended December 31, 1998, compared to $.9 million in 1997. This expense relates
to 300,000 stock options issued in December 1997. The options vested equally
over a three-month period from the date of the grant. These amounts represent
the total compensation expense based on the estimated fair market value of the
options on the date of the grant and the exercise price.
Pro forma interest expense was approximately $2.0 million in 1998 compared
to $.8 million in 1997. The increase in interest expense is due to borrowings
under Advanced's revolving credit agreement used for general corporate purposes
including financing the telecommunications operations and 1998 capital
expenditures.
Pro forma income tax expense was $.7 million in 1998 compared to
$1.0 million income tax expense in 1997. The decrease in income tax expense is
due to higher operating losses in 1998 than in 1997.
25
<PAGE>
Pro forma net loss from continuing operations was $3.0 million, or $.15 per
share, in 1998, compared to pro forma net loss of $2.6 million, or $.13 per
share, in 1997. The increase in net loss was primarily due to the aforementioned
increase in stock-based compensation expense.
Pro forma EBITDA was $6.0 million for the year ended December 31, 1998, an
increase from $4.5 million in 1997. The increase is primarily due to higher pro
forma directory revenues in 1998.
Advanced did not complete the acquisition of Great Western and the
telecommunications subsidiaries until February 18, 1998; therefore, actual
results include only the activity of Great Western from February 18, 1998 to
December 31, 1998. For the year ended December 31, 1998, actual loss from
operations was $2.2 million and net loss from continuing operations was
$3.8 million, or $.20 per share. Advanced had no operating revenues in 1997 and
was engaged principally in activities relating to the IPO.
LIQUIDITY AND CAPITAL RESOURCES
Advanced's working capital at December 31, 1999 was negative $17.2 million
and its ratio of current assets to current liabilities was .54. These amounts
include current maturities of long-term debt of $17.0 million and short-term
borrowings under Great Western's revolving credit facility of $7.0 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 2,840,909 shares of common stock. Further, Advanced
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 are
expected to be converted to equity and the $7.0 million credit facility which is
expected to be refinanced, Advanced's working capital at December 31, 1999, was
positive $4.6 million.
In anticipation of the proposed acquisition of YPtel, Web YP and Big Stuff,
and to provide working capital to finance the telecommunications subsidiaries
until their planned sale, on May 14, 1999, Great Western, the wholly-owned
yellow pages publishing subsidiary of Advanced, entered into a $40.0 million
revolving loan agreement with Bank of America National Trust and Savings
Association, now known as Bank of America, N.A. Great Western used a portion of
the new credit facility to retire Advanced's existing $25.0 million credit
facility. The balance of the new credit facility was, subject to various
restrictions, for the general working capital needs and other corporate purposes
of Advanced and Great Western and for the working capital needs of the
telecommunications operations prior to their contemplated sale. Interest on this
facility is LIBOR, adjusted by the Eurodollar reserve percentage, plus 2.75% or
Bank of America's prime or base rate plus .75%. The loan 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 facility
expires on May 13, 2000. Advanced and its telecommunications subsidiaries
guaranteed Great Western's obligations with respect to the loan facility.
Advanced secured its guarantee by pledging to Bank of America substantially all
of its assets, including the capital stock of its telecommunications operations,
and the telecommunications operations secured their guarantees by pledging to
Bank of America substantially all of their respective assets.
On November 19, 1999, Advanced sold, in a stock sale, its four wholly-owned
subsidiaries which provided telecommunications services to Ionex
Telecommunications, Inc., formerly known as Compass Telecommunications, Inc.
Those four wholly-owned subsidiaries were Feist Long Distance, Inc., FirsTel,
Inc., Telecom Resources, Inc., and Valu-Line of Longview, Inc. In addition,
prior to the sale of the wholly-owned subsidiaries, Advanced transferred its
telecommunications operations related assets and liabilities to those
subsidiaries. Advanced received cash consideration in the amount of
$49.8 million less preliminary working capital, closing plant, property and
equipment and other adjustments, in the amount of $7.2 million, or approximately
$42.6 million.
The net sale proceeds from the sale of the telecommunications subsidiaries
were used to reduce the balance of the credit facility and to pay certain
outstanding liabilities of Advanced. In addition, the
26
<PAGE>
revolving loan agreement was amended by Great Western, Advanced and Bank of
America to reduce the credit facility to $15.0 million. At December 31, 1999,
Advanced had borrowed $7.0 million under this facility. The amended credit
facility is for the general working capital needs of Advanced and Great Western
and up to $2.0 million may be loaned to Web YP and Big Stuff.
Advanced's management believes that its cash flows from its yellow pages
business and the remaining cash available under its line of credit, as amended,
will be sufficient to fund its current operations. In order to close the
acquisition of YPtel, Web YP and Big Stuff, however, Advanced will need to
refinance its existing debt and that of YPtel. Additionally, Advanced will also
need capital to implement both its plans to acquire other yellow pages
publishers and to execute its Internet directory strategy.
REFINANCING
Advanced and each of its United States subsidiaries (guarantors) have
entered into a new senior credit facility to provide for an aggregate borrowing
availability to Advanced (which is guaranteed by the guarantors), of up to $60
million in the form of a revolving credit line with a fluctuating interest rate
based on either LIBOR plus a spread of from 1.5% to 3.5% or the prime rate of
the agent lender plus a spread of up to 1.25%, in each case dependent upon
Advanced's ratio of debt to earnings.
The obligations under the Senior Credit Facility is secured by substantially
all of the stock and assets of Advanced and the guarantors. The Senior Credit
Facility contains numerous restrictive financial and other covenants that are
usual and customary for transactions of this nature.
Negative covenants includes, among others, restrictions on indebtedness,
distributions, liens, sale/ leaseback transactions, guaranties, mergers,
dispositions of assets, acquisitions, investments, transactions with affiliates,
and changes in business lines. The senior credit facility will also require
Advanced to maintain certain minimum financial ratios, including an interest
coverage ratio, a fixed charge coverage ratio, a total leverage ratio and a
senior leverage ratio.
The senior credit facility contains usual and customary events of default
and provide remedies to the lenders in the event of default. The final maturity
of the Senior Credit Facility will be February 18, 2005.
Advanced also entered into an unsecured credit facility of $20 million in
the form of convertible debentures that are due and payable in full February
2006. The subordinated debentures bear interest at a rate per annum equal to
five percent (5%). Interest is payable semiannually in cash or by adding the
remaining accrued but unpaid interest to the principal balance.
The debentures will be convertible into shares of WorldPages' common stock
based upon a conversion price initially equal to 110% of the average closing
price of WorldPages' common stock for the ten trading days prior to closing. The
conversion price will be subject to being reset at the end of every six-month
period during the first two years of the term of the debentures to the average
of the market price for shares of common stock for the ten trading days
following the reset date. The holders of the debentures will also receive
certain warrants for the Company's common stock exercisable during the five-year
period following the issuance of the debentures at a purchase price equal to
130% of the initial closing price.
The junior credit facility contains numerous restrictive covenants that are
usual and customary for transactions of this nature and contain usual and
customary events of default providing remedies to the holders in the event of
default.
The proceeds of the loans will be used to refinance existing debt, to
provide working capital and to finance acquisitions and investments permitted
under the senior credit facility.
27
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Advanced is exposed to minimal market risks based on its current holdings
and use of financial instruments. Advanced does not hold or issue any financial
instruments for trading, hedging or speculative purposes. Financial instruments
held for other than trading purposes do not impose a material market risk.
Advanced 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 Advanced's business. The interest
rate that Advanced will be able to obtain on debt financing will depend on
market conditions at that time, and may differ from the rates Advanced has
secured on its current debt. Additionally, Advanced is exposed to interest rate
risk on amounts borrowed against its credit facility as of December 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 Advanced is currently paying on its borrowings. There is no cap on the
interest rate payable on Advanced's revolving credit facility. If the interest
rates on Advanced's revolving credit facility were to increase by 10% over
December 31, 1999 levels, Advanced's annual interest expense would increase by
approximately $380,000.
Advanced's business and operations are also exposed to market risks
resulting from changes in commodity prices for paper, Advanced's principal raw
material. Certain commodity grades of paper, including the grade Advanced uses
for its yellow pages directories, may be volatile. A 10% increase in the cost of
directory grade paper used by Advanced over December 31, 1999 levels, would
result in an increase in Advanced's annual operating costs of approximately
$476,000.
YEAR 2000
In the fourth quarter of 1999, Advanced completed its Year 2000 project.
Advanced experienced no material issues in the transition to January 1, 2000.
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<PAGE>
SELECTED HISTORICAL FINANCIAL INFORMATION OF YPTEL
The following tables present selected historical financial information of
YPtel and YPtel's predecessor, Pacific Coast Publishing, Inc., which should be
read in conjunction with the historical financial statements, and the related
notes thereto, of YPtel and its predecessor's management's discussion and
analysis of financial condition and results of operations and other financial
data included elsewhere in this prospectus. The selected historical financial
data of Pacific Coast Publishing, Inc. for each of the three fiscal years in the
period ended October 31, 1998 have been derived from Pacific Coast Publishing,
Inc.'s audited consolidated financial statements included elsewhere in this
prospectus. The selected financial data for the year ended October 31, 1999, was
derived from the unaudited consolidated financial statements of YPtel and its
predecessor. All adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of results of the unaudited historical interim
periods have been included. See "YPtel Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Index to Financial
Statements."
YPtel does not recognize net revenues with respect to bookings or cash
receipts for any given directory or the costs directly related to sales,
production, printing and distribution of that directory until the month in which
it is printed and distributed. The sizes of directories distributed in a
particular market and the corresponding revenues recognized vary significantly
from quarter to quarter. Further, the actual production and distribution dates
of individual directories are not consistent and are subject to change and it is
possible that individual directories will not be produced during the same month
each year, which may result in significant monthly and quarterly fluctuation.
YPtel was incorporated in Canada on July 22, 1998. On November 1, 1998,
YPtel, through an indirect subsidiary, completed the acquisition of the assets
and liabilities of Pacific Coast Publishing, Inc., an independent yellow pages
directory business. The operating information of YPtel's predecessor is
presented for comparative purposes and does not purport to represent YPtel's
results of operations that would have actually occurred if the acquisition of
the assets and liabilities of Pacific Coast Publishing, Inc. had occurred prior
to the periods presented.
29
<PAGE>
YPTEL CORPORATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR
YPTEL ------------------------------------------------------
-------------- YEARS ENDED OCTOBER 31,
YEAR ENDED ------------------------------------------------------
OCT. 31, 1999 1998 1997 1996 1995 1994
-------------- -------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue........................ $41,162 $33,165 $28,204 $24,550 $15,481 $14,322
------- ------- ------- ------- ------- -------
Printing, distribution and
listings..................... 9,482 8,001 6,644 6,985 4,027 3,660
Sales and marketing............ 8,421 7,301 5,700 5,613 3,265 3,353
General and administrative..... 11,903 8,454 7,585 6,051 4,533 4,005
Bad debt expense............... 2,779 2,067 1,728 1,836 758 802
Depreciation and
amortization................. 2,272 170 249 335 328 308
Terminated IPO Costs........... 363 -- -- -- -- --
Stockholder remuneration....... 0 1,646 1,718 1,834 1,765 1,612
------- ------- ------- ------- ------- -------
35,220 27,639 23,624 22,654 14,676 13,740
------- ------- ------- ------- ------- -------
Income from operations......... 5,942 5,526 4,580 1,896 805 582
Interest expense............... 3,930 100 308 375 197 116
Other expense (income), net.... (13) (339) (187) (191) (218) (142)
------- ------- ------- ------- ------- -------
Earnings before income taxes... 2,025 5,765 4,459 1,712 826 608
Provision for income taxes..... 816 86 54 266 298 217
------- ------- ------- ------- ------- -------
Net earnings................... $ 1,209 $ 5,679 $ 4,405 $ 1,446 $ 528 $ 391
======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 31,
------------------------------------------------------------------
1999 1998 1997 1996 1995 1994
--------- -------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Current assets................... $22,082 $14,712 $12,343 $10,433 $ 8,978 $6,002
Working capital.................. 10,410 9,189 6,462 3,254 1,809 1,385
Total assets..................... 62,900 15,534 12,981 11,305 10,025 6,920
Short-term borrowings............ 5,324 95 586 2,488 2,328 170
Long-term debt................... 35,283 276 261 389 555 445
Stockholders' equity............. 14,989 9,735 6,840 3,737 2,300 1,858
</TABLE>
30
<PAGE>
YPTEL MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
YEAR ENDED OCTOBER 31, 1999 COMPARED TO THE YEAR ENDED OCTOBER 31, 1998
Revenues increased $8.0 million, or 24.1%, from $33.2 million for the year
ended October 31, 1998 to $41.2 million for the year ended October 31, 1999.
This increase primarily resulted from new revenues of $4.2 million related to
introduction of the Portland, Oregon directory; $1.4 million related to strong
growth in the second year Spokane, Washington and Beaverton, Oregon directories.
The remaining revenue increase was attributable to growth in revenues in the
remaining markets.
Printing, distribution and listing expenses increased by $1.5 million or
18.5% from $8.0 million for the year ended October 31, 1998 to $9.5 million for
the year ended October 31, 1999. The change was primarily due to printing and
distribution costs related to the new Portland, Oregon directory.
Sales and marketing expense increased by approximately $1.1 million or 15.1%
from $7.3 million for the year ended October 31, 1998 to $8.4 million for the
year ended October 31, 1999. This increase is generally attributable to new
sales in the first year Portland, Oregon directory and the commissions related
to higher national advertising sales. This increase is partially offset by
decreased commissions in the second year Spokane, Washington and Beaverton,
Oregon directories due to lower commissions on renewal sales than new sales.
General and administrative expenses increased $3.4 million or 40.0% from
$8.5 million for the year ended October 31, 1998 to $11.9 million for the year
ended October 31, 1999. The increase is due to a general increase in general and
administrative expenses associated with the infrastructure increases to support
the new Portland, Oregon directory and an increase in corporate costs due to
YPtel's new ownership.
The bad debt expense increased $0.7 million, or 33%, from $2.1 million for
the fiscal year ended October 31, 1998 to $2.8 million for the fiscal year ended
October 31, 1999. The increase is attributable to the general increase in
revenues as well as additional reserves taken due to a relaxing of some of the
credit terms for low credit risk customers.
Depreciation and amortization expense increased $2.1 million from
$0.2 million for the fiscal year ended October 31, 1998 to $2.3 million for the
fiscal year ended October 31, 1999. The increase is attributable to the
amortization of customer lists, non-compete covenants and goodwill that resulted
from the acquisition of the assets of Pacific Coast Publishing, Inc. by YPtel
Corporation, pursuant to purchase accounting.
Interest expense increased $3.8 million from $0.1 million for the year ended
October 31, 1998 to $3.9 million for the year ended October 31, 1999. The
increase is a direct result of the new debt facilities arranged by YPtel
Corporation, through its subsidiary Pacific Coast Publishing, Ltd., to fund the
acquisition of the assets of Pacific Coast Publishing, Inc.
Provision for income taxes increased $0.7 million from $0.1 million for the
year ended October 31, 1998 to $0.8 million for the year ended October 31, 1999.
The increase is a result of the fact that the predecessor corporation was an
'S' Corporation and for tax purposes Federal tax was being incurred at the
shareholder level, whereas YPtel Corporation's subsidiary, Pacific Coast
Publishing, Ltd., is a 'C' corporation which incurs tax at the corporate level.
The entire provision reflects a deferred tax provision for both federal and
state taxes.
31
<PAGE>
YEAR ENDED OCTOBER 31, 1998 COMPARED TO THE YEAR ENDED OCTOBER 31, 1997
Revenues increased by $5.0 million, or 17.6%, from $28.2 million for the
fiscal year ended October 31, 1997 to $33.2 million for the fiscal year ended
October 31, 1998. This increase primarily resulted from $2.2 million in revenues
related to the new Spokane, Washington directory, $1.4 million in revenues
related to the new Beaverton, Oregon directory and $0.2 million related to new
"community-type" directories in the Salt Lake City, Utah market, which have
since been discontinued. The remaining $1.2 million in revenue increase was
derived from $1.5 million of revenue increase in existing books, partially
offset by the revenue decrease associated with the discontinuation of the South
East Arizona directory, which accounted for $0.3 million in fiscal 1997.
Printing, distribution and listings expenses increased by $1.4 million, or
21.2%, from $6.6 million for the fiscal year ended October 31, 1997 to
$8.0 million for the fiscal year ended October 31, 1998. This increase was
primarily due to the addition of two new regional directories and two new
community directories during fiscal 1998, and was somewhat offset by the
elimination of the South East Arizona directory. As a percentage of revenues,
printing, distribution and listings expenses increased by 0.5%, from 23.6% in
fiscal 1997 to 24.1% in fiscal 1998. The relative increase reflected the high
ratio of printing, distribution and listings costs to revenues attributable to
the two new regional directories distributed in fiscal 1998, which historically
declines in the second year of operations.
Sales and marketing expenses increased by $1.6 million, or 28.0%, from
$5.7 million for the fiscal year ended October 31, 1997 to $7.3 million for the
fiscal year ended October 31, 1998. As a percentage of revenues, sales and
marketing expenses increased from 20.2% for the fiscal year ended October 31,
1997 to 22.0% for the fiscal year ended October 31, 1998. The increase related
to the relatively high commission rates associated with the new Spokane,
Washington and Beaverton, Oregon directories, which generated sales and
marketing expenses representing approximately 30% of those directories'
revenues.
General and administrative expenses increased by $0.9 million, or 11.8%,
from $7.6 million for the fiscal year ended October 31, 1997 to $8.5 million for
the fiscal year ended October 31, 1998. As a percentage of revenues, general and
administrative expenses decreased from 26.9% to 25.5% during the same period,
which reflected the economies of scale associated with the head office
production functions that were realized as YPtel further expanded its
operations.
YEAR ENDED OCTOBER 31, 1997 COMPARED TO THE YEAR ENDED OCTOBER 31, 1996
Revenues increased by $3.6 million, or 14.6%, from $24.6 million for the
fiscal year ended October 31, 1996 to $28.2 million for the fiscal year ended
October 31, 1997. Aside from two new community directories in the Salt Lake City
market, which generated nominal revenues, and which directories have since been
discontinued, YPtel did not produce any new directories in fiscal 1997. The
revenue increase primarily resulted from strong increases in the: Tacoma,
Washington; Vancouver, Washington; Salt Lake City, Utah; South King County,
Washington; and Tucson, Arizona directories, as well as from more modest
increases across all other directories.
Printing, distribution and listing expenses decreased by $0.4 million, or
5.7%, from $7.0 million for the fiscal year ended October 31, 1996 to
$6.6 million for the fiscal year ended October 31, 1997. As a percentage of
revenues, printing, distribution and listing expenses decreased by 4.9% from
28.5% in fiscal 1996 to 23.6% in fiscal 1997. Both the relative decrease and the
absolute dollar decrease was due primarily to:
- the overall decrease in the price of paper during fiscal 1997 from record
high levels experienced in fiscal 1996; and
- the first full year of operations under the printing contract with
Quebecor Printing.
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<PAGE>
These factors were slightly offset by the introduction of the two Salt Lake City
community directories in fiscal 1997.
Sales and marketing expenses increased $0.1 million, or 1.8%, from
$5.6 million for the fiscal year ended October 31, 1996 to $5.7 million for the
fiscal year ended October 31, 1997. As a percentage of revenues, sales and
marketing expenses decreased 2.7% from 22.9% for the fiscal year ended
October 31, 1996 to 20.2% for the fiscal year ended October 31, 1997. The
relative decrease was related to the fact that the four directories that were
introduced in fiscal 1996 paid lower commission rates in 1997 than those
provided in the first year of the directories due to the fact that a majority of
those directories' second year sales were renewals.
General and administrative expenses increased $1.5 million, or 24.6%, from
$6.1 million for the fiscal year ended October 31, 1996 to $7.6 million for the
fiscal year ended October 31, 1997. As a percentage of revenues, general and
administrative expenses increased 2.3% during the same period from 24.6% to
26.9%. The majority of the absolute dollar increase in general and
administrative expenses related to:
- additional advertising expenditures of $0.3 million relating to radio,
television and other advertising expenditures which were intended to
create awareness for the brand and the directories; and
- additional wages, salaries and benefits of $1.0 million related to both
management and production in order to grow, support and manage a larger
organization and a higher volume of advertising.
LIQUIDITY AND CAPITAL RESOURCES
Effective November 1, 1998, YPtel, through its subsidiary, Pacific Coast
Publishing, Ltd., acquired the yellow pages publishing business of Pacific Coast
Publishing, Inc. for a $2.0 million promissory note and the issuance of its
voting Class A preferred shares, which shares were later redeemed for $47.8
million in cash. The promissory note accrues interest at the rate of 7%, is
payable on maturity, and is due October 31, 2001. The promissory note may be
extended at the option of YPtel to October 31, 2006, on certain terms and
conditions. The redemption of the Class A preferred shares of Pacific Coast
Publishing, Ltd. was financed by the following capital structure, which is
currently in place at Pacific Coast Publishing, Ltd.
SENIOR TERM A NOTES AND SENIOR TERM B NOTES
Under its Senior Term Note Purchase Agreement, Pacific Coast Publishing,
Ltd. has drawn down an aggregate of $25.5 million, of which $11 million
aggregate principal amount is in the form of Senior Term A Notes and $14.5
million aggregate principal amount is in the form of Series B Senior Term Notes,
in both cases issued to a syndicate of commercial lenders.
The Senior Term A Notes bear interest with reference to the prime commercial
rate plus 3.0% or the London Interbank Offered Rate at Pacific Coast Publishing,
Ltd.'s option, plus 2.0%. The Senior Term B Notes bear interest at prime plus
3.75% or at the London Interbank Offered Rate plus 2.75%. Currently, the Senior
Term A and B Notes bear interest with reference to the LIBOR at a combined
effective rate of approximately 8.5% per annum. To date, Pacific Coast
Publishing, Ltd. has made all payments under the Senior Notes when due.
REVOLVING CREDIT NOTES
The holders of the Senior A and B Term Notes have also provided a revolving
credit facility in favor of Pacific Coast Publishing, Ltd. under the terms of
its Revolving Credit Agreement in the amount of up to $8.5 million at a rate of
interest that reflects the prevailing prime rate or LIBOR, at
33
<PAGE>
Pacific Coast Publishing, Ltd.'s option, plus an applicable margin. Pacific
Coast Publishing, Ltd. is permitted to draw under the Revolving Credit Agreement
up to 85% of Pacific Coast Publishing, Ltd.'s eligible accounts receivable by
the issuance of revolving credit notes. The revolving credit notes are repayable
on demand. The Revolving Credit Agreement contains customary aging and
concentration exclusions for eligible accounts. At July 31, 1999, Pacific Coast
Publishing, Ltd. had borrowed $1.6 million under the Revolving Credit Agreement.
SUBORDINATED NOTES
Pursuant to its Subordinated Loan Agreement, Pacific Coast Publishing, Ltd.
has drawn down an aggregate of $11 million and issued $11 million in aggregate
principal amount of subordinated notes due May 1, 2006 to a syndicate of
commercial lenders. The Subordinated Loan Agreement contains provisions by which
the subordinated noteholders have subordinated their claims against Pacific
Coast Publishing, Ltd. under the subordinated notes to the claims of the holders
of the Senior Term A and B Notes and the Revolving Credit Notes.
The subordinated notes bear interest at 12% per annum, which is payable
semi-annually in arrears on May 1 and November 1 in each year during the term of
the subordinated notes. Subject to the restrictions in the Senior Term Note
Purchase Agreement, the subordinated notes may be repaid in whole or in part,
subject to a minimum principal prepayment of $100,000, in any multiple of
$100,000 at any time and from time to time without notice or bonus.
In conjunction with the issue of the Subordinated Notes, YPtel issued
warrants to the subordinated noteholders to acquire an aggregate of 1,841,000
shares of its Class C Special Shares at an exercise price of Cdn $0.01 per Class
C Special Share. Upon repayment of the Subordinated Notes, such shares will
convert into a number of YPtel common stock to be calculated based on a
predetermined formula as follows:
- If the Subordinated Notes are repaid after November 20, 1999, but before
May 20, 2000, the Subordinated Notes will be converted into that number of
common shares representing 8% in the aggregate of the issued and
outstanding common shares of YPtel Corporation;
- If the Subordinated Notes are repaid after May 20, 2000, but before
November 20, 2000, the Subordinated Notes will be converted into that
number of common shares representing 10% in the aggregate of the issued
and outstanding common shares of YPtel Corporation; and
- If the Subordinated Notes are repaid any time after November 20, 2000, the
Subordinated Notes will be converted into that number of common shares
representing 12% in the aggregate of the issued and outstanding common
shares of YPtel Corporation.
All of Pacific Coast Publishing, Ltd.'s debt facilities are to be refinanced
as a condition of closing of the YPtel Agreement.
STOCKHOLDERS' EQUITY
YPtel issued 13,549,300 common shares for net cash proceeds of $13.28
million, after deducting share issuance expenses of $0.3 million. The YPtel
common shares were purchased by a syndicate of investors through a fund managed
by Imperial Capital.
The warrants provided to the subordinated noteholders have a book value of
$500,000, which represents an allocation of the $11.0 million face value of the
subordinated note.
34
<PAGE>
INFORMATION REGARDING MARKET RISK
YPtel's business and operations are exposed to market risks, including risks
relating to changes in interest rates and commodity prices.
The interest rates on YPtel's Senior Notes and on its revolving credit
facility are floating and will fluctuate based on changes in the prevailing
prime rate or LIBOR. These interest rates change usually monthly or bi-monthly.
The interest rate on the Senior Notes, which is currently approximately 8.5%, is
not capped. To mitigate the risks related to fluctuation in interest rates,
YPtel has entered into an interest rate cap program with Dresdner Bank. This
program caps at 7.0% the base LIBOR rate on 50% of the principal amount of the
Senior Notes. The interest YPtel pays on the Senior Notes consists of the base
LIBOR rate, which is currently 5.9%, plus a variable margin. There is no cap on
the interest rate payable on YPtel's revolving credit facility. If the interest
rates on the Senior Notes were to change by 10% from April 30, 1999 levels,
YPtel's annual interest expense would change by approximately $211,000 with
respect to the Senior Notes and approximately $15,400 with respect to the
revolving credit facility.
YPtel does not use derivative financial instruments for hedging, speculative
or trading purposes. YPtel is dependent upon outside suppliers for all of its
raw material costs associated with publishing the printed yellow page
directories. YPtel's principal raw material is paper, which YPtel purchases
either through a broker or directly from its printer. YPtel does not purchase
paper directly from the paper mills. Certain commodity grades of paper,
including the directory-grade paper YPtel uses, have shown considerable price
volatility since 1989. For example, paper prices rose sharply in 1995, from
approximately $530 per ton on January 1, 1995 to approximately $930 per cwt on
December 31, 1995, an increase of 75%, and then fell by 14% to $800 per ton at
December 31, 1996. Paper prices continued to decrease in 1997, with most of
YPtel's purchases being between $700 per ton to $750 per ton. In 1998, prices
dropped further, with most YPtel purchases being in the range of $640 per ton to
$730 per ton. Prices to date in 1999 have been primarily in the range of $680
per ton to $700 per ton. YPtel does not enter into forward purchase contracts to
hedge its exposure to changes in the price of paper. A 10% increase in
directory-grade paper would result in an increase of approximately $361,500 in
YPtel's raw material costs, based upon the amount of paper YPtel purchased
during the year ended October 31, 1999.
YPtel's sales, expenditures, debt servicing and capital purchasing are
transacted in U.S. dollars, with an insignificant portion of expenses being
transacted in Canadian dollars. Accordingly, YPtel is not significantly exposed
to foreign currency risk.
35
<PAGE>
SELECTED HISTORICAL FINANCIAL INFORMATION OF WEB YP
The following tables present selected historical financial information for
Web YP which should be read in conjunction with the historical financial
statements, and the related notes thereto, of Web YP, Web YP Management's
Discussion and Analysis of Financial Condition and Results of Operations and
other financial data included elsewhere in this prospectus. Web YP was founded
as an operating company in January 1998. The selected historical financial data
of Web YP for the years ended December 31, 1999 and 1998 have been derived from
its audited financial statements included elsewhere in this prospectus. See "Web
YP Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Index to Financial Statements."
WEB YP, INC.
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Statement of Operations Data:
Revenues.................................................. $ 851 $ 384
Operating costs:
Selling and Internet expenses........................... 3,857 753
General and administrative expenses..................... 1,271 1,232
Depreciation and amortization........................... 98 51
------- -------
Loss from operations.................................... (4,375) (1,652)
Other income (expense):
Interest expense........................................ (143) --
------- -------
Loss before income taxes.................................. (4,518) (1,652)
Income tax expense (benefit).............................. -- --
------- -------
Net loss.................................................. $(4,518) $(1,652)
======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Balance Sheet Data:
Current assets............................................ $ 905 $ 307
Working capital........................................... (3,595) (176)
Total assets.............................................. 1,097 344
Notes payable to shareholders............................. 3,653 --
Stockholders' equity (deficit)............................ (3,403) (139)
</TABLE>
36
<PAGE>
WEB YP MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998
Revenue increased $467,000, or 122%, to $851,000 in 1999 from $384,000 in
1998. The increase is the result of the addition of new resellers to the sales
channel and increased penetration of sales to customers from existing resellers
since the first nine months of operations.
Selling and Internet expenses increased as a percentage of revenues to 453%
for the year ended December 31, 1999 from 196% in 1998. The increased percentage
is primarily due to increased advertising expense, development costs to improve
functionality of the website and costs associated with a new portal agreement.
General and administrative expenses decreased as a percentage of revenues to
149% during the year ended December 31, 1999 from 321% in 1998. The decreased
percentage is primarily due to decreases in costs typically incurred by start-up
companies, such as advertising and promotion, legal fees, office supplies, trade
shows and conventions, and travel and entertainment.
Web YP's net loss increased 173% to $4,518,000 during the year ended
December 31, 1999 from $1,652,000 in 1998.
LIQUIDITY AND CAPITAL RESOURCES
Web YP's primary funding requirements are to finance operating losses,
working capital and the continued growth of the business. This includes
primarily the development of strategic alliances with internet related
companies. Web YP's primary source of liquidity is capital contributions from
its stockholders. During the year ended December 31, 1999 and 1998, the Web YP
stockholders contributed $1,254,000 and $1,388,000 of additional capital.
Net cash used by operations during the year ended December 31, 1999 was
$5,001,000. This amount is primarily made up of cash used to fund net losses.
DISCLOSURES ABOUT MARKET RISK
Web YP is exposed to minimal market risks based on its business and use of
financial instruments. Web YP does not hold or issue any financial instruments
for trading, hedging or speculative purposes. Financial instruments held for
other than trading purposes do not impose a material market risk. Web YP may be
exposed to interest rate risk, as additional financing is periodically needed
due to the operating losses and capital expenditures associated with
establishing and expanding Web YP's business. The interest rate that Web YP will
be able to obtain on debt financing will depend on market conditions at that
time.
37
<PAGE>
SELECTED HISTORICAL FINANCIAL INFORMATION OF BIG STUFF
The following tables present selected historical financial information for
Big Stuff which should be read in conjunction with the historical financial
statements, and the related notes thereto, of Big Stuff, Big Stuff Management's
Discussion and Analysis of Financial Condition and Results of Operations and
other financial data included elsewhere in this prospectus. The selected
historical financial data of Big Stuff for each of the three fiscal years in the
period ended December 31, 1999, have been derived from its unaudited financial
statements included elsewhere in this prospectus. All historical and pro forma
financial statements of Big Stuff contained in this prospectus have been
prepared and restated by WorldPages based on information supplied by Big Stuff.
The information supplied by Big Stuff did not conform to generally accepted
accounting principles. See "Big Stuff Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Index to Financial
Statements."
BIG STUFF, INC.
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Statement of Operations Data:
Revenues.................................................. $ 862 $1,648 $2,526
Operating costs:
Cost of services........................................ 833 1,049 1,857
Selling, general and administrative expenses............ 432 257 609
Depreciation and amortization........................... 206 301 149
------ ------ ------
Income (loss) from operations........................... (609) 41 (89)
Other income (expense):
Interest expense........................................ (90) (60) --
------ ------ ------
Income (loss) before income taxes......................... (699) (19) (89)
Income tax expense........................................ -- -- --
------ ------ ------
Net income (loss)..................................... $ (699) $ (19) $ (89)
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Balance Sheet Data:
Current assets............................................ $ 399 $277 $ 747
Working capital........................................... (1,899) 202 722
Total assets.............................................. 1,085 815 1,621
Short-term borrowings..................................... 337 43 --
Notes due to shareholders................................. 1,900 -- --
Stockholders' equity...................................... (1,213) 740 1,597
</TABLE>
38
<PAGE>
BIG STUFF MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998
Revenue decreased $786,000, or 47.7%, to $862,000 in 1999 from $1,648,000 in
1998. The decrease is primarily due to a shift in business focus from ad layout,
design and colorization services to the development of internet related
services, including website design.
Cost of services increased as a percentage of revenues to 96.6% during 1999
from 63.7% during 1998. The increased percentage is primarily due to an increase
in direct labor costs resulting from the addition of staff with Internet
expertise. The cost of direct materials decreased in relation to revenues. More
competitive pricing of ad-related services has also contributed to the increase.
General and administrative expenses increased as a percentage of revenues to
50.1% during 1999 from 15.6% during 1998. The increase in the expense rate is
primarily due to additional travel and entertainment costs necessary to promote
Internet related services.
Big Stuff's net loss increased to $699,000 in 1999 from $19,000 in 1998. As
a percentage of revenues, net loss increased to 81.1% in 1999 from 1.2% in 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997
Revenue decreased $878,000, or 34.8%, to $1,648,000 in 1998 from $2,526,000
in 1997. The decrease is primarily due to a shift in business focus from ad
layout, design and colorization services to the development of Internet related
services, including website design as well as speculative advertising artwork
design services for independent yellow pages publishers. Also, demand has
decreased for colorization services as improvements in technology have allowed
some customers to perform the same functions internally without significant
investment.
Cost of services decreased as a percentage of revenues to 63.7% during 1998
from 73.5% during 1997. The decreased percentage is primarily due to a decrease
in direct labor costs resulting from staff reductions in anticipation of Big
Stuff's shift in business focus to Internet related services. The cost of direct
materials decreased in relation to revenues.
General and administrative expenses decreased as a percentage of revenues to
15.6% during 1998 from 24.1% during 1997. The decreased percentage is due
primarily to decreases in costs associated with the development of Big Stuff's
ad-related services such as training, advertising and promotion, and travel and
lodging, resulting from Big Stuff's decision to shift its focus to Internet
related activities.
Big Stuff's net loss decreased to $19,000 in 1998 from $89,000 in 1997. As a
percentage of revenues, net loss decreased to 1.2% in 1998 from 3.5% in 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
Revenue increased $215,000, or 9.3%, to $2,526,000 in 1997 from $2,311,000
in 1996. The increase is primarily due to an increased customer base. Also, Big
Stuff increased revenue by providing additional services, such as speculative
advertising artwork design, to existing customers and other independent yellow
pages publishers.
Cost of services increased as a percentage of revenues to 73.5% during 1998
from 49.3% during 1997. The increased percentage is primarily due to an increase
in direct labor costs resulting from the addition of staff necessary to service
a growing customer base and to provide additional services to existing
customers.
39
<PAGE>
General and administrative expenses increased as a percentage of revenues to
24.1% during 1997 from 8.2% during 1996. The increased percentage is due
primarily to increases in costs associated with the development of Big Stuff's
ad-related services such as training, advertising and promotion, and travel and
lodging, resulting from Big Stuff's increased customer base and new services.
Big Stuff's net loss was $89,000 in 1997 compared to net income of $860,000
in 1996.
LIQUIDITY AND CAPITAL RESOURCES
Big Stuff's primary funding requirements are to finance working capital and
capital expenditures for website design equipment. Its sources of liquidity are
cash from operations and capital contributions or loans from stockholders. At
December 31, 1999, working capital was $(1,899,000).
Net cash used by operating activities in 1999 was $247,000. Net cash used in
investing activities in 1999 was $354,000, principally for purchases of
equipment. Net cash provided by financing activities in 1999 was $716,000,
representing $1,970,000 of borrowings offset by $1,254,000 of distributions to
stockholders.
Net cash provided by operating activities in 1998 was $700,000. Net cash
used in financing activities in 1998 was $795,000, representing $393,000 of
capital contributions from stockholders offset by $1,188,000 of distributions to
stockholders.
DISCLOSURES ABOUT MARKET RISK
Big Stuff is exposed to minimal market risks based on its business and use
of financial instruments. Big Stuff does not hold or issue any financial
instruments for trading, hedging or speculative purposes. Financial instruments
held for other than trading purposes do not impose a material market risk. Big
Stuff may be exposed to interest rate risk, as additional financing is
periodically needed due to the operating losses and capital expenditures
associated with establishing and expanding Big Stuff's business. The interest
rate that Big Stuff will be able to obtain on debt financing will depend on
market conditions at that time.
40
<PAGE>
BUSINESS
WorldPages, through its subsidiaries, publishes and distributes yellow page
directories, designs and produces websites for yellow and white page publishers
and operates a website designed to bring buyers and sellers together to transact
business and related interests. WorldPages operates through its subsidiaries,
Great Western, YPtel, Web YP and Big Stuff.
GREAT WESTERN
Great Western is one of the ten largest independent yellow pages publishers
in the United States. It publishes and distributes approximately 3.8 million
yellow pages directories annually in 23 markets in Texas, Oklahoma and
California. Great Western, founded in 1984 and headquartered in Amarillo, Texas,
entered the Austin, Texas market in 1999. Great Western's revenues are derived
from advertising space sold in its directories which are produced and
distributed annually in each market. Great Western's annual revenues have
increased from $29.4 million in 1995 to $50.0 million in 1999. Great Western has
historically increased revenues by increasing the number and size of
advertisements in recurring directories and by introducing new directories in
new markets. Great Western has targeted new directories and markets that are
contiguous to its existing markets in order to utilize its established sales
infrastructure and Great Western Directories' brand name recognition. Great
Western also markets WorldPages, a yellow pages Internet directory website
service operated by Web YP, to its yellow pages customers in its target markets.
Great Western has found that this service provides an opportunity not only to
provide customers with web page design and support, but also to expand into web
based advertising and electronic commerce. Great Western will also consider
growth through acquisitions of other independent yellow pages publishers that
fit into its strategic plans. Great Western sells advertising to approximately
52,000 customers in its directories.
When Great Western expands into a new market, it typically seeks to attract
targeted customers by producing and publishing a complete directory in which it
gives away advertising space to customers which is referred to as a prototype
directory. After the advertisers have had an opportunity to experience the
reception of the new directory and the response to their advertisements in the
marketplace, Great Western will sell the advertising in the second and
subsequent years. Because of this strategy, it may have substantial expenses
relating to its first directory in a new market with no corresponding revenues.
In 1999, Great Western incurred net costs of $3.1 million related to the
prototype directory in the Austin, Texas market. WorldPages believes that this
strategy improves the success of launching a new directory and builds stronger
customer relationships and customer loyalty than it could otherwise achieve by
selling the advertising for a new directory.
At December 31, 1999, Great Western had 345 employees, of which 192 were in
the sales function. None of the employees belong to a union, and management
believes that its relations with its employees is good.
Great Western owns one office building in Amarillo, Texas. WorldPages leases
its corporate headquarters in St. Louis, Missouri. WorldPages and Great Western
lease various sales offices throughout Great Western's geographic territory.
YPTEL
YPtel, through Pacific Coast Publishing, Ltd., a wholly-owned subsidiary of
YPtel, Inc., which is a wholly-owned subsidiary of YPtel, produces 17
directories in four states under its "Regional Telephone Directory" brand. It is
a leading independent publisher in Washington, Oregon, Utah and Arizona. YPtel's
revenues are derived from the sale of advertising to over 30,000 small to medium
size local businesses.
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<PAGE>
Pacific Coast Publishing, Inc., which operated this business prior to its
acquisition by YPtel on November 1, 1998, was established in 1984. Pacific Coast
Publishing, Inc.'s first independent yellow pages directory was published in
1985 in the Tacoma-Pierce County, Washington market and was a consolidated
directory for a market area with similar buying patterns which had been served
by two separate utility directories. Pacific Coast Publishing, Inc. initially
expanded its business within Washington and subsequently introduced directories
in Utah, Oregon and Arizona. In general, YPtel has continued the strategy
initiated by Pacific Coast Publishing, Inc. That strategy is to enter markets
being serviced by one telephone utility with little or no competition from
independent yellow pages publishers. YPtel then scopes the market differently
than the local telephone utility by providing one directory for areas that would
be covered by multiple telephone utility directories, offers advertising at
significantly lower prices to local businesses and offers features not included
in the telephone utility's directory, including color maps, coupons,
neighborhood and community guides, emergency listings and government listings.
For example, in the Salt Lake City market, YPtel produces one directory that
provides the same market coverage as four directories distributed by the local
telephone service provider, U S West Corporation. YPtel includes white
pages listings for local businesses and residences in its directories.
In 1998, YPtel produced 16 regional directories generating revenues of
$33.0 million with a total circulation of more than 2.4 million, as well as four
since-discontinued community directories in Salt Lake City, Utah, which had
generated 1998 revenues of $0.2 million. Of YPtel's 16 regional directories,
nine were in Washington, three were in Oregon, three were in Utah and one was in
Arizona. YPtel distributed its first directory in the Portland, Oregon market in
May 1999 with a circulation of approximately 400,000. YPtel has recently
commenced canvassing the Seattle, Washington market and plans to distribute its
first directory in that market with an anticipated circulation of approximately
750,000 in 2000.
Yellow pages marketing is a direct sales business which requires both
servicing of existing accounts and developing new customers. Repeat customers
comprise YPtel's core account base and a number of these customers have
advertised in YPtel's directories for many years. On average, since 1988,
accounts representing 82.7% of the prior year's local advertising revenues have
renewed their advertising program in the current edition of each directory.
YPtel employs two regional sales managers who, together with specific book
managers, are responsible for supervising the activities of YPtel's account
executives. Account executives generate all of YPtel's revenues and are
responsible for servicing existing advertising accounts and developing new
accounts within their assigned areas. Revenue is primarily derived from local
and regional advertisers. A smaller amount of revenue is derived from national
accounts.
The following table outlines certain sales and marketing statistics relating
to YPtel:
<TABLE>
<CAPTION>
1999 1998 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Number of Accounts................................ 31,852 29,065 26,210 25,095
Circulation....................................... 2,886,000 2,400,000 2,216,000 2,005,000
</TABLE>
YPtel enjoys copyright protection with respect to the compilation of each of
its directories. This copyright protection is registered when the directories
are produced. In addition, YPtel has registered trademark protection for "The
Only Book" in the United States and is in the process of registering trademark
protection for YPtel Corporation and the respective logo in the United States
and Canada. YPtel has registered the trade name "Regional Telephone Directory"
in the jurisdictions in which it operates. YPtel has also registered a number of
Internet domain names including: yptel.com, yptel.net, and yptel.org.
YPtel's day-to-day operations, including all order processing, art
production, credit and collections and management training functions, are
conducted at its 16,700 square foot leased facility in Tacoma,
42
<PAGE>
Washington. In addition to its corporate head office in Toronto, Ontario and its
Tacoma facility, YPtel operates 16 leased satellite sales offices throughout
Washington, Oregon, Utah and Arizona.
YPtel's production facilities currently produce 17 regional directories.
Management estimates that the facilities can increase production volume by two
to three times by adding additional shifts to the existing facilities. YPtel
contracts with third party vendors to print its directory and to distribute
directories to each business and residence in its market.
EMPLOYEES AND LABOR RELATIONS
As of December 31, 1999, YPtel had 373 employees, of which 191 are involved
in the sales function as account executives. In June 1998, union certification
was granted to sales personnel at three of YPtel's offices in Washington. YPtel
is currently negotiating a collective bargaining agreement with the
Communication Workers of America for these employees. Management believes that
relations with YPtel's employees are good.
COMPETITION
YPtel competes largely with telephone utilities and, to a lesser extent,
other independent yellow pages publishers. YPtel's largest competitors in its
markets are US West and GTE Corporation. There are no significant independent
publishers in YPtel's current markets.
Competitive local exchange carriers are telecommunications companies that
compete with local telephone utilities. Some competitive local exchange carriers
compete with YPtel by partnering with or acquiring independent publishers to
allow their existing sales force to market a more complete complement of
telecommunication services and to create or strengthen their brand name. One
such carrier, McLeod USA Publishing Company, has recently acquired independent
publishers within its service areas. YPtel believes that as competition to
provide local telephone service in the United States matures, the presence of
competitive local exchange carriers in the yellow pages directory business will
increase.
WEB YP AND BIG STUFF
Big Stuff designs and produces websites, which are marketed to Web YP's
network of yellow and white pages publishers. The websites are subsequently
hosted by Web YP. Web YP then features the customer in the WorldPages.com
directory and promotes the websites to many of the major search engines.
The mission of Web YP is to facilitate transactions between buyers and
sellers worldwide by establishing a premier Internet, print and telephony-based
yellow pages. To accomplish this objective, Web YP has established
WorldPages.com, a website intended to bring buyers and sellers together to
transact business. WorldPages.com intends to capitalize on the competitive
advantage of having its dedicated sales agents assisting their advertisers' move
into e-commerce and related web-hosted products.
Web YP, through its Worldpages.com website, hosts and promotes branded
websites and an on-line internet directory search engine for consumers and
business users. The WorldPages.com on-line search engine has the white and
yellow pages directory content at its core. Users can search for basic name,
address and telephone numbers for U.S. and Canadian white and yellow pages
listings, plus related content such as location mapping and driving directions.
The website also includes weather forecasts, directories of toll free numbers,
e-mail address directories, international directories, government information
directories and related yellow pages guidelines for categories including
restaurants, computers, attorneys, entertainment, travel and automotive. The
website also contains links to sites containing news, stock quotes, auctions and
newspaper style classified advertisements. PC MAGAZINE
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<PAGE>
named WorldPages.com one of the top 100 websites in January 1999. Web YP also
hosts more than 125,000 websites. Web YP also has established a series of
partnerships with independent yellow pages publishers to re-sell advertising
services to small and medium-sized businesses.
Web YP provides Internet advertising products and website hosting services
to small businesses and national advertisers. Web YP's services include domain
name registration and assisting its customers with branding their products and
services.
Big Stuff creates custom business websites for advertisers, including
graphics, animations, sound, video, web-based catalogues and brochures, and
electronic commerce capabilities. Big Stuff designed and built the website for
the Association of Directory Publishers which includes most independent print
yellow and white pages directory publishers in the United States. Big Stuff
produces websites for professional sports teams and for several chambers of
commerce. Earlier in 1999, the website produced by Big Stuff for the Amarillo
Rattlers of the World Professional Hockey League was recently named the best
hockey website by on-line hockey magazine IN THE CREASE.
Big Stuff also services traditional print yellow pages publishers through
its pre-press operations including coloring of print ads and designing full
color speculative advertisements for sales canvasses.
WorldPages' primary sales channel is through relationships with independent
print yellow pages publishers. The indirect sales force strategy leverages an
established sales force from these reseller publishers. Yellow pages publishers
have a proven ability to sell and have broader advertiser category coverage and
advertiser penetration compared with alternative sales channels such as
newspapers or magazines. Web YP has developed an extensive network of resellers
who publish directories that are distributed to homes and businesses.
STRATEGIC RELATIONSHIPS
In June 1999, Web YP entered into an agreement with Excite, Inc., a
wholly-owned subsidiary of At Home Corporation, to provide yellow pages
directories to Excite's users and for Web YP to maintain a co-branded website.
Excite's position as one of the leading internet search engines has increased
the amount of traffic on the WorldPages.com website. WorldPages' contract with
Excite expires by its terms in the near future. WorldPages is negotiating with
Excite regarding the contract and is hopeful that it will reach an agreement
with Excite to renew the contract.
In April 1999, Web YP announced a strategic alliance with Microsoft
Corporation designed to integrate the WorldPages.com directory into the
Microsoft Internet Explorer search capabilities. The directory is intended to
enable users of Microsoft Internet Explorer version 5.0, as well as older
versions 3.0 and 4.0, to access WorldPages.com to search for business, people
and government listings throughout the U.S. and around the world by clicking on
"yellow pages." The user is then able to choose WorldPages.com from among other
sites. The Microsoft alliance is not exclusive but allows users of Microsoft
Internet Explorer to have convenient access to the WorldPages.com website to
conduct searches.
Web YP and Big Stuff have expanded the WorldPages.com brand through these
strategic relationships, as well as some content and distribution deals that
have increased traffic to the website and provided WorldPages.com users a
broader range of content and services. Specifically, through an agreement with
Net2Phone, a user can place a telephone call over the Internet to any listed
phone number found in the Worldpages.com directory from their computer after
downloading Net2Phone's enabling software. No additional hardware is required.
Also in April 1999, Web YP became a member of SignalSoft's local.info-TM-
Content Alliance. This marked Web YP's entry into the wireless communications
arena. The content provider program combines SignalSoft's location-based
software with a range of localized information provided by the numerous alliance
members. These pre-packaged services allow cellular and PCS network operators to
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<PAGE>
provide a variety of local information services to their subscribers. It is
intended that as part of the Content Alliance, Web YP's will be able to offer
wireless subscribers access to an abundance of white and yellow pages listings,
e-mail addresses, maps, weather and news locally, regionally, nationally and
internationally.
Web YP and Big Stuff do not receive any revenues through these strategic
relationships; rather, these relationships are intended to build the
WorldPages.com brand and increase traffic to the website by linking the website
to high profile business partners like Microsoft, Excite and Net2Phone.
ASSET PURCHASE AND LICENSE AGREEMENT BETWEEN WEB YP AND WORLD PAGES, INC.
Web YP, as assignee of Fredrick Klein, is party to an Asset Purchase and
License Agreement dated as of September 19, 1997 with World Pages, Inc. ("WPI")
pursuant to which Web YP purchased certain tangible personal property,
contracts, the domain name "www.worldpages.com" and the seller's common law
rights to the trademarks "WorldPages," "Find the World Here!," and related logos
and marks. Pursuant to this agreement, Web YP licenses from WPI, under an
irrevocable, non-exclusive, perpetual, worldwide, fully-paid and royalty-free
license, the directory site software originally used for the development,
operation and maintenance of the WorldPages.com website. Web YP also licenses
graphical site elements of the website from WPI, on an exclusive basis, even as
to WPI. Web YP has all right, title and interest to all modifications and
derivative works it creates. Pursuant to this agreement, Web YP licenses back to
WPI the "buyer improvements," which means any enhancements, improvements, error
corrections or derivative works based upon or made using the directory site
software that were created by or for Web YP within one year of the closing date,
i.e., on or before September 18, 1998. WPI has all right, title and interest in
all modifications and derivative works it creates from the buyer improvements.
In September 1999, WPI requested a copy of the buyer improvements from Web
YP. Web YP has complied with this request. Web YP is not required to license to
WPI the derivatives and modifications of the directory site software developed
by Web YP after the one-year anniversary of the closing date, i.e. after
September 18, 1998. The directory site software used to develop, operate and
maintain the WorldPages.com website as it exists today was primarily developed
by Web YP after September 18, 1998. WPI has offered to sell Web YP the software
that Web YP currently licenses from WPI, and Web YP has declined. WPI has
indicated that it may seek to sell this software to a third party, including
competitors of Web YP.
Pursuant to the WPI agreement, Web YP acquired the seller's common law
rights to the trademark, WorldPages. Prior to the date of this agreement, the
seller had applied for registration of the trademark, WorldPages, with the U.S.
Patent and Trademark Office. Its application was rejected. In April 1999, Web YP
applied for registration of the service mark WorldPages with the U.S. Patent and
Trademark Office. On October 4, 1999 Web YP received notice of an office action
dated September 30, 1999 from the U.S. Patent and Trademark Office stating that,
while the examining attorney has found no similar registered mark which would
bar registration, Web YP's application might be barred because there is a
pending, previously filed application for a similar mark. Web YP has
subsequently discovered that the cited pending application has been abandoned
and has requested that the U.S. Patent and Trademark Office pass Web YP's
application to publication. There can be no assurance, however, that Web YP will
be issued the registration for the WorldPages mark. Web YP has recently applied
for registration of the WorldPages mark in Canada and the European Community.
As part of the WPI transaction, Web YP issued WPI a warrant to purchase 7.5%
of the common stock of Web YP, calculated on a fully diluted basis, for an
exercise price of $1,000. The warrant became exercisable as a result of the
acquisition of Web YP by WorldPages. Prior to the acquisition WPI expressed to
Web YP and Big Stuff its dissatisfaction with the terms of the acquisitions of
Web YP and Big Stuff by WorldPages. WPI has asserted that Mr. O'Neal's interests
as an executive officer,
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<PAGE>
director and shareholder of WorldPages conflict with his interests with respect
to Web YP and Big Stuff, to the detriment of the rights of WPI as the holder of
a warrant to purchase common stock of Web YP. Web YP and Big Stuff informed WPI
of their belief that this transaction was in the best interests of all parties,
including the stockholders, warrant holders and optionees of Web YP, and that
Messrs. O'Neal and Reid fulfilled all duties they may have owned to Web YP and
its stockholders, warrant holders and optionees. WPI has stated that it might
take unspecified action with respect to these transactions, but, to the
knowledge of Web YP, Big Stuff Messrs. O'Neal and Reid and WorldPages, it has
not done so as of the date of this prospectus.
FACILITIES
Web YP is headquartered in San Francisco, California and conducts the
front-end executive functions associated with internet directory sales,
promotions and strategic relationships.
Big Stuff is headquartered in Amarillo, Texas and supports the
WorldPages.com print and online directories, and conducts the back-end functions
associated with the operation of the WorldPages.com website including all
aspects of website design and production.
EMPLOYEES AND LABOR RELATIONS
As of December 31, 1999, Web YP had 17 employees and Big Stuff had 31
employees. Of these, a combined total of 17 are involved in sales and marketing,
executive and administrative functions, and 31 are involved in website design
and production. None of Web YP's or Big Stuff's employees is represented by a
union. Management of each company believes that relations with their respective
employees are good.
DISCONTINUED BUSINESSES OF WORLDPAGES AND DISPOSAL OF TELECOMMUNICATIONS
OPERATIONS
WorldPages completed its initial public offering in February 1998, at which
time it acquired eight telecommunications service providers and a yellow pages
publisher. WorldPages established a regional competitive local exchange carrier
that provided integrated communications services to business and residential
customers located in the Midwestern region of the United States. WorldPages'
integrated communications services included local, long distance, Internet
access, cellular and enhanced voice and data services. WorldPages'
telecommunications operations focused primarily on small and medium size
businesses in Kansas, Minnesota, Nebraska, North Dakota, Oklahoma, South Dakota
and Texas. As of December 31, 1998, WorldPages had over 125,000 local access
lines in service and provided integrated communications services to over 60,000
customers.
Prior to the sale of its telecommunications services operations on November
19, 1999, WorldPages owned and operated telecommunications networks that
included six digital switches in Kansas, Oklahoma, South Dakota and Texas.
WorldPages' local exchange network architecture was designed to allow it or any
purchaser of WorldPages' telecommunications operations, to provide services to
customers within a targeted 350-mile radius of each switch location. WorldPages
selected a number of central office locations of the incumbent local exchange
carriers for interconnection with its local exchange switches through physical
collocation of its transmission electronics in the ILEC central offices and at
WorldPages' own interconnection locations, or points of presence. In areas in
which WorldPages' telecommunications operations did not have network equipment,
its telecommunications operations resold the communications services of
providers such as Southwestern Bell Telephone Company, U S West Communications,
Inc. and others.
Before restatement to reflect its telecommunications segment as discontinued
operations, WorldPages had pro forma revenues of $114.2 million and pro forma
earnings before interest, taxes, depreciation, amortization and stock-based
compensation of $.4 million for the year ended December 31, 1998. WorldPages'
telecommunications operations were operated primarily through four
46
<PAGE>
subsidiaries. In addition, WorldPages employed assets in the telecommunications
business that it held directly.
WorldPages was required to abandon its plans when WorldPages found itself
unable to access the private equity or debt markets to fund its
telecommunications operating losses, working capital requirements and the
construction of its local switching network, a key component of its strategic
business plan. In April 1999, after considering the alternatives available to
it, WorldPages embarked on its strategy to reengineer itself into a yellow pages
publisher and Internet directory company and to divest itself of its
telecommunications operations.
In connection with the acquisitions and the sale of WorldPages'
telecommunications operations, certain officers, employee directors and
management of WorldPages have received various severance payments and incentive
compensation. The amount and timing of these payments were subject to the
persons achieving certain performance objectives and remaining in their
employment capacities for a specified time period. These compensation
arrangements were established to retain key individuals to ensure satisfactory
execution of the proposed acquisitions, the sale of the telecommunications
operations and their related transitions. Additionally, 35 other key managers
and key employees of WorldPages were granted retention packages in order to
ensure that adequate human resources remained available until such time that the
telecommunications operations were transitioned to Ionex Telecommunications.
Under the retention program, each individual received additional compensation
equivalent to their existing base salaries and wages for each day worked from
the commencement of the retention program in May 1999 through the date of their
release, provided that the individual performs their assigned responsibilities
through that date. The aggregate amount of these severance payments was
approximately $1.9 million. WorldPages is also contractually obligated to pay
$400,000 to Mr. Cragg and $370,000 to Mr. Zimmer pursuant to their employment
agreements. In addition, WorldPages paid $133,407 to Mr. Feist and $319,217 to
Mr. Thurman pursuant to their employment agreements as severance payments.
LEGAL PROCEEDINGS
DISPUTE WITH MCI WORLDCOM
In August 1996, one of WorldPages' 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 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 WorldPages 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
WorldPages 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 WorldPages or Valu-Line. If this
matter is not resolved through discussions, management's response to this claim
is to actively pursue WorldPages' rights and defenses in arbitration.
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<PAGE>
LORETTA R. CROSS, CHAPTER 7 TRUSTEE FOR TOTAL NATIONAL TELECOMMUNICATIONS,
INC. V. LOU ZANT & TELECOM RESOURCES, INC.
Loretta R. Cross, Chapter 7 Trustee for Total National Telecommunications,
Inc., filed an Adversary Proceeding July 15, 1999 against Lou Zant and Telecom
Resources, Inc., in the United States Bankruptcy Court for the Southern District
of Texas. Telecom Resources is a wholly-owned subsidiary of WorldPages and is
one of the telecommunications operations to be sold to Ionex Telecommunications.
See "Sale of WorldPages' Telecommunications Operations to Ionex
Telecommunications." The trustee's complaint seeks recovery of $2.6 million from
Telecom Resources as a fraudulent conveyance under the Bankruptcy Code. The
complaint is based on an October 1, 1996 stock purchase agreement in which Total
World Telecommunications, Inc., the parent of Total National Telecommunications,
agreed to purchase all the stock of NETTouch Communications, Inc., from Telecom
Resources and Mr. Zant. The trustee's complaint alleges that Total National
Telecommunications provided the funds to Total World Telecommunications to
complete and close the stock purchase and that Total National Communications
never received any consideration for its funds. Telecom Resources intends to
vigorously defend the action.
As a telecommunications services provider, WorldPages and the subsidiaries
through which WorldPages offered telecommunications services were subject to
claims and lawsuits arising in the ordinary course of business and typical of
businesses operating in the telecommunications services industry. According to
the terms of the stock purchase agreement, as amended, between WorldPages and
Ionex Telecommunications, WorldPages has agreed to remain liable and to
indemnify Ionex Telecommunications for any losses, costs, and expenses arising
out of any of these claims or lawsuits which WorldPages either knew or should
have known existed prior to the closing of the sale of the telecommunications
subsidiaries. WorldPages is presently defending, investigating and resolving
several claims and lawsuits. WorldPages believes that its liability, if any,
under these claims and lawsuits, in the aggregate, is not material. For
additional information regarding the stock purchase agreement and the sale of
the telecommunications operations, see the section of this prospectus entitled
"Sale of WorldPages' Telecommunications Operations to Ionex Telecommunications."
In addition, as is the case with many companies, WorldPages faces exposure
to actual or potential claims and lawsuits involving its business and assets.
WorldPages is currently party to a number of lawsuits consisting of ordinary,
routine litigation incidental to the business of WorldPages. WorldPages believes
that any liabilities resulting from such claims should not have a material
adverse effect on WorldPages' financial position, liquidity or results of
operations.
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<PAGE>
MANAGEMENT OF WORLDPAGES
The directors and executive officers of WorldPages, their ages, positions
with WorldPages and their business experience as of the closing of the
acquisitions of YPtel, Web YP and Big Stuff in February 2000 are set forth
below.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH WORLDPAGES AND PRIOR BUSINESS EXPERIENCE
- ---- --- ------------------------------------------------------
<S> <C> <C>
George Anderson 61 Director of WorldPages beginning February 2000; term expires
at annual meeting of stockholders in 2000. Director of YPtel
since November 1998; Managing director of Country Club Stock
LLC, a gold products promotion company, since 1995; prior
thereto, Mr. Anderson held various position with the NYNEX
Information Resources Co. since 1965, most recently as Vice
President of Sales and President of National Marketing
Services.
Rod K. Cutsinger 56 Founder of WorldPages; Director of WorldPages since
November 1998 and from its inception in September 1997
until May 1998; term expires at the annual meeting of
stockholders in 2000. Chairman of the Board of Directors.
Equity interest owner of CPFF and Consolidation Partners.
Since 1970, Mr. Cutsinger has been an investor in other
business.
Robert Flynn 66 Director of WorldPages beginning February 2000; term expires
at the annual meeting of stockholders in 2001. Director of
YPtel since November 1998. Retired. From 1996 to 1997,
Senior Advisor for CSC Index, a management consulting firm.
From June 1990 to December 1995, Chairman and Chief
Executive Officer of Nutrasweet Company. Director of
Northwestern University; STANTEC and Applied
Microbiology, Inc.
Wilmot Matthews 63 Director of WorldPages beginning Febuary 2000; term expires
at the annual meeting of stockholders in 2002. Chairman of
the Board of YPtel since November 1998. President of Marjad
Inc., a personal investment company. Director of Renaissance
Energy Ltd., Denbury Resources Inc. and Vice Chairman of the
Board of Nesbitt Burns Inc. from 1994 until 1996
David M. Mitchell 51 Director of WorldPages beginning February 1998; term expires
at the annual meeting of stockholders in 2001. Investor in
telephone businesses since 1982 when he founded National
Telephone Exchange which he sold, along with two other
telephone companies, to U.S. Long Distance in 1991. Former
co-owner of Valu-Line of Longview, Inc., one of WorldPages'
telecommunications subsidiaries, until it was acquired by
WorldPages in February 1998.
Richard O'Neal 58 Chairman and Chief Executive Officer of WorldPages beginning
November 9, 1998; term expires at the annual meeting of
stockholders in 2002 and director and President -- Directory
Services Group of WorldPages, since February 18, 1998;
founder of Great Western Directories in 1984 and which was
sold to WorldPages in 1998.
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
NAME AGE POSITION WITH WORLDPAGES AND PRIOR BUSINESS EXPERIENCE
- ---- --- ------------------------------------------------------
<S> <C> <C>
Michael A. Pruss 34 Chief Financial Officer and Secretary of WorldPages since
October 1, 1999; Vice President of Advanced since
April 1998 and Controller of Advanced from April 1998 to
September 30, 1999. Corporate Controller for Falcon
Products, Inc. from January 1996 to April 1998. Various
position with Argosy Gaming Company from April 1993 to
January 1996, and most recently as Director of Financial
Reporting. Auditor with Arthur Andersen LLP from July 1987
to April 1993.
</TABLE>
RESTRUCTURING OF WORLDPAGES BOARD OF DIRECTORS AND APPOINTMENT OF DIRECTORS
Under the Amended and Restated YPtel Agreement, the Amended and Restated Web
YP, Inc. Agreement and the Amended and Restated Big Stuff, Inc. Agreement, the
parties agreed to restructure the board of directors of WorldPages immediately
following the closing of the acquisitions of YPtel, Web YP and Big Stuff. More
specifically, the agreements provided that three directors were to be chosen by
the board of directors of WorldPages prior to the acquisitions of YPtel, Web YP
and Big Stuff and three directors were to be chosen by Imperial Capital Limited,
a Canadian company that acted as custodian for certain of the YPtel
shareholders. When two experienced internet executives are identified, the
reconstituted WorldPages board would increase the size of the board and appoint
these two individuals to the WorldPages board.
The Restated Certificate of Incorporation of WorldPages provides for a
classified board divided into three classes whose terms expire at different
times. Therefore, the agreements provided for the following.
- one director to be chosen by WorldPages and one director to be chosen by
Imperial Capital would serve for three year terms
- one director to be chosen by WorldPages and one director to be chosen by
Imperial Capital would serve for two year terms
- one director to be chosen by WorldPages and one director to be chosen by
Imperial Capital would serve for a one year term.
The agreements further provided that the directors to be designated by the
WorldPages board prior to the acquisitions would be Rod K. Cutsinger, David M.
Mitchell and Richard O'Neal and the directors to be chosen by Imperial Capital
would be George Andrews, Wilmot Matthews and Robert Flynn.
Prior to the closing of the acquisition of YPtel, Web YP and WorldPages, the
members of the Worldpages board except for Messrs. Cutsinger, Mitchell and
O'Neal, resigned from the WorldPages board contingent upon the closings
occurring. This board appointed Messrs. Anderson, Flynn and Matthews as
replacements to serve out the remainder of the terms of the directors they were
replacing. Immediately after closing, the aforementioned resignations became
effective as did the appointment of the replacements for the resigned directors.
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<PAGE>
The classes of the current WorldPages board and the members serving in those
classes are set forth below.
<TABLE>
<CAPTION>
<S> <C>
Term Expiring at the Annual Meeting Rod K. Cutsinger
of
Stockholders in 2000 George Anderson
Term Expiring at the Annual Meeting David M. Mitchell
of
Stockholders in 2001 Robert Flynn
Term Expiring at the Annual Meeting Richard O'Neal
of
Stockholders in 2002 Wilmot Matthews
</TABLE>
The Amended and Restated YPtel Agreement, the Amended and Restated Web YP
Agreement and the Amended and Restated Big Stuff Agreement provide that the
parties to them acknowledge that the agreements are not intended to, and do not,
except with regard to the initial WorldPages board following the acquisitions,
give any party a right to designate a certain individual or a certain number of
individuals as nominees to the board of directors of WorldPages.
In the agreement by which WorldPages acquired Valu-Line of Longview, Inc.,
one of WorldPages' telecommunications subsidiaries, in February 1998, WorldPages
agreed to place David M. Mitchell on the WorldPages board. The agreement also
obligated WorldPages' board to place Mr. Mitchell on its slate of nominees for
election by the WorldPages common stockholders prior to the expiration of his
then existing term, so long as Mr. Mitchell owns at least 100,000 shares of
common stock at the time of renomination. The WorldPages board last nominated
Mr. Mitchell and he was last elected to a three year term as a director at the
1998 Annual Meeting.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of WorldPages' common stock as of December 31, 1999, except
as noted below, by:
- each director of WorldPages, including the two nominees for election as
directors;
- each of WorldPages' executive officers and former executive officers named
in the Summary Compensation Table, and
- all directors and executive officers of WorldPages as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED(1)
-----------------------------------------------------------------------------------
AT DECEMBER 31, 1999 AFTER GIVING EFFECT TO THE TRANSACTIONS
---------------------------------------- ----------------------------------------
NUMBER OF SHARES PERCENT OF WORLDPAGES NUMBER OF SHARES PERCENT OF
OF WORLDPAGES COMMON STOCK OF WORLDPAGES WORLDPAGES
NAME COMMON STOCK OUTSTANDING COMMON STOCK COMMON STOCK(15)
- ---- ---------------- --------------------- ----------------- --------------------
<S> <C> <C> <C> <C>
George Anderson(2)....... 0 * 10,000 *
Robert F. Benton(3)...... 47,000(4) * 47,000 *
James F. Cragg........... 422,755(5) 2.0 422,755 1.0
Rod K. Cutsinger......... 5,166,664(6) 25.2 5,166,664 11.8
Todd J. Feist(3)......... 321,429(7) 1.6 321,429 *
Robert Flynn(2).......... 0 * 5,000 *
Wilmot Matthews(2)....... 0 * 269,108 *
David M. Mitchell........ 213,144(8) 1.0 213,144 *
Richard O'Neal........... 1,095,540(9) 5.2 5,308,419(14) 11.9
Michael A. Pruss......... 28,362(10) * 28,362 *
Fred L. Thurman(3)....... 318,745(11) 1.6 318,745 *
William H. Zimmer III.... 176,000(12) * 176,000 *
Executive officers and
directors as a group
(12 individuals)....... 7,789,639(13) 35.2 12,297,026(13) 26.9
</TABLE>
- ------------------------
* Percentage of shares beneficially owned is less than 1.0%.
(1) Beneficial ownership includes shares of WorldPages common stock subject to
options, warrants, rights, conversion privileges or similar obligations
exercisable within 60 days for purposes of computing the ownership
percentage of the person or group holding such options, warrants, rights,
privileges or other obligations. Except as noted, each stockholder has sole
voting and dispositive power with respect to all shares of WorldPages common
stock beneficially owned by such stockholder.
(2) Messrs. Anderson, Flynn and Matthews will become directors of WorldPages
upon the effectiveness of this registration statement. Upon the
effectiveness of this registration statement, Messrs. Anderson, Flynn and
Matthews will receive warrants to purchase 10,000; 5,000; and 30,000 shares
of common stock, respectively.
(3) Messrs. Benton, Feist and Thurman are current directors of WorldPages,
however, they will resign upon the effectiveness of this registration
statement.
(4) Includes 45,000 shares of common stock subject to stock options that are
immediately exercisable.
(5) Includes 337,500 shares of common stock subject to stock options that are
immediately exercisable.
(6) Includes 4,867,921 shares of common stock owned by Consolidation Partners
Founding Fund L.L.C., a limited liability company in which Mr. Cutsinger and
his wife beneficially own of record 80% of the interests. The remaining
interests are beneficially owned by trusts for the benefit of the
Mr. Cutsinger's two adult children over which Rod K. Cutsinger has sole
voting and dispositive power.
(7) Includes 250,000 shares of common stock subject to stock options that are
immediately exercisable.
(8) Includes 12,000 shares of common stock issuable upon exercise of a warrant
at $14.00 per share and 20,000 shares of common stock subject to stock
options that are currently exercisable.
(9) Includes warrants to purchase 658,040 shares of common stock. A trustee for
Mr. O'Neal's children owns 189,020 of these non-transferable, ten-year
warrants. Also includes 37,500 shares of common stock subject to stock
options that are immediately exercisable.
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<PAGE>
(10) Includes 25,000 shares of common stock subject to stock options that are
immediately exercisable.
(11) Includes 13,512 shares of common stock issuable upon exercise of a warrant
at $14.00 per share and 39,498 shares of common stock issuable upon
conversion of a 10% convertible note issued by WorldPages, convertible at
$14.00 per share. Also includes 75,000 shares of common stock subject to
stock options that are immediately exercisable.
(12) Includes 150,000 shares of common stock subject to stock options that are
immediately exercisable.
(13) Includes 1,708,050 shares of common stock which such persons have the right
to acquire upon the exercise of options and warrants that are immediately
exercisable.
(14) Includes 4,212,879 additional shares that Mr. O'Neal will receive upon the
effectiveness of this registration statement as a result of his direct
ownership of companies to be acquired and as a result of indebtedness owed
to him by the Company. Also includes options and warrants described in
(9) above.
(15) The total shares outstanding after the Transactions include approximately
23,500,000 shares of WorldPages common stock that will be issued in
connection with the Transactions but does not include any options or
warrants issued in connection with the Transactions
The following table sets forth information regarding all persons known to
WorldPages to be the beneficial owner of more than five percent of the common
stock of WorldPages as of December 31, 1999.
<TABLE>
<CAPTION>
PERCENTAGE OF CLASS
NUMBER PERCENTAGE AFTER GIVING EFFECT
NAME AND ADDRESS OF SHARES OF CLASS TO THE TRANSACTIONS
- ---------------- --------- ---------- -------------------
<S> <C> <C> <C>
Rod K. Cutsinger......................... 5,166,664(1) 25.2% 11.8%
3355 West Alabama, Suite 580
Houston, Texas 77098
Consolidation Partners Founding Fund
L.L.C.................................... 4,867,921 24.5% 11.1%
3355 West Alabama, Suite 580
Houston, Texas 77098
FMR Corp.(2)............................. 1,341,400 6.6% 3.1%
82 Devonshire Street
Boston, Massachusetts 02109
</TABLE>
- ------------------------
(1) Includes 4,867,921 shares of common stock owned by Consolidation Partners
Founding Fund LLC, a limited liability company in which Mr. Rod K. Cutsinger
and his wife beneficially own of record 80% of the interests. The remaining
interests are beneficially owned by trusts for the benefit of the
Cutsingers' two adult children, over which Mr. Rod Cutsinger has sole voting
and dispositive power.
(2) The information in this footnote is provided pursuant to Schedule 13G/A
dated February 11, 2000 filed with the SEC by FMR Corp., Edward C.
Johnson 3d, Abigail P. Johnson and Fidelity Management and Research Company,
a wholly-owned subsidiary of FMR and an investment advisor registered under
Section 203 of the Investment Advisers Act of 1940. Fidelity Management
reports the beneficial ownership of the 1,341,400 shares of WorldPages
common stock as a result of acting as investment adviser to various
investment companies registered under Section 8 of the Investment Company
Act of 1940. The investment company which owns the 1,341,400 shares of
WorldPages common stock is Fidelity Capital Appreciation Fund.
The Schedule 13G reports that "Edward C. Johnson 3d, FMR Corp., through its
control of Fidelity and the funds each has sole power to dispose of the
1,341,400 shares owned by the Funds. Neither FMR nor Edward C. Johnson 3d,
Chairman of FMR Corp., has the sole power to vote or direct the voting of
the shares owned directly by the Fidelity Funds, which power resides with
the Funds' Boards of Trustees. Fidelity carries out the voting of the shares
under written guidelines established by the Funds' Boards of Trustees."
The Schedule 13G also reports that through the ownership of voting stock of
FMR and the execution of a voting trust agreement among the members of the
Johnson family who own FMR voting stock, those family members, including
Mr. Edward C. Johnson and Ms. Abigail P. Johnson who is a director of FMR,
may be deemed, under the Investment Company Act of 1940, to form a
controlling group with respect to FMR.
The business address of Fidelity Management, Fidelity Capital, Edward C.
Johnson and Abigail P. Johnson is 82 Devonshire Street, Boston,
Massachusetts 02109.
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<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
------------------------------------
AWARDS PAYOUTS($)
ANNUAL COMPENSATION ----------------------- ----------
---------------------------------------------- (F) (G)
(E) RESTRICTED SECURITIES (H) (I)
(A) OTHER ANNUAL STOCK UNDERLYING LTIP ALL OTHER
NAME AND (B) (C) (D) COMPENSATION AWARDS OPTIONS PAYOUTS COMPENSATION
PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($) ($) ($) ($) ($)
- -------------------------- -------- --------- -------- ------------ ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Richard O'Neal 1999 300,000 -0- -0- -0- -0- -0- -0-
Chairman, Chief 1998 300,000 -0- -0- -0- 225,000(1) -0- -0-
Executive Officer
and President
Michael A. Pruss(2) 1999 100,000 50,000 -0- -0- 50,000 -0- 2,250(7)
Vice President 1998 67,897 -0- -0- -0- 75,000(1) -0- 462(7)
Chief Financial Officer
James F. Cragg(3) 1999 199,038 -0- -0- 223,060 50,000 -0- -0-
Former President and 1998 175,000 87,500 -0- -0- 137,500(4) -0- 808(7)
Chief Operating 1997 -0- 100,000 -0- -0- 425,000(5) -0- -0-
Officer
William H. Zimmer III(6) 1999 185,415 -0- 28,600 117,400 50,000(4) -0- -0-
Former Executive Vice 1998 185,000 47,500 -0- -0- 175,000 -0- 427(7)
President and Chief 1997 -0- 50,000 -0- -0- 350,000(5) -0- -0-
Financial Officer
</TABLE>
- --------------------------
(1) Includes original stock option awards for 150,000 shares to Mr. O'Neal and
50,000 shares to Mr. Pruss which were cancelled and replaced with new
options in connection with WorldPages' repricing on December 13, 1998. The
replacement options for 75,000 shares to Mr. O'Neal and 25,000 shares to Mr.
Pruss are also included in the total 1998 option awards.
(2) Mr. Pruss was appointed Vice President, Chief Financial Officer, Secretary
and Treasurer effective October 1, 1999. Prior thereto he was Vice President
and Controller since April 1998.
(3) Mr. Cragg was promoted from executive vice president sales and marketing to
president and chief operating officer in November 1998 and subsequently
resigned from those positions and from the WorldPages board effective
June 30, 1999. The value of Mr. Cragg's restricted stock awards at
December 31, 1999, was $517,940.
(4) These options were awarded on December 13, 1998, to replace non-qualified
stock options to purchase twice as many shares originally granted to the
named executive officer.
(5) Stock option awards for 275,000 shares to Mr. Cragg and for 350,000 shares
to Mr. Zimmer granted in 1997 were cancelled and replaced by the options
described in footnote (4) above.
(6) Mr. Zimmer resigned from his position and from the WorldPages board
effective September 30, 1999. "Other Annual Compensation" for Mr. Zimmer in
1999 represents taxable reimbursement of relocation costs. The value of Mr.
Zimmer's restricted stock awards at December 31, 1999 was $272,600.
(7) "All Other Compensation" represents Company matching contributions under its
Employee Stock Purchase Plan and 401(k) Plan.
54
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table provides information as to options grants in fiscal 1999
to the persons named in the Summary Compensation Table.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
---------------------------------------------------- VALUE AT ASSUMED
(B) (C) ANNUAL RATES OF STOCK
NUMBER OF % OF TOTAL PRICE APPRECIATION FOR
SECURITIES OPTIONS (D) OPTION TERM(1)
UNDERLYING GRANTED TO EXERCISE OR (E) ----------------------
(A) OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION (F) (G)
NAME GRANTED # FISCAL YEAR ($/SHARE) DATE 5%($) 10%($)
---- ---------- ------------ ----------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Richard O'Neal............... -0- N/A N/A N/A N/A N/A
Michael A. Pruss............. 50,000 12.7 9.00 11/18/09 283,003 717,184
James F. Cragg............... 50,000 12.7 5.88 6/30/00 21,485 43,704
William H. Zimmer III........ 50,000 12.7 5.88 9/30/00 25,388 51,915
</TABLE>
- ------------------------
(1) The dollar amounts under these columns are the result of calculations at the
5% and 10% rates set by the SEC and therefore are not intended to forecast
future appreciation, if any, of the stock price of WorldPages. WorldPages
did not use an alternative formula for a grant date valuation, as WorldPages
is not aware of any formula that will determine with reasonable accuracy a
present value based on future unknown factors.
AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR
VALUES
The following table provides information on the number and value of each
such executive's unexercised options to acquire WorldPages common stock at
December 31, 1999.
<TABLE>
<CAPTION>
(D)
NUMBER OF (E)
SECURITIES UNDERLYING VALUE OF
UNEXERCISED UNEXERCISED IN-THE-MONEY
OPTIONS/SARS OPTIONS/SARS
AT FY-END(#) AT FY-END($)(2)
(B) (C) --------------------- ------------------------
(A) SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE(#) REALIZED($)(1) UNEXERCISABLE UNEXERCISABLE
---- --------------- -------------- --------------------- ------------------------
<S> <C> <C> <C> <C>
Richard O'Neal............ -- -- 18,750/56,250 171,188/513,563
Michael A. Pruss.......... -- -- 25,000/50,000 228,250/231,500
James F. Cragg............ -- -- 337,500/0 3,312,375/0
William H. Zimmer III..... 75,000 337,750 150,000/0 1,369,500/0
</TABLE>
- ------------------------------
(1) Calculated using the difference between the actual sales price of the
underlying shares and the exercise price.
(2) Based on the New York Stock Exchange consolidated trading closing price of
WorldPages common stock on December 31, 1999 of $13.63.
55
<PAGE>
EMPLOYMENT AGREEMENTS
Upon their employment with WorldPages in December 1997, Messrs. Cragg and
Zimmer entered into six year long employment agreements with WorldPages
providing for their employment at annual base salaries of $175,000 and $185,000,
respectively. The agreements provided for a bonus potential equal to 100% of
base salary for Mr. Cragg and 50% of base salary for Mr. Zimmer. The agreements
also provided for the annual grant of options to purchase up to 50,000 shares of
WorldPages common stock each at the current market price on the date of grant,
if certain targets set by the compensation committee were met.
Under the terms of their respective agreements, Messrs. Cragg and Zimmer
would be entitled to their base salaries for a period of two years if either
were to resign after a change in the ownership or management of WorldPages that
significantly altered their job responsibilities or compensation. Further, under
the terms of the 1997 Stock Awards Plan under which their options were granted,
their options would vest immediately upon their resignation following a change
of control or the termination of their employment other than "with cause" as
defined.
In November 1998, after the resignation of Mr. Anthony from his position as
president and chief executive officer, Mr. Cragg was appointed president and
chief operating officer and his salary was raised to $200,000 per year. In all
other respects, his employment contract remained the same.
When the WorldPages board decided to change its business focus, strategy and
direction, the compensation committee determined that the employment
arrangements of Messrs. Cragg and Zimmer would need to be revised. The
compensation committee recognized that while both might desire to resign given
the restructuring of WorldPages' operations, it was important to provide each of
them with an incentive to remain with the company at least in the short term.
The compensation committee and ultimately the board concluded that the efforts
of Messrs. Cragg and Zimmer would be required until an agreement for the
acquisition of YPtel had been executed and interim financing intended to provide
working capital sufficient until the closing of the acquisitions had been
obtained.
In late April 1999, both Messrs. Cragg and Zimmer executed severance
agreements related to the termination of their employment and their resignations
as directors of WorldPages. The agreements that each entered were similar and
provided that:
- their new employment terms would terminate on the later to occur of:
- June 30, 1999; or
- the signing of the agreement providing for the acquisition of YPtel
by WorldPages.
- the options each had received upon their initial employment with
WorldPages and the performance options which had been awarded to each
of them would vest upon the termination of their employment;
- each had received performance options to purchase 50,000 shares of
WorldPages common stock for 1998.
- upon execution of their respective letter agreements, each would
receive restricted common stock of WorldPages that would be forfeited
if:
- the individual did not remain with WorldPages and fulfill his
employment obligations through the end of the new term; or
- the individual did not sign a mutual release and settlement
agreement with WorldPages.
- Mr. Cragg was awarded 38,000 shares of restricted stock.
- Mr. Zimmer was awarded 20,000 shares of restricted stock.
56
<PAGE>
- the exercise period of their respective options would extend until one
year from the date of the termination of their respective employment,
but no shares purchased upon exercise could be sold within ninety days
of their respective terminations;
- each would receive two years' base salary from the date of their
respective termination of employment with WorldPages; and
- each would be entitled to a performance bonus for the 1999 fiscal year
as approved by WorldPages' board of directors, on a pro-rata basis
based on the effective date of their respective terminations of
employment.
Although the interim financing with the subsidiary of Bank of America
Corporation closed May 14, 1999 and the acquisition agreements were executed
effective June 3, 1999, Mr. Cragg remained with WorldPages through June 30,
1999, at which time he resigned as president, chief operating officer and as a
director of WorldPages. Mr. Zimmer remained with WorldPages through
September 30, 1999, at which time he resigned as executive vice president, chief
financial officer, secretary and treasurer and as a director of WorldPages.
Mr. Anthony G. Capers entered into a five-year employment agreement with
WorldPages on March 31, 1998, which was amended in December 1998, providing for
an annual base salary of $160,000. Under the terms of the agreement, Mr. Capers
was appointed to the position of senior vice president/business markets and was
eligible for a cash bonus of up to $50,000. The agreement also provided for the
grant of options to purchase up to 70,000 shares of WorldPages common stock at
the IPO price of $14.00 per share. The options had terms of ten years and were
to become exercisable in one-third increments on each anniversary of the date of
grant. The options were subsequently replaced with options to purchase 35,000
shares at an exercise price of $4.50 per share in December 1998.
After the announcement of the change in WorldPages' business focus, strategy
and direction in April 1999 and in connection with the contemplated resignation
of Mr. Cragg, WorldPages management determined that the services of Mr. Capers
would be essential to run WorldPages' telecommunications operations until they
could be sold. To retain Mr. Capers, management negotiated a letter agreement
amendment to Mr. Capers' employment agreement dated May 5, 1999, naming
Mr. Capers the president and chief operating officer, which became effective
June 30, 1999, the official termination date of Mr. Cragg. In accordance with
his employment agreement, as amended, Mr. Capers received a bonus of $250,000
upon the sale of WorldPages' telecommunications operations and received $100,000
as severance as called for in his employment agreement.
In addition, Messrs. O'Neal, Feist and Thurman have entered into three, five
and five-year employment agreements that provide for base salaries of $300,000,
$140,000 and $175,000, respectively, and a bonus potential ranging from 50% to
63% of base salary. If WorldPages terminates Mr. O'Neal's employment other than
for "cause", as defined in his agreement, or if Mr. O'Neal resigns under
circumstances that he reasonably believes were contrived by Great Western to
force his resignation, or after a change in control of WorldPages, Mr. O'Neal
shall be entitled to continue to receive his base salary until the scheduled
expiration date of his employment agreement.
In connection with the sale of FirsTel and Feist Long Distance, WorldPages
paid Messrs. Thurman and Feist $319,217 and $133,407, respectively, in
settlement of WorldPages' obligations to them under their respective employment
agreements.
On November 19, 1999, Mr. Michael A. Pruss entered into an employment
agreement with WorldPages to serve as WorldPages' Chief Financial Officer. The
agreement provides for a two-year term which may be renewed for successive
one-year periods upon the mutual agreement of Mr. Pruss and WorldPages. Under
the terms of the agreement, Mr. Pruss
- Is entitled to a base salary of $130,000 per year.
57
<PAGE>
- Was granted an option to purchase 50,000 shares of WorldPages common stock
exercisable at the closing price of WorldPages common stock on the date of
grant.
- Is eligible for a cash performance bonus of up to 50% of his base salary
and additional option grants to be awarded at the discretion of the
compensation committee of the WorldPages board of directors.
- Is entitled to reasonable relocation assistance if WorldPages should
change the location of its headquarters, provided that if Mr. Pruss
chooses not to relocate, he will provide transition services to
WorldPages for not less than ninety days from the date he informs
WorldPages that he does not wish to relocate.
Mr. Pruss' employment agreement further provides that if his employment is
terminated by WorldPages without cause or due to a "change of control" as
defined, he will be entitled to receive his base salary for a period of twelve
months following the date of his termination. Mr. Pruss' employment agreement
contains a provision prohibiting him from competing against WorldPages for a
period of one year after the termination of the agreement or his employment with
WorldPages, regardless of whether the termination of his employment is voluntary
or involuntary.
DIRECTOR COMPENSATION
Directors of WorldPages who are also employees receive no directors' fees
but are eligible to receive, and have received, grants of stock options under
WorldPages' 1997 Stock Awards Plan. Non-employee directors receive fees of
$1,000 for each board meeting in which they participate in person, and are
reimbursed for expenditures incurred in attending and returning from board
meetings.
Non-employee directors also receive options to purchase shares of WorldPages
common stock pursuant to the 1997 Nonqualified Stock Option Plan for
Non-Employee Directors. Non-employee directors elected or appointed to the board
will receive options to acquire 15,000 shares of WorldPages common stock on the
date of their initial election or appointment. Additional non-qualified stock
options to acquire 5,000 shares of WorldPages common stock will thereafter be
awarded to each director on the date of the Annual Meeting of Stockholders at
which he or she is reelected to serve an additional three-year term. In both
cases, the exercise price of the stock options granted is the fair market value
on the date of the grant.
Mr. Todd Feist, who was reelected to the board at the Special Meeting of
Stockholders on February 16, 2000, received options to purchase 5,000 shares of
WorldPages common stock with an exercise price equal to the closing price of
WorldPages common stock on that date in accordance with the terms of the
Non-Employee Director Plan.
As consideration for their efforts in negotiating the terms of the
acquisitions of YPtel, Web YP and Big Stuff, WorldPages awarded warrants to
purchase 30,000, shares of WorldPages common stock to two current non-employee
directors, Messrs. Benton, and Cutsinger and to a former non-employee director,
Mr. Marvin C. Moses. The warrants have a strike price of 6.96 per share.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Reginald Hollinger, a former managing director and group head of the
Telecommunications Investment Banking Group at PaineWebber Incorporated and a
former member of the Investment Banking Division's Management Committee, was
also a member of the board's compensation committee from February 1998 until his
resignation from the board effective April 30, 1999. PaineWebber is one of
WorldPages' investment banking firms and served as the lead manager in
WorldPages' IPO. Neither the board nor Mr. Hollinger, during the time he served
on the WorldPages board, believe these relationships affected in any manner his
ability to serve on, or fulfill his obligations to WorldPages and its
stockholders as a member of the compensation committee of the board. To date,
58
<PAGE>
WorldPages has incurred liabilities to PaineWebber of $1,828,000 for investment
banking services rendered to it in 1999, including $750,000 in connection with
the fairness opinion rendered to WorldPages in connection with the February
acquisition. Mr. Hollinger resigned from PaineWebber on April 30, 1999 to take a
position with another firm, at which time he also resigned from WorldPages'
board.
WorldPages' board of directors maintained a compensation committee during
the year ended December 31, 1999. However, due to the need to retain key
employees during 1999 as WorldPages changed its focus, strategy and direction,
the full board made many of the compensation decisions directly and approved
other recommendations regarding compensation which were made to it by the
compensation committee. Employees of WorldPages who were also directors and who
therefore participated in deliberations of the WorldPages board concerning
executive officer compensation are identified below.
- Richard O'Neal, WorldPages Chairman and Chief Executive Officer.
- James F. Cragg, a former director, president and chief operating officer
of WorldPages through June 30, 1999.
- William H. Zimmer, a former director and WorldPages' former chief
financial officer through September 30, 1999.
- Todd Feist, an executive officer of WorldPages until November 19, 1999 and
a member of WorldPages' board of directors through the acquisitions of
YPtel, Web YP and Big Stuff in February 2000.
- Fred Thurman, executive officer of WorldPages until November 19, 1999 and
a member of WorldPages' board of directors through the acquisitions of
YPtel, Web YP and Big Stuff in February 2000.
59
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Richard A. O'Neal is an officer, director and owner of 50% of the
outstanding voting securities of Big Stuff. During the fiscal year ended
December 31, 1998, WorldPages paid Big Stuff approximately $1.3 million for
yellow pages colorizing services. WorldPages believes that the amount paid to
Big Stuff for colorizing services is equivalent to amounts that it would have
paid an unrelated third party for similar services. Great Western and Big Stuff
have entered into a sales agreement pursuant to which Big Stuff expects to
continue to render the foregoing services to Great Western upon terms and
conditions that WorldPages considers reasonable under the circumstances. Big
Stuff has also agreed to give Great Western the exclusive right to market
WorldPages in its service areas.
WorldPages issued $8.4 million of 5% Subordinated Notes to Mr. O'Neal in
connection with its acquisition of Great Western. The interest incurred on the
5% Subordinated Notes held by Mr. O'Neal during the fiscal year ended
December 31, 1999 was $0.4 million. The principal and accrued interest were to
be redeemed for WorldPages common stock in February 2000 at a redemption price
of $5.50 per share. Based on a closing price of WorldPages common stock of
$12.63 on the date of redemption, Mr. O'Neal received stock having a market
value of $18,175,019 in redemption of $8.8 million amount of indebtedness owed
by WorldPages to O'Neal.
Until the IPO, WorldPages' activities had been financed through a loan from
Consolidation Partners Founding Fund. In February 1998, the $3.2 million balance
of the loan was paid. During 1998, WorldPages incurred interest expense of
$149,000 relating to the loan.
WorldPages and Mr. Rod K. Cutsinger, a director of WorldPages, are parties
to an agreement pursuant to which Mr. Cutsinger, among other things, has agreed
that he will not:
- acquire any voting securities of WorldPages other than WorldPages common
stock issuable as stock dividends or splits or upon exercise of his
options under the WorldPages Nonqualified Stock Option Plan for
Non-employee Directors;
- sponsor or participate in any proxy solicitations;
- enter into or form voting trusts, pooling agreements or groups;
- vote any of his shares of WorldPages common stock in opposition to the
recommendation of the disinterested members of the WorldPages board of
directors regarding the election or removal of directors and matters
relating to a possible change in control of WorldPages; or
- directly or indirectly assist, encourage or induce any person to bid or
acquire any class of securities that is entitled to vote for the election
of directors.
The agreement with Mr. Cutsinger expires if he resigns or is otherwise removed
from the board of directors of WorldPages.
The WorldPages board has effectively amended the agreement between
WorldPages and Mr. Cutsinger on a one-time basis only, to allow him to receive
warrants to purchase 30,000 shares of WorldPages common stock in compensation
for his efforts in negotiating the terms of the YPtel, Web YP and Big Stuff
acquisitions. In connection with the acquisition of YPtel, Web YP and Big Stuff,
WorldPages and Mr. Cutsinger executed an agreement terminating Mr. Cutsinger's
obligations under the agreement.
In the acquisition agreement by which WorldPages acquired Valu-Line, one of
WorldPages' telecommunications subsidiaries, WorldPages agreed to place
David M. Mitchell on the WorldPages board. The agreement also obligated
WorldPages' board to place Mr. Mitchell on its slate of nominees for election by
the WorldPages common stockholders prior to the expiration of his then existing
term, so long as Mr. Mitchell owns at least 100,000 shares of common stock at
the time of renomination. The
60
<PAGE>
WorldPages board last nominated Mr. Mitchell and he was last elected to a three
year term as a director at the 1998 Annual Meeting.
Through November 19, 1999, WorldPages had a strategic relationship with
Feist Publications, Inc., a publisher of yellow page directories in 15 markets
in Kansas, Texas and Oklahoma, through which WorldPages' telecommunications
sales force had access to Feist Publications' 29,000 yellow page advertisers.
Feist Publications agreed to provide WorldPages with access to its advertising
customers and to provide eight information pages in the front of its directories
with instructions on how to subscribe to WorldPages' services as well as free
advertising in each of Feist Publications' white pages directories that are
currently in publication. Feist Publications reserved the right to terminate
this agreement if WorldPages commenced the publication of a yellow pages
directory in any market served by Feist Publications. On November 19, pursuant
to the stock purchase agreement, as amended, this contract was assigned to Feist
Long Distance Service, Inc.
61
<PAGE>
SELLING STOCKHOLDERS
The following table sets forth certain information with respect to the
Selling Stockholders:
<TABLE>
<CAPTION>
NUMBER OF
NUMBER OF NUMBER OF SHARES OWNED
SHARES OWNED SHARES TO AFTER
NAME PRIOR TO SALE BE SOLD SALE(12)
- ---- --------------- --------- ------------
<S> <C> <C> <C>
Richard O'Neal(2)........................................ 888,700(1)(3) 888,700
1,663,788(4) 1,663,788 0
2,549,091(5) 2,549,091
Richard Reid(6).......................................... 145,455(6) 145,455 0
1,663,787(4) 1,663,787
WPI World Pages, Inc..................................... 231,813(4) 231,813 0
Lelani Bluner............................................ 18,466(4) 18,466 0
Nick Wilson.............................................. 6,155(4) 6,155 0
Elise Wilson............................................. 1,231(4) 1,231 0
Jack Austin.............................................. 64,630(4) 64,630 0
Rick Klein............................................... 338,537(4) 338,537 0
Jack Tracht.............................................. 107,716(4) 107,716 0
Kent Hinkson............................................. 49,242(4) 49,242 0
Rodney Weaver............................................ 61,552(4) 61,552 0
Robert Terek............................................. 61,552(4) 61,552 0
Timothy Dick............................................. 123,104(4) 123,104 0
Adam Ayala............................................... 30,776(4) 30,776 0
Bryan Reid............................................... 30,776(4) 30,776 0
Scott Reid............................................... 30,776(4) 30,776 0
Terry Frink.............................................. 30,776(4) 30,776 0
April Watkins............................................ 30,776(4) 30,776 0
Larry C. Baldwin......................................... 710,227(5) 710,227 0
Steve A. Sparks.......................................... 198,864(5) 198,864 0
Ronald R. Baldwin........................................ 198,864(5) 198,864 0
Ronnie Emanuel........................................... 142,045(5) 142,045 0
George Anderson(7)....................................... 10,000(8) 10,000 0
Robert Flynn(7).......................................... 5,000(6) 5,000 0
Wilmot Matthews(7)....................................... 30,000(8) 30,000 0
Nicholas Ross(9)......................................... 10,000(6) 10,000 0
Max Gotleib(10).......................................... 20,000(8) 20,000 0
ACG 1 Limited Partnership................................ 99,863(11) 99,863 0
ACG 2 Limited Partnership................................ 36,925(11) 36,925 0
ACG 3 Limited Partnership................................ 145,884(11) 145,884 0
ACG 4 Limited Partnership................................ 211,996(11) 211,996 0
ACG 5 Limited Partnership................................ 114,155(11) 114,155 0
ACG 6 Limited Partnership................................ 101,910(11) 101,910 0
ACG 7 Limited Partnership................................ 25,793(11) 25,793 0
ACG 8 Limited Partnership................................ 552,374(11) 552,374 0
ACG 9 Limited Partnership................................ 36,925(11) 36,925 0
ACG 10 Limited Partnership............................... 181,587(11) 181,587 0
ACG 11 Limited Partnership............................... 144,484(11) 144,484 0
ACG 12 Limited Partnership............................... 69,955(11) 69,955 0
ACG 13 Limited Partnership............................... 124,894(11) 124,894 0
ACG 14 Limited Partnership............................... 36,925(11) 36,925 0
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF
NUMBER OF NUMBER OF SHARES OWNED
SHARES OWNED SHARES TO AFTER
NAME PRIOR TO SALE BE SOLD SALE(12)
- ---- --------------- --------- ------------
<S> <C> <C> <C>
ACG 15 Limited Partnership............................... 218,512(11) 218,512 0
ACG 16 Limited Partnership............................... 93,671(11) 93,671 0
ACG 17 Limited Partnership............................... 51,169(11) 51,169 0
ACG 18 Limited Partnership............................... 461,220(11) 461,220 0
ACG 19 Limited Partnership............................... 93,671(11) 93,671 0
ACG 20 Limited Partnership............................... 23,705(11) 23,705 0
ACG 21 Limited Partnership............................... 499,493(11) 499,493 0
ACG 22 Limited Partnership............................... 25,793(11) 25,793 0
ACG 23 Limited Partnership............................... 36,925(11) 36,925 0
ACG 24 Limited Partnership............................... 76,545(11) 76,545 0
ACG 25 Limited Partnership............................... 239,345(11) 239,395 0
ACG 26 Limited Partnership............................... 101,482(11) 101,482 0
ACG 27 Limited Partnership............................... 101,910(11) 101,910 0
ACG 28 Limited Partnership............................... 109,554(11) 109,554 0
ACG 29 Limited Partnership............................... 93,671(11) 93,671 0
ACG 30 Limited Partnership............................... 154,781(11) 154,781 0
ACG 31 Limited Partnership............................... 164,012(11) 164,012 0
ACG 32 Limited Partnership............................... 97,474(11) 97,474 0
ACG 33 Limited Partnership............................... 69,955(11) 69,955 0
ACG 34 Limited Partnership............................... 69,955(11) 69,955 0
ACG 35 Limited Partnership............................... 339,699(11) 339,699 0
ACG 36 Limited Partnership............................... 101,482(11) 101,482 0
ACG 37 Limited Partnership............................... 69,955(11) 69,955 0
ACG 38 Limited Partnership............................... 69,955(11) 69,955 0
ACG 39 Limited Partnership............................... 275,148(11) 275,148 0
ACG 40 Limited Partnership............................... 481,964(11) 481,964 0
ACG 41 Limited Partnership............................... 1,278,132(11) 1,278,132 0
ACG 42 Limited Partnership............................... 1,280,132(11) 1,280,132 0
BAR 1 Holdings Inc....................................... 892,585(11) 892,585 0
BAR 2 Holdings Inc....................................... 720,344(11) 720,344 0
BAR 3 Holdings Inc....................................... 785,569(11) 785,569 0
BAR 4 Holdings Inc....................................... 984,606(11) 984,606 0
BAR 5 Holdings Inc....................................... 912,165(11) 912,165 0
BAR 6 Holdings Inc....................................... 903,759(11) 903,759 0
BAR 7 Holdings Inc....................................... 18,971(11) 18,971 0
BAR 8 Holdings Inc....................................... 18,971(11) 18,971 0
BAR 9 Holdings Inc....................................... 1,200,000(11) 1,200,000 0
TOTAL
- --------------------------------------------------------- --------- --------- -------
</TABLE>
- ------------------------
(1) Acquired in connection with the acquisition of the operating companies in
February 1998.
(2) Chairman and Acting Chief Executive Officer of WorldPages since
November 9, 1998 and Director and President--Directory Services Group of
WorldPages, since February 18, 1998. Founder of WorldPages' subsidiary,
Great Western; Director and President of Great Western from 1984 to
present.
63
<PAGE>
(3) Includes warrants of purchase 469,020 shares of WorldPages Common Stock. A
trustee for Mr. O'Neal's children owns 189,020 of these warrants. Also
includes 18,758 shares of Common Stock subject to stock options that are
immediately exercisable.
(4) Acquired in connection with WorldPages' acquisition of Web YP and Big
Stuff. WPI has advised WorldPages that it intends to distribute its
WorldPages shares set forth on this table to its stockholders as a
dividend. Accordingly, this prospectus also covers the resale of such
WorldPages shares by those stockholders.
(5) Acquired in exchange for certain indebtedness of Big Stuff and WebYP and
the redemption of the 5% Subordinated Notes, issued by WorldPages.
(6) Former shareholder of Web YP. Mr. Reid's shares were acquired in exchange
for certain indebtedness of Big Stuff and Web YP.
(7) Former director of YPtel: Director of WorldPages pursuant to the
acquisition of YPtel by WorldPages.
(8) To be issued upon exercise of warrants to be issued to replace warrants to
purchase common shares of YPtel.
(9) Former director of YPtel.
(10) Former officer of YPtel.
(11) Acquired Class A Special Shares of ACG Exchange Company, an indirect
wholly-owned Nova Scotia Subsidiary of WorldPages, in connection with the
February acquisitions. The Class A Special Shares are exchangeable on a
one-for-one basis for the shares of WorldPages Common Stock indicated.
(12) After the offering, Mr. O'Neal, who is WorldPages' Chairman of the Board
and Chief Executive Officer, will own 2.0% of WorldPages Common Stock. All
other Selling Stockholders will own less than 1% of WorldPages Common
Stock.
64
<PAGE>
PLAN OF DISTRIBUTION
WorldPages is registering the common stock covered by this prospectus for
Selling Stockholders. As used in this prospectus, "Selling Stockholders"
includes the donees, pledgees, transferees or others who may later hold the
Selling Stockholders' interest. WorldPages will pay the costs, expenses and fees
in connection with registering the common stock, but the Selling Stockholders
will pay any brokerage commissions, discounts or other expenses attributable to
the sale of common stock.
The Selling Stockholders may sell the common stock from time to time in one
or more types of transactions (which may include block transactions), on the New
York Stock Exchange, in negotiated transactions, through put or call options
transactions relating to the shares, through short sales of shares, or a
combination of such methods of sale, at market prices prevailing at the time of
sale, or at negotiated prices. Such transactions may or may not involve brokers
or dealers. The Selling Stockholders have advised WorldPages that they have not
entered into any agreements, understandings or arrangements with any
underwriters or broker-dealers regarding the sale of the shares, nor is there an
underwriter or coordinating broker acting in connection with the proposed sale
of shares by the Selling Stockholders.
The Selling Stockholders may effect such transactions by selling shares
directly to purchasers or to or through broker-dealers, which may act as agents
or principals. Such broker-dealers may receive compensation in the form of
discounts, concessions, or commissions from the Selling Stockholders and/or the
purchasers of shares for whom such broker-dealers may act as agents or to whom
they sell as principal, or both (which compensation as to a particular
broker-dealer might be in excess of customary commissions).
The Selling Stockholders and any broker-dealers that act in conection with
the sale of shares might be deemed to be "underwriters" within the meaning of
Section 2(11) of the Securities Act, and any commissions received by such
broker-dealers and any profit on the resale of the shares sold by them while
acting as principals might be deemed to be underwriting discounts or commissions
under the Securities Act. The Selling Stockholders may agree to indemnify any
agent, dealer or broker-dealer that participates in transactions involving sales
of the shares against certain liabilities, including liabilities arising under
the Securities Act.
Because Selling Stockholders may be deemed to be "underwriters" within the
meaning of Section 2(11) of the Securities Act, the Selling Stockholders will be
subject to the prospectus delivery requirements of the Securities Act.
WorldPages has informed the Selling Stockholders that the anti-manipulative
provisions of Regulation M promulgated under the Exchange Act may apply to their
sales in the market.
Selling Stockholders also may resell all or a portion of the shares in open
market transactions in reliance upon Rule 144 under the Securities Act, provided
they meet the criteria and conform to the requirements of such Rule.
65
<PAGE>
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
At the date of this Prospectus, the authorized capital stock of the
WorldPages is 200,000,000 shares, consisting of 180,000,000 shares of Common
Stock, par value $0.0001 per share, and 20,000,000 shares of Preferred Stock,
par value $0.0001 per share ("Preferred Stock").
COMMON STOCK. The holders of common stock are entitled to dividends in such
amounts and at such times as may be declared by the Board of Directors out of
funds legally available therefor. Holders of the common stock are entitled to
one vote per share for the election of directors and other corporate matters. In
the event of liquidation, dissolution or winding up of WorldPages, holders of
common stock would be entitled to share ratably in all assets of the available
for distribution to the holders of common stock. The common stock carries no
preemptive rights.
PREFERRED STOCK. WorldPages is authorized to issue from time to time,
without stockholder authorization, in one or more designated series, 20,000,000
shares of preferred stock with such dividend, redemption, conversion and
exchange provisions as are provided in the particular series. Except as by law
expressly provided, or except as may be provided by resolution of the WorldPages
Board, the preferred stock shall have no right or power to vote on any question
or in any proceeding or to be represented at, or to receive notice of, any
meeting of stockholders of WorldPages. The issuance of preferred stock, or the
perception that such an issuance might occur, could have the effect of delaying
or preventing a change in control of the Company.
The only class of preferred stock of WorldPages currently authorized is the
Class B Voting Preferred Stock. Only one share is issued and outstanding and it
has been issued to the trustee under the Voting and Exchange Trust Agreement.
Its primary purpose is to provide a mechanism for the holders of the Class A
Special Shares to vote their Class A Special Shares in the same amount and
manner as if they held WorldPages common stock.
Set forth below are the major characteristics of the Class B Voting
Preferred Stock.
- Except as otherwise required by law or WorldPages Restated Certificate of
Incorporation, as amended, the holder of the share of Class B Voting
Preferred Stock shall have a number of votes with respect to any matter,
proposition or question on which holders of WorldPages common stock are
entitled to vote, equal to the product of
(i) the number of shares of WorldPages common stock for which the
Class A Special Shares then issued and outstanding from time to
time and held by holders of such shares are exchangeable,
multiplied by
(ii) the number of votes to which a holder of one share of
WorldPages common stock is entitled with respect to such matter,
proposition or question.
- Except as otherwise required by law or the Restated Certificate of
Incorporation, as amended, the WorldPages common stock and the Class B
Voting Preferred Stock vote as a single class and, apart from the
differing number of votes attaching to the Class B Voting Preferred Stock
as described above, such voting rights are identical.
- The share of Class B Voting Preferred Stock ranks senior, as to
distribution of assets upon liquidation, to the shares of
WorldPages common stock.
- The Class B Voting Preferred Stock has an aggregate liquidation preference
of $1.00 before any distribution is made on the common stock or on any
other WorldPages stock ranking junior to the Class B Voting Preferred
Stock as to distribution of assets on liquidation, dissolution or winding
up. Under the Certificate of Designation under which the Class B Voting
Preferred Stock was created, neither the sale, conveyance, exchange or
transfer of all or substantially all of
66
<PAGE>
the property or assets of WorldPages, nor the consolidation or merger of
WorldPages with or into one or more other entities, shall be deemed to be
a liquidation, dissolution or winding-up of WorldPages.
- The share of Class B Voting Preferred Stock is senior to the common
stock as to liquidation.
- The holder of the Class B Voting Preferred Stock is not entitled to
receive any dividends on the share.
- The holder of the Class B Voting Preferred Stock has no rights to
convert the share into, or exchange it for shares of any other series
or class of capital stock of WorldPages.
- The share of Class B Voting Preferred Stock is not subject to
redemption except that when the Exchange and Voting Trust Agreement
terminates, the Class B Voting Preferred Stock will automatically be
redeemed by WorldPages for an amount equal to $1.00 due and payable
upon such redemption.
- The holder of the share of Class B Preferred Stock has no powers,
preferences, or relative, participating, optional or other special
rights, or qualifications, limitations or restrictions other than as
set forth in the Certificate of Designation by which it was created.
Although the Class A Special Shares are issued by ACG Exchange Company, an
indirect wholly-owned subsidiary of WorldPages, it is important that persons
considering an investment in WorldPages common stock understand the
characteristics of the Class A Special Shares inasmuch as they are the economic
equivalent of WorldPages common stock.
ACG Exchange Company is WorldPages' unlimited liability company subsidiary
formed under the laws of Nova Scotia to allow stockholder of YPtel who are
Canadian residents under the federal income tax laws to obtain their ownership
interests in WorldPages on a tax-deferred basis. The Class A Special Shares will
be exchangeable on a one-for-one basis for shares of WorldPages common stock.
Although the Class A Special Shares have no voting rights, the holders of the
Class A Special Shares are parties to a voting trust pursuant to which Montreal
Trust Company of Canada holds the one issued and outstanding share of Class B
Preferred Stock of WorldPages. This share of Class B Voting Preferred Stock has
the attributes set forth above. A holder of Class A Special Shares will have the
right to direct the voting trustee how to vote the Class B Preferred Stock to
the extent of the Class A Special Shares then owned by that holder. If no
instructions are received from a holder of Class A Special Shares, the trustee
will vote the Class A Special Shares in the same manner as are voted the
majority of the other Class A Special Shares.
POSSIBLE ANTI-TAKEOVER EFFECTS
GENERAL. Certain provisions of WorldPages' charter, as well as the
concentration of ownership of the common stock, and its ability to issue up to
20 million shares of "blank check" Preferred Stock, may have the effect of
discouraging a change in control of the WorldPages, including transactions in
which stockholders might receive a premium price for their Common Stock.
STATUTORY PROVISIONS. Section 203 ("Section 203") of the Delaware General
Corporation Law restricts certain transactions between a corporation organized
under Delaware law (or its majority-owned subsidiaries) and any person holding
15% or more of the corporation's outstanding voting stock, together with the
affiliates or associates of such person (an "Interested Stockholder").
Section 203 generally prohibits a publicly held Delaware corporation from
engaging in the following transactions with an Interested Stockholder, for a
period three years from the date the stockholder becomes an interested
Stockholder (unless certain conditions, described below, are met): (i) all
mergers or consolidations, (ii) sales, leases, exchanges or other transfers of
10% or more of the aggregate assets of
67
<PAGE>
the corporation, (iii) issuances or transfers by the corporation of any stock of
the corporation which would have the effect of increasing the Interested
Stockholder's proportionate share of the stock of any class or series of the
corporaiton, (iv) any other transaction which has the effect of increasing the
proportionate share of the stock of any class or series of the corporation which
is owned by the Interested Stockholder, and (v) receipt by the Interested
Stockholder of the benefit (except proportionately as a stockholder) of loans,
advances, guarantees, pledges or other financial benefits provided by the
corporation.
The three-year ban does not apply if either the proposed transaction or the
transaction by which the Interested Stockholder became an Interested Stockholder
is approved by the board of directors of the corporation prior to the date such
stockholder becomes an Interested Stockholder. Additionally, an Interested
Stockholder may avoid the statutory restriction if, upon the consummation of the
transaction whereby such stockholder becomes an Interested Stockholder, the
stockholder owns at least 85% of the outstanding voting stock of the corporation
without regard to those shares owned by the corporation's officers and directors
or certain employee stock plans. Business combinations are also permitted within
the three-year period if approved by the board of directors and authorized at an
annual or special meeting of stockholders, by the holders of at least 66 2/3% of
the outstanding voting stock not owned by the Interested Stockholder. In
addition, any transaction is exempt from the statutory ban if it is proposed at
a time when the corporation has proposed, and a majority of certain continuing
directors of the corporation have approved, a transaction with a party which is
not an Interested Stockholder of the corporation (or who becomes such with board
approval) if the proposed transaction involves (i) certain mergers or
consolidations involving the corporation, (ii) a sale or other transfer of over
50% of the aggregate assets of the corporation, or (iii) a tender or exchange
offer for 50% or more of the outstanding voting stock of the corporation.
Prior to the effective date of Section 203, a corporation, by action of its
board of directors, had the option of electing to exclude itself from the
coverage of Section 203. Since the effective date of such section, a corporation
may, at its option, exclude itself from the coverage of Section 203 by amending
its certificate of incorporation or bylaws by action of its stockholders to
exempt itself from coverage, provided that such charter or bylaw amendment shall
not become effective until 12 months after the date it is adopted. WorldPages
has not adopted such a charter or bylaw amendment.
CHARTER PROVISIONS. The Board is divided into three classes. Each class of
directors consists, as nearly as possible, of one-third of the total number of
directors constituting the entire Board. The Charter provides that, subject to
the rights of the holders of any series of Preferred Stock, the number of
directors may be fixed from time to time by resolution of the Board, but will
consist of not less than three nor more than 14 members. One class of director
is elected annually and serves for a three-year term. A director of the Company
may be removed only for cause and only upon the affirmative vote of the holders
of a majority of the outstanding capital stock entitled to vote at an election
of directors.
The Charter provides that WorldPages may, by action of its Board, provide
for a sinking fund for the purchase or redemption of shares of any series of
Preferred Stock and specify the terms and conditions governing the opertions of
any such fund.
A stockholder may nominate directors only if written notice is delivered to
the Company by such stockholder not less than 30 days nor more than 60 days
prior to the meeting or no later than ten days after the date of notice by the
Company of such meeting if such notice is given less than 90 days in advance of
the meeting. The Charter also provides that any newly created directorship
resulting from an increase in the number of directors or a vacancy on the Board
shall be filled by vote of a majority of the remaing directors then in office,
even though less than a quorum. The Charter also provides that special meetings
of the stockholders may only be called by the Chairman of the Board or the
Board, subject to the rights of the holders of any series of Prefered Stock, and
that the stockholders may not act by written consent. The Charter provides that
certain of these provisions of the Charter may not be
68
<PAGE>
amended without the approval of at least 80% of the voting power of all shares
of WorldPages entitled to vote generally in the election of the directors,
voting together as a single class.
The foregoing provisions of the Charter and of Section 203, together with
the ability of the Board to issue Preferred Stock without further stockholder
action, could delay or frustrate the removal of incumbent directors or the
assumption of control by the holder of a large block of common stock even if
such removal or assumption would be beneficial, in the short term, to
stockholders of the WorldPages. The provisions could also discourage or make
more difficult a merger, tender offer or proxy contest even if such event would
be favorable to the interests of stockholders.
LIMITATION ON DIRECTORS AND OFFICERS LIABILITY The Delaware General
Corporation Law authorizes corporations to limit or eliminate the personal
liability of directors to corporations and their stockholders for monetary
damages for breach of directors fiduciary duty of care. The duty of care
requires that, when acting on behalf of the corporation, directors must exercise
an informed business judgment based on all material information reasonably
available to them. Absent the limitations authorized by such legislation,
directors are accountable to corporations and their stockholders for monetary
damages for conduct constituting gross negligence in the exercise of their duty
of care. Although the Delaware General Corporation Law does not change
directors' duty of care, it enables corporations to limit available relief to
equitable remedies such as injunction or rescission. The Charter limits the
liability of the WorldPages' directors to the WorldPages or its stockholders (in
their capacity as directors but not in their capacity as officers) to the
fullest extent permitted by the Delaware General Corporation Law. Specifically,
directors of the WorldPages will not be personally liable for monetary damages
for breach of a director's fiduciary duty as a director, except for liability
(i) for any breach of the director's duty of loyalty to the WorldPages or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the Delaware General Corporation Law or (iv) for any transaction from which the
director derived an improper personal benefit.
The inclusion of this provision in the Charter may have the effect of
reducing the likelihood of derivative litigation against directors and may
discourage or deter stockholders or management from bringing a lawsuit against
directors for breach of the duty of care, even though such an action, if
successful, might otherwise have benefited the WorldPages and its stockholders.
The Securities and Exchange Commission has taken the position that the
provision will have no effect on claims arising under the federal securities
laws.
69
<PAGE>
LEGAL MATTERS
The validity of the shares of WorldPages common stock offered hereby has
been passed upon for WorldPages by Blackwell Sanders Peper Martin LLP, counsel
to WorldPages.
EXPERTS
The consolidated financial statements of Advanced as of December 31, 1999
and 1998, and for each of the years in the three-year period ended December 31,
1999, have been included herein and in the registration statement in reliance
upon the report of KPMG LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing; and, with respect to financial statements of Web YP as of
December 31, 1999 and 1998 and for each of the years ended December 31, 1999 and
1998, appearing elsewhere herein, and in reliance upon the report of KPMG LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
Ernst & Young LLP, independent auditors, have audited the financial
statements of Pacific Coast Publishing, Inc. at October 31, 1998 and 1997, and
for each of the three years in the period ended October 31, 1998, as set forth
in their report and have also audited the consolidated financial statements of
YPtel Corporation at October 31, 1999 and for the year then ended, as set forth
in their report. We have included the financial statements in the prospectus and
elsewhere in the registration statement in reliance on Ernst & Young LLP's
reports, given on their authority as experts in accounting and auditing.
70
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
ADVANCED COMMUNICATIONS GROUP, INC.
Independent Auditors' Report................................ F-2
Consolidated Statements of Operations....................... F-3
Consolidated Balance Sheets................................. F-4
Consolidated Statements of Changes in Stockholders'
Equity.................................................... F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
PACIFIC COAST PUBLISHING, INC.
Report of Independent Auditors.............................. F-19
Balance Sheets.............................................. F-20
Statements of Operations.................................... F-21
Statements of Stockholders' Equity.......................... F-22
Statements of Cash Flows.................................... F-23
Notes to Financial Statements............................... F-24
YPtel CORPORATION
Report of Independent Auditors.............................. F-30
Consolidated Balance Sheet.................................. F-31
Consolidated Statement of Income............................ F-32
Consolidated Statement of Changes in Shareholders' Equity... F-33
Consolidated Statement of Cash Flows........................ F-35
Notes to Consolidated Financial Statements.................. F-36
WEB YP, INC.
Independent Auditors' Report................................ F-46
Balance Sheets.............................................. F-47
Statements of Operations.................................... F-48
Statements of Stockholders' Deficit......................... F-49
Statements of Cash Flows.................................... F-50
Notes to Financial Statements............................... F-51
BIG STUFF, INC.
Unaudited Statements of Operations.......................... F-54
Unaudited Balance Sheets.................................... F-55
Unaudited Statements of Changes in Stockholders' Equity..... F-56
Unaudited Statements of Cash Flows.......................... F-57
Notes to Unaudited Financial Statements..................... F-58
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors of
Advanced Communications Group, Inc.:
We have audited the accompanying consolidated balance sheets of Advanced
Communications Group, Inc. and subsidiaries as of December 31, 1999 and 1998,
and the related consolidated statements of operations, changes in stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1999. In connection with our audits of the consolidated financial
statements, we also have audited the accompanying financial statement schedule.
These consolidated financial statements and financial statement schedule are the
responsibility of Advanced's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Advanced
Communications Group, Inc. and subsidiaries as of December 31, 1999 and 1998,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1999, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
KPMG LLP
St. Louis, Missouri
February 4, 2000
F-2
<PAGE>
ADVANCED COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- ----------
<S> <C> <C> <C>
Revenues............................................... $ 49,987 $ 38,090 $ --
Expenses:
Printing, distribution and listings.................. 13,440 8,670 --
Sales and marketing.................................. 11,464 8,976 --
General and administrative........................... 20,529 16,689 2,071
Depreciation and amortization........................ 4,695 4,190 3
Stock-based compensation............................. -- 1,760 870
----------- ----------- ----------
Income (loss) from operations.......................... (141) (2,195) (2,944)
Other income (expense):
Interest expense..................................... (4,766) (1,845) (256)
Other................................................ 75 177 --
----------- ----------- ----------
Income (loss) from continuing operations before
income taxes......................................... (4,832) (3,863) (3,200)
Income tax expense (benefit)........................... (1,465) (91) --
----------- ----------- ----------
Net income (loss) from continuing operations........... (3,367) (3,772) (3,200)
Loss from discontinued operations, net of tax benefit
of $4,007 and $6,368, respectively................... (7,378) (7,507) --
Loss on sale of discontinued operations, net of tax
benefit
of $8,145............................................ (51,800) -- --
----------- ----------- ----------
Net loss............................................. $ (62,545) $ (11,279) $ (3,200)
=========== =========== ==========
Basic and diluted income (loss) per share from:
Continuing operations................................ $ (.17) $ (.20) $ (.39)
Discontinued operations.............................. (.37) (.41) --
Sale of discontinued operations...................... (2.60) -- --
----------- ----------- ----------
Net income (loss) per share.......................... $ (3.14) $ (.61) $ (.39)
=========== =========== ==========
Weighted average common shares outstanding........... 19,955,829 18,593,947 8,230,006
=========== =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
ADVANCED COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 1,315 $ 13,734
Accounts receivable (net of allowance of $4,246 in 1999
and
$4,014 in 1998)......................................... 14,223 13,317
Deferred costs............................................ 4,482 3,888
Prepaid expenses and other current assets................. 174 94
Deferred taxes............................................ -- 3,398
-------- --------
Total current assets.................................... 20,194 34,431
-------- --------
Property, plant and equipment, net.......................... 1,377 1,134
Intangible assets from business acquisitions, net........... 75,413 81,255
Deferred taxes.............................................. 6,504 --
Other assets, net........................................... 5,571 1,022
Net assets held for sale.................................. -- 69,780
-------- --------
Total other assets...................................... 88,865 153,191
-------- --------
Total assets............................................ $109,059 $187,622
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.................. $ 9,447 $ 4,844
Short-term debt and current maturities of long-term
debt.................................................... 24,000 17,117
Other current liabilities................................. 3,940 3,017
-------- --------
Total current liabilities............................... 37,387 24,978
Long-term obligations:
Long-term debt............................................ -- 17,233
Deferred tax liabilities.................................. -- 13,827
-------- --------
Total liabilities....................................... 37,387 56,038
-------- --------
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; $2,000 liquidation preference.......... -- 1,122
Common stock, $.0001 par value: 180,000,000 shares
authorized;
20,426,753 and 19,859,262 shares issued and outstanding,
respectively............................................ 2 2
Additional paid-in capital................................ 149,438 146,611
Treasury stock; 0 and 234,141 common shares,
respectively............................................ -- (1,013)
Retained earnings (accumulated deficit)................... (77,768) (15,138)
-------- --------
Total stockholders' equity.............................. 71,672 131,584
-------- --------
Total liabilities and stockholders' equity.............. $109,059 $187,622
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
ADVANCED COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK ADDITIONAL EARNINGS TOTAL
----------------------- PREFERRED PAID-IN TREASURY (ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT STOCK CAPITAL STOCK DEFICIT) EQUITY
---------- ---------- --------- ---------- -------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1996...................... 8,227,736 $ 1 $ -- $ 27 $ -- $ (659) $ (631)
Issuance of stock options
and warrants.............. -- -- -- 1,237 -- -- 1,237
Issuance of stock for
services performed........ 4,540 -- -- 50 -- -- 50
Net loss.................... -- -- -- -- -- (3,200) (3,200)
---------- ---------- ------- -------- ------- -------- --------
Balance, December 31,
1997...................... 8,232,276 $ 1 $ -- $ 1,314 $ -- $ (3,859) $ (2,544)
Issuance of stock options
and warrants.............. -- -- -- 5,862 -- -- 5,862
Issuance of preferred
stock..................... -- -- 1,122 -- -- -- 1,122
Initial public offering, net
of offering costs......... 8,000,000 1 -- 99,899 -- -- 99,900
Issuance of stock for
acquired companies........ 3,861,127 -- -- 39,536 -- -- 39,536
Acquisition of treasury
stock..................... (234,141) -- -- -- (1,013) -- (1,013)
Net loss.................... -- -- -- -- -- (11,279) (11,279)
---------- ---------- ------- -------- ------- -------- --------
Balance, December 31,
1998...................... 19,859,262 $ 2 $ 1,122 $146,611 $(1,013) $(15,138) $131,584
Stock option exercises...... 366,634 -- -- 1,705 785 (85) 2,405
Issuance of restricted
stock..................... 58,000 -- -- -- 228 -- 228
Conversion of preferred
stock..................... 142,857 -- (1,122) 1,122 -- -- --
Net loss.................... -- -- -- -- -- (62,545) (62,545)
---------- ---------- ------- -------- ------- -------- --------
Balance, December 31,
1999...................... 20,426,753 $ 2 $ -- $149,438 $ -- $(77,768) $ 71,672
========== ========== ======= ======== ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
ADVANCED COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(62,545) $(11,279) $(3,200)
Adjustments to reconcile net loss to net cash:
Depreciation and amortization........................... 4,695 4,190 3
Stock-based compensation expense........................ -- 1,760 870
Loss from discontinued operations, net.................. 7,378 7,507 --
Loss on sale of discontinued operations................. 51,800 -- --
Deferred tax provision.................................. (3,718) (6,459) --
Changes in operating assets and liabilities:
Decrease (increase) in:
Accounts receivable, net............................ (906) (184) 1
Deferred costs...................................... (594) 639 --
Prepaid expenses and other current assets........... (80) 581 --
Other assets, net................................... (3,161) 1,667 --
Increase (decrease) in:
Accounts payable and accrued liabilities............ 4,603 836 1,950
Other current liabilities........................... 923 706 --
-------- -------- -------
Net cash used in continuing operating activities.... (1,605) (36) (376)
Net cash used in discontinued operations............ (41,370) (8,812) --
-------- -------- -------
Net cash used in operating activities............... (42,975) (8,848) (376)
-------- -------- -------
Cash flows from investing activities:
Cash paid for businesses acquired, net of cash acquired... -- (83,256) --
Additions to property, plant and equipment, net........... (3,906) (16,738) --
Cash from sale of discontinued operations................. 43,127 10,000 --
-------- -------- -------
Net cash provided by (used in) investing
activities........................................ 39,221 (89,994) --
-------- -------- -------
Cash flows from financing activities:
Borrowings of long-term debt.............................. 52,883 17,000 2,566
Repayment of long-term debt............................... (62,338) (2,979) --
Increase in deferred offering costs....................... (780) (1,218) (2,223)
Proceeds from stock option exercises...................... 1,570 -- --
Proceeds from common stock issuance, net of offering
costs................................................... -- 99,900 --
Acquisition of treasury stock............................. -- (127) --
-------- -------- -------
Net cash provided by (used in) financing
activities........................................ (8,665) 112,576 343
-------- -------- -------
Net increase (decrease) in cash and cash
equivalents....................................... (12,419) 13,734 (33)
Cash and cash equivalents--beginning of year................ 13,734 -- 33
-------- -------- -------
Cash and cash equivalents--end of year...................... $ 1,315 $ 13,734 $ --
======== ======== =======
Supplemental cash flows information:
Cash paid for interest.................................... $ 3,038 $ 739 $ --
======== ======== =======
Cash paid for income taxes.................................. $ 43 $ -- $ --
======== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
ADVANCED COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Advanced
Communications Group, Inc. and its wholly-owned subsidiaries (Advanced). All
significant intercompany transactions have been eliminated in consolidation.
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 and
contingent 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.
Advanced was founded to provide a portfolio of telecommunications services
to business customers in service areas of Southwestern Bell and U S WEST and
publishes yellow pages directories in selected markets. Advanced completed its
initial public offering (IPO) on February 18, 1998. In connection with the IPO,
Advanced simultaneously acquired one yellow pages publisher and eight
telecommunications companies and a 49% interest in another company
(collectively, the Acquired Companies or the Acquisitions). Prior to
February 1998, Advanced had not conducted any operations other than those
relating to the IPO and the Acquisitions. Consequently, the financial statements
included herein relate only to the parent company prior to February 18, 1998,
but include the results of Great Western, the yellow pages publisher, for the
period February 18, 1998 to December 31, 1998 and for all later periods as
continuing operations. The telecommunications companies and the 49% interest in
another company are included in discontinued operations.
Great Western Directories is Advanced's only remaining operating subsidiary
at December 31, 1999. In November 1999, all of Advanced's telecommunications
subsidiaries were sold and are therefore presented as discontinued operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS--Advanced considers cash in banks and
highly-liquid investments purchased with an original maturity of three months or
less to be cash and cash equivalents.
PROPERTY, PLANT AND EQUIPMENT--Property, plant and equipment are stated at
cost. Improvements are capitalized. Repair and maintenance costs are expensed as
incurred. The cost and related accumulated depreciation of assets retired or
disposed of and are removed from the accounts, and any gains or losses are
reflected in results of operations. Depreciation is computed using the
straight-line method over the respective useful lives of the assets. The
estimated useful lives of the assets are: buildings and improvements--40 years;
equipment--5 to 10 years; furniture and office equipment--3 to 5 years; and
leasehold improvements--shorter of life of lease or useful life of related
asset.
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 customer lists and goodwill. Customer lists and
goodwill are amortized on a straight-line basis over their estimated useful
lives of 10 years and 40 years, respectively. For the years ended December 31,
1999 and 1998, amortization expense relating to intangible assets was $4,532,000
and $4,402,000, respectively and accumulated amortization totaled $8,408,000 and
$3,876,000 at December 31, 1999 and 1998, respectively.
F-7
<PAGE>
ADVANCED COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OTHER ASSETS, NET--Other assets consist of deferred debt issuance costs and
deferred acquisition costs. The costs incurred in connection with obtaining debt
facilities are deferred and amortized on a straight-line basis over the life of
the related debt instrument. Deferred acquisition costs consists of legal,
accounting and other costs related to acquisitions which are included in the
purchase price and allocated to assets acquired.
INCOME TAXES--Income taxes are recognized during the year based on all
events that have been recognized in the consolidated financial statements, with
deferred taxes being provided for differences between the book basis and tax
basis of assets and liabilities as measured by the enacted tax laws.
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 telephone directory, such as publishing and distribution
expenses, commissions on sales, other selling expenses and estimated bad debt
expense. 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, generally 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. Advanced recognized net expense of
approximately $3.1 million and $0.4 million in the years ended December 31, 1999
and 1998, respectively, relating to prototype directories.
STOCK-BASED COMPENSATION--Advanced has elected to follow the intrinsic value
method and has included in these financial statements pro forma disclosures of
net loss and net loss per share as if the fair value method of accounting had
been applied. No employee stock options or similar equity instruments were
issued by Advanced prior to January 1, 1997.
NET EARNINGS (LOSS) PER SHARE--Basic earnings per share (Basic EPS) is
determined by dividing income available to common stockholders by the weighted
average number of common shares outstanding during the period. Diluted earnings
per share (Diluted EPS) reflects the potential dilution that could occur if
securities and other contracts to issue common stock were exercised or converted
into common stock. In periods in which the inclusion of such securities or
contracts are anti-dilutive, the effect of such securities is not given
consideration. In calculating Diluted EPS for the year ended December 31, 1999,
1998, and 1997, options and warrants to purchase 3,806,523, 3,960,312, and
2,288,640, respectively, shares of common stock were outstanding during part of
the year but were not included in the computation of Diluted EPS due to their
anti-dilutive effect.
FAIR VALUE OF FINANCIAL INSTRUMENTS--Advanced's only financial instruments
are cash, short-term trade receivables and payables and notes payable.
Management believes the carrying amounts of the financial instruments classified
as current assets and liabilities approximate their fair values because of their
short-term nature. Management believes the carrying value of its notes payable
obligations approximate fair value.
F-8
<PAGE>
ADVANCED COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED
OF--Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flow expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceed the fair value of
the assets.
COMPREHENSIVE INCOME--For the years ended December 31, 1999, 1998, and 1997,
Advanced did not incur items to be reported in comprehensive income that were
not already included in the reported net earnings; therefore, comprehensive
income (loss) and net income (loss) were the same for these periods.
RECLASSIFICATIONS--Certain amounts presented in the 1998 consolidated
financials statements have been reclassified to conform with the 1999
presentation.
3. DISCONTINUED OPERATIONS
In April 1999, Advanced announced that it intended to divest its
telecommunications segment in connection with several strategic acquisitions. In
July 1999, Advanced and four of its wholly-owned subsidiaries, Feist Long
Distance Services, Inc., FirsTel, Inc., Telecom Resources, Inc. and Valu-Line of
Longview, Inc., entered into a stock purchase agreement with Ionex
Telecommunications, Inc. under which Advanced agreed to sell all of the capital
stock of those wholly-owned subsidiaries to Ionex Telecommunications for $49.8
million, subject to a dollar-for-dollar reduction to the extent current assets
are less than current liabilities at the time of closing and to the extent of
any decrease in property, plant and equipment from May 1, 1999 to the closing
date. The sale was completed on November 19, 1999 and Advanced received $42.6
million, representing the purchase price less a preliminary working capital
adjustment. The estimated remaining costs of the transaction are included in
other liabilities in the financial statements.
As a result of the divestiture, the results of all the telecommunications
segment from the date of the announcement are classified as discontinued
operations in the accompanying consolidated financial statements. Revenues from
the discontinued telecommunications segment were $86.2 million and $59.6 million
in 1999 and 1998, respectively. Net losses from the discontinued
telecommunications operations were $7.4 million, net of an income tax benefit of
$4.0 million in 1999, and $7.5 million, net of an income tax benefit of $6.4
million in 1998.
Advanced has recorded a loss on the sale of the discontinued
telecommunications operations of $51.8 million. The loss on the sale of the
discontinued operations includes operating losses incurred through the
completion of the sale, transaction costs, exit costs of leased facilities,
employee severance and termination costs, and proceeds from the sale. The loss
is recorded net of an income tax benefit of $8.1 million.
In connection with the IPO, Advanced purchased a 49% interest in KINNET, an
owner and operator of a fiber optic network in Kansas, for $18.0 million.
Advanced accounted for its investment in KINNET using the equity method. In
December 1998, Advanced sold its entire interest in KINNET back to the original
owner of KINNET for $10.0 million in cash, 225,000 shares of Advanced's common
F-9
<PAGE>
ADVANCED COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
3. DISCONTINUED OPERATIONS (CONTINUED)
stock, valued at $0.9 million, and the indefeasible right to use (IRU) certain
network facilities of KINNET valued at $7.0 million. The sale of the KINNET
stock resulted in a $2.4 million loss due to the tax effect associated with this
transaction. The loss on the sale of KINNET is also included in the loss on the
discontinued telecommunications operations. The net assets and liabilities of
the discontinued telecommunications operations are classified on the
accompanying consolidated balance sheet as net assets held for sale at
December 31, 1998.
4. ACQUISITIONS
In April 1999, Advanced's Board of Directors approved a letter of intent to
acquire all the outstanding stock of YPtel Corporation, Web YP, Inc. and Big
Stuff, Inc. for approximately 19.5 million newly issued shares of common stock.
The acquisitions are expected to be completed in February 2000. YPtel
Corporation is the parent of Pacific Coast Publishing, Ltd. a leading yellow
pages publisher located in Tacoma, Washington. Web YP maintains a website and
operates an Internet yellow pages network that is integrated with Big Stuff's
yellow pages services. In connection with the acquisitions, Advanced's Chairman
and CEO, Richard O'Neal and the other 5% Note holders have agreed to convert the
$15.0 million 5% Notes and accrued interest owed by Advanced into approximately
2,864,000 shares of common stock in support of Advanced's strategy. Advanced
will be re-named WorldPages.com, Inc.
In February 1998, Advanced completed its IPO. Concurrent with and as a
condition to the closing of the IPO, Advanced 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 (collectively the Acquisitions or the Acquired Companies). The
Acquisitions are accounted for using the purchase method of accounting.
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:
(IN THOUSANDS)
<TABLE>
<S> <C>
Consideration Paid for Acquired Companies:
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>
F-10
<PAGE>
ADVANCED COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
4. ACQUISITIONS (CONTINUED)
In addition to the acquisition of Great Western, Advanced 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 million
of customer lists and $.7 million of net other assets which have been classified
as net assets held for sale at December 31, 1998.
The following pro forma information presents results of operations as if the
acquisition of Great Western had occurred at the beginning of the periods
presented. This pro forma information is based on historical information and
does not necessarily reflect the actual results that would have occurred nor is
it necessarily indicative of the future results of the combined companies.
<TABLE>
<CAPTION>
PRO FORMA INFORMATION (UNAUDITED, IN THOUSANDS) 1998 1997
- ----------------------------------------------- -------- --------
<S> <C> <C>
Total revenues from continuing operations................... $47,336 $43,247
Net loss from continuing operations......................... (2,972) (2,563)
Loss per share from continuing operations................... (.15) (.13)
</TABLE>
In November 1998, Advanced 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 was allocated to goodwill. Approximately $3.3 million
was allocated to goodwill and will be 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. As described in Note 3, TRI
was sold with Advanced's telecom subsidiaries in November 1999.
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at December 31,
1999 and 1998:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1999 1998
- -------------- -------- --------
<S> <C> <C>
Land and buildings.......................................... $ 544 $ 544
Leasehold improvements...................................... 387 388
Furniture and office equipment.............................. 1,883 1,443
------- -------
2,814 2,375
Less accumulated depreciation............................... (1,437) (1,241)
------- -------
$ 1,377 $ 1,134
======= =======
</TABLE>
F-11
<PAGE>
ADVANCED COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
7. LONG-TERM DEBT
The carrying amount of long-term debt, which approximates fair value,
consisted of the following at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1999 1998
- -------------- -------- --------
<S> <C> <C>
Borrowings under revolving line of credit, variable
interest, 9.25% and 8.25% at December 31, 1999 and 1998,
respectively.............................................. $ 7,000 $17,000
5% Notes payable due February 18, 2000, interest due
annually (related parties)................................ 15,000 15,000
10% Convertible Notes due February 18, 2000, interest due
annually (related parties)................................ 2,000 2,000
7% Note due annually through February 18, 2001, interest due
annually (related parties)................................ -- 350
------- -------
24,000 34,350
Less short-term borrowings and current maturities........... (24,000) (17,117)
------- -------
$ -- $17,233
======= =======
</TABLE>
The weighted average interest rates at December 31, 1999 and 1998 for
short-term borrowings were 6.7% and 8.2%, respectively.
On May 14, 1999, Advanced, through its wholly-owned yellow pages publishing
subsidiary, Great Western, entered into a $40.0 million revolving loan agreement
with Bank of America National Trust and Savings Association. Advanced used a
portion of the credit facility to refinance an existing $25.0 million credit
facility and to finance its discontinued telecommunications operations. In
connection with the closing of the sale of the telecommunications operations,
the revolving credit facility was amended to reduce the total available
borrowings to $15.0 million. The balance of the new credit facility is, subject
to various restrictions, for the general working capital needs and other
corporate purposes of Advanced and Great Western. Interest on the facility
varies at LIBOR (adjusted by the Eurodollar reserve percentage) plus 2.75% or at
the Bank of America's prime or base rate plus .75%. The 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 facility
expires on May 13, 2000 and Advanced guaranteed the loan by pledging to Bank of
America substantially all of its assets.
In connection with the acquisitions of YPtel Corporation, Web YP, Inc. and
Big Stuff, Inc., (Note 4), Advanced intends to issue approximately 2,863,637
shares of Advanced's common stock in redemption of the $15.0 million 5% Notes
and accrued interest owed thereon. The 5% Notes are owed to the former
stockholders of Great Western, including Mr. Richard O'Neal, Advanced's Chairman
of the Board and Chief Executive Officer and four other individuals of Great
Western. The indebtedness was originally incurred in connection with Advanced's
acquisition of Great Western in February 1998.
The 5% Notes and 10% Convertible Notes may be prepaid at any time and are
subordinated to Advanced's senior debt as defined therein. The 10% Convertible
Notes are convertible into shares of Advanced's common stock at $14.00 per
share.
Until the IPO, Advanced's activities had been financed through a
Subordinated Promissory Note as amended (the Note), with Consolidated Partners
Founding Fund (CPFF), a related party, in the principal amount of $3,230,000 and
bearing an annual interest rate of 8%. The Note was due on the
F-12
<PAGE>
ADVANCED COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
7. LONG-TERM DEBT (CONTINUED)
earlier of December 31, 1998, or the consummation of the IPO. In connection with
the IPO in February 1998, the entire balance of the Note was repaid. During 1998
and 1997, Advanced incurred interest expense of $149,000 and $256,000,
respectively, related to the Note.
Included in short-term and long-term debt at December 31, 1999 and 1998,
respectively, are notes relating to the Acquisitions totaling $14,803,000 and
$15,393,000, respectively, which are due to current directors and members of
management. For the years ended December 31, 1999 and 1998, Advanced recognized
interest expense of $768,000 and $709,000, respectively, relating to these
notes.
8. INCOME TAXES
The provision for income tax expense (benefit) related to continuing
operations consisted of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1999 1998
- -------------- -------- --------
<S> <C> <C>
Current:.................................................... $ -- $ --
Federal................................................... -- --
------- -------
State..................................................... -- --
------- -------
Deferred:
Federal................................................... (1,230) (5,945)
State..................................................... (235) (514)
------- -------
(1,465) (6,459)
------- -------
Income tax expense (benefit)................................ $(1,465) $(6,459)
======= =======
</TABLE>
Significant components of deferred tax assets and liabilities at
December 31, 1999 and 1998 were:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1999 1998
- -------------- -------- --------
<S> <C> <C>
Deferred tax assets:
Property and equipment depreciation....................... $ 108 $ --
Reserves and accruals..................................... 172 1,273
Net operating loss carryforwards.......................... 16,555 1,222
-------- --------
16,835 2,495
-------- --------
Deferred tax liabilities:
Intangible assets......................................... (10,158) (16,144)
Deferred costs............................................ (1,701) --
Property and equipment depreciation....................... -- (319)
-------- --------
(11,859) (16,463)
-------- --------
Total net deferred tax asset (liability).................... 4,976 (13,968)
Net deferred tax liabilities included in Net Assets Held for
Sale...................................................... -- 3,490
-------- --------
Net deferred tax asset (liability).......................... $ 4,976 $(10,478)
======== ========
</TABLE>
F-13
<PAGE>
ADVANCED COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
8. INCOME TAXES (CONTINUED)
The benefit for income taxes reconciles to the amount computed by applying
the statutory federal tax rate of 34% as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1999 1998
- -------------- -------- --------
<S> <C> <C>
Computed expected tax benefit............................... $(1,643) $(6,031)
Non-deductible goodwill and intangibles..................... 317 332
State income tax benefit.................................... (155) (339)
Loss on sale of KINNET...................................... -- 816
Other....................................................... 16 (44)
Change in valuation allowance............................... -- (1,193)
------- -------
$(1,465) $(6,459)
======= =======
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion, or all of the deferred tax
assets will be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the period in
which those temporary differences become deductible. Net operating loss
carryforwards of $3,139,000, $518,000 and $39,909,000 expire in 2012, 2018, and
2019, respectively. Management believes that Advanced will generate sufficient
taxable income to absorb all net operating loss carryforwards and deductible
temporary differences prior to their expiration.
9. STOCK OPTIONS AND WARRANTS
In connection with the Acquisitions and IPO, Advanced issued various common
stock warrants that allow the holder to purchase shares of common stock at
defined exercise prices. As of December 31, 1999 and 1998, 1,674,427 and
1,584,427 of such warrants were issued and outstanding, respectively.
Advanced has an employee incentive stock option plan which allows Advanced
to grant key employees incentive and non-qualified stock options to purchase up
to 3,500,000 shares of Advanced's common stock at not less than the market price
on the date of the grant. Options not exercised accumulate and are exercisable,
in whole or in part, in any subsequent period but not later than ten years from
the date of the grant.
Advanced also has a Non-Employee Director stock option plan, approved by the
stockholders, under which Advanced grants an option to purchase 15,000 shares of
common stock to each director who is neither an officer of Advanced nor
compensated under any employment or consulting arrangements (Non-Employee
Director) upon their initial appointment as director and an additional option to
purchase 5,000 shares upon each subsequent re-election to director. Under the
plan, the option exercise price is the fair market value of Advanced's common
stock on the date of the grant, and the options are exercisable, on a cumulative
basis, at 33 1/3% per year commencing on the first anniversary date of the
grant.
F-14
<PAGE>
ADVANCED COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
9. STOCK OPTIONS AND WARRANTS (CONTINUED)
A summary of the stock option and warrant transactions under the plans for
the years ended December 31, 1999 and 1998, is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------- --------------------- ---------------------
AVERAGE NUMBER OF AVERAGE NUMBER OF AVERAGE NUMBER OF
PRICE SHARES PRICE SHARES PRICE SHARES
-------- --------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Options and warrants outstanding at
beginning of year................ $6.96 3,960,312 $ 8.76 2,288,640 $ -- 0
Options and warrants granted....... $7.50 393,961 $ 9.89 4,116,172 $ 7.59 2,813,640
Options and warrants exercised..... $4.28 (366,634) $ -- -- $ 2.50 525,000
Options and warrants canceled...... $5.56 (181,116) $13.57 (2,444,500) $ -- 0
--------- ---------- ----------
Options and warrants outstanding at
end of year...................... $7.34 3,806,523 $ 6.96 3,960,312 $ 8.76 2,288,640
========= ========== ==========
Exercisable at end of year......... 3,110,826 1,580,377 107,561
========= ========== ==========
</TABLE>
Other information regarding stock options and warrants outstanding as of
December 31, 1999, is as follows:
<TABLE>
<CAPTION>
OPTIONS AND WARRANTS OUTSTANDING
----------------------------------------------- OPTIONS AND WARRANTS EXERCISABLE
REMAINING ---------------------------------
RANGE OF NUMBER OF CONTRACTUAL LIFE WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE
EXERCISE PRICE OPTIONS (YEARS) EXERCISE PRICE OPTIONS EXERCISE PRICE
- --------------------- --------- ---------------- ---------------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
$2.50-$4.19 630,593 7.6 $ 2.54 537,260 $ 2.52
$4.50-$4.50 1,037,000 1.9 $ 4.50 932,793 $ 4.50
$4.67-$6.61 879,714 6.8 $ 6.46 601,933 $ 6.40
$6.96-$10.50 279,461 6.6 $ 8.32 189,667 $ 7.86
$14.00-$14.00 979,755 5.2 $14.00 849,173 $14.00
--------- --- ------ --------- ------
$2.50-$14.00 3,806,523 5.2 $ 7.34 3,110,826 $ 7.32
========= === ====== ========= ======
</TABLE>
Advanced accounts for the option plans using the intrinsic value method.
Under such method, no compensation expense has been recognized relating to the
stock options. Pro forma net earnings and net earnings per common share in the
following table were prepared as if Advanced had accounted for its stock options
and warrants under the fair market value method.
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net loss from continuing operations--pro forma (in
thousands)................................................ $9,024 $6,059 $5,972
Net loss from continuing operations per share--pro forma.... .45 .33 .73
</TABLE>
For the pro forma disclosures, the fair value of each option and warrant
grant is estimated at the date of the grant using an option pricing model with
the following assumptions: no expected dividends, risk-free interest rates of
6.0%, price volatility of 50% and expected lives of four years.
On December 13, 1998, Advanced's Board of Directors approved the re-pricing
of approximately 2,125,000 options granted to key employees with a
weighted-average exercise price of $13.53. Under the
F-15
<PAGE>
ADVANCED COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
9. STOCK OPTIONS AND WARRANTS (CONTINUED)
terms of the re-pricing, holders of the affected options received one new option
for each two existing options. The new options have an exercise price of $4.50
per share, which represents the fair market value of Advanced's stock on
December 14, 1998.
In connection with the Acquisitions, Advanced issued warrants to purchase
756,078 shares of common stock at $6.61 per share and options to purchase
598,500 shares of common stock at $14.00 per share (the IPO price). The fair
value of these options and warrants was determined to be $4,101,000 on the date
of grant, and was recorded as a component of the purchase price of the
Acquisitions.
During December 1997, Advanced awarded two of its officers ten-year options
to purchase 300,000 shares of common stock at an exercise price of $2.50 per
share which vested in full at the end of three months. Additionally, in
May 1997, Advanced granted to one of its consultants a warrant for the purchase
of 7,561 shares of common stock at an exercise price of $2.65 per share. During
the year ended December 31, 1998 and 1997, Advanced recognized $1,760,000 and
$870,000, respectively, of compensation expense related to these options and
warrants.
10. BENEFIT PLANS
Advanced has a stock purchase plan whereby eligible employees may elect to
invest up to 10% of their salary and Advanced contributes an amount equal to 15%
of each participant's contribution. Advanced also has a 401(k) plan whereby
eligible employees may elect to contribute a portion of their salary and
Advanced contributes an amount equal to 50% of employee contributions up to 6%
of the employee's base salary. Advanced recognized expense of $482,000 in 1999;
$281,000 in 1998; and no expense in 1997 relating to these plans.
11. LEASES
Certain sales and administrative offices and equipment are leased. The
leases expire at various dates through 2003. Leases that expire are generally
renewed or replaced by similar leases depending on business needs. Rent expense
for operating leases in 1999, 1998, and 1997 was $2,153,000, $1,370,000 and
$48,000, respectively. At December 31, 1999, Advanced's future minimum rental
payments due under noncancelable operating leases were as follows: $473,000 in
2000; $359,000 in 2001; $206,000 in 2002; $88,000 in 2003; $25,000 in 2004; and
$0 thereafter.
12. PREFERRED STOCK
In connection with a strategic alliance with a utility company, which was
consummated with the IPO, Advanced issued 142,857 shares of Series A Redeemable
Convertible Preferred Stock (Preferred Stock) with an aggregate liquidation
preference of $2.0 million. The Preferred Stock was convertible into a like
number of shares of common stock eighteen months after the consummation of the
IPO. In August 1999, the preferred stock was converted by the holder into
142,857 shares of Advanced's common stock. The Preferred Stock did not pay
dividends and its holders were not entitled to vote in the election of
directors.
F-16
<PAGE>
ADVANCED COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
13. COMMITMENTS AND CONTINGENCIES
In August 1996, one of Advanced's subsidiaries, Valu-Line of
Longview, Inc., 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 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
Advanced 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 and Advanced have
agreed to settle this matter in arbitration. Management intends to actively
pursue Advanced's rights and defenses in arbitration.
In July 1999, Loretta R. Cross, Chapter 7 Trustee for Total National
Telecommunications, Inc., filed an Adversary Proceeding against Lou Zant and
TRI, in the United States Bankruptcy Court for the Southern District of Texas.
The trustee's complaint seeks recovery of $2.6 million from TRI as a fraudulent
conveyance under the Bankruptcy Code. The complaint is based on an October 1,
1996 stock purchase agreement in which Total World Telecommunications, Inc., the
parent of Total National Telecommunications, agreed to purchase all the stock of
NETTouch Communications, Inc., from TRI and Mr. Zant. The trustee's complaint
alleges that Total National Telecommunications provided the funds to Total World
Telecommunications to complete and close the stock purchase and that Total
National Communications never received any consideration for its funds. TRI
intends to vigorously defend the action.
Advanced is party to various legal actions, proceedings and claims arising
in the normal course of business. Some of the foregoing involve, or may involve,
claims for compensatory, punitive or other damages in material amounts.
Litigation is subject to many uncertainties, and it is possible that some of the
legal actions, proceedings and claims referred to above could be decided against
Advanced. Advanced's management believes that any resulting liability will not
materially affect Advanced's financial position, liquidity or results of
operations
14. REPORTABLE SEGMENTS
Advanced considers its directory operations as its only reportable segment.
The directory operations publish and distribute yellow pages directories in
various markets in Oklahoma, Texas and California. Prior to November 1999,
Advanced had reported its telecommunications operations as another segment. The
telecommunications operations provided local, long distance and other
telecommunications services to customers in service areas of Southwestern Bell
and U S West. The different telecommunications services were aggregated and
classified as one reportable segment because they were considered one segment in
assessing performance and allocation of resources. The telecommunications
segment was sold in November 1999 and has been presented as discontinued
operations in the accompanying consolidated financial statements.
The costs associated with Advanced's corporate overhead including, but not
limited to, executive salaries, salaries of shared administrative personnel and
the direct costs of company-wide programs,
F-17
<PAGE>
ADVANCED COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
14. REPORTABLE SEGMENTS (CONTINUED)
have been allocated to the directory operations segment based on management's
estimate of those costs expected to be continuing after the sale of the
telecommunications operations. The administrative costs that will not continue
after the sale of the telecommunications segment have been allocated to the
discontinued telecommunications operations.
15. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER TOTAL
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION) ----------- ----------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
1999
Revenues................................. $18,743 $ 14,481 $ 9,113 $ 7,650 $49,987
Operating income (loss).................. 3,391 (1,126) (537) (1,869) (141)
Net income (loss) from continuing
operations............................. 1,031 (1,250) (2,181) (967) (3,367)
Net loss from discontinued operations.... (7,378) -- -- -- (7,378)
Net loss on sale of discontinued
operations............................. (51,800) -- -- -- (51,800)
Total net loss........................... (58,147) (1,250) (2,181) (967) (62,545)
Net income (loss) per common share from
continuing operations.................. 0.05 (0.06) (0.11) (0.05) (0.17)
Net loss per common share from discontinued
operations............................. (0.37) -- -- -- (0.37)
Net loss per common share from sale of
discontinued operations................ (2.60) -- -- -- (2.60)
Total net loss per share................. (2.93) (0.06) (0.11) (0.05) (3.14)
Common shares used in per share
calculation............................ 19,859 19,859 19,968 20,134 19,956
<CAPTION>
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER TOTAL
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION) ----------- ----------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
1998
Revenues................................. $ 9,183 $ 12,809 $ 8,255 $ 7,843 $38,090
Operating income (loss).................. (761) 1,596 (891) (2,139) (2,195)
Net income (loss) from continuing
operations............................. (816) 501 (1,295) (2,162) (3,772)
Net loss from discontinued operations.... (308) (1,532) (2,396) (3,271) (7,507)
Total net loss........................... (1,124) (1,031) (3,691) (5,433) (11,279)
Net income (loss) per common share from
continuing operations.................. (0.05) 0.03 (0.07) (0.11) (0.20)
Net loss per common share from discontinued
operations............................. (0.03) (0.09) (0.12) (0.17) (0.41)
Total net loss per share................. (0.08) (0.06) (0.19) (0.28) (0.61)
Common shares used in per share
calculation............................ 15,269 19,616 19,616 19,822 18,594
</TABLE>
F-18
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Pacific Coast Publishing, Inc.
We have audited the accompanying balance sheets of Pacific Coast
Publishing, Inc. (Pacific Coast) as of October 31, 1998 and 1997, and the
related statements of operations, stockholders' equity, and cash flows for each
of the three years in the period ended October 31, 1998. These financial
statements are the responsibility of Pacific Coast's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Pacific Coast as of
October 31, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended October 31, 1998, in conformity
with accounting principles generally accepted in the United States.
ERNST & YOUNG LLP
Seattle, Washington
December 22, 1998
F-19
<PAGE>
PACIFIC COAST PUBLISHING, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 31,
-------------------------
<S> <C> <C>
1998 1997
----------- -----------
CURRENT ASSETS
Cash and cash equivalents................................... $ 334,426 $ 17,922
Trade accounts receivable, net.............................. 6,275,722 4,999,533
Deferred costs.............................................. 7,271,961 6,892,487
Advances to employees....................................... 105,769 50,770
Prepaid expenses and other.................................. 723,851 332,685
----------- -----------
Total current assets........................................ 14,711,729 12,343,397
Property, plant and equipment, net.......................... 508,463 505,579
Other assets................................................ 313,950 132,381
----------- -----------
Total assets................................................ $15,534,142 $12,981,357
=========== ===========
CURRENT LIABILITIES
Current portion of debt..................................... $ 95,382 $ 585,828
Accounts payable and accrued expenses....................... 1,574,604 1,362,253
Deferred revenue............................................ 2,683,854 2,913,231
Commissions payable......................................... 1,169,261 1,019,448
----------- -----------
Total current liabilities................................... 5,523,101 5,880,760
----------- -----------
Debt, less current portion.................................. 276,224 260,600
----------- -----------
Commitments and contingencies (NOTE 5)
----------- -----------
Total liabilities........................................... 5,799,325 6,141,360
----------- -----------
STOCKHOLDERS' EQUITY
Common stock, $1 par value:
Authorized shares--50,000
Issued and outstanding shares--20,000..................... 20,000 20,000
Additional paid-in capital.................................. 119,269 119,269
Retained earnings........................................... 9,595,548 6,700,728
----------- -----------
Total stockholders' equity.................................. 9,734,817 6,839,997
----------- -----------
Total liabilities and stockholders' equity.................. $15,534,142 $12,981,357
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES.
F-20
<PAGE>
PACIFIC COAST PUBLISHING, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
---------------------------------------
<S> <C> <C> <C>
1998 1997 1996
----------- ----------- -----------
Revenue............................................... $33,165,398 $28,203,972 $24,550,563
Expenses:
Printing, distribution, and listings................ 8,001,467 6,644,443 6,985,299
Sales and marketing................................. 7,301,381 5,700,232 5,612,647
General and administrative.......................... 8,453,878 7,584,901 6,051,042
Provision for bad debts............................. 2,067,085 1,727,532 1,836,185
Depreciation and amortization....................... 170,124 249,245 334,918
Stockholder remuneration............................ 1,646,092 1,717,614 1,834,726
----------- ----------- -----------
Income from operations................................ 5,525,371 4,580,005 1,895,746
Interest (income) expense, net........................ (141,828) 94,625 247,211
Other (income) expense................................ (98,100) 26,113 (63,321)
----------- ----------- -----------
Earnings before income taxes.......................... 5,765,299 4,459,267 1,711,856
Provision for income taxes............................ 86,479 53,988 265,957
----------- ----------- -----------
Net income............................................ $ 5,678,820 $ 4,405,279 $ 1,445,899
=========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES.
F-21
<PAGE>
PACIFIC COAST PUBLISHING, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED OCTOBER 31, 1998
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL UNREALIZED
------------------- PAID-IN LOSS ON RETAINED
SHARES AMOUNT CAPITAL INVESTMENTS EARNINGS TOTAL
-------- -------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balances at October 31, 1995... 20,000 $20,000 $119,269 $(20,400) $ 2,181,550 $ 2,300,419
Net income................... -- -- -- -- 1,445,899 1,445,899
Change in unrealized loss on
investments................ -- -- -- (9,120) -- (9,120)
------ ------- -------- -------- ----------- -----------
Balances at October 31, 1996... 20,000 20,000 119,269 (29,520) 3,627,449 3,737,198
Net income................... -- -- -- -- 4,405,279 4,405,279
Cash dividends paid.......... -- -- -- -- (1,332,000) (1,332,000)
Change in unrealized loss on
investments................ -- -- -- 29,520 -- 29,520
------ ------- -------- -------- ----------- -----------
Balances at October 31, 1997... 20,000 20,000 119,269 0 6,700,728 6,839,997
Net income................... -- -- -- -- 5,678,820 5,678,820
Cash dividends paid.......... -- -- -- -- (2,784,000) (2,784,000)
------ ------- -------- -------- ----------- -----------
Balances at October 31, 1998... 20,000 $20,000 $119,269 $ 0 $ 9,595,548 $ 9,734,817
====== ======= ======== ======== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES.
F-22
<PAGE>
PACIFIC COAST PUBLISHING, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
------------------------------------------
<S> <C> <C> <C>
1998 1997 1996
------------ ------------ ------------
OPERATING ACTIVITIES
Cash received from customers........................ $ 32,154,531 $ 28,268,125 $ 23,373,735
Cash paid to suppliers and employees................ (28,307,682) (24,467,625) (22,820,826)
Investment income received.......................... 241,791 213,119 128,076
Interest paid....................................... (105,449) (333,989) (357,095)
Income taxes paid................................... (53,988) (176,756) (46,797)
------------ ------------ ------------
Net cash provided by operating activities........... 3,929,203 3,502,874 277,093
------------ ------------ ------------
INVESTING ACTIVITIES
Purchases of property, plant and equipment.......... (172,308) (100,876) (177,223)
Cash received on sale of property, plant and
equipment......................................... -- -- 500
Other activities.................................... (181,569) (21,728) (89,151)
------------ ------------ ------------
Net cash used in investing activities............... (353,877) (122,604) (265,874)
------------ ------------ ------------
FINANCING ACTIVITIES
Dividends to stockholders........................... (2,784,000) (1,332,000) --
Proceeds of debt borrowings......................... 125,134 240,736 197,536
Principal payments on debt.......................... (599,956) (2,271,084) (208,755)
------------ ------------ ------------
Net cash used in financing activities............... (3,258,822) (3,362,348) (11,219)
------------ ------------ ------------
Net increase in cash................................ 316,504 17,922 --
Cash at beginning of year........................... 17,922 -- --
------------ ------------ ------------
Cash at end of year................................. $ 334,426 $ 17,922 $ --
============ ============ ============
Reconciliations of net income to net cash provided
by operating activities:
Net income........................................ $ 5,678,820 $ 4,405,279 $ 1,445,899
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for doubtful accounts................. 2,067,085 1,727,532 1,836,185
(Gain) loss on disposal of property, plant and
equipment..................................... (699) 136,830 3,854
Depreciation and amortization................... 170,123 249,245 334,918
Increase in trade accounts receivable........... 3,343,274 2,492,926 3,212,581
Increase in prepaid and deferred costs, and
other assets.................................. (775,639) (1,126,807) (6,416)
Increase in accounts and commissions payable and
accrued expenses.............................. 362,164 225,813 171,409
Increase (decrease) in deferred revenue......... (229,377) 377,908 (296,175)
------------ ------------ ------------
Net cash provided by operating activities........... $ 3,929,203 $ 3,502,874 $ 277,093
============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES.
F-23
<PAGE>
PACIFIC COAST PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1998
1. NATURE OF BUSINESS
Pacific Coast Publishing, Inc. (Pacific Coast) is in the business of selling
yellow pages advertising and publishing and distributing telephone directories
in selected Arizona, Oregon, Utah, and Washington cities.
During 1998, Pacific Coast's stockholders entered into an agreement to sell
substantially all of the operating assets of Pacific Coast effective
November 1, 1998.
2. SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTS RECEIVABLE AND REVENUE RECOGNITION
Accounts receivable are reflected net of an allowance for doubtful accounts
as of October 31, 1998 and 1997 of $738,230 and $578,030, respectively.
Advertising revenue is recognized when directories containing the customers
advertising are distributed. Advertising revenue billed on directories that have
not been distributed is reported as deferred revenue.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost and is depreciated or
amortized using accelerated methods over the shorter of the lease term or the
estimated useful lives of the assets. Amortization of equipment under capital
leases is included in depreciation.
DEFERRED COSTS
Costs to produce, distribute, and market the directories are initially
capitalized and are expensed only when the directories are distributed in order
to match related expenses with advertising revenue. Costs include all direct
material and commission costs and indirect costs related to production, such as
indirect labor, depreciation, rent, utilities, office expenses and business
taxes, and the portion of the bad debt expense allocated to undistributed
directories. Capitalized production, distribution, and marketing costs of
directories not yet distributed are reported as deferred costs. Deferred costs
consist of the following:
<TABLE>
<CAPTION>
OCTOBER 31,
-----------------------
<S> <C> <C>
1998 1997
---------- ----------
Sales commissions.................................... $4,056,348 $3,798,699
Direct production costs.............................. 330,414 338,055
Indirect production costs............................ 2,885,199 2,755,733
---------- ----------
$7,271,961 $6,892,487
========== ==========
</TABLE>
ADVERTISING COSTS
Pacific Coast expenses advertising when the costs are incurred. Advertising
costs totaled $621,613 in 1998, $520,065 in 1997, and $244,740 in 1996.
F-24
<PAGE>
PACIFIC COAST PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1998
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BARTER TRANSACTIONS
Pacific Coast barters yellow pages advertising in exchange for goods and
services. Sales are recognized at the fair market value of the advertising sold.
Services received are recorded at the same value as the sale. There is no gain
or loss recognized on these trades. Recognition of the revenues and expenses
from trades is the same as for monetary revenues and expenses. Barter
transactions represented 3.4%, 2.9%, and 2.6%, of advertising fees in 1998,
1997, and 1996, respectively.
CONCENTRATION OF CREDIT RISK
Approximately 50% of Pacific Coast's business relates to sales in the state
of Washington. Pacific Coast performs periodic credit evaluations of its
potential customers prior to acceptance and publication and requires deposits by
customers. Pacific Coast provides an allowance for doubtful accounts sufficient
to cover estimated credit losses. Credit losses have consistently been within
management's expectation.
Under a long-term contract that expires in February 2001, Pacific Coast
utilizes one outside vendor to print its yellow pages publications. As security
for payment of production amounts owed under the contract, the vendor has a lien
on all property owned by the vendor in Pacific Coast's possession, including
work-in-process and undelivered work. Production delays or failure by this
vendor to otherwise perform could significantly impact Pacific Coast's
operations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain prior year balance sheet amounts and statement of operations amounts
have been reclassified to conform to the October 31, 1998 presentation.
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of:
<TABLE>
<CAPTION>
OCTOBER 31,
-----------------------
<S> <C> <C>
1998 1997
---------- ----------
Equipment............................................ $1,848,980 $1,724,150
Furniture and fixtures............................... 89,447 82,919
Vehicles............................................. 107,260 107,260
Leasehold improvements............................... 109,925 109,925
---------- ----------
2,155,612 2,024,254
Less amortization and accumulated depreciation....... 1,647,149 1,518,675
---------- ----------
$ 508,463 $ 505,579
========== ==========
</TABLE>
F-25
<PAGE>
PACIFIC COAST PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1998
3. PROPERTY, PLANT AND EQUIPMENT (CONTINUED)
Included in equipment are assets held under capital leases as of
October 31, 1998 and 1997 with a gross amount of $871,139 and $795,602,
respectively. Accumulated amortization as of October 31, 1998 and 1997 on the
capital lease assets totaled $715,247 and $683,286, respectively.
4. DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
OCTOBER 31,
-------------------
<S> <C> <C>
1998 1997
-------- --------
Line of credit.............................................. $ -- $460,546
Note payable to bank in monthly installments of $1,076,
including interest at 9.25% at October 31, 1998. The note
matures in August 2000 and is collateralized by a
vehicle................................................... 21,688 32,059
Notes payable to equipment vendors in aggregate monthly
installments from $1,655 to $4,698, including interest at
9.00% at October 31, 1998. There is one note outstanding
at October 31, 1998, which matures August 2002............ 182,208 230,744
Capital lease obligations................................... 167,710 123,079
-------- --------
371,606 846,428
Less current portion........................................ 95,382 585,828
-------- --------
$276,224 $260,600
======== ========
</TABLE>
Pacific Coast's line of credit agreement with a bank was renewed during 1998
for a two-year period. Pacific Coast is permitted to borrow up to $7,000,000
under the line. Borrowings on the line bear interest at 8.375% as of
October 31, 1998, which is payable monthly. All outstanding principal and unpaid
interest is due at the line's maturity in April 2000, unless the line is
extended.
Borrowings on the line are collateralized by all accounts receivable of
Pacific Coast. In addition, Pacific Coast's stockholders have personally
guaranteed the repayment of the line. The line requires Pacific Coast to meet
certain restrictive covenants, including minimum cash flow coverage and debt to
net worth ratio requirements. As of October 31, 1998, Pacific Coast had
satisfied the covenant requirements.
Future maturities of debt as of October 31, 1998, including capital lease
obligations (see Note 5), are as follows:
<TABLE>
<CAPTION>
YEARS ENDING OCTOBER 31
- -----------------------
<S> <C>
1999........................................................ $ 95,382
2000........................................................ 117,964
2001........................................................ 71,339
2002........................................................ 60,718
2003........................................................ 26,203
--------
$371,606
========
</TABLE>
F-26
<PAGE>
PACIFIC COAST PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1998
4. DEBT (CONTINUED)
Interest (income) expense, net, consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
---------------------------------
<S> <C> <C> <C>
1998 1997 1996
--------- --------- ---------
Interest and other investment income........ $(241,791) $(213,119) $(128,076)
Interest expense............................ 99,963 307,744 375,287
--------- --------- ---------
$(141,828) $ 94,625 $ 247,211
========= ========= =========
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
Pacific Coast leases equipment and office space, including its corporate
office space, from a related party (see Note 7). Certain of the leases require
Pacific Coast to pay a portion of the operating costs associated with the leased
property. Future minimum lease payments under capital and operating leases as of
October 31, 1998 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEARS ENDING OCTOBER 31, LEASES LEASES
- ------------------------ -------- ----------
<S> <C> <C>
1999.................................................. $ 62,996 $ 838,692
2000.................................................. 74,144 543,255
2001.................................................. 28,107 303,887
2002.................................................. 20,199 211,943
2003.................................................. 27,427 120,000
Thereafter............................................ -- 50,000
-------- ----------
212,873 $2,067,777
==========
Less amount representing interest payments............ 45,163
--------
167,710
Less current portion.................................. 42,336
--------
$125,374
========
</TABLE>
F-27
<PAGE>
PACIFIC COAST PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1998
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Future lease payments for operating leases include maintenance contract
payments. Rent expense, exclusive of maintenance agreement payments, was
$820,531 in 1998, $746,445 in 1997, and $601,334 in 1996.
As of October 31, 1998, certain asserted legal actions are outstanding
against Pacific Coast, which have arisen in the normal course of business. While
no estimate of loss, if any, which may occur from the settlement of these
actions can be made, it is the opinion of management that the settlement of the
asserted actions will not have a material adverse impact on Pacific Coast's
financial position, operations, or cash flows.
6. INCOME TAXES
Beginning with the year ended October 31, 1996, Pacific Coast elected S
corporation status for federal income tax reporting purposes. As a result,
Pacific Coast is generally not subject to federal income tax, and the
stockholders separately report their respective pro rata shares of Pacific
Coast's income, deductions, and losses on their personal income tax returns.
Pacific Coast remains subject to various state income taxes.
The provision for income taxes consists of:
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
------------------------------
<S> <C> <C> <C>
1998 1997 1996
------- -------- --------
Federal income taxes at statutory rates........ $ -- $ -- $ --
Internal Revenue Service audit assessment for
prior years.................................. -- -- 154,702
Various state income taxes payable............. 86,479 53,988 18,213
------- -------- --------
Current portion................................ 86,479 53,988 172,915
Deferred taxes................................. -- -- 93,042
------- -------- --------
$86,479 $ 53,988 $265,957
======= ======== ========
</TABLE>
Deferred taxes arose principally due to current temporary timing differences
related to the allowance for doubtful accounts and vacation accruals.
7. RELATED-PARTY TRANSACTIONS
Pacific Coast leases corporate office space in a building that is owned by a
corporation whose sole stockholders are Pacific Coast's two stockholders. Rents
paid to the related corporation were $412,688 in 1998, $402,144 in 1997, and
$382,289 in 1996. Pacific Coast, as well as the stockholders, is a guarantor for
a bank loan to the related corporation. As of October 31, 1998, the outstanding
balance on the guaranteed bank loan was $118,236.
F-28
<PAGE>
PACIFIC COAST PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1998
7. RELATED-PARTY TRANSACTIONS (CONTINUED)
Total stockholder remuneration was as follows:
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
------------------------------------
<S> <C> <C> <C>
1998 1997 1996
---------- ---------- ----------
Salaries................................. $1,560,000 $1,600,000 $1,800,000
Bonuses.................................. 86,092 117,614 34,726
---------- ---------- ----------
$1,646,092 $1,717,614 $1,834,726
========== ========== ==========
</TABLE>
8. 401(K) PLAN
Pacific Coast has a 401(k) plan that covers substantially all employees
meeting certain requirements. Company contributions to the Plan are
discretionary and are determined by the Board of Directors. Contributions
totaled $134,000 in 1998, $112,000 in 1997, and $88,100 in 1996.
F-29
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
YPtel Corporation
We have audited the accompanying consolidated balance sheet of YPtel
Corporation ("YPtel") as at October 31, 1999, and the related consolidated
statements of income, shareholders' equity, and cash flows for the year then
ended. These financial statements are the responsibility of YPtel's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of YPtel as at
October 31, 1999, and the results of its operations and its cash flows for the
year then ended in conformity with accounting principles generally accepted in
the United States.
Ernst & Young LLP
Toronto, Canada,
January 31, 2000.
F-30
<PAGE>
YPTEL CORPORATION
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE DATA)
OCTOBER 31, 1999
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash...................................................... $ 81
Trade accounts receivable, net............................ 11,736
Recoverable income taxes.................................. 547
Deferred production expenses.............................. 7,585
Reimbursable merger costs................................. 641
Advances to employees..................................... 83
Prepaid expenses and other................................ 1,409
-------
Total current assets........................................ 22,082
Property and equipment, net................................. 658
Intangible assets, net...................................... 38,492
Deferred financing costs, net............................... 1,668
-------
Total assets................................................ $62,900
=======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Borrowings on revolving credit facility................... $ 2,983
Current portion of long-term debt......................... 2,341
Accounts payable and accrued expenses..................... 2,906
Interest payable.......................................... 836
Deferred revenue.......................................... 1,333
Commissions payable....................................... 1,273
-------
Total current liabilities................................... 11,672
Long-term debt, less current portion........................ 35,283
Long-term interest payable.................................. 140
Deferred income taxes....................................... 816
-------
47,911
-------
Commitments and contingencies (NOTES 6, 7, AND 8)
Shareholder's equity:
Authorized:
Unlimited common shares
Issued:
13,549,300 common shares................................ 13,280
Warrants................................................ 500
Retained earnings......................................... 1,209
-------
Total shareholders' equity.................................. 14,989
-------
Total liabilities and shareholders' equity.................. $62,900
=======
</TABLE>
See accompanying notes.
F-31
<PAGE>
YPTEL CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS OF U.S. DOLLARS)
YEAR ENDED OCTOBER 31, 1999
<TABLE>
<S> <C>
Revenue..................................................... $41,162
-------
Expenses:
Printing, distribution, and listings...................... 9,482
Sales and marketing....................................... 8,421
General and administrative................................ 11,903
Bad debts expense......................................... 2,779
Depreciation and amortization............................. 2,272
Terminated IPO costs...................................... 363
-------
35,220
-------
Income from operations...................................... 5,942
Other income (expense):
Interest, net............................................. (3,930)
Other..................................................... 13
-------
(3,917)
-------
Income before income taxes.................................. 2,025
Provision for income taxes.................................. 816
-------
Net income.................................................. $ 1,209
=======
</TABLE>
See accompanying notes
F-32
<PAGE>
YPTEL CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE DATA)
YEAR ENDED OCTOBER 31, 1999
<TABLE>
<CAPTION>
COMMON SHARES
--------------------- RETAINED
SHARES AMOUNT WARRANTS EARNINGS TOTAL
---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance at November 1, 1998.................. 1 -- -- -- --
Net income................................... -- -- -- $1,209 $ 1,209
Issuance of common shares, net of issuance
costs of $280.............................. 13,549,299 $13,280 -- -- 13,280
Issuance of warrants......................... -- -- $500 -- 500
---------- ------- ---- ------ -------
Balance at October 31, 1999.................. 13,549,300 $13,280 $500 $1,209 $14,989
========== ======= ==== ====== =======
</TABLE>
See accompanying notes
F-33
<PAGE>
YPTEL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF U.S. DOLLARS)
YEAR ENDED OCTOBER 31, 1999
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 1,209
Adjustments to reconcile net income to net cash used in
operating activities
Bad debts expense......................................... 2,779
Depreciation and amortization............................. 2,272
Amortization of deferred financing costs.................. 335
Accretion of debt discount................................ 64
Deferred income taxes..................................... 816
Changes in operating assets and liabilities:
Increase in trade accounts receivable................... (8,288)
Increase in recoverable income taxes.................... (547)
Increase in deferred production and prepaid expenses,
advances to employees
and other assets...................................... (925)
Increase in reimbursable merger costs................... (641)
Increase in accounts, interest, and commissions payable
and accrued expenses................................... 1,777
Decrease in deferred revenue............................ (1,351)
--------
Net cash used in operating activities....................... (2,500)
--------
INVESTING ACTIVITIES
Acquisition of the net assets of Pacific Coast Publishing,
Inc., net of cash acquired................................ (11,029)
Purchases of property and equipment......................... (339)
--------
Net cash used in investing activities....................... (11,368)
--------
FINANCING ACTIVITIES
Proceeds from revolving credit facility borrowings.......... 2,983
Principal payments on long-term debt........................ (811)
Deferred financing costs.................................... (2,003)
Net proceeds from issuance of common shares and warrants.... 13,780
--------
Net cash provided by financing activities................... 13,949
--------
Net increase in cash........................................ 81
Cash, beginning of year..................................... --
--------
Cash, end of year........................................... $ 81
========
</TABLE>
See accompanying notes.
F-34
<PAGE>
YPTEL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS)
YEAR ENDED OCTOBER 31, 1999
<TABLE>
<S> <C>
SUPPLEMENTAL INFORMATION
Interest paid............................................... $ 3,599
-------
Income taxes paid........................................... $ 547
-------
NONCASH ACTIVITIES
In connection with the acquisition of the
net assets of Pacific Coast Publishing, Inc.,
YPtel acquired assets with a fair value
of and assumed liabilities as follows:
Assets acquired......................................... $55,415
Liabilities assumed..................................... 44,371
-------
Net assets acquired......................................... $11,044
=======
Issuance of debt in connection with the acquisition
of the net assets of Pacific Coast Publishing, Inc........ $36,500
-------
Equipment acquired pursuant to capital lease obligations.... $ 42
-------
Net prepaid assets acquired through barter transactions..... $ 333
-------
</TABLE>
See accompanying notes.
F-35
<PAGE>
YPTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1999
1. NATURE OF BUSINESS
YPtel Corporation (YPtel) was incorporated on July 22, 1998 under the laws
of Canada. YPtel's wholly owned subsidiary, YPtel, Inc. and its wholly owned
subsidiary, Pacific Coast Publishing, Ltd. (PCPL), were incorporated under the
laws of the state of Washington on October 1, 1998 and September 1, 1998,
respectively. All of the companies had nominal assets and operations until
November 1, 1998.
Effective November 1, 1998, YPtel acquired substantially all of the assets
and liabilities of the yellow pages publishing business of Pacific Coast
Publishing, Inc. (PCPI) (see Note 3). PCPI sold yellow page advertising and
published and distributed telephone directories in selected cities located in
the states of Arizona, Oregon, Utah, and Washington. YPtel, through PCPL, has
continued this business in the same four states since the acquisition of PCPI.
Effective October 26, 1999, YPtel's Board of Directors approved an agreement
to effect the acquisitions of YPtel, Web YP, Inc. and Big Stuff, Inc. by
Advanced Communications Group, Inc. ("ACG") in exchange for shares of ACG. ACG
is in a business similar to YPtel. The completion of the transactions is subject
to satisfactory refinancing of ACG, shareholder approvals, and regulatory
approvals. The transactions are expected to be completed during the first
quarter of calendar year 2000, at which time the name of ACG is to be changed to
WorldPages.com, Inc.
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the accounts of YPtel and its
wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
ACCOUNTS RECEIVABLE AND REVENUE RECOGNITION
Accounts receivable are reflected net of an allowance for doubtful accounts
(of $1.7 million as of October 31, 1999).
Advertising revenue is recognized when directories containing the customers'
advertising are distributed. Advertising revenue billed on directories that have
not been distributed, but for which a deposit has been received, is shown as
deferred revenue.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost and is depreciated or amortized
using accelerated methods over the shorter of the lease term or the estimated
useful lives of the assets. Amortization of equipment under capital leases is
included in depreciation.
F-36
<PAGE>
YPTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1999
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED PRODUCTION EXPENSES
Deferred production expenses include costs to produce, distribute, and
market directories. Deferred costs are expensed when the directories are
distributed. Deferred production expenses consist of the following at
October 31, 1999 (in thousands):
<TABLE>
<S> <C>
Sales commissions........................................... $4,123
Direct production costs..................................... 104
Indirect production costs................................... 3,358
------
7,585
======
</TABLE>
INTANGIBLE ASSETS
Intangible assets consist of customer lists, a covenant not to compete, and
goodwill. Customer lists, the covenant not to compete, and goodwill are
amortized on a straight-line basis over their estimated useful lives of 10, 5,
and 30 years, respectively.
Long-lived assets, including intangibles, are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment loss to be recognized is measured by the amount by
which the carrying amount of the assets exceed the fair value of the assets.
DEFERRED FINANCING COSTS
Financing costs, totaling approximately $2 million, have been deferred and
are being amortized to interest expense over the respective debt terms, using
the straight-line method, which approximates the interest method. Accumulated
amortization on deferred financing costs totaled $335,000 at October 31, 1999.
ADVERTISING COSTS
Advertising is expensed when the costs are incurred. Advertising costs
totalled $398,000 in 1999.
INCOME TAXES
Income taxes are provided for using the liability method. Deferred tax
assets and liabilities are determined based on differences between the financial
reporting and tax bases of assets and liabilities and are measured using tax
rates that will be in effect when the differences are expected to reverse.
BARTER TRANSACTIONS
Certain yellow page advertising is bartered in exchange for goods and
services. These barter transactions are recognized at the estimated fair value
of the advertising sold in accordance with
F-37
<PAGE>
YPTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1999
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Financial Accounting Standards Board (FASB) Statement of Financial Accounting
Standards (SFAS) No. 29, "Accounting for Non-monetary Transactions".
Barter transactions represented 2.4% of advertising revenue in 1999. Amounts
for goods or services due from customers are recorded in prepaid expenses and
other. These amounts totalled $988,000 at October 31, 1999. No allowance for
doubtful accounts has been established against these accounts in either year as
management considers the related amounts to be fully realizable in all material
respects.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments include cash, trade receivables, accounts payable, and
long-term debt. The carrying amounts of the financial instruments classified as
current assets and liabilities approximate their fair values because of their
short-term nature. The fair value of long-term debt, which is estimated using
discounted cash flow analyses based on current incremental borrowing rates,
approximates the carrying amounts of the related debt issues.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the Costs of
Computer Software Development or Obtained for Internal Use". SOP 98-1 requires
the capitalization of certain costs incurred in connection with developing or
obtaining internal-use software, and is effective for financial statements for
fiscal years beginning after December 15, 1998, with adoption required on a
prospective basis. There was no material effect on YPtel's consolidated
financial position, results of operations, or cash flows upon the adoption of
SOP 98-1.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities". SOP 98-5 provides guidance on the financial reporting of
start-up costs and organization costs, and is effective for fiscal years
beginning after December 15, 1998. SOP 98-5 requires retroactive adoption and
provides for costs of start-up activities and organization costs to be expensed
as incurred. There was no material effect on YPtel's consolidated financial
position, results of operations, or cash flows upon the adoption of SOP 98-5.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which is required to be adopted in years
beginning, after June 15, 1999. YPtel will adopt SFAS No. 133 effective
November 1, 2000. SFAS No. 133 requires YPtel to recognize its interest rate
swap on the balance sheet at fair value. Management has not yet determined the
effect of the adoption of SFAS No. 133 on YPtel's future financial statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
F-38
<PAGE>
YPTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1999
3. BUSINESS ACQUISITION
Effective November 1, 1998, YPtel acquired substantially all of the assets
and assumed substantially all of the liabilities of PCPI for approximately
$50 million. YPtel financed the acquisition through the issuance of a
$2 million note payable, and shares of its Class A preferred stock which were
later redeemed for approximately $48 million. The redemption price was funded
from $13.2 million in common share equity, $11.0 million in Senior Term Notes
and $14.5 million in Subordinated Notes. YPtel accounted for the acquisition
using the purchase method of accounting, with the operations of PCPI included in
its operations from the date of acquisition.
4. INTANGIBLE ASSETS
Intangible assets at October 31, 1999, consist of the following (in
thousands):
<TABLE>
<S> <C>
Covenant not to compete..................................... $ 1,000
Customer lists.............................................. 9,000
Goodwill.................................................... 30,612
-------
40,612
Less amortization........................................... (2,120)
-------
$38,492
=======
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at October 31, 1999 (in
thousands):
<TABLE>
<S> <C>
Equipment................................................... $ 569
Furniture and fixtures...................................... 120
Vehicles.................................................... 13
Leasehold improvements...................................... 108
-----
810
Less amortization........................................... (152)
-----
$ 658
=====
</TABLE>
Included in equipment are assets held under capital leases at October 31,
1999 with a cost of $198,000 and accumulated amortization of $52,000.
Depreciation and amortization expense on property and equipment totaled
$152,000 in 1999.
6. REVOLVING CREDIT FACILITY
The holders of the senior term notes (see Note 7) provided an $8.5 million
revolving credit facility to PCPL under the terms of a Revolving Credit
Agreement that expires in October 2003. PCPL is permitted to draw under the
Revolving Credit Agreement up to 85% of eligible accounts receivable by the
issuance of revolving credit notes. The revolving credit notes are repayable on
demand. At October 31, 1999, PCPL had borrowed $2.8 million under the Revolving
Credit Agreement. Interest on
F-39
<PAGE>
YPTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1999
6. REVOLVING CREDIT FACILITY (CONTINUED)
outstanding revolving credit notes is due monthly at the prime rate plus an
additional interest percentage ranging from 1.25% to 2.25%, or at the London
Interbank Offered Rate (LIBOR) plus an additional interest percentage ranging
from 2.25% to 3.25%. At October 31, 1999, the revolving credit notes bore
interest at 9.75%. In addition, PCPL is required to pay on a quarterly basis a
commitment fee on the unused portion of the revolving credit facility that
ranges from 0.37% to 0.625%.
The Revolving Credit Agreement requires PCPL to meet certain financial
ratios and covenants. As of October 31, 1999, management believes that all
covenant and ratio requirements have been satisfied.
7. LONG-TERM DEBT
Long-term debt consists of the following at October 31, 1999 (in thousands):
<TABLE>
<S> <C>
Senior term notes........................................... $24,750
Subordinated notes (net of unamortized debt discount of
$436)..................................................... 10,564
PCPI shareholders note...................................... 2,000
Other....................................................... 310
-------
37,624
Less current portion........................................ (2,341)
-------
$35,283
=======
</TABLE>
SENIOR TERM NOTES
Under its Senior Term Note Purchase Agreement, PCPL issued an aggregate of
$25.5 million of senior term notes, of which $11 million is in the form of
Senior Term A Notes and $14.5 million is in the form of Senior Term B Notes. In
both cases, the senior term notes were issued to a syndicate of commercial
lenders.
The Senior Term A Notes bear interest, at PCPL's option, at the prime rate
plus an additional interest percentage ranging from 1.50% to 2.50%, or at LIBOR
plus an additional interest percentage ranging from 2.50% to 3.50%. The Senior
Term B Notes bear interest, at PCPL's option, at the prime rate plus an
additional interest percentage ranging from 2.25% to 3.25%, or at LIBOR plus an
additional interest percentage ranging from 3.25% to 4.25%. The additional prime
rate and LIBOR interest percentages are recomputed each fiscal quarter, based on
the ratio of senior debt to cash flow as defined in the Senior Term Note
Purchase Agreement. At October 31, 1999, the Senior Term A and B Notes bore
LIBOR interest at 8.245% and 8.995%, respectively. Interest on the senior term
notes is due quarterly for the prime rate portion and at the end of each
contract for the LIBOR portion.
The Senior Term A and B Notes are due in October 2003 and 2005,
respectively. Principal payments on the Senior Term A and B Notes are due
quarterly and range in the aggregate from $250,000 in 1999 to $1,938,000 in
2005.
F-40
<PAGE>
YPTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1999
7. LONG-TERM DEBT (CONTINUED)
SUBORDINATES NOTES
Pursuant to a Subordinated Loan Agreement, PCPL issued to a commercial
lender an aggregate of $11 million face value of subordinated notes due in
May 2006 at a discounted amount of $10.5 million. The Subordinated Loan
Agreement contains provisions by which the subordinated noteholders have
subordinated their claims against PCPL to the claims of the holders of the
senior term and revolving credit notes.
The subordinated notes bear interest at 12% per annum, payable semi-annually
on May 1 and November 1. Subject to the restrictions in the Senior Term Note
Purchase Agreement, the subordinated notes may be repaid in whole or in part
(subject to a minimum principal prepayment of $100,000) in a multiple of
$100,000 at any time and from time to time without notice or bonus.
In connection with the issue of the Subordinated Notes, warrants with a
carrying amount of $500,000 were issued to the lender. The warrants entitle the
lender to purchase an aggregate of 1,841,000 Class C shares at a price of $0.01
per share on or before the earlier of (i) November 1, 2008 and (ii) the date
which is six years following the date on which the Subordinated Notes are
repaid. The warrants are to be exercised as part of the transaction with ACG.
PCPI SHAREHOLDERS NOTE
The $2 million promissory note payable to the former PCPI shareholders is
due in October 2001 and bears interest at 7% per annum. Both principal and
interest are payable upon maturity. At October 31, 1999, interest payable
totaled $140,000. This note may be extended at the option of YPtel to
October 2006, according to certain terms and conditions.
OTHER MATTERS
Substantially all assets of PCPL are provided as collateral under the
various debt agreements. In addition, the various debt agreements require PCPL
to meet certain financial ratios and covenants, including a minimum net worth of
not less than $11.5 million at October 31, 1999. As of October 31, 1999,
management believes that all covenant and ratio requirements have been
satisfied.
Future maturities of debt as of October 31, 1999, excluding unamortized debt
discount, are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31
- ---------------------
<S> <C>
2000..................................................... $ 2,341
2001..................................................... 4,584
2002..................................................... 3,076
2003..................................................... 4,522
2004..................................................... 4,758
Thereafter............................................... 18,779
-------
$38,060
=======
</TABLE>
F-41
<PAGE>
YPTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1999
7. LONG-TERM DEBT (CONTINUED)
Interest income (expense) consists of the following (in thousands):
<TABLE>
<S> <C>
Interest and other investment income........................ $ 291
Interest expense............................................ (4,221)
-------
$(3,930)
=======
</TABLE>
All of PCPL's debt facilities are to be refinanced as a condition of closing
of the transactions with ACG.
8. COMMITMENTS AND CONTINGENCIES
LEASES
YPtel leases equipment and office space. Certain of the leases require YPtel
to pay a portion of the operating costs associated with the leased property and
contain renewal and rent escalation clauses. Future minimum lease payments under
leases as of October 31, 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING OCTOBER 31 LEASES LEASES
- ---------------------- -------- ---------
<S> <C> <C>
2000...................................................... $ 67 $1,192
2001...................................................... 51 1,077
2002...................................................... 44 908
2003...................................................... 31 766
2004...................................................... 10 248
------- ------
203 $4,191
======
Less amount representing interest payments................ (61)
-------
142
Less current portion...................................... (45)
-------
$ 97
=======
</TABLE>
Future lease payments for operating leases include maintenance contract
payments. Rent expense, pursuant to operating leases, exclusive of maintenance
agreement payments, was $1,192,000 in 1999.
LABOR RELATIONS
Union certification has been granted to sales personnel at three of PCPL's
offices in Washington. PCPL is currently negotiating a collective bargaining
agreement with the Communication Workers of America for these employees, who
comprise approximately 11% of PCPL's total workforce.
F-42
<PAGE>
YPTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1999
9. INCOME TAXES
The provision for income tax expense consists of the following (in
thousands):
<TABLE>
<S> <C>
Current..................................................... $
Federal................................................... --
State..................................................... --
-----
Deferred
Federal................................................... 706
State..................................................... 110
-----
816
-----
$ 816
=====
</TABLE>
The provision for income taxes differs from the amount of tax determined by
applying the federal statutory rate for the following reasons (dollars in
thousands):
<TABLE>
<CAPTION>
AMOUNT PERCENTAGE
-------- ----------
<S> <C> <C>
Tax provision at federal statutory rate................... $687 34%
Permanent differences..................................... 37 2
State income taxes........................................ 110 5
Other, net................................................ $(18) (1)
---- --
$816 40%
==== ==
</TABLE>
Significant components of deferred taxes at October 31, 1999 are as follows
(in thousands):
<TABLE>
<S> <C>
Deferred tax assets:
Bad debt allowance........................................ $ (116)
Accrued salaries.......................................... (90)
Net operating loss carryforward........................... (339)
-------
(545)
-------
Deferred tax liabilities:
Intangible amortization................................... 220
Sales commissions......................................... 1,141
-------
1,361
-------
$ 816
=======
</TABLE>
At October 31, 1999, PCPL had a net operating loss carryforward for federal
income tax purposes of approximately $900,000, which begins to expire in 2014.
Pursuant to applicable regulations in effect under the Internal Revenue Code,
PCPL's use of the net operating loss incurred may be limited during the
carryforward period due to ownership changes now being contemplated with the ACG
transactions. To the extent that any single-year loss is not utilized to the
full extent due to the limitation, the unused
F-43
<PAGE>
YPTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1999
9. INCOME TAXES (CONTINUED)
loss is carried over to subsequent years until the earlier of its utilization or
the expiration of the relevant carryforward period.
10. TRANSACTIONS RELATED TO ACG
The cost of YPtel's terminated initial public offering (IPO), which totaled
$363,000, are reflected separately in operating expense. The IPO was terminated
in favour of pursuing a transaction with ACG.
Costs associated with the ACG transactions, totaling $641,000 have been
capitalized and reflected in the accompanying balance sheet as "Reimbursable
merger costs." Upon closing of the ACG transactions, all costs incurred in
connection therewith will be reimbursed by ACG. YPtel's management believes that
the transactions with ACG will be consummated. If the transactions are not
consummated, the costs will be charged against YPtel's operations in the period
the transactions are terminated.
11. 401(K) PLAN
PCPL has continued the sponsorship of PCPI's 401(k) plan that covers
substantially all employees meeting certain eligibility requirements. PCPL's
contributions to the 401(k) plan continue to be discretionary. PCPL's
contributions totaled $135,000 in 1999.
12. CREDIT RISK
Approximately 50% of YPtel's business relates to PCPL's sales in the state
of Washington. PCPL performs periodic credit evaluations of its existing
potential customers prior to acceptance and publication and requires deposits by
customers. PCPL has established an allowance for doubtful accounts to compensate
for exposure risk. Credit losses have consistently been within management's
expectations.
Under a long-term contract that expires in February 2001, PCPL utilized
Quebecor Printing to print its yellow pages publications. As security for
payment of production amounts owed under the contract, Quebecor Printing has a
lien on PCPL's work-in-process and undelivered work. Production delays or
failure by this vendor to otherwise perform could significantly impact PCPL's
operations.
The interest rates on PCPL's senior notes and on its revolving credit
facility are floating and will fluctuate based on changes in the prevailing
prime rate or LIBOR. These interest rates change usually monthly or bi-monthly.
The interest rate on the senior notes, which is currently approximately 8.5%, is
not capped. To mitigate the risks related to fluctuation in interest rates, PCPL
has entered into an interest rate cap program with Dresdner Bank. This program
caps at 7.0%, the base LIBOR rate on 50% of the principal amount of the senior
notes. The interest PCPL pays on the senior notes consists of the base LIBOR
rate, which is currently 5.3%, plus a variable margin. There is no cap on the
interest rate payable on PCPL's revolving credit facility. The interest
differential to be paid or received is recognized over the life of the agreement
as an adjustment to interest expenses. PCPL is exposed to credit loss in the
event of nonperformance by the counterparty to the interest rate swap agreement,
but it does not anticipate nonperformance by the counterparty. At October 31,
1999, the notional amount under the interest rate swap agreement was
$13 million.
F-44
<PAGE>
YPTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1999
12. CREDIT RISK (CONTINUED)
YPtel does not use derivative financial instruments for hedging,
speculative, or trading purposes. PCPL is dependent upon outside suppliers for
all of its raw material costs associated with publishing the printed yellow
pages directories. PCPL's principal raw material is paper, which PCPL purchases
either through a broker or directly from its printer. PCPL does not purchase
paper directly from the paper mills. Certain commodity grades of paper,
including the directory-grade paper PCPL uses, have shown considerable price
volatility.
PCPL's sales, expenditures, debt servicing, and capital purchasing are
transacted in U.S. dollars, with an insignificant portion of expenses being
transacted in Canadian dollars. Accordingly, PCPL is not significantly exposed
to foreign currency risk.
F-45
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Web YP, Inc.
We have audited the accompanying balance sheets of Web YP, Inc. as of
December 31, 1999 and 1998 and the related statements of operations,
stockholders' deficit and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Web YP, Inc. as of
December 31, 1999 and 1998, and the results of its operations and its cash flows
for the years then ended, in conformity with generally accepted accounting
principles.
KPMG LLP
February 4, 2000
Houston, Texas
F-46
<PAGE>
WEB YP, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 17,800 $ 107,260
Accounts receivable (net of allowance of $19,376 in 1999
and $0 in 1998)......................................... 251,813 142,473
Prepaid expenses and other current assets................. 635,555 57,292
----------- -----------
Total current assets.................................... 905,168 307,025
Furniture and office equipment, net of accumulated
depreciation of $68,736 and $3,870, respectively.......... $ 192,314 $ 36,934
----------- -----------
Total assets............................................ $ 1,097,482 $ 343,959
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued liabilities.................. $ 158,660 $ 15,256
Deferred revenues......................................... 464,592 467,713
Due to related parties.................................... 224,344 --
Notes payable to shareholders............................. 3,653,325 --
----------- -----------
Total current liabilities................................... 4,500,921 482,969
----------- -----------
Commitments and contingencies
Stockholders' deficit:
Common stock, no par value: 10,000 shares authorized;
6,086 shares issued and outstanding..................... -- --
Additional paid-in capital................................ 2,782,834 1,528,850
Accumulated deficit....................................... (6,186,273) (1,667,860)
----------- -----------
Total stockholders' deficit............................. (3,403,439) (139,010)
----------- -----------
Total liabilities and stockholders' deficit............. $ 1,097,482 $ 343,959
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-47
<PAGE>
WEB YP, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1999 1998
----------- ------------
<S> <C> <C>
Revenues.................................................... $ 850,818 $ 383,678
Operating costs:
Selling and Internet expenses............................. 3,856,570 753,202
Selling, general and administrative expenses.............. 1,271,137 1,231,799
Depreciation and amortization............................. 98,199 50,870
----------- ------------
Loss from operations...................................... (4,375,088) (1,652,193)
Other income (expense):
Interest expense.......................................... 143,325 --
----------- ------------
Loss before income taxes.................................... (4,518,413) (1,652,193)
Income tax expense (benefit)................................ -- --
----------- ------------
Net loss.................................................... $(4,518,413) $ (1,652,193)
=========== ============
Basic and diluted loss per share............................ $ (742.43) $ (271.47)
=========== ============
Weighted average common shares outstanding.................. 6,086 6,086
=========== ============
</TABLE>
See accompanying notes to financial statements.
F-48
<PAGE>
WEB YP, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT DEFICIT
-------- -------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997............... 6,086 $ -- $ 141,000 $ (15,667) $ 125,333
Net loss................................. -- -- -- (1,652,193) (1,652,193)
Capital contributions.................... -- -- 1,387,850 -- 1,387,850
----- ---- ---------- ----------- -----------
Balance, December 31, 1998............... 6,086 $ -- $1,528,850 $(1,667,860) $ (139,010)
Net loss................................. -- -- -- (4,518,413) (4,518,413)
Capital contributions.................... -- -- 1,253,984 -- 1,253,984
----- ---- ---------- ----------- -----------
Balance, December 31, 1999............... 6,086 $ -- $2,782,834 $(6,186,273) $(3,403,439)
===== ==== ========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-49
<PAGE>
WEB YP, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(4,518,413) $(1,652,193)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization........................... 98,199 50,870
Changes in operating assets and liabilities:
Decrease (increase) in:
Accounts receivable, net............................ (109,340) (142,473)
Prepaid expenses and other current assets........... (611,596) (1,736)
Increase (decrease) in:
Accounts payable and accrued liabilities............ 143,404 15,256
Deferred revenues................................... (3,121) 467,713
----------- -----------
Net cash used in operating activities............... (5,000,867) (1,262,563)
----------- -----------
Cash flows from investing activities:
Additions to furniture and office equipment............... (220,246) (18,027)
----------- -----------
Net cash used in investing activities............... (220,246) (18,027)
----------- -----------
Cash flows from financing activities:
Capital contributions..................................... 1,253,984 1,387,850
Proceeds from notes payable to shareholders............... 3,653,325 --
Increase in due to related parties........................ 224,344 --
----------- -----------
Net cash provided by financing activities........... 5,131,653 1,387,850
----------- -----------
Net increase (decrease) in cash and
cash equivalents.................................. $ (89,460) $ 107,260
Cash and cash equivalents--beginning of year................ 107,260 --
----------- -----------
Cash and cash equivalents--end of year...................... $ 17,800 $ 107,260
=========== ===========
Supplemental cash flows information:
Cash paid for interest.................................... $ -- $ --
=========== ===========
Cash paid for income taxes................................ $ -- $ --
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-50
<PAGE>
WEB YP, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1999 AND 1998
1. BASIS OF PRESENTATION
Web YP, Inc. (Web YP) is a California-based company founded in September
1997. Operations at Web YP began in 1998. Web YP's business consists of the
publishing of on-line yellow pages and white pages directories and the hosting
of web sites.
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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS--Web YP considers cash in banks and highly-liquid
investments purchased with an original maturity of three months or less to be
cash and cash equivalents.
FURNITURE AND OFFICE EQUIPMENT--Furniture and office equipment are stated at
cost. Improvements are capitalized. Repair and maintenance costs are expensed as
incurred. The cost and related accumulated depreciation of assets retired or
disposed of are removed from the accounts, and any gains or losses are reflected
in results of operations. Depreciation is computed using accelerated methods
over the respective useful lives of the assets ranging from 3 to 7 years.
INCOME TAXES--Web YP has elected to be taxed under the provisions of
Subchapter S of the Internal Revenue Code. Accordingly, no provision for federal
income taxes has been provided for by Web YP, as the stockholders of Web YP have
included the income or loss on their respective income tax returns.
REVENUE RECOGNITION--Revenues are recognized ratably over the time period
that the services are provided, generally, twelve months. Deferred revenues
consist of amounts received in advance of the services being provided.
NET EARNINGS (LOSS) PER SHARE--Basic earnings per share (Basic EPS) is
determined by dividing income available to common stockholders by the weighted
average number of common shares outstanding during the period. Diluted earnings
per share (Diluted EPS) reflects the potential dilution that could occur if
securities and other contracts to issue common stock were exercised or converted
into common stock. In periods in which the inclusion of such securities or
contracts are anti-dilutive, the effect of such securities is not given
consideration. Options and warrants to purchase 4,318 and 3,914 shares of common
stock were excluded from the calculation of Diluted EPS at December 31, 1999 and
1998, respectively, due to their antidilutive effect.
FAIR VALUE OF FINANCIAL INSTRUMENTS--Web YP's only financial instruments are
cash, short-term trade receivables and payables, prepaid expenses, notes payable
and capital lease obligations. Management believes the carrying amounts of the
financial instruments classified as current assets and liabilities approximate
their fair values because of their short-term nature. Management believes the
carrying value of its notes payable and capital lease obligations approximate
fair value as their interest rates approximate market rates.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED
OF--Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances
F-51
<PAGE>
WEB YP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net cash flow expected to be generated by
the asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceed the fair value of the assets.
COMPREHENSIVE INCOME--For the years ended December 31, 1999 and 1998,
Web YP did not incur items to be reported in comprehensive income that were not
already included in the reported net earnings; therefore, comprehensive income
(loss) and net income (loss) were the same for these periods.
3. RELATED-PARTY TRANSACTIONS
Transactions with related parties include certain web site design services
with stockholders and entities in which they have an interest. Services provided
to these related parties for the years ended December 31, 1999 and 1998 were
approximately $330,000 and $323,000, respectively. Amounts receivable from
related parties at December 31, 1999 and 1998 were approximately $86,000 and
$10,000, respectively. In addition, Web YP utilizes employees of Big Stuff, Inc.
(an entity related to Web YP by common ownership) for various operating purposes
with the related employee costs being allocated to Web YP. For the years ended
December 31, 1999 and 1998, the employee costs allocated to Web YP were
approximately $224,000 and $181,000, respectively. Due to related parties of
$224,000 on December 31, 1999 relates to expense allocations from Big Stuff,
Inc. for overhead and labor.
4. STOCK OPTIONS AND WARRANTS
In connection with its formation, Web YP issued various stock options and
warrants that allow the holders to purchase shares of common stock at defined
exercise prices. At the time of their issuance, management estimated that the
options and warrants had no fair market value based on the Company's estimate of
the fair market value of its common stock, which was $1.33 per share. As of
December 31, 1999 and 1998, 3,914 of such options and warrants were issued and
outstanding. Of the issued and outstanding options and warrants, 3,568 are
exercisable at $50.00 per share and 750 are exercisable at $1.33 per share.
In November 1999, Web YP granted options to purchase 404 shares of common
stock to certain employees of Web YP at an exercise price of $50.00 per share.
Management determined the fair value of Web YP's common stock to approximate
$1,634 per share on the date of grant based on the valuation of Web YP in the
pending sale to Advanced Communications Group, Inc. ("Advanced") (see note 9).
Compensation expense equivalent to the difference between the fair value of
Web YP's common stock on the date the options vest and the exercise price of the
options will be recorded by Web YP on the vesting date.
All of the options and warrants granted have a contractual life of 10 years
from grant date and are only exercisable in the event of a significant change in
management control or an initial public offering of Web YP. The per share
weighted-average value of stock options and warrants granted to employees during
1997 was determined to be $0.00 using the Black-Scholes model.
F-52
<PAGE>
WEB YP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND 1998
5. LEASES
Certain sales and administrative offices and equipment are leased. The
leases expire at various dates through 2001. Leases that expire are generally
renewed or replaced by similar leases depending on business needs. Rent expense
for operating leases for the year ended December 31, 1999 and 1998 was
approximately $75,000 and $133,000.
At December 31, 1999, Web YP's future minimum rental payments due under
noncancelable leases are $136,000 in 2000, $40,000 in 2001 and $5,000 in 2002.
6. PREPAID PORTAL ROYALTIES AND ADVERTISING AGREEMENT
At December 31, 1999, prepaid expenses and other current assets consist
primarily of an agreement entered into by Web YP with a third party portal
website whereby Web YP will serve as the online yellow pages directory services
provider for a period of nine months. This amount has been classified as prepaid
expenses and other current assets on the accompanying December 31, 1999 balance
sheet, and is being amortized over a period of nine months.
7. NOTES PAYABLE TO SHAREHOLDERS
As of December 31, 1999, the shareholders of Web YP had advanced $3,510,000
to Web YP. The loans bear interest at 7% per annum and accrued interest at
December 31, 1999 is $143,325.
8. COMMITMENTS AND CONTINGENCIES
Web YP is party to various legal actions, proceedings and claims arising in
the normal course of business. Some of the foregoing involve, or may involve,
claims for compensatory, punitive or other damages in material amounts.
Litigation is subject to many uncertainties, and it is possible that some of the
legal actions, proceedings and claims referred to above could be decided against
Web YP. Web YP's management believes that any resulting liability will not
materially affect Web YP's financial position, liquidity or results of
operations.
9. SUBSEQUENT EVENT
Web YP and its stockholders have entered into an agreement with Advanced to
sell all of the issued and outstanding common stock of Web YP in exchange for
shares of common stock of Advanced.
F-53
<PAGE>
BIG STUFF, INC.
UNAUDITED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1999 1998 1997
--------- ---------- ----------
<S> <C> <C> <C>
Revenues.................................................. $ 862,355 $1,647,688 $2,526,190
Operating costs:
Cost of services........................................ 833,265 1,049,296 1,856,737
Selling, general and administrative expenses............ 432,043 256,698 608,786
Depreciation and amortization........................... 206,259 300,200 149,828
--------- ---------- ----------
Income (loss) from operations........................... (609,212) 41,494 (89,161)
Other income (expense):
Interest expense........................................ (89,992) (60,162) --
--------- ---------- ----------
Income (loss) before income taxes......................... (699,204) (18,668) (89,161)
Income tax expense........................................ -- -- --
--------- ---------- ----------
Net income (loss)..................................... $(699,204) $ (18,668) $ (89,161)
========= ========== ==========
Basic and diluted income (loss) per share................. $ (199.77) $ (5.33) $ (74.30)
========= ========== ==========
Weighted average common shares outstanding................ 3,500 3,500 1,200
========= ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-54
<PAGE>
BIG STUFF, INC.
UNAUDITED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 115,977 $ 670
Accounts receivable....................................... 41,696 184,485
Inventory................................................. 16,980 21,618
Due from related party.................................... 224,344 --
Prepaid expenses and other current assets................. -- 70,203
---------- ----------
Total current assets.................................... 398,997 276,976
Property, plant and equipment, net.......................... 565,938 409,090
Intangible assets, net...................................... 119,665 128,999
---------- ----------
Total assets............................................ $1,084,600 $ 815,065
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.................. $ 60,504 $ 31,741
Line of credit............................................ 337,256 43,298
Due to stockholders....................................... 1,900,000 --
---------- ----------
Total current liabilities............................... 2,297,760 75,039
---------- ----------
Total liabilities....................................... 2,297,760 75,039
---------- ----------
Commitments and contingencies
Stockholders' equity:
Common stock, no par value: 10,000 shares authorized;
3,500 shares
issued and outstanding.................................. -- --
Additional paid-in capital................................ 1,522,969 1,522,969
Retained earnings (accumulated deficit)................... (2,736,129) (782,943)
---------- ----------
Total stockholders' equity.............................. (1,213,160) 740,026
---------- ----------
Total liabilities and stockholders' equity.............. $1,084,600 $ 815,065
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-55
<PAGE>
BIG STUFF, INC.
UNAUDITED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK ADDITIONAL EARNINGS TOTAL
------------------- PAID-IN (ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT) EQUITY (DEFICIT)
-------- -------- ---------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996............. 1,200 $ -- $ 572,969 $ 1,082,736 $ 1,655,705
Net loss............................... -- -- -- (89,161) (89,161)
Capital contributions.................. -- -- 600,000 -- 600,000
Distributions to stockholders.......... -- -- -- (570,000) (570,000)
----- ---- ---------- ----------- -----------
Balance, December 31, 1997............. 1,200 $ -- $1,172,969 $ 423,575 $ 1,596,544
Net loss............................... -- -- -- (18,668) (18,668)
Capital contributions.................. 2,300 -- 350,000 -- 350,000
Distributions to stockholders.......... -- -- -- (1,187,850) (1,187,850)
----- ---- ---------- ----------- -----------
Balance, December 31, 1998............. 3,500 $ -- $1,522,969 $ (782,943) $ 740,026
Net loss............................... -- -- -- (699,204) (699,204)
Distributions to stockholders.......... -- -- -- (1,253,982) (1,253,982)
----- ---- ---------- ----------- -----------
Balance, December 31, 1999............. 3,500 $ -- $1,522,969 $(2,736,129) $(1,213,160)
===== ==== ========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-56
<PAGE>
BIG STUFF, INC.
UNAUDITED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1999 1998 1997
--------------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................ $ (699,204) $ (18,668) $ (89,161)
Adjustments to reconcile net loss to net cash:
Depreciation and amortization................. 206,259 300,200 149,828
Gain on sale of fixed assets.................. -- 35,980 --
Changes in operating assets and liabilities:
Decrease (increase) in:
Accounts receivable, net.................. 142,789 255,323 358,006
Prepaid expenses and other current
assets.................................. 70,203 118,547 (188,750)
Inventory................................. 4,638 2,245 15,937
Increase (decrease) in:
Accounts payable and accrued
liabilities............................. 28,763 6,892 19,171
----------- ----------- -----------
Net cash provided by (used in) operating
activities.............................. (246,552) 700,519 265,031
----------- ----------- -----------
Cash flows from investing activities:
Additions to property, plant and equipment,
net........................................... (353,773) -- (668,360)
Cost of business acquired....................... -- -- (140,000)
----------- ----------- -----------
Net cash used in investing activities..... (353,773) -- (808,360)
----------- ----------- -----------
Cash flows from financing activities:
Dividends....................................... (1,253,982) (1,187,850) (570,000)
Borrowings from stockholders.................... 1,675,656 -- --
Borrowings from line of credit.................. 293,958 43,298 --
Capital contributions........................... -- 350,000 600,000
----------- ----------- -----------
Net cash provided by (used in) financing
activities.............................. 715,632 (794,552) 30,000
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents............................. 115,307 (94,033) (513,329)
Cash and cash equivalents--beginning of year...... 670 94,703 608,032
----------- ----------- -----------
Cash and cash equivalents--end of year............ $ 115,977 $ 670 $ 94,703
=========== =========== ===========
Supplemental cash flows information:
Cash paid for interest.......................... $ 89,992 $ 60,162 $ --
=========== =========== ===========
Cash paid for income taxes...................... $ -- $ -- $ --
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-57
<PAGE>
BIG STUFF, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. BASIS OF PRESENTATION
Big Stuff, Inc. (Big Stuff) is a Texas-based company established in 1995.
Big Stuff was founded to provide computer services, including web site and ad
design, and ad colorization services for independent telephone directory
publishers.
The accompanying financial information has been prepared without audit. The
financial statements include the accounts of Big Stuff, Inc. The financial
statements are based on information supplied by Big Stuff and restated by
Advanced in order to conform to generally accepted accounting principles.
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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS--Big Stuff considers cash in banks and
highly-liquid investments purchased with an original maturity of three months or
less to be cash and cash equivalents.
PROPERTY, PLANT AND EQUIPMENT--Property, plant and equipment are stated at
cost. Improvements are capitalized. Repair and maintenance costs are expensed as
incurred. The cost and related accumulated depreciation of assets retired or
disposed of are removed from the accounts, and any gains or losses are reflected
in results of operations. Depreciation is computed using accelerated methods
over the respective useful lives of the assets ranging from 3 to 7 years.
INCOME TAXES--Big Stuff has elected to be taxed under the provisions of
Subchapter S of the Internal Revenue Code. Accordingly, no provision for federal
income taxes has been provided for by Big Stuff, as the stockholders of Big
Stuff have included the income or loss on their respective income tax returns.
REVENUE RECOGNITION--Revenues are recognized as services are provided.
NET EARNINGS (LOSS) PER SHARE--Basic earnings per share (Basic EPS) is
determined by dividing income available to common stockholders by the weighted
average number of common shares outstanding during the period.
FAIR VALUE OF FINANCIAL INSTRUMENTS--Big Stuff's only financial instruments
are cash, short-term trade receivables and payables, notes payable and capital
lease obligations. Management believes the carrying amounts of the financial
instruments classified as current assets and liabilities approximate their fair
values because of their short-term nature. Management believes the carrying
value of its notes payable and capital lease obligations approximate fair value.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED
OF--Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flow expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceed the fair value of
the assets.
F-58
<PAGE>
BIG STUFF, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME--For the years ended December 31, 1999, 1998 and 1997,
Big Stuff did not incur items to be reported in comprehensive income that were
not already included in the reported net earnings; therefore, comprehensive
income (loss) and net income (loss) were the same for these periods.
3. RELATED-PARTY TRANSACTIONS
Transactions with related parties include certain web site design services
with stockholders and entities in which they have an interest. Services provided
to these related parties for the year ended December 31, 1999, 1998 and 1997
were approximately $483,000, $443,000, and $696,000, respectively. Amounts
receivable from related parties at December 31, 1999 and 1998 were approximately
$10,000 and $40,000, respectively.
To finance operations of Big Stuff the shareholders of Big Stuff loaned
$1,900,000 to Big Stuff in 1999.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at December 31,
1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
(IN THOUSANDS)
Land and buildings.......................................... $ -- $ --
Leasehold improvements...................................... 2 2
Furniture and office equipment.............................. 1,518 1,164
------ ------
1,520 1,166
Less accumulated depreciation............................... (954) (757)
------ ------
$ 566 $ 409
====== ======
</TABLE>
5. LEASES
Certain sales and administrative offices and equipment are leased. The
leases expire at various dates through 2000. Leases that expire are generally
renewed or replaced by similar leases depending on business needs. Rent expense
for operating leases in 1999, 1998 and 1997 was approximately $60,000, $168,000
and $35,000, respectively.
At December 31, 1999, Big Stuff's future minimum rental payments due under
noncancelable leases were $48,000 in 2000.
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<PAGE>
BIG STUFF, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
6. COMMITMENTS AND CONTINGENCIES
Big Stuff is party to various legal actions, proceedings and claims arising
in the normal course of business. Some of the foregoing involve, or may involve,
claims for compensatory, punitive or other damages in material amounts.
Litigation is subject to many uncertainties, and it is possible that some of the
legal actions, proceedings and claims referred to above could be decided against
Big Stuff. Big Stuff's management believes that any resulting liability will not
materially affect Big Stuff's financial position, liquidity or results of
operations.
7. SUBSEQUENT EVENT
Big Stuff and its stockholders have entered into an agreement with Advanced
Communications Group, Inc. (Advanced) to sell all of the issued and outstanding
common stock of Big Stuff in exchange for shares of common stock of Advanced.
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